18 April 2011

Brian Toohey on sovereign wealth funds and other matters

In the weekend Australian Financial Review, 16-17 April 2011, columnist Brian Toohey writes under the headline Wealth fund an unproductive idea about the notion of the proceeds of the mining boom being invested in a sovereign wealth fund.

I agree with him, and by implication my former colleague Ted Evans, all the way on the sovereign wealth fund idea:

Westpac Chairman Ted Evans is one of the most persuasive critics of sovereign wealth funds.  A former Treasury head, Evans told this columnist last week that he has not changed his view that the greatest contribution governments can make to the living standards of future generations is to ensure that today’s policies are directed towards maximising future production.

He argues one effective way to do this is to spend more on education, which he says “can yield a higher return than even good private investments”.

Later in the piece it is made clear that investment in research and development and transport infrastructure are included in this productivity enhancing approach – standard “new growth theory”, which dates from the 1960s but is still new to some of our policy makers including, I fear, the present government.

As noted above, I am with Toohey and Evans all the way on this, but unfortunately Toohey cannot resist having a swipe at the Department of Defence and the case for Australian designed submarines, in ways which do nothing to enhance his case against sovereign wealth funds and for productivity enhancing expenditure:

The ill-managed and profligate Defence Department should no longer be exempt from the overall cap on spending.

 I am not going to enter into a protracted argument in this post as to whether Defence is or is not ill-managed or whether it is or is not profligate.  Suffice it to say that, while I would regard some areas as ill-managed (it would be surprising if it were otherwise in such a large and complex organisation), I do not regard it as being nearly as ill-managed as it is alleged to be.

As for profligacy, I think that the Department and the Australian Defence Force are grossly under-resourced for the high technology capital stock that they are required to keep maintained in airworthy, seaworthy etc condition, and in which the members of the ADF are required to undertake inherently dangerous training.

Be that as it may, my main point here is that, even if Defence were guilty as charged by Toohey, any issues of mismanagement and profligacy should be addressed directly and rectified. Cutting expenditure is not an appropriate response: the size and shape of the ADF needs to be contoured around the Government of the day’s assessed needs for Australian defence, not whether or not Defence “deserves” the funds it receives.

On submarines, Toohey says:

Junking the proposed local production of 12 giant submarines to a unique Australian design would save $40 billion and let 12 proven, high performance German subs be imported for $5 billion.

Sure the German submarines are “proven”, but proven for what? German submarines are designed for short patrols in deep cold water. We want submarines that are suitable for very long patrols in warm shallow water – a totally different proposition. If we do not acquire submarines that are fit for purpose, an even better idea might be not to acquire submarines at all, but I am not going to sign up for that idea.

We need to get on with the Collins replacement with a greater sense of urgency than the Government is so far showing. We need to be cutting metal by 2016, and we have not yet settled a design or chosen a submarine builder. As I have commented before, we must be the only country in the world that would vacillate about whether to use its own submarine builder to build its submarines.


Mark said...

an even better idea might be not to acquire submarines at all

The case for us to have a submarine fleet hasn't been made very well.


I agree that the case for submarines has not been made as well as it might. One reason is that governments are justifiably reluctant to deal in detail with the many uses to which submarines can be put.

Coldsnacks said...

Mark: That is true, the case hasn't been well made as yet.

That's not to say that Australia shouldn't have a submarine fleet. We are, after all, an island continent: It's not land borders we need to worry about protecting, it's maritime borders. That is the value of having a well equipped, well maintained submarine force - to protect maritime borders. The fact that submarines are, by their very nature, clandestine, increases their value as a surveillance resource. And with the purchase of high altitude drones for the RAAF pushed back (as well as the replacement of the P3 Orion with a fewer number of P8's) the RAN is likely going to need to take a greater role in maritime border protection.


Another under-recognised point is the strike capability of modern submarines. It is not only a matter of having submarines patrolling our maritime approaches and trade routes; they have significant deterrent value because they pack a punch and are hard to detect.