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Debt poor alternative to privatisation

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S h a d o w M i n i s t e r f o r

B u s i n e s s a n d C o n s u m e r A f f a i r s


The floodgates have been opened to allow further increases in Australia's unsustainable debt due to last week's Statement on Loan Council Borrowings said John Moore, speaking in Brisbane today.

"The Treasurer has acquiesced - allowing Qantas, Australian Airlines and Australian National Line to go outside Loan Council global borrowing limits - following a review process.

"By caving into the Left, Mr. Keating has erradicated any shred of economic rationalism which may have been attributed to him.

"Granting public enterprises an open cheque book, is a reckless and irresponsible response to the urgent need for capital.

"Australian Airlines requires a capital injection of $240 million over three years, Qantas requires $600 million over five years and the Commonwealth Bank will need around $1.6 Billion over three years.

" Oiidy last w e e k , the Commonwna-l th—Bank was forced to borrow $400___ million overseas to satisfy Reserve Bank capital adequacy requirements.

"Surely a responsible program of privatisation, utilising domestic savings, is preferable to extending our overseas indebtedness even further.

"Adequate private equity funding is available in the domestic market to satisfy the capital requirements of the three enterprises demanding urgent attention.

"The Opposition has set up a task force to look hard at the implementation of privatisation in Government. We wi 11 examine the current state of our public enterprises, their capital needs, as well as the market price and timing of the sale.

"As head of that task force, I have issued two information papers to provide members of the Liberal/National Parties with some hard realities about privatisation.

"It must be understood that as indebtedness ί η ο ΐ Î’ Ώ β ό under the Labor Government, attractiveness to potential invpst.nrs falls accordingly.

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"If our public enterprises are forced to rely on debt rather than equity, they will become unhealthy privatisation candidates.

"The gearing of these enterprises is also being increased to uncommercial levels.

"These problems could be overcome if the Labor Party were to embrace privatisation immediately.

"Labor's solutions, however, to the urgent need for capital have been haphazard.

"Alternatives have run the full gambit, including equity trusts, internally generated trusts, government equity injection, freeing borrowings from the Loan Council and if all else fails...referring funding to a Committee!

"While Government factions have prevented any resolution of the capital formation problem, a Liberal/National Party Government will be ready to implement a phased policy from day one.

1 June, 1988

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A ppendix 1. Borrowings through the Loan Council All Transport and Communications government business enterprises are required to co-ordinate their borrowings through the Loan Council. The strengthening of Loan Council oversight of enter­ prise borrowings in 1984-85 was an important clement in establishing a global limit on new

money borrowings by Commonwealth and State authorities. This global approach has been an important factor in the control of public sector debt and the improvement of Australia’s economic position. The macro-economic policy objectives of Loan Council can conflict with the long-term funding needs ofGBEs since the inevitable result of the Loan Council process is the rationing of funds which GBEs may borrow. This rationing process may not allow adequate consideration of the economic returns from particular investments by GBEs and their commercial situation. A further difficulty encountered by GBEs is the timing of

Loan Council considerations, which are based on Commonwealth/State budgetary processes rather than prevailing commercial market conditions

which vary from time to time. Some authorities, such as Qantas, Australian Airlines, ANL and Telecom have found the Loan Council processes impose constraints on their ability to take up, or plan for, investment oppor­ tunities. This is particularly so where borrowings arc to support fully competitive activities, undertaken on a fully commercial, tax-paying basis.

In the context of its continuing efforts to resolve the capital formation problems being experienced by government business enterprises, the Government will further review whether it is possible to exempt Qantas, Australian Airlines and ANL — as fully commercial enterprises operating in a wholly competitive environment — from Loan Council global borrowing limits, without undermining the integrity ot tne Loan Council system or creating unacceptable pressure on the Public Sector Borrowing Requirement.

In the event that such exemption'is agreed, the Commonwealth, in its capacity as ultimately financially responsible shareholder, would retain

oversight over the general investment strategy and total borrowings of these GBEs through the following approach: • the corporate plan submitted by each GBE

Board to the responsible Minister will include appropriate information on its investment strategy and associated borrowing intentions; • each GBE Board will also submit annually to

its Minister any additional appropriate information on its investment strategy and associated borrowing intentions; • the responsible Minister will refer the invest­

ment strategy and associated borrowing information contained in the corporate plan, and any annual supplement to it, to the Treasurer and Minister for Finance for their consideration; • in the event of there being a disagreement with

the Board, an agreed Government position will be developed and the responsible Minister may suggest to the Board that aspects of its invest­ ment strategy or borrowing intentions be reconsidered; and • in the event the Board and the responsible

Minister, acting on behalf of the Government, arc unable to reach agreement, the Minister may direct the Board to amend its strategic corporate plan in the relevant respect.

The Government has also decided that the Loan Council processes presently applying to Telecom be developed to:

• take into consideration the ongoing and longer term nature of capital expenditure proposals by adopting a three-year, rolling borrowing program (subject to annual review by the Government) which would allow Telecom and

its subsidiaries and joint venture companies to proceed with major investments without the uncertainty inherent in annual borrowing allocations; • ensure sufficient flexibility to enable additional

borrowings to be considered in a year where new commercial opportunities for Telecom, its subsidiaries or joint ventures are identified; and • allow Telecom to increase its market borrowings to convert part of Commonwealth loans to private sector loans, in the context of its capital restructuring.




25 MAY 1988.