commonwealth of australia official …...portfolio but i also have a series of questions that relate...

COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATEECONOMICS LEGISLATION COMMITTEE

Consideration of Supplementary Estimates

THURSDAY, 21 NOVEMBER 2002

CANBERRA

BY AUTHORITY OF THE SENATE

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Thursday, 21 November 2002 SENATE—Legislation E 1

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SENATE

ECONOMICS LEGISLATION COMMITTEE

Thursday, 21 November 2002

Members: Senator Brandis (Chair), Senator Jacinta Collins (Deputy Chair), SenatorsChapman, Murray, Watson and Webber

Senators in attendance: Senators Bartlett, Brandis, George Campbell, Collins, Conroy,Lundy, Sherry, Tchen, Watson and Webber

Committee met at 9.02 a.m.INDUSTRY, TOURISM AND RESOURCES PORTFOLIO

Consideration resumed from 3 June 2002.

In AttendanceSenator Nick Minchin, Minister for Finance and Administration

Mr Wilfred Antioch, Corporate Finance Branch, Corporate DivisionMr David Baussman, Manager, R&D Tax Concession, AusIndustryMs Tricia Berman, General Manager, Innovation Policy Branch, Innovation and Industry

Policy DivisionDr Jane Blevin, Petroleum and Marine Division, Geoscience AustraliaMs Vicki Brown, General Manager, International and Energy Best Practice Branch, Energy

and Environment DivisionMr Don Brunker, General Manager, Industry Analysis Branch, Innovation and Industry

Policy DivisionMs Chris Butler, Manager, Business Development, AusIndustryMs Trish Cattell, Data Modelling and Reporting, Innovation Programs, AusIndustryMr Peter Chesworth, Director, Markets, Office of Small BusinessMr Drew Clarke, Executive General Manager, AusIndustryMr Alan Coleman, Manager, TCF Policy Unit, Manufacturing Engineering and

Construction DivisionMr Robert Crick, Head of Division, Analytical DivisionMr Ian Cronshaw, General Manager, Domestic Energy Policy Branch, Energy and

Environment DivisionMr Chris Dainer, Chief Financial OfficerMr Anthony Donnellan, Office of Small BusinessMr Garry Draffin, Chief Executive Officer, Invest AustraliaDr Russell Edwards, General Manager, Innovation Programs, AusIndustryMs Cherie Ellison, Business Manager, Strategic Coordination and Support, Resources

DivisionMr Malcolm Farrow, Head of Division, Energy and Environment DivisionMr Warren Fletcher, Manager, Budget Coordination, Corporate DivisionMr David Gallagher, Manager, BIF/COMET Programs, AusIndustryMs Hellen Georgopoulos, Head of Division, Industry Competitiveness Division

E 2 SENATE—Legislation Thursday, 21 November 2002

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Dr Michael Green, Director, Space Licensing and Safety Office, Industry CompetitivenessDivision

Mr Paul Griffin, General Manager, Business Entry Point Branch, eBusiness DivisionDr Jason Hajinakitas, Australian Government Analytical LaboratoriesMs Aneela Hakim, Corporate Finance Branch, Corporate DivisionDr Sandra Hart, General Manager, Australian Government Analytical LaboratoriesMs Kerri Hartland, Executive General Manager, Biotechnology AustraliaMr John Hartwell, Head of Division, Resources DivisionDr Ian Heath, Director General, IP AustraliaDr Joe Hlubucek, General Manager, Ministerial and Coordination Group, Corporate

DivisionMr Graeme Holt, Deputy Chief Financial OfficerMr Chris Hyman, Manager, Strategic Support Section, Energy and Environment DivisionMs Carolyn Jenkins, Manager, Business R&D Section, Innovation and Industry Policy

DivisionMs Marie Johnson, Head of Division, eBusiness DivisionDr Alan Jones, Manager, Innovation Analysis Section, Innovation and Industry Policy

DivisionMr Barry Jones, Executive General Manager, Invest AustraliaMs Patricia Kelly, Head of Division, Tourism DivisionMs Cathy Kimber, Executive Officer, Industry Competitiveness DivisionMr Mike Lawson, Acting General Manager, Space and Aerospace Branch, Industry

Competitiveness DivisionMr Peter Livingston, Manager, Petroleum Refining and Fuels, Resources DivisionMr David Luchetti, Manager, Venture Capital Programs, AusIndustryMr Tim Mackey, Deputy Secretary, Department of Industry, Tourism and ResourcesMr Rob McKeon, General Manager, Industry Collaboration Branch, Industry

Competitiveness DivisionMr Ken Miley, General Manager, Trade and International Branch, Innovation and Industry

Policy DivisionMs Julie Mizen, Corporate Finance Branch, Corporate DivisionMs Janet Murphy, General Manager, Tourism Market Access, Tourism DivisionMr Mark Nash, Australian Government Analytical LaboratoriesMr Philip Noonan, Head of Division, Corporate DivisionMr Kevin O’Brien, General Manager, Energy Market Reform Branch, Energy and

Environment DivisionMr Bruce O’Meagher, General Manager, Industry Policy Branch, Innovation and Industry

Policy DivisionMr Mark Paterson, Secretary, Department of Industry, Tourism and ResourcesMr Steve Payne, General Manager, Greenhouse and Environment Policy Branch, Energy

and Environment DivisionMr Bill Peel, Deputy Executive General Manager, AusIndustryMr Craig Pennifold, General Manager, Pharmaceuticals and Business Competitiveness

Branch, Industry Competitiveness Division


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Mr Mike Perri, Manager, Printing and Action Agendas, Manufacturing Engineering andConstruction Division

Mr Ken Pettifer, Head of Division, Manufacturing Engineering and Construction DivisionDr Trevor Powell, Deputy Chief Executive Officer and Chief of Petroleum and Marine

Division, Geoscience AustraliaDr Peter Robins, Director, Bureau of Tourism ResearchMr Tony Robinson, General Manager, Corporate, Geoscience AustraliaMs Kerry Rooney, General Manager, Tourism Business Development, Tourism DivisionMr John Ryan, Deputy Secretary, Department of Industry, Tourism and ResourcesDr John Schneider, Minerals and Geohazards Division, Geoscience AustraliaMs Patricia Scott, Deputy Secretary, Department of Industry, Tourism and ResourcesMr Paul Sexton, General Manager, Industry Programs, AusIndustryMr Krishan Singh, Corporate DivisionMr Stuart Smith, General Manager, Minerals and Fuels Branch, Resources DivisionMr Bob Summerville, Manager, Infrastructure, Construction and Defence Industries,

Manufacturing Engineering and Construction DivisionMr David Swanton, Manager, Industry Development, Biotechnology AustraliaMs Lynne Thomson, Manager, Innovation Access Programs, AusIndustryMs Felicity Van Der Zwan, Space Policy Section, Industry Competitiveness DivisionMr Garry Wall, General Manager, Automotive and Engineering Branch, Manufacturing

Engineering and Construction DivisionMr Peter Waddell, Corporate Finance Branch, Corporate DivisionMs Sue Weston, Head of Division, Office of Small BusinessMr Peter White, Assistant Manager, R&D Tax Concession, AusIndustryDr Neil Williams, Chief Executive Officer, Geoscience AustraliaMs Judi Zielke, Manager, R&D Start Program, AusIndustryCHAIR—I declare open this public hearing of the Senate Economics Legislation

Committee. In accordance with standing order 26(10) a number of senators have given noticeof matters they wish to raise. The committee will consider proposed expenditure fordepartments and agencies in the order in which they appear on the circulated agenda that hasbeen agreed to by the committee. Today the committee will begin with the Industry, Tourismand Resources portfolio. The committee has determined that the deadline for answers toquestions taken on notice is 20 December 2002. While the Finance and Public AdministrationLegislation Committee oversees the format of the portfolio budget statements, I remind youthat the Economics Legislation Committee is continuing to monitor the format of the PBSspresented to it. This is in accordance with the recommendation of the Finance and PublicAdministration Legislation Committee in its third report on the format of portfolio budgetstatements that the legislation committees should report on the adequacy of the portfoliobudget statements provided for their use.

The committee has authorised the recording and rebroadcast of its public proceedings inaccordance with the rules contained in the order of the Senate of 31 August 1999. I remindofficers that the Senate has resolved that there are no areas in connection with the expenditureof public funds where any person has a discretion to withhold details or explanations from theparliament or its committees unless the parliament has expressly provided otherwise.However, I also draw to the attention of the witnesses resolutions 9 and 10, agreed to by the


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Senate on 25 February 1998, concerning the conduct of hearings by Senate committees.Resolution 9 provides:

A chairman of a committee shall take care to ensure that all questions put to witnesses are relevant tothe committee’s inquiry and that the information sought by those questions is necessary for the purposeof that inquiry. Where a member of a committee requests discussion of a ruling of the chairman on thismatter, the committee shall deliberate in private session and determine whether any question which isthe subject of the ruling is to be permitted.

Resolution 10 provides:Where a witness objects to answering any question put to the witness on any ground, including the

ground that the question is not relevant or that the answer may incriminate the witness, the witness shallbe invited to state the ground upon which objection to answering the question is taken. Unless thecommittee determines immediately that the question should not be pressed, the committee shall thenconsider in private session whether it will insist upon an answer to the question, having regard to therelevance of the question to the committee’s inquiry and the importance to the inquiry of theinformation sought by the question. If the committee determines that it requires an answer to thequestion, the witness shall be informed of that determination and the reasons for the determination, andshall be required to answer the question only in private session unless the committee determines that itis essential to the committee’s inquiry that the question be answered in public session. Where a witnessdeclines to answer a question to which a committee has required an answer, the committee shall reportthe facts to the Senate.

I also remind officers of resolution 16, which provides:An officer of a department of the Commonwealth or of a State shall not be asked to give opinions on

matters of policy, and shall be given reasonable opportunity to refer questions asked of the officer tosuperior officers or to a Minister.

Witnesses should note that the evidence given to the committee is protected by parliamentaryprivilege. I also remind you that the giving of false or misleading evidence to the committeemay constitute a contempt of the Senate. I welcome Senator Nick Minchin, the Ministerrepresenting the Minister for Industry, Tourism and Resources. Minister, would you like tomake an opening statement?

Senator Minchin—No, thank you.

[9.06 a.m.]

Department of Industry, Tourism and ResourcesCHAIR—The committee’s examination will commence with outcome 1, a stronger,

sustainable and internationally competitive Australian industry, comprising themanufacturing, resources and service sectors. Mr Paterson, do you wish to make an openingstatement?

Mr Paterson—No, thank you.

Senator GEORGE CAMPBELL—I will raise a threshold question with the department.Time has been allocated for each of the departments because of the time limits on the hearing.I have questions in outcome 1 which relate essentially to the manufacturing part of theportfolio but I also have a series of questions that relate to the resources side. Is it possible todeal with the manufacturing questions and then go on to output 2 and deal with issues thatarise under that and then come back to the resources and deal with those questions as a block?At the end of the day I may have to put a swag of those on notice, given the time constraints.

CHAIR—Subject to the availability of officers and the minister, we will try to be flexibleand accommodate you.


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Mr Paterson—We have a full suite of officers available, Senator.

Senator GEORGE CAMPBELL—I want to go to the issue of PICS and EPICS, whichwas discussed at the last estimates. I asked at the last estimates whether there was anyongoing consultation occurring between the printing industry under the action agenda and thedepartment. The answer I got was no. If there had been ongoing dialogue through the actionagenda, would that not have avoided the subsequent ire that was raised in industry over theway in which these funds were cut in the last budget?

Mr Pettifer—As I indicated when you asked questions about this last time, thegovernment’s decision was a difficult one. It was made in the context of assessing its budgetpriorities. We had, and continue to have, a good relationship with the printing industry, notonly through the action agenda process but also through our other contacts with them. Theaction agenda was one that was much broader than just the book industry, which the programsactually related to. I do not think it would have made any difference. Mr Wall is closer to theaction agenda process than I am and may want to expand on that.

Mr Wall—The decisions were taken in the budget context. Under the budget conventions,they were not subject to any prior consultation with the industry either within the actionagenda process or outside it. I think that reflects the normal budget conventions. Ourrelationship with the printing industry has been a good one and a strong one both in thecontext of the action agenda and outside that. I do not believe that the industry’s reactionwould have been any different, no matter where we were with the action agenda.

Senator GEORGE CAMPBELL—Are you surprised by the strength of the reaction?

Mr Wall—In some ways the reaction was a strong one and was probably in some wayssurprising, yes.

Senator GEORGE CAMPBELL—When was the decision taken to resume the PICSprogram?

Mr Pettifer—The minister wrote to the industry association on 28 June indicating that theprogram had been reopened. Sorry, Senator, is this about PICS or EPICS?

Senator GEORGE CAMPBELL—PICS.

Mr Wall—It is a little difficult to give you an exact date. It was quite recently and it wasthe result of some further consultations between government and industry.

Mr Pettifer—Maybe the best answer to that question is that the agreement of the DeputyPrime Minister to reopening that was by way of a letter on 29 September.

Senator GEORGE CAMPBELL—Can you tell us why the resumption of the programwas only announced on the AusIndustry web site on 13 November? What was the reason forthe delay?

Mr Wall—The terms and conditions of the reopening had to be re-established and certaindocuments authorising the approval of expenditures, delegations and the like needed to beamended and endorsed by the minister, so there was an administrative delay to get theprogram formally reopened.

Senator GEORGE CAMPBELL—What will occur to any companies whose applicationswere received before 13 November?

Mr Peel—Those companies are free to resubmit their applications. AusIndustry wrote toall customers in the PICS program around 15 November indicating that they could do so.


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Senator GEORGE CAMPBELL—Has that occurred, Mr Peel? Sorry, that was only lastweek.

Mr Peel—Yes, that was on 15 November.

Senator GEORGE CAMPBELL—Presumably you have not received any since then.

Mr Peel—We have received some applications. We have about 15 on hand at the moment.

Senator GEORGE CAMPBELL—What will the impact of this process be on the fundingof that program?

Mr Wall—There is no impact on the funding of this program other than in the timing ofthe payments. All entitlements under the PICS program will be met as though the programhad been uninterrupted.

Senator GEORGE CAMPBELL—As if it had been uninterrupted?

Mr Wall—As if it had not been interrupted.

Senator GEORGE CAMPBELL—I will now go to the EPICS process. What changed tojustify the resumption of EPICS?

Mr Pettifer—As you know, the industry made representations to the government. Thegovernment had a look at those representations, considered them and decided that it wasprepared to forgo budget savings in the interests of reinstating those programs.

Senator GEORGE CAMPBELL—So the budget cuts that occurred were not as critical aswe were told at the last estimates?

Mr Pettifer—Budgets are all about setting priorities. These are fine judgments. Thegovernment has decided to apply those funds to the program. I cannot really say more thanthat.

Senator GEORGE CAMPBELL—What does the restoration of these two programs meanin terms of the department’s budget?

Mr Pettifer—The money will be fully reinstated to the department, so it does not have anyimpact in terms of money being diverted from other programs.

Senator GEORGE CAMPBELL—Does it have an impact in terms of the number ofpeople employed in the department?

Mr Pettifer—There will be a small extra demand on the people in the printing industriessection but it will not be sufficient to warrant the recruitment of extra staff. Staff inAusIndustry, though, needed to be reassigned. Mr Peel could expand on that.

Mr Peel—We have a group of approximately six people in AusIndustry who look after thePICS and EPICS programs. That is similar to the number we had before they closed. In theintervening period people came, people went and people were reassigned, but it has not hadany overall impact on staff numbers in AusIndustry.

Senator GEORGE CAMPBELL—I think on the last occasion, Mr Paterson, youindicated that there would be a reduction of 161 staff in the department overall. Will thisimpact upon the reduction in staff? Will jobs be saved as a result of these programs beingrestored?

Mr Paterson—Certainly there has been movement in overall staffing numbers. On the lastoccasion we gave a ballpark figure and I think I indicated that we were managing the changein the staffing numbers by looking at transfers, promotions, retirements and other movementsof staff. We have continued to manage the overall staffing numbers through that process.


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There will always be fluctuations in the overall staffing numbers in a portfolio of this size.But, as I said, we have continued to manage that and we move staff according to prioritiesinto appropriate areas.

Senator GEORGE CAMPBELL—What involvement did the department have in theresumption of the program? Was the department involved in consultations with the minister’soffice or was this purely a decision made by the minister and the government?

Mr Pettifer—In terms of the reinstatement of the programs, the department prepared somecorrespondence and those sorts of things to the Prime Minister to assist in that decisionmaking process. Later on the department provided advice to the minister on the administrativeaspects of reinstating the programs—the need to get necessary delegations in place and thosesorts of things.

Senator GEORGE CAMPBELL—Can copies of the correspondence that was sent to thePrime Minister be made available?

Mr Pettifer—I would have to take that on notice. That would be a matter for the ministerto decide.

Senator GEORGE CAMPBELL—Why was it left to the Printing Industry Association toannounce the resumption of EPICS instead of the department?

Mr Wall—I do not really know the answer to that question. It may have been somethingthat was agreed between the minister and members of the industry.

Senator GEORGE CAMPBELL—Would the department know the answer?

Mr Wall—Not to my knowledge.

Senator GEORGE CAMPBELL—Why was the AusIndustry web site not updated until20 August when the decision was taken, as you said, on 20 June?

Mr Peel—Are you talking about the PICS program?

Senator GEORGE CAMPBELL—The EPICS program.

Mr Peel—The AusIndustry web site was updated as soon as we were advised that wecould formally announce the reopening of the program.

Senator GEORGE CAMPBELL—Why would it have taken so long, from 20 June whenthe decision was taken to 20 August, to advise the department?

Mr Peel—As Mr Wall said earlier, it was necessary to put the appropriate infrastructure inplace to reopen the program. That would have contributed to the delay. AusIndustry wouldhave put the material on its web site as soon as it was able to.

Senator GEORGE CAMPBELL—Why which you have allowed the Printing IndustriesAssociation to make the announcement that it was being restored without all this othermechanical stuff being done first of all?

Mr Peel—It is not AusIndustry’s role to make the announcement. We simply indicate topotential customers that they can apply for the program. Any formal announcement ofreopening is not for AusIndustry to make.

Senator GEORGE CAMPBELL—The industry was telling people that the program hadbeen restored and that they could apply for it. You are saying that they would not be able to dothat until 20 August.

Mr Peel—That is correct.


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Mr Pettifer—The minister wrote to the industry, saying that the program would bereinstated, and they decided at that point that they would make that information available totheir members, basically. But there were other processes that needed to be put in place toformally allow us to reopen it and make payments. That is simply the explanation for that.

Senator GEORGE CAMPBELL—What was the process of informing AusIndustrymanagers of the decision to resume the program?

Mr Peel—Is that the EPICS program?

Senator GEORGE CAMPBELL—Yes, I am talking about EPICS now.

Mr Peel—The staff were visited by a senior officer of AusIndustry who advised them thatthe program was to be reopened.

Senator GEORGE CAMPBELL—All of them?

Mr Peel—Yes, the relevant staff.

Senator GEORGE CAMPBELL—When you say the ‘relevant staff’, who are therelevant staff?

Mr Peel—The staff involved in processing applications for the program and the statemanager in New South Wales.

Senator GEORGE CAMPBELL—So it would be the state manager. But we wereadvised that the state manager in New South Wales was not aware of the decision to reversethe scrapping of the program until three days after the decision was made.

Mr Peel—AusIndustry advised its staff of the reopening of the program as soon as it wasable to do so. As I mentioned earlier, we are not involved in the formal announcement ofreopening; we simply advise our customers when they can start to reapply for the program.

Senator GEORGE CAMPBELL—I understand you are saying that, but I would assumethat you would advise your own staff about what is going on before you advise the public orpotential customers about what is going on.

Mr Peel—We advised our staff of the situation as soon as we were able to do so.

Senator GEORGE CAMPBELL—That does not answer the question about why therewas a delay.

Mr Peel—We advised our staff as soon as we were able to do so. That is the only commentI can make.

Senator GEORGE CAMPBELL—Have any companies been disadvantaged by the gapin the operation of the scheme?

Mr Peel—I do not believe so. All the applications that were outstanding at the time thescheme was closed have since been reconsidered and assessed.

Senator GEORGE CAMPBELL—Are they the 64 applications that were on hand whenthe program was scrapped?

Mr Peel—No, it was not 64; it was 93. I apologise for giving you incorrect informationpreviously, which I have written to you about. There were 93 applications outstanding whenthe program closed. They have all been reassessed, and a small number have been withdrawnby the customers.

Senator GEORGE CAMPBELL—I was not trying to test your memory.

Mr Peel—I am glad you were not, Senator.


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Senator GEORGE CAMPBELL—Have there been any additional applications over andabove those 93?

Mr Peel—Yes, we have received an additional 26 applications since then.

Senator GEORGE CAMPBELL—What impact will that have on the funding for theprogram? Is this a question of dividing the pot of gold by the number of applications? Willthis have an impact on the allocation of funding?

Mr Peel—No, the program simply resumes from where it left off. Each application isconsidered on its merits. We have an amount of money available to us that is attributed to theapplications each year.

Senator GEORGE CAMPBELL—The more applications you have reduces the availablefunds to each of the applicants. Is it modularised in the same way as some of those others?

Mr Peel—It is a competitive process, so it would mean that if you had a flood ofapplications and the amount of money stayed the same, which is does, it would be morecompetitive and more difficult to get a grant than if there were fewer applications, providedthose applications met the merit criteria. There is no evidence, though, of a huge increase inapplications since the program reopened.

Senator GEORGE CAMPBELL—But it is possible because of the interruption to theprogram that some companies may have been disadvantaged in terms of what eventually maybe available to them.

Mr Peel—I do not believe so. Their applications have all been assessed.

Senator GEORGE CAMPBELL—You would have made decisions in relation to thembased on the original applications?

Mr Peel—Yes.

Senator GEORGE CAMPBELL—Have there been any changes to the administration ofthe scheme?

Mr Peel—No, it has just been reinstated as previously.

Senator GEORGE CAMPBELL—There is no budgetary implications of the restorationof either PICS or EPICS—

Mr Peel—No, I did not say that.

Senator GEORGE CAMPBELL—For the department?

Mr Peel—No.

Mr Pettifer—Can you clarify the question, Senator?

Senator GEORGE CAMPBELL—I was asking whether the restoration of the PICS andEPICS programs has had budgetary implications for the department. Additional funding hasbeen allocated to the department from the government to meet the cost of these programs.

Mr Paterson—That is correct.

Senator GEORGE CAMPBELL—In the answers you gave us in June it was revealedthat EPICS funding will fall from $17.7 million in the current financial year to $9 million in2003-04. Is the program being restored to the $17.7 million?

Mr Wall—Without being held to the exact arithmetic, the concept is yes, it does. There aresome other intervening factors, like there was some money rolled forward from last year to


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this year, so whether it is exactly $17 million I do not know, but the program has been fullyrestored.

Senator GEORGE CAMPBELL—I presume the fall from $17.7 million to $9 millionwas to finish off the program a year earlier, which was what the intent of the cuts was. Ipresume that will be restored to the original estimate.

Mr Wall—That is correct.

Senator GEORGE CAMPBELL—It may not be exactly $17.7 million, but that is whatwas in the budget figures in June.

Mr Wall—Yes.

Senator GEORGE CAMPBELL—In respect of the auto industry, is there any indicationwhen the government is going to announce its decision, Minister?

Senator Minchin—No, there is not.

Senator GEORGE CAMPBELL—So you are not in the loop on that one? I thought youwere a very keen observer of the auto industry.

Senator Minchin—My answer should not be taken to mean that I am not in the loop. It issimply that the matter has not yet come before cabinet and I cannot indicate when it might.

Senator GEORGE CAMPBELL—Are they still going through the process of thisconsultative council arrangement?

Senator Minchin—It is at a point where the minister is preparing his cabinet submission,and it is a matter for him, the cabinet office and the Prime Minister as to when his submissionwill come before cabinet.

Senator GEORGE CAMPBELL—Has the submission been delayed pendingnegotiations of the industrial relations framework for the industry?

Senator Minchin—I am sure the minister will want to make sure he has the best possiblesubmission which takes account of all the issues that need to be resolved and dealt with, toensure that we have a very good plan for the future of this industry.

Senator GEORGE CAMPBELL—Mr Paterson, have there been any discussions betweenyour department, the department of workplace relations and the industry about the so-calledfighting fund that was announced the other day or about the industrial relations framework?

Mr Paterson—I am not aware of any discussions.

Senator GEORGE CAMPBELL—Has the department’s role in the various councils thatwere set up now been completed?

Mr Paterson—It has.

Senator GEORGE CAMPBELL—Is that process finished, or is that going to be anongoing forum for consultation with the industry?

Mr Pettifer—The Automotive Council has submitted a report to the government, but thecouncil itself has an ongoing life at this point. Its next meeting has not been set at this time.

Senator GEORGE CAMPBELL—Who manages that? Is it your department?

Mr Pettifer—Yes, it is managed out of my division.

Senator GEORGE CAMPBELL—Is there an officer specifically allocated to that role?


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Mr Pettifer—No, it would depend on what issues were on the agenda and that sort of thingas to which officers in the team would work on it.

Senator GEORGE CAMPBELL—I think we discussed the make-up of the council on thelast occasion. Does it just comprise the major producers or is the auto components sectorrepresented as well?

Mr Pettifer—The component sector is represented as well.

Senator GEORGE CAMPBELL—So it represents the whole industry. What about theimporters?

Mr Pettifer—Yes, they are represented as well.

Senator GEORGE CAMPBELL—Has the issue of the industrial relations framework inthe industry been a subject of discussion amongst the broader auto industry council or is thatsomething that has been done separately through the Department of Employment andWorkplace Relations?

Mr Pettifer—As I think I said last time around, industrial relations issues are some of theissues addressed by the Automotive Council. They looked at those issues and workplacecapability issues.

Senator GEORGE CAMPBELL—What do you mean by ‘workplace capability issues’?

Mr Pettifer—I mean issues about the capability of employees and management.

Senator GEORGE CAMPBELL—What does that go to specifically?

Mr Pettifer—It goes to issues about their skill base and levels of productivity—those sortsof things—and their flexibility to respond to a changing competitive environment.

Senator GEORGE CAMPBELL—Does it go to the issue of training and the provision oftraining?

Mr Pettifer—Yes, it goes to the issue of training.

Senator GEORGE CAMPBELL—Has the Department of Education, Science andTraining been involved in the discussions?

Mr Pettifer—I am trying to recall. I think we did consult them on some of the issues thatcame out of that process.

Senator GEORGE CAMPBELL—Has ANTA been involved in the discussions?

Mr Pettifer—Yes, we met with ANTA.

Senator GEORGE CAMPBELL—But they have not been part of the council on anongoing basis?

Mr Pettifer—No. They provided some views to us on some of the findings of theAutomotive Council.

Senator GEORGE CAMPBELL—That has been presented as a substantive issue—acapability issue. Yet the key government department in that area has not been involved on anongoing basis in the automotive industry council consultations or discussions. Is that strange?

Mr Pettifer—I do not think that is right, Senator. We consulted them as appropriate and asnecessary as we worked our way through the issues regarding these matters as they affectedthe post 2005 policy.

Senator GEORGE CAMPBELL—But the department of industrial relations has beeninvolved on an ongoing basis on the automotive industry council, is that not correct?


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Mr Pettifer—No, Senator. We did have as part of the team, as I think we mentioned to youlast time, someone from that department. But we also had as part of the team representativesfrom other departments as well—from the Department of Foreign Affairs and Trade and theDepartment of the Environment and Heritage.

Mr Wall—These people were assigned to an interdepartmental secretariat led by theindustry department; they were not assigned to these working parties or engaged by theseworking parties as a means of engaging those Commonwealth departments directly. Theyoffered their support through the secretariat. The working parties did not engage theCommonwealth agencies with the policy responsibilities in those areas.

Senator GEORGE CAMPBELL—So that I understand you, Mr Wall, you are saying thatonly this department is involved in the Automotive Council; the other departments wereinvolved in the working parties. Is that what you are saying?

Mr Pettifer—The department was not actually on the Automotive Council; that was madeup of members of the industry. We provided secretariat support, and those other departmentswere part of that secretariat group.

Senator GEORGE CAMPBELL—I refer to the Melbourne-Gladstone rail link. Whatexactly does ‘major project facilitation status’ mean?

Mr Jones—‘Major project facilitation status’ is the key formal project recognition affordedby the Commonwealth government. It is awarded on a case-by-case basis to major projectsthat meet certain criteria.

Senator GEORGE CAMPBELL—What are those criteria?

Mr Jones—The project has to have a total capital expenditure of over $50 million, it has toneed some kind of Australian Commonwealth government approvals, and it has to becommercially ready to proceed.

Senator GEORGE CAMPBELL—What does achieving the status confer on the project?

Mr Jones—It confers a couple of things. It provides a level of formal Commonwealthgovernment recognition that the project is important. That alone can be important for someproject proponents; it gives them a level of recognition that they can use, for example, withtheir own foreign governments to establish that there is a level of Commonwealth governmentrecognition of the project, and that can be important in some countries.

More importantly, the status means that we give the project serious attention in a number ofways. It means that we help the project proponents to secure Commonwealth governmentapprovals. We help them to identify possible Australian suppliers through the IndustrialSupplies Office Network and other networks. We can identify appropriate grants for theproject—appropriate government assistance programs that might be applicable to them. Wekeep the minister and the minister’s office informed of developments with the project and ofany impediments that the project is facing so that if necessary the minister and the departmentcan consider what action might be required, what policy change or other things might berequired to overcome some problems. We perform a range of other assistance services for theproject. It acts as a way of formally coordinating Commonwealth government assistance toand approvals for the project, to a level above the normal level of service that we offer.

Senator GEORGE CAMPBELL—For example, at what stage is the Melbourne toGladstone rail link? Has funding been allocated for this project?

Mr Jones—No. The major project facilitation service does not come with fundingattached. It is not a funding program in any sense of the word. It is really just a recognition


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that that project, for example, in our opinion, is now commercially ready to proceed. It isobviously a major project, it obviously exceeds that $50 million threshold and, because of itsnature, it will require Commonwealth government approvals in order to proceed. So it ticksoff against all of the criteria for the project facilitation status.

Senator GEORGE CAMPBELL—They would require New South Wales and Victoriangovernment approval?

Mr Jones—And Queensland government approval as well; that is right. So part of theservice we offer is to try to coordinate approvals processes and assistance programs that mightbe applicable across the levels of government, so that we talk to the state governmentsinvolved and try to make sure that the various government processes are in sync rather thanconflicting with each other.

Senator GEORGE CAMPBELL—Does that also involve local councils at any stage ofthe project?

Mr Jones—We in Invest Australia, the Commonwealth, do not get involved directly withlocal councils. We leave that to the state governments.

Senator GEORGE CAMPBELL—Do you make any cost-benefit analysis or costassessment of these projects before you give them major facilitation status?

Mr Jones—Not in this case, no. Conferring major project facilitation status is not anindication that the Commonwealth thinks the project will succeed. We do not get involved inthe commercial processes that the proponent needs to go through. We just think that it is readyto proceed through those commercial processes, but it does not mean that we get involved infinding funding for them or anything like that.

Senator GEORGE CAMPBELL—Is there a set of written criteria that they have to meet?

Mr Jones—Yes. Those criteria are published and are available on our web site. I canprovide those to you, if you wish.

Senator GEORGE CAMPBELL—If you would not mind; it would save me looking forthe web site. Do you do any assessment of whether or not they meet these criteria or do youjust accept it if they come along and say, ‘We meet these criteria’?

Mr Jones—No, we make an assessment. They make an application along the lines calledfor in those guidelines that I have just provided you with, and then we make an assessment,which may involve some inquiries on our own behalf as to whether they do meet the criteria.

Senator GEORGE CAMPBELL—Would that involve using engineering consultants andso forth?

Mr Jones—Generally not for this kind of work, no.

Senator GEORGE CAMPBELL—You would do it internally?

Mr Jones—Yes, but given that the projects are commercially ready to proceed, they willthemselves have done a lot of work and we may ask for the studies that the project proponentshave already had commissioned, for example, to be made available to us to help us in ourinquiries.

Senator GEORGE CAMPBELL—You have had an application under Invest Australia,have you not, from the Protech Steel mill?

Mr Jones—For major project facilitation status?

Senator GEORGE CAMPBELL—No, I think for assistance under Invest Australia.


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Mr Jones—Under the strategic investment coordination process?

Senator GEORGE CAMPBELL—Yes.

Mr Jones—We do not normally indicate which companies have approached us forassistance under that process.

Senator GEORGE CAMPBELL—You may not normally, but I know that they havebecause they have told me they have.

Mr Jones—If they have told you they have, there is little I can do but agree with you.

Senator GEORGE CAMPBELL—Why was this project not regarded as worthy ofgovernment assistance?

Mr Jones—As I have said on previous occasions, the strategic investment coordinationprocess has a set of published criteria that projects are required to meet. In the case ofProtech, it was the view of the strategic investment coordinator that they did not meet all ofthe criteria for assistance under that process.

Senator GEORGE CAMPBELL—Was it all of the criteria or just one of the criteria?

Mr Jones—I do not believe it was all the criteria. If they do not meet one, then that isenough.

Senator GEORGE CAMPBELL—One of the issues that concerns me in this wholearea—and what seemed to be one of the issues that arose from the Protech application,although they did not necessarily put it to me in this form—is that it appears that if I comealong to you and say, ‘Unless you give me a swag of dollars, I’m going to take this projectelsewhere and build it in China or Singapore,’ that is a major criterion for saying, ‘We’ll giveyou a swag of dollars if you keep it here.’ But if I come along as a patriotic Australian andsay, ‘I want to build this project in Australia because I want to create jobs in Australia,’ yousay, ‘Well, you don’t meet the criteria, because you’re not going to take it overseas.’ In thatregard, we are not capturing the investment for this country. That just seems to me to be askewed way of looking at some of these projects.

Mr Jones—It just means that that is not the appropriate avenue for seeking governmentsupport. The strategic investment coordination process was set up with the specific purpose oftrying to positively influence the location decision of projects in favour of Australia wherethere was a competing location. That is what the process was set up for. If a project bydefinition does not have a competing location, I would suggest that that is not the appropriateavenue for seeking government support, if that is what is required. There are other avenuesfor seeking government support, as we point out to people who approach us.

Senator GEORGE CAMPBELL—But I understand that there are competing locationswhere this mill could be built; it is just that the individual actually wants to build it in thiscountry. He is committed to putting it in Australia and creating jobs in this country. Thefeeling is that he is being penalised because he has that degree of patriotism. The issue at theend of the day is that the difference—the funding difference that might have been availablethrough Invest Australia—may well mean that it is not built at all. It may well finish up goingsomewhere else—I do not know.

Mr Jones—Without discussing the specifics of the Protech case, in the kind ofcircumstances you have outlined, if a project ended up going somewhere else, that wouldindicate that there was a genuinely competing location and either that it should have met thecriteria or that perhaps the proponent did not make a strong enough case along those lines. Forprojects where they are determined to come to Australia, where they have made their location


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decision that that is where they want to build, all I can say is that if they then require someform of government assistance beyond the normal business assistance programs that areavailable, if they need some form of government assistance for that project to proceed, thestrategic investment coordination process is not the avenue for seeking that. It is not set up forthat kind of situation.

Senator GEORGE CAMPBELL—Have there been any proposals for steel projectsapproved by Invest Australia?

Mr Jones—Under the strategic investment coordination process, no. The HIsmelt projectin Western Australia is an example of a new form of making iron and steel that has gotassistance under that process.

Senator GEORGE CAMPBELL—But you say that is different because they could havetaken that to China?

Mr Jones—The United States was the competing location in that case.

Senator GEORGE CAMPBELL—I now turn to the sugar levy. What role will thedepartment have in the restructure programs funded by the sugar levy?

Mr Paterson—To the best of my knowledge, no role.

Senator GEORGE CAMPBELL—You will not have any role at all? Have you givenconsideration to potential job losses in the industry and what the impact of this onmanufacturers might be? Have you done an analysis of that?

Mr Paterson—Not that I am aware of. The administration of the sugar industry, as you areaware, is something that is pursued by the Department of Agriculture, Fisheries and Forestry.

Senator GEORGE CAMPBELL—But there has been considerable argument about thepotential impact this levy might have on manufacturers who are users of sugar. Yourdepartment has not done any assessment of what the likely impact might be?

Mr Paterson—The administration of many of the processed food sectors also falls withinthe Agriculture, Fisheries and Forestry portfolio.

Senator GEORGE CAMPBELL—But your department has had a strong view about thelevy. You have expressed that view to the cabinet.

Mr Paterson—Any matters of policy advice that we might have provided to governmentare matters of policy advice.

Senator GEORGE CAMPBELL—I am asking you, if you provided that policy advice,would you not have done it based on an analysis of the impact the levy was going to have onthe manufacturers, which essentially your department would be concerned with?

Mr Paterson—As I said, any matters of policy advice that we might have provided to thegovernment are just that—matters of policy advice. I have indicated to you that the processedfood sector tends to be administered by the Agriculture, Fisheries and Forestry portfolio.

Senator GEORGE CAMPBELL—I understand that, Mr Paterson. But in your commentsto the cabinet through the coordination process you said:ITR is strongly opposed to the introduction of a sugar levy to fund the reform package. A levy wouldpenalise consumers and other downstream processing industries for the repeated failure of the sugarindustry to undertake reform.

On what basis did you make that statement? What research or what knowledge is thatstatement based on?


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Mr Paterson—I repeat the answer I have already given you.

Senator GEORGE CAMPBELL—You go on to say:Such a levy would adversely affect the competitiveness of downstream industries in both domestic andinternational markets and the creation of an earmarked off-budget source of funding may send weakeradjustment signals to the industry.

Again, what research or what analysis was carried out to form the basis of that statement?

Mr Paterson—I repeat the answer to the question.

Senator GEORGE CAMPBELL—I am not so sure that you are actually giving me ananswer, Mr Paterson. Are you saying there was no analysis and no research carried out?

Mr Paterson—I said to you that matters of policy advice to government are just that. Thechairman indicated at the outset of these proceedings that we would not be asked to commenton matters of policy advice.

Senator GEORGE CAMPBELL—I am not asking you to comment on the policy advicethat you gave to the government. I know what the policy advice was that you gave to thegovernment. I am asking you whether or not there was a basis of research carried out by thedepartment to inform that policy advice.

Mr Paterson—And I have answered that question.

Senator GEORGE CAMPBELL—I am not so sure that you have. You went on to say:More broadly, a levy is equivalent to a product “tax” or a tariff, the imposition of which is contrary tothe philosophy of tax reform and tariff reform and, together with cost shifting to consumers, creates anundesirable precedent.

Were those comments made having regard to the experience of the department or were theysubject to a specific analysis of this particular levy that was proposed for the sugar industry?

Mr Paterson—I have answered the question, Senator.

Senator GEORGE CAMPBELL—I have another question for Mr Jones. At the lastestimates hearings, Mr Jones, I asked you for copies of the consultants’ reports that wereprepared into the HIsmelt project and the AMC project. You told us that they werecommercial-in-confidence. I understand and accept that. Can you advise us who theconsultants were that prepared the reports?

Mr Jones—I would have to take that on notice. I do not think there is a problem withdoing that but I do not have the answer in front of me.

Senator GEORGE CAMPBELL—I have some questions about the role of the PBPA—the Pharmaceutical Benefits Pricing Authority. We are aware of a number of new drugs forwhich a price has been recommended by the PBPA and which have been recommended forlisting on the PBS by the PBAC but which then end up in pricing negotiations or simply onhold for many months—in some cases even years. Can you outline for us the role of thePBPA in this process?

Mr Pennifold—The role of the PBPA is to provide advice to the health minister on thepricing of the medicines that come before it. The PBAC undertakes a therapeutic assessmentof those drugs.

Senator GEORGE CAMPBELL—Who are the members of the PBPA and what are theirqualifications?


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Mr Pennifold—There are five members of the PBPA. Graham Glenn is the chairman ofthat group. Alan Evans until recently was a member of the PBPA. He has now resigned hisposition as CEO of Medicines Australia. Brett Lennon is an official with the Department ofHealth and Ageing. I am a member, and there is also a consumer representative on the PBPA.

Senator GEORGE CAMPBELL—Who is the consumer representative?

Mr Pennifold—I have the name of the previous member. I would need to get the currentmember’s name for you.

Senator GEORGE CAMPBELL—Can you take that on notice?

Mr Pennifold—Yes.

Senator GEORGE CAMPBELL—Why does it take so long to negotiate an acceptableprice?

Mr Pennifold—The issue of negotiating those prices is a matter for the Department ofHealth and Ageing.

Senator GEORGE CAMPBELL—But you are not familiar with why it takes so long tonegotiate an acceptable price? Why is it such an involved, drawn-out process?

Mr Pennifold—It is the nature of the negotiation process. I think it varies according to thespecific drugs. It is done on a case-by-case basis.

Senator GEORGE CAMPBELL—Who are the major players in these negotiations? Areyou aware of that?

Mr Pennifold—Yes. The major people involved in that would be the sponsor of the drug,meaning the drug company seeking to list it on the Pharmaceutical Benefits Scheme, and theofficials at the Department of Health and Ageing who undertake the negotiation on price andwho then report to the minister.

Senator GEORGE CAMPBELL—Does DOFA have a major role in this process?

Mr Pennifold—To my knowledge, no.

Senator GEORGE CAMPBELL—It is principally between the health department and thepharmaceutical company?

Mr Pennifold—That is correct. It is my understanding that the health minister isresponsible for deciding the prices at which drugs would be listed on the PBS.

Senator GEORGE CAMPBELL—Are you aware of any circumstances wherepharmaceutical companies have simply withdrawn from the process because the negotiationswent on too long or no agreement could be reached?

Mr Pennifold—I am not a direct part of that negotiation process.

Senator GEORGE CAMPBELL—But are you aware of any circumstances in which thathas occurred?

Mr Pennifold—I am aware that that has occurred but I am not aware of the details of whyit occurred. Again, that matter is really within the province of the Department of Health andAgeing.

Senator GEORGE CAMPBELL—What are the consequences of such PBS listing delaysfor health outcomes?

Mr Pennifold—I have no information on that. I suggest that it would depend on theindividual medicine involved.


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Senator GEORGE CAMPBELL—Are there any consequences in respect of the viabilityof medicines as a result of these delays?

Mr Pennifold—Do you mean the viability of the companies marketing the medicines?


Mr Pennifold—There may well be.

Senator GEORGE CAMPBELL—Presumably it is a pretty competitive marketplace outthere—the pharmaceutical industry. They all seem to compete with the same products.

Mr Pennifold—It is a competitive marketplace, although each drug that comes into thesystem has its own patent attached to it, so there is certainly a high degree of competitiononce medicines have come off patent. By definition, if a drug is under patent it does give theowner of that patent an exclusive bundle of rights.

Senator GEORGE CAMPBELL—How many submissions would the PharmaceuticalBenefits Pricing Authority consider at every meeting?

Mr Pennifold—I do not have the exact numbers. The numbers would best be supplied bythe Department of Health and Ageing, as they are the secretariat for that committee. What Ican inform you of is that the submissions that go to that committee are for the listing of newmedicines on the PBS. We also work through—‘we’ being the PBPA—the whole of the listingschedule every year. At each quarterly meeting we work through a quarter of the schedule andreview prices.

Senator GEORGE CAMPBELL—How long do your meetings normally last?

Mr Pennifold—Around half a day.

Senator GEORGE CAMPBELL—How much time do you get to consider submissionsprior to the meeting?

Mr Pennifold—Generally about a week.

Senator GEORGE CAMPBELL—Has there been any time during the last year when aposition on the PBPA has been vacant and has not been filled?

Mr Pennifold—Again, there might have been such a situation with the changeover in theconsumer representative, but the secretariat of the Department of Health and Ageing would bebetter placed to give advice to you on that.

Senator GEORGE CAMPBELL—How many full-time staff support the PBPA?

Mr Pennifold—In relation to its role regarding the Pharmaceutical Benefits Schemelisting, again that is a matter for the Department of Health and Ageing. It is not a function thatwe perform in this portfolio.

Senator GEORGE CAMPBELL—Do you know what the qualifications of those staffare?

Mr Pennifold—No, I do not.

Senator GEORGE CAMPBELL—Are they all Canberra based?

Mr Pennifold—My understanding is that the secretariat is Canberra based, but it doesdraw on expertise in various institutes and universities around the country.

Senator GEORGE CAMPBELL—Who prepares the agenda papers for the pricingmeetings? Is that done out of Health?

Mr Pennifold—Correct—that is done out of Health.


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Senator GEORGE CAMPBELL—And Health do the negotiations with the companiesabout the price?

Mr Pennifold—That is correct.

Senator GEORGE CAMPBELL—Do members of the PBPA at any time meet withcompanies to discuss pricing issues?

Mr Pennifold—Not to discuss pricing negotiations. Some companies will sometimes makepresentations to the PBPA on proposals that are before the authority to ensure that we have aclear understanding of what they are proposing.

Senator GEORGE CAMPBELL—So you do discuss pricing issues with them, apartfrom the negotiations of the actual price?

Mr Pennifold—I would not call those pricing issues. It is quite distinct from thenegotiation process. It would be more an understanding of what the new medicine which theyare seeking to have listed would actually do, what its therapeutic effectiveness is and so on.To my recollection, we have never, within the authority, talked about price.

Senator GEORGE CAMPBELL—I understand what you are saying. Would you havediscussed with them, for example, that some of these medicines might be extremelyexpensive? Would you have discussions, for example, about balancing the therapeuticalimpact of the medicine they are seeking to have listed and the actual cost of the medicine—not in a specific sense, as to whether it is $2.10 a packet or $20.50 a packet, but that it may bein the high cost range?

Mr Pennifold—No, that is not the nature of the discussion that the authority has.

Senator GEORGE CAMPBELL—Does DOFA play any role in your deliberations andnegotiations?

Mr Pennifold—DOFA is not member of the authority; nor do they participate in meetingsof the authority.

Senator GEORGE CAMPBELL—Have there been any times when the PBAC has notsupported a recommendation of the PBPA?

Mr Pennifold—Such a decision has never been conveyed to me. What happens with PBPAdecisions is that the Health secretariat conveys those to the minister, and the minister hasbefore her both the recommendations of the PBPA and the recommendations of the PBAC.Again, those two sets of advice come together with the health minister.

Senator GEORGE CAMPBELL—So the two groups are never put in conflict, to yourknowledge? They may be in conflict in terms of their advice, but the conflict is not betweenthe two groups. It is a matter of judgement for the minister—is that what you are saying?

Mr Pennifold—The advice comes to the minister and, if there are any differences, that iswhere the reconciliation will take place.

Senator GEORGE CAMPBELL—Yes, by the minister, rather than any attempt toreconcile the advice between the two groups?

Mr Pennifold—That is correct.

Senator GEORGE CAMPBELL—I will now deal with the R&D tax offsets and the taxconcession audit. Is the department aware of industry concerns surrounding the restrictivetreatment by the ATO of the research and development tax concession cash offset?


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Ms Berman—There has been some discussion with some industry people about the offset.Some have suggested that the $5 million turnover is too low and that the $1 million turnoverfor research and development should be increased. We are in the position of looking andmonitoring, as you would be aware, because it is too early at this stage to estimate what theimpact will be, and that is one of the major undertakings we gave—that we would look at theimpact after the first year. AusIndustry through the IR&D Board has to report back togovernment on the impact of those various levels.

Senator GEORGE CAMPBELL—Have you had any conversations with the ATO aboutthe guidelines for the offset? In particular, have you had any discussions about the groupingarrangements?

Ms Berman—We talk to the ATO quite frequently. We have not had a meeting which hasparticularly focused on the grouping arrangements and the tax offset in the last few months, tomy knowledge—I think that is correct. We have had meetings, for example, with the ATO,AusIndustry and industry clients or customers. We have talked about arrangements.

Senator GEORGE CAMPBELL—You say you have discussed that with the tax office.

Ms Berman—Not specifically. There was not a focus on that issue, no.

Senator GEORGE CAMPBELL—But the grouping issue seems to be appearing as oneof the major issues of concern to industry for a number of reasons.

Ms Berman—What you say may be correct, Senator, but it certainly has not beenforcefully or even less forcefully made to us. Maybe it is going directly to the ATO.

Senator GEORGE CAMPBELL—I understand what you say about the $5 million andthe $1 million. They are also saying that because of the patchwork make-up of theshareholders of some of these companies that is very hard to calculate.

Ms Berman—I would have to talk to my ATO colleagues and get back to you on thatbecause that has not been brought to my attention.

Senator GEORGE CAMPBELL—Can you confirm that a business is not eligible for atax offset if a tax exempt entity has 25 per cent or more control of the business conducting theR&D?

Ms Berman—If it has more than 25 per cent, that is correct.

Senator GEORGE CAMPBELL—Does this mean that companies in receipt ofCommonwealth investment via the Innovation Investment Fund may not be eligible to accessthe tax offset?

Ms Berman—I believe that is an issue that the ATO would look at on a case-by-case basis.I could not make a general statement on that.

Mr Clarke—I do not believe you could draw that as a general conclusion. The 25 per centrule goes to control of the company. The fact that there are Commonwealth funds invested init through a venture capitalist that happens to have an IIF licence does not necessarily indicatepublic sector control.

Senator GEORGE CAMPBELL—I suppose the point I am getting at is that it was neverintended that, in putting this offset in place, companies getting funding through the IIF wouldhave been penalised in this way, if they are penalised.

Mr Clarke—I am not aware that that was ever the intent.


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Senator GEORGE CAMPBELL—If that was not the intent but it is occurring is there nota need to address that as a policy issue?

Mr Clarke—We would be pleased to look at any examples of that situation should theyarise.

Senator GEORGE CAMPBELL—Do you know offhand how many IIF beneficiarieshave given more than 25 per cent control of their companies to the IIF?

Mr Clarke—It is not control to the fund, per se. To make sure I understand your question,you are asking how many investee companies under the IIF scheme have more than 25 percent public sector control.

Senator GEORGE CAMPBELL—That is one side of the equation. How many of themwould have more than 25 per cent controlled by the people who are running the funds?

Mr Clarke—The short answer is no, I do not have that data in front of me. That is ananalysis that we would need to do through all of the IIF investees. In broad terms though Iwould draw on a general understanding of the IIF investment portfolio. I do not think therewould be very many. The nature of the IIF investments is far more directly commercial thanthat public sector origin.

Senator GEORGE CAMPBELL—I understand that but I think it is important to try toidentify these. Obviously, there are some because the issue has been raised by the industry asto what they think is an unintended consequence of the way in which the legislation has beeneither drafted or applied.

Mr Clarke—If you have specific examples—and it may not be appropriate to give them tome in a public forum—I would be very pleased to look into them further.

Senator GEORGE CAMPBELL—Do you know how many companies have applied forthe tax offset in the period since the R&D Start Program has been suspended?

Mr Clarke—I can give you the answer to the first part of your question, which bydefinition incorporates the second part. For the 2001-02 financial year, which covers the newregistrations and is of course the first year in which companies can register for the offset, thegross number of companies that have registered in the year to date is 1,279. Of those 443 haveindicated that they are nominating for the offset.

Senator GEORGE CAMPBELL—Is that high or low in terms of your expectations?

Mr Clarke—That is a very interesting question. We have been grappling with thatourselves. It is very early days in this process. Companies have only been able to do this since1 July. Four hundred and forty-three seems to us about on track with our expectations. Thereis nothing in the data at this stage that is causing us alarm that it is under or over a reasonablelevel.

Senator GEORGE CAMPBELL—Are you aware of recent media reports, such asspecifically one in the Australian Financial Review of 10 October, criticising the complexityof and the eligibility requirements of the tax concession cash offset?

Mr Clarke—Yes, I am aware of those reports.

Senator GEORGE CAMPBELL—Have you given any consideration to the issues raisedin that particular article?

Mr Clarke—Absolutely. The whole issue of ease of access to these programs is veryimportant to us. It is something that we are working with the tax office on as well as to howwe can streamline the process for companies to do their self-assessments and make their


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claims. Yes, it is very much a current issue for us in bedding down these news elements of thetax concession.

Senator GEORGE CAMPBELL—This is managed through the IR&D Board, isn’t it?

Mr Clarke—Correct, but of course the tax concession program is a joint program of thedepartment, through the board, and the tax office. But we are very conscious, as your questionindicates, to see that from the companies’ perspective it is a program such that, when theyaccess it, they should not need to be overly tied up in the differences between the twoagencies that administer it. That is why we are working very closely with the ATO.

Senator GEORGE CAMPBELL—Is it the case that AusIndustry, in a letter of 24 Aprilto companies affected by the R&D Start freeze, suggested that these companies considerapplying for the cash rebate component of the R&D tax concession?

Mr Clarke—I think that is a letter with my signature on the bottom.

Senator GEORGE CAMPBELL—I think it is.

Mr Clarke—It is certainly the case that, when new applications for R&D Start weresuspended on 24 April, one of the actions that we took through our state office network was totalk to the companies that were affected by the suspension to determine whether or not theymay be eligible for the new offset arrangement, which of course kicked in on 1 July. I amcertainly aware that in quite a few cases some of those companies did avail themselves of thatopportunity.

Senator GEORGE CAMPBELL—So we do not know how many of the 443 applicationshave been encouraged by your letter?

Mr Clarke—I would like to think that most of them have been encouraged by AusIndustryin one form or another. It is our job to market and promote the tax concession throughcompany contact and broad-based advertising.

Senator GEORGE CAMPBELL—But Mr Peel said earlier this morning that it is notyour job to get out and tell industry what—

Mr Clarke—Mr Peel said was that it was not our job to formally announce programopenings. That is something that is normally the minister’s prerogative. Once a program isopen, it is definitely our job to advise industry of their entitlements or of the opportunity toapply for competitive programs. The tax offset, of course, is an entitlement, so we take it as anobligation to maximise awareness of that entitlement.

Senator GEORGE CAMPBELL—Is this letter not also about taking the pressure off thedepartment and the government in terms of the reaction there has been by small businesses tothe freezing of the R&D Start funds?

Mr Clarke—My letter was about formally advising a bunch of companies that theirapplication for R&D Start was not proceeding and then taking that opportunity of advisingthem about alternative means of support that they may consider.

Senator GEORGE CAMPBELL—Presumably, no-one has actually got access to any ofthis funding yet?

Mr Clarke—The tax offset?


Mr Clarke—On the contrary, many companies have received cheques.

Senator GEORGE CAMPBELL—Do you know how many have already got funding?


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Dr Edwards—We had a meeting with the ATO and the informal advice at about mid-October—and it was informal advice at that stage—was that they had received claims for $24million in benefits that had been processed and of that $16-odd million was cash out the door.

Senator GEORGE CAMPBELL—Do you know how many companies that represented?

Dr Edwards—I do not.

Ms Berman—You would appreciate that, because they get cash immediately, there wouldbe an immediate response by industry.

Senator GEORGE CAMPBELL—Yes, I understand that. Are you aware of how many ofthe companies that have had the R&D Start application cancelled have subsequently accessedthe cash rebate? Have you done that analysis?

Mr Clarke—No, I have not done that analysis.

Senator GEORGE CAMPBELL—Do you know how many have applied?

Dr Edwards—I have had a quick look. In early October about 17 per cent of the 115 had,at that stage, registered for the offset.

Senator GEORGE CAMPBELL—And you do not know how many of that 17 per centhave actually received the cash rebate?

Dr Edwards—No, I do not.

Senator GEORGE CAMPBELL—Do you have a figure for the annual cost of the taxconcession since 1996?

Mr Clarke—That is the revenue forgone. Because the tax office administers the actualrevenue side of the program, we cannot give you an authoritative answer to that question.That would have to be directed to the ATO.

Senator GEORGE CAMPBELL—You do not have those figures.

Mr Clarke—The only data that we have is what the companies register for. Through ourrole of the up-front registration there is an indication of the R&D costs; hence, through the taxsystem, that flows through to the cost of revenue. But what they actually claim, which iswhere the real cost kicks in, is only held by the tax office.

Ms Berman—As you would be aware, the annual budget statement says what amount isattributed to the tax concession and it is usually after the event, when it has been reconciled.So you would see two years previously or 12 months previously.

Senator GEORGE CAMPBELL—As I understand it, the figures are usually about twoyears behind?

Ms Berman—That is correct. Treasury prepares those.

Senator GEORGE CAMPBELL—But those are the only figures that you are aware areavailable?

Ms Berman—Yes.

Senator GEORGE CAMPBELL—What is the latest date that the audit in progress on thetax concession arrangements can be tabled?

Mr Clarke—Are you referring to the ANAO audit?

Senator GEORGE CAMPBELL—Yes, there is currently an audit being done into taxconcessions. Is the ANAO doing it?


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Mr Clarke—Yes, the Audit Office is currently conducting a performance audit of theR&D tax concession, covering both AusIndustry and the tax office. The report is in progress.We have received the issues papers, which is one of the milestones in the Audit Officeprogress. We have given them comments on those papers and we are expecting to see thesection 19 draft report next month, in December. I would imagine they are looking at a tablingdate early in the next calendar year.

Senator GEORGE CAMPBELL—You have a list of audits in progress and potentialaudits. Where are they up to? Is the IIF one completed?

Mr Clarke—The IIF audit has been tabled.

Senator GEORGE CAMPBELL—What about the Textiles, Clothing and FootwearStrategic Investment Program audit?

Mr Clarke—It has not yet been commenced by ANAO. It is on their program for thisfinancial year.

Senator GEORGE CAMPBELL—Would you proceed with that anyway, given that thereis now a reference to the Productivity Commission?

Mr Clarke—It is not our choice; it is the Audit Office’s.

Senator GEORGE CAMPBELL—Is it the same with ACIS?

Mr Clarke—No, the ACIS audit has commenced. The ACIS audit is under way throughANAO.

Senator GEORGE CAMPBELL—Do you know what the potential reporting date forthat is?

Mr Clarke—It is this financial year, given that it is at an advanced stage, but I do notknow exactly when they are forecasting.

Senator GEORGE CAMPBELL—What about the audit of the administration of theR&D Start program?

Mr Clarke—It has not yet commenced, but it is on their program for this financial year.

Senator GEORGE CAMPBELL—What about the Pharmaceuticals Industry InvestmentProgram?

Mr Clarke—That is not one of mine. I cannot answer that.

Senator GEORGE CAMPBELL—What is the current state of play with R&D StartProgram?

Mr Clarke—The current state of play is that the program remains suspended for newapplications. However, as previously advised, we are continuing to work with our currentStart companies and they are receiving all the payments that they are entitled to.

Senator GEORGE CAMPBELL—Those are companies that had already signed off.

Mr Clarke—They already had signed contracts.

Senator GEORGE CAMPBELL—Have there been any discussions about the futurefunding of this program? I think that, at the last estimates or the ones before, you said youwere having a look at the way in which this whole program is administered and looking atmore efficient ways of administering the program.


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Mr Clarke—Certainly there has been a lot of work since the 24 April announcement onthe administration of the program; that is correct. That work is with a view to it all beingfinalised before the reopening for new applications.

Senator GEORGE CAMPBELL—But, in terms of the moneys that were allocated inBacking Australia’s Ability, there is no intent to change, alter or rearrange that funding?

Mr Clarke—Correct.

Senator GEORGE CAMPBELL—So that commitment will continue to be there?


Senator GEORGE CAMPBELL—And you expect to expend the moneys that wereallocated for this financial year in this financial year?

Mr Clarke—I do.

Senator GEORGE CAMPBELL—I can understand the decision taken to suspend theprogram, but can you tell me why no analysis was done of the state which various companieswere at before that blanket decision was taken?

Mr Clarke—The decision was taken on a whole-of-program basis because the whole ofthe program was overcommitted, so it was a necessary mechanism to ensure that we couldcontinue to support those companies that already had Start contracts.

Senator GEORGE CAMPBELL—I understand, but what I am asking is: for thecompanies from which you had applications, did you do any analysis of the various stagesthat they were at and whether any companies would be materially affected by the decision tosuspend the funding?

Mr Clarke—We were very conscious of where each of the 115 companies that receivedmy letter of 24 April advising that their application had been set aside were at. Obviously, wehad been working with them in their application process, so we were conscious that some hadpotentially already commenced their project and some were in the position of not being ableto make the decision whether or not to undertake their project until they had a decision of theboard. We knew they were in that range of circumstances.

Senator GEORGE CAMPBELL—There are some who were pretty substantiallyimpacted by the decision.

Mr Clarke—What they lost was a decision. Their applications were put aside. All thosecompanies were in a competitive process and that process was not concluded. Some of themwould have got a grant; some of them would not. As it turned out, all had to be set aside.

Senator GEORGE CAMPBELL—Isn’t it true that some of those companies hadobtained private sector funding based on the expectation that they would get the grant?

Mr Clarke—If they had, they must have done so on the basis that they were on noguarantee to receive a Start grant. So, if they had made commercial decisions about otherfunding, that would still have been in the context that they did not have a decision about theirStart application.

Senator GEORGE CAMPBELL—None of those companies would have been given anindication that they would be potential recipients of the R&D Start grant?

Mr Clarke—There were no decisions taken on those 115 companies because there were nofunds available to support them. Different companies may have had different views about how


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competitive their application was but they certainly did not have a decision of the IR&DBoard.

Senator GEORGE CAMPBELL—What processes have been discussed about how weare going to unfreeze these programs?

Mr Clarke—You are referring, of course, to how we can open the program for newapplications.


Mr Clarke—The core process, from a financial management point of view, is theavailability of uncommitted cash in the current financial year’s appropriation. So one of thethings we have been doing throughout this calendar year is monitoring very closely the cashflow in the program. The trigger for the reopening is the availability of uncommitted cash.

Senator GEORGE CAMPBELL—Is there a threshold for that? The trigger would not beuncommitted cash of $1.

Mr Clarke—Indeed, I take your point. Yes, there has to be a sufficient amount ofuncommitted cash available to enable us to hold a valid, credible, competitive selection round.As we get closer to the end of the year, that amount of money reduces because these are three-year grants and we are talking about cash flow on an annual basis.

Senator GEORGE CAMPBELL—Yes, but you still have not answered my questionabout what the threshold might be.

Mr Clarke—What the trigger is?


Mr Clarke—The trigger is a moving feast. We are monitoring that every month and whenwe are in a position that we believe it is appropriate and safe to reopen the program we willgive that advice to the minister and the minister will make a decision on that.

Senator GEORGE CAMPBELL—So are you saying that you do not have a fixed figurein mind?

Mr Clarke—I am not working to a target. That is correct; I am working to a whole ofprogram analysis. I am watching closely the expenditure rate of the current customer cohort. Iam watching the time of the financial year to try and judge the appropriate time to give thatadvice to the minister.

Senator GEORGE CAMPBELL—I think his junior minister, the Minister for Science,indicated that it would not happen until the first quarter of the new year.

Mr Clarke—I cannot comment on what remarks Mr McGauran may have made.

Senator GEORGE CAMPBELL—It obviously was not based on any advice that yougave him.

Mr Clarke—He is not in the industry portfolio. I have not been involved in providingbriefings to Mr McGauran.

Senator GEORGE CAMPBELL—In terms of the way in which the program will beadministered in the future, are there any changes that you have in mind as a result of thisintensive work you have been doing since 24 April?

Mr Clarke—There are some quite important changes that we are making in theadministration of the program, but it is perhaps important, before I outline those for you, tosay what we are not changing as well. The program design is not changing. Start still


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comprises Core Start, Graduate, Premium, Plus and Loans. The eligibility criteria areunchanged; the merit criteria are unchanged; the application form is unchanged. So theprogram, from a customer’s perspective, will not look very different when it is reopened fornew applications. One of the things that we are very conscious of in doing that is minimisingto the maximum extent possible the work that any of those 115 companies would need to do ifand when they choose to reapply.

So the sort of changes that we are making essentially relate to the core problem, which isthe financial management of the program. We have re-engineered the financial systems in ouradministration of Start—the links between our program management system and thedepartment’s finance system, the way in which we monitor and report cash flow andcommitment levels. We have also looked at changes to the decision making processundertaken by the IR&D board in order essentially to centralise the process of entering intonew commitments and managing our cash flow.

Proceedings suspended from 10.41 a.m. to 10.54 a.m.ACTING CHAIR (Senator Watson)—Senator Campbell, would you like to ask the first

question?

Mr Paterson—I would like to respond to a question that was raised prior to the break.Senator Campbell asked a question in relation to a proposed ANAO audit of thePharmaceutical Industry Investment Program. Their advice is that they will conduct theirregular financial audit of PIIP in 2003 and it is currently on the ANAO’s reserve list for aperformance audit in 2002-03 but there is no indication at this stage as to whether that willoccur or not.

ACTING CHAIR—Thank you very much.

Senator GEORGE CAMPBELL—When we broke, Mr Clarke, we were discussing theR&D Start program and when that might commence again. Once the program starts up, whatdo you intend to do with the 115 companies which had their applications cancelled? Will theyget a priority position or will they just be thrown back into the bucket along with everybodyelse?

Mr Clarke—When the minister announces that Start is again open for new applications,we intend to phone those 115 companies straight away and make sure that they are aware ofthat announcement immediately. Our expectation is that a proportion of them will wish toreapply very quickly—and indeed we have been in close touch with many of them in theintervening months. When they reapply they will have applications that have already, in somecases, gone through most of the assessment process. So my expectation is that those that arekeen and still eligible—and I recognise that some may not be eligible or keen anymore—willreceive a natural priority by virtue of putting in a very quick application that is able to beconsidered by the board very quickly.

Senator GEORGE CAMPBELL—Mr Clarke, you told us—I think it was at the lastestimates—that the magnitude of the cash flow problem was identified by AusIndustry inJanuary 2002. You advised the minister in a brief on 23 January. Isn’t it true that in factAusIndustry staff were told in October 2001 that nothing was to be approved for R&D Start?

Mr Clarke—No, I do not believe that is true at all.

Senator GEORGE CAMPBELL—You do not believe it is true that that advice was givento AusIndustry staff?


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Mr Clarke—The evidence to the contrary is that we did make decisions that R&D Startgrants were approved between the date you mention and the January date.

Senator GEORGE CAMPBELL—They were approved?

Mr Clarke—Yes. There were a number of grants approved in that period.

Senator GEORGE CAMPBELL—How many were approved in that period?

Mr Clarke—I would have to take that on notice.

Senator GEORGE CAMPBELL—Of the 115 that missed out, were those applications inplace during the period from October to January?

Mr Clarke—Some would have been and some would not; there would be a mixture. Someof them may well have been lodged prior to October and some after October.

Senator GEORGE CAMPBELL—Were there many applications that were deferred fromthe October round?

Mr Clarke—Deferring an application has a specific meaning in the Start program. Let metell you what I think that means. It means that the committee, the decision making body, wasnot able to make a decision on the application in front of it because there was some lack ofinformation in the application—they wanted more details about something. So there may wellhave been deferrals on that. That is not an unusual situation.

Senator GEORGE CAMPBELL—Can you advise us—and you may have to take this onnotice—how many of the 115 companies that missed out had an application in in the Octoberround and how many of those were deferred until December and were subsequently rejected?

Mr Clarke—Yes, I would be happy to take that on notice. That is an analysis we could do.

Senator GEORGE CAMPBELL—During the period of January to April, weren’t yourstaff told not to encourage quarterly reports from customers who required payments? Werethey advised to slow down the payment process?

Mr Clarke—We were concerned about cash flow in that period, absolutely. That was theproblem that we identified in January and in managing our cash we had to consider the issueof whether we would chase claims for cash or just wait for them to come in. It was prudentnot to be chasing them. However, we processed all claims made in that period.

Senator GEORGE CAMPBELL—Didn’t you have to borrow money to meet yourcommitments over that period?

Mr Clarke—We did. As I said in June, the government provided $40 million ofuncommitted funds from program out years, which enabled us to meet our commitments inthat period.

Senator GEORGE CAMPBELL—Do you categorically deny that your staff wereadvised in October that nothing was to be approved in respect of the R&D Start program?

Mr Clarke—I am listening very carefully to your words, Senator, and that does not fit atall with what happened.

Senator GEORGE CAMPBELL—Were you not aware of the magnitude of the problemduring that period?

Mr Clarke—Are you referring to the period from October 2001 to January 2002?



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Mr Clarke—Awareness of the problem grew throughout the financial year but it wascertainly not our view in that October to January period that we would be suspending newapplications. That realisation occurred in January.

Senator GEORGE CAMPBELL—Mr Clarke, are any of the staff associated with theR&D Start program or any departmental staff at all involved in the development of a newsoftware program?

Mr Clarke—We are running a number of systems development projects associated withthe R&D Start program. One is associated specifically with Start and one addresses all of ourprograms. The one specifically associated with Start is concerned with our forecasting andmodelling package, which is a financial management package. The other one more broadlyaddresses Start and every other AusIndustry program and is a replacement for the variousprogram management systems that we currently operate. So the answer is yes.

Senator GEORGE CAMPBELL—Is it correct that more than $2 million has been spenton developing this software over the past two years?

Mr Clarke—It is possible that $2 million is the correct amount. I do not have that data infront of me. Having been steered in that direction by you, Senator, I believe you are referringto what we call our benefits and grants management system. This is a project to replace all ofthe existing separate program management systems that we operate in AusIndustry with onecomprehensive program management system.

Senator GEORGE CAMPBELL—Can you tell me exactly how much has been spentboth on this software development and on any related projects in each of the financial years2001-02 and 2002-03?

Mr Clarke—I will take that on notice.

Senator GEORGE CAMPBELL—Can you also advise the committee how many staffhave been employed for the same two periods and whether they were full-time, part-time orcontracted employees?

Mr Clarke—I will certainly take that on notice.

Senator GEORGE CAMPBELL—What were the intended outcomes of this softwaredevelopment? Was it purely for managing those programs?

Mr Clarke—AusIndustry now delivers around 25 industry department programs. We dothat across a range of information systems. They vary from fairly sophisticated systems thatare now getting a bit old—namely the ones that Start and other board programs were under—to Excel spreadsheet developments or small programs for each that are developed on the fly.The goal of this big system development project is to retire all of those systems and replacethem with a single interface for our staff and a single customer database. We are looking atenhancing our ability to analyse customer data, particularly via our policy colleagues havingaccess to what is happening inside the programs for trend analysis. We are looking atenhancing our ability to provide information to other stakeholders, analysing where thecustomers are and identifying what the trends are. We are trying to improve the efficiency ofdata management. For us, it is a central plank in trying to leverage the benefit of having aprogram delivery agency.

Senator GEORGE CAMPBELL—What outcomes have been achieved so far?

Mr Clarke—We have gone through a number of stages. There was a critical milestone lastyear when we issued a request for proposals to industry. We received a range of proposals andnarrowed it down to about five that we identified from the analysis that appeared to be viable


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service providers. Our intent at that stage was to move to request for tender—to go throughthe RFP, RFT process—and we did a stocktake and asked: where are we at and how is thisproject going? We have taken it in a slightly different direction now—we are staging it ratherthan going straight to tender for the single, all-embracing solution. We are currently buildingan interim solution—‘data warehouse solution’ is the technical term—and we expect to beissuing the RFT later this financial year.

Mr Peel—The RFT will be issued in December, I believe—later this calendar year ratherthan financial year.

Senator GEORGE CAMPBELL—Are you able to identify any milestones that have beenachieved so far?

Mr Clarke—The project has a lot of elements. In parallel with this work, we wereimproving the existing systems but the principle milestone was the definition of our businessrequirement, the testing of the market on that and from that market testing the development ofthe RFT.

Senator GEORGE CAMPBELL—Do you have a ballpark figure on what the final costof this project is going to be?

Mr Peel—Our current estimate is about $2.9 million.

Senator GEORGE CAMPBELL—Do you know what has been spent so far?

Mr Peel—We have taken that on notice already, so I will get back to you on that.

Senator GEORGE CAMPBELL—Can you run through the COMET fundingarrangements for us and how we get up to this $40 million and back to the $20 million?

Mr Clarke—Yes. The government has announced funding for the COMET program in twotranches. There was one tranche in 1999, which was $30 million over three years. There wasan extension of the program in 2001 announced under BAA of $40 million over four years.When you combined those two tranches, you had a profile of the program that was $10million a year for all bar one year, when there was $20 million. There was a peak year in2001-02 of $20 million. In practice we smoothed that $20 million out across 2001-02 and2002-03. But the total package is a $30 million tranche plus a $40 million tranche.

Senator GEORGE CAMPBELL—That brings me to the key issue I am concerned about.There was an increase in the number of advisers from 10 to 17. How long has that lasted?

Mr Clarke—We reached the enhanced level of 17 in October 2001.

Senator GEORGE CAMPBELL—Why has it been again cut back from 17 to 10?

Mr Clarke—Because the core funding of the program drops back down to that order ofmagnitude—$10 million a year. The increase to 17 was in order to support the program whenit had that peak funding in the overlap from the BAA extension.

Senator GEORGE CAMPBELL—But I thought you said that you took steps to smooththat out.

Mr Clarke—Across two years only.

Senator GEORGE CAMPBELL—The people who were put on over that period wereadvised that it was only for a two-year period?

Mr Clarke—Their contracts provided for this process, yes.

Senator GEORGE CAMPBELL—Were the additional seven employed as casuals or ascontractors?


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Mr Clarke—‘Business advisers’ is our working name for them. ‘Consultants’ is really theproper term.

Senator GEORGE CAMPBELL—So they are all employed on contract?

Mr Clarke—They have consultancy contracts to provide services under the COMETprogram.

Senator GEORGE CAMPBELL—In terms of the moving back from 17 to 10, it was notnecessarily the 10 who were there who survived, was it?

Mr Clarke—That is correct; it is not necessarily the case. The process of moving backfrom 17 to 10 first involved defining the geography—that is, where we wanted thedistribution of the 10. The 10 is a full-time equivalent level in that it was funding to supportthe equivalent of 10 full-time business advisers. So the geography was defined and then wewent through a selection process. First we invited the 17 to express interest and reapply ifthey wanted to. Of those that did, we went through a selection process to fit them to thegeography that we had. In the event, there are actually 11 individuals but two of them areworking at 0.5.

Senator GEORGE CAMPBELL—What geographical shift occurred?

Mr Clarke—I will give you the distribution as it was with 17 and then I will give you thedistribution as it is now being implemented. In New South Wales and the ACT we havemoved from four to 2.5; in Victoria, we have moved from four to two; in Queensland—and Iwill qualify that in a moment—we have moved from three to two; in Western Australia ,wehave moved from two to one; in South Australia, we have moved from two to one; Tasmaniahas remained at 0.5; and Northern Australia, which includes Northern Queensland and theNorthern Territory, has remained at one. I think if you do the arithmetic that will come out at16½ to 10 on a FTE basis.

Senator GEORGE CAMPBELL—When you talk about geographical shift, has therebeen a geographical shift within those states in terms of location of these personnel?

Mr Clarke—No. They are all capital city based with the exception of the NorthernAustralia fellow, who is based in Townsville.

Senator GEORGE CAMPBELL—Has any assessment been made of what the impact ofthe cuts has been on the services provided?

Mr Clarke—This is a process of matching companies to business advisers, so the primarydriver is the appropriation for the program. We ask how many companies can be supportedwith that amount of funding and how many business advisers we need to work with thosecompanies, so it matches through. From an individual company perspective, once you are inthe program it does not change. There is, of course, a transition issue for those seven to phaseout of the program and we have designed a transition process where they will continue towork with their companies through that period.

Senator GEORGE CAMPBELL—Presumably the level of demand from companies isnot going to decline. You said that that is going to decline so that there will be less—

Mr Clarke—Demand is something different to actual approvals. I am saying that theapprovals must reduce commensurate with the available funding for the program. Demandremains to be seen.

Senator GEORGE CAMPBELL—I have some questions about the food innovationgrants, but I think I will put those on notice for you.


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Mr Peel—Senator, that is another portfolio. It is the Agriculture, Fisheries and Forestryportfolio; it is not this one.

Senator GEORGE CAMPBELL—What about the R&D Start program?

Mr Clarke—It is one or the other.

Senator GEORGE CAMPBELL—Are the food innovation grants—these FIGs—fundedby money taken out of the R&D Start moneys?

Mr Clarke—They are, but that money is now administered by the AFFA portfolio.

Senator GEORGE CAMPBELL—That is managed by AFFA; it is not administered byyou? It all relates to AFFA?


Senator GEORGE CAMPBELL—I have some questions on Ericsson which I have puton notice. I would like to go back to outcome 1 in order to deal with some of these energyissues. There is one in particular that I would like to deal with; I can probably put the rest onnotice. Do you have questions, Senator Lundy, for the AusIndustry people?

Senator LUNDY—Yes. The annual report cites the opening of 14 additional AusIndustryoffices. Can you recap briefly the location of those offices?

Mr Clarke—Certainly. These are 14 one-person offices that we have established inregional Australia. In New South Wales, they are located in Wollongong, Newcastle, Waggaand Tamworth; in Victoria they are located in Ballarat, Bendigo and Traralgon; in WesternAustralia there is one in Bunbury; there is an office in Darwin, which was a gap in our state-territory distribution; in Queensland they are located on the Gold Coast and in Townsville; inTasmania there is one in Launceston; and in South Australia they are located in MountGambier and Port Augusta.

Senator LUNDY—In terms of those one-person offices, what sort of performancemeasures have you been able to record to date?

Mr Clarke—The sort of performance goals that we established for them related tocustomer access. The underlying philosophy behind those offices was that businesses inregional Australia had an access disadvantage because of the distance to the capital city. Ourgoal is that we increase the number of companies that access entitlement programs—becausewe think it is largely an awareness issue in that they are not aware of their entitlement—andwe increase the number of applications for competitive programs. Of course, the outcomeremains the absolute merit of the application. So we established a benchmark of the numberof customers in each of the areas that we have assigned to these people.

We also looked at a benchmark of where we thought awareness in those regions wasalready at for AusIndustry. We had always been trying to service regional Australia out of ourcapital city offices with varying degrees of effectiveness, and the regions were not all thesame. Some we had done better in and there was a high awareness of AusIndustry; in somethere was less. We are using a package of growth in customer numbers but with an eye towhat sort of base they were starting from.

Senator LUNDY—In terms of how you are recording that, are those figures available?

Mr Clarke—Yes. We are getting monthly reports. On a monthly basis we look at thingslike customer visits, events and so on—the bread and butter activity that they do. Periodicallywe then review actual changes in the customer base.


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Senator LUNDY—Are you able to quantify the percentage of applicants in the variousprograms that have been successful?

Mr Clarke—Yes. We are coming up to the end of the first year of this initiative now.

Senator LUNDY—So you are running it on a calendar year cycle?

Mr Clarke—It happened to work out that way. Most of them took up their jobs inNovember or December—and a little later in one case—last financial year, so we are comingup to that milestone now.

Senator LUNDY—So you will be reporting effectively on that 12-month period?

Mr Clarke—Yes. I think we will do the first 12 months as a snapshot. We will then updatethat on 30 June and move to a financial year basis, recognising that the first six months wasjust a lot of basic groundwork anyway.

Senator LUNDY—Just to clarify, will you be publishing your report about the first 12months of their operation?

Mr Clarke—I have not given any thought to publication, but it is certainly informationthat I would be happy to provide to you when it is at hand.

Senator LUNDY—That would be useful. I am particularly interested in the proportion ofapplicants as compared to the benchmark figures—

Mr Clarke—Yes.

Senator LUNDY—and then the proportion of successful applicants in each program.

Mr Clarke—It is an obvious point, isn’t it? Are they more or less successful in theprocess?

Senator LUNDY—Yes. I know we have discussed this before, but there has been quite abit of emphasis on pushing the services out there and I am really interested to gauge howeffective it has been.

Mr Clarke—I am in the process of visiting the 14 offices. I have visited 12 of them in thelast few months and I have two more to go. I am determined to get to them before Christmas.In most of those visits I meet the local stakeholders—the state government counterparts, areaconsultative committees et cetera. The initiative has been very warmly welcomed, and thecooperation we have been receiving from our state counterparts and the local governmentinterest in all those areas have been very high. The early indicators are that we are making adifference. We are contacting customers and making them aware of the opportunities and theyare taking up the opportunities at a much higher level than would be the case if we weretrying to service it from the capitals.

Senator LUNDY—In terms of the cost and the budgeted amount for this initiative, arethere any significant variations compared to the allocation?

Mr Clarke—We were funded specifically with additional funding into AusIndustry’sdepartmental cost to support this initiative.

Senator LUNDY—Is it on budget? Are you finding that it is more expensive or are yousticking within the allocation?

Mr Clarke—We are sticking with the allocations. That is tight and one of the issues in thefirst year is learning about the differences. Some of them have very large geographic areas—for example, the whole of the Northern Territory or the whole of Northern Queensland. Othershave geography that they can easily get to within two hours drive of where they are and


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Newcastle is an example of that. Working out the base costs relative to the areas is somethingwe are gaining experience in now.

Senator LUNDY—Thank you for that. I am happy to move on to outcome 2 issues. Iintend to keep going with my questions now on outcome 2 unless Senator Campbell has anyother questions on outcome 1.

Senator GEORGE CAMPBELL—I have a couple of issues on outcome 1 relating toresources which need to be put on the record. I can put the rest on notice.

Senator LUNDY—Would you like to do that now?

Senator GEORGE CAMPBELL—Yes. Just before you go, Mr Clarke, I have a questionon the food innovation grants. I understand that they came into effect in the year commencing2002-03 and were funded from the department’s R&D Start program. Were any additionalallocations made to the funding for the R&D Start program to allow for funding for thenational food initiative?

Mr Clarke—No, Senator.

Senator GEORGE CAMPBELL—How much was paid out in that period for the nationalfood initiative?

Mr Clarke—It was a transfer of appropriations. The money was taken from the Startappropriation and put through to AFFA. I will take the actual figure on notice.

Senator GEORGE CAMPBELL—Can you also take on notice when that transfer wouldhave been made?

Mr Clarke—Yes. We will give you the administrative details of the transfer of funds.

Mr Dainer—The amount that was transferred to AFFA was $4.7 million starting this year,$7.5 million next year and $9.3 million in the following year. There is a balance of $13million for 2005-06. It is about $36 million.

Senator GEORGE CAMPBELL—What funding was sought by those 115 companies?

Mr Clarke—I will come back to you with that number, if I may.

Senator GEORGE CAMPBELL—Yes. I refer to outcome 1, resources, and the COAGenergy market review. Mr Parer recommends a single industry specific regulator—somethingthe Hilmer report warned against. No doubt the government has seen Professor Fels’scomments in relation to this matter. How can the government be certain that such a regulatorwill take into account broad national issues and, in particular, consumer issues?

Mr Ryan—I should make a few comments first. The Parer report is a draft report thatcame down last week. It is now open for comment and its final recommendations will comedown on 20 December. At this stage it is premature to say how the government are going torespond to Parer’s recommendations.

Senator GEORGE CAMPBELL—Am I asking you a hypothetical question at this stage?

Mr Ryan—In a way, yes.

Senator GEORGE CAMPBELL—I must say I have a fair degree of confidence in whatthe outcome will be. If that is the response I am going to get, there is no point in pursuing theother questions, so I will put them on notice. You will answer them at the appropriate time, Ipresume, when Mr Parer’s report is adopted by the government. Was the department involvedin any of the China North-West Shelf contract negotiations?


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Mr Hartwell—Certainly, as appropriate, a number of Australian government departmentsassisted the North-West Shelf consortium in relation to the China LNG bid.

Senator GEORGE CAMPBELL—Is that a yes?

Mr Hartwell—It is a yes.

Senator GEORGE CAMPBELL—Were you asked for advice throughout thenegotiations on the North-West Shelf contract?

Mr Hartwell—Indeed, in terms of the government-to-government relationship, which wasseen as important in facilitating the commercial negotiations, the answer to that is yes.

Senator GEORGE CAMPBELL—Did departmental representatives attend any meetingsor accompany any delegations during the time the contract was being negotiated?

Mr Hartwell—Yes.

Senator GEORGE CAMPBELL—Are you aware of any members of the governmentattending meetings or accompanying delegations during the period of time the China-NorthWest Shelf contract was being negotiated?

Mr Hartwell—Yes.

Senator GEORGE CAMPBELL—Can you identify who those members of thegovernment were?

Mr Hartwell—There would have been a whole range of people involved from time totime. Of course, in terms of the lead-up to the final outcome of our China-LNG bid, there wasa period of two to three years from when China first announced that it was interested inimporting LNG that Australia was involved in a competitive race as a supplier and therewould have been a whole range of government officials and ministers involved as part of thatprocess.

Senator GEORGE CAMPBELL—Is the department aware of any of the detail containedin the contract?

Mr Hartwell—The department is aware of the broad nature of the contract, but thespecific details of the contract are the responsibility of the commercial part of the deal.

Senator GEORGE CAMPBELL—So you are not aware of the detail?

Mr Hartwell—I am not aware of the specifics of the sales and purchase agreement, nor theequity part of the contractual arrangements.

Senator GEORGE CAMPBELL—Are you aware of the contract price of the LNG?

Mr Hartwell—No.

Senator GEORGE CAMPBELL—You are not aware of the price and you are not awarethat it is 30 per cent lower than the current contract with Japan?

Mr Hartwell—I am not aware of that.

Senator GEORGE CAMPBELL—It is understood that part of that contract affords theChinese partner shipping rights. Is that correct?

Mr Hartwell—Regarding the shipping aspect of the contractual arrangements, as Iunderstand it—but, again, I am not privy to the specifics of it and you would need to checkwith the North West Shelf people—there may be some provision for some Chineseparticipation, but I am not aware of the specifics.


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Senator GEORGE CAMPBELL—Is this contract deemed to be commercial-in-confidence?

Mr Hartwell—Yes.

Senator GEORGE CAMPBELL—All of it or only parts of it?

Mr Hartwell—I think that you would need to direct that question to the specificcommercial entities involved in the contract.

Senator GEORGE CAMPBELL—We will move on to the Australia-Chinese technologypartnership fund, which was announced by the minister at the formal signing ceremony. Canthe department confirm the establishment and financial make-up of the $25 millionpartnership fund?

Mr Hartwell—Yes, we can do that. The partnership fund is made up of a contribution of$10 million from the industry, a contribution of $7½ million from the Commonwealthgovernment and a contribution of $7½ million from the Western Australian government.

Senator GEORGE CAMPBELL—Can you outline the type of training that the Chinesegas workers will receive through workshops and training exchanges?

Mr Hartwell—That is yet to be decided. A board is being set up to administer that fund,which will have representatives of Australian industry, the Australian government, theWestern Australian government and the Chinese. Collectively, they will determine thespecifics of how these funds will be used.

Senator GEORGE CAMPBELL—When will that board come into effect?

Mr Hartwell—I cannot answer that precisely, but certainly the intention is that that wouldbe brought into operation as soon as possible early next year.

Senator GEORGE CAMPBELL—Has it been determined yet who is going to conductthe training?

Mr Hartwell—No.

Senator GEORGE CAMPBELL—Are you aware of whether or not Chinese nationalswill be given training to work on and operate the tankers that will be used to transport theLNG?

Mr Hartwell—Again, they are decisions that will be made at the appropriate time whenthe administrative architecture is set up.

Senator GEORGE CAMPBELL—Are you aware of a function that was held in Chinafollowing the announcement that Australia had been selected as a preferred supplier?

Mr Hartwell—No, I am not aware of a function in China.

Senator GEORGE CAMPBELL—The formal signing of the $25 billion contract tookplace on Friday, 18 October. Is the department aware of a delay in the signing of the contract?

Mr Hartwell—I am not aware of any delays, if that is what you are referring to. Basically,on the same day that the technology partnership fund that you have been referring to wassigned, the sales and purchase agreement was also signed.

Senator GEORGE CAMPBELL—Is the department aware that the Chinese havepurchased equity in the North West Shelf as part of the contract arrangements?

Mr Hartwell—We are aware that there is an equity part of the arrangements that have beenmade with the Chinese.


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Senator GEORGE CAMPBELL—I have a number of other issues regarding theResources portfolio but I think the majority of them can be put on notice, so I will leave itthere.

ACTING CHAIR—I understand that Senator Bartlett estimates his questioning will takeapproximately 30 minutes and Senator Lundy’s questions will take about 60 minutes. Giventhat we have less than an hour—

Senator LUNDY—That is what I originally advised the committee, Acting Chair. I will tryto condense it; I will do my best.

ACTING CHAIR—To enable everybody to ask questions, could we make sure that thetime is appropriately allocated.

Senator LUNDY—Always, Acting Chair.

Mr Paterson—Acting Chair, Senator Campbell asked a question of AusIndustry inrelation to the 115 companies that had their Start grants terminated. He asked a question aboutthe total value of those grants—not approved, but the total value of the claims made for those115 companies. The figure is $116.7 million.

Senator GEORGE CAMPBELL—That was over the full life of those grants?

Mr Paterson—The full value of the applications that were made by those 115 companies.

Senator GEORGE CAMPBELL—Thank you.

Senator LUNDY—I turn first to the action agendas. I refer in particular to the spatialaction agenda. I acknowledge the answers to questions that I placed on notice last time. I referto the table provided by the department regarding the status of the 45 action agendarecommendations. In the first instance I note that only two of those 45 have actually beencompleted. Could you give me an update? Have any other of the action agenda items beencompleted since this table was produced in June?

Mr Lawson—The nature of most of these recommendations is that we expect they will beongoing for a considerable period of time. With many of these things in one sense they willnever finish.

Senator LUNDY—I see this as being a very important area of policy. I would like to knowwhat your time frame is to speed up the implementation of the agenda.

Ms Georgopoulos—The Industry Competitiveness Division has overall responsibility forthe action agendas and monitoring. My understanding is that, with respect to theimplementation of this action agenda, there is a two-year work program and that it isprogressing on course.

Senator LUNDY—When are the two years up?

Ms Georgopoulos—The action agenda was launched on 27 August 2001. It wasannounced on 24 May 2000. A team has been established, and they had their first meeting inApril this year. So I would suggest that it will be two years after April of this year, but I willconfirm that for you.

Senator LUNDY—That gives you less than 12 months to implement the action agenda.One of the particular areas of interest is the improvement to data access and pricing. I do notknow how closely involved you are with the individual action items, but can you give anupdate as to where you are at in the availability of public data and the provision of that data,coordinated through agencies and departments for free to contribute to that public resourceobservation information?


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Dr Williams—We have carriage of a considerable amount of the spatial and geosciencedata at the Commonwealth level and we are complying with the new policy. From my point ofview, that is going extremely well. I do not have the detail with me, but we have placed aconsiderable amount of our information on the Web, and that is now available for free. We aretypically making data where bandwidth and other technical issues do not allow us to get it outeasily on the Web available on CDs, where we charge the marginal cost of transfer, which isbasically that of burning the CD. In Perth yesterday we held a big minerals explorationworkshop and one of my staff gave some statistics on the difference between last year, withthe old pricing policy, and the new free-to-air and marginal cost of charging policy. I will readyou some of those information items.

For our web site at Symonston, which is our geology and geophysical material, the averagepage views per day is now 15,250; the average for last year, pre policy, was 4,100. So it hasgone up dramatically. The average of unique clients, pre policy, was 281 per day; that is nowup to 816 per day. Last year, pre policy, about 0.45 gigabytes were downloaded per day; thatis now up to 1.26 gigabytes per day. We now have a facility for constructing maps live on theweb site in a GIS type environment and adding different information layers. Pre policy, wewere averaging 337 maps a day; that is now up to 5,000 per day. That is a tremendousincrease. Database inquiries have basically doubled from about 335 per day to 575 per day.That is the most recent information that I have.

We would estimate from our geophysical data sets, which are primarily gravity andairborne magnetic data, that under the old pricing policy and in changing to the new policysomething like $5 million worth of data under the old price has now gone out at the verycheap price of $99 a CD. The immediate impact of the policy of ensuring a much more rapiddissemination of government data into the community has certainly worked. One of the issuesthat we are now looking at is: how do we best measure the impact of having that massiverelease of data into the public?

Senator LUNDY—In terms of that quite extraordinary increase in providing electronicdata, is Geoscience Australia adequately resourced to build the back-end systems necessary tomeet the growing demand?

Dr Williams—As a CEO, I could always say we could do with more money but certainlywe have adequate funding to do the job at the level we are currently doing it at. Obviously, itis one of those operations where the more money you have the faster and better you can do it.Certainly we have moved a long way very quickly and will continue to do so at the currentfunding levels.

Senator LUNDY—Perhaps this is my opportunity to flip back to Mr Paterson and askabout the intention of the government to ensure that resources to meet a growing demand forsuch information are provided at an appropriate level to Geoscience Australia. There has beena huge growth and they are coping, but I suspect the demand for information is going tocontinue to grow.

Mr Paterson—This is a reasonably trite observation: we are always choosing amongst awhole range of desirable activities when allocating priorities. We have done that in the pastyear and we will continue to do that in future. Geoscience Australia is an important part of theportfolio. This is one element of the work that it undertakes. It has been given quite specificattention in the allocation of resources to date and I would expect that to continue.

Senator LUNDY—I would now like to ask about the photonics action agenda.

Mr Paterson—It may be useful to clarify that there is not a photonics action agenda.


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Senator LUNDY—I am trying to find the reference I have. I know there is not a specificphotonics action agenda, but I think it was identified as part of an emerging industriesprogram.

Mr Paterson—There is a cooperative research centre in photonics, which is administeredby the Education, Science and Training portfolio.

Senator LUNDY—I am aware of that. My question may be better directed to thatportfolio, but it is really about an issue that I want to follow up primarily with the minister.Over the last six months we have seen some quite dramatic changes in the global market intelecommunications, particularly in photonics, that have led to several photonics componentmanufacturers withdrawing from Australia. There have been various comments about that. Inote that JDS Uniphase’s head office rejected an attempt by local management to sustain itspresence here. This concerns technology that originally grew out of the cooperative researchcentre. Perhaps more of concern are the subsequent reduction by Corning in Victoria in thesame vein and the changes that took place with regard to AOFR and Krone in their trying toconsolidate their capability and maintain a presence. So I have a general question about thedepartment’s consideration of the changes taking place in that sector. What are you doingabout it? Is it of concern? Do you have a strategy to try to address it, given the capability thatwe have in Australia to potentially develop what is already a global niche market in several ofthose areas?

Mr Paterson—One of the reasons for creating CRCs in a number of these areas is tocombine publicly funded research activities in a variety of institutions, particularly ouruniversities, with industry partners to try to develop and commercialise some of thosetechnologies within Australia. Clearly, when sentiment shifts, sometimes dramatically, inrelation to world markets it will have an impact on Australia. It continues to be in part theresponsibility of that CRC to continue to explore the opportunities. As I said earlier, it is aresponsibility of the Education, Science and Training portfolio to manage that CRC and thefuture funding arrangements that might be applied to that CRC. But there are some verysignificant shifts in world demand, very significant changes in relation to investment andexpectations in relation to telecommunications and related technologies, and we are notimmune to those.

Senator LUNDY—My understanding—and please confirm if this is the case—is that therewere some discussions between the department and some of these companies about whatassistance could be provided and that there were no programs that fitted the scenario thecompanies faced. Perhaps you could tell me if that is the case. Do you have any policythinking about what the department is able to do in similar circumstances in the future, giventhat we are now faced with losing quite an important capability in that area, albeit one that ispretty quiet globally at the moment?

Ms Berman—There have been discussions across departments about the JDS Uniphaseissue. As you would imagine, the Department of Communications, Information Technologyand the Arts is interested, and so is the Department of Education, Science and Training.Significant assistance has been provided to the head of the CRC for photonics in the form ofsuggesting a number of options and people that he might like to talk to about possibleinvestment to maintain the local spinout firm. So there is ongoing negotiation. We would notbe the leading that. It would be more from the education and the IT departments.

Senator LUNDY—They manage the CRC department?

Ms Berman—The education department manages the CRC but the department ofinformation technology is also naturally very concerned in this area.


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Senator LUNDY—Those witnesses have gone; we had them yesterday. That is all I canspend time on, thank you. I would now like to ask a few questions about the innovationinvestment fund and related funds, as well as the pending LLP legislation. Perhaps we willstart with the IIF. I note with interest that the management of the innovation investment fundgot a reasonably big tick in the performance audit conducted by the Audit Office, which wasvery good news. It did make two recommendations, which the department and the boardagreed to. I have not had the opportunity to read this report in depth; I have read the summaryand recommendations and the audit’s conclusions. In the section of the audit report entitled‘Recommendations and DITR & IR&D board response’, there is reference to three criticalareas that have been well managed. The report goes on to say:... there is room for improvement in performance measurement against objectives ...

Could you spend a few minutes saying where you think there is room for some strengtheningin the area of performance measurement against objectives, knowing that even the AuditOffice stated that it was a high-risk endeavour and that you have come up the pretty goodresults?

Mr Clarke—Thank you, Senator. As the Audit Office indicated, the IIF was quite aninnovative and unusual program. Of course, these funds have 10-year lives. So we are acouple of years into managing a 10-year program. One of the issues that came out clearly inthe Audit Office report is that, during the establishment phase—the selection of the fundmanagers, the negotiation of licence agreements, the bedding down of the Commonwealthinvestments—our overwhelming priority was doing that properly, making the best selectionsof the fund managers and setting in place all of the governance and protection mechanisms.

The Audit Office is now saying, ‘You did that very well, but now you need to look moreclosely at actually measuring the outcomes and impacts of the program against its originalobjectives.’ The outcome objectives were things like tracking the performance of the actualcompanies that received the investments and trying to get a better handle on what impact theIIFs have had on the venture capital market as a whole, the turnover and development of thefund managers—the individuals working in the funds. The Audit Office is saying that theprogram is now at a stage where we need to be giving more attention to those objectives, sowe will be looking at things like tracking studies in order to get better indicators of them.They have also suggested to us that we should be publishing that information more widely,because the objectives of the program are, in part, in the nature of a demonstration effect—

Senator LUNDY—And promotion.

Mr Clarke—and you have to publish something in order to demonstrate it. That is the sortof direction they are encouraging us to go in, and we are very comfortable about being pusheddown that line.

Senator LUNDY—The state of the market—and this is not peculiar to Australia—hasmeant that there has been a hiatus in investment in some cases. I do not want to generalise toomuch, but it is definitely a different environment than it was.

Mr Clarke—In the ICT it definitely is, but not in the biotech area.

Senator LUNDY—How does that impact upon your performance measures, and how doyou take that hiatus or downturn into your performance measures? It is not something that isin your control, but it will have a direct impact on the IIF.

Mr Clarke—To get into that we really have disaggregate the program a little bit. The IIFwas established through two rounds. The first set up five fund managers, and the secondround established a further four fund managers. Those first five were a couple of years in


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front of the second round. Those first five are now basically fully invested—that is, they haveeach made investments in between eight and 12 companies—and our expectation is that theywill not make any more investments. One or two of them might squeeze one or two more in,depending, but we are not anticipating that. For those first five fund managers, tracking theirinvestments and the performance of the fund as a whole is clearly what we are doing now.The subsequent four round two fund managers are not fully invested yet and will not be foranother couple of years.

Senator LUNDY—That is really where this hiatus will impact on the ICT area.

Mr Clarke—The round two guys are being a lot more cautious about ICT investments, sothey are not investing as quickly as the round one managers either.

Senator LUNDY—I note in the annual report that the return to the government from theoriginal LookSmart investment—some $31 million—has been put into another fund, a newfund—

Ms Berman—No, it is not a new fund. It is what is described by the department of financeas a revolving fund category. It is not being used at this point in time for a new fund.

Senator LUNDY—I appreciate that. So, what are your plans for that? I think in the annualreport it talked about waiting until that matured somewhat from $31 million up to about $60million. Then what do you plan to do?

Ms Berman—I think it is under active consideration, but at this point in time governmenthas not made any decision about it.

Senator LUNDY—I think the implication—I read it very quickly—is that you would lookat reinvesting it into similar programs to help make IIF, for example, more self-sustaining.

Ms Berman—Shortly after the LookSmart funding came back, there was a media release. Ithink it did indicate what you have said. I think it was 1999—

Senator LUNDY—It was a while ago now.

Ms Berman—Yes, it was a little while ago. There has been a lot happening, as you haveindicated, in the tech wreck. I think that is another consideration that was not in people’sminds at that point in time but it is something that is now being considered. In relation to yourquestion about performance indicators, clearly it would be irresponsible of us not to considerthe context in which those funds are reporting back on their performance in terms of changesin the global market. That is what we would add to make sure that we picked up the broadercontext in which they are operating.

Senator LUNDY—I would like to move very briefly to tourism issues. I am veryconscious of the time, so we will be putting a few questions on notice. I understand that thegovernment intended to release a green paper some time in October on the future of tourism.Can you tell me when that green paper is likely to see the light of day?

Mr Paterson—At this stage, we cannot give a clear indication when that will be released.There has been a detailed process of consultations with the industry in preparation for therelease of a significant discussion paper and a process of consultations and review of thesubmissions since that time. A lot of work is being done on the preparation. However, at thisstage, it has not been considered by the government and it is unlikely to go to cabinet thisyear. At this stage, we are not in a position to indicate when that is likely to be released.

Senator LUNDY—If it has not gone to cabinet and it is not likely to come out this year, itis going to be at least February or March next year, isn’t it?


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Mr Paterson—As I said, it is not going to go to cabinet this year and I cannot indicatewhen it is likely to get there in the current circumstances.

Senator LUNDY—Why has it been delayed?

Mr Paterson—There has been an extensive consultation process. I think you would beaware, Senator, that there is a whole array of issues that no-one had contemplated earlier thisyear that require cabinet’s detailed consideration and we are just not able to get a slot for theconsideration of that paper.

Senator LUNDY—So the delay relates more to cabinet’s timetable than your not beingready?

Mr Paterson—Correct.

Senator LUNDY—Once it is released, and I know that we are not going to see it this year,what is the process for consulting formally with the industry and the sector about the issues inthe green paper?

Mr Paterson—We, and the government, would need to contemplate the position at thetime. Given that we cannot identify the timing at this stage of when it might be considered bythe government, a consideration of that timing would have to influence what process wastaken forward and that decision has not been taken at this time.

Senator LUNDY—Minister, what level of priority does the government put on this greenpaper given that it was supposed to come out in October?

Senator Minchin—I am not aware that we set a formal timetable for its release butobviously the health of the tourism industry is important to us. It is an important initiative tohave a green paper followed by a white paper. There is a lot of pressure on cabinet’s time, asyou would understand. There is a whole range of issues before us. However, I am sure that theminister will get it to cabinet as soon as he is able to.

Senator LUNDY—I note that the role of local government in tourism was not mentionedin the original discussion paper that the minister put out earlier in the year. Doesn’t localgovernment have a key role to play? Why were they not included?

Ms Kelly—Local government did feature in many of the 275 submissions to the greenpaper. Certainly we acknowledge local governments’ legitimate interest and concern intourism. The department has recently put in a submission on the tourism issue to theparliamentary inquiry into local government and cost shifting. We are also undertaking aproject with a number of local councils at the moment looking at the costs and benefits oftourism in a number of local government areas. We have not yet finished the process ofnominating those local government areas. However, we certainly work with the localgovernment sector and acknowledge their legitimate interest in the area.

Senator LUNDY—So will the role of local government in tourism be canvassed in thegreen paper?

Ms Kelly—It is certainly one of the issues that is taken into account in the green paper.

Senator LUNDY—There has also been a lot of industry and media speculation aboutmodels for funding and the initiatives contained in the green paper. I guess that is because theoutline of the process published on the department’s web site says that financial impedimentswill be examined and an implementation process developed. What options are beingconsidered for financing initiatives contained in the paper?


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Ms Kelly—Since that is a matter covered in the green paper and it is a form of policyadvice to government, I do not think that I can comment on that at this point.

Senator LUNDY—Are you in a position to rule out an extension of the Ansett levy?

Ms Kelly—I do not think I can comment on what is going up before ministers forconsideration.

Senator LUNDY—I will ask the minister. Minister, are you in a position to rule out anextension of the Ansett levy to fund tourism initiatives?

Senator Minchin—I think the current position with the so-called Ansett levy is that it willremain in place as long as we are able to meet the obligations that we undertook in relation toemployees. We certainly have no plans to extend it. We have not considered what theportfolio might bring to cabinet in relation to tourism so I cannot comment on what mightcome out of that discussion.

Senator LUNDY—But, from what you have just said, you should be in a position to rule itout. If it is there for its original purpose—

Senator Minchin—The current policy is that it will cease as soon as possible, once wemeet the obligations that we undertook in relation to Ansett employees.

Senator LUNDY—So are you prepared to put on the record that you are ruling itsextension out?

Senator Minchin—Regrettably, I cannot speak on behalf of the whole government. All Ican tell you—

Senator LUNDY—It’s pretty straightforward. If you don’t, it just looks like you arefudging it—trying to squib it.

Senator Minchin—Current policy is to end that levy as soon as possible.

Senator LUNDY—So rule it out if that is the case.

Senator Minchin—I know of no plans whatsoever to extend it for any other reason.

Senator LUNDY—But you won’t rule it out?

Senator Minchin—All I can tell you is what the current policy is, what the current intentis and my awareness or otherwise of any plans to do anything other. I am not aware of anyplans to extend it. It is the policy of the government to end it as soon as it possibly can.

Senator LUNDY—Could I ask whether you are prepared to rule out a further increase inthe passenger movement charge?

Senator Minchin—I am not aware of any plans to increase the passenger movementcharge.

Senator LUNDY—That is why I am asking you to rule it out.

Senator Minchin—I am not aware of any plans to increase that charge.

Senator LUNDY—I don’t think I am going to get much more out of you. Has any otherform of industry levy or tax been considered?

Senator Minchin—I know you are into ruling things out because of Mr Swan and hiscomments, but all I can do is restate government policy.

Senator LUNDY—Here is your opportunity to rule out more taxes and more levies onAustralian citizens and you are not doing it.


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Senator Minchin—We are the low-tax party; we do like to—

Senator CONROY—You’re the highest taxing government in this country.

Senator Minchin—Mr Chairman, who asked Senator Conroy? Is he a member of thiscommittee? Could you ask him not to interrupt Senator Lundy in her questioning?

Senator LUNDY—You are being given on a platter a beautiful opportunity to rule outfurther taxes and levies on Australians and you are just not going to take it; you are just goingto let it go past.

Senator Minchin—All I can do, Senator Lundy, is say that I know of no plans to changeany of those levies, and to restate current policy, which is that the Ansett levy will be removedas soon as possible. I know of no plans to extend it and I certainly know of no plans to changethe passenger movement charge.

Senator LUNDY—The timing of the green paper has been pushed out. Given thosedelays, is there any idea of when we are likely to see the white paper?

Mr Paterson—As I indicated earlier, given that we have no current indication of when thecurrent plan will be considered, we cannot comment on what the process may be goingforward. As I think I indicated in response to your earlier question, the process going forwardwill obviously be influenced by the timing of that consideration.

Senator LUNDY—I recall that after September 11 a tourism industry working party wasestablished to address issues related to the impact on tourism of the Bali bombings. AfterSeptember 11 has anything been done with respect to the Bali bombings?

Ms Kelly—We are monitoring the situation very closely post Bali. I have written to allstate and territory tourist commissions asking for information. The minister has written toover 40 CEOs asking for structured feedback. The leading indicators, which is a quarterlystudy by the Australian Tourist Commission and KPMG, will be monitored very closely to tryto ascertain what the impact is. It is rather too early to say what the post Bali impact will be inthe medium term.

Senator LUNDY—In an election environment after September 11, the government wasvery quick to establish a tourism industry working party. It seems to me that there just doesnot seem to be the required level of priority on it. Why hasn’t a specific working party beenestablished?

Ms Kelly—The difference with the events of September 2001 is that we were largelydealing with the collapse of Ansett, and the schemes that were set up following the tourismindustry working group were largely directed at addressing the impact of the collapse ofAnsett.

ACTING CHAIR—Senator Lundy, Senator Bartlett indicated that he wants 30 minutes;he now has only 20 minutes. Also, Senator Conroy indicated that he wants about 20 minutes.So we do have a problem.

Senator LUNDY—Under duress from you, Chair, I will put the rest of my questions onnotice.

[12.12 p.m.]

Geoscience AustraliaSenator BARTLETT—I want to follow up on something from the last estimates

hearing—some correspondence that flowed from that between Dr Powell and the chair of theMarine Park Authority, which I presume you are aware of, Dr Powell. In your letter of


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18 September, you confirmed that the Marine Park Authority had not commissioned or soughtthe acquisition of the SAR data, and you outlined a bit of the history of the acquisition. Youindicated that interest by GBRMPA began at a conference in Bali in October 2000, whereapparently some GBRMPA staff expressed some interest. Is that basically correct?

Dr Powell—GBRMPA did not commission the acquisition. We had developed a proposalto investigate the impact of oil seeps on the development of reefs in north-east Australia andwe had some discussions with GBRMPA staff about their potential interest.

Senator BARTLETT—Those were discussions at the Bali conference?

Dr Powell—Yes.

Senator BARTLETT—According to your letter, the matter was then followed up by DrO’Brien and you were briefed as to GBRMPA’s interest in late 2000, but you only becameaware that Dr O’Brien authorised the purchase of that date earlier this year. Is that correct?

Dr Powell—I have no memory of the data actually being acquired. To put it in somecontext, Dr O’Brien briefed me verbally about GBRMPA’s interest. We had acquired the SARdata earlier as part of our general approach to look for hydrocarbons in the ocean, as part ofour general new program direction was to support regional marine planning and matters to dowith environmental management.

Senator BARTLETT—Again, according to your letter you say you have been advised thatDr O’Brien followed up on this matter with GBRMPA staff members after the Bali meeting.

Dr Powell—That is correct.

Senator BARTLETT—Do you know what sort of follow-up that was? Was there anycorrespondence or were there any emails or phone calls?

Dr Powell—Yes, there were phone calls. I have spoken to Dr O’Brien and there were someemails. Unfortunately, the backup systems on GA computers failed. I know it sounds veryconvenient but that is what happened. We have no record of his emails backwards andforwards with GBRMPA.

Senator BARTLETT—Those emails were basically following up potential interests?

Dr Powell—Yes.

Senator BARTLETT—Presumably that potential interest did not lead anywhere.

Dr Powell—There were two incidents: first of all, in late 2000, I understand that one ofthose carriers ran aground in the Great Barrier Reef region. In fact, the staff involved got,understandably, preoccupied with other matters. Then early in 2001, Dr O’Brien became ill.He was in and out of the office for a year and that particular issue was not followed up.

Senator BARTLETT—At the time of your briefing from Dr O’Brien, the data had alreadybeen purchased. When was the purchase made?

Dr Powell—There was some data purchased in late June 2000.

Senator BARTLETT—So he had briefed you in late 2000 about GBRMPA’s interest?

Dr Powell—Yes.

Senator BARTLETT—But you still were not made aware that he had already purchasedthe data?


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Dr Powell—My recollection is that, when it was drawn to my attention earlier this year,that was the first time it had been drawn to my attention that we actually had the data. It isquite possible that I was aware of it earlier but certainly I do not recall.

Senator BARTLETT—It cost about $50,000 to purchase that data. Would you normallyhave to authorise a purchase of that size?

Dr Powell—Yes. Certainly the requisition order has come to light in the last two days and,yes, it is my signature on it.

Senator BARTLETT—So you authorised it at the time?

Dr Powell—I authorised the purchase. The division has four branches, and the divisionmanager is the person who actually orders the data and, as long as it is consistent with thegeneral direction, I just sign off on it.

Senator BARTLETT—So it was one of those things that you would sign withoutparticularly absorbing what was on it?

Dr Powell—Yes, because it was a long list of SAR scenes and SAR acquisition was part ofour strategy across many parts of Australia.

Senator BARTLETT—Subsequently, an extra $48,000 was spent on an assessment of thescenes, given that it had already been bought.

Dr Powell—Yes, earlier this year.

Senator BARTLETT—Also, around the same time you received the consortium proposalfrom Shell-Woodside. What is the normal procedure when project proposals such as this arereceived?

Dr Powell—First of all, it was not a formal project proposal, given the fact that it was sentby email from the regional studies coordinator at Woodside following a conversation betweenthat person and some of my staff at the APPEA conference. It was an idea, and we thought itwas a bad idea—and we told them that accordingly.

Senator BARTLETT—You told them verbally, did you say?

Dr Powell—Yes. Essentially we had had discussions with the oil industry early in the yearabout the nature of our work program. This particular individual became aware that we wereundertaking a project in eastern Australia to review particularly the Lord Howe Rise and todocument what we knew about the geology of offshore eastern Australia. He was trying tostart up a project within Woodside, I understand, on such work and thought it would be a goodidea if we did it jointly. Unfortunately, because of the areas that he wanted to look at andbecause of the conditions that he wanted to apply to the project, we thought that it wasentirely inappropriate for us to participate.

Senator BARTLETT—In June this year, in response to a question I asked, you indicatedthat there were informal discussions with representatives of companies from time to timeabout their interests up there, which were characterised as the industry simply asking: hasthere been any change in policy relating to north-east Queensland? Does this proposal fromShell-Woodside fall into that sort of category? Was it an informal offer?

Dr Powell—Certainly, given the nature of the proposal, we saw it very much as kite flying,to be quite honest.

Senator BARTLETT—So would it fit into the type of description that you gave?

Dr Powell—Yes.


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Senator BARTLETT—The GA work plan for 2000-01 contains no mention of any workin the north-east margin but the work plan for the year after does put it back on the agendaunder section 2.11 regarding a geological overview of the east coast basin. It appears to methat there was work being done in that area in 2000-01, but what circumstances led to thatarea being put back on the work plan?

Dr Powell—The relevant project in 2000-01 was called east and south-east, whichincorporated the eastern region. In 2000-01 we split that project into two because it turned outto be very large and unmanageable. The reason eastern Australia is identified in the latterwork program is that it was broken out of the east and south-east project in 2000-01. So, infact, work had been going on and it was documented as going on in 2000-01.

Senator BARTLETT—The component in the 2000-01 work plan mentions:A geological overview of the east coast offshore basins in order that decisions can be made regardingpetroleum exploration opportunities and acreage release.

Does that have any correlation with the use of the SAR data?

Dr Powell—No. The acquisition of the SAR data in the Great Barrier Reef region was tofollow up on the possibility that reefs in that region were associated with potentialhydrocarbon seeps, as has been found off the north-west coast of Australia in places like theTimor Sea. The reasoning behind this proposal is that, if reef development in areas such asnorth Western Australia is associated with hydrocarbon seeps then, firstly, there areconsiderable implications for how you would monitor the impact of the petroleum industry upthere. Secondly, in the case of the Great Barrier Reef, whereas one might think thathydrocarbons in that region would be associated with perhaps shipping, pollution ordischarge, there is a possibility that it was associated with natural seeps. That was thephilosophy that underpinned our reason for doing a preliminary assessment of that in north-east Australia. In terms of acreage release and petroleum potential, in the 1999 governmentoffshore strategy document the Lord Howe Rise was identified as a potential area for releaseof petroleum acreage in the future, and our work is focused on the Lord Howe Rise.

Senator BARTLETT—Among the documents that were provided through the ministerjust recently, which I imagine you would be aware of, there is a note from Mr TonyStephenson about potential further work. A company called Infoterra is advertising for sale aninterpretation of 120 dual coverage SAR seams over a range of areas, including offshore FarNorth Queensland. It says the chief of PMD, the Petroleum and Marine Division—

Dr Powell—That would be me.

Senator BARTLETT—has given consideration to the purchase of the data but has madeno decision to proceed. Why would you give consideration to the purchase of data aboutoffshore Far North Queensland? Would it be in terms of the same ongoing ecologicalenvironmental project?

Dr Powell—Another issue comes into play here. The next regional marine planning area isthe Torres Strait and the eastern Gulf of Carpentaria. In fact, that set of data is in the very farnorth of Queensland and could be relevant to that area. We have made no decision to purchaseit because the regional marine planning for that area with the National Oceans Office is notfinalised.

Senator BARTLETT—Do the east coast basins under that category include areas like theTownsville Trough, the Queensland basin and the like?

Dr Powell—Yes.


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Senator BARTLETT—With the environmental purposes that you say you are using thedata for, does that link into any particular place, any outputs or details in your work plan?

Dr Powell—The year 2000 was the first major planning period after the government’sannouncement of the oceans policy. It became quite clear that we had a role to play inadvising particularly environmental agencies on the application of geological data to variousenvironmental purposes. As a result of that and because of our experience with detecting oilin the sea, we saw oil in the sea as a subject area where we could interest environmentalagencies in the application of geoscience work. Satellite data is a reconnaissance tool that youwould use to detect oil in the sea for whatever purposes. It is very effective because you cancover very large areas at relatively low cost.

With respect to the outputs in the 2000-01 program, there was a project under theenvironmental and marine part which identified providing advice to regulatory authorities ineastern Australia as to the potential of geoscience data for environmental management. Thewords are stated in the work program. The work that we did was of an experimental nature totry to interest agencies in this type of work. The logical area would be the Great Barrier ReefMarine Park Authority.

Senator BARTLETT—During last year it appears there was a significant acquisition ofnewly programmed radar sat scenes in the Coral Sea and inside the Great Barrier Reef MarinePark. Is that data different from SAR data and can it still be used to detect seeps?

Dr Powell—It is the same. Synthetic aperture radar data is satellite data. In 2000 weacquired some scenes. There were gaps in those scenes. Dr O’Brien was seeking to fill in thegaps.

Senator BARTLETT—So radar sat is just another way of—

Dr Powell—Yes, it is the same technology.

Senator BARTLETT—In the DITR annual report there is reference to GeoscienceAustralia’s total resources. You had a budget that included income derived from sources otherthan government. It was initially budgeted at $7.24 million and it ended up coming in at $26.7million. Do you have a breakdown of what that revenue is and why there was such a massiveoverrun in your revenue?

Mr Robinson—The income received from sources other than government in 2001-02 is setout on page 364 of the annual report, in our financial statements. It shows a figure of $7.8million for sales of goods and services, $611,000 for interest and $1.6 million for other.Where are you getting the figure of $26 million, Senator?

Senator BARTLETT—From table 39 on page 204.

Mr Robinson—It has been treated differently in the report and in the audited statements, Iam sorry to say. In this table it is the net assets of the transfer from the amalgamation ofAUSLIG with AGSO in creating Geoscience Australia—$16.7 million from that source as aresult of that amalgamation. So it is really an internal thing within the department andportfolio.

Senator BARTLETT—That makes a bit more sense.

CHAIR—We now come to small business.

Senator CONROY—I am wondering if your department or the Office of Small Businesswill be putting in a submission to the Dawson committee.

Ms Weston—I might ask my colleague to answer that one.


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Mr Pennifold—You were talking about the Dawson committee. Would you repeat thequestion please?

Senator CONROY—This is the one into the Trade Practices Act.

Mr Pennifold—You asked if we were making a submission. The answer to that is no. Wehave not made a submission.

Senator CONROY—You are not from the Office of Small Business—that is why I amlooking confused.

Mr Pennifold—I am not with the Office of Small Business but we are handling thequestion of a submission to the Dawson review on a portfolio-wide basis.

Senator CONROY—That is on behalf of the Office of Small Business. Why aren’t youmaking a submission?

Mr Pennifold—The reason that the department is not making a submission is that weconsidered that our primary role was to advise our ministers on an appropriate response to theDawson review. It was the department’s view that the development of a government responsewould provide the best opportunity to address the competing interests of the very wide rangeof industries and businesses of different sizes that are encompassed within the portfolio.

Senator CONROY—So you do not think there are any unique perspectives from smallbusiness and the Office of Small Business that may be of assistance to the Dawsoncommittee?

Mr Pennifold—The Office of Small Business, along with other parts of the department,has been very closely looking at the submissions that are being made to the review and it willbe canvassing those interests and opinions once the results have come out. The Office ofSmall Business will be amongst those in the department who will be advising the ministersabout the appropriate input to the government’s response to the Dawson review.

Senator CONROY—So you do not think small businesses have any unique views at allthat are worth putting forward to the Dawson committee in the first stage of the consultationprocess?

Mr Pennifold—We have taken the view that there have already been a number ofsubmissions made to the review, many by small business concerns, and they have been wellrepresented.

Senator CONROY—Minister Hockey has been reported in the press as having indicatedto a small business forum recently—I presume you would not have been there, so we mayneed the Office of Small Business officers back at the table—

Mr Pennifold—I think you are right. I will ask my colleague from the Office of SmallBusiness to address that specific point.

Senator CONROY—Welcome back, Ms Weston. I did not realise I was going to lose youthere. Minister Hockey is quoted as saying that his department would not be putting in asubmission because ‘at the urging of many small business groups’ it was agreed not to put in asubmission. Are you aware of any small business group that has spoken with your office—MrPaterson, you may be able to help, because maybe small business groups might have come tothe department as a whole—and urged the department not to put in a submission? Did anysmall business organisation contact you with that request?

Ms Weston—I was at the forum, sitting behind the microphone to the left of the minister,and I actually did not hear him say that. He has been speaking to a lot of small business


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organisations and I obviously was not there for all of those. I cannot comment as to if he didindeed say that—

Senator CONROY—I was not asking you if he said that.

Ms Weston—And I am not aware of any that have.

Senator CONROY—I was asking you whether any small business organisation hadcontacted your office or, Mr Paterson, the wider department urging the department not to putin a submission. Are you aware of any small business organisations that did that? You arefamiliar with many, I know.

Mr Paterson—I am and I am not aware of any such proposition. I read the newspaperarticle and that was the first I was aware of it.

Senator CONROY—So it is agreed then that at no stage has any small businessorganisation contacted the Department of Industry, Tourism and Resources or the Office ofSmall Business urging that the department not put in a submission. Are you aware of thegovernment’s so-called choice of superannuation funds bill?

Ms Weston—Yes, I am.

Senator CONROY—What are the implications for small business, in your view? Did youput in a submission to the Senate select committee which examined the bill?

Ms Weston—I am not sure that we were asked to, but we have certainly been in extensivecontact with the ATO and Treasury on the potential impacts on small business. It is a concernof ours, of course, but it is all part of this—

Senator CONROY—What are your concerns?

Ms Weston—There are concerns about the compliance costs for small business inadministering that. Obviously it is about balancing community and employee needs with theconcerns of small business, and we have been advocating the small business concerns in thisdebate.

Senator CONROY—Are you able to take it on notice to give us a list of the concerns thatyou have been raising with the department?

Ms Weston—They probably form policy advice that we—

Senator CONROY—I accept it if that is the answer. You said you were particularlyconcerned and you were putting it forward, so I just thought that I would check. Is thereanything at all that you might be able to advise us of as to your concerns? Other than sittinghere and saying, ‘We’ve raised our concerns,’ are you able to give us an outline of yourconcerns?

Ms Weston—I think anyone who had some awareness of the legislation would realise thatthere will be some additional compliance requirements for small business. Interestingly, I waslistening to a chap from one of the accounting providers and it looks like they are actually—

Senator CONROY—They are very excited by it.

Ms Weston—The enhancements to their software will help.

Senator CONROY—They are very excited by how much business it is going to generatefor them.

Ms Weston—So that was quite encouraging. To help overcome—


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Senator CONROY—I am not sure that the providers of the service to help get over thecompliance problem are the people you want to take your advice from on this.

Ms Weston—No, I was just noting that at least there is some action.

Senator CONROY—There are some winners! And many accountants are smallbusinesses, so I guess you can say that there is one plus side to it. Are you aware of thequestioning in the Senate estimates committee where the costs to small business werediscussed? Have you seen the Hansard on that?

Ms Weston—I have not seen that.

Senator CONROY—I might just refer you to it. Some of the evidence talked about thepotential legal liability that small businesses may incur following the bill. Are you aware ofthat as an issue for small business?

Ms Weston—I recall seeing a press release that covered that recently.

Senator CONROY—Do you think that that is a valid concern?

Ms Weston—I have not looked at that myself. I would need to look at it more closely.

Senator CONROY—Will the office be looking at that?

Ms Weston—We are looking at the choice of fund.

Senator CONROY—The potential legal liability?

Ms Weston—That would be part of that, yes. We would be interested in looking at anyissue relating to that.

Senator CONROY—Mr Paterson, are you aware of the potential legal liabilities thatarise?

Mr Paterson—Certainly it has been raised in the general discussion and debates in relationto choice of superannuation fund over an extended period of time.

Senator CONROY—Are there any concerns about increasing legal liability on businessesor small businesses in particular?

Mr Paterson—There is always a concern about increasing legal liabilities and it issomething that I know has been actively contemplated throughout the time that this issue hasbeen in the public debate.

Senator CONROY—Ms Weston, are you aware of the $13,200 per employee fine on astrict liability basis? That would be an impost on a small business with 20 employees of$264,000 for just getting it wrong once. It is strict liability, so it does not matter why: if youget it wrong and you have 20 employees, you are up for $264,000.

Ms Weston—I saw information about that in a press release and I am having some peoplelook at it for me. I have not seen the response; I have been preparing for this.

Senator CONROY—You haven’t been able to hear the screams? I thought it was a smalloffice. It has been suggested that there are also additional costs of compliance and red tape. Topay the employees’ superannuation there are 35 main steps of compliance. You said you haveparticularly been raising the compliance issue. My colleague Senator Sherry prepared this—itis a chart of the 35 steps that you have to go through as a small business to fully comply. Wemight post you a copy of that. It will be a large envelope, as you can see.

Ms Weston—I would be pleased to look at it, especially in colour.


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Senator CONROY—You might want to show it to the tax office. Each mistake is $13,200per employee.

Senator TCHEN—Senator Sherry could have got it wrong, of course.

Senator CONROY—No, I am confident that Senator Sherry has been able to get this partright. You are welcome to take this around to some small businesses and check with them.Are you aware that small businesses might find themselves having to pay 20 cheques to 20funds each quarter under this proposal?

Ms Weston—I have yet to see the final regulation requirements around that. We wouldobviously be interested to see whether that would be one of the final regulations required.

Senator CONROY—When you say ‘final regulations’, if we got full deregulation andeach employee could choose—

Ms Weston—It is my understanding that the choice of fund is not passed yet.

Senator CONROY—I accept that, but that is a potential outcome if the legislation ispassed in its current form. Each small business with 20 employees would have to pay 20cheques each quarter to 20 different funds. That is a lot of licking stamps and putting them onenvelopes.

Ms Weston—It would be interesting to have a look at what employees of small businessdo and to profile how people actually do deal with their superannuation and whether theywould be interested in changing regularly. It would be interesting to see how people move inthe situation where they have a choice.

Senator CONROY—There is some overseas experience. Are you familiar with that? TheUK and Chile are the two with the most deregulated systems—like the one we areproposing—and the churning that takes place is fairly substantial. Churning generates fees forthe people who do the churning. Are you aware that Treasury has confirmed that not a singlerepresentative of small business has been consulted at any time over the last five years that theso-called choice proposal has been under consideration?

Ms Weston—I am not aware of that statistic.

Senator CONROY—This was Treasury evidence to the committee. They did not speak toone single small business in the five years they have been kicking this around. Minister, doyou think that is good enough?

Senator Minchin—I have not seen that testimony.

Senator CONROY—Do you care about consulting small business?

Ms Weston—We have certainly been involved in the discussion—

Senator Minchin—I have not seen that testimony in relation to the Treasury.

Senator CONROY—We will forward that on to you.

Senator Minchin—Even if true, it does not necessarily indicate that there was noconsultation anywhere in the government.

Senator CONROY—It is Treasury’s bill. Senator Watson is on the committee. If I wasmisleading you on the evidence, I am sure that Senator Watson would have mentioned it bynow.

ACTING CHAIR—There was certainly consultation through the minister’s office.

Senator CONROY—I said Treasury—the department that made the bill.


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Senator Minchin—Whether or not that evidence is accurately represented by you at thiscommittee, I would mention that the extent of consultation would have been significant at thelevel of the minister in his office.

Senator CONROY—I have great faith in Senator Watson. If I was misleading you, hewould have corrected me by now.

ACTING CHAIR—There was consultation. I am not privy to who was present.

Senator CONROY—I will move on. Ms Weston, are you aware that Labor has proposedto amend the bill to exempt small businesses from the choice regime and that this has beenendorsed by the Council of Small Business Organisations of Australia? Does the office have aview on exempting small business from this particular bill?

Ms Weston—I was aware of the COSBOA view only through Senator Sherry’s pressrelease yesterday. With 3.3 million employees in small businesses, I would wonder whetherwhat the government was trying to achieve would be achieved by that. That would be a verydifficult one for me to comment on and probably one for the government.

ACTING CHAIR—Senator Conroy, your questions are hypothetical ones, because, if theLabor Party are not going to support choice, how could they support the Labor Partyamendment?

Senator CONROY—We have indicated that we are going to amend it, but thanks for thecontribution. I will move on, because I am conscious of the time and I want to try and finishthis as quickly as I can. In the Canberra Times on 4 July the Minister for Small Business andTourism was reported as saying that he did not accept the banks’ arguments that the fall ininterest rate margins had offset any increase in fees for the small business sector and that heneeded more facts. Have you been approached by the minister for your advice and assistancein respect of the arguments put forward by the banks to support their fees?

Ms Weston—We provide the minister with advice on a variety of issues from time to time,including bank fees.

Senator CONROY—Has he asked you for specific advice? He says, ‘I need more facts.’You would normally expect him to then turn around to the department and say, ‘Give mesome facts.’ Has he approached you and asked you?

Ms Weston—We provide the minister with information, including information on bankfees from time to time.

Senator CONROY—Have you provided such information recently?

Ms Weston—Banking has been quite a—

ACTING CHAIR—This is advice between the department and the minister.

Senator CONROY—Ms Weston is fully aware of her obligations and I am sure that, if shefeels that I am crossing the line, she will point that out to me, as she has already done.

ACTING CHAIR—I am just trying to protect the witness.

Senator CONROY—In the same article it was reported that the minister said that therewas no need for an inquiry by the ACCC into small business bank fees and charges. He saidthat instead some ‘hard-core proposals’—that was his exact phrase—should be developed todeal with the problem. Are you working on some ‘hard-core proposals’ to deal with theproblem of bank fees? Are you able to tell us about hard-core proposals?


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Senator Minchin—Mr Acting Chairman, I do not think that these are at all appropriatequestions to the department at supplementary estimates. I would ask you to rule them out andask the senator to move on.

Senator CONROY—I am asking whether you are working on hard-core proposals to dowith small business.

Senator Minchin—It is not appropriate to ask about internal workings of that kind thatrelate to the relationship between the minister and the department.

Senator CONROY—I am not asking about that. I am asking whether they are doing anywork on it at the moment, not whether they are going to give it to the minister. I am not askingfor advice to government; I am allowed to ask about everything else.

Senator Minchin—I do not think that it is appropriate for the department to talk aboutanything of that kind that they might be working on internally.

Senator CONROY—I am not asking about advice to the minister at the moment, and thatis the only thing that is embargoed. Ms Weston and Senator Watson have made that point tome. You cannot just say, ‘You can’t ask the department about what they are working on.’ Thatis an absurd proposition.

ACTING CHAIR—It is preliminary information leading to advice.

Senator Minchin—In my view, that is out of order.

Senator CONROY—I will take it from that answer, Senator Minchin, that you and thegovernment are not interested in the issue of bank fees and charges and their impact on smallbusiness.

Senator Minchin—You can take whatever you like, Senator Conroy, but that would be anonsensical conclusion.

Senator CONROY—It is as nonsensical as you saying that I cannot ask the departmentwhat it is working on.

Senator Minchin—We are talking about the process in this committee.

ACTING CHAIR—You are already five minutes over your allocated time, SenatorConroy. Next question.

Senator CONROY—It is as nonsensical as you saying I cannot ask the department aquestion about what it is working on. What are we here for? We are here to ask questionsabout how they are expending public moneys. What they work on is expending publicmoneys.

Senator Minchin—You are asking about internal policy advice to the minister.

Senator CONROY—No, they have indicated—

Senator Minchin—You are. You quoted the minister and then asked if they were workingon something. You are asking about internal policy advice to the minister.

Senator CONROY—No. If you check the Hansard, you will find that I asked whether theminister had asked them to work on something—

Senator Minchin—You quoted the minister.

ACTING CHAIR—Senator Conroy, you are running out of time.

Senator CONROY—and then I asked them about some specific work, which may or maynot necessarily have been for the minister.


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Senator Minchin—Your context was a quote of the minister and then a question about thework that related to that particular quote.

Senator CONROY—I would like to move on to the question of increased GSTenforcement by the ATO, following the extra $190 million budget allocation that they havereceived. Have you been approached for your advice and assistance in relation to the impacton small business of the $190 million allocated to the ATO to enhance GST administrationand their stated objective of raising an additional $130 million in revenue? Have theyapproached you for assistance?

Ms Weston—I have been in consultation with the tax office about the impact of the newtax system on small business.

Senator CONROY—You are aware that they have allocated an extra $190 million to goand audit everybody?

Ms Weston—I think we discussed that last time.

Senator CONROY—You are still in ongoing consultations, so it is not advice to thegovernment; this is advice to the tax office. I think that probably means it is safe for me to askyou about it.

Ms Weston—What is your question, Senator?

Senator CONROY—Are you still in consultations with them?

Ms Weston—Yes, we are.

Senator CONROY—What concerns have you raised with the tax office?

Ms Weston—We are interested in knowing where their general areas of interest are inrelation to any of their compliance activity.

Senator CONROY—I have a number of other questions but I am happy to put them onnotice given the very tight time frame today.

Proceedings suspended from 12.51 p.m. to 1.34 p.m.


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TREASURY PORTFOLIOConsideration resumed from 6 June 2002.

In AttendanceSenator Ian Campbell, Parliamentary Secretary to the Treasurer

Department of the TreasuryMr Roger Brake, General Manager, Superannuation, Retirement and Savings DivisionMr Joseph Castellino, Intergovernmental Relations UnitMr Patrick Colmer, General Manager, Indirect Tax DivisionMr Blair Comley, Manager, Debt Management Review TeamMr Graeme Davis, General Manager, Macroeconomic Policy DivisionMs Kirsten Depta, Specialist Adviser, Competition Policy Framework UnitMr Nathan Dickens, Specialist Adviser, Competition Policy Framework UnitMr Damien Dunn, Manager, Economic Conditions UnitMs Laurene Edsor, Specialist Adviser, Commonwealth-State Relations DivisionMr Murray Edwards, Manager, Market Access and Pricing UnitMr Geoff Francis, Manager, Environment Policy UnitMr Steve French, General Manager, Competition and Consumer Policy DivisionMr Phil Gallagher, Manager, Retirement and Income Modelling UnitMs Karen Gilmour, Specialist Adviser, Market Integrity and Payments UnitMr Godwin Grech, Manager, Consumer Policy Framework UnitDr Paul Grimes, General Manager, Budget Policy DivisionDr Jim Hagan, General Manager, Domestic Economy DivisionMs Jan Harris, General Manager, Commonwealth-State Relations DivisionMr Rob Heferen, Manager, Negligence Review TeamDr Ken Henry, Secretary,Mr Colin Johnson, General Manager, International Economy DivisionMr Paul Johnson, Manager, Communications and Energy Markets UnitMs Kanwaljit Kaur, Manager, Competition Policy Framework UnitMr Stephen Kennedy, Specialist Adviser, Domestic Economy DivisionMr Chris Legg, General Manager, Foreign Investment Policy DivisionMr Peter Martin, Australian Government ActuaryMr David Martine, General Manager, International Tax and Treaties DivisionMr Paul McCullough, General Manager, Individuals and EntitiesMr Steve Morling, Specialist Adviser (Forecasting), Domestic Economy DivisionMs Maryanne Mrakovcic, General Manager, International Finance DivisionMr Peter Mullins, General Manager, Business Income DivisionMr Jim Murphy, Executive Director, Markets GroupMr Richard Murray, Executive Director, Fiscal GroupMr Bruce Paine, Manager, Medical Insurance UnitDr Martin Parkinson, Executive Director, Macroeconomic GroupMr Mike Rawstron, General Manager, Corporate Governance DivisionMr Nigel Ray, General Manager, Financial System DivisionMr Chris Roberts, International Monetary Fund Unit


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Mr Mike Rosser, Manager, Consumer Protection UnitMr Greg Smith, Executive Director, Revenue GroupMr Nick Stoney, Manager, Forecasting UnitMr David Turvey, Debt Management Review TeamMs Sue Vroombout, Manager, Market Integrity and Payments UnitMs Bernadette Welch, Manager, Insurance Programs UnitMr Tom Westcott, Foreign Investment Policy DivisionMr Damien White, Manager, Prudential Policy, Banking UnitMs Karen Whitham, Manager, Prudential Policy, Superannuation and Insurance Unit

Australian Competition and Consumer CommissionMr Robert Antich, General Manager, Compliance Strategies BranchMr Brendan Bailey, Senior Project OfficerMr Brian Cassidy, Chief Executive OfficerMr Alistair Davey, Acting General Manager, Mergers and Asset Sales BranchMr Joe Dimasi, Executive General Manager, Regulatory Affairs DivisionMs Lin Enright, Director, Public RelationsProfessor Allan Fels, ChairmanMr Richard Fleming, Project OfficerMr Tim Grimwade, Director, Adjudication BranchMr Lee Hollis, General Manager, Enforcement Coordination BranchMr Ross Jones, ComissionerMs Helen Lu, General Manager, Corporate Management BranchMs Marlene McClelland, Director, Finance and ServicesMs Karen McKernan, Senior Project OfficerMr David Smith, Executive General Manager, Compliance DivisionMs Tania Mayrhofer

Australian Prudential Regulation AuthorityMr Brandon Khoo, Executive General Manager, Specialised Institutions DivisionMr Charles Littrell, Executive General Manager, Policy Research and Consulting DivisionDr Darryl Roberts, General Manager, Specialised Institutions DivisionMr Senthamangalam Venkatramani, General Manager, Diversified Institutions DivisionMr Graeme Thompson, Chief Executive Officer

Australian Office of Financial ManagementMr Michael Allen, Chief Executive OfficerMr Paul FerrisMr Andrew JohnsonMs Erin MartinMr Peter McCray, Deputy Chief OfficerMr Pat Roccosta, Chief Financial OfficerMr Craig Thornburn

Australian Taxation OfficeMr Michael Carmody, CommissionerMr Kevin Fitzpatrick, First Assistant Commissioner, Aggressive Tax PlanningMr Mark Jackson, Deputy Commissioner, SuperannuationMr Neil Mann, Deputy Commissioner, Small Business


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Ms Donna Moody, Chief Finance OfficerMr Geoff Robinson, Deputy Commissioner, Personal TaxMr Barrie Russell, Deputy Commissioner, GSTCHAIR—We now turn to examination of the Treasury portfolio. I remind witnesses and

senators that the hearings this afternoon will be conducted in accordance with resolutionsagreed to by the Senate on 25 February 1988. Resolution 9 provides:

A chairman of a committee shall take care to ensure that all questions put to witnesses are relevant tothe committee’s inquiry and that the information sought by those questions is necessary for the purposeof that inquiry. Where a member of a committee requests discussion of a ruling of the chairman on thismatter, the committee shall deliberate in private session and determine whether any question which isthe subject of the ruling is to be permitted.

Resolution 10 provides:Where a witness objects to answering any question put to the witness on any ground, including the

ground that the question is not relevant or that the answer may incriminate the witness, the witness shallbe invited to state the ground upon which objection to answering the question is taken. Unless thecommittee determines immediately that the question should not be pressed, the committee shall thenconsider in private session whether it will insist upon an answer to the question, having regard to therelevance of the question to the committee’s inquiry and the importance to the inquiry of theinformation sought by the question. If the committee determines that it requires an answer to thequestion, the witness shall be informed of that determination and the reasons for the determination, andshall be required to answer the question only in private session unless the committee determines that itis essential to the committee’s inquiry that the question be answered in public session. Where a witnessdeclines to answer a question to which a committee has required an answer, the committee shall reportthe facts to the Senate.

Resolution 16 provides:An officer of a department of the Commonwealth or of a State shall not be asked to give opinions on

matters of policy, and shall be given reasonable opportunity to refer questions asked of the officer tosuperior officers or to a Minister.

Subject to those guidelines, I remind witnesses that all allowable questions are required to beanswered. A refusal to answer or a false or misleading answer may constitute a contempt ofthe Senate. I welcome Senator the Hon. Ian Campbell, Parliamentary Secretary to theTreasurer; Dr Henry, Secretary to the Department of the Treasury; and officers of theTreasury. Do any of you wish to make an opening statement?

Dr Henry—No.

CHAIR—We will commence with the Australian Office of Financial Management.

Australian Office of Financial ManagementSenator CONROY—Is Mr Smith not coming today? I thought that he looked after this

section now—not that I am in any way suggesting that we do not want you, Dr Henry. We arealways pleased to have you with us.

Dr Henry—Mr Smith does not have responsibility for this area of the department.

Senator CONROY—Who has it now?

Dr Henry—Responsibility for the Australian Office of Financial Management rests withthe chief executive.

Senator CONROY—Is that Mr Allen?


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Dr Henry—Mr Allen has, within the Department of the Treasury, responsibility for thesesorts of issues. The policy on debt management rests in Mr Murray’s fiscal group.

Senator CONROY—Welcome, Mr Murray.

Dr Henry—I am sure that you will have plenty of opportunity to reacquaint yourself withMr Smith later today.

Senator CONROY—I just meant that Mr Smith commented at the last estimates that hewas looking forward to being in charge of this section next time he appeared.

Dr Henry—He has responsibility for revenue matters within the department.

Senator CONROY—Thank you for clearing that up. Mr Allen, what is the process thatAOFM goes through when it retires Commonwealth government securities? Do you givefinancial institutions a call, then deal in CGS and place an order to buy a nominal amount of aparticular bond? Is that what happens?

Mr Allen—In normal practice, the AOFM can adopt either one of two ways of consideringthe repurchase of Commonwealth securities. But, in most circumstances to date, this has beendone through the AOFM using the facilities of the Reserve Bank and requesting that theReserve Bank act on our behalf in the particular market in the event that securities were beingtargeted for repurchase. So the Reserve Bank would effectively act as an agent to enable theparticular stock that we are targeting to be bought back from the market, and that would besubsequently purchased by the AOFM from the Reserve Bank. This does not necessarilyapply in all circumstances. There are other circumstances whereby we would purchase otherlines of stock. For example, at times we repurchase older issued securities from offshore on adirect basis, without using the Reserve Bank as an agent.

Senator CONROY—How is the purchase price of the bond determined? Is it determinedsubject to the prevailing market price?

Mr Allen—That is right. If you were to observe the Commonwealth government bond rate,you might be aware that that is an actively traded market in the sense that a large volume ofsecurities will change hands over the course of any month. The market is very transparent interms of its pricing. A wide range of financial intermediaries provide indicative pricing—closing rate pricing. That pricing is also made available by the Reserve Bank. They publishthat rate on a daily basis. Depending upon the particular stock, in most cases the secondarymarket pricing on Commonwealth government securities is very transparent.

Senator CONROY—Could you just briefly explain how the market price of a fixed ratebond is determined? For example, if a bond was originally issued at a price of, say, $100 witha fixed coupon interest rate of 10 per cent, what would cause the market price of that bond tobe higher or lower than the issue price of $100?

Mr Allen—If a bond were issued at $100 with a 10 per cent coupon at a yield of 10 percent, then the face value and the capital price of the bond would be equal. In terms of thenature of a bond, it obviously has a fixed schedule of cash flows. Regular coupons are goingto be paid on that bond at the rate of 10 per cent, paid semi-annually. Assuming I am talkingabout how that government bond might then trade in the financial markets, people who wantto actively exchange from one bond to another need to negotiate a price with another marketcounterparty. Market counterparties will exchange those bonds by observing the impact of anysubsequent change in market interest rates since the time of the issue of the original bond bythe Commonwealth. Depending on whether interest rates go up or down, that will then changethe subsequent exchange price that the two investors might negotiate.


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Senator CONROY—Would it be fair to say that the major factor would be interest ratemovements?

Mr Allen—Yes. In terms of the gross settlement price, there is obviously considerationmade for the accrued interest that is due and payable at the subsequent interest payment date,so that forms part of the price.

Senator CONROY—So if interest rates fall then the price of a bond will be higher than itsissue price and if interest rates rise then the price of the bond will be lower. Is that correct?

Mr Allen—That is right.

Senator CONROY—I would like to understand the economic impact of a governmentrepurchasing its debt. When bonds are repurchased the government would no longer payinterest on these bonds, so the level of public debt interest would decline and the budgetbottom line would improve. Is that right?

Mr Allen—In broad terms, but obviously from the AOFM’s perspective our focus is on thefinancial market.

Senator CONROY—Sure. By and large, if you reduce public sector interest or public debtinterest, then that is improving the bottom line.


Senator CONROY—Let us assume that interest rates have fallen and the cost of buyingback the bonds is higher than the issue price of $100, as in the example we were talking aboutbefore. Will the government not have to pay out more cash to investors when they repurchasethat bond than they received when the bond was first issued?

Mr Allen—In terms of the cash flows or the price that you might exchange at, that wouldbe right, but of course that ignores the benefit or the cost—

Senator CONROY—We will acknowledge that there is a benefit.

Mr Allen—That is right. But, certainly in terms of the face value versus capital price paid,that will be different.

Senator CONROY—And paying more for something than when it was issued could bedescribed as a loss?

Mr Allen—I would not describe that as a loss.

Senator CONROY—So cash flowing out is not a loss? If you pay more for somethingthan previously—in other words, the $100 becomes $110 and the $10 is cash going out—youdo not think that is a loss?

Mr Allen—If you look at it from an investor’s perspective, the investor would considerthat they have bought a bond at 10 per cent and interest rates have moved lower; therefore thecapital price has moved up. Effectively, that change in the capital price reflects the commutedvalue of that change in interest rate over the life of the bond. That is how they would look atit. It is not necessarily a profit; it is just a change in the value of—

Senator CONROY—I am not interested in it from an investor’s perspective; I aminterested in it from the government/taxpayer perspective. It is issued at $100 and boughtback at $110. The difference is a net: you are net worse off; you are $10 worse off. It is a loss.

Mr Allen—It is not only a—

Senator CONROY—It is cash going out of the government.


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CHAIR—Senator Conroy, can you let him finish his answers, please.

Mr Allen—I think you are right in the sense that the amount of cash being paid out isgreater than the cash originally received, but if you then moved to the next step and suggestedthat that was a loss you would need to define in what context you were making thatsuggestion.

Senator CONROY—Have you heard of Kerry Packer and Alan Bond? Kerry Packer solda TV station for a lot of money to Alan Bond, and a few years later Alan Bond was forced tosell it back for a lot less. Kerry Packer made a lot of money on that deal; he had a gain andAlan Bond, it is generally acknowledged, had a loss. It is a pretty simple concept, Mr Allen. Isell you a bond for $100 and you give me $100, and then I say to you, ‘I want to buy it backfrom you’. If you say, ‘Interest rates have gone down. I need $110,’ and I reply, ‘Sure, noworries,’ and give you $110, you are $10 better off and I am $10 worse off.

Mr Allen—Although in that example there were two considerations. One is that Mr Packerhad the benefit of cash in the bank over the time in which he—

Senator CONROY—There is no argument. We have identified that there is a public debtinterest gain. We are not trying to say that there is not a gain. What we are trying to do is thensay, ‘There is also the loss over here.’ For some strange reason you are trying to imply that mypaying you an extra $10 to get the thing back is not a loss. I am at a loss to understand whyyou do not want to characterise it that way—the fact that an extra $10 or 10 unit points,whatever you want to call it, has gone to you; I am 10 worse off and therefore it is not a loss. Ido not understand why you are wandering around.

Mr Allen—The reason, to use your words, we are wandering around that particular issue isthat the open use of the word ‘loss’ is not representative of the actual position. I amsuggesting that, in terms of putting a precise description on that particular movement in thevalue of the bond from A to B, I am not necessarily prepared to accept that that is a loss.

Senator CONROY—Okay, I will ask it again in a different way: if I let the bond matureand I buy it back from you at the maturity point, I do not have to give you $110, do I? I wouldget it back for the $100. So I am better off letting it mature than buying it early.

Mr Allen—Again, Senator, I do not think that is necessarily so. The movement in marketyields represents a gain or a loss in terms of the opportunity cost, but in terms of—

Senator CONROY—In cash, I am better off letting it mature.

Mr Allen—Not at all, Senator. The situation is indifferent as to whether you hold the 10per cent coupon bond, where yields are at eight per cent. So you can notionally crystallise thedifference between what you paid and what you would get from settling it at eight per cent.Of course, if you just reinvest that cash at the prevailing yield of eight per cent, you will endup at the same position at the maturity of that original bond.

Senator CONROY—Thanks for taking us through the point we have already established,which is that the opportunity cost is detained from the public debt interest. We accept that;that is the other side of the equation. But there must be two sides to this equation. At themoment we are accepting that there is a benefit over here and there is a disbenefit, a worsecash position or a loss. We can call it any of the above but it is that. There are two sides to thistransaction, and you just seem to want to talk about either a net position or only one side ofthe transaction. All I am saying is that I have identified the gain over here in the savings frompublic debt interest and I am identifying the change—to try to use a word so that you might beprepared to nod; and Hansard cannot pick up a nod—that is represented by more cash goingout of the door over here. I am referring to it as a loss because if I paid you $110 for


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something for which I received $100, on balance, to me, I am $10 worse off. If you are happyfor me to leave it as just saying I would be $10 worse off and move on to my next question, Iam happy to do so.

CHAIR—I think Senator Campbell wanted to say something.

Senator Ian Campbell—I think Senator Conroy’s problem is that he has gone from sayingwhat the benefit is to the budget of a global strategy about repaying debt and then he hasmoved to a hypothetical example of a $100 bond with a 10 per cent interest rate and he is notprepared to accept the explanation of the officers about a hypothetical question. He is tryingto jump from the real budget situation in Australia to a hypothetical bond for $100 at 10 percent, and then is trying to say that if you have to buy it back for more than $100 it is a loss.The Treasury is saying that Senator Conroy hypothetically is wrong about that. I think it ispotentially because Senator Conroy does not actually understand how the market prices abond against differential interest rates. What is happening from my understanding is that—

Senator CONROY—You’re a real estate agent; I’d shut up now, okay?

CHAIR—Senator Conroy! Senator Campbell has the call at the moment.

Senator Ian Campbell—What actually happens is that the market sets a price, as it doesfor most financial instruments and financial assets, on what it values the future stream ofincome. With a bond, you obviously have a stream of income for the period until the maturity.The market makes the decision about what the price is at that given time. You obviously,when you make that decision, have to make that and the risk is your expectation of whathappens to interest rates in the future. Obviously the government has to factor that in as well.

CHAIR—Mr Allen, do you want to add anything to that?

Senator CONROY—Do I get to respond to the—

CHAIR—You have got the call generally, Senator Conroy—

Senator CONROY—Senator Campbell has made a range of points that I would like torespond to.

CHAIR—You have got the call generally, Senator Conroy, but the way in which this hasalways worked is that other senators who want to contribute to the discussion—

Senator CONROY—He is the minister.

CHAIR—can interject. I am going to ask a question: Mr Allen, do you want to elaborateon what Senator Campbell just said?

Mr Allen—I was just wanting to be careful and make the distinction between the economicoutcome and differences in cash flow and wanting not to draw that direct link betweendifferences in cash flow on the purchase or sale of a security and the direct conclusion that itwas a loss.

Senator CONROY—To try to use your reference, there is a negative cash flow impactfrom undertaking this transaction. That is the $100 to $110 example—I paid $10 more than Ireceived earlier.

Dr Henry—Senator Conroy, I think we are at risk here of conducting a rather incompleteanalysis. Debt does not just appear on the Commonwealth balance sheet as a liability—well,not typically—in isolation from other transactions.

Senator CONROY—You are recording it as an asset but we will come to that.

CHAIR—Dr Henry, please go on with what you are saying.


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Dr Henry—The point is that when one looks at the Commonwealth’s balance sheet thereare liabilities and there are assets. Suppose that a debt was issued in order to back an asset.The movement in market interest rates that you are talking about would—other things beingequal—have symmetrical effects on the valuations of the assets and liabilities. For example, ifin order to pay out the $110 that you referred to, Senator, one had to look around in one’sbalance sheet and find an asset to pay out the $110, the asset one would go to is the one thatwas originally valued at $100. I do not see the loss.

Senator CONROY—Are you finished?

Dr Henry—I could go on.

Senator CONROY—I thought it was a rhetorical question. I was not sure if you wantedme to answer your question. I was actually going to go back to chat with Mr Allen if you hadfinished.

Dr Henry—I was simply making the statement that I think you are at risk of ignoringvaluation effects on assets matching liabilities.

Senator WATSON—We cannot, in isolation, just look at the valuation of one liability orone asset, because they move in symmetry, hopefully.

Senator CONROY—I am happy to move on.

CHAIR—Mr Allen, you are nodding. Are you agreeing with what Senator Watson said? Isthat right?

Mr Allen—That is right. If you have an asset and a liability, as the secretary and SenatorWatson both noted, the valuation effects are equivalent.

Senator CONROY—I would like to ask about table 12 on page 77 of the AOFM annualreport. This table lists Commonwealth investments as at 30 June 2002, which includesTreasury fixed coupon bonds. Are these the bonds that the government has repurchased fromthe market?

Mr Allen—Yes, that provides a list of the transactions that we have undertaken in recentyears.

Senator CONROY—What was the total cost of repurchasing those bonds? Would $5.9billion be an accurate figure?

Mr Allen—Yes, that is the cost that we note in terms of that table.

Senator CONROY—You paid $5.9 billion to repurchase those bonds—is that agreed?

Mr Allen—That was the difference in the face value and at the time of purchase that wasthe cost.

Senator CONROY—What was the value of the bonds when they were first issued?

Mr Allen—The original face value, as has been outlined in the table there?

Senator CONROY—That is $4.8 billion.

Mr Allen—Yes.

Senator CONROY—When the bonds were repurchased, the government had to pay out—in cash out the door—$1.1 billion more in cash than it received when it first issued thosebonds. That was by June 2002. Is that an accurate statement?

Mr Allen—I would look at the issue that you are putting on the table by—

Senator CONROY—Was that a yes?


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CHAIR—Senator Conroy, it was not a yes! Let the witness answer your questions as hechooses.

Mr Allen—The cost of repurchasing the $4.8 billion at face value at that particular time—

Senator CONROY—It was $5.9 billion.

Mr Allen—for the government was indifferent between a bond which obviously, under thisscenario here, had coupons that were a lot higher than what was prevailing at themarketplace—

Senator CONROY—I appreciate they were indifferent. It is factual. It is impossible toargue with the fact that they paid $5.9 billion to buy back $4.8 billion worth of bonds. That isa factual statement. Whether they are indifferent, exciting, disinterested or any otherdescription you want to give to their position, it does not take away from the fact that $1.1billion more in cash left the building.

Mr Allen—But in the way in which you are making that suggestion I think you are puttingthis particular transaction in isolation. If you are looking to make judgment on the issue, amore appropriate way of looking at it is this. At the time, this repurchase was beingrefinanced by the issuance of bonds at a much lower coupon and the net difference betweenthe two at the time of the transaction occurring is zero.

Senator CONROY—But we are agreed $1.1 billion extra went out the door, so I amhappy to move on.

CHAIR—I do not think he did agree with that, Senator Conroy. Did you agree with that,Mr Allen?

Mr Allen—No.

Senator CONROY—Well, two checks took place here: one was an increment of $4.8billion—

CHAIR—Senator Conroy, you have made your point.

Senator CONROY—Senator Brandis, can you stop answering on behalf of the witness.

CHAIR—I will not have witnesses misrepresented, because it is unfair to the witnessesand it is also against the standing orders. Mr Allen, do you adopt the proposition that was justput to you by Senator Conroy?

Mr Allen—No.

CHAIR—Why not?

Mr Allen—The proposition I am putting forward is that at the time these transactions wereundertaken the decision by the AOFM at the time was to buy back high-coupon bonds andreissue low-coupon bonds. At the point of transaction we were, in economic terms, indifferentbetween the two. What we were doing was paying out a higher cash flow amount at the pointof purchase, being refinanced by a lower coupon bond. Therefore, we were effectivelyindifferent between the two cash flows.

Senator CONROY—I appreciate that the government may be indifferent to paying $1billion more but I assure you the taxpayers are not.

CHAIR—Mr Allen, when you use the word ‘indifferent’ I take it you are using that wordin the technical sense understood by economists.

Mr Allen—That is right. The economic value of one side of the transaction was equal tothe economic value of the other.


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CHAIR—I think there was a little bit of rhetorical spin being engaged in by SenatorConroy.

Senator CONROY—It is just that there was a negative cash flow of $1.1 billion.

Senator Ian Campbell—I would like to make a point about the government’s indifference.The government’s program that we are discussing here is a debt reduction program. We havesought, since 1997, to repay debt.

Senator CONROY—I won the bet.

Senator Ian Campbell—We are very committed to repaying Labor’s debt. The LaborParty, when in power, ran up these foreign currency swaps—

Senator CONROY—It was 35 minutes. Which journo won the sweep? Was it the SydneyMorning Herald journalist?

Senator Ian Campbell—from zero in 1988 to $9 billion in 1997. Since 1997 we haverepaid $61 billion. So we have significantly reduced the interest payments for taxpayers. Infact, the interest that we had to pay on the Labor debt was $8.4 billion in 1997, and byrepaying this debt and by managing down this debt portfolio we have got those interestpayments down to $4.4 billion. The taxpayer is actually $4 billion a year better off becausethe coalition government has been repaying this debt at a significant rate. In fact, our programis to close out all of these swaps by 2008.

Senator CONROY—We are not talking about swaps.

Senator Ian Campbell—I am talking about debt and I am talking about the foreigncurrency swaps as well. We hope that this program, which was opened in 1988, will havebeen concluded by 2008. We hope that all of the debt will be have been paid off before then.A program that took the Labor Party a short time to run up is certainly going to take us a lotlonger to run down. I think that there is a lesson in economic history in this—it is pretty easyto run up $10 billion deficits and run up $96 billion debts but it is a lot harder to pay themdown. Future governments of either political persuasion should be particularly cautious whenthey live outside their means and run up massive debt. You expose the country to significantrisk, to foreign currency risk and to interest differentiation risk. For the record, I still regard itas incredibly ironic that the Labor Party would seek to make political mileage out of the hardjob that the government, with the assistance of the Treasury and AOFM, are doing. We areputting in hard work to manage down that massive Labor debt in a diligent, effective andefficient way.

Senator CONROY—Senator Campbell, all I could suggest is that, while I appreciate yourcontributions, you are the one with a plane to catch and if you want to make that point overand over again during the course of the afternoon you should book yourself on the last plane,because you are just going to slow us down.

Senator Ian Campbell—I just do not think that the record should stand with a commentthat the government is indifferent to this. We spend a lot of energy on it. The Treasury and theAOFM officers are dedicated to actually managing this in an effective way.

Senator WATSON—It is about the terminology in terms of ‘indifference’ and ‘nodifference’.

Senator TCHEN—Senator Conroy appears to be otherwise engaged, so perhaps I can askMr Allen a couple of questions on this issue.

CHAIR—Yes.


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Senator TCHEN—Is the process you just described to us about government managing thisstyle of public debt a fairly common practice amongst governments?

Mr Allen—In the area of sovereign debt management, yes. There are examples ofgovernments or sovereign debt managers undertaking consolidation programs, otherwiseknown as conversion programs, where for a whole variety of reasons—and I will come backto what drives sovereign debt managers to engage in this practice—

Senator TCHEN—Perhaps you can tell the committee whether the other Australiangovernments undertake the same practices.

Mr Allen—At the state government level this is a practice that is undertaken on a veryregular basis by the state government central borrowing authorities in particular. Theiractivities include trying to improve the cost at which their particular government can borrowmoney by making more efficient the secondary market on which those securities are traded.They also engage in, for example, conversion tenders. A bond that was issued quite a numberof years ago may have a very high coupon associated with it. That particular high couponcash flow is not a coupon that is attractive to some investors, because they would rather beable to match the coupon rate of their bond with current market rates. That particularindividual state may offer to repurchase that bond from the marketplace and refinance thatbond with a current market yield bond. I would like to highlight the point that I was trying tomake earlier and that is that at that point of exchange the central government borrowingauthority is indifferent between the two.

Senator TCHEN—Senator Conroy is also from Victoria, so I am sure he is interested inyour comments as well. Late last month the Victorian government announced that the budgetsurplus forecast of $750 million for this year has been downgraded to about $250 million.That $500 million was lost, according to a news report, and was described as a money marketexchange.

Senator CONROY—On a point of order, Mr Chairman. Are the Victorian government’sfinances within the remit of the Department of the Treasury or AOFM?

Senator TCHEN—I was just looking for expert opinions because I have not had a chanceto talk to Mr Brumby.

Senator WATSON—Further to the point of order, it is an interesting question because itraises the relative efficiency of the Commonwealth and the trading vis-a-vis the stategovernments and their levels of debt.

Senator CONROY—I do not mind the question; it is just not relevant now.

Senator WATSON—I think it is an interesting observation.

CHAIR—Senator Conroy, on your point of order: you generally have the call but you weretalking to your assistant when Senator Tchen jumped in. I am going to allow him to pursue hispoint but I ask him to respect the fact that this is substantially the opposition’s time. I willallow you to pursue this line of questioning, Senator Tchen, but I ask you to bring it to aconclusion quickly.

Senator TCHEN—Thank you, Mr Chairman. Mr Allen, I have not had a chance to ask MrBrumby, the Victorian Treasurer, how that came about, but perhaps with your expertknowledge of how it operates you can explain from your understanding how the Victoriansituation came about. How did the Victorian government lose $500 million through the moneymarket operation?

Mr Allen—I am sorry, Senator—


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Senator CONROY—Before you answer that, do you have any familiarity with theirfinances?

Mr Allen—That is my point. Unfortunately, I do not have any—

Senator TCHEN—You do not know how they lost it?

Mr Allen—I am sorry, Senator, no. Indeed, I am not even aware of the particular newsarticle you referred to.

CHAIR—I think we might return the call to Senator Conroy.

Senator CONROY—Let me take you to page 116 of the Treasury portfolio budgetstatement for 2002-03, which shows that $278 million has been appropriated for 2002-03under the Loans Redemption and Conversion Act for ‘net repurchase premia’. Is that correct?Is that what it shows?

Mr Allen—So $278 million for the 2002-03 financial year; that is right, Senator.

Senator CONROY—Thank you. Doesn’t page 116 also show that in 2001-02, $155million had been paid out for net repurchase premia associated with the repurchase ofgovernment bonds—that is the figure next to it.


Senator CONROY—So that would be cash going out of the building?

Mr Allen—That is right. That would be—

Senator CONROY—Thank you. Do not the corresponding tables in previous years showthat $325 million was appropriated or paid out for the repurchase of government bonds in2000-01; $64 million in 1999-2000; and $330 million in 1998-99? I am happy to refer you tothe pages of the previous documents because I anticipate that you do not have them handy, butyou can take my word that those figures are all accurately reported.

CHAIR—Mr Allen, rather than nodding, it might be helpful if you were to say yes if youwant to assent to something.

Mr Allen—I am sorry, Mr Chairman. I am happy to accept the numbers that SenatorConroy referred to.

Senator CONROY—What were the corresponding figures for money appropriated or paidout for net repurchase premia associated with the repurchase of government bonds under theLoans Redemption and Conversion Act in 1997-98 and 1996-97? I appreciate that you mightwant to ask someone else to get that information for you while we are talking. Perhapssomeone who is listening from Treasury might be able to access the Treasury and give us acall.

Mr Allen—We will try to track down that information for you, Senator Conroy.

Senator CONROY—Thank you. The AOFM web site shows that the governmentinvestment of its own bonds had increased to $5.1 billion by 31 October 2002.

Mr Allen—I am aware of information of that type being available on our web site but I amjust trying to understand the change.

Senator CONROY—This is the page here.

Mr Allen—I am just trying to compare that to table 12 in our annual report as at 30 June.


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Senator CONROY—I just wanted to confirm something. Your web site shows thatgovernment investment in its own bonds had increased to $5.1 billion by 31 October 2002. Ifyou are looking at the annual report, it might be that this is slightly updated from that.

Mr Allen—I have no reason to doubt the accuracy of those numbers.

Senator CONROY—Do you know the total market value of the government’s investmentin these bonds by 31 October 2002?

Mr Allen—That is a number that I do not have on hand.

Senator CONROY—Could you take that on notice or get someone who is able to get backto us.

Mr Allen—Certainly we will look into that number for you.

Senator CONROY—Thank you. I would now like to look at the outstanding debt of theCommonwealth. Table 3 on page 41 of the AOFM annual report shows that the face value ofgovernment securities on issue was $53.7 billion. Does that mean that, when the securitieswere issued, they were worth $53.7 billion?

Mr Allen—We have outlined the face value amount.

Senator CONROY—Yes, that is what it says. The same table shows the market value ofthese bonds was $60 billion by 30 June 2002, so the value of government bonds on issue hasrisen from $53.7 billion to $60 billion between the time they were issued and 30 June 2002.

Mr Allen—I am not precisely sure of the break-up of the $60 billion. I would like to checkwhether it—

Senator CONROY—Hang on, I am not sure what you mean by ‘break-up’. We arereferring to the same item, I presume.

Mr Allen—Whether it includes accrued interest or not.

Dr Parkinson—Before we go any further, it is useful to clarify that the bonds may havehad a $100 face value when they were issued, but—

Senator CONROY—These have a $53.7 billion face value. Earlier, people wereconcerned about hypotheticals.

CHAIR—Senator Conroy, let Dr Parkinson finish. He has said he wants to clarifysomething, so let us hear him clarify it.

Dr Parkinson—As you pointed out at the very outset, if the bond were issued at an interestrate higher than the ruling market interest rate, it might have a $100 face value but thegovernment would actually get more than $100 and vice versa.

Senator CONROY—We agreed that it could go both ways.

Dr Parkinson—Senator, let us be very careful; otherwise we run the risk of obfuscatingthis issue so much that people who have an axe to grind—

Senator CONROY—We—

CHAIR—Senator Conroy, I will not have officers of the Treasury treated with disrespect.Stop it!

Dr Parkinson—$53.7 billion is the face value. Whether that was the number of dollars thatcame into the building when those bonds were issued is a different matter altogether. I amafraid I do not know what the exact answer is, but it would be more if bonds were issued at ahigher interest rate than the ruling market interest rate and it would be less if, on average,


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those bonds were issued at a lower interest rate. I want to try to clarify the point. You saidmarket value had increased from $53.7 billion to $60 billion—

Senator CONROY—No, I did not; your table says it.

Dr Parkinson—No, I am sorry: it says ‘face value’ and then ‘market value’. It does not say‘market value: $53.7 billion’ and then ‘market value: $60 billion’. It says ‘face value: $53.7billion’. If you want to know what the cash amount—

Senator CONROY—How many bonds were issued at a discount? That should be a fairlysimple thing for you to answer if your proposition bears any resemblance to what you did.

Dr Parkinson—Off the top of my head, I do not know. But I do know—

Senator CONROY—Is it a policy to issue them at a discount?

Mr Comley—The point that Dr Parkinson is making is that the practice of issuing bonds isto seek to issue a bond with the same coupon once you have decided its particular line. Forexample, if I want to issue a six per cent coupon bond at a particular maturity, every bond thatI issue for that line is of the same coupon. That means that every bond in that line is identical.Because of the practice of wanting to not overflood the market at a particular time or tochoose the time at which you issue, you may issue into a particular bond line at a number ofpoints in time. It would only be the case if interest rates never changed at all during thatperiod and they were exactly the same as the coupon that face value would equal market valuefor every bond in that bond line, even at the point it was issued.

Senator CONROY—Yes; no-one is arguing that point. I am trying to find out what youhave done with your bonds, not what theoretically is possible. We are talking about $53.7billion issued at face value. Unless Treasury has issued them at a discount, Dr Parkinson,there is still $53.7 billion coming in the door. I understand that it is Treasury policy not to, butyou or Dr Henry might be able to explain to us a new Treasury policy. That is the only wayfor your proposition to hold water. I do not want to talk about the hypothetical; I have beeninstructed by the chair to stay away from hypotheticals. Unless you have some extrainformation about whether you have issued some bonds at a discount in breach of your ownpolicy, we will work on the basis that $53.7 billion came into the building, unless you canshow us—I am happy for you to show us—that that is not the case.

CHAIR—Mr Comley, were you finished?

Dr Henry—Mr Allen will be able to show you that, Senator.

Senator CONROY—I hope he does.

CHAIR—Who wants to take that question? Let us hear Mr Allen without interruption.

Mr Allen—I draw Senator Conroy’s attention to table 13 on page 78 of our annual report. Iam not sure whether it sheds too much light on history, Senator, but it shows the Treasuryfixed coupon bond tenders that the AOFM undertook over the course of the 2001-02 financialyear. We undertook four tenders across a range of different maturity dates: 2011, 2013 and2015. We had a total face value amount issued of just under $2 billion. The cash proceeds onthose bonds were in excess of face value. This gives you a very brief overview of fourtransactions that were conducted in only—

Senator CONROY—The difference is tiny.

Mr Allen—We can also draw your attention to the next table to highlight this point.

Senator CONROY—The difference is only $2 million.


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CHAIR—Let him finish, Senator Conroy. We are all trying to follow this answer. Go on,Mr Allen, please.

Mr Allen—The difference in this particular circumstance is relatively small. That is afunction of the size of the coupons that we were issuing and the prevailing market yields. Wehighlight both of those two numbers. In previous years the Commonwealth had undertakenthe practice of issuing into existing maturity dates—benchmark lines—of which a number hadhigh coupons. In those particular years the difference between the face value and the cashproceeds received would have been different again. At various times that may have beenhigher than face value.

Senator CONROY—I think the calculation works out for $53.7 billion, to accept DrParkinson’s point and your own, at $100 million.

Mr Allen—I am sorry, Senator?

Senator CONROY—The calculation comes out at about a $100 million differencebetween face value and the amount of cash coming in the building. If you get your calculatorsout, you can have a crack at it as well. I am accepting your point but the difference, in termsof cash in the building, which is the point that Dr Parkinson raised, is minuscule in a portfolioof $53 billion.

CHAIR—I think that Mr Comley, Dr Henry and Dr Parkinson are all seeking the call.Who wants to go first?

Senator CONROY—I will just book a late plane!

Dr Parkinson—Senator, could I draw your attention to note 16 of the AOFM annualreport? Unamortised—that is, the amount not yet written off—the net premium onCommonwealth government securities on issue is $979,124,000 at 30 June 2002. It is not $2million, not $100 million, but almost $1 billion that is still outstanding.

Senator CONROY—So we can take off the $53 billion, can we? My calculation might be$800 million out. Cash in the door is how much?

Dr Parkinson—I do not know.

Senator CONROY—Is it $53 billion?

Dr Parkinson—I do not know.

Senator CONROY—You are in Treasury; you are in charge of this.

Dr Parkinson—That is the unamortised amount.

CHAIR—What is being suggested here, Senator Conroy, is that your analysis isproceeding on some false assumptions.

Senator CONROY—Are you chairing the meeting or adding commentary as you go?

Mr Comley—I think the point that Mr Allen tried to outline is the comparison between themarket value and the face value. I am not sure what import you would want to put on it.

Senator CONROY—It is your table; it is accrual accounting; you are required to produceit.

CHAIR—Mr Comley, you have the call. Keep talking until you have explained yourself.

Mr Comley—The market value is a measure of the amount that you would have to pay ifyou liquidated all the debt at that point in time. That is a statement of fact.

Senator CONROY—Thank you. So the market value is $60 billion.


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Mr Comley—However, making a comparison of the face value on issue and the marketvalue at a particular time is a completely spurious comparison, because of the followingreason. It is no measure at all of loss or an economic loss of—

Senator CONROY—You could measure the cash going out the door.

CHAIR—Let him finish.

Mr Comley—It is no measure of that at all, because the government has the option to runthose bonds to maturity, and, if it ran the bonds to maturity, the face value it would pay outwould be exactly the same as the face value on issue. The question is: is the governmentlosing any money by repurchasing those bonds early compared with not repurchasing andleaving them in the market? The answer as supplied by Mr Allen is no, there is no loss at all.

Senator CONROY—Could I clarify that? He is talking about an economic loss but hasaccepted that there is a cash outflow. Are you saying there is no cash outflow in thatcircumstance?

Mr Comley—I am saying that there are no additional cash outflows associated with thedecision to repurchase early rather than leave the bonds to maturity.

Senator CONROY—That is just not true. I have just taken you through your ownportfolio budget statements, which show, under a column headed ‘net repurchase premia’, thatyou are buying bonds back. It is just not the case. Cash has gone out the door. Mr Allen hasconceded that cash went out the door. You are now saying, ‘No, it didn’t.’

CHAIR—He did not say that at all.

Dr Henry—I think the point here is that you do not know, just by looking at the face value,how much cash came in the door in the first place.

Senator CONROY—That is not what Mr Comley said, though. I accept the point that youare trying to make. I do not accept the argument that you are making. I accept that it is a validpoint that you are making, but I do not agree with it. Mr Comley has actually made a differentassertion to the point you have just made and that Mr Allen has just made. It is not true, MrComley. Cash has left the building. In the case here, on your own figures, you haveappropriated $1 billion and it has gone out the door.

Mr Comley—I do not disagree with Dr Henry’s point about the face value and the marketvalue at the time. What I am saying is that it is a completely spurious comparison between themarket value and the face value at the time.

Senator CONROY—That is accrual accounting. As Dr Henry, yourself and others haveargued previously to the committee, you do not accept that, because it has flaws. You made allthose arguments last time over the currency losses. You sat there and said, ‘This market figurething is just something we’re forced to do by accrual accounting, but it has flaws.’ If that isyour argument today, please make it and we can move on. I do not accept it, but you havemade your point. It is spurious because accrual accounting forces you to do it, but it does notrepresent anything in your view. The market out there is laughing at you, but you can makethat case if you want.

Dr Henry—I think we are making a slightly different case, which is that the differencebetween face value at the time of issue and market value at the time of redemption is nomeasure of gain or loss. That is the point we are making.

Senator CONROY—You can make that case. Your own accounts say differently, but youcan make that case.


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CHAIR—Do the accounts say differently, Dr Henry?

Dr Henry—No, I do not believe that the accounts do say differently.

CHAIR—Can you help me?

Senator CONROY—I doubt it.

CHAIR—I do not know any more about economics than Senator Conroy does.

Senator CONROY—Can you stop using the chair’s prerogative and let me continue withmy questions?

CHAIR—Can you explain to me whether the proposition you are putting amounts to thisin layman’s language: what has been put by Senator Conroy is not comparing like with like?

Dr Henry—Yes, Mr Chairman.

Senator CONROY—Have we helped you enough, Senator Brandis?

CHAIR—I want to follow the argument, Senator Conroy.

Senator CONROY—We were talking about the face value they were issued at and themarket value which you have been forced to record them in your accounts at. If thegovernment made the decision to repurchase them all, they would have to pay the marketvalue. Any arguments?

Dr Henry—Provided the repurchase decision had no impact on market interest rates. It israther an important consideration.

Senator CONROY—So if you were forced to repurchase them, for any reasonwhatsoever, the government would have a cash outflow of $6.3 billion on the face value to themarket value—that is the difference between 53-point-whatever and 60. That would be thecash going out the door. It is not possible to argue with that; that is called the market value. Itis what you have to pay to bring them back in—

Dr Henry—The cash going out the door would be $60 billion, wouldn’t it?

Senator CONROY—Sixty point whatever. I am sorry—you got me all excited here and Ihave lost track of the exact figure.

Mr Comley—Yes—the cash going out the door would be $60 billion.

Senator CONROY—Thank you. I accept Dr Henry’s point: they can change interest ratemovements. I completely agree with you and I was about to come to that point.

Dr Henry—You were at that point with your first question, Senator.

Senator CONROY—A higher interest rate could reduce the size of the cash outflow. The$6.3 billion could be smaller if interest rates went up—I am not seeking to argue with you onthat point. You are not anticipating higher interest rates are you, Dr Henry?

Dr Henry—You know I never comment on possible future values of interest rates.

Senator CONROY—I just thought you might know something that I did not know aboutthe movements in interest rates.

Dr Henry—I suspect I do, Senator. Nevertheless, I do not comment on the future value ofinterest rates.

Senator CONROY—You personally presided over the currency swaps, didn’t you? Youwere in charge of that section before AOFM was created, weren’t you?

Dr Henry—No, I did not head up any currency swaps section.


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Senator CONROY—I thought it was part of your group previously.

Dr Henry—Let me clarify—I am not trying to dodge anything here.

Senator CONROY—I just thought it might have helped you if you knew something aboutinterest rates that I did not know.

CHAIR—Senator Conroy, let him finish. Dr Henry, you have got the call.

Dr Henry—When I was Executive Director of the Economic Group of the Treasury from1998 until I took on this job, I did have responsibility for—

Senator CONROY—Yes, you did. You presided over the $5 billion loss. That knowledgein interest rates did not help you much, did it?

CHAIR—Dr Henry, you have got the call. You are entitled to speak without interruptionand I invite you to do so.

Dr Henry—Thank you. We have been through this many times before, Senator, and youknow as well as I do that the $5 billion figure you continue to parley is a complete fiction.

Senator CONROY—If there were any prospect of higher interest rates, would it be soundpolicy to swap interest rate liabilities in the government’s debt portfolio from fixed tofloating?

Mr Comley—The first point is that, certainly for a sovereign debt manager, we are not inthe position of taking a view on interest rates. So whether you enter into interest rate swaps isnot predicated on a view as to whether you think interest rates will rise or fall.

Senator CONROY—I would like to turn to table 12 on page 77 of the AOFM annualreport. Can you explain why the government would hold onto the bonds that it hasrepurchased—that is, invest in your own bonds. Why are they not retired and cancelled?

Mr Allen—There are a number of reasons why we might decide to pursue the strategy thatwe have. For example, one of the reasons is that the February 2006 and the October 2007bonds are quite actively traded in secondary markets. Our activity could disrupt the secondarymarket by, for example, the withdrawal of an amount of stock from the marketplace. At timesthat judgment can be a difficult one to make. So being able to maintain these particular bondsin our balance sheet provides the opportunity to, if required, relend that stock so that, if therewere shortages in the secondary market, the market would still be able to function. That is oneof the particular reasons that we might pursue the strategy. Of course, there is a whole rangeof other reasons as well.

Senator CONROY—Holding your own bonds, defined as investments. Investments areassets, aren’t they? So you are holding your own bonds as assets?

Mr Allen—If you look at our balance sheet at note 16 on page 144, you see it relates to ourinvestments; there is a figure of $10.4 billion.

Senator CONROY—I understand that the AOFM web site states, ‘It is not intended forthe Commonwealth government securities held as investments to be reintroduced into themarket in the future.’

Mr Allen—That is an undertaking that we make in terms of the outright sale of thosesecurities back into the marketplace.

Senator CONROY—That stands. You bought them, you held them yourself and you arenot going to reissue them?


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Mr Allen—That is the undertaking that we make. I do not see that there is any reason forthat to change.

Senator CONROY—If the government does not intend to reintroduce these bonds into themarketplace, why aren’t you retiring them or cancelling them?

Mr Allen—As far as I am aware—I am talking from the context of the operational aspectsof debt management—there has been a longstanding policy not to always retire stockimmediately that it is repurchased. I am really not in a position to be able to comment as towhy or why not that pace is not any faster than it currently is.

Senator CONROY—Are you going to continue to build up the size of the government’sholdings?

Mr Allen—That is something I would not be prepared to comment on, in the sense thatthat may be a transaction or may not be a transaction. That is to do with a future outcomethat—

Senator CONROY—You are spending taxpayers’ money; I am entitled to ask you whetheryou are going to spend it doing that.

Mr Allen—We have outlined—

Senator CONROY—You are spending an awful lot of taxpayers’ money.

CHAIR—Senator Conroy, let Mr Allen finish.

Mr Allen—We outline for the financial markets on an annual basis our current fundingplans for the next financial year. We did so at the beginning of this financial year. Thatannouncement included two potential transactions which are within this general area. Onewas the commitment to consider undertaking further conversions of our government bonds—where we buy and sell a government bond at the same time. The other commitment that weoutlined at the time was that we may, depending upon prevailing market conditions—and wedefined that by ensuring that there was a fair value price for the particular bond—consider therepurchase of the February 2006 bond. At this stage we have undertaken one conversiontender; we have not undertaken any repurchase of the February 2006 bond. Those plans arereviewed on an annual basis, and at this stage that would be the only comment that I couldmake in the context of what future plans we intend to undertake.

CHAIR—Senator Conroy, before you go on, I have been told that Professor Fels has toleave by 3.30 p.m. The officers of the ACCC, including Professor Fels, are here now. I amminded to interrupt this evidence and call them on, lest we lose the opportunity of havingProfessor Fels’s evidence.

Senator CONROY—We always intended to go until 3 p.m. and then have Professor Fels.I am not intending to have finished this by 3 p.m., because of what has transpired. Weunderstand that Professor Fels is only with us until 3.30 p.m.

CHAIR—Go on with your questioning and we will interrupt this bracket of evidence at 3p.m.

Senator CONROY—I asked why you have not retired them, and I think the answer wasthat essentially it is a government decision; it is not your call. That is why you have notretired them or cancelled them.

Mr Allen—A number of these transactions—and again I am not sure exactly how many—have been undertaken over a long period of years.


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Senator CONROY—If you have the power to make the decision to retire them or cancelthem, could you tell us? If you do not, could you tell us who does? Who has made thedecision to hold them?

Mr Allen—In our AAS31 balance sheet as outlined in the annual report, we do net thosenumbers from our outstandings.

Senator CONROY—I am asking who made the decision not to retire or cancel when youhave repurchased. Do you have the power? Can you cancel them tomorrow? Or do you haveto ask someone else? That is all I am asking. Who has made this decision to hold them?

Mr Allen—As I say, the majority of the decisions here were taken some time ago. In thecontext of the AOFM’s activity, we have continued to adopt the sorts of practices that havebeen adopted over time.

Senator CONROY—Dr Henry, Mr Allen is indicating that he is just following an existingpolicy. Is it a government policy? Is it a Treasury policy to hold these?

Dr Henry—I would need to check to be absolutely sure, but my understanding is that ithas been government policy for a very long time.

Senator CONROY—It is not AOFM advisory committee policy?

Dr Henry—I do not recall the AOFM board, which I chair, having focused on thisparticular issue.

Senator CONROY—So it is a government position? A Treasury position rather than anAOFM position?

Dr Henry—I think it has indeed been the policy of more than one government.

Senator CONROY—I am just asking who is making the decision now to hold these.

Dr Henry—I think it is a government decision—but it is that of more than onegovernment.

Senator CONROY—If it is not you, just say that it is not you, that it is the government.They continually say they take advice from you guys on these issues. That has been theirstock standard answer for the last couple of months on a variety of issues. Do you advise themon this strategy?

Dr Henry—Indeed we would, just as we have advised all governments on this issue; and Ipresume past governments, just as the present government, followed our advice on this issue.

CHAIR—Dr Henry, do I understand you to be saying that this is a continuation of alongstanding practice?

Dr Henry—That is my understanding, Mr Chairman.

Senator CONROY—Do you review it at all? Do you just ignore it?

Dr Henry—We certainly have not reviewed it. As to when the policy might if ever comeup for review, I could not speculate. Of course, that would in any event go to the preparationof policy advice to government.

Senator CONROY—I am just trying to find out who makes the decision, who is in chargeof advising on the decision. It is up to the government.

Dr Henry—I think that is pretty clear. We provide the advice; governments make thedecisions.


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Senator CONROY—I understand from page 2-15 of Budget Paper No. 1 that the budgetis prepared according to GFS accounting standards. Is that correct?

Dr Henry—That is correct.

Senator CONROY—I understand from the same page that, under this framework, flowsand stocks are valued at current market prices. Is that correct?

Mr Comley—The broad answer is that—

Senator CONROY—I just want you to confirm what is written in black and white on thepage.

Mr Comley—Sure. I just think the most qualified person to answer the question is nothere. That question would be best directed to Dr Grimes when he is available. I am not surewhen he is coming, but it is for one of the other suboutputs.

Senator CONROY—Can I read it to you, and we can argue about it. It says:The GFS framework requires that flows and stocks are valued at current market prices ...

Mr Comley—Yes, but I do not have nearly the expertise of Dr Grimes—

Senator CONROY—You are being bashful!

Mr Comley—It is a fact. I think we can agree on that.

Dr Henry—I will confirm that that is a fact.

Mr Comley—That will be relevant for the next appraisal! I am aware that somewhere inthe budget papers there are comments about a number of matters where there can bedepartures from GFS where there are practical issues with valuation that mean that we aremoving towards the full GFS treatment in those cases. But there may be some instances whereyou have historical cost accounting. I do not have the expertise to say exactly where that is,but I am absolutely confident that Dr Grimes has that expertise.

Senator CONROY—I think that it goes on to say that very thing on the rest of the page.

Mr Comley—I am saying that I have absolutely no doubt that elsewhere in these budgetpapers there is a reference that—

Senator CONROY—It is in the next couple of lines.

Mr Comley—makes it clear that there are cases where, because of practical reasons, youdo not necessarily adopt market to market in all cases, which I understand is not uncommonpractice. Again, Dr Grimes would be better placed to answer that.

Senator CONROY—I think that the Age got the sweep on that answer. Budget Paper No.1, page 2-15, also says:... not all assets and liabilities in the GFS balance sheet are currently valued at current market prices ...because Australian accounting standards allow reporting entities to elect to value their assets at eithercost or fair value ...

Mr Allen—Perhaps I could draw a link for you. If you go to note 16D on page 145 of theAOFM annual report, we outline that in terms of our accounting policy the valuation appliedto the Commonwealth government securities is—

Senator CONROY—AOFM reports are prepared with AAS31.

Mr Allen—That is right—

Senator CONROY—Thank you. This is the GFS, which is not prepared according toAAS31. There is not a link, but I appreciate your contribution.


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CHAIR—Mr Allen, you were in the middle of saying something when you wereinterrupted. Would you care to finish?

Mr Allen—You can draw the link from our accounts back to the government securities linein table 2-17, after the impact of investments at 10.4. Those numbers are approximate.

Senator CONROY—I am aware of that point. It does not change the fact. Could I go backto the questions I was asking of Mr Comley and Dr Henry. Arising from what is on page 2-15,despite the fact that the government prepares its budgets according to the GFS standards—which say that it should value assets and liabilities at current prices—you have an out clausethat you have invented for yourselves. You have decided that in practice you can decide foryourself whether you want to value assets and liabilities at cost or market value.

Mr Murray—You are making it sound like we are picking and choosing.

Senator CONROY—You are!

Mr Murray—I want to re-emphasise the point made further on, which is that therefinements of our valuations of assets and liabilities for the GFS balance sheet are beingconsidered over time and that there are some practical issues. I do not have the expertise in allthose practical issues, but Dr Grimes will be here later on and he may be able to amplify onthat. But we are certainly not deliberately picking and choosing.

Senator CONROY—Let me guess. How has the government decided to value the bondsthat it has repurchased—at cost or market value? I think cost is the answer.

Mr Murray—Yes.

Senator CONROY—That would be the only way that you could have avoided accountingfor the losses, right?

Dr Henry—Senator, we have been through this question and your use of the language oflosses, and I do not think we have accepted it.

Senator CONROY—It does not mean it is not accurate. You can not accept it until you areblue in the face, Dr Henry. Your department has made a decision or the government has madea decision—whichever you want; I do not mind—to pick and choose the accounting standardthat suits you.

CHAIR—Senator Conroy, I think the point is that whether you accept or dispute what DrHenry says—

Senator CONROY—He is not accepting what I say.

CHAIR—or whether he accepts what you say it is not fair to a witness to put a question tohim on the basis of an assumption that he has specifically rejected.

Senator CONROY—He has not rejected that they are picking and choosing theaccounting standards. He has not rejected that at all. He rejects the outcome that arises if theychoose a different accounting standard. He just dismisses it, as Treasury has consistentlydismissed accrual accounting. Unfortunately, the government made a decision that they haveto apply accrual accounting—it is just that Treasury do not like it and do not agree with thenumbers that it brings up.

CHAIR—Senator Watson.

Senator WATSON—I think the issue is very serious, because the implication is thatTreasury are picking evaluations to suit the best outcome, which is not the case. As I


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understand it, they have chosen a standard which is widely recognised, but in not all casesdoes one size fit all. Where appropriate, it is a fair value.

Senator CONROY—Is this a question or is this a lecture?

CHAIR—You have had a fair go, Senator Conroy. This is the second contribution SenatorWatson has made. You go on, Senator Watson.

Senator CONROY—I have a point of order. I am seeking clarity from the chair aboutwhen the chair decides to take the call away from me. Could you give me some indication sothat I do not get upset in the future when you unilaterally decide that you are going to take thecall away from me in the middle of a string of questions.

CHAIR—Senator Conroy, as I said much earlier, the way in which this has proceeded isthat you generally have the call, but, to assist the flow of discussion, if other senators want tocontribute to the discussion, I will give them the call as long as they are on the point. SenatorWatson wanted to say something arising out of your last question, and I invited him to do so.That is the way I propose to proceed, but you generally have the call. Senator Watson, haveyou finished the proposition?

Senator WATSON—I made my point.

CHAIR—Do any of the witnesses want to speak to Senator Watson’s proposition?

Senator WATSON—I think it is up to the witnesses—

Senator CONROY—I agree. It is up to the witnesses, not Senator Watson.

Senator WATSON—to dispute the allegations that are being inferred by Senator Conroy.

CHAIR—Dr Henry, you have heard what Senator Watson has said.

Senator CONROY—Senator Watson is trying to lead the witnesses, but that is fine.

CHAIR—Dr Henry, over to you.

Dr Henry—My understanding is that, when the decision was taken some few years ago tomove to GFS, it was recognised that there were some technical accounting issues that wouldneed to be addressed and so there would be a transition to GFS. My understanding is that, inrespect of the amounts that Senator Conroy is referring to, the accounting treatment has not asyet changed. The present accounting treatment is the accounting treatment that has been withus for I do not know how long; it is an awfully long time. We—that is, government as awhole—are still in the process of considering the transition to GFS in respect of thoseamounts.

Senator CONROY—I want to respond to Senator Watson—and in doing so put myself indanger of another interjection. Accounting standards are meant to result in a standardaccounting treatment. We have Treasury taking it upon themselves to value one liability atcost and another liability at market value, and it is entirely at their discretion. I checkedthrough the GFS and I did not find a clause that says that the Australian federal Treasury getto pick and choose. If you have a copy that says that, please table it. But you have made aunilateral decision.

Dr Henry—If we have made any decision, it is not to change a treatment. I guess it is inthe nature of a passive decision. We have not—

Senator CONROY—No—



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Senator CONROY—I had stopped. I was going to start but I stopped so that he couldfinish.

Dr Henry—We have not changed the accounting treatment of these amounts. I reject anysuggestion that we have been in the business of picking and choosing so as to generate someoutcome that is more or less favourable than some other possible outcome. I certainly rejectthat suggestion. I think it is more accurate to say that we have not changed our treatment inrespect of these amounts.

Senator CONROY—But it is the case that, by opting to value the bonds at cost in directbreach of GFS accounting standards, the government is able to avoid reporting the losssustained on the repurchase of the bonds in the budget. That is the outcome of choosing totreat them in the way that you have. You have unilaterally made that decision. Whether youunilaterally made it a few years ago is neither here nor there.

Dr Henry—More than a few, I think.

CHAIR—Dr Henry, do you accept that proposition?

Senator CONROY—Will you stop leading the witness; you are not in court now!

CHAIR—Senator Conroy, you have chosen to approach this—

Senator CONROY—Dr Henry is capable of answering question himself. He does notneed your help.

CHAIR—Order! You have chosen to approach this by putting propositions to witnesses—

Senator CONROY—And you are attempting to—

CHAIR—and the witnesses are entitled to respond.

Senator CONROY—Yes, without your help.

CHAIR—I am merely asking, ‘Do you accept that or don’t you?’

Senator CONROY—You are leading the witnesses.

CHAIR—No.

Senator CONROY—You are not in court.

CHAIR—I am asking whether they accept the propositions you put to them or they do not.

Senator CONROY—I ask him questions and you get to put a bit of comment in before hegets to answer.

CHAIR—Why don’t you turn your statements into questions by asking, ‘Do you acceptthat?’

Senator CONROY—I said, ‘Isn’t it the case?’—that was a question the last time Ichecked, but obviously your finer legal mind does not see it that way, and you feel the need toreinterpret my questions to then put them to Dr Henry. I appreciate—

CHAIR—I just want Dr Henry and the other officers to be given the opportunity torespond—

Senator CONROY—He might if you would shut up.

CHAIR—to what you are putting to them.

Dr Henry—I do not really know that I can add to what I have already said. The accountingtreatment of these amounts has not, in our applications, changed for a very considerableperiod of time. As I said, we are in the process of moving to GFS. I also said there are a


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number of technical issues that have to be dealt with in that move to GFS. As of today, I donot believe that we have taken any positive action by nature of a picking or a choosing toproduce an outcome that might be more or less favourable than another outcome that isavailable to us. In respect of these amounts, we have simply continued to follow our historicalpractice of successive governments.

Senator CONROY—Page 10-13 of budget paper No. 1 also states:Repurchase premiums and discounts are treated as economic revaluations at the time the debt isrepurchased (provided it is valued at historical cost). The GFS cash flow statement includes repurchasepremiums or discounts in the year that the repurchased stock is cancelled or matures.

Could you explain what that means? If you buy back a bond at a premium, what is the impactabove and below the budget bottom line?

Mr Murray—The repurchased premiums and discounts, because they are treated aseconomic revaluations, are not treated above the line in the GFS standards. They go into thestatement under economic flow.

Senator CONROY—That is consistent. You are investing in your own bonds, valuingthem at historic cost, holding them to maturity—which is what you are effectively doing—bywhich time the market price will have converged on the issue price, so you can avoidrecognising a $7.4 billion expense in the budget. That is what you are actually doing.

Mr Comley—That is not my understanding of how the accounting treatment works.

Senator CONROY—That is exactly how it works under GFS. You have just decided, ‘Ohmy God! We could book it.’

CHAIR—Let Mr Comley answer. You have put the proposition.

Mr Comley—The second sentence is:The GFS cash flow statement includes repurchase premiums or discounts in the year that therepurchased stock is cancelled or matures.

At that point it is recognised in the underlying cash balance.

Senator CONROY—The government has already paid out $1.1 billion. It has already putthe cash out the door, because you have bought back bonds for more than you paid for them.That is not in dispute. The question is whether it is going to be recognised and hidden fromthe taxpayers or not. You did not cancel it—that is the whole point. By not cancelling it, youdo not recognise the expense in the budget. By sitting on it and not cancelling it—

Mr Comley—It is, in fact, recognised twice. I have no reason to doubt that it is correct on10-13. It is recognised both at the time of repurchase and at cancellation.

Senator CONROY—It is not recognised as an expense in the budget above the line,because you have decided to hold it and not cancel it. It is not recognised at all. All thathappens is, under the line, $1 billion has gone out the door.

Mr Comley—It is, in fact, recognised above the line.

CHAIR—We will now go on to the ACCC.

[3.04 p.m.]

Australian Competition and Consumer CommissionCHAIR—I welcome to the table Professor Fels, Chairman of the Australian Competition

and Consumer Commission, and officers of the commission. Professor Fels, would you like tomake an opening statement or any opening observations?


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Prof. Fels—Yes, thank you. The commission are currently engaged in 80 cases in theFederal Court. That is a very high number by our standards historically. The cases covermatters under part IV, particularly cartels. There are a number of international cartels, thereare some local cartels and there are some areas of price-fixing and boycott behaviour whichhad been picked up by the extension of the reach of the act in 1995 into the professions and soon.

In recent years, we have also been doing quite a few more cases under the misuse of marketpower law, section 46. We have had a successful case against Boral for predatory pricing—although that is on appeal to the High Court—and a successful case against a couple of recordcompanies, also for misuse of market power and also on appeal. We have also had a caseconcerning Rural Press, which we have won some of and lost some of, under sections 45 and46. We have lost but are appealing a case against Safeway.

We are engaged in what I would call a normal rate of activity with respect to mergers. Icannot report any significant change of policy or practice on our part. There has possibly beena slight fall in the amount of merger and acquisition activity. The most prominent matter tocome up in recent times was the content-sharing program of Foxtel-Optus, which we initiallyconsidered anticompetitive. However, after very substantial undertakings were provided to thecommission, we withdrew our objections.

We of course do cases under part V, consumer protection. Of particular note, we have beendealing with misleading small-print qualifications—major advertisements where there arequite important qualifications expressed in small print. Where they are misleading, we takecourt action.

There have been a number of cases where we have been pursuing alleged unconscionableconduct in relation to big business versus small business. We have now had a number of caseswhere the jurisprudence is starting to emerge in these matters. It is possible to getanticompetitive behaviour authorised under the act, and we have had a number ofadjudications. One I would mention is that the dairy farmers put up a proposal—which weultimately agreed to—which allows them to engage in a degree of collective bargainingregarding how much they get paid by processors. We continue to engage in regulatorybehaviour with respect to telecommunications, electricity and gas at the national level; there isstill state regulation of them. We are also doing a little on rail and airports.

There has been an increase in the amount of activity at the international level. In 1948,when the now World Trade Organisation was set up, there was a chapter about having a fieldof activity for international competition questions, but it got dropped off. For a long time,competition policy and law lagged internationally. However, because of the large number ofglobal transactions occurring now—mergers, cartels, scams et cetera—there has been a pick-up in activity. In the latest world trade round, the question about whether there should besome competition provisions written into the world trade agreement is the subject of aworking party study. The OECD is quite active studying this area; and a new body, theInternational Competition Network, has also been set up. It is made up of some 80 regulatorsfrom around the world aiming to get more coordination. That is a very brief overview.

CHAIR—I want to ask about the last point, the development of international competitionlaw. What specific role is Australia playing in the generation of international competitionprinciples? To the extent to which it participates in these international fora, does the ACCCadvocate that those international competition law principles should be broadly similar to thosein part IV of our own act, insofar as they may be replicated in international trade? To whatextent do we adopt the European or the Sherman act models?


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Prof. Fels—We certainly participate heavily. We are very active at the OECD; I amchairman of one of the quite important committees there. We are on the steering committee ofthe new International Competition Network. Australia plays a significant role—I do not—atthe WTO meetings on this topic. Before answering the second bit of your question, can I saythat the other broad element of competition policy that we are involved in—actually this isnot that irrelevant to your question—is giving a lot of advice to Asian countries that seekinformation from us on how we think they should run policies; and we are involved intraining programs.

On the broad principles, in the OECD there is a fairly high degree of convergence betweenthe laws of the different countries. This applies even in areas where there seem to bedifferences. For example, in Europe they have a ‘dominance test’ for mergers, and it is nowgenerally accepted that they have moved, without changing the name, to something that isalmost the same as our ‘substantial lessening of competition’ test. As a first, broadapproximation: we have followed a bit more the US than the European model, but they arefairly similar. The big difference is that in Australia, with our small economy, it is possible toget authorised anticompetitive conduct. In the US, it is prohibited. In the EU, it is just aboutimpossible to get it accepted on the basis of an argument that it is in the public interest. Evenin Europe, if it is anticompetitive, end of story. In Australia, you can get authorisation. That isa key difference. Many developing countries are pretty interested in adopting our model; theysee it as being a bit more flexible.

CHAIR—Professor Fels, in your annual report there is a summary of the principal cases inwhich the ACCC has been concerned in the year under report. I can only find a reference toone section 45D case, which is against the Maritime Union. Is that the only section 45D caseproceeding that was initiated by the commission in that year?

Prof. Fels—Yes, that is correct.

CHAIR—Does that reflect an outbreak of industrial peace, or does it reflect a reluctance ofthe ACCC to be seized of litigation under that part of the act?

Mr Cassidy—There were a few others that we investigated. I think it would be fair enoughto say that those investigations did not get very far at all before the boycott activity ceased.From memory, there were one or two in the petroleum sector, and there might have been atleast one other. So, while only one case proceeded to court, there were a few otherinvestigations that we undertook. But, as I said, the conduct was not longstanding and as soonas we started investigating it the conduct ceased, so we saw no need to pursue it further.

CHAIR—So the capacity of the commission to threaten to exercise the section 45Dpowers has itself been a significant feature in deterring that conduct?

Mr Cassidy—Certainly it has been our experience in recent times that, as soon as we startinvestigating 45D conduct, it tends to cease fairly quickly.

CHAIR—Professor Fels, you mentioned litigation under section 46. I know thathistorically the ACCC has taken many more section 45 actions than section 46 proceedings.In the annual report, 21 cases are mentioned in which the principal course of action wassection 45. There are only four cases mentioned in which the principal course of action wassection 46. Do you detect a trend for the commission to litigate more section 46 cases? Inaddressing that, can you speak to the effect on the commission’s considerations of Melway?

Prof. Fels—In rather big picture terms, the commission did not take any section 46 casesin the first half of the nineties and hardly any, I think, in the second half of the eighties. It is alogical development that if the commission becomes more active on section 45 cartels and on


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mergers, as tended to happen in the first half of the nineties, it will inevitably move to thatother important leg of competition law, section 46. That has been a factor, together with theavailability of some cases that we thought were good ones to run. We can only easily talkabout the ACCC trend. There have been plenty of private cases under section 46, some ofwhich have been quite important. However, it is a bit of a new trend for us to be in section 46,as compared with the past, and I would expect that to continue.

Regarding the Melway case, the commission—for what it is worth, and the High Court isworth a lot more than we are in these matters—has no problems with the analysis done insection 46 in relation to the analysis of markets and what was happening through Melwayrefusing to make available for distribution the street maps of Melbourne to a particulardistributor. That did not look to be anticompetitive. The commission intervened in the casewhen it went to the High Court and we wished to advocate a particular point. We are pleasedthat it was picked up and, as obiter dicta, was to our mind accepted by the High Court. I thinkthat was basically accepted. We felt that we had to take sides in intervening and we intervenedagainst Melway. However, as I said, in retrospect I think the High Court analysis was verygood.

CHAIR—My last question before I give the call to the opposition is this: how manyprivate proceedings is the ACCC currently intervening in and is the ACCC exercising thediscretion to apply to intervene in private proceedings more nowadays than may have beenthe case a few years ago?

Prof. Fels—Yes. We are in a few cases and we have an enhanced power from parliament inrecent times to do this. I do not know the number—there may be two or three.

Mr Smith—I think it is about half a dozen.

CHAIR—And that is an increase over the trend in the past, isn’t it? As I recall, you couldnever get the ACCC to intervene.

Prof. Fels—Parliament has passed a law which enables us to intervene. There are differentcategories to intervene and to appear as an amicus curiae without being involved in the case.

Mr Smith—That is correct.

Prof. Fels—However, there has definitely been an upward trend in both areas.

CHAIR—Thank you.

Senator CONROY—I would like to ask some questions regarding the issue of ethanolblending in petrol, and in particular in relation to Mr Hockey’s referral to the ACCC on 20March 2001 to examine allegations that wholesalers are mixing large amounts of ethanol intopetrol and not alerting customers to that change. What were the relevant sections of the TradePractices Act for that referral?

Mr Cassidy—There are three sections that we think potentially would come into play:section 52, which is a general provision against misleading and deceptive conduct; section53A, which prohibits a corporation from making false claims about the particular standard,quality, value, grade, composition, style or model of goods; and section 55, which prohibits aperson from engaging in conduct which is liable to mislead the public as to the nature, themanufacturing process, the characteristics, the suitability for their purpose or the quantity ofany goods. So there are three possible sections involved there.

Senator CONROY—What process did the ACCC follow in investigating the issue?

Mr Cassidy—We undertook a survey of a number of services stations, particularly up anddown the east coast of Australia, which is where, from reports, the ethanol issue seemed to be


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most prevalent. We undertook a sampling approach to test the ethanol content of petrol beingsold in a number of service stations.

Senator CONROY—What evidence did you gather from those samples?

Mr Cassidy—We found quite a range. Some of the petrol did not have any ethanol at all.

Senator CONROY—I would like to expand the question. Who did the testing for you?How much testing was done? What were the results? You were just getting to the results but Ijust wanted to know the details.

Mr Cassidy—I am afraid I am not sure of the first two legs, so we will take that on notice.As I said, we found that quite a number of service stations were selling petrol without anyethanol at all but we found some service stations were selling petrol with up to about 21 percent ethanol. It varied a bit but I think we got at least a couple of readings which were 21percent or 22 per cent.

Senator CONROY—Twenty-one per cent or 22 per cent?

Mr Cassidy—Yes. There were not a great many of those but we did get some readings upto that sort of level.

Senator CONROY—Was there an average? Was there a concentration in certain regionsas opposed to others? Were particularly suppliers more likely—

Mr Cassidy—My recollection is that quite commonly where ethanol was found in petrol itwas somewhere around the 10 per cent level. That is not without significance in the sense thatit is a figure which tends to be used by motor vehicle manufacturers in their warranties interms of the acceptable level of ethanol.

Senator CONROY—I was going to come to that point. What evidence were you able togather regarding the potential impact on motorists of the higher level?

Mr Cassidy—We spoke to various independent authorities. We also spoke to the variousplayers in the industry and I have to say it was a very mixed story. People like the motorvehicle manufacturers, for argument’s sake, said that they thought anything above 10 per centwas potentially a problem. But then there were others in the industry who pointed to overseaspractice and who argued that you could certainly go up to 20 per cent.

Senator CONROY—Who were the others in the industry?

Mr Cassidy—Others in the industry, not surprisingly, were those involved with themanufacture of ethanol, such as the Biofuels Association. As I recall, we also sourced someindependent studies that had been done but they were a bit mixed in the sense that some said10 per cent and some said more than 10 per cent. I think it would be fair enough to say thatwe did not really find anyone who was prepared to go above about 20 per cent as being anacceptable level. Between 10 per cent and 20 per cent there was quite a deal of conflictingevidence.

Senator CONROY—Did you commission some independent scientific work?

Mr Cassidy—No, I do not think we did.

Senator CONROY—When did the commission report on this referral? What was thereporting mechanism?

Mr Cassidy—We wrote to the Parliamentary Secretary to the Treasurer as well as to theMinister for the Environment and Heritage on 11 December in relation to our findings.

Senator CONROY—Can we get a copy of that?


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Mr Cassidy—That letter has been distributed in the so-called ethanol task force, which is amixture of both government and private sector—

Senator CONROY—I am not on that one.

Mr Cassidy—I am sorry; that is just my leading in to say that we can quite happily giveyou a copy of that letter.

Senator CONROY—If that could be tabled, that would be great. Can you confirm that inthat letter the commission concluded that consumers may have been misled regarding thelevel of ethanol in their petrol?

Mr Cassidy—We had a concern that there was no display in relation to what the level ofethanol in petrol is. Therefore you potentially had a situation where consumers were buyingpetrol perhaps in the belief that it was—I was going to say ‘pure petrol’ but that is where thisissue starts to get a bit murky, because there is no such thing; petrol has all sorts of additives.But they may have been buying it in the belief that it did not contain any ethanol when in fact,because there was no signage, in some cases it would have.

Senator CONROY—Is it possible to get the sampling results? Is it possible to get a tableshowing how, when—

Mr Cassidy—Again, can I take that on notice?

Senator CONROY—Yes.

Mr Cassidy—I would have to check, but I think so. I do not have that with me.

Senator CONROY—There is no secret about them?

Mr Cassidy—No, I do not think so. I just need to check on things like confidentialityissues.

Senator CONROY—What would be a confidentiality issue of you going into a petrolstation and saying, ‘I’m from the ACCC; I’ve come to test your petrol’?

Mr Cassidy—On the basis that we were not using any statutory powers in doing that, so itis possible that someone may—

Senator CONROY—Did you have to sign a confidentiality clause?

Mr Cassidy—Not that I am aware of but I want to add the possibility that someone mighthave said, ‘Look, I’m quite happy for you to do that provided you use the results in anaggregated way rather than identify me individually.’

Senator CONROY—I accept that. Would you have been suspicious if someone had saidno?

Mr Cassidy—Well—

Senator CONROY—Did anybody say no?

Mr Cassidy—I am not aware of anyone actually saying no. Would we have beensuspicious? Despite the fact that we think we basically serve the interests of the people ofAustralia, I would have to say that we are not always necessarily welcome when we walk insomewhere.

Prof. Fels—ACCC paranoia sometimes runs deep in the oil industry.

Senator CONROY—Can I confirm that the commission concluded that vehicle warrantiesmay be voided by blends of greater than 10 per cent ethanol?


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Mr Cassidy—Certainly that is the case in the sense that most vehicle warranties have afigure of 10 per cent ethanol in them, so it necessarily follows that if someone is using petrolwith more than 10 per cent ethanol they could be running the risk of voiding their warranty.

Senator CONROY—And the commission concluded:Consumers are not informed that there may be a reduction in fuel economy in vehicles using an

ethanol-blend fuel.

Mr Cassidy—That is correct also. I must say from your series of questions that I am rathersuspecting that somewhere you have probably already got a copy of our letter—

Senator CONROY—You are very suspicious.

Mr Cassidy—but we will quite happily give you a copy.

Senator CONROY—Thank you. Given these explicit and quite grave warnings, what isyour view of the implications for consumers of the government’s continuing failure to act onthis issue?

Mr Cassidy—There is obviously a potential, if people were unwittingly buying petrol withethanol greater than 10 per cent, to cause damage to their motor vehicles without knowingthey are doing so. We worry that there is that risk in the current situation.

Senator WATSON—Have you checked any light aircraft fuels as to whether ethanol is inthem?

Mr Cassidy—No, I do not believe we did. The particular issue at the time focused rathermuch on the issue of petrol. It has also been an issue in relation to smaller engines—forexample, the two-stroke engines that are typically used in chainsaws, outboard motors and soforth. It has been argued by at least some that the ethanol can have an impact on smallerengines which could be more marked than on motor vehicle engines.

Senator CONROY—I appreciate that this letter was sent on 11 December, but I have acouple of concerns having just glanced at it. I am hoping you can update us from 11December. You make the point on page 2 of your letter that the commission has beenappointed to the task force. You go on to say:However, there is no clear indication of who is actually responsible for performing the studies requiredto determine the most appropriate ethanol level.

Has that been resolved?

Mr Cassidy—In the last budget the government announced that a certain amount of moneyhad been allocated for undertaking those tests, so from our point of view that has now beenresolved.

Senator CONROY—From 11 December to when the budget was announced in May,nothing actually happened at all. There were no moneys. There was no study. There were noresources. Because you go on to make the point about the fact—

CHAIR—Is that right, Mr Cassidy?

Mr Cassidy—I was going to say that this is something which falls within another portfolioand I am not privy to what—

Senator CONROY—Sorry, I was actually halfway through a question when youinterrupted me, Chair.

CHAIR—You asked him about 15 questions in one sentence. So you do not know theanswer to that, Mr Cassidy?


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Mr Cassidy—No. I certainly would not want to say that nothing happened, because it isbasically a responsibility of the Environment portfolio.

Senator CONROY—You make the point in your letter:The purpose of this Taskforce is to, among other things, determine an appropriate ethanol level forinclusion in the National Fuel Standards (‘NFS’).

You are on the task force; you are saying that is one of its jobs. I am asking about the taskforce. You then say:... there is no clear indication of who is actually responsible for performing the studies ... it wouldappear as though no funding or resources have been allocated ...

And they were not allocated for the next six months. The letter continues:As such, there is the potential for no recommendation of a ceiling for ethanol in the NFS—

that is, the national fuel standards—to be made to the Taskforce for a significant period of time, regardless of any time frame put in placefor this to occur.

Mr Cassidy, you were 100 per cent right. It was six months before a cent was available toeven begin the process, when you warned them in December that the consequence of nofunding would be that it would slow down, if not frustrate, the creation of this standard.

Senator Ian Campbell—Mr Cassidy is a member of that task force and that task force isunder a different portfolio, so I suggest, Senator Conroy—

Senator CONROY—I am allowed to ask Mr Cassidy. He or a representative attends themeetings, I presume, so I am perfectly entitled to ask him.

Senator Ian Campbell—But the task force does not come under this portfolio. Mr Cassidyis there because he has some skills and experience to bring to that task force and he has beeninvited—

Senator CONROY—So he is not allowed to answer any questions about it? Is that whatyou are suggesting?

CHAIR—Senator Conroy, let Senator Campbell finish.

Senator Ian Campbell—The task force reports to another minister in a different portfolioand Mr Cassidy is not competent to—

Senator CONROY—I think Mr Cassidy is very competent.

Senator Ian Campbell—It is outside the competence of this committee to cross-examineMr Cassidy. Mr Cassidy might well be a member of the committee of the East Melbournejunior soccer club and it would be entirely incompetent to ask him questions about thegovernance of that particular organisation.

Senator CONROY—We are asking questions about the consumer issues involved in thetask force. That is why he is there.

Senator Ian Campbell—If you want to ask questions about the task force, go across to therelevant estimates committee and ask the minister who the task force reports to. The taskforce does not report to Treasury.

Senator CONROY—The good news is that the ACCC are actually an independentstatutory authority—or they were the last time I checked—so it is up to Mr Cassidy whetherhe wants to answer the question or not. He is not an employee of a government department.You cannot tell him not to answer the question.


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Senator Ian Campbell—I can tell you where to go and ask your question. Go to thecorrect Senate committee. You are in the wrong Senate committee; you are in the wrongroom.

Senator CONROY—I can choose to take your advice or not. Mr Cassidy, are youcomfortable with answering some questions about the progress of the task force?

Mr Cassidy—Only insofar as I can. I think that the issue is that you were asking questionsabout what has happened on this issue generally and I am not aware of what else washappening within the Environment portfolio.

Senator CONROY—Can I ask you about your letter, which says:On the basis of the consumer protection considerations mentioned above, the Commission considersthat a 10% ethanol limit should be included in the NFS Regulations as soon as possible.

It is now nearly a year since you wrote this letter. Have we got a 10 per cent limit yet? I donot think we have, because I have just seen an announcement. Are we close, in your view?

Mr Cassidy—Maybe you have not quite got the letter, because we actually suggested itshould be inserted before January 2002.

Senator CONROY—I am asking if we are close.

Mr Cassidy—No, it has not been inserted.

Senator CONROY—Do we have an agreement on the committee?

Mr Cassidy—The government has announced, as I said, funding for the study. I am notaware of the decision making processes in relation to that, because we were not privy to those,but in direct response to your question there is still, at this point in time, no limit in thenational fuel standards in relation to ethanol.

Senator CONROY—Is there an agreement among the membership of the task force that a10 per cent limit is appropriate? You make it quite clear in the meantime—

Mr Cassidy—There is quite a lot of debate in the task force. As I said, the task forceconsists of both government and private sector entities and certainly at least some of theprivate sector entities would not agree that a 10 per cent level is appropriate.

Senator CONROY—You make the point in the last paragraph of your letter:In the meantime, the Commission considers an interim ethanol level of 10% should be inserted into theNFS before January 2002 to provide certainty for consumers until the results of the Commonwealthtesting are concluded.

Has that happened?

Mr Cassidy—No, it has not.

Senator CONROY—Nearly a year later we do not even have an interim ethanol level,which you have recommended is necessary to overcome your concerns, outlined in the letter.

Mr Cassidy—That is right.

Senator CONROY—The ACCC are on the public record now as saying that they believeone should be inserted for the protection of consumers to avoid all the consequences that youhave described.

Mr Cassidy—That is correct.

CHAIR—So, Mr Cassidy, the ACCC are one of the participants in the task force and thetask force itself does not have a corporate view?


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Mr Cassidy—No, there is quite a lot of debate within the task force as to what anappropriate level is.

Senator CONROY—But you have recommended that an interim level be set and insertedinto the NFS?

Mr Cassidy—That is correct.

Senator CONROY—Are you aware whether the government are intending to insert aninterim one before January 2003?

Mr Cassidy—Again, I do not know what the government might be intending. I certainlyhave not seen any announcements to that effect. The studies are under way and as far as I amaware that is the state of play.

Senator CONROY—I am not asking you to name names here. Do you believe that thetask force will reach an agreement on 10 per cent?

Mr Cassidy—Given the diverse interests in the task force I am not sure that they ever will.Notwithstanding what the results of the study might be, I think there will still be a diversity ofopinion.

Senator CONROY—In your view, you do not think that your task force can reachagreement even if the study comes back and says that cars are going to fall over and just stopdead in the street if they use more than 10 per cent?

Mr Cassidy—Let me put it this way. At the moment motor vehicle warranties have inthem the 10 per cent figure. Notwithstanding that, there are still people who will argue thatyou can run motor vehicles with more than 10 per cent ethanol.

Senator CONROY—They would be ethanol producers, wouldn’t they?

Mr Cassidy—They can do that on the basis that motor vehicles run overseas with morethan 10 per cent ethanol. It is not something that you can dismiss, because it is something thatdoes happen overseas. Those vehicles are modified in some ways to allow them to run withthose high levels of ethanol, but it is not a black-and-white issue.

Senator CONROY—Is this committee being held hostage by the ethanol producers?

Mr Cassidy—I would not say that in any sense.

CHAIR—Before you go on, Professor Fels has to go. Thank you for your attendance,Professor Fels.

CHAIR—Senator Conroy, would you like to continue?

Senator CONROY—I was asking whether you were being held hostage by the ethanolproducers.

Mr Cassidy—No, I would not say that anyone is being held hostage. There is just adiversity of views.

Senator CONROY—How will the task force resolve a position on an ethanol level? Willthe ACCC continue participating if you are unable to get your preferred 10 per cent?

Mr Cassidy—It is not quite clear to me what the role of the task force will be in decidingon the level. The government has commissioned what are some fairly extensive studies.

Senator CONROY—I thought you indicated earlier that in the opinion of Professor Fels,who wrote the letter:The purpose of this Taskforce is to, among other things, determine an appropriate ethanol level ...


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You are now saying it is not?

Mr Cassidy—I am saying that the government has announced what is a fairly extensivestudy into the issue. As to what is going to be done when those results are available—whetherit will come back to the task force or whether it will be something that is decided directly bythe government—I am afraid I am not sure, again because we are only sitting on the peripheryof this issue. It is the responsibility of another portfolio.

CHAIR—Mr Cassidy, are you the wrong person to ask?

Mr Cassidy—Yes, in terms of the process and what is intended and so forth.

CHAIR—I think that is the point that Senator Ian Campbell was trying to make.

Senator CONROY—I had not actually asked a process question. Is anyone other than theethanol producers arguing for a greater than 10 per cent limit?

Mr Cassidy—Certainly the environmental lobby are. The environmental lobby are quitekeen on ethanol as an alternative fuel.

Senator CONROY—So they believe it should be more than 10 per cent?

Mr Cassidy—The reason I hesitate is that there are, if you like, two lines of argument. Oneis in relation to having what you might say is a higher than 10 per cent level of ethanol. Thesecond argument is to have a low but universal requirement for ethanol content in petrol. Iwould have to check with what I loosely call the ‘environmental lobby’. Certainly they arearguing the second point. My recollection is that they are also arguing for the higher than 10per cent level, but I would need to check on that for you.

Senator Ian Campbell—I think there is the other issue of alternative fuels as well.

Mr Cassidy—That is right. It is part of the broader issue of alternative fuels.

Senator CONROY—Have you done any further work on the issue since reporting to thegovernment on Minister Hockey’s referral?

Mr Cassidy—No. We have thought about whether we can pursue legal action. But until weget some clarification of what an acceptable level of ethanol is in petrol—some sort ofbenchmark—our legal advice is that any sort of legal action by us would be fairly difficult.

Senator CONROY—Can you explain to the committee why you cannot act off your ownbat on this issue?

Mr Cassidy—Let me elaborate a little. Probably the most productive section of the act toproceed under would be section 52—misleading and deceptive conduct.

Senator CONROY—Not the fair trading provisions?

Mr Cassidy—Yes, part IV, with the fair trading provisions. That would be an issue ofsilence in that the producers and/or retailers are selling petrol without revealing that itcontains ethanol.

CHAIR—What about section 53—the provisions about—

Senator CONROY—Stop showing off, George!

Mr Cassidy—Sorry, I chose my words carefully. We think what I call the mostproductive—and probably the easiest—route to go would be section 52. However, we wouldnot rule out section 53. We run into the same basic problem in that silence under 52 requiresnot only material silence but also that the person who was silent realises that their silencecould potentially cause some injury. Our legal advice is that, with the level of uncertainty


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about just what is an acceptable level of ethanol in petrol, we would have difficulty sustaininga case.

Senator CONROY—Is it possible to get a copy of that advice? I am happy for you to takethat on notice and come back to us.

Mr Cassidy—I hesitate to do that because, for reasons you will probably appreciate, we donot normally pass out copies of our legal advice.

Senator CONROY—In your view, is the most effective way to address this issue and toprotect consumers still the 10 per cent limit?

Mr Cassidy—We would not necessarily commit ourselves to 10 per cent. We chose 10 percent in our letter because that was the figure in the motor vehicle warranties. We certainly dothink that the most effective way of protecting consumers would be to have a specifiedlevel—be it 10 per cent, 15 per cent or whatever—in the national fuel standards. That wouldgive a level which could then be enforced under the national fuel standards by theenvironment department. It would also give us, if you like, a benchmark which wouldimprove our chances were we to proceed to court.

Senator CONROY—If it is in the warranties and consumers do not know whether they aregoing to be in breach of a warranty, surely your original position should stand. You are aconsumer protection organisation. This is critical to consumers who are possibly going tohave their car engines wrecked.

Mr Cassidy—Our original position was an interim position. If, as a result, say, of thegovernment study, there was general agreement that 15 per cent was the appropriate level andmotor vehicle manufacturers moved to adopt 15 per cent, then we would certainly not be in aposition to say, ‘No, it should be 10.’ That is why we are not saying that 10 is absolutely theright figure. We are saying that we think there should be a figure included in the national fuelstandards.

Senator CONROY—So the ACCC would support a 15 per cent level—or a level higherthan 10 per cent—even if that voided warranties for consumers?

Mr Cassidy—I thought I chose my words fairly carefully. If as a result of the governmentstudy, there was general agreement that 15 per cent was an acceptable level, we would nothold out that it had to be 10.

Senator CONROY—But it is the figure used for other motors for agricultural uses such aspumps, chainsaws and motorcycles. This is a universal warranty issue. It is not just cars, it islike this is the—

Senator Ian Campbell—I think what Mr Cassidy is saying is that, in the event that thescience showed that a higher level was right—and again this is outside our portfolio, in somerespects, but the consumer side is within it—you would obviously bring in the manufacturersand talk to them. It is an uncertain area of science at the moment. The government is pursuinga diligent path to try and put some more certainty into it.

Senator CONROY—You can speak for yourself—

Senator Ian Campbell—And as I care about my outboard motor, I want to make sure thatthey get it right.

Senator CONROY—Thank you for that. I will move on now to a recent High Courtcase—

Mr Cassidy—Nick is worried about his chainsaw.


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Senator CONROY—In that case, the court decided against the ACCC and held that theDaniels Group was not required to give up documents to the ACCC that were properly thesubject of legal professional privilege. Following that decision, has the ACCC had to alter anynotices that have been issued under section 155?

Mr Cassidy—We did have some 155 notices that were outstanding or where we wereholding documents subject to that case. Since the case we have taken action either to vary thenotices that were still outstanding or alternatively to return development documents that werein dispute.

Senator CONROY—How many investigations are likely to involve claims of legalprofessional privilege and in how many cases in, say, the past two years have you soughtdocuments that have been claimed to be protected by legal professional privilege? Or is iteasier to list the ones that have not?

Mr Cassidy—The second leg of that question I will have to take on notice. I do not knowoff the top of my head how many cases we have had in the last two years where legalprofessional privilege was claimed.

CHAIR—Mr Cassidy, even in a case where legal professional privilege were to be claimedin relation to documents sought under a 155 notice the vast majority of documents in anordinary case that is subject to a 155 notice would not have anything to do with somethingthat would be relevant to a claim of legal profession privilege.

Mr Cassidy—That is true.

CHAIR—So the High Court’s decision is unlikely to impede your investigation.

Mr Cassidy—As a general proposition that is certainly right. There is obviously going tobe the odd case where the High Court’s decision will perhaps be an issue for us. I did not wantto imply in any way that every day we are getting claims of legal professional privilege. Weare talking about relatively few cases.

Senator CONROY—The Federal Court in the Daniels Group case said:Without information about contacts between the person under investigation and that person’s lawyer,

it may be impossible for the ACCC to see the whole picture.

That was reproduced in your press release of 16 March 2001. Do you still agree with that?

Mr Cassidy—In some cases, yes.

Senator CONROY—Does this decision in the High Court make your regulatory taskharder?

Mr Cassidy—It makes it a little harder. It is one of these curious situations where the fullbench of the Federal Court decided 3-0 in our favour and then the full bench of the HighCourt decided 7-0 against us. It is an issue that has some diversity of opinion.

CHAIR—You can hardly complain about that. It went the opposite way in QueenslandWire.

Mr Cassidy—Quite so. There are swings and roundabouts in these things. The fulldecision of the High Court makes it clear that where legal practitioners are actually involvedin an offence then legal professional privilege cannot be properly claimed.

CHAIR—That has always been the law.


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Mr Cassidy—Yes, but they were quite clear on that so there is still an issue there for us topursue and we will be seeking clarification through the courts. It is only a relatively smallnumber.

CHAIR—That is an important point to be made, though: it has never been the case, goingback hundreds of years, that legal professional privilege could be used to cloak a fraud by thelawyer or the client.

Mr Cassidy—That is true. The area of potential difficulty is the situation where someoneclaims that they did what they did on the basis of legal advice they had that it was all right.Then when we ask, ‘Can we see the legal advice?’ and we are told, ‘No, it is subject to legalprofessional privilege’ it obviously leaves us in a difficult position. It probably leaves us in aposition where without having that advice we would not be able to give any credence to theclaim that the party had that particular advice.

CHAIR—But it does not leave you in a worse position than any other prosecutorialauthority including, most obviously, the Crown in criminal proceedings.

Mr Cassidy—These are decisions of general application, so you are quite right.

Senator CONROY—Let me quote your press release on the day. It states:But today’s decision may mean that in some cases the ACCC will be restricted in properly investigatingalleged breaches of the Act with relevant information, documents or evidence being withheld from itunder the cloak of legal professional privilege.

You say that you will be restricted.

Mr Cassidy—In some cases, we could be, yes.

CHAIR—I understand that you say that, Mr Cassidy, and we can have a debate about that.I understand that that is your position, but with respect that is rubbish, in the sense—

Senator CONROY—Are you insulting the witnesses? Are you treating the witnesses—

CHAIR—In the sense that the ACCC is under no greater disability in enforcing its statutethan, for example, the Director of Public Prosecutions is in enforcing the criminal law.

Senator CONROY—So if I use the words, ‘with respect’ first, will it be okay?

Mr Cassidy—That is quite true, Senator, but equally if Senator Conroy asked the Directorof Public Prosecutions the same question—

CHAIR—He would say, ‘We would like to have a greater—

Mr Cassidy—He would probably get exactly the same—

CHAIR—Because every prosecuting authority wants to limit the rights of the subject.

Mr Cassidy—He would probably get exactly the same answer.

CHAIR—It is just the way of the world.

Mr Cassidy—I do not know whether that makes my answer rubbish—

Senator CONROY—I just want to clarify: if I say ‘with respect’ before I say that theevidence from the witness is rubbish, will you allow that with other witnesses?

CHAIR—You can go ahead.

Senator CONROY—Excellent. Is there any evidence of increasing incidents of companiesclaiming that documents are protected by legal professional privilege in, say, the last fiveyears?


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Mr Cassidy—No, I do not think so; not that we are aware of.

Senator CONROY—Are there any particular types of cases where the incidence ofcompanies claiming documents are protected by legal professional privilege is more likely?

Mr Cassidy—No, I do not think that we could say that either.

Senator CONROY—Have you had any discussions with the government regardingclarifying the operation of section 155? Would you seek to have that section amended?

Mr Cassidy—Do you mean following Daniels?


Mr Cassidy—No.

CHAIR—I bet you would!

Mr Cassidy—Sorry. No, we have not had any discussions—

Senator CONROY—Don’t be badgered by the chair, Mr Cassidy.

Mr Cassidy—No, we have not had any discussions with the government. Indeed, as I saidearlier, we think that we have more testing that we want to do in relation to section 155 andlegal professional privilege. Equally, Senator Brandis is quite right in that if the governmentcame to us and said, ‘Would you like us to change section 155 as a result of the Danielsdecision?’ as a regulator, like many other regulators, I do not think we would be saying no.

Senator CONROY—I want now to refer very quickly to credit cards and bank fees. Inyour view, is competition amongst the banks who issue and acquire credit card businesssufficient that consumers will ultimately enjoy any savings as a result of the cut to interchangefees resulting from the RBA reforms?

Mr Cassidy—We are feeling reasonably confident, particularly given another leg of thesame reforms in relation to potential new entrants, that those savings will be passed on fromthe banks to the merchants.

Senator CONROY—You would have seen reports that the ANZ, in particular, has alreadystarted shoving up its different fees on credit cards?

Mr Cassidy—We have seen those. Whether that bears any relationship to the interchangefee issue—

Senator CONROY—I am disappointed to hear you sound like the ANZ Bank, MrCassidy.

Mr Cassidy—No, because a lot has been happening with bank fees in recent years.

Senator CONROY—Yes, they have been going up.

Mr Cassidy—No, that is not actually quite true in the sense that typically what has beenhappening is that fees involving bank staff or certain facilities at banks have been going up,but fees for services which are more where the customer self-serves have not been going up asquickly and there have actually been some reductions in some of those sorts of fees.

Senator CONROY—Are you applying for a job with one of the banks? You could be oneof their PR spokespersons with that contribution.

Mr Cassidy—I am not applying for a job with the banks. I suspect that my chances ofgetting a job with a bank are probably about the same as getting a job with an oil company.

Senator CONROY—Well, if you keep practising those lines you will look pretty attractivesoon.


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Mr Cassidy—I was just trying to give you a factual answer, Senator.

Senator CONROY—Would it be practical for the ACCC to monitor the implementationof credit card reforms, to ensure that small businesses and consumers ultimately share in someof the savings resulting from those reforms?

Mr Cassidy—I could not say it would not be practical. Of course, this issue is one for thegovernment, because we cannot monitor without some sort of direction from the government.

Senator CONROY—I appreciate that. What I am asking is whether it would be practicalfor you to do it if the government eventually does the right thing and gives you a reference.

Mr Cassidy—It is something we would do if the government gave us a reference.

Senator CONROY—Can the state governments give you a reference?

Mr Cassidy—No.

Senator CONROY—They can stop you having a director but not a chairman. That isprobably all I have to ask.

CHAIR—Gentlemen, as the senators do not have any other questions for the ACCC, youare excused. Thank you. We will now ask officers from Treasury who are concerned with theAOFM to please return to the table.

[4.05 p.m.]

Australian Office of Financial ManagementCHAIR—I welcome back to the table officers of Treasury and of the Australian Office of

Financial Management.

Senator CONROY—We were discussing the accounting methods for face value versusmarket value. I am just trying to remember Mr Comley’s exact stream of consciousness.

Mr Comley—That is a challenge.

Senator CONROY—That is a challenge. I hope you did not put that one on the record!The argument we were having was whether in the end there would be a net financial impact ifyou bought back the bonds. We were arguing about whether, by picking and choosing whichaccounting standard you used—despite the fact that GFS is meant to be the accountingstandard for the budget—there was an impact by not accounting for it by marketing to marketand whether that means you had to bring an expense above the line. Given that $1.1 billion ofcash has already ‘left the building’, to use the phrase that we have been using, but it has beenbelow the line because of your accounting treatment—and I accept the point that you havetried to make about consistent policy over time—what has changed is the accounting system,and accruals have changed.

This is the key issue. The government has moved to a different accounting method and youhave ignored it in the way you are treating this particular issue. By not cancelling or retiringthe bonds that you are holding—that you have bought back and that are your home bonds—you do not have to treat it as an expense above the line. Do you want to add anything? I amhappy if you do not want to. I am happy, as I said a moment ago in private, to move to thenext issue.

Dr Henry—All I wish to say is that we do not accept that interpretation.

Senator CONROY—It is a fact, though. Because it is not treated in a market to marketway, you do not bring it above the line. That is a matter of fact. I think Mr Allen is nodding.

CHAIR—Are you agreeing with that, Mr Allen?


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Mr Allen—No.

Senator CONROY—Would you to care to expand on why?

Mr Allen—I have nothing further to add to the comment that the secretary has alreadymade.

Senator CONROY—He said no as well. Would you like to expand on why?

Mr Allen—Sorry, I was not meaning to be part of your conversation.

Senator CONROY—You put your hand up to volunteer something. I assumed you weregoing to do more than say, ‘No,’ and then say, ‘I’m not talking to you.’

Mr Allen—I have nothing further to add to the secretary’s comment.

Senator CONROY—I might come back to it but I will move on. I would like to discusshow receipts and payment of interest rate swaps are treated in the budget. I understand frompage 10-13 of Budget Paper No. 1 2002-03 that payments and receipts, and hence gains andlosses, are treated as revaluations and hence are below the budget bottom line under the GFSframework. Is that correct?


Senator CONROY—I understand that in previous budget payments and receipts, gainsand losses were treated as revenue expenses and were therefore above the bottom line. So thisyear you have treated them one way and last year you treated them in a different way.

Mr Comley—I do not think that is right. It is true that there was a change in the GFStreatment but my recollection is that it occurred in—

Senator CONROY—That was what I asked.

CHAIR—Let him finish, Senator Conroy.

Senator CONROY—He started off by saying, ‘No, that is not right,’ then he said, ‘Yes,you were right.’

CHAIR—Then he proceeded to elaborate.

Senator CONROY—Then he wants to give an explanation of why.

CHAIR—Mr Comley, finish your answer, please.

Mr Comley—My understanding is that the GFS treatment changed in 1999-2000. So yourstatement that it changed from last year to this year is not correct.

Senator CONROY—It was the year before.

Mr Comley—Yes. There was a change in GFS treatment.

Senator CONROY—I am looking at Budget Paper No. 1 1999-2000. Under ‘Interest fromother sources’, it says:This item includes interest income on Commonwealth cash balances and on other financial assets,including swap transactions entered into as a component of debt management operations. Interestrevenue from swaps is included on a gross basis for the first time. Previously interest revenue fromswaps was netted off from swap interest payments.

What is the rationale for you guys deciding to move it to below the line?

Mr Comley—Again I would not want to give the impression I know precisely what thechange was, but my understanding is that—

Senator CONROY—The effect was that it moves the line—


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Mr Comley—matters like this are often subject to review, and the treatment of derivativetransactions has been subject to considerable review in the accounting profession. Thequestion is whether or not you think the swap transactions are essentially in the nature of afinancing transaction. So, without going back to the papers at the time, there was a change inview as to whether or not it was essentially a financing transaction.

Senator CONROY—The Age just picked up the trifecta on your answers. If we go back acouple of years, it was below the line then above the line—and now it is below the line again.You have actually changed it three times. I have only mentioned one of them to you, but ifyou go back there is an earlier one.

Mr Comley—I am not aware of an earlier change. I am aware of a change of swap interestreceipts and payments where that component moved from above to below the line. I am notaware of a previous change.

Senator CONROY—I will come back to that in a tick. What is the rationale for moving itbelow the line now, in that change?

Mr Comley—As I said, it is a matter of accounting practices—

Senator CONROY—No, it is a matter of choice. Someone made a decision, and I amasking you why the decision was made—not the generic conversation over here, but why itwas made.

Mr Comley—The advice I am having passed to me is that it was an ABS decision tochange the classification from above the line to below the line.

Senator CONROY—The ABS cannot change GFS.

Dr Parkinson—I am afraid it can. GFS is actually an IMF standard—

Senator CONROY—The IMF could change it.

Dr Parkinson—Yes, and it is up to the national statistical agencies—in this case theABS—to interpret it for the circumstances of their country. It is not a document that isabsolutely rigid in everything that is done. Indeed, going back to this issue of changingtreatment, the IMF has recently reissued GFS, trying to move along with changes intreatment. My understanding is the same as Mr Comley’s—that this is an ABS-driven change.

Senator CONROY—Can you give us a reference for the source document?

Dr Parkinson—Off the top of my head, I cannot.

Senator CONROY—I meant for you to take it on notice. What was the total amount ofinterest paid on interest rate swaps held by the Commonwealth in each of the financial yearsfrom 1998-99 through to 2001-02 inclusive?

Mr Allen—In terms of the period that you are talking about, I do not have all thosenumbers at hand.

Senator CONROY—Are they nearby?

Mr Allen—I would be happy to take your question on notice.

Senator CONROY—What was the total amount of interest received on interest rate swapsheld by the Commonwealth in each of the financial years from 1998-99 through to 2001-02inclusive?

Mr Comley—I will have to take that on notice.


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Senator CONROY—Do you have any idea how quickly you can get that one back to us?

Mr Allen—We will have to go back and look at the records.

Senator CONROY—How about tomorrow morning? We can call you back tomorrowmorning, if you like. I do not want to. I am trying to save you from having to come backtomorrow morning, that is all.

Mr Allen—We will look into that.

Senator CONROY—Do you recall that your answer to my question on notice about swapcontracts that matured in 2001-02 stated that 14 cross-currency contracts matured during thatperiod?

Mr Allen—I think that that is the response to the question on notice that we provided toyou following our June Senate estimates appearance.

Senator CONROY—The AOFM web site lists all cross-currency swap contracts andshows that 15 contracts were entered into that would have matured within the 2001-02financial year. Can you confirm that only 14 contracts matured?

Mr Allen—My understanding is that 14 contracts actually matured.

Senator CONROY—A swap contract was entered into in December 1996. It had a five-year tenor and was therefore due to mature in December 2001. Does that ring any bells?

Mr Allen—I am not aware of the specific transaction that you refer to.

Senator CONROY—It is on your web site.

Mr Allen—I appreciate that, but obviously it is one of a large number.

Senator CONROY—This one is unique, because the web site also shows that this contractwas entered into at an exchange rate of 90c. Does it ring any bells now? Do you have manycontracts that you entered into at 90c?

Mr Comley—It may not ring a specific bell, but Mr Allen can expand. There is a question,when you enter into swaps, of the notional exchange rate which may be different from theprevailing exchange rate which can be made for commercial decisions. It is not a question thatyou would pay the same as if you were notionally entering into an exchange rate at the sameexchange rate as the prevailing rate. Perhaps Mr Allen can expand on that.

Senator CONROY—Please. Your streams of consciousness are just getting better!

Mr Allen—I can expand on that. Consistent with what Mr Comley is saying, in years goneby—obviously some time ago now—the original transaction price at which the swap wouldhave been entered into may have been adjusted to reflect a different exchange rate which thenwould have changed the value of the initial exchange of principle.

Senator CONROY—We are talking in generalities. I am presuming that you know aboutthis contract, Mr Allen. You are managing it.

Mr Allen—I am aware of the broad details of this particular contract.

Senator CONROY—Were you aware that it was meant to mature last year?

Mr Allen—From what I understand, in our response to the question on notice we outlinedto you details of what transactions were going to mature over the course of 2001-02.

Senator CONROY—And it was not one of them? You just said that you were aware of thebroad details: it was a five-year bond entered into 1996.


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Mr Allen—It had a maturity date of December 2001, and I have seen nothing to make meto believe that it did not mature in December 2001.

Senator CONROY—It did not. I bet it did not. Not withstanding the generalities of MrComley’s stream of consciousness and you saying that you are aware of the broad details,could you explain why this swap was transacted at 90c?

Mr Allen—Obviously I was not involved in negotiating the transaction at the time, but myunderstanding is that the swap was transacted at those particular exchange rates in order toensure that the Commonwealth’s credit exposure with the counterparty could be positioned inorder to minimise the Commonwealth’s credit exposure to that counterparty.

Senator CONROY—Can I clarify this: you entered into a contract—not you personally,Mr Allen. This was long before you joined the august body. I am more than happy to put thaton the record for you.

Mr Allen—Thank you very much.

Senator CONROY—Mr Allen was not there. Dr Henry was in charge, from recollection.When the daily exchange rate in December 1996 never exceeded 82c, according to the dailyexchange rate diary from the RBA, and when another swap was transacted in the same monthat 80c, can someone explain to me, in a bit more detail, why we entered into a contract at 90c?

Mr Allen—As I have just explained—

Senator CONROY—You paid 10 per cent over the market rates.

Mr Allen—No.

CHAIR—Let Mr Allen answer your question, Senator Conroy.

Mr Allen—What I am explaining to you, Senator Conroy, is that the principal exchange isobviously a function of the exchange rate you use at the time of executing the transaction. Theexchange rate that was negotiated at the time was higher than the prevailing market rate.

Senator CONROY—By 10 per cent.

Mr Allen—That is right. As I have just explained, the objective of undertaking thetransaction in that form was to provide a credit exposure outcome to this counterparty,whereby the counterparty then actually had to pay us more than the economic value of thetransaction, thereby the Commonwealth’s exposure in credit terms to that counterparty wasreduced. But it did not change the nature of the underlying exposure. All that it allowed tooccur was that the counterparty actually had to pay more than the economic value of theprincipal exchange at the time, thereby reducing our credit exposure to that counterparty.

Senator CONROY—I am probably going to need a few more details about what thisexposure you are referring to is.

Mr Allen—On previous occasions, we have talked about the situation where theCommonwealth has entered into a particular transaction with a market counterparty in orderto achieve a particular risk outcome and, over time, as market interest rates or exchange ratesimpact on that transaction, the market value of that transaction has changed.

Senator CONROY—So you were taking a position?

Mr Allen—I did not use the word ‘position’ in the context of taking—

Senator CONROY—I am trying to understand this. You are saying you had to get to somepoint. It is market lingo, and I appreciate that you are using it, but that is as if you are taking aposition for a particular purpose.


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Mr Allen—Sorry, Senator, I might have been loosely using a market term.

Senator CONROY—No, you were not. I am just using the phrase that I am familiar with,and I accept you did not.

Mr Allen—In undertaking any particular transaction, the impact of future movement ininterest rates or currency is going to change the valuation of that original transaction. As wehave talked about on prior occasions, that leads to the Commonwealth potentially beingexposed to credit risk. As we have explained previously as well, we take a very conservativeapproach to the management of credit risk and we try to minimise that exposure. As I havejust explained, that was the purpose—

Senator CONROY—That is minimising exposure; that is taking a position.

Mr Allen—No, that is not anything to do with the particular underlying risk. That is all todo with the exposure that you have to that counterparty in terms of that counterparty—

Senator CONROY—What exposure did you have to that counterparty?

Mr Allen—By entering into a transaction with that counterparty, you are establishing a setof obligations between the two counterparties—these are financial obligations—and, with thechange in interest rates, that is going to change the value of that future cash flow streambetween the two counterparties. If interest rates move, one counterparty will be advantagedand one counterparty will be disadvantaged from a credit exposure perspective. Again, wecould spend some time going into what I mean by that but, certainly from theCommonwealth’s perspective, we take very serious consideration of a position whereby acounterparty would owe us for a particular transaction that we have entered into.

Senator CONROY—Could you take this on notice and provide me with a writtenresponse so I can actually read over it. Otherwise I could sit here asking you about this forquite some time trying to get it straight in my head and I have a range of other issues andother witnesses that I need to move on to. On notice, could you provide me with the fulldetails of the transaction and a calculation to show how the government was no worse off thanif the transaction had been executed at the market rate? That might be the easiest way to do it.

Mr Allen—We could provide that. I appreciate your concerns and assure you that it hasbeen conducted in accordance with providing the appropriate economic outcome.

Senator CONROY—I would like to ask about table 1 on, page 33 of the AOFM annualreport. Could you provide me with the corresponding figures contained in this table for theprevious financial year, that is 2000-01? They were not in last year’s report.

Mr Allen—Certainly, we can provide that.

Senator CONROY—If I could quickly go back to a question I asked earlier. I asked aboutthe total amount of interest received on interest rate swaps held by the Commonwealth in eachof the financial years. Could I expand that to include both the interest received and the interestpaid? I add that to the questions on notice. I would like to ask about the loan consolidationand investment reserve trust account. Do you look after that one as well Mr Allen?

Mr Allen—I can provide a comment on that particular issue.

Senator CONROY—I will go through my questions and hopefully your comments willflow into the questions. The purpose of this account was for repurchasing and redeemingsecurities which represent a portion of the public debt of the Commonwealth. Is that correct?


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Mr Allen—As you may be aware, this particular act was changed with effect from 1 July1999, so any comment that I might make would be in relation to transactions that may haveoccurred on that particular account prior to 1 July.

Senator CONROY—I was asking about the purpose of that particular account when itexisted.

Mr Allen—My knowledge of the particular purpose of that account is relatively limited.

Senator CONROY—Reading from the Treasury annual report 1998-99 on page 218entitled Receipts and Expenditure of the Commercial Activities, Reserved Money Fund andSpecial Public Money (continued) Loan Consolidation and Investment Reserve TrustAccount, the legal authority is the 1955 act and the purpose is listed:—for repurchasing or redeeming securities which represent a portion of the public debt of theCommonwealth.

I understand from the AOFM web site that LCIR, as you said, was abolished when the actwas repealed in 1999. Do you have an explanation as to why it was abolished? It may be that,given that you were not there, somebody else may be able to explain. If you have got theanswer, Mr Allen, I am happy or is there is anyone else who can help Mr Allen and wants togo for it?

Mr Comley—I understand that it was abolished due to the introduction of the accrualaccounting framework and the abolition of that type of funds accounting. It no longer needs toexist under that framework.

Senator CONROY—At the end of 1998-99, when debt management operations were stillcontained in Treasury, the balance in LCIR was $21 billion according to page 218 of theannual report. In the following Treasury annual report for 1999-2000 there was no record ofLCIR or any indication of where the closing balance of $21 billion from the previous annualreport had been transferred. Where did the $21 billion go when the account was closed down?

Mr Comley—I do not have that information. I will take it on notice.

Senator CONROY—Twenty-one billion dollars was with you one day and gone the next.

Dr Henry—I am sure that is not the case.

Senator CONROY—I am hoping it is not the case.

Dr Henry—I think we are talking about changed accounting treatment here.

Senator CONROY—Did you create a new section 20 account to replace this fund or didthe money go into consolidated revenue?

Mr Allen—I can shine some light on that particular issue. Table 12 on page 77 of ourannual report, which we have discussed previously today, shows a total investments columnadd up sum at the bottom of that particular table. As at 30 June 2002, that had a face value ofaround $15 billion. My understanding is that when the LCIR was abolished that number wasapproximately $21 billion. Yesterday you had some discussions with Finance about the issue.In terms of how those flows work, I am not precisely aware of the finer details but obviouslyyou can see that there is some consistency in terms of reporting.

Senator CONROY—I am sure the money has not vanished. Even I would not make thatstatement. I would like to know what account it was transferred into and under whatappropriation it was reported to parliament. I can see that you are suggesting that the $21billion has ended up here—this is a couple of years later so it is down a bit. I understand that.What is it held in? I will come to where the $5 billion has gone but I would like to know the


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name of the account that this money is held in. Finance do not consider it to be a specialaccount so I am actually just trying to work out what sort of account it is.

Mr Allen—As table 12 highlights, we hold $10.4 billion of deposits with the Reserve Bankand my understanding is that those funds form part of the consolidated revenue fund.

Senator CONROY—So it was transferred into the consolidated revenue fund?

Mr Allen—I can only assume that. I do not know, Senator.

Senator CONROY—Dr Parkinson, you seemed keen to make a comment a moment ago.

Dr Parkinson—Senator, you know I always try to be helpful but ‘keen’ would be toostrong a description in this case.

Senator CONROY—We reserve ‘keen’ for Mr Comley.

Dr Parkinson—My understanding is that there was a routine internal transfer mechanismto move funds between the various buckets.

Senator CONROY—Can I get you to chat with Dr Watt and Mr Bowen from theDepartment of Finance and Administration? They did not seem to be aware that there was aroutine transfer mechanism.

Dr Parkinson—This is back in the days of the LCIR. This was an internal Treasuryarrangement. This is my understanding—I could be wrong. When parliament approved theFMA Act it took away the requirement to hold that in separate buckets and hence to havesome internal transfer mechanism. I have been advised that it is probably best handled byputting all this down on paper for you because it is the best way to track the changes.

Senator CONROY—I have been trying to keep track of the money.

Dr Parkinson—If we could take that on notice we would appreciate that.

Senator CONROY—Okay. Where has the other $5 billion gone? Haven’t these bondsbeen bought back with new asset sale proceeds? It was $21 billion, you are saying; it is now$15 billion. Where has the $5 billion gone? What has the $5 billion been used for?

Mr Allen—I am certainly not in a position to comment on providing any reconciliationbetween those numbers. This has to do with the abolition of LCIR. I think it would be bestaddressed in the context of Dr Parkinson’s suggestion that providing any information thatmight be of assistance—

Senator CONROY—He can explain to me how it has been transferred. I am now askingyou: where has the $5 billion gone?

Mr Allen—I am not in a position to comment on that particular assertion.

Senator CONROY—I did not make an assertion. You indicated to me and we agreed thatwhen the money was transferred into this account, which you have referred to on your page, itwas at 21; it is now at 15. I am asking you, given that it is in your report: where has it gone?

Dr Henry—These numbers are effectively balance sheet numbers three years apart. I amsure there is a perfectly sensible explanation.

Senator CONROY—I am sure there is. I am surprised by the tentativeness of Mr Allen’sanswer—quite genuinely—because the bonds were bought back with new asset sale proceeds.It is not like that is where they have gone. Now I am asking: was it current expenditure?

Dr Henry—We will provide you—

Senator CONROY—In the funding requirement figures we asked you about before?


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Dr Henry—As Dr Parkinson indicated earlier, I think it is best to deal with this as aquestion on notice, Senator.

Senator CONROY—Nobody has any idea where the $5 billion has gone?

Dr Henry—I am sure that is not the case. We wouldn’t want to be—

Senator CONROY—I am happy to take an indicative answer and then await the fullexplanation.

Dr Henry—I mean—

Senator CONROY—I am not going to allege that you have lost $21 billion—

Dr Henry—Sure.

Senator CONROY—but your answers seem to imply that you might have lost $5 billion.

Dr Henry—We would prefer not to give you an indicative answer, Senator, but I rejectabsolutely any suggestion that—

Senator CONROY—I am actually trying hard not to.

Dr Henry—any amount has been lost.

Senator CONROY—Misplaced? You just don’t know where it has gone. Dr Parkinson,are you in any further position to answer? I was asking you whether there was any indicationof where the $5 billion has gone.

Dr Parkinson—I think you will probably find it is still in the Commonwealth accounts butI think it is best if we take it—

Senator CONROY—Are you keeping something from Finance?

Dr Parkinson—Senator—

Senator CONROY—Do they not know you have got this hollow log?

Dr Parkinson—If we have got a hollow log, it is news to me, but we will—

Senator CONROY—So where do you think it is, Dr Parkinson?

Dr Parkinson—Senator, we will take that on notice and come back to you. There was, as Isaid—

Senator CONROY—Are you saying you do not know where $5 billion of Commonwealthmoneys are at this moment in time?

Dr Parkinson—No. As I understand it, you are the one saying that. I’m offering—

Senator CONROY—I am asking you: where is it?

Dr Parkinson—I’m offering to take the question on notice and get back to you in a waythat can track what has happened in and out of the LCIR and—

Senator CONROY—No, no, I appreciate that.

Dr Parkinson—Sorry—

CHAIR—Let him finish, Senator Conroy. Dr Parkinson, you have the call.

Dr Parkinson—There would have been in that $21 billion a significant proportion ofinternal Treasury moneys that would subsequently have been cancelled, and some of it wouldhave been the equivalent of bonds that had been bought back and were being allowed tomature.


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Senator CONROY—Equivalents, I see.

Dr Parkinson—In the sense that we—

Senator CONROY—An interesting way to describe it, particularly as they have gone upin value, which means that that 15 figure contains some profit.

Dr Parkinson—Senator, I know we have had a discussion before about who asks thequestions but I do find myself sitting here wondering whether you really want to hearanswers. I have offered to take the question on notice, and we will give you the best answerwe can. You are asking us to go back and trace through movements in accounts that occurreda number of years ago. None of us here have access to the data in a format that would give usa degree of comfort to help you plot through those movements. If we take the question onnotice, we will come back to you with a thorough explanation of where those transfers haveoccurred and how they have occurred.

Senator CONROY—As I have indicated, I am happy to take that. You are describingsome complex web of movements, for which I am happy to have something in writing. What Iam actually asking you is: where is it now? Where did it go? Where currently is that $5billion?

Dr Parkinson—I presume some of it would have been held in the form of bonds that havesubsequently matured.

Senator CONROY—Treasury bills perhaps?

Dr Parkinson—Now you are asking me to speculate on the composition of something thathas not existed in three years.

Senator CONROY—No. I am happy for you to say no.

Dr Parkinson—I need to go and look at it. We will come back to you with as muchinformation as we can provide you.

Senator CONROY—Okay. Are the details of the transfer contained anywhere in yourcurrent annual report and your previous annual reports? If you could refer me to your annualreport and say that it went from here to here, that would do. If it were not in your annualreport, I would probably want to ask you why it was not contained in your annual report. Areyou aware if any information on this transfer is contained in your annual report?

Dr Parkinson—I cannot make any comment one way or the other. I am not aware, but Ihave not gone back and looked at past annual reports.

Senator CONROY—Would you expect it to be?

Dr Parkinson—I am not an accountant; I am not—

Senator CONROY—This is your annual report. Accountants do not make up annualreports. You are a very proud bunch of economists, so you write your annual report.

Dr Henry—I think the point is that our annual report contains reports in line with therelevant accounting standards. I am sure you will find when we respond to your question thatour annual reports have consistently been prepared in accordance with the relevant accountingstandards.

Senator CONROY—You have probably jumped ahead of me. I am just trying to look fora discussion of what the transfer mechanism was. As you would know from yesterday’shearing, if any of you were forced to watch Finance estimates—and hopefully none of youwere—I am trying to get to the bottom of the issue of accountability and transparency to


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parliament so that the parliament knows where money is moving from and to. I am interestedin why it would not be reported in the Treasury reports.

Dr Henry, I would worry about an answer that said, ‘I’m sure we have complied with allthe requirements of the accounting standards.’ That is what companies say when they aretrying to avoid explaining their actions. I would be very concerned if Treasury had the viewthat it was okay as long as there were a few numbers there that indicated it. Treasury have amuch broader and finer tradition than that in providing information to the public and in notproviding the absolute minimum amount of a set of numbers. I was investigating yesterday,and now apparently today, and trying to find out about transparency in parliament and, if largeamounts or even small amounts of money are moving around between internal accounts, whatthe reporting mechanisms are and if they have been reported. Yesterday Finance insisted thatthe framework required that these transfers were accounted for and recorded and that mentionwas made of them in the annual reports under the existing framework. You are going to a newframework now because Finance have woken up to what you are all up to—I am talking aboutthe collective government departments, not Treasury, so you do not have to leap to your owndefence there and defend your bit. The system has been changed. But it would concern me ifan internal transfer of that magnitude—but, as I said, it can be of any magnitude—had notbeen reported in your annual report.

Dr Parkinson—My only hesitation was as to whether it was reported as an individual line.

Senator CONROY—I am sure it was not.

Dr Parkinson—The movements have clearly been reflected in our annual report in someform. All I am saying is that I am not sufficiently familiar with the details of all of thoseaccounts to be able to give you an assurance as to exactly how it is reported. If you willindulge us we will come back to you.

Senator CONROY—The closing balance on 30 June 1999 was $21 billion but no accountwas reported in the next annual report. Hence no transaction from the LCIR to elsewhereappears to have been recorded. And it is a biggie—$21 billion is a big amount by anyone’sstandards. By your definition, was the LCIR a special account?

Dr Henry—Yes.

Mr Allen—Yes.

Senator CONROY—My understanding is that it was a special account. The argument Ihad with Finance yesterday was about the size of the moneys that were in special accounts atvarious points—that is, the difference between $3 billion and $24 billion, which is $21 billion,as I am sure you have noticed.

Dr Parkinson—I have been advised that there was a note to the AOFM accounts in 1999-2000. We are not quite sure what note it was. Maybe it was note 3, but we do not have a copyof the 1999-2000 reports.

Senator CONROY—We know about the note.

Dr Parkinson—We will report back to you on that.

CHAIR—Can that be done fairly promptly, Dr Parkinson?

Senator CONROY—I am trying to avoid calling you back tomorrow to actually discuss it.I do not want to go through a situation like that.

CHAIR—It would be unfortunate if it were to be left hanging in the air, as it were.

Mr Allen—We will attempt to get a copy of that note for you.


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Senator CONROY—I am sure we have one. We could probably get one faster than you.We know which note you are talking about.

CHAIR—How quickly can that be done? Can it be done before the dinner adjournment?

Mr Allen—I am sure that would be possible.

CHAIR—I ask those Treasury officers concerned with outputs 3.1.1, 3.1.2 and 3.1.3 tocome to the table. Those officers concerned with output 3.1.4, which is basically the Mint,will not be required and are excused.

Senator SHERRY—I want to move to questions regarding the nomination of Mr Samuelto the position of Deputy Commissioner of the ACCC. I understand the advice to theTreasurer regarding the ACCC falls under this output. Is that correct?

Mr Murphy—Yes.

Senator SHERRY—Can you explain to the committee the formal procedural requirementsfor such a nomination under the competition policy agreement between the Commonwealthand the states?

Mr Murphy—Do you want me to take you through it step by step? In the recent pressrelease by the Treasurer he said that he would adhere to the formal requirements under thenational competition policy agreement. There is a call for nominations and I think there is a35-day period in which people can be nominated. Then the Treasurer examines thosenominations. The government makes some decisions, which are proposed to the states. Thereis another 35-day period in which the states have it within their province to make a decisionon whether they wish to support the nomination or not.

Senator SHERRY—What is the requirement regarding consultation with the states and theterritories?

Mr Murphy—Under the agreement, in relation to appointments there is a requirement toconsult them before any appointment is made.

Senator SHERRY—You have the initial 35-day nomination period. A slate is drawn up. Isit at that time that a single name—or is it a number of names—is put to the states?

Mr Murphy—It is a process of a call for nominations from the states. It is for them tocome forward and then it is for the federal government to decide whom they wish torecommend to the states should be appointed.

Senator SHERRY—Who is able to put forward names to be nominated for positions suchas the deputy commissioner and the commissioner?

Mr Murphy—For the ACCC?

Senator SHERRY—Yes.

Mr Murphy—The states. Also, consultations are held with various private sector bodies—whoever. The outcome to be achieved is to get the best candidates possible. Without going onabout these things, it is very difficult to get very good candidates for these positions.

Senator SHERRY—Is an advertisement placed?

Mr Murphy—Sometimes there can be an ad placed; sometimes there is not. I am not sure.

Senator SHERRY—Was there on this occasion?

Mr Murphy—On the first run with Mr Samuel, there was not. An ad may have beenplaced this time but no process has actually been started.


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Mr French—No ad was placed, and my understanding is that it would not be usual inrelation to ACCC commissioners.

Senator SHERRY—With respect to both the commissioner and deputy commissioner?

Mr French—That is correct.

Senator SHERRY—Has an ad been placed in the past?

Mr French—My understanding is that that would not be the usual practice. Thecompetition codes of conduct set out provisions along the lines that Mr Murphy outlined,where there is a consultation process between the Commonwealth government and the stateand territory governments.

Senator SHERRY—Is a list of criteria drawn up?

Mr French—The act does set out some considerations there in that consumer expertisemust be on the commission at all times.

Senator SHERRY—I understand the act.

Mr French—And there is reference also in the act to people with expertise in smallbusiness.

Mr Murphy—But, as well as that, there is a general requirement in the act that a personappointed to such a body would have expertise in competition issues, whether it be as aneconomist, a lawyer or someone from industry. With respect to the appointments ofcommissioners to the ACCC at the present time, there is a range of expertise there.

Senator SHERRY—You are saying that there is a general requirement; is that in the act?

Mr Murphy—Yes. It is with all of them. It is not an open game.

Senator SHERRY—You have touched on at least some or all of the requirements in theact.

Mr French—Section 7 of the act—

Senator SHERRY—There is no need to go through what is in the act.

Mr French—sets down some requirements and states that the Governor-General and theministers must be satisfied that the people qualify for appointment because of their knowledgeor experience in things like industry, commerce, economics, law, public administration orconsumer protection.

Senator SHERRY—Is there anything else that has been drawn up that adds to thoserequirements? We have the act. Is there anything else that is circulated to the states? Are thereany criteria?

Mr Murphy—No, it is unusual to do that.

Senator SHERRY—You said earlier that the nomination period was 35 days. Is that theperiod that the states are given to make an appropriate nomination if they intend to make anomination?

Mr Murphy—Yes. But with this new process, the Treasurer has put out a press release andthen the states will be formally written to and asked.

Senator SHERRY—I am talking about Mr Samuel.

Mr Murphy—In relation to Mr Samuel, that was a long history—that has been traversedin parliament and in press releases—whereby the deputy commissioner’s position had been


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vacant for some time after Mr Asher’s resignation. The states had been asked for nominationsand no suitable candidate had emerged.

Senator SHERRY—This is for the position of deputy?

Mr Murphy—The deputy.

Senator SHERRY—For how long has the position that Mr Asher held been vacant?

Mr Murphy—Since about 2001, I think.

Senator SHERRY—That is a long time.

Mr Murphy—His position expired on 5 November 2000.

Senator SHERRY—That is two years ago. You mentioned the nomination period of 35days. Was that period of 35 days applied with respect to the proposed appointment of MrSamuel? It was not really, was it?

Mr French—The process was that the Treasurer sought nominations on 31 May 2000 forthe positions of chair, deputy and a member of the ACCC. That kicked off the 35-day period.

Senator SHERRY—That was a specific request to the states for nominations for boththose positions on 31 May, was it?

Mr French—Correct.

Senator SHERRY—Is it true that the deputy commissioner’s role has traditionally beenseen as a consumer one within the ACCC?

Mr Murphy—Yes. It is not prescribed but it has traditionally been seen as that. If you goback to when the ACCC was established—I do not know if this is the right way to put it—adeal was struck. It was one of the things that there would be a senior person on thecommission who could be seen as a consumer representative.

Senator SHERRY—Certainly, Mr Asher seemed to perform that role.

Mr Murphy—He actually came from the consumer movement.

Senator SHERRY—Yes. I think that is where he is now, isn’t he?

Mr Murphy—Yes. He is with an international body.

Senator SHERRY—In the UK, I think.

Mr Murphy—Yes.

Senator SHERRY—What were Mr Samuel’s credentials to be an effective commissionerin the consumer role?

Mr Murphy—I think that Mr Samuel is renowned as an expert on competition andconsumer issues. Given his time as the head of the NCC I would expect that most peoplewould regard him as eminently qualified in relation to competition and consumer issues.

Senator SHERRY—I would suggest that he is more weighted to the business sector ratherthan to the consumer sector.

Mr Murphy—That is a judgment for everyone to make, but I think that in terms of policythere is a clear line now where we see consumer issues as very much a part of competitionpolicy. I think that it is taking too narrow a view of consumer interests to say that a person hasto be solely a consumer representative.

Senator SHERRY—I did not say ‘solely’, but I was thinking back to your earlierdescription about the understandings that were—


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Mr Murphy—Given Mr Samuel’s experience, he would have brought and possibly willbring considerable expertise in consumer and competition issues to the ACCC. That is not saythat someone from the consumer movement should also be appointed to the ACCC as acommissioner or as a deputy commissioner.

Senator SHERRY—What are the interim arrangements for heading the commission if thecommissioner retires?

Mr Murphy—The government would be very keen to ensure that appointments weremade before Professor Fels left.

Senator SHERRY—We have had a two-year period without a deputy commissioner.There did not seem to be much urgency.

Mr Murphy—There is urgency in these things but it is difficult to find the right people.

Senator SHERRY—For two years?

Mr Murphy—Yes.

Senator SHERRY—Ms Sylvan has been around for quite a long time with the ACA.

Mr Murphy—Oftentimes it is my experience that people are approached and, althoughthey are very well qualified, when it comes to the crunch to some extent the remuneration is areal handicap and it really holds people back from being involved in these appointments.

Senator SHERRY—So they are not paid enough?

Mr Murphy—That is one issue, plus there is the fact that you can have a quieter life inindustry, business or in the legal area than you would being a regulator. They are in thespotlight a bit. There are a number of issues.

Senator SHERRY—Notwithstanding all of this, if the commissioner retires whathappens?

Mr Murphy—In those circumstances, if there were no deputy there at the time, one of thecommissioners would act for Professor Fels.

Senator Ian Campbell—That is what happens when Professor Fels goes overseas, quiteregularly.

Mr Murphy—Three or four commissioners could act: Mr Jones, Mr Martin—a couple ofpeople.

Senator Ian Campbell—Could I just make the point, just to try and be helpful, that wedid—as I think the Hansard record will show—seek nominations for chairman and deputychairman in May 2000. We did go to the states and ask for nominations. My reading of thefile and some of the Hansard transcripts shows that there were no nominations for deputychairman. I concur with Mr Murphy’s views about the challenges that filling theseappointments create for government. An important area of public policy that needs a bit morefocus is the remuneration—and the whole process of these important appointments to thesekey regulators—in order to attract high calibre people to serve the nation in these importantroles.

Certainly, having been out of Treasury for the last three years and coming back in andseeing some of these regulatory issues in the ACCC and ASIC, it has got worse in the lastthree years. It is something that we do need to address. I think the Prime Minister’s reviewthat he has announced in relation to governance, even though it does not specifically look atthe issue of these commissioners, will hopefully put more light on this important area.


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Senator SHERRY—In the circumstances where the commissioner retires, one of theexisting commissioners could take that role. Is there any legislative prohibition on the periodin which you could have someone in that acting role?

Mr French—In the act there is a provision dealing with acting arrangements, which is tothe effect that, if there is or if there is expected to be a vacancy in the office of the chair, theGovernor-General can appoint a chairperson until it is filled. That can be for a period of up to12 months.

CHAIR—That person could presumably be reappointed in an acting capacity at the end ofthe 12-month period.

Mr French—It is silent on that issue.

Senator SHERRY—If that happened, would it require separate ratification by the states?

Mr French—My understanding would be that it would not.

Senator SHERRY—So if the deputy commissioner were to become the actingcommissioner, that could happen without the further involvement of the states?

Mr Murphy—Given the significance of the appointment and given that it would be anacting position for 12 months, the government would at least have informed, if not consulted,the states on that.

Senator SHERRY—But there is no requirement, is there?

Mr Murphy—No, there is no requirement. It is a Commonwealth-state agreement. It isimportant that it flow smoothly, so I think there would have been.

Mr French—It is a very hypothetical situation in that a new process has commenced.

Mr Murphy—I must say that Professor Fels has brought forward his retirement. His initialannouncement was that he would be leaving in 2004. That is my understanding. He hasbrought that forward for personal reasons. It is a different ball game now.

Senator SHERRY—Yes. We were having a little exchange earlier about him being a dean.We now know the Treasurer is calling nominations jointly for the commissioner and deputycommissioner, and in a separate process is putting a final recommendation to the states andterritories for ratification. That is where we are at the moment.

Mr Murphy—Yes.

Senator SHERRY—Isn’t that the process that should have been followed in the firstplace?

Senator Ian Campbell—It is the process that was followed, except we did not have avacancy for chairman. At the stage that the first process was created there was only a vacancyfor deputy chairman.

Senator SHERRY—For a very long period.

Senator Ian Campbell—I think we have covered that ground. We sought nominationsback in May 2000 and again, I think, some months afterwards.

Mr French—Professor Fels was reappointed as a result of the process that wascommenced in May 2000. He was reappointed and the position of deputy was not filled at thattime.

Senator SHERRY—I want to look at some issues relating to the referral of the fuelethanol issue from Minister Hockey to the ACCC. I will start with Minister Hockey’s referral


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to the ACCC on 20 March 2001 to examine allegations that ‘wholesalers are mixing largeamounts of ethanol into petrol and not alerting consumers to the change’. What was thebackground to that referral?

Mr Grech—My understanding is that Minister Hockey’s referral was based on somemedia reports which had surfaced, alleging that some wholesalers were using an ethanol blendin petrol. I understand that, on the basis of those accusations, it was deemed appropriate forthe matter to be referred to the ACCC.

Senator SHERRY—Was material given to Treasury?

Mr Grech—Not that I am aware of.

Senator SHERRY—So there was no evidence given to Treasury?

Mr Grech—Not that I am aware of.

Senator SHERRY—It was correspondence sent directly from the minister’s office to theACCC.

Mr Grech—That certainly predates my time in the relevant division—and it is going backquite a few months—but it is my understanding that the correspondence was not referred tothe department.

Senator SHERRY—When did the commission report on this referral?

Mr Grech—I think the ACCC corresponded with the environment minister, and copied itto my parliamentary secretary, on 11 December last year. I think that issue has been coveredin earlier communication.

Senator SHERRY—We did talk about this with the commission earlier, although SenatorConroy was more involved in the questioning than I was. Can you confirm that thecommission concluded that consumers may have been misled regarding the level of ethanol intheir petrol, vehicle warranties may be voided by blends of greater than 10 per cent ethanoland consumers were not being informed there might be a reduction in fuel economy invehicles using ethanol blends?

Mr Grech—I can confirm that they were some points that the commission raised incorrespondence to the environment minister and my parliamentary secretary, a letter which Ialso understand the opposition tabled in the parliament in September.

Senator SHERRY—I personally have not read that.

Mr Grech—It is in the Hansard.

Senator SHERRY—Can you confirm that the commission previously recommended that,on the basis of consumer protection, the government institute a 10 per cent ethanol limit in thenational fuel quality standards?

Mr Grech—The commission did not make a recommendation, but it expressed the viewthat the national fuel standards could perhaps include a 10 per cent ethanol content ceiling. Itwas just a view. The government is of course not obliged to accept advice by the ACCC.

Senator SHERRY—I understand that. You used the words ‘could perhaps’. It is a bitdifferent.

Mr Grech—I will be more specific. I will quote from the actual correspondence, whichsays:... the Commission considers an interim ethanol level of 10% should be inserted into the NFS beforeJanuary 2002 ...


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CHAIR—That is essentially a scientific judgment, isn’t it?

Mr Grech—It is a scientific judgment. With respect to my colleagues at the ACCC, it isbased on their own preliminary assessments, but the key point here is that, in a field whichhas a number of diverse views, the most appropriate response was for the government toinitiate a scientific assessment of what constitutes a safe and effective level of ethanol inpetrol. The government has done that. That review is currently proceeding under thechairmanship of Environment Australia. That review will report initially, I understand, inDecember with a final report some time in June 2004. Once the government has, through theMinister for the Environment and Heritage, at its disposal a comprehensive, scientificassessment of what constitutes a safe and reasonable level of ethanol in petrol, obviously wewill all be better placed to make a sensible decision as to what, if any, caps should exist in thenational fuel standards.

CHAIR—I followed Senator Conroy’s questions to the ACCC, I do not know whether youwere watching on the monitor, but it perplexes me a little as to why the ACCC would evenhave a view about this. Nobody gets through the doors of the ACCC unless they are aneconomist or a lawyer.

Mr Grech—I concur with you. I cannot answer for the ACCC.

Senator SHERRY—The ACCC are still in the next room. Could we bring them in and sitthem next to you and sort this out?

Mr Grech—I think I would rather have the ACCC in private, not necessarily in acommittee context.

Senator Ian Campbell—In defence of the ACCC, I think there is a consumer issue there.The issue they concerned themselves with was as follows: if you have oil companies saying,‘We’re selling you petrol’ and they are actually putting more than 10 per cent in the fuel andthe car manufacturers are saying, ‘We’ll void your warranty if you’ve got more than 10 percent,’ I think there is legitimate consumer issue. That is where the line should be drawn and itis appropriate for the ACCC to sit on the government’s task force and it is appropriate thattheir advice be taken into account. You heard Mr Cassidy say that it may well be that thatdiligent scientific process shows that 15 per cent is more appropriate and that the carmanufacturers are similarly convinced that it will not hurt the engines, the outboards and soon. We are in a constructive process.

Mr Grech—In the United States, for example, there are some jurisdictions that accept anethanol content of at least 15 per cent. There is a divergence of views and different types ofregulations are in place. We are doing the most rational thing and going through an exhaustiveprocess to determine what constitutes a safe composition. I cannot see how that could becriticised. I think it should be commended.

Senator SHERRY—Thank you. I had better get home and check my chainsaw. I amgetting more worried the longer these questions go on in this area.

Senator Ian Campbell—I think it is the oil mix that is quite crucial; you have to makesure it is right.

Senator SHERRY—There are a lot of things that affect the chainsaw.

Senator Ian Campbell—I have been using one to 100, but my mechanic said I should liftit to one to 50.

Senator SHERRY—The good thing with Tasmania is that we still have a few trees we canput the chainsaw into. Perhaps we won’t get into trees!


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CHAIR—There goes the Greens vote a bit further west!

Senator SHERRY—Don’t worry: the Greens know where I stand on that issue! I havenever made a secret of my views.

Senator Ian Campbell—I will send Wilson Tuckey over to give you some tips on how todo it.

Senator SHERRY—I do not want to spend a lot of time picking you up on this, but youread the letter and you used the words from the letter to the effect that the ACCC ‘considers’and ‘should’ but that was in contrast to your earlier comments that the ACCC had said ‘could’and ‘perhaps’.

Mr Grech—I stand corrected, Senator. I was paraphrasing from memory and then Icorrected the position by referring to the actual paragraph in the letter so we can stand bywhat is in the letter. I think that is a given.

Senator SHERRY—Thank you for doing that.

Mr Grech—That is fine; I am more than happy to do that, but that is only the ACCC’sposition and we have already had a subsequent discussion about that.

Senator SHERRY—You clarified it well; thank you. However, it seems to me that thewords ‘considers’ and ‘should’ are fairly explicit and quite firm. Did Treasury recommend anyfurther action on this issue?

Mr Grech—I am not aware that Treasury has recommended any further action. We havebeen keen to see the task force get on with its work and that is happening. We have attendedsome of the meetings and we are happy to see Environment Australia and their chairmanshipof the task force get on with it and do it. We are keen to see the outcome.

Senator SHERRY—I assume from what you are saying that there is a Treasuryrepresentative on this task force?

Mr Grech—Treasury has attended the meetings, yes.

Senator SHERRY—I did not ask that. Is there a member from Treasury on the task force?

Mr Grech—Yes.

Senator SHERRY—Who is that?

Mr Grech—I have a list of names here of people who attended the most recent meetingbut I cannot confirm that the people who attended the meeting are full-time or permanentmembers of the task force. If I can indulge, I would rather take the question on notice thanspecify people’s names.

Senator SHERRY—Okay, take it on notice. I was rather thinking that, given your veryprecise and firm clarification on these issues, you were on the task force.

Mr Grech—I have only been in this job for just over a month. I have not had the privilegeof going to the task force meetings.

Senator SHERRY—Where did you come from before you worked in this area?

Mr Grech—I came from what was our financial institutions division, which is now part ofour financial systems division.

Senator SHERRY—That is all on ethanol. I have a few questions on the FinancialServices Reform Act. Who is handling that?

Mr Murphy—Mr Ray and me.


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Senator SHERRY—There was an article in Money Management on 7 November this yearwhich stated that financial advisers would not need to disclose commission on risk products.Can you confirm that disclosure for commission products still needs to occur?

Mr Ray—I can confirm that.

Senator SHERRY—That is where advice is given?

Mr Ray—Correct.

Senator SHERRY—Have the Financial Planners Association and/or individual financialadvisers expressed concerns about this?

Mr Ray—About the provisions in Chapter 7 of the Corporations Act?


Mr Ray—Submissions were made to the parliamentary joint committee by some groupsand individuals expressing some concerns.

Senator Ian Campbell—I think the JCPA agreed with their position. I read the report.

Mr Ray—The majority did.

Senator SHERRY—This article was on 14 November so it was only a week ago.

Senator Ian Campbell—I think there is some confusion over the JCPA amongst thefraternity that are pushing for not having to disclose on risk products. The report, if you readit, is a little confusing because it says the committee stands by its position that commissionson risk products should not be disclosed but then supports the status quo. You could read iteither way you want to.

Senator SHERRY—I certainly think that the report is a bit confusing. At what point is thework being done to finalise the issues affecting financial planners and advisers?

Mr Ray—I am not quite sure what you mean by that.

Senator Ian Campbell—I can answer it if you want. Most of the outstanding issues havebeen resolved. There is one issue that they have been pushing for and that is to find a way toprotect the term ‘financial planner’ within the law. I have been working on that with the FPAand Treasury trying to find a practical outcome. We have not found one yet, but I think that isabout the only outstanding issue we are dealing with. As I have said to previous estimateshearings, basically we are trying to work through any outstanding issues with any of thegroups during this transition period and trying to make it a smooth transition. I think it isgoing very well to date.

Mr Ray—There are some draft regulations being prepared as a result of a round ofconsultations that we had starting in about September and they will be released for publicconsideration in the normal way. In addition to that, of course, the government will respond atsome time to the PJC report but at this stage that is still being worked on.

Senator SHERRY—As to the draft regulations, Mr Ray, is there any likely date?

Mr Ray—In the next few weeks.

Senator Ian Campbell—Even though they have not been called tonight, ASIC are alsoworking on a lot of implementation issues with the groups. For example, the agriculturalconsultants have some issues. Pauline Vamos is doing a very good job, working very closelywith those groups and trying to find practical solutions that uphold the spirit of the law.


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Senator SHERRY—On the issue of terrorism insurance, the Treasurer issued a pressrelease on 25 October announcing details of a scheme for replacement terrorism insurance.What are the details of the scheme? Have you any additional information on how it willoperate?

Mr Murphy—Murray Edwards is working on setting up the scheme. It is very much alongthe lines of the press release which the Treasurer issued. In effect, it is the governmentintervening to ensure that liability issues arising in relation to terrorist acts are covered, giventhe reaction of the insurance industry to events in the last couple of years. Do you want to gointo the nuts and bolts of it?

Senator SHERRY—I was going to suggest that it is a pretty lengthy press release, with alot of good detail in it. Is there any update in the sense that there are changes to what wasreleased or additions to it? Perhaps Mr Edwards can clarify that.

Mr Edwards—The short answer is no. We are consulting heavily with the insuranceindustry and probably counsel and others at this point in drafting legislation which we hope tointroduce early next month. We are just working through the details at this stage. There areobviously a lot of practical issues to work through.

Senator SHERRY—There may be some changes in the legislation, additions to it orthings that are different from the announcement, depending on the consultation?

Mr Edwards—That is always a possibility.

Senator SHERRY—It is a possibility but at this time this is the basis for the legislation?

Mr Edwards—Yes.

Senator SHERRY—Does the scheme differ from the pool scheme in the UK?

Mr Edwards—That scheme is voluntary, it has been set up for a long time and it isresponding to a particular sort of terrorist attack, but we have modelled a lot of this scheme onthe way that scheme operates. We are in close consultation with them. In fact, one of mypeople will be going to London next week, or maybe the week after, to talk to them. We arealso involved in the OECD processes there. So in designing this scheme we are obviouslytaking account of how other schemes offshore have been working.

CHAIR—I have been advised that the information sought from officers concerned with theAustralian Office of Financial Management is now available and it is desirable that thatinformation be supplied to the committee promptly. I have made an inquiry as to whereSenator Conroy is and I was told five minutes ago that he was five minutes away. I will callback to the table the officers of the Australian Office of Financial Management and therelevant Treasury officers at 20 minutes to six.

Senator SHERRY—How will the investment of the pool fund be managed?

Mr Edwards—It will be managed by the corporation set up to run the scheme. I amassuming at this stage that it will have the normal statutory authority type provisions in there.

Senator SHERRY—But that is an assumption. Will that be covered in the legislation?

Mr Edwards—It would have to be covered in the enabling legislation. At present weenvisage one bill to pick it all up.

Senator SHERRY—Do we have any detail on how, specifically, it would be invested?

Mr Edwards—No, I have not got down to that level of detail with the draftsmen. I amassuming we would obviously look to a fairly secure investment profile.


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Senator SHERRY—Mr Ray and Mr Murphy are nodding. Can you add anything to that?

Mr Murphy—The policy behind it is still being developed but the government would bevery keen to ensure that there were proper arrangements for the investment of those funds.The government does not lightly intervene into a market to support, in effect, an insurancemarket without making sure that the funds are secured. You would be looking to otherexamples of where the government has to take responsibilities for those types of matters.

Senator SHERRY—But it is not unusual in the sense that we have public servicesuperannuation trustees investing moneys.

Mr Murphy—But there will be proper rules and procedures and checks and balancesplaced in the legislation to ensure that it is adequately provided for.

Senator SHERRY—So we may see the legislation before Christmas. I do not think wewill see it in the Senate by then, but certainly in the Reps.

Senator Ian Campbell—Unless it is an amendment to the research involving humancloning or embryos!

Senator SHERRY—You could always add it to super choice and see how you go!Mention is made in the press release to winding up the scheme once commercial insuranceand reinsurance markets begin to emerge. Is that likely?

Mr Edwards—It is anyone’s guess at this stage.

Senator SHERRY—How would that be assessed?

Mr Edwards—Realistically, we would be looking to developments in the internationalreinsurance market and the appetite of the major players there for this sort of risk. I think thatis going to be the determining factor.

Mr Ray—Expert advice has been sought on the nature of the market here and overseas andI presume that we would be looking to do something similar down the track.

Senator SHERRY—It could be some years away. Clearly, if you have a special bill settingup a special fund, it is not going to be short term I suspect. Is anything being done toencourage insurers to re-enter the market?

Mr Murphy—It will be the case with this legislation that insurers will be required toprovide cover for terrorist acts and it is a commercial decision. That will obviously open anopportunity there for reinsurers and others to enter this market. They will probably think thatthey can provide cheaper cover than that provided under this scheme. Hopefully, the way it isset up, the market forces will encourage people to come back into the market.

CHAIR—We will leave that bracket of questions and I ask Dr Parkinson and Mr Allen andthe other officers who were concerned in the last bracket of evidence to come to the table.Gentlemen, Senator Conroy directed some questions to you a little while ago which you tookon notice. I understand that you have some information for us.

Dr Parkinson—Senator Conroy asked a question about, inter alia, the LCIR and where thefunds were moved to after the introduction of the FMA. We have offered to come back with amore detailed response about the mechanics. I can give you some guidance as to what isgoing on. One issue that was raised was whether or not it was reported in the Treasury annualreport. It is reported in both the Treasury annual report and the AOFM annual report. On page209, at note 21 of the Treasury annual report 1998-99, there is a figure of $18.935 billionwhich is for internal Treasury bills. Internal Treasury bills were a routine funding mechanism.Under the old Audit Act arrangement, you essentially had a series of funds and you had to


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move moneys between those funds to comply with the Audit Act. Internal Treasury bills werea means of doing that. The loan fund issued $18.9 billion of internal Treasury bills on 30 June1999. Of that $18.9 billion, $16.2 billion was transferred to the LCIR and held as aninvestment and a further $2.7 billion was held—

Senator CONROY—Did you say ‘transferred to’ or ‘transferred from’?

Dr Parkinson—I said, ‘transferred to’. A further $2.7 billion went into other trustaccounts. Note 6 of the AOFM report that Mr Allen referred to earlier cited that $2.7 billion.That $16.2 billion then matured early in 1999-2000. It was simply a mechanism to deal withthe mechanics of the Audit Act. What happened to the other roughly $5 billion? Page 219 ofthe Treasury annual report cites a series of Treasury bonds that were being held asinvestments. That is the counterpart to what appears in note 12 to the AOFM annual report.So $4.9 billion was sitting in there. These were bonds that had been purchased. Some of thosehave subsequently matured; others have been purchased and added to the stock. That is thestock that Mr Allen has referred to as table 12 of the AOFM annual report. I invite Mr Allento make any additional comments about that, but we will come back to Senator Conroy. Iknow what has actually happened is an issue of genuine concern to him. We will come backwith some more detail.

Mr Allen—The only piece of information that I can provide is further to an earliercomment that there was a note in our annual report. I can confirm that in our annual report1999-2000 on page 93, note 6, which was to do with extraordinary items, it says:As from 1 July 1999, with the introduction of accrual framework and the abolition of funds accounting,the LCIR trust account with the reserve money fund and the loan fund were abolished. This has resultedin the assumption by DOFA of a liability of $2,730 million from the AOFM for internal Treasury billsissued by the loan fund to Commonwealth agencies on 30 June 1999.

That is the end of our note. Obviously, the $2.7 billion relates to the number that Dr Parkinsonhas just referenced.

Dr Parkinson—So the $18.9 billion was raised as internal treasury bills, $16.2 billionwent into the LCIR and $2.7 billion went into other trust funds with the introduction of theFMA and the abolition of fund accounting. That $2.7 billion was then transferred across toDOFA, because the $16.2 billion was extinguished very early into the new financial year.

Senator CONROY—Are you able to let us know which trust funds the $2.7 billion wentto? At this point, I am happy for you to include that in the questions on notice.

Dr Parkinson—We will have to come back to you on that.

Senator CONROY—I do not have any other questions at this particular point. Can youhang around for about 10 minutes, in case I have some more questions that I want to put toyou on that. If not, or if something arises overnight, I reserve the right to call you backtomorrow—but I do not think that that is likely.

CHAIR—Thank you, Dr Parkinson, Mr Allen and Mr Murray. We return to those officersconcerned with outputs 3.1.1, 3.1.2 and 3.1.3.

Senator SHERRY—Has Treasury been involved in any discussions with AUSTRACregarding the application of account identification requirements to cash management trusts?

Mr Murphy—Yes.

Senator SHERRY—I note that in a press release dated 30 October 2002 Senator Ellisonsaid that he had asked Senator Coonan to consider the possibility of using tax file numbers as


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a means of identification when operating cash management accounts. Is Treasury involved inevaluating that?

Mr Murphy—Yes, we are. We decided that there was considerable confusion and disquietabout this issue within the funds management industry and uncertainty about the newrequirements which came into operation which are administered by AUSTRAC, so wechaired a meeting in which we got the players together to try to resolve what the future of theproposal that industry was putting forward should be. We are working on advice to ministerson the merits of the industry’s proposals.

Senator SHERRY—Is this the TFN versus the 100-point check? Is it called the 100-pointcheck?

Mr Murphy—There is a 100-point check, but there has been an interpretation of the lawby the Government Solicitor that says that, if the cash management trusts were to offer chequeaccounts, they would, in effect, be running accounts which would fall within the jurisdictionof the cash transactions reporting. This is all in the context of the government’s greater focuson money laundering and terrorist financing. It is quite a big issue. Where it pans out is that itis an impost on industry. On the other hand, it is a tightening up of cash management withinindustry.

Senator SHERRY—Just going back to your earlier comment, if I understand it correctly,the tightening up effectively has come about as a result of an interpretation of an existing act.There has not been a change to the existing law.

Mr Murphy—That is right. It is through the interpretation of the act plus the change inmarket practices of some of the industry that has led to them coming within this.

Senator SHERRY—You have referred to those consultations: what is the time line you seefor resolution to this?

Mr Murphy—There is the Attorney-General’s portfolio and our own portfolio. We wouldbe hoping to give advice to ministers in the next couple of weeks—the sooner, the better. ButI must say the bottom line on this is whether the government and the community, I wouldsuggest, want greater use of the tax file number for means of identification, and that is asensitive issue.

Senator SHERRY—I understand that. I can recall debates on that in the chamber for otheruses. If you were able to use TFNs in this way, would it make it harder for terrorists to openaccounts or to operate cash management accounts or managed funds in Australia?

Mr Murphy—There is one issue there before we get to that. There has been an auditreport on the veracity of TFNs and that report about a year ago said that there were a greaternumber of TFNs than there were taxpayers, and that the system needs tightening. The taxoffice is undertaking a program to improve the integrity of the tax file number and that isgoing along separate from this exercise.

Senator SHERRY—I can recall us actually discussing that—not with you specifically—and I was a bit surprised at the number of surplus TFNs in circulation.

Mr Murphy—I think that it is improving, and I think you should talk to the tax officebecause they have that well in hand.

Senator SHERRY—Part of the problem were death notices coming through the states—but I will not go into detail—

Mr Murphy—Yes. But they are putting a lot of work in to upgrade that. The Treasurer andthe Minister for Foreign Affairs have stated internationally that it is a very important thing


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that we ensure that we have proper money laundering rules in place. There is a question thateven use of the TFN would not be 100 points and would not be sufficient to give trueidentification to an individual. As at the moment, it may be one of a number of factors. It issimilar if you go to get a passport and you have to give certain—

Senator SHERRY—Yes, I understand the 100-point test for the passport.

Mr Murphy—It would be a neat solution for industry if you could say the tax file numberwould be 100 points, but it raises all these issues about whether there should be greater use ofthe tax file number as an identifier for the finance industry, as such. It may be that governmentmay wish to do that.

Senator SHERRY—Are you aware of comments by the Commonwealth Bank’s head ofsecurity, which were reported in the Australian Financial Review that CBA accounts had beenused to finance terrorism during the past 18 months?

Mr Murphy—I cannot be too specific. I have heard that that is the case. There was a quoteby a guy working at the CBA that came out a couple of weeks ago. From my recollection he isthe first person to actually say that. I think that is a concern. AUSTRAC and those sorts ofpeople would be the ones to really corroborate that or comment on it.

Senator SHERRY—It is a pretty serious comment to make, I would have thought. DidTreasury have any direct follow-up as a consequence of this claim?

Mr Murphy—We have not followed up with the Commonwealth Bank, but it is actuallypart of this working group. It would be within that context.

Senator SHERRY—It seems to me to be relevant to the issue.

Mr Murphy—It came out at virtually the same time as we were looking.

Senator SHERRY—It was 4 November. Who is involved in the working group that youare referring to?

Mr Murphy—Treasury is chairing it. It involves Attorney-General’s, AUSTRAC, the taxoffice and Foreign Affairs. We were worried. The reason we initiated this was that we worriedthat this issue was out there. There were various agencies responsible for it and we were notgetting solutions.

Senator SHERRY—A coordinating group across agencies.

Mr Murphy—Yes, that is what we are trying to do.

Senator SHERRY—The group is made up of government ministries and agencies; it doesnot have people from the private sector on it, does it?

Mr Murphy—No, but we have had very strong representations from the private sector.The private sector made very strong representations to ministers. They are aware of this groupand they feel that is the best way to go—to finalise some advice and give some options togovernment.

Mr Ray—Senator, you asked about the CBA. I have just confirmed that we are aware thatan account at the CBA was frozen on advice from the AFP.

Senator SHERRY—Because of alleged use for money laundering and terrorism?

Mr Ray—It was because the account was associated with a group that is on the relevantlist.

Senator SHERRY—When did that happen? Do you know?


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Ms Gilmour—My recollection is that it was in early October. Three accounts were frozen,in the CBA and also the ANZ Bank, for the International Sikh Youth Federation followinginformation received from the Australian Federal Police. The International Sikh YouthFederation is a listed terrorist entity.

Senator SHERRY—Who picked this up? Had the Federal Police notified the banks andthe banks had picked it up, or was it the regulator?

Ms Gilmour—The process is that the foreign minister gazettes listed individuals andentities. The banks have data systems where they run checks against customer names. In thatprocess, the name of this organisation was thrown up. They sought information from the AFPand they also reported to AUSTRAC at the same time. The AFP provided information backthat it was a probable match. On that basis, both banks froze the accounts.

Senator SHERRY—Do you have any idea how much money was in these accounts?

Ms Gilmour—My understanding is that it was less than $A2,000.

Senator SHERRY—In total in the three accounts?

Ms Gilmour—In total. The important point, though, with the accounts, is not the amountbut the facility. If you have a terrorist linked account and you do not freeze it, people canmove money in and out very fast.

Senator SHERRY—How are you aware of this, Ms Gilmour?

Ms Gilmour—I work on money laundering and terrorist financing within Treasury, and Isit on a number of committees. I was involved in discussions on this issue. Also, this issue hasbeen reported in the press.

Senator SHERRY—FRC appointments expire in December. Is it the Treasurer whoappoints the FRC members?

Mr Murphy—Yes.

Senator SHERRY—Does Treasury advise the Treasurer as to an appropriate appointment?

Mr Murphy—Yes.

Senator SHERRY—I understand a number of appointments expire later this year; is thatcorrect?

Mr Murphy—Yes, we are working on giving a list of candidates to the Treasurer. Thepeople represent all the various stakeholders who represent the interests of the FinancialReporting Council. As well, under the CLERP 9 proposals the FRC will have widerresponsibilities and we have to take that into account when we are appointing people.

Senator SHERRY—So how many appointments are there to be made?

Mr Murphy—About seven.

Senator SHERRY—Has an advertisement been placed?

Mr Murphy—No.

Senator SHERRY—So these names have emerged within Treasury?

Mr Murphy—These appointments are much easier to some extent because theseappointments are part time and because this is an advisory committee. At the moment wehave people like Elizabeth Alexander, Charles Macek and Jeffrey Lucy, who is the chair.These are people who have all been in the financial services or corporate area and who are


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willing to give some time. By asking one person, you get referred to others and other peopleemerge in industry whom other people recommend, so it is that type of thing.

Senator SHERRY—So you gather these names, you put together a list, you put the list tothe Treasurer and the Treasurer says, ‘A, B, C and D.’

Mr Murphy—We give pen pictures of these people plus approach the people to getclearance with them. Firstly, the list would go to Senator Ian Campbell, because he isresponsible for it, and then it would go to the Treasurer.

Senator SHERRY—Are these paid positions?

Mr Murphy—No, there is no sitting fee, and that is an issue. We are addressing whetherthere should be a sitting fee. They meet about three or four times a year. It is an importantbody.

Senator SHERRY—I do not underrate its importance. I assume a sitting fee would have tobe done by regulation, not legislative change.

Mr Murphy—I do not think there will be sitting fees. It is just one of those things.

Senator SHERRY—Are you letting the applicants who are emerging know this?

Mr Murphy—People are prepared to do this. International accounting standards is a veryinteresting area as well.

Senator SHERRY—I can think of someone in the Senate who would be fantastic on thiscouncil!

Mr Murphy—That could be a conflict of interest, I am afraid. But there could be a futurethere.

Senator SHERRY—Have you drawn up what the new functions will be as a result ofCLERP 9?

Mr Murphy—They are government proposals. The government is proposing that there bethese new functions and more of an oversight board for the audit profession. That has notbeen put into legislation but the CLERP 9 document sets out what the new functions wouldbe. We would need legislation to increase the responsibilities of the FRC.

Senator SHERRY—There was a recent High Court case against the ACCC on powersrequiring the production of documents. The case concerned the powers of the ACCC, theATO and ASIC to obtain documents which may be protected by legal professional privilege.Following that recent High Court decision against the ACCC, has Treasury been examiningthis issue?

Mr Murphy—It has been an area of some uncertainty for a while. I think it would be fairto say that, unless we were to receive representations from regulators and it was raised with usthat this was inhibiting their current functions—and we are aware of it as we have hadbriefing notes on it—we would not see the need to pursue that issue as a matter of priority. Ineffect, it is the court having made a clear statement of law, which is always handy.

Senator SHERRY—So there is no working group?

Mr Murphy—If it were looking at legal and professional privilege, the Attorney-General’sDepartment would probably look at it across the board. Unless we receive representationsfrom the ACCC or whomever—ASIC does not have a power like section 155 but it has alsobeen an issue for them in the past—we are not doing anything on that.


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Mr French—As I recall the ACCC did not see this as a major difficulty for itsenforcement activities.

Senator SHERRY—That concludes my questioning in this area. I have questions inoutputs 2.1.1 to 2.1.3.

[6.11 p.m.]

CHAIR—That concludes outcome 3. We will now deal with outcome 2, outputs 2.1.1,2.1.2 and 2.1.3.

Senator SHERRY—I want to go to some substantive issues relating to the fuel ethanolissue. I hope this does not cut over to the tax area but we will see how we go. I assumeTreasury was involved in the development of this proposal.

Dr Henry—Perhaps I can help you out here. We have been involved in discussions aroundthe formulation of policy in this area.

Senator SHERRY—Is it correct that after the cabinet consideration on August 26, a groupof Treasury officials were convened to further develop the proposal before it was representedto cabinet?

Dr Henry—I have no comment to make on those sorts of matters. That goes to processesinvolved in the development of policy advice to government.

Senator SHERRY—I am not asking for the advice. Was there a group?

Dr Henry—I do not mean to be pedantic, but what do you mean by a ‘group’? Do youmean a Treasury group?


Dr Henry—Do you mean a group with Treasury officers involved in discussing thematter?


CHAIR—Dr Henry, I think it is a proper question. The prohibition is on you or yourofficers being asked to give opinions on matters of policy. I think you can properly be askedwhether a process was initiated, which is essentially a structural issue.

Senator Ian Campbell—I think that is the right interpretation but Senator Sherry wasasking, ‘In between two cabinet meetings did Treasury initiate some sort of activity.’ If youare asking questions about the policy advice process going to cabinet, I do not think that hasever been—

CHAIR—It is a fine line. I agree, Senator Campbell.

Senator Ian Campbell—That was the question.

CHAIR—I understood the question not to go beyond asking whether a group of Treasuryofficers had been convened to look at something.


CHAIR—As far as that is concerned, I imagine there is a yes or no answer.

Senator Ian Campbell—The question was a little bit deeper than that. There was a cabinetmeeting and a consideration and the question was: did it come back and did Treasury do somemore work to go back to another cabinet meeting? I think that goes a lot further.

CHAIR—You heard what I said, Senator Sherry. Do you want to rephrase that question?


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Senator SHERRY—Is there a group within Treasury or was there a group in the past—itmay still exist, I do not know—examining this issue of fuel ethanol?

Dr Henry—I certainly have officers in the department who have been involved inpreparing advice to government on the issue.

Senator SHERRY—Is this just a Treasury group or are there other people involved fromother departments?

Dr Henry—I have officials in the Department of the Treasury who have been involved inwork on the issue, but they have been working with officials of other departments.

Senator SHERRY—So it is a cross-departmental group, if you like?

Dr Henry—I am a little uncomfortable with the use of the word ‘group’ because I am notquite sure what status you attach to it.

Senator SHERRY—I ask it because that is what is in the question I have got in front ofme—committee, informal committee?

Dr Henry—It might be better to say that there are officials in a number of departmentswho have been charged with responsibility for developing policy in this area and they havebeen talking to one another. I think that would be a more accurate description.

Senator SHERRY—In which other departments are officials charged with responsibilityfor talking with one another on this particular issue.

Senator Ian Campbell—Are we talking about the task force now?

Senator SHERRY—Is it a task force? That is better than a group.

Senator Ian Campbell—We have been talking about the task force all afternoon, but youare talking about a group within Treasury and then you are talking about other departments.

Senator SHERRY—I am talking about these officials that Dr Henry has just referred to inTreasury. I know there is a task force but it seems to be a separate body. Is it the task force, DrHenry?

Dr Henry—That is not what I was referring to.

Senator SHERRY—Good. So what other departments are involved with this group ofofficials from Treasury?

Dr Henry—I do not have the details with me. A number of other departments have beeninvolved in the development of policy advice in this area, but I would have to take on noticethe development of a list of agencies that have been involved.

Senator SHERRY—Do we have anyone here who has been involved that could tell us?

Mr Murray—I was not directly involved but I do have responsibility for this area or atleast for the industry policy issues. I cannot now recall exactly which departments wereinvolved in this exercise. It was just a normal interdepartmental interchange. They werenormal interdepartmental consultations about policy development. Of course, we are not thelead department in the development of industry policy.

Senator SHERRY—I understand that, but you had a pretty significant say, particularly onthis issue.

Senator Ian Campbell—Some would say not significant enough.


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Senator SHERRY—Yes, you are getting very close to policy there, Senator Campbell! Isit correct that when tax measures go before cabinet it requires an explicit sign-off from theTreasury?

Dr Henry—There is a practice that submissions raising substantive taxation issues involvethe Treasurer or a treasury minister. There is a practice to that effect.

Senator SHERRY—I have seen some newspaper reports that suggest that you would notsign-off. Is that correct?

Dr Henry—Are you asking: is it correct that you have seen those newspaper reports?

Senator SHERRY—No, you know what I was asking.

CHAIR—Senator Sherry, I do not think that Dr Henry can be asked that.

Senator SHERRY—I can ask. It is whether I get an answer, of course, is a differentmatter.

CHAIR—Then I rule the question out of order; it is not a proper question.

Senator SHERRY—To clarify: my question did not go to whether you had seen thenewspaper reports but whether the newspaper reports were correct.

Dr Henry—The chairman is absolutely right; I would not answer the question, on the basisthat I believe it to be out of order.

CHAIR—Dr Henry, if I say it is out of order, it is out of order.

Dr Henry—That is right.

Senator SHERRY—Did you correct these erroneous newspaper reports?

Dr Henry—I am not going to enter into a discussion about whether they were true or false,but I might say that, if I were to spend my time correcting every erroneous newspaper reportabout things I might have said, I would be rather busier than I am—and I am alreadysufficiently busy.

Senator SHERRY—In the process of sign-off that we have just been talking about, wouldother departments sign off as well? Is it normal process for them sign off?

Dr Henry—The normal process for the preparation of a cabinet submission is that aminister has responsibility for presenting a submission in front of his cabinet colleagues, andthat minister’s department takes responsibility for the preparation of the cabinet submission.Usually a cabinet submission will be drafted in consultation with other agencies that have arelevant policy interest. Whether or not that consultation occurs in the preparation of a draftcabinet submission, usually a draft will be circulated to departments for coordination andcomment before being lodged. That is the usual process.

Senator SHERRY—In respect of the issue of ethanol, what other departments would havebeen involved besides Treasury?

Dr Henry—I think that is essentially the same question.

Senator SHERRY—Industry, obviously. Anyone else?

Dr Henry—I answered the question previously—or rather, I did not. I did to the best of myability. I cannot recall the agencies that were involved.

Senator SHERRY—Can you give me the date that advice went to the Treasurer regardingthe proposal to introduce excise on the fuel ethanol?

Dr Henry—I certainly cannot give it to you now.


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Senator SHERRY—Can you take it on notice?

Dr Henry—I will take that on notice.

Senator SHERRY—Could you take on notice any subsequent dates that advice wasgiven? Can you recall whether written advice was given following the announcement by acompany called Trafigura Fuels Australia on 1 September that they intended to import ashipment of fuel ethanol to test-market ethanol blended petrol?

Mr Murray—I cannot recall whether there was advice or not. There were a whole lot ofthings going on around that time and there were various bits of advice going to the Treasureron this issue like there were on many other policy issues.

Senator SHERRY—I am sure that that is the case. But, specifically, was there advice after1 September following Trafigura Fuels Australia’s announcement?

Dr Henry—I think my answer to that question is the same as the answer to the previousquestion. It would be advisable for us to take it on notice. I cannot remember off the top of myhead.

Senator SHERRY—Did the department have consultations with domestic producers orinterest groups representing the biofuels industry on this issue?

Dr Henry—I am not aware of any such consultations having occurred but I could not ruleit out. Again, I will take that on notice.

Senator SHERRY—I assume, Dr Henry, that you would not have been involved directlyin these consultations, but I am sure there is someone else here who may have been involvedin consultations with interest groups or producers.

Mr Murray—Again, like our secretary, I cannot recall direct consultations with industryon this issue. However, I have only been in charge since 1 August. Whether there wereconsultations before that, I do not know.

Senator SHERRY—Who in the department would know whether there were consultationswith industry?

Mr Murray—I am pretty sure that while I have been in charge there have been noconsultations, but I will take on notice whether we had consultations prior to that. We haveinteraction with people all the time, but whether before my time there were consultations withindustry about biofuels, I do not know.

Senator SHERRY—I contrast this approach with the previous witness, with whom wewere talking about the money laundering issue. The previous officer, whose name I cannotrecall, was quite open about who was consulting, who was being consulted with and what theprocess was.

CHAIR—The officer said he would take the question on notice. I think that is the end of it.

Senator Ian Campbell—I would say that it would be highly unusual. I have certainlyspoken to people from those industries. They are very active. If the Treasury officer is notsure about any consultation process it is better to take the question on notice. There is nothingto hide.

Mr Murray—If I could reiterate: while I have been there, I cannot recall us having directconsultations with industry about the whole issue of biofuels. I can check whether myrecollections are right or wrong. Prior to me taking over, there may have been consultations,but I do not know. I will take both of those issues on notice.


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Senator SHERRY—Are you not aware of the individual or individuals involved in thisgroup?

Mr Murray—Again, I am not sure what group you are referring to.

Senator SHERRY—The one I was talking about with Dr Henry earlier.

CHAIR—That is the group that Dr Henry said was not a group but was a number ofindividuals in different departments talking to each other.

Senator SHERRY—They emerged, talked and got together on the issue.

Mr Murray—I am quite happy to answer this. These are officers in my group—in a fiscalgroup—that work with issues about industry policy and environmental issues. I am not quitesure what group you are referring to. We have finite resources to look at these issues and so,yes, I do know those people.

Senator SHERRY—We have got a new officer.

Dr Henry—We have somebody from Mr Murray’s group who may be able to help us.

Senator SHERRY—Was there consultation with industry?

Mr Francis—In relation to what issue?

Senator SHERRY—The ethanol issue.

Mr Francis—I have met with industry from time to time in relation to biofuels.

Proceedings suspended from 6.31 p.m. to 8.03 p.m.CHAIR—I welcome to the table the Minister for Revenue and Assistant Treasurer, Senator

Coonan, and officers of Treasury. We will resume the examination of outputs 2.1.1, 2.1.2 and2.1.3.

Senator SHERRY—I think we were just about to hear from you, Mr Francis, about theconsultations.

Mr Francis—I would not describe them as consultations. It is just a case of industrywanting to meet with us—as industry often does—to clarify government policy and makerepresentations. I recall at least one occasion where I attended a meeting where would-bebiofuel producers wanted to make representations.

Senator SHERRY—Who were these groups?

Mr Francis—It was just one group. I think it was CSR Multiplex.

Senator SHERRY—Were there any others that made contact?

Mr Francis—I am in contact from time to time with BP over a range of industry policyissues.

Senator SHERRY—But we are dealing here with the ethanol issue: specifically withethanol?

Mr Francis—BP is an ethanol producer.

Senator SHERRY—Yes, I am aware of that. What is your position, Mr Francis?

Mr Francis—I am the manager of the Environment Policy Unit in Fiscal and Social PolicyDivision.

Senator SHERRY—How long have you had contact with groups about the ethanol issue?Have you been in this area for some time?


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Mr Francis—Yes, I have—on fuel issues probably since I have been there, which is about2½ years. In relation to ethanol, the meeting with Multiplex is the only one that I can recallwhere representations were made by industry.

Senator SHERRY—So you are the man, it seems. You have been there for 2½ years. Youseem to have a more significant record than anyone else we have spoken to.

Mr Francis—That may be the case.

Senator SHERRY—Do Treasury have a view about the previous assistance for the sugarindustry?

Mr Francis—I think you are asking me to comment on policy issues.

Senator SHERRY—I am asking about the previous assistance.

CHAIR—No, I think Mr Francis’s point is right, Senator Sherry. It does not matterwhether it may have been a past position. It still does relate to policy.

Senator SHERRY—Has Treasury indicated any views on the issue of ethanol as a productcompared to petrol?

CHAIR—Again that is a policy question, Senator Sherry.

Senator SHERRY—I am asking publicly whether they have—

CHAIR—If you want to ask whether there have been any public statements issued byTreasury as a matter of fact, that would be a proper question.

Mr Francis—I do not recall any public statements by Treasury.

Senator SHERRY—Have you had any contact with Manildra?

Mr Francis—I have attended one meeting of what has been described as the EthanolTaskforce, where I believe Manildra had representation.

Senator SHERRY—That is the broad ethanol task force that is looking at this whole issue.

Mr Francis—There is a task force that I think is described as the E20 task force that islooking at the issue of what limit should be in ethanol. You asked whether I am on the taskforce: I suppose Treasury has an observer status on the task force, as do a number ofdepartments.

Senator SHERRY—And you attend these task force meetings?

Mr Francis—I have attended one taskforce meeting.

Senator SHERRY—Do you know how many times it has met?

Mr Francis—I do not have that information. Environment Australia would be the relevantdepartment to contact in relation to that.

Senator SHERRY—Has there been any determination of the cost to revenue in respect ofethanol versus petrol?

Dr Henry—Senator, I would have to regard that as going to policy as well. At least untilthe point at which the government were to indicate what the cost to revenue of any particularmeasure is, I would have to regard any work that we have done as being in the nature ofpolicy advice. As you know, revenue estimates that are published are government figures.

Senator SHERRY—Wasn’t there some costing of this issue before the election?

Dr Henry—I am not familiar with it, Senator.

Senator SHERRY—Mr Francis, are you familiar with that?


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Dr Henry—And I doubt that it would be a Treasury number. I stand to be corrected but Idoubt it.

Senator SHERRY—Does anyone have any knowledge of that?

Mr Francis—Treasury does costings in relation to fuel issues in general. That is done allthe time. To the extent that we use these, it is used as policy advice to government.

Senator SHERRY—I understand there was an election commitment entered into by thegovernment, costed consistent with the charter of budget honesty. You have no knowledge ofthat? I am not talking about the currently developing policy. I am talking about the previouslypublicly proclaimed policy.

Dr Henry—I am sorry, I misunderstood. If that is the case, it would be on the publicrecord, I presume.

Senator SHERRY—I am just asking if you can provide me with the details here.

Dr Henry—I am not able to do that.

Senator SHERRY—Mr Francis, did you or any of your officials have any contact withTrafigura?

Mr Francis—No, not that I am aware.

Senator SHERRY—Or anyone who was involved in the proposed shipment of ethanolfrom Brazil?

Mr Francis—No-one in the department of Treasury that I am aware of.

Senator SHERRY—Was the impact of the decision to impose an excise on a commercialtransaction that had already been undertaken in respect of the import of the ethanol fromBrazil?

CHAIR—I think that is a policy question, Senator Sherry, or it is at least an observationabout the effect of a policy.

Senator SHERRY—What has occurred is a matter of fact, not a policy.

CHAIR—I suspect that you could rephrase it in a way that would not be objectionable andget what you want.

Senator SHERRY—Are you aware of the decision to impose an excise on the importationof ethanol from Brazil?

Mr Francis—Yes.

Senator SHERRY—The importation of ethanol from Brazil was a commercial transactionthat had taken place?

Dr Henry—That was not my understanding, Senator.

Senator SHERRY—What do you understand it to have been, Dr Henry?

Dr Henry—My understanding was that the importation had not occurred.

Senator SHERRY—It had not reached Australian shores?

Dr Henry—That is correct.

Senator SHERRY—A contract had been entered into for the purchase?

Dr Henry—I am not across the details of any commercial arrangements that may or maynot have existed. I would not be able to comment on it. But as a matter of whether any


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quantity had passed a taxing point, I could state reasonably confidently that the answer wouldbe no.

Senator SHERRY—But the issue of a new excise tax applying to a commercialtransaction that had occurred clearly happened in this case, didn’t it

Dr Henry—As I say, I do not know. I am not familiar with the details of any commercialtransaction that may have been involved.

Senator SHERRY—Are you, Mr Francis?

Mr Francis—No, I am not aware of any details of any commercial transaction that mayhave taken place.

Senator SHERRY—You are aware, though, that there was a shipment of ethanol on theway to Australia.

Mr Francis—I am not aware that it was on the way.

Senator SHERRY—You are not?

Mr Francis—No.

Senator SHERRY—That has been very widely reported.

Mr Francis—I am aware of speculation that there was a shipment. Whether it was actuallyon the seas—you say ‘on the way’—implies that it is—

Senator SHERRY—Literally on the way, as I understand.

Mr Francis—I am not aware that it was on the way.

Senator SHERRY—But you are at least aware that it was to be on the way.

Mr Francis—I am aware of the media reports in relation to it.

Senator SHERRY—Maybe Dr Henry can give me an indication of where a change hasbeen made to an excise or tax provision in similar circumstances. I cannot think of one,Dr Henry, but you might be able to point to one.

Dr Henry—Not off the top of my head, Senator.

Senator SHERRY—Mr Francis?

Mr Francis—No. I am not an expert in taxation.

Senator SHERRY—I am not asking you to be an expert in taxation. I am just askingwhether or not you are aware of a similar set of circumstances.

Mr Francis—Not off the top of my head.

Senator SHERRY—Dr Grimes, you have had long experience. Can you recall such acircumstance?

Dr Grimes—Could you repeat the question? I did not catch that.

Senator SHERRY—There was a shipment of ethanol, which I understand was literally onits way to Australia, that had been ordered—I am not sure whether it had been paid for but ithad certainly been ordered—and an excise was imposed. I am just asking whether or not wecan think of a circumstance where an excise or a tax change has been implemented when acommercial transaction has taken place.

Dr Grimes—That obviously goes well outside my area of expertise. I do not have any suchrecollections.


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Senator Coonan—You would have to know the commercial transaction, Senator Sherry.There are a lot of assumptions in your question.

Senator SHERRY—I certainly know that it had been ordered and that it was on its way. Ithad left port. I am not sure what part of the Pacific it was in.

Senator Coonan—It would be a matter of when it might be dutiable; when it was to bepaid for; when property changed hands, when title passed; how it was shipped.

CHAIR—I think, Senator Coonan, that Senator Sherry is stuck with his own question. Hecan only expect answers as particular as the question gives some specifics.

Senator Coonan—Quite so, Mr Chair. I am just pointing out that on a hypothetical it isvery difficult to get the officers to provide any factual answer.

Dr Henry—It is a question that you could ask when the Tax people are here.

Senator SHERRY—I can certainly do that.

Dr Henry—In principle, the sort of issue that you are raising must happen quite a lot.Whenever an excise rate is changed, for example, a question would arise as to whethercontracts have been entered into for the supply and delivery of certain products, at what rateshould the excise apply, and so on. We have people who are expert in the application of excisein those sorts of circumstances. They would be, I am sure, very capable of answering yourquestion. All you are discovering is my limited knowledge.

Senator SHERRY—I was asking you first and initially you could not point to a similarcircumstance. It was on its way. I do not know whether it was in the Pacific or the Atlantic. Itcould have been in the Atlantic.

Dr Henry—I don’t know.

Senator SHERRY—Was the company contacted prior to the imposition of the excise—theissuing of whatever the legal instrument was to impose the excise?

Mr Francis—You are asking if the company was contacted?


Mr Francis—Before or after?

Senator SHERRY—Before.

Mr Francis—I would have to take that on notice.

Senator SHERRY—What is the practical effect of an imposition of an excise on importedfuel?

Dr Henry—This is going to sound a bit circular but it depends on which party bears theincidence of the tax. For example, if the exporters were prepared to reduce the price theyreceive by the full amount of the excise, obviously something pretty close to nothing wouldhappen to the domestic or landed price of the product. That is a theoretical possibility.

Senator SHERRY—I know. You are speculating about theoretical possibilities. The shipturned around and went back!

Dr Henry—It was a hypothetical question; I gave a hypothetical answer.

Senator SHERRY—On the basis the ship turned around and went back, it is fairly safe toassume that did not happen.

Senator CONROY—They were not prepared to bear the incidence.


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Dr Henry—An alternative interpretation is that is precisely what happened.

Senator SHERRY—In respect of this decision, was any consideration given to WTOcompliance issues?

Mr Francis—I understand there was.

Senator SHERRY—Was the WTO contacted about this?

Mr Francis—DFAT would be the appropriate people to address that question.

Senator SHERRY—You say that you understand there was.

Mr Francis—I have been involved in the policy process.

Senator SHERRY—So you are aware that DFAT did contact the WTO about this matter.

Mr Francis—No.

Senator SHERRY—What are you aware of?

Mr Francis—I am aware that WTO considerations were a policy consideration.

Senator CONROY—Did DFAT pass any information on to you?

Dr Henry—We would not be able to comment on the content of it anyway, Senator Sherry.It would be advice that goes into the preparation of policy advice for the government.

Senator SHERRY—But we have not asked for the content; we have asked whether or notyou received advice from DFAT on this matter.

Mr Francis—DFAT is part of the policy process so we would have access to thatinformation.

Senator CONROY—You were aware of the DFAT advice?

Mr Francis—Yes.

Senator Coonan—One of the issues that may well need to be taken into consideration isthat Brazil itself is a subsidiser of both ethanol and sugar. There is no problem with providinga production subsidy for ethanol producers. It is consistent with the WTO obligations.

Senator SHERRY—Has there been any contact with domestic producers? I think youacknowledged a contact with Manildra at the task force meeting, didn’t you, Mr Francis?

Mr Francis—I would not say I had contact with Manildra. I attended a meeting whereManildra had representation.

Senator SHERRY—Are there any other domestic producers besides Manildra?

Mr Francis—I believe CSR Multiplex may be a producer. I could not answer thatcategorically.

Senator SHERRY—You did indicate that there had been some contact between yourselfand CSR Multiplex.

Mr Francis—Yes. I should add that ethanol is produced also for industrial purposes. Thereis probably a range of people who produce ethanol for industrial purposes but I could notname them off the top of my head.

Senator SHERRY—Has there been any economic modelling of the impact of the decisionon the excise?

Mr Francis—I am not sure that I understand the question.

Senator SHERRY—Presumably there will be some sort of cost-benefit analysis.


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Mr Francis—I do not recall it. I do not believe there has been any cost-benefit analysis.

Senator SHERRY—Has there been any analysis of whether or not there would be anyexpansion in the Australian production of ethanol?

Mr Francis—No.

Senator SHERRY—The producer subsidy that was introduced is to finish at the end of12 months, isn’t it?

Mr Francis—I believe that is correct. It would be 12 months from 17 September 2002, so17 September 2003.

Senator SHERRY—We have no economic modelling of this. What about analysis onenvironmental grounds?

Mr Francis—I believe there has been some analysis done on environmental grounds. Youwould be better off directing those questions to Environment Australia. They are the expertsin this area.

Senator SHERRY—But you have knowledge of some analysis on that basis.

Mr Francis—That is correct. There is a reasonably widely reported CSIRO study. I shouldcorrect the record in relation to your question about how many ethanol producers there are. Iam aware that CSR and Rocky Point Distillery—

Senator SHERRY—Where’s Rocky Point?

Mr Francis—I do not know.

Senator SHERRY—I know there is a Rocky Point in Tasmania, but I am damn sure it isnot the Rocky Point in Tasmania!

Dr Henry—It is in Queensland.

Senator SHERRY—How is the producer subsidy to be administered?

Mr Francis—It is administered by the Department of Industry, Tourism and Resources.

Senator SHERRY—Do you know whether there will be in a separate appropriation?

Mr Francis—No, I do not know.

Senator SHERRY—Are there currently any grants paid to ethanol producers?

Mr Francis—I could not comment categorically on that. I am aware of programs that areadministered by the AGO and Environment Australia that may fall into that category.

Senator SHERRY—Doesn’t the ATO have a product grants administration act of somedescription?

Mr Francis—That is a question that you should address to the taxation people.

Senator SHERRY—No, I would, but I just wondered whether you were aware of thatparticular grant act.

Mr Francis—Now that you mention it, I am aware of it, although I could not comment onthe treatment of ethanol in relation to it.

Senator SHERRY—I am very sure you are aware of it, given what I have here. I have aParliamentary Library brief on that particular act, which is very useful.

Mr Francis—That is good!


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Senator SHERRY—Are you aware of the Australian Chamber of Commerce andIndustry’s press release of 29 October 2002 regarding the sugar levy?

Mr Francis—I am aware that they have made a press release. I believe I read it on oneoccasion. As to the specific detail, I do not recall.

Senator SHERRY—One of the paragraphs says:The decision today to impose a levy on domestic sugar sales undermines the continued micro-economicreforms of the past 20 years which have improved the competitiveness of Australian business.

Are you aware of that argument?

Mr Francis—Now that you have read it, I am aware of it.

Senator SHERRY—Has Treasury dropped its commitment to micro-economic reform,Dr Henry?

Dr Henry—We advise governments on micro-economic reform issues.

Senator SHERRY—The release goes on to say the food manufacturing industry:... competes in an international market and will not be able to pass on this artificial cost increase. Thishas a direct impact on the ability of our food businesses to compete with imported products and maycreate an incentive to locate value adding food businesses overseas.

This is correct, isn’t it, Dr Henry? That is the impact of it.

Dr Henry—Senator, it is a matter for judgment. It depends on the incidence.

Senator SHERRY—So you don’t believe it has that effect or you are just not willing tocomment?

Dr Henry—We have not conducted independent modelling of the economic impact of thesugar levy and, in the absence of that work, I would not be prepared to comment.

Senator SHERRY—Has Treasury modelled the employment impact at all?

Dr Henry—I do not believe we have, Senator. I stand to be corrected though. I do notbelieve so.

Senator SHERRY—Mr Francis?

Mr Francis—No.

Senator SHERRY—There was no modelling conducted at all by Treasury on thisproposal?

Mr Francis—No modelling on the employment impact. There would have been modellingin relation to the revenue it raised.

Senator SHERRY—Who is administering the levy?

Mr Francis—I believe the Department of Agriculture, Fisheries and Forestry.

Senator SHERRY—Has Treasury done any compliance impact of the levy?

Mr Francis—Not that I am aware of.

CHAIR—That concludes the examination of outputs 2.1.1, 2.1.2 and 2.1.3. We will nowdeal with outputs 2.1.4 and 2.1.5.

Senator SHERRY—Mr Martin on the last occasion we had a chat about recruitment ofactuaries. Can you give me an update?


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Mr Martin—The office at the moment boasts three qualified actuaries working full time,one working with us part time, five full-time analysts and one part-time analyst.

Senator SHERRY—When you say ‘analysts’, they are not qualified actuaries? They havesome other qualification?

Mr Martin—Partly qualified. They are on the road to full qualification.

Senator SHERRY—So that is eight full time?

Mr Martin—Eight full-time technical people.

Senator SHERRY—And two part time.

Mr Martin—Yes.

Senator SHERRY—What is your status at the moment? Were you acting last time?

Mr Martin—No, acting the time before that.

Senator SHERRY—I had better congratulate you on your appointment.

Mr Martin—Thank you, Senator.

Senator SHERRY—How does this staffing level compare with two years ago?

Mr Martin—It is slightly higher, but only marginally. The number of actuaries has notchanged. We have one more analyst on board and a part-time actuary, which is an addition.But it is roughly the same.

Senator SHERRY—One part-time actuary and one analyst up?

Mr Martin—That is right.

Senator SHERRY—How many of the analysts will become actuaries?

Mr Martin—Hopefully, five out of five. It remains to be seen. We have what I would calltwo senior analysts who are currently undertaking their specialist subjects, one moderatelysenior and one junior, and one of them I suspect will not get there. He does not have anyintention. He is a technical person, but not at this point in time.

Senator SHERRY—I did not want to go into that sort of detail.

Mr Martin—Okay.

Senator SHERRY—Have you or any of your staff been attending the HIH RoyalCommission?

Mr Martin—We have not been attending it. We have been watching the evidence.

Senator SHERRY—You have been looking at the transcripts but not attending the actualcourt?

Mr Martin—That is right.

Senator SHERRY—Have you taken up any new work since we last saw you?

Mr Martin—I am trying to remember what we were doing when we last saw you, Senator.

Senator SHERRY—Back in May. Has there been anything new in the last six months?

Mr Martin—Obviously, medical indemnity has been on the go. There have been other bitsand pieces. New work comes; work gets completed.

Senator SHERRY—We were talking earlier about terrorism insurance. Have you beeninvolved in that?


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Mr Martin—Not directly, but we have had some input, in much the same way as lots ofother people have.

Senator SHERRY—What is the work on the medical indemnity?

Mr Martin—It is across a whole spectrum of things. It is primarily contributing to thedebate on industry reform, looking at how to deal with the tail.

Senator SHERRY—Have you or any of your staff attended any international conferencesin the last six months?

Mr Martin—No, not in the last six months, Senator.

Senator SHERRY—Has there been any new contract work to departments, any additionalwork with different departments, other than the areas you have mentioned? It may not be newduties, but is there an additional workload?

Mr Martin—We are certainly busy.

Senator SHERRY—Could you indicate how you are busy? I am not surprised that it isbusy, but aside from the medical indemnity and the terrorist insurance, what are the otherareas?

Mr Martin—There has been a whole raft of, shall we say, insurance issues. We arecontinuing to advise a number of departments—Attorney-General’s, Defence, Veterans’Affairs, FACS, Centrelink et cetera. That is in the annual report.

Senator SHERRY—Yes, I understand that. Has the demand for advice lifted from, say, thetraditional clients?

Mr Martin—The advice we are giving is restricted to the Commonwealth public sector.

Senator SHERRY—Yes. You are saying you are certainly busy, though.

Mr Martin—There are a fair few agencies in the public sector.

Senator SHERRY—Yes. Are agencies generally more aware of the role of actuaries?

Mr Martin—That is a hard call to make. My judgment is that the answer is probably no,but it may be yes.

Senator SHERRY—But it is certainly busy.

Mr Martin—Yes.

Senator CONROY—I note with interest that the Treasurer has recently announced that theMid-Year Economic and Fiscal Outlook will be released on 27 November. Is that correct?

Mr G. Smith—I have heard that date indicated, Senator.

Senator CONROY—Is that consistent with your understanding?

Mr G. Smith—That is consistent with my understanding.

Senator CONROY—What determines the time of release of MYEFO?

Mr G. Smith—It is required under the Charter of Budget Honesty Act to be released by theend of January. No precise date is set down. It has become usual practice to release it roughlysix months after the budget, which makes sense when it is a Mid-Year Economic and FiscalOutlook review.

Senator CONROY—Who makes the decision? Is it you?

Mr G. Smith—The Treasurer will make the decision.


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Senator CONROY—How much notice does the Treasurer give the department of theexact release date?

Mr G. Smith—I do not think there is a fixed practice for that.

Senator CONROY—Is there a specific date that Treasury works towards for severalmonths before, or is it more that you get into a general state of readiness and then finalise thedate closer to the time?

Mr G. Smith—The rhythm of this activity is pretty well set by external factors, theobvious one being the release of quarterly national accounts data. As the quarterly nationalaccounts data is released, there is a re-estimation of the economic forecasts. It is usually theeconomic forecasting process that then sets in train the production of parameters. That takes afew weeks. The parameters are then provided to relevant agencies to enable them to developthe revenue and the expenditure revisions. That pretty much dictates the time frame.Basically, once the national accounts data is released, we work on the assumption that aMYEFO will be based on them. It is pretty much determined by that process.

Senator CONROY—When do you start getting the rhythm?

Mr G. Smith—It commences when the national accounts for the June quarter come out. Icannot remember the date for that but that tends to be pretty much always the same week inthe cycle because the ABS takes much the same time every quarter to do it.

Senator CONROY—They come out the same time every year, though, don’t they?

Mr G. Smith—Not exactly.

Senator CONROY—Within a day or two.

Mr G. Smith—Pretty much. I cannot recall. I think it is a couple of months after the end ofthe quarter. And then the forecasting process: economic parameters are produced—and youwould need to ask about those tomorrow when you do that part of the Treasury—there is ahigh level set and, from those, other specific parameters need to be developed for theparticular items of revenue.

Senator CONROY—So you are in the rhythm fairly early.

Mr G. Smith—Yes, but it takes quite a few weeks.

Senator CONROY—To build up those data.

Mr G. Smith—And to produce the forecasts, then to produce the parameters and then toproduce the new estimates. Typically we are ready in November. Of course, until the time thatit needs to be finalised for printing and that type of thing, it is possible to take into accountany late developments that could and quite often do mean that it is not finalised until the printprocess has to be put into place.

Senator CONROY—Why don’t you just aim for, say, six months after the budget eachyear?

Mr G. Smith—The Charter of Budget Honesty Act sets down the government’s policy inrelation to what is required. To my knowledge, the budget itself is not fixed, either. I think notthis year but the year before, the budget was two weeks later than usual, due to other events. Icannot remember what they were. These things are not fixed in law in a precise time and ofcourse you have to take into account the other things that are on. The Treasurer is overseas,for example, at the present time. Those sorts of things have to be taken into account.

Senator CONROY—Why is MYEFO being held back to the end of November this year?


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Mr G. Smith—I do not think it is being held back. MYEFO has come out over a range ofdates, and that is a fairly typical one.

Senator CONROY—If the end of November is appropriate this year and typical this year,how can it also have been appropriate to rush it through in the middle of October last year?

Mr G. Smith—As you know, last year there were different circumstances. The precise datehas to take into account the varying circumstances of the time.

Senator CONROY—You had the rhythm a bit earlier last year, did you? Did all thosestatistics you need come out a bit earlier last year?

Mr G. Smith—It was a rush last time.

Senator CONROY—A rushed rhythm.

Mr G. Smith—We would have had to do it last time, in any event, because there was anelection called and, as you know, we have to do a pre-election fiscal outlook.

Senator CONROY—Was it just a coincidence that you rushed?

Mr G. Smith—No. The two of them came out one day apart, from memory, and they wereidentical in what they presented, as you would expect, because they are produced by the sameprocess.

Senator CONROY—Yes, that is right. They did come out so close together.

Mr G. Smith—With the minor exception that they are signed by different people.

Senator CONROY—Is MYEFO being late again this year?

Mr G. Smith—I do not think it is late. It is at an appropriate time, a fairly typical time forMYEFO over the years.

Senator CONROY—It is appropriate just about any time you want to release it, from thesound of it.

Mr G. Smith—Not me.

Senator CONROY—If it is appropriate in November, does that mean it is inappropriate inOctober?

Mr G. Smith—It properly takes account of circumstances at the time. It would have been avery difficult thing to do in the week or two or three after an election because obviously a lotof change occurs in that period.

Senator CONROY—You did not know the time of the election any better than we did,though, did you?

Mr G. Smith—I did not. You are talking about November last year.

Senator CONROY—If you were working at your normal rhythms, then you would havebeen working to mid-November.

Mr G. Smith—But November last year was a post-election month.

Senator CONROY—Yes, but you did not know when the election was when you wererushing your rhythms.

Mr G. Smith—Under the Charter of Budget Honesty Act, we are required to produce thepre-election fiscal outlook, from memory 15 days after the issue of the writs.

Senator CONROY—When did the Treasurer advise you of the date he wanted MYEFO?

Mr G. Smith—I do not recall. I honestly do not recall that.


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Senator CONROY—Does he write to you? Does he pick up the phone and say,‘Mr Smith, how are your rhythms?’

Mr G. Smith—I do not recall how I came to know the date.

Senator CONROY—Would you be able to take on notice when you were asked toproduce the MYEFO?

Mr G. Smith—It was our view that we should prepare for the contingencies of that period,so we did. We were ready. I am not sure everyone else was.

Senator CONROY—Would you take on notice when the Treasurer advised you that hewould like you to prepare MYEFO?

Mr G. Smith—I will take that on notice. I do not know that it is appropriate to provide theanswer, but I will find out.

Senator CONROY—Has MYEFO been held back just to avoid admitting the governmentwill be in deficit again this year?

Mr G. Smith—I think you should wait for MYEFO before you speculate, Senator.

Senator CONROY—How often does the Treasury update its forecasts or projections ofthe likely final budget position for the end of the financial year?

Mr G. Smith—The forecasting process for the budget position we only really publishtwice a year.

Senator CONROY—I was meaning the internals rather than your published ones.

Mr G. Smith—I think it is important to make this point about that process. It is probablyonly at the MYEFO and at the budget that we do it comprehensively. There is then a wholerange of adjustments made through the course of the year as events unfold and as variousthings become known to us, which might lead us to be able to give advice about those eventsand those changes, but they would not be comprehensive re-estimations. They are invariablyforced to be only partial.

Senator CONROY—Surely you have a process which is ongoing every few weeks or so. Iappreciate it would not be a major process.

Mr G. Smith—We provide advice on the fiscal and budget developments on a fairlycontinuous basis. Needless to say, the budget process itself requires that we produce advice onthe fiscal position as it evolves but it is not ever—

Senator CONROY—It would help you keep the rhythm, wouldn’t it, if it were a regular—

Mr G. Smith—This is a good word. I quite like it, so I will keep using it too.

Senator CONROY—I have taken a shine to it.

Mr G. Smith—Another word would be ‘cycle’. There is quite a clear cycle for the budgetprocess. It is partly driven by the sequence of events around the issuing of economic data andpartly driven by the production requirements of the various elements of the budget process.

Senator CONROY—When did you first inform the Treasurer that the budget was going tobe in deficit in the last financial year?

Mr G. Smith—Senator, you keep interpolating into your questions information that Icannot assist you with.

Senator CONROY—You wouldn’t like to clarify that, would you?


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Mr G. Smith—You just said something about the deficit. I do not know what you aretalking about.

Senator CONROY—The deficit in the last financial year. The budget was in deficit. Itfinished in deficit last year.

Mr G. Smith—Yes, it finished in deficit last year.

Senator CONROY—And when did you first tell the Treasurer it was going to be indeficit?

Mr G. Smith—The actual final budget outcome became known only after all of the workwas done in the post 30 June period. The FBO itself, of course, only becomes known inSeptember.

Senator CONROY—You had no idea we were plunging into deficit? Treasury had noidea?

Mr G. Smith—I would have to check one thing.

Senator CONROY—You just got up in June, July, August and suddenly found we were indeficit—whoops!

Mr G. Smith—With respect, Senator, the budget which was released early May—it mayhave been 11 or 13 May 2002—forecast an underlying cash balance for 2001-02 of minus$1.2 billion. That was published in the budget well before the end of the year. I cannot turn upthe final budget outcome relative to that cash estimate of minus $1.2 billion, but I think it was$1.1 billion. The final budget outcome which, as I say, was released in September was notmaterially different from the budget released four or five months previously.

Senator CONROY—The budget takes many months to prepare. You start preparing inDecember traditionally for a document that is released in May.

Mr G. Smith—Usually all that occurs in December is an initial budget strategy discussionand a broad ministerial look at things. That does not even happen every year; sometimes thatis deferred until January or February. There is no absolute certainty on that. But, yes, broadlythe government turns its mind to the budget typically after MYEFO, so either December orlate January, early February.

Senator CONROY—Do you regularly brief senior ministers on the state of the budget?

Mr G. Smith—The process of the budget these days—and this is just a matter of practiceby governments; there is nothing prescribed or mandated about this—is that usually a specificgroup of senior ministers oversee the formulation of budget policy and, of course, formthemselves into what is usually called the Expenditure Review Committee. It usually meets inthe February-March period and then later can sometimes form into a revenue purpose as well.That is fairly typical, but there is nothing mandated about that process. We would provide,with of course our colleagues in Finance, advice through that process.

Senator WATSON—I understand that the ATO still prepares estimates based on the ETMmethod, the Treasury on LTM, tax lodgment method, and both argue that each is inaccordance with the relevant accounting standard. I think the Auditor-General prefers ETM.You were a little bit worried in the past about the reliability, but you are working on it in thehope that you will get to a common standard. What progress has been made?

Mr G. Smith—If I could just correct you, Senator, it is not LTM; it is TLM.

Senator WATSON—TLM, sorry; tax lodgment method, yes.


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Mr G. Smith—It is actually tax liability method. The other method is the economictransactions method. ETM is the method that is preferred as the interpretation of theaccounting standards by the Auditor-General for the AAS 31 presentation of the budget. TheAuditor-General does not take a view or is not the authority for the presentation of the budgeton the GFS standard. There are two accounting standards, if you like, or financial reportingstandards: the government financial statistics and the Australian accounting standards. Thesetwo are quite different.

Because the rest of the world pretty much follows GFS, it is the actual national accountingstandard; it is the standard used by the statistician. Most countries follow that standard. Underthe GFS a range of approaches can be taken. Most countries simply use cash, which Australiaof course used until the introduction of accrual. When you introduce accrual there are eitherTLM or ETM options. The ETM standard is the appropriate one—there is no dispute aboutthat—for the AAS 31 presentation, and the tax office uses that quite sensibly andappropriately in providing agency accounts on an accounting standard basis and, of course,meets the requirements of the Auditor-General for its accounts.

However, budgets are prepared on TLM. It is not that the tax liability method is superiorfor financial reporting; it is superior for financial budgeting. That is the principal distinctionthat we need to make. For budget purposes you are looking forward and asking what mayhappen. ETM, by the way, is basically taking the expected tax collected in respect of theeconomic activity of a period, irrespective of when it is collected. TLM is based on the likelyactual lodgment of tax returns in a period, the likely debt raised in a period. That is thedifference.

Senator WATSON—It is essentially a timing difference.

Mr G. Smith—It is a timing difference, exactly, although you could get a differencebecause ETM will also require, of necessity—when you do budgets, not when you doreporting—estimates of the economic activity and its tax effect in the year ahead and in theforward years. We are one of only about three or four countries in the world actually usingaccrual accounting at all. None of them, to my knowledge, use ETM for budgets. Like theothers, we are using TLM, which is the actual estimate of what will be assessed in terms oftax liability in the year ahead. We also, of course, report separately the actual cash whichderives from those assessments and lodgments.

This is an issue about budgeting, not about financial reporting; it is not about reporting thepast but about reporting the budget for the future. At this stage we have preferred TLMbecause, particularly in the case of company tax, we find it much more difficult to estimatethe likely tax that may come from an economic period compared to the likely lodgment of taxreturns which, by and large, will be in respect of a prior period as we already know somethingmaterial about the economic events of that period. That gives us, we think, a more accuratebasis for making a budget estimate.

Moving from TLM to ETM for budget purposes essentially consists of the challenge ofbuilding our data and our understanding to the point where it would be reliable enough to useas a budget basis. That basically turns on things like settling down and developing clearlyestablished patterns under the new tax system of payments and of practices in the variousheads of revenue. We have significantly changed the business tax base and we havesignificantly changed the indirect tax base. These need to settle down, and a judgment willneed to be made at some point in the future about whether or not we shift to ETM from TLM.


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In the case of things like transaction based taxes—the GST, for example—we are probablyalready a long way there. I think the issue is really the company tax and other assessmentbased taxes. That is the difficult area. That is the short answer.

Senator WATSON—Thank you very much.

Senator CONROY—The short answer!

Senator WATSON—I can understand it if you are comparing budget figures with budgetfigures but a lot of people also compare the budget figures with the actual figures of whathappens. So there is going to be a difference, isn’t there?

Mr G. Smith—No, we present both. You will find both are presented. There is a consistentset of GFS results—they are the statistician based results as well—and there is a consistent setof financial reports from the tax office on accounting.

Senator WATSON—There is no problem with that, then?

Mr G. Smith—No. You have to make sure you do not swap from one to the other whenyou make your comparison.

Senator WATSON—That is right.

Senator CONROY—I think you said you start by giving your briefing to the seniorministers group in February-March. I do not think you brief the Treasurer—

Mr G. Smith—No, usually before March. It can be as early as December.

Senator CONROY—When did you start last year?

Mr G. Smith—I think it was into the new year, because of this post-election situation.

Senator CONROY—As well as the senior ministers, would you brief the Treasurer moreregularly than that?

Mr G. Smith—The Treasurer is one of the senior ministers, of course.

Senator CONROY—He is your minister?

Mr G. Smith—Yes.

Senator CONROY—Do you brief him more regularly than—

Mr G. Smith—We regularly advise the Treasurer.

Senator CONROY—When did you first become aware that the budget was likely to be indeficit, was in deficit or was going to be in deficit—any of the above?

Mr G. Smith—I would have to take that on notice. I really do not know. What you arereally asking is not whether I knew but whether there was advice at any time; when was thefirst advice indicating that that was a possible outcome. We do not settle the estimates untilApril, so formally it would not be much before the budget that the estimates are finallysettled. I do not usually finalise the estimates until April.

Senator CONROY—When you give this briefing to the senior ministers or the Treasurer,what do you say? Do you say, ‘Look, I’ve got no idea, Mr Costello. I don’t finalise theestimates until April. Don’t ask me till then’?

Mr G. Smith—No. We give them an ongoing advisory service.

Senator CONROY—When did the ongoing advisory service first work out we were goingto be in deficit?


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Mr G. Smith—I do not think it is appropriate for me to reveal the contents of any of thatadvice.

Senator CONROY—I have not asked you to reveal any advice; I have asked when.

Mr G. Smith—Yes, you did. You asked me to reveal an aspect of that advice. I am notwilling to provide any such answer.

Senator CONROY—When did you first become aware?

Mr G. Smith—I am not willing to reveal that either.

Senator CONROY—That is not advice.

Mr G. Smith—Yes, it is. It is what I use for advice. My awareness is, of course, the basisof my advice.

Senator CONROY—But I have not asked you when you passed it on; I have just askedwhen you become aware.

Mr G. Smith—I am not willing to tell you. I think that would be revealing policy advice.

Senator CONROY—Is there anything that you do that would not possibly be drawn intopolicy advice during the course of the day?

Mr G. Smith—I have given some extremely complete answers in the last few minuteswhich reveal that I am willing to provide answers where questions are appropriately askedand do not take me into territory that I am not required to attend.

Senator CONROY—Will you take on notice to give us a list of the areas on which you arewilling to answer questions in the future?

Mr G. Smith—No, I am not going to take that on notice.

Senator CONROY—If you could just break down which areas you consider youractivities fall into: ‘These are part of my ongoing daily work duties.’

Mr G. Smith—I can give the answer now. The answer is that I give answers in accordancewith the guidelines for official witnesses before parliamentary committees.

Senator CONROY—As you interpret them.

Mr G. Smith—I am entirely in the hands of the chairman.

Senator CONROY—At the budget session of estimates you promised on three separateoccasions that you would take on notice my request for an updated costing of the revenueimpacts of the Ralph business tax reforms. I do not think I have seen the answer comethrough. Is that consistent with your understanding?

Mr G. Smith—I do not have the details. As of two or three days ago, I was aware thatabout 20 questions had not been lodged. I do not know whether they have been lodged sincetwo days ago. But it is quite possible that you have not received them. They certainly werenot lodged as of a couple of days ago.

Senator CONROY—This was an undertaking you gave me three times.

Mr G. Smith—I undertook to take them on notice. As I advised the committee last time,we then provide draft answers that are required to be cleared by the minister—particularly theminister’s office—and, if they have not been answered, it is because they have not beencleared.

Senator CONROY—So they may be about to arrive?


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Mr G. Smith—I am not able to answer for the minister’s office.

Senator CONROY—Have you prepared them?

Mr G. Smith—We prepare draft answers to all questions we take on notice and we seekclearance of them. We prepare them within a month.

Senator CONROY—Minister, are you aware if any answers are likely to reach thecommittee to honour Mr Smith’s promise?

Senator Coonan—So far as I know, I do not have any in my office. But I will make aninquiry.

Senator CONROY—And you will make an inquiry to the Treasurer’s office?

Senator Coonan—Yes, I will make an inquiry.

Senator CONROY—I briefly turn to the issue of bracket creep, Mr Smith. We discussedthis issue last time as well, and you mentioned that Treasury has, from time to time, donesome calculations of the impact of bracket creep but declined to publish them. I think that iswhat you said. You mentioned last time that there tended to be differing versions of what theterm bracket creep actually meant in a technical sense. Perhaps you could help the committee:what does Treasury mean when it says ‘bracket creep’?

Mr G. Smith—Treasury does not have an authoritative position in relation to such acolloquial term—

Senator CONROY—It is immodest?

Mr G. Smith—But I am willing to assist you with a fairly common definition that could beused—although it still begs many questions about technical design—and that would be: theadditional revenue collected as a result of not adjusting tax thresholds proportionally withmovements in a price index.

Senator CONROY—Given that there has been a bit of an upsurge of interest in this matterrecently, I was wondering if Treasury had done any calculations on that subject.

Mr G. Smith—As I said, I think we do provide advice on questions of tax, including thosetypes of questions from time to time, but they are not published unless the Treasurer wishes topublish them. But we certainly do prepare—

Senator CONROY—Have you done any recently?

Mr G. Smith—We do them all the time.

Senator CONROY—How regularly is ‘all the time’? Weekly, fortnightly, monthly?

Mr G. Smith—I do not think there is any particular pattern, but we do them frequently. Ofcourse, people often raise these—

Senator CONROY—What does ‘all the time’ mean?

Mr G. Smith—As often as the issue seems to be relevant. In recent times there has beenquite a bit of publicity about this question, so, needless to say, we have provided advice on thequestion. The interest seems to come and go.

Senator CONROY—No; I think I made the point there has been a bit of an upsurge.

Mr G. Smith—Mostly, although not entirely, it is a reaction to developments that occur insociety.

Senator CONROY—I assume you have done some recently, given the upsurge in interest.


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Mr G. Smith—Yes.

Senator CONROY—Are you in a position to share with the committee the results of yourcalculations?

Mr G. Smith—No.

Senator CONROY—I have probably gone past the point where only Mr Smith can get aquestion, so ATO can come to the table as well.

CHAIR—As there are no more questions for Mr Smith, we will move on to ATO.

[9.16 p.m.]

Australian Taxation OfficeSenator JACINTA COLLINS—Mr Carmody, I spent earlier today with Family and

Community Services and Centrelink in relation to their side of the family tax benefitadministration issue. One of the problems we have in reaching some assessment is from thetax side. The most recent taxation statistics publication we have is for 1999-2000. To theextent you are able to help us with more recent statistics, we will be able to get somemeaningful combinations between the data from different aspects of the system.

Mr Carmody—Yes, Senator. Taxation statistics is a very comprehensive document andthere is a lead time to that. I do not know that we will have statistics readily available for youthis evening. We will do what we can and take what we can on notice.

Senator JACINTA COLLINS—Given the nature of the types of statistics I am asking for,I hope they will not necessarily take the full Treasury period of on notice questions either.

Mr Carmody—You will find our questions will be reasonably promptly responded to.

Senator SHERRY—Tax are a little better, Senator.

Senator JACINTA COLLINS—Thank you. I also want to go to the periods immediatelyprior to the implementation of family tax A and B, so some of the phraseology is going tochange over the period. I am trying to establish trend data for how many taxpayers obtainedfamily tax assistance payments through the tax system, basically from 1998-99 through to ascurrent as possible.

Mr Carmody—We will need to take the trend data on notice but the 2001-02 year wasslightly over 80,000 I understand.

Senator JACINTA COLLINS—Do you have the figure for the year prior to that?

Mr Carmody—I am sorry, I do not have the prior year data.

Senator JACINTA COLLINS—Fine. What was the total value of the benefit for thatyear?

Mr Carmody—The total paid through the tax system?

Senator JACINTA COLLINS—To those 80,000 people?

Mr Carmody—Slightly over $170 million, Senator.

Senator JACINTA COLLINS—Is that family tax A and B?

Mr Carmody—My chart says ‘entitlement’ so I can only assume it is B.

Mr Robinson—It is A and B.

Senator JACINTA COLLINS—In that figure?

Mr Carmody—Yes.


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Senator JACINTA COLLINS—One question I am unclear of from the 1999-2000publication is whether the figures there refer to people’s entitlement in a particular period orjust the amount that was paid in a particular period. As you would be aware, some peopleclaim outside of their entitlement period. We are trying to ascertain whether that would bereflected in the year in which their claim was processed or in the actual year to which theentitlement pertained.

Mr Carmody—What year was that, Senator?

Senator JACINTA COLLINS—It would vary from year to year.

Mr Carmody—I am sorry, I thought you referred to the taxation statistics publication.

Senator JACINTA COLLINS—In having a close look at the 1999-2000 publication it isnot clear to us whether the equivalent of the quantum you have just said—$170 million for themost recent period—relates to the amount paid to people who had an entitlement for thatperiod or the total amount paid to all people, whether it related to the entitlement for theperiod or an entitlement for a previous period.

Mr Robinson—The figure we have given was paid in financial year just ended for the yearbefore.

Senator JACINTA COLLINS—But does that reflect simply your payments or just yourpayments for that entitlement year?

Mr Robinson—It is the benefits paid through the tax system, through the tax return, thatrelates to that particular year. It is the entitlement for that tax year.

Senator JACINTA COLLINS—If I am a taxpayer who has put in a late return and I getpaid family tax A and B for the previous financial year, that figure would not be reflected inthat data?

Mr Carmody—Senator, we would need to check it but I suspect that refers to paymentsmade during the 2001-02 year, which you would expect to be—

Senator JACINTA COLLINS—Predominantly—

Mr Carmody—More than predominantly; the vast majority would be in respect of theprevious year. I will need to check. There may be some late returns, although the benefit onlycame in in the previous year. There might be some but it would be very small. I do notimagine there would be much difference in it, Senator.

Senator JACINTA COLLINS—Just for statistical purposes we are seeking to clarify if itis simply the payments the tax office has made regarding that benefit during that period.

Mr Carmody—I would say it is the payments made during that period.

Senator JACINTA COLLINS—That was my suspicion too, but if you could confirm thaton notice I would appreciate it.

Mr Carmody—If it is not, yes, I will do that.

Senator JACINTA COLLINS—Thank you. Going back to 1998-99 and appreciating thetransition between dependent spouse payments and family tax B, could you also incorporateinto that data I am seeking the dependent spouse with child rebate offset and the sole parentrebate? So that is the full gamut of family payments starting in that 1998-99 period through tocurrent, and appreciating the transitions that have occurred in different types of payments.

Mr Carmody—We will attempt to do what we can, but with transition it might be difficult.


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Senator JACINTA COLLINS—If there are some difficulties in terms of assumptionsabout double counting and that sort of thing, I would appreciate the information about that aswell.

Mr Carmody—Yes.

Senator JACINTA COLLINS—Can you tell me how many taxpayers’ income tax returnswere reduced as a result of overpayments in the years 2000-01 and 2001-02?

Mr Robinson—For the tax delivery part of it? Is that what you are asking?

Senator JACINTA COLLINS—Yes, people who had their tax returns reduced or madevoid because they had a family tax benefit debt.

Mr Robinson—This is the first year that we have been doing that.

Senator JACINTA COLLINS—You only have year to date figures. Is that right?

Mr Robinson—Yes, up until 8 November 2002. For debts returned to Centrelink it is160,000; 71,000 debts were partially offset.

Senator JACINTA COLLINS—Were there no debts fully offset?

Mr Robinson—It is the title of those. Sorry, partial and—

Mr Carmody—I suspect fully offset would be included in the partially offset because thatis probably the figure where we have done it without having to refer to Centrelink.

Senator JACINTA COLLINS—Just let me try and understand it and you can correct meif you think I am wrong. For 71,000 people, 160,000 has been returned to Centrelink orFACS.

Mr Carmody—We might take that on notice. We might even be able to give it to youtomorrow. We are just trying to interpret a chart that is not exactly clear. We will get that backto you as soon as we can. If we can get it tomorrow, we will.

Senator JACINTA COLLINS—Related to that is obviously how many taxpayersreceived a top-up in 2001-02. That would be probably year to date also in this case, withrespect to top-ups, unless they were applied earlier through the tax system.

Mr Robinson—For this year, as at 8 November, there were 116,440 top-ups, whichamounted to just over $100 million—$100.8 million, roughly speaking.

Senator JACINTA COLLINS—We have a bit of uncertainty about Family andCommunity Services and Centrelink. In your characterisation of that figure, does it includethose people who claim family tax benefit B, solely through the tax system?

Mr Robinson—We cannot distinguish between A and B in our figures. It is just family taxbenefit.

Senator JACINTA COLLINS—Let me see if you can help me with circumstances in partsimilar to my own. My only interface with the family tax benefit system is each year when Iput in my tax return, when I put in a claim for family tax B. Would a change in my return,because I claim tax B through the tax system, be characterised as a top-up?

Mr Robinson—Not claiming it. The top-up is if the estimate of the income and the benefitpaid through Centrelink—

Senator JACINTA COLLINS—Is adjusted?

Mr Robinson—Yes.


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Senator JACINTA COLLINS—Only if I have a payment through Centrelink is itadjusted?

Mr Robinson—Yes.

Senator JACINTA COLLINS—Can you advise what steps the ATO has taken to improvethe administration of family tax benefit since its introduction?

Mr Robinson—Overall it has been an education campaign. We have made informationavailable to tax agents through the Tax Agents Portal. We have put a process in there so thatthey can check to see if one of their clients has received full benefit for the year. It is a virtualoffice, if you like, with the Family Assistance Office, with Centrelink, Health InsuranceCommission and FACS. We provide feedback and participate in the general management.Overall there has been education. There are forms and publications that we provide and anexplanation of them; an inquiry service and a publication of the number with that; training ofstaff. We have put things like a calculator and more explanations on the web site so thatpeople can have access to information and be more informed.

Senator JACINTA COLLINS—Let me give you a different type of problem related toperhaps the implementation of the system. When I thought, fairly late in the process, to lodgemy family tax benefit B claim, my accountant still had a software package that was notworking and so was unable to file my tax claim with my family tax B claim at the same time.I understand that problem has since been rectified, but that was a major program, a MYOBprogram. I am interested in how some of the software difficulties are going. Have they allbeen resolved now?

Mr Robinson—The software is provided by private firms.

Senator JACINTA COLLINS—That is right.

Mr Robinson—What we do is brief the firms who prepare packages—which is not onlyfor family tax benefits, but the electronic lodgment of tax returns—but they develop andprovide the product. It is up to these private firms to correct them. When we receive advicethat they are not working properly through, say, our inquiry services, we pass on that advice.In the main the software is not provided by the ATO. It is provided by private firms.

Senator JACINTA COLLINS—I appreciate that, but it is still a significant problem in theadministration of a system if the large majority of people who file their tax returns throughaccountants or agents are unable to process a family tax benefit B claim because, regardless ofwhether it is private or not, the software to achieve that method of processing is not online.

Mr Carmody—We understand that these are private sector packages provided by firms,but we recognise the point that you have made, that they are an integral part of the system. Ata more general level, as has been mentioned by Mr Robinson, we do provide feedbackdirectly to software providers. If we get evidence that there is a problem we work with themvery closely. We have, over the last year, spent a lot more time working with them andensuring that we meet their deadlines for information. We do the best we possibly can toachieve that. Even though we recognise that they are private sector firms, we try and workwith them as closely as possible where there are problems to ensure that they get therequirements in time to meet their deadlines.

Senator JACINTA COLLINS—I would class that as a example of a fairly significantimplementation problem. Have there been others?

Mr Carmody—Before accepting that I would need to check just how significant it was. Iam not aware that it was all that significant. We might have seen some instances, but it is


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certainly not clear to me that it was a major problem. One of the issues for tax agents is inunderstanding, when their clients come in, whether or not they have actually claimed itthrough the direct payment system through Centrelink. As a result of that—as Mr Robinsonsuggested—we have made information available through a web site for individual agentsaccording to their clients. They have access to client listings. We have made that availablerecently so that they are able to check whether their client has received benefits directlythrough the system.

There have been some teething issues, particularly for agents in understanding their clientsand in ensuring that they are not double claiming. We have worked closely to provide that sortof information and that is probably the extent of the issues we have had to deal with.

Senator JACINTA COLLINS—My own personal inquiries with the tax office were quitefruitful. In fact, if anything the advice I received, once then referred to Centrelink, was farmore timely than had been anticipated even by the tax office, which is probably more of acompliment to Centrelink in that case.

Mr Carmody—We work in close partnership.

Senator JACINTA COLLINS—How many families attempted to claim family tax benefitor child care benefit entitlements for the 2000-01 year but lodged their return beyond the June2002 deadline under the family assistance legislation? You may need to take that on notice.

Mr Carmody—I do not think we have details. I can say that we put a fair bit of effort intoadvising agents, through a series of seminars and advices, of the need to lodge returns by30 June.

Senator JACINTA COLLINS—Is that something that you could look at on notice?

Mr Carmody—We will take it on notice, to the extent that we can. It may be, though, thatwe do not know. We could only tell you what returns might have been lodged between30 June and now. If it is possible, we will get that to you.

Senator JACINTA COLLINS—When you do that, could you look also at the value thatthese families would have been entitled to but for the fact that they hit that deadline?

Mr Carmody—If people who did not meet the deadline put in claims, then we will be ableto provide that, but we clearly need to take that on notice.

Senator JACINTA COLLINS—Another issue that was canvassed—

Mr Carmody—Sorry, Senator. I have just been informed that there may be difficulties inidentifying particular amounts because we do not process the claims, but we will check theinformation that is available to us and make that available to you.

Senator JACINTA COLLINS—As I understand it, the claim would still be processed butthe people would lose any potential top-up that they might have been entitled to once theyhave hit that deadline.

Mr Robinson—That is the people claiming for direct payment system through Centrelink,when they do that reconciliation. The top-up is gone after the year. If there is a debt, that canstill exist.

Senator JACINTA COLLINS—Yes. I am interested in what people might have sought toclaim through tax rather than direct payment and have lost the opportunity to receive a top-upbecause they have come in after the deadline.


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Mr Carmody—We will take that on notice. But I think if it is not a Centrelink based claimin respect of which there is a top-up because of a change in income, if they lodge it directlythrough the tax system, then they lose their entitlement.

Senator JACINTA COLLINS—That is what they have lost: whatever top-up they mayhave been entitled to.

Mr Carmody—We will try and get figures of the entitlements, whether for a top-up or forthe family tax benefit, if we have it in our systems.

Senator JACINTA COLLINS—In relation to the extensions that the ATO would grant topeople with respect to lodging their returns, how many taxpayers that are involved in thefamily tax benefit system would that be affecting?

Mr Carmody—I am not sure I can tell you that. As I mentioned, because we were awareof this situation, we spent a fair bit of effort advising tax agents to ensure that, if they havefamily tax benefit clients, they lodge returns by 30 June. We did that through seminars, adviceand other things. The only information that we could provide is if people did not, in fact,follow that and lodged, and still attempted to claim the family tax benefit. Then it is aquestion of whether our systems have maintained a record of that. I think that goes back toyour previous question and we have taken that on notice to see if we can provide you with anyinformation.

Senator JACINTA COLLINS—The ATO does grant extensions for some people, doesn’tit?

Mr Carmody—We do for income tax purposes.

Senator JACINTA COLLINS—In a case where you grant an extension to somebody andit later develops that they had a family tax benefit component to their circumstances, wouldthe cut-off that applies in the family assistance legislation still apply?

Mr Carmody—It still applies, irrespective of the extension, because they are differentsystems. One is a benefit provision. It is not our legislation but there is an attempt to provideequivalent results, be it through the tax system or through direct payment, so the 30 Junecut-off is one that is consistently applied for direct benefits and is, therefore, applied to claimsin the tax system. For income tax purposes, separate from the provision of family tax benefits,yes, there is an ability to obtain an extension of time for lodgment. If you do that, it does nothelp you in respect of the family tax benefit cover.

Senator JACINTA COLLINS—Has that point been absorbed into the advice given topeople when they might seek an exemption?

Mr Carmody—I am not sure whether individually, when they approached us for anextension, we would have said that. We have certainly advised all agents on a number ofoccasions of the clear cut-off date for family tax benefits.

Senator JACINTA COLLINS—If that inconsistency between those two systems is notgoing to be resolved, then on a long-term basis would it not perhaps be sensible to incorporatethat point quite clearly into your automatic advice to tax agents or others that might beseeking exemptions?

Mr Carmody—We will certainly look at that. As I said, we believe we have provided, onnumerous occasions, information to tax agents to prepare them to understand that they need tolodge those returns by 30 June. But I will take on board your suggestion.


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Senator JACINTA COLLINS—That probably works if they have their family tax benefitcap on but when they move over to their other cap—‘I’ve got to help someone with anexemption’ cap—the information may not automatically translate across.

Mr Carmody—I think agents are well aware of the family tax benefit provisions throughthe tax system and what it means for them now. They have certainly raised it with us onenough occasions.

Senator JACINTA COLLINS—That concludes my questions. Thank you.

Senator WATSON—There are two major concerns from the very small tax agents with thedelivery time of stationery of 17 June and the timing of the tax practitioners seminars for4 July. Given that many returns are prepared pre 30 June, the timing of both have caused agreat deal of inconvenience. Can the committee have an assurance that the tax office willbring forward both events for next year, 2003, because they are just too late?

Mr Carmody—In relation to stationery, I do not know of any significant problems thisyear in getting stationery out.

Senator WATSON—It was 17 June.

Mr Carmody—I was saying that from our perspective there was nothing that held updistribution of stationery. I would need to take that on board and discuss it with agents,because as far as the seminars go my recollection is that the timing of those was very muchdone in conjunction with agents. There is an issue for them of getting through the year—theytend to be wrapping up their year—before they turn their minds to the new tax year. Myunderstanding is that we did a lot of consultation on the timing of those. In fact, we hadanother satellite seminar this morning, covering a further range of people, and the attendanceat these seminars has been higher this year than they have ever been. I understand that this hasbeen raised with you.

Senator WATSON—It is not the concept of the seminars.

Mr Carmody—No, I understand that.

Senator WATSON—It is the timing of the seminars.

Mr Carmody—I understand. I am saying, Senator, that my understanding is that thetiming was done, as much as possible, according to what the agents were telling us was anappropriate timing for them. It might be that individual agents have different practices. I willcertainly take it on board and we will consult further with agents and provide the seminars atthe time that is best for them.

Senator WATSON—I have been told that many public accountants who use the HandiSoftprogram have a problem when the client wishes to cease being a GST payer—for example,when selling a business or earning under $50,000. Is it correct that the tax agent must requesta paper cancellation rather than an electronic cancellation?

Mr Carmody—I will have to take that on notice. I am not sure.

Senator WATSON—It seems unusual, if that is the case.

Mr Carmody—Yes.

Senator WATSON—Similarly, when a BAS is amended, then that amended statement is apaper return and not an electronically lodged return. Again, that seems a bit unusual.

Mr Carmody—I am sure we will be able to give advice tomorrow. My expert has just leftbecause of the earlier advice and the questions.


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Senator WATSON—Clients who fail to lodge a GST return, for example because theyhave a series of nil returns, are being fined $550 for failure to lodge on time. However, if aperson has a nil income tax return, unless there is a specific order to lodge, there is a nilpenalty.

Mr Carmody—Yes.

Senator WATSON—Given that the ATO had such a long period before it made up itsmind what it was going to do or it gave a long amnesty, whichever way you look at it, interms of imposing the penalties, in the past few weeks people have suddenly received a lot ofincome tax assessments in terms of the GST, with many periods of multiples of $550. Theymight only have a GST liability in terms of one quarter and no GST liability in terms of threeother quarters, and yet they have been penalised for $550 each.

Mr Carmody—We made up our mind from the start. You would understand that this wasquite a calculated program of assistance and gradually changing the balance, including onpenalties. It was not that we had not made up our mind as to how we would apply penalties.

Senator WATSON—The imposition of the penalties suddenly came nearly two years afterthe event. Consequently, people were still putting in nil returns because of a nil income.

Mr Carmody—We made our penalty policy quite clear. We said that we would not apply itvery broadly based, that initially we would give people the benefit of the doubt. As of the startof this year we have made a number of public statements indicating that we were slowlychanging the balance of our approaches, including our approaches to penalties, so there waspublic information. That was a predetermined program. Secondly, it is not my understandingthat for nil returns you would get a penalty.

Senator WATSON—You do. That is my problem.

Mr Carmody—If there were debit returns lodged previously, we might have imposed apenalty because they had not lodged their activity statement. If they then lodged it and it wasa nil return, they would be entitled to request a remission.

Senator WATSON—They did not lodge it because they did not have any GST income.

Mr Carmody—We have made it very clear in all our advice on lodgment dates that if it isnil return and you still want to be part of the system—you are entitled if you are under thethreshold to withdraw from the system, and we have done a number of programs invitingpeople to consider whether they want to stay in the system—you have to lodge an activitystatement, even if it is nil, because how do we know that it should be nil?

Senator WATSON—These people have not individually been returned. I think you havesent pieces of paper around which do not mean much to a lot of hillbillies.

Mr Carmody—I am sure they do not feel they are hillbillies, Senator.

Senator WATSON—A lot of tax clients probably do fall into that category. Unless it isindividually addressed, you have a problem or you are required to do this, they are probablyrelegated to the bin.

Mr Carmody—I will confirm this, but I am quite clear that we have made it clear that ifyou are still in the system you need to lodge, even though you have a nil return. If it is a nilreturn, and we understand they have had a history of nil returns, we would not normallyimpose penalty, but if they have had debit returns and we do not know they have moved to anil return, then it is possible that we would have applied penalty before they lodged it. If theylodge a nil return, they should seek a remission of that penalty. I will confirm that policy foryou.


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Senator WATSON—I think it is really the nature of your advice. It is not personal enough.That is the problem.

Mr Carmody—We do provide them with a kit each time we send out their activitystatements. I am sure it would say on that that if it is a nil return you still need to lodge, but Iwill follow that up.

Senator JACINTA COLLINS—Going back to that earlier data that you undertook to seewhat you could provide to me, can I ask in relation to those years since 1998-99 that you lookat the current year to date as well.

Mr Carmody—We will.

Senator WATSON—To have $550 for a BAS vis-a-vis a nil return for income tax seems tobe inconsistent.

Mr Carmody—It is graduated according to level; $550 is only for larger taxpayers.

Senator WATSON—No, this is for a nil return.

Mr Carmody—If they got $550, they must have been a large taxpayer last return and all ofa sudden become a nil. But it is graduated according to size. It starts at $110, I think, forlow-level activity statements.

Senator WATSON—People are complaining about the difference between the relativelyhigh penalty for a BAS vis-a-vis a nil return for income tax.

Mr Carmody—Yes, but if they are both nil returns, a penalty would not normally beapplied in either case.

CHAIR—We will suspend the examination of the Australian Taxation Office at this pointand ask you to return tomorrow.

[9.59 p.m.]

Australian Prudential Regulation AuthorityACTING CHAIR (Senator Watson)—Do you want to make an opening statement?

Mr Thompson—I did want to make an opening statement, but in the interests of time I amhappy to table it.

Senator CONROY—What is it in relation to?

Mr Thompson—It touches on a few issues this committee has had an interest in duringprevious hearings.

ACTING CHAIR—We had better hear it then.

Mr Thompson—I am happy to do that. Given time constraints, I do not want to take uptime unnecessarily.

Senator CONROY—I was just wondering if you were going to say that you cannotanswer questions on the HIH Royal Commission, for instance, if that was something you weregoing to say in there.

Mr Thompson—That would still be our position while the royal commission is stillrunning and before APRA’s closing submissions have been completed.

Senator CONROY—If that was all—

Mr Thompson—That was not the only thing—

Senator CONROY—How many hours have you spent in the box?


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Mr Thompson—I had about four.

Senator CONROY—Other officials?

Mr Thompson—We had four days altogether.

ACTING CHAIR—Can we receive your statement electronically?

Mr Thompson—You will receive it first thing tomorrow morning electronically.

ACTING CHAIR—I think it should be in the Hansard.

Senator CONROY—I think Mr Thompson has indicated there are some issues he wants toupdate us on that we continually ask him about. We might like to read it now; it might save usasking some questions.

ACTING CHAIR—So you wish it to be read out?

Senator CONROY—No. I am happy for him to hand it over; for it to be photocopied andgiven to us.

ACTING CHAIR—Then it will not go inn the Hansard record.

Senator CONROY—Okay.

ACTING CHAIR—What is the wish of the committee?

Senator CONROY—Let’s just get going.

ACTING CHAIR—Can you send it to us electronically and give us a synopsis now?

Mr Thompson—I am happy to do that. I am just conscious of the time.

ACTING CHAIR—Okay.

Mr Thompson—I will give a brief version. Thank you for the opportunity. I just want tocomment briefly on a couple of key events since we last appeared in front of the committee;in particular, some issues this committee has had an interest in. The first thing to note is thatwe did complete the very large project of considering, and in some cases declining,applications for relicensing of all general insurance companies in the first half of this year intime for the introduction of the new prudential regime that became effective on 1 July. As aresult of that process we now have a regulatory regime for the general insurance industrywhich is much stronger, much more adaptable and tougher than the one we were working withpreviously.

On the question of superannuation, we served, as you know, on the government’sSuperannuation Working Group looking into ways of improving the safety of super. We verymuch welcome the outcomes of that process. In particular we believe the proposal for theuniversal licensing of superannuation funds by APRA and the requirement for trustees toprepare and submit a risk management plan will greatly enhance the effectiveness of oursupervision going forward. In parallel with that reform program we are working towards asubstantially more useful statistical collection from superannuation funds. It is another issuethis committee has had an interest in on previous occasions. We are consulting with industryin the lead-up to the introduction of that new statistical collection in the middle of next year.

Over the past couple of years we did set ourselves a task of improving the superannuationsector’s very poor record of lodging annual returns on time. We can report very good progresson that project. By 1 November this year 82 per cent of expected returns had been lodged,which compares with 72 per cent at the same time last year and only 17 per cent the yearbefore that.


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One particular superannuation fund we have talked about a good deal here in the past isCommercial Nominees Australia. We have now briefed the Director of Public Prosecutions toadvise on any available criminal prosecutions arising out of information in the inspector’sreport into CNA. We have initiated our own processes that may lead to the disqualification offormer directors of CNA on the grounds of their not being fit and proper to continue to act astrustees of superannuation funds. We have also sought and are assessing counsel’s opinion onthe recovery options, costs and prospects associated with pursuing recovery from formertrustees. The Holder matter we have discussed here previously as well. It concerns anex-CNA director believed to have fled to South America to escape creditors.

Senator CONROY—He is the most famous trustee in the world.

Mr Thompson—We think he is a real person and not a mythical character. We havereferred that case to the Federal Police for their pursuit. As I am sure you are aware, we arecontinuing to work with the acting trustee on compensation applications under the SI(S) Act.Of these compensation claims, four have already been determined by the minister, involvingaround $19½ million. Another five of those compensation claims are under consideration atthe present time.

We have continued to build our resources over the past year. Our staff numbers arepresently around 435, compared with an average 407 through the last financial year.Significantly we have been successful in adding several people with substantial industryexperience to our senior ranks. We still do have some sort of problem with staff turnover; itremains higher than is comfortable, with many of our junior staff still being attractive to theprivate financial sector and subject to poaching.

As part of building our resources we have created a new insurance risk team in ourconsulting group. As well as adding to our core supervisory strength, we have established aquality assurance and consistency unit to help ensure that our processes are on a par with bestpractice. Our budgeted operating expenditure this year is just over $60 million, comparedwith $56 million last year. Costs associated with the HIH Royal Commission, on which wehave spent a good deal of time over the past few months, are additional to those costs andthey are being funded separately, not out of the levy revenue we collect from regulatedindustry.

There was a reference in our annual report to a benchmarking survey. This is a project wecommenced to assess the appropriate level of our resources going forward. We commenced astudy to look into that. We expect to be discussing the results with government early nextyear. We have also continued to work on a project this committee has shown an interest in atprevious hearings, which is a stocktake of our present supervisory powers, particularly ourenforcement powers. The objective there is to identify gaps and unnecessary inconsistenciesacross the various industry groups we are responsible for regulating. We expect to have theresults of that stocktake for discussion with government also early in the new year.

Just summing up very broadly on the state of the Australian financial system, which isbasically what we are about looking after, that financial system is in reasonably good shape. Itdoes not mean that there are not some issues around for our attention. You may have noticedwe recently flagged some concerns about deposit takers’ exposure to the residential propertymarket. We are monitoring those exposures very closely. As we have already indicated, weare keen to improve our grip on weaknesses in the superannuation sector. We are intending todevote additional resources to the life insurance sector where some Australian companies arebeing affected not so much by misadventures in this market but by weaknesses in insurancemarkets offshore.


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In a nutshell, by most international standards the Australian financial system’s health ratesvery well. That is the very short version of my opening remarks.

Senator SHERRY—You mentioned resourcing staffing. What is the position withactuarial staff?

Mr Thompson—We have recruited more actuaries in the past couple of years. There arefour or five qualified actuaries on the staff now.

Mr Senthamangalam—We have recruited two very high-level senior actuaries. One iscurrently the President of the Institute of Actuaries; another a senior partner from MercerConsulting. We also have a number of people who are progressing to actuarial exams atvarious stages. Apart from them we have actuarial staff in front-line supervision as well.

Senator SHERRY—What is the number of actuarial staff and the number who arestudying to be actuarial staff?

Dr Roberts—Five fully qualified, although Tom Karp would not primarily be working asan actuary, and a couple of students.

Senator SHERRY—The APRA Super Trends publication contains information on theoperating expenses of superannuation funds. I asked about this in some detail on the lastoccasion and you provided me with some answers to the publication of information on fees,charges and commissions. Thank you for that response. Could you explain how the data iscollected and what fees and expenses are included and excluded from the current definition of‘fund expenses’?

Mr Littrell—As to how they are collected, as of 30 June we converted to a new on-linecollection system from the past paper and the diskette based system. That does not change theforms themselves, but it does make them more accurate. As to the question of which fees andexpenses we collect, we collect the net returns of the funds. For those funds that are investingtheir own assets, we collect the fees and expenses they incur directly. However, for thosefunds that are investing through funds managers—third parties—we only get their fundmanager returns net of the fees paid. We do estimate that for some of our research work but,in our next generation of forms, we are planning on collecting much more extensiveinformation on that point.

Senator SHERRY—What do you intend to do with that information? Do you intend toregularly publish it?

Mr Littrell—There will be an extensive consultation cycle with the public as to what getspublished. Our intent is certainly to publish at the industry level and to break it up bysubindustry level—for example, public offer, corporate and whatever. That will start to rollout from 2004.

Senator SHERRY—Not any earlier?

Mr Littrell—We will continue to publish what we have published in the past. In terms ofthe more detailed next generation forms, that will start being collected from 1 July 2003, butthe first full year of results will not be until mid-2004.

Senator SHERRY—When you say it will be published in July 2004, will that relate to theyear 2003-04?

Mr Littrell—Our intent is to continue publishing the sorts of figures we publish now,albeit with more accurate numbers. Our intent from the June 2004 year is to collect moredetailed data on many areas of super, but including fees and expenses. That will be publisheda few months after July 2004.


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Senator WATSON—As a series of figures?

Mr Littrell—That is still subject to consultation. It will doubtless be a series, but we willbe doing one-off work as well.

Senator SHERRY—Some people prefer, for example, information as to the charges asthey affect the decision making of a member; in other words, those fees that directly impacton that particular cost, whether it be $78 a year, $54 a year or whatever it might be, asopposed to a manager’s fee for managing the portfolio, which tends to get absorbed in the netfigure returned to the various trustees. You have not made up your mind?

Mr Littrell—It is not only us. Under the statute, we are required to consult with theindustry and the public, so we will be taking their feedback as well.

Senator SHERRY—I am glad you added that last bit about the public, because I thinkthere is a different view between industry’s requirements and those of the public, particularlythe consumers’ and consumer organisations’ fears. You will be consulting with consumerorganisations?

Mr Littrell—Yes, we will.

Senator SHERRY—The position of commissions paid: is that data collected in any format the present time?

Mr Littrell—Sorry, are we still on superannuation?


Mr Littrell—You are speaking of financial adviser commissions?

Senator SHERRY—Advisers’ commissions, yes.

Mr Littrell—Those are external to the fund and, on our current collections, they are notpicked up. We are looking at how we might include those in the next generation.

Senator SHERRY—I would certainly urge you to in the next generation.

Mr Littrell—This is the 2004 generation of forms.

Senator SHERRY—Mr Littrell, you gave an interview to the Australian Financial Reviewpublished on 2 November , when you said:... we have in -house research we’ll be releasing shortly showing that, in the case of the larger funds, agreat many seem to get by comfortably on three quarters of 1 per cent expense ratio. There are othersthat require one-and-three-quarters. Some require two-and-three-quarters, some require more than three.There’s no obvious reason for that.

That is an accurate quote, isn’t it?

Mr Littrell—As I recall it, yes.

Senator SHERRY—When will you be publishing that research?

Mr Littrell—That research is in a working paper. I have seen the draft of it. They are inthe process of going through the fine detail of conforming their econometric workings, whichwill probably take another month. Then it will be released, or so I am expecting, beforeChristmas.

Senator SHERRY—Why do you believe that there is such a variation between differentfunds, which you referred to in your comments?

Mr Littrell—That is one of the bases of the research. We plan on asking a few of the fundswith larger fees as a proportion of their assets why they are in that category. One reason that


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shines out quite strongly in the data that we have is average member balance. There is astrong inverse connection between average member balance and fee as a percentage of fund.There is relatively little indication that fees change by fund size. In this particular survey, weare looking at funds over $60 million, so we are not talking about the smaller funds wherethere are different expense drivers. From $60 million up to about $10 billion, there is somesize effect, but it is not huge. There is a type effect. For example, corporate funds—many ofwhich have highly advantageous servicing arrangements with their corporate sponsors—tendto be the cheapest, in terms of our current reporting. The public sector and the industry fundstend to be in the middle, and the public offer tend to be the most expensive.

Senator SHERRY—Is there any relationship between fees and returns?

Mr Littrell—Yes. I would add a third factor as well, which is volatility. It is possible tohave a low-return fund, but you need to work out if it is a low or high investment risk fundtoo before you make an assessment. Again, speaking about funds that are already fairlylarge—over $60 million in this particular research sample—there is little relationship betweenfees and returns. Quoting from memory here, I think the correlation was negative 0.14, whichindicates in fact that the greater the fee, the lower the return. Having said that, 0.14 is notanything to write home about and that is the net position. So of course the bigger the fee, thelower the return. When we split into three dimensions, including volatility, it is not obviousthat there is a group that is particularly strongly better or worse than any other group.

Senator SHERRY—How long have you been with APRA, Mr Littrell?

Mr Littrell—Since March.

Senator SHERRY—Where did you come from?

Mr Littrell—Wollongong.

Senator SHERRY—What were you doing in Wollongong?

Mr Littrell—I was an agribusiness venture capital investor, as a private citizen. Beforethat, I was with Westpac for many years.

Senator SHERRY—I look forward to reading that research. It sounds excellent. Furtheron in the interview, you said:

The other issue is the fees and expenses for that service, which is investment and administrationservices, and advice to some extent—is that a fair fee? ... is 3 per cent per annum fair? I’d find it verydifficult to be persuaded that that would be a fair number. Is 2 per cent fair? That’s a big ask. Is 1per cent fair? Probably.

That is an accurate quote?

Mr Littrell—Yes, it is.

Senator SHERRY—It seems to me you are indicating that, where fees of two per cent,three per cent or more exist, they are unfair—excessive?

Mr Littrell—Sorry, I am indicating there that those would be the funds of whom we wouldask, ‘Why are you apparently out of line?’ I expect that, in some of those cases, we will findthat there are operational issues. For example, if they run a great many very small accounts,that would be a legitimate reason why they would have a high fee as a proportion of theirasset base.

Senator SHERRY—Can I just remind you what you said?

Mr Littrell—Yes.


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Senator SHERRY—You said, ‘Is three per cent per annum fair? I would find it verydifficult to be persuaded that that would be a fair number. Is two per cent fair? That is a bigask.’ My understanding of ‘a big ask’ is that it is a criticism.

Mr Littrell—Yes. Our starting position on a fee above three per cent means that you wouldhave to have a fairly strong and somewhat unique reason to justify that sort of level as a fairfee. When you get to two per cent we expect that we will see some funds that can stand upand say, ‘Yes, our average member balance is much lower than the average number,’ and youwill start to see why that is the case. In other cases it is just a big fee and may well get inthere. I should note here that we are the statistical collector for the regulated financial sectorbut, when we are getting into issues of disclosure and fairness, as long as they are meetingtheir promise to the fund member, that is more the APRA issue. When we look at this, welook at these as not so much as, ‘Is it fair, or is it not fair?’ but as large fees tending to indicatethat we should pay more attention to those people on a supervisory basis.

Senator SHERRY—It is you who used the term ‘fair’.

Mr Littrell—Yes.

Senator SHERRY—You posed the hypothetical at each level, including indicating thatthey were not fair.

Mr Littrell—That they would require more justification. They are clearly higher thanaverage. Whether they are fair or not, we would have to do more research.

Senator SHERRY—You do say you would find it difficult to be persuaded that that wouldbe a fair number in respect of three per cent.

Mr Littrell—Yes. There are a few large funds that charge three per cent. I cannotremember off the top of my head how many, but there are not very many as a proportion ofthe total.

Senator SHERRY—You said in your initial comment that I quoted, ‘and advice to someextent’. I take it that your comments did not necessarily—when you were going three, two,one—include commissions for advice.

Mr Littrell—We do not collect that data. This was the MER, if you will—the annualoperating costs of the fund.

Senator SHERRY—I just wanted to be clear whether commissions for advice wereincluded in that critique.

Mr Littrell—No.

Senator SHERRY—You are gathering this data. When will it be available? Are you doingsome sort of report?

Mr Littrell—This is the same study I mentioned before.

Senator SHERRY—So it is a composite study.

Mr Littrell—Yes.

Senator SHERRY—Is APRA developing any proposed regulatory approach in the area offees?

Mr Littrell—The regulatory approach is based on government’s announced policy, whichis that we intend, in conjunction with ASIC, to build a more sophisticated collection systemon essentially all the frictional drags between what the member puts in and what they get out.I anticipate that that data will largely be turned over to ASIC for their use when we get into


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the issue of fairness. It is one of many signals we use to identify those funds where we need tolook at the trustees harder, on the basis they might not have the members’ best interests atheart, but it is not the sole or even the most important supervisory issue that we wouldconsider.

Senator SHERRY—No, I understand that. Are you collecting entry and exit fee data aswell?

Mr Littrell—I would have to check on that.

Senator SHERRY—Could you let me know on notice.

Mr Littrell—Okay.

Senator SHERRY—I do have a couple more questions but I know that Senator Conroywould like to ask you some questions also. So I would just say congratulations.

Mr Littrell—Thank you.

Senator SHERRY—It is one of the best projects I have seen come out of APRA in a long,long time.

Mr Littrell—We have high hopes for it.

Senator SHERRY—Good, that is excellent.

Senator CONROY—I want to talk about a press release that Senator Coonan issued on29 October. I want to ask some questions regarding the review of financial sector levies whichwere announced by the minister. Did APRA suggest to the minister that such a review beconducted?

Mr Thompson—No, I think Minister Hockey gave a commitment a couple of years ago toa comprehensive review of the levy arrangements at around about this time. When the levyarrangements fully came into effect for the 1999-2000 financial year industry raised someissues which led to a mini-review and some modifications, I believe early in 2000 or perhapsin 2001.

Senator CONROY—Yes. I remember relatively recently we had a discussion about it. Weonly see each other every three or four months, but I remember a discussion not that long ago.

Mr Thompson—I am not sure if that was in early 2000 or 2001. Probably it was in early2000, but at that time Minister Hockey undertook that there would be a more comprehensivereview of the levy arrangements in two to three years time.

Senator CONROY—Like yourself, it does not seem like it was two to three years. WasAPRA consulted on the terms of reference?

Mr Thompson—Yes.

Senator CONROY—Is APRA seeking more funds, a new way of calculating levies, orboth?

Mr Thompson—We have not formulated a budget submission or request for next financialyear. The benchmarking study that I referred to earlier will be an input to that. There are someaspects of the current levy arrangement which we certainly think should be looked at afresh—for instance, where the current minimum and maximum amounts are set. There are somedifficulties for us in cost allocation and some other aspects in the fact that the levyarrangements are based on a separate levy rate and a separate minimum and maximum foreach of the industry sectors, whereas a lot of the things that we do now and the way that we


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are organised goes across industry sectors rather than being organised on a solo basis. It iscertainly sensible for that industry basis of collection to be reviewed.

Senator Coonan—Senator Conroy, I think it is fair to say that the review is very muchfocused on arrangements for the determination of the levies, not necessarily the amountraised.

Mr Thompson—Yes, it is the arrangements for raising whatever the amount is.

Senator CONROY—If you do not apply for all the amount that is raised, what happens toit?

Mr Thompson—We feed an estimate of a budget figure into the process and then a set oflevy parameters is determined by the minister each year, calculated in conjunction withestimates of industry assets to raise that amount of funding.

Senator CONROY—I am naturally assuming that you would end up with 100 per cent ofthe money raised from the levy.

Mr Thompson—Some of it goes to ASIC and some of it goes to the tax office. I think inround terms the total amount being collected is in the order of $75 million and about$62 million of that comes to—

Senator CONROY—None of it goes to consolidated revenue, though.

Mr Thompson—That is correct.

Senator WATSON—You made a good profit last year, though, of several million, didn’tyou?

Mr Thompson—We might overspend or underspend in a particular year. If we collectsignificantly more than is required because of perhaps poor estimate of industry asset growth,then that overcollection would be taken into account in the setting of the levy rates for thefollowing year. We aim to have a level of reserves on our balance sheet but not a—

Senator CONROY—Don’t tell the department of finance that. They will come for you.Finance are hunting hollow logs. Have you been reading the papers?

Mr Thompson—No, these are not hollow; they are very clearly displayed in our balancesheet. Our objective is, as I said, to have a level of reserves for emergencies in our balancesheet, but we do not set out to make a profit and we do not set out to make loss.

Senator CONROY—From whom will you be seeking submissions? In the press release itsays you will be seeking submissions.

Mr Thompson—That process is being managed by Treasury, as I understand it. I think themajor industry and consumer groups have been invited to provide a submission, and theintention then is that we will work with Treasury on an issues paper that takes into accountthose submissions before another round of public consultation.

Senator CONROY—Is there any chance that members of the public will be invited, likethe Senate invites people, ordinary punters, to put in?

Mr Thompson—I do not think the general public is being invited in this first round butcertainly in the second round, when the issues paper is published, anyone with an interest willbe able to provide input.

Senator CONROY—Will the submissions be made public?

Mr Thompson—I do not see why not.


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Senator CONROY—If they are not going to be, could you let us know? I cannot see anyreason either, but just in case.

Mr Thompson—Sure. They are submissions from industry groups. It is really up to themas to whether they make them public.

Senator CONROY—Sometimes they are very shy and bashful.

Mr Thompson—Industry groups?

Senator CONROY—Yes, they can be.

Mr Thompson—Not in my experience.

Senator CONROY—I appreciate that it is only in the very early stages, but what can youtell us about the court case—the class action from the liquidator?

Mr Thompson—All I can tell you is that a statement has apparently been filed in the ACTSupreme Court but it has not been served on anybody. The liquidator has said that he is likelyto serve it after the royal commission reports.

Senator CONROY—Does that mean that you can discuss it now, or discuss what youhave read about it, because it has not been served?

Mr Thompson—I do not think so. I think we are constrained. He has stated a clearintention to proceed with an action, which makes it rather difficult for us to comment.

Senator CONROY—You do understand that, in terms of the questions we ask, we are notbound by the fact that you have a potential, future or even ongoing court case?

Senator WATSON—What is the basis of the claim?

Mr Thompson—I understand that. But I am sure you understand that we are in a difficultsituation.

Senator CONROY—Sure. I do not have any questions.

Mr Thompson—We face the possibility of a fairly significant legal action.

Senator CONROY—We have been reasonably constrained in asking questions about theHIH Royal Commission. I do not think we have harassed you too much on that.

Senator WATSON—You can tell us the basis of the claim, though?

Mr Thompson—I have read the statement of claim. I think I can summarise myunderstanding of the statement. Is that the question?

Senator WATSON—Yes.

Mr Thompson—My understanding is that the claim relates to the period from when theInsurance and Superannuation Commission was established in 1987 through to February1999, which was the date that the purchase of FAI by the HIH group was completed. It allegesnegligence on the part of the regulators over that period for not in some way preventing thatpurchase from proceeding. It is a claim on behalf of the HIH companies for compensation inrelation to those companies’ free will acquisition of FAI.

Senator CONROY—It seems perverse that companies who appear, on the evidence thathas been tendered so far, to have been trading while insolvent—both of them—should thenturn around and sue you for not noticing. I would have thought their own directors wouldhave been a good starting point. I can appreciate it if you do not want to respond to that.

Mr Thompson—I cannot respond to that, but I would not be surprised if there were otheractions.


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Senator CONROY—Priceless! You have to give them 10 out of 10 for front. I notice thatyou may have discussed this issue with Senator Sherry, so if I am overlapping let me know. Atthe last estimates I asked about staffing levels at APRA and the number of senior positionsthat had been advertised. Have all of those positions been filled? Senator Sherry was askingabout actuaries earlier.

Mr Thompson—I think we may have one at senior level—the risk analysis one. Largely,yes, all of our senior slots are filled. There is one general manager slot which is still open atpresent.

Senator CONROY—Are there many other positions vacant at the moment?

Mr Thompson—Our budgeted structure has about 450-odd positions in it and we arerunning at about 435 at present.

Senator CONROY—Is that more than usual or is that the average figure?

Mr Thompson—Gap.

Senator CONROY—Average gap?

Mr Thompson—No, we have probably succeeded in closing it a bit in the last six to ninemonths.

Senator CONROY—In an article in the Financial Review on 22 October of this year Ithink you are reported, Mr Thompson, as saying that APRA has strong legal powers and thatyou are encouraging staff to use these powers. How are you encouraging your staff?

Mr Thompson—By setting examples, by making use of the powers, by making sure thatour training programs leave staff well informed about all of the powers that are available foruse and by bolstering the numbers of lawyers in the organisation who can be called on foradvice about the use of enforcement powers. Those are the main ones

Senator CONROY—Do you think all staff got the message?

Mr Thompson—I think so. Our annual report shows a significant increase in enforcementactions in the last financial year, compared with the previous one.

Senator CONROY—I look forward to the next report. In September of this year APRAasked credit unions and building societies to review the soundness of their lending practices.That is in a press release dated 19 September.

Mr Thompson—Yes.

Senator CONROY—What factors caused APRA to ask credit unions and buildingsocieties to review their lending practices?

Mr Khoo—From our on-site inspection programs we had identified some areas in whichwe felt that the standard of lending practices was not quite at the level we would like to see.We had been identifying cases of these occurrences across different regions and, on that basis,we felt it was appropriate for us to take some action in that area.

Senator WATSON—Were states worse than others? Was there any pattern?

Mr Khoo—That was not apparent, Senator. What I can say is that we did identify similardeficiencies across the different regions.

Senator CONROY—What do you define as deficiencies? What was it that triggered yourconcern and made you look at it?


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Mr Khoo—Mainly credit lending standards. Some of the lending practices were not quiteup to the standard we would expect to see.

Senator CONROY—In what way?

Mr Khoo—One example is in lending assessments. In the residential area we were seeingin some cases that they were pushing the lending standards to the point where, with regard toloan to valuation ratios, some of those were getting quite high. In terms of assessingserviceability, they were getting high. Some of them were getting to the point where we feltthat perhaps it was not quite as prudent as it could have been.

Senator CONROY—Do you just look at home loans? Do you look at credit cards as well?

Mr Khoo—In our media release it was specifically with regard to residential lending andsome commercial lending we had seen.

Senator CONROY—Do you look at credit card lending as well?

Mr Khoo—Yes, we would.

Senator CONROY—Do you have any thoughts on credit card lending? Day by day we aregetting more stories about the level of consumer debt on credit cards.

Mr Khoo—Senator, I would have to say that it has not come to my notice that we haveseen any major issues occurring in the credit card lending area.

Senator CONROY—There seems to be a lot of newspaper speculation. The Treasurer andvarious people have commented about the level of personal debt on credit cards. I know Visasay that it is actually a wonderful thing; that it is driving the boom in consumer spending andthat, if we did more of it, we would probably do even better. Visa’s approach seems to be thateveryone should double their personal debt. It is a novel argument. It is not one I am attractedto.

Mr Thompson—It is certainly true that that form of lending has grown rapidly. We havenot seen the same evidence of credit standards having slipped as we have seen—

Senator CONROY—Yes, it is the credit standard issue and the servicing issue.

Mr Thompson—That is right, yes.

Senator CONROY—Are you monitoring that closely?

Mr Khoo—With the credit cards, very often the debt tends to be a lot smaller.

Senator CONROY—You have not met my credit card!

Mr Khoo—And they do not have the same servicing requirements which we see on theother types of lending.

Senator CONROY—Have you talked to consumer groups about that view? I get regularrepresentations from consumer groups.

Mr Littrell—Yes, we are reaching out more to consumer groups.

Senator CONROY—They seem to have an ongoing concern about the level of debtAustralians are getting themselves into.

Mr Littrell—Yes. One of the issues for us is that our statutory responsibility is more todepositors, so one reason we focus heavily on the home loan sector is that it is a much largerchunk of the ADI balance sheet. Most deposit takers could have quite a large proportionalproblem in their credit cards but it really would not show up in their soundness.


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Senator CONROY—You say you had concerns about potential damage to depositorconfidence in credit unions and building societies. Was that versus banks per se? Did APRAconsider an ADI-wide release? I am referring to your earlier one.

Mr Thompson—The issues that we raised in that particular release were certainly morerelevant to the smaller ADIs. It was a week or so after that that we issued a press release thatwas directed more at banks. The messages there were not totally different from the messagesfor the smaller ADIs, but there were some differences. We were concerned more aboutevidence that some of the medium size and larger banks were economising imprudently onrisk management resources. We wanted to get a message out about that. Amongst the largerplayers we had not seen the same evidence of the weakening in credit standards that we hadseen amongst the others.

Senator CONROY—You made the point in your release, and reiterated it, that there aremore lending practices that are questionable in their prudence. What powers do you have toensure lending practices are prudent? I will not ask you to name names, because that is nothelpful at this point, but what are you doing? Are you working with them? How do you fix it?What powers do you have?

Mr Littrell—Are you asking what powers we have to determine if their practices areprudent or what powers we have to help them fix imprudence?

Senator CONROY—I am happy to have an answer to both these issues.

Mr Littrell—On the first question, we get quarterly statistical returns which, on a broadlevel, help us identify who is being more enthusiastic. We also send on-site visit teams in.They engage in a number of activities, including checking files and speaking to the relevantrisk managers. We have pretty experienced people in the credit risk area who go out—boththe direct supervisors and the second-line risk specialists—and they have a pretty good trackrecord of picking up questionable practice.

Senator CONROY—They pick up the smell test pretty quickly?

Mr Littrell—Yes. So we are feeling reasonably good. We are picking up institutional signsof either overly loose policy or overly loose process. Having identified that, we have anumber of policy and supervisory steps we can take, notably with the ADIs. We can lift theircapital ratio, which is both a prudent step and a pretty strong signal to the board of directorsthat they need to lift their game. Outside policy, there is a practical matter, particularly withthe smaller ones who are trying to do the right thing. We will give them a bit of guidanceabout where to go for consulting, how to set their systems up better, how to set their policiesup better. If we have someone who is determined to be a risky lender, then we would moveinto our middleweight enforcement powers, notably directions, and in theory those can bepretty detailed and pretty strong.

Senator CONROY—And if they are recalcitrant after that?

Mr Littrell—If they are recalcitrant after that we have FSLAB2 running. We would likethe power at that point to start considering fitness. Most of ‘fit and proper’ is about propriety;we do not tend to make judgments about confidence. There are a few cases where we havegone in and said, ‘You’re not doing it right. You need to change.’ You go back in and say:You’re not doing it right. You need to change.’ The third time in, you really need to ask: ‘Whyam I having this conversation with you?’

Senator CONROY—And what would be the time period between your first and second:‘Hello, I’m back’?


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Mr Littrell—It varies a great deal by entity.

Senator CONROY—I would have thought it would get shorter between the time you firstgo in and say: ‘You’ve got something to fix,’ and when you go back a second time. I am justassuming the periods get shorter rather than longer.

Mr Littrell—It depends on the severity and direction of the issue. If when you go in thefirst time—this is a hypothetical example—you see things that need to be corrected but arenot of themselves worrisome, you might not come back on that issue for two years. If it isintensely worrisome, you will be back next week. So it really does vary a great deal.

Senator CONROY—Do you see any link between the less rigorous lending practices andescalating housing prices? Is it contributing to the boom?

Mr Thompson—There is a relationship there. If lenders are making loans that they mightnot have made a couple of years ago—

Senator CONROY—It is increasing supply.

Mr Thompson—then it is obviously increasing supply, feeding into a supply of credit andcontributing to price inflation in that sector.

Senator CONROY—Just moving on to your second press release, of 1 October 2002,where you indicate that you sent a letter to chief executives in the banking industry, againnoting lending practices that were concerning. Was the letter addressed to all parts of thebanking industry and, if not, to what parts? I think you mentioned earlier that it was more thesmaller banks. I was not sure if you were referring then to the credit union structure asopposed to the banks.

Mr Thompson—The first one you asked about?


Mr Thompson—Prior to the issue of the press release we wrote to the chief executives ofall credit unions and building societies. Prior to the release of the second one we wrote to thechief executives of all licensed banks.

Senator CONROY—What are your concerns with the lending practices in the bankingindustry per se?

Mr Littrell—As a general rule of thumb, with some outstanding individual exceptions, thelarger the deposit taker the sounder the credit policy, on its face. There is this hierarchy thatsays the credit policies of the four largest banks are probably the soundest, then the nextbiggest and then down through the ranks in terms of how they do—

Senator CONROY—You said ‘probably’ the soundest.

Mr Littrell—Yes. We are talking about 250 institutions, so it is hard to memorise. But,going the other way, the larger the entity, particularly if they are publicly listed. They areunder tremendous pressure to cut cost and keep their share price moving up, which is nottypically an issue for the mutuals—the credit unions and the building societies. We feelgenerally quite good about the credit soundness of the larger entities but less good about theirongoing investment in the whole risk management infrastructure. It is not only credit. It isinternal operational controls, trading risk—it is a lot of things. In fact, the large losses wehave seen recently in listed banks have not been credit losses; they have been other sorts oflosses.

Senator CONROY—Like HomeSide?


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Mr Littrell—As a large example—

Senator CONROY—There have been some doozies recently.

Mr Littrell—Not large enough to threaten confidence in the bank, but—

Senator CONROY—No, but enough to hurt them on their balance sheet.

Mr Littrell—Yes. Also, when we investigate in those cases, there are issues there: hadthey had another internal accountant or another internal controller maybe they would havecaught something earlier. There is a tremendous tension between needing to maintain thatlong-term, expensive, unglamorous, back office risk control and the need every half-year toreport a profit to shareholders. The stock market is giving these people tension every day. Wecome along and provide some balancing tension on the other side.

CHAIR—Senator Conroy has 10 minutes to go. I want to give Senator Watson a chance,and Senator Sherry has, I think, a bit more time as well.

Senator CONROY—I do not have too many more.

CHAIR—You might put those on notice.

Senator CONROY—I am sure with a little bit of flexibility we can finish very quickly.

CHAIR—Okay.

Senator CONROY—Your press release stated that the banking sector’s loans secured byresidential property have increased at an average annual rate of 12 per cent, an unsustainablelong-term growth rate and a low inflation environment. That is a pretty strong statement.What are the reasons for that increase, in your opinion?

Mr Thompson—There will be demand. In a rising market there will be people looking toget in before the next rise, so there is a kind of standard—

Senator CONROY—Compounding effect.

Mr Thompson—inflationary expectation pressure there. One of the reasons that is sounsustainable is that eventually you will get to the point where there is a correction, as we seewith asset price markets of all kinds. That sort of growth rate is clearly more rapid than theunderlying growth rate of demand for housing in an economy growing at two per cent or threeper cent with average inflation.

Senator CONROY—What will be the consequences, then? You mentioned a correction.

Mr Thompson—One consequence is that the process, to the extent it is going into houseprice inflation, is likely to lead to a correction—in time. But it also could be a sign that, tomaintain that sort of growth rate, the standards of credit assessment that are being applied arebeing compromised; they are not as rigorous as they were. That sort of rapid rate of growthcan be an indicator of improvements; marginal and of a kind that we were trying to point to,particularly in the first press release, but also, to a lesser extent, the second.

Senator CONROY—Are you taking any action to ensure sustainable levels of growth? Doyou have the capacity? Other than writing to them and saying: ‘Hey, where you’re going isjust unsustainable,’ do you have any powers to do anything other than send them a letter onthat particular issue?

Mr Thompson—We are, in a sense, back to the question you asked earlier about how wecan reign in imprudently rapid lending by the people we regulate, which can mean use of highcapital requirements. In cases where there is clearly imprudent behaviour involved with thatgrowth rate we can issue directions and ultimately get to use the fit and proper test, if that is


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an issue. Regulation of the financial system has moved beyond the point of actual lendingcontrols. We know that does not work, unless you control everything that moves, becausesomething unregulated will take up the slack.

Senator CONROY—You have written to all ADI lenders saying: ‘Just a minute, things aregetting a bit out of control and there are a few credit quality and risk quality issues.’

Mr Thompson—Yes.

Senator CONROY—But there are mortgage brokers and originators operating outsideyour prudential regulation. Do you see this as raising any concerns of regulatory gaps? Doyou have sufficient powers to address any improved lending practices? Do you need any extrapowers?

Mr Thompson—We do not have powers over those people you referred to. Our powers areultimately directed at protecting the interests of depositors and policyholders andsuperannuation fund members. With some of those unregulated lenders there are nodepositors, policyholders or fund members associated with them, and that is why they escapethe prudential regulation net. The short answer to your question is no, we do not have thosepowers, and it would not be normal for a prudential regulator to have powers over those sortsof entities.

Senator CONROY—But, as you say, if you tighten up the regulated sector and all thatdoes is lead to the slack being taken up in the unregulated sector, that is a regulatory issue.

Mr Thompson—It raises an issue, and perhaps an issue for macroeconomic management,but as far as we are concerned we have achieved our objective of protecting the interests ofthe depositors with the people that we are regulating. I know it is not a totally satisfactoryanswer to your question, taking the broad view, but from the view of the prudential regulatorwe will have achieved our objective.

Senator CONROY—Sure. I had some questions for Dr Roberts. I do not want you tothink I have been ignoring you today, Dr Roberts. You look a little disappointed. Thequestions were about your desire to remove directors, but I will wait until another day to askyou about that.

Dr Roberts—Okay; but I am disappointed.

Senator WATSON—I refer to binding death benefits under section 59A of the SI(S) Act.Are you aware of any legal means of preventing the lapsing of a binding nomination afterthree years?

Mr Senthamangalam—At the moment the law provides that if a trustee chooses to offerbinding nomination, which is a choice or an option which a trustee can take or may refuse totake, then those nominations need to be renewed every three years. We are not aware of anyoption whereby that need not be done, and the option will continue to be binding.

Senator WATSON—Are you aware that at least one fund—and maybe more—has found alegal means of preventing the lapsing of a binding nomination after three years?

Mr Senthamangalam—No, we have not come across any such instance. It has not beenbrought to our notice.

Senator WATSON—What would you do if you found one such instance?

Mr Senthamangalam—If we actually found an instance we would check it against whatthe legislation provides. If it was a loophole in the legislation, we would obviously take it upwith the government for redress. But if it was simply an interpretation issue—and the broad


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view of APRA seems to be that the legislation makes it reasonably clear—we would simplygo back to the offending fund and, if we thought it was a persistent practice, issue a generaldirective to the industry. We would also talk to institutions like ASFA and IFSA and reiteratethe message.

Senator SHERRY—The bulk of my questions relate to questions on notice to the minister,many of which go back quite a number of months and which I will not get to tonight. Theminister might care to have a look at those, because I know the time for the answering ofthose questions has long since lapsed. Mr Littrell, in the survey work you are doing on feesand charges, are you also looking at the issue of insurance costs and salary continuance, salaryprotection, which is debited against superannuation contributions in many funds?

Mr Littrell—We do not have anything currently running specifically on salarycontinuance. Again, as we move forward into the next generation of forms, we are trying toget much deeper into all the feeds into and out of the member benefits, so that is one of theareas we will probably be looking at. Sorry, what was the first part of your question?

Senator SHERRY—Death and disability insurance.

Mr Littrell—Certainly.

Senator SHERRY—It is very common in superannuation.

Mr Littrell—Yes. We are doing some policy work there in terms of self insurance andwhen that might prudentially be allowed. In terms of its value and its cost, again that isscoped for this next generation of forms expansion.

Senator SHERRY—Also, the fees and the charges issue generally, matched against thelevel of contributions; both SG contributions, which are the statutory legal minimum, andother contributions—employer additional and employee additional.

Mr Littrell—We have looked at both those issues but we do not particularly link them.There is not an obvious causal link between the two.

Senator SHERRY—I ask you to take that issue on notice and have a look at it. We willexplore it on another occasion.

Mr Littrell—Yes.

Senator SHERRY—This is a totally different issue: the EPAS fund in Queensland, whichwe have talked about before, Mr Thompson. EPAS was the trustee operating in Queenslandthat recorded that negative 43 per cent return in 1997-98. Is APRA aware whether anydirectors or senior employees of EPAS—or any of the individuals who were involved—arestill involved in the superannuation industry?

Mr Thompson—We might have to take that on notice. I do not know the answer.

Senator SHERRY—There are a couple of additional questions on that.

Senator WATSON—They are involved in a court case.

Mr Thompson—Yes, we are working with ASIC on legal action against some of thepeople associated with EPAS, certainly. That is under way.

Senator SHERRY—I am just wondering whether they are still involved in other sectors ofthe industry.

Mr Thompson—I do not know.


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Senator SHERRY—There are a couple of other questions. I will put those on notice. Thefinancial assistance announced by the minister on 2 July 2002 for the Australian IndependentSuperannuation Fund, which is the WA theft case: what is the total eligible loss in AISF?

Mr Thompson—From memory, it is of the order of $600,000, but I should really take thaton notice to give you a more accurate figure.

Dr Roberts—I can give you that.

Senator SHERRY—Thank you.

Mr Thompson—It is Dr Roberts’s opportunity here.

CHAIR—You have a minute to star, Dr Roberts.

Dr Roberts—It might take me more than a minute to find it.

Mr Thompson—I have beaten him to it: $812,000. Sorry, that is the compensation.

Dr Roberts—That is the compensation, yes.

Mr Thompson—The eligible loss was about $900,000.

Senator SHERRY—What type of fund was AISF? How did the members becomemembers?

Mr Thompson—What type of fund?


Mr Thompson—I cannot recall. It was a small accumulation fund with two trustees, but Icannot recall the details of the nature of the membership.

Dr Roberts—AISF was an employer sponsored fund for legal practice staff. Actually, innature it was probably like some other employer sponsored funds that we would now regardas ones that should be public offer but which are set up as multiemployer. It was not a verygood arrangement: if they are essentially retail, they should be set up as public offer with anapproved trustee and the extra requirements that entails. But it was set up initially for the legalstaff of the law firm of one of the directors and then recruited from other law firms in Perth.

Senator SHERRY—Approximately how many fund members were there prior to theactions being taken?

Mr Thompson—159.

Senator SHERRY—How did that exist in an environment of choice in WA?

Dr Roberts—Do you mean in the sense that in Western Australia the state governmentallows under state awards—

Senator SHERRY—Yes, full-on choice.

Dr Roberts—It would depend what awards those legal staff were under.

Senator SHERRY—Yes. I am pretty sure they were not under a federal award.

Dr Roberts—But presumably the employers, the legal partnerships, felt entitled to makethe decision on behalf of the staff to put them into this multiemployer fund.

Senator SHERRY—Hence my question. It is a full-on choice environment in WA. Howdid that come about? Have you investigated that at all?

Dr Roberts—No; that would be more of a tax office issue, an SG issue. Our role is to tryto safeguard the money once it gets into a fund. SG compliance and the industrial side of


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whether awards apply or whether the employer is free to choose a fund would not be anAPRA issue.

Senator SHERRY—You might take it on notice and see if you can find out anything. Iwill certainly ask the tax office as well. It seems to me passing strange that you can have afull-on choice environment but the employer determines the fund for the employees—assuming you are under a state jurisdiction, and I think that is a pretty safe bet—and that theywere bound to a fund in those circumstances.

Dr Roberts—I imagine there are employers all over the countryside in small businesswhose compliance, in terms of where they put their employees, might be questionable.

Senator SHERRY—Even in a choice environment, apparently.

Dr Roberts—I am not familiar with the extent of the state choice. Is it mandatory choiceor just full-on choice?

Senator SHERRY—It is full-on choice.

Dr Roberts—For employees under state awards?


Dr Roberts—It is not an APRA matter, in any event. You know our concern aboutlicensing: employer sponsored funds are set up without our knowledge.

Senator SHERRY—I just thought you might be able to throw some light, in terms of theinvestigation, on how the events occurred. That is it, Chair. Thank you.

Senator WATSON—Perhaps they should have exercised choice, Senator Sherry.

Senator Coonan—They did with their replenished balances, Senator Sherry. Thereplacement trustee transferred 50 per cent of the replenished account balances of members tosuperannuation funds nominated by them.

CHAIR—Thank you, Minister. Thank you, gentlemen. The hearing is adjourned until 9a.m. tomorrow morning.

Committee adjourned at 11.07 p.m.

commonwealth of australia official …...portfolio but i also have a series of questions that relate...

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