It seems the Australian government is in the mood to throw money around in order to try and lessen the impact of the recession, but one option that does not seem to have been raised is for the government to establish another sovereign wealth fund. This new fund could act as means of supporting the stock market and provide a source of income over future years to maintain spending on such things as national infrastructure and healthcare.
Australia already has a sizeable sovereign wealth fund namely The Future Fund which was established in 2006 and at the end of 2008 had around AUD $60 billion in assets. This amount included Telstra shares valued at around $7.65 billion so the fund I would imagine has declined in value since December 2008, but nonetheless it is a sizeable amount of money and it was a good move by the former Howard Government to set up such a fund.
So perhaps now with stock prices so depressed it could be time for the Rudd Government to look at setting up another fund so that in years to come the nation will be able to tap into a once again thriving economy once this recession has passed.
As you are probably aware from all the press coverage, some sovereign wealth funds have been fairly active of late in snapping up what they hope will be long term bargains in everything from depressed U.S. financial stocks to mining companies right here in Australia. So if you are interested in what funds are out there then have a look at website of the Sovereign Wealth Fund Institute
Unlike the current Future Fund I would propose the new fund be set up as a way to fund future national projects and/or budget spending and not used as a way to fund future government pension liabilities. The proceeds from this new fund could then be directed into areas such as healthcare, national road works, education etc. as determined by a semi-government authority.
The fund could also act as a type of economic buffer in that it would be built up during the good years but money siphoned off during downturns in order to fund additional government spending without getting the country into massive debt. It is of course too late now for a new fund to help much during this recession but the time might be ideal to set it up ready for the next one.
The new fund could be managed similar to the current Future Fund but in addition, the investment managers would need to ensure that the majority of funds were invested in Australian companies that met certain ethical, environmental and national interest criteria. Perhaps some funds could also be set aside to provide venture capital or specifically for investment into companies involved in the development of renewable energy technology for example.
In addition, there would be scope for this new fund to take strategic stakes in key national assets such as mining companies so that the national interest was protected with hard cash and not only legislation, although I suspect this would be difficult to achieve in practice. (it would simply require too much money)
The fund managers would also be given scope so they could be active buyers in times like now and take stakes in Australian companies that has valuable assets but had seen their share price savaged. I am not suggesting the fund try and put a floor under the stock market; but rather take advantage of bear market conditions and snap up some bargains, as opposed to letting an overseas fund or company be the only ones buying up cheap Australian assets. I would suspect even at this late stage this sort of activity would help put some confidence back into the stock market.
The tricky question is where would the money come from to seed such a fund? Unfortunately any funds that were available have been spent via Rudd’s cash handouts or set aside for massive spending plans, but I am guessing if we checked behind the couch we might find a few billion to at least seed the fund.
Maybe we can trim a little off the spending for pink bats, the painting of schools and catering on the P.M’s VIP jet? Seriously though, I am sure some funds could be found to seed the fund even if it means just spending a little less on the national broadband network. (which I think is another blunder by the way, but more on that in a future post!)
Of course there are many ways the fund could be set up and the mandate given to the fund managers could be very different to the one I have outlined above. But in my view, getting another Australian sovereign wealth fund up and running would give the stock market a shot of confidence and could be in years to come, be a source of much needed funds when the bad times strike once again.