Bills Digest no. 90 2013–14

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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.

Rob Dossor
Economics Section 
17 June 2014

 

Contents

Purpose of the Bills

Structure of the Bill

Background

Committee consideration

Statement of Compatibility with Human Rights

Policy position of non-government parties/independents

Position of major interest groups

Financial implications

Key issues and provisions

Concluding comments

 

Date introduced:  29 May 2014

House:  House of Representatives

Portfolio:  Finance

Commencement:  The Asset Recycling Fund Bill 2014 commences on 1 July 2014.

Sections 1–3 of the Asset Recycling Fund (Consequential Amendments) Bill 2014 commence on Royal Assent. Schedule 1 commences immediately after the commencement of section 3 of the Asset Recycling Fund Act 2014.

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on each the Bills’ home pages for the Asset Recycling Fund Bill 2014 and the Asset Recycling Fund (Consequential Amendments) Bill 2014 or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

 

Purpose of the Bills

The purpose of the Asset Recycling Fund Bill 2014 (the Fund Bill) is to establish the Asset Recycling Fund as a dedicated investment vehicle, with a focus on providing financial assistance and incentives to the states and territories, to create new productive infrastructure.

The purpose of the Asset Recycling Fund (Consequential Amendments) Bill 2014 (Consequential Amendments Bill) is to make consequential amendments to other statutes to enable the operation of the Asset Recycling Fund.

Structure of the Bill

The Fund Bill contains five parts. Significantly:

• Part 2 establishes the Asset Recycling Fund
• Part 3 sets out the responsibilities of the Future Fund Board to invest the funds of the Asset Recycling Fund and the nature of those investments
• Part 4 sets out the reporting obligations of the Future Fund Board in relation to the Asset Recycling Fund and
• Part 5 deals with miscellaneous matters such as delegations.

The Consequential Amendments Bill amends:

• the COAG Reform Fund Act 2008[1]
• the DisabilityCare Australia Fund Act 2013[2]
• the Future Fund Act 2006[3] and
• the Nation-building Funds Act 2008.[4]

Background

In the lead up to the 2013 Federal Election the Coalition pledged that, if elected, it would be an ‘infrastructure‑focused government’.[5]

Once elected, the Abbott Government directed the Productivity Commission (PC) to commence a ‘thorough examination of infrastructure costs and financing in Australia’.[6] Specifically, the PC was required to ‘undertake an inquiry into ways to encourage private financing and funding for major infrastructure projects, including issues relating to the high cost and long lead time associated with these projects’.[7] The PC submitted its final report to the Government on 27 May 2014, but the report has not yet been made public.[8]

The rationale for the PC inquiry is the increasing caution by private investors about committing to public infrastructure projects. This comes in the wake of some high profile commercial failures such as the Sydney Cross City Tunnel, Lane Cove Tunnel, the Brisbane CLEM7 tunnel and Airportlink M7.[9]

Economic geographer Professor Brent Flyvbjerg found that up to 50 per cent of traffic forecasts overestimate passenger traffic by over 20 per cent, which may result in these infrastructure projects looking good on paper but performing poorly when built.[10] The Brisbane Airportlink M7, for example, reportedly forecast usage by 135,000 vehicles a day after opening, rising to 190,000 six months after opening. In comparison, the actual number of users (as of February 2013) was significantly lower, at around 45,000 per day.[11] In addition, the PC has confirmed that ‘the failure of some toll road projects, such as Sydney’s cross-city tunnel and Brisbane’s CLEM 7 motorway were partly a result of overly optimistic assessment of patronage forecasts by private consultants’.[12]

Infrastructure growth package

The Government announced as part of its May 2014 Budget that it would provide an additional $11.6 billion to establish an Infrastructure Growth Package to fast-track investment in critical infrastructure across the country.[13] The Infrastructure Growth Package includes, amongst other things:

$5.0 billion over five years towards the Asset Recycling Initiative which provides incentive payments to encourage the states and territories to sell assets and recycle the sale proceeds into new productivity-enhancing infrastructure.[14]

Asset recycling initiative

A key pillar of the Coalition’s infrastructure plan is to encouraging private companies to fund and run public infrastructure, particularly transport.[15] This, in part, is due to the recognition that governments face fiscal constraints in building and maintaining infrastructure.[16] To facilitate public investment, the states and territories are to be given an incentive to sell assets, including transport infrastructure, and use the proceeds to fund new public infrastructure. This incentive will be provided through the Asset Recycling Initiative (ARI) which was agreed by the Council of Australian Governments (COAG) on 2 May 2014.[17] The incentive will be provided by the Commonwealth in the form of a financial contribution of 15 per cent of the asset value of the sale that is used to fund the infrastructure.[18]

The payments to the states and territories under ARI will be sourced from the Asset Recycling Fund. The Asset Recycling Fund itself will receive $2.4 billion in uncommitted funds from the Building Australia Fund and $3.5 billion in uncommitted funds from the Education Investment Fund.[19] Subsequent resourcing for the Asset Recycling Fund will be provided by the sale of Commonwealth assets, the first of which will be Medibank Private.[20] The Asset Recycling Fund will provide monies for all the measures in the Infrastructure Growth Package, including the ARI, new investments in the Infrastructure Investment Programme projects and the Western Sydney Infrastructure Plan.[21]

Building Australia Fund

Both the Building Australia Fund and the Education Investment Fund will be shut down after the funds are redirected to the Asset Recycling Fund.[22] The Building Australia Fund was a Labor commitment made during the 2007 Election.[23] The Building Australia Fund was established on 1 January 2009 by the Nation-building Funds Act 2008 to ‘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’.[24]

Committee consideration

Senate Finance and Public Administration Legislation Committee

The Bills were referred to the Senate Finance and Public Administration Legislation Committee (the Senate Committee) on 29 May 2014 for inquiry and report by 16 June 2014.[25]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Bills Digest, the Standing Committee for the Scrutiny of Bills had not commented on the Bills.

Parliamentary Joint Committee on Human Rights

At the time of writing this Bills Digest, the Parliamentary Joint Committee on Human Rights had not commented on the Bills.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[26] The Government considers that the Bills are compatible.

Policy position of non-government parties/independents

At the time of drafting this Bills Digest the position of the opposition or other non-government members had not been expressed.

Position of major interest groups

There has been little commentary about the content of the Bills. However, the potential sale of state and territory assets has attracted some interest at a local level. The Australian Financial Review, for example, is in favour of the prospective sale of a number of Queensland state assets:

Of the Queensland asset sale program, about $5 billion will be in direct sales, with another $28 billion to be equity injections … The Newman government has taken a step in the right direction with its asset sales but could have achieved much more.[27]

However, Chris Aulich, Professor of Public Administration, remains less convinced, stating in The Conversation:

I hope that states will be able to resist the 15% bribe and undertake due diligence on any potential asset sale. This should take into account necessary changes to the regulatory regimes that should, in almost all cases, accompany proposals for divestment of publicly-owned assets.[28]

Financial implications

The Bills will have only an insignificant effect on the underlying cash balance. The initial credit from the Building Australia Fund and the Education Investment Fund will remain within the Consolidated Revenue Fund and so have no effect on the underlying cash balance. Interest earnings on the fund and management fees of the Future Fund Board will have a minor impact on the underlying cash balance.[29]

Key issues and provisions

Asset Recycling Fund Bill

Preliminary matters

Part 1 of the Fund Bill contains preliminary matters including, at clause 8, an alternative Constitutional basis for the Bill. Legislation must be supported by a Constitutional head of power.[30] The High Court has also established that Commonwealth spending must be supported by a valid legislative head of power.[31] The following recognised heads of Commonwealth legislative power are referenced in the following subclauses:

• the trade and commerce power in subsection 51(i) of the Constitution: subclause 8(2)
• the corporations power under subsection 51(xx) of the Constitution: subclause 8(3) and 8(4)
• the territories power under section 122 of the Constitution: subclause 8(5)
• Commonwealth places over which the Commonwealth has exclusive powers under section 52 of the Constitution: subclause 8(6)
• the Commonwealth’s power with respect to railways under subsection 51(xxxiv) of the Constitution: subclause 8(7)
• the external affairs power under subsection 51(xxix) of the Constitution: subclause 8(8)
• the defence power of the Commonwealth under subsection 51(vi) of the Constitution: subclause 8(9) and
• the executive power of the Commonwealth under section 61 of the Constitution (also known as the nationhood power), and the incidental legislative power under subsection 51(xxxix) of the Constitution: subclause 8(10).

The Fund Bill, to the extent that it provides for payments to the states, is supported by section 96 of the Constitution which is about financial assistance to the states. Payments to other persons might require reliance upon the alternative constitutional bases as set out in clause 8.

Clause 9 outlines the objectives of the Fund Bill, namely to enable the Commonwealth:

• to transfer amounts to the COAG Reform Fund to make financial grants to states and territories for expenditure incurred under the National Partnership Agreement on Asset Recycling,[32] that is, through the Asset Recycling Initiative
• to transfer amounts to the COAG Reform Fund to make financial grants to states and territories for expenditure under the National Partnership Agreement on Land Transport Infrastructure Projects[33]
• to transfer amounts to the COAG Reform Fund in order to make infrastructure grants and
• to transfer amounts to the Asset Recycling Fund Infrastructure Special Account to enable the making of infrastructure payments.

Asset recycling fund

Clause 11, which is in Part 2 of the Bill, establishes the Asset Recycling Fund which consists of:

• the Asset Recycling Fund Special Account (Special Account)[34] and
• the investments of the Asset Recycling Fund.

Clause 13 of the Bill operates to credit the Special Account with two separate amounts on 1 July 2014. The first amount is the lesser of $2.4 billion or the balance of the Building Australia Fund Special Account on that day. The second amount is the lesser of $3.5 billion or the balance of the Education Investment Fund Special Account on that day. Where the amounts credited are the lesser amounts, clause 34 of Part 3 of the Bill operates so that Future Fund Board is to determine in writing which of the financial assets of the Building Australia Fund and the Education Investment Fund are to be transferred to the Asset Recycling Fund to make up the balance.

As of 31 March 2014, the Building Australia Fund Special Account had a balance of $4.09 billion and the Education Investment Fund had a balance of $3.87 billion.[35]

Clause 14 enables the Treasurer or the Minister for Finance to determine, in writing, further amounts to be credited to the Special Account on a specific day or in instalments on specific days. Subclause 14(3) makes this a non-disallowable legislative instrument. This means there is no scope for the Parliament to disallow any determination made under this clause.

Clause 15 outlines the main purposes of the Special Account. These purposes are in equivalent terms to the objectives of the Fund Bill described in clause 9 above.

Clause 16 outlines specific purposes of the Special Account that relate to investments in accordance with the provisions of Part 3 of the Fund Bill.

Clause 17 outlines purposes of the Special Account that do not exclusively relate to the Asset Recycling Fund (ARF) but are linked to specified purposes under the Future Fund Act, the Nation-building Funds Act and the DisabilityCare Australia Fund Act.

Channelling of grants through the COAG Reform Fund

Clauses 18–21 of the Bill set out the manner in which grants are channelled through the COAG Reform Fund.[36]

• clause 18 empowers the Finance Minister to direct, in writing, a specified amount to be debited from the Special Account and credited to the COAG Reform Fund (subclause 18(1)).[37] The direction must be expressed so that the amount may be subsequently debited from the COAG Reform Fund for the purpose of making either:

–      a specified grant of financial assistance to the states and territories. The specified grant may be for expenditure incurred under the National Partnership Agreement on Asset Recycling (in which case the Treasurer must recommend the specification)[38] or for expenditure incurred under the National Partnership Agreement on Land Transport Infrastructure Projects (in which case the Infrastructure Minister must recommend the specification)[39] or

–      a specified infrastructure national partnership grant, in which case a Minister (other than the Finance Minister) has recommended the specification.[40]

• once the amount specified is credited to the COAG Reform Fund under clause 18, the Treasurer must ensure that, as soon as practicable, the COAG Reform Fund is debited for the purposes of making the relevant grant. In circumstances where that cannot be done, the credited amount must be withdrawn from the COAG Reform Fund and repaid to the special account[41]
• where the COAG Reform Fund is to be debited for the purposes of making a grant for the purpose of financial assistance to a state or territory for purposes set out in clause 18, clause 21 of the Bill requires that the terms and conditions on which the assistance is to be granted are to be set out in a written agreement between the Commonwealth and the state or territory. This agreement may be entered into by a Minister on behalf of the Commonwealth.

Channelling of payments through the Infrastructure Special Account

Clause 22 establishes a second Special Account—the Asset Recycling Fund Infrastructure Special Account (Infrastructure Special Account).[42] The purpose of the Infrastructure Special Account is to enable the making of infrastructure payments.[43]

The nature of the payments is either by way of a grant of financial assistance or otherwise.[44] The impetus for the payment is a written direction by the Finance Minister (a copy of which is to be given to the Infrastructure Minister)[45] that an amount be debited from the Special Account and credited to the Infrastructure Special Account (subclause 24(1)).[46] That direction must be expressed as being for the purpose of enabling the making of infrastructure payments.[47] Clause 25 specifies that the direction must not be made unless the Infrastructure Minister recommends it.

Once the amount specified in the direction made under clause 24 has been credited to the Infrastructure Special Account, the Infrastructure Minister must, as soon as practicable, ensure that the Infrastructure Special Account is debited for the purposes of making the relevant payments.[48] In circumstances where that cannot be done, the credited amount must be withdrawn from the Infrastructure Special Account and repaid to the Special Account.[49]

Where the Infrastructure Special Account is to be debited to make a grant of financial assistance as permitted by paragraph 23(2)(a) of the Bill, the terms and conditions on which the assistance is to be granted are to be set out in a written agreement between the Commonwealth and the person who is to receive the assistance.[50] Similarly, where the Infrastructure Special Account is to be debited to make a payment otherwise than by grant of financial assistance as permitted by paragraph 23(2)(b) of the Bill, the terms and conditions on which the payment is made are to be set out in a written agreement between the Commonwealth and the person who is to receive the payment.[51]

Investment of the Asset Recycling Fund

It is the responsibility of the Future Fund Board to invest the Asset Recycling Fund. In acquiring a financial asset[52] (an asset that establishes a claim on the issuing person or organisation)[53] as an investment of the Asset Recycling Fund, the Future Fund Board must comply with the objects of investment which are set out in clause 32 of the Bill. Importantly, the Future Fund Board may invest amounts only in a financial asset. Under clause 49, if an investment of the Asset Recycling Fund ceases to be a financial asset (for example, when a financial asset becomes a fixed asset – an asset not rapidly turned over in the course of business, i.e. land, buildings and plant machinery)[54], the Future Fund Board must realise the asset as soon as practicable after it becomes aware of the cessation. Although investments are made in the name of the Future Fund Board, they are taken to be investments of the Asset Recycling Fund.[55] Income derived from an investment of the Asset Recycling Fund will be credited to the Special Account.[56]

Asset Recycling Fund Investment Mandate

Clauses 36–39 of the Bill deal with the Asset Recycling Fund Investment Mandate (the Investment Mandate). The Treasurer and the Minister for Finance[57] must give at least one direction to the Future Fund Board on the performance of the ARF investment functions.[58] This, and any other directions by the responsible Ministers to the Future Fund Board, will be known as the Investment Mandate.[59] When developing the Investment Mandate the responsible Ministers must consider maximising the return of the Asset Recycling Fund consistent with international best practice for institutional investment, enhancing the Commonwealth’s ability to fulfil the objectives of the Act and any other relevant matters.[60] The Future Fund Board must be consulted on the development of the Investment Mandate and take reasonable steps to comply with it.[61] The directions which comprise the Investment Mandate are non-disallowable legislative instruments which are exempt from sunsetting.[62]

Clause 40 provides that the Future Fund Board must not acquire a share in a particular company to the extent that it would trigger the takeover provisions of the Corporations Act 2001.[63] If the takeover provisions were triggered, however, the transaction would still be valid (subclause 40(2)).

Clause 41 outlines the conditions under which the Future Fund Board is authorised to borrow money.

Clause 42 specifies that the Future Fund Board must formulate, publish and comply with written investment policies which are consistent with the Investment Mandate about:

• the investment strategy for the ARF
• benchmarks and standards for assessing the performance of the ARF
• risk management for the ARF
• a matter relating to international best practice for institutional investment
• a matter specified in the rules.[64]

The Future Fund Board may engage one or more investment managers for purposes in connection with the ARF.[65] The Future Fund Board may not, however, undertake investments on behalf of the ARF, unless through an investment manager, or in a manner approved by the responsible Ministers. The investment managers can only invest in derivatives in certain circumstances (subclause 43(1)) and may not invest in derivatives for the purpose of speculation or leverage.

Reporting obligations

The Finance Minister may, by written notice given to the Future Fund Board, require the Future Fund Board to prepare a report about specified matters or prepare a document setting out specified information about the performance of the Future Fund Board’s functions under the Fund Bill.[66] The Future Fund Board must comply with the written notice.[67] Having received the relevant report or document, the Finance Minister may cause it to be published on the internet or otherwise.[68] In addition, the Finance Minister may give a Minister the report or document.[69]

Delegations and rules

Part 5 of the Fund Bill sets out the powers of the Finance Minister, the Treasurer and the Infrastructure Minister to delegate his, or her, powers or functions to Departments and Agencies (clauses 56–58). In addition, the Finance Minister may, by legislative instrument, make rules prescribing matters which are required or permitted to be prescribed by the Fund Bill as well as those that are necessary or convenient to give effect to the Bill (clause 59).

Consequential Amendments Bill

Schedule 1

Items 1–17 and 19–39 of the Consequential Amendments Bill make minor and technical amendments to the COAG Reform Fund Act, the DisablityCare Australia Fund Act, the Future Fund Act and the Nation-building Funds Act to include references to the Asset Recycling Fund Act 2014. Item 18 inserts annual reporting requirements for the Asset Recycling Fund into the Future Fund Act.

Concluding comments

Currently, projects funded by either the Building Australia Fund or the Education Investment Fund have to be assessed by a specialist agency. For example, any proposed expenditure on transport infrastructure funded through the Building Australia Fund must first be assessed against the relevant Building Australia Fund evaluation criteria by Infrastructure Australia.[70] The Fund Bill includes no such requirement and therefore appears to fail to implement the Coalition’s commitment that ‘to ensure more rigorous and transparent assessments of taxpayer-funded projects we will require all infrastructure projects worth more than $100 million to undergo a cost-benefit analysis [by Infrastructure Australia].’[71]

The National Partnership Agreement on Asset Recycling states that to be eligible for funding, infrastructure projects must:

1. demonstrate a clear net positive benefit
2. enhance long-term productive capacity of the economy and
3. where possible, provide for enhanced private sector involvement in both funding and financing of infrastructure.[72]

The Agreement states that the Commonwealth will also consider projects that meet long-term economic infrastructure priorities in regional economies.[73] There is no mention however, in the Agreement, or in these Bills, of who is responsible for determining whether an infrastructure project meets these requirements. The only indication of who would determine this eligibility came from the Treasurer, who said, when asked who would assess whether an infrastructure asset is productivity boosting, ‘We will, through the Treasury, and we will form an opinion on it.’[74]

It is unclear why the Treasury would make this assessment when Infrastructure Australia already makes similar assessments of public infrastructure.

 

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