Down Debt

WestConnex sale to add $ 13 billion to NSW Generations Fund

“The NGF does this by ensuring that all invested funds are managed strategically to maximize the ability of NSW governments – present and future – to repay debt.”

“The NGF, as its name suggests, is resolutely focused on the medium and long term.”

“This clear direction means that the NSW government can choose to pay down debt in some years and not others, and even a loss in any given year could be absorbed provided the strategy long term remains strong. “

“For this reason, the NSW government has always and will continue to review and, if necessary, adapt its NGF strategy, ensuring that the fund in turn continues to serve current and future generations. . “

On Monday, Prime Minister Gladys Berejiklian was invited by the Financial analysis on financial strategy and referred the matter to the treasurer who was not present at the press conference.

“I would ask you to ask the treasurer about this. He is Australia’s best treasurer and I support what he does.

The initial $ 10 billion fund was set up in late 2018 with budget surpluses and the proceeds from the initial sale of 51% of the WestConnex Expressway.

As the budget swings into deficit and debt during COVID-19, the government plans to continue supplementing the now $ 15 billion fund with mining royalties, dividends from state-owned companies and privatization revenue from active.

NSW plans to sell the remaining 49 percent of WestConnex, starting at 24.5 percent in September and the remaining balance thereafter.

Proceeds will go to the fund for future generations of New South Wales citizens and the government will borrow on the cheap at around 1.5% to fund a massive $ 108 billion infrastructure program over the next four years .

New South Wales shadow treasurer Daniel Mookhey said the government had misled the public about its ‘asset recycling’ pledge.

“They told the public that they would use the money from the Westconnex privatization to build infrastructure such as schools, hospitals, roads and trains,” Mookhey said.

“Instead, they gamble this money on the stock market and other risky financial assets.

“Every dollar earned from the privatization of Westconnex that is not spent on infrastructure translates into an additional dollar of borrowing to make up the difference. It’s a recipe for more debt, more risk, and higher interest charges.

The fund has generated an average annual return of 9.4% since its inception in late 2018, adding more than $ 2 billion to the state’s wealth. It is expected to reach $ 90 billion by 2030-31.

Risky and adventurous

Former New South Wales and Federal Treasury official Robert Carling said indirect use of debt to increase fund inflows to buy equity-type assets seemed “risky and adventurous” to one. state government.

“It might work in the longer term, but in the short to medium term it could explode if interest rates go up and asset prices go down,” Dr Carling said.

“In the event of a severe market downturn, they may have to wait a long time to move forward. “

Center for Independent Studies chief economist and former Reserve Bank of Australia chief Peter Tulip said critics of the fund were wrong.

“The equity premium is a major market failure and a sovereign wealth fund is the appropriate remedy.

“New South Wales taxpayers derive huge benefits from the fund.”

the Financial analysis spoke about the strategy to a dozen prominent and former treasury officials and fund managers.

Most spoke on condition of anonymity because they did not want to get involved in a sensitive political issue.

A former chief executive of fund management with a background in public policy raised concerns about state government expansion in financial services and additional debt. If the government were to dip into the fund when interest rates rose, it would likely be during a market downturn when the value of the fund’s assets fell.

“Oh dear. The very moment this fund will be needed will be when it is destroyed,” they said.

Not a crazy idea

A former senior treasury official responsible for managing the funds said: “I have a lot of confidence in the NSW Treasury Secretary.

“It’s not a crazy idea. It’s tempting right now with the interest rate policies of central banks.

“But it’s based on returns above the cost of borrowing, which may be a fair assumption, but I’m not sure I would be willing to take that risk in case the markets turn sour.”

A senior equity fund manager in Sydney said governments should take advantage of their low cost of capital, and sovereign wealth funds have the advantage of not facing a cash crunch when making redemptions.

“NSW can generate excess returns that will put the government in a much better position in the long run,” they said.

“That’s exactly what the Chinese government is doing and it’s smart.

“NSW will always have open markets and, throughout the cycle, is expected to generate returns significantly above this cost of capital.”

A former senior Macquarie executive said: “A very strong case can be made for the long-term outperformance of stocks, but one of the questions here is whether borrowing to make that extra investment is good public policy.

“There is more that we don’t know, and a future for the Generations Fund that is very uncertain, so we need to know more about the objective, the risks and the governance. “

with Finbar O’Mallon

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