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Thursday, 12 March 2009
Page: 2500

Mr TANNER (Minister for Finance and Deregulation) (12:49 PM) —I move:

That this bill be now read a second time.

Today I am introducing a bill to facilitate the establishment and operations of the Australian Business Investment Partnership Limited (ABIP).

The government is establishing ABIP in partnership with Australia’s four major banks as a temporary contingency measure to provide refinancing of loans relating to commercial property assets in Australia where finance relating to those assets is not available from commercial providers—other than ABIP—and the asset is financially viable.

This initiative, announced by the Prime Minister and the Treasurer on 24 January 2009, is necessary because of the current unprecedented global economic conditions.

It is another demonstration of the government acting in a timely, practical and decisive way to help protect the Australian economy in the face of the global financial crisis.

ABIP is an important and sensible measure to facilitate the continued flow of credit in the private sector, and assist in ensuring that the Australian economy is as well placed as possible to face the consequences and impacts of the global recession.

The government is aware that establishing ABIP and providing finance to the commercial property sector is not without risk. The commercial property sector can be particularly vulnerable in a downturn in the economic cycle.

That is why a range of safeguards have been put in place to limit the risk to taxpayer funds.

These safeguards include:

  • ABIP’s prudent lending criteria;
  • appropriate provisioning by ABIP for any bad and doubtful debts;
  • the requirement for unanimity of decisions of the ABIP board to enter financing arrangements; and
  • the requirement that the four major domestic banks maintain their exposures to commercial property assets that ABIP lends to.

The global financial crisis raises the possibility that some financiers, particularly foreign banks, may reduce their level of financing of viable Australian businesses.

Many foreign banks are facing difficult circumstances in their home economies and may look to reduce their lending commitments and exposures generally, which could create a liquidity shortage, or a ‘funding gap’, in the Australian economy.

This potential funding gap could result in financing being taken away from good Australian businesses that require this funding to invest in growth and jobs.

To maintain liquidity and continued financing, any gap in financing will need to be sourced from elsewhere, such as from Australia’s four major domestic banks.

However, it would be difficult for these banks to fill any funding gap that may arise on their own.

Accordingly, government action is required.

The generally highly leveraged nature of commercial property assets makes this sector particularly vulnerable to a liquidity shortage.

It is also important to note that foreign banks comprise around a quarter of the commercial property exposures in Australia.

The commercial property sector is an important part of the Australian economy, and provides employment for a large number of Australians as well as opportunities for small and large investors, including superannuation funds.

Around 150,000 people are employed in the commercial property sector in Australia, many of whom are tradespeople, such as plumbers, electricians and carpenters.

Further, other businesses—both large and small—provide goods and services to the sector.

A funding gap that arises in the commercial property sector could result in distressed asset sales and an exaggerated decline in commercial property prices, resulting in prices falling below the underlying long-term value of those assets.

This could also negatively impact on the ability of businesses to continue to borrow at current levels.

It could have general adverse implications for the operational expenditure and growth plans for business generally, not just those in commercial property, and possibly spread to the rest of the economy, constraining general bank lending.

Without action, a combination of weak demand and tight credit conditions brought about by the global financial crisis could see significant job losses in the sector with consequent effects on jobs and businesses in other parts of the economy.

This government will not sit idly by and watch jobs, investments and small and medium sized businesses wiped out by fluctuations in global credit markets.

It is against this background that the government and Australia’s four major banks have decided to establish the $4 billion Australian Business Investment Partnership.

ABIP’s purpose is to help fill the gap left by the possible withdrawal of commercial lenders, particularly foreign banks, from Australian businesses.

ABIP will be established under the Corporations Act 2001 and will be a public company limited by shares.

The shareholders of ABIP will be the Commonwealth of Australia (Commonwealth); and Australia’s four major domestic banks—the Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia, National Australia Bank Ltd and Westpac Banking Corporation.

The Commonwealth will have a 50 per cent shareholding in the company and the four major banks will each take a 12½ per cent share.

The government and the four major domestic banks will each provide initial loan funding to ABIP, as well as an amount for ABIP’s working capital.

The government will provide $2 billion and each of the major banks will provide $500 million.

Accordingly, on its establishment, ABIP will have access to $4 billion in undrawn loan facilities, less an amount for working capital (expected to be $4 million).

It is important to note that the financing provided by the four major banks will not be government guaranteed.

If ABIP requires additional financing beyond the initial $4 billion contribution, it will be able to issue up to $26 billion in debt to raise that additional funding.

However, it will only be able to issue such debt with the unanimous agreement of all shareholders.

This could provide ABIP with up to $30 billion in financing.

ABIP will only issue debt when the initial $4 billion loan funding provided by the government and the four major banks has been exhausted.

In order to ensure that debt issued by ABIP is sufficiently attractive in the market, it will be government guaranteed.

Accordingly, this debt will attract an appropriate fee (on a sliding scale, up to around 150 basis points) to be reflected in the pricing of the issue.

The level and timing of the fee will need to be unanimously agreed by shareholders, and will have regard to risk and liquidity factors and general market conditions at the time any such debt is issued.

Under Australia’s prudential framework, as ABIP issues debt the banks’ contributions could be increasingly treated as equity by the Australian Prudential Regulation Authority, as a result of the greater value of loans issued by ABIP.

This would have an impact on the banks’ own lending more generally, which would be counterproductive to the purpose of ABIP to facilitate credit flows.

Accordingly, to limit this impact, a small proportion of the government guaranteed debt that ABIP may issue (up to around five per cent) is likely to be subordinated to the initial $4 billion of loans.

The Commonwealth will receive an appropriate return on the subordinated debt.

Applications for financing will be assessed in accordance with ABIP’s lending criteria.

These lending criteria will be appropriate, prudent, and broadly consistent with the lending criteria of the four major banks. They will be determined unanimously by all five shareholders.

ABIP will only provide funding for commercial property where the underlying assets, and the income streams from those assets, are financially viable.

To provide a broad indication, the types of commercial property assets that ABIP may consider providing financing to include, but are not limited to, retail shopping centres, commercial office buildings and industrial property.

Property located outside Australia, land banks, speculative development assets and rural property would fall outside the scope of ABIP’s lending criteria.

Further, to protect the interests of ABIP shareholders, any major domestic bank that is an existing participant in a financing arrangement before ABIP, must maintain at least their existing level of financing in percentage terms.

It is important to note that ABIP will operate in a commercial manner with directors subject to the Corporations Act. Reflecting this, if a loan becomes impaired ABIP will undertake normal enforcement procedures to protect its investment.

ABIP will also be structured to allow sufficient flexibility to provide financing arrangements in other areas of commercial lending, if circumstances necessitate and provided those arrangements are agreed unanimously by ABIP’s shareholders.

At this point, it is worth re-emphasising that ABIP is intended and designed to address a potential liquidity problem—not a creditworthiness problem.

It is not the intention of the four major banks that have put their funding into ABIP, nor is it the intention of the government, that ABIP will support problem assets.

It is simply not within ABIP’s scope.

To ensure that ABIP has a high degree of accountability and governance, the government will apply special features to ABIP.

In relation to the structure and operations of the ABIP board:

  • the board will be comprised of representatives from the government and each of the major banks, with the board chaired by the government’s representative;
  • board resolutions, apart from those relating to loan enforcement, must be unanimous;
  • this provision protects all shareholders by ensuring that commercial property assets are only supported where all directors consider that the asset is commercially viable; and
  • resolutions on loan enforcement may be passed by four of the five directors. However, the director nominated by the Commonwealth must be one of the directors supporting the resolution.

To ensure there is sufficient parliamentary scrutiny and accountability for the government’s investment in ABIP:

  • the directors of ABIP will be required to give the minister a copy of ABIP’s financial report, directors’ report and auditor’s report for each financial year;
  • the minister will have to table the reports in each house of the parliament; and
  • ABIP will also be obliged to provide its shareholders with any other information the shareholder may reasonably require.

Additional measures the government is imposing on ABIP are that:

  • ABIP’s auditor will be the Auditor-General; and
  • the directors of ABIP will be required to establish and maintain an audit committee, that must be constituted consistently with the arrangements for audit committees of wholly owned Commonwealth companies.

The shareholders of ABIP will enter into a shareholders’ agreement which will outline, among other things, the operation, control, management and funding of ABIP.

To provide greater transparency for ABIP’s operational arrangements this agreement, and any amendments to it, will be made public as soon as practicable after it is entered into. I am tabling the draft shareholders’ agreement today.

Arrangements to deal with conflicts of interest, as well as the confidentiality of sensitive information obtained by ABIP, are also set out in the shareholders’ agreement.

The shareholders’ agreement will provide for provisioning for any bad and doubtful debts within ABIP and the distribution of profits.

ABIP will adopt a cash flow provisioning policy which reflects an appropriate, but conservative, approach.

The provisioning arrangements that will apply are that:

  • until an aggregate of $500 million has been borrowed from ABIP, a cash flow provision of 50 basis points will be applied; and
  • once more than $500 million has been borrowed from ABIP, a dynamic provisioning policy will be adopted to take account of economic conditions and risks at the time.

Profits from the financing operations of ABIP will be shared proportionately, commensurate with the initial loan funding.

Profits available for distribution will be paid as half-year and full-year dividends.

To remove any uncertainty about the operations of ABIP, the ABIP Bill specifically authorises the shareholders agreement, and the activities undertaken by ABIP, its shareholders, directors, officers, agents and employees in the furtherance of ABIP’s objectives, to be exempt from the competition provisions of the Trade Practices Act.

As previously noted, this is a contingency measure to address a possible temporary problem.

In that context, ABIP will only be able to enter into new refinancing arrangements of commercial property assets for two years from the date of its establishment. Furthermore, if credit markets improve so that ABIP is no longer required the government will seek to wind it up as soon as possible.

The establishment of ABIP is another government initiative to insulate the Australian economy and protect Australian jobs from the impacts of the global recession.

As I have previously highlighted, this initiative is a contingency measure that the government is putting in place to address liquidity problems in the commercial property sector, should they arise.

It is the government’s hope that such liquidity problems do not emerge.

This would mean that ABIP would not have to step in and provide financing, and potentially may never have to write a single loan.

However, the government is also realistic, and is prepared to put measures in place to meet the challenges head on, and support the flow of credit to good Australian businesses and therefore support the jobs they provide.

The alternative is to do nothing and to simply carp from the sidelines while Australian businesses and jobs are sacrificed to the global recession.

I commend the bill to the House.

Debate (on motion by Mr Hartsuyker) adjourned.