EXPLANATORY STATEMENT
Announcement of the Education Investment Fund
The Government announced as part of its 2008‑09 Budget that the Higher Education Endowment Fund (HEEF) will be absorbed into the broader Education Investment Fund (EIF) when established and that payments from the EIF would commence from 2009‑10, i.e. there will be no payments from the HEEF in 2008‑09. Until the EIF is established by legislation, requirements under the Higher Education Endowment Fund Act 2007 (the Act) remain, including the requirement to determine Maximum Grants Rules.
Maximum grants amount
Under the Act, the HEEF has been established to make grants of financial assistance to eligible higher education institutions in relation to capital expenditure and research facilities.
Subsection 47(1) of the Act provides that the Treasurer and the Minister for Finance and Deregulation (as the responsible Ministers) may, by writing, make rules for ascertaining the maximum amount that can be debited from the HEEF Special Account (the Fund Account) during a financial year for the following purposes:
(a) making grants of financial assistance to eligible higher education institutions in relation to capital expenditure;
(b) making grants of financial assistance to eligible higher education institutions in relation to research facilities.
The responsible Ministers must make at least one such rule before 1 July 2008. Subsection 47(2) of the Act clarifies that these rules are to be known as the Maximum Grants Rules.
In making the rules, subsection 47(3) of the Act requires that the responsible Ministers must have regard to:
(a) the objective that, over the medium to long term (i.e. a period of five years or longer), grants authorised under section 45 of the Act should not result in the balance of the HEEF falling below the real value of the Government contributions to the Fund Account; and
(b) the objective of moderating volatility in maximum grants amounts from financial year to financial year;
and must not have regard to any other matters.
Subsection 47(5) of the Act states that the maximum amount that can be debited from the Fund Account must not exceed the accumulated nominal earnings of the HEEF as at the start of the financial year. Section 49 of the Act defines accumulated nominal earnings at the start of a financial year as:
(a) if the balance of the HEEF as at the start of the financial year exceeds the total of the Government contributions to the Fund Account that were made before the start of the financial year—the amount of the excess; or
(b) otherwise—nil.
In preparing the Maximum Grants Rules, modelling was undertaken to ensure that, over the medium to long term, the balance of the HEEF will not fall below the real value of the Government contributions and the volatility of the maximum grants amounts is moderated.
Calculating the amount
Clause 5 of the Maximum Grants Rules describes how to calculate the maximum grants amount. The formula is the sum of:
(a) $175 million; and
(b) the annual maximum grants amount adjustment,
with the amounts at (a) and in the calculation of (b) indexed after 1 July 2008.
Indexation is in accordance with the June All Groups Consumer Price Index published by the Australian Bureau of Statistics, in publication 6401.0, and applicable immediately before the start of the financial year.
If the result of the Maximum Grants Rules calculation results in a value below zero, then the maximum grant amount for that year is treated as zero.
The two components of the formula provide at (a) a stable component (indexed) and at (b) a component that takes account of the actual performance of the Fund. The quantum of the stable amount and the parameters within the annual maximum grants amount adjustment have been determined through modelling. The calculation reflects that, over the medium to long term, the balance of the HEEF will not fall below the real value of the Government contributions and that the volatility of the maximum grants amounts is moderated.
Annual maximum grants amount adjustment
Part (b) of the formula is determined by the actual performance of the HEEF, as described in the steps below.
Step 1
In step 1, the market value of the Fund as at 30 June in the preceding financial year is identified.
Step 2
In step 2, the real value of the total Government contributions to the Fund Account is subtracted from the figure identified in step 1.
The real value of the Government contributions are indexed in accordance with the June All Groups Consumer Price Index published by the Australian Bureau of Statistics, in publication 6401.0, and applicable immediately before the start of the financial year.
Step 3
In step 3, $500 million is subtracted from the figure derived in step 2.
The $500 million figure is a buffer. The buffer acts to stabilise payments.
The buffer will also be indexed after 1 July 2008 in accordance with the June All Groups Consumer Price Index published by the Australian Bureau of Statistics, in publication 6401.0, and applicable immediately before the start of the financial year.
Step 4
The result of step 4 is multiplied by 0.3. The 0.3 figure is a weighting applied to the calculations, determined from the modelling undertaken.
Consultation
As required by paragraph 47(6)(a) of the Act, the Education Minister was consulted on the Maximum Grants Rules.
The Future Fund Board of Guardians (Board) was consulted in relation to any implications for the performance of the Board’s HEEF investment functions, as required by paragraph 47(6)(b) of the Act. The Board was also consulted on whether the Investment Mandate given under subsection 24(1) should be varied or revoked, as required by paragraph 53(2)(d) of the Act.
Providing the maximum grants amount to the Education Minister
Subclause 48(1) of the Act provides that as soon as practicable after 1 July 2008 and for each later financial year, the Board must calculate, in accordance with the Maximum Grants Rules, the maximum amount that can be debited from the Fund Account for the purpose of making grants of financial assistance to eligible higher education institutions for capital expenditure and research facilities. The Board must give the Education Minister a written statement setting out the result of the calculation and must give a copy of that calculation to each responsible Minister.
While this statement will indicate the maximum amount of money that can be withdrawn from the HEEF during 2008-09, no money will be withdrawn from the HEEF during this period consistent with the Government’s announcement in the
2008-09 Budget.
Under subclause 48(2) of the Act, the Board may also provide any relevant comments on the calculation.