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Thursday, 12 November 1964

Senator HENTY (Tasmania) (Minister for Civil Aviation) . - I move -

That the Bill be now read a second time.

This Bill seeks the approval of Parliament to the borrowing by the Commonwealth of up to 30 million dollars, or about £13.4 million, on behalf of Qantas Empire Airways Limited and the Australian National Airlines Commission - Trans-Australia Airlines. The Bill appropriates the Loan Fund to enable the proceeds of the borrowing to be advanced to Qantas and T.A.A. It also appropriates the Consolidated Revenue Fund to enable the Commonwealth to pay principal and interest and to meet other charges associated with the loan. As the two airlines will provide the Commonwealth beforehand with all of the funds necessary to meet these latter payments, the loan will involve no net cost to the Commonwealth.

The borrowing is being made by the Commonwealth in order to assist Qantas and T.A.A. to finance the purchase of additional Boeing jet aircraft and related equipment. Qantas will be assisted by the loan to acquire either two or three additional Boeing 707-338C aircraft, and T.A.A. one additional Boeing 727 aircraft, in each case with related equipment and spares. The loan will be for 24 million dollars if Qantas decides to finance two aircraft from this loan, and 30 million dollars if it decides to finance three. The new aircraft will increase Qantas' Boeing 707 fleet to eighteen or nineteen, and T.A.A.'s Boeing 727 fleet to three. The arrangements for the borrowing are similar to those approved by Parliament in May 1964, when the Commonwealth borrowed 25 million dollars or £11.2 million, on behalf of Qantas. The entire proceeds of the borrowing will be made available to Qantas and T.A.A. by the Commonwealth on terms to be determined by the Treasurer. These conditions will be the same as those under which the Commonwealth itself will borrow the money. As the airlines will be required to meet all charges under the loan agreement, the Commonwealth will therefore assume a function similar to that of guarantor of the loan and, as I have said, there will be no net charge on the Consolidated Revenue Fund.

Prior to the present loan, the Commonwealth had arranged loans totalling 124.6 million dollars or £55.6 million, in the United States of America for the purchase of aircraft and related equipment since 1956. Of this amount, 108.6 million dollars represented loans for Qantas, and the remaining 16 million dollars loans for T.A.A. Loans previously arranged with United States commercial banks total 85.4 million dollars, of which 50.3 million dollars remains to be repaid. In addition, the International Bank and theExport-Import Bank of Washington have lent 39.2 million dollars for aircraft purposes, of which 23. 5 million dollars is still outstanding.

These loans have contributed significantly to the extension, modernisation and re-equipment of their frontline fleets which Qantas and T.A.A. have both undertaken in recent years. In arranging the loans, the Government has continued the previous practice of asking each airline to help to finance the purchase of new aircraft by borrowing in the country of manufacture. Also, following sound commercial practice, the loans are repayable during the expected life of the aircraft being purchased, and during the period that the aircraft are making a substantial contribution to the successful operating results of the airlines in question. In the case of Qantas, its earnings of oversea currencies are more than sufficient to repay the loans raised.

Australia is a net importer of capital, and it has been the Government's continuing policy in past years to accept the very favourable terms it has been able to negotiate for finance for aircraft purchases for its two airlines. The major part of the present loan will not be drawn until late 1965 or early 1966, and there are obvious advantages in taking steps now to ensure that funds are readily available to meet known future contractual commitments.

Our balance of payments position is strong at present, but it is traditionally subject to wide fluctuations, often within short periods. Our economy is growing rapidly and with that growth there is a continuously increasing demand for imports - materials, capital equipment and other requirements that we must obtain abroad. Our export earnings also have been growing but we cannot expect every year from now on to be better for export earnings than the one before. Rather, whether because of seasonal conditions affecting export production or variations in the prices obtainable in oversea markets, we can expect some years to be less favourable than others for export earnings. Especially when import demand is running high, we will in some years undoubtedly have to draw on our reserves - sometimes, perhaps, quite heavily. That, in fact, is what the reserves are for - to see us through periods when the balance of payments runs against us.

For that reason, it is no more than prudent to take advantage of whatever opportunities we have to strengthen our reserves. The fact that, at a particular time, the level of our international reserves happens to be unusually high can thus be no reason for ceasing to make every effort to increase our export earnings. Nor is it any excuse for forgoing opportunities for obtaining a continuing supply of " specialist " capital of this nature when it becomes available on reasonable terms and conditions. The operation of the United States interest equalisation tax has placed difficulties in the way of the Commonwealth continuing its series of public loans on the New York market but, as I shall explain later, the new tax does not apply to borrowings of the type which we have been able to arrange with United States commercial banks, and the same considerations thus do not apply in this case.

The present loan is being made by a group of five United States commercial banks. These are Morgan Guaranty Trust Company of New York, the Chase Manhattan Bank, Bankers Trust Company, Continental Illinois National Bank and Trust Company of Chicago, and American Security and Trust Company. The text of the loan agreement which the Commonwealth negotiated with these banks is annexed as the Schedule to the Bill.

The two airlines will request the Commonwealth to make drawings on the loan as payments for the new aircraft are required by the manufacturer. Drawings are expected to commence soon after parliamentary approval has been obtained to the Bill, and are to be completed by 15th March 1966. A commitment fee of t per cent, is payable on undrawn amounts of the full 30 million dollars, unless the Commonwealth gives notice before 15th March 1965 that only 24 million dollars are required, which would be the case if Qantas decided to finance only two additional Boeings at this stage instead of three. From the date of such notice being given, the commitment fee would apply to only 24 million dollars. The commitment fee is i per cent, less than that payable on the previous Qantas loan.

As the loan is drawn, interest will become payable at 4i per cent., and the

Commonwealth will issue interim promissory notes of appropriate amounts to each of the five lenders. On 31st December 1966, the interim notes will be exchanged for five series of fourteen notes of approximately equal value, which will be payable half-yearly between June 1967 and December 1973. The notes repayable in 1967 will bear interest at 4} per cent., those repayable in 1968 will bear interest at 41 per cent., those repayable in 1969 will bear interest at 5 per cent., those repayable in 1970 will bear interest at 54 per cent., and those repayable in 1971, 1972 and 1973 will bear interest at 5i per cent. The average interest cost over the life of the loan is approximately 5 per cent., or only very fractionally higher than the interest cost for the loan approved in May 1964.

In general, the loan agreement annexed to the Bill follows the form of the previous agreement. In view of the reference to the possible application of the United States interest equalisation tax in the loan agreement for the previous borrowing on behalf of Qantas, I should mention specifically section 8 of the present agreement. This contains an undertaking by the Commonwealth to the effect that not less than 85 per cent, of the proceeds of the loan will be used for the purchase of property manufactured in the United States.

The significance of section 8 will be apparent if I explain that the Interest Equalisation Tax Act became law on 2nd September last. It is now more readily apparent that securities issued for the present loan, and the previous aircraft loan, will not attract the tax. However, by an amendment included shortly before the legislation was passed by Congress, the President is authorised to extend the application of the tax to certain commercial bank loans if, in his view, the acquisition of oversea debt obligations by commercial banks has materially impaired the effectiveness of the tax. The same amendment specifically prevents the application of the provisions of the Act to commercial bank loans, if not less than 85 per cent, of the amount of the loan is attributable to the sale of property manufactured or produced in the United States.

It is clear that both loans will fall within this exempt category.

The terms and conditions of the borrowing have been approved by the Australian Loan Council, and the borrowing will be additional to the Commonwealth's loan programme of £51.4 million for housing which was approved at the July 1964 meeting of the Loan Council. As with previous loans arranged on behalf of Qantas and T.A.A., the Commonwealth is acting only as an intermediary, and the borrowing will therefore involve no net call on the Commonwealth's resources.

I must apologise for introducing this Bill so late in the present Parliamentary session but, by force of circumstances, the terms of the loan agreement could not be settled until the end of last month, and the loan agreement, which appears a schedule to the Bill, was not signed in New York until Monday of last week. As I have indicated, both Qantas and T.A.A. will be wishing to draw on loan proceeds before the next Parliamentary session commences. I commend the Bill to honorable senators.

Debate (on motion by Senator Murphy) adjourned.

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