Senator SHERRY —Flicking to page 5 of ComSuper's annual report, the average administration cost per member across all schemes was $73 in 2000-01, down from $76 in 1999-2000. Firstly, does the total administration cost per member include pre-retirement and post retirement costs?

Mr Dent —The $73 is the average of three separate charges that we levy contributors, people with preserved benefits and people receiving a pension.

Senator SHERRY —Can you give me those average charges now?

Mr Dent —The charge for a current contributor is $93, the charge for a preserver is $64, and the charge for a pensioner is $58.

Senator SHERRY —Have those three subcharges decreased? Has the average administration cost for members decreased over those two years?

Mr Dent —There was a slight decrease as a consequence of the goods and services tax removing some small indirect taxes, but it was not significant.

Senator SHERRY —On page 12, ComSuper has done an evaluation. In paragraph 3 of the evaluation it says that it has `below average costs'. On what basis do you make that claim? I assume that to have below average costs is ComSuper's costs in relation to other superannuation funds that exist?

Mr Dent —That is correct. ComSuper is an administrator of defined benefit schemes—they are largely what are called `hybrid schemes', which are mixes of defined contribution and defined benefits. The most relevant peer group for comparison is other administrators who provide those sorts of schemes. The group that we look mostly to is an international group. It comprises Canadian, North American, Dutch and Australian defined benefit administrators. About 50 administrators participate each year, analysing quality of service provision over about 13 or 14 activities and looking at the cost of service provision over those activities. The results that we have received from that benchmarking are that our costs are generally below the median and our service levels, in general, are quite good and in some instances significantly above the median. Our review of the study would suggest that, as a value-for-money administrator, we come up reasonably well in that type of comparison.

Senator SHERRY —This so-called choice stuff has been around for a long time. Have you carried out any evaluation of the impact of that policy in respect of the costs of public sector superannuation?

Mr Dent —The effect on ComSuper as the administrator would be somewhat lagged and would depend on the exact nature of the choices that people exercised and the number of choices they were given. For example, if public servants were offered choice and they elected to leave the schemes they were in and commence in a new scheme, under one scenario—and it is perhaps the most likely one—we would still manage their preserved benefit for them and, therefore, we would still collect fee income in respect of those preserved entitlements. There would be a long-run effect on ComSuper, but I am not sure—

Senator SHERRY —I understand that, but all the surveys I have seen in Australia would indicate—and not just in respect of Commonwealth superannuation funds but state government superannuation funds as well—that they are the lowest cost vehicles for superannuation.

Mr Dent —That is correct. The most recent IFSA survey, I think, suggested that government funds were about 43 basis points, which is very low cost.

Senator SHERRY —There is nothing lower, is there, that I can find?

Mr Dent —No, and that is largely a scale phenomenon. Public sector schemes are generally very large, and superannuation is largely a business of scale.

Senator SHERRY —I am glad you raised that issue. When you say that it is largely a business of scale, generally it is true, isn't it, that the larger the fund the more cost effective it is in terms of the total management costs?

Mr Dent —Yes, the fixed costs are run off over a larger population or asset base.

Senator SHERRY —Talking to Finance earlier—you were sitting at the back of the room, weren't you?—they did not appear to have much idea about what happened when choice was introduced in the United Kingdom public service. You referred earlier to international evaluations. Do you have any information on what happened in United Kingdom?

Mr Dent —No. There are no United Kingdom participants in the benchmarking we do. I am only aware of the situation through general reading and some of the litigation that occurred.

Senator SHERRY —You certainly appear to know something. Through your general reading, and you mentioned litigation, what is your understanding of what occurred?

Mr Dent —There was some degree of mis-selling of private pensions, I think.

Senator SHERRY —And the litigation? Are you aware of what occurred?

Mr Dent —I think the current government—and I am scratching for details—encouraged a settlement in respect of some particular firms who employed agent sales forces.

Senator SHERRY —ComSuper does not employ commission agents, does it?

Mr Dent —No. We have a mandatory scheme, so it is not necessary.

Senator SHERRY —Why don't you employ commission agents?

Mr Dent —It is an employer sponsored scheme. For most categories of employees it is mandatory to join.

Senator SHERRY —In a mandatory fund you do not need the cost structures of a retail distribution network?

Mr Dent —No, not in a mandatory arrangement.

Senator SHERRY —Is that the critical factor in ensuring low retail distribution costs?

Mr Dent —I do not know. I would think there are some commercial arrangements which are quite efficient in distribution. I am not close enough to that side of the industry.

Senator SHERRY —Do you know when the ANAO performance audit will be completed?

Mr Dent —My understanding is it should be available in the next month or so.

Senator SHERRY —Under workplace relations on page 20, it says:

These commitments including an increase in the standard working day.

What is that all about?

Mr Dent —We had what I think was the traditional Public Service closure at 4.52 p.m., and that was extended to five o'clock.

Senator SHERRY —So there was an increase in the weekly working hours of 2[half ] hours?

Mr Dent —No, it was 10 minutes a day.

Senator SHERRY —Obviously ComSuper recovers its administration and management costs, which are billed to each department.

Mr Dent —That is correct.

Senator SHERRY —Do you know what the per capita cost of those arrangements is to each department?

Mr Dent —The per capita cost should be $93 for the contributors.

Senator SHERRY —Does it vary from department to department at all?

Mr Dent —No. What varies between departments is the numbers of former employees for whom they are paying fees to us. Most of the former staff are paid for by the department of finance because the user charging arrangement came into effect in 1998. Any retired or former staff at that point were covered by the department of finance.

Senator SHERRY —We had a discussion earlier about so-called choice and whether it should be implemented. The new employees who would be barred from joining the PSS would go into some other fund, whatever that fund may be. Are you aware of any comparative costs in the area of death and disability premium charges?

Mr Dent —No, I am not. The funds offer two mechanisms: one is that you pay a consistent amount per annum, which might be $1 a week and the amount of cover you get declines as you get older for the same contribution; the other arrangement is that you get the same amount of cover but pay more for it as you get older because the risk of disability increases. I do not have any comparative information.

Senator SHERRY —Isn't it generally true that group cover larger funds—the issue we discussed earlier—is more cost effective?

Mr Dent —From an insurer's point of view it is.

Senator SHERRY —Page 31 refers to the establishment of a ministerial liaison group. What is that? It flowed on in members' communications—the appointment of a public relations person in the military superannuation communications advisory group.

Mr Dent —This would have been a group related to the Defence superannuation. I think it involved staff within the policy area of the Department of Defence to keep the minister advised.

Senator SHERRY —So this ministerial media liaison group specifically refers to the Defence fund, and it does not refer to the Public Service?

Mr Dent —Yes.

Senator SHERRY —And all communications have to go through the minister's office?

Mr Dent —No, that is not my understanding. I think it was a more general briefing.

Senator SHERRY —The Defence area must be about the only exception to that now famous policy. On page 38, re the old surcharge tax, you say:

The superannuation surcharge processing generated increased workloads throughout the year.

Will the government's proposal to reduce the rate from 15 per cent to 10.5 per cent for those who pay surcharge reduce your administrative costs at all?

Mr Dent —It might if fewer contributors paid money to us to discharge their surcharge obligations because they thought it was better to wait until benefit payment time. That might affect some of our transactions.

Senator SHERRY —You say:

Not unexpectedly, surcharge assessments have led to some complaints from members.

What is that about?

Mr Dent —I imagine they would be members who feel aggrieved or dissatisfied that their benefit has been affected.

Senator Abetz —They would want Senator Sherry to vote for the decrease in the surcharge.

Senator SHERRY —Under our option, Senator Abetz, far more people benefit. We will debate that another day. I do not want you to give me anything that is commercial-in-confidence, but is there anything you can tell us about the fund return for this last financial year?

Mr Dent —The returns for all of the funds up to this point are negative. That is consistent with the general superannuation industry act this year.

Senator SHERRY —Do you have any benchmarking about your negative returns vis-a-vis other funds' returns?

Mr Dent —They are comparable to funds with similar asset allocations.

Senator SHERRY —It is the first time in about 15 years that returns have been so low; in many cases negative. Have you had any feedback from fund members about that issue?

Mr Dent —There have been some calls. I do not know the number.

Senator SHERRY —I did not particularly want to know the number; I want to know the nature of the calls concerning the negative return.

Mr Dent —I imagine that they are unhappy and that they would like a better return.

Senator SHERRY —You say that you imagine. I am really after first-hand, not an imagination.

Mr Dent —I would make one final point before I pass over to Mr Bruce Kruttschnitt, our Chief Operations Officer. While the civilian funds have experienced a negative return, that actually has not been transferred to the membership, because they have a zero minimum declared exit and crediting rate. So the fund has produced a negative result but members have got, at worst, a zero result.

Senator SHERRY —That is the smoothing out.

Mr Dent —That is the smoothing. In the military, there have been some exit rates which have been negative.

Senator SHERRY —That is an unusual feature, isn't it, compared with other superannuation funds?

Mr Dent —Yes, the capital guarantee.

Mr Kruttschnitt —There has been a differential rate of calls in recent times about the negative crediting rate. As Kevin indicated, people are generally unhappy that the returns are so low. The contact centre staff involved try to assure them. There are a number of issues that we try to go through with them: it is a defined benefits scheme, and the negative crediting rates impact on only a component of the benefit that they are receiving. The trustees are of course working very hard to make better returns through their funds managers, and they are very much aware of the international situation. So I guess it just about raising people's awareness and, generally speaking, making people aware of what the investment cycle is—that over time there will be negative returns and positive returns.

Senator SHERRY —That is the difficulty, isn't it?

Mr Kruttschnitt —Absolutely.

Senator SHERRY —From my experience, it is very hard, particularly given the last 15 years of performance, to convince people that the record average returns were not going to continue forever and that the long-term average is the important issue. Do you agree?

Mr Kruttschnitt —Most funds in the public offer funds and managed funds will say one in four or one in five are going to get a negative return. It has been hard to sell that prospect into the public sector and, more importantly, into the Defence area, where they have actually felt the impact of negative rates.

Senator SHERRY —The cost of ComSuper outputs remains stable over the forward estimates period at $43 million to $44 million. Have any costs associated with proposed change to so-called choice been factored into the forward estimates yet?

Mr Dent —No; they have not, because of the lagged impact on us.

Senator SHERRY —Have you taken into consideration the increase in workload as a result of so-called choice in terms of staffing levels?

Mr Dent —No, we have not. That is something which could be best determined once we were aware of exactly what options were available to members and how much work they actually generated.

Senator SHERRY —The Commonwealth Superannuation Board Bill proposes to combine the CSS and PSS boards. Has the proposed merger of the boards been taken into account in the forward estimates?

Mr Dent —No, it has not. In fact, what you see in the portfolio budget statements are estimates for two separate boards: the PSS and CSS boards. It is anticipated that those boards will be prescribed as agencies under the Financial Management Act. They could, of course, be subsequently amalgamated if the legislation passed, and they could become the Commonwealth superannuation board. At the moment we are dealing with them as separate entities.

Senator SHERRY —Are you aware of any additional costs associated with the merger of the boards?

Mr Dent —No, I am not.

Senator SHERRY —Has an evaluation been carried out?

Mr Dent —I am not aware of any evaluation. There may have been one in Finance. In a practical sense, I think the boards do operate in many respects in concert and in synergy, so it may be that there would not be a great difference in operating costs.

Senator SHERRY —The proposal to combine the two boards is not dependent on the closure of the PSS and the introduction of this so-called choice, is it? You can still combine the boards?

Mr Dent —You could have a combined board, yes.

Senator SHERRY —Thanks.

ACTING CHAIR —I think we are through outcome 1.1 on ComSuper completely now. There is nothing more on that?

Senator SHERRY —Can I check something on that? I have something in asset management, which we are obviously not—

ACTING CHAIR —That is still to come—in output group 2.1, Asset Management. Senator Brandis has questions on that as well.

Senator SHERRY —I have some matters in respect of Employment National.

ACTING CHAIR —I think that is in output group 2.3, Business Services, isn't it?

Senator SHERRY —Yes, the department as a shareholder.

ACTING CHAIR —When we return we will commence with outcome 2, improved and more efficient government operations; and output 2.1, asset management.

CHAIR —The committee was examining output 2.1. I invite Senator Brandis to ask some questions of the committee.

Senator BRANDIS —Mr Hutson, I understand you are the gentleman responsible for the disposal of land?

Mr Hutson —I am with the property management branch that has the disposals program, which includes the disposal of land, yes.

Senator BRANDIS —I wanted to ask you some questions about the disposal of two parcels of Commonwealth land in Canberra: one is a parcel on Marcus Clarke Street and the other a parcel on London Circuit. Are you familiar with those two parcels of land, Mr Hutson?

Mr Hutson —Yes.

Senator BRANDIS —Am I right in understanding that those two parcels of land have been placed on the market by the Commonwealth?

Mr Hutson —They are part of the divestment program for the Commonwealth. They are not currently formally on the open market. We are awaiting a discussion with the ACT government about them purchasing that land.

Senator BRANDIS —But am I right in understanding that the Commonwealth is—and has been for some little time now—interested in selling those two parcels of land, and that the ACT government is aware of that fact?

Mr Hutson —Very much so, yes.

Senator BRANDIS —Could you tell us a little bit about each of those parcels of land and the history of their sale plans?

Mr Hutson —When it comes to the history I will defer to my colleague Mr Jackson.

Senator BRANDIS —Yes, certainly.

Mr Hutson —The block on Marcus Clarke Street, which is block 11 section 61, is opposite the Canberra School of Music. The other on London Circuit, which is block 11 section 63, is near Rydges Lakeside Hotel. I understand that this property has been scheduled for divestment for quite some years now and it was originally planned to be sold last financial year. After discussions with the ACT government we deferred that sale, pending their interest in acquiring the property.

Senator BRANDIS —Has there been opposition from the Labor government of the ACT to the sale of those properties?

Mr Hutson —The ACT government was interested in purchasing the properties from the Commonwealth. They did not want us to sell them on the open market; they wanted to purchase them directly.

Senator BRANDIS —Were they to be sold on the open market, is it likely that the Commonwealth would realise a higher sale price than if they were sold by private treaty with the ACT government?

Mr Hutson —That is something I really cannot comment on. The sale deal with the ACT government is that they be sold at market value.

Senator BRANDIS —Has a valuation been done?

Mr Jackson —Yes, it has.

Senator BRANDIS —By whom—by you or by the ACT government?

Mr Jackson —The valuation was commissioned by Finance.

Senator BRANDIS —Without disclosing any commercial-in-confidence negotiations, has the ACT government made an offer which approaches your view of the market value of either or both of the parcels?

Mr Jackson —On 8 February, the ACT government wrote to Finance advising that they did wish to proceed with the purchase of those properties. We provided them, sometime in April, with contracts of sale which indicated the price. The ACT government have indicated that in principle they were comfortable with those purchase prices.

Senator BRANDIS —The price was nominated by you, was it?

Mr Jackson —That is correct. I believe that the ACT government, as would have been prudent, would have sought their own valuation advice themselves, and I believe that it may have been a case where we split a marginal difference on costs through agreement of the respective valuers.

Senator BRANDIS —Do you now expect the transactions in respect of these two parcels of land to proceed to completion?

Mr Jackson —We certainly have no advice to the contrary.

Senator BRANDIS —Are you aware of the building called the City Labor Club in Canberra?

Mr Jackson —I am, yes.

Senator BRANDIS —In Childers Street, Civic.

Mr Jackson —That is correct.

Senator BRANDIS —You are aware of that, Mr Jackson; do you know about that, Mr Hutson?

Mr Hutson —I am familiar with the building, yes; I know where it is.

Senator BRANDIS —That is about two or three blocks away from the Marcus Clarke Street and the London Circuit properties, isn't it?

Mr Hutson —Yes, that would be correct.

Senator BRANDIS —Are you aware that the City Labor Club was recently sold by its owner, Canberra Labor Club Ltd, to a company called Childers Nominees Ltd?

Mr Hutson —No.

Senator BRANDIS —Mr Jackson?

Mr Jackson —I am aware of that, yes.

Senator BRANDIS —Minister, jump in at any stage if you have anything to add.

Senator Abetz —I am aware of that.

Senator BRANDIS —Are you aware that the General Manager of Canberra Labor Club Ltd has stated that Childers Nominees intends to build residential units on the site and a smaller licensed club, which will be called the New City Labor Club?

Mr Jackson —I am aware that there was a newspaper article indicating that the new owners did plan to seek a variation to the lease that allowed a different use.

Senator BRANDIS —That statement, incidentally, comes from a circular letter to members of the Canberra Labor Club, over the signature of Mr Arthur Roufogalis, general manager, dated 1 May 2002. Are you aware of press reports that Childers Nominees Ltd would be seeking a planning change that would allow for residential development on the old Canberra Labor Club site?

Mr Jackson —Yes.

Senator BRANDIS —I take it that residential development would be, as a general rule, more profitable than commercial development on that site—would you agree?

Mr Jackson —Subject to it being done correctly, it is highly probable, yes.

Senator BRANDIS —Because that would be the highest and best use of that particular parcel of land.

Mr Jackson —That is a fair assumption.

Senator Abetz —It is currently zoned, as I understand it, for commercial type purposes. It would be highly unlikely that a property developer would purchase such a property and then seek to have the zoning changed for a less profitable venture. One would assume that the rezoning application would be so that they could get even more money out of it, and that is why the zoning change is that important.

Senator BRANDIS —The zoning change is going to maximise the value of the parcel of land from a commercial point of view.

Senator Abetz —Yes. Of course, the Labor Club that you mentioned is a substantial donor—in excess of the sum of $200,000—to the Labor Party. By way of interest, Mr Corbell, who is the local planning minister in the ACT Labor government, has been taking great delight in telling the people of the ACT that there was this uncoordinated approach to selling vacant land. When you look at the plan in relation to Civic West where the Commonwealth land is situated, which is vacant land, open and capable of development, why a Minister for Planning would want that vacant land not to be used for development defies all explanation in my mind until you come to realise there is a commercial venture being undertaken by the Canberra Labor Club to sell their property for an undoubtedly substantial rate of return.

This deal has not been fully signed, sealed and delivered because, as I understand it, this coming Sunday there will be a meeting of the Labor Club to agree to the terms of the contract that was signed between Canberra Labor Club Ltd and Childers Nominees. It is very interesting that Mr Corbell's attacks on the federal government selling land occurred on 2 May in the Canberra Times—

Senator BRANDIS —Wasn't that a day after the Labor Club wrote its circular letter?

Senator Abetz —Exactly right.

Senator SHERRY —On a point of order, Mr Chairman: how is this issue relevant to the Commonwealth's asset management?

Senator Abetz —Because we are selling Commonwealth assets.

Senator SHERRY —Hang on, I have not finished my point of order—just shut up.

Senator Abetz —There is no need to be so offensive.

CHAIR —It is your call, Senator Sherry.

Senator SHERRY —How is this relevant? What involvement does the Commonwealth have in this issue currently under discussion in terms of asset management? If Senator Brandis and the minister want to do a dump on the issue, there are other forums in which to do that. This is not directly relevant to estimates.

Senator BRANDIS —May I speak to the point of order, Mr Chairman?

CHAIR —Yes.

Senator BRANDIS —The questions are directly related to the disposal of two Commonwealth assets—that is, two parcels of Commonwealth land. The relevancy of questions concerning the Canberra Labor Club goes directly to the market value which might be achievable for those two Commonwealth properties at the moment.

Senator FORSHAW —On the point of order: I know that Senator Brandis is legally qualified and may endeavour to use these sorts of tricks to draw very long bows, if he is involved in some cross-examination. The point is firstly relevance—and I want to raise another point of order in a minute. As I understand it, there is no direct relationship between the issue of asset management and the disposal of Commonwealth land and what might be happening elsewhere in terms of that other land.

Senator Abetz —Yes, there is.

Senator FORSHAW —Unless you can show that it is directly related, you can speculate all you like.

Senator Abetz —It is a matter of sensitivity.

Senator FORSHAW —It is not a matter of sensitivity. We have sat and listened to you soliloquise for a while, but where is the connection?

CHAIR —On the point of order, Minister?

Senator FORSHAW —I am asking you to rule.

CHAIR —It is about the disposal of Commonwealth property.

Senator FORSHAW —How? Is the Canberra Labor Club Commonwealth property?

Senator BRANDIS —On a point of order, Mr Chairman. You, Mr Chairman, can't be interrogated about your rulings by a member of this committee.

Senator FORSHAW —If you want to create some problems with the functioning of this committee, we are happy to do that.

CHAIR —I think it is within the terms of reference of this committee.

Senator FORSHAW —On another point of order, Mr Chairman: during the minister's commentary he referred to, I think, the Minister for Planning.

Senator Abetz —That is right.

Senator FORSHAW —I understood that to be the Minister for Planning in the ACT.

Senator Abetz —That is right.

Senator FORSHAW —I draw your attention, Mr Chairman, to the standing orders regarding improper imputations regarding the conduct or motives of members of parliament either here or elsewhere.

Senator BRANDIS —Standing order 82.

Senator FORSHAW —I listened carefully to what the minister at the table said and there is no doubt that there was what I regard to be a very objectionable imputation regarding the motives of the Minister for Planning in the ACT. I think you should ask the minister at the table to withdraw it.

CHAIR —Before I do that, I think Senator Brandis has a point to make on this point of order.

Senator BRANDIS —Yes, Mr Chairman.

Senator Abetz —Isn't it amazing how sensitive they get?

Senator FORSHAW —It depends on how low down in the gutter you get.

Senator Abetz —Oh, come now.

CHAIR —I will give Senator Brandis the call.

Senator FORSHAW —There was nothing sensitive about this at all. You were quoting from the newspaper. How sensitive can that be?

CHAIR —Order!

Senator Abetz —It is on the public record.

Senator FORSHAW —So where is the sensitivity? We can raise it if it is on the public record.

Senator Abetz —Yes, but why would he raise it?

Senator BRANDIS —I would like to speak to the point of order. The standing order to which Senator Forshaw refers is a standing order concerning the rules of debate in the Senate. We are not debating an issue here. I am asking questions and the minister is answering questions. The standing order does not even apply.

CHAIR —I think the minister will be careful in his answers.

Senator FORSHAW —On that point of order, I invite you to take that to the Clerk of the Senate—

CHAIR —I will do so, Senator Forshaw.

Senator FORSHAW —and ask him for an explanation on that point.

CHAIR —And in addition, Minister, you will be careful of any imputations.

Senator FORSHAW —It is the first time I have ever heard that assertion made: that somehow the standing orders that prevent a member in the Senate from—

Senator Abetz —You did well with raising the point of order that allowed Senator Ray—

Senator FORSHAW —making imputations against another member of this parliament or elsewhere—

Senator Abetz —Oh, right, that is good!

Senator BRANDIS —You are very sensitive!

CHAIR —Order! Senator Forshaw does have the call.

Senator ROBERT RAY —We are sensitive about your pathetic performance.

Senator FORSHAW —I am just making the point that it seems to be spurious—

CHAIR —Senator Ray, please!

Senator ROBERT RAY —Shut your minister up. If the minister wants to verbal me, he is going to get some back.

CHAIR —Senator Ray, I was trying to give Senator Forshaw the call.

Senator FORSHAW —I think I have made my point: I regard the—

CHAIR —You think the ruling is injudicious. I understand that, Senator Forshaw.

Senator FORSHAW —No, the interpretation by Senator Brandis of the standing orders regarding the making of improper imputations is thoroughly outrageous.

Senator BRANDIS —As you know, I have just directed your attention to the standing orders and standing order 193 expressly describes itself as `rules of debate'.

Senator FORSHAW —Do you want to throw the rules of debate out here, Senator Brandis?

CHAIR —Mr Forshaw, please let us not go down that path.

Senator BRANDIS —No. I am not debating anything with Senator Abetz, with Mr Hutson or with Mr Jackson; I am merely asking questions. I ask this question in a spirit merely of seeking information because I am unfamiliar with this. Minister—or officers at the table, whoever can help me—can you elaborate on the various respects, if any, in which Mr Simon Corbell has interfered in, placed fetters upon or otherwise sought to impede the realisation by the Commonwealth of these two assets? Senator Abetz, do you know anything about that?

Senator Abetz —For example, page 3 of the Canberra Times had the heading `ACT won bid to block federal land sale in Civic West: Corbell'. Of course that was in circumstances which the departmental officials have already alluded to—that the ACT are still asserting that they are genuinely interested in purchasing the property. There is nothing on departmental file—and correct me if I am wrong about this—and the ACT are still interested in buying.

Mr Jackson —We have had no advice to the contrary.

Senator Abetz —Yes. We have had no advice to the contrary, yet he claims in the newspaper that he has somehow won a bid to block the federal land sale. Why any Minister for Planning would want to stop the sale of land for development defies belief, especially in the circumstance that there is a land drought within the ACT. Those of us who read the Canberra Times would be aware that the HIA and MBA have been placing advertisements in the paper, talking about the land drought and saying there is not enough land for development. It is, as you have pointed out in your question, possibly highly coincidental that the two parcels of land on which Mr Corbell claims he has blocked the federal land sale are in very close proximity to the proposed redevelopment of the Canberra Workers Club.

Senator BRANDIS —Minister, do I understand the position to be that the ACT Minister for Planning, Mr Corbell, has actually boasted to the press that he has succeeded in blocking the sale by the Commonwealth of this land?

Senator Abetz —I can table the article. It is dated 8 May 2002 and titled, `ACT won bid to block federal land sale in Civic West: Corbell'. When I read that, I issued a media release, indicating that the ACT government was notified in March 2001 of our plans to sell. Advice from my department—which has been confirmed today—is that the ACT government is still interested in buying the land, despite the lengthy delay. As a result, I challenged Mr Corbell. I said:

That is, unless Mr Corbell is claiming the ACT's alleged interest in the land has been a dishonest ruse to get the Commonwealth to delay the sale. Mr Corbell must come clean and tell us if he really wants the land or not.

To date, as the departmental official explained, we have still not been told whether the ACT government in fact wants the land. In the meantime, that land has been tied up, has not been put on the open market. As a result, any potential developer who might want to develop in the general Civic West area would have to look at other properties to purchase and, just perchance, the Labor Club is on the market and a developer has purchased it.

Senator BRANDIS —We will come to that. Mr Hutson and Mr Jackson, are you familiar with the page 3 Canberra Times article of Wednesday, 8 May by a journalist called Monika Boogs? It is titled, `ACT won bid to block federal land sale in Civic West: Corbell' and in it the journalist says, among other things:

A second parcel of undeveloped land that was to have been advertised for sale by the Commonwealth Government last week was not because of pressure from the ACT Government, Planning Minister Simon Corbell said yesterday.

.........

Mr Corbell said the ACT Government was told by officials from the Department of Finance and Administration that unless the ACT signed a contract of sale for it and another Civic block by April 29 the land would be advertised on May 1.

Were you familiar with Mr Corbell making the claim that he caused the sale of the Commonwealth land to be tied up?

Mr Hutson —I am familiar with the article.

Senator BRANDIS —As the minister has observed, for as long as the Commonwealth land is tied up so that it is not available to be sold it would increase the value of adjacent land of similar dimensions and zoning, would it not?

Mr Hutson —I think that would be speculation. I do not think I am in a position to speculate.

Senator BRANDIS —I am inviting you to agree or disagree. You do not have to agree with me; I am just putting to you that proposition. There are not a lot of large parcels of vacant land around Civic, are there?

Mr Hutson —I am really not familiar enough with Civic.

Senator BRANDIS —If you do not want to speculate on that, then don't.

Mr Hutson —I am not competent to speculate on that.

Senator SHERRY —It has all been set up. You do not have to act innocent.

Senator Abetz —Senator Sherry, do you remember your admonition to me just before? Take your own medicine!

Senator SHERRY —It is the chair's responsibility to issue rebukes.

Senator Abetz —And not yours. Exactly!

Senator BRANDIS —I have the AEC funding and disclosure report for the ACT branch of the Australian Labor Party lodged on 22 October 2001. That return records that in the reporting period the ACT branch of the Australian Labor Party received two donations from the Canberra Labor Club Ltd. One donation was the sum of $229,427.65 and another donation was the sum of $4,160, so about $233,000-odd in the period under report. I should say as well that that donation is more than all of the other donations to the ACT branch of the Australian Labor Party put together in that reporting period. Does it not amount to this: that the chief financial backer of ACT Labor has sold its site—that is, the Canberra Labor Club site—to a developer and now the ACT Labor planning minister is tying up the opportunity for other parcels of land in the adjacent area to be placed on the market?

Senator Abetz —That is my reading of it, Senator.

Senator BRANDIS —And I presume—

Senator ROBERT RAY —Do you want to go outside and say that?

Senator Abetz —I indicated earlier in a press release that:

... unless Mr Corbell is claiming the ACT's alleged interest in the land has been a dishonest ruse to get the Commonwealth—

and he has not responded to that, which is of great interest.

CHAIR —Excuse me, Minister. On the point of order made earlier by Senator Forshaw about the imputations against other members of parliament; I should say we have had advice just now from the Clerk of the Senate. Senator Forshaw, your interpretation of the rules was correct, and mine was wrong.

Senator FORSHAW —Senator Brandis was wrong.

CHAIR —No; according to the clerk it has got to be my ruling and not Senator Brandis's.

Senator FORSHAW —I appreciate that, but he spoke on a point of order, Chair.

CHAIR —Standing order 193 read in conjunction with standing order 35.

Senator FORSHAW —Yes. Thank you.

CHAIR —It is incorrect for a senator to make imputations against another member of parliament.

Senator ROBERT RAY —On the point of order, that is the standing order. You also have to look to the way it has been applied in the past, which is reasonably robustly—that is, it is not a total admonition. It is a sort of guidance, and most senators in the past have known that they can robustly debate activities, if you like, of their state and territory colleagues. Robustly debate it, I think has been the interpretation from the chair in the past. Obviously, if Senator Abetz were to go too far then he would go too far; I think you would get the sense of that. But it has been robustly applied. That is the only point I want to make. I do not want to second-guess the clerk's opinion, either.

CHAIR —Thank you, Senator Forshaw and Senator Ray.

Senator FORSHAW —I thought it was important to draw it to the attention of the chair because, as we have found in the past, these things can lead to things being said under privilege and then it is too late, sometimes, to do—

CHAIR —You are quite right.

Senator ROBERT RAY —It should at least be noted. I did not hear what you said, Senator, but the person you said it about does have a better right of reply than most citizens have.

Senator BRANDIS —Mr Chairman, I will bow to your ruling in relation to the matter. I am simply trying to draw certain facts to the attention of the minister and the officers at the table. I want to go back to the ACT Labor Party's financial disclosures. The aggregate income in the reporting period was $393,685, so the ACT Labor Club contributed in the reporting period 59.33 per cent of all income to the ACT Labor Club. It is the case, is it not, that the principal asset of that donor to the Labor Party is now being realised—that is, the Labor Club land? That is a matter of public record, I think, or at least it is now. Is it also the case that parcels of Commonwealth land in the vicinity, which would be competitive in the same market against that land, are having their realisation interfered with by the Labor Territory planning minister, Mr Corbell, at the very time at which the Labor Party property is being marketed? Is that what it amounts to?

Senator Abetz —That is exactly right—the same Mr Corbell who owes his endorsement to the ACT ALP.

Senator BRANDIS —Thank you.

Senator ROBERT RAY —I am right, aren't I, Minister, in saying that, when the disclosure laws on donations came before the parliament initially—the ones we are operating under—the Labor Party voted for them and the Liberal Party voted against them? I am right in that, aren't I?

Senator Abetz —I am not sure that that is relevant to this section, Chair.

Senator BRANDIS —On a point of order: I do not think ministers at the table can take a point of order, because they are witnesses, but I can. It is not relevant. Why is the legislative history of electoral disclosure laws relevant to the DOFA estimates?

Senator ROBERT RAY —Because the disclosure laws insist on people disclosing donations, so that you can be sure—

Senator BRANDIS —But nobody was suggesting that it was not disclosed. In fact, I have just read from the disclosure.

Senator ROBERT RAY —No, exactly, but under your regime, no-one would ever have known.

Senator BRANDIS —On a point of order, Chair: the question is—

Senator Abetz —We still would have known about Mr Corbell's interference—

Senator ROBERT RAY —No, you would not have known about it in donations.

Senator Abetz —in the Commonwealth trying to sell land in circumstances where the Labor Party in the ACT is trying to make a huge profit and does not want any other competitor in the market.

Senator ROBERT RAY —I am sure you will pop outside and give a doorstop on that. If you are looking for big vacant land, why don't you look for some greenfield sites—the $4.6 million interest-free loan that you got, corruptly.

Senator Abetz —Excuse me, I have just been accused of getting a $4.6 million loan corruptly.

Senator ROBERT RAY —`You' the Liberal Party.

Senator Abetz —If the Labor Party want to play their points of order, courtesy of Senator Forshaw, they might like to swallow their own medicine. It just goes to show how sensitive they were on this matter, and when even worse allegations are made against me and my colleagues, there is not a whimper out of them, which shows the duplicity in which they approach this matter.

Senator BRANDIS —Minister, I might be testing your knowledge of local geography here, but how far away is Marcus Clark Street from Centenary House?

Senator Abetz —Now there is a good question. That I cannot tell you.

Senator ROBERT RAY —Or Robert Menzies House.

Senator Abetz —But what I can tell you—

Senator SHERRY —I raise a point of order. He cannot tell you, so can we move on, Chair? He has just said he does not know.

Senator Abetz —A very good media release was issued today about Centenary House, Senator Brandis.

CHAIR —Your question lends itself to the harmony of the afternoon, Senator Brandis! Is it the wish of the committee that the document referred to by Senator Brandis—an article by Monika Boogs from page 3 of the Canberra Times, Wednesday, 8 May—be received? There being no objection, it is so ordered.

Senator ROBERT RAY —We have discussed at the estimates before the government's and department's policy of selling off Commonwealth property and then having it rented back. I do not want to re-traverse all that ground—I saw Mr Early downstairs before and it reminded me of just how much we went over it—but have the press reports of about 8 May that Austrade is intending to move out of the DFAT complex come to your attention?

Dr Watt —We are aware that Austrade is moving out of the building, yes.

Senator ROBERT RAY —Can you tell me why?

Dr Watt —I am not aware clearly of the reason, but my colleague might be.

Mr Jackson —Not of the specifics, no.

Senator ROBERT RAY —I think it is confirmed by the minister—but I am a bit dodgy to rely purely on a press report—that the rent is too high. Mr Vaile is commenting that Austrade was doing the right thing by taxpayers in rejecting the rental hike demanded by the MTA and looking for cheaper accommodation, which I understand—

Senator Abetz —It is a pity that the Auditor-General cannot do it.

Senator ROBERT RAY —The Auditor-General did look at the issue of selling off—

Senator Abetz —No, he cannot do it—as in move out from the exorbitant rentals that are being charged.

Senator ROBERT RAY —Yes, but the Auditor-General did look at the government's policy of selling off buildings and renting them back and he was not all that complimentary, but I was not wanting to go to all those details.

Senator Abetz —`He,' of course, is in the worst of situations now, having to pay in excess of $3 million above market rates.

Senator ROBERT RAY —Are you saying there was something illegal or wrong in those arrangements?

Senator Abetz —Wrong, yes—most definitely.

Senator ROBERT RAY —But not illegal? You are not contradicting Justice Morling?

Senator Abetz —You asked the question—

Senator ROBERT RAY —Are you contradicting Justice Morling?

Senator Abetz —No—

Senator ROBERT RAY —Of course you are not.

Senator Abetz —Stop interrupting. If you want an answer to a question, take your own advice. I will not use the terminology you used, but take your own advice and I will give you an answer. You asked me whether the lease that the Auditor-General has on Centenary House is either illegal or wrong, and I said, `Yes, it is wrong.'

Senator ROBERT RAY —Is it illegal?

Senator Abetz —Things can be morally wrong yet legal. The Australian Labor Party, that parades around as an alternate government for this country, has a lot to answer for because it is clearly morally wrong. I doubt that anybody would argue that it is a proper or a commercial deal, given what we now know.

Senator ROBERT RAY —The Auditor-General looked at the issue of the sell-off of property and renting back, didn't he?

Mr Bowen —That is correct; he did.

Senator ROBERT RAY —Do you want to refresh us of their broad conclusions?

Senator Abetz —I do not think there is any need for that.

Senator ROBERT RAY —I am asking to see whether the officers know it so we can go on and discuss this.

Senator Abetz —There is no need for officers, Mr Chairman, to give summaries of reports for the benefit of backbench opposition senators. They can read the reports themselves and come to their own conclusions.

Senator ROBERT RAY —Mr Chairman, this is coming from a minister who, a few months ago, refused even to tell us which staff members were working for Mr Reith. This constant interference and stonewalling is unnecessary. I have been trying, for five minutes, to get to the bottom of this issue so we can dispose of it.

Senator Abetz —There is no sense, with great respect. If you point to a particular conclusion of the Auditor-General or a particular paragraph in his report and ask departmental officials for a response to that, I think that is quite appropriate. But to ask for a summary of the report does not fit into this area whatsoever.

Senator ROBERT RAY —Can any officers at the table confirm that the Auditor-General found the actual cost—

Senator Abetz —Now we are getting there.

CHAIR —Minister, please. Senator Ray, you have the call.

Senator Abetz —That is the way the questions ought to be framed, and I am pleased with the way it is being approached now.

Senator ROBERT RAY —Have you finished with your monologue?

Senator Abetz —You are one to talk! But you ask the questions.

Senator ROBERT RAY —I will wait until we are ready.

CHAIR —Please.

Senator ROBERT RAY —If you cannot chair this committee, we will get someone else.

Senator Abetz —Sensitivity plus!

CHAIR —Minister, please. You have to let the senators ask their questions. Senator Ray, it is your call. Minister, please allow the question.

Senator ROBERT RAY —Can you confirm that the Auditor-General found that the actual cost to the government in the long term, with rental agreements, was more than the profits for the one-off sales? Was that the Auditor-General's finding?

Mr Bowen —It is some time since I have looked at that report, but it is true that the Auditor-General made conclusions of that nature. We had some differences of opinion over his methodology. I cannot confirm the actual words that you used, but the sentiment—

Senator ROBERT RAY —You got a draft report. You would have expressed your views on the draft report before it became a final report?

Mr Bowen —We did.

Senator ROBERT RAY —Was that disagreement recorded in the report? I concede that it is not always.

Mr Bowen —To some extent, I believe it was. As I say, it has been some time since I have looked at that report but I think our views were summarised in it.

Senator ROBERT RAY —Is it true to say that the DFAT building, the R.G. Casey building, was built specifically for the purposes of Department of Foreign Affairs and Trade and Austrade so that they would be an integrated organisation and you would have Foreign Affairs, Trade and Austrade all in the one building?

Ms Campbell —Yes, the government built R.G. Casey building for the Department of Foreign Affairs and Trade and Austrade.

Senator ROBERT RAY —Am I right in saying that it came in under budget, too? That surprised all of us.

Ms Campbell —Yes, it did come in under budget.

Senator ROBERT RAY —When was it sold to the Motor Traders Association?

Ms Campbell —I believe it was in 1997, but I will check with my colleague Mr Jackson.

Mr Jackson —I believe that is correct, but I would have to take it on notice to get the exact date.

Senator ROBERT RAY —Was any protection put in in terms of the level of rent for individual units within the building—which Senator Abetz would obviously like?

Mr Bowen —My understanding was that it was a commercial rental agreement.

Senator ROBERT RAY —What, renewable every three, four or five years?

Mr Bowen —The Austrade lease, I think, had a five[hyphen]year term, and they have exercised their right not to renew. But you might know a bit more, Ms Campbell.

Ms Campbell —Each agency within that building was able to define their operational needs and determine their lease term when the lease was prepared to be sold with the building.

Senator ROBERT RAY —I do not know whether you will recall, but arguments were made at the time, and led at this committee I think, that perhaps the selling off of some buildings into private hands, especially those with security aspects, might not be necessarily advantageous—referring in particular to Defence and Foreign Affairs. Clearly, if Austrade moves out, there will be vacant space in that building. Is there any golden share or anything else to prevent the Motor Traders Association superannuation fund from moving private interests in there?

Ms Campbell —I understand that the lease has a clause that allows the other tenants within the building to have some call over who moves into the building. The lease did include quite extensive provisions for the security of the tenants.

Senator ROBERT RAY —We do have ASIS housed in the same building. I suppose this is a hypothetical question, but it is one the government should think about: what happens if the rent is too high for ASIS? That is an absolutely specifically designed architectural building with security in mind—electronic and everything else. It just seems to me that it is not necessarily a convincing argument that this policy is a failure but, in this instance, I think it is extremely undesirable to move Austrade out—and apparently 100 metres down the road. Do we know whether or not that is right?

Mr Jackson —No, we do not.

Senator ROBERT RAY —I will have to look at what is 100 metres down the road, I guess.

Senator Abetz —I can give you that street map that I just had.

Senator ROBERT RAY —It is pretty close to the notorious territory. We might have to go and talk to them. I just think, Chair, it is passing strange that Austrade has to be forced out. I do not think it necessarily is a judgment on the rest of the policy. As you have said, it is virtually five years later, but have any studies been done on the amount of capital received from the sales and the amount of rent paid? I remember that you had some projected crossover points. Have you gone back and measured those?

Mr Jackson —No, it has not been done, because that form of analysis is considered not to be appropriate.

Senator ROBERT RAY —Why?

Mr Jackson —The simplistic view of doing those crossover analyses is that often they do not take into consideration other risks related to the ownership of property, with regard to maintenance and ongoing flexibility, with the likes of Austrade moving.

Mr Bowen —I think the bounds for the financial decision to retain or sell were set at that time, and decisions were made at that time. You may be aware that the hurdle rate has now been amended.

Senator ROBERT RAY —What to?

Mr Bowen —To 11 per cent.

Senator ROBERT RAY —Down from 15 per cent?

Mr Bowen —Yes.

Senator ROBERT RAY —I am surprised.

Mr Bowen —And decisions will be taken now in the light of that rate. But, when the government has set a particular hurdle, our undertaking of that type of analysis really does not take us anywhere.

Senator ROBERT RAY —Why did it go from 15 per cent to 11 per cent?

Mr Bowen —It went from 15 per cent to 11 per cent following a review. A couple of factors have changed. One in particular is the cost of funds to the government. There has been a reduction in interest rates. There are two components that make up the hurdle rate, under the capital asset pricing model—which the ANAO has recommended we use. One is the risk-free rate, which we have taken in our analysis—and the government has accepted—as the 10[hyphen]year average of the 10[hyphen]year bond rate. Secondly, there is a risk premium based on the premium in the equity markets over the last 10 years—and that is based on external research—to give a reasonable approximation of the types of risks that you enter by holding or purchasing an asset such as property.

Senator ROBERT RAY —Am I right in saying that, when it was set at 15 per cent—leaving aside Parliament House—there was only one Commonwealth property that met the 15 per cent hurdle? That is my memory of the evidence.

Mr Bowen —I am not sure about that.

Senator ROBERT RAY —Therefore we will not assume that is the case. Now that it is set at 11 per cent, would any current Commonwealth property meet that hurdle and not be required to be sold off?

Mr Bowen —Yes. In fact, it has resulted in two CSIRO properties not being sold in 2003[hyphen]04. They were factored into the budget at $6 million, and that amount has now been backed out. So it has had a negative impact on the budget estimates in 2003[hyphen]04 to the extent of $6 million.

Senator ROBERT RAY —But this reduction is not because we all told you that it was wrong at 15 per cent; other factors have come in. This is a sort of gentle `I told you so'.

Mr Bowen —Perhaps I could just say that there is a rationale for having revised it. I think originally the rate was set as a long[hyphen]term investment rate, and it was not varied for short-term fluctuations, as you know. But, given that the long[hyphen]term cost of funds has come down significantly in a sustained way, the government decided that it was now appropriate to review it.

Senator ROBERT RAY —If it were 11 per cent, would the R.G. Casey building have been sold?

Mr Bowen —I think the answer is yes, because it was less than 11 per cent.

Ms Campbell —The internal rate of return on R.G. Casey at sale was 7.5 per cent.

Senator ROBERT RAY —It never had a chance, did it? Thank you.

Senator SHERRY —Has the lawsuit between the Macquarie Bank and the Commonwealth been settled yet?

Mr Hodgson —Yes, the dispute was resolved and settled on 1 July this financial year.

Senator SHERRY —What was the agreed settlement?

Mr Hodgson —The settlement was a complex series of transactions that saw various amounts paid and settled. Some amounts were in dispute, and some amounts were not in dispute but were held up until the final settlement. There was a payment of $15.7 million from the Commonwealth to Macquarie Fleet Leasing arising from the agreement of the deed of release, which was the release of all claims, and a payment of $8 million from Macquarie Fleet Leasing to the Commonwealth arising from the same deal. There were some other payments, as I said, which were related but not actually in dispute.

Senator SHERRY —So the Commonwealth paid $15.7 to Macquarie; Macquarie paid $8 million—a difference of $7.7 million—

Mr Hodgson —Correct.

Senator SHERRY —greater than Macquarie paid. What was the Macquarie Bank seeking?

Mr Hodgson —It varied over the course of the dispute. The highest figure that I recall is of the order of $70 million. I can get you a more exact figure with that.

Senator SHERRY —Are you sure that is right?

Mr Pahlow —The number varied quite extensively, depending on how you measured it. There were a lot of interrelated issues in the dispute. Depending on how you measured it, it could have been as high as $96 million or as low as about $50 million. But we could get you some details on that.

Senator SHERRY —How did the figure change during the dispute? What was the stated rationale?

Mr Pahlow —Depending on which area of the dispute you were trying to measure, some amounts, as the dispute went on, were clarified more, and therefore you had a better feel for what the number in dispute actually was. For example, in a number of areas in dispute, the amount was determined by the number of vehicles involved. As the arbitration process and the dispute wore on, the number of vehicles involved was crystallised so that the number became firmer. In some instances, Macquarie Bank, for example, conceded a point and, therefore, there was a reduction in the number.

Senator SHERRY —Please take on notice those further details that we were talking about earlier. What was the final sale price for Dasfleet?

Mr Pahlow —I think the original sale price was $407 million.

Mr Hodgson —It was $407.9 million.

Mr Pahlow —Then, as Mr Hodgson has mentioned, there were some adjustments to that. They were amounts that were not in dispute but had remained outstanding—for example, as part of the sale agreement, the amount of debtors outstanding was repaid at a subsequent date.

Senator SHERRY —But, from what Mr Hodgson is saying, basically there is another $7.7 million off the $408 million. Is that right?

Mr Pahlow —Yes, approximately.

Senator SHERRY —So it would be a round figure of almost exactly $400 million. This was before an agreed arbitrator, wasn't it?

Mr Hodgson —Correct. Sir Daryl Dawson was at one stage appointed as an arbitrator. We did not finalise the arbitration process because we had had a series of meetings with the arbitrator and he had made some interim decisions. We continued to negotiate in good faith with Macquarie, and the dispute was settled before there was a final arbitration made by the arbitrator.

Senator SHERRY —Was Sir Daryl Dawson paid for his services?

Mr Pahlow —Yes, he was.

Senator SHERRY —How much was he paid?

Mr Pahlow —I do not recollect. We can get that information for you.

Senator SHERRY —Was he paid by the department?

Mr Pahlow —From memory, the costs were shared between the two parties.

Senator SHERRY —On a fifty-fifty basis?

Mr Pahlow —They were shared between the Commonwealth and the Macquarie Bank, from memory, on a fifty-fifty basis, including the arbitrator's time, costs of rooms and that sort of stuff.

Senator SHERRY —Even though he did not finally settle it. Can you give me some sort of ballpark figure?

Mr Pahlow —I think it is several hundred thousand, but I would have to check.

Senator SHERRY —What about the legal fees? Presumably there were legal costs incurred by the department.

Mr Pahlow —Yes.

Senator SHERRY —What were they?

Mr Pahlow —Again in the order of $3 million, I think. I would have to check the number to be exact.

Senator SHERRY —Legal fees of $3 million?

Mr Pahlow —Over the course of the entire 3[half ]- to four[hyphen]year period of the dispute, yes. That included senior counsel, legal advisers, probity advisers, et cetera.

Dr Watt —I think it is probably better that we do not speculate, given that our recollections might be faulty. We are happy to get the answers to these questions on notice.

Senator SHERRY —I am not going to hold you to it. If you came back and said 3[half ] or 2[half ], I would not admonish you for that.

Dr Watt —But if he comes back and says $300,000, you might be disappointed.

Senator SHERRY —I would be very pleased if that were the case. It was some millions, anyway. Given the significance of the dispute, it was not a minor commercial dispute; it was a very major dispute, one of the largest. Have there been any other disputes of this magnitude in recent times?

Mr Pahlow —I could not speculate; I do not know.

Senator SHERRY —I am not asking you to speculate; I am just asking whether you could—

Mr Hodgson —Not that we are aware of—certainly not involving Finance.

Senator SHERRY —They are Finance's and the government's legal fees. The Macquarie Bank are not paying any part of those, are they? I assume that they are just paying their own.

Mr Pahlow —No, we settled on the basis of both parties paying their own costs.

Senator FORSHAW —I have some questions regarding some Commonwealth land in Sydney. Firstly, there is a parcel of bushland, as I think it is probably best described. It is about three kilometres in size and it is between Sandy Point and Alfords Point on the Georges River. I understand this was former Defence land.

Mr Jackson —That is correct.

Senator FORSHAW —It has been transferred to the Department of Finance and Administration.

Mr Jackson —Yes, that is correct.

Senator FORSHAW —Could you tell me what has transpired since it was transferred to the department, and where it is at at the moment in terms of disposal et cetera?

Mr Jackson —The site was acquired for Defence purposes in 1917 and has been declared surplus to Defence's requirements. As such, it has been transferred to Finance. At this point in time, no final decision has been made on the site. Given the special nature of the property, it is fair to say that an open market sale is considered inappropriate. The site has a number of very special characteristics and any investigations that are undertaken will take into account the requirements of the Environment Protection and Biodiversity Conservation Act. At this point in time it would be premature to speculate on what the final fate of the site will be, but it is certainly considered to be a site with very special characteristics.

Senator FORSHAW —What was the land used for when it was part of the Defence department? Was it part of the Holsworthy complex? I know it is nearby, but it is not directly so.

Mr Jackson —I understand it was part of a wider complex. I do not know what the specific site was used for.

Senator CONROY —Let us not build an airport there, though.

Senator FORSHAW —No; but the planes would probably have flown straight over the top. What are these special characteristics that you have referred to?

Mr Jackson —Parts of the site are on the indicative list of the Register of the National Estate. There are some sandstone slopes and Aboriginal sites of archaeological significance. There is some bushland, and the site is foreshore land.

Senator Abetz —That is spelt `Forshaw'.

Senator FORSHAW —I think Hansard would have picked that up without you having to tell them, Minister. I am definitely sure you do not intend that to have any controversial meaning.

Senator Abetz —But if you are interested in buying it, we will talk to you!

Senator FORSHAW —No, I could not afford this lot, I can tell you. But it is a lovely part of the world. That leads me to my next question: has there been an approach from the state government—and I am going from newspaper reports, so I would like some confirmation from National Parks and Wildlife Service—regarding their desire to incorporate this land into the Georges River National Park?

Mr Jackson —There have been suggestions to that end, yes.

Senator FORSHAW —Has there been anything more than suggestions? Have there been any approaches from the government to either the service or the state minister?

Mr Jackson —I would have to check if there has been any written approach to us in that regard.

Senator FORSHAW —Maybe you could help me, Minister. The Daily Telegraph on 28 March said:

A letter from Environment Minister Bob Debus to a local member revealed the NPWS had approached the Department of Finance about including the land in national park.

Are you aware of this, Minister?

Senator Abetz —My memory is such that I cannot confirm that, but I will take that on notice.

Dr Watt —We would have to check. We are not aware of it sitting here.

Senator FORSHAW —Can I take it a bit further. I would like you to check that and, if it is appropriate, provide me with a copy of any such correspondence. I appreciate that will have to be taken on notice. I would also like to ask that of you, Minister, particularly, because I have been advised that you actually replied on behalf of Senator Minchin in this respect.

Senator Abetz —Yes. I was just being advised. As I understand it, a letter was sent to Senator Minchin, but we will have this clarified for you. My recollection is not necessarily as good as one would hope. Senator Minchin got a letter, which was transferred to me because it is in my portfolio responsibility. If I recall correctly, the New South Wales minister was basically wanting the land for free. It was on that basis that we responded, saying, `Chances are, no.' I will get the detail for you.

Senator FORSHAW —I have not seen the correspondence, so I am relying here on some newspaper reports and a speech in state parliament, which I am happy to make available.

Senator Abetz —Did he say the date in that speech, because then we could check it?

Senator FORSHAW —No, but I am sure you will have a copy in your own files. You responded indicating that the land did have high conservation value.

Senator Abetz —Yes, or aspects of it, as opposed to the whole lot.

Senator FORSHAW —Yes, and that has been acknowledged by Mr Jackson. Would you please provide me with a copy of your reply letter?

Senator Abetz —Yes.

Senator FORSHAW —And the letter in response to you.

Senator Abetz —We will see if we can get it for you very quickly.

Senator FORSHAW —I have just about taken this as far as I wish to today. Whilst you made a comment there about state government seeking the land for free—I think you said that it was not likely or something along those lines; no doubt I will check what your letter said, and I will be interested in your comments today—isn't it more correct to say that the approach was made to the Commonwealth on the basis that the land would be transferred to the state government or to the National Parks and Wildlife Service for inclusion in the Georges River National Park?

Senator Abetz —Yes.

Senator FORSHAW —In other words, it would not end up being sold either on the open market or in any other way for some other development, but would become publicly owned.

Senator Abetz —As I understand it, certain aspects of the land have high conservation value. There are other aspects that do not. I am trying to recollect as I speak, so I might need to correct the record. Why would you want to transfer land, which is not of a high conservation value and may have a good commercial value, into a national park when there are no national park or conservation type values attached to it? If the land is appropriate for the Register of the National Estate, of course, it will be protected. Under the Environment Protection and Biodiversity Conservation Act 1999, we have certain responsibilities which I understand are still being undertaken.

Senator FORSHAW —You will come back to me on that, but I make the point—

Senator Abetz —Sensible environmentalism.

Senator FORSHAW —I was taking up your point that the government wanted it for free. That might be one literal interpretation. I was trying to draw your attention once again to the purpose behind it—all of the land or some of the land would become public ownership, if you like, in that it would become part of a national park.

Senator Abetz —There is a lot greater chance of getting agreement if we are talking about `some' as opposed to `all', and whether that `some' is that which is of high conservation value.

Senator FORSHAW —That is a matter that I am sure we can address on a further occasion. The second property I want to ask some questions about is the Customs marine site at Neutral Bay. Has this site been listed for disposal by the department?

Mr Jackson —Yes. The property is currently included on the proposed divestment program.

Senator FORSHAW —Can you give me any more information as to the timing and manner of its disposal or what it might be disposed for?

Mr Jackson —The Neutral Bay marine centre is currently occupied by Customs themselves. We are currently negotiating the terms of a lease with Customs to secure their ongoing occupation of that site. We are also undertaking a number of discussions with the North Sydney Council, the Heritage Council of New South Wales and the Australian Heritage Commission. We have also prepared a draft archaeological assessment and conservation management plan. In preparing the property for sale, we are doing what we term `a due diligence' to provide the market with an informed set of documents to allow it to compete in an orderly fashion.

Senator FORSHAW —I gather from your answer a moment ago that the intention is to dispose of it but on the condition that it would continue to be used by Customs?

Mr Jackson —That is correct. We are entering into a lease to secure Customs' ongoing occupation of the site.

Senator FORSHAW —Can you be a bit more specific about how long you would envisage that lease, that usage, for?

Mr Jackson —To some extent that would be dictated by Customs. If they asked for a 10-year lease that would be acceptable; if they asked for a 15-year lease that would also be acceptable.

Senator FORSHAW —Has that been communicated to the North Sydney Council?

Mr Jackson —It would not be normal practice for us to discuss matters between ourselves and Customs with regard to the terms of a lease with the North Sydney Council.

Senator Abetz —Are you talking about the lease or the sale?

Senator FORSHAW —I am talking about the whole site, and that includes the future usage of the site. I refer to a letter in the Mosman Daily newspaper on 11 April this year by Joe Hockey, the member for North Sydney. He was replying to an earlier story on 14 March. I quote, in part, from his letter:

I am not aware of any plans to rezone or redevelop the site in question. However, given the importance of this issue I have already sought the advice of the Minister for Justice and Customs, the Minister for Finance and the Special Minister of State with regard to the future of the Customs centre site at Neutral Bay.

He also goes on to refer to lobbying efforts by councillors. So there is certainly a concern in the community about the future usage which the local member, your ministerial colleague, has been taking up.

Senator Abetz —And the local member has in fact raised it personally with me.

Senator FORSHAW —Apparently they have not had a response from the local member, so I thought I would try to help today.

Senator Abetz —They have in the newspaper, surely?

Senator FORSHAW —No. He says in the letter on 11 April that he would pursue the issue, but my advice is that they have not heard from him in reply.

Senator Abetz —I have heard from him.

Senator FORSHAW —I am sure you should have.

Senator Abetz —He is a good local member.

Senator FORSHAW —What do you understand would be the future usage of the site by Customs?

Mr Jackson —I understand that Customs' desire is to continue their ongoing operation.

Senator FORSHAW —Which is what? What do they actually perform there?

Mr Jackson —That would be more a question for Customs I think, Senator.

Dr Watt —I think, from memory, they moor their boats there and use it as a base for some of their patrol boats.

Mr Jackson —I believe that is correct.

Senator FORSHAW —I am aware that I can ask that of Customs at another committee, but I thought you might be able to help me today.

CHAIR —The committee is continuing its examination of output 2.1.

Senator CONROY —Thank you for carrying on in my absence. I want to talk about some other asset sales. The department has allocated $12.3 million in 2002-03 to continue asset sales activities. Can you please provide the breakdown of expenditure between costs associated with the sale of Sydney Basin airport and scoping studies on Medibank Private, the Defence Housing Authority and ComLand?

Dr Watt —Senator, we do not break those down.

Senator CONROY —You have not got any breakdown at all?

Dr Watt —No. We normally do not break down the various components of our assets sales program.

Senator CONROY —You normally do not?

Dr Watt —No.

Senator CONROY —Are you able to now that I have asked?

Dr Watt —They have not traditionally been broken down for public consumption because a large slice of those funds go to hiring the consultants and so forth—

Senator CONROY —They do, don't they. An enormous amount part of those sums go to consultants.

Dr Watt —A slice, Senator. We are always reluctant to say how big our budget is on things like that—

Senator CONROY —Perhaps you might be able to give us some advice in camera or just privately. I am not actually looking to allow someone to tender; I am not trying to blow your strategy.

Senator Abetz —Can we take that on notice?

Senator CONROY —Sure.

Senator Abetz —Then we will consider it and get back to you.

Senator CONROY —I am not actually trying to help the companies bid their way up on you.

Senator Abetz —We appreciate that.

Senator CONROY —I understand all three scoping studies are to be completed by early 2003. Is that the short term?

Dr Watt —That is the medium term.

Senator CONROY —That is only seven or eight months away, after all.

Dr Watt —I appreciate that.

Senator CONROY —Are we talking January and February or are we talking the first half of the year—that is, June? Even I would concede that that is medium term.

Dr Watt —Early 2003 is about right: we are looking to have those substantially done by the beginning of the new financial year so that any implications can be taken into account in the budget process.

Senator CONROY —So they would not be finished by the end of the next financial year?

Dr Watt —Do you mean June 2003?

Senator CONROY —Yes.

Dr Watt —The point is rather that we are interested in having the scoping studies finished in time for any implications of those scoping studies to be considered in the 2003-04 budget process.

Senator CONROY —Okay. Have the terms of reference for the scoping studies been released?

Dr Watt —No, they have not.

Senator CONROY —Are they available?

Dr Watt —They have not been finalised.

Senator CONROY —When do you expect them to be finalised?

Dr Watt —I hope they will be finalised fairly soon. I am not aware that we release the terms of reference. They are a matter between the department of finance, the relevant portfolio area and the agency concerned.

Senator CONROY —I did not know it was a state secret. Could you take on notice whether we can have a copy of the terms of reference?

Dr Watt —I am happy to take that on notice.

Senator CONROY —The list is building up on you, isn't it?

Dr Watt —I think some of them might be short answers.

Senator CONROY —I am hoping the minister will see the light and be prepared to cooperate with the Senate rather than—

Senator Abetz —Are you suggesting that you are the Senate?

Senator CONROY —I am speaking as a member of a committee of the Senate.

Senator Abetz —Not as the Senate.

Senator CONROY —No, I am speaking as a member of the Senate.

Senator Abetz —That you are.

CHAIR —And it is delightful to have you here, Senator Conroy.

Senator CONROY —I want to talk about Medibank Private. Has a report been done into the potential privatisation of Medibank Private?

Dr Watt —I think the point is rather that the scoping study will look at options to change the ownership of Medibank Private and what the issues are that would have to be dealt with if the government were to consider a change of ownership. That is the role of the scoping study.

Senator CONROY —So you have not done any other assessment?

Dr Watt —I am not aware that the department of finance has.

Senator CONROY —There is a difference between a scoping study to implement the sale and a working party.

Dr Watt —We are not aware that the department of finance has been involved in such an assessment.

Senator CONROY —Has the government received an opinion from the Solicitor-General on its legal position with regard to the sale of Medibank Private?

Dr Watt —Any legal issues would normally be dealt with as part of the scoping study.

Senator CONROY —I appreciate that you may only be able to speak on behalf of your department, but it has been reported widely in the newspapers that there has been a legal opinion—

Dr Watt —What we are saying is that we are not aware of such a legal opinion. We have no legal opinion from the Solicitor-General. That is not to say that another part of the government does not have a legal opinion, but we do not have one.

Senator CONROY —My question was probably a bit too broad. It is just that it has been reported widely that the government have got some advice and I was wondering if you had received a copy. Before you go down the path of the scoping study it might be an idea to get across the legal opinion.

Dr Watt —Again, what legal issues are involved is part of the scoping study.

Senator CONROY —You could save a lot of cost if you just picked up the phone, rang him and said, `Can we get a copy of that opinion you gave to Medibank Private a little while ago?'

Dr Watt —If he has given one to Medibank Private—and I do not know that for a fact—then I am sure we will get it.

Senator CONROY —If it said, `No, you cannot do it,' then there would not be much point in expending the funds on a scoping study, would there?

Dr Watt —If there is a major hurdle to any scoping study of any kind, you would expect the usefulness of the scoping study to be reassessed from the start.

Senator CONROY —I do not think the legal advice says that.

Dr Watt —You have an advantage on me.

Senator CONROY —On this one, I do—it is one in a million. Minister, is it possible to get a copy of the opinion of the Solicitor-General?

Senator Abetz —Is it possible?

Senator CONROY —I am asking you to table the legal advice.

Senator Abetz —That is a different issue, and I would doubt that we would. One, I do not know if there is such legal advice floating around.

Senator CONROY —Dennis Rose prepared it for you.

Senator Abetz —Two, I am not sure that we would necessarily table it or make it available.

Senator CONROY —Is that, `I will take it on notice and get back to you'?

Senator Abetz —If you like.

Senator CONROY —Or is that just, `Go away, no'?

Senator Abetz —I was hoping you would take it as a, `Go away, no.'

Senator CONROY —Let us save time.

Senator Abetz —Seeing you have persisted, I will take it on notice.

Senator CONROY —Thank you, Minister.

Senator Abetz —We do try, sometimes.

Senator CONROY —I know. It is just that I was hoping that you would save Dr Watts the one page of paper with the `Go away, no' on it by saying it now.

Dr Watt —I am sorry, I missed that.

Senator CONROY —That is all right; we are just trying to save you work.

Senator Abetz —I have already said to him, `Go away, no,' but he persisted, so I have agreed to take it on notice, and chances are we will give him the same answer in writing.

Senator CONROY —I was just trying to save you another answer to another question on notice. Can you confirm that at June 2001 Medibank had reserves of $557.8 million?

Dr Watt —This would be the number recorded in their annual report, I take it?

Senator CONROY —Yes.

Mr Dobbie —Off the top of my head I cannot confirm that, but I can have an answer for you fairly quickly.

Senator CONROY —That would be great. I was just wondering, if that is not the value of the reserves, if you could give us the actual value.

Mr Dobbie —I can get that for you.

Senator CONROY —How were those reserves accumulated? Do they consist of funds contributed by members?

Mr Dobbie —Yes, they would.

Senator CONROY —Anything else? Would there be investment returns off the back of that, as well as the actual contributions?

Mr Dobbie —Yes.

Dr Watt —And retained earnings.

Senator CONROY —Minister, is the government considering enabling other private health insurance providers to purchase Medibank Private?

Senator Abetz —All that is going to be part, I would imagine, of the scoping study. I do not want to speculate as to what may arise out of any scoping study.

Senator CONROY —Could you give us a guarantee that the scoping study will address competition issues?

Senator Abetz —What I can guarantee is that the scoping study will be thorough and comprehensive and look at as many aspects as those that are involved can think of. Given that you have now put that on the public record, undoubtedly that will be one of the issues that they may look at.

Senator CONROY —Is that a `yes'?

Senator Abetz —Maybe.

Senator CONROY —It is not a `No, go away'?

Senator Abetz —I am not going to tie down to chapter and verse what they are going to be looking at in the scoping study.

Senator CONROY —Dr Watt, would it be normal for competition issues to be considered within a scoping study?

Dr Watt —If I can put it in a slightly different fashion, it might help. As part of any scoping study, you would look at whether there were implications from change of ownership for the market of a particular firm as a whole. That does not mean narrowly focused competition issues. For example, you would never do a scoping study on the sale of Qantas—as must have been done all those years ago—without looking at the implications for the aviation market.

Senator CONROY —If Medibank Private was going to be purchased by, say, MBF—I think those are the two largest nationally—then there would be economies of scale and potentially monopoly—

Senator Abetz —Professor Fels may well be interested.

Senator CONROY —They are relevant issues. You could probably sell at a greater price to, say, MBF than you could to, say, NIB because MBF could derive greater synergies—let us use that as a pseudonym for `profiteering'.

Dr Watt —I think we are getting into the realms of speculation. Perhaps I should—

Senator CONROY —I am not trying to draw you on that. I am just saying that it would not make sense if those sorts of issues were not considered by the scoping study.

Senator Abetz —A range of issues will be—

Dr Watt —I think you would rather ask: what would be the impact on the market if ownership were to change? What proportion of the market is it? Is it a trivial proportion or a non-trivial proportion? If it is a non-trivial proportion and would have a non-trivial impact, is there something special that needs to be thought of?

Senator CONROY —That is great. Thanks. Minister, you have not at the moment ruled out anything so everything is in. Can you give us an undertaking that, when assessing those sorts of issues, taken into account will be not only the national position but also the state breakdown—as some of the organisations are heavily in one state and not others—so that as part of that examination you would consider state competition issues and not just national ones?

Dr Watt —Again, I think you would look at the market penetration in major markets.

Senator CONROY —Thank you.

Mr Hodgson —We have confirmation that the assets were $557.864 million, as per the annual report.

Senator CONROY —Thanks. Minister, would you be concerned if Medibank Private and another private health insurer joined and led to a significant concentration of market power in one or two states or territories? You would not want to see only one significant provider in the Tasmanian market, would you?

Senator Abetz —What concerns me or does not concern me is not necessarily of great interest to this committee, but I am sure that all those facts—

Senator CONROY —I am asking you as a Tasmanian senator on behalf of your Tasmanian constituents.

Senator Abetz —Let me declare my interest. Yes, I am in a private health insurance fund. I am with St Luke's Health Insurance, which is very much a Tasmanian based operation.

Senator CONROY —Do they want to buy Medibank Private?

Senator Abetz —They may well want to, but I had better not comment on that. I might have a conflict of interest; my premiums might go down.

Senator CONROY —So that you understand the point of the question, Medibank Private have 34 per cent of the Tasmanian market. My question goes to the issues in your mind, as in the government's mind. I am not really addressing Dr Watt now. I am trying to get a sense from the government that they are aware that these issues are genuinely out there.

Senator Abetz —Depending on what the scoping study says—and there is a whole range of imponderables in relation to what the scoping study might throw up, and I do not want to pre-empt anything of that nature—any government decision I am sure will be based on the benefits for the Australian taxpayer and the Australian consumer of private health insurance.

Senator CONROY —As I think you mentioned earlier—

Senator Abetz —You are not verballing it?

Senator CONROY —No. I think you mentioned Professor Fels earlier, and those sorts of issues would also come under the attention of Professor Fels.

Senator Abetz —I am sure he would have a great degree of interest in it.

Senator CONROY —Would part of the scoping study be to talk to Professor Fels? It sounds like it would be commonsense.

Mr Yarra —Yes, as a matter of course we would talk to him.

Senator CONROY —I thought that might be the case.

Senator Abetz —I have some correspondence for Senator Forshaw. In relation to Senator Forshaw's previous questions regarding the Georges River, I have a letter from Mr Debus, who is Attorney-General and Minister for the Environment, dated 11 January 2002 and my response dated 26 March 2002. I am happy for them to be tabled or whatever the committee might want to do with them.

CHAIR —Is it the wish of the committee that we receive the letter from the minister to the Hon. Bob Debus, the Minister for the Environment of New South Wales, and also the letter from the Attorney-General of New South Wales, Bob Debus, to Senator Minchin, the Minister for Finance and Administration? There being no objection, they are tabled.

Senator CONROY —Do you think there would be competition issues if Medibank Private were to be purchased by a health service provider rather than an insurance provider, such as Mayne Nickless? Do you think the same sort of competition issues would kick in?

Senator Abetz —If we go down that path, it is all very hypothetical. In that context I am not sure how we can really deal with those sorts of questions, but the chairman is allowing this hypothetical question—

Senator CONROY —Stop badgering the chairman.

Senator Abetz —so I will deal with it on the basis that, if that were to be the outcome, there would undoubtedly be competition issues irrespective of who bought it.

Senator CONROY —What is the appropriate method of valuation for a company such as Medibank Private?

Mr Yarra —There are probably a number of different ways of valuing the company. There are comparatives in the market. If the company is listed, based on the stock exchange listing you could do a discounted cash flow analysis using the capital asset pricing model. Typically, in the circumstances of scoping studies, a variety of methodologies are examined to see which is most appropriate. Which would be used in the case of Medibank Private, I do not know, but it is quite likely that they would do a discounted cash flow analysis over a 10-year period with a retention value at the end.

Dr Watt —Again, the early stages of the scoping study would sort through the alternatives.

Senator Abetz —I am sure that makes it clear for you, Senator Conroy.

Senator CONROY —As mud. I understand that Medibank Private's surplus profit last year was $105.9 million; is that correct?

Mr Dobbie —Yes.

Senator CONROY —However, if privatised, presumably it would be paying tax.

Mr Yarra —Yes, I assume it is already paying tax. It is nonprofit. I presume it is paying tax. It is a Corporations Law entity.

Senator CONROY —An earnings multiple of 25 is the average for the ASX as a whole. That would imply sale proceeds of around $2 billion.

Dr Watt —Now you are getting well beyond our ability to comment.

Senator CONROY —That is not an unusual earnings multiple, though?

Dr Watt —I would defer to others on that.

Senator CONROY —Mr Yarra?

Mr Yarra —I have not got a view.

Senator CONROY —I am saying that that is the average for the ASX.

Mr Yarra —It could be. I have no view in relation to the matter.

Senator CONROY —No, that is the average for the ASX.

Mr Yarra —Thank you, Senator, I have noted that.

Senator FORSHAW —How much tax are they paying?

Mr Yarra —It would be in their accounts, I am sure.

Senator FORSHAW —I have not studied this as closely as my colleague Senator Conroy, but you don't know? They are getting a 30 per cent private health insurance benefit from the government. You do not have to respond to that.

Dr Watt —No, they are not.

Mr Yarra —No.

Senator Abetz —No, the people are who are insured get that.

Dr Watt —Those who subscribe are.

Senator FORSHAW —Yes, but in most cases it goes directly to them.

Senator Abetz —The aspirational classes—you know, that Cheryl Kernot referred to.

Senator FORSHAW —I have not even seen that article, and I am a member.

Dr Watt —But it does reduce your premiums, Senator Forshaw.

Senator FORSHAW —I beg your pardon?

Dr Watt —I do not see the money, either, but it does reduce your premium.

Senator FORSHAW —That depends upon the level of the premium that is set by the fund. This is probably for another committee, but a 30 per cent rebate is—

Senator Abetz —A 30 per cent rebate.

Senator FORSHAW —Yes. But, of course, then the fund puts its premiums up by anywhere up to 20 per cent. One could debate this all day.

Dr Watt —I think the best guarantee of that not occurring is a competitive market.

Senator FORSHAW —I do not think you should—well, I do not want to ask you any policy questions, Dr Watt.

Senator CONROY —I wanted to talk about the scoping study for Defence Housing Authority. What is the value of Defence Housing Authority's property portfolio?

Dr Watt —We should be clear right from the start: it is not a scoping study into the sale or otherwise of Defence Housing Authority; it is a scoping study into the sale or retention of some of Defence Housing Authority's assets.

Senator CONROY —Yes, even I would not have wanted to have misrepresented you in that way, Dr Watt.

Dr Watt —Thank you.

Senator Abetz —What was your question, again, Senator?

Senator CONROY —What is the value of the Defence Housing Authority's property portfolio?

Mr Hodgson —As at 30 June 2001, they managed a property portfolio of 19,000 properties with a total value of $3.7 billion, of which the authority owned $1.6 billion. The remainder was leased by the authority from private investors.

Senator CONROY —Is the accommodation and relocation business also being sold?

Dr Watt —It is a scoping study—not `sold'; a scoping study.

Senator CONROY —Sorry, I am aware of the distinction you drew earlier, so I am just trying to sort out whether or not the accommodation and relocation businesses are part of the scoping study. Does that make it a fairer question for you?

Dr Watt —It is a study into assets.

Senator CONROY —And the accommodation and relocation business would be an asset?

Mr Hodgson —Defence Housing Authority have only recently moved into this area. We are actually looking at the scoping study into the assets and the ownership of the assets of Defence Housing Authority.

Senator CONROY —I am probably a bit confused here. The government decides what it wants to sell, so it says to you, `This is what we want to sell.' Is that fair or do you just devise a few ideas yourself?

Dr Watt —No.

Mr Hodgson —No.

Senator Abetz —The government has made no decisions.

Mr Hodgson —The government has asked us to undertake a scoping study into the possible sale of Defence Housing Authority assets.

Senator CONROY —And what I am trying to ascertain is whether or not the accommodation and relocation business is included in that. I am not trying to be tricky; I am actually just trying to work out whether or not that is part of the assets.

Dr Watt —We have not bounded the actual nature of the issue yet.

Senator CONROY —That is what I am trying to understand. I would have thought that the government binds you on that rather than you deciding what is in or out yourself. That is really what I am trying to work out.

Dr Watt —The government will consider the terms of reference for all the scoping studies.

Senator CONROY —But you do not know whether or not that business will be considered for sale.

Dr Watt —At this stage there is no decision.

Senator CONROY —When will that decision be made, Minister or Dr Watt?

Senator Abetz —The terms of reference in relation to these three scoping studies have not been determined as yet, as I understand it, but they will be determined sooner rather than later—it is a variation on a theme.

Senator CONROY —Short term! I understand that some ADI assets are being considered as part of this, or is that separate?

Dr Watt —There is also a scoping study on Comland.

Senator CONROY —Is that separate?

Dr Watt —That is a third scoping study.

Senator CONROY —Does that incorporate ADI?

Dr Watt —It incorporates ADI land in both Melbourne and Sydney.

Senator CONROY —I appreciate that Senator Forshaw may have asked you about this previously; I do not think I am going to cover the same ground but if I do please let me know.

Senator Abetz —If you are dealing with Comland land, Senator Forshaw did not traverse that.

Senator CONROY —I am probably going to be chatting about Sandy Point. Did Senator Forshaw cover Sandy Point?

Dr Watt —No.

Senator CONROY —I understand that there is a potential joint venture between ADI and Lend Lease being considered. Is that correct?

Mr Hodgson —There is a current joint venture between Comland and Lend Lease.

Senator CONROY —Could you outline the nature of the joint venture?

Mr Dobbie —It is a joint venture to develop the parcel of land. I want to make sure we are talking about the same parcel of land; I am not familiar with Sydney and I am not sure that Sandy Point is the parcel of land that you are referring to.

Senator CONROY —I am going to come to Sandy Point; I have not come to it yet. I was just making sure that Senator Forshaw had not covered it already. I am interested in the joint venture and what it is doing at the moment.

Mr Dobbie —The joint venture is to look at the development of approximately 1,500 hectares of land at St Marys in Western Sydney. At present, the development has not commenced. There are about 820 hectares within there which are protected and will not be developed, and so ultimately the development will only be about half of the entire parcel of land.

Senator CONROY —I understand that the joint venture is being held up by environmental concerns.

Mr Dobbie —That is correct.

Senator CONROY —Could you explain those concerns and how they are being addressed?

Mr Dobbie —The concerns centre around the protection of Cumberland Plain woodland, the boundaries of which are not quite straightforward. I do not believe the boundary of the land which is to be protected as opposed to the land which is to be developed has been completely finalised at this stage of the game.

Senator CONROY —Do you think that it will be sorted out soon, in the short term?

Mr Dobbie —We are a long way down the track but we have not quite got to the finish line yet.

Senator CONROY —I want to go on to Sandy Point. I am looking at my notes and I am not from Sydney so I am, like you, not completely sure. My notes refer to an area adjacent to Holsworthy Army Base, which I know was of interest to Senator Forshaw; that is why I asked about Senator Forshaw's questioning. I am referring to the Alfords Point-Sandy Point area adjacent to Holsworthy Army Base along the Georges River. It does seem to be the same geographic area, so I am hoping my questions are a little different. I apologise if there is some duplication, but please let me know. Those areas were formerly part of the Defence estate and are something that the government considers surplus to requirements and has handed over to DOFA to sell off. Is that right?

Mr Jackson —That is correct.

Senator CONROY —And part of the area in question has been nominated to the Register of the National Estate?

Mr Jackson —That is correct.

Senator CONROY —In light of this, has the department sought any advice from the Australian Heritage Commission, formally or informally, concerning the environmental or heritage value of the land?

Mr Jackson —Yes, the department has had close consultation with the Heritage Commission.

Senator CONROY —I understand that both an environmental assessment and a planning study covering cultural heritage have been prepared for DOFA's property group by consultants Planning Workshops Australia as part of this property disposal process?

Mr Jackson —That is correct; that firm has prepared a report for us.

Senator CONROY —Will you make these reports available? Can I have a copy?

Mr Jackson —It is one of a number of reports

Senator CONROY —I am happy to have them all.

Mr Jackson —I am happy to take that on notice; we will have a look at it.

Senator CONROY —Is that longhand for, `No, go away'?

Senator Abetz —Possibly; just to make it clear.

Senator CONROY —I am very slow like that. I would like to talk about property sales. If Senator Ray has covered some of this, I apologise. Page 6-66 of Budget Paper No. 1 reports property sales by the department of finance and CSIRO. Are these newly announced property sales that have not previously been included in the forward estimates?

Mr Bowen —Which particular—

Senator CONROY —The second dot point states:

[middot]Largely offset by property sales by the Department of Finance and Administration and CSIRO, and the run-off of the Commonwealth motor vehicle fleet finance leases ...

What I am asking you is: are they new?

Mr Jackson —There are no sales included that have not previously been in forward estimates.

Senator CONROY —Not previously?

Mr Jackson —That have not previously been in the paper.

Dr Watt —No new ones.

Senator CONROY —So they are not new?

Mr Jackson —No, certainly not from the property management branch's point of view.

Senator CONROY —Can I confirm that in Budget Paper No. 1 the proceeds from property sales are shown on page 12-6 in table 3?

Mr Bowen —Yes, they are.

Senator CONROY —Again, I am going back to this difference between varying accounting standards. I am hoping you can walk me through it. Is it shown in the GFS framework?

Mr Bowen —I think it should appear in the cash area of the GFS.

Senator CONROY —If you are able to point to a table where you think it should be, that would be great.

Mr Bowen —We might have to check that.

Senator CONROY —I am happy for you to come back after dinner or something.

Mr Bowen —I think it is in the `Net cash flows from investments in non-financial assets'. I cannot see where else it is.

Senator CONROY —And if that is not right, someone will tip us off?

Dr Watt —We will come back regardless, with either a yes or no.

Senator CONROY —Thanks. Sorry about the basic accounting lesson as we go.

Dr Watt —That is all right. We are getting one too.

Senator CONROY —Can I confirm that in 2001-02, $1 billion worth of property was to be sold, but only $198 million worth was sold? Is that right?

Dr Watt —That is harder for us to comment on because most of those properties were not to be sold by the department of finance.

Senator CONROY —If you are able to check it out and shed any light, that would be good. Going back to that previous question, Mr Bowen—and I appreciate that you are still digging away there—if the property sales are included in the cash area, do they go off the bottom line?

Mr Bowen —Property sales do come off the bottom line under the GFS convention, so it affects underlying cash. Just to clarify the previous answer, on page 11-7, in the middle—it is table 3—

Senator CONROY —This is one of my favourite tables, as you know. We have been trawling through it.

Mr Bowen —We have. The property sales will be in the line `Sales of non-financial assets' under the `Cash flows from investments in non-financial assets' heading. It is about the middle of the page.

Senator CONROY —So that is confirming that they do come off the bottom line?

Mr Bowen —There is absolutely no doubt that they come off the bottom line. Sales of financial assets do not, but sales of non-financial assets do.

Senator CONROY —We could spend hours discussing why there is an accounting difference—

Senator Abetz —But we will not.

Senator CONROY —but let's not.

Senator Abetz —Good.

Senator CONROY —I was just asking about which properties, and you were going to check which properties—whether they were DOFA controlled—

Dr Watt —We can—

Senator CONROY —Thank you. Excluding plant and equipment, what are the proceeds from property sales in 2002-03?

Mr Bowen —We would have to come back to you on that.

Senator CONROY —I am happy for you to come back on that one. As an obvious follow-up to that one, how confident are you that you will reach your target?

Mr Bowen —I would have to defer—

Senator CONROY —I am happy for you to work out the figure and then let me know, or, if you think you can answer without the figure—

Dr Watt —The target is not always within the department of finance—

Senator CONROY —I am happy for you to pause and come back on that one. Mr Hutson did seem to be keen to get to the microphone.

Mr Hutson —I was going to say that, if we have had a target for divestment in the past, we have always met it, and we would expect to do so in the future, particularly at this point.

Dr Watt —This is the department of finance?

Mr Hutson —Yes.

Senator CONROY —Within your bit?

Mr Hutson —Within our bit, we will be pushing very hard to meet our target.

Dr Watt —The finance component of the estimate, which we are competent to speak on, is a best estimate. We believe we can achieve it. It is a best on balance estimate, like all budget estimates, so it is no different from anything else. In a sense, we believe the target is achievable and we are working towards it.

Senator CONROY —I do understand that you did have some discussions about the hurdle rate. The hurdle rate has been cut from 15 to 11 per cent.

Dr Watt —From 14 to 15 to 11.

Senator CONROY —Excuse me.

Dr Watt —The hurdle rate was previously a band at 14 to 15.

Senator CONROY —Is it a band of 11 now?

Dr Watt —No, it is 11.

Senator CONROY —You do not like bands any more?

Dr Watt —Oh, no, I think we have just got a point estimate rather than a band.

Senator CONROY —I understand the hurdle rate is calculated by adding the government bond yield and a risk premium.

Dr Watt —That is correct.

Senator CONROY —What is the current yield on the government 10-year bond?

Mr Bowen —The figure that we have used is actually the 10-year average of the 10-year bond rate. The reason for that is that this is intended to be a hurdle rate for long-term investment decisions. So it seemed sensible to use an average of the long-term bond rate. It was 7.3 per cent.

Dr Watt —You would expect that estimate to be a lot less volatile than a point day-by-day estimate of any bond rate.

Senator CONROY —The 10-year bond rate is about six per cent, I believe.

Mr Bowen —I do not have today's rate, but it is actually a bit above six per cent. I think, off the top of my head, it is around 6[half ].

Senator CONROY —Your 10-year average, then, is not too far from, say, today's rate.

Mr Bowen —Not too far—7.3 per cent. And the second factor is the risk premium.

Senator CONROY —No, I actually wanted to come to how you calculate that risk premium, given that it is about four per cent.

Mr Bowen —It is 3.7.

Senator CONROY —How does that compare with risk premiums in the private sector, and how do you calculate it?

Mr Bowen —It is the 10-year premium from the equity markets—the averages of the last 10 years of the premium on equities over and above the long-term bond rate. It is a proxy for the risk premium that the Commonwealth could expect to incur by investing in assets such as property over and above its risk-free borrowing rate. That figure is derived from work that was done by Ibbotson Associates for the Australian equity market.

Senator CONROY —Is that a public study?

Mr Bowen —I believe it is. It is certainly one that we had available to us. So it has been done by a reputable firm for the market.

Senator CONROY —Your press release restates that property should only be held where the anticipated yield on the property exceeds the return the Commonwealth can make in some other way. What do you mean by `in some other way'?

Mr Bowen —I think the property principles have not changed, apart from the hurdle rate, and the principle is that property will be retained provided the internal rate of return exceeds the hurdle rate. If it does not, it would be, under this policy, divested unless there was some public interest reason for retaining it.

Senator CONROY —What properties would have been sold had the hurdle rate not been reduced?

Dr Watt —The budget statements indicate that there were two CSIRO properties in 2003-04 that were considered for disposal that would have been sold had the hurdle rate not been reduced. They have now not been sold. They are worth about $6 million between them.

Senator CONROY —What properties would have been sold in the past if the hurdle rate had always been set at 11 per cent and what properties would have been retained?

Senator Abetz —That is very hypothetical. I am not sure—

Senator CONROY —No, it is not. It is a perfectly straightforward question.

Senator Abetz —But I am not sure it is correct, in as much as—

Senator CONROY —It does not require any guesswork, though. It is factual. Calculations were done previously.

Senator Abetz —I agree with you that the word `hypothetical' is not the correct description and I withdraw that. I meant to say that it is not very productive because we are dealing with a different environment: different bond rates, inflation rates, interest rates et cetera. It is like comparing an interest rate today as opposed to 10 years ago.

Senator CONROY —I think a hurdle rate is a hurdle rate.

Senator Abetz —What would you have done in business if the interest rate was only six per cent instead of the 20 per cent that it was all those years ago? I am not sure it is necessarily helpful.

Senator CONROY —I appreciate that you do not want me to ask the question, Minister, and I appreciate your attempt to deflect my probing.

Senator Abetz —I just do not think it has got any probative value at all.

Senator CONROY —Thanks for your opinion. I will ask Dr Watt which properties would have been sold if the hurdle had been 11 per cent previously and, more importantly, which ones would have been retained?

Dr Watt —I think I have to defer to the answer given by the minister. It is difficult. The minister is right in the sense that the reason the hurdle rate has come down is that the economic environment in which we are operating is different.

Senator CONROY —Come on, it goes up and down—the fundamentals are still the same irrespective of the figure.

Dr Watt —I do think that the basis for the rate—the economic environment—has changed significantly and that is why the rate is lower. This is not something we put up and down on the basis of a whim. It has been several years since it has been reviewed, it is a lower rate, and you are in a somewhat different environment. For one thing, if the cost of capital has come down it has come down across the economy. So you might expect, for example, that yields on property have also come down. It is a complex environment, so it is not a straightforward question.

Senator CONROY —I think when you start taking property advice from the minister sitting next to you, you are in real trouble, Dr Watt. If your defence is that you are deferring to his judgment on property sales, we are all in trouble.

Dr Watt —I am not a property speculator in any sense.

Mr Hutson —At this point I might say that earlier I said DOFA had always met its target. I understand from my colleague Mr Jackson that on occasion in one of the recent years we actually did not meet our target for divestments. You asked us a question on notice about it as well, so I just thought I would put that on the table.

Senator CONROY —Dear oh dear.

Dr Watt —We apologise.

Senator CONROY —I want to move on to the sale of Sydney airport. Budget Paper No. 1, page 9-7, says that `the sale is factored into the budget estimates'.

Mr Bowen —In the cash flow statements in statement 12 on page 12-6, you will find a line for proceeds from asset sales, and all of the prospective asset sales are factored into that line—about the centre of the page.

Senator CONROY —Is it also in Budget Paper No. 1, page 2-18? I am just trying to match all these things up so that I save time asking you in the future, that is all.

Mr Bowen —We have slightly different figures, which I cannot explain off the top of my head, but they are under different accounting conventions.

Senator CONROY —GFS, page 10-14, has got them as well. In my head I am trying to put them together and say, `These are the places that I can find them.'

Mr Bowen —You will find that some are pure asset sales and some have some other factors in there.

Dr Watt —Also, GFS is just profit on the sale of assets rather than the sale proceeds, if I read it correctly. Your page 10-14 reference is just profit on the sale of assets rather than the total sale.

Mr Bowen —If you want the pure figure on asset proceeds, look at page 12-6.

Senator CONROY —No, it only shows the $2.8 billion in 2002-03. The market estimates have been around $5 billion. Is that just conservative?

Dr Watt —We have to tread a bit carefully here.

Senator CONROY —Yes, I appreciate that.

Dr Watt —There are two things: firstly, what you mean by market estimates is media speculation.

Senator CONROY —Let me rephrase that: `media speculation'.

Dr Watt —Secondly, there are some liabilities that come with SACL, and so if you are talking about gross proceeds—

Senator CONROY —What are the liabilities? Am I allowed to ask that?

Dr Watt —Yes.

Senator CONROY —What are the liabilities that come with the premier piece of real estate in the country?

Mr Hodgson —Sydney Airport Corporation Ltd has a certain amount of borrowing on its balance sheet.

Senator CONROY —Can I ask about that? I am asking whether it is okay to go there?

Mr Hodgson —I really do not think it is, because it is a live sale.

Senator CONROY —That is fine; I am about maximising revenue.

Dr Watt —The point is that what is in the budget papers is a net concept.

Senator CONROY —What has been the cost of the sale process to date?

Mr Yarra —Could we take that on notice?

Senator CONROY —Do you have a ballpark figure?

Mr Yarra —A ballpark figure, at a guess, would be $9 million to date.

Dr Watt —We would much prefer to give you an accurate figure.

Senator CONROY —That is fine. What was the cost impact of the suspension of the sale process?

Mr Yarra —Without trying to work on a number, the deferral of the sale process caused the bidding entities to down tools and disperse to their places around the world.

Senator CONROY —Some of them withdrew, didn't they?

Mr Yarra —No, not as a result of the deferral.

Senator CONROY —No, as a result of uncertainty in the market.

Mr Yarra —For the vendor, the Commonwealth, the implications for us were that we had advisers on deck and we needed to suspend their services or to retain their services in such a way as they could be brought back on stream when the sale kicked off again.

Dr Watt —I think the important thing is that in the post September 11 environment you could not have sold the asset for anything like a sensible price.

Senator CONROY —There is no question about that. I am not being critical of suspending the sale; I think it was the eminently sensible thing to do. However, I did want to get to the criteria on which the decision was made to recommence the sale process. What analysis or research was conducted?

Dr Watt —From memory, consideration as to restarting the sale process was a reflection of the fact that the international aviation market had settled.

Senator CONROY —Settled at the bottom.

Dr Watt —No, I do not think that is right. In an asset sale, what really drives the value of the property is traffic over a very long period of time. So even if, in early this year, traffic levels had still not recovered to their pre-September 11 heights, they were still very high by historical standards—and I mean very high. What people look at is the growth over 15, 20 or 25 years; that is what you are really buying. So in a sense, even though traffic levels were slightly off their September 11 highs—

Senator CONROY —I was going to come to that. Let me ask specifically, so that we can clear this up: what was the loss of traffic at KSA as a result of September 11 and Ansett's collapse? You are saying it is getting back, but it is not quite there. Has there been a recovery? To what level?

Dr Watt —Recovery has been extremely substantial. I think we will take that on notice.

Senator CONROY —Were any discussions of any kind held with any potential bidders prior to the decision being made to recommence the sale?

Mr Hodgson —We kept in touch with the three bidding consortia all the way through the process.

Senator CONROY —Did one of them fall over? I thought I remembered that someone withdrew.

Mr Hodgson —Some time ago, there was a withdrawal; but that was before September 11.

Senator CONROY —That was before, was it?

Mr Hodgson —Yes. The three consortia that we stayed in touch with have remained committed to the sale; we have remained in touch with them and advised them accordingly.

Dr Watt —I think that the more important point is that the Commonwealth advisers on the asset sale were in regular contact with the bidders, rather than the Commonwealth per se. Most of the contact during the period of suspension would have been between the advisers and the bidding consortia.

Senator CONROY —Did the events of September 11 have any impact on the longevity of KSA capacity? Was some analysis or research done on this?

Mr Yarra —There is a view, generally, that it has extended the operating envelopes for airports in terms of the traffic numbers having—

Senator CONROY —Is that because there is less traffic?

Mr Yarra —Yes, because there was less traffic, and because of the rate of recovery of that traffic. But that is just a general view that we sense in the aviation market—that the operational envelope for Sydney KSA might have been extended.

Senator CONROY —Is there any indication of how long it might have been extended for?

Mr Yarra —Nothing that I would quote to you or rely on. It is just a sentiment that we have picked up.

Senator CONROY —So we did not do any research or analysis on it?

Mr Yarra —No.

Senator CONROY —How important was it for a final decision to be made on airport pricing before the sale was concluded?

Mr Hodgson —It removed an uncertainty in the mind of the bidders as to where this was going to go, so it would have had an effect on the sale. But we cannot quantify exactly what that effect would be.

Senator CONROY —Why did it take so long? It was only a couple of weeks ago that it was actually finalised.

Mr Hodgson —My understanding is that the bidders were well aware of the report. It is a question for Treasury, really; they are the ones who handled it.

Senator CONROY —Are you aware of fresh reports that the government's acceptance of the Productivity Commission report on airport pricing added at least $100 million to the sale price?

Mr Yarra —We are aware of the speculation.

Senator CONROY —Do you agree with it?

Mr Yarra —We have no view, Senator.

Senator CONROY —You must have some view.

Mr Yarra —No, the bidders are forming their views. We have no idea what views they have formed, and we will be relying on the bidders to tell us what they think the airport is worth.

Senator CONROY —You mentioned the three bidders. Can I clarify those? They are Sydney Gateway—

Mr Yarra —As a policy, even though it has been well discussed, we prefer not to—

Senator CONROY —I can read it on the front of the Financial Review any day!

Mr Yarra —We just do not confirm or deny this for any asset sale so that we do not behave differently with different asset sales. We do not confirm or deny it, as a practice.

Senator CONROY —What is the current time line?

Mr Yarra —We expect a sale completion some time in the second half of this calendar year.

Senator CONROY —Binding offers are due on 12 June, I understand?

Mr Yarra —In mid-June, yes.

Senator CONROY —The preferred bidder is expected to be nominated soon after with a sale agreement by 30 June?

Mr Yarra —Can I pick up on that answer before? We are expecting an outcome on the sale before the end of June and completion soon thereafter.

Mr Hodgson —An announcement of the winner prior to 30 June.

Senator CONROY —We are not rushing you just to get it into this financial year, are we?

Mr Yarra —This financial year, yes.

Dr Watt —It does not have any impact, Senator.

Senator CONROY —The preferred bidder is expected to be nominated soon after 12 June with a sale agreement by 30 June?

Mr Yarra —That is our plan.

Senator CONROY —When are proceeds expected to be received?

Dr Watt —Proceeds will not be received this financial year.

Senator CONROY —So it would not be this year?

Dr Watt —There are three points to make, Senator. One, as we have discussed, this does not impact on the underlying cash balance or the accrual balance. That is what it said; it does not have any effect on the key budget balances that the government considers. Two, you do not expect people to pony up several billion dollars on the spot.

Senator CONROY —My next question is: what was the timing of the payments? Is there an up-front deposit with a balance due in a certain number of days? That is the standard arrangement.

Dr Watt —There is an up-front payment of 10 per cent, which is due shortly after the sale is announced—I have probably not been specific on that—and the balance is due sometime down the track. We will certainly not get the balance in this financial year.

Senator CONROY —So which year would it be included in?

Dr Watt —Next year, but it does not affect—

Senator CONROY —It is an under the line transaction; you are making that point. Which year, on an accrual basis, should it be accounted for?

Dr Watt —The same.

Senator CONROY —If the transaction is made on 30 June, I would have thought that on an accrual basis—under the line, so that we are not playing with the—

Dr Watt —No, but it is a receipt from a sale of a financial asset that is under the line. It does not affect either the accrual or the cash budget balance.

Senator CONROY —I understand that. I am trying to understand which year in the non-affecting budget bottom line would it be accounted for? You seem to be rushing to get it before 30 June. I am just trying to understand why you need to do that, given that it does not affect it, as you describe it. I am just trying to understand why you are determined to get it in by 30 June.

Dr Watt —We are not determined to get it in by 30 June, but in asset sales—as I understand it, and I am the new boy on the block—it is highly desirable to minimise the period between the closing of bids and an announcement. The longer that period, the more the bidders are at risk to a change in material circumstances. So you try to minimise that.

Senator CONROY —Sure; that is fair.

Dr Watt —People actually put in very long hours between sale and announcement to get that through. That is a clear point. That is why we try to keep the period down.

Senator CONROY —I understand the practical reason. This is more of an academic question than anything else: given that you receive money up front—part of your 10 per cent—

Dr Watt —A small part, yes.

Senator CONROY —which year does it get accounted for without it affecting the budget bottom line?

Mr Bowen —Under accruals, whether it is GFS or AAS I think, you will book the transactions in this financial year but it will not affect the bottom line under either scenario.

Senator CONROY —I have not tried to allege that. I appreciate your sensitivity, but I have not tried to allege that.

Mr Bowen —You book a receivable, so there is an increase or change in assets.

Dr Watt —Can I ask a question for my understanding, as I am learning something?

Senator CONROY —We could get in real trouble here if you are asking me questions, I have got to tell you.

Dr Watt —No, it is all part of an effective learning process. The trigger for booking the receivable is the announcement of sale, the actual announcement of a winning bidder? That is the day on which you book the receivable?

Mr Bowen —We will get back to you if there is any difference there, but I would have thought the signing of the contract would basically lock us in.

Senator CONROY —That is the moment that is accounted for in an accrual sense?

Mr Bowen —That would normally be the case, yes.

Dr Watt —And we will sign a contract usually within a day of an announcement. Again, the bidder is at great risk during that period.

Senator CONROY —Going back to page 12-6, if it is booked in 2001-02, I think the proceeds are only listed as $500 million?

Mr Bowen —No, that is the cash—that table is purely cash.

Senator CONROY —But it is an accrual entry?

Mr Bowen —There would be an accrual entry which would appear in the balance sheet, which is on the page before. It will not necessarily be identifiable on this page but it will be in there.

Senator CONROY —And page 12-6 is cash based?

Mr Bowen —It is purely the cash flows, yes.

Senator CONROY —And so there is no connection between the sale and the table on page 12-6 being only cash flow?

Mr Bowen —There is to the extent that if you receive a deposit in actual cash then yes, that would be in there.

Senator CONROY —So does that $500 million figure include that?

Mr Bowen —It would include that.

Senator CONROY —So it is a cash figure; therefore—

Mr Bowen —If you go back to page 12-5 I think that the balance would be in the receivables area of 2001-02.

Senator CONROY —Thanks for that. We have moved from Accounting 101 to Accounting 202! I would like to ask about what will happen to the residual Sydney Airport Corporation. Will SACL be wound up?

Mr Hodgson —There will not be any residual; SACL is being sold.

Senator CONROY —The whole entity is going?

Mr Hodgson —Yes, the whole entity.

Mr Yarra —Shares in the entity are being sold and the entity will continue to exist after sale day. It will have a new owner.

Senator CONROY —What happens to employee entitlements?

Mr Yarra —The employees are employees of the corporation; they will continue to be employees of the corporation and nothing will change.

Senator CONROY —Are they assumed by the new owner or the Commonwealth?

Mr Yarra —They continue to be employees of Sydney Airports Corporation Ltd and the owners of that corporation will determine employment down the track.

Senator CONROY —But their entitlements will pass on fully?

Mr Yarra —Absolutely.

Senator CONROY —Does SACL own the building they occupy in Sydney?

Mr Yarra —SACL own the airport; they own buildings on the airport. For example, they have just bought one of the important buildings on the airport, that is the Ansett terminal. Qantas own the other terminal.

Senator CONROY —Do they occupy a building on the site? I know you said they have bought one, but where do they occupy?

Mr Yarra —I do not know which buildings they occupy on the site; they do have offices at the airport.

Senator CONROY —But they have offices outside of the airport?

Mr Yarra —Yes. I am not sure whether they are inside or outside the boundary. And they own the international terminal.

Senator CONROY —So you do not know if they own the building they occupy off the airport?

Mr Yarra —I do not. We can find out.

Senator CONROY —If you could, that would be great. I was just wondering if that was part of the sale.

Mr Yarra —If they are assets on the balance sheet of the entity then they are for sale.

Dr Watt —If there are any off-airport assets then they are part of the sale process.

Senator CONROY —They will transfer across as well.

Dr Watt —That is right. We are selling the entity as a whole.

Senator CONROY —You might want to take this one on notice—if you know the answer, that would be great: what SACL assets are included in the sale, other than the physical airport site?

Mr Yarra —If you want a listing we will take it on notice.

Senator CONROY —As I said, I am happy for you to take it on notice.

Mr Yarra —It is probably going to be the assets that you read on the balance sheet.

Senator CONROY —I would like to ask about Bankstown, Hoxton Park and Camden. Did the change of timetable for the sale of KSA have any impact on the timing for the sale of the other Sydney airports?

Mr Yarra —My view is that there is no necessary direct linkage but, yes it did, in the sense that the department of finance focused on the sale of Sydney and getting that sale moving. Hoxton, Camden and Bankstown will follow in due course.

Senator CONROY —Will SACL staff, executives, board members or anyone else remain in place to manage the other remaining airports—Bankstown, Hoxton and Camden?

Mr Hodgson —There has been a separation of the airports into separate entities with their own independent boards and their own management. There is no linkage between Sydney Airports Corporation and Bankstown; they have been broken up in order to be sold.

Senator CONROY —Let me come back to the question I asked you to take on notice about which assets are included. Please include liabilities.

Mr Hodgson —Yes.

Senator CONROY —Just out of interest, what is the name of the entity that those people are transferring into?

Mr Yarra —Is this Bankstown?

Senator CONROY —Yes, the ones that will be looking after Bankstown, Hoxton Park and Camden.

Mr Yarra —There are separate companies.

Senator CONROY —What are they called now?

Mr Yarra —Bankstown Airport Corporation.

Senator CONROY —They are individually called that, are they?

Mr Yarra —Yes. Do you want the actual names?

Senator CONROY —Yes.

Mr Yarra —It is Bankstown Airport Ltd, Camden Airport Ltd and Hoxton Park Airport Ltd.

Senator CONROY —Very creative!

Dr Watt —That's the department of finance for you!

Senator CONROY —Do these smaller airports have a single management structure?

Mr Hodgson —Correct.

Senator CONROY —Each of them is individual? There isn't one overarching the three?

Mr Hodgson —Correct. I should point out that there are some common directors on the board.

Senator CONROY —Which department is responsible for making the decision on the sale of these other airports? Would it be Transport, DOFA or a combination?

Mr Hodgson —It is a combination. The sale decisions are of course with the minister.

Senator CONROY —Which minister? Minister Anderson or Minister Minchin?

Mr Hodgson —It is with Minister Minchin. In a number of areas, there are aviation policy implications, separation issues at Bankstown and so on which will need to be addressed by the department of transport.

Senator CONROY —If there is a decision to land a jumbo at Bankstown, you will let us know?

Mr Hodgson —I certainly will.

Dr Watt —There won't be that decision. The government has a policy commitment to the possible extension of Bankstown to take 737s but nothing bigger.

Senator CONROY —Nothing bigger than a 737?

Dr Watt —Yes.

Senator CONROY —Are there any 737s landing there now?

Dr Watt —No. The runway needs to be strengthened and lengthened. The ability for Bankstown to act as an overflow airport with a capacity to handle up to 737s would be part of the sale process.

Senator CONROY —Are you able to give me a rough estimate—I am happy for you to combine the three—of expected revenue from these airports? I do not want to pin you down to individualise them.

Mr Yarra —As a matter of policy, we never do.

Senator CONROY —You have mentioned one caveat in terms of an allowance for an extension. Are there any other caveats on those three airports that allow the extension of that airport? Maybe `caveats' is the wrong word. I call it a positive caveat rather than a negative caveat, if you can just go with me in my logic—but are there any other caveats or conditions on the sale that I can be made aware? I am hoping I can be made aware of them all.

Mr Hodgson —The properties would be sold with a requirement for any upgrade or any development to comply with the Airports Act and the Environment Protection and Biodiversity Conservation Act.

Dr Watt —But they are standard requirements.

Senator CONROY —Are there any others similar to the extension one? Is that the only one?

Mr Yarra —Not that we are aware of. We will check.

Senator CONROY —Thanks. Please double-check, in case there is something sneaking around back there. I would like to ask about western Sydney airport—Badgerys—if I could. What is the impact of the sale of KSA on western Sydney airport? Does the new owner get first option on a new airport within 100 kilometres of Sydney? Is that right?

Mr Yarra —That is the first right of refusal for the purchaser of Sydney Airport Corporation.

Senator CONROY —Are there any other impacts on Badgerys from KSA?

Mr Yarra —Shooting from the hip, I am not aware. The government has reserved the Badgerys site for future use as a possible airport, but I am not aware of any impact per se.

Senator CONROY —So you have that first right of refusal. Is it only a first right of refusal? You do not have last right of refusal?

Mr Yarra —Could I take that on notice?

Senator CONROY —Sure. How is that specified in the contract?

Mr Yarra —It is a clause in the sale contract. It is an agreement between the parties.

Senator CONROY —Is that an option on owning and then building? I am trying to get specific on what the actual—

Mr Yarra —At this point, we are discussing a sale agreement which has not yet been consummated through the sale process. It will become—

Senator CONROY —I do not want to go into a transaction-banking-style tender process where you change the criteria after you have let the contract, but you must know what is there. You must be able to tell me.

Mr Yarra —We know intimately what is there. My problem is discussing it in public.

Senator CONROY —That is okay. That is all you had to say. But you said you would get back to me on notice.

Mr Yarra —We have taken on notice the question on the first right of refusal. On subsequent questions, my preference is not to answer any more detailed questions about what is in the sale agreement.

Senator CONROY —Okay. How about this as a sort of middle ground: you take it on notice and, if you find that you are not able to discuss anything, you say, `Other issues are confidential.' If there is anything else that you feel does not quite cross that line, perhaps you could let us know.

Dr Watt —We are happy to do that.

Senator CONROY —Which department owns the Western Sydney site?

Dr Watt —The Department of Transport and Regional Services, I would assume.

Senator CONROY —I guessed that as well.

Dr Watt —In fact, I am certain of that.

Senator CONROY —Which department will have responsibility for future policy decisions on the maintenance of that site?

Dr Watt —The Department of Transport and Regional Services.

Senator CONROY —Senator Mason, I have probably finished a section at this point.

CHAIR —How fortuitous!

ACTING CHAIR (Senator Murray) —Welcome back. Senator Conroy, you have the call.

Dr Watt —Before you begin, there are two points we would like to take up from the discussions just before dinner. One is an error on our part. I think we told you that Medibank Private paid tax. In fact, it does not so, and so we will correct that. The other thing is that we might have left you with the impression that the three small airports in Sydney apart from Kingsford Smith are under quite different management structures. They do have elements of a common board, but they actually are under one common management umbrella. That fixes those points up.

Senator CONROY —Let me see if I was meant to ask another question. I think I asked whether they had a single management structure.

Dr Watt —The answer is that they do, and the board has a number of people in common.

Senator CONROY —I remember you said the boards were common. Thank you for that. There are no other questions that flow from that. Why is the government including the sale of Telstra in the forward estimates if it cannot guarantee that Telstra can be sold unless regional services improve?

Dr Watt —The government has two policy objectives—if I might put it that way. It will not be taking steps towards the full sale of Telstra unless and until it is satisfied that telecommunications services are adequate. Nevertheless, it remains government policy to sell Telstra.

Senator CONROY —Why does that mean it is in the forward estimates?

Dr Watt —What it means is that the government is interested in selling Telstra once rural services are up to scratch.

Senator CONROY —Simply by the fact that you have included it, I presume that you believe it. You make a judgment about what to include. You must have made a judgment that regional services will improve sufficiently in the course of the next financial year.

Dr Watt —That is a judgment for the government, not for me.

Senator CONROY —Were you instructed to include Telstra?

Dr Watt —No. That is just the government's judgment. The government believes that Telstra will be sold. The government is comfortable with the sale timetable.

Senator CONROY —You gave me a description of how, in the ongoing process, you test assumptions. Have you rigorously tested the government's assumption?

Dr Watt —The assumption is a reasonable one, given government policy.

Senator CONROY —So you are comfortable that regional services will improve sufficiently for you to have included this?

Dr Watt —That is really not a question for me.

Senator CONROY —Did you ask the government what criteria would be used to determine whether regional services have improved?

Dr Watt —That is a matter for the government.

Senator CONROY —No; I am asking if you asked them.

Dr Watt —That is a matter for the government.

Senator CONROY —Minister, what are the criteria?

Senator Abetz —We will make that assessment, given all the requirements and criteria that we believe are appropriate at the time. Would you have expected me to have said anything different?

Senator CONROY —I would have been so badly disappointed if you had! What will be the effect on the budget and forward estimates, if the Telstra sale does not proceed as projected?

Dr Watt —The best way I can put that is that we do not talk about actual amounts, but we have allowed for the impact of the sale of Telstra in the forward estimates from 2003-04 on.

Senator CONROY —Are these above the line, below the line or on the line?

Dr Watt —They are below the line.

Senator CONROY —This is a financial asset?

Dr Watt —Yes.

Senator CONROY —I promise you that we will come back to have this discussion at some other point.

Senator Abetz —Yes, just not tonight.

Senator CONROY —Not now, rest assured on that. At some point, I am going to want to plumb the depths of what causes you to put one where, but let's not do it now.

Senator Abetz —Can I suggest that you do it on your retirement estimates?

Dr Watt —You might want to pursue this with the ABS because, in the end, GFS is an ABS classification based on international standards and, to all intents and purposes, we follow a GFS classification.

Senator Abetz —And ABS is in a different committee. Good!

Dr Watt —I wasn't thinking of tackling it here, Minister.

Senator CONROY —Do I detect a tad of self-interest, Minister? In each forward estimate year, what share price have you used when estimating proceeds from the future sale of Telstra in the budget?

Dr Watt —My understanding is that we do not talk about share prices.

Senator CONROY —Are you aware that the Treasurer announced a share price during the course of the budget?

Dr Watt —No, I am not.

Senator CONROY —At the press conference he released the document. Did anyone in Finance notice that during the election?

Dr Watt —Sorry; you said the budget, Senator.

Senator Abetz —During the election or the budget?

Senator CONROY —My apologies; during the election. Are you familiar with that press conference?

Dr Watt —I remember it.

Senator CONROY —It would have been brought to your attention.

Dr Watt —It has certainly been brought to my attention, but officials simply do not discuss the issue of share prices. The Treasurer may wish to have a discussion with you, but I cannot.

Senator CONROY —Just out of interest, was that price above or below the current share price?

Dr Watt —I would not speculate, Senator.

Senator CONROY —No; it is a factual issue. He said that the price was about $5.50? I am just asking you to recall a statement of fact by the Treasurer; I am not asking you to sign up to it.

Senator Abetz —Yes; but you can get the current share price yourself.

Senator CONROY —Yes, but I am wondering whether anyone knows what it is. It is about $4.75 or $4.80.

Dr Watt —I am not a shareholder; I do not take much interest in it.

Senator CONROY —Neither am I. Minister, are you a shareholder in Telstra?

Senator Abetz —No; but I understood that Senator McKiernan and Senator Crowley were or have been, and so your Labor colleagues who so opposed the sale of Telstra were quite anxious to buy some shares. Why don't you discuss it with them?

Senator CONROY —I was asking you, actually. Senator Brandis, you wouldn't have any Telstra shares, would you?

Senator BRANDIS —I do.

Senator CONROY —What is the current share price? Have you got T1 or T2?

Senator BRANDIS —T1.

Senator CONROY —Thank God! So you are not completely under water. This is good; I am glad to see that someone is doing okay. Senator Murray, Telstra shares?

Senator MURRAY —Of course not.

Senator Abetz —It was $4.75 on the news tonight, I have just been informed.

Senator CONROY —Thank you. I thought it was around that price. Senator Mason?

CHAIR —No; I have term deposits.

Senator Abetz —What about you, Senator Conroy?

Senator CONROY —I have not a single share in either one.

CHAIR —Senator Conroy, can we please carry on.

Senator Abetz —He has been carrying on!

Senator CONROY —Just going back to the accounting—we discussed this a moment ago—can you confirm that the proceeds of asset sales, such as Telstra, are contained in Budget Paper No. 1?

Mr Bowen —Yes.

Senator CONROY —Is it GFS 10-14 and 12-6?

Mr Bowen —It is 12-6 in AAS—

Senator CONROY —That is AAS31?

Mr Bowen —Yes.

Senator CONROY —But not GFS?

Mr Bowen —It will be there as a flow.

Dr Watt —In the cash reconciliation, I assume.

Mr Bowen —I think it was an answer to one of your earlier questions.

Senator CONROY —Yes.

Dr Watt —Yes, 10-14.

Senator CONROY —GFS 10-14.

Mr Bowen —And 11-7. There is a cash flow statement two[hyphen]thirds of the way down: net cash flows from investments in financial assets.

Senator CONROY —Thank you. As I have said, I have a question here about treatment to asset sales differing between AAS31 GFS, but we will come back to that.

Mr Bowen —I think it is more that there are other things in that.

Senator CONROY —No, it is just the treatment of asset sales rather than the specific dollar amounts. But, as I have said, we will revisit that another day. I understand from Budget Paper No. 1, page 2-10, that the sale of Telstra is currently assumed for late 2003.

Dr Watt —That seems perfectly accurate.

Senator BRANDIS —Dr Watt, that is an assumption—

Dr Watt —That is an assumption; that is right.

Senator BRANDIS —by the author of the budget paper. That is one of the hypotheses on the basis of which the—

Dr Watt —It is, if you like, an estimating assumption.

Senator CONROY —And that would be from the estimates document and not you.

Dr Watt —Yes. But it also goes on to say that actual timing will depend on being satisfied with regional improvements to the telecommunications services.

Senator BRANDIS —These documents are prepared on a variety of hypotheses. Those hypotheses are not the same thing as assumptions that the government will do a particular thing at a given future time.

Dr Watt —The assumptions are in accordance with broad government policy however; they would not fly in the face of it. But, as I said, the government has a policy to sell Telstra at a time when it is satisfied that rural telecommunications services are up to scratch.

Senator BRANDIS —But the point I am at pains to make is that the implication of Senator Conroy's question was that there was—

Senator CONROY —There was.

Senator BRANDIS —a provisional decision, as it were—

Senator CONROY —It says `assumed'.

Senator BRANDIS —to make a decision at a given time. That is nothing other than a working hypothesis by the draftsman, rather than a preannouncement of a policy.

Dr Watt —I think rather this says when you will start to get revenue—

Senator CONROY —I was quoting the actual words in the document and `assumed' is in the document.

Dr Watt —rather than timely decision making.

Senator BRANDIS —I think it is the distinction between an assumption and a hypothesis.

Senator CONROY —No, but it says `assumed'—they say `assumed'. I was just quoting the exact words out of the document; I was not adding any commentary.

CHAIR —Dr Watt?

Dr Watt —That is correct, yes. It is an assumption.

Senator CONROY —What is meant by late 2003? Is that December?

Dr Watt —I think it is an estimating assumption. Whether it is October, November or December, which are what I would call late 2003, probably does not matter very much.

Senator CONROY —Would that be the short, the medium or the long term?

Dr Watt —Definitely long term.

Senator CONROY —It went to the long[hyphen]term category, did it?

Dr Watt —Definitely long term. It is a long way off, that one.

Senator CONROY —We are slowly whittling down to what is likely in two years time. What time would the sale process need to commence to meet the late 2003 deadline?

Dr Watt —It depends upon the sale process that is adopted. That is the best way I can put that.

Senator CONROY —Is there an average sort of sale process time?

Dr Watt —It depends entirely on the process that they do adopt.

Senator CONROY —What would you think is reasonable though, anyway?

Dr Watt —A process would take quite a while, but I would not want to put a figure on it. It depends entirely on what is reasonable with what process you set up. Remember, one point to make is that, when you go through an asset sales process, you go through a huge exercise in legislation and due diligence. For T3, the legislation is largely in place. We do not have to have the Telstra sale act passed from scratch, which you had to have with T1. Another thing is that a lot of the due diligence has been done. That means that it is an easier process than—

Senator CONROY —Is that due diligence based on the government's plans to separate it structurally and in accounting terms?

Dr Watt —No. Effectively, it is due diligence so that bidders can be sure of what they are buying. For example, if you are selling a block of land, you will go through a due diligence process that says that the purpose for which the block of land is sold satisfies environmental regulations—that there are no contaminants; there are no hidden covenants on the block; a promise has not been made by the present government or previous governments that the block will be used for something else. All of that is a huge due diligence exercise. It is not quite the same when you are selling the second or third component of an asset. On the other hand, it is a very large asset sale, and so that in itself will require some careful work. But it is an on-balance thing, and you would not really want to put too fine a time line on it.

Senator CONROY —How long were the previous sale processes?

Dr Watt —I would have to take advice on that.

Mr Hodgson —About 12 months, on average.

Dr Watt —I think T1 was a lot longer than that, and that was because of the legislation. The second one I do not know about because that is when they had to do the legislation from scratch, and it was a huge effort.

Senator CONROY —Are negotiations taking place with financial counterparties to manage the sale process?

Dr Watt —No.

Senator CONROY —None at all?

Dr Watt —No.

Senator CONROY —Are any negotiations or discussions of any kind taking place with any Australian or international corporation or any other entity of any kind about the possibility of that entity purchasing a shareholding in Telstra?

Dr Watt —Not that I am aware of.

Senator CONROY —Does your answer cover everybody—I am not trying to be facetious here—or was that a personal `Dr Watt answer', or was that on behalf of the entire department?

Dr Watt —No, my answer is: not that the department of finance is aware.

Senator CONROY —Have you heard rumours that there are discussions?

Dr Watt —The answer is: no, I have not, I am afraid.

Senator Abetz —Except just now.

Senator BRANDIS —Started by Senator Conroy.

Dr Watt —At least not until this moment.

Senator Abetz —Next you will be asking about `crikey.com'.

Senator CONROY —A well-read magazine. You have just got yourself another subscription.

Senator Abetz —No, I have never read it and I refuse to, but I have heard reports.

Senator CONROY —Have you made a decision about the structure—I am happy for the minister to comment—in terms of whether it will be open to the public, as it was last time, and those sorts of issues?

Dr Watt —There has been no decision on structure or details of the sale. We are not working on it. That would be a matter, in the first instance, for government to consider.

Senator CONROY —Minister, have you considered the structure of the sale? Would it be open to mums and dads of Australia? Would it be half open to mums and dads and maybe a few large institutions, a few large overseas companies, Microsoft, or anyone like that?

Senator Abetz —Undoubtedly those decisions will be made at the time. But this government has a very proud record of getting mums and dads to be shareholders—

Senator CONROY —To lose their money.

Senator Abetz —I understand that a more senior spokesman than you has been suggesting that share ownership ought be made more available to mums and dads. So, Senator Conroy, I suggest you have this debate with your own more senior shadow minister than with me.

Senator CONROY —I must have missed that because I was too busy reading about one of your more juniors suggesting that the easiest way to get shares was to stop smoking a couple of packs of cigs a week and invest that money in the stock market, and that would lead to millions of dollars—

Senator Abetz —That sounds like very good counsel to me for the physical health—

Senator CONROY —And also financial.

Senator Abetz —and also the economic wellbeing of the nation. So it is a win-win. Perhaps I can refer you to Mr Latham—or was it Lindsay Tanner? Who was it?

Senator MURRAY —This is not getting us very far.

CHAIR —It is not, but it is amusing, Senator Murray, isn't it? It is a description of the great sharing democracy of Australia.

Senator CONROY —It is, and that is something we are just as equally proud of.

Senator Abetz —We are a sharing and caring committee.

Senator BRANDIS —It is a bit late for Senator Abetz. The Hon. J.J. Dedman, the Minister for Housing in the Chifley government, was opposed to private ownership of homes for fear it would turn Australians into a nation of little capitalists. Wouldn't you agree?

Senator Abetz —That may well be Senator Conroy's approach; I am not sure.

Senator CONROY —Can I just confirm that no decisions have been made about the structure at this stage?

Dr Watt —Not that we are aware of.

Senator CONROY —Minister, can you give us a guarantee that the float will be open entirely to mums and dads, that there will be no—

Senator Abetz —I will not guarantee anything at this stage. I am not going to rule anything in or out.

Senator CONROY —So mums and dads could miss out?

Senator Abetz —As I have already indicated to you, this has been a government that has had a very good record in relation to involving mums and dads in share ownership—

Senator CONROY —Helping them lose their money. They are under water, aren't they?

Senator Abetz —something which has now been adopted, as I understand it, by your more senior spokesperson, Mr Mark Latham. There was a suggestion we ought to be subsidising it, if I recall correctly.

Senator BRANDIS —These shares, whatever happens, whatever the mode of launch onto the market, will be traded on the Stock Exchange and will be open to any investor, including mums and dads.

Senator Abetz —Exactly. As I understand it, that is the case. Once the shares are sold, they are on the open market and then anybody can seek to buy them and sell them, et cetera.

Senator CONROY —To seek to buy them is the key. Thank you for your assistance, Senator Brandis, as always. Has there been any decision about whether it is going to be sold in three tranches, rather than in instalments, as was the case with T1 and T2?

Mr Hodgson —No, that was just the way it was expressed in the budget.

Senator CONROY —So there has been no further work done, other than that, at this point.

Mr Hodgson —No.

Senator Abetz —I understand the Labor Party are working on a policy of cutting Telstra up and selling off the pieces.

Senator CONROY —We are working on so many policies—

Senator Abetz —It is just a pity you did not have them before the election, isn't it?

Senator CONROY —The department did spend a fair bit of time costing Labor's policies, which did not exist, apparently, so it should not have taken long. Mr Bowen will come back to us on that one.

ACTING CHAIR (Senator Murray) —Order! Let us have more questions and less debate.

Dr Watt —I think we costed policies that had reference to Labor's policies in them.

Senator CONROY —Labor will do this after it is elected. They are subtle hints that they are parts of Labor policy.

Senator BRANDIS —They are obviously very long-term commitments if they are followed by the words `if elected'.

Senator Abetz —Was it Cheryl Kernot, that former great leader of your party, Senator Murray, who said that she trusted Labor not to sell Telstra whilst in opposition but would not trust them if they were to ever attain government?

ACTING CHAIR —Senator Conroy, I suggest you ask some questions.

Senator CONROY —If I could get a word in edgeways between Senator Brandis and Senator Abetz, I will attempt to further the course of my questions.

Senator Abetz —We are just here to help.

Senator CONROY —Budget Paper No. 1, page 6-7, says that there will be decreases in expenditure for transport and communications `due to the conclusion over the forward years of programmes designed to improve telecommunications service standards'. Can you explain that?

Mr Bowen —In broad terms, I think they are programs that are coming to their conclusion. One is mentioned there—the Roads to Recovery program—which concludes in 2004-05 but, to go further than that, I would have to come back with the detail.

Senator CONROY —I am looking at that in terms of the government arguing that it will improve telecommunications service standards in rural areas, but they are actually phasing out spending on a reading of—

Dr Watt —Perhaps I can help you with my former portfolio in mind. The government initiated a number of programs coming out of the Telecommunications Service Inquiry—the Besley report—including programs in relation to expanding mobile phone usage, for example. Those programs will have been completed over a three- or four-year funding period. They would start to drop off in the next year or so. For example, with regard to the commitment to have mobile phone access for every town with more than 500 people, the successful tender was announced last year. That has been rolled out now. That will be in place—

Senator CONROY —My point is that the government, on this indication, seem to think that they have actually done sufficient—

Dr Watt —I think it goes a bit further. I think that the TSI program did a lot to boost regional and rural telecommunications.

Senator CONROY —I am not actually arguing with your assessment.

Dr Watt —Some of the achievements of that program will be paying off in the next couple of years. Funding for existing programs would therefore come to an end—or will come to an end.

Senator CONROY —I actually agree completely with your assessment. I was just really trying to get an impression of whether the government are already comfortable with the level of service that is being provided—and that would seem to be the case, because they are actually allowing some programs to phase out. That was really the only point I was making.

Dr Watt —I think that, rather than the programs phasing out, the objectives set forth have been achieved and completed.

Senator CONROY —I accept your point. I would just like to discuss how the proceeds of asset sales will be used. What is the government policy on the use of proceeds from asset sales—how should they be used?

Dr Watt —Asset sales are being used to reduce net debt.

Senator CONROY —That is their sole current purpose?

Dr Watt —By and large, yes.

Senator CONROY —By and large—what about by and small?

Dr Watt —By and large.

Senator CONROY —By and large is not 100 per cent.

Dr Watt —The proceeds from asset sales such as Telstra come in below the line. By definition, those proceeds therefore go to pay off net debt.

Senator BRANDIS —That was the $92 billion of accumulated debt?

Senator Abetz —No, $96 billion.

Senator BRANDIS —$96 billion—I am sorry, Minister—of accumulated debt in 1996.

Senator Abetz —That is right.

Senator BRANDIS —What is that reduced to now?

ACTING CHAIR —It is $39 billion.

Senator BRANDIS —And how much was there in 1983?

Senator Conroy interjecting—

ACTING CHAIR —It was just a matter of clarification but I think that the point of order that Senator Conroy has just made is correct. Let us go back to questions and answers.

Senator CONROY —Thank you, Senator.

ACTING CHAIR —You did put a question—

Senator BRANDIS —That was a question.

ACTING CHAIR —and you got the answer.

Senator Abetz —A genuine question.

Senator CONROY —As they say, any mug can reduce their mortgage by selling their house.

Senator Abetz —What it does do is free up a lot of money that would otherwise be wasted on interest payments—

Senator CONROY —Yes, it is just that you have got to pay rent to live somewhere later, that's all.

Senator Abetz —for social opportunities such as extended funding for health, education and Aboriginal welfare.

Senator CONROY —As I say, any mug can reduce their mortgage by selling their house.

Senator Abetz —So you would prefer to be spending money on interest than on increased expenditure on health, education and Aboriginal welfare?

Senator CONROY —I am happy for you to come and sit next to me and ask questions of the officers, if you like.

Senator Abetz —In terms of social opportunity and social benefit we, as a government, have determined that investing in the welfare of our indigenous community, our young people and those in need of health care is more important than having investments in bricks and mortar. As a long-term investment that is a lot wiser and, if you have got a social conscience, a lot more appropriate.

Senator CONROY —Is this a ministerial statement or are you answering somebody's question? I do not remember that you were asked one.

Senator Abetz —I am answering your question.

Senator CONROY —I did not actually ask a question. Senator Brandis raised the point and you have been chatting with him since.

Senator BRANDIS —I was just adverting to the fact that the Labor Party seems to have lost its way ever since it lost belief in social justice.

Senator Abetz —Exactly. That is a very good summary, but let us get into questions.

ACTING CHAIR —Let us try again. This has now degenerated into debate—you know it has—and you are being disorderly, Senator Brandis.

Senator CONROY —Budget Paper No. 1—

Dr Watt —Sorry, we are learning what is in the budget papers, too.

Senator CONROY —Please don't buy into this one—it will just get out of hand.

Mr Bowen —Table 3 on page 2-9.

Senator CONROY —Budget Paper No. 1, on page 8-14, says that privatisation proceeds will be applied to `debt retirement at both the Commonwealth and State/local levels'. Can you just run us through what is meant by that?

Dr Watt —As I understand it, that is describing the downward trend in debt as a percentage of GDP, which you see in the chart on the top of page 8-15. This simply reflects the fact that the general government sector, at both state and Commonwealth levels, has reduced its net borrowing requirement—often to less than zero—as a result of an improved budget position, and taken the privatisation proceeds and used them as debt retirement. That is what the chart shows. This is in terms of Commonwealth and state.

Senator CONROY —It says `State/local levels'. I am just trying to get an understanding of—

Dr Watt —This part of the budget statement is an overview of Commonwealth and state and local.

Senator CONROY —But it does say that they are going to use sale proceeds to pay down state and local debt. I am just trying to understand that.

Dr Watt —I think the point is that the Commonwealth has used its budget surplus and its asset sales proceeds to pay down its debt. The states and the local government sector have done the same thing with their own asset sales and budget surpluses.

Senator Abetz —And with sound economic management, the states are getting more money from the Commonwealth.

Senator CONROY —So you are not taking any Commonwealth proceeds and giving them to the states?

Dr Watt —There has been no repayment of state debt by the Commonwealth.

Senator CONROY —It would have been very generous of you if you had done it!

Senator Abetz —But, of course, the states have been getting more money from the Commonwealth, as a result of which they can then use that increased income to pay off their debt.

Senator CONROY —Minister, seeing as you are revealing yourself as an expert on the GST agreement with the states, could you tell me—

Senator Abetz —So you are saying the increased income to the states—

Senator CONROY —No, I was about to ask you a question.

Senator Abetz —is as a result of the GST? Thank you for putting that on the record.

Senator CONROY —Given that you were the only person in the room with your lips moving, it is going to be hard for you to claim I put something on the record. But, seeing as you are such an expert on the GST agreement with the states, can you tell me which years the GST agreement becomes revenue positive for each state? Pick any of them—Victoria, for example.

Senator Abetz —I know that, for my home state of Tasmania, it has come forward considerably.

Senator CONROY —From, what, 2008 to 2006?

Senator Abetz —Mr Carr has already indicated payroll tax reductions. Mr Beattie increased expenditure on state education as a result of the GST payments.

Senator CONROY —I appreciate that; I just wondered if you could answer the question.

Senator Abetz —In Tasmania, the new ferries that the state government has bought will be funded largely due to the windfall finances coming in from GST payments. That is three states for you, off the top of my head.

Senator CONROY —Which years do they become GST revenue positive? You will not find it in there. It is actually in the GST agreement.

Senator Abetz —They are your state Labor colleagues. I am sure they have already told you.

Senator CONROY —You were just demonstrating an expertise that I thought you might be able to help us with, but that is okay. In Budget Paper No. 1 2002-03, in table B2 on page 2-17, equity assets are projected to decline from $51.4 billion in 2001-02 to just $14.4 billion in 2005-06. That is a 72 per cent decline. I assume that reflects the Telstra sale.

Dr Watt —I would assume it is.

Senator CONROY —Likewise—I am just assuming.

Mr Bowen —I assume it is asset sales generally, including Telstra.

Dr Watt —And the matching item is government securities and liabilities, which decline in a similar way.

Senator CONROY —In table B2, government securities fall by a total of $61 billion—from $64 billion to just under $3 billion. I assume this reflects the use of cash surpluses and the proceeds of asset sales being used to pay out government debt.

Dr Watt —That is true.

Senator CONROY —So the equity assets would make sense, then, as the offset?

Dr Watt —I think that is true, yes.

Senator CONROY —According to the budget papers, by 2005-06 there will be $3 billion of government securities on issue. That is what it says.

Dr Watt —That is what this particular line says, yes.

Senator CONROY —How does this reduction in government securities on issue impact on the viability of the government bond market?

Dr Watt —That is something I think you will have to ask Treasury. It is not something we profess to have any expertise in.

Senator CONROY —Neither do they, but it does not stop them losing money. This reduction in government securities would have a significant impact on interest expense, would it not?

Dr Watt —Certainly it should.

Senator CONROY —Is that reflected in the reduction in other interest expense in Budget Paper No. 1, on page 2-16?

Mr Bowen —There is certainly a reduction there.

Dr Watt —We assume there is something there, but whether that has some other things in there as well—

Mr Bowen —Senator, I think the better place to look at that is on page 2-9, table 3. Net interest payments decline over that period, consistent with a reduction in net debt.

Senator CONROY —Are they billions?

Mr Bowen —Yes, they are billions, and below that is a percentage of GDP.

Senator CONROY —So those interest savings are a reduction in expenses; they would contribute to a lower deficit or higher surplus in the out years.

Mr Bowen —Yes.

Senator CONROY —So if they were not recognised—let us say, next year—on this figuring there is half a billion dollars in projected savings that would, therefore, have been factored into the estimates that make up the fiscal balance.

Mr Bowen —Yes, I think that is right.

Senator CONROY —So if Telstra is not sold, or is unlikely to sell, half a billion dollars in savings will not occur.

Mr Bowen —Are you talking about 2002-03?

Senator CONROY —Yes. It has gone from $4.2 billion to $3.7 billion.

Mr Bowen —But the Telstra sale is not mooted until 2003-04, is it?

Senator CONROY —Okay. So it is $3.7 billion down to $3.3 billion?

Mr Bowen —Yes.

Senator CONROY —So in the out years it is $0.4 billion?

Mr Bowen —Yes. Whether it is all related to Telstra—but the absolute change in net interest payments is $0.4 billion.

Dr Watt —Why don't we see if we can get you an answer to this, Senator. There will be a number of things operating there.

Senator CONROY —It is hard to imagine that the Telstra component is not the biggest part, by a lot.

Dr Watt —Certainly you would think it would be important. For the sake of completeness, it might be useful if I draw your attention to budget statement No. 7 `Budget funding'. It is a very short statement. At the top of page 7-4 it says—

Senator Abetz —It is chapter 7, I think, of Budget Paper No. 1.

Dr Watt —Yes. It says:

The reduction in Commonwealth net debt has raised questions by some market participants about the future viability of the CGS market.

Which is what I think you are alluding to. It goes on:

The Government acknowledges these concerns and is carefully considering them, taking the views of key stakeholders into account.

Senator CONROY —That is one of the issues that I was alluding to. The budget projections depend on the virtual eradication of a viable bond market.

Mr Bowen —I do not believe they do. We are in other people's territory here.

Senator CONROY —I was going to leave it alone, but Dr Watt decided to—

Dr Watt —I just wanted to draw your attention to where the government has made this definitive statement. There will be a substantial run down in the CGS market.

Senator CONROY —Substantial? It was wiped out!

Mr Bowen —We are on other people's territory, but on page 7-3 it says:

The reduction in net debt has been managed in line with the objective of maintaining the viability of the CGS market ...

Dr Watt —It points out:

Consistent with this approach, reductions in CGS on issue have lagged the reduction in net debt.

Senator CONROY —It still virtually wipes outs one market—$70 billion to $30 billion to $3 billion does not leave a lot.

Mr Bowen —We are not saying that. I think you would need to talk to Treasury about that.

Senator CONROY —Let us go back to the question of the out years and the budgeted savings, which have improved the bottom line. There is about $0.4 billion; that is the calculation.

Mr Bowen —You are looking at the table 3 on page 2-9?

Senator CONROY —Yes.

Mr Bowen —That gives the absolute projected reduction in net interest payments, yes.

Senator CONROY —So if Telstra does not get sold—and provided that Telstra is the majority component, which you would expect—that would mean that the out year budget bottom line would be worse off by $0.4 billion and by almost a full billion in 2004-05 et cetera.

Dr Watt —I think, again, you are looking at one component.

Senator CONROY —I accept that. But the out years forecast contains those savings.

Dr Watt —In terms of the interest savings not realised, that is correct, but obviously the Commonwealth would keep its share of the dividends.

Senator CONROY —There will be some offset there, but I do not think it would be quite that much. Even you guys could not find a hurdle that you could fail if that figure were more.

Senator Abetz —Now, now!

Senator CONROY —I want to move on to Audit report No. 41: Transactional banking practices in selected agencies. Can you briefly outline the cash management incentive scheme that was introduced when the new banking arrangements were introduced on 1 July 1999?

Mr Bowen —In 1999-2000, the government introduced a scheme whereby agencies were able to earn interest on their cash balances. The scheme was intended to be budget neutral. The way that was to work was that an amount of money was to be reduced from agencies' appropriations to the extent of their expected interest earnings. An appropriation was provided to the Department of Finance and Administration to meet interest payments to agencies to that extent. The scheme operated on that basis for two years; however, while moneys were what we call `clawed back' ex ante, they were not clawed back ex post, or retrospectively.

Senator CONROY —I am afraid I am not a student of Latin!

Mr Bowen —Okay. While moneys were clawed back in advance in each of those years—and in the third year, for that matter, which is the current year—they were not clawed back retrospectively, to ensure that agencies had not earned more than it was originally estimated that they should earn. Hence the Auditor-General found that, over this three-year period, agencies had earned some $151 million in excess of the amounts that would have meant the scheme was neutral. We do not disagree in concept with the Auditor-General's finding on that point, although the amount is subject to further consideration. The Auditor-General did not find, and has not said, that there was an equivalent negative impact—or indeed an impact—on the budget balance of $151 million. In fact, the Auditor-General did not investigate that aspect whatsoever.

Dr Watt —I think that gives you a fair idea.

Mr Bowen —That is the background.

Dr Watt —Do you want to keep going?

Mr Bowen —We can go on.

Senator CONROY —I am happy for you to keep going, because I was quite enjoying that.

Dr Watt —Why don't I say a couple of words?

Senator CONROY —Mr Bowen was on a roll, there.

Dr Watt —Mr Bowen was on a very good roll, but I should say a couple of words. Mr Bowen was saying that the Auditor-General does not conclude that the scheme has had a negative impact on the budget balance. The Auditor-General did not investigate that. Consistent with our comments in the audit report, we consider it likely that a major proportion of the $151 million has accounted for several things: firstly, dividend payments from special accounts which went back to the budget are no longer with the agencies concerned; secondly, interest held in special accounts; and, thirdly, reduced departmental appropriations as a result of government decisions and things like output pricing reviews which have taken the agencies' cash positions into account. The ANAO in its report accepted that these various processes do take interest earnings into account when considering agency resourcing.

However, the government does want to be certain that the scheme is budget neutral. To do this, it has decided to review the scheme payments for the past three years to assess the extent to which there may have been overpayments that require adjustments. Finance has been working with agencies to, first of all, confirm Finance's estimates of the extent to which agencies were overpaid. Secondly, until that review is completed, agencies have been requested not to spend the estimated $151 million in their combined bank accounts. Those amounts have been quarantined. This will ensure that any overpayments remain in the agency bank accounts for the duration of the review. That review will be done very quickly. We are working intensely with agencies. I think it is fair for me to say that the Department of Finance and Administration does not feel it has implemented this scheme very well.

Senator CONROY —I know you have maintained the argument that you believe it did not affect the budget—and I have all the quotes here and can dig through them—but the Auditor-General specifically makes the point that it is not budget neutral.

Dr Watt —I think the Auditor-General specifically makes the point that the scheme itself is not budget neutral, but the Auditor-General certainly does not say that agencies have spent the money. We have $151 million quarantined until we sought out the process.

Senator CONROY —But, on an accrual basis, you do not have the money back. You might have sent a lasso two years down the track and told them they are going to cough up $151 million irrespective of whether that money has anything to do with what happened two years ago.

Dr Watt —The money is fungible.

Senator CONROY —The money is fungible—that is a great word; I love it.

Dr Watt —The agencies have $151 million—

Senator CONROY —It does not seem to matter that it has nothing to do with the program that you run. I accept that you can get $151 million back from them if you set your mind to it. However, on an accruals basis—

Dr Watt —No, I do not think that is what we have said. I think what we have said is that decisions were taken on agency resourcing in the light of, among other things, their cash holdings. Therefore, we are having a look at those decisions to see what they were based on—their cash holdings, including the higher cash holdings that may have resulted in these additional repayments. We will review that overall picture when we have finished having a look.

Senator CONROY —But, on an accrual basis, when you are looking at what is in and what is out, there is an out that is not in; there is money that has gone out from you that has not been clawed back in, on an accrual basis.

Dr Watt —No, money has gone from the Commonwealth's central bank account, for want of a better term, to the agencies' bank accounts. That is where the money is. The agencies are holding $151 million more cash as a result, unless the government has taken resourcing decisions specifically to take that into account.

Senator CONROY —I guess you can put it in the deep freeze for as long as you want and pretend. In Appropriation Act No. 1 1999-2000, $54 million was appropriated to DOFA under outcome 2 to make interest payments under the incentives scheme; however, actually interest paid to Finance in 1999-2000 was $91 million. Had this been received or retained, it would have pushed Finance outside its outcome 2 appropriation limit by about $24.5 million. Is that accurate?

Mr Bowen —I do not have the actual figures in front of me, but, yes, I think that is right.

Senator CONROY —Give or take rounding errors?

Mr Bowen —For the moment, the answer is yes.

Senator CONROY —Would Finance have been required to seek an additional appropriation?

Mr Bowen —I think, in that initial year, Finance did in fact seek additional appropriation to cover that, didn't it?

Mr Staun —No, we did not. In fact, it goes to page 16 of the ANAO report—which you are probably coming to—which identifies the fact that, in the following year, 2001, Finance received an injection of $24.5 million to cover the fact that in the previous year we had returned the interest we had received via the appropriation from the Department of Finance and Administration and also did not draw down further on our interests receivable that year. I believe that is the case.

Senator CONROY —You probably jumped through a string of my questions; I am afraid will have to keep working through them slowly because, unfortunately, I need to keep it sequential for myself. I think you have gone to some of the issues I want to go to, so I will happily come back to them with you. Instead of seeking additional appropriation, Finance decided to either not accept or to return funds totaling $24.5 million to the consolidated revenue fund.

Mr Staun —Correct.

Senator CONROY —In the following year, 2001-2002, as you have mentioned, Finance issued an invoice for $24.5 million dollars, which they received under Appropriation Act No.2. Is that correct?

Mr Staun —I am not aware that an invoice was issued, but certainly we received an equity injection in that year of $24.5 million.

Senator CONROY —The effect of these actions shifted the budget impact of interest payments between years. Is that correct?

Mr Staun —It shifted the impact of cash between the years but not interest revenue in an accrual sense.

Senator CONROY —In a cash sense?

Mr Staun —The cash was clearly transferred, because we received the cash in 2001 but we accrued the revenue in 1999-2000.

Senator CONROY —So you maintain there was no accrual change at all?

Mr Staun —There was none. We had quite a number of discussions with the Audit Office over this matter. Their original draft report stated that there had been an impact on the fiscal balance, and that is not the case, because the interest revenue was recorded appropriately in 1999-2000.

Senator CONROY —On page 54 of the ANAO report, despite your discussion, they state:

Finance's actions effectively shifted the Budget impact between the financial years 1999-2000 and 2000-2001.

What do they mean by that?

Mr Staun —`Budget impact' is a term which could cover both accrual and cash. I believe the statement is correct in terms of cash but not in terms of accruals.

Senator CONROY —I will come back to that. Finance also split the appropriation for interest payments in 2001-2002 between Appropriation Acts Nos 1 and 2. Is that right?

Mr Staun —That is correct.

Senator CONROY —I understand that in 1999 the Senate made amendments to the definition of what expenditure forms part of the ordinary annual services of the government, and that it was this change that enabled such a shift between appropriations to take place.

Mr Staun —I am not aware of that; I do not quite follow you. Certainly the $24.5 million was in Appropriation Act No. 2, because that was an equity injection. But we also received in 2001, under bill No. 1, interest revenue in relation to 2001. The reason for the split goes to the accounting methodology.

Senator CONROY —Page 51 of the ANAO report, at paragraph 2.28, reads:

In March 2002, Finance advised ANAO that: `All agencies reflected interest revenue and expense in the year in which it was receivable or payable—ie 1999-2000. Finance's actions however resulted in the underlying cash transaction being received or paid in the year 2000-2001'. Finance's actions effectively shifted the Budget impact between the financial years 1999-2000 and 2000-2001.

Mr Staun —I agree with that statement.

Senator CONROY —Again, we are down to what the ANAO meant by `shifted the budget impact'.

Dr Watt —We are clear that it was underlying cash.

Mr Bowen —And the ANAO say that, don't they?

Dr Watt —I think they are our words in italics, but the ANAO does not dispute that it is only underlying cash.

Senator CONROY —I cannot see any appropriation for interest payments for the next financial year in Finance's portfolio budget statement. The statement I read out before was your own statement to the ANAO which is why I would expect you to nod in agreement. It does not necessarily mean they agreed with it. They were just reporting what you said.

Dr Watt —I think the point is that they do not disagree with it. The ANAO have not made the point in the report that they disagree with our statement. If they did, they would have, based on past experience.

Senator Abetz —I think that is a very fair assessment.

Senator CONROY —I cannot see any appropriation for interest payments for the next financial year in Finance's portfolio budget statement yet the Auditor-General's report estimated that a payment of $86 million or $37 million after clawback was made in 2001-02. Where is the appropriation for interest payments in 2001-02?

Mr Bowen —In 2001-02, the current financial year, the Department of Finance and Administration, in accordance with legal advice that it sought on this issue, dispensed with a central appropriation on the basis that it was legally possible to transfer the funds directly from the official public account to agencies' accounts without a central appropriation.

Senator CONROY —Had you ever done it before?

Mr Bowen —It had not been done before for the agency banking scheme, no. The scheme has been running three years. For the first two years there were central appropriations. For the third year there was no central appropriation but simply transfers from the central account to the accounts of individual agencies. For next year we have returned to a central account.

Senator CONROY —Where is the appropriation in the agencies' accounts.

Mr Bowen —The appropriation for the agencies is something known as a section 31 agreement. If you have a look at Budget Paper No. 4 you will find a description of how section 31 agreements work. On page 16 of Budget Paper No. 4 under the heading `Net appropriations' it states:

(1) If a section 31 agreement applies to a departmental item, then the amount specified in the item is taken to be increased in accordance with the agreement ...

What it means is that an agency's normal appropriation can be supplemented by an item specified in the section 31 agreement. The section 31 agreement is where agencies specify that net interest earnings can be added to their appropriations and that is how they receive that funding.

Senator CONROY —Was that in last year's budget papers.

Mr Bowen —It would have been in each set of budget papers, I think. In general terms it is always there. Net interest payments have been part of section 31 agreements since 1999-2000.

Senator CONROY —Why did you feel the need to get legal advice?

Mr Bowen —I am going purely on the files and the advice that I have been given. This was clearly a change in practice. I think the reason for pursuing the change is pretty obvious. It was to reduce administration costs. With a change of that nature it was clearly felt at the time by the people doing it to be prudent for legal advice to be sought and that advice was obtained from the Australian Government Solicitor.

Senator CONROY —Is it available to the committee to be tabled?

Dr Watt —We will have a look at whether we can table it.

Senator CONROY —What did the legal advice go to? What was the area that you were specifically worried about?

Mr Bowen —The issue is whether transfers of funds from the public account to agency bank accounts can occur legally without an appropriation, bearing in mind these accounts are within the public account and that the impact on the budget occurs only when agencies spend the money. Their authority to spend the money comes under the section 31 agreement which applies to their own appropriations.

Senator CONROY —Section 5 of the Appropriation Act states:

For the purposes of this Act notional transactions between agencies are to be treated as real transactions.

The legal advice was available to the Auditor-General, and they make specific reference to it in their report.

Mr Bowen —Yes, I know.

Senator CONROY —The department of finance's legal adviser noted:

In my view, the payment of 'interest' to agencies by your Department is clearly a notional transaction of the kind contemplated by section 5 of the Appropriation Acts.

So your legal advice said it is a notional transaction and the law therefore requires it to be treated as a real transaction, which means it requires an appropriation.

Mr Bowen —The appropriation is there via section 31.

Senator CONROY —Which part of the following section of the Australian Constitution is not clear? Section 83 states:

No money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law.

Mr Bowen —That is clear.

Senator CONROY —Yes, it is pretty straightforward.

Mr Bowen —But that is what section 31 enables.

Dr Watt —This might not be the moment for it, but we would be quite happy to provide you with a detailed briefing on the way section 31 works.

Senator CONROY —I am happy to receive that; however, nobody else in the building, the country or anywhere else has ever seen such an outrageous misuse of accounting principles or legal efforts. But I am quite happy to receive a briefing. This is, frankly, the worst abuse I have seen in nearly six years of my parliamentary term—that the department of finance felt it could subvert the Constitution and section 5 of the Appropriation Act.

Senator Abetz —Is this a homily or a question?

Senator CONROY —It is probably the most serious issue that you will face sitting in that chair, Minister.

Senator Abetz —In that case I think I will be a very relaxed minister.

Dr Watt —As I said, we would be very happy to give you that briefing in due course. We acknowledge that this has not been well implemented, and we are more than happy to acknowledge that that is probably an understatement as well, but we do disagree with the inferences you are drawing.

Mr Bowen —Without wanting to debate it now, neither the Auditor-General nor the Australian Government Solicitor has accused Finance of breaching the Constitution, and the processes of that period have been laid bare to those people. So we have not been accused of breaching the Constitution. I think it is fair to say that we believe the better way to account for and to manage this program is via a central appropriation, and so does the government. That is why we have a central appropriation for 2002-03.

Senator CONROY —I appreciate that you had the whistle blown on you.

Senator Abetz —Do you have a question?

Senator CONROY —I know you want to trivialise this, Minister.

Senator Abetz —No, I am asking you to ask a question.

Senator CONROY —This is one of the most serious public policy issues you will ever address while sitting in that chair.

Senator Abetz —We can debate that. Just ask your question and stop making statements.

Senator CONROY —Your own legal advice states:

However, the transfer of such amounts without an appropriation will no doubt raise policy issues, given the fact that notional payments are generally drawn down from appropriations and presumably the intention is to treat all notional transactions on the same basis ...

What do you think is meant by the phrase `raise policy issues'? If I can just get an answer to that question I am happy to have a break. What do you believe are the policy issues that are flagged in your own legal advice?

Mr Bowen —I think the fact that we have recommended, and the government has accepted, that we return to a central appropriation basically says what we feel about the situation.

Senator CONROY —Was section 31 amended in 1999—I think I mentioned this to Mr Staun—which is what allows this to happen? Was it the 1999 amendment that allowed this?

Mr Bowen —I will take advice, but I do not believe so.

Senator CONROY —You do not think that amendment has affected your capacity to do this?

Mr Bowen —I believe section 31 has been a feature of the FMA Act since its inception.

Senator CONROY —I am interested in whether you think that was the trigger or not?

Mr Staun —I am not too sure when it was actually amended, but clearly our PBS shows that the appropriation was granted in 2001.

Senator CONROY —If the amendment had not been made, would you still have thought you could do it? That is what I am interested in.

Mr Bowen —Which amendment are we talking about?

Senator CONROY —There was a 1999 amendment to section 31.

Dr Watt —We can take that under advice.

Senator CONROY —It has been put to me that it was the 1999 amendment that allowed you to go down this path—potentially.

Dr Watt —We are happy to take that on notice.

Senator CONROY —I was wondering whether you had an opinion on it.

Dr Watt —We do not. We are happy to get you an answer.

Senator CONROY —The Auditor-General's opinion is fairly clear. Do you think this establishes a precedent whereby notional payments can be made and spent without an appropriation and therefore without any external accountability or scrutiny? You have backed away from it now—you have retreated, or however you would like to phrase it—but would you do it again?

Mr Bowen —We would not do this. From our actions you can see we have put it back onto an appropriate basis.

Senator CONROY —So you would not do it again?

Mr Bowen —It would not be our recommendation.

Senator CONROY —Dr Watt, would you do it again?

Dr Watt —I do not think I can improve on Mr Bowen's answer.

Senator CONROY —I am happy for you to back Mr Bowen up on that one, I can tell you!

Dr Watt —I am not blaming Mr Bowen.

Senator CONROY —I said I am happy for you to back him up; I did not say `blame'.

Dr Watt —I am very happy to back him up.

Mr Bowen —To be clear, we do not acknowledge that it was illegal but we believe there is a better way. Nobody has said it was in contravention—except here tonight—of the Constitution.

Senator CONROY —No I am prepared to say I am not reading you the Constitution. You would have to find a pretty good lawyer to get you around that one.

Mr Bowen —Well, we have pretty good lawyers!

Senator CONROY —Senator Mason, Senator Brandis?

Senator Abetz —Justice Conroy! I think there's a High Court vacancy coming up soon!

Senator CONROY —I confess: I am not a lawyer, I am just a simple Australian reading the Constitution, and I appreciate that there are smarter people than me who can find their way around anything if they try.

Mr Bowen —We had a good lawyer and a good Auditor-General and neither found that conclusion.

Senator Abetz —But it is still the most serious issue I will ever face.

Senator CONROY —It absolutely is, Minister. If you have not worked that out by listening to your own officers at the table, then you are just not paying attention, which does not surprise me.

Senator Abetz —The Auditor-General and the Australian Government Solicitor seem to be not of your opinion.

Senator CONROY —Dr Watt and Mr Bowen are both indicating to you that they themselves would not do this again. That should send some sort of alert into even your head.

Senator Abetz —But it does not mean it is the most serious issue that I will ever face. It really was a bit hysterical of you to assert that.

Senator CONROY —No, I am sorry, the Constitution is involved here. Your own officers are saying that they would not do it again.

Senator Abetz —But not on the basis that you are asserting, which the Auditor-General does not agree with nor does the Australian Government Solicitor.

Senator CONROY —They had to go and get special legal advice—the department, not you two, because neither of you were there—to make sure that, within that opinion, they were within the law and the Constitution. It even makes reference to there being no constitutional need. It has got to the stage where they are checking the Constitution to see whether what they are doing—

CHAIR —Do you want to continue on before we have a break?

Dr Watt —Let me pick up one point quickly. Mr Bowen and I both supported the approach that is again being adopted in 2002-03, not because we necessarily thought there was anything illegal in previous years but because it is a simple, plain, vanilla approach that we are both very comfortable with.

Senator CONROY —I understand why you are saying that. I understand the approach that you have both taken, as you were responsible for it.

Senator Abetz —You are not hoping for a headline out of this one, surely!

Senator CONROY —Footnote 4 on page 45 of the PBS for 2001-02 refers to:

Reporting of bank interest transferred from Department of Finance and Administration to Crown from 2001/02.

Can you please explain to me what the Crown is? There are not many places you will find the word anywhere in the 100-year history of PBS statements or their forerunners.

Mr Staun —I think that was a little clumsily expressed. What it was trying to explain was why there was an estimated actual appropriation for bank fees and interest charges of $97.5 million in 2000-01 and none for 2001-02. Perhaps instead it could have been better expressed as something along the following lines: `Bank interest is now paid direct to agencies from the OPA.' If we insert `OPA' in place of the word `Crown', it makes much more sense.

Senator CONROY —Which creative genius came up with the word `Crown'?

Mr Staun —The concept is—

Senator CONROY —I know what the concept is; it is just that I have never seen it used in a budget document before.

Dr Watt —We might have to take that question on notice.

Senator CONROY —Thank you, Dr Watt. Can you explain where it is found in the budget and whether you have ever seen any other transactions made to the Crown and, if so, what they were?

Mr Staun —There is no portfolio budget statement for the Crown per se. There is a portfolio budget statement for the Department of Finance and Administration, which incorporates some elements in relation to the Crown concept, the OPA or whatever you might want to call it. There is no portfolio budget statement relating to the whole of government.

Senator CONROY —So the Crown is getting bigger as we speak. It has gone from elements of Finance to the whole of government?

Mr Staun —I might defer to my colleague—

Senator CONROY —I do not think anyone wants to rescue you, Mr Staun.

Mr Staun —I am quite happy to rescue myself, Senator. I come from a commercial background where it is not unusual to find the concept of a holding company, which then deals with a number of subsidiary companies. The same concept could certainly apply to the Commonwealth, where the government as a whole is, if you like, the holding company, and then there are a series of subsidiaries, which are the agencies. I think that is where the concept came within the department of finance, as a discussion, and that is how it came to be quoted in this particular document.

Senator CONROY —Have you ever seen it quoted before?

Mr Staun —No.

Senator CONROY —Was legal advice sought on the use of the word?

Dr Watt —Not that we are aware of, Senator. I think you can safely say that it will not be used again either.

Senator CONROY —So no other transactions have been made to the Crown? It is actually a very serious question. There is this new thing called `Crown', and I just want to know—

Dr Watt —As we tried to explain, the concept is of a central government bank account or arrangement, but you are right that it does not sit well in the PBS. We will certainly do better next time.

Mr Bowen —We have done better already.

Senator CONROY —I was just about to come to `next time', Mr Bowen.

Mr Bowen —We have already done it.

Senator CONROY —I note that in its portfolio budget statements for 2002-03 Finance shows a payment of $73 million for the Agency Banking Incentive Scheme.

Mr Bowen —That is right.

Senator CONROY —There is no reference to `Crown'. It has vanished without trace.

Senator Abetz —I think we have established that.

Senator CONROY —Why did you make this change, Mr Bowen?

Mr Bowen —We talked about that before the break. We believe this is the appropriate way to have the funds appropriated centrally and paid directly and openly to agencies, as per any other payment.

Senator CONROY —So I will never again have the pleasure of finding `Crown' in government PBSs?

Mr Bowen —Not unless there is some change of nomenclature that would bring it in.

Dr Watt —We cannot guarantee it for other agencies.

Senator CONROY —I would hope you could. In all seriousness, I hope you would be able to point out to them that you would never accept that sort of shonky accounting being given to you.

Dr Watt —I meant the use of the word `Crown'.

Senator CONROY —Should I say `shonky description', then? You would not cop a snow job like that if one of your departments bowled it up to you, so I hope you would be able to guarantee that you would never let anyone get away with it.

Dr Watt —I do not necessarily see the nature of the transaction and the description as being linked. The description is simply a clumsy and very poor way of trying to describe a central government bank account.

Mr Bowen —That is what it is, yes.

Senator CONROY —Has the $73 million been clawed back from the agencies?

Mr Bowen —Yes.

Senator CONROY —All of it?

Mr Bowen —All of it, to the best of our knowledge—let me just add that.

Senator CONROY —Has a decision been made by the government to claw it back?

Mr Bowen —These were amounts that were clawed back this year from earlier claw-backs. So, yes, the government has agreed that that is the amount that agencies will earn in interest.

Senator CONROY —Was there a meeting on 20 May, attended by the Treasurer, Assistant Treasurer and the Prime Minister, that ticked off on this?

Mr Bowen —Not to my knowledge.

Dr Watt —We are not privy to the decision making process, but I would not have thought that that particular set of ministers would make this decision. The decision was taken in correspondence between the Minister for Finance and Administration, the Treasurer and the Prime Minister. So I would not have thought that that meeting—which must have had a worthy purpose, I am sure—had anything to do with this.

Senator CONROY —It did not tick this off?

Dr Watt —Not that I am aware of.

Senator CONROY —I want to come back to the question of whether you got the full $73 million. As far as you know, you have? What factors would lead to you not having it at the moment and would you be getting it even if you had not got it all just yet?

Mr Bowen —To the best of our knowledge, based on our records, we have it.

Senator CONROY —Given that you are saying, `Based on our records'—

Mr Bowen —Could you repeat your question about factors that would lead us to think that we might not have it?

Senator CONROY —You are saying, `To the best of my knowledge, based on our records'. I am only querying it because you are qualifying it.

Mr Bowen —I will remove the qualification, on the basis of my most recent advice. In our accounting records, which is the central accounting system for the Commonwealth, we have records for agencies that add to the $72.8 million.

Senator CONROY —How have agencies paid the money back?

Mr Bowen —Agencies' appropriations were reduced to that extent.

Senator CONROY —So you just automatically chopped it when you passed them the money?

Mr Bowen —In their forward estimates at various points in time they have been reduced to that extent.

Senator CONROY —Okay. So they have not had to give any money back. You have not gone through the practice of giving them the money and having them give it back to you?

Mr Bowen —No.

Senator CONROY —You have just not given them approps?

Mr Bowen —Yes.

Senator CONROY —Have any of the agencies' programs been affected by the reduced appropriation?

Mr Bowen —No, they would not be affected because they would receive interest to the extent to which they have had it clawed back. That was the intent of the scheme.

Senator CONROY —On an accrual basis, though, it is not quite going to slot into the right slots.

Mr Bowen —I think it does.

Senator CONROY —Certainly on a cash basis it will not.

Mr Bowen —I do not think there is a very big difference between the cash and accrual measures for this particular item.

Senator CONROY —I have been trying to convince you guys of that all day.

Mr Bowen —I had not noticed.

Dr Watt —I thought you were playing up the virtues of the accrual framework, Senator.

Senator Abetz —I thought you supported it.

Senator CONROY —I do. I have been trying to convince you that when the accrual and cash measures come together that is a good thing. Will you give a commitment that you will identify such interest payments separately in portfolio budget statements each year so that we can see where you have clawed them back?

Mr Bowen —Agencies already do, I think, identify it.

Senator CONROY —We can hear them screaming, but I would like to see where—

Mr Bowen —No, I am saying they do identify all their sources of revenue including interest.

Senator CONROY —I am seeking some acknowledgment in your document when you snip them to get the money back. I am asking that when you do not send them the full amount, when you reduce it by a bit—this is just for simplicity of tracking—that your clawback is specifically recognised within your statement so that I only have to look in one place, not trawl my way through 20-odd PBSs.

Mr Bowen —We could certainly put in a sentence or two to explain some of the underlying features of the central appropriation that we have; we could do that.

Senator CONROY —If you were originally going to give them $100 million and in the end you took $5 million as part of that clawback from a previous period—so you only sent them $95 million—I am looking for some acknowledgment. That would save time for the auditor as well as everybody else. The problem that you have identified is that they were not able to test—or they did not attempt to test—whether or not your clawback had come through.

Mr Bowen —I think what they did not seek to test was whether agencies had actually spent the interest that they had earned.

Senator CONROY —Yes, but they identified that they could only find, at best, $73 million. Maybe the numbers are a coincidence but from recollection there is a particular number that they identified that they think you might have clawed back.

Mr Bowen —I think we need to make a distinction between what has happened in the past—

Senator CONROY —Sure. I am just looking to help transparency—to make a difference in the future.

Mr Bowen —In the future it will be very transparent because there is a central appropriation.

Senator CONROY —That is true; that will help.

Mr Bowen —This year it was $73 million, rounded, and agencies will show amounts of interest in their PBSs that add to $73 million.

Senator CONROY —Okay. I guess I am seeking a disaggregation of the $73 million, or its equivalent, in the future.

Mr Bowen —It is in the agencies' PBSs and also it would be implicit in Budget Paper No. 4.

Senator CONROY —I am just trying to make it explicit, that is all. I appreciate that it is there if you are able to dig through. We are working on the budget documents, as Dr Watt indicated. We are trying to work on them overall. I am just looking for a simple place to find it. You would consider putting a couple of sentences in?

Mr Bowen —Rather than design the documents at 10 past 10 tonight, we can certainly have a look at that issue.

Senator CONROY —Okay. The Auditor-General are very strong—and we spoke with them either 24 or 48 hours ago; I am afraid I don't quite remember—that in their opinion the tender that was lowest on their assessment was not the tender victor. In other words, they believe the Reserve Bank won at least one of the tenders—possibly your own, from recollection—on their tender process.

Dr Watt —I think the key words in your question are `on their assessment'. We think their assessment is flawed. If I could pass over to Mr Staun.

Mr Staun —That is correct. On both a qualitative and a quantitative basis the evaluation showed that the CBA was the preferred tenderer. The ANAO has then come back and with the issue raised of same-day value has imputed a further cost to the Commonwealth of not having that same-day value, added that on and then determined that the lowest tender was the RBA because they had access to GDES. I would put it to you that, if with 20/20 hindsight we were to compare apples with apples, we should also then add in the benefits and savings that we have achieved through our relationship with the Commonwealth Bank. In its report the ANAO acknowledged those savings and they are identified in the report. On that basis, the original assessment made by the department certainly holds true.

Senator CONROY —It was pretty embarrassing to not achieve T0 from the Commonwealth Bank.

Mr Staun —I am sorry, Senator: T0?

Mr Bennett —I think what the senator is alluding to is deferred net settlement versus same-day value and access.

Senator CONROY —Yes. T0 was an RBA offer. When you signed up with the Commonwealth Bank it was not a requirement.

Mr Staun —That is not correct. The banks were required—

Senator CONROY —It has taken three years for you to get T0. I have had discussions with plenty of people about that. You have now got T0.

Mr Staun —Certainly from 18 January this year.

Senator CONROY —Yes.

Mr Staun —However, if I understand your question, you said we entered into it without having that. I am explaining that at the time the department was of the view that all banks could comply with the core protocols, which included core protocol 4 which required same-day value. In fact the department wrote to the three non-RBA tenderers requesting confirmation that they could comply with the core protocols. All three replied that they could. The only one who suggested they could not was Westpac, and that was in relation to sweeping arrangements. So clearly the department worked on the assumption or basis that same-day value was available and indeed the banks were of the view that they could provide it, either through GDES, if it was released by the Reserve Bank, or through their own systems. They do have access to same-day value systems, although not for general banking purposes.

Senator CONROY —I was not arguing that they had access to it. In fact I am surprised Westpac said they did not. I am quite sure that they had access to it. The question is whether they were required to provide it.

Mr Staun —They were required to provide it under the core banking protocols.

Senator CONROY —So how much have you recouped from the Commonwealth Bank for not providing it?

Mr Staun —We have recouped nothing from the Commonwealth Bank if you—

Senator CONROY —I would have thought failing to meet one of the tender requirements would have meant that you actually terminated the contract—but let us put aside that aspect. Why haven't you sought to recoup money from the Commonwealth Bank on the basis that they we not meeting one of your core, as you described it, protocols?

Mr Staun —There is a question as to whether they could meet the core protocols or not. The Commonwealth Bank would certainly be of the view that it could. From our perspective, no, we have not attempted to recoup the lost value, as it was called by the ANAO. The estimate was some $40,000 a year over the three-year period—or less now, since this has come in on 18 January. On the other hand, whilst we have not attempted to recover it—and there would be legal issues surrounding that as to whether indeed the Commonwealth Bank had not met the contract or otherwise; there would be a difference of view there—we have also gained other benefits which have more than outweighed any costs that we have incurred by not getting same-day value.

Senator CONROY —But you could have gained them and gained the benefits of the $40,000.

Mr Staun —That is a question that would only be answered in a contract dispute settlement of some sort, whether through a court of law or by negotiation.

Senator CONROY —Did you try to enforce this section of the contract that you believe is there?

Mr Staun —No.

Senator CONROY —You did not try to enforce T0?

Mr Staun —When I became aware in May of last year that in fact the Commonwealth Bank were not complying with the core protocols in obtaining a same-day value, I wrote to them seeking to know why. I was assured in the letter following that in fact that they had now reached agreement with the Reserve Bank that the core protocols would be introduced. We then continued to work with them to do that. It took longer, of course, than was perhaps originally intended; it took from May last year to 18 January this year for it to be implemented.

Senator CONROY —So it took two years for the Auditor-General to notice that they were not complying with the contract, and the department of finance did not notice?

Mr Hutson —Perhaps I can explain a bit more carefully about the issue of same-day value and deferred net settlement.

Senator CONROY —My question is actually about the supervision of the contract by your department. You can talk to me at length about that, and I am happy to hear it, Mr Hutson. My question at this point is what is the explanation for why it took two years to discover—and it was not even discovered by the department; it was discovered by the Auditor-General—that they were not complying with your own contract?

Mr Hutson —We were very well aware from a very early stage that commercial banks were not going to be able to meet our expectation that they would provide same-day value. That is detailed in the Auditor-General's report. The department has been working with the finance industry almost since the realisation that the expectation was not going to be met to ensure that the systems would change to enable it to take place. The original core protocols with respect to this particular issue were principles based. They did not explicitly and absolutely demand T0 and, accordingly, it is not entirely clear that in fact the Commonwealth Bank did not comply with the contract. Subsequent core protocols—the ones that came into effect from 18 January—are very clear and explicit on this point.

Senator CONROY —That is actually the discussion I was having earlier with Mr Staun when I asked, `Did you require it?' and Mr Staun indicated that he thought he did.

Mr Hutson —In terms of the core protocols that were issued back in 1999, the position is perhaps arguable.

Senator CONROY —So it is not clear cut. While you sought assurances they could provide the service, you did not actually write into the contract that they should. They wrote back happily and said, `Sure, we provide that particular service.' You went, `You beauty!' and then forgot to ask them to do it.

Mr Hutson —I do not think that is a correct characterisation. The core protocols that were issued in 1999 were not explicit in requiring—

Senator CONROY —But you wrote to them, you said.

Mr Hutson —No. The core protocols that were issued in 1999 were principles based and were not explicit in terms of requiring T0, as you describe it, in respect of certain payment types. Then the contract—which was with the Reserve Bank—required the bank to comply with the core protocols. To the point that the particular protocols were not entirely clear on that point, the position is arguable.

Senator CONROY —Damn tricky those private banks, aren't they? I understand there was some controversy—perhaps that is the wrong word—in that the Auditor-General pointed to the tendering process. I wanted to get to what happened and whether this problem was due to the tendering process. The Auditor-General identifies that the tender documents were issued, applications came back and then the evaluation process changed guidelines after the applications were received.

Mr Staun —That is correct.

Senator CONROY —Was this T0/T1 issue one of these issues that was asked for or sought? You indicated that you wrote to them, so I am getting the impression that the original documents did not necessarily ask for T0, and you wrote to them after that. Is this one of the issues that was changed after tenders were received?

Mr Staun —No, it was not.

Senator CONROY —Just out of interest, what processes were changed?

Mr Staun —There was a range of issues. It appears from the documentation that all of the criteria were reclassified from mandatory to non-mandatory. It appears that none of the banks were able to meet all of the requirements. As a result, my reading of the document suggests that the decision was made to make them non-mandatory so that all banks were in a position to be able to tender for the contract.

Senator CONROY —Did any banks actually qualify on the original documents?

Mr Staun —None.

Senator CONROY —That is priceless! Not even the Reserve Bank?

Mr Staun —No.

Senator CONROY —That is priceless! Is it normal when you get a situation where everybody fails the tender to vary without going back out into the marketplace? I appreciate there is a limited number of potential applicants, but Deutsche Bank, Lloyds or Barclays might have wanted to put one in as well. Is it normal departmental process, in that set of circumstances, to vary the evaluation criteria without going back into the market?

Mr Staun —I do not know what is normal practice.

Senator CONROY —Do you think it is satisfactory? From the sound of it, you were there, because you indicated that you have been reading the file.

Mr Staun —I was not there, no.

Senator CONROY —Would you vary the contract like that and not go back out into the marketplace?

Dr Watt —That is a hypothetical situation.

Senator CONROY —Do you think it is good practice, Dr Watt?

Dr Watt —I think your question is hypothetical.

Senator CONROY —I am asking you: is it good practice to vary the document? The department has done this.

Dr Watt —Yes, I appreciate that.

Senator CONROY —Would you authorise it?

Dr Watt —I think you would have to look at the circumstances surrounding it. It may well be that you really did have everyone who was likely to bid. I do not really think Barclays, Lloyds or anyone else were likely to bid.

Senator CONROY —I do not know, but you only had three applicants.

Dr Watt —Four, from memory.

Senator CONROY —Four?

Dr Watt —I would point out that we did get full probity sign-off from the probity auditor on the subject.

Senator CONROY —Was it four applicants: three private ones and the RBA?

Dr Watt —That is correct.

Senator CONROY —The report notes that the incentive scheme provides agencies with an `opportunity to earn interest on surplus departmental funds'. Could a cynic think this encourages agencies to seek to bolster their surplus funds?

Dr Watt —I am not a cynic, but I do not think so. I do not think there is any significant change in behaviour. You have to remember that all sorts of things constrain agencies' cash positions, and agencies hold cash for all sorts of reasons. I do not think that there would be any significant change in behaviour sought or effected. As far as I am aware, we have never detected anything substantial in the way cash has behaved because of this. The other thing to remember is that you are really talking about pretty low rates of interest. It is hardly a bonanza for agencies.

Senator CONROY —It is not at the moment, but if you put enough money in, even at a low rate, you would still get some return.

Dr Watt —Agencies are always a little chary of holding too much cash.

Senator CONROY —Defence seem pretty keen on it at the moment.

Dr Watt —I think we are back to the point that that is about a fortnight's payout there. It is not a big amount—

Senator CONROY —We ran out of bullets for him, remember. I would like now to discuss foreign exchange risk management. I appear to have misplaced my Employment National questions. Good news—I haven't!

Senator Abetz —Let us be the judge of that.

Senator CONROY —You really should listen to your wife's advice more often, Senator Abetz.

CHAIR —We were doing so well, Minister.

Senator CONROY —He could not contain himself. Which output is Employment National under, just so I do not start off in the wrong direction?

Senator Abetz —Are we on foreign exchange or have we finished it?

Senator CONROY —I do not want to go to Employment National; I am asking which output it is.

Dr Watt —It is output 2, so we would like to do it tonight if we could.

Senator CONROY —I am happy to try to squeeze in Employment National and foreign exchange risk management. My last is business services.

CHAIR —In the next half hour?

Senator CONROY —As I said, I do not have that many questions. I tell a lie—from the look of it, there are a good, solid 21 questions. I may not finish it tonight.

Senator Abetz —How many could be put on notice?

Senator CONROY —I have not thoroughly examined that brief yet, but I will try to get through as much as I can before 11 o'clock. What did you say, Senator Brandis?

Senator Abetz —Just ask the questions!

Senator BRANDIS —I was just chuckling. I am always chuckling.

Senator CONROY —I know that.

Senator Abetz —He is a very happy man.

Senator CONROY —A happy chappy. The Auditor-General issued a report in May 2000 that noted that the Department of Defence has received almost $3 billion of additional appropriations to compensate departments for movements in the exchange rate. Do you recall that report?

Dr Watt —I am familiar with the Auditor-General's report, Senator.

Senator CONROY —At estimates last February I asked whether any further appropriations had been necessary to compensate departments for foreign exchange risk management. The answer received indicated that almost $486 million of new funds have been appropriated to Defence since June 2000. Do you recall this answer? I think it was on notice.

Dr Watt —Yes, I recall that.

Senator CONROY —It was question on notice No. F11. The Defence portfolio budget statement for 2002-03 shows a further $351 million has been allocated to account for foreign exchange fluctuations. So, since the Auditor-General's report in May, over $800 million of additional appropriations has been made to cover foreign exchange fluctuations. Is that correct?

Dr Watt —We do not have access to Defence PBS documents.

Mr Bowen —I do not have the 2002-03 figure.

Senator CONROY —Taken together, $351 million and $486 million come to over $800 million. Looking at the answer F11 you have $486 million, and then the new Defence portfolio budget statement shows a further $351 million. Simply adding those two figures together gets us past $800 million. Does that make sense?

Dr Watt —We are not disputing you.

Senator CONROY —I do not think I have led you astray on any of my numbers so far and I am not planning to do so this late at night. I would like to ask about the press release from the Minister for Finance and Administration put out yesterday in response to the Auditor-General's report, two years after the Auditor-General's report was issued. So there was a two-year gap before the government responded. Are the government's foreign currency revenues approximately equal to its foreign currency liabilities?

Dr Watt —I will have to take that on notice.

Senator CONROY —What are the government's foreign currency revenues and what are its foreign currency expenses?

Dr Watt —Foreign currency revenues come in a number of forms. It is wrong to think that the right comparator is foreign currency revenues; it should be revenues that are linked to the value of the Australian dollar. For example, the government gets customs duty on imported goods and services. That customs duty will vary with the level of the Australian exchange rate, but those duties are not paid in foreign currency. It is just that the amount received is linked to the exchange rate. Another source of revenue is from petroleum product. I think the tax is called a resource rent tax, although I cannot remember if that is the right term. Those revenues in turn reflect the value of the price of a barrel of oil. That is a US dollar price. If they are received from domestic sources such as North West Shelf producers, they will be paid in Australian dollar terms, but they are linked to the exchange rate of the Australian dollar.

Senator CONROY —I note that Mr Bowen is feverishly flicking away.

Mr Bowen —No.

Senator CONROY —Are you trying to see if it is possible to find out if revenues approximately equal foreign currency liabilities?

Dr Watt —We can take that on notice.

Senator CONROY —No, I saw Mr Bowen was flicking away hopefully—

Dr Watt —The point I was making to you is that it is not actually the question you should be asking; really it is the revenues linked to the exchange rate that matter, rather than revenues paid or received in foreign currencies per se.

Senator CONROY —Thank you for that. Are foreign currency liabilities greater than revenues?

Dr Watt —We are not able to help you with that. As we said, we are happy to take that on notice.

Senator CONROY —You mentioned a couple of examples. Can you give me an expanded version?

Dr Watt —We can give you that. We can work something up. We are happy to take that on notice.

Senator CONROY —The minister's press release talks about a natural hedge. Take me through the natural hedge.

Dr Watt —I think the natural hedge is that the Commonwealth has revenue—

Senator CONROY —`The Commonwealth'?

Dr Watt —I always use the term `Commonwealth'; I am old fashioned.

Senator CONROY —`The Commonwealth' has a slightly broader definition than `government'.

Dr Watt —You are quite right, it can.

Senator CONROY —Yes, and I understand why you want to transpose it at this stage.

Dr Watt —Oliver Cromwell was a great user of the term, and I will not go into that either. The Commonwealth government has a number of ways in which movements of the exchange rate affect both sides of the budget balance sheet. Some of them, as I mentioned, are sources of revenue which are linked to the value of the exchange rate, such as customs duty or petroleum product revenues. The second is the value of the Reserve Bank's foreign currency portfolio. The Reserve Bank holds in the order of $10 billion to $15 billion of foreign currency. Those are assets denominated in foreign currency terms and they yield a stream of revenue in foreign currency terms, which is received by the Reserve Bank. That in turn affects the level of the Reserve Bank dividend which it pays to government.

But there is a broader issue as well and that is the actual operation of the exchange rate. Your point is that when the exchange rate depreciates, the cost of foreign currency expenses of the budget rise in Australian dollar terms. Another effect of a depreciating exchange rate is to provide a stimulus to the Australian economy; it is one of the things that we are all aware of. A depreciating exchange rate provides economic stimulus: a more competitive traded goods sector, faster growth and higher employment. That in turn brings in additional revenue. It also reduces expenses on things like unemployment benefits. On the other hand, exchange rate appreciation reduces your expenses in foreign currency terms.

Senator CONROY —That J-curve is still around.

Dr Watt —No, this is not a J-curve; it is a standard part of the operation of the exchange rate. When the exchange rate falls it does provide stimulus to the domestic economy. When the exchange rate appreciates that actually, all else being equal, tends to dampen economic activity. So, to come back to the report, really the Auditor-General looked at a very narrow subset of the impact of the variation of the exchange rate on part of the budget. The government is saying that there is a whole broader picture out there that suggests that a partial analysis is incorrect, and that is what the government has taken into account in setting its foreign exchange policy.

You have to go a bit further than that, Senator; you have to say that, over time, there are two things that you have to take into account. Firstly, the swings and roundabouts on the exchange rate. If memory serves me correctly, the Auditor-General looked at a period when the Australian dollar depreciated. If he had looked at a different period, he would have gotten quite different results because you would have had a substantial period of Australian dollar appreciation. That is one thing. Over the long term, you would expect exchange rate cycles to mean that there are swings and roundabouts in here—

Senator CONROY —How long is the long term? Greater minds than mine have commented on this, as I am sure you are aware, Dr Watt. I think the most famous speculation on the long term is that in the long run we are all dead.

Dr Watt —It was John Maynard Keynes who said that.

Senator CONROY —That is probably outside even your long-term thinking. I think, earlier in the evening, we moved into about 18 months being your definition of long-term.

Dr Watt —I think we might be talking about the very long term. I think the point is that over the long term—and a number of people say this; you have seen the Access Economics material—

Senator CONROY —I am still embarrassed for them, but if you want to tout their work around claiming that the exchange rate would be 72c right now—which is 18 months after they produced their report—then I am pleased for them.

Dr Watt —I would never speculate on the value of the Australian dollar.

Senator CONROY —No, but they did.

Senator Abetz —They costed some of your promises too; didn't they?

Dr Watt —Senator Conroy, that is a different issue. One issue is what is a fair value of the Australian dollar and the other issue is what is the tendency over the long term for the cycles to even out.

Senator CONROY —Those world markets, damn them; they are just never fair, are they?

CHAIR —What did Lord Keynes say about the long-term?

Senator CONROY —You failed Economics 1; we decided that a little earlier all right.

CHAIR —I did. The one thing I do remember is that Lord Keynes said, `In the long term we are all dead.'

Senator CONROY —I just said that. In the long run we are all dead; that is actually my point.

CHAIR —This is why you passed Economics 1 and I failed.

Senator CONROY —Yes; that is right. I actually agree. Few people mount the long-run argument to justify where we are at.

Dr Watt —I think it is important to note that with currency fluctuations there is a sense of swings and roundabouts over the long term. They do not keep going up and they do not keep coming down; they do tend to fluctuate over the longer term. There is another point as well, which I think it is important to take into account, and that is the cost of hedging. Hedging is not costless; in fact it is a very expensive exercise. For example, hedging costs per $US1 million based on the current exchange rate—close enough to the current exchange rate—for a five-year period would be in the order of $120,000. That is the hedging cost.

Senator CONROY —Compared to $3.8 billion.

Dr Watt —This is $1 million. What that says is: you are protecting $1 million at a cost—as I understand these numbers—of 12 per cent. If you do it over 10 years, it is $180,000. Hedging costs themselves—for those who would argue the alternative to the government's policy of self-insurance, which is fully hedging everything—are very significant. That has got to be taken into account.

Senator CONROY —I do not think that the Auditor-General argued that it was costless.

Dr Watt —He did not argue that it was costless, but I do not think he took it into account.

Senator CONROY —I am sure he did not believe it was free. I am sure that even the Auditor-General—in his ivory tower, as it is sometimes called by some members of the bureaucracy—would realise that hedging is not free.

Senator Abetz —I would not described Centenary House as an ivory tower, although the charges would indicate it was an ivory tower!

Senator CONROY —It is a very nice building, Senator Abetz.

Dr Watt —I am not seeking to categorise the Auditor-General as in an ivory tower. What I am saying is people often underestimate the costs of hedging long term, which is really what we are talking about—we are talking about long-term flows. It is a very expensive exercise, and that needs to be taken into account.

Senator CONROY —It depends whether you are now defining `long term' as 10 years or not.

Dr Watt —I am certainly thinking about `long term' as 10 years in the foreign currency world, Senator.

Senator CONROY —But a natural hedge means that changes in the exchange have no impact on the budget?

Dr Watt —It means that it has a limited net impact.

Senator CONROY —So $3.8 billion, in your view, is a limited net impact?

Dr Watt —No, that is one side of the transaction. You would then have to look at what happened on the other side of the ledger, as we discussed.

Senator CONROY —Let us look at the Reserve Bank's position, seeing we want to rope them into this, which frankly I think is an outrageous thing to do, but let us not have an argument about it. They are not part of the Commonwealth government: they are an independent statutory authority.

Dr Watt —They are an independent statutory authority that pays dividends to the Commonwealth government—very substantial dividends.

Senator CONROY —They managed not to lose money.

Dr Watt —No, they are the Commonwealth's assets, not the Reserve Bank's assets, and they pay dividends on those assets. They are an independent—

Senator CONROY —They managed to defy the cycle over time, don't you think? They would say to you that they have never lost money yet, but, on your analysis, they should be part of the cycle—losing money occasionally—shouldn't they?

Dr Watt —I think that is something that you would have to take up with the Reserve Bank.

Senator CONROY —Come on, you cannot have it both ways. If there is a natural ebb and flow and cycle, they surely should be losing some money as well—and they proudly boast that they have never lost a cent.

Dr Watt —There may well have been years in which the value of the foreign currency portfolio has been reduced because of depreciation of the exchange rate. I do not think they would deny that. I think what they would say, though, is that each year they have earned a return on that foreign currency portfolio. But I am getting out of my depth, I am sure.

Senator CONROY —I will draw to the attention of the Reserve Bank Governor your contribution—

Dr Watt —Please.

Senator CONROY —and I am sure he will be pleased. In their May Reserve Bank Bulletin, the RBA noted on page s76 that in April they had less than $8 billion—that is, total reserves of $35 billion minus $27 billion already sold through the forward market. They have only $3 billion of liquid foreign exchange assets. Are you aware of that?

Dr Watt —I am not aware of the detailed make up of their portfolio.

Senator CONROY —Only $3 billion?

Dr Watt —$3 billion of?

Senator CONROY —Of liquid foreign exchange assets.

Dr Watt —I think that is `liquid', Senator. Where is the rest of the portfolio?

Senator CONROY —The rest have all gone forwards.

Dr Watt —But that is still a foreign exchange asset.

Senator CONROY —At the end of 2000-01, government foreign liabilities comprised 20 per cent of the government's debt portfolio of $64 billion, which roughly works out at $13 billion. Does the government have any other foreign currency assets?

Dr Watt —That is something I am not aware of. I will take that on notice.

Senator CONROY —It seems on my adding so far that liabilities are well in excess of assets, so where is the natural hedge?

Dr Watt —There is also the point we have made about the behaviour of the exchange rate and effect on the economy.

Senator CONROY —Yes.

Dr Watt —And also on the fact that a number of revenues are affected by the value of the exchange rate, such as customs duty and—

Senator CONROY —Yes, the Access Economics report, which is two years old.

Dr Watt —No, but those customs duty revenues do exist. We have not stopped importing goods and services in the last two years.

Mr Bowen —And also the fact, I think, that the government is running down that foreign US denominated debt.

Senator CONROY —Yes, which goes to the point that it is not actually a natural hedge. There are policy decisions that are taken to get to a position; it is not a natural hedge. You have got to have things on both sides.

Mr Bowen —It goes to your point that there is a higher level of liability in foreign currency than in foreign assets. I am simply making the point that the government is running down that foreign US denominated debt.

Senator CONROY —That is my point: a natural hedge has to be balanced. There is a policy decision that is not making it balanced; therefore it cannot be a natural hedge. They are not balanced. That is the actual point.

Dr Watt —I think we made the point that there was perfect balance, either way. I think that is a fair comment. We have been talking about the Reserve Bank, and you had already promised me a call from the governor—

Senator CONROY —He has already rung?

Dr Watt —One of his staff rang today.

Senator CONROY —Are they in disbelief as well that you have roped them in?

Dr Watt —No, Senator. The Reserve Bank have been involved in the development of this policy over a period of time. As they have some strong views in this area, we thought it was worth our while determining what we could and could not say here, because we do not want to take the bank's name in vain.

Senator CONROY —Did they contact you after you put out the press release taking their name in vain?

Dr Watt —We have been in regular contact with the Reserve Bank over the last several months—including on agency banking, I am afraid.

Senator CONROY —I am sure you have!

Dr Watt —Perhaps it is important to get some of this on the record. What they have indicated they are happy to have stated here is their view that the Reserve Bank agree that the Commonwealth is best served by not externally hedging and that, if the exchange rate behaves in the future in the same way it has in the past, there will be no significant difference over time between always hedging and never hedging, transactions costs aside.

Senator CONROY —Come on then: seriously, cough up a time frame; let us have a long-run time frame, on your calculation.

Dr Watt —I think you would have to ask that one of the Reserve Bank.

Senator CONROY —You cannot bring them in to defend your position unless you are prepared to give us a time frame.

Dr Watt —I think the bank is making the point that, over time, the Commonwealth is best served by this. There are swings and roundabouts.

Senator CONROY —If I could go back to my esteemed colleague Senator Mason's quote from Mr Keynes: we are all dead in the long run. We will be long dead when the natural hedge balances out over 27,000 years.

Senator Abetz —But the Reserve Bank will continue in perpetuity.

Senator CONROY —That is true, and they will continue to keep making money on our behalf.

CHAIR —Just like the estimates committees.

Dr Watt —And the Commonwealth budget is delighted.

Senator CONROY —And so it should be, as the Reserve Bank boffins have pointed out to Treasury.

Senator Abetz —They will not like you any more: calling them boffins.

Senator CONROY —I am sure they would take that as a term of endearment and affection. Coming back to the discussion we are having about the Reserve Bank's position, I was talking about total reserves of $35 billion, minus $27 billion already sold through the forward market. Forwards are negative reserves. The currency has been sold—$27 billion. I am just trying to look for that other side of the natural hedge.

Dr Watt —I think it is still there, Senator.

Senator CONROY —Even though they sold it? A forward is a contract to sell—gone, into the ether—it is not liquid.

Dr Watt —What have they sold? Have they sold $A forward in the foreign currency exposure or the other way around? I cannot tell from that balance sheet.

Senator CONROY —Do you know any business that would be able to take the gamble to stay in the market after they have dropped $3.8 billion? Pasminco has dropped less than that, and it has gone out of business.

Dr Watt —Sorry, what is the question?

Senator CONROY —The question is: exactly how long do you stay in the market? In your case, you just stay in the market because, at some point over a 10- or 20-year period, you make the money back.

Dr Watt —What the Commonwealth has done is to adopt a self-insurance principle on the basis that, over time, there will be swings and roundabouts. It is worth pointing out that you have picked out a number of years in which defence expenditure is reasonably big.

Senator CONROY —I have not picked it out; it is just what has happened. Blame the Auditor-General; they picked it out.

Dr Watt —But you have highlighted a number of years in which expenses have risen because of exchange rate movements. I think there are some years where the reverse has happened in recent times.

Mr Bennett —It is important to note that under the supplementation arrangements for Defence receiving supplementation when the dollar falls, in the past it also has had periods where the dollar has risen and it has obviously returned to the budget.

Senator CONROY —Would they even come close to $3.8 billion, even if you went back over 20 years?

Mr Bennett —I do not have that information with me.

Senator CONROY —That could be a natural hedge.

Mr Bowen —We talked about it before, but in this financial year the estimate is for a $664 million revaluation impact. That is in one year.

Dr Watt —It is also worth reflecting on the natural hedge again. I note that the Reserve Bank realised something of the order of $3 billion in currency gains in 1997-98 and 1998-99.

Senator CONROY —Given the dollar is going up, why are you giving them money? Why do you make up this figure if you are weighting it out over the long run?

Dr Watt —But that is the point. If the dollar appreciates then the agencies concerned will not get the windfall gain. They do not bear the windfall loss and they will not get the windfall gain. The position is symmetrical in relation to the rise and fall of the dollar. That is the whole purpose.

Senator CONROY —What dollar figure is it symmetrical around? What is the rate that it is symmetrical around, or are you saying it is just the actual contract value?

Dr Watt —No.

Senator CONROY —When they bought something for X Australian dollars—

Dr Watt —When I say symmetrical, the point I am making is: when the exchange rate rises and there is a windfall gain to be made by the agency because it has reduced foreign currency expenditure, the budget benefits from that just as, as you pointed out, when the exchange rate falls the agency gets budget supplementation because it is symmetrical. If we gave with one hand and did not take with the other we would not be symmetrical.

Senator CONROY —It is hard to argue with that, isn't it? At what point, with the dollar rising as it is at the moment, do you think you will actually stop giving Defence money? Over the last six months it has edged its way up and it has had a spectacular rise over the last two months. What is the symmetrical point? What is the point where you stop giving them money?

Dr Watt —I think it is better to look at year to year movements. You say `stop giving them money'—

Senator CONROY —Or stop giving them a break. When am I going to stop seeing appropriations turning up on the floor of parliament?

Dr Watt —I think the answer to that is that will occur when the exchange rate over the relevant period—the financial year if that is the relevant period, and I am now not exactly sure how these things work—is equal to or higher than the exchange rate in the previous year then we will not be giving them money.

Mr Bowen —Or the rate specified in the contracts that they have entered. The other point to make is it also would depend upon the exact exposures that Defence has. Much of those would be in dollar US, but not all of them.

Senator CONROY —Do you think there will be any need for an appropriation next year?

Dr Watt —You wouldn't ask me to speculate on the value of the Australian dollar exchange rate, Senator!

Senator CONROY —But you have to put forward estimates in. Have you made a forward estimate?

Dr Watt —I would have to defer to others on that, but I would just note that the government has to deal with an exchange rate as part of its normal budget processes, so this does not change anything.

Mr Bowen —We do not project forward exchange rates into the forward estimates. A spot rate is adopted and used for the forward period.

Senator CONROY —But in terms of the calculation you do to determine an appropriation, you said it was an average over a year?

Dr Watt —I was guessing; I should not have been interrupting Mr Bowen.

Senator CONROY —Dr Watt said before that you make the decision based on a yearly average rather than a spot rate, whether or not an appropriation is going to be necessary. You work it out over 12 months.

Dr Watt —I think you asked me the question, `When will we stop giving them money?' I think I said, `When the average exchange rate over a financial year was equal to or higher than the average exchange rate over the previous financial year.' I think that is the layman's answer. How it actually works through the—

Mr Bowen —I think in practice the forward estimates are set on the basis of an exchange rate—the budget estimates and the forward estimates. But an agency's access to funds for supplementation or an agency's requirement to repay will depend very much on the contractual arrangements that they have entered into. The Department of Defence enters into long-term contracts and hence locks into particular exchange rates if it does it in, say, US dollars. So it will depend very much on the nature of those contracts, the length of those contracts, the rates specified in those contracts and the actual rate at the time of payment on those contracts. It is quite complex to actually work out.

Senator CONROY —I have no doubt that it is. That is probably as far as I can go on that one. The time is almost 11 p.m. and I am happy to pull stumps. The only two issues that I have left for first thing in the morning is Employment National and, I might even be able to do it now, very quick questions on business services, output 3. That will probably only take five minutes. I just want to knock that over.

Dr Watt —The more we can knock off, the better. We have got the people here.

CHAIR —The committee is happy to capitalise on your enthusiasm, Dr Watt, so we will carry on.

Senator CONROY —Do lease agreements include a provision for an increase in rental payments over time?

Mr Hutson —To lease it? That would be a pretty common thing.

Senator CONROY —I want to talk about the leasing terms you have negotiated for properties that were sold and subsequently leased back by government agencies.

Mr Bowen —The leases were put in place by normal commercial arrangements with provisions for escalation. But we have got our experts, so I will defer to Barry Jackson.

Mr Jackson —Is it possible for you to repeat the question, Senator?

Senator CONROY —I was asking about the lease terms that are negotiated for properties that were sold and subsequently leased back by government agencies. Do those lease agreements include a provision for an increase in rental payments over time—annual, biannual; how does it work?

Mr Jackson —All leases are based on a commercial model which do include provisions for a fixed rental or increase, or a CPI increase, or a market increase, or a combination thereof, depending on how it was negotiated.

Senator CONROY —Do you have a standard model? When you say there is one of 10 choices of menu, or even an average of them, what is the preferred model that you negotiate?

Mr Jackson —There is actually no preferred model, insomuch as the respective agencies that we are entering into leases with seek their own commercial advice. Obviously a lease for a property in, for example, Tasmania would be different for a lease in Sydney with regard to the type of escalation clauses that may be there, and also the length of the actual lease itself would impact on the type.

Senator Abetz —What about Canberra and Sydney?

Senator CONROY —We are almost finished, Senator Abetz. I am trying to knock this over so the officers can get away. So is reference to the CPI normal?

Mr Jackson —It is not unusual.

Senator CONROY —With regard to agreements adjusted by the CPI, would increases have reflected the spike in the CPI following the introduction of the GST?

Mr Jackson —My understanding is that the ACCC made a ruling that they should not be reflected by the spike in the GST.

Senator CONROY —Did you negotiate that?

Dr Watt —We would have to check that. I think the general impression with contracts was that, as far as possible, they look through the GST spike.

Senator CONROY —Rent is not meant to be subject to the GST.

Dr Watt —It was not rent in particular but all contracts were supposed to look through the GST spike.

Senator CONROY —I think it is correct that Mr Fels and the ACCC did make that point. What I am asking therefore is did you negotiate that outcome?

Mr Jackson —The property management branch did not enter into negotiations or discussions with the ACCC on that issue.

Senator CONROY —I am talking about with the actual new building owners. What I am asking is: did you deliver that outcome for the leases for these buildings you used to own?

Dr Watt —I think that is one we will have to take on notice. I do not have the ability to say yes or no.

Senator CONROY —It should be the case. The ACCC has ruled as part of their price exploitation powers that it should be the case. You agree that it should be the case in terms of what they have said.

Dr Watt —Again, I think we have to check the facts.

Senator CONROY —Would you be surprised to find that there were leases that did not deliver this outcome? I guess nothing surprises you anymore after taking this one on, Dr Watt.

Senator Abetz —There is one with a nine per cent spike which is way above the CPI.

Dr Watt —We would need to check the facts. One question that comes to mind is: were the leases you referred to negotiated well in advance of the GST or after the GST period?

Senator CONROY —If they were negotiated during the period—

Dr Watt —Again we would need to check the facts. If you tell me there were leases then that may well be the case. We do not know enough about it.

Senator BRANDIS —What would you think about a lease that was $509.15 per square metre per annum above the market rate?

Dr Watt —I think I might pass on that one.

Senator Abetz —Allow me to answer; I will say excessive.

Senator BRANDIS —I do not want you to pass on it. I am asking what you think.

Senator CONROY —I think Senator Abetz indicated he would like to answer that and I think he said `excessive'. I know you have had some discussions about the DFAT building earlier in the day so I apologise if my couple of quick questions cut across what you have already discussed. Presumably because the DFAT building is a security purpose-built building any old tenant cannot move into the Austrade vacancy?

Dr Watt —That is correct. We could give you the same answer we gave Senator Ray.

Senator CONROY —I apologise.

Senator Abetz —You can discuss it at a faction meeting.

Ms Campbell —The lease for the R.G. Casey building was negotiated so that the remaining tenants who had security requirements had some input into who the new tenants would be.

Senator CONROY —If a suitable tenant cannot be found who picks up the bill for the spare space?

Ms Campbell —I do not have the details of the lease with me and I do not think Mr Jackson has either. The provisions were to the satisfaction of DFAT when they were negotiated.

Senator CONROY —If the Cuban embassy wanted to move in you would think that DFAT would probably say, `No, I do not think so'?

Ms Campbell —That would be an issue for DFAT, but they did have the power within the lease to have some veto over who could come on the premises.

Senator CONROY —It makes perfect logical sense that that is the case. If a suitable tenant cannot be found is there a clause that requires DFAT, the Commonwealth government or DOFA to pick up the tab for the vacant space? I appreciate you do not have the information, so can you come back to me on that question.

Dr Watt —We will take that on notice.

Senator CONROY —Thank you. My apologies for not getting to Employment National. If your next question is whether it is on first or last, we do not know yet.

Dr Watt —Is Employment National the only thing left from outputs 1 and 2?

Senator CONROY —Certainly so far as I am concerned. I think I speak for most of my colleagues, though I understand Senator Sherry did have some questions for Employment National as well.

Dr Watt —He asked superannuation questions.

Senator Abetz —A lot of flexibility has been provided.

Senator CONROY —I am just saying that I think Employment National is all that is left from outcome 2.

Dr Watt —And outcome 1 is finished?

Senator CONROY —Yes.

Senator Abetz —So we will only bring Employment National back tomorrow?

Senator CONROY —That will be fine.

Senator Abetz —I understand that, no matter what, the AEC will be on at 11 a.m. Is that right?

CHAIR —I think that is correct, Minister. Thank you, Minister and Dr Watt.

Senator CONROY —I am sorry, I have just turned a page and found something I did not know was here. My apologies.

Senator Abetz —You need permission to ask the question.

CHAIR —I hope we do not forget the indulgence of the chair.

Senator CONROY —I have some questions about the HIH Royal Commission and the building royal commission.

Dr Watt —How many questions are there, Senator?

Senator CONROY —There are four.

Dr Watt —We can do them tonight.

Senator Abetz —Let us do them now.

Senator CONROY —I am happy to do them now so the officers can go home.

CHAIR —Thank you for the offer to accede to your wishes!

Dr Watt —Senator, before you ask your questions I should make a point. You are aware, of course, that responsibility for royal commissions passed from the department of finance with the AAO changes. So, while we were the responsible agency up until the end of November or the beginning of December last year, we have not had any responsibility for this area since.

Senator CONROY —These are questions which go to determining the salary of the royal commissioner. I think it is something that you had responsibility for at the time.

Dr Watt —It is something the department had an involvement in.

Senator CONROY —You were involved; it is not as though it happened afterwards. How was the salary of the royal commissioner determined?

Mr Suur —Which royal commissioner are you speaking about?

Senator CONROY —Justice Neville Owen.

Mr Suur —Justice Neville Owen was a judge of the Supreme Court of Western Australia, and an agreement was entered into between the Commonwealth government and the Western Australian government that, for the duration of his appointment as royal commissioner heading the inquiry into HIH, the Commonwealth would compensate the Supreme Court of Western Australia for the cost of his salary, and that the Commonwealth would supply additional funds to the Supreme Court of Western Australia to engage a judge to replace Justice Owen.

Senator CONROY —So, in effect, there is a double whammy: they are paying for his replacement as well as for his salary while he is doing this job.

Mr Suur —That is my understanding.

Senator FORSHAW —When was that agreement reached?

Mr Suur —That agreement was reached upon the appointment of Mr Owen.

Senator CONROY —So he is being paid what he was paid previously?

Mr Suur —Yes. There is a continuation. Justice Owen is somebody who will return to the Western Australian bench at the conclusion of the commission. It gives him employment continuity and continuity of his conditions of service, pension arrangements and such matters. These arrangements were negotiated between Justice Owen and the Attorney-General's Department.

Senator CONROY —Was the Minister for Finance and Administration responsible for approving the amount initially budgeted for the HIH Royal Commission?

Mr Suur —A budget was submitted to the minister for finance by the HIH Royal Commission, yes.

Senator CONROY —So he ticked it off. Did the minister consider the proposed annual salary of the royal commissioner as part of the budget process?

Mr Suur —Yes.

Senator CONROY —Was the minister responsible for authorising it or was it a cabinet decision?

Mr Suur —The appointment of Justice Owen was a matter for the Governor-General.

Senator CONROY —On recommendation from—

Mr Suur —From the government, that is right.

Senator CONROY —So it was a cabinet/Prime Minister—I am not quite sure what the legal term is, but it was a cabinet decision?

Mr Suur —Yes.

Senator CONROY —With respect to the remuneration package of Terrence Cole QC in the building royal commission, how was the salary of the royal commissioner determined?

Mr Suur —Again, negotiations were held with Mr Cole.

Senator CONROY —What did Mr Cole do before? Was he a judge?

Mr Suur —He was a former New South Wales Supreme Court judge, but I understand that he had retired from the post before his appointment.

Senator CONROY —I am sorry I interrupted you, Mr Suur. How was the salary of the royal commissioner determined?

Mr Suur —It was determined through negotiations with Mr Cole. Those negotiations in relation to his salary did not involve the department of finance; rather we were advised on 3 August by the Department of Employment, Workplace Relations and Small Business that an amount had been agreed in relation to his remuneration.

Senator CONROY —What is that amount?

Mr Suur —The amount is $660,000 per annum.

Senator CONROY —What is the amount that Justice Neville Owen receives per annum?

Mr Suur —I do not have those numbers immediately in front of me, but my recollection is that it is somewhere between $200,000 and $250,000, which is the remuneration of a judge—

Senator CONROY —Of a West Australian court. I appreciate that. So the minister for finance was not responsible for approving it; he was just told there was an amount?

Mr Suur —Yes. But in relation to both, there are additional benefits that they receive. They relate to things like the provision of suitably furnished accommodation in the city in which the royal commission is based. There is a living away from home allowance; there are some arrangements that allow them to undertake family reunion travel and so on, but those are not matters that go to remuneration.

Senator CONROY —Are you able to give a costing? Is there a fringe benefits costing on those things?

Dr Watt —We are not able to give you that.

Senator CONROY —Is that because you do not have it?

Dr Watt —We are not aware of it.

Mr Suur —That would be a matter for the Attorney-General's Department. The fringe benefits tax is calculated at the end of March of each year.

Dr Watt —Based on usage.

Mr Suur —We ceased having responsibility in November, so we do not have those actual numbers.

Senator FORSHAW —Do you know whether Commissioner Cole continues to receive his pension or whatever entitlement he receives as a retired judge?

Dr Watt —My understanding is that his entitlement to a pension from the New South Wales Supreme Court is a continuing entitlement that is not affected by—

Senator CONROY —If a politician had been appointed to a position like this, I think the arrangements are now that you have to give up your pension, whatever pension you have at the time, to claim extra money.

Mr Suur —Again, this is a matter of detail that I think is better explored with the—

Senator CONROY —You may not know this but what is the pension for a retired judge?

Dr Watt —We do not know that.

Senator Brandis interjecting—

Senator CONROY —Senator Brandis has kindly suggested 75 per cent of the salary. Does anyone have any idea of what a New South Wales—

Dr Watt —We are simply not able to answer the question.

Senator Abetz —Ring up your mates in New South Wales.

Senator CONROY —I think Justice Neville Owen is getting between $200,000 and $250,000. Would it be roughly the same across states? Is there parity?

Senator FORSHAW —In the state in which it is being reimbursed.

Dr Watt —You are taking us to areas where we do not have enough information to even speculate.

Senator CONROY —I will come back to two final points. The minister was not responsible for approving this salary; he was just advised by Workplace Relations? I think that was the evidence that Mr Suur—

Mr Suur —There were negotiations between other portfolios and ministers and Commissioner Cole. My understanding is that the Attorney-General's portfolio and the Employment and Workplace Relations portfolio were involved.

Senator CONROY —Was it part of the budget process? Were you just told, `Put this in your budget'?

Mr Suur —The appointment of royal commissioners is a matter for the Prime Minister, and the appointments are made by the Governor-General. Things like the terms of reference and details of the royal commissioners themselves were handed to us by the people who provide the administrative support to the royal commission, and we did the backup, in a sense.

Senator CONROY —You had no part in the processing of it?

Mr Suur —That is correct.

Senator CONROY —The final decision on the HIH Royal Commission was made by cabinet. Did the building royal commission therefore also go to cabinet for approval?

Mr Suur —I would imagine so, although, again, we were not involved in that part of the process.

Senator CONROY —I appreciate that. Thank you very much.

CHAIR —Minister, Dr Watt and officers, many thanks for your assistance.