Issues raised in evidence
2.1
This chapter considers the key measures in the bill and explores the
concerns raised in evidence regarding the bill's provisions.
Farm business concessional loans
2.2
Concessional loans have been provided to assist farm businesses to
improve their debt servicing capacity, or recover from the effects of drought,
since 2003.
2.3
Under the program, the Commonwealth provides loan funding to the states
and the Northern Territory to establish and fund schemes that provide concessional
loans to eligible farming businesses.[1]
The loans provide short-term, targeted assistance to farm businesses suffering
financial hardship, but which have a sound prospect of returning to commercial
viability.
2.4
Currently, the delivery arrangements for the scheme are negotiated
bilaterally with each jurisdiction and are underpinned by a loan agreement and
a service level agreement that outlines roles and responsibilities, reporting
and performance requirements and the terms and conditions of the Commonwealth's
loan.[2]
2.5
In April 2016, the Australian National Audit Office (ANAO) published a
performance audit report in relation to the first two concessional loan programmes
established by DAWR including the Farm Finance Concessional Loans Program and
the Drought Concessional Loans Program.[3]
2.6
In its audit report, the ANAO recognised that decentralised delivery
models such as the farm finance scheme, generally involve more complex
arrangements than centralised models. In the case of the concessional loans
programmes, the ANAO noted that the model incorporates a range of jurisdiction
specific arrangements while the schemes themselves are administered by a
diverse range of entities with differing levels of loan management experience.[4]
In addition, the ANAO found that decentralised delivery models can, due to the
number of different arrangements to be agreed, affect the ability of the federal
department to open schemes simultaneously.[5]
2.7
The Minister for Agriculture and Water Resources acknowledged these primary
concerns – inconsistency in delivery and the different arrangements across
states and territories – in his second reading speech on the bill:
There is no doubt these loans are successfully providing
practical support to the farm businesses that have received them, with over
$680 million in loans approved to 1,270 farm businesses as of 30 April 2017.
But the fact is that delivering through the states is
unwieldy and there is a lack of consistency in delivery across the country.
Currently the Commonwealth has to negotiate separately with
each state government to change an existing arrangement or roll out a new
program to farmers.
Even with the best endeavours, this can involve protracted
negotiations over delivery, loan terms and administration costs––delaying the
rollout of and farmers' ability to apply for this important government support.
We have also found that loan decisions are not being made
consistently across the country.
For example, some states apply a very restrictive approach to
assessing loan applications and have a very low rate of loan approvals.[6]
2.8
The National Farmers' Federation (NFF) observed that where previous
state-based organisations did not have the 'bandwidth to do so', the RIC should
aim to react efficiently and effectively to the needs of regional and rural
communities.[7]
For these reasons, it voiced its support for the bill's centralised approach:
The NFF is supportive of having farm business loans
controlled and operated out of a central location, as there is less scope for
funds to be lost through administrative costs...There is hope in the farming
community that the lag between political announcements about farm business loan
programs and that the actual delivery will be significantly shortened. Thus,
during tough seasons, a streamlined and centrally administered farm business
loan program could prove vital to farmers across the nation. Paramount to a
functional and useful RIC will be to eliminate unnecessary paperwork and to
process applications in a timely manner.[8]
2.9
DAWR noted in its submission that the ANAO's findings had been
considered in the design of the RIC, and in the delivery of concessional loans.
In particular, the key principles contained in the ANAO's recommendations
relating to good governance and risk management, have been incorporated into
the bill.[9]
2.10
DAWR made the point that by delivering farm business loans nationally,
the RIC will streamline administration and ensure national consistency in
decision-making. It noted that the farm business loans will not be the same as
those currently offered by the Commonwealth through the state and territory
government delivery agencies. Instead, the proposed RIC will deliver a new
concessional loans programme that aims to 'support the long-term strength,
resilience and profitability of Australian farm businesses'.[10]
Furthermore:
The new programme will help farm businesses build and
maintain diversity in the markets they supply and take advantage of new and
emerging opportunities across Australia and overseas. The Corporation will also
provide loans to help farm businesses prepare for, manage through and recover
from periods of drought. The functions associated with delivering farm business
loans are set out in clause 8(1)(a) of the Bill.[11]
National Water Infrastructure Loan Facility
2.11
The secondary function of the RIC is to administer, on behalf of the
Commonwealth, financial assistance for water infrastructure projects which were
granted to states and territories.
2.12
The National Water Infrastructure Loan Facility (NWILF) was announced as
part of the 2016–17 federal budget. It provides state and territory governments
with concessional loans to co-fund the construction of water infrastructure.
These loans are available through an expression of interest process managed by
DAWR.
2.13
The NWILF is designed to assist state and territory governments to
co-invest in vital water infrastructure. DAWR noted that the funding aims to
accelerate the construction of major water infrastructure projects including
dams, weirs, pipelines, and managed aquifer recharge and wastewater treatment
and use projects to provide affordable and secure water supplies to support the
growth of regional economies and communities.[12]
Concerns raised in evidence
2.14
Under the proposed provisions of the bill (namely subclauses 8(1)(b) and
8(1)(c)), the RIC will provide advice to the Government on projects being
considered under the NWILF.
2.15
The Australia Institute (AI) raised concerns regarding the provision of
'independent advice', noting that the bill does not elaborate what the
independent advice will involve, or how the ministers will be required to
consider it. AI also argued that the bill does not provide that the advice, or
a version of it, be publicly disclosed. AI held the view that this brings into
question the 'accountability and rigour of the Corporation and the spending the
Bill will facilitate'.[13]
2.16
DAWR clarified that the independent advice provided by the RIC to
government may include advice on matters such as feasibility, alignment with
government objectives for water infrastructure, and suitable terms and
conditions for any financial assistance.[14]
However, it was made clear that the decision about whether to grant a loan to a
state or territory under the NWILF, will continue to be made by the government,
rather than the RIC.[15]
2.17
Under subclause 12(3) of the bill, the ministers may give a written
direction to the RIC to enter into an agreement, on behalf of the Commonwealth,
for the grant of financial assistance to a particular state or territory in
relation to a particular water infrastructure project. DAWR noted that these
directions are not legislative instruments for the purpose of the Legislation
Act. The direction provides the mechanism in which the government notifies the
RIC of its decision relating to a proposed loan under the NWILF.[16]
Operating Mandate
2.18
The RIC will undertake its functions in line with an Operating Mandate
issued by the responsible ministers. The Operating Mandate will 'enable the
government to set out its expectations' in relation to the performance of RIC's
functions. It may include matters such as:
-
the objectives that the RIC is to pursue in administering the
programmes for which it is responsible;
-
expectations in relation to the strategies and policies to be
followed from the effective performance of the RIC's functions;
-
eligibility criteria for loans or financial assistance;
-
management of funding; and
-
other matters the responsible ministers deem appropriate.[17]
2.19
The NFF argued in favour of a provision in the bill within the Operating
Mandate to require the RIC to specify timeframes for the assessment and
determination of loan applications.[18]
It also suggested an amendment to clause 11 to require the responsible
ministers to conduct public consultation on a draft Operating Mandate, prior to
its finalisation. According to the NFF, the responsible ministers are not
required to consult with stakeholders when formulating the first mandate or
receive advice from the RIC board when revising the mandate in the future.[19]
2.20
However, DAWR emphasised that the Operating Mandate will set out the Government's
expectations in relation to the performance of the RIC's functions. This may
include matters such as the eligibility criteria for loans or financial
assistance, as well as expectations in relation to strategies and policies.[20]
Role of ministers
2.21
Under clause 12 of the bill, the responsible ministers may give 'other
directions' to the RIC. This may include directions relating to farm business
loans and particular water infrastructure projects.
2.22
The AI raised concerns about subclause 12(1) of the bill which provides
that the ministers cannot make directives with regard to particular loans under
the farm loan programme, but can make directions with regard to a 'class' of
such loans. It argued that as a 'class' is not defined in the bill, it would
appear possible for the Government to issue directives that 'concern
arbitrarily tightly defined classes of loans'.[21]
2.23
The AI was also concerned by subclause 12(4) of the bill whereby the
grants of assistance for water infrastructure may be given on direction of the
responsible ministers. It argued that, given the functions outlined in
subclause 8(1)(b), the ministers would be able to determine the terms and
conditions of the loans. At the same time, those functions do not allow the RIC
to give such loans without direction. It suggested that the end result was
that, 'very substantial aspects of the Corporation's lending activities will be
at ministerial discretion' which 'creates serious risk of politically directed
spending without rigorous oversight or analysis'.[22]
2.24
However, the EM explained that the responsible ministers may give a
written direction to the RIC in relation to a class of farm business loans under
subclause 12(1) as:
This provision is intended to allow the responsible Ministers
to respond, for example, to a particular industry event or regional
circumstance, by giving a direction to the Corporation on its treatment of
classes of loans. This direction power cannot be used to direct in relation to
a particular farm business loan.[23]
2.25
It should also be noted that subclause 12(2) requires the responsible
ministers to seek advice from the board prior to giving a direction under
subclause 12(1). This ensures that the board has an opportunity to provide
expert advice to the responsible ministers, prior to the direction being made,
for example, on how best to frame the direction to ensure its successful
completion. Similarly, the responsible ministers are required to consult with
the board prior to making a direction on an individual water infrastructure
project under subclause 12(3) of the bill.[24]
2.26
In terms of oversight, DAWR made the point that the reporting
requirement for corporate Commonwealth entities under the PGPA Act, require
that the details of any directions given by the responsible ministers will be
published in the relevant annual report of the Corporation.[25]
RIC board and expertise
2.27
The RIC will be a corporate Commonwealth entity with an independent
board consisting of a part-time chairperson and two part-time board members.
The role of the board is to ensure the proper, efficient and effective
performance of the RIC's functions.[26]
2.28
Clause 17 of the bill provides that the members and the chair will be
appointed by the responsible ministers by written instrument. The ministers
must be satisfied that a person has appropriate qualifications, skills or
experience in one or more of the following areas in order to be eligible for
appointment as a board member:
-
agribusiness and the financial viability of businesses within the
agricultural sector;
-
banking and finance;
-
water infrastructure planning and financing;
-
issues concerning rural industries and communities;
-
economics;
-
financial accounting or auditing;
-
government funding programs or bodies; and
-
law.
2.29
Alternatively, a person would be eligible for appointment to the board
if they have expertise in an area that is relevant to a program prescribed by
the relevant rules.
2.30
The Chair of the board must convene at least four meetings a calendar
year; while clause 29 specifies that quorum is constituted by a majority of
board members.
Concerns raised in evidence
2.31
The Pastoralists & Graziers Association of WA (PGA) argued that a
board membership of three was too small, and that the governance arrangements
'enshrine political influence' into what should be a purely commercial
operation.[27]
It suggested that the size of the board and its composition should be similar
to that found in private financial organisations in order to cover the range of
qualifications, skills and experience listed in section 17 of the bill.[28]
Similarly, the AI queried whether a board of three members would be 'sufficient
to effectively govern' the RIC and that there was a risk that the board would
'end up having a limited range of experience'.[29]
These concerns were also raised by the NFF.[30]
2.32
The Western Australia Department of Industries and Regional Development (WADIRD)
also raised concerns about the proposed board in terms of both the membership
under clause 16, and what constitutes a quorum under clause 29. It argued that
as RIC is to manage a loan portfolio of $4 billion, and up to 1000 clients, while
operating across all jurisdictions with variations in climatic and production
zones, three members would provide an 'insufficient spread of skills and
experience for effective governance'.[31]
2.33
The WADIRD highlighted section 201A of the Corporations Act 2001,
which states that there should be at least three board members for a public
company while the Australian Institute of Company Directors suggests that, as a
minimum, a public sector board should comprise six to twelve members. Based on
these standards, it argued that the RIC board should comprise a membership of
five.[32]
The NFF held the same view, arguing that three was 'too few in number to deal
with unforeseen circumstances'.[33]
2.34
The WADIRD also argued for amendment to the quorum provision proposed in
the bill in accordance with its suggestion of a board of five members.[34]
2.35
However, it should be noted that the PGPA Act does not specify a minimum
number of members to be appointed to a board. According to the Australian
Securities and Investments Commission, a proprietary company must have at least
one director while a public company must have at least three directors.[35]
2.36
Therefore, the number of proposed RIC board membership complies with
the minimum requirement.[36]
2.37
In response to concerns about expertise, DAWR confirmed to the committee
that the governance structure would provide for 'independent commercial
decision-making, and appropriate responsiveness to government and the needs of
industry'.[37]
It made the point that RIC will not only be able to employ its own staff, but
will also have the capacity to engage consultants to assist in the performance
of its functions.[38]
2.38
Accordingly, the NFF voiced its support for subclause 44(3) of the bill
which would enable the RIC to source local expertise. It noted that this
provision is 'likely to add significantly to the effectiveness of the RIC'.[39]
2.39
Finally, DAWR explained that to administer both farm business loans and
the NWILF, the RIC will 'consolidate loan delivery expertise within the
portfolio'. It argued that this will 'allow skills and expertise to be shared
across administration of both programmes, particularly at the senior level,
delivering flexibility and economies of scale'.[40]
RIC location
2.40
The PGA argued that the location of the RIC had been 'unilaterally
decided without any apparent economic analysis or even discussion with
agricultural industry stakeholders' which in turn highlighted 'another
dimension of the non-commercial nature of RIC'.[41]
2.41
However, the Minister for Agriculture and Water Resources stated that
the location of the RIC in Orange, NSW made sense because:
Orange is an important agricultural hub in a region which
generates about $1.7 billion in gross agricultural production, and is the home
of the NSW Department of Primary Industries.[42]
2.42
The Minister highlighted that establishing the RIC in Orange would
'present new growth opportunities for the city and surrounding areas, creating expanded
career pathways for regional people'.[43]
2.43
Most recently, the Minister noted that the announced decision to
establish the RIC in Orange would provide certainty to the board about the location
of the entity and allow it to focus on having the RIC fully operational by July
2018.[44]
Budget neutrality
2.44
The Financial Impact Statement contained in the EM states that:
The farm business concessional loans programme and National
Water Infrastructure Loan Facility are expected to be budget neutral over their
life, with the establishment and operating costs of the Corporation to be
recovered through the interest charged on loans to farm businesses and state
and territory governments.[45]
2.45
The AI argued that it would appear that there is no requirement in the
bill that this must happen, or a requirement that decisions – by the RIC or the
ministers directing it – be informed by appropriate financial due diligence, to
ensure that it happens.[46]
2.46
However, DAWR confirmed that the delivery of farm business loans and the
NWILF is intended to be budget neutral over the life of the programmes.
Therefore, the establishment and operating costs of the RIC are expected to be
offset through the interest charged on loans to farm businesses and state and
territory governments.[47]
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