Minority Report
By Senator Nick Xenophon
1.1
The key premise of the Australia Business Investment Partnership (ABIP)
Bill is that the withdrawal of liquidity by foreign banks from the Australian
commercial property sector is not only likely, but imminent. This bill is
intended as a contingency measure to address the risk presented by a chain
reaction of asset price discounting that would impact on the broader economy.
1.2
However, apart from the high profile withdrawal of the Royal Bank of
Scotland, the premise of significant foreign bank withdrawals was not
unequivocally substantiated through the inquiry process. While it must be
acknowledged that comprehensive evidence to substantiate contingency plans can
be difficult to produce, two points stand out:
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The limited or lack of any evidence to substantiate the claims of risk;
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At a time when all sectors of the economy are struggling, why this
particular sector should benefit over others with equally legitimate and (in
many cases more substantial) evidence based claims for support.
1.3
Thus, the bill should be closely examined at the level of its
fundamental assumptions.
1.4
A further assumption that appears to be made by the bill, which raises
concerns, is that the taxpayer carries responsibility for the costs of borrowing
while any dividends are distributed to the shareholders. Specifically, if a
deed of guarantee is called upon, this is funded by the taxpayer, but the
taxpayer does not share in the profit generated by ABIP. Again, this
fundamental assumption is worthy of closer examination.
1.5
In addition, this bill raises a broader issue of the accountability of
banks to the taxpayer for their financial support. For example, when
questioned, Mr Fahour indicated that there could be secondary benefits to the
four major banks (Hansard: 14/04/09 page 46). However, in the context of this
measure and the previous bank guarantee, it can be legitimately asked what is
the moral mutual obligation of the banks? If taxpayers are effectively
investors, what is their return?
1.6
In relation to specific provisions of the bill and unintended
consequences, four are worthy of note.
1.7
Firstly, the bill provides for significant investments by large
syndicates and clearly does not provide for small to medium size businesses.
While much of the Government’s rationale is that ABIP is to provide for large
scale financial risk and flow on effects, it also presents arguments about
protecting jobs in the current financial climate. Further, answers to questions
from the Property Council of Australia and Mr Fahour indicate that they believe
that ABIP may apply to all commercial property projects, including small and
medium enterprises. For these reasons, it is not unreasonable to ask for
clarification about whether this bill could also provide for small to medium
sized commercial property investments, and if so, the circumstances where such
investments would take place.
1.8
Secondly, the bill does not seem to provide for cases where a foreign
bank may be a member of a syndicate that includes Australian domestic banks
that are not represented on the ABIP Board. There is the potential for concern
that the interests of the four major banks may not coincide with the interests
of those remaining should a foreign bank withdraw from the syndicate. Further
clarification is required on this point.
1.9
Thirdly, clarification is required in relation to status of residential
property. Within submissions, differing views have been presented, varying from
the exclusion of residential property, the inclusion of residential property
when associated to commercial enterprises, and the possibility to extend beyond
commercial property with the existing definitions. While the Government appears
to desire flexibility to enable the inclusion of ‘commercial property-like’
situations, further clarification is required in relation to the link between
commercial and residential property and any potential impact on residential
property prices.
1.10
Associated with this point is the scope of current definitions and the
impact this will have on the utilisation of the $4 billion initial provision.
While it was repeatedly stated in the inquiry that the hope for the contingency
plan was that it would not be utilised, issues surrounding the breadth of
definitions and the nature of eligibility criteria can have significant
implications for the transition to the secondary funding provisions.
Projections as to the time that it will take to exhaust the initial provisions
would be important for those deliberating over their support for the bill.
Further clarity on the conditions required to trigger the $26 billion secondary
provisions would be of assistance, as would projections in relation to this
occurring within the two year initiation phase of ABIP funding.
1.11
Finally, the inquiry has failed to fully address concerns about the
potential of ABIP to create distortions within the market. It has been argued
that inadvertently ABIP may create incentives for foreign banks to withdraw
from the market. The basis of this argument is that the interests of the main partners
of the syndicate is not to lose a project through the withdrawal of a foreign
bank, and hence will maintain values and supplement with ABIP funding. The
response within several submissions to the inquiry is that the decisions of
foreign banks are not made considering Australian conditions at the micro
level. That said, a similar argument could be about the withdrawal of smaller
domestic banks to minimise their losses, which could result in greater power to
the major four banks. The response of Treasury has been that this would most
likely not be in the interests of the major banks, but specific safeguards are
yet to be articulated.
1.12
It must be noted that the existence of ABIP provides the option for
withdrawal in the context of a price guarantee for an at risk asset.
Senator XENOPHON - Just finally, there is an argument
that ABIP might have the unintended consequence of actually giving foreign
banks an incentive to pull out on the basis that, in terms of their own risk
management, value will be retained if they pull out by virtue of ABIP being in
place rather than hanging in there. What is your response to that? Has the
Property Council done any analysis about that quite important concern?
Mr Verwer – Yes. The moral hazard criticism is
probably the strongest of all those that are levelled against the ABIP
proposal. We have looked at alternative mechanisms for dealing with that
hazard, but they are messy and not necessarily convincing. That is to say that
there would need to be some sort of corollary punishment applied to foreign
banks that withdraw.
Senator XENOPHON – But you acknowledge that there is a
real concern with ABIP that a foreign bank might perversely have an incentive
to pull out because they know that they will get paid out in full?
Mr Verwer – We agree that it is a logical possibility.
Senator XENOPHON – It is a pretty key hazard, isn’t
it, in all of this?
Mr Verwer – It is the strongest argument against ABIP.
That is why we have looked at solutions. We have not come up with one yet.
However, as I note in the submission, we think that the factors which are
driving the withdrawal of those foreign banks – that is, the risks associated
with the new era of global financial protectionism, with foreign politicians
saying, ‘We want the money back in our own countries’ – wash out or at least
trump that particular argument to some extent. Nevertheless, we do not have the
technical answer as to how we can make sure foreign banks do not try and use
ABIP as their escape card from Australia.[1]
1.13
The risk that foreign banks could try and use APIB as their ‘escape
card’ from Australia has not been addressed in the Bill.
1.14
Further, concerns that there may be a tightening up of lending were not
fully addressed in the submissions to the inquiry, especially in relation to
restricting entry and it being perfectly legal for the four major banks to
coordinate pricing. Such concerns should be addressed in a substantive way
prior to this bill being voted on in the Senate.
1.15
There are also a number of practical matters that require a substantive
response:
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Further clarity is needed about the reporting requirements and
responsibility of the Government appointed member of the ABIP Board. The
crucial final vote of this Board member makes such information vital to
assessing the independence and integrity of decisions that are made by the
Board.
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The Government has claimed that provisions under the Corporations
Act will ensure that Board members will be required to act in line with the
interests of ABIP and its shareholders, not the major banks that they
represent. Throughout the inquiry, specific information in relation to these
provisions was not provided in enough detail to allay these concerns.
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Further information is required in relation to the day to day
governance provisions of ABIP. Specifically, this relates to the necessity of
an exemption for ABIP from Part 4 of the Trade Practices Act. Concerns have
been raised that this exemption may lessen competition. In the absence of
modelling, Treasury responses to questions that support the exemption on
grounds that it will not detract from business competition, that it is a
contingency and is temporary, are at best elusive and at worst lacking
evidence. While the need for speed to respond to the global financial crisis is
legitimate, this should not be at the expense of the proper scrutiny by bodies
such as the ACCC. Proper scrutiny and independent assessment can prevent the timely and
costly process of retrospectively fixing poorly prepared policy.
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Answers
to questions in relation to lending criteria and the loan to value ratio of
ABIP against the banks require more substantive response. Submissions to the
inquiry and Treasury’s response have been unclear about the specifics of
lending criteria, but to indicate that they are in the latter stages of
development. Further, the possibility of funding outside the lending criteria
requires additional clarification (Hansard: 14/04/09 pp 44-45). In the light of
concerns about the potential of ABIP to prop up unviable commercial property
enterprises, further information is required to allay these concerns. One
possibility is for the Auditor General to provide independent oversight of
lending criteria and projects that are commercially viability to provide
additional safeguards to the taxpayer. Such initiatives would also need to be
supported by adequate additional human and financial resourcing for the Auditor
General’s Office.
1.16
In the light of the concerns that have been raised and the lack of
substantive information that has been provided in relation to these concerns,
it is my recommendation that the Bill should not be supported in its current
form.
Nick Xenophon
Independent Senator for South Australia
7 May 2009
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