Chapter
4
The loans component
4.1
The second component of the Green Loans Program, the green loans after
which the program was named, was cancelled by Minister Garrett on
19 February 2010 as a result, according to the Minister, of it being
unpopular.[1]
4.2
Organisations representing the financial institutions which participated
in the program noted various issues with the design of the loan product, a lack
of consultation in the government's development of the program, as well as
serious communication issues with DEWHA, which they argued contributed to
problems with the operation of the loans aspect of the program. For example, Mr
Mark Degotardi, Head of Public Affairs, Abacus Australian Mutuals (Abacus),
commented:
Abacus believes that this program had both design and
implementation issues and we remain disappointed with the performance of the
Department of the Environment, Water, Heritage and the Arts in designing and
administering the program.[2]
4.3
Furthermore, the evidence received by the committee with respect to
various stakeholders' experience with the loans component of the program, does
not correspond with the evidence that the committee received from householders,
assessors and participating financial institutions, all of whom largely blamed
the low uptake of loans on the slow return of assessments.
4.4
This chapter sets out the concerns of financial institutions and other
submitters with the development of the green loans product; the issues
experienced by participating financial institutions throughout the program; and
evidence received by the committee regarding the experience of householders and
financial institutions with the uptake of green loans.
The green loan product
4.5
Under the program, once a householder had received their home
sustainability assessment report from DEWHA, they could apply to a
participating financial institution for an interest free green loan of up to
$10 000. According to DCCEE's submission, 'agreements existed with 24 financial
institutions to cover payment of the interest and administrative costs of the
loans, and for the financial institutions to report the loans approved'.[3]
4.6
The Australian Banking Association (ABA) and Abacus, which represent
23 of the 24 financial institutions involved in the program—two banks and
21 credit unions, mutual building societies and friendly societies
respectively—each made submissions to the inquiry, and appeared before the
committee at its public hearing.
4.7
Both organisations informed the committee that before the program
commenced they had identified a range of design and implementation issues with
the loans. These issues included:
- various technical and administrative constraints, which required
financial partners to develop new products with non-standard rules and payment
features;
- the processes and systems required for banks to provide green
loans were not aligned with their existing systems and processes for other
loans; and
- the implementation period did not enable financial institutions
to conduct feasibility studies.[4]
4.8
Furthermore, the way the loans were set up, and specifically the fixed
administration fee of $150 and fixed interest rate, required banks to absorb
significant costs in managing the loans as well as carry the risk of the loan:
Financial Partners [were asked] to provide an unsecured loan
at a large discount to usual unsecured rates, with no flexibility to alter the
rates or charges. This meant that Financial Partners carried the additional
risk and capital cost for the loans, which in hindsight considering later
events, have borne out in terms of sovereign risk.[5]
4.9
With respect to the $150 administration fee, the ABA submitted:
At the time, banks indicated that the fee restrictions would
result in a bank being required to absorb the additional administration and
servicing costs. It was noted that loan origination and set up costs for all
unsecured personal loans are fixed, which means these costs are more difficult
to recover on small loans, even at current interest rates.[6]
4.10
The ABA thus explained:
The proposed loan subsidy model was based on a calculation
being the cash rate plus 5% as specified by the Government. The subsidy amount
provided to financial partners was 50% of the funds dispersed on each
application. At the time, banks indicated that current interest rates for
unsecured lending were in excess of this subsidy, implying that a bank would be
required to carry the capital cost of the difference between the commercial
rate available at the time and the loan subsidy.[7]
4.11
According to both Abacus and the ABA, these issues created a disincentive
for financial institutions to become involved with the program.[8]
4.12
Both organisations told the committee that the issues with the structure
of the loans could have been addressed had the government consulted with the
lending industry prior to rolling out the program. Mr Steven Münchenberg, Chief
Executive Officer, ABA stated:
...we believe the program would have been stronger if the
government had consulted earlier with the banking industry on the structure of
the program and the design of the product. It is possible to deliver government
programs through the banking system, but this can only be done effectively if
the industry is involved early in the product design.[9]
4.13
According to Mr Münchenberg, the ABA was consulted about the program
'belatedly', however by that point:
...more important design features of the program already
appeared to have been settled upon and it would have been preferable to have
had those discussions earlier, before decisions or assumptions were made by the
government as to how the program and the product were to operate.[10]
4.14
Similarly, Mr Degotardi, Head of Public Affairs, Abacus, stated with
respect to the consultation that they were involved in with DEWHA from
September 2008 that 'we do not think that it was an effective consultation'.[11]
Mr Degotardi further commented:
The view from our side of the consultation was that, while we
had quite considerable experience as financial institutions—and that is only
one perspective—that experience was not being considered.[12]
4.15
Mr Münchenberg explained that because of the government's lack of early
consultation:
[W]hat was put on the table to us by the government really
did not make a lot of commercial sense to the banks and we had to do a lot of
work to make changes and modifications to enable the banks to deliver those
loans.[13]
4.16
However, Mr Münchenberg continued:
In contrast, had the government come to us early on and said,
'This is overall what we would like to achieve. What products do you have that
might already be suitable that can be quickly rolled out or that just need a
few modifications?' then we would have been in a situation where we would have
had both a commercial and a social incentive to provide those loans rather than
a whole pile of difficulties to overcome before those loans could be provided.[14]
Lack of regulation of householders' use of loans
4.17
Submitters also raised concerns about the lack of regulation surrounding
the loans portion of the program. Specifically, it was argued that as that
there was no regulation or verification mechanism to ensure that loan funds
were spent on improving the energy efficiency of households, there was no way
of ensuring householders used the loans as intended.
4.18
For example, a householder who received an assessment but whose report
was delayed by DEWHA, preventing him from obtaining a loan, submitted:
It is open to abuse as the householder decides how much is
allocated to each eligible item. If ten items at your house were eligible, a
person could decide to spend
100% of the loan on one item, such as “Install external shading for north facing
windows”. There is nothing to stop a person building an elaborate $10,000
pergola over two windows. The item selected by the household could have been
the least effective method of reducing the household energy costs on their
list.[15]
4.19
Mr Jeff Wormald, an assessor from NSW, emphasised the need for
verification of the green loan expenditure:
I would
strongly suggest that as a minimum for checking and validation of the Green
Loan spend, the Green Loan funds are only made available by way of bank cheque
or electronic transfer direct to supplier or installer of energy efficiency
technology and that in this way there is at least some accountability of the
use of the Green Loan funds and some means of verification put in place as the
funds are spent.[16]
4.20
According to DCCEE:
Applicants were required to sign a Green Loan Declaration
that the loan funds received from the financial institution would only be used
for eligible actions as identified in a valid assessment report.[17]
4.21
However, there was no mechanism in place to verify that householders had
spent the loans amount in the manner in which they declared they would. Mr Münchenberg,
Chief Executive Officer, ABA confirmed:
We are not aware that the banks took any role in confirming
that customers had actually expended the money as they had indicated.[18]
4.22
Yet he noted, that it 'is not unusual' for there to be no checks on the
way customers spend bank loans:
Even if we lend money to you to buy a car, we do not
necessarily go around to make sure you actually bought a car.[19]
Financial partners' experience of the program
4.23
The majority (87.5 per cent) of the financial institutions involved in
the program were credit unions, mutual building societies and friendly
societies rather than banks. Abacus submits that these financial partners put
significant resources into developing, complying with and marketing their
products.[20]
However, according to Abacus, its members had significant problems with their
interactions with DEWHA during the course of the program, including:
- difficulty in communicating with DEWHA, 'telephone contact
numbers were often forwarded to the switchboard, and often messages were not
returned at all';
-
inadequate marketing and support for the green loans component of
the program; and
- the speed at which assessments were returned to householder
'significantly hindered' the ability of financial partners to promote and
distribute the product.[21]
4.24
Furthermore, Abacus submitted that a number of financial partners:
...were not paid for the loans they had provided for months,
despite providing the necessary information to the Department. Abacus is
advised that in most cases, institutions did not receive any of their funding
between October 2009 and February 2010 when the loan component of the program
was withdrawn.[22]
4.25
Mr Degotardi, Head of Public Affairs, Abacus, attributes some of this
non‑payment to DEWHA's inadequate invoice payments system, and noted an
instance where one financial partner 'was due an outstanding subsidy payment of
over $1 million for its involvement'.[23]
4.26
The experience of the two banks involved in the program seems to have
been identical:
There were ongoing issues at the time that the program ran.
There were some technological problems with it [the program], which resulted in
delays in the processing of applications.[24]
4.27
The lack of communication and consultation from DEWHA to its financial
partners under the program is demonstrated by the fact that financial partners
were not informed of the closure of the program until the day it was publicly
announced. Both Abacus and the ABA informed the committee that they and their
members first became aware of the cancellation of the loans portion of the
program 'via media release that the involved banks and I [Ms Dianne Tate, Director,
Financial Services, Corporations, Community, ABA] were provided with'.[25]
4.28
Mr Mark Degotardi, Head of Public Affairs, Abacus, commented that the
'unilateral way in which the program was withdrawn' along with the numerous
other problems with the program experienced by financial partners meant that
the program 'turned out to be a very disappointing engagement with the
government'.[26]
Mr Degotardi further stated:
It is also unlikely that participating institutions will be
so keen to participate in partnerships in the future without more binding
agreements on both parties.[27]
Cancellation of the loans
4.29
As noted above, the cancellation of the loans portion of the program was
announced on 19 February 2010. Participating financial institutions were told
to stop offering loans as of 22 March 2010.[28]
4.30
In announcing the cancellation of the loans, the then responsible
Minister, the Hon Peter Garrett MP, stated that the loans had been a 'less
popular component' of the program, and ceasing them would 'provide for the
significant boost to assessment availability'.[29]
4.31
The submission from DCCEE echoed Minister Garrett's statements regarding
the end of the green loans portion of the program, stating that:
This followed the low take-up of loans experienced to that
date under the Program. As at 4 April 2010, participating financial institutions
reported that 2,527 loans had been issued to householders.[30]
4.32
DCCEE outlined 'factors contributing to householders’ decisions in
relation to the take-up of loans', which included:
- householders’ reluctance to take
out loans due to the global financial situation;
- householders choosing to fund
low-cost changes from their own resources;
-
householders choosing to adopt
no-cost behavioural changes (this may include simple behavioural changes such
as having shorter showers and turning off equipment when not in use);
- householders not meeting the
financial partners’ lending requirements; and
- householders choosing to apply for
rebates under other government programs at the Commonwealth, state/territory or
local level.[31]
4.33
However these statements by Minister Garrett and DCCEE do not accord
with the experiences of householders and financial institutions who
participated in the program. Stakeholders who discussed the issue unanimously
commented that the loans were more popular than expected and blamed DEWHA's
slow return of assessments for participating householder's inability to access
loans.
The return of assessments to
householders
4.34
Under the program, once an assessor had conducted a household
assessment, they sent the electronic assessment report to DEWHA, which then
sent an official copy of the assessment report to the householder. This
official copy was required for the purposes of obtaining a green loan.
4.35
A significant number of assessors and participating householders
commented on the time that it took for the DEWHA to return assessments to
householders.[32]
Assessors and householders suggested that this was a key reason for
householders not being able to take up the loans. For example, Ms Dot Green, an
assessor from Victoria submitted:
The majority of my clients were keen to obtain a Green Loan
to implement the recommendations of the report generated from the assessment.
However the official report was required to apply for the green loan, not one
of my clients received the report from the Green Loans Scheme and they were therefore
not able to apply...
The main reason stated for the termination of the green loans
component of the scheme was lack of uptake of the green loans component of the
scheme. Based on the experience of my clients I believe the Department was
either not aware that the reports were not being sent, or conveniently ignored that
fact in its public communications.[33]
4.36
This view was echoed by Mr Mark Walker, an assessor from NSW who
submitted:
It appears from my own experience, contrary to Minister
Garrett’s statement that the “loans were unpopular”, that this was, in fact, a popular
component of the program.
The basis on which his statement appears to have been made is
that, at the time of making the statement, only 1100-odd Green Loans had been
approved and paid by the Department.
Yet the moment he announced the axing of the loan component,
the financial institutions, individual assessors and assessor organisations were
flooded with requests from householders who did not wish to miss out on the
opportunity. Add to this the approx. 110,000 householders who had received an
assessment but were yet to receive the Assessment Report, from the Department,
enabling them to apply for a Green Loan, and the Minister’s statement is
clearly fatuous at the least, if not actually disingenuous.[34]
4.37
These comments were corroborated by submissions from householders. One
submitter who received an assessment in November 2009 informed the committee
that they had repeatedly asked DEWHA for the assessment in order that they
could obtain a loan, and did not receive it until March 2010.[35]
4.38
Another householder, Mr Bradley von Xanten, informed the committee that
he received an assessment on 30 August 2009. He repeatedly followed up the
report with the assessor and DEWHA until:
I contacted the relevant department in late October 2009.
They stated that there had been a backlog however I should receive mine
shortly. In mid November I contacted them again and they stated that they would
place my name on a list of reports not yet received and that it would be
escalated...
In late January 2010 I did manage to speak to a person and
they again stated that she would place me on a list of reports not yet received
and that it would be escalated...
Early February [2010] after listening and reading some media
reports on the green loans scheme I contacted my assessor and voiced my
concerns to him and that I was still waiting for the assessment report without
which I was unable to access the green loans scheme. The assessor was kind
enough to provide a copy of his report. I took his report to the bank and was
successfull [sic] with the green loans application...
On 24 March 2010 I received the assessment report from the
Department of the Environment, Water, Heritage and the Arts. The enveloppe [sic]
was postdated 23 March 2010 [sic]. The report was an exact copy of the report
that the assessor provided me with which was the report he forwarded on to the
department on 31 August 2009. There was no covering letter or information
letter with the assessment report.[36]
4.39
In summary, it took almost six months from the date of assessment for
Mr von Xanten to receive his report from the Department, which was an
exact copy of what the assessor had done. By the time he received his report, the
green loans portion of the program had been discontinued.[37]
4.40
Mrs Patricia Smith[38]
and Mr Brian Peters[39]
recounted similar stories in their submissions.
4.41
The experience of participating financial institutions corroborates the
views expressed by assessors and householders. In its submission, the ABA
stated:
...adequate resources should also have been provided within the
Department to deal with other program logistics, including addressing
outstanding issues, implementing agreements with financial partners, and
processing of loans (i.e. verification of assessment data).[40]
4.42
In fact, according to ABA's two members involved in the program,
customer demand for the loans exceeded initial expectations:
...those banks that did ultimately make the investment in the
product found that the uptake of the product was actually more than they had
anticipated and there was clearly demand for the product as well...[41]
4.43
Similarly, Mr Mark Degotardi, Head of Public Affairs, Abacus, stated
that the experience of Abacus members was that:
...there was strong consumer interest in the Green Loans
Program. I think the fact that many people got assessments on their houses done
is an indicator of that. We certainly had strong consumer interest at our
financial institutions. It would appear to us, again, anecdotally, that the
process of getting the assessments out was a major contributor to the lack of
take-up.[42]
4.44
When asked why the government had taken such a long time to send audits
back to householders, DCCEE officials explained that the delays were due to the
contract between the government and the distributor, which was limited to
dispatching 10 000–15 000 reports per week.[43]
DCCEE did not check or value-add to the reports in any way.[44]
4.45
On 10 March 2010, Minister Wong 'aired the dirty laundry' on the Green
Loans program when she made a comprehensive and damning ministerial statement
about program in the Senate.[45]
Included in the minister's speech was a revelation about the 'unacceptable'
delays in sending out home assessment reports. The minister stated:
As at 28 February 2010, 305,327 home sustainability
assessments had been booked and, of these, 210,864 had been completed. This is
clearly a very popular element of the program. However, only around 84,000
reports produced as a result of those home sustainability assessments had been
sent out to households as at 28 February 2010. There are currently around
100,000 reports that have been submitted to the Department of the Environment,
Water, Heritage and the Arts but which had not yet been sent out to households
at the time responsibility moved to the Department of Climate Change and Energy
Efficiency. The remaining reports have not yet been submitted to the department
by assessors following completion of the home sustainability assessment. The
delay in sending reports is unacceptable...[46]
4.46
Mr Malcolm Thompson, Deputy Secretary, DCCEE informed the committee that
the government had made significant progress in this area since the change of
minister:
We are working to clear the backlog of home sustainability
assessment reports, with over 170,000 reports dispatched to householders in May
2010. This brings the total number of assessment reports sent to households to
around 280,000. New arrangements now aim to see assessment reports sent to households
within 10 business days of being sent to the department by assessors.[47]
Committee comment
4.47
In the committee's view, the development and operation of the loans
aspect of the Green Loans Program suffered from a severe lack of consultation
by the government from beginning to end.
4.48
From the outset of the program, it is evident that the government did
not pay sufficient regard to the views and experiences of its financial
partners in designing the loans. This resulted in the loans component of the
program having serious design flaws from the perspective of participating
financial institutions, and discouraged many national lending institutions from
participating in the program. In the committee's view, if the government
intends to use private financial institutions to deliver a government program,
it is essential to involve the private sector in a genuine consultation and
take on board their views.
4.49
The government's lack of engagement with its financial partners was also
evident throughout the operation of the program—in financial institutions'
experience of not receiving payment; problems with departmental invoicing
systems; and their difficulties in contacting DEWHA. The committee is greatly
concerned that the financial sector's experience of the Green Loans Program
will discourage financial institutions from becoming involved in future government
programs.
4.50
Finally, the committee is appalled by the fact that the government did
not consult with its financial partners and the industry bodies representing them,
prior to announcing its decision to cancel the Green Loans Program. While the
government has said the loans were cancelled due to being unpopular, this in no
way accords with the experience of stakeholders under the program. By all
accounts the loans were far more popular than anticipated.
4.51
Furthermore, any disparity between the popularity of household
assessments and loan applications was, according to the unanimous view of
stakeholders involved in the program, purely due to the government's own tardiness
in providing household assessment reports to householders. Yet, instead of
addressing this problem with its own systems and processes, the government
unilaterally decided to cancel the loans.
4.52
This decision has left a great many individuals as well as a number of
financial institutions in a significantly worse-off situation, simply because
they chose to become involved in a government program.
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