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ECONOMICS LEGISLATION COMMITTEE
(Senate-Wednesday, 20 October 2010)
INNOVATION, INDUSTRY, SCIENCE AND RESEARCH PORTFOLIO
Australian Nuclear Science and Technology Organisation
Office of the Chief Scientist
Commonwealth Scientific and Industrial Research Organisation
Australian Research Council
Department of Innovation, Industry, Science and Research
- Australian Nuclear Science and Technology Organisation
- RESOURCES, ENERGY AND TOURISM PORTFOLIO
Australian Prudential Regulation Authority
Department of the Treasury
Mr Di Giorgio
Australian Bureau of Statistics
- Australian Prudential Regulation Authority
- INNOVATION, INDUSTRY, SCIENCE AND RESEARCH PORTFOLIO
Content WindowECONOMICS LEGISLATION COMMITTEE - 20/10/2010 - TREASURY PORTFOLIO - Department of the Treasury
CHAIR —I now welcome the Markets Group of Treasury to the table.
Senator LUDLAM —I think it is Mr Murphy who I want to put some questions to. I was just going back through the transcript from last year and it was a nearly a year ago today that we spoke about the OECD national contact point. Are you still the right person to put some questions to about that?
Mr Murphy —Yes, if you want to. Frank Di Giorgio is here as well.
Senator LUDLAM —We spoke last October about the OECD national contact point and its role within the OECD framework, and I was a bit surprised at the time to find that it does not really have an office, does not really have any staff and does not have a promotional budget. Is there anything that has arisen in the last 12 months that is any material change to the material that you made available to us last year? Does the office have any staff?
Mr Di Giorgio —Without knowing in detail what was said last year, I imagine nothing in particular has changed. The office, in effect, is held by the general manager of the division. It is supported by staff in the division as required. So, to that extent, the situation and the arrangements hold.
Senator LUDLAM —Is it still the case then that we will not find the national contact point’s annual report anywhere in an Australian portfolio statement as such, but that it reports through the OECD and we have a page or a chapter in an OECD annual report—
Mr Di Giorgio —I believe that is right.
Senator LUDLAM —That is still the case, okay. Can you give us a rundown on the work of the office in the last 12 months.
Mr Di Giorgio —The last 12 months has, as I understand it, been about being on top of the processes as they are undertaken in the OECD, so the contact point has gone to a number of meetings at the OECD. Very recently we received a couple of cases which are very fresh and are obviously not public.
Senator LUDLAM —Who represents Australia at those meetings?
Mr Di Giorgio —It is Patrick Colmer, the general manager of the division.
Senator LUDLAM —Do we refer to him as the national contact point? Is he the national contact person?
Mr Di Giorgio —Yes.
Senator LUDLAM —What can you put on the public record in terms of the cases that are with you? I have read a little bit about one of them in the press. What is in the public domain about the cases you are actually dealing with?
Mr Di Giorgio —According to my brief, in June 2005 the contact point received a submission from several Australian overseas non-government organisations in relation to a UK-controlled multinational.
Senator LUDLAM —Which one is that?
Mr Di Giorgio —That is Global Solutions Ltd.
Senator LUDLAM —And that has been pending since 2005?
Mr Di Giorgio —No. There was a resolution of some of the key concerns in April 2006, as I understand it. In 2006 the contact point also received a submission from the Australian Conservation Foundation and other Australian and overseas non-government organisations with some allegations around forestry business in PNG.
Senator LUDLAM —Which one? Just name names as you go, if you are at liberty to do so. Or, if you like, if there is a list, rather than taking up the committee’s time, do you want to just table a list?
Mr Di Giorgio —I can table a list if you like, Senator.
Senator LUDLAM —I would appreciate that. What I am mainly interested in is which cases are still alive. Is that the list that you were reading to me? Are they still pending?
Mr Di Giorgio —As I understand it all of these cases have been resolved. But I will have to check that and, as I said earlier, there are two fresh cases that have been received.
Senator LUDLAM —Thank you. If we can get that list from you, that will give us the semi-recent work history of the NCP. What can you tell us about the two cases that are live at the moment?
Mr Di Giorgio —I do not believe I am in a position to say anything about them, because they are not yet public.
Senator LUDLAM —Some of it is in the newspapers at the moment.
Mr Di Giorgio —Having said that, I do not have the details with me. So, again, I can provide some basic information about those to the extent that they are public.
Senator LUDLAM —Okay. Is it a concern to you that it is in the press that the trade union movement has brought one case to the NCP only in the last couple of weeks? Presumably it is not a secret to say that you have brought a matter to the NCP—or is it a bit like the ABCC, where you cannot tell anybody in case you disappear after dark if you have been contacted by it?
Mr Di Giorgio —I had not thought of that, but I guess I am respecting the privacy of the people involved.
Senator LUDLAM —All right. I will not dwell here. If you are uncomfortable, until you have been able to check what you can put into the public domain I will just ask you to provide us, as soon as you can, with anything you are able to about those two live cases.
Mr Di Giorgio —Certainly.
Senator LUDLAM —Thank you. So you have two cases ongoing. Mr Colmer has attended a couple of meetings. This might be germane to the meetings that Mr Colmer has attended: what is the Australian government’s position on calls to strengthen the text of the guidelines for the current review of the OECD Guidelines for Multinational Enterprises? There are obviously calls from several society groups and some governments to strengthen the guidelines in regard to human rights; free, prior and informed consent; due diligence; supply chains; transparency; and disclosure, among other matters. Has the Australian government got a formal position, have we put a draft text, or is there any documentary position that you can provide for us that we are taking into these negotiations?
Mr Di Giorgio —I do not believe that the government yet has a formal position on changing the text.
Senator LUDLAM —When will we be developing one, and will you be seeking guidance or input from Australian NGOs, for example?
Mr Di Giorgio —I will have to take that on notice.
Senator LUDLAM —That would be great. It would be good to know what your program of work is in relation to that review and whether there is any intention to engage with Australian civil society or indeed the industry.
Mr Di Giorgio —Sure.
Senator LUDLAM —Thank you. Moving on—and this might fall into that same list—in relation to our position on calls to ensure consequences and remedies in reply to companies found in breach of the OECD Guidelines for Multinational Enterprises, what are the penalties? At the moment I do not know that there are any.
Mr Di Giorgio —I do not believe there are any penalties as such. As I understand it, it is a non-adversarial forum and, in effect, it is a mechanism to bring parties together and try to resolve issues through discussion. So I do not believe it actually has penalties attached to it as such.
Senator LUDLAM —Okay. This next one is an issue that I raised last time—and you do not have the transcript in front of you; that is fine. It is the fact that we do not appear to promote the existence of the national contact point in areas where Australian multinational companies might be operating. If you are in Malawi, for example, and a company has turned up and just spoiled your backyard—and that is probably a little bit of an aggressive example to pick—what are Australian companies operating abroad or the Australian government doing to notify host communities that there even is a national contact point, a phone number and some resources available?
Mr Di Giorgio —I know that the Australian national contact point is referred to in the annual report.
Senator LUDLAM —In what?
Mr Di Giorgio —In the annual report of the Foreign Investment Review Board.
Senator LUDLAM —Are we handing out copies of the annual report to host communities?
Mr Di Giorgio —I do not believe so.
Senator LUDLAM —No. So what are we doing to promote the existence of the NCP anywhere where its existence might be relevant, such as to host communities where Australian companies are operating?
Mr Di Giorgio —To the best of my knowledge, there is no active promotion.
Senator LUDLAM —Is that something that we could change? Would it seem sensible to advertise the existence of this office, since we are resourcing it?
Mr Di Giorgio —That would be an issue for the government to consider.
Senator LUDLAM —Okay. Minister, can I park that one with you?
Senator Sherry —I take your point, Senator. I will take it on notice. I am sure one of the Treasury officers can raise it with the Assistant Treasurer or maybe the Treasurer. We will come back with a response on notice to you.
Senator LUDLAM —I know I have been raising it with a sense of irony; it is actually quite a serious issue.
Senator Sherry —I agree.
Senator LUDLAM —A condition of membership of the OECD was that we establish this office. We did. It has been around for a long while and is meant to help resource local communities if they are impacted on by Australian companies operating overseas. The office, to my knowledge, is not actually an office. I am not sure that it is staffed. It does not appear to have a direct phone number, and we do not advertise or promote its existence, in any way, to anyone who might care.
Senator Sherry —I take your point, but an office can be an office in title—as distinct from an office physically.
Senator LUDLAM —That is what we seem to have, yes.
Senator Sherry —That, I think, is the context in which it is used. But I take your point. I will take it on notice and ask one of the officers to discuss with the Assistant Treasurer or Treasurer what is appropriate, to ensure there is broader knowledge so that the office, if need be, can be put to use.
Senator LUDLAM —As we have just traversed, it is not necessarily an adversarial forum to which you would take a fight, but if a company is going into a host community and advertising its presence, and consulting on a proposed development, one of the things that they might inform communities of is that this office exists, and for a very good reason.
Senator Sherry —Your point is taken. I will take it on notice and see what can be progressed.
Senator LUDLAM —There have been some calls, since the last time we spoke, about strengthening the institutional arrangements and independence of the Australian NCP. Is their a view within government—either within the department or with the minister—that this would be appropriate? I guess what I am asking is: are we happy with the situation as it is?
Mr Di Giorgio —I think it is fair to say that our thinking on the position is that there is a process in the OECD at the moment around that. We are part of that process in considering how that may evolve. But it is not a settled position as such and so it is something that we would have to consider and brief and seek the opinion of government on.
Senator LUDLAM —When does that review conclude? What can you tell us about the timing of that?
Mr Di Giorgio —I would have to check and give you the facts on that. I know there are meetings happening this year and there is another one occurring, I believe, in December.
Senator LUDLAM —I guess I have asked you to take away a bundle of homework, so if you can just add that to the list, to give some idea of what process there is and when it is expected to conclude. In that case, the last point that I would make is whether there should, perhaps, be some additional resources and perhaps even staff.
Mr Murphy —I can speak on that. Cases are taken quite seriously. Patrick Colmer is the general manager of the division. He is the contact point, but he has the resources within the division—of around 40 people—to call on to handle these cases. He goes to Paris twice a year on these matters to discuss these issues with his colleagues at the OECD.
Senator LUDLAM —That must be nice.
Mr Murphy —This is taken quite seriously by Treasury and the government, as it is an international commitment which we have entered into.
Senator LUDLAM —It is. The two trips to Paris sound nice.
Mr Murphy —No, that is where these matters are discussed.
Senator LUDLAM —I think we called it ‘demand driven’ last year, which I think is reasonable—if there are no enquiries then there is no work for the office to do. But in a busy year, how many people or how many FTEs would you have to assign to Mr Colmer?
Mr Murphy —In terms of the foreign investment division, there would be just under 40.
Senator LUDLAM —How many of them work on NCP related matters?
Mr Murphy —My point is, when a case arises, Mr Colmer can call on any resources within that group to handle these matters. I cannot give you a specific number as to allocation of—
CHAIR —Senator Ludlam, we have been 15 minutes on this topic.
Senator LUDLAM —And we have only just got to the bit about the trips to Paris. How many people are working—
Mr Murphy —OECD meetings call for this issue.
Senator Sherry —I do not think the implied criticism of trips to Paris—the OECD is headquartered in Paris.
Senator LUDLAM —We just have not been able to establish what the office actually does.
Senator Sherry —Senator, if you want involvement in these international organisations on these sorts of issues, you have to be involved, which, by necessity, involves a trip to Paris. So what? I frankly could not care if it was a trip to Timbuktu. The job would still need to be done. Paris is where the OECD is. I do not accept your implied criticisms.
Senator LUDLAM —All right. I want to wrap up. How many of the 40 people within the division that you have identified are working on the NCP related matters at the moment? Could you give us a break up of FTEs or some other metric?
Mr Murphy —If there were a case—
Senator LUDLAM —There are two cases.
Mr Di Giorgio —The division has a unit within it which deals with trade and related international issues. That unit would be where Patrick Colmer would draw resources and staff from.
Senator LUDLAM —Can you give me the name of the unit? How do we describe the unit? What is its title?
Mr Di Giorgio —It is the trade policy unit.
Senator LUDLAM —How many people are in that?
Mr Di Giorgio —Approximately six.
Senator LUDLAM —How many of those folk are currently working on NCP related matters?
Mr Di Giorgio —I know Patrick called a meeting just last week about the new case they received. I believe there were three staff involved.
Senator LUDLAM —At the meeting or in an ongoing way?
Mr Di Giorgio —At the meeting to have preliminary discussions about the issues.
Senator LUDLAM —I am not sure I am going to get much further.
Senator XENOPHON —I have some questions about foreign investment in agricultural land and water. During the last Senate estimates it was clarified that applications for foreign investment under $231 million, unless it is a state-owned enterprise, do not have to come before the board for approval. Is that correct?
Mr Di Giorgio —That is correct.
Senator XENOPHON —Given this, how is the board able to effectively, accurately and on an ongoing basis monitor foreign investment in Australia in agricultural land?
Mr Di Giorgio —As I think was outlined last time, the guidelines are such that agricultural land is not picked up in terms of foreign investment other than through companies that invest in enterprises where primary production is the primary activity and where it is over $231 million.
Senator XENOPHON —So there would be no register to determine how much agricultural land is owned by overseas entities?
Mr Di Giorgio —No.
Senator Sherry —Not at the FIRB level, but if you went to land registers in each state you may be able to identify in some cases foreign ownership.
Senator XENOPHON —Minister, you are talking to a person who had to do conveyancing as a suburban legal practitioner. If it is a company, you do not necessarily know the foreign ownership.
Senator Sherry —Hence my careful use of the words. I have not been a conveyancing solicitor, but I know you can identify in some areas foreign investment and ownership of land through state land registries, but FIRB do not keep any sort of national register.
Senator XENOPHON —Minister, does that mean that the government recognises there is not an ability to assess, analyse and forecast in terms of the level of foreign investment in agricultural land and, for instance, to see whether there are creeping acquisitions taking place in that industry?
Senator Sherry —On the last occasion when the foreign investment rules were reviewed and changes were made—I am just looking for the date, because it was when I was the Assistant Treasurer; however, the date itself is not important—they dealt with some issues relating to real estate investment. Beyond that it is not the government’s intention to change any of the existing parameters around foreign investment since that last set of changes in respect of residential real estate.
Senator XENOPHON —In terms of agricultural real estate my understanding is that New Zealand has recently amended its regulations around assessing overseas investment applications, including an economic interest factor and a mitigating factor, to safeguard New Zealand’s sovereign interests. It has also altered its regulations so that these tests apply to all foreign investments of ‘sensitive land’, which includes farm land greater than five hectares, which compares to the $231 million here in Australia. Has any consideration been given to the New Zealand policy approach in relation to this? Is that something the board has looked at?
Senator Sherry —I understand that the former Senate Select Committee on Agricultural and Related Industries made some recommendations on this in August 2010. The government has not responded yet; therefore, the issues you raise would be dealt with in that response. So we are considering those recommendations.
Senator XENOPHON —But in relation to the board: I take it that the board is aware of the New Zealand approach to foreign investment in agricultural land?
Mr Di Giorgio —The board would be aware of those issues, yes.
Senator XENOPHON —It is not something that is being considered with a view to advising government?
Mr Di Giorgio —It is an issue that we take into account in the mix of considerations on policy issues.
Senator XENOPHON —And my final line of questioning, if I may: given the guide to the draft plan for the Murray-Darling Basin that was issued last week and the whole issue of water security and water for the Basin, you may be aware of a series of articles last month, particularly in the Sydney Morning Herald, in relation to water purchases by overseas entities. Given that it is a multi-billion dollar water market, there were concerns expressed by irrigators’ representatives that merchant banks have been approached in Europe in terms of how European investors can pour hundreds of millions of dollars into our water market. What thresholds are there for the purchase of water rights with regard to the board’s powers of assessment and approval?
Mr Di Giorgio —Water rights would be considered in the mix as another asset in any company. If we are talking about a company that is buying an interest in land, the water rights would form part of that asset.
Senator XENOPHON —But water rights can be bought separately? If water rights have been disconnected from the land, are water rights subject to any approval process or scrutiny by the board?
Mr Di Giorgio —They are considered an asset under the act.
Senator XENOPHON —Does that mean that we have got the $231 million threshold as well for water rights? Or is there a separate threshold for water rights before it has to go to the board for approval?
Mr Di Giorgio —There is not a separate threshold for water rights.
Senator XENOPHON —Is the threshold $231 million?
Mr Di Giorgio —Yes, it would be.
Mr Murphy —Unless it is a foreign country. If it were—
Senator XENOPHON —Unless it is a state-owned enterprise.
Mr Murphy —If it is a state-owned enterprise there is no threshold—
Senator XENOPHON —Sure. Does that mean that if you have an overseas company that purchases $230 million in water assets one day, then in a separate transaction the same company purchases another $230 million, then because they are under the threshold neither of those transactions—nor as cumulative transactions—would come under the scrutiny of the board?
Mr Murphy —Notionally, no, but I must say that the board does look at the cumulative effect of investments in certain sectors. It is not required to do that under the act, but it does that.
Senator XENOPHON —What does that—
Mr Murphy —It means that it looks at the aggregate effect of the amount of, in effect, investment in iron ore, investment in coal, investment in water—these types of sensitive areas—and looks at a longitudinal study. In effect, what are the investments; not just transaction by transaction but over a span of time.
Senator XENOPHON —Okay, but if an overseas entity purchased, say, half a billion dollars worth of water over a series of half a dozen transactions over a 12-month period you would not be able to stop any of those individual transactions, would you?
Mr Murphy —You could not stop the transactions, but you could start to see whether, in effect, the government may need to change policy if you got concerned about that.
Senator XENOPHON —So, you have got a role of observing—
Mr Murphy —Yes, to make sure—
Senator XENOPHON —but you cannot act on it?
Mr Murphy —The act says investment that is contrary to the public interest, and we set down thresholds—you have got to have some guidelines. But at the same time the government—that is, the division—has policy responsibility to ensure that the act, as it is set out, is meeting the requirements of the government. Water is one of the key areas that there is sensitivity about—
Senator XENOPHON —A very key area.
Mr Murphy —and it has got to be kept under observation.
Senator XENOPHON —Finally, maybe I am missing something—
Mr Murphy —No.
Senator XENOPHON —but isn’t there a flaw in your argument in relation to that? Given that these transactions do not have to be brought to the attention of the board, it can be under the radar so that—
Mr Murphy —To some extent it can be, but there are other ways of gathering information in terms of who is engaging water rights.
Senator XENOPHON —But you have acknowledged that there could be policy concerns about overseas entities purchasing significant amounts of water rights in the Australian market.
Mr Murphy —As there is in any key sector.
Senator XENOPHON —Sure, in any key sector. And water is a very key sector, just ask the people of the Murray-Darling Basin. But, given that there is, to use a Senator Cameron term, an ‘information asymmetry’—it is a very good term, Senator Cameron—
Mr Murphy —And it is a term of art, an economics term.
Senator XENOPHON —There is an information asymmetry there.
Mr Murphy —Yes.
Senator XENOPHON —The minister quite properly pointed out that you might be able to find out some information, but if there is this lack of information in terms of who has got what and which entities have got what, how on earth can you give reasonable, considered advice to government?
Mr Murphy —I think you are looking at it through the prism of foreign investment. There are other areas of government which would have data on the ownership of water rights, and so if there are concerns with the foreign investment, one of the jobs of foreign enforcement division is to consult with the other areas, arms of government, to garner that information.
Senator XENOPHON —But you do not do that as a matter of course, though, do you?
Mr Murphy —Well, yes. If there was an investment proposal in a certain industry where we felt we needed information from another department that had expertise on that industry, yes, we would gather information from them.
Senator XENOPHON —But hang on. If it is under the radar, if they are $50 million or $60 million transactions—
Mr Murphy —Yes, they can be. But I am talking about if there is public unrest and if it was brought to our general notice that there were concerns about the sale of water rights. We have got to put this in context. We are an open government welcoming foreign investment. So if there is a matter of concern we can garner some information on that.
Senator XENOPHON —I am not sure. Perhaps you want to take this on notice.
Senator Sherry —Senator, you pose the hypothetical of, frankly, a none too subtle creeping acquisition. You deliberately break it up into blocks of below $230 million. You are correct that it does not have to go to the Foreign Investment Review Board, but that does not mean that in the, I would suggest, public debate perhaps controversy around that approach would not come to the attention of government, and it does not mean that an approach such as that, where a none too subtle accumulation of a substantial asset by perhaps a contrived approach to drop the acquisition below the $231 million cut-off point, would not come to the attention of government and that the government would ignore that. It does not mean that.
Senator XENOPHON —But right now there is no policy, Minister, that would prevent that. Even $50 million of water rights in a particular community in the basin would be very significant.
Senator Sherry —We have determined the threshold. In most sectors there are exceptions. The state-owned enterprises is a good example, and there are other sectors where there are limits by legislation. That is the policy position, but it does not mean that that sort of activity would go unnoticed and that there would not be a reaction to it.
Senator XENOPHON —Minister, there is a hell of a difference between $231 million and five hectares.
Senator Sherry —I am aware that the Senate committee on agriculture make recommendations on this. The government is considering those recommendations at the present time.
Senator XENOPHON —Can you indicate when the government is likely to respond to those recommendations?
Senator Sherry —I cannot, Senator. I have to take that on notice.
Senator XENOPHON —Finally, Mr Murphy, it is a bit like that Donald Rumsfeld phrase—it is a bit of a ‘known unknown’, isn’t it? We do not quite know how much foreign investment it is because there is a lack of completeness of information and a convenient data collection point, if you like.
Senator Sherry —The source of data on foreign investment is not just the Foreign Investment Review Board. I think the Australia Bureau of Statistics has a comprehensive data collection set on foreign investment. Just because you have got a $231 million threshold does not mean that everything under that is not collected statistically. I do not know the detail of the extent to which the ABS collects that data and how it is collected. They are here later on and they can probably give us an outline. Because there is an investment below $231 million, it does not mean it is excluded from data collection.
Senator XENOPHON —I will leave it at that, other than to say that there is a hell of a difference between $231 million and five hectares.
Senator Sherry —Yes, but as I said, the recommendations of the select committee are before government. We will take it on notice and find out when that is likely to be responded to.
CHAIR —We have a series of other questions on FIRB. Senator Cameron has a quick question I understand.
Senator CAMERON —This is for the Foreign Investment and Trade Policy Division. I am happy for this to be taken on notice. It is in relation to our participation in bilateral and multilateral trade agreements. Could you advise on the increase or decrease of GDP for each bilateral trade agreement that we have entered into? Could you advise on the effect on Australia’s trade balance for bilateral trade agreements that we have entered into? Could you advise on the availability of empirical as opposed to theoretical evidence on the benefits of the free trade agreements that have been entered into by various Australian governments? Could you advise on the efficacy of the assumptions underpinning the econometric modelling—the CGE model—used by governments to promote the various bilateral agreements? Could you advise on the outcomes of these free trade agreements compared to what the modelling proposed the benefit was under these various trade agreements? Is that clear?
Mr Murphy —Yes. There is a string of questions there. I do not know whether we would have that information.
Senator CAMERON —I am happy to put it on notice.
Mr Murphy —I would say that there is a major inquiry into the benefits of free trade agreements that is being conducted by the Productivity Commission. They have put out a draft report that has a wealth of information. A lot of that information I would expect to come out in the Productivity Commission’s final report on free trade agreements, which is scheduled for the end of this year. A lot of your questions go to the issue of the debate as to whether we should be doing bilateral free trade agreements or sitting back and waiting for a multilateral agreement within Doha.
Senator CAMERON —My question is not one of principle or political arguments about it; my question is about what the economic outcomes are. The trade policy division should be able to advise me, surely.
Mr Murphy —We will endeavour to give you that information, but you are waiting for a period of time to elapse after the free trade agreement is signed to be able to garner some of that information.
Senator CAMERON —How long does that take?
Mr Murphy —We would have to say—
Senator CAMERON —How long is a piece of string?
Mr Murphy —No. I am saying possibly you could look at the influence of the free trade agreement with the US as one that by now would be able to give you some discernable data as to what impact it has. Of course, I think it is going to be very difficult to isolate the impact of a free trade agreement from the normal trade arrangements. What is the counterfactual if you did not have it?
Senator CAMERON —The modelling does that. It tells us that this is what the benefit is.
Mr Murphy —We will do our best for you, Senator.
Senator CAMERON —I am happy for you to take that on notice as well. I am asking whether the statement you have made then means that the modelling that we are advised provides all the benefits under these so-called free trade agreements is wrong?
Mr Murphy —No. It is the best modelling we can come up with and it is modelling. It is not what actually happens.
Senator CAMERON —I would like to know what the modelling said and what real life says.
Mr Murphy —Okay. We will do our best.
Senator WILLIAMS —To follow on from Senator Xenophon: foreign companies overseas can come to Australia and buy any farmland under $231 million. It does not have to be approved by you or the Treasurer. That is the situation now?
Mr Murphy —Yes.
Senator Sherry —Except for the case of state owned enterprises.
Senator WILLIAMS —Does that include partially state owned enterprises?
Mr Murphy —No, if a state owned enterprise is involved—
Senator WILLIAMS —It has to be 100 per cent state owned?
Mr Murphy —No, there would just be involvement with state owned enterprise.
Senator WILLIAMS —So a case like Shenhua, for example—which is going into the Liverpool Plains area and buying up land to establish a coal mine—which is 68 per cent owned by the Chinese government, would have to go through?
Senator Sherry —Yes—and it has. I have dealt with cases like that.
Senator WILLIAMS —I find it concerning that large amounts of money like that can go through automatically without the Treasurer’s or the government’s scrutiny. I find this a concern for the ownership of our land with that large amount of money. We have seen the change in New Zealand.
Mr Murphy —Yes. I think what you are raising is a concern. As the minister previously mentioned, we have had a parliamentary inquiry. That has raised concern about agricultural land and water rights. These are issues which maybe five years ago were not of immediate concern. It is wherever there need to be adjustments in the threshold. There is flexibility within the foreign investment regime to be able to do that.
Senator WILLIAMS —And we come back to the vertical integration. Australia is obviously glad to export the coal, food or whatever. My opinion is that we need to keep a close eye on it so that in the future we have control of our exports instead of other countries owning our land and controlling it.
Senator Sherry —I will just make a point—I do not have the statistics in front of me. I know that generally—I would have to look at the ABS, which I think have some quite detailed statistics—the overwhelming countries of ownership are the US and the UK for pretty obvious reasons.
Senator WILLIAMS —In Australia, you mean?
Senator Sherry —Yes. It has been, and by a country mile.
Senator WILLIAMS —Yes, it has been like that in foreign investment for years—the UK especially.
Senator Sherry —Yes. It is the same with overall foreign investment.
Mr Murphy —The top five sources of total investment in Australia in 2009 were the US, at $500 billion; the UK, at just under $500 billion; Japan, dropping to $100 billion; the Netherlands, at $43 billion; Hong Kong, at $43 billion; and China, at $16 billion.
Senator Sherry —That might surprise a few people in the community, given some of the recent debate about these sorts of issues. Overwhelmingly, the stock of foreign ownership is in the hands of the UK and the US. It has been, in the case of the UK, since European settlement; and, for the US, probably for the best part of the last hundred years.
Mr Murphy —I will make a point on this. The US has invested $500 billion in us. We have invested $400 billion in the US.
Senator Sherry —To complete the statistical barrage, since you have opened this up: the stock of Australian investment abroad—that is, our investment in other countries—is $1.2 trillion. The stock of foreign FDI in Australia at the end of 2009 was $436 billion. We have $436 billion in stock into Australia and $1.2 trillion in Australian stock in other countries. I think that in the context of this debate this is just not appreciated.
Senator WILLIAMS —To refer to creeping acquisitions: you would be familiar with Swift, the abattoir company. I believe the Brazilian government has an interest in it; not only were they buying up the abattoirs around the country, they also have their own trucks to transport the stock from the saleyards to the abattoirs etc. Are you familiar with that company?
Mr Murphy —No, I am not.
Mr Di Giorgio —I am familiar with the case.
Senator WILLIAMS —Could you find out the ownership of the company? I would appreciate if you could take that on notice.
Mr Di Giorgio —Sure.
Senator WILLIAMS —Is there any way that you can check out the ownership and whether there is financial backing from the Brazilian government? I am concerned that we are going to have one company alone in 10 years time controlling the whole abattoir industry in Australia. You know how big that industry is with the amount of livestock we run, slaughter and export.
Mr Murphy —What kicks in there as well are issues relating to the ACCC and competition. If you are saying one company is taking over other companies to have dominance of an industry, you are going to come into breach of the Trade Practices Act. That is our protection in terms of that outcome.
Senator WILLIAMS —It is also an industry in which it is very hard to make a profit and many people welcome foreign investment to keep it alive and to keep jobs because without that investment there may be just an empty shell of an abattoir and a balancing act—but can they have them all?
Mr Murphy —That is the benefit of foreign investment.
Senator BUSHBY —Minister, one thing that confused me in your answer is that you mentioned that initially $500 billion was invested by the US.
Senator Sherry —I think Mr Murphy read the statistics.
Mr Murphy —The top five sources of total investment in Australia in 2009.
Senator BUSHBY —Of the total, how much did the US and UK contribute?
Senator Sherry —Not the total stock.
Senator BUSHBY —I know.
Senator Sherry —Total stocks are different. The five sources of foreign investment in Australia in 2009 were the US approximately $500 billion—
Senator BUSHBY —Was that $500 million or billion?
Mr Murphy —It was $514 billion to be precise.
Senator BUSHBY —How does that compare? If you add the US and UK investments you get roughly a $1,000 billion. You indicated that FDI in Australia was less than $500 billion.
Mr Murphy —Yes, the figure I have here for the stock of FDI at the end of 2009 is $436 billion.
Senator BUSHBY —How does FDI compare with your statistics for the US and the UK?
Senator Sherry —That is a good question. Maybe one of the officers can help.
Mr Di Giorgio —The difference is that the figures we are referring to here, the $514 billion, are total investment of which foreign direct investment is a subset.
Senator BUSHBY —When you say the US has invested around $500 billion, the FDI component of that is much smaller?
Mr Di Giorgio —The FDI component would be smaller, yes.
Senator BUSHBY —That in itself could confuse the public. I do not want to go into that in great detail. Treasury’s annual report notes, against the objective of well functioning markets, that:
Particular attention is being given to core infrastructure (energy, transport and communications), financial and labour markets.
Other parts of the annual report also highlight water infrastructure as a key activity for the Markets Group. I would like to look in a little detail at each one of the headings that the report indicates you are working on in particular, starting with infrastructure. In the red book, Treasury calls for the explicit incorporation of a net public benefits test when considering major infrastructure investments. Could Treasury outline some of the benefits of such a test.
Mr Archer —I think the issue is fairly straightforward, that a government with limited financial resources available to it ideally will ensure that the projects that it is considering allocating funding to are properly assessed to ensure that they represent value for money and can be prioritised accordingly.
Senator BUSHBY —What are the risks for government and taxpayers from making investments which do not explicitly incorporate a public benefits test?
Mr Archer —I think the risk is that ultimately the best projects are not coming to fruition and that suggests that, in a sense, welfare is not being enhanced by as much as it could otherwise be with a different allocation of those funds.
Senator BUSHBY —Would you say taxpayers are not necessarily getting value for money?
Mr Archer —That is correct.
Senator BUSHBY —Best bang for their buck, so to speak. Can Treasury point to any actions that this government has taken to incorporate a net public benefits test in major infrastructure projects?
Mr Archer —The government established Infrastructure Australia to provide advice on major infrastructure projects. Infrastructure Australia has undertaken a lot of work with project proponents to ensure that a robust cost-benefit analysis accompanies the project proposals that come forward, and I think that has probably been the major initiative that the government has taken to promote more rigorous assessment of projects.
I think the other development we have seen has been the development of longer term planning strategies to ensure that projects come forward within the context of a process which evaluates long-term infrastructure needs. Those processes are still ongoing. I think two examples are work being undertaken by Infrastructure Australia in relation to establishing a national freight strategy and undertaking a review of ports. Through COAG, the government with the states and territories has also established a process around strategic planning in our capital cities, again with a view to ensuring that, as one element of that, infrastructure projects that come forward are developed within that broader context of robust and longer term planning.
Senator BUSHBY —Have all major infrastructure projects of this government been assessed by Infrastructure Australia and put through a proper net public benefits test?
Mr Archer —Have all projects? I guess it depends on what you are including within the scope of your question. Infrastructure Australia has been set up to look at economic infrastructure projects and has played a role, I think, in most government major economic infrastructure projects that have been considered. I am not sure that I could put my hand on my heart and say ‘all’.
Senator BUSHBY —The most high-profile example would be the $43 billion NBN.
Mr Archer —There was a separate process established through the implementation study to conduct analysis of the National Broadband Network. Infrastructure Australia has identified enhancing broadband services in Australia as one of its national infrastructure priorities, but it did not itself conduct a detailed analysis of that project.
Senator BUSHBY —What about the health infrastructure through the health reforms? Did Infrastructure Australia look at that?
Mr Archer —No, and I do not think it was asked to—again going back to my point that its mandate really is to look at what we regard as economic infrastructure as supposed to, I guess, social infrastructure, if you can make that distinction.
Senator BUSHBY —Would the NBN be considered economic infrastructure?
Mr Archer —I believe so, yes.
Senator BUSHBY —So why was a separate approach taken for that?
Mr Archer —I think this is an issue that has been canvassed in a number of previous Senate estimates hearings and in fact in the Senate inquiry into the NBN. The government initially has explained that the National Broadband Network was an election commitment that it was committed to. It has also established a separate process where it engaged experts in relevant fields to develop the implementation study for the National Broadband Network. That is the course that it took.
Senator BUSHBY —Was Treasury consulted on the Parramatta-Epping rail line project prior to the election?
Mr Archer —Were we consulted? I do not recall that we were, but I would prefer to take that one on notice.
Senator BUSHBY —Okay, that is fine. Given our discussion earlier on the risks for government of not doing a net public benefit test or a cost-benefit analysis and given that that was not undertaken for the NBN, does that expose taxpayers to a greater risk that they will not get good value for money or the best bang for their buck?
Mr Archer —I think, as I have already said, the government has commissioned detailed analysis of the National Broadband Network. It was not what would be regarded formally as a cost-benefit analysis. It certainly examined in detail the costs of the network and established that, under a range of scenarios, it could provide a return to the government. The advisers for the implementation study were not asked to conduct a cost-benefit analysis. The government has pointed to a range of overseas studies and evidence which highlight the importance of effective and high-speed telecommunications networks.
Senator BUSHBY —But nonetheless there are a number of ways of implementing a high-speed broadband network, and presumably, in assessing the cost-benefits of each of the different ways of approaching it, a cost-benefit analysis would be a useful way of assessing the risks to taxpayers.
Mr Archer —It would certainly be one way. I think we are on the record in the past as noting that there would be some significant challenges in attempting to identify the potential benefits of such an infrastructure project, given its long life span of 30 or 40 years, and we simply may not be able to recognise the benefits that it could provide.
Mr Murphy —The amount of analysis through the McKinsey report and other analysis of NBN far exceeds, probably, analysis on other infrastructure projects.
Senator BUSHBY —I would be interested in Treasury putting together a paper that demonstrates that that was the equivalent of a full cost-benefit analysis and that that was conducted to the equivalent level of overall net outcome—that that analysis that you referred to actually delivers the equivalent degree of confidence that a full net public benefits test would normally deliver.
Mr Murphy —I think that should be directed to the department of communications.
Senator BUSHBY —I was responding to your comment more than anything else there. You mentioned that one of the reasons it was treated differently was that it was an election promise, but that is not entirely true. The election promise was a $4.7 billion broadband—
Mr Murphy —I think it was treated differently because of its great importance to the government, and it is a major—
Senator BUSHBY —Sorry, Mr Archer did actually mention that it was an election commitment. I just wanted to correct that. The $43 billion NBN was not an election commitment; the $4.7 billion broadcast broadband plan was. The $43 billion network came in—
Senator Sherry —All I can recall, Senator, was that there was an enormous amount of debate about this issue in the election. I do not think anyone could deny that it was a major issue in the election.
Senator BUSHBY —It was a major issue, but you were talking about spending $4.7 billion at that time, not a factor of 10 times that amount.
Senator Sherry —I certainly heard—not you personally; you may have done, but I do not know—some of your colleagues bandying around a figure of $43 billion quite constantly during the election campaign. But that is a political discussion that we can have at another—
Senator BUSHBY —During which election campaign was that?
Senator Sherry —In the last election campaign.
Senator BUSHBY —No, I am talking about the fact that you went to the 2007 election with a $4.7 billion—
Senator Sherry —Sorry, I thought you were referring to the 2010 election.
Senator BUSHBY —And halfway through the term, when it appeared that the plan you had gone to the election with had failed, you came up with this new one, which came to $43 billion.
Senator Sherry —Look, this is a political debate we are now getting to. I do not agree with you, but it is not an issue that the witnesses before you can engage in.
Senator BUSHBY —Coming back to Mr Murphy’s comments, the KPMG-McKinsey study only showed that returns would be above the bond rate, not a risk adjusted return, which you would normally consider in the context of a cost-benefit analysis.
Mr Murphy —My point is that there was considerable analysis and work done on the NBN project before the government made a decision in that regard. Certain matters are referred to Infrastructure Australia, and Infrastructure Australia ran a process which was largely getting views of the states then trying to adjudicate, prioritise and fine out infrastructure investments. But, as Mr Archer pointed out, in their report to COAG they recommended and stood behind the government’s investment in a fast broadband network.
Senator BUSHBY —But they did not conduct a full cost-benefit analysis.
Mr Murphy —No, they were not asked to, but they saw the benefits of it.
Senator BUSHBY —No, but it is economic infrastructure. We heard from Mr Archer that that is Infrastructure Australia’s job; part of their job is to consider the cost-benefit of economic infrastructure. We heard evidence tonight that it is economic infrastructure.
Mr Murphy —But it is only one source of advice. A separate process was run by NBN because of its importance.
Senator Sherry —That is right. Questions in respect of NBN and Infrastructure Australia are not the remit of this part of Treasury estimates. This discussion, debate and question-and-answer session is one that I have actually heard on, frankly, numerous occasions in other estimates. I do not think we have learned anything new, with due respect to the witnesses, of anything tonight.
Senator BUSHBY —Mr Murphy mentioned that there was lots of analysis done before it was announced. Are you aware that analysis was? As far as I am aware, it did not even go to cabinet before it was announced.
Mr Murphy —I think you should direct those questions to the department of communications. They will have it at their fingertips.
Proceedings suspended from 9.16 pm to 9.30 pm
CHAIR —The committee will resume with the markets group.
Senator PRATT —I have a quick question to start with. You are welcome to take it on notice if required. In the markets group some parts look at advice on insurance.
Mr Murphy —Yes.
Senator PRATT —So I was interested in whether the markets group had done any assessment on the changes to midwifery practice and any impact on medical insurance. I know there is some analysis of medical insurance in some of the work that you do.
Ms Wilkinson —That is the health department’s policy. As far as I know there is nothing in markets group. I do not know whether the fiscal group has done any work on that.
Senator PRATT —I have seen some other work that the section has done on insurance but I was not sure. It does not surprise me to hear that is the case.
Ms Wilkinson —We are responsible for insurance, but not health insurance.
Senator PRATT —It is not health insurance; it is indemnity insurance.
Ms Wilkinson —Yes, but the health department has had carriage of that.
Senator PRATT —You assess the affordability of insurance in terms of the overall scope of liabilities, or is it Heath that does that?
Ms Wilkinson —In terms of the midwifery?
Senator PRATT —No, just in terms of the affordability of liability and risk assessment overall—making sure insurance products have a proper assessment of the liability within them.
Mr Murphy —We look at the policy in terms of insurance and, yes, accessibility but the administration of insurance products is with APRA. That is a whole stream of work. Ian Laughlin is the commissioner who deals with that.
Ms Wilkinson —And the policy advice on the particular midwifery insurance has been the responsibility of Health.
Senator PRATT —I have another insurance question on a different topic, the progress of the review into the carve-out of unfair contracts. Where is the deliberation on that up to? This committee has done quite a lot of inquiry into insurance products and consumer legislation, as you would be aware. One of the issues that came up is many consumers complaining about insurance contracts having exemptions from unfair contracts clauses. I understand the markets group has been responsible for a review into that.
Mr Miller —In the coming months the government is likely to be pursuing a range of reforms to the Insurance Contracts Act that did not pass through the previous parliament before the election. It included various aspects of removing impediments to the use of electronic communications for statutory notices and documents; ensuring that the failure to comply with the duty of utmost of good faith is a breach of the act; giving certain powers to the regulator, ASIC, to address certain breaches; and making the duty of disclosure easier for consumers to understand and comply with. The question about whether insurance contracts should be subject to generic provisions regarding unfair contracts terms or actually remain subject to a tailored regulatory regime in the Insurance Contacts Act is quite a contentious issue and one which involves quite a lot of underlying legal and policy complexity. All I can say is that the government is looking at that issue and how that fits in. Whether to include or exclude that from these provisions which are being worked up now is a matter that is currently under consideration.
Senator PRATT —So the insurance bill has been reintroduced but it is unclear yet whether it is going to include provisions on unfair contracts.
Mr Miller —Correct.
Senator PRATT —And that is currently being actively reviewed. Do you know what the timeline is likely to be for concluding that?
Mr Miller —I do not. I can try to find a bit more information—I do not work on it directly.
Senator PRATT —I would interested. In reference to consumer law, clearly the federal parliament has dealt with that and I understand there are now draft Australian consumer law regulations and guides being prepared.
Mr Writer —On 24 September this year the government issued draft regulations under the Australian consumer law on behalf of the Standing Committee of Officials of Consumer Affairs for consultation. That consultation closed on 13 October. So far we have received 35 submissions, five of which are confidential and the remaining 30 are now published on the Treasury website. We are now considering those submissions and discussion with our state and territory colleagues is the final approach before those regulations are finalised.
Senator PRATT —Is there anything in those submissions that represents any real risk to the consumer law becoming operative in the new year?
Mr Writer —The primary legislation has been passed, and section 2 of the Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 states that the legislation will commence on 1 January 2011. So that legislation will commence on that date.
Senator PRATT —Those regulations and guidelines will be ready and operable by then as well?
Mr Writer —The intention is to have those regulations finalised in the coming weeks.
Senator PRATT —What is the assessment of how ready business is for the introduction of the new consumer law?
Mr Writer —A considerable amount of work is being done to insure that consumers and business are aware of the new laws and can comply with them. Part of the consideration in finalising the regulations is whether specific transitional requirements are needed in particular areas, and questions were asked about that. A document was issued in July this year by the Treasury on behalf of the standing committee of officials about the implementation of the law, and that invited businesses in particular to make comments about the proposed implementation process. There is also a lot of work being done by various groups of the national and state and territory consumer agencies to ensure there is appropriate consumer and business awareness of the law.
Senator PRATT —As I understand it, the state consumer agencies are still responsible for upholding and implementing the laws in each jurisdiction even though they are uniform. Is that correct?
Mr Writer —That is correct. There will be a single law but a joint enforcement approach, and that enforcement approach is underpinned by a memorandum of understanding that has been signed by all of the Australian consumer agencies and our New Zealand colleagues.
Senator BUSHBY —Is New South Wales sticking to it?
Mr Writer —As far as I am aware. In addition to that there will be a number of other protocols agreed at a more operational level to govern the way in which they work together day to day.
Senator PRATT —Do all of the state consumer protection departments seem ready to kick off after a busy time of consumption over Christmas and the new year?
Mr Writer —As I say, there is a lot of work to be done. Everyone is working towards the 1 January commencement date, and the intention is that everyone will be ready to commence on 1 January, subject to any particular transitional arrangements that are made in particular areas.
Senator PRATT —If someone consumes or buys a good or service this calendar year but has a problem with it next calendar year, is it the new laws that apply?
Mr Writer —Under the Commonwealth provisions, my understanding is that the existing laws will apply up until 31 December in relation to goods or services acquired on or before that date, and then the new law will kick in from 1 January.
Senator PRATT —What if someone buys a new washing machine for Christmas and it breaks down in the new year? Is it the old or the new law?
Mr Writer —My understanding is that the current rights will apply.
Senator PRATT —So does that mean jurisdictions will be having to manage both sets of laws until every last washing machine breaks down and everyone has bought a new one post 2011?
Mr Writer —Potentially that is the case, although clearly the vast bulk of consumer goods will transition over to the new period as people replace their washing machines and other appliances over time.
Senator PRATT —But it could in fact be a long transition period, given that one of the things we have been told is that consumers should be using their statutory rights and statutory guarantees more than they currently are.
Mr Writer —The consumer guarantees provisions, as we explored in the committee’s inquiry on the bill earlier this year, are quite similar to the new consumer guarantees requirements. In terms of the level of protection consumers have, that will be quite similar. Clearly there is an intention that the new consumer guarantees requirements will be more effective in their operation. However, one of the key reasons for redrafting and clarifying the law is to ensure that people are more aware of the rights that they do have now. In a sense, people will have very similar rights either side of 1 January, but there maybe different ways of enforcing those. Those things should be ironed out over time.
Senator PRATT —So it will not matter if someone buys their dishwasher at the Boxing Day sales or waits til the new year. Thank you.
Mr Miller —Chair, can I seek your indulgence as I need to make a quick correction on something I said to Senator Pratt. The Insurance Contracts Amendment Bill 2010 has not been reintroduced yet.
Senator BUSHBY —Prior to the break, in amongst the general questions about the net public benefits test and the ensuing conversation about the NBN, I asked whether Treasury were consulted on the Parramatta-Epping railway line prior to the election. I think you indicated you did not believe so. If you find otherwise, I would appreciate it if you would let the committee know. Since the election, has Treasury or Infrastructure Australia undertaken a cost-benefit analysis in respect of that rail line—or any other arm of government, for that matter?
Mr Murphy —I think IA has. The government has said it will work with Infrastructure Australia on several projects, and one of those is the Epping to Parramatta rail link.
Senator BUSHBY —A cost-benefit analysis has been conducted or is being conducted?
Mr Murphy —I think your question—
Senator BUSHBY —I asked whether a cost-benefit analysis had been conducted by either Treasury or IA, or any other arm of government.
Senator Sherry —That is not my recollection of the question.
Mr Murphy —No, it wasn’t—
Senator BUSHBY —I read it out—it is written in front of me.
Senator Sherry —It is still not my recollection of the question, whether you read it out or not.
Mr Murphy —I do not think you mentioned ‘cost-benefit’. That is all right, I know where you are coming from. The government has referred it to IA, and it would be part of their processes as to how they approach it. But they do cost benefit analysis and I would expect that it would happen.
Senator BUSHBY —Okay—you think there will be one.
Mr Murphy —Yes.
Senator BUSHBY —In the red book for the incoming government, Treasury states:
Without further reform of water pricing, trading and infrastructure, poor water policy will increasingly undermine economic growth, inflate the cost of sustaining even moderate population growth and result in even further irreparable environmental damage.
Could Treasury please expand on what kinds of water reform are needed in order to avoid those outcomes?
Mr Murphy —I think—
Mr Archer —That question is best directed to our fiscal group colleagues tomorrow.
Mr Murphy —Yes.
Senator BUSHBY —The reason I am asking you is because against well-functioning markets it is noted that, ‘particular attention is being given to core infrastructure’—
Mr Murphy —Yes.
Senator BUSHBY —and then notes, ‘in other parts of the annual report for markets highlight that water infrastructure is a key activity for the group’.
Mr Archer —Not for markets group. I am surprised that you have found that—
Senator BUSHBY —It says ‘other parts of the annual report also highlight water infrastructure as a key activity for the markets group’. It is in—
Mr Archer —We do not—
Senator BUSHBY —You do not have anything to do with water?
Mr Murphy —Matters pertaining to that policy have been dealt with by the industry and environment division within the Treasury, which is in fiscal group.
Senator BUSHBY —Okay. So even though it is infrastructure, water—
Mr Murphy —Yes, that is right. There are divisions around those—
Senator BUSHBY —I understand, but I actually—
Mr Murphy —We could answer off the top of our heads, but if you want a really informative answer, you need—
Senator BUSHBY —That is fine, I will look at it then, but it is just confusing that Treasury’s annual report actually says that water infrastructure is a key activity of the markets group.
Mr Murphy —I am surprised at that—
Senator BUSHBY —I do not have a reference, so I cannot tell you where I saw it.
Mr Murphy —Well-functioning markets are the key outcome which markets group is looking at, but other areas of Treasury are also looking at trying to get well-functioning markets in Australia.
Senator BUSHBY —I will move on to a different market then. What analysis of Australia’s labour market has the markets group undertaken recently?
Mr Murphy —Sorry about this, but we are not really responsible for labour markets. Again, that is dealt with in another area of Treasury.
Senator BUSHBY —Okay, once again Treasury’s annual report notes against the objective of well-functioning markets, ‘Particular attention is being given to core infrastructure energy, energy transport and communications, financial and labour markets.’
Mr Murphy —I think that is probably for editorial or convenience purposes—everything has been thrown in together. That is not the clear delineation. I am sorry about that, but labour markets have always been—
Senator BUSHBY —I did read that opening statement before I started and said that I was going to go through each of these—
Senator Sherry —It is difficult. I must say that when I sat in your position, I made a valiant attempt—when I could get to markets group, I have got to say; I did not have that much time before them—to start off on questions like this and found that markets group did not do everything in the world that I hoped they did. When I could get to them, I might say.
Mr Murphy —I think we have a full range of responsibilities, which we struggle to meet.
Senator BUSHBY —It is the markets group, and we are talking about particular markets. That is fine, but when trying to ascertain that this was the appropriate area you look at the annual report and it suggests it is.
Mr Archer —It may be that there is a distinction between the output which the agency is responsible for and then how which parts of the output are allocated within the groups. So although the output refers to functioning markets, what markets group has responsibility for as a subset—
Senator Sherry —That area is more appropriately macro—
Mr Archer —Fiscal.
Senator Sherry —Fiscal—okay. We will forewarn them of your intention to pursue them on these issues. I am sure they will be very happy—
Senator BUSHBY —As market group, what role do you actually play with analysis that the fiscal group may make of labour markets? Presumably you have a remit that relates to labour markets in some way, even if you do not analyse them yourself?
Mr Murphy —They would look at the macro with labour markets. We look at specific sectors. In terms of the infrastructure, competition and consumer policy division, we look at infrastructure, energy, transport and communications. As well as those, there are whole departments looking at these issues. We are looking at their macroeconomic effects.
Senator BUSHBY —You are looking at the macroeconomic effect of those particular markets?
Mr Murphy —Yes, of energy markets, transport markets, communications—that is our brief to do that.
Senator BUSHBY —I suggest that somebody has a look at the annual report in terms of identification of the particular focus you have this year, which is what was talked about. It says you are particularly focusing on a number of things, including labour markets.
Mr Murphy —It must be the last edition of the annual report. This is the first time. I have never been asked about labour markets or water markets before.
Senator BUSHBY —We will move on to a different market. I am pretty confident you look at these ones: financial services, energy and retail. I note in the red book that Treasury characterised financial services, energy and retail as oligopolistic. In what ways are these markets oligopolistic?
Mr Murphy —I suppose it is not so much whether they are oligopolistic or not, but we are concerned about the difficulty of getting competition in some of those markets in Australia. Why? Because you have a small number of major players and a second tier, or fringe players, also operating. You could have two major players and have strong competition, but what you are concerned about is to ensure, from the consumer’s point of view, that there is adequate competition in those markets. Taking financial services, it was a great benefit to Australia that we had four major financial institutions—a solid platform, a foundation, for our financial services market. At the same time, as we have seen coming out of the GFC, that raises issues of competition. It is the same in the retail space. You have Woolworths and Coles. We have been very pleased that you have other foreign entry into the market for retail groceries to try to get competition there. It is the size of Australia that tends you to oligopolistic markets. It probably makes you more attentive to how they are operating to make sure there is appropriate competition. That is the issue. We are flagging that. We are saying, ‘We don’t just look at these things and say everything is okay.’ We have to continually pay attention to those markets and, also, we would expect the ACCC to keep a watchful eye on developments in those markets.
Senator BUSHBY —I often get a question or two about those particular markets at estimates as well. Treasury calls for the situation at these markets to be monitored. How are they being monitored at the moment? Is the government taking any additional action to increase the monitoring of the level of competition in these markets?
Mr Murphy —On financial services, John might like to speak. We have increased the monitoring there.
Mr Lonsdale —In terms of banking, in particular you asked about the measures that have been taken. As Mr Murphy said, a range of things happened during the GFC that detracted somewhat from competition. We saw the exit of some key players, particularly foreign players in the market; securitisation froze over which made it more difficult for smaller players to come into the market and compete with the larger banks. The government has undertaken a range of measures to try and enhance competition. There is the RMBS program, the two lots of $8 billion of RMBS, and the two tax measures that were announced in the budget, one on the bringing forward of interest withholding tax and the 50 per cent discount on interest income. I guess all point towards trying to enhance competition in the banking market.
Senator BUSHBY —We have had an inquiry into banking guarantees, but it may well have contributed to reduction in competition for some time. We will not get into that today. What I was particularly asking about was the recommendation in the red book to monitor the situation. What action in terms of monitoring are you taking at the moment, looking forward from here? Given that we have an oligopolistic situation in these markets, what action are you taking to act upon the recommendation to monitor?
Mr Lonsdale —We regularly monitor the data coming out of the Reserve Bank.
Senator BUSHBY —Is that any different?
Mr Murphy —That has been enhanced in the last 12 months. The government has requested more data from the banks.
Senator BUSHBY —On the basis of this advice it appears that it is something worth looking at more closely. I am interested in what you are doing as a step up from the basis of this advice.
Mr Lonsdale —The banks have been providing us with more data through APRA that we have been examining in a number of areas, and we keep that under review.
Senator BUSHBY —You are examining it in this particular context from the perspective of competition? APRA’s remit isn’t competition at all, as I understand it.
Mr Lonsdale —APRA have competition in their mandate. I think you will have heard Dr Laker talk about the statistical function of APRA which goes to collecting a whole range of statistics to assist in policy advising. We utilise those in the same way as we utilise the statistics coming out of the Reserve Bank.
Senator BUSHBY —I am conscious of the time and there are more questions to come, so I will move on. Has Treasury provided the government with any advice on whether Infrastructure Australia will continue to be funded beyond 2010-11?
Mr Archer —The correct answer, as I understand it, is that that is a matter that will be considered in the course of the government’s ordinary processes for developing the next Commonwealth budget. Those are processes that are underway but at an early stage. We would envisage that we would have an opportunity to comment on that issue, but that has not arisen yet. I should say, it is beyond the advice that we provided for the incoming government briefing.
Senator BUSHBY —Just going back to the discussion we had about some of these markets not actually being in your area, I found an article in which Mr Archer is mentioned as a contact. There are a number of dot points in the document talking about such things as Australia having sufficient water resources to sustain projected economic and population growth, the commitment to bridge any gap between environmental water recovered under water for the future and what is required to be returned by the Murray-Darling Basin Authority would likely present significant fiscal risks.
Mr Archer —That sounds like it might be part of the incoming government brief and I am defined as the contact officer for a brief on infrastructure issues. That brief does draw on input from more than one area of the department including outside the markets group. There is room on that brief for one contact officer and I think that, because a majority of the issues relate to the division I am in, I am the contact officer.
Senator BUSHBY —It is all about water infrastructure though.
Mr Archer —Yes, that is correct. There was a decision taken that that was an appropriate place within the context of the brief for that issue to be addressed.
Senator BUSHBY —To some extent at least.
Mr Murphy —It is not intentional.
Senator BUSHBY —No. There is some knowledge of water and it appears it resides with you, Mr Archer, in the group on water infrastructure.
Mr Archer —Senator, in relation to the preparation of that brief the input was very much provided by our fiscal group colleagues.
Senator BUSHBY —But then you put it in amongst the markets group.
Mr Murphy —There was no demarcation within the red book as to whatever group. It is just in as a contact point.
Senator Sherry —Whether it wanted to be or not, the central contact point or conduit remains in infrastructure.
Senator BUSHBY —That is probably more an aside at this point than anything. Is the Treasury providing any advice on the Regional Infrastructure Fund?
Mr Archer —In keeping with our general advisory role on infrastructure issues, again, I think we will have the opportunity to provide input into the development and implementation of the Regional Infrastructure Fund. My understanding is that the primary policy responsibility for that does reside with the department of infrastructure.
Senator BUSHBY —Are you aware of whether funding under that program will explicitly incorporate a public benefits test?
Mr Archer —I think the details around the allocation of grants from that fund and its implementation are still to be settled.
Senator BUSHBY —Given the comments in the red book calling for the explicit incorporation of a net public benefit test when considering major infrastructure investments, I would have thought that you prefer to see it—
Mr Murphy —Yes, we would—
Mr Archer —Certainly I do not resile from that comment.
Mr Murphy —and I expect that the cabinet would like to see it as well.
Senator BUSHBY —One would hope so. Their performance so far does not necessarily suggest that they always like to see it.
Mr Murphy —No comment.
Senator BUSHBY —No, I was not asking you to comment on that. Turning to infrastructure and population—and I do not know whether we talk about population with respect to you—the Treasury red book at page 9 notes that the recent rapid rate of population growth has exceeded the strategic capabilities of the different tiers of government. I note in the red book that the Treasury advocates a regular independent report from Treasury or the Productivity Commission which outlines population projections to better inform planning and investment of all governments. What would be the benefits of a group like the Productivity Commission examining the infrastructure requirements in the context of population growth?
Mr Murphy —It is a matter on the public record that there are issues relating to population. The Intergenerational report raised issues relating to population. Work was done by the government prior to the election to set up a consultation process on population. It may be that there would be some benefit in the Productivity Commission or other bodies that do that type of work to do some forecasting as to what infrastructure is needed to benefit the rise in population. That is all I can say on that. Is there anything specific?
Senator BUSHBY —No, it is just that—
Mr Murphy —We do think that is sensible forward planning.
Senator BUSHBY —I tend to agree. I think it is common sense. My personal view is that adding in a few more Australians is probably not a bad thing provided we actually do take the steps to plan and ensure that we are delivering infrastructure that is capable of taking them.
Mr Murphy —I think that the only other thing to say there is that, as has been pointed out by Treasury a number of times, we have an ageing population so it may be that the infrastructure you need is of a different kind from what you have got at the present time, or that there are different emphases.
Senator BUSHBY —The Treasury red book at page 5 notes that Australia’s ability to weather future shocks to world financial markets depends on Australia continuing to enjoy the confidence of global capital markets. There have been reports in the media and elsewhere that the proposed introduction of the RSPT and then the MRRT has caused some international investors to reassess the attractiveness of Australia as an investment.
Mr Murphy —I doubt that very much.
Senator BUSHBY —Has the market group been tracking offshore investment intentions regarding Australia?
Mr Murphy —Yes, they are on the public record. We have seen no falling away of interest in investment in Australia, and that comes through the private sector and through our contacts offshore. There has been no diminution in investment. I think that was a furphy thrown out there.
Senator BUSHBY —So what sources—
Senator Sherry —If you look at the stats on foreign investment in Australia, what we have today that has been published by FIRB, and I think that ABS has published some data, indicates that there has not been any falloff. Certainly when I was AT I did not notice any diminution of applications for foreign investment, Senator.
Senator BUSHBY —Moving on, I just want to ask a few questions that arise out of last estimates. I asked then about the progress towards a seamless national economy reform agenda.
Senator Sherry —I can fill you in on that. Deregulatory responsibility—but it is not the right estimates, I have to say, it is Finance—
Senator BUSHBY —Can you please provide an update as to where progress has advanced in the last three or four months.
Senator Sherry —On the 27-reform COAG agenda?
Senator BUSHBY —Yes.
Senator Sherry —It is Finance, although some of the reform—
Senator BUSHBY —I got very detailed answers last time.
Mr Murphy —We do a lot of the work.
Senator Sherry —Yes, that is right, and I was just about to say that for many of the issues on the COAG agenda the detailed implementation policy work is done by Treasury and Markets Group.
Mr Murphy —I do not know which one to start.
Senator BUSHBY —Just a summary. Of the 27, how many have been delivered now? Has the CRC delivered any additional reports since last estimates?
Senator Sherry —The Markets Group can give you an assessment of the projects they are dealing with. I am not sure they are in a position, because it is Finance and Deregulation, to give an overview of the 27.
Mr Murphy —I would just say things are on track. You have seen the notable one, where the Prime Minister has come out and spoken very strongly about occupational health and safety.
Senator BUSHBY —New South Wales’s—
Mr Murphy —That is a key reform and it is very important. The host of others are all progressing. There is a report back to COAG at the end of the year. The policy of a seamless national economy—these projects—is well advanced. That is going well, I think.
Senator BUSHBY —In respect of the seamless national economy agenda, how does the agreement on national laws for workplace safety fit into that?
Mr Murphy —Occupational health and safety?
Senator BUSHBY —Yes.
Mr Murphy —It is a key reform and it is a reform which business raised with us over a number of years. It would be very disappointing if New South Wales—
Senator BUSHBY —Agreement was reached on that with all states?
Mr Murphy —Yes.
Senator Sherry —I think there were some issues that WA—
Mr Murphy —That WA held back on.
Senator Sherry —But this department is not responsible for the detailed oversight of the health and safety reform, if you are interested in detail.
Senator BUSHBY —I am more interested in how it fits into the overall picture and what impact it might have.
Senator Sherry —In terms of the overall picture—which, frankly, fits in Finance and Deregulation, I have to say—the 27 action items broadly are going well.
Mr Murphy —Yes.
Senator Sherry —I would be confident that the date, which I think is the end of 2013, will be met, that the 27 will be delivered. I would observe that, putting aside the recent events of the last week in respect of New South Wales and health and safety, there has been a generally very cooperative approach from all states, with that one significant exception.
Senator BUSHBY —Is that particular exception one of the areas where progress had been reported and was it considered complete, in the sense that agreement had been reached? Last time there were eight that had been reported as—
Senator Sherry —Agreement was considered to have been reached, that is correct, so therefore very significant progress had been made.
Senator BUSHBY —It had been, but now there is a grey? Okay.
Mr Murphy —There are incentives there. As has been mentioned, there are payments for completion.
Senator BUSHBY —And getting into all those details probably is the area of Finance.
Senator Sherry —Yes, the overall coordination is Finance and Dereg. There is up to half a billion that is allocated on a specific formula to all the states and territories. The figure of $140-odd million for New South Wales comes to mind. There is no doubt, as the Prime Minister has said, that all or part of that is at risk in terms of the payment that could be made to the New South Wales government. There is no doubt about that.
Senator BUSHBY —I am sure that that will form part of their consideration when they work through that. I will move on from there. Mr Lonsdale may be interested in the next set of questions which are related to banks.
During the period after the North Atlantic financial crisis where we saw the RBA dramatically cut the cash rate and more recently with its increases, the fact that the banks have not followed the cash rate all the way down and then have increased faster than the cash rate has obviously caused a lot of consternation with the public. What tools does the government have to either require or pressure the banks to follow more closely the cash rate movements by the RBA when setting their variable interest rates on their loans?
Mr Lonsdale —They are largely commercial decisions for the banks. Having said that, what the government has been doing is trying to foster the best environment it can for competition to make sure the most competitive rates are being delivered to consumers and, as well as that, looking at the funding tools that are available to banks when they access markets. So securitisation is a key funding source that banks use, particularly the second-tier banks, and, as I mentioned before, the AOFM program and the $16 billion tranches are a key part of kick-starting that market in coming back. I guess we have seen other competitive pressures that I mentioned and other competitive measures that the government has introduced as well.
Senator BUSHBY —Increasing the competition is a great way of dealing with it. What about sticks as opposed to carrots? Does the government have any ability to strongly encourage the banks to do what it needs them to?
Mr Lonsdale —There are a range of consumer measures in place that will mean that if there are unfair fees, for example, or unfair parts of a contract, consumers can take action through the courts, if they are not happy with that.
Senator BUSHBY —I want to ask a question about some of the contracts and legal opinion that you may or may not be aware of. But I will get to that in a minute. Please continue.
Mr Lonsdale —If you get into limits on rates or those sorts of sticks, they are not policies that apply here, as I am sure you know.
Mr Murphy —I think what we are seeing is competition between the majors coming back. One of the institutions has undercut the others and sought to have lower rates on variable mortgages. The government is seeking to facilitate competition by the switching package. That still could be improved a bit, but we are trying to get people to actually take decisions which make banks be more responsive to what the market demands.
Senator BUSHBY —I could not agree more that that is a necessary thing to be doing, and it is a good thing for the financial services market if competition is encouraged and engendered.
Mr Murphy —But, as well as that, the Treasurer has made a number of very strong statements about the banks justifying their actions, and the banks do not welcome that. I think that is some form of discipline on the banks and their actions.
Senator BUSHBY —They do not seem to pay much attention, though. They may not welcome it, but they—
Mr Murphy —I think they have paid a bit of attention. At the moment they are constrained. As you would have seen with recent public statements, I think they are testing the water on how the public would react to above rate rises. The difficulty in the whole thing is a dispute as to the real facts of the situation.
Senator BUSHBY —In terms of the costs of their funds and things like that.
Mr Murphy —Yes. The Reserve Bank and Treasury do not believe the view put by the banks that they still need to put up mortgage rates higher than the movement in the cash rate, to recover funds—to recover the past losses.
Senator BUSHBY —Presumably, Treasury is aware of the power, in section 50 of the Banking Act 1959, to control interest rates by way of conferral upon the RBA—a power to promulgate regulations with the Treasurer’s approval?
Mr Lonsdale —Yes, Senator.
Senator BUSHBY —I was asking what sticks might have been available, and that is not something that came to the front of your mind when I was asking.
Mr Murphy —No.
Senator BUSHBY —Has Treasury, in the last few years, provided any advice to the Treasurer regarding this power?
Mr Murphy —No.
Senator BUSHBY —You are very firm on that. Have any draft regulations under this clause been compiled in the last two years?
Mr Murphy —Not in my time.
Senator BUSHBY —In what circumstances does Treasury consider the use of such a power would be justified?
Mr Murphy —Emergencies.
Mr Lonsdale —That is a largely hypothetical question, Senator.
Senator BUSHBY —It is. But, quite clearly, when parliament inserted that section into the act, it inserted it for a reason.
Mr Murphy —Circumstances may arise, but if you are running an open market economy I cannot see the circumstances where you would really need to do that.
Mr Lonsdale —The general approach of governments for a long time has been to create a competitive market.
Senator BUSHBY —Which, as I said, I agree a hundred per cent with.
Mr Murphy —To find its equilibrium.
Senator BUSHBY —But, ultimately, when the Treasurer goes out and makes statements about how this is all very naughty and he is not very happy, he needs to have some ability to pressure the banks to think a little more closely about what that might mean—the fact that they have caused the Treasurer some displeasure. Having something like this in his back pocket might be quite useful in order to lean on them a little bit harder.
Mr Lonsdale —I think what Mr Murphy was outlining before was that the Treasurer has been trying to push for more accountability amongst the banks, to make it very clear that they are accountable for their actions, but at the same time have a range of measures that empower consumers, to better enable them to make choices.
Senator BUSHBY —I am a big supporter of that.
Mr Murphy —That does affect the businesses. If they see that they are losing business they are quick to respond.
Senator BUSHBY —You touched on the fact that one rationale used by the banks is that the cost of their funds has increased and that they need to maintain their profits and their margins. When you see their annual reports, you see that they have been doing quite well. Even through the North Atlantic financial crisis they managed to sustain those quite well. Does Treasury concede that it is the right of the banks to maintain their profits and their margins at the expense of other businesses and individuals—Australians generally—or is it happy to allow the banks to wear the consequences of implementing monetary policy, rather than the RBA? In some circumstances, when the RBA is considering increasing the cash rate, if the banks have been independently increasing their rates at a faster level it may well negate the need for some adjustment in the cash rate. Is it about allowing the banks to do a little bit of monetary policy? Are you quite happy to sit back and allow them to get away with it rather than wearing the consequences of an RBA decision which may reflect on government?
Mr Murphy —That is quite a complex sort of question. The banks have recently been saying that their mortgage rates are not keyed off the cash rate; they are keyed off the cost of their funds. That is what the banks are saying at the present time.
Senator BUSHBY —That is what they are saying, but you indicated earlier that Treasury and the RBA do not necessarily agree with that.
Mr Murphy —No, what I said was that the RBA and Treasury do not agree that the banks’ cost of funds has reached a stage whereby they need to increase their margins to, in effect, pay for moneys that they have paid out previously on more expensive funding. I am not explaining that very well. They are arguing that their funding rates have gone up and that now they have to reconstitute that funding and recover their funding costs. We question that.
Mr Lonsdale —So they are separate issues, in a sense. On the one hand, the question is: are funding costs going up for the banks? I think we are seeing more repricing of risk. If you talk to any of the banks, they will say it is more expensive to raise money. So that is one issue.
Senator BUSHBY —Which is where the difference of opinion between Treasury and the RBA and the banks is. Is that right?
Mr Murphy —Yes.
Mr Lonsdale —I think the issue Mr Murphy is getting to is: is that by itself sufficient justification for the banks to be increasing rates out of step with the RBA?
Mr Murphy —Yes, or should they be absorbing that? If there are increased costs, should they be absorbing them at this time? Everyone else had to face the global financial crisis.
Senator BUSHBY —Exactly. I think I indicated that in an earlier question: should they have a right to maintain their profit margin by passing on higher costs?
Mr Murphy —They are operating in the community and they are largely operating with the goodwill of the Australian public. They have to take note of that. That is what the Treasurer is trying to stress. They are accountable to the public; they are not just accountable to themselves or their shareholders.
Senator BUSHBY —As I said before, they do not seem to be listening that much. You said earlier that one of the major banks had undercut the others in fees. Has that bank appreciably increased its market share as a result?
Mr Murphy —Yes.
Senator BUSHBY —On what basis do you say that?
Mr Murphy —Based on data.
Senator BUSHBY —What data?
Mr Murphy —Based on information that has been provided to us.
Senator BUSHBY —Is it publicly available data?
Mr Murphy —I think it is, yes.
Senator BUSHBY —Do you have it, or a reference, available today?
Mr Murphy —No, but I could—
Senator BUSHBY —Could you take that on notice?
Mr Murphy —If it is public information, I could get it for you.
Senator BUSHBY —Would you please find that for me and make it available to the committee? We would appreciate it.
Mr Murphy —Yes.
Mr Lonsdale —We can come back.
Senator BUSHBY —As we discussed, the threat to the banks’ profits appears to come from higher costs of accessing the funds which they then loan out.
Mr Murphy —Yes.
Senator BUSHBY —But variations in variable interest rates impact not just on that percentage of a bank’s loan portfolio than is written in the period immediately following a rate rise or that is written using the funds that they have had to access at a higher cost. It also impacts on that much more significant percentage of their loan portfolio that has already been written using funds that were previously borrowed by the bank, presumably—or certainly in many cases—funds which they had accessed in an easier and cheaper fashion. Is it right that banks should value, at today’s cost of money, moneys that have been previously on-lent to customers that had been previously sourced at a much lower cost?
Mr Murphy —Maybe that goes to the nub of the issue. John Lonsdale has mentioned that prior to the GFC, to put it colloquially, money was cheap and the banks were borrowing and they expanded their businesses. Come through the GFC and money is more expensive because risk is priced in much better. So we are in a better world and we are in a world where, more likely than not, the cost of funds is back to its right level, but it will probably be more expensive than it was during that period of time leading into the GFC when money was probably cheaper than it should have been.
Senator BUSHBY —But the money they accessed when it was cheaper than it should have been—
Mr Murphy —I think what you are asking is: who should get the benefit of that?
Senator BUSHBY —The banks are getting it at the moment.
Mr Murphy —Well, that is why you need to really scrutinise this. I think what we are doing at the moment is working with the banks to try to sort out what their true funding costs are, and the banks are very open about this. They are working with Treasury, the RBA and APRA on these issues.
Senator BUSHBY —As part of that, are you looking not just at the true funding costs of accessing money now so that they can on-lend it, but also at how the cost of moneys that they have already lent out impacts on their overall cost of funds?
Mr Murphy —To some extent, yes.
Mr Lonsdale —The issues are linked.
Senator BUSHBY —Obviously the end result is that they have a total cost, and they may well be saying the cost that should flow through to interest rates should just reflect that higher cost of the new funds that they are accessing now. I do not know.
Mr Lonsdale —It is quite a complex question. I think some of those funds that might have been accessed at, as you put it, cheaper interest rates, may well have come from overseas. There are exchange rate variations, I think, in some of those contracts, so the true cost of funds could get quite complex to pinpoint.
Senator BUSHBY —I have one final question on an issue I hinted I would ask something about. I do not know what you can really say about this, but I suspect that you have probably been given, or Treasury has probably been sent, a copy of a senior counsel advice which contains a legal argument that it is not possible for a bank to reserve to itself the right to vary the interest rate on a loan so as to set whatever interest rate the bank chooses. Under the legal advice, a bank is actually constrained in certain ways, based on the history of jurisprudence in Australia and the UK primarily, and, further, that an attempt by a bank to reserve to itself an entitlement to vary an interest rate by whatever amount it pleases would be contractually void. Are you aware of that legal argument and have you given any consideration to the impacts it might have?
Mr Murphy —I am not aware of that argument.
Mr Lonsdale —I am not aware of it.
Mr Murphy —And I would doubt it.
Senator BUSHBY —I have actually read the senior counsel opinion and it is—
Mr Murphy —Which senior counsel?
Senator BUSHBY —I do not have it with me.
Senator Sherry —Senator Brandis?
Senator BUSHBY —No, it is not Senator Brandis—it is somebody quite unrelated.
Senator CAMERON —Brandis to Brandis.
Senator BUSHBY —Quite unrelated to the Liberal Party.
Mr Murphy —If you are relying on UK and—
Senator BUSHBY —No, Australian cases. There were cases I think starting from the early 1980s. The argument at that time was that the variation clause was void for uncertainty. It failed; that case was not successful. But some of the findings of the judge in respect of that clause have application to what I am talking about today, and it is built on there. A number of other cases, put together, give the picture that if you had the right argument there is a risk that that clause in itself would be limited. I think there is potentially a class action that may be—
Mr Murphy —I am not aware of it. If you wish to provide it to Treasury we would be quite interested.
CHAIR —They can put up their interest rates. If they do that—
Senator BUSHBY —They cannot vary them, but it says that they do not have an absolute right to vary them—
Senator Sherry —Mr Murphy has indicated that Treasury would be quite interested, if you would provide it to us. It could be a useful part of our armoury.
Senator BUSHBY —I believe that part of it has been provided to the ACCC and to ASIC. I was not sure whether it had been provided to you.
Mr Murphy —It has gone to ASIC, has it?
Senator BUSHBY —It has, yes.
Mr Murphy —That is good. We are in government. That is where it should be. People should look at these things.
Senator WILLIAMS —Mr Lonsdale, in relation to the foreign borrowings of the banks, are they exposed to exchange rate movements all the time? They do not have any swap agreements?
Mr Lonsdale —They are most likely to have swap agreements, as I understand it.
Senator WILLIAMS —So, in other words, fluctuations of the exchange rate will not vary the principal when they repay it. Is that what you are saying?
Mr Lonsdale —I am not an expert in this matter but, as I understand it, exchange rate fluctuations during the course of a loan can affect payments that are made between the counterparties. That is the extent of my knowledge. So that is why I say it is not as simple as just looking at the interest rate and comparing it from one period to another. There is also the exchange rate variation.
Senator WILLIAMS —I had a currency loan in Swiss francs, so I am very familiar with how it works and how expensive it can be. Back in December I changed my home loan to Westpac, and with a 0.25 per cent rise in official interest rates in December they raised my loan by 0.44 per cent. They did indicate to me that they probably will not have to do that again. But with the rising Australian dollar, even against our third currencies—not only the US dollar but the third currencies, as they call them—they should have had windfalls when it comes to paying interest. So I think that deletes to some extent their argument about the cost of funds being more expensive. If the cost of funds is rising for Australian banks, how are the overseas banks going? Official rates in Japan are at 0.1 of one per cent and they are very, very low in America. Surely those banks would be getting their funds cheaply enough to make a profit, wouldn’t they?
Mr Lonsdale —My point on the exchange rate was just a very simple one: it is a complicated assessment of the true cost of funds. You are right in what you say. If the exchange rate moves one way it can be a windfall; if it moves the other way it can be the reverse. I was not seeking to undermine Senator Bushby’s point; I was seeking to make it clear that it is a complex issue. In terms of how other countries’ banks fund their systems, their makeup is probably a bit different to ours. We are heavily reliant on offshore funds. Other banks may not have that and they may actually be sourcing a lot of their funds from the one currency. Again, it is a complex issue.
Senator BUSHBY —That was not a currency question, though, was it?
Senator WILLIAMS —No.
Senator BUSHBY —If the cash rate in those countries is at or near zero, which in some cases it is, and they have high costs in accessing funds to borrow, presumably they cannot then get away with lending it out at eight or nine per cent. They need to be somewhere closer in scale to what the cash rate is in that country. I think the thrust of the senator’s question was: how do they go about accessing funds in a way that makes it viable for them to on-loan at an interest rate that is actually consistent with the cash rate in the country?
Mr Murphy —A lot of them in those countries are not borrowing. They are relying on deposits.
Senator Sherry —As I understand it, a country like Japan has very significant domestic savings and pays on that savings through their banks and post office accounts—although I think they would have privatised that—and has very low levels of depositer interest. It is very different.
Senator BUSHBY —Basically very different characteristics of those—
Senator Sherry —They have different characteristics in their market.
Mr Murphy —Our key feature is our need to access offshore markets to fund our system. That is a key feature of Australia.
Senator BUSHBY —Overall it is consistent with Treasury and RBA’s view that the argument of the banks about their high cost of borrowing is maybe not as strong an argument as the bank thinks it is.
Senator Sherry —Mr Murphy has indicated that.
Mr Murphy —But it is a complex matter—I will give you that—and we are still to be convinced of the bank’s argument.
Senator WILLIAMS —Mr Murphy and Senator Sherry, perhaps banning exit fees on variable loans would free up more competition in Australia.
Mr Murphy —It may.
Senator WILLIAMS —If I leave my bank now, I have to pay a $1,000 exit fee and I think that is very unfair. To get true competition, when we see the banks cribbing more than what the Reserve Bank moves interest rates on, Treasurer Swan has said ‘Vote with your feet’, but that can be difficult.
Mr Murphy —It is.
Senator WILLIAMS —How do we fix that problem if you have to pay that exit fee to go down the road?
Senator Sherry —Certainly in some circumstances with some financial products, exit fees are there to be a barrier to exit.
Senator WILLIAMS —Exactly. You can understand on a fixed rate—you have a contract and you might be fixed for three years—you would have to pay an exit fee. But on a variable rate, where you are just flowing with the market, it should be made easier, so we can have proper competition, so we can walk out of one institution and into the next.
Mr Murphy —There was a bill that went through parliament recently which had a facility to do that. My understanding is that in consultation with the opposition it was rejected—by the opposition.
CHAIR —We might investigate that.
Senator WILLIAMS —We might have to investigate that, Chair. Exactly.
Senator Sherry —You had better get on to those Liberal Party colleagues of yours.
Senator WILLIAMS —I am with you, Senator.
Mr Murphy —You have a point, Senator.
Senator WILLIAMS —I make this analogy, Mr Murphy: if you take your car to a garage and you are not happy with the job they did servicing or repairing your car, you do not have to pay them $500 to go down the road to the next garage. The country runs on competition; that is what keeps prices down. If we have anything that inhibits competition, we are encouraging higher prices. Banking is no different.
CHAIR —I thank the Markets Group for coming in this evening.