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Tuesday, 8 March 1966

Mr McMAHON (Lowe) (Treasurer) . - I move-

That the Bill be now read a second time.

This Bill seeks the approval of Parliament to a borrowing by the Commonwealth of up to$US54 million from a group of commercial banks in the United States to assist in the financing of jet aircraft and related equipment being purchased by Qantas Empire Airways Ltd. and the Australian National Airlines Commission. It is the largest private borrowing so far arranged by the Commonwealth on behalf of Qantas and Trans-Australia Airlines. Each drawing from the loan will be made in the name of the Commonwealth and will be initially paid into the Loan Fund, prior to being advanced to Qantas or T.A.A. Accordingly, the Bill appropriates the Loan Fund to enable the proceeds of the loan to be passed on to Qantas and T.A.A. It also appropriates the Consolidated Revenue Fund to permit the Commonwealth to meet interest payments, repayments of principal, and other charges associated with the borrowing. As the two airlines will pay to the Commonwealth all of the funds necessary to meet these payments, the loan will involve no net cost to the Commonwealth itself.

The borrowing will assist Qantas to purchase three, four or five additional Boeing 707-3 3 8C jets. T.A.A. will use its share of the loan to assist in the purchase of one additional Boeing 727 and three Douglas DC9's. The amount of the loan will be reduced by $14 million if Qantas decides to buy only three new Boeings or by $7 million if it decides to purchase four. The new aircraft will increase the Qantas fleet of 707's to 22, 23 or 24 and will increase T.A.A.'s jet fleet to four Boeing 727's and three Douglas DC9's.

The arrangements for the borrowing are similar to those approved by Parliament in November 1964 when the Commonwealth borrowed $US30 million on behalf of Qantas and T.A.A. The full proceeds of the loan will be made available to the two airlines on terms and conditions to be determined by myself as Treasurer, but these terms and conditions will be the same as those under which the Commonwealth itself will borrow the money from the United States banks. As the airlines will be required to meet all charges under the loan agreement, the Commonwealth will therefore assume the function of an intermediary only in these arrangements. Prior to the present loan, aircraft borrowings arranged by the Commonwealth with United States commercial banks since 1956 totalled SUS115.4 million, of which $US64.4 million has yet to be repaid. In addition, the International Bank and the Export-Import Bank have lent $US 39.2 million for aircraft purchases of which SUS12.4 million is still outstanding. From these borrowings SUS132.2 million has been advanced to Qantas and SUS22.4 million to T.A.A. Following sound commercial practice, the loans are repayable over the expected life of the aircraft and during the period that they are making a substantial contribution to the finances of the two airlines. Qantas of course earns more than enough overseas currency to cover the foreign exchange costs of the loans.

Australia is a net importer of capital, and at the present time we are running a balance of payments deficit which is expected to continue into next year. It has been the Government's continuing policy to arrange overseas finance for a large pro portion of the cost of new aircraft purchased by its two airlines. The major part of the present loan will not be drawn until the latter part of 1966 and early 1967 and there are obvious advantages in taking steps now to ensure that funds are readily available to meet known future contractual commitments of this nature. In a growing economy such as ours it is inevitable that there will be a continuously increasing demand for imports of materials, capital equipment and other items which must be obtained from abroad. It is also inevitable that there will be periods such as the present when our foreign currency receipts from exports, capital inflow and so on will be insufficient to prevent some decline in our international reserves. The Government therefore believes that it should take advantage of whatever opportunities arise to borrow overseas at reasonable rates of interest in order to strengthen our reserves or to arrest the rate at which they are declining.

The operation of the United States interest equalisation tax has placed difficulties in the way of the Commonwealth continuing its series of public loans on the New York market. Our most recent public dollar loans in May and November last year were floated predominantly in Europe. However, as I shall explain later, the tax does not apply to private borrowings of the type which we have been able to arrange with United States commercial banks.

The loan covered by this Bill is being made by a group of nine United States commercial banks. These are listed in Section 1 of the loan agreement which is annexed as the Schedule to the Bill. The two airlines will request the Commonwealth to make drawings on the loan when payments for the new aircraft are required by the manufacturers. Drawings are due to commence before the end of this month and are to be completed before 31st December 1967. A commitment fee of one-half of 1 per cent, is payable on undrawn amounts of the loan.

As each section of the loan is drawn, interest will become payable at an initial rate of 5 per cent, for a period up to 21 months. After this all drawings will be consolidated into a single loan which will be repayable in 14 approximately equal halfyearly instalments over the period June 1968 to December 1974. The earliest instalments, those due in June and December 1968, will carry interest at the rate of 51/2 per cent., and this will rise in steps up to a maximum of53/4 per cent, for the portion of the loan repayable in 1974. The average interest cost over the full period of the borrowing is slightly less than51/2 per cent. In general the loan agreement annexed to the bill follows the form of the November 1964 agreement. Perhaps I. should bring section 8 of the Agreement to the attention of honorable members. This contains an undertaking by the Commonwealth that the proceeds of the loan will be used for the purchase of property manufactured in the United States. This undertaking creates no difficulties for us and, in fact, the total cost of the aircraft concerned will be greater than the amount borrowed.

Under the provisions of the interest equalisation tax legislation, the United States President is authorised to extend the application of the tax to certain commercial bank loans if, in his view, the acquisition of oversea debt obligations by commercial banks has materially impaired the effectiveness of the tax. However, the legislation specifically exempts commercial bank loans from the tax if at least 85 per cent, of the amount of the loan is attributable to the sale of property manufactured or produced in the United States. Thus the borrowing will not be subject to the interest equalisation tax. Commercial bank lending abroad is subject also to guidelines which have been issued by the Federal Reserve system to reinforce the measures to improve the United States balance of payments, of which the interest equalisation tax forms a part. Each commercial bank was requested to restrict its foreign credits outstanding during 1965 to an amount not in excess of 105 per cent, of the amount outstanding at 31st December 1964. As the present loan came within these restrictions, some banks which had participated in Australian aircraft loans in the past found themselves unable to do so on this occasion, and the lending group contains a number of names which are new to these loans.

In December 1965 the Federal Reserve issued a new set of guidelines for banks and other financial institutions to follow during 1966. Each bank was requested to restrain any expansion in foreign credits during the year to an amount not exceeding 109 per cent, of the December 1964 total, so that the permitted expansion in 1966 will be even less than that permitted in 1965. The terms and conditions of the loan have been approved by the Australian Loan Council and the amount of the loan will be additional to the Commonwealth's loan programme of $A102 million for housing which was approved at the June 1965 Loan Council meeting. I commend the Bill to honorable members.

Debate (on motion by Mr. Crean) adjourned.

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