Bills Digest no. 67 2008–09
Nation-building Funds Bill 2008
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Date
introduced: 13
November 2008
House: House of Representatives
Portfolio: Finance and Deregulation
Commencement:
Sections 1 and 2, and
anything not covered elsewhere in the table in clause 2, commence
on Royal Assent. Sections 3 to 278 commence on 1 January 2009, but
if the proposed Nation-building Funds (Consequential Amendments)
Act 2008 does not receive Royal Assent before 1 January 2009, these
provisions do not commence.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
To establish three infrastructure
investment funds the Building Australia Fund, the Education
Investment Fund, and the Health and Hospitals Fund and the
arrangements for the operation of these funds.
The Nation-building Funds Bill 2008 the Bill should be read in
conjunction with the Nation-building Funds (Consequential
Amendments) Bill 2008.
The Howard Government started the current trend towards
establishing Funds by setting up three funds:
- the Future Fund
- the Higher Education Endowment Fund, and
- the Communications Fund.
The Howard Government proposed a Health and Medical
Infrastructure Fund but this was not established.
The Rudd Government proposes to establish three Funds:
- the Building Australia Fund
- this will be partly funded from the Communications Fund
- the Education Investment Fund
- this will be partly funded by the Higher Education Endowment
Fund, and
- the Health and Hospitals Fund.
The Howard Government established the Future
Fund to finance, from Budget surpluses, the Australian
Government s unfunded superannuation liability. The Rudd Government
has pledged to continue the Future Fund. In the 2008-09 Budget
Speech, the Treasurer, the Hon. Wayne Swan, announced:
The Government will meet its commitments to the
Future Fund to pay the superannuation liabilities of Commonwealth
Public Servants. The Government will invest $3.9 billion into the
Future Fund to help it reach its target by 2020.[1]
At 30 June 2008, the superannuation liability was in the order
of $108 billion.[2]
At 30 September 2008, the Future Fund had assets of $63.43 billion
including Telstra shares held by the government in escrow valued at
$8.22 billion.[3]
The
Future Fund Act 2006 established the Future Fund Board
of Guardians which is responsible, among other things, for
investing money in the Future Fund and the Higher Education
Endowment Fund. The Bill proposes to give to the Future Fund Board
of Guardians responsibility for investing money in the Building
Australia Fund, the Education Investment Fund and the Health and
Hospitals Fund.
The Howard Government announced
the Higher Education
Endowment Fund (HEEF) in the 2007-08 Budget Speech:
For the first time ever, the Australian
Government will establish an endowment fund the Higher Education
Endowment Fund (HEEF) as a perpetual fund to generate earnings for
capital works and research facilities in our institutions of higher
learning. The initial investment of $5 billion out of this year s
Budget surplus will broadly double all the existing financial
investments and endowments currently held in the total university
sector. The capital will not be spent. It will be invested. And,
what is more, we will add further capital from future Budget
outcomes to this perpetual fund. Individuals who wish to contribute
to this visionary initiative will be able to make tax deductible
gifts to be managed along with the Government endowment. The
Endowment will be managed by the Guardians of the Future Fund. The
earnings generated by this investment will be dedicated to building
first class institutes of learning first class by world standards
and put our Institutes of Higher Learning on a secure footing for
ever.[4]
The
Higher Education Endowment Fund Act 2007 established the
HEEF.[5]
At 30 September 2008, the HEEF had assets valued at $6.37
billion.[6]
The Communications Fund was established in 2005 by the
Telecommunications Legislation Amendment (Future Proofing and
Other Measures) Act 2005. This Fund s purpose was:
to provide an income stream to fund the
Commonwealth Government s response to any recommendations proposed
by the Regional Telecommunications Independent Review Committee to
the Government in a report of a review of the adequacy of
telecommunications services in regional, rural and remote parts of
Australia.[7]
This Act was part of a suite of legislation that accompanied the
2005 Telstra sale legislation. This Act also established the
Regional Telecommunications
Independent Review Committee (the RTIRC). The two initiatives
are related insofar as the original intention of the Communications
Fund was to produce a notional income stream which would be used to
fund the government s response to recommendations of the RTIRC. It
was estimated that the Communications Fund would generate income in
the order of $400 million every three years.
The Coalition Government announced the Health and Medical
Infrastructure Fund of $2.5 billion on 21 August 2007.[8] The proceeds of the
proposed sale of Medibank Private, when realised, would also be
added to the Fund. It was proposed that the Fund be used to
purchase new capital and medical facilities such as surgical
theatres and high-tech medical equipment.[9] When the announcement was made, the AMA
expressed concern that this might lead to a bidding war around the
country.[10] The
Rudd Government has not taken up this proposal and, instead,
proposes to establish the Health and Hospitals Fund.
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The Rudd Government
announced that it would establish three Funds the Building
Australia Fund, the Education Investment Fund and the Health and
Hospitals Fund in the 2008-09 Budget speech.
The Labor Party s national
platform for the 2007 election stated:
Labor s Building Australia Fund will
provide an ongoing revenue stream to finance, or leverage finance,
for key infrastructure of national significance.[11]
The following is the extract from the Budget Speech relevant to
the Building Australia Fund:
The Building Australia Fund will finance
critical national transport and communications infrastructure,
including roads, rail, ports and broadband, that is not being
provided by the private sector or the States. The Building
Australia Fund will receive an initial allocation of around $20
billion. So that investment can begin immediately, tonight I
announce that the Government will allocate $75 million in 2007-08
for immediate feasibility studies on high-priority transport
projects across Australia. This will begin the necessary planning
work for key projects in advance of further deliberations by
Infrastructure Australia.[12]
With respect to funding of the Building Australia Fund:
Subject to final budget outcomes, the
Government will commit funds to the BAF from the 2007-08 and
2008-09 Budget surpluses. With the inclusion of communications
priorities within the scope of the BAF, the Government will close
the Communications Fund and transfer its assets (currently valued
at around $2.4 billion) to the BAF. The BAF will also receive $2.7
billion from the Telstra 3 sale process.
The BAF will meet the Government s commitment
to invest in a National Broadband Network, with disbursements
dependent on the final outcome of the recently commenced Request
for Proposals process and the Government s consideration of the
Glasson Review. On current projections, the initial Government
contributions to the BAF from the above sources will be in the
order of $20 billion.[13]
The Explanatory Memorandum states that the Building Australia
Fund will receive $7.5 billion from the 2007-08 Budget surplus and
the legislation provides for this.[14]
Under the government s proposed arrangements, Infrastructure
Australia will be responsible for recommending projects for
funding from the Building Australia Fund.
The Education
Investment Fund (EIF) was the major initiative in the Rudd
Government s 2008 09 higher education budget. The government
announced that the EIF will incorporate the existing Higher
Education Endowment Fund (HEEF) and extend disbursements to the
vocational education and training sector.[15] With respect to funding of the EIF,
the government announced that:
Subject to final budget outcomes, the
Government will make an initial contribution to the fund of around
$11 billion, comprising around $6.2 billion that is currently
invested in the HEEF, and a further contribution of around $5
billion from the 2007-08 and 2008-09 Budget surpluses.[16]
The Explanatory Memorandum states that the EIF will receive $2.5
billion from the 2007-08 Budget surplus.[17]
In the 2008-09 Budget, the government announced there would be
no allocations from the EIF until 2009 10 but instead provided $500
million in grants in the 2007 2008 financial year, under the Budget
measure Building Better Universities , to improve university
infrastructure.[18]
Since the Budget the government has announced an accelerated $304
million funding round from the HEEF for new research facilities or
capital expenditure in universities as part of the Prime Minister s
announcement to fast track the government s nation-building agenda.
Fifty-five expressions of interest were received by the HEEF
advisory board and 14 projects totalling $700 million were invited
to submit final applications.[19] The provisions relating to fast tracking are in
the related Nation-building Funds (Consequential Amendments) Bill
2008.
Like the HEEF, the EIF s purpose is to fund capital and research
infrastructure. However, unlike the HEEF, the EIF will be able to
make disbursements from the Fund s capital as well as the earnings,
there will be no cap on annual allocations, and payments will be
extended to include vocational education and training
providers.
With respect to the Health and Hospitals Fund (HHF), the
Treasurer stated:
Mr Speaker, the Health and Hospitals Fund will
finance health infrastructure. Key priorities include spending on
hospitals, medical technology equipment, and medical research
facilities and projects. The Fund will receive an initial
allocation of $10 billion.[20]
The $10 billion was to come from Budget surpluses:
Subject to final budget outcomes, the
Government will make an initial contribution of around $10 billion
from the 2007-08 and 2008-09 Budget surpluses.[21]
The Explanatory Memorandum states that the HHF will receive $5
billion from the 2007-08 Budget surplus.[22] Whereas the Treasurer s speech
specified some spending priorities, the Explanatory Memorandum
refers only to capital expenditure and acquisition of
assets.[23]
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On 23 October 2008, the government introduced the COAG
Reform Fund Bill 2008 to establish the COAG Reform Fund as a
Special Account in order to provide financial assistance grants to
the states and territories. On 23 October 2008, the Senate referred
the COAG Reform Fund Bill 2008 to the Standing Committee on
Economics for inquiry and report by 10 November 2008. The reporting
date was subsequently extended to 1 December 2008 to allow for
concurrent reporting with the Nation-building Funds Bill 2008 and
the Nation-building Funds (Consequential Amendments) Bill 2008,
which were introduced in the House of Representatives on 13
November 2008. Details of the inquiry are at
http://www.aph.gov.au/Senate/committee/economics_ctte/coag_08/index.htm.
On 26 November 2008, the Senate Scrutiny of Bills Committee
commented on the Nation-building Funds Bill 2008 and the
Nation-building Funds Bill 2008 (Consequential Amendments) Bill
2008. Details of the inquiry are at
http://www.aph.gov.au/Senate/Committee/scrutiny/alerts/2008/d13.pdf.
Infrastructure
Partnerships Australia is the peak private sector
infrastructure body. Infrastructure Partnerships welcomed
the announcement of the three Funds in the 2008-09 Budget.
Industry Super Network representative, Mr David Whitely,
reportedly said that the superannuation industry will not be
fronting the cash for the government's nation building plans unless
the deals stack up. Mr Whitely noted that industry super funds had
been investing in infrastructure for well over 10 years.
National Farmers Federation:
The National Farmers Federation (NFF) has
welcomed the establishment of Infrastructure Australia to audit,
and make recommendations on, nationally significant infrastructure
development. The NFF believes that this is an important step
forward in building the capacity of the Australian economy and
ensuring that we can enhance our competitiveness within the global
trading environment.
The NFF notes that Infrastructure Australia
will focus on issues including water, energy, transport and
communications. Each of these infrastructure issues is of vital
importance to the agriculture sector and its supply chain, which
collectively comprises over 12% of Australia s Gross Domestic
Product.[24]
Australian Local Government Association:
ALGA also welcomed the decision of the
Australian Government to ensure that the membership of the Advisory
Council of Infrastructure Australia included at least one member
with knowledge of, and experience in, local government. ALGA sees
this as an important acknowledgment that the local and regional
dimensions of national infrastructure investment proposals should
be actively and thoroughly considered.[25]
Urban Development Institute of Australia:
UDIA NSW welcomes the Commonwealth Government
initiatives with regard to infrastructure and the emerging role of
Infrastructure Australia in providing the framework for informing
decision making. The consultative process being undertaken as part
of the infrastructure audit initiative will be fundamental to a
comprehensive analysis of needs and priorities to guide public
investment and the opportunity to comment is appreciated.[26]
Minerals Council of Australia:
MCA has long held that Government should
promote infrastructure spending over further tax cuts. Yet, few of
these problems can be solved in a single round of funding
allocations by Infrastructure Australia, or even a single Budget.
There is a need for greater Government funding of social
infrastructure. In other areas, related to physical export
infrastructure, many solutions to these capacity
constraints will not require additional spending, rather they
require better Federal State co-operation, the elimination of
duplicative and contradictory regulatory processes, institutional
and intellectual capacity building, and more appropriate
competition policy settings. With the right policy and
regulatory settings most infrastructure issues can be resolved
commercially.[27]
Rod Sims, Port Jackson Partners Limited:
First, Infrastructure Australia should create a
permanent project pipeline with two strict tests for entry.
Projects in the pipeline must have a completed pre-feasibility
study outlining not only the benefits and costs but also the
project timetable and how various issues will be addressed; and
there must be a statement of context that describes how the project
fits within a wider infrastructure plan.
Infrastructure Australia could recommend
projects for funding only from within the pipeline. So recommended
projects could be finished on time and on budget and they would be
appropriate to a wider need. This would take Infrastructure
Australia down a new path. Rather than a one-off selection of
projects from those submitted, Infrastructure Australia would
instead focus only on well -prioritised and planned projects.
The second recommendation is that
Infrastructure Australia should favour projects that will meet
explicit state target service levels. This would encourage states
to set target traffic congestion levels for our cities, seek
sustainable water supplies and ensure freight-travel journey times
are within acceptable limits. It will also mean that projects would
be funded only if they help meet transparent goals.
Third, projects should receive a positive
weighting if they are undertaken within a sound policy environment.
Infrastructure Australia should avoid funding projects that would
not, for example, be necessary with appropriate infrastructure
prices. Infrastructure prices are often inappropriate and they can
skew our spending to the wrong projects.
Fourth, there are many areas where
Infrastructure Australia can advise on improved practices. One is
to reduce the enormous bid costs for projects. There are examples
of bidders spending more than $30 million each on bids, which ties
up key skills and works against sound outcomes. The solutions
include standardising project documentation as much as possible,
and adjusting the probity pendulum, which has swung so far that it
can limit communication between the bidders and the client
government on how best to achieve the desired outcomes.
The response to the current crisis can either
allow Infrastructure Australia to address many of our longstanding
infrastructure problems, or it can make those problems worse. In
the coming months we will see which path we follow. If we choose
wisely there will be important benefits to national productivity.
If we do not, the hopes for Infrastructure Australia will be
significantly damaged.[28]
Business Council of Australia:
The changing investment climate makes the need
for efficient investments in infrastructure even more important,
says Business Council of Australia Chief Executive Katie Lahey The
submission says Infrastructure Australia will play a central role
in ensuring efficient infrastructure investment, both by advising
on key infrastructure reform issues and by bringing independence
and rigour to the analysis of reforms.
The economic slowdown should not prevent
rigorous assessment of infrastructure proposals.
Compared to other spending in the stimulus
package announced this week, infrastructure spending will take
longer to impact on the economy, Ms Lahey said.
Spending money fast should not be the
government s main infrastructure priority. Infrastructure proposals
should receive tough scrutiny, to make sure that they are efficient
and that Australia gets the most economic growth for its
infrastructure dollar. [29]
Nigel Wilson, energy writer for The
Australian:
Energy Supply Association of Australia
executive director Brad Page said it was not clear whether the new
organisation, promised by Labor during the election campaign, would
take over the role of the Ministerial Council on Energy which,
representing both state and federal governments, was already
overseeing electricity and gas industry reform. ``Is Infrastructure
Australia just another institution that will become involved in the
reform process, or is it going to set the pace?'' Mr Page
asked.[30]
Adele Ferguson, article, Weekend Australian:
The main problem is the excessive timing. A
year to create a list suggests this is not a real plan, according
to King. "By that time, the Government will have lost valuable time
and be in its second year. Also there is a significant skills
shortage to physically deliver the projects with engineers,
investment banks, builders either overseas in Europe or Dubai or in
the mines in WA or Queensland," he says.[31]
The main concern of higher education stakeholders is
insufficient funds. Although the Bill will allow disbursements from
both capital and earnings, universities claim that they have a
backlog of $4.5 billion in building maintenance and refurbishment
and need $8 billion to demolish unusable buildings and construct
new ones .[32] The
current funding round from the HEEF reinforces their position with
projects estimated at $700 million competing for $304 million in
disbursements from the HEEF.
The Group of Eight, a coalition of research-intensive Australian
universities, has called on the government to commit $8.5 billion
of the EIF capital to support capital renewal in the higher
education sector, release $800 million a year for ten years to the
sector from the EIF, allocate higher education EIF funds according
to a formula based 50 per cent on student load and 50 per cent on
research income, and establish an independent process to assess and
assure the condition of Australian university
infrastructure.[33]
Extending funding to the vocational education and training
sector and research institutions will put further pressure on the
available funds. Universities Australia, the peak lobby group for
the higher education sector, seeks a guarantee that universities
would not receive less than they would have under the HEEF.[34]
Universities are also reported to question the submission-based
funding process as being too slow and favour the EIF funds being
distributed according to a formula process.[35]
TAFE Directors Australia s (TDA) Budget submission recommended
extending HEEF funding to vocational education and welcomed the
announcement in the Budget. TDA Chief Executive, Martin Riordan,
said the Fund would create improved capability for TAFE Institutes
to develop technologies, improve infrastructure, and improve
industry co-investment for increased online and enterprise training
needs. Furthermore, TDA welcomed the Minister s assurances that the
Commonwealth would make a special effort to negotiate with states
and territories, to ensure the Fund would be additional to current
infrastructure support from STAs (State Training Authorities)
.[36]
On the EIF, the Coalition is opposed to expending the capital,
seeks assurances that universities will receive the same amounts as
under the HEEF, and wants eligibility criteria to be clearer,
especially as they relate to the position of medical research
institutes.[37]
Treasury spokesperson, the Hon. Julie Bishop, is reported as
claiming the extension of funding to the states for vocational
education and training opens the way for bailing out failed state
Labor governments .[38] Shadow Parliamentary Secretary for Education, Senator
Brett Mason, has criticised the EIF as an all purpose slush fund
which Labor would use to make big, headline-grabbing promises
without any concern for good economic management and funding
sustainability .[39]
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Although the legislation has not yet passed, the government has
already announced that the Chair of the proposed Health and
Hospital Fund Advisory Board will be Mr Bill Ferris AC.[40] This appointment was
welcomed by the Australian Healthcare and Hospitals
Association.[41]
Other stakeholders have been largely silent about the Bill and the
appointment of Mr Ferris.
The Minister for Health and Ageing, the Hon. Nicola Roxon, has
stated that the Health and Hospitals Fund (HHF) can not be used by
state and territory governments to top-up health budgets.[42] The legislation
provides that grants to a state or territory are to be set out in a
written agreement between the Commonwealth and the state or
territory. State and territory governments will be able to apply
for funding but consideration will be given to prior performance,
the amount of proposed expenditure (by the state or territory
government) and whether the expenditure should be part of their
budget.[43] Despite
this, the NSW government has indicated that their Budget decisions
will be influenced by outcomes of applications made to the
HHF.[44]
Although there is flexibility in the legislation for the types
of investment in infrastructure projects that can be funded through
the HHF, the Explanatory Memorandum notes that the Commonwealth s
intent is to direct funding towards capital expenditure, consistent
with the objective of nation-building.[45] This suggests that the investment in
bricks and mortar such as the construction of hospitals or
health-related facilities such as cancer treatment centres, may be
given priority at the expense of less capital-intensive
infrastructure projects (such as the development of research
capabilities or equipment).
The legislation (clause 247) describes how the HHF evaluation
criteria will be developed. As with the other Funds, the Minister
must consult the responsible Ministers and ensure that the criteria
are in force at all times. The criteria will become a legislative
instrument and subject to disallowance.[46] This adds a level of parliamentary
scrutiny and transparency to the decision making of the HHF
Board.
The establishment of the HHF must be also considered in the
context of the Australian Health Care Agreements (AHCA) that are
currently being negotiated between the Commonwealth and the state
and territory governments and the proposed National Health
Partnerships that are yet to be finalised. The AHCAs are largely
for the funding of public hospitals in each of the state and
territories. Media reports have suggested that the Federal
government is expected to offer $70 billion dollars over five
years.[47] Previous
AHCAs have included a provision that could be used to fund capital
investment but it appears that the HHF will become the major source
of funds for capital investment.[48]
The Bill empowers the government to deposit money into the three
proposed Funds from Budget surpluses as is now the case with the
Future Fund and to make payments from the three Funds (via Special
Accounts). The Bill also allows initial transfers of $7.5 billion
to the Building Australia Fund, $2.5 billion to the EIF, and $5
billion to the HHF. Further, the Bill provides for limits general
drawing rights on the total that can be paid from the three Funds
annually.
Establishing the three Funds, by itself, does not affect the
Budget outcome because the creation of the Funds involves changing
the composition of assets so that only the asset side of the
balance sheet is affected.
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The Bill comprises five chapters with separate chapters devoted
to the Building Australia Fund, the EIF and the HHF (chapters 2, 3
and 4 respectively). The provisions establish similar structural
and governance arrangements for all three Funds. The following
therefore covers only the provisions relating to the Building
Australia Fund, which are taken to be illustrative of the EIF and
HHF Funds.
Further, the Building Australia Fund provisions are identical
except in so far as one set relates to transport, another set to
communications etc. The provisions relating to transport are taken
to be representative of communications, energy, water etc. The only
differences and they are relatively minor relate to broadband.
Clause 3 contains a simplified outline of the
Bill. In particular, it identifies the areas for investment from
each of the three Funds. For example, the Building Australia Fund
will fund payments for transport, communications, national
broadband networks, energy and water. The EIF has five areas while
the HHF has only one.
Clause 4 contains definitions. The Bill defines
Agency to mean the Future Fund Management Agency. The Future
Fund Act 2006 established the
Future Fund Management Agency. The Agency is responsible for
developing investment strategies for the Future Fund and the HEEF
for the purpose of making recommendations to the Future Fund Board
of Guardians, and also for administration.
Clause 4 contains multiple definitions of
Special Accounts.[49] The three Funds will operate through Special Accounts.
A Special Account is, in essence, an account in a ledger in which
all transactions receipts and payments related to a particular
activity are recorded. The way in which the Special Accounts will
operate is as follows, using the example of water.
To fund water projects, money will be transferred from the
Building Australia Fund investments and credited to the Building
Australia Fund Special Account. (Funding for all water projects as
well as transport, communications, broadband, and energy projects
will pass through the Building Australia Fund Special Account).
Money for water projects is then transferred from the Building
Australia Fund Special Account and credited to the Building
Australia Fund Water Portfolio Special Account. Payments for
projects will then be made from (debited to) the Building Australia
Fund Water Portfolio Special Account.
There is a Special Account for each of the three Funds: there is
also a Health and Hospitals Fund Special Account and an Education
Investment Fund Special Account. Further, there are Special
Accounts for each area of investment, for example, research, and
vocational education and training.
The above process means that, at any one time, it is likely that
there will be funds in both the Building Australia Fund Special
Account and the Building Australia Fund investments. Consequently,
the definition of balance of the Building Australian Fund in
clause 4 encompasses both.
All three Funds are required to invest in financial assets.
Clause 5 defines financial assets. To do this,
clause 5 draws on the accounting system known as
Government Finance Statistics (GFS). This is a specialised system
of accounts designed specifically for government. Clause
5 defines financial assets as:
(a) an asset that, in accordance with GFS
Australia, is treated as a financial asset for the purposes of the
GFS system in Australia; or
(b) an asset specified in regulations made for
the purposes of this paragraph;
but does not include a reference to an asset
that, under the regulations, is taken to be a non‑financial
asset for the purposes of this Act.
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Clause 12 establishes the Building Australia
Fund. Subclause 12(1) provides that Building
Australia Fund is established by this section. Subclause
12(2) provides that the Building Australia Fund consists
of the Building Australia Fund Special Account paragraph
12(2)(a) and the investments of the Building Australia
Fund paragraph 12(2)(b).
Subclause 13(1)
establishes the Building Australia Fund Special Account.
Clause 14 deals with initial credits to the
Building Australia Fund. Paragraph
14(1)(a) empowers Ministers to credit, by
determination, amounts to the Building Australia Fund Special
Account. Subclause 14(4) provides that a
determination is irrevocable. Subclause 14(5)
provides that a determination is a legislative instrument, but that
section 42 (disallowance) of the Legislative Instruments
Act 2003 does not apply.
As noted, the Explanatory Memorandum states that the Building
Australia Fund will receive $7.5 billion from the 2007-08 Budget
surplus. Subclauses 14(2) and
14(3) provide for this transfer.
Clause 15 deals with subsequent credits to the
Building Australia Fund. Subclause 15(1) provides
that the responsible Ministers may determine that an amount is to
be credited to the Building Australia Fund. Subclause
15(2) provides that, in making a determination, the
Ministers must have regard to the object of Chapter 2.
Subclause 15(3) provides that a determination is a
legislative instrument, but that section 42 (disallowance) of
the Legislative Instruments Act 2003 does not apply.
As noted, the Building Australia Fund will be partly funded by
transferring the amount in the Communications Fund and part of the
proceeds from the sale of Telstra. Clause 16
provides for the transfer of the full amount from the
Communications Fund Special Account as soon as practicable.
Subclause 17(1) provides that the
responsible Ministers may determine that an amount equal to the
balance of the Telstra Sale Special Account as at a specified time
is to be credited to the Building Australia Fund Special Account.
The Ministers must make a determination before 30 June 2009
[subclause 17(2)]. Subclause
17(3) provides that a determination is a legislative
instrument, but section 42 (disallowance) of the
Legislative Instruments Act 2003 does not apply to the
determination.
Clause 18 enumerates the purposes for which
payments from the Building Australia Fund Special Account can be
made. They fall into two categories: funding of transport, energy
etc. infrastructure paragraphs 18(1)(a) to
18(1)(e), and paying various costs/expenses
paragraphs 18(1)(f) to 18(1)(l).
The wording used in paragraphs 18(1)(a) to
18(1)(e) is making payments in relation to the
creation of development of [transport, energy etc] infrastructure .
Clauses 21 to 25 elaborate on
this wording (see below).
Subclause 18(3) provides that a payment under
paragraphs 18(1)(a), (b), (c), (d) or
(e) may be made by way of a grant of financial
assistance paragraph 18(3)(a) or otherwise than by
way of a grant of financial assistance paragraph
18(3)(b).
As to the purpose of paragraph 18(3)(b), the
Explanatory Memorandum states:
This provides flexibility in relation to
payments from the BAF.
Other payments (i.e. payments that are not
grants) include payments for the acquisition, in the name of the
Commonwealth, of financial assets (such as shares, debentures and
trust units) in a company involved in the creation or development
of relevant infrastructure. Other payments could also include
public-private partnership payments.
The Commonwealth would also have the
flexibility to make a payment (other than by a grant of financial
assistance) to a State or Territory under an ordinary contractual
obligation.[50]
It seems that paragraph 18(3)(b) would allow
the Commonwealth to take an equity position in, say, a company that
owns a port.
Clause 21 reinforces this interpretation.
Clause 21 extends the meaning of the words making
payments in relation to the creation of development of transport
infrastructure used in paragraph 18(1)(a).
Clause 21 defines this term to mean a payment for
the acquisition of shares in a company subclause
21(a); the acquisition of debentures of a company
subclause 21(b); the acquisition of units in a
unit trust subclause 21(c); the acquisition of a
financial asset in a business entity subclause
21(d); a payment in relation to a matter incidental or
ancillary to a matter set out in paragraph (a), (b), (c) or
(d) subclause 21(e). See also the provisions of
clause 121 (below).
The wording in clauses 22, 24 and
25 is identical to that of clause
21 except that whereas clause 21 relates
to transport, clauses 22, 24 and
25 relate to communications, energy, and water
respectively.
Clause 23 relates to an eligible broadband
network matter . The purpose of clause 23 is to
give the government as much flexibility as possible to allow it to
create a national broadband network. With respect to a national
broadband network, clause 23 has virtually the
same provisions with respect to shares, debentures etc. that
clauses 21, 22, 24 and 25 have.
Clause 23 adds three additional subclauses: the
creation or development of a national broadband network
subclause 23(e), the supply of a broadband
carriage service over a national broadband network
subclause 23(f), and the acquisition of assets for
use in connection with the creation or development of a national
broadband network subclause 23(g). The Explanatory
Memorandum notes:
The definition of eligible national broadband
network matter is not intended to prescribe a particular form of
funding or investment, rather it is intended to provide flexibility
in how the Government may ultimately invest in the [national
broadband network]. This might include a combination of forms of
investment covered by clause 23. While the Government has indicated
that its preference is for an equity investment, it has also
indicated that it will consider other options with a view to
achieving the optimal outcome.[51]
Division 5 allows transfers from the Building Australia Fund to
the Future Fund (clause 27), the EIF
(clause 28), and the HHF (clause
29). The Explanatory Memorandum explains that the purpose
of these provisions is to cover situations where one Fund pays
entirely for an expense that is also partly attributable to other
Funds.[52]
As noted, responsibility for investing the Building Australia
Fund will rest with the Future Fund Board (of Guardians).
Subclause 32(1)
provides that the Future Fund Board may invest amounts held in the
Building Australia Fund Special Account in any financial
assets.
As noted, the Building Australia Fund is to be partly financed
by transferring funds from the Communications Fund. Clause
33 Building Australia Fund to inherit
investments of the Communications Fund has the effect
of making a financial asset in the Communications Fund an
investment in the Building Australia Fund. It is worth noting
that:
As these financial assets will not be part of
the BAF, the Future Fund Board will not be involved in the
acquisition or management of these assets.
Rather:
It is intended that the Communications Minister
will manage the Commonwealth s ownership obligations as well as
exposures and risks associated with the assets, on behalf of the
Commonwealth.[53]
Clause 34 deals with
the management of investments of the Building Australia Fund.
Subclause 34(1) provides that income from
investments must be credited to the Building Australia Fund Special
Account. Likewise, a return of capital must also be credited to the
Building Australia Fund Special Account subclause
34(2). Subclause 34(3) allows the Future
Fund Board to realise an investment, with the proceeds to be
credited to the Building Australia Fund Special Account
subclause 34(4). Subclause 34(5)
allows the Future Fund Board to reinvest a maturing asset.
Given that the Future Fund Board is responsible for investment
in the Building Australia Fund as well as the Future Fund, it is
not surprising that the provisions in the Bill dealing with
investment of the Building Australia Fund clauses
34 to 48 are virtually identical to those
in the
Future Fund Act 2006 with appropriate changes. The
counterparts to clauses 34 to 48
are sections 17 to 32 of the Future Fund Act 2006. The
Explanatory Memorandum describes these clauses adequately.[54]
As noted, payments for transport, communications, a national
broadband network, energy and water infrastructure will be made
from the Building Australia Fund. Many of the provisions in
Division 2 are repetitive in that they relate first to transport
then to communications etc. In what follows, the clauses relating
to transport are taken to be representative of the clauses relating
to communications etc.
A feature of the Bill is that payments must not be paid for
transport etc unless Infrastructure Australia has first assessed
the proposed project and has confirmed that it meets evaluation
criteria. Further, the Finance Minister must not pay for the
project without the recommendation of the Infrastructure Minister.
Clause 52 effects these requirements.
Subclause 52(1) provides that the Finance
Minister must not authorise a payment [for transport
infrastructure] unless the Infrastructure Minister has recommended
the authorisation of the payment. Subclause 52(2)
provides that the Infrastructure Minister must not make a
recommendation to the Finance Minister unless Infrastructure
Australia has advised the project satisfies the Building Australia
Fund evaluation criteria. Subclause 52(3) provides
that in deciding whether to make a recommendation to the Finance
Minister, the Infrastructure Minister must have regard to the
advice from Infrastructure Australia paragraph
52(3)(a) and such other matters (if any) as the
Infrastructure Minister considers relevant paragraph
52(3)(b). In short, the Infrastructure Minister cannot
make a recommendation unless the advice from Infrastructure
Australia is that the project meets the Building Australia Fund
evaluation criteria.
The Bill envisages grants to a state or territory but also to a
person other than a state or territory. Clauses 53
to 56 deal with grants to a state or territory and
clauses 57 to 60 with a person
other than a state or territory.
Clause 53 deals
with a grant to a state or territory for transport infrastructure.
Subclause 53(2) provides that terms and conditions
under which financial assistance is granted must be set out in a
written agreement between the Commonwealth and the state or
territory, while subclause 53(3) empowers the
Infrastructure Minister to enter into an agreement on the
Commonwealth s behalf.
Clause 57 deals with a
grant to a person other than a state or territory for transport
infrastructure. Subclause 57(1) states that
this section applies if the purpose is to make a payment to a
person other than a state or territory paragraph
57(1)(a), the payment is a grant of financial assistance
paragraph 57(1)(b), and the payment is for a
purpose mentioned in paragraph 18(1)(a) that is,
for the creation or development of transport infrastructure
paragraph 57(1)(c). As with a grant to a state or
territory, the terms and conditions under which financial
assistance is granted to a person must be set out in a written
agreement between the Commonwealth and a person subclause
57(2) while subclause 57(3) empowers the
Infrastructure Minister to enter into an agreement on the
Commonwealth s behalf.
As noted, payments will be made from the Building Australia Fund
investments into the Building Australia Fund Special Account.
Payments will then be made from the Building Australia Fund Special
Account to another Special Account, for example, the Communications
Portfolio Special Account in the case of communications
projects.
Clause 61 establishes the Building Australia
Fund Infrastructure Portfolio Special Account.
Like the recommendations about direct payments for grants under
clause 52, clause 64 Recommendations about
payments empowers the Infrastructure Minister to recommend
payment for transport infrastructure but only after receiving
confirmation from Infrastructure Australia that the infrastructure
satisfies the Building Australia Fund evaluation criteria
subclause 64(2). In deciding whether to fund the
infrastructure, the Infrastructure Minister must have regard to the
advice from Infrastructure Australia paragraph
64(3)(a) and such other matters (if any) as the
Infrastructure Minister considers relevant paragraph
64(3)(b).
Clauses 65, 66 and
67 are mechanical provisions dealing with payment
procedures, which the Explanatory Memorandum explains
adequately.
Divisions 4, 5 and 6 deal
respectively with communications, energy and water. In all three
cases, communications between the relevant Minister with
Infrastructure Australia is to be made through the Infrastructure
Minister. See, for example, subclauses 118(4) and
118(5) which require that all communications
between the Energy Minister and Infrastructure Australia are to be
made through the Infrastructure Minister.
Subdivision A Channelling of transport infrastructure
grants
A separate bill the COAG
Reform Fund Bill 2008 seeks to establish the COAG Reform Fund
as a Special Account to provide financial assistance grants to the
states and territories. Division 7 establishes the
framework for these transfers. Most of the provisions in
Division 7 of the Nation-building Funds Bill 2008
repeat those in Divisions 2, 3, 4, 5 and
6 in the Nation-building Funds Bill 2008 except
that Division 7 relates to the COAG Reform
Fund.
The Minister for Finance and Deregulation, in his second reading
speech, stated:
Consistent with the Government s economic
security strategy to strengthen the Australian economy in the face
of the global financial crisis, the Bill permits me, as Finance
Minister, to determine a drawing rights limit for spending from the
Funds covering the period up to 30 June 2009. This will allow work
in key infrastructure areas to commence before 1 July 2009. To
apply rigor and transparency to spending from the Funds prior to
the 2009-10 financial year, the determination will be made in
writing and tabled in the Parliament.
Clause 109
General drawing rights limit in relation to a financial
year covers two situations: the financial year ending
on 30 June 2009, and another financial year. In the former
case, the general drawing rights limit will be via a declaration,
in writing, by the Finance Minister paragraph
109(1)(a) while in the second case, the mechanism will be
via an Appropriation Act paragraph 109(1)(b).
Subclause 109(2) provides that the total amount
covered by the drawing rights from the Special Accounts in
paragraphs 2(a) to 2(l) must not
exceed the general drawing rights limit for the financial year. The
Special Accounts in paragraphs 2(a) to
2(l) are for communications, water etc.
Subclause 109(3) provides that the Finance
Minister s declaration is a legislative instrument, but
section 42 (disallowance) of the Legislative Instruments
Act 2003 does not apply to the declaration.
Clause 111 provides, in effect, that if the
Finance Minister has not issued a declaration or there is no
Appropriation Act dealing with drawing rights, then no drawing
rights are to be issued. Responsibility for decisions across all
portfolios falls on the Finance Minister.
The government is keen to accelerate infrastructure investment
to counter the slowdown in the economy. Clause 112 Total
payments to depend primarily on the macroeconomic
circumstances seeks to enshrine, in legislation, the
principle that the total amount spent on infrastructure from the
various Funds should be determined primarily by macroeconomic
conditions.
Clause 113 provides that the Finance Minister
may require the Future Fund Board to prepare reports dealing with
the Board s performance. Subclause 113(4) provides
that the Finance Minister may choose to publish these reports.
Clause 113 empowers the Finance Minister
to require the Future Fund Board to provide reports and
information.
Subclause 113(4) provides that the Finance
Minister may publish the Board s report.
Subclauses 113(5)
and 113(6) provides that the Board s reports
and documents are not legislative instruments.
Clause 115 Finance Minister may give reports to other
Ministers etc. allows the Finance Minister to give reports
etc to the Treasurer and the Building Australia Fund portfolio
Ministers.
The
Infrastructure Australia Act 2008 established Infrastructure
Australia. Section 5 of the Infrastructure Australia Act
contains Infrastructure Australia s functions. They include
advising governments on Australia s future infrastructure needs and
related infrastructure issues. Clause 116 imposes
another function on Infrastructure Australia, namely, to advise the
Infrastructure Minister about matters that the Infrastructure
Minister refers to it paragraph 116(1)(a) and that
relate to the making of payments in relation to transport
infrastructure paragraph 116(1)(b).
Subclause 116(2) provides that in giving advice to
the Infrastructure Minister, Infrastructure Australia must apply
the Building Australia Fund evaluation criteria.
However, the Building Australia evaluation criteria have not yet
been established. Subclause 120(1) empowers the
Infrastructure Minister to formulate Building Australia Fund
evaluation criteria, which Infrastructure Australia is to apply
when giving advice to the Infrastructure Minister in relation to
transport infrastructure. The criteria will be a legislative
instrument. The criteria will disallowable by Parliament.[55]
According to the Explanatory Memorandum, the purpose of
subclause 120(2) is to acknowledge that there
may be certain differences in the criteria applied by
Infrastructure Australia in giving advice relating to transport,
communications etc. infrastructure.[56]
As noted, clause 21 permits investment in
shares etc, for the purpose of creating or developing
infrastructure. Clause 121 relates to these
investments. The Explanatory Memorandum notes that section 39 of
the Financial Management and Accountability Act 1997
authorises the Finance Minister to invest only in a limited range
of investments such as government bonds and bank deposits.[57] Further, investment in
the Building Australia Fund is restricted to financial assets.
Investment in shares etc. would, therefore, be contrary to the
Financial Management and Accountability Act 1997 and the
requirement that the Building Australia Fund invest only in
financial assets. Accordingly:
subclauses 121(2)
and (3) provide that Part 2.3 of the Bill (which
relates to investments of the BAF managed by the Future Fund Board)
and section 39 of the FMA Act do not apply to these
assets.[58]
The provisions relating to fast tracking are in the related
Nation-building Funds (Consequential Amendments) Bill 2008.
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As noted, the Howard Government started the current trend
towards establishing Funds. The Future Fund and the Higher
Education Endowment Fund were convenient places to park Budget
surpluses while being seen to provide community benefits. However,
unlike the Howard Government s Higher Education Endowment Fund and
proposed Health and Medical Infrastructure Fund, the Bill
introduces a new element into three proposed Funds by establishing
advisory bodies to vet infrastructure projects. The Bill thus has
the potential to ensure that scarce resources are devoted to
projects yielding positive net social benefits. The merit of having
projects assessed by the advisory bodies Infrastructure Australia,
the Education Investment Fund Advisory Board, and the Health and
Hospitals Advisory Board is that proposals yielding few or no
social benefits will, hopefully, be weeded out.
Much will depend on the criteria the bodies use to assess
projects, how the bodies interpret the criteria, and how well
placed the bodies are to make assessments. Infrastructure
Australia, for example, is tasked with recommending transport and
other projects to the Infrastructure Minister. But Infrastructure
Australia is not resourced to undertake independent benefit-cost
analyses of projects by itself and so will have to rely on
information or advice provided by others. The $75 million the
government has allocated for feasibility studies of urban
congestion and planning should ease this problem. Whether the
projects which the government hopes to fast track will have been
subject to rigorous independent cost-benefit analysis is
unknown.
Ministers can approve projects only if the advisory bodies have
certified that the projects have met the evaluation criteria. While
this should eliminate projects of little or no value, Ministers
have discretion as to whether to fund a project. This leaves scope
for the funding of a project which, while yielding positive net
social benefits, may be less worthy than other projects. The need
to spread funds across all the states and territories by itself
almost guarantees that funds are unlikely to be allocated purely on
the basis of which projects offer the greatest net social
benefits.
Professor Henry Ergas, pointing to the poor record of OECD
countries, has expressed concern about the risk that poor quality
projects pose to taxpayers:
Throughout the Organisation for Economic
Co-operation and Development area, the salient feature of
large-scale infrastructure programs has been how many poor quality
projects, whose costs greatly exceeded their benefits, have been
implemented
That inefficiency is aggravated by the frenzies
of rent-seeking that important infrastructure projects unleash.
With individual projects involving
multibillion-dollar outlays, the gains from being selected to
operate a project are huge. The sheer magnitude of those gains
encourages every form of manipulation and deception. It is
therefore unsurprising that the track record of big infrastructure
programs is dismal.
For example, although road construction is a
relatively standardised activity, a study of a large number of road
projects found that costs were routinely underestimated, with the
average gap between estimate and actual expenditure being in the
order of 15 per cent. Forecast error on big rail projects was even
greater, with an average underestimate of costs in the order of 40
per cent, while demand was overestimated by an average of 105 per
cent, so that actual use was typically less than half that
initially estimated.
It is therefore unsurprising that 40 per cent
of the large projects examined in one recent study were found to
have performed very badly, with fewer than half the projects
surveyed ultimately meeting most of their stated objectives
The trend to undertaking significant
infrastructure projects through public-private partnerships has
made that political economy only worse. By taking outlays off
balance sheet, PPPs reduce the visibility of the costs forced on
taxpayers and consumers, making it more difficult for those costs
to be controlled. That most of those costs are shifted into the
future further reduces their visibility, as do the opaque
risk-sharing and cost-recovery arrangements built into many PPP
contracts
Stringent safeguards are therefore needed if
the Building Australia Fund is not merely to add to this farrago of
waste, inefficiency and favouritism. Those safeguards need to
include rigorous cost-benefit testing of all projects; full
disclosure of the data, assumptions and models used in that
testing, along with the results; complete transparency of any PPP
contracts, along with estimates of their costs to the public;
annual audit of outcomes compared with initial estimates; and
stringent probity requirements around project selection and
implementation.[59]
Set against the criteria in the final paragraph of the quote,
the Bill falls short.
Reporting and accountability requirements in the Bill are
limited. While the legislation provides that the Finance Minister
may require the Future Fund Board to prepare reports dealing with
the Board s performance and allows the Finance Minister to publish
these reports there are, for example, no requirements for ministers
to report to parliament which projects the ministers have approved
or the reasons for decisions. Given that substantial sums of
taxpayers money are at stake, justification to parliament of
ministers decisions would seem to be a minimum requirement. Nor
does the Bill require ministers to keep parliament informed on
movements in the Funds. Finally, the Bill does not provide for any
ex post accountability to answer the question: were the
approved projects a good use of taxpayers money?
One aspect that may be controversial is that the Bill:
allows spending proposals from the BAF, EIF and
HHF to include the acquisition, in the name of the Commonwealth, of
financial assets (such as shares, debentures and unit trusts) in a
company involved in the creation or development of relevant
infrastructure.[60]
The desirability of the Commonwealth having, for example, equity
stakes in projects is debatable.
The prospect of reduced Budget surpluses or even deficits puts a
cloud over future Budget funding of all four Funds. In the case of
the Building Australia Fund, for example, the government has
referred to funding of $20 billion. But the government has not
identified the time period to which this refers nor detailed how
this amount will be funded. To date, we know of a total of about
$12.6 billion consisting of $2.4 billion from the Communications
Fund, $2.7 billion from the sale of Telstra, and $7.5 billion from
the 2007-08 Budget surplus. Further, the figure of $20 billion
could be regarded as tentative since the government could seek to
spend more than $20 billion to provide fiscal stimulus to the
economy by funding investment in transport etc. in the event of a
prolonged or deep economic downturn.
As noted, the government is keen to accelerate infrastructure
investment to counter the slowdown in the economy.[61] A long-standing problem with
increasing infrastructure spending as a counter-cyclical measure to
stimulate the economy is the lags in getting projects up and
running. By the time it takes to select projects, evaluate them,
put them out to tender, select contractors and draw up contracts,
the reason for the spending may have passed. To assist fast
tracking, Infrastructure Australia is to advise the government in
December 2008 on projects that might be funded. However, the time
frame for Infrastructure Australia to report is very tight given
that submissions were due on 15 October 2008.
Submissions were to be evidence-based and no more than 15
pages.
The states and territories are likely to welcome the three
Funds, first because it will be the Commonwealth and not the states
funding projects and secondly, because the states will see scope to
shift costs on the Commonwealth. In other words, expenditure from
the Funds may, to some extent, substitute for state and territory
investment rather than add to overall investment. Further, some
states are likely to see the Commonwealth s funding of
infrastructure as a way of bailing them out of their partly
self-imposed Budget difficulties.
Accounting standards treat interest, dividends etc from
investments as income. Income is included in Budget aggregates,
that is, is included in revenue in the operating statement.
Consequently, the income from the Future Fund is included in Budget
aggregates. The income from the three proposed Funds will also be
included in Budget aggregates:
All earnings and expenditure from the Funds
will impact on the budget aggregates.[62]
However, when it comes to reporting the underlying cash balance,
it seems that the treatment of the income from the three proposed
Funds may differ from that of the Future Fund.[63] The income from the Future Fund
is not included in the underlying cash balance.[64] This treatment is debatable. The
rationale seems to be that the Future Fund s earnings are
quarantined and cannot be spent for purposes other than reducing
the superannuation liability. However, it seems that the income
from the three proposed Funds will be included in the underlying
cash balance.
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Richard Webb, Coral Dow and Rebecca de Boer
28 November 2008
Bills Digest Service
Parliamentary Library
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