Industry Super Australia (ISA) Innovations in Infrastructure: Beyond the G20 Symposium

Earlier in March, Executive Policy Officer Rod Pickette delivered a speech on behalf of the ACTU to an ISA conference in Canberra. Below are his observations from an Australian context:

I have been requested to make some observations on infrastructure financing from the perspective of organised labour – an L20 perspective. Under the Australian presidency the L20 was constituted by the leadership of the ACTU and its Executive, in collaboration with leaders of the international trade union movement and the Trade Union Advisory Committee to the OECD (TUAC).

Some of you will be familiar with the broad themes of the L20 views on infrastructure, investment and capital formation, and its importance in transforming economies and underpinning job creation – decent jobs – as the basis for meeting human needs and addressing inequity in society.

Sharan Burrow, General Secretary of the International Trade Union Confederation, the ITUC, cogently argues the need for more patient capital, and by implication less speculative capital – for investment in nation building activity that helps transform economies and industries to lower carbon usage.

The L20 principles have been widely advocated in all the G20 forums in recent years, particularly since the Global Financial Crisis (GFC).

One important principle is that infrastructure financing must facilitate job creation and decent work.

This along with other L20 principles gained some traction in the G20 in the recent period, culminating in the joint meetings of finance and labour/employment Ministers during the Russian Presidency and G20 endorsement of High Level Principles on Long-term Investment by Institutional Investors.

That was significant because it was a recognition that capital and labour need to work together if the challenges being faced by the emerging economies and by the so called developed economies are to be effectively addressed and social cohesion maintained.

So in St Petersburg in September 2013 the G20 committed to:

➢ Promoting labour market adaptability and efficiency and ensuring adequate labour protection

➢ Investing in people’s skills, quality education and life-long learning ➢ Supporting labour market infrastructure and effective labour activation policies, and

➢ Improving job quality, including through working conditions, wage bargaining frameworks, national wage-setting systems, and access to social protection.

These are all critical requirements to address the trend towards increasing inequality, but they are not enough.

Thomas Piketty’s book Capital in the 21st Century demonstrates that the current systems for managing economies are very likely to continue to reinforce the trend towards inequality.

This is because wage income – being the main source of sustenance to most of the world’s working population - is likely to grow at a significantly lower rate than the rate of return on capital. And of course by and large, the returns on capital don’t accumulate to wage earners.

I refer to this analysis because there is a new lever (to complement monetary and fiscal policy) that could be utilised by Governments to help influence the performance of the economy and reduce inequality and that is the lever of not-for-profit (NFP) pension fund capital.

If Governments are prepared to put ideologies aside, and work with organised labour and the trustees of NFP pension funds, the opportunity to harness the collective power of these pension fund accumulations to direct those to productive sectors of the economy, is available. The policy responses required to make this work need not be onerous. For example, risk sharing that would not exceed that provided by Government for fixed income securities, like bonds.

That is a win for Governments in an era of declining public finances, and is a win for the pension fund members. Cycling stable returns on invested capital to pension fund members is one way to reduce the inequality Picketty refers to.

This approach essentially requires Governments to enter into an understanding, a partnership, with the pension fund trustees, and requires sensible policies and regulatory arrangements that respect the rights of the social partners to manage the NFP pension funds on behalf of the members.

.All the recent literature on fiduciary duty, including the most recent work from the Pensions and Capital Stewardship Project in the Harvard Law School at Harvard University in the US, suggests that there is advantage in ensuring a close association between the fund members and their representatives that exists in other aspects of labour relations e.g. in wage bargaining, and applying it in the pension fund sphere.

Returning to the G20 in the period to 2013.

There is also a recognition that arrangements for transferring ownership of infrastructure assets must have regard to the rights of the current owner workforce, and future owner workforce, particularly where there is to be a public to private ownership transfer.

Organised labour in Australia and globally will continue to partner with institutional capital, particularly those accumulations in pension funds with which we have an organic relationship, the NFP pension funds, to ensure that the investment of this capital is undertaken in ways which meet the post retirement living standards aspirations of the beneficiaries, but also their social responsibilities as citizens and the overall direction of the economy.

This pool of capital is worker’s savings held in trust to deliver the outcomes I mention. It exhibits different characteristics to other forms of capital.

The L20 has also called for more pro-active government planning to prioritise infrastructure assets and projects that require renewal or construction, against a set of national interest criteria. These can take the form of freight plans, energy plans, water plans, communications plans, urban plans etc.

Without appropriate planning it is difficult to prioritise essential infrastructure and for governments to then identify the risk profile, which needs to involve community and workforce buy-in having had the opportunity to consider those government plans, that might then guide the investment decision

With regard to the establishment of an infrastructure market, the L20 suggests there are four key elements:

➢ First there must be a transparent and open discussion about the appropriate role of Government in providing both economic and social infrastructure to meet the bigger objectives of government on behalf of the community. Should for example, Government be sole owner, regulator, joint venture partner or facilitator of private investment (or a mix of the above), to name a few possibilities. The costs and benefits of the various approaches need to be placed under the spotlight.

➢ Second, in cases where a Government has a mandate to involve the private sector, it needs the capability to identify and prioritise a pipeline of infrastructure projects that are suitable (or could be made suitable) for institutional investor financing participation where this is considered appropriate. In Australia, a national body, Infrastructure Australia, has played the prioritisation role and this is presumably what the Global Infrastructure Hub (GIH) will aim to achieve internationally.

➢ Third, Government needs to create transparent and innovative market offer mechanisms for priority projects and assets, as central to the development of an infrastructure market. Among the suite of market offer options, we say there must be must be more emphasis on options that are specifically designed to attract NFP pension fund investment contributions with a complementary focus of ensuring transaction costs (bid costs and commissions/fees) are minimised.

➢ Fourth, open and transparent governance arrangements are vital to secure and sustain community support for these collaborations. The OECD Principles on the Public Governance of Public-Private Partnerships set down some clear guidance here.

This, in the view of the L20, is the best way to ensure that both community and workforce aspirations are met. • Governments will need to be a bit more creative in accessing institutional capital in the face of declining public finances and rising demand for Government intervention in delivering the expectations of the population.

The Symposium has heard about the Australian inverted bid model, the mutualisation model and the approach already taken by collective investment vehicles like IFM Investors. These models and vehicles are supported by the L20, as is the UK Pension Infrastructure Platform (PIP) model and US West Coast Infrastructure Exchange. They are innovative and they exemplify the characteristics that are important to those whose interests the L20 represents.

In essence, these models demonstrate a commitment to long term investments which match the working/retirement life cycle characteristics of pension fund members, they reduce the need for return sapping intermediaries, and they are generally good quality owners who want to value add to the initial investment – with the potential to create good, secure jobs.

Nevertheless, we think that there is room for further development of these approaches, essentially around improved risk mitigation.

First there needs to be a stronger commitment on the part of the fund managers that are proposing to invest pension fund capital to engagement with the representatives of organised labour in the early stages of a market offer process.

Such a process will provide the opportunity for the expectations of both the fund manager as bidder or potential bidder and of organised labour to be considered – on such issues as employment, safety, labour relations, technological change and other determinants of productivity performance that are material considerations in assessing risk, and hence yield. • The C20 makes a strong case for corresponding start-to-finish engagement with affected local communities and traditional owners, and we support its case.

In this regard we want Governments to facilitate transparency, not reduce it. We believe there can and must be reform of bid processes so that key stakeholders are not locked out of the dialogue on the grounds of probity. This creates mistrust at the outset, and inhibits the partnership model we are advocating.

Second, we want to see greater breadth in the risk assessment methodologies that are applied during due diligence processes that are undertaken by Trustees, their advisers and fund managers in considering an investment in an asset or a project.

In particular we want to see commitments on the part of fund managers, under the direction of fund Trustees, to extend ESG principles to include labour standards, in addition to environmental, social and governance standards.

We acknowledge that there is currently no comprehensive tool or test that is actuarially and economically credible and which conforms with contemporary interpretations of fiduciary duty that could be consistently applied by trustees and fund managers they engage for measuring the labour standards practices of an entity in which the pension fund has invested or in which it is considering investing.

In Australia, Trustees are currently exploring ways to initiate such an important body of work, which we expect on completion will have application across the global pension fund sector.

There are many examples where new pension fund owners work effectively with organised labour, and apply appropriate standards in their labour relations practices.

There have nevertheless been high profile cases where pension funds have invested in entities whose labour practices (and those of their upstream and downstream suppliers) have not met community expectations, have not been in compliance with the core labour standards of the ILO or the nation in which the entity operates and in some cases have resulted in significant labour disputes or safety breaches that has ultimately impacted adversely on investment return.

Such outcomes are of concern to fund members, not only because they expect their pension fund to behave ethically and adopt sound ESG approaches to investment, but because investment in such entities brings reputational and investment risk to the fund members’ holding in the pension fund, often with consequences for returns on investment/yield (and pension longevity), leading to lower retirement incomes than could have otherwise been expected.

We consider these approaches to be a natural evolution of risk management, which need to evolve as the pension fund capital pool grows, and their collective investments take on greater strategic importance in economies, and as the contributors increasingly rely, at the beneficiary stage, on the pension income stream to fund their retirement in circumstances where the public finances of Governments are under pressure to meet the expectations of its older citizens.

Third, we would like to ensure that there is scope for labour participation in the governance of the entity in which a pension fund or fund manager takes a significant, majority or controlling stake as a result of its investment.

In summing up, I emphasise the following:

➢ The L20, as the voice of organised labour to G20 leaders and ministers, is calling for a more collegiate and participatory approach to the investment of pension fund accumulations in infrastructure.

➢ Organised labour is a custodian of the NFP pension funds and intends to ensure its voice remains at the forefront of innovation in the ways pension funds invest this important pool of capital in the interests of the beneficiaries.

➢ We are comfortable with many of the innovations that are emerging, particularly those that aim to invest in productive activity in the economy, such as infrastructure, but we think there considerable room for extending the features of these models, based on the principles developed by the L20.

➢ If these innovations in infrastructure are to grow to potential, it is essential that investors respect and honour in word and in deed the international guidelines – including the OECD Principles for Public Governance of Public-Private Partnerships and the High Level Principles on Long-term Investment by Institutional Investors.

Thank you