Public pays again for state investment folly

The Age

Thursday March 3, 2011

Carelessness with other people's money is inexcusable. THE Brumby government talked up its financial management credentials right up to its election defeat in November. As opposition leader, treasurer and then premier, John Brumby had much to do to restore Labor's reputation and to learn from the financial scandals that sank its "guilty party" Labor predecessor, the Cain-Kirner government, two decades ago. That makes it all the more extraordinary that, despite being burnt before, the last Labor government gave free rein to the Victorian Funds Management Corporation, contributing to huge losses.The state's investment arm lost about half of $1 billion invested in a scheme that gambled on US life expectancies. That is a bigger loss than ultimately incurred by the Victorian Economic Development Corporation 20 years ago, which finished off careers and ultimately a government, but the lack of oversight and accountability is familiar. Despite the British regulator having rung alarm bells about "death funds", a 2009 VFMC review obtained by The Age found a lack of due diligence and a "surprising" willingness to believe sales pitches.This is the same corporation that oversaw a plunge in managed assets from $43 billion at June 30, 2007, to $30.42 billion at March 31, 2009, which prompted the then opposition's Kim Wells, now the Treasurer, to tell Parliament that "we have grave concerns about the way the VFMC is being managed". Its executives still received the biggest bonuses and salaries in Victorian public service history. Mr Brumby admitted the payments were excessive, but insisted the corporation's performance was acceptable in light of the global recession.The VFMC is an odd hybrid of corporate governance and Westminster responsibility, minus the accountability of either. Assets now total about $35 billion in superannuation savings, pensions, payouts and other public money. Clients include WorkSafe, the Transport Accident Commission, hospitals, universities, the National Gallery and about 150,000 former and current public servants. The Kennett government created the VFMC in 1994, but Mr Brumby transformed it, enabling executives to make direct investment decisions, rather than operate more as trustees. The vision was to put public money to work in an actively managed sovereign wealth fund, the biggest of its kind in Australia, "positioning the state as a centre of investment excellence".As The Age reveals, the corporation's dysfunctional investment tracking and risk-management systems are anything but models of investment excellence. Another problem is government conflicts of interest as fund watchdog, shareholder and promoter. The prudential regulator is the Department of Treasury and Finance. On advice from the department, the Treasurer must approve significant investments, but government "interference" rankled with VFMC investment chief Leo de Bever, who resigned in 2008. Yesterday he attacked The Age's reporting, but the facts, as established by VFMC accounting and legal reviews, speak for themselves.The government and the VFMC board failed to get satisfactory answers to questions that having responsibility for public money demanded. To obtain the Treasurer's approval, the death fund was even classed as "international fixed interest" rather than "alternative investment", which would have attracted closer scrutiny. The 2009 review was also damning about responses to specific questions put by the board to its executives.The corporation insists stricter controls are in place, but matters cannot be left at that. An independent prudential supervisor is an essential reform, albeit only a first step. Too many people in positions of responsibility were in the dark about what was done with huge amounts of public funds, and appeared content with that. This is part of a wider political and financial culture ��� not just a Labor disease ��� that tolerates carelessness with other people's money. Changing that is a huge challenge.

© 2011 The Age

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