Super Funds & Impact Investment: Speech
In the aftermath of the GFC, the traditional debt-financed model for infrastructure was hit through substantial increases in the cost of borrowing. In response, governments have been looking to re-orient the financing model of infrastructure and social service delivery and looked for institutional investors, rather than using public finance. So infrastructure policy, and increasingly public service and social policy, is framed around creating projects that will be of interest to investors, meaning that they focus on the areas of provision that are able to generate revenue which in turn are separated to make them more easily accessible to investors. This focus has shifted towards making public infrastructure and services attractive to investors; rather than the focus being to design and deliver services and infrastructure for the public good.
Superannuation funds in Australia and around the world are investing in these new funding models through the most common model, Public-Private-Partnerships (or PPPs) and, more recently, Social Impact Bonds – also known as impact investing.
Some funds go so far as investing in full privatisation of government services such as recent announcements by the NSW and SA governments in relation to their Land Titles Offices.
A PPP is a long-term contract between a government agency and a consortium of private sector firms whereby the consortium provides a range of project services and at least some private capital. PPPs may be a contract to design-build-finance-operate-maintain an asset or service, or any combination of these stages.
Social Impact Bonds are a newer form of privatisation that are being marketed to superannuation funds as an ‘ethical’ investment which will deliver social outcomes.
But in reality, Social Impact Bonds are a complex venture capitalist model applied to the provision of public services. They are not actually bonds. They rely on the profit motive to get private investors to fund and source the service delivery in order to ensure an agreed social outcome is reached. If the investor is successful, governments pay them a profit of between 15-30%, but if not they do not receive a profit.
In a typical Social Impact Bond, a government will determine the outcomes it wants to achieve in a particular area of social policy, for example reducing re-offending rates of prisoners. The government will then task an intermediary company to find investors for the project and a private organisation to deliver the service. All major Social Impact Bonds, such as Rikers Island (US) and Peterborough Prison (UK), have failed to deliver their objectives.
PPPs and Social Impact Bonds are both forms of privatisation, the problems of which are well-documented, including diminishing service quality, accountability and transparency, increased costs, inflexible and secretive contracts with private companies, and erosion of workers’ pay and conditions.
We believe PPPs and Social Impact Bonds - apart from being problematic from the standpoint of service-users and public servants - also pose risks for superannuation funds who invest in them. Trustees already take into account Environmental, Social, and Governance (ESG) considerations when making investments – we believe trustees should pay careful attention to the ESG issues relating to privatisation, and the views of superannuation scheme members, particularly when the fund is a public sector fund.
There are many ESG issues related to privatisation which should be considered, for instance:
- PPPs and Social Impact Bonds are complex to establish, have high transaction and monitoring costs, long lead times and complicated regulatory and oversight issues;
- Private operators, in seeking to maximise profits, often dismiss workers and rehire them as contract and temporary workers, undermining the terms and conditions of employment. We’ve already seen the Land Titles privatisations have led to job losses;
- Private operators often engage in tax avoidance;
- Privatisation leads to less transparency and accountability of how public money is spent;
- They have the potential to fail - evidence of the success of PPPs and Social Impact Bonds is patchy at best;
- Private operators may not integrate social and environmental considerations which are essential when operating public services;
- Privatisation is unpopular, so affected communities and workers should be consulted;
- There are non-financial risks such as reputational damage and opposition by scheme members, who may object to their savings being used to privatise public sector workers’ jobs;
Public sector superannuation funds have a particular conflict of interest in this regard. The financial and reputational risks for a fund that invests in a PPP that could privatise the jobs of scheme members is clear – not to mention that removing scheme members means removing income for the fund. Public sector superannuation trustees need to consider the impact on fund members, whose unions are campaigning against privatisation and job losses, in investing public sector workers’ money in privatisation. In this case, due to the reputational risk investing in privatisation poses, the public sector fund should deem it inappropriate for the fund to invest in PPPs or Social Impact Bonds on ethical grounds.
We have unionists on superannuation fund boards to ensure that workers are looked after in retirement, and that we invest workers’ capital in the kind of investments that benefit working people - and not invest in things that are going to harm current and future generations of workers by destroying the environment, our health, and our living & labour standards. It is for this reason that many funds make ethical decisions to not invest in companies that manufacture tobacco, or companies responsible for pollution and contributing to climate change. Some funds have divested from companies that run offshore immigration detention.
The investment of workers’ capital in privatisation can be harmful to current and future generations of workers, and in particular there are social considerations in regards to the impact on service-users and employees, and governance considerations in terms of accountability and transparency. Recent privatisations in SA and NSW saw staff lose their jobs either in the lead up to the sale/lease or post-announcement.
In the immediate term, privatisation results in job losses, and employees in the new privatised service are often being paid less and with lesser conditions. In the longer term, privatisation leads to declining quality, less accountability and transparency, and robs future generations of commonly-owned assets and services. This is evident in the case of privatisation of the Land Registry Offices in a number of Canadian provinces, and ironically was one of the reasons the UK government finally opposed their Land Registry being privatised, when the cost of services escalated.
The negative impacts of privatisation on workers, service-users, and the broader community is well known. It’s for this reason that we believe privatisation - whether its investments in PPPs or Social Impact Bonds, or any other forms of private organisations running or owning public assets and services - should be carefully considered from an ESG perspective, and from an ethical investment perspective.
As public sector trade unionists, we are at the forefront of opposing privatisation and the marketisation of public services – so we should also be opposing workers’ money being used to fund the privatisation agenda.
Therefore, I would like to make the following suggestions for future policy discussion:
Trustees should require that if their fund wants to invest in privatisation, they should consult all superannuation fund members to determine if they support their money being used in that way;
Trustees should carefully consider the ESG issues relating to private companies taking over government services and assets;
Trustees should require due diligence on similar proposals for privatisations using evidence from overseas or interstate;
Trustees should require that all existing investments in privatisation be reported to members in regular communications and that members’ views on these investments be collected and factored-in to the fund’s future investment decisions; and
If funds want to invest in infrastructure, they do so through a partnership with government through government bonds, not stocks. This ensures that ownership of assets and services remains with government, while controlling the cost to government and guaranteeing a return to investment funds.
ACTU Superannuation Trustees Forum
What should be the approach of super funds to infrastructure and social impact investment in an era of privatisation?