The coming federal budget, to be tabled in May, would be Treasurer Jim Chalmers’ first opportunity to build what he calls “values-based capitalism”.
In an essay published in The Monthly, Chalmers envisions an Australian capitalism that is not defined by just one notion of value (presumably economic value), but by values, or “our (Australian) values”.
Recognising the multiplicity of values in society, and trying to create an economy that serves them, is always welcome. How Chalmers proposes to get there is more problematic, however. Tapping financial market innovations to deliver policy goals is not a new idea. Rather than a hundred flowers blooming, this approach subordinates other public and social values to financial value – creating assets that deliver reliably high returns to investors. And for what? ‘Financialising’ the state usually doesn’t even deliver the intended policy outcomes.
Private capital’s central role in Chalmers’ vision
Having previously ruled out increasing taxes or government debt, Chalmers has few cards to play to deliver on the government’s social policy agenda. The “federal budget is deep in debt and under pressure”, he writes, “so the options for large, broad new programs are limited.”
Like many policymakers in Australia and elsewhere he has thus turned to private investors and financial markets. The logic is deceptively simple: trillions of dollars are sloshing around financial markets. Wouldn’t it be great if some of this money could be directed towards worthy causes?
Chalmers expends considerable effort explaining how private markets should be reimagined and redesigned so they can better allocate capital in line with social values. He blames market failures on the lack of government leadership in defining priorities, challenges, and missions.
He identifies three tools at the government’s disposal, in particular: co-investment, collaboration, and impact investing. None is entirely new: they are all forms of public-private partnerships (PPPs), a staple of government policy in the single-value era Chalmers purportedly wants us to leave behind.
Here’s the rub, however: as we know from many years of PPPs, investors only put their money into schemes where either good returns (relative to other investment options) are highly likely, or where government has removed the risk to such an extent that investors are practically guaranteed a return on their investment.
This means that such schemes only work in sectors where profitability is already high, and hence public support is not required, or where the costs of ‘de-risking’ investment is so high for government that there is little point corralling private investors in the first place. Where neither condition is met, PPPs simply fail to achieve results. Either way, financial value leads the way.
The case of clean energy
A case in point is the Clean Energy Finance Corporation. Chalmers identifies it as one successful example of the co-investment model, where government partners “with investors to direct capital where it can have the greatest impact, not by subsidising returns but by helping structure investment vehicles in a rapidly emerging economic sector”.
What Chalmers overlooks is that government has already done the heavy lifting of de-risking and guaranteeing profits for clean energy, via schemes such as the Commonwealth Renewable Energy Target and contracts-for-difference, which involve either direct or indirect subsidies. Additionally, the sector’s profit prospects are further enhanced by the current geopolitical context, which increases the cost of fossil fuels. There is no lack of private capital interested in investing in clean energy innovation. In Australia, the main impediment has rather been political and ideological.
Financialisation of social services
Impact investing is even more problematic. In the essay, Chalmers recognises its potential in playing a greater role across the so-called “social purpose” economy, in areas like aged care, education and disability.
He argues: “effective organisations with high-quality talent can offer decent returns and demonstrate a social dividend.” The problem now, he writes, is that they find it hard to grow because they struggle to get investors.
Unfortunately, previous attempts to harness financial markets for investment in social services have rarely succeeded. Social impact bonds have floundered, since investors have struggled to properly assess risk, remaining a niche pursuit. The heavily marketised aged care sector attracts investment, due to government subsidies, but was plagued by scandals even before the pandemic, as revealed by the Royal Commission inquiry.
Indeed, the lesson from PPPs’ record to-date is that to attract investment, government must not only set up a financial market framework, but also provide direct funding or subsidies to shore up financial returns. But government’s reluctance to directly fund services is precisely why it is looking to financial markets in the first place. And even then, capital’s focus on profitability often comes at the expense of service quality. In the end, there is no magical substitute for government spending on social services.
Media reports are already suggesting a cautious response toward a social impact investment fund planned by the federal government. Big banks reportedly prefer to lend to the proposed fund than invest. And from a financial point of view, who could blame them? Equity investment in small-scale social impact companies is risky, while loans to a government-backed fund would generate stable returns for the banks.
Financial players are also waiting to see what is on offer by the government. As the title of a news report suggest, “‘Values-based capitalism’ needs quid pro quo for business.”
Rather than use government guidance to multiply the values that Australian capitalism serves, Chalmers’ proposed PPPs will likely achieve the opposite, making financial value the highest objective of government policy in a range of important areas.