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Community Affairs Legislation Committee
(Senate-Wednesday, 1 May 2013)
CHAIR (Senator Moore)
Content WindowCommunity Affairs Legislation Committee - 01/05/2013
JOHNSTON, Mr Ross, Chairman, Aged Care Guild
LUNN, Mr Stephen, Senior Manager Public Policy, Australian Unity, Retirement Living
McMILLAN, Mr Derek Allan, Chief Executive Officer, Australian Unity, Retirement Living
SUDHOLZ, Mr Mark Andrew, Director, Aged Care Guild
CHAIR: Welcome. You have information on parliamentary privilege and protection of witnesses and you know how the system operates. I now invite you to make an opening statement.
Mr McMillan : By way of background, Australian Unity is a mutual organisation. We promise our clients improved quality of life and wellbeing. We operate in retirement village, aged-care and in-home care, and provide services to about 3½ thousand people.
CHAIR: Across the country or just in Victoria?
Mr McMillan : In Victoria and New South Wales. At the moment we have two aged-care facilities in development. So matters in relation to capital and the implications of this are top of mind at the moment.
In terms of an opening comment what I would like to do is leave much of the black-letter comments that have been very well represented in, particularly, LASA's submission and other industry submissions. They have gone into great detail. I would like to focus predominantly on five areas which I think are of particular concern to Australian Unity, one of which actually relates not to what is in the bills but what is not in the bills before us today.
In summary, we believe that, instead of promoting more self-reliance, there are in fact aspects of these bills that actually will cause more reliance on government and a higher risk to government should they proceed. I will cover those points now. The first is that the services continue to be rationed under this proposal. The best example of that is the ACAR allocation and in-home care packages, which continue to based around the package that you have and then as your needs evolve that package and support is unable to be evolved with you. So it really does mean that, rather than being allocated to need, we continue with this model which is really a retrograde model not based upon need but based upon first in, first served.
The second general point that I would like to make is that the approval process for accommodation payments will actually restrict access to quality of care rather than increase access to care. In particular, inner city and middle-ring suburbs will be affected because those with a much higher cost base will require pre-approval of accommodation payments. Because of the cost of the land and, by nature, the high cost of land means the vertical construction, that means that you have a much higher cost to serve and then that higher cost means that we will need to get pre-approval under this model. That will force aged-care providers to move outside that middle ring and inner city because the risk to development, and the question around, 'When do you seek approval in that development process?' is such that most providers will move out of those higher cost areas and reduce the services for people in those suburbs.
In terms of in-home care, clients still are unable to have a choice of provider under this model. A choice of provider of course would promote competition and innovation. It would promote better value for money. Continuing without a choice of provider means that, while we are moving towards some consumer-directed care, in reality they do not have the control that they believe they should have.
One of the most important issues that I would like to raise is that what is missing from the legislation is a way to enable older people to access the capital, the equity, that is currently in their home, in order to co-contribute to the cost of their care. Essentially what that—not being able to release or access the equity in their home—means is that you will have asset-rich, cash-poor older people. So there could be full pensioners in a million-dollar house who are unable to contribute to the cost of their care. The whole funding model that this is predicated on is that we could extend the number of people with access to services by having people who can afford to pay contributing. That is actually a very valuable proposition in this bill. It will not be realised because there will be so many people who are unable to contribute. Linked to that, then, is the need to have a mechanism to access this capital. I can talk to that separately, under questions, but I have identified that in our submission.
My last opening comment is: providers, under this bill, would appear to have inadequate control over the timing and form of accommodation payments in relation to residential aged care. By that I mean that, if providers are unable to pay down debt based around accommodation bonds, if they are unable to access those or if there is uncertainty about that, providers will end up with larger-than-expected recurrent debt. So what we will see is that what is currently private equity, as most aged care facilities are funded by private individuals providing equity to fund it through the form of accommodation bonds, will move to a large component of bank debt. When that next global financial crisis hits—and there always will be another one—what we will see is that, when the banks withdraw funding, the government will need to step in and support the sector; otherwise, these people will be out of a bed.
I am not quite sure of the rationale for the restriction on accommodation payments, but the consequence of it will be that the government will be required to provide some form of guarantee at some point in the future to provide support for funding.
CHAIR: A kind of underwriting?
Mr McMillan : Yes. Those were my main opening comments.
CHAIR: Mr Johnston? Mr Sudholz?
Mr Johnston : Firstly, thanks very much for the opportunity of presenting. We produced a little presentation pack which I think sharpens—
CHAIR: Okay. Do you want to table that, Mr Johnston? We will add that to your submission, so that is fine.
Mr Johnston : Would you like a copy?
CHAIR: We would always like a copy, but it would be particularly rude, if you have them all there ready to go, to say no! What you are going to tell us is, by and large, what is in there?
Mr Johnston : Yes.
CHAIR: That is fine.
Mr Johnston : Firstly, thanks for the opportunity. I will tell you a little bit about the Aged Care Guild, and we have put some information in this pack about that. Our mission, if you like, is to promote investment in the residential aged-care industry. We are a fairly new organisation. We have been formed for about 18 months.
CHAIR: That makes me feel better. I did not know you when I looked at the submission, so I feel a little bit better about that.
Mr Johnston : And we fly below the radar. That is probably the best way. Our members are the five largest for-profit providers in the country. That is on page 2 of this package. We own and operate more than 10 per cent of the residential aged-care beds in Australia, collectively, and we have $1.6 billion of the $12 billion bond pool between the five of us. That is about 13 per cent of the bond pool. We invest significantly in this industry, and we continue to.
Our document and our submission are very much focused around the cash flow impacts from the changes in the resident choice issue and the changes in the means testing within the Aged Care Act now around accommodation bonds. Page 4 of our document says that we believe that the proposed legislative reforms will influence consumer behaviour such that there will be a move to accommodation payments and a move away from accommodation bonds. Why do we say that? Because at the moment the family home is excluded from the means test in the pension assessment, but now that there is an asset assessment in the aged-care legislation the family home is included. To add to that, if the family home is excluded, there is now a $140,000 inclusion. So there are two incentives not to include the family home in the assessment. What that will mean is this. We have spoken to the banks and a number of the bed fillers and the intermediaries that advise residents, and they are telling us that under no circumstances will they advise anybody coming into aged care to provide a bond.
Senator SIEWERT: Sorry, could you explain that a little bit more?
Mr Johnston : Sure. Under the current legislation, the family home is excluded from the means test under the pension. With this legislation, there is now an assets test within the Aged Care Act. There used not to be. Despite what the document says—it says it is the same—it is not the same. Now, if you have a family home, it is included up to $140,000, so there is an incentive. You do not need to sell the family home to pay a bond. And, if you do sell the family home, all of that cash is included in the asset test; therefore, your government contribution will fall, so you will pay more money yourself. With those two simple things, compounded with the 28-day choice issue, we believe there will be a massive outflow of bonds in this industry. Our advice from the banks and the intermediaries is that that is going to be their positioning, if you like.
CHAIR: They are going to provide that financial advice to their clients?
Mr Johnston : Yes.
Senator SIEWERT: Not to sell their homes?
Mr Johnston : Yes, and not to pay a bond.
Senator SIEWERT: Yes, you would not be paying a bond if you—
Mr Johnston : Well, you could. There is a big spectrum of consumers out there. Some have a lot of cash in the bank, but the average consumer, I believe, has $600,000 worth of assets and $100,000 in the bank when they are looking for aged care, so at the moment they probably sell the family home. Our issue is that the industry has $12 billion worth of cash from bonds, and, if you unwind that, given that most residential aged-care providers have their 75, 80 or 85 per cent high care, it will unwind in two to three years. We cannot fund the cash outflows. We will not be able to support it.
My learned colleague is next to me. There is something in the banks' agreements now, after the GFC, called a market disruption clause. If this happens, they will enact that clause, and providers with big bond pools will lose control of their banking facilities. I know that is a very large statement, but those clauses exist and the banks will protect their capital. It sounds like a bit of theatre, but the reason we have chosen one issue is that this is a very principal issue for the industry.
Senator BOYCE: Is that partly because you break your covenants with the bank?
Mr Johnston : What will happen is this. The way the wording works in the agreements—I do not know if any of the banks are presenting—
Senator BOYCE: No.
Mr Johnston : you should ask them about the market disruption clauses in their agreements—is that it says there is a shift in a market. If this legislation goes through as it is, that will be classified as a shift, and they will move to protect their capital. That is just the way they are written. Why did this happen? In the GFC when things went a bit wobbly and all their cost of capital increased they could not go to their customers, if you like, and say, 'I need to put my fees up,' because everything was set. What it allows them to do now is to review that. So this issue, page 4 we have laid it out. The important point is that the family home is excluded from the means test under the pension now. It is now included on the other side of the ledger and is compounded by the $140,000.
Senator FIERRAVANTI-WELLS: And the next step after that, once the covenants are called upon, it means therefore that the banks will then—then you take the receivership, that line, and eventually, because a facility has less and will have less bonds, it means that whereas now it might have $1 million worth of bonds, under this new regime they might only have, say, $300,000 worth of bonds. Therefore even if the government invokes the guarantee under the guarantee bond scheme that it is proposing in its modified form, it can only call on the $300,000. Therefore the scenario that Mr McMillan was foreshadowing is that suddenly you are going to have the Commonwealth being left with little old ladies on the street because the homes are not worth very much, the banks cannot recover very much, they are calling in their covenants, so basically in the end the Commonwealth is going to be in a situation where they are going to have little old ladies on the street and they going to have to provide.
Mr Johnston : Just to amplify it again, the biggest impact is from a value perspective of any residential aged care facility. At the moment if we sell a facility the bond pool moves to the purchaser. It is just a liability on your balance sheet. This will turn that into a transferred liability to a liability and you will not be able to transfer it. So the value of our organisations will fall by the value of our bond pools, or 60, 70 or 80 per cent of it. You will see collateral damage. In every one of our agreements with banks everyone says there are two things: if you breach covenants the banks can do what they like to you or they will recall the loans and the loans are repayable immediately. Every banking agreement says that in this country.
Senator FIERRAVANTI-WELLS: And then the banks' next step once they repossess the home, its value is really then only in the land, it is not going to be very valuable—
Mr Johnston : Residential aged-care facilities generally do not have alternate use. If this scenario happens, I think what will happen is that banks will review their lending to the industry, they will tighten up, the value of the asset will fall and no-one will want to invest. Who is going to come into this place? It will have to be new investment. There is a knock-on effect that is quite ugly. We tried to make this a little sharper than the Senate inquiry submission. That discussion is on page 4. Page 5, I will flip to Andrew, and we have tried to get down to the nitty-gritty of what we think will happen.
Mr Sudholz : If we look towards the next five to 10 years in the aged-care sector, to provide the care that we need to meet the demand of the elderly residents we have to come up with $15 billion. That capital is normally coming from the accommodation bond pool. Ross has explained the problems that the current mechanism has. The impact of that is that the industry is going to suffer in investment. We are not going to attract the capital that we require to achieve the $15 billion to meet that demand. The impact flowing from that is obviously that we are not going to provide the care that we need to provide to the residents in our marketplace. At the present time the balance sheets of the major providers are strong because of the bond structure we have got. Under the mechanism that is being proposed, you are going to find that those bonds are going to be called down, so the replacement of the bond from, say, 400 comes to 150. The question that Ross is asking and we ask is how do you fund that gap, because the mechanism does not allow that and that is the critical thing in the industry. So it is going to fall down to the smaller providers. At the present time, the larger providers have the balance sheet strength to resolve a problem. That will not be the case in the future under the current regime.
Senator FIERRAVANTI-WELLS: That $15 billion that you are talking about, that is into the future? That is separate from the figure of $3.5 billion that the Grant Thornton report was talking about as being currently on hold?
Mr Sudholz : Correct. We have done two studies in the market. We have done a study by La Trobe University and LEK which supports what government has put out themselves—that is, there is a need for approximately 35,000 to 40,000 new beds in the system over the next five years. You can see what has happened in the last three years: just go back and look at how many new beds have been built in the last three years. That 40,000 beds equals $15 billion investment. That is the number.
Mr Johnston : Just to reinforce that: we talked about bank debt; we believe that bank debt in the industry—sorry, the bonds—is about $4 billion to $5 billion.
Senator FIERRAVANTI-WELLS: Sorry, you are on page 5?
Mr Johnston : Yes. In this industry there is a $12 billion bond pool; the bank debt is about $4 billion to $5 billion. The banks probably will not step up more than that. If I can talk from a Regis perspective: I think we have the largest bond pool in the industry—it is $560 million. That equates to about the value of our enterprise today. If we cannot recover the bond pools, because the bond pools are looked at by the accounting fraternity as a revolving loan, if that merry-go-round stops we cannot fund it in a very short space of time, despite the fact that we have a strong balance sheet today. The outflow we believe will be three years, so we are funding nearly $200 million a year. We will survive for about 10 months. That is not an overstatement; that is if the banks do not intervene in the process. We are talking about significant amounts of capital. Our debt at the moment is about $220 million. Why is it that? We have spent a quarter of a billion dollars on new facilities in the last four years, so we are recovering the bonds to fund that. Here is someone who is a good public citizen who has invested in high-quality assets, and we are facing this. If it has to change—the last sentence in this pack says it has to change—do it on a managed basis over five years so that people can adjust their balance sheets and the banks and everybody can get used to the new order and we can survive. That is, if you like, our message.
We have gone from a regime, as Andrew said, of very strong balance sheets—and the reason there is a $12 billion bond pool is that providers at the moment can decide how they have sold the bed. We would completely lose that right, so we would be just 'Bed for sale,' and 28 days after the resident comes in they will tell us how they will pay us. What business operates like that? I do not know. Page 5 says we would lose control of how we sell our beds, which is what I just said; we would lose control of our capital structure, where our cash and our assets are; we will have to fund this massive cash outflow; there is the choice issue; and it runs the risk that there will be a serious capital outflow. This will not be an attractive industry if this change goes through. That is what is going to happen. Equity is very difficult to get at the moment in this industry, so that will not solve this problem. I do not think the banks will solve the problem. What will solve the problem is a move back to what we have got, which has worked for 16 years and works quite well. It ain't broke so don't fix it, I suppose is our message.
CHAIR: Sitting through many of these inquiries, Mr Johnston, I have not heard many people say the system is not broken.
Mr Johnston : Sorry, on this issue it is not broken; I am not sure about the system.
Senator FIERRAVANTI-WELLS: Obviously, the guild represents a fair portion of providers—not just financial, but in terms of beds. Has the guild, in particular, participated on any committees?
Mr Johnston : Yes, we are represented on the Ageing Expert Advisory Group, the ACFI committee, the specified care and services committee, the prudential advisory group. We are on ACFA.
Senator FIERRAVANTI-WELLS: These are the sorts of issues you have been telling the government about this, and clearly the government has not been heeding your view, despite the financial potential. In so doing, has it given you or indicated to you what financial modelling may have been undertaken by the government to warrant such a change?
Mr Johnston : We have not seen anything on this.
Senator FIERRAVANTI-WELLS: Are you aware whether it has done any modelling?
Mr Johnston : No.
Senator FIERRAVANTI-WELLS: So we do not know if there has been any modelling and certainly you have not been made aware of it. There has been a lot of discussion, and you have mentioned it as well, about the fact that we have framework legislation but we have not got the principles. Clearly having the principles now would be preferable because whilst the legislation is not on the table it adds to the uncertainty.
Mr Johnston : It does, yes, absolutely. This drafting is the first time we have seen it in these bills. There has been no discussion around—
Senator FIERRAVANTI-WELLS: Sorry, Mr Johnston, can you repeat that?
Mr Johnston : Until we had seen these bills I do not believe that there had been any discussion around including the $140,000 inclusion for the family home and, if you like, the change in relation to the assets test. We have not seen anything before.
Senator FIERRAVANTI-WELLS: So it is all very well for the government to promulgate letters or explanation but until you actually see the legislation and see it in black and white we do not know what this government is actually going to propose. You have just given us a very good example where you have participated in a range of different committees where these matters, one would assume, ought to have been properly discussed. Yet, when the legislation or at least the framework legislation comes out you now know that this has happened.
Mr Johnston : Yes.
Senator FIERRAVANTI-WELLS: Okay. It begs the question: what else is buried in the principles that we do not know and yet we are being asked to pass this legislation.
Mr Johnston : The act has been a fairly static document for the last 10 years. There have been some revisions around accommodation requirements and things but this moves it. The principles are quite fluid. They could be administered by the minister or the department. This is a new dawn for the aged-care industry, I suppose. You are exactly right, this is the first time and this has been a big surprise for us, and we have other issues. The reason we focused on this issue is the materiality of it.
Mr Sudholz : And also the history of what has happened here. When the initial submissions were made by the guild the concept on the accommodation bond was around the 95th percentile of bonds, which the industry saw was going to come out at about $490,000 or something like that. It then fell down to another cap, which was around $406,000. Now it has fallen down to a mechanism where the bond is not the driver but the DAP is the driver. We supported a free market position because that is how it has worked and worked very well in the previous environment. Now that we are in the RAD/DAP relationship there are some serious implications around that. As you look at the DAP and setting the DAP in the tiers and you have the interest rate applied to that, our projection—and we have not seen any projections on this from government; it is a really big concern—is that you are going to finish up with a bond of somewhere between $170,000 and $230,000 or something like that. There are two implications. It is the implication of: if you have bonds in your facilities at $400,000, you are just faced immediately, or very close to immediately, with a requirement to pay $200,000 out of your own balance sheet. So, the resident that moves out gets paid back the $400,000. The resident that moves in under the assessment program will pay $200,000. The industry has to pay $200,000. That is massive. It is not going to happen. It is going to do what Ross implied.
Mr Johnston : That is 10 times the operating cap of a good operator.
Mr Sudholz : So, you have one impact and we have seen no modelling on this. We have had no feedback on this. That is the one impact. That is a massive, serious risk for the industry. It has to be stated over and over again. Someone is going to have to listen to this. The other impact on this is that we are trying to grow the industry and give it viability and sustainability. There are a lot of good people in this industry. The previous speakers were talking about the care, and that is what drives us. We have elderly who suffer and we want to provide the best care and the best accommodation for them. We have a $15 billion investment to make. There is absolutely no way known that that investment is going to come into this industry under that environment. This particular mechanism is going to stall and cancel investment in this industry. It is as simple as that. So, what we need to do is have a process in place where we can get to an acceptable scenario. Ross mentioned a program over the next five years. I do not think so. I think the answer is getting it right upfront. We are all trying to attract capital into the industry; we have talked about that. Personally I am trying to convince the superannuation funds in Australia to get into this industry, not for our respective organisations but for the betterment of the industry. We are now getting some coverage on that. That market will not invest in this sector. We have to get this fixed and we have to get it fixed quickly.
Senator FIERRAVANTI-WELLS: Certainly my understanding is that once the detail is pretty much known I think you have pretty much answered your question as to whether the superannuation funds are even going to contemplate going anywhere near this sector if these provisions do go through, because I do not think it is financially for them—particularly in the rate of returns; that is really going to put them off. Can I ask about the capping and the artificiality that that will create and therefore really make certain people closer to the top of the cap and at the bottom and leave a whole raft of people in the middle who will just not be viable, even if you do want to take a bond from.
Mr Sudholz : Correct. The is actually happening now. If you look at the market and some of the people who are looking to move out of the market for reasons not around their particular areas but reasons around the legislation, the reform agenda, we look at those people and the substantial bond liability on their balance sheets. There is a group in New South Wales that have $60 million on their balance sheet in bond liability. Currently they are in a position where they have got nowhere to go. Ross and I may have picked them up in the past but not certainly now. We are seeing already in the market this scenario where activity in growth is stalling.
Senator FIERRAVANTI-WELLS: Mr Sudholz, is your recommendation that those provisions be removed from the bill? What is the Guild's position in relation to the package of bills.
Mr Johnston : We have only responded on this issue. On this issue, if it ain't broken, don't fix it—it's fine. The bond pool has been an open market. Yes, there have been some very large bonds. There was a $1.4 million bond. There was one of those. It still operates efficiently as an open market. It has provided $12 billion worth of capital to the industry, which has been the principal nub of most of the construction, I think you will find, if you look under the numbers. Our returns are such, in the absence of bonds, that we cannot afford to spend $200,000 or $300,000 per bed with land and medical equipment and furniture. We just can't. The open market works fine. If there is a cap, fine, but make it the median house price or something that is commercial and leave it as a part of the assets test.
Senator SIEWERT: Just on that, you do not want the change, then, between low and high care, so that there is no distinction about who pays bonds and not? You just want those who are in high care to be paying bond?
Mr Johnston : Personally, we do not see bonds in high care. In this environment it actually makes it worse—
Senator SIEWERT: Sorry, I got it the wrong way around.
Mr Johnston : Bonds in low and high care. Yes, but if this is the price to pay for it, I think no.
Senator SIEWERT: The advice I have had in the past is that more and more people are not just going into low care but just going into high care. So if that trend continues, you are going to get less people going into low care and less bonds available.
Mr Johnston : Yes.
Senator SIEWERT: So what do we do then?
Mr McMillan : If I could, in order to fix one issue, which is the fact that people are moving more into high care and then permitting bonds in high care, it does not mean that the legislation should be such that it actually destroys the capital formation of the whole sector. It is just bad legislation the way that the accommodation bonds and accommodation charges and the capping is being contemplated.
Senator SIEWERT: So you still want the concept of bonds in high care in the legislation.
Mr Sudholz : Yes we do, and let me explain why. It gets to provision of care. It is in previous presentations. The market and the providers cannot provide new accommodation in the high care market. The industry works on revenue and on capital. In the sense of building a new facility, it is not viable to build a new facility at the present time. Just bear with me while I give you an example. If the two of us go and build a 100-bed facility on high care alone, it will cost $250,000 a bed to build, all up, so that is $25 million. We will go to Ross and say, 'Ross, you run it.' He is pretty good at running aged-care facilities, and he will generate an EBITDA of about $1.6 million, $16,000 a bed, and the market will pay $14 million for that. So the two of us have just built something for $25 million that we can sell for $14 million. That is the high-care environment. How do you fix that high-care environment? By the revenue model, by applying the capital model, and that is why it bonds have to come into high care, because then we can do it.
Senator SIEWERT: I am actually not disputing that. What I am disputing is that you want that but not the other change that goes with it.
Mr Sudholz : Yes, we do, absolutely.
Senator SIEWERT: So you have got access to more capital.
Mr McMillan : I am not quite sure what is wrong with that. What is bad public policy about having that?
Senator FIERRAVANTI-WELLS: Why do you have to have one or the other?
Senator SIEWERT: You have heard the complaints from some people about the bond system. It is not just the high end. You have also heard the consumers say that they want more choice.
Mr Johnston : That is fine, but you cannot make a change with a high-care population of residents, where things turn over pretty quickly—they come from low to high care and they come from extra service—
Senator SIEWERT: But many people do not do that anymore. That is the point that is being made: with the changing environment, many people do not come from low care to high care; they come straight into high care.
Mr Johnston : They do, but also a lot of residents come in at the back end of high care. What happens is that they age in place very quickly these days. At Regis, 35 per cent of our beds are low care and 14 per cent of those residents are actually low care. They come in and they age in months. That is what happens. They age really quickly. You have got a bond that carries through to high care. To answer your question, in our responses to ACFA and the department and other things, if it is going to be the way it is, the relationship between the accommodation payment and the bond has to be a commercial return and it has to be something like 12 to 20 per cent for an existing facility to a new facility. Why? Because at the moment we get the MPIR rate at 6.9 per cent. That is less than our debt. That is the problem. Andrew's point is that there is a pillar of capital called bonds which makes the equation work. If you take that away, there is a massive gap in return. We have provided a worked example here on what happens to a 100-bed facility over three years if we cannot attract bonds, and it is pretty ugly. It says your operating cash flows increase under the legislation, because we get more accommodation payments, but cash outflow cannot be met. You breach the covenants and you end up with the scenario we talked about at the beginning of the presentation. We have pitched to ACFA and other things that it has to be a commercial return if it is going to be this way, but even if it is you have to give us time to adjust our balance sheets, because again, at Regis, the value of the enterprise equates to the bond pool. We have been really good citizens and invested hundreds of millions of dollars, and we are faced with this.
Mr McMillan : If I could just put a different lens on that comment that Ross was making, we need to deconstruct the different components. One is that the cost of accommodation is not being currently covered by the accommodation payments that people are making. That is one issue and that has been somewhat addressed by contemplating a raising of the accommodation charges. I think that is sensible. The other issue that Ross was talking about was this issue around high care and low care. Yes, residents are entering in a more frail state, which can purport to high care. Residents in low care still have a choice today between paying an accommodation bond or accommodation payment, so extending that to high care does not diminish choice; it in fact increases the amount of choice that residents have, because under the current scheme residents in high care are largely accommodation charge payers. So it supports choice by extending bonds into high care and it enables people to provide capital into the sector without actually diminishing the capital pool. What the proposed legislation does is put at risk the current bond pool as well as restricting the ability to fund new facilities.
Senator FIERRAVANTI-WELLS: On top of that, Mr McMillan, there is the inequity when you start dealing with the $140,000, whether you are in residential or in community care. In submission No. 2 to the inquiry, there is an example done with Mrs Smith and Mrs Jones. Would you mind having a quick look at that to see if you concur with the assessment that was done by that aged-care facility? They took two people in exactly the same circumstances, one in residential aged care and one in community care, to draw certain conclusions.
CHAIR: Senator, this is the last question.
Senator FIERRAVANTI-WELLS: Yes. Mr McMillan, following your comments on building, even if there are providers who decide, 'Yes, I am going to risk it and build,' chances are that they will be building out on the fringes of our cities because that is really about the only cost-effective place left for them to build. That is basically what you are saying. So we are going to shunt off all our old people—
Mr McMillan : That is right.
Senator FIERRAVANTI-WELLS: out onto the fringes of society, which is what the Productivity Commission said should not happen and why they made certain recommendations in relation to capital changes.
Mr McMillan : Yes, because organisations will not be able to cope with the level of debt, which will be ongoing, from constructing facilities in the middle and inner ring. Furthermore, it is not necessarily about just the volume of debt; it is also about the operating earnings supporting the interest payments to the bank. So it may be that the interest cover is not there because the operating earnings are not there.
Mr Johnston : Could I add a response to that. The issue for us is that if we are in urban areas, which is where most of the client base is in the big cities, we compete with property developers and everybody. So, if we are going to buy a block of dirt or consolidate one, we are going to have to pay top of the market to get it. Unless you have got big land tracts, you are out consolidating sites, and that is a very expensive and slow process. So the issue is that it is the capital model Andrew talked about.
CHAIR: This adjustment has been happening many years.
Mr Johnston : Understood.
CHAIR: The point is well taken, but it is not now. I would think the industry has been talking about that. Thank you very much for your detailed submissions and your evidence. I am sorry we do not have more time. I know Senator Boyce had a question for you, Mr McMillan; she may put that on notice. I know you have been given homework, to look at submission No. 2 and see if there are any comments you would like to make to the committee on that. Thank you.
Proceedings suspended from 12:32 to 13:07