Statement 7: Asset and Liability Management (Continued)
The Australian Government's major assets and liabilities
Assets
The Government's financial assets are estimated to be $214.6 billion at 30 June 2011, increasing to $232.1 billion in 2011‑12 and $263.9 billion by the end of the forward estimates.
The Government's total stock of assets is estimated to be around $323.0 billion at 30 June 2011, increasing to $345.2 billion in 2011‑12 and $381.3 billion by the end of the forward estimates.
Future Fund
The Future Fund was established in 2006 to accumulate financial assets and invest them on behalf of the Australian Government to address the Government's unfunded superannuation liability.
The Treasurer and the Minister for Finance and Deregulation set the Investment Mandate for the Future Fund, which, since the Fund's establishment, has set a benchmark return of at least the CPI plus 4.5 per cent to 5.5 per cent per annum over the long term. The Investment Mandate gives guidance to the Future Fund Board of Guardians in relation to its investment strategy. The Board is independently responsible for the investment decisions of the Fund. The Investment Mandate also requires the Board to take an acceptable but not excessive level of risk for the Fund, measured in terms such as the probability of losses in a particular year.
During the initial transition period of the Future Fund, it was envisaged that returns would be lower while investments were built in line with the long‑term strategic asset allocation. Since inception, returns have reflected this situation. Returns have also been affected by the difficult investment climate associated with the global financial crisis, although the Fund's performance compared favourably with institutional investors generally during this period.
Since the effective start of the investment program on 1 July 2007, the Future Fund has generated a nominal return of 5.0 per cent (excluding its Telstra holdings). Since the first contribution to the Future Fund on 5 May 2006, the return has been 5.3 per cent per annum.
At 31 March 2011 the Future Fund's return for the financial year to date was 11.7 per cent (excluding its Telstra holdings). The Future Fund's Telstra portfolio returned 8.2 per cent for the March 2011 quarter and 0.2 per cent for the year to 31 March 2011.
On 24 March 2011, consistent with its strategic asset allocation, the Board announced that it had reduced the Future Fund portfolio's holding in Telstra to 620.4 million shares or 4.99 per cent of the company. As a result of owning less than 5 per cent of the company, the Future Fund has ceased to be a substantial shareholder in Telstra. Substantial shareholders of companies listed on stock exchanges in Australia have various requirements and disclosure obligations under the Corporations Act 2001.
The Future Fund was valued at $74.6 billion at 31 March 2011. Table 1 shows changes in the asset allocation of the Future Fund over 2010‑11.
Table 1: Asset allocation of the Future Fund
| Asset class | 30 June 2010 $m |
31 March 2011 $m |
|---|---|---|
| Australian equities | 7,465 | 8,478 |
| Global equities | 15,764 | 19,905 |
| Private equity | 1,895 | 2,487 |
| Property | 3,125 | 4,451 |
| Infrastructure | 2,865 | 3,508 |
| Debt securities | 13,822 | 14,269 |
| Alternative assets | 9,871 | 11,868 |
| Cash | 8,266 | 8,025 |
| Total (excluding Telstra holdings) | 63,074 | 72,990 |
| Telstra holdings | 4,272 | 1,629 |
| Total Future Fund assets | 67,346 | 74,619 |
Nation‑building Funds
The Building Australia Fund (BAF), the Education Investment Fund (EIF) and the Health and Hospitals Fund (HHF) were established on 1 January 2009. These Nation‑building Funds were established to finance investment in transport, communications, broadband, energy, water, higher education, research, vocational education and training, and health infrastructure.
The Investment Mandates for the Nation‑building Funds, which are set by the Treasurer and the Minister for Finance and Deregulation, give guidance to the Future Fund Board of Guardians, which has responsibility for managing the investments of the BAF, EIF and HHF. The Board is responsible for the investment decisions of the funds.
The Investment Mandates set a benchmark return on the Nation‑building Funds of the Australian three‑month bank bill swap rate plus 0.3 per cent per annum calculated on a rolling 12 month basis (5.2 per cent for the year to 31 March 2011). The Investment Mandates require that investments minimise the probability of capital losses over a 12 month horizon. Consistent with these requirements, the assets of the three funds are invested in combinations of short‑term and medium‑term debt instruments.
The March quarter 2011 return for the BAF was 1.4 per cent, while the EIF and the HHF each returned 1.5 per cent. Over the 12 months to 31 March 2011, each of the Nation‑building Funds has returned 5.4 per cent, exceeding the mandated benchmark return of 5.2 per cent.
At the end of the March quarter 2011, the value of the BAF was $8.6 billion, the EIF was $5.2 billion and the HHF stood at $4.7 billion.
The estimated uncommitted balance of funds at 31 March 2011 was $1.5 billion for the BAF, $2.5 billion for the EIF and $0.5 billion for the HHF. These figures include net investment earnings up to 31 March 2011.
The Nation‑building Funds are financial asset funds, consisting of cash and investments in debt instruments. When cash is drawn down from the Funds to fund projects, this reduces the size of the Funds on the balance sheet. In addition, decisions which commit to future spending from the uncommitted balances of the Funds will impact on the underlying cash balance estimates at the time those decisions are taken.
Residential mortgage‑backed securities
The global financial crisis led to the profound dislocation of the Australian residential mortgage‑backed securities (RMBS) market. In view of these developments, in October 2008 the Government directed the Australian Office of Financial Management (AOFM) to invest $8 billion in high‑quality AAA‑rated Australian securities to support competition in residential mortgage lending from smaller lenders.
In October 2009, the Treasurer announced that the Government would extend the program to invest an additional $8 billion to support competition in the mortgage market. The objectives of the program were extended to also include support for lending to small business. The AOFM estimates that close to 10 per cent of funds already invested from the Government's second $8 billion support tranche have been lent to Australian small businesses.
In December 2010, as part of its Competitive and Sustainable Banking System package, the Government announced a further $4 billion of investment in the RMBS market, with an additional objective of transitioning to a sustainable market. The AOFM will also continue to support innovative structures such as 'bullet' securities. This brings the Government's total investment commitment to $20 billion.
As at 30 April 2011, the AOFM had invested $12.8 billion of these funds, taking an average 13 per cent interest in RMBS deals with AOFM support since 1 January 2011, down from around 80 per cent for transactions undertaken in the corresponding period in 2009.
The securitisation market has recently shown signs of improvement, with spreads in deals narrowing and some recent deals going ahead without Government support. In one case, the AOFM was completely scaled out of a transaction it was prepared to support.
The AOFM and the Treasury will continue to monitor conditions in the RMBS market closely.
National Broadband Network
NBN Co Limited (NBN Co) was created in April 2009 to build and operate the National Broadband Network (NBN). NBN Co is a Government Business Enterprise.
NBN Co's Corporate Plan for the three years from 1 July 2010 to 30 June 2013 was released in December 2010. The Corporate Plan outlines NBN Co's intended approach to delivering the NBN and details the assumptions and cost estimates underpinning that approach; it incorporates decisions made by the Government on issues such as network design and uniform national wholesale pricing. A key assumption of the Corporate Plan is the finalisation of the Definitive Agreements between NBN Co and Telstra.
The Corporate Plan confirms that the NBN is a financially viable project which will provide a return on the Government's investment over time. The Corporate Plan shows that Australian taxpayers will get their investment back, with interest, as well as a state‑of‑the‑art high‑speed broadband network.
Following the release of the Corporate Plan, the Government asked corporate advisory firm Greenhill Caliburn Pty Ltd to review the Plan and provide an independent assessment of the Plan's key assumptions and potential risks. The Greenhill Caliburn report confirms the key assumptions underlying the revenue and cost projections contained in the Corporate Plan.
As outlined in the Corporate Plan, total capital expenditure for the project is estimated to be $35.9 billion. This is lower than the $42.8 billion estimated in the NBN Implementation Study undertaken by McKinsey/KPMG.
Provisioning in the Budget for the Government's investment in the NBN has been updated to reflect a level of funding that is consistent with the estimates outlined in the Corporate Plan and the operational needs of NBN Co. The Government expects to contribute $27.5 billion in equity for the roll‑out of the NBN, including $3.1 billion in 2011‑12 and $18.2 billion from 2011‑12 to 2014‑15.
NBN Co will be funded with Government equity until NBN Co has sufficient cash flows to support private sector debt without explicit Government support. The Government expects that during the NBN roll‑out period, private sector debt raised by NBN Co will complement Government equity to fund roll‑out activities. The Government will retain full ownership of NBN Co during the roll‑out in order to achieve its policy objectives, including its commitment to prioritise the roll‑out of the NBN in regional areas.
The Government has endorsed the Corporate Plan as being compliant with the Statement of Expectations for NBN Co, which constitutes the Government's final response to the NBN Implementation Study.
Higher Education Loan Program
The Higher Education Loan Program (HELP) comprises concessional loans to students that enable them to meet their education costs prior to earning an income above a certain level. The value of HELP is estimated to be around $15.3 billion at 30 June 2011, which is $1.7 billion higher than projected in the 2010‑11 Budget. The value of HELP is projected to grow to around $17.2 billion over 2011‑12 and $24.5 billion by the end of the forward estimates.
This growth is largely due to the estimated increase in university commencements over the forward estimates, principally the result of the Government's Bradley reforms which lifted the over‑enrolment cap from 5 per cent to 10 per cent in 2010 and 2011 and will uncap Commonwealth supported places from 2012. In addition, as announced in this Budget, from 1 January 2012 the Government will reduce the discount available to students electing to pay their student contribution up‑front from 20 per cent to 10 per cent.
Liabilities
The Government's total liabilities are estimated to be $391.3 billion at 30 June 2011, increasing to $432.7 billion in 2011‑12 and $452.3 billion by the end of the forward estimates.
Public sector employee superannuation liabilities
Public sector employee superannuation entitlements relating to past and present civilian employees and military personnel are a financial liability on the Government's balance sheet. The Government's superannuation liability is estimated to be around $129.5 billion at 30 June 2011.
The Australian Government has never fully funded its superannuation liabilities. The Commonwealth Sector Superannuation (CSS) Scheme and the Public Sector Superannuation (PSS) Scheme were closed to new members in 1990 and 2005 respectively. The Public Sector Superannuation Accumulation Plan was introduced from 1 July 2005 and provides fully funded accumulation benefits for new civilian employees.
Despite these reforms, the value of the Government's existing superannuation liability is projected to continue growing (in nominal terms) into the future, reaching $147.8 billion by the end of the forward estimates. This is the result of growth in the membership of the Military Superannuation and Benefits Scheme (MSBS), which remains open to new military personnel, and continued growth of entitlements accruing to existing members of the closed civilian and military schemes.
An actuarially determined discount rate is used to estimate the present value of future unfunded superannuation benefits. Consistent with the latest Long Term Cost Reports for the civilian and military schemes, the discount rate currently applied is 6.0 per cent per annum. Owing to the long term nature of the unfunded superannuation liability, the value recorded on the balance sheet is highly sensitive to the discount rate used.
As the superannuation liability is included in the Government's net worth and net financial worth aggregates, revaluations of the liability have an impact on these aggregates (see Note 1 in Budget Statement 9).
Commonwealth Government Securities
The face value of the total stock of Commonwealth Government Securities (CGS) on issue at 30 June 2011 is expected to be $192 billion. CGS is reported in the balance sheet in market value terms, consistent with relevant accounting standards.
Net issuance of CGS in 2011‑12 is expected to be around $33 billion, which takes into account $53 billion in gross bond issuance, $14 billion in bond maturities and a $6 billion run down in the volume of Treasury Notes on issue.
Treasury Bonds
Chart 2 shows Treasury Bonds outstanding at 30 June 2010 and new issuance in 2010‑11. Three new Treasury Bond lines were issued in 2010‑11.
Chart 2: Treasury Bonds on issue
Note: New issuance in 2010‑11 is to 10 May 2011.
The face value of Treasury Bonds on issue at 30 June 2011 is projected to be around $161 billion. Treasury Bond issuance in 2011‑12 is expected to be around $51 billion.
Treasury Indexed Bonds
Treasury Indexed Bonds are medium‑term to long‑term securities that have a capital value which is adjusted for movements in the CPI. Interest is paid quarterly, at a fixed rate, on the adjusted capital value. At maturity, investors receive the adjusted capital value of the security. The Australian Government recommenced the issuance of Treasury Indexed Bonds in 2009‑10.
Treasury Indexed Bonds contribute to the management of Australian Government debt by widening the range of available debt instruments, diversifying risk and tapping additional sources of investor demand.
Chart 3 shows Treasury Indexed Bonds outstanding at 30 June 2010 and new issuance in 2010‑11.
Chart 3: Treasury Indexed Bonds on issue
Note: New issuance in 2010‑11 is to 10 May 2011.
The face value of Treasury Indexed Bonds on issue at 30 June 2011 is projected to be around $14 billion. Treasury Indexed Bonds issuance in 2011‑12 is expected to be around $2 billion.
Treasury Notes
Treasury Notes are short‑term debt securities used primarily to meet within‑year financing requirements resulting from differences in the timing of receipts and payments. The volume of Treasury Notes on issue will vary over the course of the year, depending on the size and profile of the within‑year funding flows. It is anticipated that at least $10 billion of Treasury Notes will be kept on issue at all times to maintain a liquid market in Treasury Notes.
The face value of Treasury Notes on issue at 30 June 2011 is projected to be around $17 billion.
Aussie Infrastructure Bonds
On 7 April 2009, the Government announced that its investment in NBN Co would be partly funded through the issuance of Aussie Infrastructure Bonds (AIBs).
AIBs will not be required until 2011‑12, as the revised Government equity requirement for NBN Co in 2010‑11 will be met in full with funds from the Building Australia Fund. In 2011‑12, it is expected that $2.7 billion of the Government's equity investment in the National Broadband Network will be financed by AIBs, through wholesale issuance of CGS as part of the AOFM's overall debt program.
AIBs will not be separately identifiable from CGS, but will be reported as AIBs in the Budget statements. In addition, from 1 July 2011 the AOFM's weekly CGS tender notices will indicate that some of the proceeds of tenders may be used to finance the Government's investment in NBN Co.
On 12 December 2010, the Government announced that it would facilitate the trading of CGS on a retail exchange platform in Australia, as part of its Competitive and Sustainable Banking System reforms, to foster a deep and liquid corporate bond market. This commitment will provide the opportunity for retail investors to invest in Australian Government bonds through a mainstream and visible exchange platform, helping to finance the NBN in the same way as wholesale investors.
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