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Economics References Committee
09/09/2011
Finance for the not-for-profit sector

NASH, Mr Stephen, Chief Executive Officer, Home Ground Services, Grocon

RESIDE, Mr Chris, Chief Executive Officer, Abbeyfield Australia Ltd

TYNDALE, Mr Andrew, Director, Grace Mutual

WALDREN, Mr David John, General Manager, Carlton Brewery Redevelopment

[16:30]

CHAIR: We welcome you all here today and I think we are about to resume again. We usually get people to do opening statements, but I think we might start off with Grace Mutual as your opening statement might be your presentation. Is that an agreed format?

Senator STEPHENS: That is okay.

Mr Tyndale : Thank you very much, Chair and senators. I appreciate the opportunity to speak here. The presentation that is before you we will flick through quite quickly. We will try to do less than a minute a slide so we will keep going here. The agenda is very simple. I just want to introduce Grace Mutual. There are two specific proposals that I would like to put before the committee, then use the example of NRAS, the National Rental Affordability Scheme, about the good and the bad parts of it, the missed opportunity that I believe the government left behind and the commercial opportunity that th is allowed for us, and then make some comments by way of extrapolation into the aged care sector.

Just very briefly, my background is 26 years in investment banking. We bring decades of commercial and business background to the exercise. Grace Mutual is a not-for-profit and our passion is to bring capital to the not-for-profit sector. We do that by creating investment products which are attractive to commercial wholesale investors in order to attract them and bring them into the not-for-profit sector. Ideally, capital to change the world is where we are headed. Government is great and their component is very necessary to trigger investment. Philanthropy is wonderful, volunteering is fantastic, but if you want to move the dial you have to access the one and a half trillion dollars worth of super fund investment in Australia—you have to—so that is what we are about.

If we turn to the slide that is entitled ‘Primary Proposal 1’, we strongly recommend that in the development of all of government incentives and all of government interventions, that the finance—or the capital—portion is split and separated from the service provision and even the infrastructure component. Our observation is that almost every tender that has a component of services in it starts with the services and therefore the service providers are asked to make a tender which includes finance and infrastructure and services. They are asked to go and speak to state governments about recurrent funding; they are asked to do this. These organisations do not have financial capability—they certainly do not have best practice financial capability—and they cannot, by any means, access the scale that you need across one of these incentives to get real traction.

A major super fund will not look at an investment of less than $50 million and they then cannot in many cases be more than five or 10 per cent of the fund, so in some cases you have to have a minimum fund of $500 million before you can attract any attention from them—get on their radar—at all. Asking an individual service provider to bid for NRAS or SAIF or any of these guys, coming from their own project and the services they provide, they have no skills at $500 million and no opportunity to put that together. Consortiums within the not-for-profit sector are a disaster and there is just no way to access wholesale institutional capital when the tenders are all pitched starting with the services and expanding backwards.

So, our strong recommendation and our proposal is that you split the finance capital component in the tender process and ideally I believe that you should do that in advance so that you identify the ideal optimal capital solution for that particular initiative and then every tenderer on the services and the infrastructure gets to bid into that. So, there are kind of two-stage tenders, I would propose.

There is a great reason and a great desire to have multiple service providers, from diversity, local government, community buy-in, expertise, local resident needs, everything from cultural to local geographic desirability. You want to propagate the sector, you have got probity issues and not handing it all to one person; I absolutely understand that. The problem is that all of the factors that lead to local benefits for service providers are completely the opposite when it comes to finance. Finance is about scale, it is about central standardisation, it is about central expertise, and it is about access and speaking the language of institutional investors, and that does not happen when you start with localised services.

If we could then move to the Primary Proposal 2, which is related, our observation is that even the best of the government incentive programs often miss the mark. They are often beautifully wrapped and delivered and in many cases really thought through, but some of the key sectors have not been consulted or not been considered in developing them. I will give you the example of NRAS because it is the one that I am closest to. It appears to us that it was largely driven by replicating—

Senator MARK BISHOP: Why or how are you or your firm close to NRAS?

Mr Tyndale : May I take the question on notice? I will explain that in just a moment.

Senator MARK BISHOP: Okay.

Mr Tyndale : Thank you. With NRAS the majority of consultation, as I understand it, was around community housing providers, who have a very specific history of being on the state stakeholder list exclusively and they are also trying to replicate the program from overseas, both in the United States and in England. That is great, but there are several problems with the NRAS program. One is it is a tax based program and if you are trying to attract superannuation funds, they have no use for tax based programs. So, the fact they pay 15 per cent tax—many of them are tax free—just means that there is no incentive. One of the key objectives of the NRAS program was to introduce and attract wholesale institutional funding; you are just not going to do that with a tax based program, so that was a design flaw.

The second is that indexation, which is very generous—fantastic. The problem is it is non-standard indexation. If anybody had asked a bank, they cannot hedge rental CPI. They can hedge CPI but they cannot bear the interest rate risk—the basis risk—between CPI and rental CPI. Even though rental CPI was intended to be generous because of rent foregone on the discount, you cannot get bank finance against the rental incentive because they cannot hedge the rental CPI; it is a non-standard indexation. So, they are a couple of design flaws when you are trying to get either bank finance or superannuation fund finance.

Then finally, it is an income support program, so on the basis of the promise of future income community housing providers are required to get capital today to make the construction to become eligible in order to receive the incentive. That is great except nobody really stopped to think about how are we going to come up with probably $16 billion worth of capital in that sector. It is just not feasible; it is not possible. The not-for-profits currently represent something like two-thirds of the approved eligible organisations under the NRAS program, and they are the community housing providers, the Mission Australias of the world, Salvation Armys and so on. They do not have access to $16 billion worth of capital to deliver the program—that is the way it is designed—in order to achieve the incentive. So, there are some structural flaws in the design. Every one of them is running around trying to turn that incentive into capital today in order to build the houses.

Our strong feeling about the risk is that there are roughly 23,000 apartments or dwellings that are going to be completed and tenanted by July next year and we believe that the balance—the second half of the program—could be at risk if there is not extra capital or some other way available. Almost all the organisations we talk to are tapped out. They have borrowed everything they can get and they have raised all the money they can get. They have built everything they can and they are sitting on projects two, three and four and they do not know how to fund them yet. Our assessment is that the second half of that program is at risk.

I will turn to the NRAS example on the next page, which is page number six, I think. Just to recap, this is our view on NRAS. It is a generous incentive, it is a generous indexation and it is very flexible. It was not too prescriptive, which provides a lot of innovation and I think all of those are good factors. However, it is income and not capital, and capital is what this sector needs. Its indexation is non-standard, so bank finance against the incentive is not a possibility, and of course it is tax based, which means that you can knock out the attraction to anybody who is not at a very high marginal tax rate.

If we move to the next page, the next three slides were, in fact, taken from a presentation which we made to Treasury earlier this year about how to restructure the NRAS program. The response we got was, ‘Great idea; too late. It has gone too far down the track and we can’t change it.’ Just to give you an illustration, there are essentially three inefficiencies in the program in the way it is designed. The first is that the government’s cost of funds against the not-for-profits’ cost of funds means there is leakage every time somebody tries to take a government incentive and turn it into capital under their cost of funds. Secondly, the non-standard indexation, although the intention was to be generous, means that only very few people can absorb that non-standard indexation with any degree of certainty. Thirdly, it also provides, I would argue, an unknown future liability for government and therefore an uncapped liability, and the fourth one is it is hugely administratively heavy.

We will come back to the administration component of it, but our alternative proposal was that the government should provide an interest free loan; it should be funded by government bond issues and there, in turn, the superannuation funds would have been buying bonds and funding it themselves; and that the loan process should have been outsourced to a series of approved professional lenders, and that loan process should have been paid for by the borrowers. That would have solved the cost to government, both on the leakage and also on the admin cost, and it would have given the actual underlying organisations the capital that they need, rather than the promise of future income.

If we turn to the next page, this is just an illustration of how much could have been saved by government. We treat this as an opportunity lost. The cost savings are enormous. It is a fixed 10-year bond rate of, call it five per cent, for an interest free loan of $135,000 compared to the cost of indexation. We are going to assume that the rental indexation continues at 4½ per cent per annum. That may be conservative but I think it is going to be significantly above CPI for some time to come. The savings that could have been got—or just turn it around the other way, the additional cost to government—is 16 or 17 per cent for an incentive that began this year in 2011, and it rises to 30 per cent savings that could have been available for those incentives that begin in the year 2014, because you have already had three or four years of indexation before you kick in. So, the opportunity cost is frustrating because that money could have gone into additional homes or it could have gone into all kinds of other different things.

The administration right now—it used to be FaHCSIA—is S EW PAC. The people have all changed, everybody has to start again, the ATO has bought in and out twice and the Treasurer has come across the top and changed the law. The amount of money that has gone into legal and tax advice and accounting advice in the industry—forget the government—is just outrageous; it is just enormous. So, all of that is just wastage; it could have been done so much simpler.

This next, and final, slide on the alternative proposal is entitled ‘Benefits to government’. It is self explanatory. We have talked about them, but the answer was, ‘It is too late to get there.’ There is a need for foresight and my major proposal today is not so much around NRAS, but the lessons from NRAS as we approach aged care, because it is a significantly bigger liability for us. Fortunately, there is a silver lining to the missed opportunity, and that is a commercial opportunity. This is in answer to your question, Senator. What we have done is designed an investment product based on the NRAS incentive program whereby we can attract institutional investors from the superannuation funds. It is a debt product, which is not ideal, but it allows organisations that have built these and are now receiving the incentive to recycle their capital and complete their development programs—recycle capital and develop again. That enables them to get around this idea of being landlocked with no future opportunity.

We have teamed with Perpetual and there is bank—the bank decides next Wednesday—and then the prospectus is issued. The funds should be up by the end of year, so November probably. The anticipated demand right now looks like between $500 million and $1 billion going back into NRAS and back into affordable housing. That releases $1 billion worth of capital for redevelopment and continued development. If we look at the benefits of this approach to the NRAS program, the first is that we think that it helps reduce the risk on the second half of the NRAS apartments that have not been built yet. It also continues to build the asset base within not-for-profits. One of the major strategies for recycling capital is to sell the apartments that they built and retain the tenancy management and relationship with a fee and use the capital that way. As sure as anything, at the end of 10 years, the owners, who are all owners in the private sector, will put it back out of the affordability market, back into the market and make money. So, by holding on , the not-for-profits can gain sustainability by building their asset base and it increases the likelihood that the apartments in the hands of the not-for-profits will stay in the affordability sector after the end of the NRAS program.

Just as a note I will deal with the rough cost. If the government had issued bonds directly to investors, the cost to government would have been around CPI plus 1½ per cent—something like that. We are offering our investors CPI plus five per cent, funded by the government. T hat is the quantum of difference. So, I just wanted to draw those observations and learnings as we go into the aged care opportunity now. Aged care is in this kind of neat development phase, the same way affordable housing was four or five years ago, where all the legislation is up for grabs, we have had a Productivity Commission review and there are lots of good recommendations. The industry, for the first time in living memory, is now behind the proposed recommendations and we have this opportunity to be really clever about how we do it. Our strong recommendation , to repeat , is to have a tender that takes into account investor needs and sector needs as well as government needs, and develop a finance solution for the whole of the sector into which everybody is allowed to bid for services and infrastructure, so we split that process.

I was listening to Simon McKeon do a speech last week and he mentioned that in Melbourne if a baby girl had been born last week in one of Melbourne’s better hospitals, the life expectancy for that child is 103 years and eight months. The liability associated with aged care and the opportunity associated with aged care is enormous. The current need is $20 to $40 billion, but that is before we have this enormous life expectancy increase. Thank you for bearing with me through this.

CHAIR: Questions?

Senator MARK BISHOP: Thank you, Chair. Who is the minister responsible for aged care?

Senator STEPHENS: Minister Butler.

Senator MARK BISHOP: Mr Tyndale, just for your information, Minister Butler is doing a road show on the government’s proposals on aged care in October, November and December; he is going to every state and all the regions. I know that because my office is involved in doing some of the planning for Western Australia. It would be very useful in terms of the utility of your proposition for that to be exposed to him and be exposed to a range of the aged care provider organisations and senior groups who are heavily involved in setting up those meetings and doing the explanation to thousands of people who might be interested.

Mr Tyndale : Thank you; I was not aware of that.

Senator MARK BISHOP: Minister Butler is from South Australia; if you had a look at either his government website or his own website it will probably have details of public meetings, and it would be, as I say, an opportunity for you to put your proposition up there for sale and testing. Free advice.

Now, could I just ask you a couple of questions? The original proposal on the NRAS scheme—correct me if I am wrong—was for the government to somehow or other unlock large amounts of capital for social housing and at least some of the serious intent was to get into the private sector, either through capital markets via the superannuation funds or other mechanisms. I think there was also a serious suggestion at one stage that some of the major property developers in the various states would have capacity to raise capital to fund the projects over time and so on.

That all got bogged down for a long time in terms of taxation issues and access issues to superannuation funds in terms of guarantees and risk. Do you mind putting on the record for us in that context, firstly, was the consultation with the relevant industry sectors adequate? Secondly, if not, who was missed in the consultation phase? And thirdly, could you address the shortcomings or deficiencies of the taxation issues and the access to superannuation funds issues, in terms of the for-profit sector, particularly property developers and the like, who might have access to capital via different routes for the project development? I would like to have that stuff out there if you can.

Mr Tyndale : Sure. The consultation process happened for a considerable number of years, and well before 2008 when the original policy was designed. I am not aware of the consultation process but what I am aware of now is the evidence of the people who were not consulted and we have not run into any of the institutional investors, any of the super funds, any of the corporates, or any of the foundation funds, who were consulted in any way. So, the observation is—

Senator MARK BISHOP: The government was proposing a product to sell to them and did not consult with them?

Mr Tyndale : The market seems to have been ignored, yes. The tax office aspect is one that is difficult for me to say what the motivation was about, but what the outcome is that an incentive which essentially offered a lot of stability and certainty suddenly became very uncertain, and that was for structure, outcomes and timing. That does not work for commercial property developers. They have an option for two months or three months or six months over a piece of land. Their bank finance, for which they paid enormous fees, now is on a time fuse ticking. They cannot wait indefinitely for a tax ruling or for an injunction or whatever it turns out to be in terms of certainty; they must have it in a timely manner. So, that threw out most of the initial people who had come through. There are lots of warm noises made around NRAS, but I do not know whether they forgot to check with the tax office or the tax office took a contrary view, but they came out and said, ‘No, it doesn’t work’, and everybody said, ‘Whoa, what is that?’.

There is another feature we have not talked about today. I have been in this country working in the finance industry since 1984, having dealt with most of the relevant groups around the country, and I have never before run into the first comment being regulatory risk. I think the tax office shake-up of the structures, the change between S EW PAC and FaHCSIA, and the general publicity around a number of stimulus incentives that were criticised roundly has led institutional investors and overseas investors to, for the first time ever, put regulatory risk as number one in their viewpoint when they are looking at this. I have never seen that before, but it is very concerning.

Senator MARK BISHOP: You make comment somewhere in your document that you think part two or rounds three and four might be at risk; where is that? Here we are; it is not numbered: ‘Risk: second half construction cannot be funded.’ What do you mean by that?

Mr Tyndale : Let me give you an example of a community housing provider. Most of these people benefitted from the stock transfer as part of the stimulus package. This particular one I am thinking of had an asset base of about $50 million; they have been going a number of years. The state has been giving grants and ongoing support. They received in the stimulus $200 million worth of social housing stock transfer funded by the Commonwealth, built by the state and transferred. They bid for that allocation on the basis of how much they would gear up against that and build affordable housing using NRAS. So, because it is social housing and the rents are low, the gearing you can get on the $250 million is really low. They had to buy the piece of land and do the development for the first. They have three or four or five development plans. So, they pledged everything they had in their asset base and they pledged this development to raise enough bank finance to fund the development.

Senator MARK BISHOP: They bet the house.

Mr Tyndale : Not just bet the house, but it means that they have no capacity to borrow anything more right now. So, they pledged everything, they built the apartments and now they are saying the only option they can see is that they have to sell the apartments to self-managed super funds or private investors, retain a tenancy management arrangement with a fee and that will release the capital to go forward. The problem is that these guys I am thinking about are not particularly experienced developers and they never have been; this is all new for them. They have not picked the market; they assumed they could make $50,000 per apartment on a development profit and they cannot sell them in the market. Plus there is going to be $8 billion or $9 billion worth of apartments built by June next year and that cannot be absorbed by the self-managed superannuation funds; not enough people are interested to gain that. There is lots of news about housing bubbles and things, so people are a little nervous where there is not a yield.

So, they are stuck with this development. They have got three or four others with a time fuse ticking, both on the options on the land and also their NRAS incentives are on a time fuse, so they must release capital to move on and build them, otherwise they are going to have to let the incentives go. So, they have no option right now to borrow and if the sales process does not work, and it is very, very slow for them, then they have no options to fund that next step.

CHAIR: We are going to have to move on to the other two witnesses because time is running out a bit, but we can come back. First of all, Abbeyfield. Would you like to make an opening statement, Mr Reside?

Mr Reside : Thank you for the invitation to speak. Abbeyfield would probably be one of the smallest, I expect, community housing providers that might be speaking to you, because we are quite small. That is the context from which I am coming: a small, community based housing provider with a national front. Abbeyfield Australia is a not-for-profit company with PBI deductible gift recipient status. Abbeyfield Australia essentially represents 26 incorporated community groups up and down the seaboard from Huonville in Tasmania all the way up to Babinda in Queensland and across to South Australia.

Each community based local organisation is providing community housing in their local community. Abbeyfield Australia provides support to each of those local community groups and Abbeyfield House—a quirky beast. In many ways Abbeyfield House is much the same as your residential house: run-of-the mill residents; they are either older residents who need some assistance to retain their independence or they are younger adults with mild or moderate intellectual disabilities who, again, need some support just to retain their independence. It is a purpose built house. We have 10 residents in a house. The residents will come and go as they please. It is not an institution. It is not a facility. It is honestly a house. If you picture your house or my messy house, which is reasonably messy today, it is just a house. There will be someone in the kitchen cooking—housekeeper—someone sitting in the lounge, residents watching TV and people come and go.

It is a fairly unique mix for the community housing sector because we provide not only the accommodation, but there is a live-in housekeeper onsite and the live-in housekeeper cooks incredibly nutritious meals. I have, in fact, put on weight in my three years with Abbeyfield, which is frightening but true, so it is excellent food. The housekeeper keeps an eye on the residents just to make sure everything is okay and that the residents are tracking along, and beyond that the residents come and go as they wish. It is not a care model. There is not a Div 1 nurse or a director of nursing; it is as far away from an institution or as far away from a facility as you want to get. It is just an ordinary house in an ordinary street. In fact, that is one of the Abbeyfield mantras; these things are just an ordinary house in an ordinary street.

So, that said, I just wanted to bring out a couple of points about where we have seeded finance. I have some notes which I can circulate if I could.

CHAIR: You can table them, yes.

Mr Reside : Thank you. While my learned colleague and I support the capital market wholly, there are instances where Abbeyfield Australia would argue that we do look for government finance in the community housing sector for particular niche sectors of the community. I am talking for financially disadvantaged residents, residents with an intellectual or a physical disability, for cohorts of a community where the accommodation cannot be run at a financial return that is sufficient enough to generate dividend or cover interest. The nuance or gist of what I present is that in the range of services that are available to a community—and all the communities need a range of housing options—there is a niche where community-government support would be required.

I will present a little bit on the Abbeyfield model. It has a very low life-cycle cost to government. To house a resident in an Abbeyfield House costs about $8,000 per resident per year. I kid you not; this is inexpensive accommodation, but it is not cheap. Our houses are lovely; they are really nice comfortable homes. It is crackerjack accommodation, but the cost to government is very, very low. Today, to build an Abbeyfield House will cost about $2.6 million, and I know that because last month we received a grant of $2.6 million from the New South Wales government to build an Abbeyfield House in Narrabri in far northern New South Wales, a little country town with a community of six or seven thousand people, servicing a much larger area. That Abbeyfield House will provide, again, crackerjack accommodation for 10 younger adults who happen to have a mild intellectual disability. We are also building in Goulburn an Abbeyfield House, again, funded by ADAC, the New South Wales government. Again, it is just a house and it will be occupied by 10 adults with mild or moderate intellectual disabilities and, once it is built, will be largely self-sufficient. It is admittedly quirky, but it is a very, very good outcomes based model.

One of the disadvantages of the Abbeyfield model is that, because it is affordable accommodation, the rent that our residents pay is based on 70 per cent of the pension or the disability support pension, plus federal rent assistance, so it is very affordable accommodation. That said, the house generates quite little income. An Abbeyfield House today will generate a surplus at the end of the financial year of about $10,000 to $20,000. So, after it has paid the housekeeper, bought all the food, paid all the electricity, paid all the rates, covered all the costs and provided great accommodation for 10 residents, seven days a week, 24 hours a day; having done all that, it might have saved $10,000 or $20,000 above where it started from. That is not much return on a capital investment of about $2.5 or $2.6 million.

That is why it is difficult—nigh impossible—to attract commercial debt or equity into an Abbeyfield House, because whilst it runs on the smell of an oily rage, because it is volunteer managed by local community groups, it is akin to the Goulburn Football Club where you will have an incorporated committee, with your president, your secretary, your treasurer, your resident liaison person and your house asset manager. Whilst it is managed by volunteers and charges affordable rents, it does not generate much cash surplus, so its life-cycle cost is very, very low but it does not generate enough money to raise capital.

In the Abbeyfield world, we refer to that as the capital hump. It is a combination of the fact that our housing provides affordable accommodation for niche sectors often who require accommodation but it does not generate enough cash income to service debt or equity. We could. It would be easy to tweak the model, bump up the rents, charge the residents much more and we would be able to cover debt and cover equity, but you stop being affordable. The 35-, the 37-, the 40-year old guy or woman with Down syndrome who would struggle to live anywhere will not have an Abbeyfield House. The 75-, 85-year old—and there are 90-year olds living quite happily in Abbeyfield Houses all around the country—would struggle to maintain their independence if they were not living in an affordable Abbeyfield House.

That is our dilemma and that is why, amongst a whole range of responses that the government has to finance in the community housing sector, Abbeyfield Australia would argue that within that whole broad range of solutions there is a niche where we would argue that the government needs to maintain some scheme to put government capital funds into the community housing sector. There is a niche aspect to the community housing sector where wonderful people who deserve housing just cannot afford it. This is a community based model where volunteers give their time freely to run fantastic housing, but it does need that assistance to overcome the upfront capital hump. Thank you.

CHAIR: Thank you very much. Now, Mr Nash, would you like to do your opening presentation.

Mr Nash : We are a medium-sized not-for-profit focused on ending homelessness in Melbourne and we do that through a range of different services and, more recently, getting into housing acquisition and ownership. It was suggested we come and speak today about a project that we have been involved in called the Elizabeth Street Common Ground Supportive Housing Project, which is the first of its kind in Australia in terms of scale and whole-of-community support and corporate philanthropy, in particular; that was seen to be of some interest to this committee.

Mr David Waldren from Grocon is here and Grocon agreed to be involved in this project which was focused on ending homelessness for 65 people who are most vulnerable in the homeless population, which meant that they were also fundamentally very expensive to the taxpayer. They would be disproportionately having contact with high-cost emergency health, mental health, policing and justice services. We adopted a lot of the features of this model from the United States that had had 20 years of experience in ending homelessness through the provision of supportive housing and proving the cost savings to government as a result of ending homelessness for that group of people.

So, I think the element that may be of interest to you is the corporate philanthropic contribution from Grocon, or led by Grocon, in this model. Following the first speaker, we would certainly advocate that there are a lot of things that can be done to try and attract institutional and other investors into projects that do house a group of people who are left out of all other housing options and who, coincidentally, are then very expensive to the taxpayer as they endure the crisis of homelessness. I just really wanted to alert you to a model that has had some contribution in the order of over $10 million from the corporate and philanthropic sectors. It is just one project in Melbourne that is being replicated in Brisbane and Sydney as a way of trying to attract corporate support. I think with incentives that Mr Waldren and others would know a lot more about, there is an abundance of corporate support out there for getting involved in projects that end homelessness in particular. I guess I would leave it there at this point.

CHAIR: Mr Waldren, do you want to make some remarks?

Mr Waldren : Stephen, thank you for that. Grocon is Australia’s largest privately owned developer and construction company and I will speak from that perspective. I will speak to two issues in this setting. The first is the one that Stephen has talked about, which is the common ground model. Mr Daniel Grollo, who is our chief executive officer, some time ago put the company’s hand up effectively to say we wish to assist in the sector and find a way—a team—to deliver that assistance. That took some considerable amount of time. Primarily, I would argue that the time it took to get there was simply a question of scale. That said, not just Grocon, but other of our colleagues in the sector would find a very small project to be $50 million to $100 million. In the sector we are coming to to try and assist, $50 million to $100 million is a very big project, and prior to perhaps the last stimulus package they were perhaps few and far between. So, there was a nexus there about how we could get involved.

The opportunity was identified for the common ground project in Elizabeth Street, which in round numbers was a $50 million project. The problem with it being any smaller than that, and even at that scale, is that we cannot be efficient in that space. We are just too big to be efficient in that space, but we do have access to equity and we do have access to debt that we can bring to the table, so we were keen to see how we could assist. What we effectively said to the not-for-profit housing association was we understand that your funding model is one whereby the state government says to you, ‘You come along with 25 per cent of the development project and we will fund 75 per cent, so we will leverage you into that development.’ Our assistance went to the 25 per cent.

So, again in round numbers, a $50 million project, the state government is in for 75 per cent of it, and whatever we could save in the project was to the benefit of the housing association. In the common ground model, rather than just supportive housing, maybe in retrospect that was not the greatest model, but it worked well in this instance. So, we have a situation where the housing association in this case is into the $50 million project with not a dollar on the table—good outcome. The problem from an access to finance point of view was that that organisation needed to sign a building contract with us and, for us to be comfortable to sign that contract with them, they needed to have enough certainty that they could pay their 25 per cent if the savings did not materialise. That was tricky for them because it was a project of scale; we were dealing with a housing association—there are not that many of them—and their access to be able to give a funded guarantee behind that was limited. No risk with the 75 per cent from the state; it was about the housing association support.

We have now gone on to work on a project in Sydney and another one in Brisbane and, whilst each project is different, the issue of certainty of contracting entity is something that really did need to be thought through quite carefully and there were some issues there that needed to be sorted out. I would be happy to talk about that separately, but they do run to the not-for-profits’ access to funds and guarantees.

The other comment that I will make, not specifically related to Home Ground Services, is actually from a perspective at the other end of the spectrum and referring to Mr Tyndale’s presentation. As a developer and a developer of projects like the Carlton Brewery Project, which is a redevelopment of a former brewery site in Melbourne and which is a $1.2 billion project which we have underway at the minute, we have a particular interest in the NRAS scheme for potential accommodation into that development as affordable housing solutions.

Senator MARK BISHOP: Is that redevelopment into a housing redevelopment?

Mr Waldren : It is a mixed-use development. It is currently effectively 1.6 hectares of opportunity—it is an empty site to all intents and purposes—and we have approval to develop 300,000 square metres of new built form on that site, some of which will be residential and some of that residential could potentially be supported through NRAS or other mechanisms.

Senator MARK BISHOP: Okay.

Mr Waldren : We are open to that conversation. I thought I would share with you, though, our view from the developer’s perspective is one where the debt and equity markets are starting to look at that, I would argue, reasonably closely, but the time frames are disjointed. The time frame it takes a developer like us to go through a procurement and approval for NRAS funding is significant and I will be absolutely clear with you and say we have not sought one NRAS funding position, notwithstanding we have developments up and down the eastern seaboard. We have not done that because our view is that the processing time frame is too onerous.

Senator MARK BISHOP: The approvals process?

Mr Waldren : Yes. Effectively, the amount of work that needs to be done to provide certainty as to the project’s viability is significantly different if one is seeking NRAS funding to if one is going to a mum and dad investor to say, ‘Would you like to buy this apartment?’ It is quite a significant body of work and there is no certainty to it, notwithstanding it takes quite a long time. As Mr Tyndale has said, you cannot sit there with a great big asset doing absolutely nothing because the finance cost on that is just eating its head off. So, that has been something of a problem. The other side of the equation, though, is that the financial yields that are coming out of those projects now are getting to the point where they are, at a point, marketable to the bigger institutions as single line investments, but again they have to be of scale; $50 million, as you have said, or larger, is a significant at-scale investment.

The question that is quite rightly being asked by those investors is, ‘What happens in year 10 and one day?’ The second question inevitably is, ‘How certain are you of delivery on the date that is the last possible date for that facility before it is no longer able to access the NRAS that it might have had approved for it?’ So, there is significant front-end risk and back-end risk. I just share that with you, not because it is a train crash, but it is really the sort of feedback we are getting from the industry that we are liaising with quite a lot now on debt and equity, because our development will start in the first quarter next year and take us through to 2014. So, two issues there, sorry.

CHAIR: Thank you very much.

Senator MARK BISHOP: Can I cut in?

CHAIR: Yes, of course.

Senator MARK BISHOP: This is probably a question for you, Mr Waldren, and also for Mr Tyndale. Mr Tyndale, I think you said—or it might have been the previous witness—the issue of taxation and attraction to institutional investors in the NRAS scheme was not an issue. Of course, it is an issue to those involved in the for-profit sector, isn’t it? In terms of the future rounds for the NRAS, as to the criticisms you raise at this stage in terms of potential interest by institutional investors, what are the significant impediments that are there that need to be addressed so that the significant interest being shown by institutions can get over the line?

Mr Waldren : Would you like to do that first?

Senator MARK BISHOP: I am asking particularly from the perspective of property developers and property investors because they are the people who have been in and out of my office for the last six months in Perth. I am finally getting my head around this, and I am not a property developer.

Mr Tyndale : I think it is important to differentiate the investor classes. So, there are superannuation funds, some of which are taxable and some of which are not. Then there are corporates who are investors and there are some foundations who would be investors in things like this. The bulk of when people talk institutional investors, it is really around superannuation funds. So, there are several negative aspects for them. One is that they get paid annually in arrears and potentially up to 15 months in arrears from the time they put the money out the door. Secondly, it comes in the form of tax offset, so it is a rebate from the tax office. They have to think, ‘Which fund did I draw which amount of money out of, and is that fund taxable or not taxable and when am I going to do my tax return so that the tax office will give me a cheque back?’ And they are just not interested.

It is hard enough to get them across the line. When you talk affordable housing, they say, ‘Oh, social housing, right. This is going to be a bunch of—’ Our biggest battle is to get them to understand what affordable housing is and then it is so complex after that, they just cannot deal with it. They have to write big cheques, set and forget and walk away. Most of these big funds have a handful of people who make these decisions and they are looking at them every day and they just cannot take the time.

Senator MARK BISHOP: So, that imposition of process; is that the regulations imposed by the Commonwealth through the various authorities?

Mr Tyndale : Part of it is the design of the incentive and part of it is the tax office imposition of the structure.

Senator MARK BISHOP: Do you have anything to add to that, Mr Waldren?

Mr Waldren : Because I am not a financier I would put it in relatively simple terms from my perspective of it, which is to say it seems to me to be a model that works incredibly well for mum and dad investors because they can deal with that lag on payments—they can adjust their taxable payment. It does not work for primarily those reasons for institutions because of that really significant lag on the funding. The discount is discounted and gone for 15 months, and that is a really significant impost. It is too long and it is too uncertain, really, in its process.

Senator MARK BISHOP: From those impediments you have now identified going forward in future rounds for NRAS, are there lessons there also, Mr Waldren, in terms of the forthcoming debate in terms of the aged care funding issue? Is that part of your territory, the development of aged care?

Mr Waldren : Not presently. It is something that we have looked at in some detail and decided is not currently for us, primarily for much the same reason. The certainty as to funding mechanisms and to the process over time is something that makes it significantly more complex—and woe betide the Abbeyfields of the world and the amount of paperwork that they have to do—to a relatively straightforward process of property development and sale.

Senator MARK BISHOP: In that case then, the aged care issue is probably going to be more of interest to the mums and dads side as opposed to the institutional side?

Mr Tyndale : No, I believe that with aged care the opportunity is for the government to structure its support in a way which leverages institutional investment. So, it is right up front; it starts up by putting a little bit in to gain a lot and there are clever ways, we believe, to attract institutional investment into the development of aged care.

Senator MARK BISHOP: So, that then needs the relevant department to consult with your peak organisations early on, does it not?

Mr Tyndale : Right.

Mr Waldren : See it as a financial product first and a housing product second, and it will be looked at differently from a housing product looking for a financial solution.

Mr Tyndale : That is very good.

Mr Waldren : That would be how I would see it.

Senator MARK BISHOP: Thank you very much. Thank you, gentlemen. Thank you, Chair.

Senator STEPHENS: I know time is running away from us but I just wanted to give the other witnesses an opportunity to just reflect on the financing model used for the Melbourne project. Is that the same model that you have used for Sydney and Brisbane?

Mr Waldren : To all intents and purposes, yes.

Senator STEPHENS: So, that has been effective?

Mr Waldren : Yes, it is.

Senator STEPHENS: Are they similar size projects?

Mr Waldren : No. The Melbourne one is the largest of the three. I have not brought the numbers in my head, but Melbourne is the larger; Sydney and Brisbane, I sense would be very similar scales. It is a model that, in the case of the Melbourne project and the others, opens the opportunity for myriad private companies that subcontract in a building project either as consultants or fabricators or builders to provide assistance to the sector that is not necessarily financial. What we have found in each instance in each state is providing the opportunity to that sector to say, ‘Instead of us asking for money to support a particular outcome, how about you support it via your expertise or your capacity?’, and it is that that has really opened up a really significant tap to those projects.

Senator STEPHENS: That is quite an important lesson for us, I think. So, just in terms of Abbeyfield, being the little part of the pie, it is a good model. Chair, I have to put on the record that I am the patron of the Abbeyfield House in Goulburn so I have been working hard to help them raise some money. So, the $2.6 million comes out of the Narrabri proposal and you actually got $2.6 million from the New South Wales government?

Mr Reside : Yes.

Senator STEPHENS: Do you have other projects on the drawing board from community organisations wanting to take this model up?

Mr Reside : Yes. Right now there are two what we would call Abbeyfield branches wanting to develop Abbeyfield housing, one in inner-western Sydney based around Leichhardt where the Abbeyfield House might wind up being one or two floors of a multi-storey building but still a house, and the second community now is Castlemaine here in Victoria and in that instance it may well be a resident funded Abbeyfield House. We would receive at the Abbeyfield office an inquiry every six weeks from a community saying we would like that house. The problem is that it took Narrabri six and a half years to receive the funding, and lots of communities burn out.

Senator STEPHENS: So, you made the point that a model could be a resident funded model in the sense that parents concerned about the future care of their children might actually invest in the house themselves.

Mr Reside : We are doing some very early work at the moment at the Retirement Villages Act and because we operate in so many jurisdictions it is a state based act, but there are two issues there. Does the Retirement Villages Act apply to people who might be 35 and 45? Then there is also the notion of making the model financially sustainable.

Senator STEPHENS: Yes.

Mr Reside : But certainly, resident funding is certainly an option my board is looking at.

Senator STEPHENS: Thank you. That is very helpful. So, thinking about that, would you be looking for a fully funded model like, say, 10 residents, $25,000 each?

Mr Reside : I would like to avoid that. I would like to have a house where people from a community can live in their Abbeyfield House regardless of their means. So, in the ideal world it would be a model which would allow a percentage of the residents to invest in the house under some sort of mechanism, pay a monthly fee to cover service charges and for those that cannot afford to invest, or whatever word, in the house, they would still basically live there but pay the same monthly service charge. Abbeyfield is an international organisation and we talk about the Durham model. Durham is an Abbeyfield House in Canada which was the very first Abbeyfield House that successfully developed a resident funded model. One of its strengths is that it generated lots of capital from six of the 13 residents, I think, and the other seven residents were able to move in and just pay the same monthly fee. So, there was no discrimination and no one-upmanship; it is just people living in a house.

Senator STEPHENS: What about the notion of the families actually investing in the property and then Abbeyfield being able to use that to leverage some loan capital?

Mr Reside : On the face of it I would be quite open to it. The thing about options for Abbeyfield is that we do long-term housing and so whatever financial model we develop it would need to cover all the debt and all the equity in the longer term. There is nothing worse than going to a house and saying, ‘Sorry, folks, we are closing in six weeks’ time.’ But certainly, all those options would be on the table.

Senator STEPHENS: Thank you very much. Thank you, Chair, that is very useful.

CHAIR: We thank the witnesses for appearing and I close this session of this inquiry. Thank you, Hansard. Thank you, staff. Thank you, all.

Committee adjourned at 17:27