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Finance and Public Administration Legislation Committee
20/11/2014
Estimates
FINANCE PORTFOLIO
Medibank Private

Medibank Private

[09:49]

CHAIR: Now we will officially move to the Medibank Private questions. They will be directed to the minister and the secretary on the basis that things have moved and the officials cannot be here.

Senator Cormann: By way of context setting—this is not to be unhelpful—the committee would be aware that we are at the pointy end of the process to sell Medibank Private. As such, there are likely to be a range of matters that we will not be able to assist with today, given the acute commercial sensitivity right now and the interests of the Commonwealth at stake at this stage of the Medibank Private share offer process.

CHAIR: Thank you. I am sure we are aware of that. Hence, we will not ask what the share price is going to be or how much the Commonwealth is going to raise, because I am sure we will get no response.

Senator LUDWIG: You put out a press release on 16 October entitled 'Medibank Private share offer preregistration exceeds expectations'. What were your expectations then in terms of the number of Australians lodging their interest in the prospectus?

Senator Cormann: That is a good question and one I am happy to assist you with. With these sorts of large IPOs—and I am led to believe that this Medibank Private IPO is the second or third largest IPO this calendar year in the world, so it is a sizeable IPO—a lot of work goes into preparing such an IPO. That includes a lot of market research and the like. Before we went into the process, the advice that I had based on relevant market research and the like was that in perfect conditions—if there was high penetration of the advertising campaign and a high level of awareness of the call to action, in terms of encouraging people to preregister their interest should they have an interest— to expect preregistrations to the tune of just above 660,000. We ended up with about 750,000.

Ms Halton : 750,494, to precise. That is what we received.

Senator Cormann: I think the perfect conditions modelling assumed that we might get about 660,000. We got about 100,000 more than expected on the basis of perfect conditions, I hasten to add.

Senator LUDWIG: That is in terms of eligible members of Medibank Private?

Senator Cormann: No. Preregistrations were available to any Australian resident over the age of 18. Obviously, there was an opportunity for Medibank Private or AHM policyholders to preregister their interest. We have already announced since then the basis on which they will be able to apply or were able to apply for a preferential share allocation. There is also the capacity for employees to register their interest. There then was the capacity for members of the general public to register their interest. There were three different broad categories of opportunity there.

Senator LUDWIG: Did you have an expectation for each of the categories?

Senator Cormann: If you want me to go down into that detail—

Senator LUDWIG: I was just trying my hand.

Senator Cormann: The short answer is yes, but I cannot off the top of my head recollect that.

Senator LUDWIG: I am happy for you to take that on notice.

Senator Cormann: Yes. It will be interesting for historical records, because I suspect it will not have much acute interest anymore.

Senator LUDWIG: As to the 30 October press release, 'Medibank Private Broker Firm Offer exceeds expectations: $12 billion in bids received—$1.5 billion allocated,' what were your expectations in terms of the amount of shares that would be bid for by broker firms?

Senator Cormann: Let me say that, in the first 24 hours of the general public offer, where there was a broker bid component, the level of binding broker bids—and I guess I can talk to this now, because, as of lunchtime today, the book build process has now been concluded, so, as such, there is no direct market sensitivity to the question that you are asking me about. But our expectations were well below $12 billion, which is where we have ended up, and, as you would be aware, we made a decision at the time, which has been announced, to scale back the actual allocation to $1.5 billion; so the demand was eight times the ultimate allocation that was made to brokers through that process. The expected demand was about half.

Senator LUDWIG: So then, on the Monday, 17 November, this week, the total demand for retail offers was $4.8 billion—and I recognise market sensitivity, but, as I think you have indicated, I think I am pretty safe now, but let me know if I am still not that safe. Are you able to provide an update on how the overall split of share allocations has been worked through?

Senator Cormann: That decision has not been made yet. Consistent with all of the announcements that I have made so far, now that the book build has been concluded there is going to be a process, obviously, to assess the quality of bids received—the quality of the institutions that have made bids at various price levels, at various pricing points. I will be receiving advice from my department and from the joint lead managers over the next few days, and, as we have indicated publicly, the final price and the final allocation will be announced by 25 November. The question that you are asking me very much goes to a series of processes leading to decisions that we will be making in the next few days, with a view to reaching a final landing point by 25 November, which is not that far away.

Senator LUDWIG: No. You have in part described the process, but, just to remind me, is there a process for doing it? Who makes the decision?

Senator Cormann: Now that we have reached this part of the process, I guess the final decision will be mine, but based on advice. There were decisions along the way that involved cabinet, earlier on in the process. There were decisions that involved, under a delegation from cabinet, the Prime Minister and I, in consultation with the Treasurer and the Minister for Health, but, now that we are at this pointy end of the process, the final and ultimate decision will be mine, on advice.

Senator LUDWIG: Is there a date that you have to make that by?

Senator Cormann: As I have indicated in response to an earlier question, we have already said that we would make the announcement on the final price and final allocation methodology, the split between institutional and retail and the split between domestic and foreign institutions. We will make that announcement by 25 November.

Senator LUDWIG: There was an article, 'Sign up for a healthy profit.' It is not a case of whether you are familiar with it or not.

Senator Cormann: I am not aware of the article.

Ms Halton : Was that in the Financial Review?

Senator LUDWIG: It was in The Sunday Telegraph in Sydney. I am happy to make it available.

Senator Cormann: Can I have a look at it, if you want to ask me questions about it?

Senator LUDWIG: Yes.

Senator Cormann: So what is your question?

Senator LUDWIG: It states that independent research house Morningstar recently gave the tick of approval to Medibank Private's sale but warned that future government changes to the Medicare levy, surcharge and private health insurance rebates were examples of policy changes that could affect the franchise. So are you able to advise the committee on what the possible effects could be?

Senator Cormann: This matter, as you would expect to be the case in the context of a privatisation of this size, was dealt with in the prospectus, and there was a disclosure in the prospectus. In fact, it is on page 36. If you go to point 2.3.13, it talks about Australian government policy priorities for PHI:

The Australian Government is committed to promoting PHI—

private health insurance—

as a means of ensuring the sustainability of the Australian health care system and has committed to restoring the PHI rebate when it is fiscally responsible to do so.

In support of this, the Australian Government may consider short and long term options for private health reform.

Consideration may be given to the recommendations of the National Commission of Audit, and to proposals developed from within Government and industry. Any significant reforms will be the subject of industry, consumer and stakeholder consultation. If reforms are supported, implementation will not occur before 1 July 2015, and in many cases will be subject to the passage of legislation.

That is the relevant disclosure that we made in the prospectus. From where I sit today, I do not really have anything else to add to that disclosure.

Senator LUDWIG: These issues were part of the earlier scoping study?

Senator Cormann: Post the scoping study and post the decision having been made by government to proceed with the sale and in putting the prospectus together, consistent with all of the relevant requirements under corporations law and the like, we obviously did go through a due diligence process to make sure that we identified all of the information that needs to be made available to the market in the context of a private share offer like this one—the Medibank Private share offer, as it is in this case. We provided that information in the prospectus.

Senator LUDWIG: I know Medibank are not here, but perhaps you can take it on notice. Have they done any work on this issue? Have they looked at the sorts of effects that it may have? Have they crunched any member numbers or the type of cover that members might receive as a consequence?

Senator Cormann: Any information that is material and relevant and that needs to be disclosed has been disclosed in the prospectus. So, to the extent that they have done work that is relevant, that information has been published in the prospectus, as is the requirement under corporations laws.

Senator LUDWIG: The indicative price range for the Medibank Private share, which is $1.55 to $2 per share—has that been determined yet?

Senator Cormann: There are a couple of points here. Firstly, when we released the prospectus we did indeed announce an indicative price range of $1.55 to $2. We said at the time that the relevance of that price range was that the upper limit, the $2, would be in effect a price cap for retail investors. We did indicate at the time of releasing the prospectus that the final price would be determined based on the book-build process involving institutional investors and that the final price—that was our indication at the time—could be within the range, above the range or below the range.

But since that time I have made a further announcement, earlier this week, indicating that we have revised the indicative price range, and indeed we have revised it to a range from $2 to $2.30. The practical effect of that is that, given that $2 has now become the bottom of the price range, that is the price that retail investors will pay for their Medibank Private shares, given the $2 cap that was put in place at the time we released the prospectus.

Senator LUDWIG: And the maximum amount of shares that any one person can have is 15 per cent, as I understand it.

Senator Cormann: That is right. That is under the provisions of the Medibank Private Sale Act 2006, which, very helpfully, the previous Labor government never repealed.

Senator LUDWIG: So it is about 413.1 million shares?

Senator Cormann: I take your word for it.

Senator LUDWIG: I will not try to calculate the range, because I would need a spreadsheet.

Senator Cormann: I suspect there would not be too many general retail investors who would invest at that level. I do not think we will have many general retail offer participants who would be proposing to invest at that level, or be allocated shares at that level.

Senator LUDWIG: It is the legal definition of a person. I understand it means that it is a natural person and a corporation or a company.

Senator Cormann: Sure. The point, though, is that the final price for those not participating in the retail offer has not actually been set. That is the process we are going through over the next few days. The book billed process concluded at lunchtime today. The quality of the bids and the quality of the institutions having submitted those bids is currently being assessed. There are various other due diligence processes taking place and some time over the next few days we will be making relevant decisions, ready for announcement by 25 November 2014.

Senator LUDWIG: So the indicative market capitalisation has also increased as a consequence—

Senator Cormann: When we made the relevant announcements at the time of releasing the prospectus, the indicative market capitalisation was in the range of approximately $4.3 billion and approximately $5.5 billion. Obviously, now, not having a final price, it is a matter of mathematical fact that the indicative range of market capitalisation has gone up as a consequence. It is now between $5.5 billion and whatever—

Senator LUDWIG: Do you agree that what was then estimated to be transferred to the Asset Recycling Fund will now increase to the new indicative projected market capitalisation?

Senator Cormann: You are making assumptions on what our assumptions may have been beforehand. But leaving that to one side, I cannot help you with the revised market capitalisation figure, because that would actually require, as one of the assumptions and inputs into the mathematical formula, a decision in relation to the sharing between the retail and the institutional offer. That is not a decision we have made. We do know that—

Senator LUDWIG: But you must have made it to make the original market—

Senator Cormann: No, we must not have at all. When we announced the original price range of $1.55 to $2, that was a price range that applied across the board. The situation we are now in is that given that we have revised the pricing range from $1.55 to $2 up to $2 to $2.30, that increased revised pricing range is only relevant to institutional investors, because we applied a $2 cap for retail investors.

Senator LUDWIG: I see. But in any event it is still the government's policy to transfer that amount into the Asset Recycling Fund?

Senator Cormann: Yes, it is.

Senator LUDWIG: How was the forecast fully franked dividend figure calculated?

Senator Cormann: I do not know—

Senator LUDWIG: You might have to take it on notice.

Senator Cormann: I will take it on notice.

Ms Halton : It was based on professional advice—

Senator Cormann: It was done in the usual way, using appropriate professional advice.

Ms Halton : That is right.

Senator Cormann: If you ask me to go through the ins and outs of it—

Ms Halton : I could not do it, either.

Senator LUDWIG: I mentioned at the beginning that we might run out of the more general—

Senator Cormann: You are now testing the boundaries of our expertise!

Senator LUDWIG: I will run through this and put it on the record, but don't feel obligated to answer. It can be answered in due course.

Ms Halton : What I can tell you is that that was subject to the advice of our experts, particularly looking at similar floats and other people in this part of the market, in terms of where they were trading. So it has taken account of what we know in relation to our existing market, and then the expert advice of our advisers. But that is why I hit the wall in terms of what I can tell you.

Senator LUDWIG: I imagined that would be broadly part of the answer. I will just run through this. If you look at the minimum allocation of shares the dividend would be about $49, based on the minimum allocation being 1,000 shares and 4.9 per cent per share. The prospectus quotes eight specific risks and has another heading of 'other key risks', on page 12 and 13 of the prospectus. I note that there is some detail in section 5 of the prospectus. It seems to me I really need Medibank here. Have they taken any of those risks into account—

Senator Cormann: Which page are you talking about?

Senator LUDWIG: Section 5. The first part is on pages 12 and 13 of the prospectus. That is relatively straight forward.

Senator Cormann: Sorry, I am a bit confused. The key risks are in section 5.

Senator LUDWIG: Yes, the key risks are at 1.5—pages 12 and 13.

Senator Cormann: That is where I am getting confused—12 and 13. In the prospectus that I have, which I think is the official prospectus, the key risks start at page 92. Can you help me?

Senator LUDWIG: If you go to page 12—

Senator Cormann: Sorry. That is the summary.

Senator LUDWIG: Yes, I am just looking at the summary. It is easier to deal with.

Senator Cormann: I went to the detail. I thought you were going to ask me a forensic question so I thought I had better—

Senator LUDWIG: I said to you at the outset that I recognised that Medibank is not here.

Senator Cormann: So you do not think that I can do the forensic stuff?

Senator LUDWIG: That is not what I said!

CHAIR: Gentlemen, there is about four minutes before we go to a break.

Senator LUDWIG: All right. There is detail in section 5, which is what I think you went to.

Senator Cormann: Yes.

Senator LUDWIG: Will any of these risks directly impact on the indicative market capitalisation value?

Senator Cormann: The reason that those risks are openly and transparently listed there is so that every investor considering an investment in Medibank Private can assess to what extent that is relevant to their judgement on whether or not they think investing in Medibank Private is a good investment. Obviously any business at any one point in time faces a series of risks that need to be managed. The purpose of this section in the prospectus is to ensure that everybody well understands the type of risks that Medibank Private faces and manages. In terms of market capitalisation that is a question that really goes to the ultimate price.

The ultimate price is set by the market. We have just gone through the bookbuild process to determine what the market valuation of Medibank Private is. I am sure that those who have been making bids and putting share applications into the process have properly reviewed and assessed and considered the relevant parts of the prospectus, including this one.

Senator LUDWIG: So there is the 30 per cent and the 15 per cent bonus allocations for employees and policyholders who preregistered for their share offer. How will that work in practice?

Senator Cormann: Firstly, the decisions on the split between retail and institutional are yet to be made. Obviously there are various preferential share allocations which have been publicly announced. The guarantee that we have provided is that nobody will get less than the minimum allocation of $2,000-worth of shares. Beyond that it will essentially be a mathematical formula that will be applied. The decisions in relation to the specific details, including in relation to how the scaling-back might work—taking into account perhaps bigger applications versus medium or small applications—are yet to be made. That is going to be part of the process over the next few days as I take advice from my department and from the joint lead managers as to what the most appropriate approach is going to be, given the nature of the interest that has been received.

Senator LUDWIG: How will you provide that information? Post this process, will there be an advertising piece that tells people—

Senator Cormann: That is right. That is exactly what we have announced. By 25 November 2014 we will advertise in all the major daily newspapers—

Senator LUDWIG: Once the decision has been made you can advertise.

Senator Cormann: That is right.

Senator LUDWIG: We will that money come from? Will that money come out of the budget or will that come out of—

Senator Cormann: We have gone through this in the past.

Senator LUDWIG: I know.

Senator Cormann: We are selling Medibank Private, which is a very significant asset. There are a range of sale objectives. I am not going to bore you with those because you would think that I am playing for time. The one that is relevant to your question here is that we want to maximise net proceeds from the sale on behalf of taxpayers. Net proceeds obviously means gross proceeds minus costs. There are various costs that will obviously be deducted from the gross proceeds. The costs that you have just referred to are part of the costs of selling Medibank Private.

I hasten to add here, though, that there is an allocation in the budget. There is an allocation of $90.9 million over two years for the cost of selling Medibank Private, which we have previously talked about. But that in itself, in effect, is funded through the gross proceeds of Medibank Private, taking into account various presale adjustments that were made in that context and that have previously been disclosed.

Senator LUDWIG: So, the $90 million—I think we asked this before—will not be advertising; it will effectively come out of the float?

Senator Cormann: There is a total allocation for the sales, and that is part of the cost of the sale.

Senator LUDWIG: Yes. And then is there any—do you know whether or not after the—

Senator Cormann: It will be very vanilla advertising. Probably, I suspect, it will be the same sort of branding—I envisage it will be the same feel—as the advertising that has taken place so far.

Senator LUDWIG: Is there predicted to be any further advertising after that?

Senator Cormann: I do not believe so. I cannot see a reason why we would—

Senator LUDWIG: No, all right. I will not hold you to that if there is then. I will come back and ask. On page 36, where we were before, I noticed at the bottom—I had not seen that before—that it said:

Consideration may be given to the recommendation of the National Commission of Audit, and to proposals developed from within Government and industry.

Is the government bringing forward any of those relevant to the Medibank sale under the National Commission of Audit recommendations?

Senator Cormann: Well, that is not what it says. What it says is that consideration may be given. As you would appreciate, the words in this prospectus are always very precisely chosen, based on appropriate advice, and there is no such decision that the government will do such things. But, in the interest of full disclosure and appropriate disclosure consistent with relevant legal requirements, we did need to make a disclosure that this may happen so that people later cannot say that we were not open and transparent about that possible eventuality.

Senator LUDWIG: Can you confirm whether there was a special dividend paid by Medibank this year to the government?

Senator Cormann: Well, there was a $100 million special dividend that was already budgeted for as a result of decisions made by the previous government and as part of the preparation of Medibank Private for sale. I believe there was a further special dividend to the tune of, I think, about 96 point something million dollars or thereabouts. But I will get the exact—

Ms Halton : I understand that it was $96.8 million.

Senator LUDWIG: Eight, was it?

Senator Cormann: There you go. I was pretty accurate.

Ms Halton : I will correct it if that is not right.

Senator Cormann: My recollection was not that bad, was it?

Senator LUDWIG: No, I am starting to worry about that!

Senator Cormann: Ninety-six point something.

Senator LUDWIG: I will not say too much to you in future then! You can take the others on notice, and then I will rest at this point. How was the breakdown between the $138 million for retained earnings as at 30 June 2014 and the $58.8 million from earnings from the five months to 30 November 2014 determined? And will the special dividend be paid to Finance or back into consolidated revenue?

Senator Cormann: The answer to the last question is into consolidated revenue, as is normal practice and as has been the practice for all of the other previous dividends. How did we arrive at it? By the same process as the previous government arrived at these sorts of decisions: engagement between the government as the owner of the asset and the board of the company. Obviously you would appreciate that, in the context of preparing an asset of this size for sale, there is very intensive engagement, ongoing and continuous engagement, between the government, as the owner of the asset, and the board, supported by engagement at the departmental and management level, and of course ultimately the decision was arrived between government and the board.

Senator LUDWIG: What I am curious about, though, is that the last time I was here we were told by Medibank Private that, in terms of any special dividend, they had not finished their cycle; they had not worked anything out. So, between then and now, did you request the dividend? Did they ask and say, 'Look, we've found some money; we'll send it over to you'?

Senator Cormann: No. This is the way this works. We are about to sell the asset. We are about to divest ourselves of this asset. Obviously part of the process of divesting yourself of an asset is to make sure that you finalise all relevant accounts so that you can pass on the asset to new owners. If you were to sell a house, you would be making sure that, at that point, you regularised all of the outstanding financial liabilities and revenue that was owed to you. On this occasion, obviously, preparing an asset of this nature for sale involves bringing all of these decisions to a final conclusion, because otherwise you are not in a position to proceed with the sale in an orderly and methodical fashion.

Senator LUDWIG: So was that amount already accounted for in the budget in May?

Senator Cormann: Sorry?

Senator LUDWIG: Was that amount—the $96.8 million—already accounted for in the budget?

Ms Halton : That I do not know.

Senator LUDWIG: I am happy for you to take on notice.

Senator Cormann: We will take it on notice.

Senator LUDWIG: And the question still stands; I am not sure you answered it: was it generated by Medibank—in other words, they did a reconciliation and said, 'Whoops; we've got to send you another $96.8 million'—or was it Finance who then said to them, 'You should do'—my words—'a reconciliation and send us the $96.8 million'?

Senator Cormann: It does not quite work like that. When you are putting a prospectus together, the prospectus—as you can see at the front of the prospectus—includes quite a bit of information about the financial position and the forecasts and the revenue this year. There is historical information. There is projected information. In order to provide that information accurately—including information on those special dividends, which is included in the prospectus—in order to be able to provide accurate forecasts in terms of future performance, past performance, current performance, you need to ensure that you identify all of these facts in the usual way. That is what we have done. The board has got particular responsibilities, as the board governing Medibank Private as a company. The government, as the owner of the asset, has got, obviously, certain rights and responsibilities. It was a constructive process of coming up with the right approach moving forward, which was agreed between the government and the board.

Senator LUDWIG: All right. I will put anything further on notice if I am a bit more curious, or we will come back to it next time.

CHAIR: Thank you, Senator Ludwig. That concludes the questions for Medibank Private.

Proceedings suspended from 15:54 to 16:16

Department of Finance

CHAIR: We will recommence the Senate estimates with the examination of the Department of Finance. We are going to return to outcome 1.

Senator LUDWIG: In the variations in payments that are on page 7 of the 2013-14 FBO, we were last there and we were then discussing the milestones. That was the last one in respect of the school education partnership agreement. Then I was moving to the general government sector expenses. In the variances in expenses that are on page 83 to 85 of the 2013-14 FBO, they show the differences in expenses—this is really to help me through this, on the estimates for the 2013-14 financial year—between the 2014-15 budget and the FBO. I am still correct about that, is that right?

Ms Huxtable : Can you just say that again?

Ms Halton : This is the function and updates of the function and subfunction tables at appendix A?

Senator LUDWIG: Yes. We are still on the same explanation that I got earlier. It tracks it, yes?

Ms Halton : It is organised in a different way, basically.

Senator LUDWIG: When we look at the expenses, financial and fiscal affairs' expense was $658 million lower than estimated at the 2014-15 budget. Let's look at some of the individual ones: is there an explanation for why expenses for assistance to the aged were $397 million lower than estimated at the 2014-15 budget? I was going to go through those.

Ms Huxtable : I have got explanations about a change in income support for seniors and a change in residential and flexible care. I am not sure which one of those that is.

Senator LUDWIG: One of them was assistance to the unemployed and the sick, which was $180 million lower than estimated. There were a range of them. For financial and fiscal affairs, the outcome was $658 million lower than estimated at the 2014-15 budget; assistance for the aged was $397 million lower than estimated at the 2014-15 budget; assistance to people with disabilities, $196 million lower than estimated at the 2014-15 budget; and assistance to families with children, $221 million higher than estimated at the budget. I was trying to ascertain if Finance can enlighten me about whether (a) it can be unpacked into particular programs or, if you cannot do that, (b) you can give me a reason for why it might be higher in some cases and lower in others. Some of them are not demand driven programs, either.

Ms Huxtable : I have reasons in respect of some of the ones that we have already discussed, because I have the variances in order, but I do not have reasons for everything in that table. So it might be easier if we take that on notice; then we can go to those very specific issues.

Senator LUDWIG: Can you give me the explanations you have at the moment?

Ms Huxtable : I have already gone through some of these, the ones we have already discussed, such as the National Partnership Payments—

Senator LUDWIG: Right. Yes, I understand.

Ms Huxtable : the Department of Defence, the lower IMA numbers, the health programs and then there are some others. It does not quite map to the areas you asked about. I do not know. Someone at the other end of the table might have more information than I have.

Senator LUDWIG: I look up expectantly. If anybody can help me, then feel free.

Ms Halton : Yes. This is about how you aggregate across functions. That is one lot of information. This is now the functional split. The colleagues can probably give you an at least an overview of how that works.

Senator LUDWIG: That would be helpful.

Ms Blewitt : As Ms Huxtable said, we do have some of them; I do not have all of them. These are some of the major drivers and the variations in the function expenses. For defence, as it is indicated, the variance of $727 million primarily reflects similar reasons to when we were talking about the payments variations—so it is the estimated expenses, with some of the reduced expenses being reallocated to capital acquisitions. Higher than estimated capital acquisitions for the defence function are actually shown in table 6. The decrease in expenses also reflects the result of foreign exchange rates, similar to what happened in the payments variations, and lower than anticipated expenses in relation to Defence operations.

Under 'general public services', for financial and fiscal affairs, the $658 million variance is largely due to lower than expected write-offs of tax penalties by the ATO; that actually represented $467 million of that $658 million. For health, the $528 million variance largely reflects the decrease in demand and the costs of a range of Department of Health programs—similar once again to the payment variation explanations—and pharmaceutical benefits, Medicare services and mental health programs.

For fuel and energy, the $298 million variance largely relates to the Australian Renewable Energy Agency, which primarily reflects the Moree Solar Farm project being delayed from 2013-14 to 2014-15—$138 million is representative of that—and then there was a decrease in expenses also relating to a range of other, smaller underspends in a number of other programs in agencies.

Under 'other economic affairs', for immigration the $251 million variance largely reflects a decrease in the illegal maritime arrival numbers—once again, similar to the payment variation explanation—and the closure of some of the detention network facilities. For agriculture, forestry and fishing, the $244 million change primarily reflects lower expenses for a number of programs, including the water reform program and expenses under the national partnership for water and natural resources. For labour and employment affairs, the $185 million change primarily reflects lower expenses for the vocational education and training national support program—$90 million of that is attributed to that—as well as delays in the achievement of project milestones, fewer approvals of new projects through the National Workforce Development Fund, and lower than forecast expenses in relation to the Australian Apprenticeship Centres due to an unanticipated reduction in apprenticeship commencements and completions.

Under other purposes, there is nominal superannuation interest of $106 million. This reflects variations in the superannuation liability as a result of changes in the actuarial assumptions. Then we have the other purpose contingency reserve. There was a $790 million positive there. That largely reflects the provision of the underspend which we include in the budget estimates to offset the decrease in expenses at the FBO.

Senator LUDWIG: Can you explain that one a little bit more?

Ms Blewitt : We have an underspend provision that we include in budget and then we reverse that out as we come closer towards the end of the year. That is to reflect the tendency for agencies to sometimes overestimate their expenditure for that year. So it is a standard practice that has been operating for many, many years.

Senator LUDWIG: Is that the same amount you use every year or do you adjust that for CPI?

Ms Blewitt : It could vary, but, no, we have used that same amount for some years. We do review it, if we think that it might need to be adjusted because behaviour might be changing.

Senator LUDWIG: So, in this instance, behaviour seems to be changing by and large. There are a lot of underspends—or a couple of them.

Ms Blewitt : Well—

Senator LUDWIG: A couple of them maybe not.

Ms Huxtable : Senator, I think you will find that this is not unusual compared to other years. It is common that we have movements both ways. As we described earlier, when budget comes around there are still some weeks left. We do the best estimates we can but sometimes they do not quite turn out like when the audited statements come in. I do not think there would be anything particularly unusual about this year.

Ms Halton : No.

Ms Huxtable : Admittedly, I have not been doing this job for a very long time, but others have.

Ms Blewitt : And we did have a look at it recently, and there is nothing unusual happening there. It is fairly consistent.

Senator LUDWIG: And you would look at it to make sure of that too, wouldn't you?

Ms Blewitt : We just make a general review to make sure the provision we are including is broadly representative.

Senator LUDWIG: Of the total, how much did they utilise of the provision that you set aside?

Ms Blewitt : We actually do not disclose the provision.

Senator LUDWIG: Why is that?

Ms Huxtable : That has been standard—

Senator LUDWIG: I am not challenging you on that. Is there a reason? I guess it goes to departmental behaviour. I can guess why.

Ms Halton : I think it is a bit like the old commercial-in-confidence; we do not disclose how much provision we have made for the private health insurance rebate—insurance increases. It is the same deal. You do not want to actually tell everyone what you have got provision for, because it might change behaviour again.

Senator LUDWIG: That is what I meant. If you told the departments how much you have provisioned for them they would split it up on you very quickly.

Ms Halton : Exactly.

Ms Blewitt : They might think we have got enough provision there to offset. When I say 'offset' I mean account—

Senator LUDWIG: You are best not to tell them at all, really.

Ms Blewitt : No.

Ms Halton : Correct. I think most departments would not know about it.

Senator LUDWIG: And we are pretty safe—I am sure they are not listening.

Ms Huxtable : You would be surprised.

Ms Halton : I agree with her: you would be surprised. Hello, colleagues.

Senator LUDWIG: I do not think we have quite finished with those matters. We might finish and then I will come back to some general questions on those. I am sorry to have interrupted you.

Ms Blewitt : Under other purposes, there are general purpose intergovernmental transactions—$339 million, largely caused by higher than estimated GST collections resulting in higher expenses in relation to payments to the states; mining, manufacturing and construction—$313 million, largely driven by higher than forecast claims and claim amounts for the research and development tax incentive; natural disaster relief—$194 million, reflecting an increase in expenses for the Natural Disaster Relief and Recovery Arrangements program as a result of updated expenditure estimates received from states and territories; and, finally, the general public services: government superannuation benefits, $167 million, which reflects increases in expenses for military superannuation schemes. These increases are partly offset by a reduction in the PSS Scheme expenses resulting from changes in actuarial assumptions.

Senator LUDWIG: As to the reasons, do you go back and analyse the reasons and look at how you can help the department correct that—other than with the demand-driven programs or something else having occurred perhaps? But do you analyse those, particularly the underspends, and ensure (a) that the reasons are relevant, and (b) that they then cannot adjust their programs into the future to suit, or is that just a broad communication you have with the particular departments?

Ms Blewitt : We do analyse these, in terms of when the agencies identify why there are payment variations, or, in this case, function variations, yes. That is part of the general business of budget group. Agencies are always looking at how they can review their models and adjust them accordingly, but each model is obviously different in terms of trying to project and anticipate expenses. Some of them are based on historical and some on behavioural—

Ms Huxtable : If I could just add to that: at each budget update and pre-ERC update, by which I mean around February, there is a process of reviewing estimates, and the various areas in budget group who, through the agency advice units, are working with portfolios basically work with portfolios in terms of their estimates, and they would, as part of that, use the information that is available in the FBO as one of the inputs, to be working with departments and asking questions in respect of the accuracy of the estimates.

Senator LUDWIG: Is there anyone else who wanted to ask questions, Chair, or were you happy for me to continue? We have lost Chair!

Senator Cormann: Cory!

CHAIR: Yes, sir! I beg your pardon.

Senator LUDWIG: Were you happy for me to continue? I was pausing there just in case there were others who wanted to ask questions.

CHAIR: I am happy for you to keep going, Senator Ludwig—unless Senator Lundy has something pressing?

Senator LUNDY: I am fine, thanks, Chair.

Senator LUDWIG: We touched upon the Defence department earlier, and some of the operations are funded on a no-win no-fee basis, but, as to the funding for the Defence operations, is that still treated the same in the budget?

Ms Huxtable : Not all of the Defence budget is on a no-win no-loss basis. So that relates to that part of the budget associated with military operations—Stephen can probably add to this—and in that case there is not a forward provision in the estimates in respect of the costs, so they are dealt with on an annual basis, but, in respect of the rest of Defence—you can jump in—I think it is much more akin to the management of a normal public service agency.

Mr Clively : I missed the element of the question that related to the rest of the Defence budget.

Ms Huxtable : I think the question was: how does no-win no-loss work, and how broad is its coverage—

Mr Clively : The no-win no-loss arrangement applies to net additional expenditure for operations above $10 million in respect of declared operations. For the rest of Defence, there is a budget for the Defence department that generally operates the same way as other departments', although most of it is departmental rather than departmental and administered.

Senator LUDWIG: In the no-win area, how is that additional? So, if they spend the money, how is that provided? Is that a separate and specific payment that is made to cover that, or do you do a reconciliation of the budget?

Mr Clively : Is this for no-win no-loss?

Senator LUDWIG: Yes.

Mr Clively : It is reconciled separately, once a year, typically. It is part of the budget process. There is an estimation for each operation, as to what is anticipated to be spent. There is typically a list of items that relate to what is a net additional expenditure. So that amount goes into the budget, typically for one year of operations, for each budget year. And, at the end of the budget year, a reconciliation is done between Finance and Defence, to establish whether they were paid too much or too little.

Senator LUDWIG: If they were paid too little, how do you make that payment?

Mr Clively : If they were paid too little, they are supplemented for that.

Senator LUDWIG: That reconciliation is, you say, done once every 12 months. So where does that appear? What paper? In the FBO?

Ms Huxtable : In this instance, the FBO reflects a return of funding, because there was less spent than was anticipated.

Senator LUDWIG: So it is reflected in the FBO then.

Mr Clively : Yes.

Senator LUDWIG: You do not detail it by operation? It is just a holistic assessment?

Mr Clively : In the FBO there is only one reported—

Senator LUDWIG: Yes. It is only Defence. Do you break it down when—

Mr Clively : The reconciliation is done operation by operation.

Senator LUDWIG: I wonder if you could provide that. Is it you who does that or is it Defence?

Mr Clively : It is between Finance and Defence. An amount is agreed.

Senator LUDWIG: Perhaps on notice you could just do the current one by operation, so that I could have a look at how the operations have fared—no win, no lose on each basis. Like the operations in Iraq—out of which operation they are funded. Sometimes the names may not help. They may not necessarily point to what the operation is. So if you could possibly describe the operation.

Mr Clively : We will take it on notice and include an attribution as to which particular operation it relates to—the detail.

Senator LUDWIG: What I was trying to avoid is, like Operation X—and I am not sure what X means.

Ms Huxtable : We will say X (country).

Senator LUDWIG: Please. That would be helpful. And the official development assistance: how is that shown in those operations? If they are doing, for argument's sake, in Iraq, you are expending money there. Is that just a normal budgetary process or—

Mr Clively : It only atypically relates to normal budget processes. This is funding for the defence operations that relate to defence forces, as opposed to other activities in those areas where the operations are occurring.

Senator LUDWIG: If ODA are doing work in Iraq out of their budget, do you talk to them about how they are expending it? Do you look at how they are expending it in any way?

Mr Clively : In terms of the expenditure on any particular program for ODA, that would be reported through the normal system in terms of what they expended against. It is not something that is reconciled in the same way, because it is not a no win, no loss funding arrangement.

Senator LUDWIG: For ODA eligible things, that is simply a function for that department. I can go ask them those questions—how they expend their money and what they expend it on.

Ms Huxtable : Senator, you might want to refer to the press release associated with the budget statements for the foreign affairs portfolio of 13 May 2014, from Ministers Bishop and Robb. It sets out in some detail the country, regional and global allocations from the aid budget. It has got a table that goes through in some detail the 2013-14 estimated outcome and the 2014-15 budget estimate.

Senator LUDWIG: That would be helpful. I will do that. Thank you. The trade union royal commission and the budget extension: is that a matter that comes to here? Or is it a matter for them internally? There was an announcement by the Attorney-General on 7 October that the government would be recommending that the royal commission into trade unions be expanded and extended by one year. That extension would cost $23.6 million, but there would be an underspend of $15.2 million from the existing provision. That means effectively $8.4 million in addition—

Senator Cormann: Which has been offset.

Senator LUDWIG: Yes. I did not see it but sometimes you can make a specific performance payment which might include the difference, or you can—

Senator Cormann: What we said to the relevant ministers is that the additional expenditure would have to be offset, and that is consistent with the budget process operational rules that have been in place for the whole period we have been in government.

Senator LUDWIG: Yes, I do know that pain. The other part of that is: did you identify with the Attorney-General's Department why there was a $15.2 million underspend from the existing provision of the 53 over the two years?

Senator Cormann: Because they did not spend as much as they thought.

Senator LUDWIG: I figured that.

Senator Cormann: Indeed. That is the definition of an underspend. You do not spend as much as you thought.

Senator LUDWIG: But the question is: was your estimate that wrong to begin with?

Ms Huxtable : We might have to take that on notice for the actual reasons—unless you have that?

Senator LUDWIG: There are always reasons. Obviously they did not spend the money; therefore it was left over. Did they not spend it because they did not employ enough X; wages were cheaper?

Ms Huxtable : We will take it on notice. I am not sure off the top of my head. It is probably better directed to the Attorney.

Senator LUDWIG: I was just debating that in my mind. If you think that they are better directed there, I am always happy to—

Ms Halton : Can I suggest that I think that is a question that would be better off directed to the agency. They understand the precise detail of this far better than we do. We manage it in terms of the reliability of their estimates, consistency with government decision making et cetera, but the bottom line is that the microdetail is theirs.

Senator LUDWIG: I am always happy to be referred to another department. The only reason—by way of explanation—that I sometimes ask it here as well is in case they have given you an explanation and then, when I go to them, they say, 'Go to Finance.' It is just trying to avoid that loop sometimes.

Ms Halton : I think on this one they are unlikely to say, 'Go to Finance.' In fact, they should not.

Senator LUDWIG: You would be surprised sometimes what they do say—as I have been here a few years now. In terms of the Commonwealth Grant Guidelines, do you do those? What input do you have into the Commonwealth Grant Guidelines?

Senator Cormann: I have responsibility for it, but we will get the relevant officers to assist you.

Senator LUDWIG: I thought it was you. It says 'Department of Finance'.

Senator Cormann: That is right.

Senator LUDWIG: I thought we would start with just a process question about the Commonwealth Grants Rules and Guidelines. Obviously they are a Department of Finance document. In terms of the process by which departments utilise your Grants Rules and Guidelines, I just want to get an update as to whether that process has changed—this is dated July 2014, so these are new grant rules and guidelines—or it is still consistent. If we take the Community Development Grants Program or the Safer Streets Program, which are developed by departments, they read these guidelines and then implement their programs accordingly. Is that the way it works? I am happy to be corrected, or you can just take me through that general process.

Mr Youngberry : I think, yes, it is largely the same process that existed under the previous Commonwealth Grant Guidelines. The name of them has changed. The guidelines have been put into two different categories: the things that they must do and the things that represent better practice. But the process that an individual agency would follow is largely the same as it was previously.

Senator LUDWIG: So there is the must-do and the should-do categories. Where did the reasoning for that come from? Was that something the minister came up with or did the department recommend it? Was there a review undertaken?

Mr Youngberry : There was a review. I was not involved with it so I might ask my colleague to explain the reasoning behind it because she was involved with the review.

Ms Markoulli : With regard to the Grants Rules and Guidelines we undertook a review of what was then the Commonwealth Grants Guidelines in 2013. We issued new guidelines in mid-2013. With the introduction of the PGPA Act there were minor changes but essentially there was not a significant review of content because it had only been recently reviewed. The guidelines had always been in a part 1 and part 2 format. Part 1 contained the mandatory requirements and part 2 contained the better practice. It was essentially making sure—moving a couple of sentences that were in part 1. But essentially it was the same content.

Senator LUDWIG: Was the review a public review or an internal review?

Ms Markoulli : It involved a working group with all government entities but there were also workshops with the not-for-profit sector. So there was non-government input into that.

Senator LUDWIG: So was that a publicly released review or was it just an internal review?

Ms Markoulli : I guess the update to the guidelines was the output of the review. It was not a matter of: here is a review report assessing the guidelines; the purpose of the review was to update the guidelines.

Senator LUDWIG: When did that review commence?

Ms Markoulli : Mid-2012.

Senator LUDWIG: When did it finish?

Ms Markoulli : Mid-2013.

Senator LUDWIG: So you then wrote them up and released them by July 2014.

Ms Markoulli : In June 2013 there was an update. They had not been updated since they were first released in 2008. So 2013 was the first review since that date.

Senator LUDWIG: Then it comes back to what Finance is involved in once the department utilises the guidelines. I will use the Safer Streets program as an example. Will they, remotely from you, develop their program under the guidelines? Do they come back and have a checked process as to whether they have met the guidelines of the Department of Finance?

Ms Markoulli : Finance certainly has a role in commenting on the consistency of grants program guidelines with the Commonwealth Grants Rules and Guidelines. So along with the Department of Prime Minister and Cabinet and our colleagues in Budget Group, Finance looks at all program guidelines, including grants program guidelines. One of the considerations is consistency with our requirements.

Senator LUDWIG: You do not tick off individual programs and say, 'We recognise you have met the Commonwealth guidelines. You get a gold star.'

Ms Markoulli : We do not give out gold stars. We certainly give feedback and then it is up to the entity to take on board that feedback.

Senator LUDWIG: They do not have to follow the guidelines?

Ms Markoulli : They need to follow the mandatory requirements. It is up to them whether they take on board our feedback about the better-practice elements.

Ms Halton : My understanding is that it is still the case that there are specific guidelines created with respect to particular programs. You will remember this process under your government. That is still the case.

Senator LUDWIG: I am just trying to see if there has been any change following on from that. How do you determine whether they have met the mandatory requirements under the guidelines?

Ms Markoulli : We have a checklist, which is published on our website, that highlights what we consider both the mandatory and the better-practice elements of the Commonwealth Grants Rules and Guidelines for grants program guidelines. We use that tool.

Senator LUDWIG: So they send you the program at some point, for you to have a look at?

Ms Markoulli : Yes, the program guidelines.

Senator LUDWIG: And you work with them, tick it off and put it on the web.

Ms Markoulli : Yes.

Senator LUDWIG: So I was just closing the loop there.

Ms Markoulli : And—sorry—

Senator LUDWIG: Feel free to add.

Ms Markoulli : I was going to say there were some answers on notice in regard to this. The finance minister also has a role not in approving the guidelines but agreeing to their release if they are medium or high risk.

Senator LUDWIG: Right, yes. So the National Audit Office is conducting an audit into the award of the funding under the Safer Streets Program. Have they been in contact with you about that program?

Ms Markoulli : I would have to take that on notice.

Senator LUDWIG: So you do not have information about that at the table?

Ms Markoulli : The Audit Office regularly contacts us about grants programs. It can be as simple as a phone call or meeting or it can be requesting formal feedback on a particular grants program, so I would have to take that on notice.

Senator LUDWIG: So we will through it a little more in detail. In that instance has the ANAO requested assistance? I understand you will take this on notice but just so that we flesh it out a little bit more, I am trying to get the level of engagement, whether they have just simply asked you to provide some information or feedback in relation to the Safer Streets Program all the way to the continuum of whether you are working with them in respect of the ANAO Safer Streets Program. That might be more unusual but it could be a possibility.

Ms Markoulli : I think it is more likely to be the earlier because if it was us working with the Audit Office I would have a stronger recollection.

Senator LUDWIG: That is what I took it to mean, but just in case. Turning to the Commonwealth guidelines themselves, I guess I am trying to understand the changes. If they were reviewed, promulgated in July—there were a range of changes and you have indicated that there were mandatory requirements and part one and part two, so there is a change in terminology and phrasing. If you pulled out the majors—I am not after the minor— what are the major changes, if any, to the Commonwealth guidelines both in the mandatory and in the better practice? If you could comment now, that is fine. If you need to take that on notice, I would be happy for you to take it on notice.

Ms Markoulli : I am happy to answer that from the perspective of major changes. The major changes between the 2013 version and the 2014 version are mostly technical. There is almost no change in content. To give you an example, previously the term 'grant' was defined under the Financial Management and Accountability Act. The grant was not defined under the PGPA Act. So we had to move that definition into their 2014 guidelines. There were also some requirements that were previously part of the FMA legislation about recording the basis for a grant. That was only a requirement for a spending proposal that involved a grant. We wanted to continue with that requirement. It was not part of the legislation so we included it as a requirement of the 2014 guidelines, but essentially there is not a change in content, mostly an update of technical terminology.

Senator LUDWIG: And the same goes for the early review—

Ms Markoulli : The 2013 review?

Senator LUDWIG: Yes.

Ms Markoulli : That was a more substantial change in content. Part of it was a change in terminology. The 2008-09 guidelines were drafted following a strategic review and essentially it was the first Commonwealth grants guidelines. The terminology, the requirements for risk, a lot of the better practice requirements have been informed by audits, by experience, so we updated it quite significantly. If you want further information, we can certainly take that on notice.

Senator LUDWIG: I will not put you to that trouble. I think that answers it more broadly. Do you also keep a list of offending departments that do not follow the guidelines as well as they should that are not managing the better practices as well as they should and keep them as a follow-up department?

Ms Markoulli : I think the audit office probably keeps that list.

Ms Halton : Let us be clear. Do we have a dirt file? No. At the end of the day we work with departments in an open and transparent way. We do not keep secret lists of departments who are the worst offenders.

Senator LUDWIG: I was not saying they were secret; I am sure you tell them. I asked if you have a list of departments that have been troublesome, and if they then turned up again—

Senator Cormann: If there are issues there, it is not—

Senator LUDWIG: All right. Sorry, I cut you off, Ms Halton. Had you finished?

Ms Halton : Yes, I had. Thank you.

Senator LUDWIG: Going to 4.13 of the guidelines and requirements for minister—relevantly, around 4.11 and 4.12—is there a list of those for this government that have utilised those provisions? I know they have been amended but they are substantially the same, I think, as the earlier one.

Ms Markoulli : They are.

Senator LUDWIG: Is there a list kept of those currencies, where the minister has had to write to the finance minister advising of the details; and is that available?

Ms Markoulli : This is an annual report that occurs in March each year to the finance minister. The department summarises that report. So there is certainly a brief to the finance minister summarising ministers that have reported instances where they have approved a grant that their agency has recommended against.

Senator LUDWIG: Is that published?

Ms Markoulli : No.

Senator LUDWIG: Can I have a list of those?

Ms Markoulli : We can take that on notice.

Senator LUDWIG: What I was after, if they were available, were the summary and the individual circumstances.

Ms Markoulli : Usually, they are quite short lists, but we can certainly take that on notice.

Senator LUDWIG: I would imagine they would be short, but nonetheless. That would then apply to 4.12, 4.13 and of course (b), which—

Ms Markoulli : 4.12 is not reported. Elliotts reported throughout the year. Every six months we provide a summary to the minister.

Senator LUDWIG: Just to be clear, could you take on notice both the annual report, the summary, individual occurrences and the 4.12 ones which are done six monthly? They presumably have a short summary and an individual circumstance, as I would imagine it. Can you provide that please?

Ms Markoulli : Yes.

Senator LUDWIG: I have now moved on from that area. As I understand it, the Minister for Health gave $100 million in extra hospital funding to premiers in the 2013-14 financial year. If you look at the total amount of funding for payments for specific purposes to support state health services in the FBO on page 70, there is a total of $15.9 billion. What I am doing is trying to get to where we have to get to.

Ms Halton : It would not be a grant.

Senator LUDWIG: It would not be a grant. What would it be then?

Ms Markoulli : A transfer payment.

Senator LUDWIG: A transfer payment. Can you take me through how that occurs then? Do they get lucky?

Ms Halton : There are indexes that apply to hospital funding. Those indexes are used to calculate the actual payment that is due—this is under the current arrangements. We can confirm if that is wrong. But if there are adjustments in respect of those sorts of payments, they will be a function of the formula that drives the obligation of the Commonwealth in respect of transfer payments to the relevant state.

Senator Cormann: We have gone through this exact aspect of the budget in some detail during estimates and in answers to questions on notice in previous estimates—in particular, in the budget estimates. I am happy to go through that same ground again.

Senator LUDWIG: I do have a recollection of it. I was trying to actually skim around that to get to another point.

Senator Cormann: Maybe go directly to the point rather than skimming around it. Let's go for the straight line.

Senator LUDWIG: Sometimes that does not get you to where you want to go. If you look at the FBO on page 70, there is a total of $15.9 billion. If you then look at 2014 budget figure for the same payment in 2013-14 on budget paper No. 3 page 11, it is 15,854. There is about $20 million which is not there. I do not know whether that is just simply a rounding error.

Ms Halton : Where are you, senator?

Senator LUDWIG: There are two parts. If you look at page 70, there is an $875,180,000. If you look at the 2014-15 budget figure for the same payment in 2013-14 budget paper No. 3 page 11—

Ms Halton : You are looking at the table at the bottom of page 11 of budget paper No.3?

Senator LUDWIG: Yes. It has got 15,854.6.

Ms Halton : Yes, that is in the FBO.

Senator LUDWIG: No, what is in the FBO is 15,875,180. I am looking at the 2014-15 budget figure for the same payment—I assume it is the same payment. That is part of the question. It is budget paper No. 3 page 11. It shows that it is 15,854.6. It is a minor point, but I am trying to get across this. I am not nearly as experienced as Senator Cormann in this area. Where did the $20 million go?

Ms Halton : This is the difference between estimates and actual—

Senator LUDWIG: It is back to the same issue.

Ms Halton : Yes, that is exactly right. If you look at what is in this particular table for payments to support state health services, it is exactly as we indicated earlier. This will be an estimate. For example, you have got national partnership payments here in respect of health infrastructure. I am not saying that this is where the actual difference is, but the reality is that these are capital projects. The discharge of capital obligations varies and, indeed, ultimately the cost of a project will vary. You have got other elements, including—for example—national health reform A. That is reward funding. We had this issue in respect of some of those other payments when we went through.

Senator LUDWIG: Yes.

Ms Halton : I can tell you for a fact—because I know about this; I was doing it at the time—that a number of the states did not meet their targets.

Senator LUDWIG: I recollect that.

Ms Halton : So they did not get payments. Again, I am not telling you that is where the precise difference is, but what you are seeing here is what we actually provisioned in respect of likely need and obligation. What you are seeing in the FBO is actually what happened. It is pretty close.

Senator LUDWIG: Yes. It didn't amount to a hill of beans in the scheme of things but—

Ms Halton : No. I think, technically speaking, not material, Senator.

Senator LUDWIG: I thought if I could just start to use some of these figures and tables I will get a bit sharper by the time we get to the next round.

CHAIR: You're plenty sharp enough already.

Senator LUDWIG: Neither of those two amounts then relate to the earlier matter about the $100 million. What I am trying to say is: is that part of it or is that not part of it?

Ms Halton : Which—

Senator LUDWIG: If you remember, where Minister Dutton provided $100 million extra hospital funding to premiers: that is not reflected in any of those figures, or it is?

Ms Halton : To the extent that there is an estimate in a budget paper, which gives you an estimate of additional funding and the number which will be basically remitted to the state, and then to the extent that that number is actually the final outcome, yes, it will be in there, to the extent that it varied. Again, we do not have the specifics in terms of those particular differences we talked about previously, but that is obviously an estimate of how much extra was going to be provided. And in some cases estimates turn into actuals and in some cases they do not.

Senator LUDWIG: Turning to a different issue then: the Industry, Innovation and Competitiveness Agenda. That was released on 14 October 2014.

Senator Cormann: That is, of course, in a different portfolio—

Senator LUDWIG: I know. I was not going to go the specifics of that. I really only wanted to know: did Finance cost the proposals that are included in that agenda?

Senator Cormann: Yes. As part of normal, ordinary routine cabinet process, these sorts of decisions are always underpinned by a formal costing by Finance.

Ms Halton : Yes.

Senator LUDWIG: The proposals relating to the VET sector reform and enhancing the 457 and investor visa program did not have costs in the agenda. Were you asked to cost those and it was not included, or did Finance for some reason say, 'We don't need to cost those'? They could have been absorbed, for argument's sake.

Senator Cormann: Truth be told, in the pre-budget process as we were identifying savings, we identified savings—as was disclosed at budget time—out of the industry portfolio. So a significant proportion of the funding for that package comes from allocating a proportion of those savings. And then there is a particular measure as part of that package which relates to the employee share scheme arrangements, which relates to Treasury, where the responsibility for offsets resides with the Treasury portfolio.

Senator LUDWIG: But if we answer the primary question: did you cost any of the proposals relating to the VET sector reform?

Senator Cormann: All proposals that are part of it were costed.

Senator LUDWIG: So what was the VET sector reform costed at?

Senator Cormann: We might have to take that on notice.

Senator LUDWIG: That would have been the 457 and investor visa program. Then, if I wanted to ask about what was absorbed I can go to the department. At least I can ask them the same question, as to what the amount was that they absorbed.

Ms Huxtable : We will take it on notice.

Senator LUDWIG: I am not asking you that. That is where I should go, isn't it?

If they reflect zero in the agenda, then they have not been costed, and I do not believe that. So it has been costed, and it came to an amount; and, if it is not specified there, then it is either a zero cost, which seems unlikely—

Ms Halton : Or it is coming out of an existing allocation.

Senator LUDWIG: Yes. It has come out of an existing allocation or they have absorbed it or done something. But you would not be able to answer that latter question; I would have to go to them? That is what I am suggesting—unless you can, in which case—

Senator Cormann: No, we cannot.

Senator LUDWIG: No.

Senator Cormann: Sorry.

Senator LUDWIG: That is okay. I was just confirming that I was right about that—

Senator Cormann: You were right.

Senator LUDWIG: and we could move on. The central budget management system redevelopment task force—I am going to have to try to manage this better in future, won't I?

Ms Halton : Yes; we are doing a yoyo here.

Senator LUDWIG: Yes, I can see this.

Ms Halton : That is a different group of people again. Start asking your questions, and we will see what we can do for you, Senator.

Senator LUDWIG: I do feel we are going to do some more yoyoing. But we seem to have time.

CHAIR: We are still under outcome 1?

Senator LUDWIG: Yes, we are still generally under it.

Senator Cormann: You could always move to outcome 2 to move things along a bit!

Senator LUDWIG: No, I am quite happy watching them try.

CHAIR: My question was—

Senator Cormann: Soon we will be running behind.

CHAIR: Senator Ludwig, outcome 1 now encompasses a whole range of departments, investment funds and also the management of the Building Australia Fund and so forth. So are we just dealing generally with outcome 1 or are you focusing on outcome 1.1?

Senator LUDWIG: No, we are still in outcome 1.

CHAIR: The introductory one?

Senator LUDWIG: Yes. I have not got to outcome 2.

CHAIR: Okay. So it is dealing broadly with the areas in outcome 1, so there will be a bit of yoyoing. We will deal with that, Ms Halton.

Ms Halton : Yes. Perhaps, to be helpful to Senator Ludwig, just as a sort of a general FYI, there is a distinction between questions asked of people who deal with other departments and then questions about the business that we do. So the people who work in the business that we do are a different group.

Senator LUDWIG: I was going to ask you that question so I can group them next time.

Ms Halton : Yes.

Senator LUDWIG: So, what was the division? There are those people who work with external departments—

Ms Halton : Correct.

Senator LUDWIG: and those, obviously, who do Department of Finance work.

Ms Halton : Correct. If you think about it, Senator Faulkner was interested in asking that question earlier on today about open government; that is basically our business, as is the system that we are about to talk about. That is our business, as opposed to us being involved in other people's business.

Senator LUDWIG: This is the only one, I think—maybe one on Williams. The others go to paid parental leave, the GP co-payment, defence and a few others.

Ms Halton : Yes. See, they are other people's business.

Senator LUDWIG: Yes. I will do the central budget management system and the Williams case now, because they could have implications for you to answer. We will see where we go. When was the division or branch formed post the central budget management system redevelopment task force? When did it start?

Ms Halton : The redevelopment itself?

Senator LUDWIG: We will break it down. When did the task force start, when did the task force finish; when did the budget group called the central budget management system redevelopment system task force come about?

Ms Halton : Some of this we may have to take on notice because this is for officers who are not at the table, because we are going back into history. But I will ask Ms Watt whether she has any—

Senator LUDWIG: I am happy for you to take it on notice.

Ms Halton : Would that be okay?

Senator LUDWIG: It is not critical to the next set of questions I am asking. I was just trying to get a sense of it.

Ms Halton : Fine. The answer is: this has been going on for some time.

Ms Huxtable : I think the answer is early 2012. That is my understanding of when the project commenced. While that was before my time also, I expect that is when the task force was stood up. It would have been around the same time.

Senator LUDWIG: What I was trying to get a sense of was when it appeared in your organisational chart, when it got created and put in.

Ms Halton : Well, certainly, Ms Watt was not working on that, and neither Ms Huxtable nor I were there—indeed, neither were you, Minister—

Senator Cormann: Indeed.

Ms Halton : so we will take that on notice.

Senator LUDWIG: Thank you. As for the work that that branch now does—it sits within the Governance and Resource Management Group, so what work is it tasked to do?

Ms Halton : There is a complete redevelopment of the budget management system. This is—

Senator LUDWIG: I have read the title. I am just trying to get a sense of what it means.

Ms Halton : If you think of the system that enables not only us, the Department of Finance, to manage the budget, but which enables departments out there to deal with their matters that need to be entered, being able to keep track of measures, money et cetera—putting at its very high end, in the vernacular—we have a system which is, I think, if I am going to be generous, described as 'clunky'. Some people would probably be more colourful in their description. So there was a decision taken, some years ago now, that this system should be redeveloped. The project to redevelop the system has been up and running for some time, and there have been budget allocations in respect of that redevelopment.

Senator Cormann: In fact it was supposed to come into effect a month after the election, and, manifestly, that is one of the legacy issues that we have inherited from the previous government, dare I say, that we are now working to resolve, and that the secretary is working to resolve.

Ms Halton : Correct.

Senator LUDWIG: So what will it do?

Ms Halton : It will replace the existing IT system, which is, as I said, a little clunky, to actually enable us to deliver the budget using an appropriate IT system—

Senator LUDWIG: So have you finalised the ICT spend? Has it gone to AusTender? I am happy for you to take this on notice.

Ms Halton : I think this might be worth canvassing, because, essentially, we have a project which had an allocation and there are, I think, a significant number of problems with that project, which certainly, when I arrived in the department, I was quite concerned about—in fact, very concerned. As a consequence, we have changed the team out, and we are actually in the process of looking at the work that has been done to date, to size it and see what capability has been built for what money, in order that we can determine how the project should best proceed. My colleague Ms Watt here has possibly the unenviable task, but she is doing a marvellous job of getting the project back under some sort of control.

Senator LUDWIG: As to the ICT spend, is it built? Do you have a platform?

Ms Halton : No.

Senator LUDWIG: I am just trying to get a sense of it. Has a request for tender been developed?

Ms Halton : Yes. There is an ICT firm that was contracted, some considerable amount of time ago, to build this particular system. The ICT firm, obviously, is working with a number of other partners—

Senator LUDWIG: Yes. They are always complex.

Ms Halton : Exactly. I have met with very senior people from that firm to express my concern about progress with the project, and we are now, as I say, trying to size it, to see what actually has been built and in order to work out how this can come to fruition.

Senator LUDWIG: Is it a mid-range platform? Is it a large platform?

Ms Halton : It depends on how you define 'mid-range' and 'large'. This is not a small project.

Senator LUDWIG: Well, the M204 in Centrelink is a big—

Ms Halton : No, this is not of the scale of Centrelink; I would acknowledge that.

Senator LUDWIG: So then there are mid-range platforms, which are IBMs or Hewlett-Packards.

Ms Halton : Let us make a distinction, can we, between the technology you use that you put the system on versus people who you might bring in to contract to actually build the system. As you understand, all of this is complicated, so there is both the hardware and then the software that is necessary.

Senator LUDWIG: Yes. Is there a budget allocation for that?

Ms Halton : There has been, yes.

Senator LUDWIG: Can we get an update on what the budget allocation was and how much it is and whether it is running over spend or under spend at this point?

Ms Halton : As I have indicated, we will give you, on notice, the allocation, but, as I have indicated, at this particular point, sadly—and I keep telling the minister this with a long face—I cannot say what it will actually cost to finish this system because of the issues with the project when I arrived, and we are in the process of trying to nail that down.

Senator Cormann: Just for the record, this is a project that was funded by the previous Labor government in the 2010 budget, and when we came into government we found—like, system testing was conducted in June 2013 which at that time found over 2,000 defects. Most of those have been remedied since then because of the work that has been done, but, again, I reinforce the point that I made earlier: this is one of the many problem issues that we inherited when we came into government that we are now working to resolve.

Senator LUDWIG: I am just seeing where you are at with it.

Senator Cormann: But it is always important to put a proper context around some of these matters, so that there is no misunderstanding about the reason we find ourselves in the situation we are in.

Senator LUDWIG: Is the project paused at this point in time? Would that be a way of describing it?

Ms Halton : No, I would not describe it as paused. In fact, we are continuing to do a lot of work on the project. Ms Watt, would you like to perhaps describe what is not a pause?

Ms Watt : I am the project director for the central budget management system. We are going through a review phase, looking at what has been built and what remains to be built and therefore the time and effort required to complete the project.

Senator LUDWIG: When will that review be completed?

Ms Watt : Early in 2015—the first quarter of 2015.

Senator LUDWIG: And so that will also then set out the likely cost to get to a final point, where you re up to, and—

Ms Halton : That is my hope, Senator.

Ms Watt : The objective is to do that—as well as the time required.

Senator LUDWIG: So I should come back then and ask if that review is available?

Ms Halton : This is an internal process—

Senator LUDWIG: I understand that.

Ms Halton : which is advising me, Senator, so that I can actually decide how the project is best managed going forward and, obviously, so that I can then brief the minister.

Senator LUDWIG: So I should come back in 2015 and see how that matter is progressing?

Ms Halton : That is correct.

Senator LUDWIG: I might put some more questions on notice about that, if I turn my mind to a little bit more. In terms of the Williams case and the second case in relation to the chaplaincy program, I understand that you were heavily involved in the work that is finance after the first Williams case. What work have you done in relation to the second case?

Ms Halton : I am sorry, Senator, but I missed that.

Senator LUDWIG: That is all right. I am sure Mr Suur can help.

Mr Suur : There was a framework put in place after the first Williams case to manage the consequences of that case for government programs. That framework has continued. There is a steering committee which is chaired by Dr Helgeby, from the Department of Finance, and includes the Attorney-General's Department, the Prime Minister's department, the Treasury and representatives from the Australian Government Solicitor and the Office of Parliamentary Counsel. That committee continued its work leading up to the second Williams case and after the second Williams case. Underneath that committee is a working group which I chair and the representatives on that working group are from the same departments. Those two committees coordinate government actions that arise as a result of the Williams case.

Senator LUDWIG: Has the second Williams case required additional work or a change in the direction of the work?

Mr Suur : In many ways, the second Williams case reaffirmed the High Court's decision in the first Williams case. The High Court, however, game more clarity to its thinking and was more specific in relation to particular Commonwealth powers that were the subject of litigation. The direction is the same. If you are going down the path of asking what the constitutional or legal ramifications of the Williams case, I would be more comfortable with those questions being steered towards the Attorney-General's Department.

Senator LUDWIG: No, I am happy not to ask you those. I would ask the Attorney-General's Department those questions if I were minded to. So the work that you are doing will reflect how? Could you give me an example? Will you require departments to consider different ways of funding projects or programs? Are they going through an audit of the programs that they fund to ensure that they are compliant with the High Court?

Are you just giving them advice as to whether the specific programs are within the competency of the Commonwealth to do?

Mr Suur : There are a couple of things that are happening. The first is that the High Court has been clear that, in addition to a valid appropriation to support a government activity, a valid government activity also needs legislative support. As a result of the first Williams case an amendment was made to the then Financial Management and Accountability Act which has continued through into the new financial framework under the Financial Framework (Supplementary Powers) Act. That is what was called the section 32B mechanism. I think that you are familiar with that. From time to time schedules are made and are presented to the parliament. Those schedules describe the government activity in question and also the purpose of that activity. After the first Williams case, Senator, and after many long nights and many gallons of coffee the bureaucracy managed to bring to the parliament over 500 programs which needed legislative support.

Senator LUDWIG: I do recall that report. Can I express appreciation for the work that you did.

Mr Suur : That process in a more orderly fashion has been continued since that time. Now we drink tea rather than coffee.

Ms Halton : At least it's not gin, Senator.

Senator LUDWIG: I moved to green tea for that same reason.

Ms Halton : Did you? Ms Huxtable is into the tea as well.

Mr Suur : We have managed to systematically bring schedules up to the parliament to give legislative authority to government activities as they are put in place. In addition to that, we are going through a process of reviewing programs to ensure that they have a valid constitutional basis, and that is ongoing work that is being undertaken by the government.

Senator LUDWIG: For the individual program, like the chaplaincy program, would I go to the department to see how they funded that?

Mr Suur : The chaplaincy program has been recast to take account of the High Court decision. Again, questions about that program are best asked of the education department.

Senator LUDWIG: Yes. I would ask them how they now provides the funding and what mechanism they have used. It would have been the Department of Education that would have done that.

Mr Suur : Yes, Senator.

Senator LUDWIG: I will reflect it there. In relation to the paid parental leave contingency reserve, what amount is provisioned for the paid parental leave in the contingency reserve?

Ms Huxtable : Senator, we do not disclose the amounts that are in the contingency reserve. It has been a longstanding practice.

Senator LUDWIG: I know. Just in case it changed I thought I would try a very dry question, and you never know your luck.

Senator Cormann: You are putting lines into the water just in case you get a nibble, are you?

Senator LUDWIG: True, you would be surprised.

Ms Halton : Senator Faulkner has a technique called 'purse-seine netting'. You throw it out and reel it in. It is quite a different technique.

Senator LUDWIG: You never know. The area I am interested in I will summarise because I do not think I will get very far, but it is worth trying in any event. What I was looking for is the profile over the forward estimates for each of the elements that make up the scheme, which is the gross costs, the 1.5 per cent tax on companies with over $5 million taxable income per year—

Senator Cormann: Are you talking tax?

Senator LUDWIG: No, the taxable income. If you recall there is a 1.5 per cent tax on companies with over $5 million taxable income. That is what is going to fund—

Senator Cormann: That is actually Treasury. That is my point. That side of it is very much one of Treasury.

Ms Halton : We do not do that.

Senator LUDWIG: So, you do not do any of the profile over the forward estimates?

Senator Cormann: No, this is all Treasury.

Senator LUDWIG: So, Finance has no role?

Senator Cormann: No.

Ms Halton : No.

Senator Cormann: Not on that side of it. The side that you are now asking about is not anything to do with Finance.

Ms Halton : It is not us.

Senator LUDWIG: Well, that is helpful. I will ask them.

Senator Cormann: We have previously established it, but I am happy that we were helpful.

Senator LUDWIG: I will put it on notice to Treasury. So you did not make any assumptions as to what part or how much of the contingency reserve would be—

Senator Cormann: If you asked me personally—obviously the budget is two sides of the coin, the revenue and expenditure sides—

Senator LUDWIG: As Minister for Finance.

Senator Cormann: As Finance, if you ask me as the 'royal we' then, no, we did not.

Senator LUDWIG: What about in relation to the state and territory component of the provision of the contingency reserve?

Senator Cormann: Anything that is not a contingency reserve is obviously not disclosed. To the extent that things are part of the expenditure side related to the paid parental leave scheme, obviously that is a matter for Finance. To the extent that assumptions have been made about how the federal scheme would interact with pre-existing state schemes, that is something that would be within our purview. But given that we have not finalised practical arrangements with a view to getting it to announcement stage, there is nothing else really that we are able to share with you here today.

Senator LUDWIG: That is the same answer I think I got before.

Senator Cormann: That is exactly right.

Senator LUDWIG: The questions and the answers are the same.

Senator Cormann: Sure. We are nothing if not consistent. Until such time as we are in a position to make an announcement, that is going to be the answer you will get.

Senator LUDWIG: I can try to ask it in different ways but it is not going to succeed.

Senator Cormann: It should not. Otherwise we would be inconsistent, and that is not something we want to be.

Senator LUDWIG: I would not mind it, though!

Ms Halton : It is one of our key performance criteria!

Senator LUDWIG: I will leave that. I might put it on notice nonetheless and see what comes back. They all come across your desk, don't they, Minister?

Senator Cormann: They do, to make sure that they are absolutely accurate.

Senator LUDWIG: I do not have a high hope, then, but I might try. In terms of the GP co-payment and reduction in spending on public hospitals, this is an area that I think we have explored before. What I was trying to analyse was whether or not introducing a $7 co-payment to see a general practitioner would reduce spending on public hospitals? If you introduce the $7 co-payment, the rationale for that is obviously that it could be that it then reduces expenditure on public hospitals.

Senator Cormann: The whole point of the co-payment is that it is a price signal that, in the context of growing demand for relevant health care services, in particular in the context of the ageing of the population, it will help us ensure the efficient allocation of limited resources to a growing demand for access to health care services. As we have indicated in the budget, the revenue/savings that are generated as a result of that measure and other measures in the health portfolio will be directed into the Medical Research Future Fund until such time as we have achieved capitalisation of $20 billion. The net returns generated by the Medical Research Future Fund will then be reinvested in additional funding for medical research, which, over time, will enable the government to double, on a fiscally sustainable basis, the funding provided to medical research in Australia.

Senator LUDWIG: I understand that, but you start with the term 'price signal'. That connotes that a) it is a price signal—

Senator Cormann: It is a price signal.

Senator LUDWIG: If it is a price signal then it depends what rationale you have relied on to describe it as a) a price signal and, b), whether it is elastic or inelastic? Because if it is inelastic, then it may be a price signal but it is not going to change anything. So then there must be a rationale or a document that then has supported the economic analysis that it is a price signal that will give you a marginal return.

Senator Cormann: Sure. At a high level, if you look at the way health expenditure has been tracking over the past decade or so, you will see that government expenditure on health care in Australia has been growing faster than the economy, so the share of healthcare expenditure as a share of GDP has been steadily increasing. Given the ageing of the population, it is self-evident that that is expected to continue over the next decade and beyond. Obviously, you reach a point when you have got regular annual increases in expenditure well above the growth in the economy and then over time you reach a point when the level of expenditure becomes less and less sustainable. So what the government has sought to achieve in trying to address that structural challenge is to ensure that the allocation of limited resources available in the economy to be invested in health is as efficient as possible so we get maximum bang for our buck, so to speak, so that the available resources can be spread across as many services as possible.

The policy objective of the government when it comes to financing access to health care is to ensure that all people across Australia can have timely and affordable access to quality health care and to do it in a way that is affordable over the medium to long term for taxpayers. When it comes to GP services right now, the government is paying 100 per cent of the Medicare schedule fee as a benefit. That is a situation that has been the case since January 2005, I believe. Now doctors in Australia are able to charge as they see fit. So, depending on the circumstances , as you would be aware, doctors will decide whether they bulk-bill or whether they impose a fee in excess of the Medicare schedule fee. The point here is that, given what has happened to the growth trajectory in relation to healthcare expenditure in the past, given what is foreseen to be happening into the future, given the pressures on the system that will continue to increase in the context of the ageing of the population, we need to ensure that allocation of limited resources is as efficient as possible. A price signal is a proven way to improve the efficiency of allocating limited resources to a growing and potentially unlimited demand.

Senator LUDWIG: But for it to be a price signal it actually has to work as a price signal in an economic sense. In other words, it does not if it is inelastic. Because what it looks like and what it sounds like, when you describe it as offsetting the growth that is potentially there, is more like a tax.

Senator Cormann: It is clearly not a tax, because it is a co-contribution. It is a user charge, if you like. The co-payment is only payable at the time of accessing a service—

Senator LUDWIG: That is like the GST.

Senator Cormann: No, the co-payment helps to defray part of the cost of the service. So it is a small contribution as part of the overall cost of accessing the service. It is a charge for a specific service rather than a general charge that is applied irrespective of whether or not you access a service and then goes into consolidated revenue.

Senator LUDWIG: But that is exactly what the GST does.

Senator Cormann: No, the GST is not a user charge.

Senator LUDWIG: If you buy a washing machine, then you pay 10 per cent GST on that.

Senator Cormann: The GST is not a user charge. The GST is clearly a tax. The co-payment is a price signal. It is a share of the price for accessing a particular service. That is what it is.

Senator LUDWIG: But how is that different from a 10 per cent GST on a washing machine?

Ms Halton : Because it is an additional cost, Senator, to the actual cost of production.

Senator LUDWIG: That is what the GST is—

Ms Halton : Yes, exactly. If you think about it, you buy a washing machine and without a GST you will pay $1,000 or whatever. With the GST you are going to pay plus 10 per cent across that. This is not the same. This is a price that you will pay as part of the total price. It is not in addition to the total price of the service. It is not added on.

Senator LUDWIG: But you have identified it as $7. You can then just use VAT, which just shows you the final price.

Ms Halton : No.

Senator Cormann: No, no, no. The thing is the GST is a percentage, for starters. Here, what we are saying is that, for relevant GP services, diagnostic imaging services and pathology services, the patient when accessing such a service—and only when accessing those services—will pay $7 towards the total cost of providing that service. It is not a tax on top of the cost of providing that service.

Ms Halton : Exactly. Let me draw a parallel with something that in fact happened the last time I was in Finance, which was the introduction of the PBS co-payment—exactly the same principle.

Senator Cormann: I know. Were you in government that long ago?

Ms Halton : I know! It's sad, isn't it!

Senator Cormann: Because that was in 1983 that that came in.

Ms Halton : No, the one I am talking about was in about 1988 or 1989. But I was in government then, yes.

Senator Cormann: Thank goodness. I started to worry!

Ms Halton : No, no, I was in government then as well. But, if you think about it, the whole point of that was that as part of the total, the fixed price of delivering the medicine, there was an amount which then was to be charged to the patient in respect of that medicine.

Senator LUDWIG: All right. But where is the underpinning work to describe it as a co-payment that will have the effect that you say it will have? Is there something I can read that confirms what you say and how much it will contribute to the fund or how much it will impact on the patient deciding whether or not to use that service?

Ms Halton : This is an issue that I think has been well canvassed in the Health estimates—well canvassed. We verify and agree with costs as they are proposed in respect of particular budget measures. I do understand the irony of me sitting here saying this—

Senator LUDWIG: I was not going to mention it!

Ms Halton : I am happy to out myself in that respect. But the work in relation to the assumptions which ultimately led to the measure's description there and the estimates was done by Health and then, ultimately, those numbers were agreed by the Department of Finance.

Senator LUDWIG: All right. I will move on.

CHAIR: May I interrupt the line of questioning for a moment? I just want to confirm: Senator Cormann, you are required elsewhere at 6 pm; is that correct?

Senator Cormann: Yes. At six o'clock, Senator Ronaldson is replacing me. As I understand it, after that, we are pretty much going into his areas of responsibility in the Finance portfolio.

CHAIR: Okay. I just wanted to confirm that—for Senator Ronaldson's benefit, actually.

Senator LUDWIG: In the 2014-15 budget, does the Defence department include its forward projections for salaries and what the increases in those salaries and wages are?

Ms Halton : The first thing to say about Defence is they work inside a capped—

Mr Clively : A global budget.

Ms Halton : a global budget. That is the term I am searching for, Mr Clively.

Mr Clively : Yes. Defence work within a global budget. Their budget includes an amount for wages and salaries and other expenditure, as it does also for capability and operations—operational funding like fuel et cetera.

Senator LUDWIG: So, for the Defence budget, they estimated and entered into the central budget management system 2014-15 figures for salaries and wages that showed an average increase of 3.89 per cent over the forward estimates. That is what they estimated, I assume—and then it ends up in your system. So I take it you take those numbers from them and plug them in. Is that how it works?

Mr Clively : They would have been the numbers at budget time.

Senator LUDWIG: Are you able to confirm that I am right about those figures? Because the growth in Defence salaries and wages budgeted for a 3.89 per cent increase over the forward estimates.

Mr Clively : I would have to look the number up.

Ms Halton : We are happy to take that on notice, Senator. But I would like to make an important point about this. There are a number of people who have done what I would describe as an enthusiastic but relatively simplistic and therefore not correct analysis of some the figures that have been published to have what I think the minister would describe as a 'gotcha' moment. I might be putting words in your mouth, Minister. The reality is that there are a number of things in the numbers that you see in respect of this domain—the number of staff and things like increments. So you cannot do a simplistic calculation that says, 'Take one number, divide it by another, and KaBoom! there is the answer.' It is much more complicated than that.

Senator LUDWIG: That is why I thought if you produced the numbers I would have a much better basis to work from.

Ms Halton : It is an aggregate number—which was exactly my point. You cannot go from the aggregate to the specific. There are a lot of things rolled into the aggregate.

Senator Cormann: The important point here, of course, is that the government has made a decision about the framework within which public sector pay rises will be negotiated, and that is a matter that is not the responsibility of this portfolio. That is very much a matter that is the responsibility of Mr Abetz's portfolio—the Minister for Employment and Minister Assisting the Prime Minister for the Public Service.

Senator LUDWIG: What I am trying to reconcile, and it is in the media—

Senator Cormann: The media has got it wrong.

Senator LUDWIG: I am quite happy to give you the opportunity of correcting it.

Senator Cormann: We actually told the journalist at the time that it was incorrect. If you give me a bit of time, my office might be able to track down the comments that we provided to the journalist which were not published. Hopefully my office is watching. That will give me the opportunity to get it on the record.

Senator LUDWIG: What I was trying to reconcile is that if you look at the wages and salaries in the Department of Defence, the forward estimates demonstrate that they must have to say with this amount we are going to consider what our growth in wages and salaries will be over the forward estimates—every department does that, I am sure. How does that reconcile with what they actually got? In this instance, it was—

Senator Cormann: The first point to make is that the government did not make a specific allocation for salary increases, because the arrangement with this government—the same as the previous government—is that these increases are funded from within existing resources. The government has determined a framework within which public sector salary increases are to be negotiated. As I have previously indicated, that is a responsibility for the Minister for Employment, Senator Abetz.

Senator LUDWIG: So the defence department put in a statement which you then pick up and put in the central budget management system?

Senator Cormann: That is not the way it works. The government does not make a specific allocation for salary increases. There are some processes, like the secretary has indicated, with usual increments and the like that just happen and there is obviously a mathematical formula that plays out through the system. But, in terms of the government making an allocation with the budget—as was wrongly asserted by the Canberra Times—that has not been the case and that is not the case. The policy decisions around the framework to negotiate appropriate increases in a fiscally constrained environment are, as we indicated publicly, the responsibility of Minister Abetz.

Senator LUDWIG: But the defence department at the time of the 2014-15 budget included a funding provision that grew 3.89 per cent on average over the forward estimates.

Senator Cormann: Sorry, could you say that again?

Senator LUDWIG: The defence department budget at the time of the 2014-15 budget included a funding provision that grew 3.89 per cent on average over the forward estimates.

Ms Halton : Let's be clear on this. As has already been indicated, they have a global budget. The fact that they may have ascribed a component of the global budget to a particular purpose, that will go to a whole series of assumptions which we cannot go into but, as I have already indicated, include a significant number of factors and it is not an easy process of say, 'Ah, ha; that was the amount to be provided for pay increases.' That is what I think people are trying to do, and it is not correct.

Senator Cormann: The journalist in question at the Canberra Times put to us that we have got this money in the budget. The truth is that there is no money in the budget because the budget—for anyone who has looked at it closely—continues to be in deficit. We inherited $123 billion in projected deficits over the forward estimates. In the context of the budget, we had a $48½ billion in 2013-14. We are on track for a deficit this year, in 2015-16 and in 2016-17. So whatever money is ultimately allocated to public sector pay increases will have to come from borrowed money. There is no money available in the budget. It is borrowed money that will have to be deployed, to the extent that there is going to be an increase. And of course the framework for negotiating those increases has been publicly articulated and is the responsibility of Minister Abetz.

Ms Halton : Let us be clear: departments have not been supplemented for this purpose. They have not been supplemented. So there is not an additional amount of money allocated based on an assumption about a pay rise.

Senator Cormann: Just to be clear, because you have now mentioned it: I now can give you those comments that I provided, on the record. A journalist asked me about this supposed 3.21 per cent which had been allocated. I said very explicitly: 'The figure of 3.21 per cent is incorrect. A range of assumptions appear to have been made in your calculations, including that a 1.5 per cent wage increase was factored in to the budget in the forward estimates. This and other assumptions that you appear to have made were not factored in. The government's approach to wage-setting has been articulated in the 2014-15 budget. Negotiations on the terms and conditions of an enterprise agreement are a matter for departments and agencies and their staff, and, in the case of Defence military personnel, the Defence Force Remuneration Tribunal, and are guided by the Australian Government Public Sector Workplace Bargaining policy.' He then said, 'But there is money that is available in the budget,' to which I replied that that was wrong. The budget in 2014-15 remains in deficit; indeed, the budget will remain in deficit for 2015-16 and 2016-17 too, as a result of Labor's waste and mismanagement over six years in government. There is no spare money in the budget for additional public sector salary increases, and no such allocation has been made by the government in the budget. So thank you very much for the opportunity to put that on the record.

Senator LUDWIG: I think the point was being made—though I am certainly not trying to stand in the shoes of the journalist—that if you look at the Defence department's allocation in their budget—so, not in the overall budget but in their budget—they budgeted for more than 1.5 per cent, which was pay.

Senator Cormann: No, that is not right. And if they did do that, then that would come at the expense of investments in Defence capability. There is no magic pudding here. The overall government budget is in deficit. We are currently borrowing money in order to fund a large proportion of recurrent services. So, to the extent that there would be additional expenditure, either it has to be borrowed or, if you say it is in the overall pot, if it is spent for this purpose then it is not available to be spent for another purpose, namely—

Senator LUDWIG: But if they have already done their budget and they have budgeted this amount then they have said, 'This amount for that; this amount for that; this amount for that.' So they have already finalised that and put it out over the forward estimates; it is on average 3.86 per cent—

Senator Cormann: Firstly, those questions about the specific Defence budget are obviously matters for the Defence portfolio.

Senator LUDWIG: Yes.

Senator Cormann: But I will just make this general point: there is only one federal government budget, and the federal government has not made a specific allocation and has not provided supplementation to departments for the purposes of funding public sector salary increases. That is the fundamental and important point. So the assertions that were made by The Canberra Times are inaccurate. The journalist was told that they were inaccurate. For some reason, between them, the journalist and the editor of the paper decided to press ahead with that story, irrespective of having been told that what they were asserting was inaccurate. That is a matter for them, ultimately. But it is good that I have had the opportunity to put on the record that what was asserted there was completely wrong.

Senator LUDWIG: I might put a few more questions on notice about that. There was another article in a paper—I do not really need to go to the article itself, but the ATO building at Gosford—

Senator Cormann: The ATO is obviously part of the Treasury portfolio.

Senator LUDWIG: I understand that. I was wondering if you had any involvement in the first pass or second pass.

Senator Cormann: Not in my capacity as the Minister for Finance. As you are aware, I currently have two hats. I am also the acting Assistant Treasurer, and I have had some involvement in that process of delivering on that election commitment in my capacity as the acting Assistant Treasurer. But any specific questions in terms of the mechanics of how this process is being conducted are obviously matters that should be addressed to the Australian Taxation Office, which appeared as part of the Senate Economics Committee.

Senator LUDWIG: Or Treasury for first and second pass. Or you.

Senator Cormann: No, the tax office is responsible for the business case and for running the proper process in relation to this.

Senator LUDWIG: I will go to the ATO for all of that. Has the Department of Finance had any involvement in the ATO Gosford—

Senator Cormann: I do not believe so.

Ms Halton : There is some involvement in respect of the property side of the project. I do not have enough detail on me. What happens with CEOs is that on any kind of property transaction that is worth a certain amount of money, or above, they are actually required to come to the Finance Secretary for agreement that it represents value for money. I do not have any more detail than that to tell you, and as yet I have not seen anything in respect of this project. I suspect my property people, who are not here at the moment, may or may not have some involvement. It has not come up to my level yet.

Senator LUDWIG: What I was particularly interested in is that when you look at the resource management guidance for the two-stage capital works approval process for Australian government construction projects, paragraph 5, on pages three and four, confirms that:

5. New Policy Proposals (NPPs) for capital works, excluding fit-outs, which are estimated to have a capital cost of $30 million or more and are undertaken in Australia, its external territories and overseas, are subject to the Two Stage process.

That is where you would come into play as the Department of Finance, as I understand it. So what I was trying to ascertain is whether it has come to you because it is over that amount, or it has not.

Ms Halton : I have not seen it yet, but I will take that on notice.

Senator LUDWIG: All right. If it is available tonight, because I wanted to follow up with a range of questions. But it may be ATO rather than you.

Ms Halton : We will get back to you on it.

Senator LUDWIG: Thank you.

CHAIR: We have questions about outcome 2.

Senator LUDWIG: I will pause then. We should go to outcome 2.

CHAIR: If we go to outcome 2, we then finish outcome 1.

Senator LUDWIG: I understand that.

CHAIR: If you are happy with that, we will conclude with outcome 1. After conferring with the deputy chair, the suggestion put forward by the minister is that we will now suspend and resume at 7:30 pm with the Department of Finance on outcome 2.

Proceedin gs suspended from 17:58 to 19 : 32

CHAIR: We will recommence the proceedings of the Senate Finance and Public Administration Legislation Committee estimates hearings, and I welcome Senator the Hon. Michael Ronaldson, Special Minister of State. Before the break we were dealing with outcome 1 and a little bit of outcome 2 for the Department of Finance. Senator Ludwig has a few concluding questions on outcome 2, and we are waiting for Senator Xenophon to join us and he has some further questions.

Senator LUDWIG: I have a question on the work done on the scoping studies for the sale of the ASIC registry, Australian Hearing and Defence Housing Australia. I think I have asked this before but, now we are post the budget, where are we up to? We will start with the broad question and see if we can narrow it down from there.

Mr Renwick : I have responsibility for the four scoping studies. As announced in the budget, the four scoping studies are to report to government in the context of the 2015-16 budget—to report in terms of the next budget—and we are on track to provide a report to government in time to consider it in the context of the next budget.

Senator LUDWIG: So that is the scoping study—

Mr Renwick : The four scoping studies.

Senator LUDWIG: So there are four separate scoping studies. Have you employed additional staff for that, or is that being one in-house?

Mr Renwick : It is being done within Finance. We have a team of about 14 managing those four scoping studies.

Senator LUDWIG: So you have pulled them in and nominally put them into the team. Is there a name that you associate with the group?

Mr Renwick : Yes. There are two task forces. One is the Housing and Hearing TaskForce and the other is the Treasury Entities Task Force—which is looking at the ASIC registry and The Mint.

Senator LUDWIG: Is there a date for when the scoping studies will finish?

Mr Renwick : No. The only date that has been made public is for the studies to be completed in time for the 2015-16 budget. We are working towards having them completed in the near future, in order for the government to consider the recommendations.

Senator LUDWIG: I should leave that, because anything I ask will really be said; it will be subsumed by what is announced at the budget time. I could ask this: is it the intention of the minister to make the scoping studies public?

Mr Renwick : The scoping studies are a report to government, and it will be the minister's call or the government's call as to whether or not they make them public.

Senator LUDWIG: Perhaps you could take that on notice, Minister. When it comes to the ICT and AGIMO, I think it was in the answer to F276 where you indicated—this was about the cloud. I was looking at the outline of the time lines for the three phases of the audit of spending capex and outcomes generated by ICT investment across all agencies. Do I need to say that again?

Ms Pensko : Yes, please.

Senator LUDWIG: There was an answer provided to F276, so what I was seeking was the outline of the time lines for the three phases of the audit of spending capex and outcomes generated by the ICT investment across those agencies. The cloud policy was obviously released on 8 October, so we will start with that first bit and see where we go after that.

Ms Pensko : Could you—

Senator LUDWIG: Do you have F276?

Ms Pensko : Yes, I have now.

Senator LUDWIG: That helps, I suspect. I was just going to go and find it myself, if that makes sense. Do I need to say it again? I was just looking for more information. You have whetted our appetite, and now we are trying to drill down a bit further.

Ms Pensko : You are referring to the ICT audit that is underway and is due to be finalised in December 2014?

Senator LUDWIG: Yes, that is right. Are there time lines for that? It is completed when?

Ms Pensko : December.

Senator LUDWIG: Is that a report to the minister?

Ms Pensko : Yes, it is.

Senator LUDWIG: Will that be made public?

Ms Halton : That is a matter for the minister.

Senator LUDWIG: I know, but he has gone on me.

Mr Renwick : It is not this minister; it is actually—

Senator LUDWIG: He can take it on notice for the relevant minister.

Ms Halton : We can refer it ourselves, yes.

Senator LUDWIG: That would be great. With the cloud computing policy, is it the intention to go to AusTender for the cloud computing, or is it just simply an announcement about looking at it?

Ms Pensko : We released a policy in relation to the cloud. Are you referring to the—

Senator LUDWIG: The policy. There is the policy. What are you going to do about it?

Ms Halton : The policy affects agencies.

Senator LUDWIG: Yes. Well, you are an agency.

Ms Halton : Indeed we are. So we expect agencies now to procure consistently with the policy. You will note that there are some things which may not be appropriate for cloud, depending on the criteria that they have set, consistent with the policy. So we have told agencies what our expectation is. You would know the expectation that we have that people would save a significant amount of money if they used cloud, but we are not procuring for them.

Senator LUDWIG: No, but it does come with some inherent risks as well.

Ms Halton : Risk is one of the things that you measure and manage.

Senator LUDWIG: And manage.

Ms Halton : Correct.

Senator LUDWIG: In terms of your agency, Finance, have you started to look at cloud computing?

Ms Halton : Yes, we have.

Senator LUDWIG: Have you started a review? Have you started the preliminary work?

Ms Halton : No. We are thinking about what it is we are intending to procure in the next little while, and there has been an active discussion internally about how we might utilise some services that are provided via the cloud which would actually save us money.

Senator LUDWIG: How will that process then progress forward to actually utilising cloud?

Ms Halton : When we have decided, in a number of the spaces—I cannot say, obviously, too much in relation to what we are thinking, because that would be signalling what our intentions are before we have actually made those specific decisions, but what we will do is to consider what services we need that we might be able to procure which might actually be relevant in respect of the cloud, and then we will go to the market.

Senator LUDWIG: What role does the minister play in this?

Ms Halton : If it is procurement it is us, not him.

Senator LUDWIG: There are 10 action items listed in the policy. It says: one, which has been completed. What does that mean? What action has been done to complete that first policy outcome?

Ms Pensko : Are you referring to the cloud policy?

Senator LUDWIG: Yes.

Mr Vickers : The first action was around issuing a resource management guide to agencies to highlight their responsibilities under the new policy.

Senator LUDWIG: So that has been done?

Mr Vickers : That has been done.

Senator LUDWIG: Is that public?

Mr Vickers : Yes.

Senator LUDWIG: Is it on your web?

Mr Vickers : I would have to check.

Ms Pensko : We will take that on notice.

Senator LUDWIG: All right. If it is not on your web, can the committee have a copy of it? And it is a matter for you as to whether you put it on your web. The other items—3, 4 and 5—are close to scheduled completion. Would you give me an update on those?

Ms Pensko : I would have to take that on notice. So that was in relation to 3, 4 and 5?

Senator LUDWIG: Perhaps we could just deal with the remaining nine items and you could just let us know where that is.

Ms Pensko : Yes.

Senator LUDWIG: It is going to be agency heads who will make the decision on this—so not ministers; I think we canvassed that earlier.

Ms Pensko : In procurement—yes.

Senator LUDWIG: And that will be all departments—they will be able to just action the policy?

Ms Halton : The procurement rules apply, and then what we are saying is that in the context of the procurement rules we want people to take account of this other policy. So none of that is displaced with procurement rules in terms of who is responsible for what.

CHAIR: Senator Ludwig, may I just interrupt for a moment? We were waiting for Senator Xenophon. He was here, and now he is gone.

Senator LUDWIG: I was happy for him to break in.

CHAIR: Yes. That is what we were expecting. Senator Xenophon has agreed to put his questions on notice. So, if you were happy to do the same, Senator Ludwig, we would be able to proceed to the next item.

Senator LUDWIG: I will.

CHAIR: That is great. Thank you.

Ms Halton : That would be an advance for mankind, Senator!

CHAIR: Indeed it is!

Senator LUDWIG: I'm always happy to contribute to the advancement of mankind!

CHAIR: You are a very welcome addition to this committee, I must say, Senator Ludwig!

Senator LUDWIG: Don't worry me too much!

[19:43]

CHAIR: We are now going to revert to outcome 1.1, which falls under Minister Ronaldson's responsibilities. Were there any questions on that?

Senator LUDWIG: I am sorry—you might have to remind me what that is on.

CHAIR: This is on budget financial management and procurement, and, specifically, government campaign advertising.

Senator LUDWIG: I like that area.

CHAIR: I thought you might. I was hoping to avoid mentioning those words! Nonetheless, we will go to that.

Senator LUDWIG: I particularly enjoy the comparative analysis!

CHAIR: Senator Ludwig.

Senator LUDWIG: I just have to find it again, but I do recall it well. I can start while I am looking for it. How many are currently in the pipeline for approval, in terms of campaigns, by cost and the type of campaign it is and where it is up to in that process?

Senator Ronaldson: Senator Ludwig, you have put a number of questions on notice in relation to government advertising. As you know, it is standard practice not to talk about what campaigns are in the making. We have taken on notice your questions in relation to how much has been spent, costs, approving officers, details of the outlets that were paid and so on. You have asked what government advertisers plan for the rest of the financial year, a list of the total expected costs, a list of each item of expenditure and cost, a list of the approving officers, details of the outlets and so on. We have taken all of those on notice. Do you have anything over and above everything we have put on notice?

Senator LUDWIG: I will go to the more specific ones. First there is the Medibank share offer. When did the campaign relating to the Medibank share offer commence?

Ms Halton : We have many things here, but we may not have the date.

Senator LUDWIG: Do you have the cost?

Ms Halton : There is information published on AusTender in relation to cost which we can refer you to.

Senator LUDWIG: That would be fine. Does what is on AusTender include the media platforms that have been chosen?

Ms Halton : It will just be the contracting arrangements.

Senator LUDWIG: It will not demonstrate which ones you have actually chosen and whether there has been any additional cost above that?

Ms Halton : That is correct. We will give that to you on notice.

Senator LUDWIG: I think we heard the figure of $90.9 million earlier today. Is that still the correct figure?

Ms Halton : That is the total appropriation for the sale process and it encompasses a whole series of things. We are not finished yet, so I cannot yet answer the question.

Senator LUDWIG: Can you give me an update of that figure?

Ms Halton : No additional funding has been allocated. I can tell you that. That is the capped amount I have allocated for this function. What we actually spend, I am happy to take on notice.

Senator LUDWIG: Spend to date as well would be useful—to give me an idea of how much is left.

Ms Halton : Sure.

Senator Ronaldson: That is part of your questions on notice anyway.

Senator LUDWIG: I thought I was pretty comprehensive.

Ms Halton : Apparently so.

Senator Ronaldson: You were.

Senator LUDWIG: I do not have that file in front of me. I forgot to bring it along. What about the 'Stop the boats' campaign?

Senator Ronaldson: While the officers are finding that, I think it is important to note that, under the previous government, $58.1 million was spent in the 2½ months from July to mid-September 2013. Under the current government, there was about $10 million less spent—but over a period of 9½ months. I understand that roughly about $5.4 million was spent in July, $4.6 million in August and $5.1 million in September. In virtually 12 months the government has spent only very marginally more than the previous government did in the 2½ months in the run-up to the last election. But you are probably aware of those figures anyway.

Senator LUDWIG: Normally I do not give advice like this, but I would say: be careful of what you tie yourself to today—because tomorrow or next year or the year after, you might regret it. If I have already asked this, I will not re-ask, but there was a measure of $19.9 million over four years in the 2013-14 budget for the 'Stop the boats' campaign.

Senator Ronaldson: You have already asked that. I think it was questions on notice F168 and F188: 'How much has been spent on government advertising, including job ads' and so on. You have already covered that.

Senator LUDWIG: I will not progress any further on that, then. I am pretty sure I dealt pretty comprehensively with all of the government advertising.

CHAIR: We understand. Senator Ludwig, in view of that, I am hoping Senator Smith will put his questions on notice too.

Senator SMITH: I will oblige.

[19:50]

CHAIR: Thank you, Senator Smith. We have therefore finished with outcome 1.1 dealing with government campaign advertising. We will now move to outcome 3 in the Department of Finance, which deals with 'support for parliamentarians, others with entitlements and organisations as approved by government through the delivery of entitlements and targeted assistance'. Are there any questions on this area?

Senator LUDWIG: Not from me.

CHAIR: In that case, we will take a short break and move on to the Australian Electoral Commission when we come back.

Proceedings suspended from 19:51 to 20:16