33 thoughts on “Sandpit


    Six days ago, news services reported that Australia’s Future Fund has topped $100 billion. What is Australia’s Future Fund? Well, there are all the lies and then there is the truth. The truth is that the Future Fund is one giant confidence trick and ordinary Australians are the losers.

    The Wikipedia entry repeats some basic facts and all the basic conventional lies about the Future Fund so let this entry have its say first.

    “The Australian Government Future Fund is an independently managed investment fund into which the Australian Government deposits its budget surplus. The purpose of the fund is to meet the government’s future liabilities for the payment of superannuation to retired civil servants of the Australian Public Service. The fund’s investment decisions are made at arm’s length from the executive.

    The stated aim of the fund is to hold A$140 billion by 2020; this figure would free up A$7 billion in superannuation payments each year from the federal budget.”

    Sounds good doesn’t it? But is this a good deal or a bad deal for the Australian people? Let’s look at how it was set up. Let me use more Wikpedia quotes, it saves me from typing.

    “On 11 September 2004, the Federal Treasurer, Peter Costello, announces that the Future Fund will be established following the 2004 federal election. The Future Fund Act, 2006 (Cth) received Royal Assent on 23 March 2006 and on 5 May, A$18 billion in seed capital, derived from government surpluses and income from the sale of a third of Telstra in its ongoing privatisation, was deposited into the fund. The Australian Government transferred their remaining 17% stake in Telstra, valued at A$8.9 billion, into the fund on 28 February 2007. This contribution, combined with other transfers, will push the fund to over A$50 billion by the end of the 2006-2007 financial year.” – Wikipedia.

    “In the 2008 and 2009 federal budgets, there was a deficit of A$27 and A$57 billion respectively, yet during these years the Australian Government added a further A$41 billion into the Fund.[16] The 2008 federal budget created a A$20 billion Building Australia Fund to invest in roads, rail, ports and broadband; an $11 billion Education Investment Fund, which absorbed a similar $6 billion fund set up by the previous government; and a A$10 billion Health and Hospital Fund. These new funds were established and administration placed in the hands of the Future Fund, on behalf of the government.” – Wikipedia.

    End of quotes, so now let’s do a little analysis. Telstra was sold and some of this money was put into the Future Fund. Prof. J.Q. has written a number of times about governments selling income producing assets and then claiming they are better off. But if the income producing asset was servicing the debt and maybe even producing a profit then retiring the debt does not necessarily make the government or the people any better off.

    But with the Future Fund, the government sells a productive asset (Telstra) and sets up another asset (The Future Fund) which it then invests in the market (incoming producing assets). This seems like a lot of paper shuffling that would incur a lot of brokerage costs and indeed it did.

    Furthermore as Wikipedia tells us (last long quote I promise);

    “During May 2007, it was revealed that the Chicago-based Northern Trust Corporation had won a competitive tender process to manage the A$51 billion Future Fund. Rick Waddell, President and Chief Operating Officer of Northern Trust indicated that Australian companies did not have the expertise to manage the Future Fund. Northern Trust stood to collect A$30 million in annual fees. Controversies arose when it was realised that the fund will be managed by a foreign bank with no base in Australia. National secretary of the Finance Sector Union Paul Schroder estimated that around 100 jobs will be lost when the US company starts managing the fund from Singapore using staff from India. Northern Trust was linked to the Enron scandal. General Manager of the Future Fund Management Agency, Paul Costello told a Senate estimates committee hearing that “We were not concerned that this represented a risk to us in terms of the arrangements that we were seeking to put in place with Northern Trust”.”

    End of that quote.

    In addition, the Future Fund has since been criticised for investments in the nuclear weapons and tobacco industries.

    We are also told, “In the 2008 and 2009 federal budgets, there was a deficit of A$27 and A$57 billion respectively, yet during these years the Australian Government added a further A$41 billion into the Fund.”

    Apart from monies from asset sales, the governments (Liberal and Labor) also took money from the federal budget, either reducing surpluses, creating deficits where none needed to exist or making making deficits larger. In other words, Australians were taxed more and/or received less government services so that the monies could be transferred to the future fund. The future fund like any investment attempts to pick winners. The Labor government under Rudd was attempting to pick winners (via fund managers) just as Howard/Costello had done.

    Would not the Australia people have been better left with the money to make their own spending or investment decisions and/or been better off with more government services? Transferring money from taxpayers’ pockets and from the government spend into a Future Fund must have reduced aggregate demand from what it could have been under those budgets. And would not this artificial fund simply serve to inflate share market and asset prices depending on where it was invested?

    If our economy suffered extra drag from this wealth transfer to a Future Fund (which is very arguable) then the economy will have a growth gap and thus a revenue gap running out to 2020 and beyond. The claim that the Future Fund will fund future super committments is dubious in this light as the revenue gap from forgone economic growth is very likely to be equal or larger.

    Finally, if the Future Fund is mismanaged or embezzled or collapses and vanishes in smoke (not impossible events) then the orginal income producing asset (Telstra) is gone from the public sphere and the economic growth is foregone and all the infrastructure it could have created is irretrieveably gone too. The Future Fund is a wobbly investment which makes Australia’s future less secure. Governments do not need to play the share market. Governments of stable countries and with a fiat currency are on a sure thing. Natural monopolies in government hands are also a sure thing for governments. Why would a government need to play the market?

    It’s the clear the whole thing was and is a rent seeking opportunity for rentiers and capitalists.

    Note: I haven’t expressed my point well or succinctly but I feel pretty sure J.Q. and E.G., to name two economists, will support the general direction of my argument.

  2. If the future fund requires any but the most basic management, who ever set it up was clearly too incompetent to set up a future fund. It’s like Catch-22 except even simpler. More like Catch-1.

  3. What’s the difference between FF and Norway’s sovereign wealth fund, which is I think generally seen as a “good thing”. (Possibly different because if I am correct it was funded by resource revenue not selling existing assets).

  4. Further more, @Ikonoclast , why would such a large fund be put at the risk of one and only one fund manager? I would have thought it prudent to split the fund and to have two managers at the very least. Something about having all one’s eggs in the same basket…

  5. If $31,000,000 is the total cost of managing the future fund, that doesn’t seem too bad for a $100 billion pile of dosh, however, as a future fund, its pretty damning. You see, since its a political thingy it has to be set up incredibly clearly and straight forwardedly to prevent abuse, theft, and corruption. And when these things are set up in a clear and straight forward manner their running costs are incredibly low. If the management costs are more than a trivial amount it suggests that either incompetence or theft going on. So if it was skillfully set up to siphon off funds to management that would be competance used to the detriment of the Australian people, or theftcompetence if you will.

  6. @Donald Oats
    Donald, a national fund should really require management as such. It should simply follow a clear cut, concise set of rules. And while it may be necessary to elaborate on some details, they should basically be able to fit on one A4 piece of paper with double spacing. If someone needs $31 million to follow the instructions on one sheet of paper they just might be getting over paid.

  7. Norway’s sovereign wealth fund is said to be nudging $1 trillion in assets. I guess much of that came from something akin to the MRRT but on North Sea oil. I believe they have frittered away some of it, for example on saving rainforests in Bolivia whereby the obliging forest persons chopped down the adjoining trees instead.

    A problem with such funds is whether money can replace the same stream of benefits in future. North Sea oil is around $100 a barrel. What if by 2050 you can’t buy that amount of liquid fuel for $1,000?

  8. Hermit, firstly Norway has the capacity to keep producing oil far beyond 2050. It is the nature of conventional oil fields to produce small quantities of oil for centuries. So there will still be oil available for Norwegian domesitic use, should they choose to use it. But they may not need it. Norway is currently eliminating its main sources of oil use and electrifying transportation. In March electric cars were over 20% of new car sales in Norway.

  9. @bjb

    Perhaps an accredited, but not neoecon, economist would like to comment on that question. From my point of view thay are not essentially different. Our Future Fund is a sovereign wealth fund also. Clearly, three basic sources of revenue could be put into a sovereign wealth fund. These sources are government asset sales, taxation revenue and resource revenue. Arguments could be had on whether these sources are always different. For example, taxation revenue and domestic resource revenue, both collected in the domestic fiat currency, are essentially the same and are tax revenues. (Both Australia and Norway have their own fiat currencies by the way.) However, resources sold for foreign currency generate a revenue source that is, I assume, qualitatively different from fiat tax revenue.

    The thing is, once revenue is in a sovereign wealth fund as fiat currency, or foreign exchange, it is all just money. It does not matter where it came from though it might matter what the current exchange rates are. When the next step is taken, that of investment in shares and other asset classes then it begins to partake of the all the usual market risks, political risks and global conflict risks in addition to risk on changes in exchange rate.

    First, I would ask why a government would sell a national asset (say Telstra) which it controls, which gives it natural monopoly profits and for which it controls the issue of legislative risk: selling it for a fund which then invests in stocks, bonds, shares and other free market valued assets. This fund now exposes the government to risks which it was not otherwise exposed to. It might be said that it also gains the chance to profit more but this is dubious for reasons I hope to make clear in this or a later post.

    Second, I would ask why a government would set up a sovereign wealth fund which might often invest overseas when the government could take that revenue and directly invest it in its own country for infrastructure, health, education and other purposes. If it is a small country, like Norway, with a huge revenue, like North Sea Oil, which it cannot invest domestically because the economy could not absorb it (overheating economy, inflation etc.) then I would have to wonder why they are withdrawing the resource so fast from the reserve. Why not leave it in the reserve and withdraw it only at the pace needed for revenue and investment? Perhaps there is a fear of it becoming a stranded asset but I doubt it. I think we can safely predict China and the globe will buy all available oil for some considerable time to come (although this unfortunately is bad from a climate change perspective).

    Third, I would ask why a government would levy excess taxes to create a surplus only to divert this surplus into an investment portfolio. It would be better that the government did not levy these surplus taxes but rather left the money in the people’s pockets to be spent or invested as they choose. Normally, a government surplus reduces aggregate demand because the surplus is not spent nor is it invested. Essentially a government surplus destroys money (reducing demand, reducing inflationary pressure). But a government surplus paid into a soverign wealth (investment) fund is not destroyed but re-circulated and re-circulated in a special, biased way. Aggregate demand is depressed but asset prices face inflationary pressure from the sovereign wealth fund. (Though international trades will greatly affect this. The aggregate demand fall may be domestic and significant and the asset inflation global and spread thin.) In a very real sense though, a surplus diverted to a sovereign wealth fund and invested, is not a surplus at all. The very claim that it remains a surplus is specious for it has been spent on assets. A surplus is that part of taxes not spent.

    And of course, all these financial shenanigans, for that is what they are, carry overhead costs as well as risk costs. They carry brokerage and management costs. They also carry opportunity costs. Money that goes into a sovereign wealth fund and thence often into foreign investments and infrastructure could have gone into domestic investments and infrastructure. Then there is the issue of sovereign risk. I mean not just the altering of foreign-exchange regulations by a foreign government but also the risks of debt repudiation, nationalisation and even conflict and war.

    Sovereign wealth funds are a really bad idea for large stable governments with healthy economies and a fiat currency. It brings increased risks but no rewards that are not offset or more than offset by opportunity costs. Sovereign wealth funds might be a good idea for little city-state economies like say Dubai or Singapore or small island-state economies but that’s about it in my opinion.

  10. It is intersting that Norway, an oil exporter, has the highest uptake of electric cars in the world while in Australia, which imports the majority of its oil, the entirety of our direct efforts towards improving fuel efficiency consists of placing a sticker showing fuel consuption on the windscreen of new cars. Perhaps we should reorganise our priorities. Maybe reducing our oil consumption is a little more important than our right to racially vilify people or finding out exactly who has an above average attraction towards goats.

  11. IMO, Australia needs a much better energy security policy than it has currently. Relative to our population size, we are rich in coal, natural gas, uranium, sunshine and wind. We are poor in oil, especially the heavier fractions used for diesel fuels. If we were smart, we would be shifting away from oil, diesel and petrol use and converting our national transport fleet to run on natural gas.

    Naturally, to help prevent global warming, we also need to move away from coal use now and from natural gas use in the mid to long term. By as early as 2035, most of our economy should be run on solar and wind power, if that is feasible. Transport should be mostly electrical with long-haul by electric trains. We should stop exporting uranium and leave it in the ground. Nuclear power is never safe.

  12. @Ikonoclast
    Getting off oil certainly makes sense, Ikonoclast, but switching to natural gas doesn’t as it is horribly expensive and quite environmentally destructive. Currently feed-in tariffs for new solar for most Australians range from six to zero cents. This theft of electricity makes the marginal charging an electric car from household solar free for some people and the majority of Australian cars are parked at home for most of the day. And with rooftop solar set to meet all demand around noon on sunny days a large company paying spot prices might often pay nothing for electricity used to charge employees’ cars. While the purpose of many companies seems many to be the preservation of status in some sort of primate pecking order, some actually try to be nice to their employees because it makes economic sense and these ones probably won’t mind people charging at work, especially if daytime electricity is often free or low cost.

  13. Hermit, because you’ve clearly been confused on electricity generation in Germany in the past and written things as fact that were plainly wrong, here’s a link to this showing changes in generation 2012/2013 to 2013/2014:


    As you can see, brown coal generation is down 3.1 terrawatt-hours, black coal black coal is down 6.1 terawatt-hours, and natural gas is down 5.6 terrawatt-hours. That’s a reduction of 14.2 terawatt-hours generated from fossil fuels which is greater than the entire electricity consumption of South Australia.

  14. @Ronald Brak

    I agree that solar power is far preferable to even natural gas. However, we will need a transition period of something like 20 years, at least, to become a 100% renewable economy. Using our natural gas for transition would be necessary and preferable to using coal and oil. I am talking about ALL our energy needs not just electricity. We have to wean our transport system and much of our machinery off fossil fuels. That cannot be done overnight.

  15. @Ikonoclast
    Transportation will not be weaned off oil overnight, but when it is cheaper to switch to electric transportation than natural gas transportation or other options, that is what will be switched to. Renewables are cheaper than new gas capacity so we’re not going to see an expansion of gas capacity there. And thanks to recent changes our load following gas plants are being switched to peak operation. Torren Island Power station, the largest in South Australia – they try not to switch that on very often these days. I think the last figure I saw it was running at 23% capacity. Now rather than go into the relative costs of electric transportation vs natural gas transportation, I’ll just point out that there is very little use of natural gas in transportation outside of a few niche areas. In fact, oddly enough Australia is a world leader in this and may have the most natural gas buses per capita in the world. Which is just weird. Anyway, natural gasification of transport hasn’t caught on, despite formally incredibly low prices by world standards in Australia and a significant fuel excise on diesel and petrol. And it’s failed to catch on recently in the United States despite their low natural gas prices and their falling dollar increasing their cost of petrol. Now that electric cars are starting to make inroads into the new car market, it seems unlikely there will be any big switch to natural gas vehicles, particularly as service stations would have to invest a lot in new pump equipment to sell something that’s very expensive here.

  16. I note the use of Northern Hemisphere summer data when quoting coal consumption. It’s more interesting to compare summer with winter when solar is reduced while electric heating increases. I nonetheless think the comparison between Germany 81.9m population and South Australia 1.7m (I think) is valid as their governments seem to be on the same wavelength. A 2012 study found they had similar retail electricity prices though less than Denmark.

    A key similarity between the two is aversion to using gas as well as nuclear. Germans have nukes unlike SA which does have the world’s largest uranium deposit at Olympic Dam. I understand the Germans are paying about $8 a gigajoule for mainly Russian gas. SA is using some Victorian gas but mainly from Moomba in the northeast which is also directly connected to the Gladstone Qld LNG plants which start next year. Some think the SA wholesale gas price will go from $4 to $8 then perhaps $12. If so I think they will import more Victorian brown coal power in exchange for RET guaranteed windpower. A transmission upgrade between those states has been approved.

    Therefore the the question for both Germany and SA is will their annual emissions (not half year) increase if they shun both nuclear and gas? I’ve seen one prediction (CarbonCounter) that German annual emissions will increase to 2020. They might also get a manufacturing exodus and subsidy fatigue before then.

  17. Hermit, you’ve also clearly been confused about the amount of rooftop solar being installed in the past. You’ve even written about it falling. Now that did happen at some points for installation rates were affected by changes in feed-in tariffs, such as what happened in Queensland, over time the installation of rooftop solar capacity has increased. We apparently have almost 4.5 gigawatts of it currently and it looks like about three quarters of a gigawatt will be installed this year. Note that this is after feed-in tariffs have been cut to a point where a lot of people’s solar generated electicity that is exported to the grid is simply stolen. And as eliminating the Renewable Energy Target would raise electricity prices, ending that would not end the installation of rooftop solar. Here’s an article on Australian rooftop solar installation in July for you:


  18. @RB PV installation is not ending but tapering off compared to ~350,000 in 2011 and 2012
    Possibly large arrays with generous capex assist from CEFC or ARENA are taking up the slack. That’s businesses not homes. For example the Uriarra ACT solar farm has or will have ~25,000 panels. State and territory FiT’s may be going but arrays over 100 kw nameplate capacity get the federal LGC subsidy now around $25 per Mwh.

    Yesterday morning my home panels were covered in snow. By mid morning it had turned to translucent mush and slid off. Shame I was too cash challenged to run a resistive heater with fan the night before.

  19. Hermit, the average size of rooftop solar installation has increased considerably so this means we are still on track for about 750 megawatts of installed rooftop solar this year. Which is a lot. In comparison utility scale solar projects are rather small. The Uriarra project is a puny 7 MW. Currently we are installing more than that on roofs every four days. The Moree solar project is larger but still only a month’s worth of rooftop solar. And given the decreasing cost of daytime electricity resulting from rooftop solar it is going to be extremely difficult to get any more utility scale solar power built. It’s not going to be built privately and government funding is not likely to materialize.

  20. Wait a minute, did I say Australia has 4.5 gigawatts of solar a little bit back? We don’t have that much right now. Maybe at the end of the year. Sorry for my sloppiness.

  21. @RB suppose Australia has 4 GW of PV. Using Melbourne’s 16% capacity factor as representative of the whole country we can expect electrical generation of 4 X 8,760 X 0.16 = 5,606 Gwh. According to BREE’s July 15 media release the last estimate for Australia’s annual electricity was 249,000 Gwh.

    Therefore 4 GW of PV would generate something like 2.3% of Australia’s electricity. I don’t like the chances of 80% decarbonisation following this path.

  22. @Hermit
    Yes, I do agree that eliminating 80% of coal, natural gas, and oil use use in Australia would be difficult using only rooftop solar, even though it is technically possible. Do you agree that if grid electricity prices remain at about 30 cents a kilowatt-hour and rooftop solar can be installed for $2 a watt then Australia is doomed to get at least a quarter of its electricity from rooftop solar? Now 25% of electricity from rooftop solar is truely a pathetic amount compared to the noble goal of 80% decarbonisation and abjectly trembles before its greatness, but do you agree that 25% of electricity use is inevitable if current conditions are mantained?

  23. @Ronald Brak
    It’s hard to say where it will level out. As with pink batts rebates and subsidies seem to spur far more people into taking up the idea. I wonder how many people have installed pink batts in existing homes since the big scheme. BTW I don’t regard Uriarra and Moree as ‘rooftop’ solar.

    A possible development is where power companies do the home installation as we see in Arizona USA. If that progresses to distributed battery storage then we’ll know the big end of town thinks it is a net winner. They will also have the cash for a $10k battery replacement which pensioners occupants won’t. Many factors at play..continuing RET, true time-of-use pricing (not the Vic shoulder rate), electric cars, capacity payments for standby generators, future gas prices and so on.

  24. Hermit, solar is being installed in Australia for $2 a watt right now before any subsidy. So the $2 a watt is a maximum price. Since with a $2 a watt installation and a 30 cents a kilowatt-hour price for grid electricity many Australians who own roofs will be able to produce electricity from rooftop solar at under a third the cost of grid electricity, even with no feed in tariff, they will have an incentive to install rooftop solar even if they use less than half the electricity it produces and export the rest to the grid. Even people with a 10% discount rate could still save money in a good location with a 50% self consumption rate. Now there are no doubt plenty of people in Australia who have a higher than 10% discount rate, but that doesn’t matter because there are plenty who don’t. So given that solar costs $2 a watt to install, that grid electricity costs households and many businesses about 30 cents a kilowatt-hour, and given the fact that there is plenty of roofspace, do you agree that Australia seems certain to get at least 25% of its electricity from rooftop solar if those factors remain constant?

  25. RB your calculations seem to show that it makes sense for roof owners without PV to get it installed. I’m saying that people don’t do these calculations but wait for bobbydazzler incentives like rebates, feed-in tariffs, discounts whatever. Unless something new comes up it could well be that most people who will ever get PV in Australia already have it, perhaps some 3.5-4 GW in total. Australia’s average electricity consumption is about 28 GW (full time) based on BREE data.

    A possible game changer is the type of scheme where the roof owner pays nothing up front and gets power bill reductions. The installer which could be a utility that also owns big power stations effectively rents the roof space. An argument has been made that it is better for grid operators to control home batteries which eventually may cost (opex not capex) as low as 8c per kwh. See several recent articles in http://theenergycollective.com/
    Therefore 25% PV penetration may be possible then again it may never happen.

  26. @Hermit
    Hermit, it is possible that the last person who wants solar installed on their roof in Australia applied for it today. However, that doesn’t seem very likely to me. It’s hard to see why people would stop installing solar and leave all that meat on the table. It just doesn’t make sense. It’s like predicting Australians will stop buying new cars and start cycling and using public transport instead. Technically possible, but not believable.

  27. Andrew Bolt has accomplished the extremely challenging feat of writing the most ridiculous thing I have ever read on the Israel-Palestine conflict:

    I’d suggest also this: which nation most clearly shows white in conflict with brown, Western civilisation in conflict with the Oriental; capitalism in conflict with the tribal; reason in conflict with the “romantic”, the strong in conflict with the weak? In every fault line, Israel is on the opposite side to a certain kind of tribal Leftist. Israel is once again the canary in the coal mine of civilisation.

    More at Loon Pond.

  28. The second par of my comment @31 was a quote from Bolt that I should have formatted accordingly. Sorry!

  29. Meanwhile, Andrew Bolt’s good friend the Prime Minister was on the news tonight saying that he is “putting forward the long, strong arm of Australia” to protect people in Iraq from “the devilish hordes of the Islamic State”.

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