Bills Digest no. 24 2009–10
Asian Development Bank (Additional Subscription) Bill
2009
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 August
2009
House: House of Representatives
Portfolio: Treasury
Commencement:
Royal
Assent
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 enable Australia to take up
its allocated subscription (409 480 shares) as part of the
fifth general capital increase (GCI V) at the Asian Development
Bank (ADB).
The Asian Development Bank (ADB), which is headquartered in
Manila, Philippines, was established in 1966 to provide assistance
to Asian countries, which were at that time, predominantly based on
agriculture. Its initial efforts were directed towards rural
development and providing technical assistance aimed at increasing
food production. Throughout the 1970s, the focus of the ADB shifted
into education, health, infrastructure and industry. Concessional
lending and co-financing also commenced in the 1970s. In the 1980s,
the ADB focussed on improving private sector participation in
development projects. Since then, the ADB has expanded into areas
such as regional cooperation, poverty reduction and enhancing the
effectiveness of development activities.[1]
The ADB currently has 67 member countries of which 48 are from
the Asia Pacific region. Australia is a founding member.
The highest level of decision-making at the ADB is the Board of
Governors. One Governor and one Alternate Governor are appointed by
each member country. In Australia s case, the Governor is currently
the Treasurer, Wayne Swan MP, while the Alternate Governor is Bob
McMullan MP. The Board of Governors meets formally at an annual
meeting held in a member country. The day-to-day running of the ADB
is delegated from the Board of Governors to a full-time Board of
Directors. The Board of Governors also appoints a President for a
term of five years.[2] The ADB President, under the direction of the Board of
Directors, is responsible for carrying out the business of the ADB.
Under the President are four Vice Presidents, the Managing Director
General and the Dean of the ADB Institute. In addition, the
Independent Evaluation Department and the Office of the Compliance
Review Panel report directly to the Board of Directors.
When the ADB was established in 1966, the authorised capital
stock of the ADB was USD1 billion (in terms of the value of US
dollars as at 31 January 1966).[3] This was divided into 100 000 shares, at a
par value of USD10 000 each. Half of the shares were paid-in
shares, while the other half were callable shares.[4] Australia s initial subscription
was USD85 million, or 8.5 per cent of the total shares available.
The issue of valuation of shares since the formal collapse of the
Bretton Woods system of fixed exchange rates in 1978 has still not
been satisfactorily resolved, although now ADB shares are nominally
valued at SDR10 000.
The ADB reviews its capital needs on a five-yearly basis and can
replenish its capital through either general capital increases
(GCIs) or special capital increases (SCIs). GCIs are capital
increases where all members are given the opportunity to subscribe
to the shares on offer, in the same proportion as their existing
holdings, thus (if fully subscribed) leaving voting shares
unchanged. Each member is under no obligation to subscribe to each
increase. SCIs occur when members want to change their proportion
of shareholdings in the ADB and are conducted through an entirely
separate process. GCIs have been undertaken on four occasions in
the past, and the Board of Governors passed a resolution in favour
of the current proposed GCI, known as GCI V, on 29 April 2009. The
last GCI, GCI IV, was undertaken in 1994.
At present Australia holds 204 740 shares, or 5.77 per cent
of the total and is the fifth largest shareholder. The overall
Australian capital subscription is USD3.17 billion (as at 31
December 2008), with paid-in capital of USD 221.93 million.[5] The Bill proposes to
triple Australia s shareholding, an increase of 409 840
shares, to a total of 614 220 shares.
Voting shares are partly related to shareholdings. The aggregate
sum of both basic and proportional votes comprises the total number
of votes. Twenty per cent of the total stock of votes is set aside
as basic votes, while the remaining 80 per cent of votes
(proportional votes) is equivalent to the total number of shares
held. The basic votes are distributed equally to all ADB members.
Australia has 217 972 votes, or 4.92 per cent of the total.
The total capitalisation of the ADB is summarised below in table
1:
|
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 communiqu , 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:
- we have agreed to increase the resources available to the IMF
through immediate financing from members of $250 billion,
subsequently incorporated into an expanded and more flexible New
Arrangements to Borrow, increased by up to $500 billion, and to
consider market borrowing if necessary; and
- we support a substantial increase in lending of at least $100
billion by the Multilateral Development Banks (MDBs), including to
low income countries, and ensure that all MDBs have the appropriate
capital.[7]
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).
Concluding comments
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.
Scott Kompo-Harms
8 September 2009
Bills Digest Service
Parliamentary Library
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