Helen Coonan (NSW, Liberal Party, Shadow Minister for Finance, Competition Policy and Deregulation) Share this | Hansard source

I rise to speak in response to the proposed Australian Business Investment Partnership Bill 2009, called ABIP or colloquially called Ruddbank. ABIP will be established under the Corporations Act 2001 and will be a public company limited by shares. The members, or shareholders, of ABIP will be the Commonwealth of Australia and Australia’s four major domestic banks, Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia, National Australia Bank Ltd and Westpac Banking Corporation.

This bill provides for the creation of the Australian Business Investment Partnership, which is a company established to address the potential risk of a funding gap in the commercial property sector due to a reduction of foreign banks’ level of financing. The objectives of this organisation are to provide refinancing for loans relating to commercial property assets in Australia in situations where finance relating to those assets is not available from commercial providers other than the organisation itself—that is, other than ABIP—and the assets would be otherwise financially viable. Its further object is to provide financing arrangements in other areas of commercial lending if circumstances necessitate and provided those arrangements are agreed upon unanimously by the members of ABIP. The board of the organisation comprises one nominee from each of the four major banks, and a Commonwealth nominee will chair the board. The Treasurer, Mr Swan, announced at 11.30 pm on Sunday, 10 May the appointment of a former senior public servant, David Borthwick, to be the chair of Ruddbank. Each member has a right of veto, and all decisions about lending need unanimous agreement.

How much will it cost? The government and the four major domestic banks, Commonwealth, NAB, Westpac and ANZ, will provide initial loan funding to ABIP and an amount of working capital. The government will provide $2 billion, and the four major domestic banks will provide $500 million each. On its establishment, ABIP will have access to $4 billion in undrawn loan facilities less an amount for working capital, which is expected to be $4 million. The financing provided by the major banks will not be government guaranteed. ABIP will relend the loan funding provided by the government and the four major domestic banks to commercial property assets that meet ABIP’s lending criteria, determined by shareholders. The organisation will only provide funding for commercial property where the underlying assets and the income streams from those assets are financially viable. If additional financing is required beyond the initial contribution of $4 billion, ABIP will be able to issue up to $26 billion in debt to raise that additional funding, subject of course to the unanimous agreement of shareholders. This could provide the bank with up to $30 billion in funds and financing. Debt issued by ABIP will, however, be guaranteed only by the Commonwealth.

ABIP is expressly exempted from the provisions of the Trade Practices Act. The Trade Practices Act is of course the key competition law in Australia and provides fair trading and the protection of consumers and prevents some restrictive trade practices of companies. As the government is proposing that ABIP be exempt from the Trade Practices Act, ABIP will not be subject to the laws promulgated in the Trade Practices Act regarding restrictive trade practices, unconscionable conduct or misleading or deceptive conduct.

The first issue here, then, is whether the foundation for the Ruddbank—namely, the potential for withdrawal of foreign banks—is likely. On 20 January 2009, the Prime Minister gave an address in Adelaide and spoke of how:

... cash-strapped foreign banks are scaling back their lending in foreign markets such as Australia.

The Prime Minister went on to say:

If foreign banks do not roll over their share of these loans, it would be difficult for Australia’s four major banks to fill the gap on their own.

The Prime Minister was insinuating, if not stating directly, that Australia could expect to see an exodus of foreign lenders in Australian credit markets, particularly where loans have been provided in the commercial property sector. Four days later, the Prime Minister took it upon himself to establish a solution to this scenario. On 24 January 2009 the Prime Minister announced through a media release the birth of the $30 billion policy project, the Australian Business Investment Partnership, through the bill which we are now discussing in the Senate.

Two weeks after Mr Rudd made this announcement, the Reserve Bank of Australia refuted the Prime Minister’s claims with regard to the possible exodus of foreign lenders from Australian shores. In its Statement on monetary policy released on 6 February 2009 it stated:

Over recent months there has been some speculation that many foreign owned banks will withdraw from the Australian market and that this will create a significant funding shortfall for businesses. While there is a risk that some foreign lenders will scale back their Australian operations, particularly if offshore financial markets deteriorate further, at this stage there is little sign of this, with most of the large foreign-owned banks planning to maintain their lending activities in the Australian market.

So here we have a situation where yet again Mr Rudd has overreacted, created policy on the run and responded to a problem where the evidence was at least equivocal.

In evidence to the Senate Standing Committee on Economics, the Property Council of Australia said that of the 23 foreign banks in Australia only one, the Royal Bank of Scotland, had been withdrawn from the Australian market. It added that the US Citigroup faced some difficulties. These banks, of course, face unique solvency problems in their respective home countries. Perhaps their problems are not unique, but they are certainly pervasive. No specific evidence was given to the committee of further foreign banks planning to withdraw from Australia; only vague references were made to what appeared to be unsubstantiated possibilities that some foreign banks might be considering withdrawal.

In his submission from Concept Economics, respected economist Professor Henry Ergas disagreed strongly with the government’s pre-emptive concerns about foreign bank withdrawal. He said:

There seems to be little convincing evidence justifying the primary rationale for the proposal—bailing out distressed syndicated commercial property lenders and preventing fire sales—and even less evidence of a market failure in respect of the secondary purpose of financing commercial lending in general.

This points to one of the major problems with the proposal: the moral hazard that it creates. There is a material risk that the initiative could actually encourage the very actions it is designed to forestall. Faced with a one-way bet, developers have an incentive to play off their existing foreign lenders which, in turn, could accelerate their withdrawal from the Australian market.

ABIP, then, could potentially act as a counterproductive incentive for foreign banks, offering them the security of a taxpayer funded safety net that will allow foreign banks to exit at the full value of their investment. This will encourage them to reduce their Australian exposures and could harm Australia’s reputation more broadly in global markets. This very point was raised at the Senate Standing Committee on Economics hearing of 14 April 2009, which I referred to a little earlier, when Mr Peter Verwer, the longstanding Chief Executive Officer of the Property Council of Australia, said:

It is the strongest argument against ABIP.

               …            …            …

… we do not have the technical answer as to how we can make sure foreign banks do not try and use ABIP as their escape card from Australia.

If there were a prize for the most counterproductive legislation of the year, this mess before us, I think, would have to be in the running as a standout winner.

Under Australian Corporations Law, companies are required to have a board which consists of members acting in the best interests of the company. Given that the board structure of ABIP consists of a representative of the four major banks and the government, the four major banks do expose themselves to a potential conflict of interest and abuse of market power. All four banks are involved in competitive financial commercial property developments, and each has a veto over any decisions of the board of ABIP. In his submission, Professor Ergas highlighted the concerns for good corporate governance and accountability in this particular part of the structure:

The majority of commercial property exposures in Australia are held by domestic banks. In particular, most exposures are held by the proposed shareholders of the new entity—the four major banks.

We are starting to get the picture here; unusually for a government agency there are no clear lines of accountability for ABIP either to a minister or indeed to the parliament. This lack of transparency and accountability offends just about every principle of good governance that I can think of and should not be countenanced.

Another significant concern with this bill is the broad nature of the lending criteria. The Australian Business Investment Partnership Bill 2009 fails to specify the criteria for the ‘other’ commercial lending that may be embarked upon by the bank. Section 7(2) of the Australian Business Investment Partnership Bill does not prevent the partners lending from this fund for whatever purpose they see fit. Concerns surrounding the broad nature of the lending criteria in this fund have also been shared by General Electric. In correspondence which I have received from their Vice-President, Government Relations, they stated their concerns: ‘The scope of the legislation is too broad and it goes beyond the government’s originally stated intention to cover just property.’ Here we have a bit of legislation creep.

The large gaps in this bill leave the door open for lending that would not be restricted to the commercial property sector, exposing the scheme to potential uncertainty and exposure to unnecessary debt. Of no small concern is the fact that Ruddbank has been given specific exemption from the Trade Practices Act. Some would claim that this is necessary for the structure to work. I can understand the thinking that would have surrounded this exemption, but such an exemption from the Trade Practices Act does smack of a potential for decision making by a cartel. The ACCC were not, as I understand it, involved in discussions of any significance with Treasury in formulating the scheme, and they were involved in no discussions about the implications of exemptions from the Trade Practices Act or the legal framework within which the bank would operate. We really have to ask: why not? We do not appear to have a cogent reason why, although, as I say, I can imagine in developing the scheme the reasons why it may have been thought the only way it would work would be to exclude it. But it does expose the scheme to risks.

The bill does not explain in what circumstances, for instance, finance is ‘not available’ in the definition or describe the circumstances where a viable project would become ‘unviable’—what does that mean?—due to the margin of the financing arrangement available other than that of the bank. It is a very circuitous definition. This bill structures the bank in a way that provides, of course, a disproportionate level of risk for Australian taxpayers. This is a critical factor. The four banks own half of Ruddbank, participate equally in the benefits of the bank but are not liable for the $26 billion in further borrowings. Guess who is liable for that? The good old Australian taxpayer. These borrowings are guaranteed by the Australian taxpayer.

What government, I ask, in their right mind would set up a company, contribute half the capital and bear all of the risk for billions of dollars worth of borrowings for a problem which is yet to emerge, let alone eventuate? If the size of the taxpayers’ contribution towards this mess was not enough, it is the composition and the unfettered powers of the bank which really beggar belief. Ruddbank is a rushed piece of legislation brought to the parliament to fix a problem which is yet to surface or emerge or manifest itself in any significant way. It is a problem which some may argue is a result of an earlier mistake made by the Rudd government, back in October 2008. Overseas lenders are finding it increasingly difficult to lend against the Rudd government—taxpayer funded—guaranteed banks. Foreign lenders are in fact being crowded out of the market.

Australians have witnessed billions of their taxpayers’ dollars used in frivolous cash splashes this year and yet are now facing the largest deficit in this nation’s history. The Howard government paid off $96 billion of Labor’s debt and left the Rudd government with a $22 billion surplus, lower taxes, record low unemployment and higher real wages. We had set up the Future Fund, the Higher Education Endowment Fund and the Communications Fund. There are expectations that tonight the Rudd Labor government will bring down a budget that will have a deficit of $60 billion and debt and deficit as far as the eye can see. From a surplus of $22 billion last year, the Rudd Labor government has made spending decisions in the order of $80 billion since the last budget that have been largely wasted on short sugar hits that have had no lasting benefits but have contributed to ballooning debt. Australia will have the largest deficit in modern Australian history and every Australian will now be paying for the Rudd Labor government’s reckless spending. The government has simply lost control of the nation’s finances.

The Rudd government now, in this legislation, wants to press ahead with a scheme that will increase Australia’s contingent liabilities, which some people in the chamber might not realise are currently running at about $1 trillion. With insufficient detail as to how this bank will support jobs in the commercial property sector, no real evidence before us of a pattern of withdrawal in financing, the government has spectacularly failed to substantiate the need for this new commercial vehicle. We need to keep asking ourselves the question: what is the government really doing to support small business and jobs, allowing the productive capacity of the economy to recover and pull us out of the rivers of red ink? Someone has to stand up for Australian taxpayers, and that is exactly why we are opposing this legislation. This is a poorly constructed bill and has the potential to make a difficult economic situation worse. The coalition will not support it.