EXPLANATORY STATEMENT – HEALTH AND HOSPITALS 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 Health and Hospitals Fund (HHF) to enhance the Commonwealth’s ability to make payments in relation to the creation or development of health infrastructure.
The HHF will be managed by the Future Fund Board of Guardians (the Board). Initially, $1 billion was credited to the HHF on 20 February 2009. Decisions on further crediting will be determined by the Government in accordance with its obligations under the Act.
Directions issued under subsection 229(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 HHF 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 HHF, 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 HHF.
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 HHF, 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 Health and Hospitals Fund Investment Mandate was enacted as part of the legislative framework established under the Nation-building Funds Act 2008, with the primary purpose of enhancing the Commonwealth’s capacity to fund the creation and development of health infrastructure. This mandate was introduced to address a gap in the availability of dedicated funding for significant health infrastructure projects, thereby ensuring a sustainable and reliable source of financing. The enactment of this legislation was overseen by the Australian Government, with the Treasurer and the Minister for Finance and Deregulation acting as responsible Ministers. The policy objective, as outlined in the explanatory statement, is to direct the Future Fund Board of Guardians to manage the Health and Hospitals Fund in a manner that maximises returns while adhering to international best practices for institutional investment, all while maintaining a focus on minimising potential disruptions to financial markets and preserving the Government’s reputation in both domestic and international financial spheres.
Scope and Application
The Health and Hospitals Fund Investment Mandate, as outlined in the explanatory statement, applies to the Health and Hospitals Fund (HHF) which is managed by the Future Fund Board of Guardians (the Board). The Act pertains to the investment strategy and benchmarks established for the fund, which was initially credited with $1 billion and is subject to further crediting by the Australian Government in accordance with the Nation-building Funds Act 2008. The mandate sets out the objective of maximising the return on the HHF while adhering to international best practices for institutional investment, with a specific benchmark return set at 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 includes a requirement for the Board to minimise the potential for capital losses over a twelve-month investment horizon and to avoid actions that could disrupt domestic financial and credit markets or affect the Australian Government’s reputation in financial markets. The mandate applies nationally as a Commonwealth initiative but may also extend to international markets given the Board's potential investment activities overseas.
Key Provisions
The Health and Hospitals Fund Investment Mandate (sections 81 and 229) sets out the guidelines for the investment strategy of the Health and Hospitals Fund (HHF), which is designed to support the development of health infrastructure in Australia. Under section 81 of the Future Fund Act 2006, the Chair of the Board must report annually on the operations of the Board and the performance of the HHF's investments. The Board is directed to adopt a benchmark return of 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 Board is also required to invest in such a way as to minimise the probability of capital losses over a twelve-month investment horizon.
The Act imposes several obligations on the Board in managing the HHF's investments. Firstly, the Board must act in a manner that minimises disruption to domestic financial and credit markets, avoids causing any abnormal change in the volatility or efficient operation of Australian financial markets, and does not diminish the Australian Government's reputation in financial markets. The Board is also expected to act in a manner that is unlikely to cause embarrassment for the Australian Government in international financial markets, given the Government's participation in international organisations that promote high standards of conduct in financial markets.
The Act does not explicitly outline specific offences, penalties, or civil/criminal consequences for breaches of the investment mandate. However, it is expected that the Board will adhere to the guidelines set out in the mandate to avoid any potential negative impacts on financial markets or the Australian Government's reputation. Failure to comply with the mandate may result in the need for the Government to reassess the investment strategy of the HHF to ensure it aligns with the objectives outlined in the Act. Additionally, the Board may face reputational damage if its actions are seen to negatively impact financial markets or the Australian Government's standing in international financial markets.