EXPLANATORY STATEMENT
Objective of the Directions
As stated in the Higher Education Endowment Fund Act 2007 (the Act), the Government has established the Higher Education Endowment Fund (the Fund) to make grants of financial assistance to eligible higher education institutions in relation to capital expenditure and research facilities.
The Government will invest seed capital of $6 billion in the Fund in 2007-08. In addition, the Government will seek to make further transfers to the Fund from future realised budget surpluses, subject to other policy priorities.
The responsible Ministers are to give directions, under subsection 24(1) of the Act, providing the Government’s broad expectations for how the Fund will be invested and managed by the Future Fund Board of Guardians (the Board).
In developing these directions, subsection 24(3) of the Act requires that the responsible Ministers must have regard to maximising the return earned on the Fund over the long term, consistent with international best practice for institutional investments; enhancing the Commonwealth’s ability to make grants of financial assistance to eligible higher education institutions in relations to capital expenditure and research facilities; any Maximum Grants Rules that are in place; and such other matters as the responsible Ministers consider relevant.
One of the other matters that the responsible Ministers consider important is that there be an Investment Mandate in place at the time the $6 billion seed capital is credited to the Fund. This Mandate will be in place pending the development of a longer-term Investment Mandate that takes into account all relevant matters. The Mandate requires that there be a negligible chance of capital loss to facilitate a transition to a longer-term mandate, which is expected to be in place before the end of June 2008.
Subsection 24(12) of the Act requires that the Board must seek to maximise the return earned on the Fund over the long term and enhance the Commonwealth’s ability to make grants of financial assistance to eligible higher education institutions in relation to capital expenditure and research facilities. The responsible Ministers recognise that the Board’s obligation to seek to achieve the objectives set out in subsection 24(12) is subject to its obligations to take all reasonable steps to comply with this Mandate.
Directions
In setting this Investment Mandate, the Government has considered it prudent to confine investments to assets that would maximise returns, subject to a negligible chance of capital loss, for the initial period of the Fund. A longer-term Investment Mandate will subsequently be set after appropriate analysis is complete.
Limits on investment
Investments under this direction are confined to assets that would maximise returns, subject to a negligible change of capital loss, such as securities of the Commonwealth, or of a State or Territory; securities guaranteed by the Commonwealth, a State or a Territory; a deposit with an authorised deposit-taking institution, including a deposit evidenced by a certificate of deposit; and a bill of exchange accepted or endorsed only by an authorised deposit-taking institution. An authorised deposit-taking institution means the Reserve Bank of Australia and a body corporate in relation to which an authority under subsection 9(3) of the Banking Act 1959 is in force.
When making decisions on investments, the Board should consider the Government’s intention to issue further investment directions in the future.
Benchmark return
For the period that these directions are in place, the Government has directed to Board to adopt a benchmark return that is consistent with the type of assets listed under subsection 5(1) of the direction.
Overview
The Higher Education Endowment Fund Act 2007 was enacted by the Parliament of Australia to address the need for a sustainable funding mechanism to support higher education institutions in Australia. The Act establishes the Higher Education Endowment Fund, which is designed to provide grants for capital expenditure and research facilities. The policy objective of the Act is to enhance the Commonwealth’s ability to support eligible higher education institutions by ensuring a steady stream of financial assistance through the Fund. The responsible Ministers have issued directions under the Act, focusing on maximising the return on the Fund over the long term while maintaining a negligible chance of capital loss. These directions require the Future Fund Board of Guardians to invest prudently in assets that align with the Government's objectives, such as securities guaranteed by the Commonwealth or authorised deposit-taking institutions.
Scope and Application
The Higher Education Endowment Fund Act 2007 applies to the Future Fund Board of Guardians, which is responsible for the management and investment of the Fund. The Fund itself is a Commonwealth entity established to provide grants for capital expenditure and research facilities to eligible higher education institutions. The Act applies to the initial investment of $6 billion in seed capital in 2007-08 and any future transfers from budget surpluses, subject to policy priorities. The scope of the Act is national, as it is a Commonwealth Act. The Act specifies that investments are to be confined to assets that maximise returns with a negligible chance of capital loss, including Commonwealth, State or Territory securities, deposits with authorised institutions, and bills of exchange. These restrictions remain in place until a longer-term Investment Mandate is developed. The Board must also consider any future investment directions issued by the Government. The Act does not specify exclusions or exemptions, but rather sets clear parameters within which the Board must operate. Subordinate instruments may extend or restrict application, but the primary legislation outlines the fundamental investment strategy and objectives.
Key Provisions
The key provisions of the legislation primarily revolve around the investment mandate for the Higher Education Endowment Fund (Fund) as outlined in section 24 of the Higher Education Endowment Fund Act 2007. This section requires the responsible Ministers to provide directions to the Future Fund Board of Guardians (Board) regarding how the Fund is to be invested and managed. The objective is to maximise the return on the Fund over the long term while ensuring there is a negligible chance of capital loss, particularly during the initial phase of the Fund’s operation. This is achieved by confining investments to specific types of assets that meet these criteria, as detailed in subsection 5(1) of the directions.
The obligations imposed on the Board by the Act are significant. Under subsection 24(12), the Board is mandated to seek to maximise the return on the Fund over the long term and enhance the Commonwealth's ability to make grants for capital expenditure and research facilities in eligible higher education institutions. This mandate is subject to the Board taking all reasonable steps to comply with the initial investment directions provided by the responsible Ministers. Additionally, the Board must consider the Government's intention to issue further investment directions in the future when making investment decisions.
The legislation also outlines the consequences for non-compliance with the Act's provisions. While specific penalties or civil/criminal consequences are not detailed in the explanatory statement, breaches of the Board's obligations could potentially lead to legal actions or regulatory sanctions. The emphasis is on adhering to the investment directions and the mandate to ensure the Fund's objectives are met effectively. The responsible Ministers' role in setting and reviewing these directions ensures accountability and adherence to the statutory objectives of the Fund.