Let me, reader, draw your attention to a very important, and glossed over aspect of this current debate being sponsored by Corporate Australia.
In a previous life I was engaged in risk management. I worked as an analyst for banks, finance houses and brokers. The one element which I found to be missing from the overall risk management dogma of financiers today is one that I was taught back in the 1980’s.
“If it were your money you were lending, would you put it into this project?”
There is a disconnect between that simple mantra, and the drive today for profits engendered by ‘sales’. Granting funding to an entrepreneur, business (big or small) or project is, or should be, determined by risk. Insofar as Australian banks are concerned, risk is countered almost exclusively by collateral. Property, Equipment, Infrastructure. Tangible, obtainable and disposable collateral. Lending to corporates is always backed by the personal guarantees of the directors, who under the Corporations Act, are directly responsible for the activities of their companies. Even those guarantees are generally backed by property. Usually their own homes. Of course, every lender jumps on that boat. If you’re the second mortgagee on a 6 million dollar property, and the personal guarantee it supports amounts to 100 million, it’s only comfort value. There is nothing tangible in support of that guarantee, and unless you’re the first mortgagee, the registered charge isn’t worth spit.
When a Corporate approaches you for funding in the hundreds of millions of dollars, and the net worth of that Corporate doesn’t match the funding requested, you then need to look at who, or what, owns that Corporate. Very often, the nest of companies is deep and wide, acceptable collateral is too hard to get a grip on, and so the risk element increases. That’s just a small part of the overall risk – getting the money back if the project goes belly up. Depending on the complexity of the project, overall risk could be enormous and way beyond simply being repaid in the event of default.
So, if we look at this latest push by the major corporates in this country, and their ‘friends’ – the Keatings, Frasers, bank CEOs, et al – for access to superannuation savings of workers, we need to be asking the managers of those savings, “How do you assess ‘risk’?”
For example, Reinharts Roy Hill venture is not simply Roy Hill Pty Ltd. The ownership runs far deeper. Risk elements in regard to that project are vast. It’s not simply related to digging iron ore from the ground & selling it overseas. Yet, Reinhart, et al, would have us believe that she & her ilk are good for the money – from behind the shield of corporate law and a phalanx of skilled barristers – purely backed by a Bond over an extended period of time. A Bond is nothing more than an ardent promise. A contract. No collateral backing aside from the worth of the nested Corporates backing the project to which the Bond is to be applied. Would you lend YOUR money on that basis? Should we – the investors in our own superannuation holdings – be placing an unerring faith in the ability of our fund managers to accurately assess ‘risk’ on the basis of a promise in support of commodity based projects over extended periods of time? At less than market rates of return? Make no mistake, the returns WOULD be at less than market rate, else these Corporates would not be pushing for access to the funding.
Go look at Roy Hill Pty Ltd’s website. You won’t find annual returns. Have a look at Hancock Prospecting Pty Ltd….no returns. Yet, we are being asked – through the auspices of our superannuation fund managers – to allow OUR funds which are ultimately intended to fully support us in retirement & old age, to be granted to national and international Corporates because they promise via a contractual arrangement not to default.
Paul Keating, as much as I respect his economic nous, has no dog in this fight. Neither does John Fraser, or David Neal, or even Linda Cunningham or Kristian Fok. Lindsay Fox does. Gina Reinhart does. Shayne Elliot does. Rod Eddington does, and Anthony Pratt certainly does.
Think about it. Do we understand how CBus Super or the Future Fund assess this ethereal but essential aspect of lending called RISK?