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'Couers' opens next week. And this was our last regular show for the year but we will be covering
all the big films that are hoping during our break in aur massive hour-long summer special which
goes to air on Sunday, 16 December at 6pm. In the meantime, get online and visit our website to
vote for your favourite film of 2007 in our annual At the Movies viewers poll. You'll find a
complete list of the films on our website. I

t. This vote has become an institution so don't forget.

I love finding out what you our audience enjoys seeing throughout the year. And this's the show for
tonight. Goodnight.

Don't forget to joins on the 16th. Goodnight.

Closed Captions by CSI

Tonight - two to tango.

I'm really looking forward to the party room meeting tomorrow.

The party room will make that decision tomorrow.

As Tony Abbott pulse out because he was too close to John Howard, Peter Costello's father-in-law
put s his family first.

There is no doubt that this man of great promise and great ability was blocked by Howard's
egomania. I don't think that can be doubted.

CC

Good evening. Welcome to Lateline. I'm Tony Jones. In the lead-up to his possible ascension to the
Liberal leadership, Malcolm Turnbull has set out an ajend to the Liberals. Support for Kyoto
ratification, sympathy for the gay agenda and an outright rejection of WorkChoices. Much of this
was policy on the run, so what do Conservative Liberals think about his tactics?

We are in a hiatus and the sort of thing which would be improper if we had a leadership in place
and a party room process that could be gone through, I think is not so objectionable, given that we
are in a position of flux at the moment.

You accept that this is a legitimate way to behave?

I am saying that Malcolm is Malcolm and, you know, Malcolm is a primal force of nature, someone
once said. I think things will be interesting under Malcolm.

Tony Abbott coming up along with a special report from Tehran. First our other headlines. High
hopes - Palestinian and Israeli leaders agree to a 14-month deadline to end the Middle East
conflict. Changing of the guard - Musharraf steps down as Pakistan's military chief to be sworn as
n as a civilian president. And on Lateline Business, monopoly fears - BHP

Libs leadership race down to two as Abbott withdraws

TONY JONES: The Prime Minister elect is in Canberra tonight as he prepares for tomorrow's first
meeting of his government.

The victorious Labor Leader is set to reveal the makeup of his frontbench after a caucus meeting in
the morning.

The Liberals will also meet to elect a new leader.

The race for the job of opposition leader is now down to two people but the recriminations over the
election loss continue.

From Canberra, Hayden Cooper reports.

HAYDEN COOPER: The new rulers have swept into town. Kevin Rudd and Julia Gillard are ready to name
their team and get down to business in Canberra as the first lady handled the press over in the
commercial airport.

THERESE REIN, KEVIN RUDD'S WIFE: Hi nice to meet you. Hi, I'm Therese. G'day, nice to meet you. Hi
how are you? Okay.

HAYDEN COOPER: Therese Rein was on a fact-finding mission: a new school for her youngest son.

THERESE REIN: I'm really excited about the amount of support and encouragement and I think
excitement in the community, so yeah I'm excited about that.

HAYDEN COOPER: But before anyone settles in, John Howard has thrown one final party in the Lodge.

His ministers joined him for lunch for the last time.

PHILIP RUDDOCK, LIBERAL MP: I guess it's conviviality isn't it?

HELEN COONAN, LIBERAL MP: We can thank him for all the good things he did.

TONY ABBOTT, LIBERAL MP: It's probably going to be the last supper at the lodge for quite some
time.

HAYDEN COOPER: One that Peter Costello and Alexander Downer didn't attend.

Today the former Treasurer's father-in-law and former state Liberal came out firing over the
weekend's election annihilation, pointing the finger of blame at John Howard.

PETER COLEMAN, FORMER LIBERAL MP: The fatal flaw was egomania.

HAYDEN COOPER: And accusing him of killing Mr Costello's career.

PETER COLEMAN: There is no doubt that this man of great promise and great ability was blocked by
Howard's egomania, I don't think that can be doubted.

JOHN HOWARD, FORMER PRIME MINISTER: And as the party moves on from the Howard influence the former
prime minister's greatest supporter is shelving his own leadership ambitions.

TONY ABBOTT: This time does not suit me.

HAYDEN COOPER: Not this time, but a future one, sure.

TONY ABBOTT: Who knows what future times might hold?

REPORTER: So the baton's still in your knapsack?

TONY ABBOTT: Oh yes, absolutely right.

HAYDEN COOPER: And so it's down to two... Brendan Nelson.

BRENDAN NELSON, LIBERAL MP: I'm really looking forward to the party room meeting tomorrow.

HAYDEN COOPER: Malcolm Turnbull...

MALCOLM TURNBULL, LIBERAL MP: Well, we'll see the party room will make that decision tomorrow,
okay?

HAYDEN COOPER: And most members are coy on who they'll back.

ALEXANDER DOWNER, LIBERAL MP: That's my business. I'm in the glorious position now where I don't
have to say. I think either of them will be fine.

KEVIN ANDREWS, LIBERAL MP: I'll continue to talk to my colleagues about that and I'll cast my vote
in the privacy of the party room tomorrow.

TONY ABBOTT: It's best to let that emerge tomorrow.

HAYDEN COOPER: Julie Bishop is putting herself forward as a team builder in the deputy's job and a
counter to Julia Gillard.

JULIE BISHOP, LIBERAL MP: Well I've been a cabinet minister, the other deputies have not, I've also
been a junior minister.

HAYDEN COOPER: The contrast could not be more clear.

As the Liberals and the Nationals seek a new leader the new Labor Government is sailing into town
to take up the spoils of office.

Outgoing ministerial staff had a deadline of today to pack up their things and tomorrow the makeup
of the new ministry moving in should be revealed.

JOEL FITZGIBBON, LABOR FRONTBENCHER: Well, I've been travelling to Canberra for eleven and a half
years and this is the first time I've travelled to Canberra as a member of the government. It's a
pretty good feeling.

STEPHEN SMITH, LABOR MP: Happy to do whatever Kevin wants me to do.

HAYDEN COOPER: Watching from abroad, the UK and the US are taking notice of Kevin Rudd's plans,
especially on climate change.

GORDON BROWN, UK PRIME MINISTER: He's already said that he will press at the Bali talks for further
carbon emission reductions and I believe that his contribution to that debate is going to be very
important for the future.

HAYDEN COOPER: And also on Labor's plans to withdraw troops from Iraq.

ROBERT MCCALLUM, US AMBASSADOR: We are going to talk to Mr Rudd about the whole range of issues
that relate to Iraq and Afghanistan, no doubt.

REPORTER: Do you need Australian combat troops?

ROBERT MCCALLUM: Well, that is one of the things that we are going to be talking about with Mr
Rudd.

HAYDEN COOPER: The new era is set to begin.

Libs post election turmoil manifests itself in QLD and WA

TONY JONES: Well the post-election turmoil in the federal Liberal Party has spilled over into the
party's Queensland and West Australian divisions today.

The Liberal leaders in both those states were forced to resort to bare-knuckle politics in an
effort counter increasingly rowdy calls for their resignations.

Tom Iggulden reports.

TOM IGGULDEN: West Australian Liberals were sharpening their blades for Paul Omodei even as the
federal election campaign was underway.

Now, with John Howard ejected from the Lodge and his seat, the knives came out today for Mr Omodei
in Perth.

JOHN MCGRATH, WA LIBERAL FRONTBENCHER: You either have to come out and guarantee to members you can
win the election for us or... or maybe you might face a challenge

PAUL OMEDEI, WA OPPOSITION LEADER: Paul Omodei doesn't get tapped on the shoulder - Paul Omodei
makes his own decisions. And if somebody comes in and taps me on the shoulder, they'll be very
lucky if they don't get a good right hook.

TOM IGGULDEN: The Liberal Party in Western Australia bucked the trend and performed well in the
federal election.

But that's unlikely to save Mr Omodei's leadership in a state that's the liberal's next best hope
of getting back into government.

PETER VAN ONSELEN, POLITICAL SCIENTIST, EDITH COWAN UNIVERSITY: The performance in Western
Australia was all about John Howard, and that's why they did well and not because of Paul Omodei.
Paul Omodei's personal approval ratings are in the low teens. He is not seen as the most effective
of opposition leaders. He is a good bloke, but he is not someone that most people in the party
think can win an election.

TOM IGGULDEN: In Brisbane the State Liberal Party is in crisis after an attempted leadership spill
that failed to produce a conclusive result.

Loyalists to party leader Bruce Flegg walked out in protest before the vote could be taken.

TIM NICHOLLS, LEADERSHIP CHALLENGER: We are entering uncharted territory here. I think the
disappointment we have is that there was no vote that was allowed to go forward. To be quite frank,
I don't believe there would be many people who would know where this will end up.

TOM IGGULDEN: For now, though, Dr Flegg isn't having any more talk of a leadership contest.

BRUCE FLEGG, QUEENSLAND LIBERAL LEADER: He did not have the numbers. That is what it amounts to.
And anything further is simply going to degenerate this whole thing into even more farce.

TOM IGGULDEN: But with the party room split evenly four against four, the leadership crisis is
expected to deepen.

PETER VAN ONSELEN: They are diametrically opposed on a lot of issues - moderates and conservatives
- and they're also opposed to one another in terms of personality problems that have built up over
years of factional feuding.

So it is hard to see the Queensland Liberal Party fixing itself, particularly in the wake of the
disaster that they encountered federally.

TOM IGGULDEN: Liberal party historian Peter van Onsolen says the party's crushing defeat at the
federal election is to blame for leadership tensions in Queensland and Western Australia.

PETER VAN ONSELEN: It's an opportunity in a chaos environment for people to start to settle scores
and to pursue their own personal ambition.

If that's all it's about it's a bad thing. If they use it as a way of embracing the battle of ideas
to redefine what the Liberal Party stands for, it could become a good thing.

TOM IGGULDEN: Western Australia is due for a state election in February 2009, with Queensland due a
few months later.

Tom Iggulden, Lateline.

Musharaff steps down as military commander

TONY JONES: Pakistan's military dictator Pervez Musharraf has stepped down as army chief.

He handed over command to the successor at an elaborate military parade in Rawalpindi.

After giving up his military title, he now becomes a civilian head of state and will be sworn in
for a second five-year term on Thursday.

The move is widely viewed as an attempt to ease the country's political crisis.

But President Musharraf remains under international pressure to lift the state of emergency imposed
earlier this month.

Israeli, Palestinian leaders agree to peace timetable

TONY JONES: The leaders of Israel and Palestine have agreed to an ambitious timetable in a bid to
reach a comprehensive peace deal for the Middle East.

At the behest of the US President George W Bush, Ehud Olmert and Mahmoud Abbas will try to
concluded a settlement on all outstanding issues before President Bush leaves office at the
beginning of 2009.

The breakthrough came during talks in the US city of Annapolis.

North America correspondent Mark Simkin reports.

MARK SIMKIN: The security was stifling and emotions were high. Hundreds of protesters converged on
Annapolis, a very public manifestation for the divisions that ended earlier attempts at peace.

This time, the participants hope it will be different. More than 40 countries attended the
conference including key Arab nations.

For most of his presidency, George W Bush resisted getting personally involved in the peace
process. Now he is in the middle of it.

GEORGE BUSH, US PRESIDENT: We need to lay the foundation for the establishment of a new nation, a
democratic Palestinian state that will live side-by-side with Israel in peace and security.

MARK SIMKIN: After intense last minute haggling, the Israelis and Palestinians agreed on a
framework and timetable for negotiations. They want to finalise a peace treaty by the end of next
year.

At this stage, it's just an agreement to seek agreement and key issues such as the borders of a
Palestinian state and the future of Jerusalem are yet to be addressed.

EHUD OLMERT ISRAELI PRIME MINISTER (TRANSLATION): We want peace. We demand an end to terror, an end
to incitement and to hatred. We are prepared to make a painful compromise rife with risks in order
to realise these aspirations.

MAHMOUD ABBAS, PALESTINIAN PRESIDENT (TRANSLATION): Time has come for the cycle of blood, violence
and occupation to come to an end. Time has come that both of us should look at the future with
confidence and hope and that this long-suffering land which was called the land of love and peace
would not be worthy of its own name.

MARK SIMKIN: Any peace deal could still be sabotaged. On the West Bank, thousands of Palestinians
denounced the conference and the Palestinian leadership.

Police loyal to President Abbas shot and killed one of the protesters. There were further
demonstrations in Hamas controlled Gaza, underlining just how difficult it will be to get agreement
on issues like the borders of a Palestinian state.

GEORGE BUSH: The task begun here in Annapolis will be difficult. Yet the parties can approach this
work with confidence. The time is right. The cause is just. And with hard effort, I know they can
succeed.

MARK SIMKIN: No one really expected a day of talks could end decades of violence and the diplomats
here agree it's what happens after Annapolis that is really important. There will be further
top-level talks at the White House tomorrow and the formal negotiations will begin in mid-December.

Mark Simkin, Lateline.

begin in mids December.

Tony Abbott talks frankly about leadership and loss

TONY JONES: Well returning now to our top story on the turmoil in the Liberal Party in the run-up
to tomorrow's vote for a new leader. Tony Abbott bowed out of the leadership race today leaving
Malcolm Turnbull and Brendan Nelson to slug it out. The outgoing health minister joined us earlier
this evening after dining with John Howard at the Lodge for the last time.

Tony Abbott, thanks for joining us.

TONY ABBOTT: Thanks, Tony.

TONY JONES: Did you stand down from the leadership race because John Howard is now on the nose?

TONY ABBOTT: I stood down because I didn't have the numbers to mount a credible challenge. I
thought I did on Sunday. Or at least I thought I might on Sunday. But by the time I had done a full
canvas it was pretty obvious that Brendan and Malcolm have much more support.

TONY JONES: But you also mentioned your relationship with John Howard being a key factor - and I
guess the reason you don't have any support.

TONY ABBOTT: I didn't have no support, but I didn't have enough support to be a credible challenger
at this time.

This time does not suit me. Who knows what the future might hold. I think it would be fair to
say...

TONY JONES: You mean during the next term? Because, we know what conservative governments in defeat
were like in Britain: revolving doors for leaders.

TONY ABBOTT: And let us hope that that doesn't happen to this conservative opposition.

TONY JONES: But if it does, you will be there.

TONY ABBOTT: Well, I certainly have staked a claim. I think I have something to offer the future of
the Party, but I think it is true just at the moment, the Party thinks that it is important to move
on from the Howard era. And I obviously have always been very closely associated with John Howard.
I think history will judge him very well. I think that in the not too distant future this may well
seem like a golden age. But just at the moment, the Party is devastated understandably by the loss
and wants to distance itself from the recent past.

TONY JONES: I've got to ask you this. Whoever takes the leadership tomorrow. Should they remain
leader under any circumstances until the next election?

TONY ABBOTT: Um, I'm certainly not guaranteeing that I won't in the future challenge for the
leadership. But I certainly intend to try to be a very constructive and loyal member of the team of
whoever wins tomorrow.

TONY JONES: So you won't say that the person who wins tomorrow should remain leader until the next
election?

TONY ABBOTT: Well, if that person performs, yes.

TONY JONES: Oh, it's a bit like Kevin Rudd, is it? Performance measures.

TONY ABBOTT: But look, we are in a new period of time and prior to the election we had very, very
well-proven leadership in Peter Costello and John Howard. This is a whole new ball game. I hope
whoever emerges tomorrow goes well. I certainly wish that person well. I will be happy to serve in
whatever capacity that person might ask me to serve. But in the end it will depend on performance
how long that person lasts and how well that person goes.

TONY JONES: You will be riding shot-gun effectively.

TONY ABBOTT: Look, I will be there doing my best for the team.

TONY JONES: Is the Party ready for a socially progressive small L liberal whose policy positions
are barely distinguishable from the Labor Party's?

TONY ABBOTT: Well, I don't think that is a fair characterisation of either Malcolm or Brendan. And
I think...

TONY JONES: Are you sure you don't?

TONY ABBOTT: I think both of them are more complex and more interesting politicians than that.

But let's face it. These are unusual political times. We've just had an election won by someone who
promised to be indistinguishable from the government on most issues, someone who claimed to be both
an old-fashioned Christian socialist and an economic conservative. That chameleon won an election.
So who knows how the opposition might go?

TONY JONES: Well, it does look a bit like me-tooism turned on its head. Here is the Turnbull agenda
as we know it: an Australian Republic, sorry to the stolen generation, ratify Kyoto, he is
sympathetic to the gay agenda and he now rejects WorkChoices outright. Is that the party you signed
up for?

TONY ABBOTT: Well, that is a different take to that which we have been pursuing over the last few
years.

TONY JONES: You can say that again. I mean, that is a totally different party, it sounds like.

TONY ABBOTT: Look, I don't think that that is the totality of Malcolm's position,

TONY JONES: Okay, well let's just take those ones I mentioned. They are key... he calls them the
symbolic things. Do you think the Party, and are you ready for a series of symbolic changes along
those lines.

TONY ABBOTT: Well, let's say this, Tony. The incoming government will ratify Kyoto. So that will be
if you like, a done deal. And once it is ratified, you can hardly unratify it. And in any event,
the whole world will have moved on from Kyoto in a couple of year's time.

On the question of Indigenous things, well look, um... The former government, I think has a much
better record on Indigenous policy than is often recognised.

TONY JONES: But do you agree... let's not go through the detail of that, because we have done that
a lot in government, but do you accept this argument about the symbolism of saying sorry?

TONY ABBOTT: Look, I think John Howard successfully moved us beyond that. And frankly, if Kevin
Rudd wants to get into that quagmire, I think he is making a big mistake.

TONY JONES: Malcolm Turnbull we are talking about.

TONY ABBOTT: And the other point I want to make, though...

TONY JONES: Is Malcolm Turnbull making a big mistake?

TONY ABBOTT: The other point I want to make is that regardless of whether Malcolm or Brendan
becomes the leader, the Party still has some influence. And in the end it is the party room which
not only determines the leadership but ultimately determines the policy.

TONY JONES: You have... you would be aware of concerns in the Party about the public campaign that
Malcolm Turnbull has been running on the airwaves, including all of these new policy prescriptions.
Is that causing concern among your colleagues?

TONY ABBOTT: I think that it's inevitable, given the kind of open democracy that we have and given
the kind of media pressures that we are all under that people who are running for the leadership
are going to end up speaking to the media and they are going to end up making commitments... or at
least, making statements that haven't gone through, if you like, a proper party room process so to
speak.

But we are....

TONY JONES: Is that particular issue - not going through a proper party room process... you are
making a series of party policy prescriptions on air - live on air as it were. I mean, is that
concerning people? I mean there have been rumblings about Malcolm Turnbull's non-consensus style,
for example.

TONY ABBOTT: I think notwithstanding this slightly unorthodox campaign for the leadership, I think
Malcolm does have strong support. Whether he has stronger support than Brendan will be apparent
tomorrow. But the point I want to make is that we are in hiatus and the sort of thing which would
be improper if we had a leadership in place and a party room process that could be gone through is
I think not so objectionable given that we are in position of flux at the moment.

TONY JONES: You accept it, then that this is a legitimate way to behave.

TONY ABBOTT: Well, I'm saying that Malcolm is Malcolm. And Malcolm is a primal force of nature,
someone once said. And things will be interesting under Malcolm, but nevertheless, he is entitled
at the moment to do these things. And I don't think - should he become leader tomorrow - that it
will in any way prejudice the open days of his leadership.

TONY JONES: Sounds like you think he's got the numbers.

TONY ABBOTT: Well, I don't know. Certainly, he has got a lot of support in the media. Whether that
translates to support in the party room, only time will tell.

TONY JONES: Now you have just come from what is already being termed the "Last Supper" in the
Lodge. None of us were there, obviously, give us a sense of the atmosphere.

TONY ABBOTT: There was nothing funereal about it, I've got to say. Obviously there are... there
were many people who were disappointed at Saturday. Some people had been shattered by Saturday
because they had lost their seats as well as their ministries. But you know, we have been a good
government, Tony. And I don't think many months will go by without people looking back with
considerable nostalgia and affection towards the administrative competence, and the political
steadfastness of the Howard government.

TONY JONES: We have barely seen John Howard since election night, how is he bearing up?

TONY ABBOTT: I think he has the character to cope. I'm not sure that all of his recent predecessors
in that role of ex-prime minister have coped that well with the aftermath of defeat. But John
Howard is a man of very fine character and of very stern stuff.

TONY JONES: So you instinctively think...

TONY ABBOTT: He is philosophical about these things.

TONY JONES: You have spoken to him obviously about it?

TONY ABBOTT: Obviously I have.

TONY JONES: And he feels philosophical?

Does it feel like it was his fault?

TONY ABBOTT: He knows that there were many decisions that he made in the last term that will
inevitably be called into question. And maybe he got some of those calls wrong. But he also knows
that he led a good government and he has changed Australia for the better.

TONY JONES: I've got to ask you this - is John Howard now re-asking his closest colleagues the
question that he essentially put to Cabinet some time ago - "is it me?" In this case, "was it me?"

TONY ABBOTT: I'm not so sure, because I think that he has come to the conclusion that it wasn't
really him. It was the fact that the government was 11.5 years old. And I don't believe - even with
the wisdom of hindsight - that changing the leadership 12 months ago let alone three months ago
would have made that much difference. Because unlike for instance, Morris Iemma who had been a bit
player in the Carr government in NSW, Peter Costello had always been absolutely central to the
Howard government.

TONY JONES: So you think... you are essentially saying that he shares half the blame for the loss.

TONY ABBOTT: And I think half the credit for the successes of that government.

TONY JONES: But half the blame for the loss.

TONY ABBOTT: Well, I'm not saying that Tony. I'm saying that in the end, the prime minister of the
day takes the responsibility for the government's successes and failures. But Peter Costello was
not just another minister. He was, if you like, the twin pillar on which the Howard government
rested.

TONY JONES: Now Peter Costello wasn't at the lunch. So he has kept in tact his record of never
having had a meal at the Lodge with John Howard.

TONY ABBOTT: But Peter has had many meals at the Lodge with John Howard.

TONY JONES: Why wasn't he at this one?

TONY ABBOTT: He and Tania hadn't been to a foursome with John and Jeanette.

TONY JONES: I hate even to contemplate the thought of that. But why wasn't...

TONY ABBOTT: I would have loved to have been at such a gathering. And of course, Peter and Tania
had been at gathering with John and Jeanette and other people.

TONY JONES: Let me ask you this, why wasn't he at this lunch?

TONY ABBOTT: That's not a question that I can answer.

TONY JONES: Now we heard last night that publishers are desperate to get Peter Costello to write a
tell-all memoir. Gerard Henderson told us that Peter Costello took extensive notes of conversations
- private conversations with John Howard and with others. Are you urging him not to write that
memoir.

TONY ABBOTT: Well, I think that any memoir that Peter Costello wrote would be a tribute to the
colleagues who have helped him to do the good work that he has done.

TONY JONES: That is what you'd like it to be. But what if it actually was a memoir which told what
he really thought about John Howard.

TONY ABBOTT: And what he really thinks about John Howard is that John Howard was a great prime
minister - not perfect. Peter and John didn't always agree. Obviously, Peter would have loved John
to have vacated the chair at some point in the past.

TONY JONES: Do you agree with Michael Kroger that the Party is now at its lowest ebb since it was
formed?

TONY ABBOTT: I think these are pretty dark days for the party. But I also think that we should keep
things in perspective.

Just three years ago, the same team with much the same policies and certainly the same values won a
stunning victory. So sure, we've had...

TONY JONES: A lot of those values seem to be changing now if Malcolm Turnbull gets in charge.

TONY ABBOTT: We've had a massive defeat. No doubt about that. But we are still only three per cent
away from winning next time round.

TONY JONES: So you don't accept the political reality that the Liberal Party is very likely now to
be out of office for two terms?

TONY ABBOTT: I don't accept that at all.

TONY JONES: Alright, the last time I saw you, you looked totally exhausted.

TONY ABBOTT: I'd had a hard day.

TONY JONES: You had had a very hard day indeed. You've had a hard day again today. You haven't seen
much of your family.

Have you considered, or did you consider giving the game away completely like others?

TONY ABBOTT: No. No, look I didn't Tony. Look, I'm very lucky. I have a family that doesn't always
like what I do, but which is very supportive of what I do. And my wife and my kids have always
known that I had a vocation to politics and thus far at least they are prepared to support it. And
I am very grateful to them for that.

TONY JONES: So you imagine you will be round from here until the next election at least?

TONY ABBOTT: Not from here to eternity, but certainly for I hope a long time.

TONY JONES: Here is snapshot of the Liberal Party at the moment. It has been decimated at a federal
level. In WA the Liberal Leader Paul Omodei has virtually barricaded himself in his office and he
is threatening to knock the block off anyone who comes in to challenge him.

TONY ABBOTT: That's muscular leadership.

TONY JONES: It certainly is. In Queensland, the Party president has told his leader Bruce Flegg to
stand down after Flegg refused to allow a leadership spill. In NSW, the Party has been taken over
by the right. Some say the extreme right.

I've got to ask you this. Isn't it the Liberal Party rather than the voters that is sleepwalking to
oblivion at the moment?

TONY ABBOTT: We have some problems. But I don't think that they are problems which good people and
good policies can't fix. And in NSW I would certainly dispute the claim that there has been any
extreme right takeover. Barry O'Farrell is a very decent bloke. He is a highly competent
experienced professional...

TONY JONES: I'm talking about the Party at an organisational level.

TONY ABBOTT: I don't... it's just a grotesque caricature to describe the Party membership that way.

TONY JONES: On election night a number of senior Liberals said the scandal in Lindsay was
responsible for not only destroying the end of the campaign but in many respects tipping the
balance in the election.

Will there be, as well as the Federal Police investigation, will there be an internal Liberal Party
investigation that goes right up the chain into the state executive to find out what actually
happened and who knew what?

TONY ABBOTT: Well, there certainly should be. But I think I can tell you absolutely point blank,
Tony, that it was a rogue act by a group of lunatics.

TONY JONES: But some of those lunatics or at least one of those lunatics...

TONY ABBOTT: Well connected lunatics, sure. But the fact of the matter is, even the espousers of
candidates and retiring members are capable of doing crazy things.

TONY JONES: I'm just saying it went right up the chain to the state executive. Are you not worried
that there may be a poison in the state executive?

TONY ABBOTT: I think that factionalism has ill-served the NSW Party. Factionalism of the left and
factionalism of the right. I think people are perfectly entitled to a philosophical view. I think
people are perfectly entitled to have their friends, and be inclined to support their friends. But
in the end, everyone has got to work together. And that is the poison that sometimes contaminates
political parties.

TONY JONES: Did Jackie Kelly talk to you before those pamphlets went out?

TONY ABBOTT: No. Absolutely not. And Jackie had no inkling, as I understand it from subsequent
conversations - had no inkling of what was about to happen.

TONY JONES: Did she ask for your advice before she went on AM and put her foot comprehensively in
it? And gave what some would describe as the worst interview ever done by a member of parliament
and took the Chaser defence. Were you responsible for the Chaser defence.

TONY ABBOTT: Look, Jackie was my best friend in the Parliament. She's a terrific person. But even
she would accept that that was the lowest ebb of her political career. And look, I don't put words
in her mouth, just as people don't put words in my mouth.

TONY JONES: You didn't advise her on this.

TONY ABBOTT: No, look Jackie and I discussed it. Obviously you discuss these things.

TONY JONES: What did you tell her to say?

TONY ABBOTT: As I said, Tony, I don't put words in people's mouths.

Politicians are responsible for what they say.

TONY JONES: What'd you tell her to say?

TONY ABBOTT: I didn't tell her to say anything.

TONY JONES: What did you suggest she say?

TONY ABBOTT: I didn't suggest that she say anything. I... we just lamented what a crazy thing it
was.

TONY JONES: What a crazy thing is was it happened in her living room.

TONY ABBOTT: Look. Tony, you are now pressing me on things that I'm afraid I know nothing about.
And they are the sorts of things that will have to come out in the various investigations that are
going on.

TONY JONES: Tony Abbott, we thank you once again. A hard day at the office. I've got to say, you
always come in on hard days - some of the hardest days - to talk about it. That is one thing to be
admired about you and we thank you very much for coming in once again.

TONY ABBOTT: Part of the political process and democratic accountability, Tony.

political process and

Iran vows to push ahead with nuclear program

TONY JONES: Iranian negotiators will sit down with the head of the international atomic energy
agency at the end of this week but are vowing to press ahead with a uranium enrichment program.

There are increasing international efforts to stop Iran's program but key members of the security
council are at odds over whether it's time to impose tighter sanctions.

And dissidents in Iran say the West needs to pay more attention to mounting economic problems that
are more likely to influence Ahmadinejad's government than pressure from abroad.

Middle East correspondent, Matt Brown, reports form Tehran.

MATT BROWN: For the Islamic Republic of Iran enriching uranium is seen as a God-given right. Iran
says it will never again agree to suspend its nuclear program despite concerns it might build an
atom bomb.

Chief nuclear negotiator Saeed Jalili says the rest of the world can't be trusted to let Iran have
enough uranium to meet its future energy needs.

The United States wants to bring Iran to heel by imposing tougher and tougher sanctions. But the
government's critics say existing sanctions have helped paper over serious economic problems.

SAEED LAYLAZ, ECONOMIST: In my opinion sanctions have been very important and valuable gift to
radicals in Tehran to hide their mismanagement.

MATT BROWN: Respected economist Saeed Laylaz says Iranians are suffering because inflation has gone
through the roof.

SAEED LAYLAZ: People are not happy at the moment.

MATT BROWN: Rents alone have doubled and that is a massive blow to the 30 per cent of Iranians who
don't own their own home.

SAEED LAYLAZ: There are a lot of people who can not manage their life any more.

MATT BROWN: Mahmoud Ahmadinejad is best know internationally for his nuclear stance and his talk
about wiping Israel off the map but that is not what his supporters expected.

Mahmoud Ahmadinejad came to power on a promise to deliver economic justice, a better deal for most
Iranians. That was far more important than any international issue like enriching uranium.

These days, the government spokesman faces tough questions. Iranian reporters want to know about
petrol rationing and politically motivated budget cuts. So the government's loathed to give up on
its nuclear nationalism.

Is your government paying too much attention to the nuclear issue and neglecting important issues
like inflation, and unemployment?

The spokesman says his government will manage both issues and prosper. And he may be right because
the government has access to the mother of all war chests.

SAEED LAYLAZ: In every 24 hours, we are earning more than $214 million US dollars hard currency
income. $10 million US per hour.

MATT BROWN: With the world's attention focused on US-led efforts to revive the Middle East peace
process, Iran claims to have added a new weapon to its arsenal capable of hitting Israel and US
bases in the Middle East. Iranian reformers say internal pressures, not sanctions or the threat of
military strikes is the best way forward.

Matt Brown, Lateline.

not soorntion the threat of military strikes is the best way forward. A quick look at the weather
now - a shower or two for Brisbane, a showers and a possible thunderstorm for Canberra, an
afternoon shower or storm in Darwin. Mainly fine for Melbourne but the chance of a thunderstorm
there. Fine with a late shower in Perth and fine in 'Hobart'. That's all from us. Lateline Business
coming up in a moment but if you want to look back at tonight's interview with Tony Abbott or at
any of ourtor I at any of ourtor I story you can visit our website. But now here is Blaze with Ali
Moore.

Tonight, customer concerns - BHP Billiton attempts to hose down the worries of its major customers
about the proposed merger with Rio Tinto.

Combined entity will be able to produce more product more quickly and for the customers security of
supply and more product is and more product is ultimately the best thing we can do.

The ACCC still running its own investigation into alleged cartel behaviour by Qantas in Australia.

We are investigating the issue of air cargo such as has been dealt with by the DOJ in the United
States.

And life after WorkChoices - how Business is going to deal with Labor's industrial relations
system.

The challenge for business will be to work with the new the new government to allow the government
to enact its mandate but at the same time ensure the new system is flexible enough to allow further
productivity growth and doesn't result in a return to industrial chaos.

First to the markets and despite Wall Street's solid recover y y, Australian shares fell for a fell
for a second day. The All Ordinaries gave up 61 points after falling commodity prices weighed down
mining stocks. The ASX 200 dropped 1%. Financial firms resumdz their decline amid persistent credit
stories. The Nikkei shed half a per cent. Hong Kong investors pushed the hang essential 161 points
higher and FTSE has booked a booked a 28-point gain. BHP Billiton is getting ready for a protracted
battle in its bid to merge with mining rival Rio Tinto. The company's total shareholders at its
annual general meeting in Adelaide today that its offer presents compelling logic. BHP is also
seeking to ease the concerns of its major customers by promising more product more quickly. Kneel
Woolrich reports. After a reports. After a three-week road show, Marius Kloppers returned to
Australia to front his first AGM as BHP Billiton's chief executive. While his plans to merge with
Rio Tinto have met opposition from customers it appears some shareholders need little convinceling.

I don't think it will do any harm.

Great idea

. I think it will be a good idea person ally. Put both of them person ally. Put both of them
together.

The local investor support didn't stop a concerted sales pitch at today's AGM. BHP Billiton is
forecasting $4 billion in cost savings and revenue gains from joining with its rival mining heavy
weight.

Quite simply because we believe the a combination of the two will deliver more shareholder value
than either is capable of delivering alone. The combination The combination presents an opportunity
to create the world's premiere diversified natural resurs company and no our view no other
Darwination is as logical or as compelling.

Marius Kloppers says he's spoke groan a large number of major shareholders accounting for half of
the vote ing power in both companies and they overwhelming accept the logic in the proposal.

I would say that the thing that is most say that the thing that is most apparent when you talk to
the sharehold errs is their recognition that there is a pool of value that doesn't exist if the two
companies are apart.

But overseas steel mills remain sceptical with European producers now kd adding their concerns to
Chinas.

TRANSLATION: What we care about is the issue of price in the international resources market. We
want the marketing price We want the marketing price of international resources to reflect supply
and demand, market rule. The price should be long lasting, stable and be beneficial to everybody.

BHP denies that it its plan would Crete an inefficient giant that would drive up prices.

More volume, more quiek. We can comboin the two sets of resource and infrastructure and one of our
core value prop one of our core value prop sigs is that the combined entity will be able to produce
more product more quickly and for the customer security of supply and more product is ultimately
the best thing we can do.

Marius Kloppers refused to be drawn on the prospect of a Chinese sovereign fund taking a blocking
stake in Rio Tinto. But he argues that any rational investor in either company should support the
union.

We believe that we've got a believe that we've got a value proposition on the table that for all of
the shareholders of the combined company creates the most value and at the end of the day anybody
who buys the stock of these two companies is looking for maximum value creation opportunities.

And while the proposed deal is little more than rhetoric at this stage, it appears that BHP
Billiton won't be walking away in a hurry. Reports suggest the company has enlisted company has
enlisted seven major international banks to support its bid and they're ready to provide 70 billion
US dollars in a funding. We're about halfway through the trading day in Europe and for late est
news we're joined by London by Philip Lawlor. The FTSE's higher but investors haven't managed the
courage to follow the dhow up.

, no it's a lack lustre start this lack lustre start this morning. It took a couple of hour force
the market to show? I strength. A muted rebound, possibly a bit of confidence that this afternoon
in New York we will get more of a follow through. So lack lustre but broad based bounce as we're
speaking.

Possibly dampening investor enthusiasm I understand there's no concerns that the credit crunch is
hit that the credit crunch is hit ing households in Britain.

Definitely. The subprime is rippling into the economy in the UK in quite a big way. We've had a
survey by a big consumer group who are anticipating that about #6d million people will see quite
severe squeeze on their mortgage s through the increased lend ing standards. So so some bitter news
soming through as we speak.

What are

through as we speak.

What are UK investors focusing on at the moment? Is it credit worries or inflation?

There's lots of angles to this. You're right, the first thing is the subprime and the im impact on
banks financials. We saw Barklays here trying to reassure the market about its capital position but
people are very suspicious about where banks are in terms of their ability are in terms of their
ability to sustain their current capital. They will have to see potentially dividend cuts coming
forward. From a macro economic stand point it comes down to whether consumption demand global ly
will have a big squeeze over the next six months and as we were saying with the subprime, the UK's
in the same position as the with about a 6-month lag.

In terms of that inflation focus, I understand you have some understand you have some concerns that
the issue is not so much inflation but a word that we haven't heard for a while - deflation.

Absolutely. I think the real thing here is are the central banks behind the curve. Inflation is a
lagging indicator. What the bond markets are telling us is that disposable income will be squeezed
halve savagely next year and dis inflation or deflaeltion is a deflaeltion is a manifestation f
there being in sufficient demand, excess supply of goods. That's the market that the bond market is
warning us about. So the bond market is forward looking, inflation is a lagging indicator and I
suspect central banks have been swayinged by the lagging indicators. They're on the horns of the
dill Ella but we must be clear that bond markets are giving clear, explicit message at the moment.

So fundamentally

moment.

So fundamentally that means a substantial slowdown in the US economy.

Yeah, potentially much bigger that is currently being diskoint counted. The korlation wen too US
bond yaeld and the nominal GDP growth is nominal and that indicates we could see growth in Tus by 3
to 3.5% with nominal or real. So a long way below even consensus is currently currently
forecasting.

Look at the US, what are the dhow futures telling us?

At the moment, again a bit of a follow through hence the recovery in Europe. They're looking for
the market to be up about.25%. A bit of a follow through b but we have to wait for more economic
DATTy to unfold.

Many thanks for talking to us.

Thank you. you.

To the major movers on our market today - iron ore explore er Fortescue Metals was one of the
session's biggest loser, dipping 5%. With shares in Australia's top investment bank Macquarie Group
shed 3%. Another currency linked profit warning saw ABC Learning drop over 2%. But cattle over 2%.
But cattle producer Australian Agricultural Company managed to buck the trend, climbing over 7%. On
currency markets - the Australian dollar has suffered on worries commodity demand will be hurt by
the sluggish economic growth I was just speaking about. A short time ago it was worth just under
87.5 US cents. On commodity markets - gold has dropped behind $800 an ounce, expectations OPEC will
increase expectations OPEC will increase output are seeing US crude oil extends its loss and for
the London metal exchange, copper has pulled back some of the decline. It seems WorkChoices is set
to become history. Former Minister for Workplace Relations Joe Hockey has publicly declare ed the
policy he sold is dead and went too far. A number of business groups funded an 11 million dollar
advertising campaign to dollar advertising campaign to support WorkChoices. Now they're back
tracking, as Labor pledges to abolish the Howard Government's IR reforms. Sue Lannin reports.

After 34 years of service I was sacked an then offered my job back with a 30% pay cut.

It was the IR propaganda campaign to end all