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USD MILLION (as at 31 December) |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
Subscribed Capital |
47 234 |
51 997 |
54 162 |
50 163 |
53 169 |
55 978 |
54 890 |
Callable Capital |
43 912 |
48 340 |
50 352 |
46 635 |
49 429 |
52 041 |
51 029 |
Paid-in Capital |
3 322 |
3 657 |
3 809 |
3 528 |
3 740 |
3 937 |
3 861 |
At the Group of Twenty (G20) summit, held in London on 2 April 2009, national leaders (including Prime Minister Rudd) committed to supporting an increase in lending of at least USD100 billion by the multilateral development banks, of which the ADB is one. The explicit commitment made by national leaders of the G20 at the London summit communiqué, in relation to funding multilateral development banks is as follows:
We have…agreed today to make available an additional $850 billion of resources through the global financial institutions to support growth in emerging market and developing countries by helping to finance counter-cyclical spending, bank recapitalisation, infrastructure, trade finance, balance of payments support, debt rollover, and social support. To this end:
The specific Australian commitment was made by the Australian Government in the 2009‑10 Budget. The Government has committed USD197.6 million (AUD241.0 million) over 10 years as additional paid-in capital towards the ADB’s USD110 billion increase. Australia has also committed to increase its uncalled capital subscription by USD5.6 billion (AUD6.8 billion).[8]
As at the time of writing, the Bill has not been referred to a committee for inquiry. The Senate Standing Committee for the Scrutiny of Bills examined the Bill and did not raise any concerns with it. The committee noted that the standing appropriation is limited to a specific purpose and for a specific amount of funds.[9]
As such, the Bill will not have any impact on the underlying cash or fiscal balance. The increase in Australia’s paid-in shareholding is included as a capital measure in the 2009-10 Budget. The increase in Australia’s callable shareholding is shown in the 2009-10 Budget as a contingent liability. Passage of the Bill will mean that, as a result of GCI V, the uncalled capital subscription will total USD8 billion.
The Bill contains a standing appropriation from the Consolidated Revenue Fund which is limited to payments made under any agreement reached between the Treasurer and the ADB, including any payments to be made under a promissory note.
GCI V is the largest ever GCI in the history of the ADB. The Board of Governors of the ADB adopted Resolution No. 336, which served to increase the ADB’s authorised capital stock by 7 092 622 shares and authorised the acceptance of increases in individual member countries subscriptions. If the increase is fully subscribed, the capitalisation of the ADB would be tripled and relative shareholdings (and therefore voting shares) would be unaltered. Only four per cent of GCI V takes the form of ‘paid-in’ shares, the rest being ‘callable’ shares. ‘Callable’ shares are merely an obligation for the member to pay, either partially or fully, an amount to the ADB in the event of default by borrowers. They entail a contingent liability, in other words, a potential liability that is contingent upon a certain event occurring, in this case, default by ADB borrowers.
The payment method for ‘paid-in’ shares is complex. The payments for are to be in five equal annual instalments. Of each instalment, 40 per cent is required to be paid in a freely convertible currency (the ADB considers the Australian dollar to be freely convertible), while the other 60 per cent can be paid in the member’s own currency. The 60 per cent that can be paid for in the member’s own currency is able to be paid as promissory notes, which the current Bill enables the Treasurer to do. The ADB has stated that any promissory notes are likely to be encashed in five equal annual instalments after the last cash instalment is paid. Thus the total amount for paid-in shares is likely to be paid over a ten year period.
The ADB has specified two payment options with different prices. The choice of which option to pay under is at the discretion of the individual member country. The first option is to pay (in current terms) USD12 063.50 per share, while the second option is to pay SDR10 000 per share. Using the daily average exchange rate for August 2009 (SDR1=USD1.560163), the USD price per share is around USD3 500 cheaper than the SDR price per share. Thus, unsurprisingly, the Australian Government has nominated to pay for the instalments using the USD option.
The ADB has provided flexibility for each member country to nominate either option for future instalments and to fix the exchange rate (at a rate predetermined by the ADB) between the USD and a freely convertible currency up to one year prior to each instalment falling due. The utility in the Australian Government availing itself of these options will depend on movements in exchange rates over time. However, the Bill specifically mentions only the USD option, and whilst that option is more favourable to Australia at present, over a time horizon of 10 years (for payment of the paid-in shares), this situation could change. It may therefore be wise for the Australian Government to avail themselves of the full degree of flexibility afforded by the ADB.
Clause 3 inserts definitions of the terms used in the Bill. Reference is made to the ‘Agreement’ establishing the Asian Development Bank, which is set out in the Schedule to the Asian Development Bank Act 1966. ‘Callable shares’ and ‘paid-in shares’ are defined as per the abovementioned agreement.
Clause 4 authorises the Treasurer to make an agreement, or agreements with the ADB to purchase both the 16 379 additional paid-in shares and 393 101 additional callable shares, at a price per share that is equivalent to USD12 063.50. Therefore, the text of the Bill indicates that the Australian Government has chosen the USD payment option, rather than the SDR option for all of the instalments. In addition, under this clause, the Treasurer is authorised to negotiate terms and conditions of any agreement between the Australian Government and the ADB.
Clause 5 authorises the Treasurer to create and issue to the ADB, promissory notes that are non-negotiable, non-interest bearing and payable to the bank at par value upon demand. The promissory notes are specifically for issue to the ADB, for the purposes of subscription to GCI V. Proposed subsection 5(3) removes any possible ambiguities about process for the creation and issue of promissory notes for the purposes of GCI V, as opposed to other ADB capital raisings or calls on existing callable shares. Specifically it provides that section 5 of the Asian Development Bank Act 1966, which empowers the Governor-General to issue promissory notes to the ADB, does not apply to any agreement entered into under subsection 4(1) of the proposed new Act.
Clause 6 establishes the standing appropriation from Consolidated Revenue for payments to be made under any agreement struck between the Treasurer and the ADB (including those made under a promissory note).
The ADB has specified two payment options with different prices as part of the conditions for subscription. The choice of which option to pay under is at the discretion of the individual member country. The first option is to pay (in current terms) USD12 063.50 per share, while the second option is to pay SDR10 000 per share. The Bill explicitly mentions the USD option, however, each country has the option of using either price for each of the five annual instalments (and on what terms to pay the out any promissory notes issued when they are encashed), as well as an option to fix the exchange rate between a freely convertible currency and the USD one year in advance of an instalment being paid.
It should be noted that the conditions for subscription established by the ADB give member countries considerable flexibility in determining whether they pay each instalment using the USD or SDR payment options and also whether to fix the exchange rate between the USD and the member’s currency up to a year in advance of payment of each instalment. It may be wise for these provisions to be explicitly referred to in the Bill, so as to provide maximum flexibility over the life of the agreement.
The long time horizon for payment of the instalments for paid-in shares suggests that the ADB does not urgently require an expansion of equity finance, in the form of ‘paid-in’ shares, but rather, requires an increase in ‘callable’ shares as collateral to expand their operations.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2455.
[1]. For more information on the ADB, see: http://www.adb.org/about/serving-asia.asp, viewed 18 August 2009.
[2]. The president is able to be reappointed for more than one term.
[3]. The
Agreement establishing the ADB refers to ‘United States dollars of the
weight and fineness in effect on 31 January 1966’. This reference was made
when the Bretton Woods system of managed fixed exchange rates was in place, and
the US dollar was pegged to the price of gold. Since 1 April 1978, currencies
no longer have par values in terms of gold. This is why a nominal valuation of
SDR10 000 is currently used. SDR refers to Special Drawing Rights, or the
IMF unit of account, which is comprised of a basket of four currencies, the
Euro, US Dollar, UK Pound and Japanese Yen, in set proportions, which are
reviewed every five years. The valuation is based on market exchange rates.
See: Agreement establishing the Asian Development Bank, Asian
Development Bank, Manila, Philippines, 1966, viewed 19 August 2009, http://www.adb.org/Documents/Reports/Charter/default.asp
See also: Annual Report 2008 Volume 2, Asian Development Bank, Manila,
Philippines, 2008, pp.48-49, viewed 19 August 2009, http://www.adb.org/Documents/Reports/Annual_Report/2008/Annual-Report-2008-Vol02.pdf
[4]. The financial obligations of ADB members for both of these classes of shares is discussed in the ‘Key Issues’ section of this Digest. Paid-in shares form the equity base for the Bank’s Ordinary Capital Resources (OCRs) and these shares are fully paid by all members. Callable shares on the other hand, do not form part of the OCRs, but are merely for the protection of the ADB’s creditors, in the event of wide‑scale defaults by ADB borrowers.
[5]. Asian Development Bank & Australia, ‘ADB Fact Sheet’, Asian Development Bank, Manila, Philippines, 2009, viewed 19 August 2009, http://www.adb.org/Documents/Fact_Sheets/AUS.pdf
[6]. ‘Credit Fundamentals, Capital Structure’, Asian Development Bank, , ADB website, viewed 19 August 2009, http://www.adb.org/Bond-Investors/cf-capital-structure.asp
[7]. Group of Twenty, Final Communiqué, London Summit, London, 2 April 2009, paragraph 17, viewed 18 August 2009, http://www.londonsummit.gov.uk/en/summit-aims/summit-communique
[8]. Australian Government, Budget measures: budget paper no.2: 2009-10, Commonwealth of Australia, Canberra, 2009, p. 417. Please note that conversions of US dollar figures into Australian dollars uses the (more up-to-date) exchange rates assumed in the Explanatory memorandum to this Bill, as opposed to those used in the 2009-10 Budget Papers.
[9]. Senate Standing Committee for the Scrutiny of Bills, Alert Digest, No. 10 of 2009, 19 August 2009, viewed on 24 August 2009, http://www.aph.gov.au/senate/committee/scrutiny/alerts/2009/d10.pdf
[10]. For details of the subscription process see: ‘Information on subscription for the Fifth General Capital Increase’, Asian Development Bank, May 2009, viewed 24 August 2009, http://www.adb.org/Documents/Brochures/Fifth-General-Capital-Increase/general-capital-increase.pdf
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