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Tuesday, 18 March 1980
Page: 742

Senator TOWNLEY (Tasmania) -I rise purely to repeat a couple of comments that I made the other day. Perhaps before doing that I should reply in part to some of the kind remarks Senator Grimes made about me just a moment ago.

Senator Grimes - A pleasure.

Senator TOWNLEY -He says that it was a pleasure and no doubt it was to him. But I do not take any heart in the fact that Australia's drug production is, to a large extent, in the hands of overseas companies. I do not take any heart from the fact that a British company is trying to buy out F. H. Faulding and Co. Ltd, a company with which I once dealt to a very large extent. I do not like to see anybody's job going down hill. The thing that worries me about allowing the Commonwealth Serum Laboratories Commission to go into competition with the overseas drug companies, which admittedly produce most of the drugs that are sold in this country, is that I feel that by doing so we are just bringing about their exit from this country a little earlier.

I do not think anybody would say that the profitability of the overseas owned drug companies has been very large over the last 1 5 to 20 years. They have not had high profits. I believe they are now reaching the stage where they will leave this country and establish their production centres in areas such as the Philippines or Singapore where they will receive some assistance in operation and they will have stability in the work force. That,I think, will be the time when we will see a number of jobs disappearing from this country, when the big companies which were mentioned the other week move out of production in Australia. Make no bones about it, CSL has wanted for many years the powers that we are now giving it. It has wanted to get into this area of production of tablets, capsules and things of that nature almost since the end of the Second World War. I feel that somebody should say what I said the other day, that is, that if the Labor Government had brought in this Bill when it was in power, I am quite convinced that the Senate, with a Liberal Party majority, would have rejected it, and now we of that party have brought it in ourselves.

If we look at the financial situation, which is quite well detailed by the report on the financial accounting and audit provisions of the Commonwealth Serum Laboratories Bill prepared by the Senate Standing Committee on Financing and Government Operations during the last 10 days or so, we will see quite a few anomalies compared with the situation for ordinary companies with which we are supposed to compare CSL. A public listed company, for instance, would have to show that it has a reasonable amount of assets, such as land. It would have to pay rates, it would have to make the right superannuation contributions. I am not quite sure what all these extra amounts would come to but I think I heard correctly when I heard Senator Rae say that if the CSL had to include those amounts in its financial statement it would not be showing a profit. That, unfortunately, is true of so many of the qangosquasiautonomous national government organisations- throughout this country. They do not operate on a profit; they are not efficient. If we look at the history of England we will see that nearly every time the government there has stuck its finger into the mixing bowl, whether it be medicines, airways or whatever, it has not come out profitably. In some cases a government should do things in the national interest, but I do not believe that it is necessary for the Government to move into the area of giving CSL this power. I think somebody should speak out against it, and I am doing that.

For the sake of the completeness of the record, I seek leave to incorporate in Hansard paragraphs 4.6 to 4.24 of the report of the Standing Committee on Finance and Government Operations.

Leave granted.

The document read as follows-4.6 CSL are given wider borrowing powers under the amendment Bill. They will now. with the Treasurer's permission, be able to borrow from sources other than the Commonwealth (under the proposed section 34a). They will also be able to invest funds more freely. (Under a proposed amendment to section 36. ) These are the standard provisions currently recommended for commercial authorities by the Department of Finance. 4.7 Any additional borrowing and investments will of course be shown in CSL's financial statements. The Committee makes no comment on this aspect other than to note that CSL stated in evidence that they will welcome the increased financial flexibility provided by the extended powers. 4.8 The proposed new section 34B of the CSL Act provides that:

(1)   The Minister, after consultation with the Commission-

(a)   shall, before the commencement of each financial year, by notice in writing to the Commission, determine the percentage of the capital of the Commission that would represent a reasonable return to the Commonwealth from the operations of the Commission in that financial year: and

(b)   may, at any time during a financial year, by reason of a change in circumstances, in like manner amend a determination made in relation to that year under paragraph (a ).

(2)   Before making or amending a determination under sub-section ( 1 ) in relation to a financial year, the Minister shall take into account, in addition to any other relevant matters-

(a)   any operations carried on or to be carried on by the Commission in that financial year in accordance with paragraphs 19 (1) (b) and (c); and

(b)   any submissions made to him by the Commission in relation to the financial affairs of the Commission.

(3)   The Commission shall, in the conduct of its operations, pursue a policy directed towards making, during each financial year, profits sufficient to enable the Commission to pay to the Commonwealth, out of those profits, an amount equal to an amount representing the percentage of its capital determined under sub-section ( 1 ) in relation to that financial year.

This is the standard provision relating to dividend policy currently recommended by the Department of Finance for commercial authorities, with an additional reference to the national interest' activities of CSL. 4.9 The dividend which is eventually paid to the Commonwealth will of course affect CSL's financial statements. The profit and loss statements will influence the level of dividend and the payment will be reflected in the balance sheet. The Committee has no comment to make on the dividend policy as such, because this is outside the terms of reference of our review. However, we wish to make the following comments on the determination of the dividend insofar as it affects CSL's financial statements.

Land valuation 4.10 CSL's main buildings are situated at Parkville in Melbourne on about 33 acres of land owned by the Commonwealth. This land is in fact the most important of the assets in the custody of CSL which were referred to earlier. Because CSL does not own the land, its value is not included in the

Fixed Assets' listed in CSL's balance sheet for 1978-79. The Committee notes that this fact alone lessens the comparability of CSL's balance sheet with that of any similar public listed company. The balance sheet of a public company would normally include an item of valuation for such an important asset as the land on which the company's main buildings are located. If the public company does not own the land, but leases it, then the rental will be included in the profit and loss statement.

4.   1 1 CSL informed the Committee that rent is in fact paid to the Commonwealth for the land, although no formal lease agreement has ever existed. The rent payment is included in CSL's profit and loss statement. The amount of rent for 1978-79 was $123,000. This was believed to include some amount in respect of rates, although the Commonwealth does not pay rates to the Municipal Authority. 4.12 The land on which CSL pays this amount of rent is prime Melbourne inner city real estate. While an accurate assessment of its commercial value is not available and may present some difficulty due to uncertainty in relation to its alternative uses and future zoning, there can be no doubt that the amount paid by CSL is far less than the economic rent. CSL stated in evidence that because part of the land was used for ' national interest ' purposes, it assumed that the rent was calculated for only that part used for commercial purposes.

4.   1 3 The situation is obviously both informal and unclear. The Committee is concerned that this arrangement means that CSL's financial statements do not fully reflect either its available resources or the extent of the taxpayers subvention to its activities, because the true value of the land which it uses is not shown. To this extent CSL's statements do not disclose as much as those of a comparable public company. Commercial comparability is not available. 4.14 There are ways of overcoming this problem. One would be to include in the balance sheet a notional value for the Commonwealth-owned land. Another would be for CSL to pay the Commonwealth a commercial rent for the land while at the same time receiving reimbursement for that proportion of the land which is being used for ' national interest ' purposes. This latter approach might make no difference to the net amount paid by CSL, but its financial statements would disclose more accurately the Commonwealth 's contribution to its activities. 4.15 Under the current legislation, if CSL makes a net profit on its commercial activities which is less than the costs of its national interest activities, then the profit is used to offset those costs, the remainder of which are met by the Commonwealth. CSL only makes a taxable profit if the net profit is greater than the national interest costs, all of which are then met by the Commonwealth. Under the new legislation, CSL will be permitted to keep any net profit without having to first use it to reduce any larger 'national interest' losses.

4.   1 6 This will involve changes in the preparation of CSL 's financial statements. The new statements which relate to CSL's commercial activities will reflect the financial information used by CSL to determine its pricing policies, which in turn will affect its share of the market and its profitability. Those statements should therefore show CSL's full costs, in order that its true profitability may be determined. 4.17 The Committee wishes to make no further comment on this aspect in this report. However, the general issue of determining the real value of the tax-payers ' contribution to statutory authorities and of ensuring that this value is reflected in authorities' financial statements will be pursued by the Committee under its responsibility for the continuing over-sight of authorities' activities.


4.   1 8 Another aspect of the use by CSL of Commonwealth land is the effect on the payment of local government rates. A comparable business operated by a public company would normally pay rates to the local government authority for the services provided. However, when an authority such as CSL uses Commonwealth-owned land the local government authority in the area may well be disadvantaged by not receiving those rates. One solution to the problem would be for CSL or the Commonwealth on its behalf to make an exgratia payment to the local government authority in lieu of rates. Such an amount would of course then be shown in the authority's financial statements. 4.19 This is another example of the financial statements not showing the full extent of the Commonwealth contribution to CSL. The possible effects on CSL if it had to bear the cost of rates can be seen from examining its 1978-79 Statement of Profit and Loss. CSL's net commercial profit (before that profit was applied to reduce the national interest losses) was $750,945. The profit may well have been significantly less if the cost of rates had been borne, with the consequent effects this would presumably have on CSL's future pricing policy and share of the market.

Superannuation 4.20 Note 17 to CSL's 1978-79 balance sheet reads us follows:

Superannuation Contribution Contingencies

Following the introduction of the Superannuation Act 1 976, it is estimated that the Commission is incurring some liability due to the indexing of pension benefits. On the other hand, the Commission has an entitlement to a share of the surplus payable to employers resulting from termination of the old Fund. The net effect of these changes cannot be determined at this stage. '

This is another aspect of the CSL's financial statements which appears at first sight to be unsatisfactory to the Committee because it does not disclose CSL's full financial position. 4.21 CSL stated in evidence to the Committee that it had established a contingency fund of 15 per cent of the salaries bill for those of its employees who come under the Commonwealth superannuation scheme. However, as the note above explains, this provision may not be sufficient to pay the pension benefits when they fall due. The question therefore arises as to the extent of this unforeseen liability. 4.22 The Committee understands that other statutory authorities apply a higher percentage of their wages bill as a contingent superannuation provision, some as high as 25 per cent. If the real liability of CSL for superannuation payments is in fact 25 percent of its wages bill and not 15 percent, this would represent an additional amount of approximately $ I million in current terms. Moreover, the liability has been accumulating since the introduction of the Superannuation Act in 1976. As the note to the account indicates, an unspecified share of the surplus from the old fund will be payable to CSL at some time in the future which could then be set against the outstanding liability. 4.23 However, the Committee wishes to make the point that CSL may be incurring a very significant and growing superannuation liability the extent of which is not specified in its financial statements. We do not wish to make any further comment on this subject in this report. If the situation is common to other statutory authorities it is obviously an important matter for us to investigate under our responsibility for the general oversight of authorities. 4.24 These three issues- CSL's use of Commonwealthowned land, its non payment of local government rates and its treatment of its contingent superannuation liability- all affect CSL's financial statements and hence the determination of its dividend under the proposed section 34b. They exemplify the difficulty of divorcing the consideration of an authority's accounts from a consideration of its financial policy.

Senator TOWNLEY - In conclusion, I see the time coming, because of this Bill, most probably directly because of this Bill, when some of the overseas based drug companies will leave this country. If they are selling drugs to this country and they are based out of Australia, we could find them saying that we will have to pay $x for a particular tablet or capsule and if the national health service or whoever is wanting to get that drug is not prepared to pay that amount we will not be able to get it. I would much prefer to have seen CSL remain as it was. If we needed to make some minor amendments to cover the situation that other speakers have mentioned, I would have preferred that. I certainly think that the doubling of the number of commissioners- from four to eight- is an unnecessary extension of the membership of this qango

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