Sovereign wealth fund investment 

I'm Steven Economides. I lead KPMG's Tax Practice on Sovereign Wealth Funds, and I lead the Asia Pacific International Tax Practice. A Sovereign Wealth Fund is an entity created by a government for one of two purposes. Firstly, it can be funded out of specific reserves such as oil revenues. And secondly, it can be funded out of general surpluses. Say for example, you have a number of funds in the Middle East that are being funded out of oil reserves and you have funds in Canada, North America, Australia and Singapore funded out of trading reserves. The first thing you need to understand about Sovereign Wealth Funds is their purpose is intergenerational funding. What they're doing, is they're taking your resource that exists today whether it's oil, copper, gold. It's creating a profit for a country and they're creating a fund that they can fund future revenue when the oil revenue or the copper revenue disappears. So they are looking for long-term investments. The principal long-term investments they look at are infrastructure and real property. And yes it's a very competitive market for their capital.

A Sovereign Wealth Fund is tax exempt in the country they formed but not necessarily tax exempt in the country they invest in. For example, if we look at the future fund in Australia. The Future Fund is an entity wholly funded by the federal government. It wouldn't make sense for the federal government to tax itself. However, when the Future Fund invests offshore, as far as a foreign market is concerned, it's just another investor. So, most countries reserve the right to tax all Sovereign Wealth Funds. The most important thing for a Sovereign Wealth Fund is a long-term investment. Long-term investment means that a Sovereign Wealth Fund cares about the stability of a currency. So when you're looking at the Australian dollar, the issue before the Sovereign Wealth Fund is, what will the value of that currency be in twenty years time? And that's a function of a country's net worth, balance of payments and debt. Australia has a low debt environment. Federal government is 5% of GDP at the moment which is small by world standards and Australia will soon be in a budget surplus. So, it's got the right economic climate.

The other advantage Australia has is I've introduced a set of provisions called managed investment trusts. They provide a maximum tax rate of 7 1/2% to foreign tax-exempt investors. So if Sovereign Wealth Fund wants to invest in Australia, in real estate or infrastructure, they can end up with a tax rate of 7 1/2%. If they make that same investment in another country, which has a 30% tax rate, then the Australian investment on half a tax base is materially better IRR, all other things being equal. The future for Sovereign Wealth Funds is very rosy. What's happened in the world over the last four years is a collapse of the Sovereign Debt Market. A collapse of the Corporate Bond Market. Therefore sovereign investors need a place to put capital.

Countries globally all need infrastructure, whether you're in Indonesia, whether you're in the United States or whether you're in Australia you need infrastructure. United States has a lot of aging infrastructure that needs to be replaced. Australia has a lot of mines that need to be developed. Indonesia has a lot of schools that need to be built. All that infrastructure has to be funded from somebody. Now the governments can fund it either by borrowing money or seeking current investments through Sovereign Wealth Funds. And the statistics show that global infrastructure demand over the next ten years exceeds the fund of available capital. So by that simple example, it's obvious there will be competition.