EXPLANATORY STATEMENT – BUILDING AUSTRALIA FUND INVESTMENT MANDATE
Objective of the directions
As stated in the Nation-building Funds Act 2008 (the Act), the Australian Government (the Government) has established the Building Australia Fund (BAF) to enhance the Commonwealth’s ability to make payments in relation to the creation or development of transport infrastructure, communications infrastructure, energy infrastructure and water infrastructure, and to make payments in relation to eligible national broadband network matters.
The BAF will be managed by the Future Fund Board of Guardians (the Board).
$2.48 billion was transferred into the BAF on 2 January 2009. Decisions on further crediting will be determined by the Government in accordance with its obligations under the Act.
Directions issued under subsection 35(1) of the Act are known collectively as the investment mandate.
In setting an investment mandate, the responsible Ministers (the Treasurer and the Minister for Finance and Deregulation) must have regard to maximising the return on the BAF consistent with international best practice for institutional investment, enhancing the Commonwealth’s ability to make payments, and any other matters the responsible Ministers consider to be relevant.
The investment mandate is expected to be reviewed before 1 July 2010. This reflects the Government’s intention to assess whether there are marked changes in the investment environment over the next twelve to fifteen months that should be reflected in the investment mandate.
Directions
Benchmark return
For the purpose of this investment mandate, the Government has directed the Board to adopt, as the benchmark for the performance of the BAF, the Australian three month bank bill swap rate plus 0.3 per cent per annum, calculated on a rolling twelve month net-of-fee basis.
The Government has indicated its intention for funding for approved infrastructure projects to be made available to support the Government’s broader economic strategy. The benchmark return has regard to this and to volatility in the financial and credit markets. These considerations are also reflected in the requirement that, in targeting the benchmark, the Board is directed to invest in such a way as to minimise the probability of capital losses over a twelve month investment horizon.
Under section 81 of the Future Fund Act 2006, the Chair of the Board must, as soon as practicable after the end of each financial year, prepare and give to the nominated Minister a report of the Board and Agency’s operations. This includes the requirement that the report must include a report of the performance of the investments of the BAF.
Board must consider impacts from its investment strategy
The Government has an obligation to the Australian community to make decisions that are economically and fiscally responsible. It is the expectation of the Government that in managing the investments of the BAF, the Board should minimise disruption to the operation of domestic financial and credit markets and act in a manner that minimises the potential to effect any abnormal change in the volatility or efficient operation of Australian financial markets.
The Board is also required to act in a manner that is unlikely to cause any diminution of the Australian Government’s reputation in Australian and international financial markets.
The Government participates in a number of international organisations which pursue high standards of conduct in financial markets. The Government recognises that the Board will potentially invest in international capital markets as part of the fulfilment of their requirements under the Act. In doing so, the Government expects that the Board will act in a manner that is unlikely to cause embarrassment for the Government.
Overview
The Building Australia Fund Investment Mandate, detailed in the explanatory statement of F2009L02897, was introduced under the Nation-building Funds Act 2008. This legislation was enacted to establish the Building Australia Fund (BAF) by the Australian Government, with the aim of bolstering the Commonwealth’s capacity to finance infrastructure projects, specifically in transport, communications, energy, and water sectors, as well as matters relating to the national broadband network. The Fund, overseen by the Future Fund Board of Guardians, was initially credited with $2.48 billion as of 2 January 2009, with future crediting decisions subject to the Government's discretion under the Act. The primary objective of the investment mandate, as outlined by the responsible Ministers, is to maximise returns on the BAF in alignment with international best practices for institutional investment, while simultaneously enhancing the Commonwealth’s payment capabilities.
The Government’s policy objective, as articulated in the explanatory statement, is to ensure that the BAF's investment strategy minimises potential disruptions to domestic and international financial markets and preserves the Australian Government's reputation. The Board is mandated to consider these impacts when formulating its investment strategy, with a particular emphasis on achieving a benchmark return that reflects economic strategy considerations and market volatility, while aiming to minimise capital losses over a twelve-month horizon. This mandate underscores the Government’s commitment to responsible economic and fiscal management in line with its international obligations.
Scope and Application
The Building Australia Fund Investment Mandate, outlined under the Nation-building Funds Act 2008, applies specifically to the Building Australia Fund (BAF) which is managed by the Future Fund Board of Guardians. This mandate sets the framework for the investment strategy of the BAF, which is designed to support the creation or development of critical infrastructures such as transport, communications, energy, and water, as well as matters related to the national broadband network. The mandate is issued by the responsible Ministers, namely the Treasurer and the Minister for Finance and Deregulation, with the primary objective of maximising the return on the BAF in alignment with international best practices for institutional investment while also enhancing the Commonwealth’s capacity to make necessary payments. The mandate extends across the Commonwealth of Australia and is subject to review before 1 July 2010, reflecting the Government’s intention to adapt to changes in the investment environment over the subsequent twelve to fifteen months. The mandate also incorporates specific performance benchmarks, such as the Australian three-month bank bill swap rate plus 0.3 percent per annum, calculated on a rolling twelve-month net-of-fee basis, with a focus on minimising the probability of capital losses over a twelve-month investment horizon.
Key Provisions
The primary sections of the Building Australia Fund Investment Mandate (F2009L02897) outline the framework for the management and investment strategy of the Building Australia Fund (BAF). Section 35 of the Nation-building Funds Act 2008 mandates that the responsible Ministers, namely the Treasurer and the Minister for Finance and Deregulation, set the investment mandate for the BAF. They must consider various factors, including maximising the return on the fund, enhancing the Commonwealth’s ability to make payments for infrastructure projects, and adhering to international best practices for institutional investment. The mandate also requires the Board of Guardians of the Future Fund to adopt a specific benchmark for the performance of the BAF, which is the Australian three-month bank bill swap rate plus 0.3 per cent per annum, calculated on a rolling twelve-month net-of-fee basis.
The obligations imposed by the Act on the Board of Guardians are multifaceted. They must ensure that the BAF investments are aligned with the benchmark return while minimising the probability of capital losses over a twelve-month investment horizon. The Board is also expected to consider the broader economic strategy of the Government and the impact of their investment decisions on domestic and international financial markets. They are directed to act in a manner that minimises disruption to financial markets and avoids any abnormal changes in market volatility or efficient operation. Additionally, the Board must avoid actions that could diminish the Australian Government’s reputation or cause embarrassment within international financial markets.
In terms of consequences for breach, the Act does not explicitly detail criminal or civil penalties for failing to comply with the investment mandate or the benchmark return. However, the importance of the mandate and the detailed considerations indicate the seriousness of adhering to these provisions. Non-compliance could potentially lead to adverse economic outcomes, reputational damage, or legal scrutiny from the Government or financial oversight bodies. The Chair of the Board is required to prepare an annual report under section 81 of the Future Fund Act 2006, which must include a performance report of the BAF investments. This ongoing reporting mechanism underscores the importance of transparency and accountability in the management of the fund.