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2014
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
ASSET RECYCLING FUND BILL 2014
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Minister for Finance,
Senator the Hon Mathias Cormann)
Table of abbreviations and common terms
Abbreviation or Full term or description
common term
Agency Future Fund Management Agency
ARF means the Asset Recycling Fund
ARF Special Account means the Asset Recycling Fund Special Account established
under section 12
BAF means the Building Australia Fund established under the
Nation-building Funds Act 2008
COAG Reform Fund means the Fund established under the COAG Reform Fund
Act 2008 for the purpose of making grants of financial
assistance to the States and Territories
DisabilityCare Australia Fund means the DisabilityCare Australia Fund Act 2013
Act
EIF means the Education Investment Fund established under the
Nation-building Funds Act 2008
FMA Act Financial Management and Accountability Act 1997
Finance Minister The Minister who administers the Financial Management and
Accountability Act 1997
Future Fund Act means the Future Fund Act 2006
Future Fund Board Future Fund Board of Guardians
Future Fund Special Account means the Future Fund Special Account established by
section 12 of the Future Fund Act 2006
Infrastructure Minister means the Minister who administers the Infrastructure
Australia Act 2008
ITAA Income Tax Assessment Act 1997
Legislative Instruments Act Legislative Instruments Act 2003
Nation-building Funds Act means the Nation-building Funds Act 2008
Responsible Ministers means the following:
(a) the Treasurer
(b) the Finance Minister
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Asset Recycling Fund Bill 2014
Context
The Government is delivering a substantial infrastructure package in the 2014-15
Budget to support economic growth and improve the long term productive capacity of
the economy.
The Infrastructure Growth Package includes an Asset Recycling Initiative that will
provide financial incentives to State and Territory governments to sell existing assets
and reinvest the sale proceeds into additional productive economic infrastructure and
provide additional new investment to expedite nationally significant infrastructure.
The Asset Recycling Fund (ARF) will be set up to facilitate the Government's
investment under the Infrastructure Growth Package.
Summary
The Bill establishes the Asset Recycling Fund on 1 July 2014, which consists of:
· the Asset Recycling Fund Special Account; and
· the investments of the Asset Recycling Fund.
The ARF is a dedicated investment vehicle with a focus on providing funding,
financial assistance and incentives to the States and Territories to create new
infrastructure to boost economic growth.
Credits
The initial size of the Asset Recycling Fund at commencement is $5.9 billion,
comprising amounts of:
· $2.4 billion from the Building Australia Fund (BAF); and
· $3.5 billion from the Education Investment Fund (EIF).
Further credits may be made to the Asset Recycling Fund in the future.
Debits
The Finance Minister can direct in writing that specified amounts be debited from the
Asset Recycling Fund and credited to:
· the COAG Reform Fund for making grants of financial assistance to the States
and Territories for expenditure on infrastructure under the National
Partnership Agreement on Asset Recycling and the National Partnership
Agreement on Land Transport Infrastructure Projects;
· the COAG Reform Fund for making other infrastructure national partnership
grants; and
· the Asset Recycling Fund Infrastructure Special Account for making
infrastructure payments.
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Investment of the Fund
The Future Fund Board will be responsible for deciding how to invest the Asset
Recycling Fund in line with the objective of enhancing the Commonwealth's ability
to make grants of financial assistance to the States and Territories and to make
infrastructure payments.
The responsible Ministers can give written directions to the Future Fund Board
regarding the performance of investments of the Asset Recycling Fund, in the form of
an Investment Mandate.
Earnings and expenses
Earnings on investments of the Asset Recycling Fund will be reinvested in the Fund.
Expenses associated with investment and administration of the Asset Recycling Fund
by the Future Fund Board will be met from the Fund.
Reporting
The Finance Minister is responsible for reporting and giving information on the Asset
Recycling Fund and may seek reports and information from the Future Fund Board.
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Financial Impact Statement
The initial credit of funds from the BAF and the EIF into the Asset Recycling Fund
will not have a direct impact on underlying cash and fiscal balances, as these are
already part of, and remain within, the Consolidated Revenue Fund (CRF).
The assets of the Fund are within the CRF and are therefore included in the
Government's balance sheet.
The interest earnings of the Fund have a positive impact on the underlying cash and
fiscal balances. Management fees of the Future Fund Board have a negative impact
on the underlying cash and fiscal balances.
The payments from the Fund will be met from the capital and net earnings (interest
earnings less management fees) of the Fund with payments to occur from when the
Fund is established. Payments from the Fund will have a negative impact on the
underlying cash and fiscal balances.
Statement of Compatibility w ith Human Rights
The provisions in the Bill do not:
· engage any of the applicable rights or freedoms outlined in the Human Rights
(Parliamentary Scrutiny) Act 2011, such as encompassed in the International
Covenant on Civil and Political Rights; or
· limit any human rights, nor propose any offences or penalties.
This Bill is therefore compatible with the human rights and freedoms recognised or
declared in the international instruments listed in subsection 3(1) of the Human Rights
(Parliamentary Scrutiny) Act 2011.
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ASSET RECYCLING FUND BILL 2014
NOTES ON CLAUSES
Part 1 Preliminary
Section 1 - Short Title
Section 1 provides for the Act to be cited as the Asset Recycling Fund Act 2014.
Note: The sections in the Bill will become sections of the Act on Royal Assent.
Section 2 - Commencement
Section 2 provides that the Bill commences on 1 July 2014.
Section 3 - Simplified outline
Section 3 is an information provision which is intended to provide a high level
introduction to the provisions in the Bill, to aid readability. The outline is not
intended to be comprehensive and should not be relied on in place of the substantive
provisions in the Bill.
Section 4 - Definitions
Section 4 provides definitions of the terms and expressions used in the Bill.
Section 5 - Crown to be bound
Section 5 provides that the Act binds the Crown in each of its capacities but does not
make the Crown liable to be prosecuted for an offence.
Section 6 - Extension to external Territories
Section 6 provides that the Act extends to every external Territory.
Section 7 - Extra-territorial application
Section 7 provides for the geographical reach of this Act to be wide - applying both
within and outside of Australia - due to the possibility that the Asset Recycling Fund
may be invested in overseas markets.
Section 8 - Alternative constitutional bases
Section 8 details the constitutional bases upon which the making of infrastructure
payments relies.
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Section 9 - Object
Section 9 sets out the objects of the Bill, namely to enhance the Commonwealth's
ability to transfer amounts to:
· the COAG Reform Fund for making grants of financial assistance to the States
and Territories, for expenditure on infrastructure under the National
Partnership Agreement on Asset Recycling and the National Partnership
Agreement on Land Transport Infrastructure Projects
· the COAG Reform Fund for making other infrastructure national partnership
grants; and
· the Asset Recycling Fund Infrastructure Special Account for making
infrastructure payments.
Part 2 - Asset Recycling Fund
Division 1 - Introduction
Section 10 - Simplified outline of this Part
Section 10 is an overview of Part 2 to assist with readability.
Division 2 - Establishment of the Asset Recycling Fund etc.
Section 11 - Establishment of the Asset Recycling Fund
Section 11 establishes a financial asset fund - the Asset Recycling Fund - consisting
of amounts credited to an Asset Recycling Fund Special Account and investments of
the Asset Recycling Fund.
Section 12 - Establishment of the Asset Recycling Fund Special Account
Section 12 establishes the Asset Recycling Fund Special Account - a Special Account
for the purposes of section 21 of the FMA Act.
A Special Account is an appropriation mechanism that sets aside an amount within the
Consolidated Revenue Fund to be expended for specific purposes. Any amounts
credited to the Asset Recycling Fund Special Account are quarantined from the rest of
the Consolidated Revenue Fund and can only be debited from the Asset Recycling
Fund for the purposes set out in the Bill.
The note immediately following this section is included to assist the reader by
clarifying that amounts could be credited to the Asset Recycling Fund Special
Account by an Appropriation Act.
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Division 3 - Credits of amounts to the Asset Recycling Fund
Section 13 - Initial credits to Special Account
The initial size of the Asset Recycling Fund is $5.9 billion, comprising:
· $2.4 billion from the Building Australia Fund (BAF); and
· $3.5 billion from the Education Investment Fund (EIF).
Section 13 establishes a mechanism for amounts to be credited to the Asset Recycling
Fund Special Account and debited from the Building Australia Fund Special Account
and Education Investment Fund Special Account respectively.
The mechanism is intended to give flexibility for the initial credits to be made up of
cash amounts in the BAF Special Account and EIF Special Account, as well as the
current investments of the BAF and EIF held in the name of the Future Fund Board.
It is not intended that the Future Fund Board be required to realise investments to
make up the initial credits. The notes at the end of subsections 13(1) and (2) assist
readers by referring them to section 34 in relation to the transfer of investments to the
Asset Recycling Fund.
Section 14 - Subsequent credits of amounts
Section 14 provides the mechanism for subsequent credits to be made to the Asset
Recycling Fund in future, either by way of a particular one-off amount or by a series
of set instalments.
Amounts are credited by a written determination of the responsible Ministers or their
delegates. Refer to sections 56 and 57 for delegation powers of the Finance Minister
and the Treasurer.
Subsection 14(3) provides that a determination to credit a specified amount to the
Asset Recycling Fund Special Account is a legislative instrument for the purposes of
the Legislative Instruments Act and, as such, will be tabled in the Parliament and
published on the Federal Register of Legislative Instruments.
However, the determination, as a ministerial direction, is not disallowable. Such
determinations would usually be regarded as administrative, rather than legislative, in
character. It is not appropriate that they be disallowable as they are a one-off
instrument made when funds are about to be credited. The same approach was taken
in equivalent provisions in the Future Fund Act.
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Division 4 - Debits of amounts from the Asset Recycling Fund etc.
Subdivision A - Purposes
Section 15 - Purposes of the Asset Recycling Fund Special Account - main
purposes
Section 15 sets out the main purposes of the Asset Recycling Fund Special Account.
These purposes are consistent with the objects of the Bill, namely:
· the COAG Reform Fund for making grants of financial assistance to the States
and Territories for expenditure on infrastructure under the National
Partnership Agreement on Asset Recycling and the National Partnership
Agreement on Land Transport Infrastructure Projects;
· the COAG Reform Fund for making other infrastructure national partnership
grants; and
· the Asset Recycling Fund Infrastructure Special Account for making
infrastructure payments.
Section 16 - Purposes of the Asset Recycling Fund Special Account - purposes
related exclusively to the investments etc. of the Asset Recycling Fund
Sections 16 relates to the payment of various expenses that may be incurred by the
Future Fund Board which relate exclusively to the investments of the Asset Recycling
Fund, but which do not relate to the main purposes of the Fund. It sets out the range of
these additional purposes for which the Asset Recycling Fund may be debited.
Section 17 - Purposes of the Asset Recycling Fund Special Account - purposes
not related exclusively to the Asset Recycling Fund
Section 17 relates to the payment of various expenses that may be incurred by the
Future Fund Board in respect of its broader functions under this Bill, as well as the
Future Fund Act, the Nation-building Funds Act and the DisabilityCare Australia
Fund Act. It sets out the range of additional purposes for which the Asset Recycling
Fund may be debited in respect of costs that are common across each of the funds for
which the Future Fund Board has responsibility.
Subdivision B - Grants channelling through COAG Reform Fund
Section 18 - Channelling of State/Territory grants payments through the COAG
Reform Fund
Section 18 provides that the Finance Minister may direct that a specified amount will
be debited from the Asset Recycling Fund Special Account and credited to the COAG
Reform Fund for the purposes of making a grant of financial assistance to a State or
Territory in relation to expenditure incurred under the National Partnership
Agreement on Asset Recycling, the National Partnership on Land Transport and
Infrastructure Projects, or a specified infrastructure national partnership grant.
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The Finance Minister's direction is administrative, rather than legislative, in character
and is therefore not a legislative instrument for the purposes of the Legislative
Instruments Act. Subsection 18(4) has been included to assist readers.
Subsection 18(5) requires the Finance Minister to give a copy of the direction to the
Minister who recommended the grant.
Section 19 - Recommendations about grants payments
Section 19 requires the Minister responsible under the relevant national partnership
agreement to recommend the specification of the grant. The recommendation by the
relevant Minister to the Finance Minister will outline the overall payments for each
project approved by the Government to be funded from the Fund. This
recommendation reflects accountability by the relevant Minister regarding the
payments for the project given that the relevant Minister (not the Finance Minister) is
responsible for the funding agreements relating to the projects.
It is intended that the Minister's recommendation will be one-off for the specified
projects (which could include more than one project at each time) prior to payments
commencing for a project, and that ongoing milestone payments will be managed at
the departmental level. The recommendation by the relevant Minister to the Finance
Minister is therefore not required for individual milestone payments.
Section 20 - Debit from the COAG Reform Fund
Section 20 reflects the Government's intention that the COAG Reform Fund operates
as a vehicle through which payments from the Asset Recycling Fund will be
distributed to States and Territories.
Consistent with this, the Treasurer is required to ensure that, as soon as practicable
after an amount is credited to the COAG Reform Fund, that the amount is debited for
the purposes of making the grant.
If for any reason the payment cannot be made, subsection 20(3) provides the
mechanism for its return to the Asset Recycling Fund Special Account. The intention
is that the money is returned to be invested by the Future Fund Board until such time
as the payment can be made.
Section 21 - Grant to a State or Territory
Section 21 is concerned with grants of financial assistance to a State or Territory
through the COAG Reform Fund in relation to expenditure incurred under the
National Partnership Agreement on Asset Recycling and the National Partnership
Agreement on Land Transport Infrastructure Projects and the making of Infrastructure
national partnership grants.
The note immediately following subsection 21(1) assists the reader by referring to
subsection 20(2), which deals with payments channelled through the COAG Reform
Fund.
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The section provides that the terms and conditions upon which a grant is made to the
States and Territories are to be set out in a written agreement between the
Commonwealth and the State or Territory, and that such an agreement may be entered
into by a Minister on behalf of the Commonwealth.
Subdivision C - Payments channelling through the Asset Recycling Fund
Infrastructure Special Account
Section 22 - Establishment of the Asset Recycling Fund Infrastructure Special
Account
Section 22 establishes the Asset Recycling Fund Infrastructure Special Account - a
Special Account for the purposes of section 21 of the FMA Act.
A Special Account is an appropriation mechanism that sets aside an amount within
the Consolidated Revenue Fund to be expended for specific purposes. Any amounts
credited to the Asset Recycling Fund Infrastructure Special Account are quarantined
from the rest of the Consolidated Revenue Fund and can only be debited for the
purpose set out in section 23.
The note immediately following this section is included to assist the reader by
clarifying that amounts could be credited to the Asset Recycling Fund Infrastructure
Special Account by an Appropriation Act.
Section 23 - Purpose of the Asset Recycling Fund Infrastructure Special Account
Section 23 provides that the purpose of the Asset Recycling Fund Infrastructure
Special Account is to enable the making of infrastructure payments, which may either
be by way of a grant of financial assistance or otherwise.
The definition of infrastructure payments will allow payments to be made to bodies
other than States, including Territories and local governments.
Section 24 - Channelling of payments through the Asset Recycling Fund
Infrastructure Special Account
Section 24 provides that the Finance Minister may direct that a specified amount will
be debited from the Asset Recycling Fund Special Account and credited to the Asset
Recycling Fund Infrastructure Special Account for the purposes of making
infrastructure payments.
The Finance Minister's direction is administrative, rather than legislative, in character
and is therefore not a legislative instrument for the purposes of the Legislative
Instruments Act. Directions of this type are administrative in character because they
are merely the application of a legal power in a particular case; they do not determine
or alter the content of the law itself. Subsection 24(4) has been included to assist
readers.
Subsection 24(5) requires the Finance Minister to give a copy of the direction to the
Infrastructure Minister.
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Section 25 - Recommendations about payments
Section 25 requires the Infrastructure Minister to recommend the specification of the
payment. The recommendation by the Infrastructure Minister to the Finance Minister
will outline the overall payments for each project approved by the Government to be
funded from the Fund. This recommendation reflects accountability by the
Infrastructure Minister regarding the payments for the project given that the
Infrastructure Minister (not the Finance Minister) is responsible for the funding
agreements relating to the projects.
It is intended that the Infrastructure Minister's recommendation will be one-off for the
specified projects (which could include more than one project at each time) prior to
payments commencing for a project, and that ongoing milestone payments will be
managed at the departmental level. The recommendation by the Infrastructure Minister
to the Finance Minister is therefore not required for individual milestone payments.
Section 26 - Payments -debit from the Asset Recycling Fund Infrastructure
Special Account
Section 26 reflects the Government's intention that the Asset Recycling Fund
Infrastructure Special Account operates as a vehicle through which payments from the
Asset Recycling Fund will be distributed to recipients in respect of infrastructure
projects.
Consistent with this, the Infrastructure Minister is required to ensure that, as soon as
practicable after an amount is credited to the Asset Recycling Fund Infrastructure
Special Account, that the amount is debited for the purposes of making the payment.
If for any reason the payment cannot be made, subsection 26(3) provides the
mechanism for its return to the Asset Recycling Fund Special Account. The intention
is that the money is returned to be invested by the Future Fund Board until such time
as the payment can be made.
Section 27 - Grant to a person other than a State
Section 27 is concerned with an infrastructure payment, that is by way of a grant of
financial assistance, to a person other than a State.
The section provides that the terms and conditions upon which the grant is made are
to be set out in a written agreement between the Commonwealth and the recipient,
and that such an agreement may be entered into by a Minister on behalf of the
Commonwealth.
Section 28 - Payment to a person other than a State
Section 28 is concerned with an infrastructure payment, that is other than by way of a
grant of financial assistance, to a person other than a State.
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The section provides that the terms and conditions upon which the payment is made
are to be set out in a written agreement between the Commonwealth and the recipient,
and that such an agreement may be entered into by a Minister on behalf of the
Commonwealth.
Subdivision D - Obligation to ensure sufficient money
Section 29 - Future Fund Board must ensure that there is sufficient money in the
Asset Recycling Fund Special Account to cover authorised debits etc.
Section 29 requires the Future Fund Board to take all reasonable steps to ensure that
the amount of money standing to the credit of the Asset Recycling Fund Special
Account is sufficient to cover amounts to be debited from the Asset Recycling Fund
Special Account.
The note immediately below this section assists readers to understand the obligations
of the Future Fund Board in respect of this requirement.
Division 5 - Inter-fund transfers
This section allows for transfers from the Asset Recycling Fund Special Account to
the Future Fund Special Account.
Section 30 - Transfers from the Asset Recycling Fund to the Future Fund
Sections 30 allows for amounts to be transferred between the Asset Recycling Fund
and the Future Fund. The purpose of this is to enable reimbursement to the Future
Fund for expenses incurred in relation to the Asset Recycling Fund that have been
debited from the Future Fund Special Account.
The section allows the Finance Minister to direct one Fund is to be debited and the
other Fund credited by a specified amount.
The Finance Minister's direction is administrative, rather than legislative, in character
and is therefore not a legislative instrument for the purposes of the Legislative
Instruments Act. Directions of this type are administrative in character because they
are merely the application of a legal power in a particular case; they do not determine
or alter the content of the law itself. Subsection 30(3) has been included to assist
readers.
Part 3 Investment of the Asset Recycling Fund
Section 31 - Simplified outline of this Part
Section 31 is an information provision which provides an overview of Part 3 to assist
with readability.
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Section 32 - Objects of investment of the Asset Recycling Fund
Subsection 32(1) is intended to reinforce that amounts are invested by the Future
Fund Board for the main object of enhancing the Commonwealth's ability to provide
grants of financial assistance to the States and Territories, and infrastructure
payments. That is, the objective of the Future Fund Board in investing the Asset
Recycling Fund is consistent with the objective and main purposes of the Asset
Recycling Fund itself.
Subsection 32(2) sets out that the ancillary objects of the investment of the Asset
Recycling Fund are for enhancing the ability of the Commonwealth and the Future
Fund Board to discharge costs, expenses, obligations and liabilities and make
payments for the ancillary purposes as set out in sections 16 and 17.
Section 33 - Investment of the Asset Recycling Fund
Section 33 is modelled on the investment powers under section 39 of the FMA Act.
However, subsection 33(1) expands those powers to specifically provide for the
investment of the Asset Recycling Fund in a broad range of financial assets, which
could include cash, interest-bearing securities and other debt-like securities. Specific
conditions on the acquisition of derivatives are separately covered in section 43. This
approach to investment of the Asset Recycling Fund is consistent with similar
arrangements for the Future Fund.
Investments of the Asset Recycling Fund will be made in the name of the Future Fund
Board (rather than the Commonwealth) to reinforce the position that the Future Fund
Board manages the Asset Recycling Fund at arm's length from the Government.
However, beneficial ownership of the Asset Recycling Fund remains with the
Commonwealth at all times.
Subsection 33(3) provides that amounts invested in financial assets are investments
of the Asset Recycling Fund and, as such, may be realised, disposed of or redeemed
by the Future Fund Board.
Section 34 - Allocation of investments to the Asset Recycling Fund
Section 34 relates to the initial credits to the Asset Recycling Fund (also see
section 13) and applies if the amount transferred to the Asset Recycling Fund Special
Account under section 13 is less than the full initial credit of:
· $2.4 billion from the BAF; and
· $3.5 billion from the EIF.
The section sets out the mechanism for a transfer of existing investments, rather than
money in the BAF Special Account and EIF Special Account. It is intended that the
Future Fund Board would work out what amounts have been transferred to the Asset
Recycling Fund Special Account under section 13 and then determine sufficient
investments to make up the balance of the initial credits from the BAF and EIF,
respectively.
16
These investments will then cease to be assets of the BAF and EIF and will become
investments of the Asset Recycling Fund.
The purpose of the mechanism is to provide flexibility to the Future Fund Board, so as
not to require that investments be realised for the purposes of the initial credits of the
Asset Recycling Fund.
The determinations of the Future Fund Board are administrative, rather than legislative,
in character and are therefore not legislative instruments for the purposes of the
Legislative Instruments Act. Directions of this type are administrative in character
because they are merely the application of a legal power in a particular case; they do
not determine or alter the content of the law itself. Subsections 34(3)
and 34(6) have been included to assist readers.
Section 35- Management of investments of the Asset Recycling Fund
Subsections 35(1) and (2) provide that income derived from an investment of the
Asset Recycling Fund, including a return of capital or another form of financial
distribution, must be credited to the Asset Recycling Fund Special Account. This is
consistent with the requirements under sections 81 and 83 of the Constitution (which,
in effect, provide that public money forms part of the Consolidated Revenue Fund and
can only be spent if authorised by an appropriation made by law). In practice, any
money that has not been invested must be held in an official bank account. The
requirement to hold the money in an official bank account is covered in the FMA Act.
Subsections 35(3) to (5) relate to the arrangements that will apply in relation to the
realisation of assets. While subsections 35(3) to (4) are self explanatory,
subsection 35(5) allows the Future Fund Board to authorise, prior to an investment
maturing, that the proceeds of this investment be automatically reinvested with the
same entity. This avoids the need for the proceeds of realisation of the investment to
be treated as public money and credited to the Consolidated Revenue Fund only to be
then reappropriated and reinvested. Any reinvestment is an investment of the Asset
Recycling Fund.
Subsection 35(6) provides that section 39 of the FMA Act does not apply to an
investment of the Asset Recycling Fund. Section 39 of the FMA Act authorises the
Finance Minister to invest public money in only a limited range of investments, such
as government bonds and bank deposits. However, section 33(1) provides for the
investment of the Asset Recycling Fund in a broader range of financial assets, which
could include cash, interest-bearing securities and other debt-like securities.
Section 36 -Asset Recycling Fund Investment Mandate
It is appropriate that the Government, as owner of the Asset Recycling Fund, has a
mechanism for articulating its overall expectations for how the Asset Recycling Fund
will be invested and managed by the Future Fund Board. Section 36 establishes a
framework that enables the Government to give strategic guidance to the Future Fund
Board while preserving the Board's role in managing the investment of the Asset
Recycling Fund at arm's length from the Government. This approach is consistent
with that existing in relation to the Future Fund.
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Subsection 36(1) provides that the responsible Ministers have the power to give the
Future Fund Board written directions in relation to the performance of its investment
functions and the exercise of its powers. The responsible Ministers must issue at least
one such direction and to provide clarity and certainty to the Future Fund Board.
Note that the Asset Recycling Fund investment function is defined in section 4.
Subsection 36(2) provides that any direction issued under subsection 29(1) has effect
subject to the limitations set out in section 37 - Limitation on Asset Recycling Fund
Investment Mandate.
The fact that a direction has already been issued does not prohibit the responsible
Ministers from issuing additional directions. All of these directions together comprise
the Investment Mandate (see subsections 36(1) and 36(4)).
While the responsible Ministers can issue new directions at any time, the intention is
that the Investment Mandate will reflect the nature of the Government's policy. Any
new directions will therefore only be issued in light of significant policy changes or
material changes in the investment environment faced by the Asset Recycling Fund.
Subsection 36(3) provides that in setting an Investment Mandate, the responsible
Ministers must have regard to maximising the return on Asset Recycling Fund
consistent with international best practice for institutional investment, and of the
objectives of the investment of the Asset Recycling Fund, and any other matters the
Ministers consider to be relevant.
This requirement will give the Future Fund Board and the Parliament assurance that
the responsible Ministers must consider the scope of their directions from an
investment perspective, while ensuring that there is flexibility to take account of
broader policy issues and national interest considerations.
Subsections 36(5) and 36(6) provide that the Investment Mandate may include, but is
not limited to, statements about policies the Future Fund Board must pursue in
relation to risk and return and the allocation of the Asset Recycling Fund to particular
asset classes. This may include restrictions or thresholds for investing the Asset
Recycling Fund in certain jurisdictions or asset classes and statements of the
Government's tolerance for losses.
Subsection 36(7) provides that any policies are subject to the limitations set out in
section 37.
Subsection 36(8) ensures that the Future Fund Board is not given conflicting
directions regarding the Government's tolerance for risk, its expectations for returns
and any associated allocation of the Asset Recycling Fund across asset classes.
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To avoid doubt, subsection 36(9) makes it clear that the scope of the responsible
Ministers' powers to issue directions to the Future Fund Board in relation to the
investment of the Asset Recycling Fund is bound by the Act. For example, the
responsible Ministers could not direct the Future Fund Board to use derivatives in a
manner that contradicts section 43 (which deals with the acquisition of derivatives by
the Future Fund Board).
Subsection 36(10) provides that the Investment Mandate will not formally commence
until at least 15 calendar days after it is issued. This is to allow the Future Fund
Board time to adjust to any revised directions issued by the responsible Ministers.
Importantly, the Future Fund Board will be able to know with certainty when the new
direction will come into force.
Subsection 36(11) provides that directions under subsection 36(1), which set out
certain rules that the Future Fund Board must comply with, are legislative in character
and are therefore legislative instruments for the purposes of section 5 of the
Legislative Instruments Act 2003. However, any directions issued by the responsible
Ministers as part of the Investment Mandate are exempt from parliamentary
disallowance provided by section 44 of the Legislative Instruments Act 2003 and
exempt from sunsetting provided by section 54 of the Legislative Instruments Act
2003.
As legislative instruments, any directions given to the Future Fund Board under this
section are required to be registered on the Federal Register of Legislative Instruments
and tabled in the Parliament.
This approach enables the public and Parliament to hold the Government accountable
for the directions it issues to the Future Fund Board without impeding the
Government's ability to manage its finances.
Subsections 36(12) and 36(13) provide that, subject to the restrictions set out in the
Act and the expectations of the Government as articulated in the Investment Mandate,
the Future Fund Board has a statutory obligation to seek to maximise returns,
consistent with international best practice for institutional investment and enhancing
the Commonwealth's ability to make payments in relation to the objects of the
investment of the Asset Recycling Fund (set out in section 32).
This provision (together with subsection 36(8)) establishes a clear hierarchy of
priorities for the Future Fund Board - the responsibility to maximise returns is
subordinate to the investment parameters set out by the Parliament and the
Government. This framework provides appropriate flexibility while still ensuring
suitable accountability for any directions the Government gives the Future Fund
Board regarding the investment of the Asset Recycling Fund.
It also provides the Future Fund Board with clarity as to the extent of its accountability
- the Future Fund Board must be able to demonstrate that it is pursuing policies and
strategies that are clearly directed at maximising investment returns in a manner that is
consistent with best practice.
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It is expected that the Future Fund Board will adopt a best practice approach to a
range of issues by learning from the experiences of other investors and funds of
national significance.
The purpose of subsection 36(13) is to clarify that subsection 36(12) is the default
position in the event that a direction under subsection 36(1) is not issued or is
revoked. However, a direction issued by the Ministers under subsection 36(1) will
override subsection 36(12).
Section 37 - Limitation on Asset Recycling Fund Investment Mandate
Subsection 37 specifies that the responsible Ministers cannot direct the Future Fund
Board to use the assets of the Asset Recycling Fund to invest in a particular financial
asset, for example, shares in a particular infrastructure company. It also prevents the
responsible Ministers from issuing a Ministerial direction that has the effect of
requiring the Future Fund Board to use the assets of the Asset Recycling Fund to
support a particular business entity, a particular activity or a particular business.
This section does not limit the ability of the Investment Mandate to set out the
policies as intended under the Bill, such as those to be pursued by the Future Fund
Board in relation to matters of risk and return.
Section 38- Future Fund Board to be consulted on Asset Recycling Fund
Investment Mandate
Consistent with the Future Fund arrangements, the responsible Ministers are required
to consult the Future Fund Board on any changes or additions to the Investment
Mandate. Subsections 38(1) and 38(3) achieve this by requiring the responsible
Ministers to send a draft of the new direction to the Future Fund Board and inviting
the Board to make a submission within a specified time limit.
The specified time limit will be determined on a case by case basis with regard to
relevant circumstances and priorities at the time. It may be the case that urgent changes
are required in the national interest. In this situation, it would be reasonable for the
Future Fund Board to be asked to consider a draft direction quickly. However, where
there is less urgency, or the change in the Investment Mandate is quite substantial, it
would be reasonable to provide the Future Fund Board with more time
to consider a draft direction.
Subsection 38(2) provides that any submission received by the responsible Ministers
from the Future Fund Board must be tabled in the Parliament with the new direction.
In this way, the Future Fund Board will be able to ensure that their views on the
expected impact on their ability to maximise returns are publicly known.
Section 39 - Compliance with Asset Recycling Fund Investment Mandate
Subsection 39(1) provides that it is the responsibility of the Future Fund Board to
take all reasonable steps to ensure that all policies and decisions regarding the
operation and investment of Asset Recycling Fund are in accordance with any
directions (Investment Mandate) issued by the responsible Ministers. Since the
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Investment Mandate is intended to provide broad guidance to the Future Fund Board,
it may contain directions that require the Board to apply its judgement on whether or
not Asset Recycling Fund investments comply with the Mandate.
Subsection 39(2) provides that if the Future Fund Board becomes aware of a breach
of the Investment Mandate, it must inform the responsible Ministers in writing as
soon as is practicable, including a proposed strategy to bring the operations of the
Asset Recycling Fund into accordance with the Investment Mandate.
Similarly, subsections 39(3) and 39(4) provide that if the Government identifies
areas where the Future Fund Board is not complying with the Investment Mandate,
the responsible Ministers can issue written directions to the Board to take action to
remedy the situation. The Future Fund Board is required to comply with any such
directions, noting that the responsible Ministers are the final arbiters on what is
intended by the Investment Mandate.
Subsection 39(5) provides that any transactions undertaken by the Future Fund Board
that are deemed later not to have complied with the Investment Mandate, are still
valid and the Board is required to honour any commitment made. This protects third
parties who enter into transactions with the Future Fund Board or its agents in good
faith.
Subsection 39(6) makes it clear that a direction under subsection 39(3) is not a
legislative instrument. This provision is merely declaratory in nature. Directions of
this type are administrative in character because they are merely the application of a
legal power in a particular case; they do not determine or alter the content of the law
itself.
Section 40 - Future Fund Board must not trigger the takeover provisions of the
Corporations Act 2001
Section 40 aims to minimise market distortion and eliminate the potential for conflicts
of interest for the Government as a market regulator. It provides that the Future Fund
Board is prohibited from triggering the takeover provisions under section 606 of the
Corporations Act.
Section 606 of the Corporations Act essentially prohibits acquisitions in relevant
interests in the voting shares of a listed company, or unlisted company with more than
50 share holders, if a person's voting power increases from a figure at or below 20%
to a figure above 20% (or from a figure above 20% to a higher figure above 20% but
below 90%) - unless the shares are acquired in one of the circumstances set out at
section 611 of that Act.
However, it is the Government's intention that the takeover threshold be adhered to
quite strictly in relation to listed companies and unlisted companies with more than
50 shareholders. Therefore, subsection 40(1) provides that the exceptions provided
under section 611 of the Corporations Act (that is, exceptions to the prohibition in
section 606) do not apply in relation to acquisitions by the Future Fund Board.
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The prohibition on the Future Fund Board is not expected to have a material impact on
the investment efficiency of the Asset Recycling Fund as such limits are quite similar
to those often used by other fund managers. However, the Future Fund Board will
need to have regard to the entirety of its interest (that is, through investment of the
Asset Recycling Fund) in a particular company when the Board is proposing a
particular acquisition in the context of the Asset Recycling Fund.
Subsection 40(2) provides that if for some reason the Future Fund Board has not
complied with section 606 of the Corporations Act (as it is applied to the Future Fund
Board under section 40), the relevant transactions will still be valid. The aim of this
provision is to ensure third parties are not adversely affected by any non-compliance
of the Future Fund Board.
A note at the end of the section assists the reader by referring to section 39 of the
Future Fund Act, which sets out the application of the Corporations Act to the Future
Fund Board.
Section 41 - Borrowing
Section 41 prohibits the Future Fund Board from borrowing money, except for short
term borrowing associated with the settlement of transactions, or in other
circumstances prescribed in the rules (sees subsection 41(3) below).
The overall aim of this section is to ensure that the Future Fund Board is able to
operate efficiently without exposing the budget to undue risk.
Subsection 41(3) provides that the rules may be made to specify circumstances in
which it is considered appropriate for the Future Fund Board to be able to borrow.
The rules may also be used to clarify any uncertainty on whether a particular activity
constitutes borrowing. While it is not anticipated that the Future Fund Board will
have a need to borrow, this provision allows for unforseen events or changes in the
investment environment without the need to amend the primary legislation. The rules
would be disallowable by either House of the Parliament.
Section 42 - Asset Recycling Fund investment policies
Section 42 provides that the Future Fund Board is required to formulate, publish and
comply with a number of policies on its investment activities.
The aim of this provision is to ensure rigour and transparency around how the Future
Fund Board performs its investment function in relation to the Asset Recycling Fund,
including risk management, performance assessment and benchmarks.
Subsection 42(1) and 42(7) requires the Future Fund Board to formulate and comply
with policies and any additional matters specified in the rules.
A note at the end of subsection 42(1) reminds the reader that, under subsection 33(3)
of the Acts Interpretation Act, the Future Fund Board is able to repeal, rescind,
revoke, amend, or vary any such policies.
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Subsection 42(2) provides that the policies that the Future Fund Board develops must
not be incompatible with the Investment Mandate.
Subsection 42(3) and 42(4) provides that the Future Fund Board must publish the
first set of policies on the internet.
Subsections 42(5) and 42(6) provide that the Future Fund Board must conduct
reviews of these policies periodically and where the responsible Ministers change the
Investment Mandate. It is not expected that these reviews would be a formal process
or that the results of the reviews would be required to be published. However, if the
review resulted in any changes to the policies, it is intended that the updated policies
would be published on the internet.
Subsection 42(8) provides that if the Future Fund Board enters into a transaction which
is not consistent with a policy that it has published under this section, the transaction
will still be valid. This will ensure that third parties are not affected by any
inconsistency with the Future Fund Board's policies. However, subsection 42(7)
provides that the Future Fund Board is required to take all reasonable steps to comply
with the policies it develops under subsection 42(1).
Subsection 42(9) makes it clear that the policies of the Future Fund Board are not
legislative instruments, because they are administrative in character. They do not
determine or alter the content of the law, but are rather administrative policies that the
Future Fund Board are require to formulate and comply with to ensure rigour and
transparency around how the Board performs its investment function.
Section 43 - Derivatives
Derivatives are widely used by financial market participants as a tool for risk
management. As the sophistication, size and mobility of capital markets around the
world increases, investment managers are looking for more ways to maximise the
returns on investments while minimising the volatility of results. The types and
volumes of derivatives being traded has grown exponentially as the underlying
markets have created demand for these types of instruments.
Section 43 provides for the Future Fund Board to make use of derivatives for certain
purposes. This includes as a risk management tool and to achieve indirect exposure to
assets that it could not otherwise achieve. The Future Fund Board may also use
derivatives to reduce the transaction cost of achieving required exposures. However,
subsection 43(1)(e) and 43(1)(f) provides that it may not use derivatives for
speculative purposes or for leverage.
Subsection 43(2) provides that the acquisition of derivatives under this section cannot
be inconsistent with the requirement under section 42 for the Future Fund Board to
formulate a policy on its investment strategy and take all reasonable steps to comply
with that policy.
Subsections 43(3) and 43(4) provide that derivatives must be held in the name of the
Future Fund Board and are taken to be an investment of the Asset Recycling Fund.
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Similar to other investments, derivatives may be realised by the Future Fund Board
under subsection 35(3).
Section 44 - Additional financial assets
Section 44 provides that if the Future Fund Board becomes a holder of another
financial asset, for example through a capital distribution, that asset becomes an
investment of the Asset Recycling Fund and is therefore subject to all the restrictions
and requirements for investments of the Asset Recycling Fund.
Section 45 - Securities lending arrangements
Section 45 provides that the Future Fund Board is able to enter into securities lending
arrangements. Lending of securities is commonplace among institutional investors. It
may also take collateral as part of a securities lending arrangement. Any collateral it
takes is either credited to the Asset Recycling Fund Special Account or becomes an
investment of the Asset Recycling Fund.
Section 46 - Investment managers
Subsection 46(1) provides that the Future Fund Board is able to hire one or more
investment managers. Investment manager is defined broadly to include custodians,
transition managers and other investment managers. However, the Agency is
excluded from this definition as it is generally expected that investment activities,
such as acquiring derivatives or investing money, will be outsourced.
Unless approved by the responsible Ministers, the Future Fund Board must use
investment managers to invest money in financial assets, acquire derivatives, enter
into securities lending arrangements or realise financial assets.
Subsection 46(2) provides that the responsible Ministers may provide approval in
writing for certain methods of investment, other than through investment managers,
should it be prudent and cost effective to do so.
Subsections 46(3) and 46(4) provide that the Future Fund Board is required to ensure
that investment managers operate within the Act and must report on the state of
investments of the Asset Recycling Fund to the Board and the Agency. It would be
expected that such obligations are set out in the contractual arrangements between the
Future Fund Board and the investment manager.
Section 47 - Custody of securities
Section 47 provides that section 40 of the FMA Act does not apply to investment of
the Asset Recycling Fund.
Section 40 of the FMA Act requires officials who receive any bonds, debentures or
other securities in the course of their duties to deal with them in accordance with the
Finance Minister's Orders. This provision is designed for departments of state which
carry out a more limited range of investment activities than is envisaged for the Future
Fund Board (and Agency) in relation to the Asset Recycling Fund. Further, making
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custodians and other investment managers comply with the Finance Minister's Orders
for investment purposes could impose an undue administrative burden.
While section 40 of the FMA Act is excluded, a framework for how the Future Fund
Board must deal with securities that it receives in relation to the Asset Recycling Fund
is covered by sections 33 and 43.
Section 48 - Refund of franking credits
Under subsection 84B(1) of the Future Fund Act, the Future Fund Board is deemed to
be an exempt institution that is eligible for a refund of franking credits under the
ITAA. As the Future Fund Board is exempt from income tax, it may have an
investment bias towards assets whose return had not previously been subject to income
tax (such as debt instruments or unfranked dividends). Refunding franking credits
removes any potential bias against franked dividends.
Section 48 deals with refund of franking credits and provides that if the Future Fund
Board receives a refund of a tax offset under the ITAA and the tax offset is
attributable to the investment of the Asset Recycling Fund, any refund received is
credited to the Asset Recycling Fund Special Account.
Section 49 - Realisation of non-financial assets
Section 49 requires the Future Fund Board to realise an asset that ceases to be a
financial asset or any asset acquired by the Board (as an investment of the Asset
Recycling Fund) that is not a financial asset. This could include circumstances where
the Future Fund Board holds an asset which was mistakenly acquired by the Board, or
given to the Board, or which ceases to be a financial asset due to a revision of the
ABS government finance statistics manual, for example.
The section provides that a non-financial asset is treated as a financial asset up to the
time it is realised. Sections 49(1)(b) and 49(2)(b) ensure that the asset is considered
an investment of Asset Recycling Fund and that relevant provisions relating to
investments of the Asset Recycling Fund apply to that asset for the time it is held by
the Future Fund Board.
Section 50 - Additional function of the Future Fund Board
Section 50 provides that the functions of the Future Fund Board include the function
of investing amounts in accordance with the Act.
Part 4 Reporting obligations etc.
Section 51 - Simplified outline of this Part
Section 51 is an information provision which provides an overview of Part 4 to assist
with readability.
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Section 52 - Finance Minister may require Future Fund Board to prepare
reports or give information
Section 52 provides that the Finance Minister may require, in writing, that the Future
Fund Board prepare a report or a document on one or more specified matters relating
to the performance of the Future Fund Board's functions under Part 3. This report or
information must be provided within the timeframe outlined in the Finance Minister's
request.
The Finance Minister may choose to publish any report or document provided.
A report or document of the Future Fund Board is administrative, rather than
legislative, in character and is therefore not legislative instruments for the purposes of
the Legislative Instruments Act. Subsections 52(5) and 52(6) have been included to
assist readers.
Section 53 - Keeping the responsible Ministers informed etc.
Section 53 requires the Future Fund Board to notify the responsible Ministers of any
information that the responsible Ministers should know, including by providing any
written information to the Finance Minister. This could include significant
investment results, concerns regarding fraud and any non compliance with the
Board's policy on conflicts of interest.
Section 54 - Finance Minister may give reports to other Ministers etc.
Section 54 allows flexibility for the Finance Minister to give reports, documents and
other information to another Minister. This includes reports and documents under
sections 52 and 53 and any other information obtained by the Finance Minister under
the Act.
Part 5- Miscellaneous
Section 55 - Simplified outline of this Part
Section 55 is an information provision which provides an overview of Part 5 to assist
with readability.
Section 56 - Delegation by the Finance Minister
Under subsection 52(1), the Finance Minister may, in writing, delegate his or her
powers under sections 14, 18, 24 or 30 to the Secretary of the Finance Department or
to an SES employee (or acting SES employee) in that Department.
The Finance Minister's powers under sections 14, 18, 24 and 30 relate to the making
of crediting determinations to the Asset Recycling Fund and the authorising payments
from the Asset Recycling Fund. Delegation of these functions to the Secretary of, or
SES official in, the Finance Department is consistent with the efficient administration
of these matters.
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Subsection 56(3) allows the Finance Minister to delegate, in writing, his or her
powers under section 30 of the Act, to the Chair of the Future Fund Board or to an
SES employee (or acting SES employee) in the Agency.
The Finance Minister's powers under this provision allows for amounts to be
transferred from the Asset Recycling Fund Special Account and the Future Fund
Special Account. Accordingly, the Minister delegating this function to the Chair of
the Future Fund Board or an SES official in the Agency is considered to be a normal
administrative arrangement for the efficient handling of these matters.
A note at the end of subsections 56(1) and 56(3) assists the reader by referring to the
relevant section of the Acts Interpretation Act in relation to the expressions `SES
employee' and `acting SES employee'.
It is envisaged that the delegate will be accountable to the Finance Minister for his or
her actions under any delegation. Subsections 56(2) and 56(4) reinforce this
intention by requiring the delegate to comply with any direction of the Minister in
exercising powers under a delegation.
Section 57 - Delegation by the Treasurer
Under section 57 the Treasurer may, in writing, delegate his or her powers under
section 14 or subsection 20(2) to the Secretary of the Treasury Department or to an
SES employee (or acting SES employee) in that Department.
A note at the end of the section assists the reader by referring to the relevant section
of the Acts Interpretation Act in relation to the expressions `SES employee' and
`acting SES employee'.
The Treasurer's powers under sections 14 and 20(2) relate to the making of crediting
determinations to the Asset Recycling Fund and ensuring payments are made from the
COAG Reform Fund. Delegation of these functions to the Secretary of, or SES official
in, the Treasury Department is consistent with the efficient administration of these
matters.
Section 58 - Delegation by the Infrastructure Minister
Under section 58, Infrastructure Minister may, in writing, delegate his or her powers
under subsection 26(2) to the Secretary of the Infrastructure Department or to an SES
employee (or acting SES employee) in that Department.
A note at the end of the subsection assists the reader by referring to the relevant
section of the Acts Interpretation Act in relation to the expressions `SES employee'
and `acting SES employe e'.
The Infrastructure Minister's powers under subsection 26(2) relate to ensuring
payments are made from the Asset Recycling Fund Infrastructure Special Account.
Delegation of this function to the Secretary of, or SES official in, the Infrastructure
Department is consistent with the efficient administration of these matters
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Section 59 - Rules
Section 59 provides that the Finance Minister, by legislative instrument, may make
rules covering matters required to be prescribed in this Act, or matters that it would be
convenient to prescribe for the purposes of this Act.
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