Western Australia's New Future Fund

It’s a bit of a slow day here in the land of giants, so I thought I’d tick off one of my “to dos” and go back and take a deeper look at what Western Australia is up to with it’s new “Future Fund” (let’s call it “WAFF” for short).

The Australian state (which occupies a full third of the country – i.e., it’s big and has lots of natural resources) appears to be following Alaska, Alberta, and Abu Dhabi’s lead in that it has decided to launch a sub-national sovereign fund. In fact, State Treasurer Christian Porter has even indicated that he is specifically looking to the Alberta Heritage Savings Trust Fund for inspiration as he ponders what the WAFF could look like. Now, since I’m from Alberta and, full disclosure, work for the Province’s SWF (via AIMCo), I thought I’d dig a little deeper to see what WA is planning.

But before we jump into that, let’s pause for a bit of background. The first I heard of the idea of a sovereign fund for Western Australia was in a paper by Jason Hart (of University of Western Australia) in 2010. In it, he argued rather convincingly of the need for such a fund. Here’s a blurb:

“Western Australia has been found to have Dutch disease...Revenue funds are a potential policy tool if the Western Australian government decides to limit the impact of export prices on Australia’s exchange rate. As this is unlikely to be an objective for a state government, it should instead be seen as an added benefit to countercyclical or sustainable fiscal policies. In this case, only a sovereign wealth fund is considered appropriate at the state level and could be used to manage royalties sustainably, reduce movements in Australia’s exchange rate and gain greater fiscal autonomy for the states.”

Hart would thus seem to deserve quite a bit of credit for putting this on the radar of State politicians, but there have also been plenty of detractors keen to debate the necessity of such a fund.

Anyway, I’m not all that interested in getting into the debate over whether WA needs to launch a new SWF... I’m interested in how it intends to do. So, let’s take a look. 

Here’s what we know:

• The WAFF’s generic mandate will be to generate benefits for future generations from today’s mineral resource revenues.
• WAFF will be capitalized with $1 billion seed capital from the Royalties for Regions Fund.
• From 2016 a minimum of 1% of WA’s royalty revenue will be paid into the fund (something in the range of $70 million per year).
• All principal and its returns will be “quarantined” from public spending for 20 years (when it is estimated the fund will be worth close to $5 billion).
• 20 years from now, the returns on the fund’s capital base (something around $230 million per year) will be used to build WA infrastructure.
• The fund will be protected from political interference thanks to its “manner and form” provision, which requires “...an absolute majority of both Houses of Parliament to repeal or amend the Act during the accumulation period.”

That all sounds fairly sensible and valuable. So how will it be invested? 

• The Treasurer will manage the money as a “special purpose account” under the rules of the Financial Management Act of 2006. 
• The assets in the funds will thus be spread among deposit accounts, Commonwealth debt securities, and corporate debt with at least a rating of A or A2.

The investment strategy being adopted is thus very conservative, and the fund is also fully embedded within the existing political apparatus of the state. In short, it’s hard to see anything that would suggest the WAFF shares DNA with Alberta, Alaska or even Abu Dhabi’s sovereign funds. The latter three all have separate agencies that invest the assets and, moreover, they all have quite aggressive investment policies.

But, to be fair, WA did consider this. And here’s the explanation for why it chose the path it did...

“For example, the Commonwealth’s Future Fund model, which invests in more diverse assets than the State’s Public Bank Account is permitted to, in 2010-11 included a staffing compliment of 79 and management costs of $444 million. Over the last decade, the State’s Public Bank Account has earned an average return of approximately 5.2 per cent per annum, which is in line with the average return earned by the Commonwealth’s Future Fund since its establishment in 2006.”

Hey, fair enough. It’ll be interesting to see how the WAFF develops in the future. Good luck to them!