For many national governments the lustre of global financial services hubs like New York, Tokyo or London, with their well paid professionals, M&A activity and the power of large investment houses, is something to aspire to. In August 2008, Australian Prime Minister Kevin Rudd reignited his country’s long held aspiration to become a regional centre for financial services, by convening a Financial Services Summit in Sydney.
Bringing together all of Australia’s regulatory agencies with senior finance sector executives, Rudd told the gathering “this sector represents so much of Australia’s long term economic future and potential when it comes to how we can take the great strengths of the Australian financial sector and turn them into platforms for export, particularly in our wider region in the East Asia hemisphere.”
This is not the first time the Australian government has established such an objective. Back in 1999 former Prime Minister John Howard established AXISS Australia as a centre to promote Australia as a financial services centre, and together with NSW Premier Bob Carr led a delegation to New York to promote Australia’s financial service credentials. The effort subsided without any substantive actions beyond a marketing exercise that sought to point out a series of benefits to international institutions of locating investment activities in Australia.
Has anything fundamentally changed to suggest that this time Australia’s government will succeed in its objective? One answer to this relates to the commodities boom. The Australian economy has benefited from the incredible increase in commodity prices for its core mining exports of coal, gas and iron ore. This boom has led to significant investment in new mining capacity. And while the boom has benefited the Australian Government’s fiscal position, it has also led Kevin Rudd to question what would happen when the boom eventually dies.
Rudds’ vision is to concentrate on three sets of concerns, “the impact of Australia’s business taxation system on foreign funds flowing to Australian fund managers, market access barriers in certain critical regional markets and the need to comprehensively badge and brand Australia across the region as a natural funds management hub for Asia - just as Ireland is becoming in Europe.”
The Prime Minister has given Assistant Treasurer Chris Bowen carriage to implement reforms to the taxation system that will open up Australia to overseas investment funds. Legislation has already been passed that will reduce Australia’s withholding tax rates from 30% to 22.5% in 2008-09, 15% in 2009-10 and 7.5% thereafter. Bowen is looking at introducing further legislative reform including:
- Providing a further 2% safe harbour allowance at the whole of trust level for non-trading income;
- ·Clarifying the scope and meaning of investment in land for the purpose of deriving rent;
- ·Introducing a 25% safe harbour allowance for non-rental, non-trading income from investments in land;
- ·Expanding the range of financial instruments that a managed fund may invest in or trade in.
- ·Amending Division 6C of the income Tax Assessment Act 1936 to reduce complexity,
- ·Increase certainty and minimise compliance costs for Australian real estate property trusts;
The Federal Government is enacting a widespread review of the whole taxation system, headed by Secretary to the Treasury Ken Henry. The Henry Review will consider the role of the funds management industry as part of its remit. A number of regulatory and diplomatic initiatives are being undertaken to break down market access barriers. Nick Sherry, Minister for Superannuation and Corporate Law, has announced mutual recognition agreements with the U.S and New Zealand for securities. A joint consultation paper produced by Treasury and the Australian Securities and Investments Commission, ‘Cross Border Recognition: Facilitating Access to Overseas Markets and Financial Services’ has also recently been released that proposes to develop a mutual recognition framework for application in agreements between Australia and an overseas jurisdiction that ensures the integrity of financial markets and protects investors.
Branding Australia’s Fund Management Industry
One of Prime Minister Kevin Rudd’s criticisms of Australia’s previous efforts to market its fund management capacity is that AXISS Australia focused on encouraging institutions to invest in Australia, rather than promoting the export of funds management out of Australia. To develop recognition of Australia’s fund management industry Rudd is proposing to use his own office. He told the Financial Services Summit that “if it will assist our efforts to expand the sector’s global opportunities, I would like to prepare to lead a delegation of senior industry leaders to key Asian economies to showcase the strengths and sophistication of Australia’s financial services sector.”
While Rudd is prepared to direct his own government to support the marketing campaign, he expects the industry to do its share: “We intend to make this work but like most things it will not work if we have the sound of one-hand clapping. We are up for it, so long as you guys are.”
Despite Prime Minister Rudd’s undoubted commitment, it is reasonable to assume that the duties of Prime Minister will mean his focus is diverted elsewhere. There is also a question of whether Australia is really prepared to compete with places like Singapore as financial services hubs for Asia Pac. One of Singapore’s key marketing points is that within seven hours flying time it is able to access 500 million people in the Southeast Asian market and 2.8 billion people in the broader Asian market. In contrast a flight of seven hours from Sydney takes an investment professional only as far as Indonesia.
Prime Minister Rudd believes that Australia’s strength is not its location within Asia, but its understanding of Asia: “I would like financial executives in London, Brussels, Paris and Berlin to say this is the place to go for a deep understanding of the economies and markets of Asia.” Marketing Australia’s fund management industry may become about marketing Australia’s skill at being Asian literate, but it may also be about being a gateway to invest in a range of new economic generators, including renewable energy. In this regard Australia’s establishment of an Emissions Trading Scheme in 2010 may prove to be one area in which Australia ends up developing a regional comparative advantage.