EXPLANATORY STATEMENT – EDUCATION INVESTMENT 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 Education Investment Fund (EIF) to enhance the Commonwealth’s ability to make payments in relation to the creation or development of higher education infrastructure, research infrastructure, vocational education and training infrastructure, eligible education infrastructure and to make transitional Higher Education Endowment Fund payments.
The EIF will be managed by the Future Fund Board of Guardians (the Board).
$6.48 billion was transferred into the EIF 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 154(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 EIF 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 EIF, 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 EIF.
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 EIF, 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 Education Investment Fund Investment Mandate, introduced by the Australian Government under the Nation-building Funds Act 2008, aims to enhance the Commonwealth's capacity to fund higher education, research, vocational education and training, and eligible education infrastructure, as well as make transitional Higher Education Endowment Fund payments. Managed by the Future Fund Board of Guardians, the Fund received an initial transfer of $6.48 billion, with future crediting subject to government decisions. The responsible Ministers, including the Treasurer and the Minister for Finance and Deregulation, are tasked with setting an investment mandate that maximises returns on the EIF in line with international best practices, while considering the Commonwealth's payment capabilities and other relevant factors. The mandate sets a benchmark return of the Australian three-month bank bill swap rate plus 0.3 percent per annum, calculated on a rolling twelve-month net-of-fee basis, aiming to minimize capital losses over a twelve-month investment horizon. This reflects the government's intention to support its broader economic strategy and considers volatility in financial and credit markets.
Scope and Application
The Education Investment Fund Investment Mandate, issued under the Nation-building Funds Act 2008, applies specifically to the Education Investment Fund (EIF) which is managed by the Future Fund Board of Guardians. The mandate sets out the investment strategy for the EIF, which was initially funded with $6.48 billion transferred on 2 January 2009. The Act applies to the Board as the managing entity of the EIF, and its purpose is to enhance the Commonwealth's capacity to make payments for various educational infrastructures and transitional Higher Education Endowment Fund payments. The mandate is designed to be reviewed before 1 July 2010 to allow for adjustments based on changes in the investment environment. The responsible Ministers, the Treasurer and the Minister for Finance and Deregulation, must consider maximising the return on the EIF while adhering to international best practices for institutional investment. The mandate also instructs the Board to minimise capital losses and avoid disrupting domestic and international financial markets. The jurisdiction of the Act is Commonwealth, and there are no specific exclusions or thresholds outlined in the explanatory statement. The mandate may be extended or restricted through subordinate instruments as deemed necessary by the Government.
Key Provisions
The Education Investment Fund Investment Mandate (F2009L02898) sets out specific directions for the management of the Education Investment Fund (EIF), as per section 154(1) of the Nation-building Funds Act 2008. The mandate, issued under the Act, aims to ensure that the EIF is managed by the Future Fund Board of Guardians (the Board) in a way that maximises returns while aligning with international best practices for institutional investment. Section 154(1) details the responsibilities of the Board in setting the benchmark for the EIF’s performance, which is defined as 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 mandate also directs the Board to consider the broader economic strategy of the Government and to minimise the risk of capital losses over a twelve month horizon.
The Board is tasked with ensuring that the investment strategy of the EIF does not cause disruption to domestic financial and credit markets, nor any abnormal change in their volatility or efficient operation. Additionally, the Board is expected to act in a manner that preserves the Australian Government’s reputation in both domestic and international financial markets. This includes considering the impact of investments on the stability of the financial markets and avoiding any actions that could lead to embarrassment for the Government within international organisations.
The Act imposes several obligations on the Board, including the requirement to report on the performance of the EIF’s investments to the nominated Minister at the end of each financial year, as stipulated in section 81 of the Future Fund Act 2006. These reports must include a comprehensive assessment of the EIF’s investment performance relative to the benchmark return set by the mandate. The Board must also ensure that its investment strategy aligns with the Government’s economic objectives and maintains the integrity and stability of the financial markets.
In the event of a breach of the provisions outlined in the Act or the investment mandate, there are potential civil and criminal consequences. The Act does not explicitly state the specific penalties for breaches; however, given the nature of the responsibilities and the impact on the financial markets, significant penalties could be imposed. These may include fines, legal action, and potentially, disciplinary measures against the Board members responsible for the breach. The exact penalties would depend on the severity and impact of the breach, but the overarching aim is to enforce compliance and uphold the integrity of the EIF’s management.