Australian Government, 2012‑13 Budget

Statement 7: Asset and Liability Management (continued)

The Australian Government's major assets and liabilities


The Government's total stock of assets is estimated to be around $325.8 billion at 30 June 2012, increasing to $349.4 billion in 2012‑13 and $397.4 billion by the end of the forward estimates.

The Government's financial assets are estimated to be $216.3 billion at 30 June 2012, increasing to $238.5 billion in 2012‑13 and $283.4 billion by the end of the forward estimates.

The Government's non‑financial assets are estimated to be $109.5 billion at 30 June 2012, increasing to $110.9 billion in 2012‑13 and $114.0 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 (the Board) 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, 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 4.6 per cent. Since the first contribution to the Future Fund on 5 May 2006, the return has been 4.9 per cent per annum.

At 31 March 2012, the Future Fund's return for the financial year to date was 2.2 per cent.

The Future Fund was valued at $77.0 billion at 31 March 2012. Table 1 shows changes in the asset allocation of the Future Fund over 2011‑12.

Table 1: Asset allocation of the Future Fund

Table 1: Asset allocation of the Future Fund

*Note: In August 2011 the Future Fund Board of Guardians announced that it had achieved market weight in its Telstra holding following the completion of its portfolio rebalancing activity and that it would no longer report its Telstra holding separately from the rest of the portfolio.

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 Board, 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 2012). 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.

Over the 12 months to 31 March 2012, the BAF and EIF each returned 5.4 per cent, while the HHF returned 5.3 per cent, exceeding the mandated benchmark return of 5.2 per cent.

At the end of the March quarter 2012, the value of the BAF was $6.7 billion, the EIF was $4.6 billion and the HHF stood at $3.9 billion.

The estimated uncommitted balance of funds at 31 March 2012 was $1.7 billion for the BAF, $2.8 billion for the EIF and $0.7 billion for the HHF. These figures are the amounts available for new eligible projects and include net investment earnings up to 31 March 2012.

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 securitisation market globally, including the Australian residential mortgage backed securities (RMBS) market. In view of these developments, during 2008 and 2009 the Government directed the Australian Office of Financial Management (AOFM) to invest $16 billion in high quality, AAA‑rated Australian securities to support competition from smaller lenders in the residential mortgage and small business lending markets.

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, bringing the Government's total investment commitment to $20 billion.

As at 1 May 2012, the AOFM had invested $14.9 billion of these funds, with $5.1 billion remaining within the AOFM's mandate to invest in future high‑quality RMBS. The program has so far supported 58 securitisation deals to raise over $39.2 billion, assisting 20 smaller mortgage lenders to continue lending to the retail market.

The Government's securitisation program continues to be successful in supporting smaller lenders access funding to compete in the retail mortgage and business lending markets.

Since 2008, it is estimated that the program has assisted smaller lenders fund over 211,000 home loans and more than $2.4 billion worth of loans to small businesses. Within the banking sector, non‑major Australian‑owned banks have increased their market share by 1.0 percentage point in the year to March 2012.

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), the single largest infrastructure project in Australian history. NBN Co is a wholly owned Australian Government company that has been prescribed as a Government Business Enterprise.

There have been some delays to the rollout of the NBN over the course of 2011‑12, owing to the delay in finalising the Definitive Agreements between NBN Co and Telstra and in NBN Co negotiating better value construction contracts. As a result, NBN Co's equity requirement from Government in 2011‑12 has decreased to reflect these delays from $3.4 billion to $2.1 billion. The Government will provide $20.1 billion in equity to NBN Co over four years from 2012‑13.

The NBN rollout is expected to accelerate in 2012‑13 following the Definitive Agreements coming into force on 7 March 2012. On 29 March 2012, NBN Co announced the three year rollout plan for the NBN, which will see construction of the fibre optic network underway or complete in areas containing over 3.5 million premises in 1500 communities in every State and Territory — up to one third of Australia's homes and businesses.

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 $17.6 billion at 30 June 2012, which is $0.3 billion higher than projected in the 2011‑12 Budget. The value of HELP is projected to grow to around $20.3 billion over 2012‑13 and $30.6 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 uncapping of Commonwealth Support Places for Undergraduate courses from 1 January 2012 and the expansion of access to the Vocational Education and Training FEE‑HELP scheme.

Clean Energy Finance Corporation

On 10 July 2011, the Government announced it would provide $2 billion a year for five years from 2013‑14 to the Clean Energy Finance Corporation (CEFC). The CEFC will apply its capital through a commercial filter to increase flows of finance to the clean energy sector. It will invest in the later‑stage development of renewable energy, low‑emissions technology and energy efficiency. It will also invest in manufacturing businesses that provide inputs for these sectors. The CEFC will use a range of financial instruments to make these investments, including loans on commercial and concessional terms, loans guarantees and equity.

The CEFC will be established by legislation and will operate as a Commonwealth authority. Investment decisions will be made by an independent Board, consistent with a high‑level investment mandate set by the Government.

Further information can be found in the measure: Clean Energy Finance Corporation detailed in the 2011‑12 Mid‑Year Economic and Fiscal Outlook.


The Government's total liabilities are estimated to be $467.6 billion at 30 June 2012, increasing to $487.2 billion in 2012‑13 and $509.1 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 $138.5 billion at 30 June 2012.

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 $159.7 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. While recent yields on government bonds have been lower than average, the long‑term nature of the unfunded superannuation liability requires the use of a longer‑term discount rate. The value recorded on the balance sheet is highly sensitive to the discount rate used. 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.

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 2012 is expected to be $235 billion. The face value of Treasury Bonds and Notes represents the amount that the Government pays back at maturity and is independent of fluctuations in market value.

CGS are reported on the balance sheet in market value terms, consistent with relevant accounting standards. The market value of CGS reflects bond prices in the secondary market, which are constantly changing with market conditions.

Treasury Bonds

Chart 2 shows the face value of Treasury Bonds outstanding at 30 June 2011 and new issuance in 2011‑12. Three new Treasury Bond lines were issued in 2011‑12.

Chart 2: Treasury Bonds on issue

Chart 2: Treasury Bonds on issue

Note: New issuance in 2011‑12 is to 8 May 2012.

The face value of Treasury Bonds on issue at 30 June 2012 is projected to be around $205 billion, and around $214 billion at 30 June 2013.

Treasury Indexed Bonds

Treasury Indexed Bonds (TIBs) 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 TIBs in 2009‑10.

TIBs 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 TIBs outstanding at 30 June 2011 and new issuance in 2011‑12.

Chart 3: Treasury Indexed Bonds on issue

Chart 3: Treasury Indexed Bonds on issue

Note: New issuance in 2011‑12 is to 8 May 2012.

The face value of TIBs on issue at 30 June 2012 is projected to be around $16 billion, and around $18 billion at 30 June 2013.

Interest payments made on TIBs are reflected in the Government's cash flow statements, with the adjusted capital value paid in the year which the bond matures. In 2015‑16 there is an increase in interest paid as a result of the August 2015 TIB maturing.

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 2012 is projected to be around $15 billion.

Aussie Infrastructure Bonds

In April 2009, the Government announced that its investment in NBN Co would be partly funded through the issuance of Aussie Infrastructure Bonds (AIBs).

AIBs were not required prior to 2011‑12, as the Government's equity contributions were met in full with funds from the Building Australia Fund. In 2011‑12, it is expected that around $1.7 billion of the Government's $2.1 billion 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 issuance program.

From 2012‑13, all of the Government's equity contributions to NBN Co will be funded through AIBs. In 2012‑13, this is expected to be around $5.8 billion.

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