07/10/2014 - 05:53

Sovereign state not worth anything

07/10/2014 - 05:53


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Nauru is a good example of why a sovereign wealth fund is not such a smart idea.

Sovereign state not worth anything
SOURCE: The small island of Nauru did very well out of supplying phosphate for fertiliser.

As I prepare for my annual sojourn to that haven of sanity off our coast, Rottnest, I could not help having my attention drawn to another island of almost the same size that gets a lot more press than my favourite holiday destination.

The place I refer to is Nauru.

Now fear not, regular readers, I will as ever provide a column next week that more clearly references my experience at Rottnest.

I realise that this tends to be the most sought-after material of the year from rusted-on readers.

But right now, momentarily, my focus is on Nauru, a microscopic Pacific island of around 9,000 people living on a 21-square kilometre land mass.

Nauru, home to one of Australia's most important detention centres, is a poster child for the negative view on two issues that many geopolitical discussions centre on: small states and sovereign wealth funds.

Firstly, Nauru is a good example of why small states are not always the self-reliant and independent homes of purity as many like to romanticise.

Nauru is so small it is being brought to its knees by a $16 million debt now owed to a US fund manager. If this was George Soros crippling an adult-sized economy, there would be condemnation in the US, but because its Nauru, no-one cares.

Or maybe it is because Nauru has been so cash-strapped for so long that it's near rogue-state behaviour, such as switching diplomatic ties between Taiwan and China in order to earn millions in aid, has made the UN or any important neighbours like Australia quite unsympathetic.

Nauru's poor finances have also led it to play a role in many other tricky global situations, including Australia's boat people issue, that it highlights why the world does not need a bunch of tiny countries, which may be independent in name only.

Whether or not Scotland would have been at such risk is a moot point now; it is nearly 600 times bigger than Nauru so maybe the comparison is unfair.

And why is Nauru so poor?

Perhaps more than any other nation in the world, including Haiti, Nauru is an example of bad management being the ruin of a sovereign state.

It is also a good example of why the sovereign wealth fund concept, so often touted as why we ought to tax resources companies to the point of pain, may not be so smart.

Nauru was once the richest countries on earth per capita due to the phosphate previously contained on this island.

This wealth was extracted in a hurry and the royalties bundled into a sovereign wealth fund that would, had it simply been preserved at its peak and kept pace with inflation, probably be worth almost $2.5 billion today. What would the Rottnest Island Board give to have that kind of stash to use as a nest egg?

Instead, it was wasted as Nauru's leaders lost touch with the responsibility they were given for the future and made a series of dreadful decisions. I am sure plenty of Australian advisers helped them on their way, as much of the money was lost in property developments and business investments in this country.

So, I realise that Nauru is at the extreme. Like a young cousin who wins Lotto and ends up in jail after being fleeced by the fast set and crashing his Ferrari, there are some for whom material wealth was never intended, for long at least.

Nevertheless, the example shows that the concept of sovereign wealth is not without risks.

Nauru is not alone. Plenty of African nations have seen their wealth take a permanent vacation in Switzerland, and even Brunei had a fair chunk of its oil fortune burned by mismanagement by the brother of the ruling sultan.

But there are many examples of well-run sovereign wealth funds such as Singapore, Qatar, Norway and, more recently, Australia's Future Fund, right?

Maybe. Many of those funds are opaque so we will never know if they really are managed well. And remember, giant scale does not mean wealth is preserved. In fact, as many fund managers know, the bigger the amount controlled, the more difficult it is to do anything more than match the index.

Of course, Norway and Australia are far more transparent but that does not mean that money can't be wasted. In our democracy we frequently hear calls for even privately owned superannuation wealth to be diverted into alternative projects, which have a political aura.

Would Nauru be better off today if it had embarked on a process of enriching its individual citizens rather than trying to have an asset-rich government?

Firepower out

Were others as shocked as me that investigations into the $100 million collapse of fuel-saving pill maker Firepower failed to dig up enough evidence to warrant legal action?

Its seems Firepower's disgraced boss, Tim Johnston's, ban from managing a company for 20 years is all he will suffer even though the bankrupt is believed to have squirrelled away millions of dollars offshore.

Apparently, the Australian Securities and Investments Commission is not satisfied there are reasonable prospects of a conviction.

I really do find this unbelievable. I wonder if a $100 million tax fraud would be given up on like this?


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