Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Economics Legislation Committee
01/06/2015
Estimates
TREASURY PORTFOLIO
Clean Energy Finance Corporation

Clean Energy Finance Corporation

[15:00]

CHAIR: I now welcome officers from the Clean Energy Finance Corporation.

Senator MILNE: Thank you for coming along. I wanted to go to the new investment mandate that the government provided to you earlier this year. Could you just outline to the committee, first of all, how it differs from the previous investment mandate of the Clean Energy Finance Corporation and, secondly, for the benefit of the committee, how the investment mandate fits in the context of the decisions that you make in the short and longer term?

Mr Yates : The original investment mandate required the CEFC to seek a benchmark, which was equal to the average of the five-year government bond rate for the investments that we made on a period after meeting our own operating expenses. That was the previous benchmark. If we look at the borrowings that we had under the previous benchmark, the cost of funds or our benchmark was to meet, after expenses, a return of about 3.1 per cent. The new benchmark is different. The new benchmark seeks for us to achieve a gross return based upon a similar scenario—being an average of the five-year government bond rate at the time we are making investments. But, in addition, it seeks a return of an additional four to five per cent above that rate as a target benchmark. In effect, the main scenario is a lifting of the rate by four to five per cent. However, the current rate is a gross amount. So it is before operating costs; whereas, the previous rate was after operating costs.

Senator MILNE: When we set up the Clean Energy Finance Corporation, part of it was a recognition that the return to the community from the CEFC was not just in terms of the financial return on the investment but also in terms of the greenhouse gas emission reductions that had been achieved.

Senator Cormann: If I might just interpose myself here: that premise is just wrong. The reason that premise is wrong is that what is driving additional investment in renewable energy is the renewable energy target, and the Clean Energy Finance Corporation—or ARENA for that matter—does not add anything to it, because all of the compliance requirements attached to the renewable energy target mean that the target, whatever the target is, will be met no matter what. Even without the Clean Energy Finance Corporation and ARENA, the renewable energy target will be met, and with the Clean Energy Finance Corporation and ARENA the renewable energy target will be met. So there is actually no difference from the existence of the Clean Energy Finance Corporation, other than that there is an additional and alternative taxpayer-funded and taxpayer-supported financing mechanism. But in actual outcomes, in terms of greenhouse gas emissions and renewable energy generation, it makes no difference at all.

Mr Yates : I would beg to differ a little bit in relation to that matter. The CEFC's mandate is much broader, as you know, than just renewable energy. It also covers a whole variety of activities which are not supported under the RET. So, if there were a claim that our activity was really only secondary to the RET, I would beg to differ. Our mandate, as I said, is vastly broader than that.

The second issue that I would raise is the fact that Minister Macfarlane recently raised a serious question as to whether, even with the revised RET of 33,000, the RET may be difficult to meet without additional financial support. The CEFC believes that, if the government now has a clear policy of a revised RET, to achieve that RET it is likely that they are going to need the support of an organisation like the CEFC if that RET is to be met and corporations and the industry are not to be subject to a default price or a higher charge as a result of the revised RET level being met.

Senator MILNE: Thank you. That is the point I was getting to, but the point I was getting to was also that the reduction in greenhouse gas emissions was also part of the performance objective of the CEFC when it was set up, and that was taken into account in terms of the rate of return. I wanted to ask you particularly: what difference will this higher level of return that is now being expected because of the investment mandate make to the kinds of projects that you are able to fund? Any or none?

Mr Yates : It is a good question. Our act is quite complicated, and we have a primary statutory obligation under our act. Then we receive direction or persuasion, for want of a better word, through the investment mandate. So our act sets for us a statutory obligation, which is to assist the country to meet the challenge of decarbonising over a period of time. The investment mandate gives the corporation an indication of how it may like to focus its activities to achieve that. The real issue is that you have to balance those two, because our primary obligation is to meet the objectives of the act. The secondary obligations are obviously to try and meet, where possible, the mandate that is provided to us by the minister of the day.

From our own perspective, we have always operated the corporation with a view to try and generate the highest return we possibly can whilst achieving our public policy purpose. It is very important. You talk about this purpose, and you discussed the Future Fund. The CEFC is a bit different to the Future Fund. The CEFC is really a bit like the Future Fund, except that it has an obligation to not only do good but also do well, whereas the Future Fund has an obligation to just do well. It has the whole globe to invest in. It can compete against the private sector. It does not have the other objectives that we have, which are to invest in Australia, to decarbonise the economy and to assist the economy to meet the challenges that we will go through as we face the inevitable investment challenges.

So our situation is that we look at all investments carefully and prudently, and we continue to assess them to attain the highest return we possibly can. We obviously are very cognisant of the directions that we are provided pursuant to our investment mandate, and we seek to achieve that investment mandate, but ultimately we have our obligations under the act that we must follow, and we try and marry those two.

Senator MILNE: Does it mean that you will not be able to invest in some of the more early stage? Let me put it that way. One of the criticisms of the CEFC that was made in the early days was that it was displacing the private sector from investment in some of these projects, which has been disproven over time. The whole point of ARENA and the CEFC was to assist in bringing to commercial rollout new technologies. Is this going to dampen that or are you still able, with the new investment mandate, to be supporting newer technologies?

Senator Cormann: Just in terms of the assertion that this has been disproven, as I have said on earlier occasions, it really is very hard at this stage of the cycle to make conclusive statements on what has and has not been proven in terms of behavioural responses to a certain measure of the previous government. The second point I would make is that our criticism was actually a bit broader than that. Our criticism was that, if the investment returns, given a particular risk profile of a particular investment, are commercial in nature, then arguably the private sector would have invested in those projects. Alternatively—and we did not discount the alternative, and this is something that will only become apparent over a period of time—if the risk being taken on for a particular return is higher than what the private sector would be prepared to take on, in those circumstances it is the judgement of our government that it is not appropriate for the taxpayer to be exposed to that additional risk. If you look at the history of taxpayer-funded and government-sponsored banks, the history is not that flash. Obviously, there are times you can keep certain appearances going for a period, but over the medium- to long-term inevitably governments are not very good at running banks. That is our judgement.

Senator MILNE: Is the same judgement going to be applied, Minister, to the Northern Australia development fund?

Senator Cormann: That is obviously a very time limited facility, and the judgements are yet to be made in terms of what infrastructure this will end up supporting.

Senator MILNE: Time will tell on that.

Senator Cormann: Absolutely, time will tell, exactly.

Senator MILNE: I will turn back to the CEFC in relation to this particular matter. Do you have anything to add to that before I go on to the next question?

Mr Yates : No, I think that is fine, Senator.

Senator MILNE: As you have said, overall your work is to help decarbonise the Australian economy. You have now been operating for a couple of years. Would you like to comment on the trends, if you like, of what is proving to be very successful, both financially and in decarbonisation? What do you regard as the most interesting trends in the sector that you are currently working in, where you are co-financing with the private sector? I am interested to know what you think the emerging trends are.

Mr Yates : I guess at the moment we still face a significant challenge that Australia is embedded with an economy which has a very, very high carbon risk. We look at it and we say, 'If the nation is going to move from position A to position B, and to get to position B it has to have a lower carbon footprint, what are the main areas that are driving those emissions and what are the challenges that the nation faces to be able to reduce those carbon emissions in those sectors?' The biggest area that remains happens to be in the electricity sector. That is why the RET remains an important policy tool, because without a charge on carbon emissions the only tool which will allow you to move from carbon based electricity systems to greener electricity systems happens to be the RET.

In all other sectors of the economy there is an enormous carbon inefficiency that is still evident. In the building sector, in particular, which is an area we are now focusing on, we are conscious that the nation needs to build better. Our buildings really do not have the same performance standard as would be necessary for next year, the year after and going forward. These buildings are going to be 30- to 40-year assets. We know we are going to face a carbon constraint and we need people to build differently. We notice that within the vehicle sector there is a really massive challenge. Australia is running miles behind in terms of improving vehicle efficiency. In fact, vehicle efficiency is approximately 40 per cent, from a carbon basis, behind what we are seeing in Europe. So, not only do we have a problem within the electricity sector that needs dealing with, but the long-term assets that people are buying today are going to be around for 20 or 30 or 40 years. We need to have programs, and we need to provide finance into those type of sectors in particular, so those assets are built today so that they are assets in the future rather than liabilities in the future in a carbon-constrained world. We have been very active looking at the building sector. Now we are actively looking at the transport and liquid fuel sector, as well as the generation sector to see where the other areas are that we can reduce carbon emissions.

One other area which is very important is overall national productivity. If we can use our financing to encourage corporations to invest in cleaner technology and invest in more efficient manufacturing arrangements, they will reduce their energy consumption and therefore reduce their carbon emissions. We have an increasingly broad footprint of the CEFC and increasingly broad activities across the economy to try and ensure that people are making proper investment decisions today which will last and be of value in a carbon-constrained future.

Senator Cormann: To put this into context, the CEFC already started to write loans on 1 July 2013. That is a very short period of time within which to assess some of the assertions that you have made in terms of their success or otherwise, so you have to be a bit more circumspect than the glowing references you are giving the outcomes based on a relatively short period of time.

Senator MILNE: I would like to come back to Mr Yates in relation to a couple of those areas that you mentioned. Obviously, if we had mandatory vehicle fuel efficiency standards, that would assist in that. I want to go to the areas that you mentioned. Building materials and energy efficiency are clearly areas where we can be working. I am also interested in the investment and productivity side. Today you will hear every peak business body in the country talking about the investment freeze: why is business not investing? Yet, if you look at the work you are doing with co-investment, there is considerable investment. I am interested in your figures of what you have been able to leverage. Do you have that broken down into the energy efficiency sector, the renewable energy sector, or the generate/generation sector? I am interested in what you have been able to leverage in private sector investment at a time when people have lost the confidence to invest.

Mr Yates : I will be delighted to give you some views on that. We have put out about $1 billion now. It has been involved in projects of about $4 billion. In terms of additional private sector money to the table, we are typically seeing at least two dollars coming to the table when the CEFC participates with RE activity. That being said, we are in that investment market; we recognise that it is very slow. Businesses are much slower to invest now than they were maybe 18 months ago. But I think that is changing. I think there is a sign that there could be a change in confidence starting to build in the economy. We have seen corporations and companies delaying investment activity, typically due to uncertainty around their own business—uncertainty about future costs and prices and uncertainty about the dollar. There is natural uncertainty in the economy, but at the moment it seems to be quite high, particularly when it comes round to the energy sector. In terms of our portfolio, we have nine per cent of it currently in bioenergy, 20 per cent of it is in things like energy efficiency such as refrigeration, lighting, air conditioning. Generation and distribution assets are around 10 per cent. Solar PV is running at about 27 per cent. Ocean energy is three per cent and wind is 31 per cent. We are seeing increasing activity in the other sectors of the economy in relation to our portfolio, and that is really because there has been a significant reduction in the renewable energy sector. As I mentioned last time when I was here, Bloomberg indicated a decline in investment activity of around 80 per cent within the renewable energy sector. That has not changed yet. We expect that to change now with some clarity in relation to the RET.

Senator MILNE: Just to go to that certainty which you mentioned, and obviously there are a range of reasons for that—the dollar and various things—have any businesses expressed to you their reluctance to proceed because there is uncertainty about whether a carbon price will be reintroduced and at what point they will have to deal with that, or are businesses now including that as part of their risk assessment as something that will occur in the future?

Mr Yates : I think most large sophisticated corporations are assuming that there will be some form of cost involved in relation to emitting carbon in the future. For small businesses, they have got many other things to worry about.

Senator WHISH-WILSON: Senator Milne asked you about some exciting areas, or some trends. Could you give us an update on battery storage technology? That is something you have talked about previously as potentially being disruptive to the environment?

Mr Yates : I would be happy to provide a very brief summary. You have seen people like Tesla come out with their talk about their battery. AGL is coming out with a battery program. I am happy to address it directly at another time with more detail. However, it is definitely a distinct trend that we are finding batteries being combined with PV solar as people try and get better utilisation of the existing investment that they have on their rooftop. We are expecting storage to become a very large feature of the solar PV market in this country soon.

Senator WHISH-WILSON: How affordable are they? Can you give us an idea of the range?

Mr Yates : I guess the big question is not how affordable they are today but how affordable they are likely to increasingly become. People believe that the trend in price reduction that you have seen in solar PV panels will be mirrored in battery units. We are expecting that whatever price that is applicable today it could well rapidly fall as more units come into production. It is pretty clear that it will become a very economic and viable option for people to consider using batteries for storage.

Senator WHISH-WILSON: Could that potentially displace the whole utility network business model that we have got now into the future?

Mr Yates : That is probably a supposition that I would not like to necessarily speak on, I am afraid, or suggest. You have got a great infrastructure out there being your electricity networks. I cannot see why they would not be used to transfer electricity between one source of electricity and another. I think networks should remain part of our system and I think that they will.

Senator WHISH-WILSON: Thank you.

CHAIR: We will finish up here on the green block with Senator Waters and then we will go to the red block and the blue block.

Senator WATERS: Thanks, Mr Yates, and the other CEFC officials for the great work that you are doing. In previous estimates you have told us that you think CEFC alone could deliver about half of the government's five per cent emissions reduction target. How are you tracking in relation to that estimation?

Mr Yates : I think we may have provided an answer to that on notice last time. I am happy to provide an answer to that on notice.

Senator WATERS: Thanks very much. Do you have estimate of the emissions abatement that you have achieved so far?

Mr Yates : If the committed investments that we committed to were all implemented I think it is approximately four million tonnes per annum of abatement that we anticipated. I point out that that abatement has been occurring at no cost to the taxpayer, obviously, because when we lend we make a profit for the government and emission reductions happen as a by-product.

Senator WATERS: I think I recall last time you were saying that the profit you made for every dollar you spent was about $2.36. That is from the top of my head.

Mr Yates : It might be. This year we are expecting the revenue from our activities to be around $54 million, so profits to be around $30 million this year. It is another steady year.

CHAIR: Profit on what capital deployed?

Mr Yates : That is profit on—I would use the number of about $1 billion. This is all round because it makes it easy for you, Senator. The current government's cost of funds—

CHAIR: You need to make it easy.

Mr Yates : Yes. The current government's cost of funds is about 2.27 per cent as a five-year bond rate. So $30 million on $1 billion is about a three per cent return after costs.

CHAIR: That is good. Thank you.

Senator WATERS: That is a good rate. What is the current price per tonne that you are reducing emissions for?

Mr Yates : Numerically, it is positive $2 a tonne. But obviously as you do more and more projects, you become more and more profitable. It is a number which works in inverse fashion. So $2 a tonne is where we are at the moment—about $2.40, I think, is where we were a while ago. It is negative $2.40—in other words, we make $2 for the tonne that we save.

Senator WATERS: How does that compare to the cost emissions abated under the Direct Action first auction?

Mr Yates : It is a different program. I will not comment on the ERF program, if that is okay.

Senator WATERS: I will hazard that it is actually far more efficient, but I will go and compare those figures.

CHAIR: Do we need to ask that question?

Senator WATERS: I did and, thank you, I will move onto my next one. Given the proposed reduction in the renewable energy target, is it commercially viable for CEFC to assist in financing those large-scale clean energy projects that do not rely on revenue from renewable energy certificates?

Mr Yates : For a project to be able to compete efficiently with the black price of energy then they would have to be able to produce electricity at around $30 to $35 a megawatt hour. There are no renewable energy projects that can produce energy at $30 to $35 a megawatt hour; therefore they will be dependent long-term, at this stage, on the RET.

Senator WATERS: Thank you. Can you expand for me on the green bond initiative that was announced last week?

Mr Yates : Yes. We have been obviously keen to see additional finance come to the market. The green bond initiative is an initiative by banks and institutions to refinance existing assets that they have which are generating clean energy or are fitting within green credentials in the market through the issue of what are called green bonds or climate bonds. We cornerstoned the initial offer by National Australia Bank last year by providing a $75 million commitment to that transaction. I think it was a $400 million transaction in total that was issued in the market. Last week, ANZ followed that and followed it extremely successfully with their own issue of green bonds. We offered again to provide a $75 million co-investment, but it was very heavily oversubscribed, fortunately. It was great to see investors from all walks of life—superannuation funds, multinationals, governments and individuals. So we did not need to contribute one dollar and they raised over $600 million. What you are seeing is that people are starting to vote with their money and deciding that if they have a choice between one bond which is not green and a climate bond or a green bond then they are electing to see their money invested in green and climate bonds.

Senator WATERS: That is good news. Thank you.

Senator CANAVAN: I want to go back to the previous questioning about the inclusion of the Future Fund earnings. I do have some questions for CEFC as well.

Senator DASTYARI: Chair, I thought we were going to the general and not to Mr Ray, so we are not going to CEFC.

Senator Cormann: But we are in fiscal.

Senator DASTYARI: Okay.

Senator CANAVAN: This is still in fiscal. It relates to the question we had earlier about the underlying cash balance and the inclusion of Future Fund earnings. There is a chart in the budget papers, chart 1 on page 3-6, which projects the underlying cash balance for different budgets and MYEFOs. There is a footnote which seems to say that you have included the impact of Future Fund earnings for all of those projections. What does that mean in fact?

Mr Ray : The projections for the 2015-16 budget include net Future Fund earnings from 2020-21. We back-cast that for the 2014-15 MYEFO and the 2014-15 budget. We did not back-cast it for the 2013-14 MYEFO.

Senator CANAVAN: What effect does that have?

Mr Ray : For the 2014-15 budget and the 2014-15 MYEFO, other things being equal, it has the effect—compared with the originally published medium-term projects—of increasing the underlying cash balance from 2020-21.

Senator CANAVAN: For the ones that are adjusted?

Mr Ray : For the ones that were adjusted, yes.

Senator CANAVAN: It was only 2013-14 that was not adjusted—MYEFO.

Mr Ray : That is correct.

Senator CANAVAN: Everything else was adjusted for the Future Fund earnings to deliver a fair comparison.

Mr Ray : Yes.

Senator CANAVAN: Back to the Clean Energy Finance Corporation: I might be right off the track here, but do you sign power purchase agreements as result of your investments? Are you involved in negotiations with them?

Mr Yates : Now, we have not signed power purchase agreements. That is normally up to a distributor or a retailer to do that.

Senator CANAVAN: Have you been involved at all in negotiating them?

Mr Yates : We certainly rely on the income under those power purchase agreements to fund the cost of debt—to meet repayments that are due.

Senator CANAVAN: Have some been signed in recent times?

Mr Yates : None have been signed for quite a while. There is obviously a reason for that. A power purchase agreement usually incorporates two forms of power, effectively—the black and the green. Typically you buy both—you buy the black power and the right to the RET. Without certainty of the RET price it has been very difficult for people to contract.

Senator CANAVAN: You are saying you rely on that income stream—that it is important for your business. What is your assessment of when a PPA might next be signed?

Mr Yates : That is a good question. PPAs can be short or long. Short-term PPAs will, I think, be executed on an ongoing basis consistently. But to build the projects we need to meet the renewable energy target—we are talking about between $10 billion and $15 billion worth of expenditure—long-term PPAs will need to be signed; otherwise they will need the financial support of the CEFC. Without clarity post-2020, it will be difficult for people to work out how to forecast the future REC price and it will therefore be difficult for proponents to enter into long-term PPAs at the moment, still.

Senator CANAVAN: Did you just say that if PPAs are not signed, CEFC will help finance?

Mr Yates : I think the answer is that that is part of our obligation. Our obligation is to assume that the government's policy of the day, which is to achieve its target, will be achieved. So long as we feel that the risks are manageable, we see no reason why we would not still need to assist in the market. As we have done—we have taken merchant risk—we may have to take merchant risk on these contracts until such time as the private sector steps back in.

Senator CANAVAN: How does it work under the Renewable Energy (Electricity) Act? If you sign a PPA, can you surrender RECs?

Mr Yates : We would not necessarily sign a PPA, but we may lend to a company based upon volatile earnings. The reason there would be volatile earnings is that they may not know what the REC price is going to be. So we may have to ride with them for a period of time—until the REC price settles out or the black price increases. We do not have to sign a PPA to find ourselves exposed to future electricity prices and REC prices, but projects are going to need support if their revenue stream is uncertain.

Senator CANAVAN: 'Volatile' is one way to put it, but I suppose this post-2020 risk is more downside risk. You are saying that the Commonwealth government will take that on board, effectively, through you in the absence of private companies. You take the risk that the REC price is going to be below the break-even price for one of these projects.

Mr Yates : The federal government does not willingly take on risks on behalf of the private sector. However, we as an organisation can assist and look longer term at the likely future electricity prices. Longer term, if anything is to be built in this country, overall electricity prices must rise from a current price of $35 for black power.

Senator CANAVAN: To what extent do you look at the energy market, though? One of the big problems in Queensland at the moment is an excess supply of electricity. In particular, in North Queensland it is hard to get anything built because there is too much supply from down south. So why would you be trying to put more supply into the market in that environment? It does not seem to make a lot of sense: if there is already a surplus of electricity, why would we be installing more?

Mr Yates : Our object under our act is to—

Senator CANAVAN: Apart from the RET. Putting the RET to one side, why would we seek to install more electricity in a marketplace that is already oversupplied?

Mr Yates : I think the answer is, 'The question is: is it oversupplied with the type of energy which will position Australia for a low-carbon future?' and the answer is: probably. It is oversupplied with black energy, and it is probably undersupplied with green energy.

Senator CANAVAN: So you do not deny it is oversupplied, though, at the moment? Black plus green?

Mr Yates : I do not deny there is an oversupply of electricity in the market.

Senator CANAVAN: If you think there is an undersupply of green energy, what is your assessment of what we need for a low-carbon future? How much green energy do we need in 2025 or 2030? You have obviously got some benchmark in mind, because you think there is an undersupply, so what is that benchmark?

Mr Yates : The government will need to set that as part of its post-2020—

Senator CANAVAN: Sorry, Mr Yates, you said your view and the CEFC's view is there is an undersupply, so what is your benchmark? I am just wondering on what instruction you are establishing that benchmark.

Mr Yates : My own instruction would be that to decarbonise the economy, you need to actually move to a lower form of emitting energy, so truth will say that that will mean you will have to go from the current scenario, which is probably 80 or 90 per cent black, towards a greater proportion of green. It is as simple as that.

Senator CANAVAN: I am asking for a number, though, Mr Yates, because you said there is an undersupply, so what is your view? What would we need?

Mr Yates : I think that would be a government policy question.

Senator CANAVAN: That is exactly my point, Mr Yates: it is actually a matter for the parliament what the target of green energy is. It seems a little remarkable that you are establishing your own independent targets of green energy, independent of the parliament.

Mr Yates : We are not, Senator.

Senator CANAVAN: You just said that.

Mr Yates : We, like everybody else, are taking a market-perceptive view. You do that in relation to any commodity, whether it be oil, gas, iron ore: you have to actually look at what the market is likely to be in the future, and if you read what if any of the pundits are saying in relation to the market for clean energy, the Climate Change Authority has indicated a target should be X; Ross Garnaut was in the paper indicating that a target should be Y. We have to assess all that, and say, 'Where are we likely to come up long term?' because companies have to make long-term investment decisions, and, not surprisingly, everybody has to take an assessment of risk, so we have to take an assessment of risk like everybody else, like any other commercial proponent has to take an assessment of risk.

Senator CANAVAN: I am not familiar with every clause in your legislation, but what particular aspect of your mandate from the parliament are you using to establish these benchmarks of what level of renewable energy—'green energy', in your words—we should have in the future?

Mr Yates : I have not suggested that there is a particular level; you said there is a risk assessment.

Senator CANAVAN: But you said there is an undersupply, so you must have a level in mind, to establish an undersupply. How can you establish an undersupply without having a level of green energy in mind?

Mr Yates : The question is, 'In the current scenario, do you have enough green energy in the market at the moment?' and the supposition I would ask you is, at the moment, you are probably not likely to have enough, because it is likely that you are going to see a switch towards greater demand for green energy over black energy.

Senator CANAVAN: What part of your mandate from the parliament gives you the power to establish or measure that future undersupply, given there is no direction, apart from the legislation that is already in place?

Mr Yates : We do not establish; we actually take a risk based assessment of where we think the market is going to be in the future.

Senator CANAVAN: You have said multiple times here, Mr Yates, that you have established there is an undersupply. You have said that multiple times. I am trying to ask: on what grounds of the mandate we have given you, do you then go and say 'We think there should be 25, 30, 40 per cent renewable energy in 2030' or 2035 or whatever?

Mr Yates : I am not saying that, but I can tell you that my risk assessment is that there will be. So you want to invest in the market where you are going to be, rather than where you are today.

Senator CANAVAN: So you have done a risk assessment; you have established there is going to be an undersupply, in your view, but I have still got the question: you are putting billions of taxpayers' dollars at risk. What aspect of the mandate you have been given gives you that power to make judgements on what the parliament will legislate for green energy—because those are the only people that can do it—in 15 or 20 years time?

Mr Yates : We have just done it. We have got 16,000—

Senator CANAVAN: You have just done it? You do not need a mandate—you just do it.

CHAIR: Order!

Mr Yates : Senator, quite simply, you have got 16,000 megawatts, currently, of green energy. The government has just decided a target is 33,000; so, yes, there is less than what the government has determined there should be. I am not the one who is necessarily determining. All I am saying is that currently there is this much; the government has said there should be this much. Therefore, there is undersupply.

Senator CANAVAN: Okay. That is where is I was getting confused, because when I asked for a number before, all you had to give was 33,000.

Mr Yates : That is what the government has set.

Senator CANAVAN: You did not give me that, so I thought—

Senator WHISH-WILSON: We are actually off topic, so—

Senator CANAVAN: I thought you were coming up with some other number because you seemed to be saying that it is—

Mr Yates : No. We do not come up with numbers. We try to respond to market.

Senator CANAVAN: That is why I was getting concerned, Mr Yates. That is fair enough. The number is not 33,000 yet, but that has been the proposal, of course. I apologise for that. I took your meaning, when you were setting targets of certain amounts of green energy to decarbonise the economy, to be that you were making your own numbers up. It is clear you are not. You will require the mandate of the parliament—they set a lower number or a higher number, and that is what you go with.

Mr Yates : Yes. We are commercial.

Senator Cormann: Could we just pause for a moment. Mr Ray wants to put a clarification forward.

Mr Ray : In response to Senator Canavan's earlier question, all of these projections have the same treatment of Future Fund earnings—

Senator CANAVAN: Including 2013-14?

Mr Ray : Including 2013-14 MYEFO.

Senator Cormann: Just for the record, again, because Senator Wong earlier today accused us of cooking the books: the cook was Senator Wong, and she has ended up with egg all over her face because she tried to make an allegation against the government, which originated with the decision of the previous government.

Senator CANAVAN: You are saying she is not a master chef?

Senator Cormann: She is not a master chef. She has forgotten her previous cooking.

CHAIR: Minister, I had control of this place for a moment.

Senator Cormann: She has forgotten her previous cooking and now she has ended up with egg all over her face.

Senator DASTYARI: He has been tweeting all day about it.

CHAIR: Order! Are we all peaceful? Senator Canavan, how much longer have you got with the clean energy thing?

Senator CANAVAN: This is a slightly different line of questioning. How much time do we have?

CHAIR: That is not the question I asked you.

Senator CANAVAN: I just have one more. This negative $2.40 carbon abatement cost—you are making money by abating carbon. So why aren't other people doing it?

Mr Yates : Yes. The answer is they probably could. All we are doing is saying that if you lend to people, and you lend to them in ways where they can borrow that money and apply it to a program whereby they become more productive, they will use less energy; and by us lending them money, we make a return on it. Emissions are less; we make a return; therefore, emissions have been reduced and we have made a profit.

Senator CANAVAN: Can you give me an example?

Mr Yates : An example? An energy-efficiency loan is a good example. I have just done one with an apple storage scenario. They had a very old refrigeration system.

Senator CANAVAN: Who was that?

Mr Yates : This was Radevski's. They are one of the larger apple-growers.

Senator DASTYARI: You should not have said apple. I was thinking of tax.

Mr Yates : No, not that Apple—the fruit apple. They have a very old refrigeration system. We lend to them at a positive return. Every loan that we make is well above the government's cost of funds. We earn a positive return on our money, and they are, in that case, generating about a 30 per cent return by reinvesting that money in their business because they reduce their energy costs significantly. The payback period on a refrigeration upgrade for an old refrigeration system is about three years but they need funding to go about doing that. We encourage them to go and do that. We participate with them. We show them the returns we can get by investing in those things.

Senator CANAVAN: And what happens to their capital, like the old refrigerator they got replaced? Did they resell that, and now someone else is using it?

Mr Yates : You cannot, in relation to those, because there are 22 refrigerants which you cannot buy as refrigeration gas anymore. So it ends up—

Senator CANAVAN: That negative $2.40, does it take into account some of the sunk capital costs that cannot be used in the future?

Mr Yates : Generally the refrigerators we are replacing are over 15 years old, so—

Senator CANAVAN: But they still have an economic life.

Mr Yates : No, they do not. They do not have an economic life and that is the reason they need to be replaced. If they had an economic life—

Senator CANAVAN: If they needed to replace them anyway, why are we lending to them? They could have gone to the bank.

Senator WHISH-WILSON: The securitisation model of energy efficiency has been around for decades, especially in Europe. It is—

Senator CANAVAN: Chair, I am sure he is expert at this—

Senator WHISH-WILSON: You should know your subject.

Senator CANAVAN: and he can answer the question, just like you guys. If you want to be a witness, go and get a job with them. I am sure they will employ you. You are right up their alley.

CHAIR: Senator Whish-Wilson, there will be no interjections. You are on my patch.

Mr Yates : Your question is why doesn't the private sector always do that.

Senator CANAVAN: In this specific case, where they needed to replace—

Mr Yates : We actually did it jointly with the private sector. That was done through the National Australia Bank scheme. No, sorry—it was done through the Commonwealth Bank scheme. We did it jointly with the Commonwealth Bank. We jointly lent dollar-for-dollar.

Senator CANAVAN: I just wonder why we are lending money to people to buy new fridges they would have had to buy anyway. That is what we have done. I was not here when you voted for it. Who was here?

Senator DASTYARI: I want to touch on one or two things. I just want to clarify this, and I am sure this is the case: Mr Yates, in the way in which you are lending money, you are not operating outside your legislative framework at all, are you?

Mr Yates : No.

Senator DASTYARI: Okay, I just wanted to check that. I just wanted to make sure.

CHAIR: For a moment there, I thought you were going to give a different answer.

Senator DASTYARI: This is going to show a lack of understanding on my part of this issue and the PBS, which I have not gone through in detail: Minister, at the moment, is abolishing the Clean Energy Finance Corporation in the budget papers?

Senator Cormann: It remains government policy, but obviously, for as long as the parliament does not pass the—sorry?

Mr Ray : From December this calendar year.

Senator Cormann: From December this calendar year, yes. We have obviously adjusted the budget treatment in recognition of the fact that the parliament has not yet passed the legislation.

Senator DASTYARI: In the forward estimates, is there an assumption that the Clean Energy Finance Corporation gets abolished?

Senator Cormann: There is an assumption that the Clean Energy Finance Corporation gets abolished from December this year onward. Mr Ray might be able to add to that.

Senator DASTYARI: Where would I find that in the budget papers? Am I looking at Budget Paper No. 2 or No. 1? Where am I going? No. 2, I imagine—or the PBS.

Senator Cormann: The government's measure is obviously an old measure. In terms of where that is reflected by way of adjustment—

Senator DASTYARI: It must be a bit awkward sitting with Mr Yates, Senator Cormann.

Senator Cormann: I do not think so.

Senator DASTYARI: You are trying to abolish his job.

Senator Cormann: I think the government's position is well understood.

Senator DASTYARI: Terminate his job—forced redundancies?

Mr Ray : It will be in the cash flow statement and on the balance sheet.

Senator DASTYARI: Okay.

Mr Powell : Page 254 of the PBS is the start of the assumptions in relation to abolition. The assumption is that no new investments will be made post 30 June 2015. However, there will be a six-month transition period during which the assets are transferred in an orderly manner to Treasury, and then the termination of every employee effective 31 December 2015.

Senator DASTYARI: Mr Yates, can I ask a very practical question: what must the impact be on being able to go out, lend money, do business transactions and operate as a company when hanging over your head while you are doing all this is the fact that the government itself is advocating your abolition by the end of this year according to its own documents?

CHAIR: We have done this at every estimates.

Senator DASTYARI: I know. I am asking.

CHAIR: We will do it again, I suppose.

Senator DASTYARI: I did not know it was still in the budget papers. I thought they had given up.

Mr Yates : That has been the environment really since we have established ourselves. We have deployed $1 billion. The market is well aware of the situation and the policy of the government, and the government has also made it very clear that, if it were successful in abolishing us, any transactions that we have committed to would continue to operate, and there would not be disruption to the market as a result.

Senator Cormann: That is right. That is true.

Senator DASTYARI: This is the final question, and then I will move on. I assume you manage the contracts at the moment. Will you hand them over to Treasury? How will you do it?

Senator Cormann: As it says in the statement that was just read out, there will be an orderly transfer of any contracts to the Treasury, and then—

Senator DASTYARI: Yes, but what does that mean? Treasury takes the contracts?

Senator Cormann: Treasury takes responsibility for managing them, and over time you would assume that the government would be divesting themselves of those contracts in an orderly fashion.

Senator DASTYARI: I have more, but we will place them on notice; I am very conscious of time. I want to note, though, Deputy Secretary Ray, that there has been what I think is clearly a massive misleading of the Australian Senate when Secretary Fraser said that you were currently on holiday, and you are with us today! At some point—I imagine the next day—Secretary Fraser is going to come back and fix up the Senate record.

Mr Ray : I do not think he said that.

Senator DASTYARI: I believe there was some reference to you being on holiday at the moment—a well-deserved break.

Mr Ray : I do not think he said that.

Senator WATERS: Mr Yates, in relation to that last exchange, about the apple company that CEFC had assisted to upgrade its plant and equipment, there were various contentions made. What is your response to those contentions that the company would have made that investment anyway?

Mr Yates : I would say that eventually they would have had to make that investment over the period of time, because ultimately all capital equipment eventually has to be replaced. However, having access to a financing partner who is able to not only provide the finance but actually work with you to point out the savings that are available to you is an advantage.

We go on roadshows with the Commonwealth Bank. I have been nearly all around this country—from Port Hedland to Darwin—talking, with the Commonwealth Bank, to small businesses about how they identify these opportunities. The question I get from many people is, 'How do I know whether I can save money?' and I say to them, 'Go out the back of the shed and have a look at your fridge and have a look at the nameplate on it and see when it was manufactured. If it is over 10 or 15 years old, you can make a 30 per cent return on your money by investing.'

We take a very positive view in pointing out to people that there is an opportunity for them to be more productive, for them to save money, and for the environment to be better off. So we are very actively engaged in not only deploying money but also deploying knowledge in the economy.

CHAIR: I thank the Clean Energy Finance Corporation for appearing today.

Proceedings suspended from 15:50 to 16:03

CHAIR: We will resume. Senator McAllister, who is not Senator Dastyari.

Senator DASTYARI: Only a mother can tell us apart!

Senator McALLISTER: Thank you. Thank you, Mr Ray, for your comments clarifying your position on decisions around the Future Fund. I have some additional questions I would like to pursue with you around that. I note your assertion, Senator Cormann, that this is a decision that was taken some time ago. What I am struggling to understand is if that was the case, why were those Future Fund earnings not included, for example, in last year's budget?

Senator Cormann: I will start off and then I will let Mr Ray answer for Treasury. What you call my assertion is, of course, explicitly provided for in the previous government's 2012-13 budget, so I will start off by what was in Budget Paper No. 1 2012-13. It has got Mr Swan and Senator Wong on the front page.

Senator McALLISTER: We have seen it.

Senator Cormann: You accept that that is a 2012-13 budget paper? If you go to page 9-32, you will see there in the second-last paragraph—

Senator WHISH-WILSON: Can you table it?

Senator Cormann: I am sure you can source the 2012-13 budget paper.

Senator WHISH-WILSON: That is fine.

Senator Cormann: It states:

From 2020, the Future Fund becomes available to meet the Government's superannuation liabilities. At this time, earnings will be available to meet the Government's recurrent superannuation spending—

So this will be included in the underlying cash balance. That is a direct quote out of Labor's 2012-13 budget. Then, of course, the government initiated a review. I tabled in the Finance estimates the consultation paper that was released by the then Department of Finance and Deregulation and by the Treasury where they say:

In the 2012-13 Budget, the Government announced that it would review the budget treatment of the Future Fund and asked the Department of Finance and Deregulation and the Department of the Treasury to consult with stakeholders on this issue.

Then it says:

The paper and the outcomes of consultation will be put to the Government for consideration in the lead up to the 2012-13 Mid-Year Economic and Fiscal Outlook.

Clearly, that was done, because when you look at Labor's last Mid-Year Economic and Fiscal Outlook and you go to page 321, you find it says there:

Under the Future Fund Act 2006, earnings are required to be reinvested to meet the Government's future public sector superannuation liabilities. From 2020, the Future Fund becomes available to meet the Government's superannuation liabilities. At this time, earnings will be available to meet the Government's recurrent superannuation spending, and both costs and earnings will be included in the underlying cash balance.

I hasten to add that we do not have any query with the decision of the previous government, that it was the right decision. Indeed, it was implied in the Future Fund Act 2006 that from 1 July 2020 these earnings would become available and, as such, appropriately, that should be reflected in the budget paper when it comes to the underlying cash balance.

The way Future Fund earnings have been treated—they have always been part of the fiscal balance. They have not been part of the future of the underlying cash balance, and they will not be until 30 June 2020, because until 30 June 2020 those earnings will not be available. The cash will not be available to the government to meet those liabilities. From 1 July 2020, they will become available for the government to meet certain liabilities.

The proposition that somehow the government should have excluded the earnings while including the liabilities from 1 July 2020 onward would actually mean that the government would mislead people in terms of the true budget position when it comes to the underlying cash balance. Of course, our intention is very much to ensure that there is an accurate representation of the true underlying cash position as it is projected over the forward estimates and here over the medium to long term. We are dealing here with a period beyond the forward estimates.

The suggestion that was made earlier this morning by Senator Wong that this somehow was tantamount to cooking the books is really quite outrageous and inaccurate. If she thinks that this is cooking the books, as I have indicated, she was the cook along with the then Treasurer, Mr Swan. The question that you have asked is an appropriate question—that is, why has it taken so long for this to be reflected? All that has happened in this budget is that Treasury has applied the changes that were announced by the previous government. Why has that taken so long? The advice I have is that it took until the putting together of the Intergenerational report with the related medium to long-term forecasts to adjust the Treasury methodology, but that was an administrative matter. It was not a matter of policy decision by government, this one or the previous one, in terms of the timing of it. It was really a matter of within which period Treasury was able to give effect to the decision of the previous government as was announced in MYEFO 2012-13. The decision, again, which I think was the right decision, is of course consistent with what was envisaged when the Future Fund was first established. I will just ask Mr Ray to see whether he can add anything else to that.

Mr Ray : Thank you, Minister. I think the short answer to the question is that this was the first Intergenerational report after the 2012-13 budget.

Senator McALLISTER: So this was a decision that was taken to action this new policy direction prior to the Intergenerational report, if I understand the minister correctly?

Senator Cormann: But a previous government made the decision. The question is: when was that decision first reflected in the forecast? What Mr Ray is saying is that it was first reflected in the forecast at the time of the Intergenerational report because that was the first Intergenerational report after that decision of the previous government. Then, of course, the budget medium- to long-term forecasts have to be consistent with what is in the Intergenerational report as well, as was also envisaged by the decision of the previous government in 2012-13.

Senator McALLISTER: When that discussion paper that Mr Fraser referred to earlier was released in 2012, there was quite a lengthy discussion about the complexities of treating funds of this kind, including:

… there are no international standards for the budget treatment of entities such as the Future Fund and comparisons between funds are difficult to make because of the different functions of the funds and the different accounting treatments applied in each country.

That suggests to me that there were a series of decisions that needed to be taken about the way that these matters would be treated in the budget papers. And I understand that they are serious policy decisions, Mr Ray. I am wondering if Treasury—

Senator Cormann: If I could just pause you there—

Senator McALLISTER: Could I just ask my question?

Senator Cormann: You had a pretty lengthy preamble.

Senator McALLISTER: Indeed, but I would like to get to the question.

Senator Cormann: I need some clarification here.

CHAIR: Ask your question, Senator.

Senator McALLISTER: I am wondering, given the complexity of the policy area, whether Treasury provided options to government on the appropriate treatment of Future Fund earnings and when they were provided?

Senator Cormann: This is why I wanted to pause you there, because the way you are asking the question assumes that these were options and scenarios that were put to the current government.

Senator McALLISTER: That is indeed my question. Were options and scenarios put to the current government?

Senator Cormann: That is the whole point. If you look at the opening paragraph of the document that you have just read from, there are two key bits. Firstly, in the 2012-13 budget, the government announced its intention to review. The second key bit is that this paper and the outcomes of the consultations, including in relation to the issues that you have just raised, would be put to the government for consideration in the lead-up to the 2012-13 Mid-Year Economic and Fiscal Outlook.

Presumably that was done, because the decision to change the budget treatment from 2020 onwards in the way that we are now having a discussion about was made by the previous Labor government after the consultation but before the last election in the 2012-13 Mid-Year Economic and Fiscal Outlook. So this is not a matter that came before this government in any way, shape or form in terms of policy decisions. The policy decision had already been made and had already been announced and, indeed, it was a decision that was consistent with what was envisaged in the Future Fund Act 2006 when it was first set up.

Senator McALLISTER: Indeed. I am wondering then, Mr Ray, about the delay in implementing that decision. If the evidence provided by the senator is correct, why is it—

Senator Cormann: It is correct.

Senator McALLISTER: I accept that. Can you tell me why it took so long for it to be incorporated into Treasury's practices?

Mr Ray : I might just step through things a little. I do not think it actually is a policy decision—that is the first point. It is about an accounting treatment. It goes back, as the minister said, to 2006—in fact, to the 2005-06 budget. The question that you asked me was about the report to the government from the two former secretaries of finance and the Treasury. That report was actually on a specific question and it was not to do with the treatment from 2020-21. That report was about the question of whether the costs incurred by the Future Fund should be netted off from the underlying cash balance in the more immediate term. So it was about a different question and, if you like, the explicit statement about the accounting treatment pre-dated the report, as the minister said, because it was in the 2012-13 budget. I just wanted to step through the history, if I may.

Senator McALLISTER: Thank you, Mr Ray, that is an important distinction.

Mr Ray : In terms of the change in the modelling treatment, we are refining our modelling all the time. But, as a general rule, in terms of the longer term projection modelling that we do, the Intergenerational reportsare the natural step to work through a lot of these questions in some detail. We worked through this question as we worked on the 2015 Intergenerational report. We started to work on the report back in 2012. That is how long it takes—to think about the modelling, not the writing up of the report.

We have to project Future Fund earnings out there, and we consulted with the Future Fund on how we should think that through and how we should go about it. We do not want our projections of Future Fund earnings to be in any way indicative of what they think they are going to earn—so that is one issue. The change in the accounting treatment is a relatively simple bit.

Senator McALLISTER: I am not sure that it is simple, to the extent that it has obviously attracted quite a lot of attention—and not simply from senators but also from the media observing these things. Isn't it case that Treasury would usually flag or explain a change in the accounting treatment of this kind in a box in the budget papers or in the Intergenerational report?

Senator Cormann: And it was. That is the whole point. If you go to the 2012-13 budget, there was a box at page 9-33. When the change in this accounting treatment was given effect before the last election by the previous government, there was a detailed box which talked about Future Fund earnings and costs and the underlying cash balance. It makes the point very clearly as to why the accounting treatment of Future Fund earnings from 1 July 2020 onwards would be different to the accounting treatment in relation to the underlying cash balance up until 30 June 2020. Indeed, the discussion paper makes that point very clearly, too. It says:

The Future Fund's gross earnings have been excluded from the underlying cash balance since its establishment in 2006. This was on the basis that Future Fund earnings, while accounted for as Government receipts, are not available for recurrent spending but are instead quarantined and reinvested to meet the Government’s future public sector superannuation liabilities.

That reality changes as of 1 July 2020. As the previous government indicated in its 2012-13 budget and again in Labor's 2012-13 MYEFO, as was always envisaged, from 1 July 2020 onwards 'earnings will be available to meet the government's recurrent superannuation spending, and both costs and earnings will be included in the underlying cash balance.' That was a statement in the 2012-13 MYEFO. To have done otherwise would have meant that you would have excluded one part of the equation. Obviously, taking into account the expenditure, you would be representing an inaccurate position of the underlying cash balance if you excluded the cash revenue that is available for you to meet some of those liabilities.

Senator McALLISTER: Mr Ray, notwithstanding this explanation, this is the first budget in which these numbers have been included in the projections around the underlying cash balance. I am wondering whether you provided a draft box to the Treasurer's office when you were preparing the budget papers to explain this.

Mr Ray : We do not normally get into what draft material we may or may not have provided.

Senator Cormann: Why don't we take it on notice for you and see whether we can assist you. I cannot recollect having seen a draft box, but it was of course very explicitly presented in the 2012-13 budget, in the 2012-13 MYEFO and in the Intergenerational report earlier this year. So it was not new information, as such. When you say that this is the first time that this was reflect, that is not quite right. It was first reflected in terms of the medium to long-term forecast in the Intergenerational report.

Senator McALLISTER: Yes, Senator Cormann. However, we just had a conversation about how chart 1 has been adjusted from previous charts to incorporate all this information. It is actually the first time that this material has been presented and incorporated into this chart.

Senator Cormann: It has also been part of the chart in the Intergenerational report, and that is being done so that we have an apples with apples comparison. If we had not made the adjustment to previous trajectories in these lines for 2013-14 MYEFO and the 2014-15 budget and so on then the comparison would not have been valid.

Senator McALLISTER: I entirely agree, but it is the first time that that has happened, and I am asking about—

Senator Cormann: In the budget?

Senator McALLISTER: However, we are going to take this on notice. We are going to get some information.

Senator KETTER: Thank you. Mr Ray, in terms of the impact of the Future Fund earnings on the budget bottom line down the track, can you provide the committee with the Future Fund earnings in each year from 2021.

Mr Ray : I am happy to take that on notice.

Senator KETTER: You might also want to take this on notice. Can you give us an idea of the magnitude of the Future Fund earning beyond the forward estimates.

Senator Cormann: From an underlying cash balance point of view, this is only material appearing beyond the forward estimates, because manifestly the accounting treatment reflecting the changed reality from 1 July 2020 only starts on 1 July 2020, which is not just one year but two years out of the current forward estimates period.

Senator KETTER: Would it be a safe assumption that it would be at least $4 billion a year, given that the earning figure for 2018-19 is around that?

Senator Cormann: We have taken that on notice.

Mr Ray : That is the 2018-19 number.

Senator Cormann: You asked in the period beyond the forward estimates. Obviously, the change in treatment, which was initiated by the previous government, already comes into effect from 1 July 2020, when the earnings from the Future Fund become available to meet relevant government liabilities. We have taken that question on notice, and we will provide the information on notice.

Senator KETTER: Notwithstanding you are taking some of that on notice, Mr Ray, would you be able to give us some idea of how much the Future Fund earnings contribute to surpluses in the years 2020 to 2025.

Senator Cormann: That is a different way of asking the same question, and I have already taken that on notice.

Senator KETTER: Okay. I think Senator McAllister has dealt with the other issues I had.

Senator McALLISTER: Chair, I do have some additional questions, if we are able to come back to me—

CHAIR: Absolutely.

Senator McALLISTER: I want to come back to the adjusted chart: 3-6 chart 1. The surplus hits around 0.7 per cent of GDP but then declines to less than half a per cent of GDP. Am I reading that graph correctly?

Mr Ray : You are, Senator.

Senator McALLISTER: Should the $14 billion of cuts to family payments that are currently held up in the Senate not be legislated? Would it be true that the budget would be in deficit in 2025-26?

Senator Cormann: That is a hypothetical question. Obviously, the government is working to ensure that its budget measures pass the Senate.

Senator McALLISTER: I suppose we have accepted that we will receive on notice some information about the impact of Future Fund earnings in that period, but one can imagine that if we remove the Future Fund earnings from that cash balance then that result looks even worse. Is that correct?

Senator Cormann: If the Labor Party continues to oppose all of the savings and revenue measures currently before the Senate into the future then the budget will be worse off than if the Labor Party decided to support some of these measures which we have put forward. If you are asking me the question would the budget be better off if the Labor Party took responsibility for the state of the budget they left behind and if you are asking me whether the budget would be in better shape if the Labor Party supported through the Senate our measures to reduce spending growth, make spending growth more sustainable, then obviously the answer to that question is yes.

Senator McALLISTER: On the current estimates, will the government ever reach its one per cent surplus goal?

Senator Cormann: Well, the government has been very explicit. Our commitment is to get the budget back to surplus as soon as possible. Based on the information that we currently have in front of us in terms of economic parameters, and based on the decisions that we have made that are reflected in the budget, it is currently projected that the budget will return to surplus by 2019-20 which, incidentally, is the same timetable as in last year's budget. What we have said is that that is the current indication. But obviously, if you are saying to me that you know for a fact that the budget measures that Labor is currently opposing will continue to be opposed forever and a day, we will make adjustments to our forecasts consistent with that in relevant budget updates, as has been done by previous governments.

Senator McALLISTER: I suppose I am just thinking about the very specific commitment in the budget papers. In Budget Paper No. 1, at page 3-4, it says:

The Budget repair strategy is designed to deliver budget surpluses building to at least 1 per cent of GDP by 2023-24 consistent with the medium-term fiscal strategy.

Senator Cormann: Indeed. That is our objective, and that is what our plan will deliver—obviously, based on a series of assumptions in relation to macroeconomic conditions, for example, and based on the best available information and advice that we currently have about the context. Our statement as a government, or our aspiration is that our commitment has always been to bring the budget back to surplus as soon as possible. Based on the decisions reflected in our budget and based on the plan that we have put forward in the context of current economic conditions, projections are that the budget will return to surplus by 2019-20. If any of the variables change, then either that could come forward or it could be delayed. Obviously, that is the way things have always operated.

Senator McALLISTER: I suppose it is just that the chart that we have been talking about actually sees the budget surplus deteriorating in those years.

Senator Cormann: Which chart are you looking at now?

Senator McALLISTER: Still at chart 1. As a percentage of GDP, we see the budget surplus actually deteriorating towards 2025-26, and not establishing that one per cent surplus.

Senator Cormann: If your question is, 'Is the budget repair job finished?' No, it is not. We believe that we are now heading in the right direction and we believe that we are now making progress in heading in the right direction. We certainly believe that we are in a much stronger position than we would have been if we had not made some of the adjustments to policy settings that we have made since coming into government. But obviously, there is still more work to be done and we do not shy away from that one bit.

Senator McALLISTER: But it is also true that without the inclusion of Future Fund earnings, the budget would barely be in surplus in the medium term, and back in—

Senator Cormann: We can continue to go round and round in circles on this. This was a decision that was made at the time of the 2012-13 budget, consistent with the way that the Future Fund was set up in 2006—obviously, both the liabilities that Future Fund earnings are meant to cover as well as the earnings that cover the period beyond the forward estimates in the relevant period from 2020 onwards. To suggest that we should reflect the expenditure but not the related earnings would present an inaccurate picture of the budget's underlying cash balance. This government is committed to an accurate reflection of the expected underlying cash balance over that period.

Senator CANAVAN: Can I start with a slightly unusual request: do you take complaints, Mr Ray?

Mr Ray : Often!

CHAIR: I presume this is going somewhere?

Senator CANAVAN: I just want to make a complaint. It is a complaint against my own government about the budget.gov.au website. There is some animation or something there. I go to it all the time: all I want to get are the documents, and now I have to click on another page to get to the documents first. Maybe you could have it up for budget night, but I think there are people as sad as me, still going to budget.gov.au two or three weeks after the big night.

CHAIR: It is a very good site.

Senator CANAVAN: It is a very good site, yes. But sometimes I just want to get a budget paper, and now I have to click more times. It is very frustrating.

A more serious complaint, after I have said that: will Treasury ever put Excel spreadsheets of the tables or budgets up on the website at all? Has that been discussed? I know that you have for a lot of other reports but not for the budget itself.

Mr Ray : I will need to take that on notice. The budget tables do not come to us in Excel spreadsheets; they come out of the Central Budget Management System.

Senator CANAVAN: Okay.

Mr Ray : But we do publish, for example, all of the plot points in the charts and that sort of stuff. They are all available.

Senator CANAVAN: Where are they? On the budget website?

Mr Ray : On the budget website.

Senator CANAVAN: I probably have not found them before. Thanks for that. Can I ask questions about your commodity price forecasting? Is this the right group?

Mr Ray : Unfortunately, no. I think they were here this morning.

Senator CANAVAN: All right—no problem. What about the childcare package—is that you guys? To the extent that it relates to Treasury issues or costing issues?

Mr Ray : To the extent that it would relate to a Treasury issue it is Ms Croke, yes.

Senator CANAVAN: Can I just clarify a few things? The childcare subsidy costs $3½ billion—is that right?

Ms Croke : The additional—

Senator CANAVAN: Over the forward estimates.

Ms Croke : Yes—$3.5 billion in additional childcare assistance.

Senator CANAVAN: I sometimes hear a figure of $4.4 billion. What is the extra $900 million—

Ms Croke : The additional money was the two-year national partnership money for access to preschools. The two things were part of the families package.

Senator CANAVAN: Sorry—what were the two other things?

Ms Croke : The $3.5 billion is the additional childcare assistance and the $843 million, which is where you get to the $4.4 billion, was a two-year national partnership with states and territories for preschool access.

Senator CANAVAN: So it is only those two—I thought you said there were two more. But it is only those two which make it the $4.4 billion.

Ms Croke : Those two components.

Senator CANAVAN: Is the nanny program trial included in the $3.5 billion?

Ms Croke : Yes, that is right.

Senator CANAVAN: And the $3.5 billion broken up over the forward estimates—is that possible? Do you have that? I presume it is only in the last two years anyway.

Mr Raether : You would have to go to Budget Paper No. 2—

Senator CANAVAN: Yes. There are just lots of different packages there. I suppose I just want the $3.5 billion divided up. You can take that on notice if you want—I do not need it right now.

Mr Raether : On page 154 is the main measure—the workforce participation—

Senator CANAVAN: Is that the whole $3.5 billion, or is it just part?

Mr Raether : There are elements of it—

Senator CANAVAN: Perhaps you could take it on notice for me.

Ms Croke : It would be better for the Department of Social Services, which has policy responsibility for child care.

Senator CANAVAN: Given that it is a costing issue, could you still take that on notice for me here. As I am a permanent member of this committee it is hard for me to get to others, particularly with the new rules. Would that be too much to ask? Then if you need to consult with your colleagues, that could be possible?

Mr Ray : We will do that for you.

Senator CANAVAN: Thank you. I will try not to make any more complaints! Could you do the same for the preschools package as well—the $843 million. The $3.5 billion—that benefits 1.2 million families. Is that right? I understand that might be something for DSS.

Mr Raether : I think it is about that amount, but the exact amount is a question for DSS.

Senator CANAVAN: That is fine.

Senator KETTER: I would like to ask some questions about the instant asset write-off scheme.

Mr Ray : Before you do, that is a matter for revenue group.

Senator Cormann: We did indicate that earlier in the micro session. It is a measure on the revenue side of the budget because, effectively, it provides an accelerated tax deduction.

Senator KETTER: I was going to ask about the key assumptions underlying the $1.8 billion—

Senator Cormann: Very much a—

Mr Ray : It is very much a matter for revenue group.

Senator Cormann: They are here tomorrow.

Senator KETTER: Okay.

Senator CANAVAN: Can I ask a question about the zone tax offset? I forgot about that one.

Mr Ray : That is also revenue.

Senator CANAVAN: Because it is revenue—okay.

Mr Ray : Yes.

Senator KETTER: In which case I will try something else. The reconciliation table—can we talk about that?

Mr Ray : Yes.

Senator KETTER: Cash or accrual?

Senator Cormann: Which page?

Senator KETTER: Page 317.

Senator Cormann: This is the one that goes to 2017-18, just to be clear. If you want to have a proper look at the effect of policy decisions over the forward estimates, the best table is table 3 on page 3-11.

Senator KETTER: Let me start by asking some general questions about—

Senator Cormann: As long as you know that this is only the 2014-15 forward estimates and not over the 2015-16 forward estimates.

Senator KETTER: Mr Ray, would you say that this is the most important table in the budget documentation in terms of reconciling—

Senator Cormann: You are asking him for an opinion.

Senator DASTYARI: Would you say it is a matter of fact?

Senator KETTER: How would you describe the importance of the table in terms of reconciling the budget bottom line?

Mr Ray : This is one of many important tables in the budget.

Senator Cormann: That is why I said—perhaps in an abundance of pre-emptive helpfulness, because I understood where you wanted to go—table 7 does not give you an accurate reflection of the impact of policy decisions by the government over the 2015-16 forward estimates, because it excludes the 2018-19 financial year. The most accurate aggregate table outlining the net effect of policy decisions of the government since the Mid-Year Economic and Fiscal Outlook is table 3 on page 3-11. That is the reason why I made that point when I appreciated where you wanted to go.

Senator KETTER: Nevertheless, can you take us through that particular table that I preferred to talk about—the one on 3-17—and tell us what that table tells us.

Mr Ray : In general terms that table tells us how we have got from the underlying cash balance that was published in the 2014-15 budget through the 2014-15 MYEFO to the 2015-16 budget, as the minister said, across the forward estimates of the 2014-15 budget. So it reconciles, if you like, the 2015-16 underlying cash balance back to the 2014-15 MYEFO and back from there to the 2014-15 budget. Since MYEFO, it breaks down the effect of policy decisions by the government and the effect of parameter and other variations on the budget.

Senator KETTER: Thank you. But would you agree with me that it shows the budget bottom line blowing out massively since the last budget?

Mr Ray : I would not use language like that. What it does show is that there has been a deterioration in the budget, in the underlying cash balance across the forward estimates.

Senator KETTER: And would you agree that that was due to policy decisions?

Mr Ray : No, I would not. I would agree that that was due to a range of things, in large part developments in the economy, including where Senator Canavan wanted to go with my Macroeconomic Group colleagues on commodity prices.

Senator KETTER: So you don't think that policy decisions have any role there?

Mr Ray : I am not saying that they did not have any role but I am saying that there are other factors at play as well. Indeed—

Senator Cormann: The most accurate table reflecting policy decisions is table 3, page 3-11.

Senator KETTER: Mr Ray, could you state what the change in the budget bottom line has been since the budget last year.

Mr Ray : Do you want me to read into the Hansard the numbers?

Senator KETTER: Yes, please.

Senator Cormann: They are in the budget. We are not going to—this is like Senator Wong earlier today wanting the secretary of Treasury to read attachment tables. The numbers are in the budget. You have got the budget paper.

Senator DASTYARI: What are the numbers? I do not know them off the top of my head.

Senator Cormann: You can read them. Go to page 3-17 and you will be able to review them.

Senator DASTYARI: Page 3-17 of which budget paper?

Senator Cormann: Budget paper 1. We are not going to get senior officers of Treasury to read out numbers that are published in the budget papers.

Senator DASTYARI: No—I want to ask a question from it.

Senator KETTER: You have agreed that the figures have gone from $60 billion to around $116 billion?

Mr Ray : That is the sum across the years, yes; I would agree with that.

Senator KETTER: Could you outline the changes that have occurred since MYEFO, including a breakdown of changes in parameters and changes in policy decisions.

Senator Cormann: There has been a $20 billion write-down in revenues, for starters, since MYEFO. In fact since we came into government we have had to—compared to expected revenue at the time, revenue had to be written down by $92 billion over the current forward estimates.

Senator KETTER: Mr Ray, would you like to supplement that?

Mr Ray : A downward revision to receipts of $21.3 billion as a result of parameters and other variations. This is where it gets tricky—a reduction in payments, therefore an improvement in the underlying cash balance due to parameter and other variations of $17.4 billion, a large part of which is the reversal of the provisions that were in the budget for paid parental leave, giving a net impact of $3.2 billion from parameter and other variations, and then $9 billion of policy. As the minister said, the reversal of the PPL provision is netted out in the table that he referred to earlier.

Senator KETTER: In general terms you have mentioned there was $9 billion in new policy decisions. In layman's terms, what does that mean?

Mr Ray : These are decisions taken by the government. They are the net of the policy decisions.

Senator Cormann: The net effect on the budget bottom line of policy decisions taken.

Senator KETTER: So this is spending that has not been offset?

Senator Cormann: No, that is not what we said. As you can see in table 3 on page 3-11, all of the policy decisions taken by the government with a negative impact on the budget bottom line were more than fully offset by new policy decisions to improve the budget bottom line. In fact, as you can see in table 3 on page 3-11, the offsets of decisions with a negative impact on the budget bottom line exceed those decisions by $1.6 billion over the forward estimates. That is the net budget impact of new policy decisions, which, as I say, you can see in table 3, offsetting new decisions.

Mr Ray : And, Senator, if I may, detail of all the major movements are set out from pages 3-18 through to 3-22.

Senator Cormann: That is right, including the impact of the decision of reversing the Paid Parental Leave scheme, where you see on page 3-22 that not proceeding with the Paid Parental Leave scheme has resulted in decreased cash payments of $10.1 billion over the five years to the 2018-19 provision, which were provisioned for in the contingency reserve.

Senator KETTER: I take you to the government's fiscal strategy on page 3-4 of the budget papers, which talks about new spending measures to be more than offset by reductions in spending elsewhere within the budget.

Senator Cormann: Once you take the effects of the decision announced by the Prime Minister in January that we would not be proceeding with the Paid Parental Leave scheme, you will find that the reduction in payments exceeds the impact of decisions to increase payments.

Senator KETTER: If the $9.3 billion of new spending identified in the reconciliation table were fully offset, would it not be identified there?

Senator Cormann: That is why I am referring you to page 3-22 as well, because you would appreciate that the government did make a decision not to proceed with the Paid Parental Leave scheme, as was announced by the Prime Minister earlier this year. However, that was provisioned for in the contingency reserve. But, as you can see on page 3-22, the effect of that decision is that government payments over the forward estimates to 2018-19 will now be $10.1 billion lower than they would have been if we were still proceeding with the enhanced Paid Parental Leave scheme. But, as I say, the most accurate summary table in terms of assessing offsets of policy decisions is table 3 on page 3-11. All of the detail, as Mr Ray quite accurately outlined, is on pages 3-18 to 3-23. All of the detail on material changes is reflected there.

Senator KETTER: From a purely technical perspective, would you agree that the government has not met its fiscal budget repair strategy?

Senator Cormann: No, I do not.

Senator KETTER: When we have $9.3 billion identified—

Senator Cormann: I have just explained to you the basis on which I assert that we have met our objective. I have put it in black and white on the public record, and you can review it in Hansard after the event if you like.

Mr Ray : At the risk of stepping in here, this is not the first time a government has presented its net decisions taking into account things that were in the contingency reserve. That has happened over a number of years.

Senator Cormann: That is a Treasury way of saying that this is consistent with past practice.

Senator DASTYARI: They can speak for themselves.

Senator Cormann: I am just translating for the benefit of the committee.

Senator KETTER: I will move on to page 3-13. Mr Ray, could you highlight the pathway of the structural budget balance beyond 2020-21?

Mr Ray : You really are asking the wrong people. These estimates are calculated in the Macroeconomic Group. Once the terms of trade have come back to their structural level, the point estimate of the structural balance becomes the underlying cash balance. I think by 2022-23 that is the case. If you really want to go into detailed questions, I will need to either bring back my macro colleagues or take the question on notice.

Senator KETTER: It is not too much detail, but I was wondering if you could confirm whether I was right in assuming that the structural budget balance just creeps into surplus but then goes backwards out to 2025-26.

Mr Ray : Out beyond the early part of the next decade, as I tried to explain—and did poorly, as I am not an expert—it follows the underlying cash balance.

Senator KETTER: So what has happened to the structural budget balance since the budget last year?

Mr Ray : I need to check what I need to add to an answer, so I am happy to take that bit on notice. But I would say that in broad terms out there what has happened to the structural budget balance mirrors what has happened to the underlying cash balance.

Senator KETTER: Would you agree with me that it has deteriorated significantly?

Mr Ray : I would agree with you that it is lower than it was, as is the underlying cash balance out there.

Senator KETTER: So, in other words, the structural position of the budget has worsened since the budget last year?

Senator Cormann: As I have indicated, since the budget last year, there is about $52 billion less in revenue than was anticipated at the time because of circumstances outside of the direct control of the government, in the main. Over that period, the impact on revenue of lower iron ore prices, which no government controls, is about $20 billion since last year's budget, as was indicated by the Secretary of the Treasury this morning. So if your question is whether the position has worsened compared to last year's budget, in the context of global economic headwinds that were unanticipated at the time, yes. As to whether the government now heading in the right direction as a result of the decisions we are making, the answer is also yes. Are we in a stronger position than we would have been if we had not made some of the decisions that we have made since last year's budget? That is a resounding yes. Is there further to go? Yes, there is. Obviously we are very conscious of that. We know that there is more work to be done, and we do not resile from that one bit.

Senator KETTER: Thank you. Mr Ray, if you agree that the structural position of the budget has worsened, do you have an estimate as to by how much?

Mr Ray : We would by definition because we can compare the two, but I would need to take it on notice.

Senator KETTER: Am I right in assuming that in the last year it would equate to around one per cent of GDP?

Mr Ray : I would need to take it on notice to give you an exact thing, but you can get an idea if you look at the difference between the projections that I was discussing earlier with senators McAllister and Canavan in chart 1. Once you get to the end of those projections the underlying cash balance and the structural balance are coincidental.

Senator KETTER: Okay. Next, I wanted to take you to the consideration of spending in the budget as a proportion of the overall economy. I take you to page 10-7 of the budget papers. Can you highlight to the committee what spending as a proportion of GDP is expected to be in 2015-2016 and 2016-2017?

Senator Cormann: Hang on—you want the Deputy Secretary of the Treasury to read out published tables? You are pointing us to the table, so you can read for yourself what it says. Everybody can read what it says, and what it says is that the expenditure as a share of GDP is peaking at 25.9 per cent, and is projected to reduce to 25.3 per cent over the forward estimates.

We have had this conversation in finance. We had this conversation this morning with Senator Wong, when the Secretary of the Treasury was here. Do you really think it is useful to ask senior officials of the Department of the Treasury to read out budget papers to you?

Senator DASTYARI: The thing is—

CHAIR: Senator Dastyari!

Senator Cormann: You go to Budget Paper No. 1, page 10-7. You must have run out of questions to ask if you are now going to ask officers from the Department of the Treasury to read out the budget papers to you.

Senator KETTER: Perhaps I will move—

CHAIR: It is all good. It is resolved.

Senator KETTER: We can agree then, Mr Ray, that in the last 12 months, the proportion of government spending is increased by a full percentage point in each of the next two years?

Senator Cormann: As I indicated to Senator Wong this morning, when we came into government we inherited a situation where spending was projected to increase by 3.6 per cent above inflation on average per annum over Labor's first five years in government. Sorry, it did increase by 3.6 per cent above inflation on average per annum, and over the medium term was projected to increase by 3.7 per cent on average per annum. In our first budget, we reduced expenditure growth to one per cent on average per annum above inflation. In this budget, that has increased slightly to 1.5 per cent—still much lower than Labor's first five years and still much lower than Labor's medium-term forecast was suggesting.

The reason the average over the 2015-2016 forward estimates is slightly higher at 1.5 per cent above inflation is, as I indicated this morning to Senator Wong and as I indicated to Senator Wong last week in finance estimates, that the ramp-up in expenditure on the National Disability Insurance Scheme is coming into the forward estimates in 2018-2019 in a more significant and more material way. Our effort to reduce spending growth in other areas is designed in no small part to make the fiscal space required to channel investment in important initiatives that have bipartisan support, such as the National Disability Insurance Scheme.

If your suggestion is that somehow expenditure is increasing by more than it was under Labor, that is wrong. I assert that spending as a share of GDP is now lower than what it would have been if the previous government had stayed in government and had not substantially adjusted its policy decisions, as we did. It is peaking at 25.9 per cent. That is a matter of public record, and it is projected to reduce to 25.3 per cent over the forward estimates. With that, I might hand over to—

CHAIR: Yes, I was just going to say, Minister Fifield is behind you. Did you want to clarify—

Senator DASTYARI: I think it has now been clarified. I am scared that on his way back to his office, Senator Cormann is going to continue to answer the questions to himself as he walks!

Senator Cormann: I might provide an explanation to cabinet if you want.

Senator DASTYARI: Just keep talking about—

CHAIR: Thank you for your fulsome answers today, Minister Cormann. Welcome, Minister Fifield. We are ploughing through. We have been very courteous to each other here today, and I am sure that will continue with your good stewardship as well.

Mr Ray : I was going to make a slightly different point, and that is that it is quite difficult to make the sort of comparison that you are making. You are comparing ratios where both the numerator and the denominator can move. All of the change in the ratios from the last MYEFO and a large part of the change in the ratios from the 2014-2015 budget are as a result of changes in the denominator, not the numerator. One of the things that has happened is that the particular years which are forecast years rather than projection years have changed between last year's budget and this year's budget. So, I just urge a little bit of caution to make the comparison that you are making.

Senator KETTER: I understand the point you are making, Mr Ray, but nevertheless it is a measure that is often used—spending as a proportion of GDP—and it is a relevant one. Notwithstanding the minister's fulsome answer before, could you supplement that answer with your view as to what is driving that increase in the proportion of spending to GDP?

Mr Ray : It is to all intents and purposes that there is less GDP. For example, if you take the 2014-2015 MYEFO: spending in this budget each and every year is lower than it was in the 2014-2015 MYEFO but it is higher as a proportion of GDP in every year except the current year, and that is because there is less nominal GDP.

Senator KETTER: We have weaker nominal GDP growth and—

Mr Ray : It is the level that matters here. We have less nominal GDP in level terms in each of those years.

Senator KETTER: But will increases in spending not also have a part in this?

Mr Ray : They would. But in dollar terms, spending in this year's budget and each year up to 2017-2018 is lower than it was in the MYEFO. I am not going to make a big point about it because it is basically the same.

Senator KETTER: To what extent do parameter revisions also play a part here?

Mr Ray : This is total spending, so that includes parameter revision spending as well as policy decisions. The parameter revisions tend to affect both the numerator and the denominator in these ratios.

Senator KETTER: One more than the other?

Mr Ray : It varies from circumstance to circumstance, but it is usually in the same direction.

Senator KETTER: Going back to the reconciliation table we were talking about before: we can see the government has $4.5 billion in new net policy decisions in 2015-2016. Would I be right in assuming that government decisions have driven, at least in part, the increase in spending as a proportion of the economy?

Mr Ray : We are talking about 2015-16?

Senator KETTER: Yes.

Mr Ray : Government decisions have, if you like, increased payments by $4.1 billion, and parameter and other variations have reduced payments by 5.3. Part of that reduction is $2.4 billion. That is a bit complicated. Part of that reduction is because of the reversal of the PPL decision.

Senator KETTER: So you would not agree with me that the government has $4.5 billion in new net policy decisions?

Mr Ray : I would agree with you in new net policy decisions, but we were talking about the payments-to-GDP ratio.

Senator KETTER: Okay.

Senator DASTYARI: I am going to apologise for this, Mr Ray, in advance. This is something that we have been talking about all day and I have gotten a bit confused by all of this. The minister and Senator Wong had a bit of an exchange about this, and it has kind of been retouched in this and that. Can you explain it to me? I want to quickly get this right. What we have determined today, or what the minister has put, is that the accounting treatment over this whole Future Fund issue, of how it is treated, was settled in 2012. Is that correct?

Mr Ray : Yes, that is correct.

Senator DASTYARI: There has been so much said. I just want to get it in your language, just to understand.

CHAIR: There has not been so much said.

Senator DASTYARI: We have probably spent about four hours of different—

CHAIR: Are you going to try and rewrite the history of this morning now?

Senator DASTYARI: No. I am asking a question.

Senator BERNARDI: You are going to ask the same question.

CHAIR: You are going to ask the same question, yes.

Senator DASTYARI: I want to work out, once it was done in 2012, why it was not included in the figures until this budget.

Mr Ray : The answer to that that I gave before is that we made the modelling adjustment in the work that we did leading up to the Intergenerational report that was published in March this year. That is normally where we think about these longer term issues, in the work that we do for the Intergenerational report from time to time.

Senator DASTYARI: It is not in the IGR—or is it in the IGR?

Mr Ray : It is in the IGR.

Senator DASTYARI: And then you include it in the budget?

Mr Ray : Correct.

Senator DASTYARI: This is the point that Saul Eslake and others have been making—I am sure you have seen the stuff from Saul Eslake and Mike Keating; I am just quoting here from what they have said—that there has been:

… a change in the accounting rules so that, from 2020-21, the annual net earnings of the Future Fund will be counted as budget revenue, not as an increase in the balance in the fund.

That is a matter of fact then? That is not the bit that the minister was disputing?

Mr Ray : I think what the minister is saying—and I do not really want to try to tell you what the minister is saying—is that that accounting treatment was clear from the 2012-13 budget.

CHAIR: I think he also said that it was the original intent in 2006.

Mr Ray : He did say that, and we can—

CHAIR: I am paraphrasing.

Mr Ray : Yes.

Senator DASTYARI: Can you take this on notice, because you probably will not have the data here. Saul Eslake—who is known to all of us and has done a lot of stuff for this Senate economics committee and has given lots of evidence at different times—estimates that this change will account for more than half of the budget surplus projected for 2024-25 and 2026-27; I think that is meant to be 2025-26; I think that is a typo. Are you able to take on notice whether that is factually correct or not?

Mr Ray : You may have been out of the room, Senator, but we took on notice before—

Senator DASTYARI: I thought I was listening to that. Sorry. I must have missed it.

CHAIR: It has come up a couple of times.

Mr Ray : We took on notice before the impact of the net Future Fund earnings on the underlying cash balance from 2020-21.

Senator DASTYARI: So the question, you are saying, has already been taken on notice and you will get us an answer in writing on that—what I just said you?

Mr Ray : We have taken it on notice, yes.

Senator DASTYARI: I want to make sure about something that we are going to take to Revenue Group tomorrow—the instant asset write-off. What has happened to us in the past is everyone passes on what we say to the last person then they say, no, technically it should have been Finance last week. This always happens. Should questions to do with the instant asset write-off largely be directed to Revenue Group.

Mr Ray : If it is around the costing.

Senator DASTYARI: What about questions about when we are going to see the impact of that in nominal GDP. Can you answer those?

Mr Ray : They were questions that were discussed this morning with Macroeconomic Group.

Senator DASTYARI: They were kind of discussed but parts of it were put away. What part of it are you responsible for?

Mr Ray : To do with the budgetary measure.

Senator DASTYARI: Just the budgetary measure?

Mr Ray : To do with that particular measure. Nothing other than putting the budget together.

Senator DASTYARI: You are involved in everything, Mr Ray—you are an impressive man; you do everything in this place.

Senator Fifield: It has been the case for quite a long time.

Senator DASTYARI: Mr Ray is leaving Fiscal Group. They have promoted him out of the way.

CHAIR: I do not think that is the case at all.

Senator DASTYARI: No, he is actually going to macro group, which I think he will be fantastic in. You are saying, then, that projections were done by macro group. The revenue part is being dealt with by Revenue Group.

Mr Ray : The accelerated depreciation measure is more about the forecasts than the projections, and they were done by Macroeconomic Group.

Senator DASTYARI: We will go to Revenue Group for the actual specifics of the measure?

Mr Ray : True.

Senator CANAVAN: I refer to the Northern Australia Infrastructure Facility. I will not ask you to read out the numbers in the table; I am more interested in the design of it. Who will be eligible for it? Is it just state governments that can apply and borrow the money at the concessional rates or is that still to be worked out?

Mr White : We are working through, effectively, eligibility criteria for it but the government has said that one of the main objectives of the scheme is to encourage private sector investment in infrastructure. We have a website up for the Northern Australia Infrastructure Facility, as of this morning, and I think it says that state governments are eligible to apply and the private sector is eligible to apply—preferably in partnership with a state government, but the idea that the loans can go to either to a state government or a private entity is most likely where we will end up. As we say, we are in the process of doing eligibility criteria.

Senator CANAVAN: What about local government?

Mr White : As I said, one of the objectives is to encourage private sector investment in infrastructure to the extent that they can partner with local governments. That is probably okay but, as we said, we are going to be working on it.

Senator CANAVAN: Is there a project size limit?

Mr White : This facility is for major infrastructure. We are looking at the question of whether we have a minimum size limit and we will have to see but it is for major infrastructure so I suspect we are talking of loans to be made in the hundreds of millions of dollars, as opposed to anything below that.

Senator CANAVAN: You are still putting together the criteria. Is there some kind of consultation process that people can be involved in?

Mr White : That is the plan. We plan to do some draft eligibility criteria and we plan to go out and consult with anyone who thinks they have something to add.

Senator WATERS: I go to the Northern Australia Infrastructure Facility that I understand, from various inquiries that I have made during the course of the week, your department has the carriage of. Can you tell me whether the Department of Infrastructure had any input into the facility before it was announced? Did you brief them or involve them in the process of policy development?

Mr White : Yes, Senator.

Senator WATERS: Okay. My colleague established that Infrastructure Australia had not been so involved. So I just want to double-check whether you made any forays to Infrastructure Australia to brief them or involve them.

Mr White : I would have to check. I do not quite remember. We may have, but I would be inclined to say no. We will take that on notice.

Senator WATERS: Thank you. If you could take that on notice, that would be lovely. Can you tell me where the idea originated? Did it start with your department or did it start with Infrastructure? Where was the genesis of it?

Mr Ray : It was part of the policy development.

Senator WATERS: I beg your pardon?

Mr Ray : It was part of the policy development, and it is a government decision. I do not know that we can really add too much more to that.

Senator WATERS: Was it your department that was working on that or the PM or—

Mr Ray : It came through the Northern Australia white paper process.

Senator WATERS: When did you start working on the facility? Proximate to budget night, what was the work that you were doing, Mr White?

Mr White : The Northern Australia white paper process has been going for a long time. The green paper came out last year. A number of infrastructure issues and proposals have come along through that process, and this is where that came from.

Senator WATERS: Sure, but the actual creation of the facility is a new announcement from budget night.

Mr White : Yes.

Senator WATERS: When did you start working on that new aspect of what has been a long process?

Mr White : I would not know exactly when, but earlier this year.

Senator WATERS: If you would not mind, could you take on notice a bit more specificly around those dates? Do you know whether the facility will require new legislation?

Mr White : We do not think so, but we will have to check.

Senator WATERS: Sure. In terms of the eligibility criteria and the governance arrangements, who will you be engaging to advise you on that?

Mr White : We are at the moment thinking about eligibility criteria, as I said to Senator Canavan just before. We have a process at the moment of engaging a firm to help us, especially on the financial criteria but as well as the cost-benefit and how good a project criteria.

Senator WATERS: That is what the $8½ million is provided for?

Mr White : No, that is not what the $8½ million is for. That is actually for assessing proposals when they have come in.

Senator WATERS: I see. Is there a separate line item for the expert advice?

Mr White : No.

Senator WATERS: Pardon me, I am having trouble hearing. Did you say you are getting that from a firm?

Mr White : Yes, we are. We are having a process for bringing on board a firm to help us with the eligibility criteria.

Senator WATERS: But there is not a line item for that, because that is in under some other—

Mr White : No. We have no other money for that. There is no money in the measure for doing that.

Mr Ray : So, in other words, it is coming out of the Treasury's appropriation.

Senator WATERS: It is coming out of general consolidated. You are engaging a private firm to help you work on the eligibility criteria. Are you anticipating that Infrastructure Australia or the Department of Infrastructure will have any input into the setting of those eligibility criteria?

Mr White : Most likely. We have already talked to the Department of Infrastructure a number of times about the facility, including on the eligibility criteria.

Senator WATERS: I am just trying to understand the division of labour between the private firm, Infrastructure Australia and your department.

Mr White : The eligibility criteria will ultimately be a product of the Treasury and ultimately ticked off by ministers. So we are responsible for it. We are basically engaging a firm and consulting with others around the government who have an interest in eligibility criteria. What we are putting together is a draft eligibility criteria, which will then go for consultation.

Senator WATERS: I have some questions about the two line items. One appears to relate to the concessional component of the loans that are proposed to be offered under the facility. Am I correct in that you have booked the concessional component of the loans over the life of the loan in the year that the loan has been issued?

Mr White : I think that is right, Senator. Are you are looking at Budget Paper No. 2?

Senator WATERS: I hope so. Could you just double check that I am on the right track with that?

Mr White : Yes.

Senator WATERS: Can you just let me know how you work how much the concessional component would be?

Mr White : In my layman's terms, there is a difference between a rate at which a proponent of a proposal could borrow and the rate that we would lend through this facility. There is a net present value of that calculation that is taken to calculate the concession, and that is put in upfront as the cost.

Senator WATERS: So you have basically estimated how much of an interest rate difference you would offer and that is the amount of that gap?

Mr White : Yes.

Senator WATERS: Have you assumed in those figures that the full $5 billion would be distributed in the three years that it has been budgeted for, when you have calculated that concessional component line item?

Mr White : No. It goes beyond the forward estimates.

Senator WATERS: Obviously the projects will take longer than three years, but—

Mr White : I understand, but it goes beyond the forward estimates.

Senator WATERS: Does that mean there are likely to be more concessional component costs beyond the forward estimates as well?

Mr White : Yes.

Senator WATERS: Can you explain to me the difference between the $793.9 million figure, which I thought was the concessional component, and the $138 million which is referred to as reflecting the cost of government borrowing? I do not understand the difference between those two things.

Mr White : The measure in here is in fiscal balance terms, in accrual terms. In accrual numbers we record the value of the concession upfront, as those numbers show. This is about the cost of borrowing and the cost that borrowing has on financing this. When we give out a loan and we give out some money to a proponent, the government therefore has to borrow to give that money to the proposal proponent. This effectively is the cost of our borrowing at whatever the government interest rate is at the time. It is $138 million over the forward estimates.

Senator WATERS: Is that something that you usually have as a separate line item? It seemed to be a change in practice.

Mr White : It has been mentioned a few times in relation to concessional loans.

Mr Ray : The general rule is that, no, it is not a separate line item. But where things are done for balance sheet purposes or where it is a financial transaction, the normal practice is to include it.

Senator WATERS: Thank you for that explanation. Have you worked out yet what level of discount, effectively, you are proposing to give?

Mr White : As I mentioned to Senator Canavan, we have a website up as of this morning that deals with this. The basic idea is that the facility is planned not to make a profit or a loss for the government. It is basically to recoup our costs of borrowings over the life of the facility.

Senator WATERS: Unspecified?

Mr White : It would depend on how long people want loans from us and those sorts of things. Whether we have maximum loan terms will be an issue we will think about in the eligibility criteria, but it could also depend on the proponent. They might want longer or shorter loans. Roughly, the idea is that we will make back the costs of our borrowings over the life of that facility.

Senator WATERS: In interest payments by the people you have loaned to.

Mr White : Yes. So, more or less, the interest payments we make on money that we borrowed will be equalled by money that we get back from a person who took a loan from us.

Senator WATERS: So it will be revenue neutral over the life of the facility?

Mr White : Yes.

Senator WATERS: Putting that in comparison with the Clean Energy Finance Corporation, who we just heard from, and given that they are actually making money for government—

Mr White : Yes.

Senator WATERS: I do not really know what the question is here, but the rate of return is obviously looking really good for them and you are after a revenue neutral rate of return over an unspecified amount of time. That seems to be a much riskier investment of taxpayer dollars than the guaranteed revenue positive activities of the CEFC. Have you advised around the risk component there?

Mr White : The purpose of the two schemes is different. The CEFC has a mandate effectively not to provide concessional lending, more or less. The purpose of this is to provide concessional lending. It is completely different. This fits in with the government's whole infrastructure agenda. We have grants and now we have concessional loans, which is sort of building on the WestConnex sort of model of giving a concessional loan as part of WestConnex building. The idea here is to lend at a concessional rate, which is different to the CEFC, but also to get our money back. One of the major bits of the criteria is to lend to things that have an income stream where we can get our money back and pay interest and principle back.

Senator WATERS: Who will do the modelling for that? I was asking earlier about macro and how on earth they are proposing that they will still be making $150 billion out of new coal and gas revenue by 2030. Presumably the viability of some of the projects that the facility will be considering are coal and gas and other infrastructure. From whom will you seek advice about the long-term viability of those projects?

Mr White : As you mentioned before, Senator, we are getting $8½ million to assess those things against the eligibility criteria that we come up with. As we said, there will be a detailed analysis of the financial viability of the things that we are lending to.

Senator WATERS: In terms of the cost-benefit analysis that you have mentioned a few times, will you use Infrastructure Australia's guidelines?

Mr White : As I said, we are doing our eligibility criteria. We know that the government has a position on when to use Infrastructure Australia when it is investing in infrastructure, so we will look through that and reflect it in our guidelines as well when we do it.

Senator WATERS: Is that a yes, you will use them, or you will consider them or no, you will not?

Mr White : We will look at what the government's position on using Infrastructure Australia is, when it uses it when it is investing in infrastructure, and we will reflect that in our guidelines.

Senator WATERS: I do not know the answer to that either. Do you know that now? When the government decides to use that cost-benefit process?

Mr White : My understanding is that if there is $100 million being invested by the government—

Senator WATERS: They have said they will require an analysis?

Mr White : They have said they will use Infrastructure Australia. We are just looking at how that reflects in a concessional loan facility as part of our—

Senator WATERS: Your intention, then, is that you will comply with that earlier commitment to employ the Infrastructure Australia cost-benefit guidelines for projects over that amount?

Mr White : Ultimately, it is a government decision but, as I said, we are looking at the question.

Senator WATERS: Thank you. Will those cost-benefit analyses be made public?

Mr White : I do not know. We have not got that far yet.

Senator WATERS: I understand that the Infrastructure Australia audit—which is obviously linked to this facility loosely in ways that we have established earlier this week—was underpinned by something called the 2030 vision for developing Northern Australia, which included various objectives. One of those objectives was what I mentioned earlier—that coal and gas exports would be up to $150 billion by 2030. Will you be reflecting the objectives of that vision document in your eligibility criteria?

Mr White : I do not think we will be reflecting that in our eligibility criteria. I think we will be saying something along the lines of 'There has been an audit. It has identified a number of projects.' It does not mean that those projects would necessarily be suitable for our facility for a number of reasons, including whether they have a financial return. I also do not think we will be constrained to having the projects and the audit be the universe of projects that we consider either, so we would have things outside of that.

Senator WATERS: Just in terms of ability to access the facility: will there be any sort of means test or asset test?

Mr White : Do you mean for proponents?

Senator WATERS: Yes, for proponents to be able to seek cheaper loans.

Mr White : This is for major projects so, as I said before, we are probably looking at loans at least in the hundreds of millions of dollars. I do not think we have thought about the question of a means test on proponents. We are trying to fit in the space of things that are close to commercial—because they are the sorts of things that would be able to pay us back—but also not things that are actually commercial, that the private sector would do. So it is trying to get additional infrastructure as opposed to infrastructure that might already be built.

Senator WATERS: That is the genesis of my question. How will you establish what is genuinely additional? Will you just take the company's word for it, 'Oh no, we weren't going to do this anyway, give us some cheap money'? How will you establish whether it was going to proceed according to market conditions without government stepping in?

Mr White : That will be part of our analysis of projects that come forward to us because it will be part of the eligibility criteria. The proponent of a project, and whoever we engage to help us assess that, will have to come to views about whether it was going to be done without assistance from the facility.

Senator WATERS: My final question: which, if any, companies have already contacted you in your capacity as the point person on this new facility expressing interest, including whether that is Adani or Hancock Prospecting Pty Ltd or even our friends at the Institute of Public Affairs Australia?

Mr White : None.

CHAIR: I thank you very much, Fiscal Group. I suggest you take my advice and lickety-split even quicker this time! Thank you, Mr Ray. I call the officers of the Australian Bureau of Statistics, who I believe have just recently arrived in the building.