Australian Business Investment Partnership Bill 2009: Second Reading
Wed, 13 May 2009
11:59 AM - Senator David Bushby
I rise today to speak on the Australian Business Investment Partnership Bill 2009 and the Australian Business Investment Partnership (Consequential Amendment) Bill 2009, which together seek to set up what has become known as ‘Ruddbank’. These bills are said to be needed as a direct consequence of the impact of the global financial crisis on the commercial property market in Australia. Last night we had the first budget from the Rudd Labor government since the financial crisis hit, and I would just like to make a couple of points about that in the context of the ongoing effects of this crisis on the Australian economy and the dismal failure of the budget to set up Australia to come out of it well at the other end.
The budget shows we will have a cumulative deficit over the next five years of some $220 billion. International ratings agencies have overnight said that this level of deficit and debt will not threaten our AAA rating, and that is good news because that would be a disaster for Australia. But the very fact that they had to consider this is itself damning. In less than half a term this Rudd Labor government has taken us from a strong healthy surplus into a position where we are recording record deficits and accumulating debt faster than at any other time in our nation’s history. And, yes, this is happening in the context of a massive international financial shock. But one simple fact highlights that the government cannot shift all the blame for this massive debt accumulation onto the financial crisis. That is, around two-thirds of the projected net debt, or over $120 billion of it, is accounted for by new discretionary spending by the Rudd Labor government. Put simply, despite the effects of the international crisis, our projected net debt could have been only one-third of what we are facing if the Rudd Labor government had not been so profligate in spending the money of Australian men and women and their children. It is worth noting that the projected net debt arising from this massive spending increase will lead to a debt of around $9,000 for every man, woman and child in Australia and, further, that every man, woman and child will have to pay $500 in taxes every year just to cover the interest bill before they pay taxes to be used for services like health and education.
These bills create a partnership between government and the private sector through the big four banks, ostensibly as a contingency measure proposed to cover the possible need for the refinancing of viable commercial property projects just in case the foreign banks decide to withdraw from the Australian commercial property market. It is yet another Rudd Labor government policy announcement accompanied by extraordinary and alarmist suggestions regarding the number of jobs at risk if this particular government policy is not adopted. Indeed, the Prime Minister has claimed that up to 50,000 jobs could be lost in the event of the rejection of these bills by this place, our democratically elected Senate.
This claim that it is necessary to implement ABIP as a job-saving measure, as opposed to an attempt to stabilise the financial system, has generated confusion and mistrust, as Mr Rudd has once again attempted to parade around like a knight in shining armour, single-handedly saving Australia and its people from the global financial crisis. However, the reality is that the proposal contained in these bills is bad and irresponsible policy for a wide-ranging array of reasons. The stated purpose of the bills is to protect the Australian commercial property market from the withdrawal of foreign banks. However, no evidence was presented to the Senate Standing Committee on Economics of the intention of any foreign bank to withdraw from this market. In fact, there is a very solid case to suggest that the establishment of the ABIP will encourage foreign banks to withdraw from the commercial property market in Australia and actually fuel the problem that the bills have been proposed to deal with. The only conclusion that can be drawn is that this is an unjustified overreaction to an unlikely possibility.
Professor Henry Ergas from Concept Economics, in his submission to the committee, stated:
Treasury has not presented any compelling … evidence of the need for the interventions that are contemplated in this Bill. Taxpayers have been provided with no guidance as to exactly which foreign banks are contemplating exit from Australia, how much money is actually involved, which assets might actually be affected, which syndicates and domestic banks are actually affected, the actual commercial terms under which these agreements have been made, or the precise nature and size of the economic effects that would ensue should withdrawals occur.
This would indicate that the legislation is simply just precautionary. If this particular line of economic reasoning of the government’s was applied more widely or taken more seriously, it would set a very dangerous precedent, given that Treasury has developed no framework to limit future allocation of taxpayer funds for precautionary reasons in this or any other such cases where comparable precautions could be justified. Henry Ergas gives the recent decline in world commodity prices as a potential example of a situation where this new precautionary approach could be justified. Given that global commodity prices have fallen and they affect Australia’s terms of trade, exchange rates, gross national income, gross domestic product and employment, would Treasury also favour precautionary government measures to combat such movements? Maybe there will be a return to the bad old days of inefficient quotas, widespread tariff protection and commodity price stabilisation schemes.
The government is selling ABIP as being necessary to support jobs in the commercial property sector against significant withdrawal from the Australian market by foreign banks. So how real is the threat of foreign banks withdrawing? The Reserve Bank’s February 2009 statement on monetary policy states:
Over recent months there has been some speculation that many foreign-owned banks will withdraw from the Australian market and that this will create a significant funding shortfall for businesses. While there is a risk that some foreign lenders will scale back their Australian operations, particularly if offshore financial markets deteriorate further, at this stage there is little sign of this, with most of the large foreign-owned banks planning to maintain their lending activities in the Australian market.
Advice from Treasury is that there has been no indication from foreign banks of possible withdrawal from the Australian market. Suggestions of an intention by the Royal Bank of Scotland, the only bank that I have heard any suggestions about, to withdraw have also been scotched completely in a letter from that bank to Senator Hurley dated yesterday, which said:
RBS has not withdrawn from the Australian market. In fact, on 26 February 2009, RBS announced the outcome of the Group’s global strategic review alongside its annual results. As part of that announcement, the Group confirmed that Australia not only remains a primary focus for the business going forward, but it is one of our six trading hubs situated across the globe.
So even the Royal Bank of Scotland, the only bank I have heard any rumours about at all, have denied that the rumours are true. If we look at the total score of how many foreign banks are looking at withdrawing from Australia, we come to zero.
So the quantity of taxpayers’ funds to be put up to fund the ABIP represents an enormous sum of money to address a problem that is yet to have been proved to exist. It represents a new precedent by taking precautionary action against what in legal terms would be referred to as a mere spes: a possibility based purely on speculation rather than fact. However, rather than save jobs, the Rudd government, through this bill, may actually provide the catalyst for turning this mere spes into a reality. One of the biggest flaws in the ABIP bill is that it is highly likely to actually cause the very problem it was designed to prevent. Highly respected economist Professor Henry Ergas has stated:
In the short run, the scheme seems likely to induce developers to play off their existing foreign lenders against the safety net the scheme provides. This could accelerate the very withdrawal of foreign lenders the scheme is intended to guard against, while allowing developers to secure some free kicks on the basis of what amounts to taxpayer-funded insurance.
Whilst the ABIP is seemingly intended to dissuade foreign banks from exiting Australia, it actually provides an incentive for any foreign bank that wishes to exit by allowing easy repayment of their commercial paper at 100 per cent of face value, regardless of whether this would be available commercially. This effectively means that, through the ABIP, the Rudd Labor government is proposing to use Australian taxpayers’ money to encourage foreign banks to withdraw from the Australian commercial property market by paying them out in full.
How does letting ABIP be used to prop up the balance sheets of foreign banks protect 50,000 Australian jobs? How is this being a responsible custodian of billions of dollars of taxpayers’ money, particularly given that, according to the Australian Financial Review, foreign banks increased their loans to non-financial corporations in Australia by a double-digit percentage over the past year? The bottom line is that this proposal will make it much easier for foreign banks to exit the Australian market because they will be able to circumvent heavy losses on the loans. This also brings up another interesting facet of the ABIP debate—the vested interest of local banks in having the government take over loans of foreign banks. National Australia Bank chief executive Cameron Clyne said in February that there is little evidence yet that the foreign funds exodus is happening, and it seems that to date not one destitute real estate investment trust has testified to being abandoned by the departure of a finance syndicate member. In fact, in a great many cases it is the Australian banks driving the tough deals in refinancing.
There is concern from many of the bankers involved in refinancing that giving an easy exit to foreign banks will create an inequity between them and domestic banking institutions, further complicating already tumultuous refinancing negotiations. Despite the comments by the Reserve Bank and the lack of evidence of foreign banks withdrawing, the fact is that there are refinancing pressures in the Australian market, and, to a significant extent, these pressures have been exacerbated—and even, in part, caused—by the decisions of the Rudd Labor government. It is a fact that significant amounts of syndicated debt will need to be turned over this year, not only in commercial property but also by Australian corporations in general. It is also true that many small and large Australian businesses are facing challenges in securing refinancing, but it needs to be acknowledged that, to a large extent, this is as a result of the crowding out of debt markets that was caused by the Rudd government bank guarantee which was introduced in October last year.
The question we should be asking here is whether the Australian taxpayers should bear the burden of averting a possible fire sale of Australian commercial property if the reason for this possibility being transformed from a mere spes into a reality is this poorly-conceived piece of Labor government legislation which is, ironically, intended to prevent that very outcome? The ABIP will expose the Australian people to a potential liability of $28 billion. The Commonwealth will have a 50 per cent shareholding in the ABIP company, a $2 billion commitment, with the other half being provided by the big four banks. But, if the ABIP requires additional funds over and above the initial $4 billion, it will be able to issue loans up to an additional $26 billion at the Commonwealth’s risk alone—a potential addition of another $26 billion to the already gargantuan $200 billion debt legislated by the Rudd government, which, in the context of last night’s budget, is clearly now going to be exceeded.
This piece of legislation has been sold to Australia as a job-saving measure, with the Prime Minister stating that it will prevent the loss of 50,000 jobs. But it quite simply will not. During one of the Senate Standing Committee on Economics hearings in the inquiry into the bill, in Sydney, Peter Verwer from the Property Council said:
ABIP does not put new money into the system and therefore is not a source of funds for new investment.
Put simply, this means that ABIP will not play a role in starting any new projects that would create employment, and it would appear on the basis of the evidence given at the committee hearings that employment in the commercially viable projects ABIP is authorised to invest in is unlikely to be at risk. It was made quite clear by Mr Verwer that they were not going to be investing in anything that was not absolutely top shelf, and if you have a top-shelf proposal, you are not going to need ABIP anyway.
It stands to reason that the only commercial property projects in which job losses might occur would be projects which were not commercially viable to begin with and would not qualify for the refinancing assistance offered by ABIP as a result. This would suggest that, once again, the Prime Minister’s claims about protecting employment are completely lacking in credibility. Not only is the ABIP likely to be harmful in creating market distortion and putting taxpayers’ funds at risk; it is also anti-competitive and unaccountable. The Minister for Finance and Deregulation states that the bill:
… specifically authorises the shareholders agreement, and the activities undertaken by ABIP, its shareholders, directors, officers, agents and employees in the furtherance of ABIP’s objectives, to be exempt from the competition provisions of the Trade Practices Act.
This is justified by the minister as being essential ‘to remove any uncertainty about the operations of ABIP’. This, in fact, creates huge uncertainty as to how ABIP will actually operate.
In a situation where a law applies to the wider Australian community but not to this particular Rudd government quango, one must have misgivings as to how or even whether anti-competitive practices could be prevented in its absence. Evidence was given at the committee inquiry that the Australian Competition and Consumer Commission was not involved in discussions of any significance with Treasury about the implications of its exemption from the Trade Practices Act or the legal framework within which ABIP would operate. This is astounding given the ACCC’s role as the competition watchdog of Australian business. To make things even worse, good corporate governance is breached by having a board composed of representatives of the big four banks and the Commonwealth as opposed to independent board members who would act in the best interests of the company. It will be very difficult to remove perceptions of board members acting in their own interests—the representatives of the banks acting in their commercial interests and the representative of the Commonwealth, the government’s appointed nominee, acting in the government’s political interests. This mistrust will be further compounded by the clear lack of ministerial or parliamentary oversight. As outlined, this bill proposes what can only be viewed as bad policy. It will deliver outcomes contrary to the stated intention. It creates a new ‘precautionary’ principle that could have very broad consequences, and it should be rejected.