Cut red tape to boost economy, say CFOs

by 8 November 2019

Article by Jonathan Shapiro and James Thomson, courtesy of the Australian Financial Review

The nation’s top finance chiefs say cutting red tape would do more to help the economy than further interest rate cuts or budget stimulus, with Wesfarmer’s chief financial officer, Anthony Gianotti, urging the government to retain some fiscal dry powder.

And despite Finance Minister Mathias Cormann again urging business to increase capital expenditure to lift employment and wages, top chief financial officers said they were cautious about reducing hurdle rates on potential investments, warning low rates would push up asset prices and investors remain hungry for dividends.

Woodside Petroleum chief financial officer Sherry Duhe told The Australian Financial Review CFO Live conference in Sydney on Thursday that the energy giant had projects worth in excess of $45 billion in the pipeline and had implored federal and state governments to help deliver them on time.

“Cutting red tape and just having regulatory efficiency is really important for us, because the number of agencies and individuals that we have to deal with can be overwhelming,” she said.

“If you’ve got to wait months every time [you get to the] next step, there’s a real risk you cannot meet your project schedules.”

Mr Gianotti, CFO of Wesfarmers, which was until recently Australia’s largest employer, said a myriad of local and state regulations complicated their efforts to run a national business.

“There are things that can be done without reducing governance in terms of what we are required to comply with,” he said, adding that the budget surplus was a “big positive”.

“It probably allows the government to do something if things get worse. At the moment, the level of stimulus is OK and I think … making it easier for business to invest and lowering regulation would be helpful.”

Cochlear CFO Brent Cubis said a lower corporate tax rate would have been the best way to encourage more investment but he conceded “we lost that battle“, despite lobbying alongside fellow health giant CSL.

“If we had our time over again, we wouldn’t set up in Australia,” Mr Cubis said. “And CSL is one of the most amazing companies in the world.”

Mr Cubis said an extension of the electoral cycle from three to four years would improve the stability of the economy, and suggested incentives around visas could help.

“We are losing good people,” he said.


Diminishing returns

Alison Harrop, the chief financial officer of Dexus, one of Australia’s largest commercial landlords, said consumers needed more confidence about the outlook for the housing market, and interest rate cuts could only do so much.

“There’s a low of diminishing returns to some degree. You may not be generating the sort of stimulus that people expect,” she said.

Telstra CFO Vicki Brady backed this view, telling the conference “there are plenty of levers and low rates alone are not going to do it”.

But a number of the CFOs reported that the economy was in better shape than the headline figures suggest, adding support to the view of Senator Cormann, who told the conference he was cautiously upbeat ahead of the federal budget update next month.

“What I can say is the RBA governor made a very clear statement that he expects economic growth to gradually strengthen and return to trend growth in 12 months,” he said. “We are quietly optimistic.”

But Senator Cormann added his voice to those of Reserve Bank governor Philip Lowe and Treasurer Josh Frydenberg in calling for businesses to grow the economy by lifting investment levels.

“If we are going to create more jobs and allow people to keep more of what they earn, we need businesses to increase their capital expenditure,” Senator Cormann said.

Mr Lowe has urged companies to reduce the hurdle rates on potential investments (the desired rate of return) following falls in interest rates, while Mr Frydenberg has suggested companies should prioritise investment over shareholder returns.

But while Australia’s cash rate now sits below 1 per cent for the first time in history, large companies are still apprehensive about lowering hurdle rates.

Dangerous game

Wesfarmers’ Mr Gianotti said it was “a dangerous game to bake what are historically low interest rates into a long-term view” and hurdle rates were just one assumption that formed part of the assessment of a project.

“It’s easy to talk to a hurdle rate because it’s a single number and you can move it up and down, but the reality is it’s much more complex than that,” he said.

He also warned that an economy-wide shift to lower hurdle rates could be dangerous.

“If people start to factor in lower discount rates and lower hurdle rates, it actually pushes asset prices up,” he said.

“One way to destroy a lot of shareholder value is to overpay for an acquisition, so it’s something we are focused on.”

Ms Brady said Telstra invested over $3 billion a year but that it has a “hard balance” to satisfy institutional investors that wanted the company to invest more and the needs of the 1.3 million individual shareholders that relied on the dividend.

“We then have institutional investors overseas and can guarantee you they will ask why aren’t you investing more and why is the dividend as high as it is?

“Where we have good business cases and we need to invest for growth we do. But we do need to be mindful of the dividend.”

Woodside’s Ms Duhe said it was “too soon to rethink hurdle rates” but she did say the company was taking advantage of lower borrowing costs in the debt market.

“We went out earlier this year and did our biggest bond we’ve ever done at $1.5 billion and you will see us getting funding while can as opposed to waiting when we need it.”

‘Good idea’ to invest in real estate

Ms Harrop from Dexus said ultra-low interest rates were driving the investment decisions of global investors.

“Super funds and sovereign funds use to be sticky about a return number, but we are seeing that absolutely come down as interest rates hit the floor.”

She said it would be “silly” not to reconsider interest rate hurdles given how low interest rates are, pointing out that real estate investments were delivering a yield of almost 3 percentage points above the government bond rate – “literally at all time highs”.

“So putting your money in real estate is really a good idea and we are finding a lot of offshore capital is flooding into Australia wanting to get invested.”

Meanwhile, CFO lobby Group of 100 announced on Thursday that REA Group CFO Janelle Hopkins was its new president, taking over from Andrew Porter, the CFO of Australian Foundation Investment Company. There are 32 female CFOs in the ASX 200.

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