commonwealth of australia official committee hansard · professor allan fels, chairman mr brian...

COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATE ECONOMICS LEGISLATION COMMITTEE

ESTIMATES

(Budget Estimates)

THURSDAY, 5 JUNE 2003

C A N B E R R A

BY AUTHORITY OF THE SENATE

INTERNET

The Proof and Official Hansard transcripts of Senate committee hearings, some House of Representatives committee hearings and some joint committee hearings are available on the Internet. Some House of Representatives committees and some joint committees make available only Official Hansard transcripts. The Internet address is: http://www.aph.gov.au/hansard To search the parliamentary database, go to: http://search.aph.gov.au

Thursday, 5 June 2003 Senate—Legislation E 531

ECONOMICS

SENATE

ECONOMICS LEGISLATION COMMITTEE

Thursday, 5 June 2003

Members: Senator Brandis (Chair), Senator Jacinta Collins (Deputy Chair), Senators Chapman, Murray, Watson and Webber

Senators in attendance: Senators Brandis, Chapman, Conroy, Crossin, Lundy, Mason, Sherry and Watson

Committee met at 9.06 a.m.

TREASURY PORTFOLIO

Consideration resumed from 4 June 2003.

In Attendance

Senator Ian Campbell, Parliamentary Secretary to the Treasurer

Australian Securities and Investment Commission (ASIC) Outcome 1

Mr Mark Adams, Director, Regulatory Policy Mr Jeffrey Lucy, Deputy Chairman Berna Collier, Commission Member Mr Ian Johnston, Executive Director, Financial Services Regulation Mr Peter Kell, Executive Director, Consumer Protection Ms January Redfern, Deputy Executive Director, Enforcement Mr Doug Niven, Deputy Chief Accountant Mr Peter Wood, Executive Director, Enforcement

Australian Bureau of Statistics (ABS) Outcome 1

Mr Dennis Trewin, Australian Statistician Mr Rob Edwards, Economic Statistics Group Mr Graeme Hope, First Assistant Statistician, Corporate Services Division Mr Paul Williams, Assistant Statistician, Census, Demography and Geography Branch Mr Patrick Corr, Director, Demography

Australian Competition and Consumer Commission (ACCC) Outcome 1

Professor Allan Fels, Chairman Mr Brian Cassidy, Chief Executive Officer Mr David Smith, Executive General Manager, Compliance Division Mr Joe Dimasi, Executive General Manager, Regulatory Affairs Division Mr Robert Antich, General Manager, Compliance Strategies Branch Mr Mark Pearson, General Manager, Mergers and Asset Sales Branch

Productivity Commission Mr Robert Kerr, Head of Office Mr Garth Pitkethly, First Assistant Commissioner

E 532 Senate—Legislation Thursday, 5 June 2003

ECONOMICS

Australian Accounting Standards Board (AASB) Mr Angus Thomson, Technical Director

Australian Bureau of Statistics (ABS) Outcome 1

Mr Dennis Trewin, Australian Statistician Mr Rob Edwards, Economic Statistics Group Mr Graeme Hope, First Assistant Statistician, Corporate Services Division Mr Paul Williams, Assistant Statistician, Census, Demography and Geography Branch Mr Peter Harper, First Assistant Statistician, Economic Accounts Division

Australian Office of Financial Management Outcome 1

Mr Blair Comley, Acting Chief Executive Officer Treasury Outcome 2.1—Fiscal

Mr Richard Murray, Executive Director, Fiscal Group Mr Steve French, General Manager, Budget Policy Division Ms Maryanne Mrakovcic, Budget Policy Division Mr Paul Roe, Manager, Budget Policy Division

Treasury Outcome 3—Markets

Dr Ken Henry, Secretary CHAIR—I call to order this hearing of the Senate Economics Legislation Committee to

resume consideration of the budget estimates for the Treasury portfolio. Would any of those at the table like to make an opening statement?

Australian Securities and Investment Commission

Mr Lucy—Firstly, I apologise on behalf of our chairman, David Knott—who is overseas on ASIC business at the moment—for his nonattendance. I believe that the people at this table are known to the panel, with the exception of my colleague Commissioner Collier. I believe that this is her first time before Senate estimates, so I introduce her to the senators here this morning.

CHAIR—Good morning, Ms Collier. I hope you enjoy it as much as we all do.

Prof. Collier—I am looking forward to it.

Senator WATSON—My first question concerns tree plantations. In the past not all tree plantations have followed your edict about long-term financial projections. Can we now be assured that every tree plantation operation that issues a public prospectus has now deleted these long-term future projections?

Mr Lucy—We have in the marketplace a very clear guideline as to what is required as far as long-term projections go. The difficulty ASIC has faced in the marketplace is that many of these long-term projections have included fundamental assumptions—for example, about CPI—which might be drawn from informed, reasonable and sustainable data but are not necessarily taken to the next stage of applying them to the pine plantation, to take your example. Our concern has been that a number of these documents in the marketplace are


ECONOMICS

misleading to the extent that their forward projections go beyond what we would regard as being reliable.

Senator WATSON—I agree with that, but my question is about ensuring that we have a level playing field—that all prospectuses out there in the marketplace at the moment do not have those projections. You can appreciate that, if some do and some do not, you have an unsatisfactory situation. You are the regulator. I am seeking assurances from you that all the prospectuses out there do not have long-term projections. Somebody who is closer to the coalface may be able to respond.

Mr Johnston—My understanding is that as of yesterday all—or perhaps all but one exception—of those schemes have now withdrawn those forecasts from their documents and issued either supplementary documents or replacement documents. There may be one that is still outstanding, but we are in discussion with that fund manager at the moment.

Senator WATSON—That would not be the one that has the highest acknowledged cost structure?

Mr Johnston—It may well be that one.

Senator WATSON—Therefore, I would see some importance in ensuring that it is brought into line.

Mr Johnston—As I said, we are in discussions with one at the moment. My understanding is that all of the other prospectuses have withdrawn their projections, their forecasts. I would be hopeful that we would be in a position whereby everyone has adopted the same standards.

Senator WATSON—Why would this one be hanging out?

Mr Johnston—I do not know that it is a case of hanging out. We are in discussions with them at present, so I do not think I can say much more than that.

Senator WATSON—Would you be confident that it is likely to be brought into line in a short period of time?

Mr Johnston—I think it would be unlikely.

Senator WATSON—The reason I say that is that this money is collected in a very short period of time, and the month of June is fairly critical.

Mr Johnston—Therein lies the difficulty. Because the money is collected in a very short space of time, the marketing takes place in a very concentrated period, so it is somewhat difficult for ASIC to review on a risk basis all their prospectuses in the marketplace at the same time.

Senator WATSON—Yes, but if you have only got one prospectus outstanding you can focus on this one, can’t you?

Mr Johnston—That is why we are in discussions with them now.

Senator CONROY—I just wanted to talk about HIH and the task force. I understand the government has provided you with additional funding of $17 million and $10 million in the next two years—is that right?

Mr Lucy—That is correct.


ECONOMICS

Senator CONROY—Can you advise the committee of the composition of the HIH task force, its terms of reference and whether a special prosecutor will be appointed?

Prof. Collier—I can answer the question as far as the composition of the HIH task force is concerned. It will be composed of approximately 40 people. There will be a media release with some of this information on it. There will be a project office which will nurture it at commission level. We will have a project manager. Our executive director of enforcement, Peter Wood, I understand is in that project office, along with our chairman, David Knott. It will be set up in the same premises as ASIC in Sydney, but separate from ASIC as far as operational matters are concerned.

Senator CONROY—Will there be a special prosecutor?

Prof. Collier—That is a matter for government.

Senator Ian Campbell—I can actually help there. The government has made it quite clear in its public comments and through its actions that ASIC will be given whatever is necessary to get the best outcome in terms of prosecutions.

Senator CONROY—Can you advise the committee which external parties will be included in the HIH task force?

Prof. Collier—At this stage, there is one, which is an external counsel that we are about to engage.

Senator CONROY—Do you know who that is yet?

Prof. Collier—Yes, that will be Peter Clarke, SC, from Melbourne.

Senator CONROY—Any others likely?

Prof. Collier—To my knowledge, no. I will ask our executive director, Peter Wood, if he can comment on that further.

Mr Wood—Yes, I might be able to assist. There are two junior counsel currently briefed in that matter. In addition, if I could go on, the task force is going to receive debriefings from counsel who are briefed on the royal commission, so we will pick up some of the ongoing knowledge that was accumulated there. If you would like, I will go into the governance—it is a bit closer to me than to Commissioner Collier. There is a board being formed to run the task force. The board is chaired by our chairman, David Knott. It comprises the chairman plus the most senior staff in the enforcement directorate. The CEO, handling the task force on a day-to-day basis, is Allen Turton, who is the Director, Enforcement for north-east. There is a chief investigator and a series of teams. Allied to that structure is a cell with counsel—Peter Clarke has been appointed; I think the title he has been given is special counsel to the task force. As I mentioned, he has two junior counsel assisting him. There will also be, as required, experts retained—be they accounting, actuarial or whatever.

Senator CONROY—I should take this opportunity to congratulate everybody involved in a whole range of recent successes. It would be no secret to anyone on this committee or even ASIC that I have followed John Elliott’s career very closely. I am particularly gratified that justice has finally caught up with him. It is not just John Elliott; there is Rene Rivkin—there is a string of difficult cases which you have won. The organisation deserves a lot of


ECONOMICS

commendation for having a go. Some weeks you are subjected to criticism for only going after the small fry and other weeks, all of a sudden, people say you have got a fixation with going after the tall poppies. I wish people would look at the record consistently before they have a crack at you on that basis.

Senator WATSON—So did Rene Rivkin.

Senator CONROY—Hopefully, Mr Rivkin will end up where he belongs. I will not ask you to comment on that, as it is an ongoing matter. Senator Watson correctly makes the point, and he may even have some questions about it. I wanted to put that on the record.

Senator Ian Campbell—Richo wants to know whether he is going to a birthday party tomorrow night!

Senator CONROY—Yes, I wonder if Richard Alston is going to take John Elliott to the footy for the next Carlton-Collingwood match or not!

Senator Ian Campbell—He doesn’t know either.

Senator CONROY—These are the questions that abound in life.

Senator Ian Campbell—It is these uncertainties—just ask Simon Crean.

Senator CONROY—Could you find a breakdown of how the additional $17.5 million for HIH would be allocated. Is that mainly staffing costs or is it research?

Mr Wood—It has not presently been broken down. There was an apportionment done for budgeting purposes, but I think it is something which will just evolve with the investigation. Our experience has been that retaining experts to support these investigations, prosecutions and civil actions is a very expensive business. We are not sure just yet how many of those experts we will need to retain. We can project counsel reasonably accurately, but, again, investigations, almost being living thing, will expand or contract depending on developments from time to time.

Senator CONROY—Hopefully, it does not expand in the Yannon style proportions, where you had entire floors dedicated to years of frustration.

Mr Wood—I think we share that hope.

Senator CONROY—I am sure you would share that, Mr Wood. In relation to three potential criminal prosecutions that you have already referred to the DPP relating to HIH, has the DPP made a decision on these matters?

Mr Wood—Yes, they have.

Senator CONROY—Will the prosecutions be proceeding?

Mr Wood—Yes.

Senator CONROY—To refresh my memory, who are the three individuals involved?

Mr Wood—I do not think it is appropriate to name them.

Senator CONROY—I thought they might be public. If they are not public, that is fine.

Mr Wood—Our policy is not to go to that sort of detail until they make their first appearance in court.


ECONOMICS

Senator CONROY—That is understood. The HIH royal commission has made 53 referrals to ASIC, as I understand it. Mr Knott has indicated that ASIC may look beyond those referrals to other issues such as directors’ duties. Could you advise the committee about the additional matters which ASIC is investigating?

Prof. Collier—At this stage, it is a matter that we are considering and are not in a position to comment about publicly.

Senator CONROY—A number of matters were not referred by the royal commission. Justice Owen made specific mention that, in his view, FAI was probably insolvent at the time of purchase. Has that come across your radar screen, with high-profile success recently with directors trading while insolvent? I was just wondering if that was one of the matters that you might be looking at.

Prof. Collier—Our best answer is that our investigations are continuing at this stage. It is not really appropriate for us to comment publicly.

Senator CONROY—It is a major public company that a royal commission has pointed to and said that it was probably trading while insolvent. Surely that would be one of the issues that you would be looking at.

Prof. Collier—As our chairman, David Knott, said—and as you have mentioned—we will not be confining our investigations into the referrals and will be looking at other matters coming out of HIH. But, at this stage, it is not appropriate for us to comment because our investigations are continuing. We have not formed any views at this stage.

Senator CONROY—Sure. I am not asking you about the finality; I am asking: given that Justice Owen has pointed to a large public company that he believed was trading while insolvent, would this be one of the matters you would be considering?

Prof. Collier—I will ask our executive director, Peter Wood, if he would like to comment on this matter, because he is closer to this matter than I am.

Mr Wood—It is very difficult to be helpful without going into operational details.

Senator CONROY—I appreciate your caution and, as you know, I am always cautious on those matters.

Mr Wood—I think you have to take the overall view that the HIH FAI saga was a pretty vast canvas of events and images. You really had two investigations running in parallel, in a sense. You had the royal commission following their terms of reference and, at the same time, you had ASIC pursuing their own regulatory functions. It is fair to say that there was a fairly significant degree of correlation or alignment between the referrals made by the royal commission and the lines of our inquiries. I think the chairman has also said that we will be continuing to pursue the matters which we are working on which were not within the list of referrals. In all of that, I have no doubt that the solvency or otherwise of FAI would come up as an issue.

Senator CONROY—What are the sorts of breaches that will be considered—directors’ duties? What else—what are the other breaches that you will be looking for? I do not think that goes to operational maters; that is just general. What are the areas that concern you?


ECONOMICS

Mr Wood—Right across the whole—

Senator CONROY—These are the things that have not been referred to you by the royal commission. Mr Knott has indicated that you are looking beyond the 53 referrals to other issues such as—and I think he indicates—directors’ duties. Are there any other?

Senator WATSON—There are a few you covered yourself.

Mr Wood—I am finding it difficult to help you without identifying a line of inquiry.

Senator CONROY—I am just trying to identify the sorts of issues that you are concerned about.

Mr Wood—If I mention possible charges, I think it is easy to identify the individuals subject to those charges.

Senator Ian Campbell—He is right to be cautious.

CHAIR—Mr Wood, I think Senator Conroy and other senators fully appreciate your caution. I do not think anybody is going to press you to identify an individual or a company, either by name or by a description so narrowly confined that it would, in effect, identify them. But I think senators can fairly ask you about categories or types of investigations. Is that what you are getting at, Senator Conroy?

Senator CONROY—That is all I am asking, yes.

Senator WATSON—Or offences.

CHAIR—Just be guided by that.

Mr Wood—I suppose the issues that would arise would involve perhaps conduct in relation to auditors and possible insolvent trading. Directors’ duties, of course, cover a wide range of conduct. I think that would cover the majority of the suspected criminality that we have been looking at.

Senator CONROY—Thank you. I might come back to that. Mr Pound is probably needed for the next bit.

Mr Lucy—Greg Pound is also overseas with our chairman.

Senator CONROY—What is the conference? It sounds like a good one.

Mr Lucy—It is IOSCO.

Senator CONROY—It is a good one. I remember it because I went to it when it was in Australia. It is a very worthwhile organisation. Is anyone able to help me with your draft guidelines for valuing options?

Mr Lucy—I can perhaps assist in the first instance. Our assistant chief accountant is also here if we need to call in the reinforcements.

Senator CONROY—You issued recent draft guidelines on valuing options, and it adopts the IASB’s exposure draft ED2 share based payment as the basis for valuing options.

Mr Lucy—Correct.

Senator CONROY—Why did ASIC choose to adopt this international standard as the basis for its guideline when the standard does not state a formula to value options?


ECONOMICS

Mr Niven—We chose that as an appropriate basis for valuing options, and we are aware that some have expressed concern about the level of detail that that exposure draft goes into. However, we felt that that is an appropriate basis in that it is likely to be the basis that will be adopted in the international standard for both expensing in Australia for an accounting standard dealing with disclosure issues in relation to remuneration. Internationally there is a question in accounting standard setting as to how far you go in terms of prescribing rules. The view that has been taken by the International Accounting Standards Board is to set principle based standards as opposed to rule based standards. Part of that debate relates to issues that arose in the US.

The view we have taken is that it is appropriate to pick up the basic exposure draft. That provides sufficient guidance. We will never be able to cover the entire field of the possibilities that could occur with options and be able to set detailed rules that cover every aspect of valuation. The exposure draft covers the main six features, with some additional guidance as to how you choose a valuation model. We believe that it is then possible for the companies to determine a valuation model that might cater with particular peculiarities of their own option arrangements.

Senator CONROY—As you know, I have had an interest in this issue for a long period, Mr Niven. While I welcomed the report in the newspapers that ASIC had taken a step forward, I am not sure how it solves the problem that Mr Knott has identified to me consistently over the last few years—that is, there is no agreed method and, therefore, ASIC cannot prosecute anybody for failing to comply with the current Corporations Law. I was just wondering how the option that ASIC itself have now put forward, which does not actually provide a system, meets with Mr Knott’s implied criticism of the Corporations Law.

Mr Niven—I think it does bring us much closer. When we issued our release practice note 68 in 1998, all we said was that there was a requirement to value options. At the time, we did not specify a method at all because we believed that was a role for AASB.

Senator CONROY—And the news flash is that you have not specified a method in this one.

Mr Niven—It does not specify a single valuation model that must be used, but the exposure draft does indicate a couple of valuation models and it also specifies the particular features that must be taken into account in those valuation models. I think it would be inappropriate to confine companies to particular valuation models which may have limitations in a particular regard that may not cater for their particular option arrangement. But certainly it specifies in the exposure draft the binomial model, the Black-Scholes model or another option pricing model that covers six particular features.

Prof. Collier—Can I make the observation that ED2, as you correctly pointed out, has also been adopted to some extent by the Australian Accounting Standards Board as ED108. When the international accounting standards are adopted in Australia, they will have force of law from 1 January 2005.

Senator CONROY—No. If they pass parliament they will have the force of law.

Prof. Collier—That is correct. In the ASIC policy statement—I think it is 68; Mr Niven can correct me on that—we have made it clear that valuation of options is something which is


ECONOMICS

important and that it needs to be disclosed as far as the executives and directors are concerned in their emoluments. I just want make the observation that in this exposure draft there are models available, as Mr Niven has said. For exchange traded options there is a model and for other types options there are six factors to be taken into account, which Mr Niven can identify. I am afraid I cannot at this stage. ASIC has taken the view that it is useful for us to issue these draft guidelines at this stage, pending further developments.

Senator CONROY—They do not actually require anybody to do anything other than what they are doing at the moment. How can you define that as even the remotest of steps forward? Even the Institute of Company Directors, who are my absolute opponents on this issue, say that this is a waste of time and will lead to inconsistencies. The people who do not want them at all say that it is rubbish, and I am sitting here saying, ‘How on earth have you met Mr Knott’s criticism of the Corporations Law when he says that it does not give us anything to work with?’ All you have said is that entities should select whichever model is most appropriate in the circumstances—pick and choose? You are not serious that that is actually an advance.

Prof. Collier—We would submit that it provides guidance to the Australian business community, in that—

Senator CONROY—‘Just select whichever model is appropriate’; that is providing guidance?

Prof. Collier—For two reasons: one is that it is based on the international accounting standards, which, as you point out quite correctly, will if parliament accepts them be adopted in Australia from 1 January 2005; two, at the end of the day you should keep in mind that the directors of the company, who will be responsible for ensuring that the appropriate valuation model is used, are accountable to their corporations.

Senator CONROY—God help us if they are in charge of it!

Prof. Collier—They will be accountable to their own shareholders, as far as adopting the correct model for their own corporation is concerned. At this stage, all we can do is issue guidance.

Senator CONROY—I could not disagree with you more strongly. If you want to become a regulator that has the reputation of APRA, you feel free to lead it in that direction, Ms Collier. I have to tell you that they do not get to pick and choose what is appropriate for their company, because it will be a dog’s breakfast. Even the Institute of Company Directors has put out a statement saying that this will lead to inconsistencies.

Mr Lucy—At this stage in the global marketplace, there is an international exposure draft—that is the level of maturity. It is only an exposure draft, so we do not have anything that is firm that we in Australia can latch onto.

Senator CONROY—Why did you bother then? We have an exposure draft that has been issued by the IASB; we have the Australian Accounting Standards Board looking at this, seeking comments on it, and you have issued something like a pretence that you are doing something when, in fact, you are not doing anything.


ECONOMICS

Mr Lucy—We do not control the agenda of the Australian Accounting Standards Board. They are going ahead determining their approach and they will do that in isolation of ASIC.

Senator CONROY—So why did you even bother putting out a press release? If you were not trying to control the agenda, what were you doing?

Mr Lucy—I do not think that controlling the agenda is the point. In the current environment where there is no specific Australian standard and there is an international draft only, our approach is that at this stage we—

Senator CONROY—And you said, ‘Pick whatever you want.’

Mr Lucy—There is no other alternative. The only alternative is for ASIC to prepare an accounting standard, which is not our role.

Senator CONROY—Then why did you put out a statement?

Mr Lucy—Because we believe that the statement which we are referring business to—namely, the international exposure draft—is better than nothing at all.

Senator CONROY—What; that they did not notice the international accounting standard? That they did not notice the Corporations Law, which requires a valuation to be disclosed to shareholders? It has been the Australian Corporations Law since 1998. You just thought you would point out to people: ‘By the way, just in case you hadn’t noticed, there is an international accounting standard.’ That is all you have done.

Mr Lucy—What we are flagging is that essentially at this stage that is best practice. Internationally, that is the best that there is available as to the measure under which—

Senator CONROY—So you are a signed up member of the race to the bottom: ‘This is best practice internationally. We’re not going to be world’s best; we’ll just do whatever the world tells us.’

Mr Lucy—It is not our role to prepare accounting standards.

Senator CONROY—Then why did you issue a statement? Why did you buy into the debate if you are now, at this table, running away from it as fast as you can?

Mr Lucy—I do not see our role as running away from it.

CHAIR—Senator Conroy, there is a line between vigorous exchanges and being rude to witnesses and I think you are about to cross it.

Senator CONROY—You want to start?

Senator Ian Campbell—Mr Chair, the problem that Senator Conroy has got—and I do feel sorry for him—is that he and Senator Murray introduced section 300A into the Corporations Law with no consultation, no expert advice and against the wishes of the government. The government said, ‘Let’s have a proper look at this. Let’s make sure that ASIC is consulted on its application, its compliance and its prosecution processes.’ But they said, ‘No, we would rather get a little headline in the paper and a bit of a pat on the back from people like Sandy Easterbrook, who pushed it forward.’ Of course, as predicted in Hansard, on the day—and Senator Chapman was there—I said, ‘Let’s send this to Senator Chapman’s committee. Let’s consult on this and let’s go forward in a diligent, sensible way.’ Ever since


ECONOMICS

then, as predicted by me on the day, it has been a disaster because it wasn’t thought through, it was not done diligently. It was typical Stephen Conroy policy. It was grabbed from someone else. It was plagiarised.

CHAIR—Senator Campbell!

Senator CONROY—Is Senator Campbell answering a question or is he making an editorial comment? I do not mind him making an editorial comment; I just hope you rule consistently.

Senator Ian Campbell—On this occasion it snuck into the law and Senator Conroy has had egg on his face ever since, so Senator Conroy has to go through this—

CHAIR—Senator Conroy, I am giving Senator Campbell the opportunity to respond to a series of assertions you put generally to the witnesses at the table, including him.

Senator CONROY—I put questions.

CHAIR—No, they were not all questions. Given what you put to Mr Lucy, it is fair to let Senator Campbell respond, on behalf of the witnesses at the table.

Senator Ian Campbell—Senator Conroy has to go through this little routine every time there is an estimates hearing because he is covering up for his own—

CHAIR—Senator Campbell, can you please confine yourself. Do not make too many party political points.

Senator Ian Campbell—I will. I am just explaining to you because you were not here at the time Senator Conroy did this typical dilettante brush with policy. The sad thing about today is that both Commissioner Collier and Commissioner Lucy were not at ASIC at the time when Senator Conroy did this dilettante dash across the policy firmament.

Senator CONROY—That would be the parliament.

Senator Ian Campbell—What ASIC have had to do under first Alan Cameron’s leadership and now David Knott’s leadership, with many of the executive directors here today, is to try to make a silk purse out of a sow’s ear that the parliament gave them; they have to try and implement it. As has been explored eloquently by Commissioner Collier and Commissioner Lucy, ASIC are trying to give guidance to the business community—who they regulate—about how you comply with section 300A.

There is no accounting standard on valuation of options. There is now an international standard which we think just about all jurisdictions across the globe will have on board within 12 to 18 months and all corporations across the world will have an agreed standard of how to value options. Senator Conroy for some reason thinks that he knows better than all of the international accounting standard setters, the Australian standards setters and all of the people at ASIC on valuations. You and I both know that when it comes to valuations the Labor Party has an interesting track record, particularly in relation to Centenary House.

Senator CONROY—What did you value Telstra at?

Senator Ian Campbell—They would be the last people you would ask for advice on the valuation standard.


ECONOMICS

CHAIR—Senator Campbell, I will stop you there.

Senator CONROY—You are cutting into George’s territory. You should leave Centenary House to George.

CHAIR—I am trying to be fair. Senator Conroy asked some questions. Senator Conroy, try to be a little more courteous to the witnesses.

Senator CONROY—I appreciate your views on the matter. As long as you consistently rule from the chair—

CHAIR—I always do, Senator Conroy, as you know.

Senator CONROY—we will have a good day. How will ASIC’s guidelines assist companies to value their options when no specific formula is set out?

Mr Niven—The guidelines cover more than the option valuation model. They also cover the date at which the valuation should be made and how the value is spread over time. In the absence of the exposure draft, there has been big a question mark on whether the value is recorded at grant date, vesting date or exercise date, over what period of time and on whether values have changed over time. This guidance answers that question. That is a very important element of the guidance.

Senator CONROY—Are the Australian Institute of Company Directors correct when they say in their submission to you ‘in the absence of a reliable measurement methodology inconsistent and unacceptable practices will emerge’?

Mr Niven—Given the models that are mentioned in the exposure draft, I would be surprised if there was a wide variance in the values that come up even using different valuation models. But I would repeat that we believe that we cannot specify a particular valuation model because companies will need to have modifications to models to take into account the specific features of their particular option arrangements.

Senator CONROY—These are the very people who Ms Collier earlier will be doing it and they are telling you that it is a dog’s breakfast.

Mr Lucy—What we have invited are submissions in respect of our approach. You are referring to one; frankly, I am not sure that we have seen that submission in writing.

Senator CONROY—It is titled ‘Submission to ASIC on draft guidelines valuing options’. It might not have reached your desk, Mr Lucy. I did not think you would be working in this particular area, but if you are I suggest that you have a chat with Mr Niven or Mr Pound when they get back. You did not indicate you were working directly in this area.

Mr Lucy—Correct, I did not indicate that.

Senator CONROY—Are you?

Mr Lucy—No, I am not working directly in this area. All I am saying is that at this stage we are seeking responses. You are referring to one response from the AICD. It is a question of having a look at the balance of the response. All we are attempting to do in this regard is to recognise that internationally there is no clear guideline. In Australia, the Accounting Standards Board has not issued an accounting standard. What we are trying to do in the interim is to provide something which is helpful.


ECONOMICS

Senator CONROY—The problem is that the Institute of Company Directors—Professor Collier says that individual companies will be making these decisions, in consultation with or on behalf of their shareholders, which is a joke—say:

... in the absence of a reliable measurement methodology inconsistent and unacceptable practices will emerge—

under the guideline you have issued. That hardly sounds like you have given good guidance.

Mr Lucy—That is their reference, Senator. We cannot respond to what they have to say.

Senator CONROY—Sorry—you cannot respond?

Mr Lucy—That is their statement. It is not up to us to comment on their statement.

Senator CONROY—It is a submission to you.

Mr Lucy—We acknowledge that it is a submission received.

Senator CONROY—You have got nothing to say?

Mr Lucy—At this stage, on that particular response, no, nothing further.

Senator Ian Campbell—I am happy to respond. I am happy to tell the AICD that there is going to be an international accounting standard, which will be law in Australia—subject to the parliament passing it—within a few months. If they were smart, they would focus on complying with what is likely to be the law in Australia and start moving towards it. I am not surprised that the AICD are trying to focus problems on the valuation method. It is something that companies around the globe are focusing on. But when there is an international accounting standard agreed across all the major jurisdictions, this will be a very old debate.

Senator CONROY—Which major jurisdictions are signed up to the international accounting standards at the moment that you are aware of, Senator Campbell?

Senator Ian Campbell—Virtually all jurisdictions have indicated that they will be moving to international accounting standards by 2005, excluding the United States.

Senator CONROY—Would you like to name who they are?

Senator Ian Campbell—I can provide a list to you. I have a list out of the latest IAS report.

Senator CONROY—I should be able to work it out, but I think there are two who have officially said that they would sign up. I think Botswana has agreed to sign up.

Mr Lucy—It is the full European Union, Senator.

Senator CONROY—The European Union was not a country the last time that I checked.

Mr Lucy—The countries within the European Union.

Senator CONROY—No, they have not.

Mr Lucy—That is not my understanding.

Senator Ian Campbell—As Senator Conroy needs information, I will provide him with a list of all of the countries that have indicated that they will be moving on the 2005 timetable. Senator Conroy has focused on the countries that might have signed up already. Some countries that have no standards at all have decided to move straight to IAS rather than set up


ECONOMICS

their own standards. Many countries—advanced nations like Australia and the United Kingdom and most of the Europe zone countries—have indicated that they will move from their old nationally based accounting standards to internationally agreed accounting standards on a timetable for 2005. There are a series of categories. Some have already signed up: as I have said, usually new, emerging nations; nations that have not had set national standards have agreed to do it straightaway; and others, like Australia, have to go through a transition process, which we are doing. We used to have the support of the Australian Labor Party on a bipartisan basis on this but, in their policy flux, in their policy vacuum, they now seem to be trying to move away from support for the move to international accounting standards and are indicating that they now want to pick and choose which standards they would like to adopt, which again is their policy attitude to valuations at Centenary House. They will choose what valuation they want. If it is $600 a square metre in Barton or $300 a square metre somewhere else, they will choose what suits them, without any policy principles or consistency.

CHAIR—Senator Conroy, you have your answer. You asked which countries they were and you were told that there were a lot and that you will have a list soon.

Senator CONROY—I look forward to it. How does ASIC plan to ensure a level of consistency between companies when reporting the value of their options, in light of the fact that, under the international standard, each company can modify the model to take account of issues such as performance hurdles, vesting conditions or the expected life of the option?

Mr Lucy—Could I clarify the beginning of that. Were you asking how we were going to ensure consistency?

Senator CONROY—Yes. I said: how do you plan to ensure a level of consistency between companies when reporting the value of their options in light of the fact that under the international standard—which you are championing, Senator Campbell—each company can modify the model to take account of performance hurdles, vesting conditions or the expected life of the option? That is the international accounting standard which Senator Campbell has just nailed himself to.

Senator Ian Campbell—And you are rapidly unnailing yourself to. It is a bit like valuing a building. If you value a building, you have to look at the life of the lease and all the different conditions. If you are putting a value on a building, you have to look at the net present value of the future of serious potential revenues. I think, Senator Brandis, you were asking some questions about the valuation of Centenary House at this estimates committee, or another one last week. Those are entirely related to this. You need to look at the term of the lease, the reviews, the performance hurdles, if you are looking at a valuation.

Senator CONROY—I was actually asking ASIC a question, Senator Campbell.

CHAIR—Senator Conroy, the minister at the table—

Senator CONROY—We know why he is not a minister; he is a parliamentary secretary.

CHAIR—is entitled to respond to any question directed to any of the officials, as I understand it.

Senator Ian Campbell—And Senator Conroy is the deputy Leader of the Opposition this week. We do not know what he will be next week.


ECONOMICS

Senator SHERRY—He will get them to deliver it faster than you have.

Senator CONROY—You just keep crying in your beer.

CHAIR—Senator Conroy! Come on. I am not telling any rooster jokes about you, Senator Conroy—away you go.

Senator Ian Campbell—Who is Deputy Sherry backing?

Prof. Collier—I would be happy to speak to that briefly. In the broader sense, one way in which ASIC can address the consistency issue is through our accounting surveillance program. That has yet to be finalised. We anticipate that one of the targets of next year’s accounting surveillance program will be this particular issue: evaluation of options.

Senator CONROY—Australia will be signed up to this accounting standard if Senator Campbell is successful in his crusade.

Mr Lucy—As you rightly point out, the process will be that, firstly, there needs to be an international standard. At this stage, there is not; there is an exposure draft. Then it is a matter of what the Australian Accounting Standards Board does, and then it is a matter for parliament.

Senator CONROY—I do not know that that is inconsistent with me saying that this is Senator Campbell’s crusade. Australia has signed up with the following heavyweights: Barbados, Georgia, Honduras, Mauritius and Papua New Guinea. They are the only ones.

Senator Ian Campbell—Chair, can I correct the record.

Senator CONROY—They are the only countries who have signed.

Senator Ian Campbell—Senator Conroy has just misled the committee; he has actually said we will not have international accounting standards in Australia until the parliament signs on to them through the disallowance process of the instruments which they will be. You cannot have it both ways: you cannot say that we have signed on and correct Commissioner Collier when she says we have signed on. Australia has indicated that it will move to adopting international accounting standards for domestic reporting in Australia by 2005. It has indicated that, as have scores of other countries.

Senator CONROY—Like Barbados, Georgia, Honduras, Mauritius, Papua New Guinea and nobody else.

Senator Ian Campbell—Senator Conroy seeks to continue to mislead the committee.

CHAIR—Senator Conroy, this is fairly arid debate.

Mr Lucy—The United Kingdom have signed up for 2005.

Senator Ian Campbell—And Germany, France, Spain, Italy and Scandinavia.

Senator CONROY—No, they have not. Senator Campbell, you are actually misleading. You have got it wrong.

CHAIR—Senator Conroy, you have put an assertion to Senator Campbell which he disputes. He has said that he will produce to the committee in the course of the day a list of the nations which have made an announcement.


ECONOMICS

Senator Ian Campbell—There are a number of categories. Some have indicated—like Australia, the United Kingdom, Germany and France—that they will be moving towards international standards by 2005. Some countries have already adopted them and some countries fall into other categories. I think there are two or three different categories. It is wrong to say that Australia signed up, because, as Senator Conroy pointed out quite accurately, Australia will not have signed up until all of the international standards have been not disallowed by the Australian parliament. That will not happen until 2005, I would expect. I think it is important that Senator Conroy is today flagging to the Australian business community and to the international community that Australia’s move to international standards is now no longer a bipartisan matter—it is something that the Labor Party is going to play politics with. I think that is a very important development.

CHAIR—I would be surprised if too many members of the international community were listening to Senator Conroy this morning, Senator Campbell.

Senator CONROY—I defer to your greater judgment, Senator Brandis.

CHAIR—Come on, Senator Conroy.

Senator Ian Campbell—You should not underrate this, because it is actually very important.

Senator CONROY—The newsflash—

Senator Ian Campbell—I would certainly hope that the Australian Democrats do not play the sort of game that Senator Conroy is playing. It is not a good area to differentiate—

CHAIR—Senator Conroy, you have the call.

Senator CONROY—Thank you, Senator Brandis, for taking control of the committee.

CHAIR—You have the call. Now start asking some relevant questions.

Senator Ian Campbell—He is behaving like a rooster with its head cut off.

CHAIR—Senator Campbell, don’t go there!

Senator Ian Campbell—Sorry, I could not help myself. It is too enticing.

CHAIR—We all have to exercise a bit of self-discipline sometimes.

Senator CONROY—Being beaten to death by a feather duster. You would like to say you have been a rooster, Senator Campbell, but, frankly, you are just a feather duster.

CHAIR—Senator Conroy, now you are doing it. Now stop it! Just ask some questions.

Senator Ian Campbell—He is waiting for the e-mail to come through from his research assistant.

CHAIR—You stop it too. Senator Conroy?

Senator CONROY—Thank you, Senator Brandis. The AICD have suggested that any modifications to the model would need to be disclosed and supported by explanatory material. However, the international standard does not make this mandatory. Will ASIC require companies to disclose the modifications and provide explanatory material even though the international standard does not?


ECONOMICS

Mr Lucy—Senator, to the best of my knowledge, the international standard is an exposure draft. Until it is confirmed, I guess it is just too early to respond to that question.

Senator CONROY—You have just issued guidance which did not deal with this issue, so you have taken a public view.

Mr Lucy—Yes.

Senator CONROY—I am asking: will you consider requiring companies to disclose the modifications and provide explanatory material even though the international standard does not at this stage? Hopefully it will, but the issue here is whether ASIC, who have now taken a public stand on this matter by issuing and buying into the debate, will make it mandatory.

Mr Niven—Our guidance at the moment is a draft. However, the draft does specifically say that we expect disclosure of the valuation model and the key assumptions, and I would have thought that would include these sorts of aspects. However, in considering the submissions that are made, we will focus on whether additional guidance does need to be given on that particular aspect.

Senator CONROY—I expect it to snow this weekend, but that does not mean it is going to. The word ‘expect’ is not the same as making mandatory, and that is the question I am asking.

Mr Niven—We are not an accounting standards setter and cannot make law. What we are doing is providing guidance to—

Senator CONROY—You can mandate disclosure of information.

Mr Niven—We can provide our policy views. We do not have a power to create law. We can state the ways in which we intend to—

Senator CONROY—Yes. I am asking: will this be one of the ways you intend for the law to be interpreted? That is what I am asking.

Mr Niven—That is right, and our guidance—

CHAIR—Are you talking about enforcement guidelines, Mr Niven? The guidelines that you adhere to—

Senator CONROY—I do not know that you can quite call them enforcement guidelines, that is all.

Mr Niven—In terms of enforcement, it comes back to having a look at each specific case. We would obviously look at dealing with cases of gross abuse.

Senator CONROY—Is that a yes or a no? I am happy for you to say, ‘Look, we’ll take it away, we’ll consider it and we’ll get back to you.’ But, at this stage, your considered position does not include mandating of disclosure. I am asking whether it is an option for you consider.

Mr Lucy—The point is—obviously we have not clarified it properly—that at the moment what we have done is put out an exposure as to what ASIC believe is an appropriate stance and we are inviting responses. One response is from the AICD, to which you are referring. There no doubt will be other responses. Having regard to those responses and the sorts of comments that you are bringing forward today will then determine our approach to it. We


ECONOMICS

have not at this stage determined our final approach, and it may be that that picks up your point.

Senator CONROY—Just so it is clear—and I know you have not read the AICD submission, which we are talking about here—they do not ask for it to be made mandatory; they just point out that it is not. I am asking whether you think it should be, and you have said that you will think about it.

Mr Lucy—Correct.

Senator CONROY—Thank you. Research from the University of New South Wales suggests that, since 1998, only around half of all firms awarding options to senior executives have valued this component in their reported executive compensation. Have you prosecuted any companies for breach of section 300A(1)?

Mr Niven—We have not prosecuted any companies. However, we did approach some companies on the basis of our belief that there was a gross abuse in not disclosing the options, having regard to the nature of their arrangements. The companies in each of those instances did make the disclosures in their subsequent financial reports.

Senator CONROY—Mr Lucy, I think you mentioned that it is a draft. The status is that we have a draft about a draft; we have the draft international standard and the draft ASIC guidance.

Mr Lucy—Yes.

Senator CONROY—When the final international accounting standard is approved—passed by parliament or whatever the process is—will the ASIC guidelines still be relevant? Will they be withdrawn, or do you intend them to complement that standard?

Mr Lucy—I would expect that there will be no requirement for them at that point, because the clarification would be provided through the Australian accounting standard.

Senator CONROY—So they would be withdrawn?

Mr Lucy—Correct.

Senator CONROY—So you have issued some guidance just for the next 12 months? It is not even 12 months because, if we are going to international accounting standards, most companies will have to start drawing up their statements in accordance with those now for the next financial year.

Mr Lucy—They do not have to comply with them until the financial years commencing after 1 January 2005.

Senator CONROY—But most people in the markets are saying that in preparation to be able to report they have to start doing it now.

Mr Lucy—They will certainly be undertaking the calculations. Whether or not they provide the disclosure would be something else.

Senator CONROY—I thought Senator Campbell and the Treasurer were talking about having the options issue dealt with earlier. I thought there were a couple of public comments about that.


ECONOMICS

Senator Ian Campbell—We might pass this to the AASB when they appear—and Mr Lucy may know better than I do—but it was my understanding that, as the AASB has issued the IAS standard for exposure—

Mr Lucy—Correct.

Senator Ian Campbell—you would have an exposure period, a comment period, and then it would be issued as an Australian standard before the 2005 timetable.

Mr Lucy—In all likelihood it will be.

Senator CONROY—I thought you had suggested 2004, Senator Campbell.

Senator Ian Campbell—That is what I thought the process would lead to.

Mr Niven—My understanding is that the AASB has announced its intention to have the standards in place for years commencing 1 January 2004.

Senator Ian Campbell—But I think this standard in particular is ahead of the pack.

Mr Niven—That is right—so 1 January 2004 up to 2005.

Senator CONROY—Senator Campbell announced that his view—and I presume that meant the government’s view—was that this particular area should be dealt with from 2004. That is what I thought you intended from what you said, but Mr Lucy seemed to think that that would not be the case.

Senator Ian Campbell—Mr Chairman, I will get for the committee an updated timetable for that standard’s progress towards the status of a disallowable instrument.

Senator CONROY—I understand that the ISB made their decision last week that the draft standard would be amended to be more consistent with the US accounting standard. Is that right, Mr Niven?

Mr Niven—That is correct. At the meeting, which I think was in May, they decided that in one particular regard—spreading the value over the period from grant date to vesting date—there would be a modification on the current approach on units of service.

Senator CONROY—Would you consider that a major shift?

Mr Niven—It is a significant shift. It is not a shift that impacts on the draft guidelines we have issued.

Senator CONROY—I am asking because you issued this a little while ago now, so it is a moving feast. As I think we have just discussed, the AASB equivalents to the ISB standards are scheduled to be issued by 31 March 2004. Has ASIC begun to prepare to enforce the adoption of the new accounting standards?

Mr Niven—We have considered plans relating to the adoption of the international standards in 2005. However, the first year in which the standards will become mandatory for companies is the year ending 31 December 2005, so in our surveillance for 30 June 2003 and the time leading up to that year we will not be looking at compliance with international standards—except, of course, to the extent that standards are adopted by the AASB prior to that 2005 date.


ECONOMICS

Senator CONROY—As Mr Lucy suggested, one of the reasons for issuing this guideline is to wave a flag and say, ‘Hey, everybody, this is where it is going. International accounting standards are coming.’ There is a lot of concern in the community that the business community is not really gearing up in this area. I think Mr Lucy has been running a hard campaign to try to draw everyone’s attention to it for the last year—that this is where we are going. Are you looking at an educational program to try to get people more aware than they currently are? One way might be to begin the preparations for policing compliance. I have always found that is a good way of getting people’s attention.

Mr Niven—One thing that we have said publicly—and I think this was in a speech that Professor Collier gave recently—is that we do not intend to give any concessions in terms of the adoption of the international standards in 2005. That is a message we are already commencing to give to the market: they will be part of the law and we will expect compliance with them, and companies really need to be looking at the adoption of those standards now. We will be conveying that sort of message to the market.

Senator CONROY—You will be giving no exemptions, did you say?

Mr Niven—It is not our intention to give exemptions from the application date.

Senator CONROY—Okay. Why did you grant BHP special relief to report in its financial statements in US dollars?

Mr Niven—The BHP situation was not a case of pre-empting the international accounting standards. You are probably aware that the international accounting standards do not specify that reports must be in accordance with the currency in the home jurisdiction. Rather, we were having regard to the unique nature of the dualistic company arrangements. This is not something that we would envisage being relief that would be applied to other types of companies. In the case of BHP, as you are aware—and a couple of other companies operating in Australia—they have entered into these dualistic company arrangements with a foreign listed company. So they actually have, in a sense, two parent companies which are listed in different jurisdictions and they have reporting obligations in each of those jurisdictions. In the case of BHP, they are required to report in the UK and also to report information in the US, where they are also listed. In both of those jurisdictions, they report only in US dollars. If we were to insist upon reporting in Australian dollars—

Senator CONROY—No, no—if you required them to comply with the law.

Mr Niven—We have a modification power which does allow us to provide relief. If reporting were in a different currency, that causes potential confusion. It makes it more difficult for the markets to reconcile the two sets of reports—both within Australia and in the international context. International investors in that particular industry, we understand, are particularly interested in US dollars. It also has particular regard to the fact that BHP’s revenue sources are linked to US dollars

Senator CONROY—So you will quite happily shaft BHP shareholders here in Australia, because they have asked you to.

Mr Niven—I would not put it as ‘shafting Australian shareholders’. We had regard to all of the different aspects of the relief. We have a relief power which is subject to some very strict


ECONOMICS

preconditions, and we have to be satisfied that one of those preconditions is met. In doing that, we had to have regard to all of the aspects—

Senator CONROY—What about your obligations to Australian shareholders?

CHAIR—Mr Niven, I think you were not finished, and I think it is fair enough that you should be given a go to make your point in as much detail as you wish. Continue your answer, please, Mr Niven.

Mr Niven—In applying our relief power, we are obliged under law to give relief where we are satisfied that one of those three preconditions, as given in a particular section of the law, is met. In assessing whether those preconditions are met, we have to have regard to all of the aspects of the situation. We did not disregard what the information needs of Australian shareholders may be; we had regard to those and to all of the other aspects concerning the nature of the DLC arrangement: consistency in terms of the information in the markets to ensure that shareholders in Australia were receiving information in consistent currency with their counterparts in the UK who are shareholders in BHP Billiton, and also the US shareholders who are receiving information in the US market. So we had regard to those aspects, but we had to take account of all of the aspects in coming to a final decision as to relief.

Senator CONROY—It is nice to see you have a higher regard for the concerns of the American and UK shareholders than you do for Australian shareholders. It is a very powerful message to send out about the relevance of ASIC.

Mr Lucy—I think that that suggestion is really unfounded. Clearly ASIC approaches this responsibility with full regard to circumstances within Australia and, as Mr Niven has said, some 90 per cent or more of BHP’s transactions are in US dollars. So it is far from being an unusual situation to convert from US back to Australian for the purposes of preparing Australian accounts. It is indeed significantly more logical that they continue to account in the currency under which they have undertaken the majority of their transactions.

Senator CONROY—Here is a news flash for you, Mr Lucy: you are now the Deputy Commissioner of ASIC, not a representative of the big business community. Your job is to look after shareholders in Australia.

Mr Lucy—Correct.

Senator CONROY—How many shareholders—not managements—in Australia approached ASIC saying that they were confused by their BHP accounts, that they did not understand them because they were not in US dollars? Do you have one?

Mr Niven—I could not say that any approached ASIC directly. We understand that they did approach the company.

Senator CONROY—The company told you that they had been approached by their own shareholders asking for this change?

Mr Niven—I did not say ‘asking for the change’. I was answering your question. I would not say that that came into consideration in our decision. We had to have regard to whether we felt that the information—


ECONOMICS

Senator CONROY—I am asking whether anybody approached ASIC—one Australian shareholder?

Mr Niven—No, I am not aware of anyone approaching ASIC.

Senator CONROY—Does that imply a great deal of confusion out there in the marketplace—if not one shareholder approached you, Mr Niven?

Mr Niven—We had regard to looking at the situation ourselves and making our own assessment of that. It is appropriate for—

Senator CONROY—So you know better than the market?

CHAIR—Senator Conroy, you have to let them finish their answers. Go on, Mr Niven.

Mr Lucy—Senator Conroy, could I perhaps suggest that we provide to you—obviously we cannot on the spot—details of any complaints that ASIC has received from shareholders in respect of this position, if that would be helpful?

Senator CONROY—At the same time as you provide me with a list of any complaints you received from shareholders about the pre-existing state.

Mr Lucy—Yes, by all means.

Senator CONROY—But I did not know your job was to run around acting on behalf of UK and US shareholders in this matter.

Mr Lucy—We did not.

Senator CONROY—No, you just acted on behalf of the board of BHP.

Mr Lucy—No, we did not.

Senator CONROY—Big business interests, determined that they wanted this.

Mr Lucy—That is quite an incorrect inference.

CHAIR—Senator Conroy, you put a proposition to the witness and he has flatly disputed it. Move on to your next question.

Senator CONROY—I have one question: did you roll over to the BHP board?

Mr Lucy—That is not correct.

Senator CONROY—That is exactly what happened.

CHAIR—Order! Senator Conroy. The way in which this proceeds is by question and answer. I always allow plenty of latitude to move into a discussion, but I will not have argumentative assertions thrown up in the witness’s face in relation to propositions which have been specifically and categorically denied. Move on to your next question.

Senator CONROY—As long as you make sure Mr Lucy complies with that, that will be excellent.

CHAIR—I have no doubt that Mr Lucy and all other witnesses before this committee will fulfil their obligations to the Senate.

Senator CONROY—All I ask for is consistency from the chair.


ECONOMICS

Senator WATSON—Can we be assured that Australian shareholders are not disadvantaged?

Prof. Collier—Perhaps I can answer that and also address some of Senator Conroy’s concerns. I was party to the decision where we decided to grant this relief to BHP. I can categorically assure you that a broad range of considerations, including commercial considerations, the impact on shareholders and the interest of Australian shareholders, were very much taken into account in making this decision. If you would like, we could provide you with some more details of the ASIC decision on this matter. Everything that has been raised this morning was taken into account in quite a detailed and lengthy meeting where this matter was concerned. So the answer is yes.

Senator WATSON—So you give that assurance.

Prof. Collier—I give that assurance.

Senator CONROY—That does not change the fact at all, Ms Collier. You rolled over. During our last round of estimates—

Mr Lucy—ASIC cannot possibly accept that being on the record, Chairman. It is a rude, inaccurate—

Senator CONROY—You can feel free to contest it on the record.

CHAIR—Order! Senator Conroy. You are at liberty to put any proposition you like to these witnesses and they are at liberty to dispute them. They have disputed categorically and specifically what you have put to them. Now move on to your next question, please.

Senator CONROY—I agree that they have disagreed with my assertion. Mr Lucy, however, seems to feel that he has the right to determine what gets to be on the record and what does not.

CHAIR—No. Mr Lucy is entitled to put on the record a denial of, or a specific challenge to, a proposition you have put to him, and that is what he just did. Now move on to your next question.

Senator CONROY—During our last round of estimates in February, Mr Johnston outlined the surveillance campaign that ASIC was undertaking in relation to investment banking. At that point eight institutions were being questioned by ASIC and ASIC had served notices on the people who were the target of the campaign. Can you update the committee on the outcome of that surveillance campaign?

Mr Johnston—The report on that campaign will be published by us at the end of this month. It will draw attention to our findings and it will focus on areas where we think compliance and disclosures could be improved. The primary focus, of course, was on informing our position in respect to CLERP 9 submissions and in relation to formulating our policy around those matters. That report will be out at the end of this month.

Senator CONROY—During that campaign, did ASIC find any examples of ‘spinning’—the practice whereby investment banks allocate shares in company floats to senior representatives of the companies that are clients of the investment banks?


ECONOMICS

Mr Johnston—That was not specifically a focus of the campaign. There are some matters that we have identified that we will follow up specifically with individual organisations—bearing in mind that, when we launch a campaign, it is for the purpose of informing us as to market practices, making a commentary on those practices and, as I said before, suggesting our position on law reform. So it is not an investigation with a capital ‘I’, if you like. For an investigation there has to be a suspicion of some breach of the law before we can commence an investigation.

Senator CONROY—I was asking about a surveillance campaign.

Mr Johnston—Yes. There will be observations that we make and there will be some conduct that we will then follow up which may or may not result in investigations.

Senator CONROY—Sure, but what I was asking was: did you come across any examples—I have used the term ‘spinning’; that is the market term for it—of spinning as a practice at all?

Mr Johnston—We certainly did not come across any systemic issue there.

Senator CONROY—So we are the only country in the world where this does not happen?

Mr Johnston—I did not say that it did not happen. We did not come across a systemic issue; in other words, we did not find widespread misconduct of the type that was seen in the US.

Senator CONROY—So it does not go on in this country?

Mr Johnston—No, I am not saying that it does not go on; I am saying that we did not find any widespread or systemic abuses such as happened in the US. If there were any individual matters that we had come across, they would be followed up.

Senator CONROY—It has been reported that you are talking to corporate clients of the securities firms. Could you advise the committee of the outcome of those discussions?

Mr Johnston—Those discussions are still taking place.

Senator CONROY—Are you able, without naming any companies, to give specific examples in this area of what has gone on? I know what ‘spinning’ means, but the rest of the committee and that massive audience, including internationally, that Senator Campbell flagged earlier, will be listening at the moment.

Mr Johnston—The discussion that we are having with corporates is to help us to understand how they have interacted with investment banks and with analysts and to help us to identify whether there are any examples of the type of conduct about which you are talking, but we have not finished those discussions yet—those are still in train.

Senator CONROY—So you have not come across any individual cases?

Mr Johnston—I did not say that we had not come across any individual cases.

Senator CONROY—That is what I was asking.

Mr Johnston—We have not come across any systemic misconduct.

Senator CONROY—I asked you if you could outline the sort of nature and structure of the examples that you have come across without naming any companies.


ECONOMICS

Mr Johnston—I do not have that detail available to me.

Senator CONROY—Last week the SEC began the second stage of their campaign to identify conflicts of interest on Wall Street by subpoenaing emails, performance reviews and other correspondence from Wall Street firms in an effort to determine if managers were properly supervising their employees. Is ASIC concerned about the role of managers in investment banks in Australia?

Mr Johnston—That will be one of the areas that we will comment on within the report.

Senator CONROY—Parliamentary Secretary, are we near seeing the CLERP 9 draft?

Senator Ian Campbell—Yes. As I have said publicly quite a lot in the last few weeks, it is in the hands of the draftspeople, as you have to say if you want to be politically correct. It is in the parliamentary drafting process now. I did say in a meeting yesterday that I thought it would be out by the end of June. I was quickly told by one of my staff that it may spill into July. It is a little bit out of our hands. It is pretty well on schedule but I was hoping to have it.

As I have said publicly, I think it would be good process if as soon as the draft is available we refer it immediately to the joint parliamentary committee, which will mean that the parliament can start looking at the provisions at the same time that it is available under the provisions of the Corporations Agreement for public exposure. Under the Corporations Agreement, certain provisions of the law that are being changed have to be exposed for three months. Sometimes the states in a cooperative spirit allow us to shorten that. I would like to try and get it out there as early as possible and allow the parliamentary committee to look at it. That would allow us then to progress it through the parliament in the spring sittings, as I think they are called.

Senator CONROY—Hopefully, everything will be in place by the time we rise in December.

Senator Ian Campbell—I think it is quite doable, yes.

Senator CONROY—I noted that in yesterday’s Bulletin you were making new pronouncements which—

Senator Ian Campbell—They were not really new. Mr Deans, who was the journalist, quoted me accurately talking about what the CLERP 9 provisions would do in relation to remuneration. My quote is accurate. I think he embellished it slightly. I am not having a go at him because, as you know, it is an area where there is quite a lot of policy involved. There are directors, there are executives, there are the other five—however you want to describe them—and there are the retirement benefits. There is a range of different things that a policy in this area, if it is going to be comprehensive, needs to address. There was a little bit of confusion around those.

Senator CONROY—A little bit of licence.

Senator Ian Campbell—I think Mr Deans was trying to interpret what I said accurately. What I said—and I am happy to say it on the record here—is that, rather than give piece by piece examples of how the policy will come out, the government position will be clearly revealed when the legislation is put down. I do not think there is very much difference between what we are looking at now and the policy ideas that you, Senator Conroy, have been


ECONOMICS

announcing. There is a strong convergence. I have absolutely no doubt there will be disagreements on some sections of it; I would be very disappointed if there was not. But in general we are making sure that shareholders have greater rights, that there will be more transparency, that remuneration packages will be disclosed—to use my cliché—up front in real time and that to the greatest extent possible shareholders will have a greater voice on the remuneration policy and the application of the remuneration policy. We are grappling with how you put that into law in a way that is enforceable. We will end up with a better regime; I am quite confident we will achieve that. All will be revealed when the legislation comes out.

We could have, after the cabinet meeting, had a policy announcement and said, ‘This is CLERP 9 plus one,’ but the Treasurer and I both decided it would be better to put the law out there and allow that process to keep moving. It is only a matter of weeks. That is where we are at.

Senator CONROY—One of the issues, as you know, is very dear to my heart. You have now teased us for the third time, if you count on the floor of parliament when we were discussing it and in the Bulletin yesterday—I appreciate the embellishment issue. You have just teased us again. Is the government now supporting the proposal to give shareholders a vote on the executive remuneration policy?

Senator Ian Campbell—I do not want to go into—

Senator CONROY—As I said, you have teased us publicly a few times now so I am giving you a chance to—

Senator Ian Campbell—All I have said is that we want to give shareholders more opportunity. Part of the problem that we have had is that the disclosures occur, in the public’s view, sometimes years after the policy has been created and put into place. I think it is in everyone’s interest to know what the remuneration policy is and to allow shareholders to have the greatest say possible on it. The problem that you have grappled with, as we are grappling with it, is that sometimes a board has to make a decision about a remuneration issue. If you are employing someone, that can happen any day within 12 months and the shareholders do not really get to have a say until potentially, as I have said in the parliament, 12 months or even longer after that decision. You have to find a way to allow the shareholders’ voice to be heard without taking away from the responsibilities of the board and so you want to hold the board responsible. As you have with your policy, which I have read, we are grappling with how you do that, and it is not easy.

Senator CONROY—A major concern here is that ASIC may be knocking on your door.

Senator Ian Campbell—Unless you want to have an AGM every time you employ a new person in the top five. I do not think you or I want that to happen.

Senator WATSON—How do you propose to bring that information forward?

Senator Ian Campbell—That is what we are dealing with, Senator Watson. It depends on directors, executives and the other five people but that is what we are dealing with, and I am answering you in the same way that I have answered Senator Conroy. We will be bringing forward a draft piece of legislation which will reveal all.


ECONOMICS

Senator CONROY—I am just worried that ASIC may be visiting you, because clearly you are in breach of the continuous disclosure provisions of the Corporations Law here. You are just teasing people with whether or not you are going to support this. I can only again offer you the opportunity to come out and clarify your remarks in the Bulletin yesterday.

Senator Ian Campbell—I think it is a good debate to be having. It is probably the best informed debate that we have had in Australia. It is easy to pick one piece of it out and say, ‘Let’s focus on retirement benefits’. Obviously, every time someone bails out of the company as a CEO or as a director, there is going to be a front page these days about how many millions they got.

Senator CONROY—Do you think Dick Warburton should walk away with half a million, given the performance?

Senator Ian Campbell—I do not think it is sensible to comment on every single instance—although it is fun for the media and it is fun for you to comment every single time a CEO or chairman goes.

Senator CONROY—The Prime Minister and the Treasurer have commented frequently on these issues.

Senator Ian Campbell—It is sport at the moment. The one-day matches in the West Indies have stopped, the footy season is only just winding up, and so one of the sports in Australia at the moment is commenting on CEO and chairman retirements. I think the more important debate is that you get all this right. Retirement benefit is part of remuneration. It is part of your and my remuneration. Most people in the community think that you and I—

Senator CONROY—Super is different to a retirement benefit. No-one is suggesting that non-executive directors do not get their super.

Senator Ian Campbell—It would be very good if you looked at remuneration as the whole package: options are part of it, the remuneration itself is part of it, the performance hurdles are part of it, the retirement benefits and even superannuation are part of it. Most people who look at parliamentary remuneration would not agree that the superannuation benefits we receive are not part of our package because—although we do not get paid as highly as people who have comparative workloads in the private sector—a lot of people would argue that our retirement benefits are much higher than people in the private sector and so we are compensated in that way.

Senator CONROY—Not Gilbertson; he has got $1.5 million a year.

Senator Ian Campbell—It is not a good argument to get into. I think that philosophically—if we want to get this policy right—we need to look at all those things and make sure that the law, the accounting standards, the listing rules and any ASIC guidance in relation to the disclosure provisions all work well. I think the great opportunity that CLERP 9 has given us is to get the disclosure regime and the remuneration working together. I think there is a big opportunity for the government and the parliament, in cooperation with ASIC and the ASX, to get this right this year. I think that we have got a good process to do it.

Senator CONROY—As I said, I was only offering you the opportunity to clarify what was almost the opening paragraph in the Bulletin yesterday. I guess we will just have to get teased


ECONOMICS

a bit more. I want to ask you some questions about issues that are possibly in. I appreciate you do not want to talk about the draft bill. I am more interested, almost by a process of elimination, to work out which issues are not in. It has been reported that CLERP 9 will include a requirement that financial services licensees are required to manage conflicts of interest and that ASIC has been delegated the task of joining the dots with a detailed set of guidelines. Will the guidelines prohibit analysts from trading in company shares that they had reviewed for a set period before and after the research is produced?

Senator Ian Campbell—We wanted to have a debate, as CLERP 9 set out, around this issue of analyst independence. I think CLERP 9 spent quite a large amount of its space on dealing with this issue. We looked at that issue of whether you can deal with conflicts of interest under the existing requirement in the law that analysts or financial services licensees, which analysts have to be, run their business under the deal efficiently, honestly and fairly provision. The specific number of that law I have forgotten; but it does not really matter. We reached the conclusion, after consultation on CLERP 9, that there needed to be a more specific requirement in the law about conflicts of interest. We had consultations with stakeholders, including shareholders, institutional investors and ASIC. The way forward, which will be exposed when the law comes out, will be a new provision that will require licensees to specifically manage conflicts of interest. The words in that provision will be revealed when CLERP 9 is exposed.

I think it is fair to say that Mark Adams from ASIC, and ASIC generally, are working on a draft policy proposal. Although I cannot direct ASIC on how to work, my hope was—and the indications from ASIC earlier in the year were—that they would issue some draft policy at about the time we issue the draft law. The community would be able to see what the regime will look like in terms of how the new law would work and how ASIC would then enforce it. ASIC can feel free to field questions about what is in that policy proposal. I have not seen it yet. It is probably better to wait until it is launched.

Mr Johnston—The other point we could make is that the work that we are doing in the surveillance campaign will inform what is in the policy.

Senator Ian Campbell—It will inform that process. It is a very good process. My understanding is that ASIC’s policy proposal will be subject to stakeholder and community consultation once it is issued. So CLERP 9 will be out there for consultation. If my proposal goes forward—and I seem to be getting positive body language from that end of the table—that will allow the community at large to give the government and ASIC feedback simultaneously.

Prof. Collier—We do engage in consultation on all our policy proposal papers.

CHAIR—The committee will now adjourn for morning tea.

Proceedings suspended from 10.29 a.m. to 10.51 a.m.

ACTING CHAIRMAN (Senator Chapman)—I call the committee to order. We will proceed with further questions for ASIC.

Senator CONROY—We were just talking about analysts’ independence and CLERP 9. Will the guidelines prohibit analysts from trading contrary to any recommendation they


ECONOMICS

make? I am thinking of the Rene Rivkin style of saying, ‘Buy this stock quickly,’ while he happens to be out there actually selling it. Is that one you have considered as part of the CLERP 9 legislation, Senator Campbell?

Senator Ian Campbell—I am sorry. Could you start again?

Senator CONROY—Will the guidelines prohibit analysts from trading contrary to any recommendation they make—like Rene Rivkin, who says, ‘Buy this share quickly,’ while he is actually the main seller?

Senator Ian Campbell—I do not think we would want to get into detail now, but I am happy for Mark, who I think is in charge of drafting that—

Senator CONROY—If it is not in that, that is cool—I will move on. I do not want you to go into the guidelines. It is really a question of just trying to test—

Senator Ian Campbell—That is one of the core issues. One of the ideas was: do you prevent trading around a report? One of the concepts was that you might ban analysts from trading for three days before a report is issued and two weeks afterwards. The problem that I saw in that proposal that I saw floating around was that the definition of an analyst is actually the whole firm. This is the example that I thought of when we were looking at these ideas: if, let us say, JBWere were issuing a report on BHP Billiton on a Friday and their CEO retired or left the firm on the Sunday, would it be a perverse outcome of a ban on trading around a report if JBWere were not able to trade in BHP Billiton shares before or after? That is one of the problems we are dealing with. That would actually be the consequence of doing those bans. I think ASIC are trying to write a policy that seeks to ensure that consumers are protected from the risks of conflicts. The law will require that they have to manage conflicts, and ASIC’s guidance will help licensees know how to comply with the law, but that is one of the things that I know ASIC are grappling with. Perhaps Ian or Mark would like to say something.

Prof. Collier—I will ask the director of our regulatory policy branch, Mark Adams, to speak for a moment on this.

Mr Adams—There are probably just a couple of things I could say. Just as Senator Campbell has indicated, we are aware that the government has plans in relation to a general licensee obligation on managing conflicts. Against that backdrop, we are in the process of developing a policy proposal paper to consult on how entities might comply with that general obligation.

Senator CONROY—Mr Johnston, I think you indicated that you may be addressing the spinning issue in the guidelines.

Mr Johnston—I was not talking about the guidelines. I was commenting on the report that we would put out as a result of the surveillance campaign commenting on activity and conduct that we saw.

Senator CONROY—Senator Campbell, we were talking a little earlier about the issue of spinning—favoured placements in hot stocks. Is that one of the issues you have looked at in CLERP 9?


ECONOMICS

Senator Ian Campbell—A range of those sorts of practices were highlighted in the New York State Attorney General’s and the SEC’s investigation of Wall Street firms. I was very pleased to see the project that has been run by ASIC which looks at whether any of those practices are prevalent in Australia. I am reassured by Mr Johnston’s words today—he has given us a bit of an insight into what that report will show—but they are the sorts of practices that we would want to make sure did not occur in Australia. So we are trying to bring in a little bit more prescription or clarity in the Corporations Law itself and then clearer guidance from the regulator about how you comply with that law. They are the very sorts of practices that we would want to make sure do not occur in Australia. I think Mr Johnston said that, although their project may have brought up some cases of those, they are not systemic.

My experience of what I see in the marketplace—which is based on briefings from ASIC, looking at the industry and talking to the industry, shareholders and institutions, and would be similar to your own experience—is that I think the industry in Australia is in far better shape and far better regulated than occurred on the other side of the Pacific. But I am not at all complacent about it, nor are ASIC. What we want to make sure of is that, if we have not seen those practices occur in Australia as they did on the other side of the Pacific, we know what were the regulatory and legislative provisions and the things that saved us from that in the last few years and what we can do to make sure that they do not become prevalent in Australia.

Senator CONROY—I can think of one very famous incident a few years back and I know ASIC did look at it. I think it was Guandong. There were questions raised about how Jeff and Felicity Kennett got into a share offering after it had, frankly, closed. At the time, ASIC investigated it—so you might want to look into the history of this—and came back and said no laws had been broken despite the fact that the Kennetts were able gain a placement by phoning. I cannot remember who it was they phoned, but fundamentally ASIC came back and said there was no breach of the law.

Mr Johnston—It pre-dates me.

Senator CONROY—I understand. It is one that sticks out in my mind for very obvious reasons, being from Melbourne, and there was quite a political furore around it at the time. So I can point to one example where I know it has happened, but no laws were broken. You might want to look at your old files on that.

Senator Ian Campbell—The placements issue is another one that is related and something that we have been approached about. I know ASIC has had pressure put on them. I think currently ASIC have just moved the limit on placements to employees and existing shareholders without a prospectus up to 5,000 from 3,000. ASIC’s advice is that they cannot really give relief much above that without a change to the law.

The point has been made to me—and I suspect to you, Senator Conroy—that, because of that bit of policy, if you want to do a fundraising without a prospectus, a placement is a good way to potentially do that, and a cheap way. It can often be to the great benefit of the employee share ownership plans or to other existing shareholders that, because of that limitation—that I think is there for good policy reasons—a lot of mum and dad type shareholders and employee share owners miss out on placements, because it is a lot cheaper just to go straight to institution. That is actually an issue that was canvassed in CLERP 9 and


ECONOMICS

it is one that I would like to keep some policy focus on. I have not found a way through it. Five thousand to me seems a bit low, but I accept ASIC’s advice that once you start going much higher you open up consumer risks to unscrupulous operators. We have to find a balance there. It is not an easy one.

Senator CONROY—I want to talk about insider trading. Mr Wood might want to take these questions—I am not sure. The conviction of Rene Rivkin has put insider trading in the spotlight. One issue which has been raised by investor groups and commentators is that a listed company, the ASX, has an inherent conflict of interest and is not the most appropriate body to monitor the market. The President of the Australian Investors Association says:

ASX income comes from turnover on the exchange. Why then should they be terribly fussy about questionable or, shall we say, marginally suspicious trading? So they are really only left to go for the ones that are blatantly obvious, that blind Freddy would pick up in retrospect. I think there are a lot of small fish swimming around and having a nice feed out there.

In addition to this, the Australian Shareholders Association, amongst others, has called on ASIC to assume full responsibility for monitoring the market and be given increased funding to fulfil this role. In the light of these comments and the fact that the ASX referred only 29 suspicious matters to ASIC last year when there were 15.5 million trades, has ASIC considered the role of the ASX as an issue?

Mr Adams—I can make some observations. In short, if the senator is aware, ASIC has an obligation in relation to providing an assessment on market operators and an assessment as to whether their operations are adequate. We have completed those assessments. That would include their wider operations. We are in the process of finalising those at the moment. I am not aware of the details of that work.

Senator CONROY—I appreciate, Mr Adams, that you are probably not in the position to comment in terms of policy, but I was really commenting not on how you are going with the 29 but on the fact that there are only 29. I was wondering whether Mr Lucy and Professor Collier agreed with the President of the Australian Investors Association and the ASA on this matter. Senator Campbell, I think you have expressed views on this in the past.

Senator Ian Campbell—I was actually reading through the list of countries that were signing up to IASB when you were asking the question.

Senator CONROY—I was talking about insider trading. Commentators and investor groups have suggested that, as a listed company, the ASX has an inherent conflict of interest and is not the most appropriate body to monitor the market. I read a quote from the President of the Australian Investors Association. He says:

ASX income comes from turnover on the exchange. Why then should they be terribly fussy about questionable or, shall we say, marginally suspicious trading? So they are really only left to go for the ones that are blatantly obvious, that blind Freddy would pick up in retrospect. I think there are a lot of small fish swimming around and having a nice feed out there.

Also, recently the ASA has called on ASIC to resume full responsibility for monitoring the market. Given there have been only 29 referrals to ASIC out of 15.5 million trades, do you think those views are fair?

Senator Ian Campbell—I would want to check on the figures.


ECONOMICS

Senator CONROY—Mr Adams confirmed that the figure is 29.

Senator Ian Campbell—That is referrals for continuous disclosure breaches or for insider trading?

Senator CONROY—That is all referrals.

Prof. Collier—If you do not mind, it is something we would like to take on notice, only because, although I do not doubt your figure of 29 formal referrals, there could be other discussions we have had with the Stock Exchange which would illuminate this issue.

Senator CONROY—I am sure there are.

Senator Ian Campbell—That is why I raise the question, because it does not fit with the discussions I have had on this issue with either ASIC or the ASX. From the ASX’s perspective, they have been one of the leading advocates, for example, of giving ASIC the infringement notice penalty power which the government has proposed in CLERP 9 and which we are committed to carrying through. It was, in fact, Richard Humphry and David Knott who approached me jointly shortly after I came into the portfolio saying that they wanted this because they wanted to ensure that particularly smaller breaches of continuous disclosure can face a real-time penalty. That is reflective of ASX’s view of its own role in supervising a fair and efficient market. I think what is wrong with the Investors Association’s interpretation of the ASX’s role is that, if it is to remain in the high regard in which it is held around the world as a market, it needs to run a quality market where any of that sort of malfeasance or breach of rules is quickly dealt with.

Look just around our own region at the problems that the Hong Kong stock exchange has had, where former ASIC chairman Alan Cameron has had to go up and be part of a task force to investigate what I think was called the penny stocks scandal. They are the sorts of things that I know that ASX will not allow to occur, because it is against their own interests. There is an incentive for the ASX to ensure that not even a so-called penny dreadful gets away with any sort of bad behaviour. It is quickly dealt by the ASX themselves, and if they are not able to get action they refer it to ASIC for ASIC to take action. Richard Humphry and the board of the ASX have strongly supported it—against, it is fair to say, and you will accept—

Senator CONROY—I have congratulated him publicly.

Senator Ian Campbell—the very strong opposition of most people in the business community. So I think the Investors Association have got it wrong there.

Senator CONROY—Can I just clarify that, because I think you missed the early part of what I said; I only repeated half of it. I was speaking specifically about the insider trading issues, and I was referring to an article by Gabrielle Costa on the weekend, where she says:

A nine-member ASX team, which keeps tabs on underhand and insider trading, sifted through each of them—

the 75,000 triggered alerts—

and referred 29 suspicious cases to the Australian Securities and Investments Commission ...

So it is probably narrower; it is insider trading in particular.


ECONOMICS

Senator Ian Campbell—I would not want to put a number on the continuous disclosure breaches, but—

Prof. Collier—I do not have those details to hand, but we can provide them.

Senator Ian Campbell—That article really shows how thorough the ASX’s monitoring is. I think you have had a briefing—

Senator CONROY—I have.

Senator Ian Campbell—I certainly have had a briefing on how it works. They have got very intricate, world-leading systems to pick up distorted trading patterns. That is the sort of electronic surveillance that ASX and ASIC are using to pick up the sorts of things that can lead to the prosecutions which have been high profile in recent years, without looking at any particular ones. I think you have commended ASIC for their role in some of these prosecutions. It was very hard to get a prosecution for insider trading seven years ago, when I first joined this portfolio. It sends a very strong signal to greedy people who may contemplate using insider information to get an advantage over all of the other shareholders in Australia when you see a picture of someone being taken away.

Senator CONROY—So you do not agree with Graeme Samuel’s published views on insider trading, which are that they should, frankly, be allowed?

Senator Ian Campbell—I believe that insider trading should be punished with the full force of the law.

Senator CONROY—Are you aware of Graeme Samuel’s views on this?

Senator Ian Campbell—No, I am not.

Senator CONROY—I will get you the article.

Senator WATSON—Will Rene Rivkin spend his birthday in prison?

Senator Ian Campbell—That is up to the courts, isn’t it?

Prof. Collier—That depends on the appeal which Mr Rivkin has commenced.

Senator WATSON—Will that be known today?

Prof. Collier—I do not believe so. I am not sure when the appeal will be held.

Mr Lucy—Friday, I believe.

Senator WATSON—Is ASIC resisting that?

Mr Wood—Mr Rivkin has sought bail pending the determination of the appeal against his conviction. So his appeal really is against the refusal of bail and the imposition of the sentence immediately upon conviction. I think that will be heard tomorrow.

Senator WATSON—It would be sending the wrong signal if he gets off, I think.

Mr Wood—Yes. I might add to that—

Senator WATSON—Or if he gets it deferred.


ECONOMICS

Mr Wood—the matter is now in the hands of the Commonwealth DPP. So it is really the Director of Public Prosecutions who will, I guess, frame the arguments, presumably against granting of bail.

Senator WATSON—I think the signals that ASIC may send in this situation are significant, though—

Mr Wood—Yes.

Senator WATSON—given his flouting of the sentence and the manner in which he has handled that.

Prof. Collier—We probably will not comment publicly on this further until the appeal is heard.

Senator CONROY—I think that is wise, Senator Watson.

Senator WATSON—That is all right. I am only interested in the signals—

Senator CONROY—I am with you in sentiment, but I think the officers are in a difficult position.

Prof. Collier—Thank you.

Senator CONROY—When Rene Rivkin was found guilty of insider trading, the Chairman of ASIC, David Knott, said:

The fact that he made a relatively small profit from the transaction does not alter its criminal nature. The offence he committed was against the sellers of 50,000 QANTAS shares who thought they were dealing in a properly informed market. Instead they were dealing with a person who had gained inside information and withheld it from them.

To my mind, that is the key to the case. Even though his profit was small, the fact of the matter is that he breached the law. Yet the ASX surveillance manager, Jim Berry, takes a different view. I am sure Mr Berry is known to you, Senator Campbell, as he is to me, and I have very high regard for Mr Berry. But he is reported saying that the size of any profit gleaned must be a factor in considering whether a matter should be referred to ASIC.

Senator WATSON—Surely he had the potential to make a lot more money than he actually made, though? That is the issue, isn’t it?

Senator Ian Campbell—I think you can talk about Mr Berry’s attitude on these things—

Senator CONROY—The problem is that he is the man in charge of making the referrals to ASIC, and he is saying that when they take into consideration whether or not to refer it to ASIC they take into account the size of the profit, which is directly contrary to, firstly, the law, and, secondly, Chairman Knott’s stated views.

Senator Ian Campbell—It is an important policy issue. I would have thought that the good way to proceed with a debate on the issue would probably be before the joint statutory committee. I think, when you have ASIC and the ASX in, it would probably be a very good thing to debate there. I do not want to talk about the particular case, because I absolutely do not want to do anything to prejudice what might occur in a court, but, in general terms, if you are a kid on the streets of Australia, you break into someone’s house and steal a VCR that might be worth a couple of hundred dollars and you are proven guilty in a court of doing that,


ECONOMICS

my strong view is that you should get locked away. You should not be able to break into people’s houses and steal anything. I do not think whether it is a $200 VCR or a $100 bicycle should make a difference. If you do that, you should get taken out of the community and the community should send a strong signal to people that you do not break into people’s houses and you do not steal people’s property. The community should not accept stealing $100 bikes or $200 VCRs or stealing $2,000 by breaching the Corporations Law. That is what insider trading is. You are stealing from other people. You are engaging in criminal behaviour and it should not matter whether the gain is $100, $2,000 or $200,000.

Senator CONROY—I can only support you—

Senator Ian Campbell—Both of those hypothetical criminals are committing a crime against the whole of society, and they should be treated with equal disdain.

Senator WATSON—The insider trader had the opportunity, if the market had reacted differently, to make a lot more money than was actually made.

Senator Ian Campbell—I do not think it should make a difference. Where you put the decimal point should not make the difference. I do not want to disagree with Mr Berry, because, to be fair to him and the Stock Exchange, it is probably better to have the Stock Exchange in the room when you debate this important issue so that he can clarify or expand on his views.

Senator CONROY—I welcome and support the comments that you have made, Senator Campbell—you are dead right. I mentioned Mr Graeme Samuel’s views on insider trading before. I thought I might read them to you. This is from a BRW or Bulletin interview he gave a number of years ago. He said:

The regulators who are keen to impose more regulations are saying that the small shareholder has little rights. They don’t acknowledge that he has little interest as well. ... One must ask several questions, including whether the contribution made by the small investor to the market warrants the cost of providing him with necessary protection, (and) whether it is possible to protect the true small investor from himself, his ignorance and, in most cases, his apathy.

Do you share Mr Samuel’s views?

Senator Ian Campbell—I am not going to give a running commentary on everything that Mr Samuel has said since he was in grade 6 at whatever school he went to. You obviously want to run a political campaign against Mr Samuel with some of your friends in the Labor Party, and it is a fun game for you to play. But, if you want to take the time, I am happy for you to send me everything that Graeme Samuel has said about corporate governance in the last 30 or 40 years. I think he is a highly intelligent man with a fantastic contribution to make to Australia. I think one of the things that this parliament needs to do is make sure that we have a Trade Practices Act that ensures that the Commonwealth government can make an appointment to the head of the ACCC, be responsible for the quality of that appointment and not allow the sort of cheap, pathetic political games that are taking place because Labor Party premiers want to play games.

Senator CONROY—With views like that, would you appoint him to the board of ASIC?

Senator Ian Campbell—I am very happy for you, Senator Conroy, to send me a whole file on what Mr Samuel has said. I think he is a very intelligent man who has done superb work


ECONOMICS

for Australia and who will continue to do so in his new role. I am not going to engage in your little political game of trying to denigrate a great Australian.

Senator CONROY—You would support John Elliott being found guilty of being a director of a company that was trading while insolvent?

Senator Ian Campbell—I am not going to comment on cases that are before the courts.

Senator CONROY—That one is finished. It is the sentencing issue that is left. John Elliott has been found guilty. You would not support—

Senator Ian Campbell—Senator Conroy, what you are asking me to do is to make a comment about sentences before they are issued—

Senator CONROY—No, I didn’t. I just asked you whether you support—

Senator Ian Campbell—You just said that you do not think it is appropriate that we should go to how Mr Rivkin will be treated at the court tomorrow, but you are quite happy to say that I should make comments about the sentence that should be placed on someone else in another capital city. You have asked Senator Brandis to be a consistent chairman today and I ask you to be a consistent senator.

Senator CONROY—I did not quite get to finish my question before you jumped in. I think you were anticipating something. I was not going to ask you to comment on his sentence. I agree that you should not.

Senator Ian Campbell—If you want me to play your game with Graeme Samuel—or your character assassination of Graeme Samuel—I am not going to be part of the game. Play another game—ask another question.

Senator CONROY—Are you aware of Mr Berry’s views that insider trading resulting in small profits may not be being referred by ASX to ASIC?

Senator Ian Campbell—I think it is an important issue that you should tease out when you have the ASX and ASIC before you.

Senator CONROY—You are the parliamentary secretary in charge of this area.

Senator Ian Campbell—I have put my views on the record. I think that you should lock away someone who breaks into a house and steals a bicycle worth $100. I do not believe in ‘Three strikes, you’re in.’ I think it should be ‘One strike, you’re in.’ I think there should be zero tolerance for that sort of crime. I think there should be zero tolerance for corporate crime. If it results in a $100 profit, I would report it to ASIC and I would get them to chase it down.

Senator CONROY—The issue I am raising is not that—

Senator Ian Campbell—I agree with Senator Watson. It is not the quantum. Depending on how an ill-informed market reacts, the profit could be $100 or $100,000.

Senator CONROY—I think we are in heated agreement about how we should treat people on this issue. My question is—

Senator Ian Campbell—I think it is an important issue. I would be concerned if the ASX was not reporting these things. But I do not want to be unfair to the ASX. I think that Mr


ECONOMICS

Berry would want to expand, clarify and discuss these things in a fully informed environment. I do not think it is fair to continue the conversation when they are not here.

Senator CONROY—Have you had the chance to have a discussion with the ASX yet on his comments?

Senator Ian Campbell—No.

Senator CONROY—Do you intend to raise it with them?

Senator Ian Campbell—I talk to the ASX very regularly. It is certainly something—

Senator CONROY—So you will raise it with them?

Senator Ian Campbell—Yes.

Senator CONROY—Apart from the size of the profit, what other criteria does the ASX take into account when determining what constitutes inappropriate dealings? There is an MOU that sets some of these issues out, between the ASX—

Prof. Collier—I am sorry, Senator, I do not know the answer to that. I have just asked Mr Adams and he is not aware of it either. Unless one of the other executive directors has the answer to that, we might have to take the question on notice.

Senator CONROY—Thank you. ASIC recently secured the conviction of Rene Rivkin on insider trading charges. Can you tell me how ASIC became aware of the information that prompted the investigation?

Prof. Collier—It is my understanding is that it was by an ASX referral, but I will just check with the executive director, Peter Wood. He is nodding to that effect.

Senator CONROY—In deciding what matters to pursue, does ASIC pay close attention to market rumours in the financial press?

Senator Ian Campbell—Do we have that last answer clear in the Hansard? The answer was that it was an ASX referral.

Senator CONROY—Mr Wood said yes.

Mr Wood—Yes.

Senator CONROY—In deciding what matters to pursue, does ASIC pay close attention to market rumours in the financial press? What is the threshold that must be crossed before an investigation is launched?

Prof. Collier—I would like to make a preliminary statement before I hand over to Executive Director Wood. In ASIC we define the word ‘complaints’ very broadly. We monitor the financial press and we include that in our definition of complaints. So if there are issues which come to our attention through the press it may be something which we are prepared to inquire into. I will now ask Mr Wood if he has any additional comments he would like to make on that point.

Mr Wood—The threshold test, which we must meet before we can open investigations under section 13, is that we must have a reasonable suspicion of a contravention having been committed.


ECONOMICS

Senator CONROY—But you do inquire before you open an investigation?

Mr Wood—Yes, indeed.

Senator CONROY—And your inquiries would be based on referrals, markets, rumour, financial press issues. Is that fair?

Mr Lucy—Yes.

Mr Wood—All of those.

Senator CONROY—I am sure there are a few others I have missed.

Mr Wood—Yes.

Senator CONROY—Is ASIC aware of allegations of insider trading in Sausage Software that have been levelled at Mr Steve Vizard in the course of a criminal case that is currently being heard in Melbourne?

Mr Wood—I think I can say that ASIC is aware of the publicity that has surrounded the committal proceedings, yes.

Senator CONROY—Are you inquiring into this matter?

Mr Wood—It is not our practice to comment on matters as to whether we are investigating them or otherwise.

Senator CONROY—We have agreed that it is not investigation; I am asking: are you inquiring?

Mr Wood—We are looking at the matter.

Senator CONROY—Thank you. I would like to briefly talk about AMP. Mr Johnston, are you the person to ask?

Mr Johnston—It depends what you are going to ask. Hopefully not!

Senator CONROY—In relation to AMP’s $750 million issue to small shareholders, I am concerned that AMP has used the share purchase plan of the Corporations Law in a way in which it is not really intended to be used. The purpose of the SPP regime is to allow companies to make small capital raisings to a fully informed market. In the case of AMP I think it is certainly questionable whether the market was already informed when the shares were issued. For example, shareholders did not know about the exact financial position of the British business, the position of the hedges, the unwinding of the equity exposures, the position of the British regulators, the risks going forward or AMP’s position if the demerger does not go through. Those are some fairly substantial issues that you would have to say ordinary shareholders of AMP were just not across. I know that you have had a number of chats with AMP, and I think recently they voluntarily paid a fine for lack of disclosure. In the light of this, do you share my concern and do you think there need to be amendments to the Corporations Law to plug this loophole or do you think that, in actual fact, the market has not been fully informed?

Prof. Collier—Can I intervene there, just for a moment. As far as amendments to the Corporations Law are concerned, that is government policy and we would respond if a law reform proposal came up.


ECONOMICS

Senator CONROY—Can I clarify something on that point. You are an independent authority.

Prof. Collier—That is correct.

Senator CONROY—And you frequently comment on the need for changes to the law; you do not wait for a law reform proposal. In fact you are one of the generators of reform—as I think Senator Ian Campbell has just described in the situation where David Knott and Richard Humphry went forward and asked for a change to the law.

Prof. Collier—That is correct.

Senator Ian Campbell—I would like to say that I have already—it was about half an hour ago—explained in some detail that this particular area in relation to placements is something that the government is focusing on and has consulted ASIC on. As I have said, it is an area where there needs to be a balance—

Senator CONROY—I appreciate that it is a question of balance.

Senator Ian Campbell—The example that you have raised is a very good example of why you need to get that balance right.

Senator CONROY—I should declare that my wife has AMP shares so, tragically, I get to follow this every day.

Senator WATSON—Are you taking them up?

Senator CONROY—I could not, in good conscience. I do not have a financial service licence so I would not want to give advice because Mr Johnston—a known Footscray supporter, who is terrified Luke Darcy is moving to Collingwood—would have a severe conflict of interest in pursuing me. So I cannot give my wife advice on this issue.

ACTING CHAIR—What is she going to do?

Senator CONROY—She may pass up the opportunity. I think Senator Campbell encapsulated the issue well: it is a balance issue.

Prof. Collier—I think Mr Adams is more equipped to speak on this.

Senator CONROY—Given the sorts of issues I have outlined, would you consider that my wife has been in a position to make an informed decision here?

Mr Adams—I will go back to what you were discussing before, Senator. There are two aspects here. One is the share purchase plan—and I think your question is about the informed market on AMP. On the share purchase plans, the relief that ASIC has provided for people being offered $5,000 as an opportunity was the balancing exercise that the senator referred to. We took into account the history there—which was only a figure of $3,000, which was taken from marketable parcels—and what people could do. So we have raised that by five over the effluxion of time since we originally picked the $3,000 figure. On the AMP and the market, all I can say is that I am aware, as the commissioners have said earlier, that we monitor all things associated with companies, and I am not aware of any details which I can go into any further.


ECONOMICS

Senator CONROY—If you have allowed this to happen, I have to ask you to justify it. Given the extent of the financial position of the British business, the position of the hedges, the unwinding of the equity exposures, the position of the British regulators, the risks going forward and the position if the demerger does not go through, can you justify allowing this SPP to take place?

Mr Adams—All I can say is that the general policy was that share purchase plans could go ahead on the basis that the market is informed—that there have been disclosures to the market.

Senator CONROY—Are you suggesting to me that the market was informed, at the time, of AMP’s true financial position? By definition, if you have allowed it, your answer, Mr Adams, is yes.

Mr Lucy—Perhaps I should take responsibility. In fairness to Mark Adams, it was not his call. ASIC would have to take the responsibility for holding that view.

Senator CONROY—So ASIC are happy to go on the record and say that at the time—

Mr Lucy—We did not intervene; therefore that was the outcome.

Senator CONROY—Therefore you did consider?

Prof. Collier—I would like to add something. As has been discussed earlier today, continuous disclosure is an issue which ASIC takes extremely seriously. We have been at the forefront of pushing for increased powers in relation to continuous disclosure. And we have been monitoring the AMP situation constantly. AMP has been a company which we have monitored to a considerable degree for some time.

Senator CONROY—You certainly have. There can be no criticism that you have not chatted with them, got money out of them, slapped them on the wrist, and all of the above. Up until this point, you have done everything you could to try to keep the market informed.

Mr Lucy—And an outcome of that is that AMP are very conscious of their responsibilities.

Senator CONROY—I am not aware of the exact timing issues involved here but—

Senator WATSON—The question is: do you believe that you have succeeded, as a result of what you have done, in keeping the market informed? I know that you have tried your best, but in hindsight do you believe that you have succeeded and that the market is informed now?

Mr Lucy—I think it is fair to say that our attitude would be that we have succeeded in that regard. You will never have a perfect system, and ASIC has been campaigning with the government, so we have further immediate opportunities to influence behaviour that is unsatisfactory, regarding continuous disclosure.

Senator WATSON—I think you will find, from Senator Conroy’s wife’s involvement, that the market is quite confused at the moment. If the market is confused, the question is: have they been adequately informed? If they had been adequately informed, I do not believe there would be the element of confusion out there that there is.

Mr Lucy—Unfortunately, information does not necessarily eliminate confusion. Sometimes information can arguably add to confusion. It is not automatic that with one you get the other. The question from an ASIC perspective is: was the market aware of these


ECONOMICS

issues? That is our perspective. Whether the market is able to interpret the issues is for the market.

Senator WATSON—Surely more informed information creates a situation of less confusion.

Mr Lucy—Certainly.

Senator CONROY—AMP has avoided disclosing to the market. You have pinged them on that. I do not think anyone is seriously arguing—

Mr Lucy—That was an earlier incident.

Senator CONROY—Yes, but let us call a spade a spade. Mr Mohl made a straightforward statement in mid-February about whether there would be a need for further capital raising. Yet shortly after he came to ASIC and said, ‘What I said a couple of weeks ago’—it was only a couple of weeks ago—‘isn’t actually right.’ They have avoided making a disclosure to the market and they have avoided sign-off from directors on the accounts, and now you step back and watch them issue shares. Nobody else in the marketplace thinks they have properly informed the market, but ASIC is saying that it is comfortable and that it thinks it has succeeded in keeping the market informed.

Mr Lucy—I think it is very much a matter of the timing between a company reaching a decision and announcing that to the marketplace. It is our responsibility to ensure that there is the minimum time between the decision being made and the information being provided. We cannot stop a company changing its mind. That is not our role.

Senator CONROY—I appreciate that.

Mr Lucy—Our role is to make sure that, when they change their mind, they announce that change.

Senator CONROY—Terry McCrann, whose headline on his article is ‘Prospectus rules bent to non-disclosure point’, says:

The AMP’s $750 million issue to small shareholders is both outrageous and mind-bogglingly incredible.

Whether or not subscribing for the new shares will prove a good investment is an altogether different and more complex and more difficult question.

That is the issue my wife is facing right now: do I take up this offer? This applies even to shareholders able to bring to bear the most sophisticated financial investment analysis, because they do not have anything to analyse. I accept that Mr McCrann is only a commentator. He believes there is a major flaw in the Corporations Law. He believes, and it is arguable that many believe, that AMP, by using the SPP, has legally avoided giving shareholders the information they need to be able to make an informed decision.

Mr Lucy—Having a mechanism for share placement in the marketplace is always a risk. That is why you come back to the point of whether the balance is appropriately struck at $3,000, $5,000 or some other figure. Either you have that opportunity for shareholders to participate or you do not. If you do have it, then it is on the presumption that there is ongoing, continuous disclosure.


ECONOMICS

Senator CONROY—I appreciate that there has to be a balance. There has to be a way to try to get it right. The issue here is whether the balance has been got right.

Senator Ian Campbell—A good friend of mine spends a lot of time looking at this issue. I would be happy to hear from Mr McCrann if he thinks the Corporations Law needs to be changed. I guess most of the people coming to us have their own interests. They are saying that we should liberalise it to make it easier for people to raise money and that it is in the interests of small shareholders. I would be happy to hear Mr McCrann’s argument the other way.

Senator CONROY—He is highlighting the need for some restrictions in terms of the balance. I think he is arguing for some restrictions. Perhaps I will read a little more, Senator Campbell, and then you might like to comment.

Senator Ian Campbell—My view is that with a sound continuous disclosure regime, further strengthened by giving ASIC an infringement penalty notice power, shareholders should always be fully informed about their company’s performance. If a company is criticised for doing a placement when the market is not fully informed, I would argue that they are in breach of the continuous disclosure regime.

Senator CONROY—That is not quite right.

Senator Ian Campbell—Do you understand what I am saying? In other words, the market should be fully informed.

Senator CONROY—No. If it is something to do with SPP, it is a requirement that the market be fully informed.

Senator Ian Campbell—It is a requirement under the continuous disclosure regime that they are fully informed. If any material fact is known to the company, it needs to be known to the market. If something is going to affect the price of the shares, it needs to be known to the market. I think your argument in relation to that company—or any company; I will try to stay away from a particular company—is that, if there is a regulatory issue overseas which might affect the share price or if there are write-downs which should have taken place that might affect the price of the shares or if any information occurs anywhere, the market should be informed about it. I do not think it is an issue that is special to the special share placement schemes or share purchase schemes. I think it is an issue about the continuous disclosure regime. It is canvassed fairly thoroughly in CLERP 9. You are shining a light right on that policy dilemma.

Senator CONROY—This might be one of the issues for which you would get bipartisan support. I will take you through a couple of the points that Terry McCrann raises. He is talking in general. He says:

That prospectus does two main and self-evidently important things. It provides the most up-to-date financial information on the company; and—

most importantly—

it forces directors to sign off on that information.

And importantly, also, what might be termed future information. What is or could be coming down the pike.


ECONOMICS

He also says:

The SPP exemption operates on the basis that companies have kept the market fully and timely informed under their continuous disclosure obligations.

AMP had basically made some announcements which, in McCrann’s view, rendered its accounts for 2002 completely inoperable because of the magnitude of what it was doing. He says:

But not only is that historical information completely meaningless—with the foreshadowed writing off of some $2.6 billion. But it hasn’t a clue what it all means for its future financial position.

He then talks about the size of the placement. I appreciate that this is a balance issue, but $5,000 multiplied by AMP’s nearly one million shareholders would theoretically enable AMP to raise up to $5 billion. It is able to raise an extraordinary amount of money through this placement.

Prof. Collier—I have a comment which will hopefully address some of the issues you have raised. I will reiterate some points we made before. Continuous disclosure is very high on ASIC’s agenda as an issue. Second, we constantly monitor the market—in addition to the ASX, of course—and we are very conscious of recent developments in AMP. There have been a number of AMP matters on our radar because a lot has been happening in relation to that company. All I can say about the matter you just raised is that it is a matter we have been aware of. In the context of the provision of timely information to the market which is price sensitive, we have no investigations or inquiries going on at this stage.

Senator CONROY—When they came to you with this proposal and wanted to use the SPP, did you believe that their existing accounts, which had been signed off, were still relevant?

Mr Lucy—I will have to check that, because I am not sure that there is any obligation for them to come to us.

Mr Adams—That is correct. They made an institutional offer as well as the share purchase plan. In the institutional offer they were relying upon a class order ASIC had issued in relation to offerings and the need for a prospectus for a secondary sale. The relief we have in that class order is premised on the basis that the entity complies with its continuous disclosure obligations and that they make an announcement to the market, as I think they did, that they have nothing further about their position to inform the market of at the time. The share purchase plan is another class order instrument which relies upon the market being informed. In this context, you have the announcement by the entity that it had nothing further to add to the market’s information.

Senator CONROY—Do you believe that their signed-off accounts were still relevant, given the magnitude of the decisions that they were taking and seeking fundraising for? In other words, did the existing accounts still have any relevance whatsoever in representing the true position of the company?

Mr Lucy—Isn’t it right that their announcements subsequent to the financial accounts for the previous year clearly made an important commentary that would cause any shareholder or potential shareholder to make adjustments to those accounts?


ECONOMICS

Senator CONROY—Sure, but they were not issuing any new information that was signed off. The key here is information they are prepared to put their names to. That is the key test to the small shareholder.

Mr Lucy—But the directors still need to stand behind any market announcements they make.

Senator CONROY—There is a difference between a market announcement and a signed prospectus. Would you concede that?

Mr Lucy—Of course.

Senator CONROY—There is an entirely different test involved here.

Mr Lucy—In particular, depth.

Senator CONROY—Mr Mohl made a market announcement a few weeks before that they would not need any further capital raisings. That was a market announcement that he was standing behind, yet a few weeks later he had done the complete reverse of his market announcement and signed-off statements. That is one issue. There is also the size. Surely the size is an issue. The potential for raising the quantum is really important. To be fair, this is a provision about regular small capital raisings. Is there any other raising which has been this big, or even close to this big, using SPP? Mr Adams, have you seen one of this magnitude?

Mr Adams—Not that I am aware of. I would have to take that on notice to provide the details.

Senator CONROY—To be fair, I think you are right. It is a massive number of dollars on what most people would think is a smallish—

Mr Lucy—But the quantum is simply a coincidence of the number of shareholders there are. The real issue is the $5,000, in that there are many of these—

Senator WATSON—I do not think we are querying that. Most of us agree that you did the right thing in lifting the quantum to $5,000. That is not the issue. The real issue is the confusion associated with statements made earlier about capital raising which were then reversed and whether enough information had been given to the market to enable people such as Senator Conroy’s wife and others to make an informed decision as to whether that entitlement should be taken up. That is really the issue, and that is why there is confusion. Had enough of the downsides been given to the market in terms of possible future contingencies? That is the worry.

Senator Ian Campbell—The problem we have here is that it is quite appropriate for Senator Conroy to cross-examine the ASIC team about how they handle that issue, but there is a bigger policy question on the table at the moment through CLERP 9.

Senator CONROY—I accept that you are looking at it.

Senator Ian Campbell—I think that is the way forward. I do not think Senator Conroy is disagreeing with the fact that $5,000 is probably a better limit than $3,000. It is just a judgment call. Mr Lucy said that the quantum is particularly large in AMP’s case because it is one of Australia’s biggest companies with the largest number of shareholders—because it is demutualised.


ECONOMICS

Senator CONROY—It used to be.

Senator Ian Campbell—Yes, but in terms of the number of shareholders and in terms of its business it is still a very big organisation. In terms of what the market capitalises it at, it is not as big as it was. However, I think all Australians would hope that AMP can move on.

Senator CONROY—That it bounces back.

Senator Ian Campbell—For Mrs Conroy’s sake in particular, let us hope it does. I think that, as Australians, we would all hope that the AMP does go from strength to strength. It has been through tough times. From Australia’s point of view as a nation, having successful, large financial services companies domiciled in this place is very good for Australia and our financial services sector. One of the problems you have is that it is easy to look at things in hindsight. As I recall, Mr Mohl was answering a question in relation to the need to meet UK regulatory requirements and whether they would need more capital to meet those. I have met Mr Mohl only once, but I suspect that, when he answered that question, he was not trying to mislead anyone. I may be wrong, but I think that was the context in which he answered the question. He probably answered it very accurately at that time. I am briefed by the AMP people from time to time.

I had a knock on the door from Al Kinloch, as I am sure Senator Conroy did. Mr Kinloch said: ‘We are announcing that we are going to do a demerger.’ I said, ‘That seems to make sense. Thanks for letting us know.’

Senator CONROY—If you had shares in it, would you take them up?

Senator Ian Campbell—It is not a problem I have. I am like you, Senator Conroy—I do not have any shares.

Senator CONROY—Mr Lucy, I assume you do not, but if you had any shares, would you take up the offer?

Senator WATSON—I have to declare an interest—my wife has an interest.

Senator Ian Campbell—A lot of wives do.

Senator CONROY—They are the only shares my wife has.

Senator Ian Campbell—I presume Mr Mohl’s statement at the time in answer to that question would have been absolutely correct and accurate. At the same time, AMP could have been, and probably were, working on alternative strategies which, in hindsight, we know were to do a demerger. I presume the board would get together to look at a range of strategies to handle their business going forward. I am sure AMP have been doing that ad nauseam for the last year or so. I do not think there is potentially a conflict between Mr Mohl saying that they do not need to do any capital raising to meet a regulatory requirement in the UK and then, a few weeks later, announcing the demerger. What the government—and I am sure ASIC—want to make sure of is that all companies registered in Australia and listed on the Australian Stock Exchange comply with continuous disclosure and, by doing that, keep the market fully informed so that these sorts of placements can take place in a fully informed marketplace. If you get that right, placements will be a very efficient way for all Australian companies to raise new capital.


ECONOMICS

Senator CONROY—I think getting it right is the point.

Senator Ian Campbell—Yes. The market must be fully informed.

Senator WATSON—That is not being challenged at all.

Senator Ian Campbell—That is very much on the table. CLERP 9 has put it on the table. I have not read the discussion paper for a while, but I think you will find quite a few pages dedicated to dealing with this issue. I think the decision in CLERP 9 was basically to leave the status quo. I think we said, ‘We’re going to leave it as it is.’

Senator CONROY—Maybe you will want to revisit it in light of these developments.

Senator Ian Campbell—The push was to liberalise it to make it easier to do placements. We said no out of caution.

Senator CONROY—Given the developments, that caution was well placed. It may be that you will want to revisit that issue, given what has happened here. You are probably being more generous in your interpretation of market events than perhaps my wife is at the moment, but she has a direct pecuniary interest in the matter.

Senator Ian Campbell—I am not making a comment on market events. I am saying that it is possible for someone to make an honest statement about what the company was proposing on one day and then, a couple of weeks later, to announce something that may seem to be in conflict with it.

Senator CONROY—I will move on. In relation to a takeover bid for Cobra Resources, ASIC applied to the Takeovers Panel for orders that a bidder—Mr Stephens—be restrained from proceeding with his bid. Why did you apply to the Takeovers Panel and not take action yourself?

Prof. Collier—I have some notes here which indicate that we did take an action to the Takeovers Panel to seek to stop Mr Stephens from making takeover announcements for that company. We note that Mr Stephens is a person who is currently banned from managing a company and that he has not demonstrated an understanding of the requirements of the act. But we do note that Mr Stephens ultimately consented to the panel’s orders. At the moment we are satisfied with the current position in relation to Cobra and Mr Stephens’ inappropriate takeover attempt.

Senator CONROY—Thanks for that, but my question was: why did you ask them? Why didn’t you take action yourself?

Mr Adams—Perhaps I could mention one thing. Because there was a takeover bid in place, I think we considered that the appropriate venue to suggest there may have been unacceptable circumstances surrounding the takeover was to go to the Takeovers Panel.

Senator CONROY—Why did you consider it not appropriate for you to take action? You could have sought an injunction. You could have taken action yourself.

Prof. Collier—I think the answer is, as Mr Adams said, that it was a takeover announcement, so we thought the Takeovers Panel was the appropriate place to hear this particular matter.

Mr Lucy—And to achieve the outcome.


ECONOMICS

Prof. Collier—And to achieve the most expeditious outcome.

Senator CONROY—So it was a matter of expedition. You were concerned about a lengthy court process?

Prof. Collier—It is simply a case of achieving an outcome which is appropriate in the circumstances as quickly as possible in order to prevent any destabilisation, for example, of this company and to ensure that, as Mr Lucy just said, the most reasonable and appropriate outcome is achieved as quickly as possible.

Senator CONROY—I am just concerned that ASIC seem to be abdicating their responsibility under the Corporations Law and your own act.

Prof. Collier—We did take the action to the Takeovers Panel, and it seemed to be an appropriate process to undertake in the circumstances.

Mr Lucy—We would not see that we were abrogating our responsibility. We actually took it to the takeovers panel, so we actually took the action. We were the catalyst for the action.

Senator WATSON—Together with your reservations, when you took it to the Takeovers Panel?

Mr Lucy—With a full explanation as to what matters we had regard to, yes.

Senator CONROY—The Takeovers Panel is only a quasi-law organisation. You are the enforcer of the Corporations Law.

Prof. Collier—I do not think that is strictly accurate. Mr Adams, would you like to comment?

Mr Adams—I do not claim to be an expert on the Takeovers Panel but they do have powers to make orders in relation to takeover proceedings and they are enforceable.

Senator CONROY—And you have powers to take actions in takeovers matters. My question is: why did you delegate it to another authority rather than acting yourselves?

Prof. Collier—I do not think it is really a case of abdicating our responsibility or delegating the matter. We sought, as an appropriate action, to take it to the statutory body, which is the Takeovers Panel.

Senator CONROY—You are a statutory body.

Prof. Collier—Yes, but the Takeovers Panel is empowered by the ASIC Act and the Corporations Law to hear matters in relation to takeover issues. It seemed to be an appropriate process to take the matter to the Takeovers Panel, as we do on other occasions. There was nothing particularly special about Cobra. We have taken matters to the Takeovers Panel on a number of occasions.

Senator CONROY—I am just concerned that you appear to be abdicating your responsibilities under the Corporations Law which you have been specifically given by parliament.

Senator Ian Campbell—But the parliament empowered the Takeovers Panel to do this.

Senator CONROY—The Takeovers Panel is going to be here a bit later, so we will have a chat about what they think their appropriate powers are.


ECONOMICS

Senator Ian Campbell—The regulatory outcome is the one that I presume you would have wanted.

Senator CONROY—It is the one that I wanted. I am just concerned that ASIC believes that the appropriate forum for dealing with these is no longer ASIC; it appears to be the Takeovers Panel.

Mr Lucy—It was an avenue. Had the avenue not been effective, then we would have rethought our position.

Senator Ian Campbell—I can ask the question—I do not know the answer. I presume if you had not got a satisfactory outcome and you were still concerned—

Mr Lucy—We would have then acted ourselves.

Senator Ian Campbell—Belt and braces, ASIC could have acted.

Senator CONROY—ASIC had the power to act independent of the Takeovers Panel: is that correct?

Mr Lucy—We might have to take that on notice.

Prof. Collier—The exact powers of ASIC in relation to takeovers is something that—

Senator CONROY—I would be shocked if the answer was no. You are in charge of the Corporations Law.

Senator WATSON—But at the end of the day that is not necessarily the end of the matter for ASIC. ASIC still has a residual link.

Senator CONROY—What powers you think you have is an important policy issue here. I am concerned that you think you do not have powers to take actions in this matter. I do not believe the department repealed any of your powers.

Mr Lucy—I am sure that is not a question, but we will take that—

Prof. Collier—We will have to take that on notice.

Mr Adams—My own observation is that, as I think we do have a range of avenues that we may choose, it might be taking injunctive action if necessary. However, in this case, because of the circumstances of confusion, we felt that it was appropriate to go to the panel as an expert venue to consider whether that confusion amounted—

Senator CONROY—My concern is that you seem to think that you are not expert enough to deal with this. That to me is a concern.

Prof. Collier—Could I possibly put another view? I do not think there is any allegation by ASIC that we do not have people in our agency who are experts in this matter. There is no question that we do have people who are experts in this matter. However, in circumstances like this, if we do not take the matter to the takeovers panel to have the matter heard expeditiously and efficiently by a body which is empowered by the law to hear matters on this particular type of conflict, we are at risk of opening up ourselves to criticism from the business community for not having the matter heard by the appropriate panel. In our view, in this case the Takeovers Panel was the appropriate venue for having this matter resolved quickly.


ECONOMICS

CHAIR—Ordinarily, a regulatory authority—and I know that I did this for the ACCC in my former career—before moving to a court for an injunction would take counsel’s advice on the prospects of successfully applying for an injunction, even if it were an urgent matter. I assume you would do that.

Prof. Collier—I will need to take that question on notice. The operational officers in this matter are not present here today.

Senator CONROY—Can I say in response to you, Chair, that I would hope that ASIC did not have advice that they could not successfully take out an injunction. I would be shocked if that were the case. I am not sure if you are aware of the particular facts of this case. It is actually pretty clear cut. You had a real spiv who had been banned.

Senator Ian Campbell—Could I make a response. You have this specialist panel that the government, with the support of the parliament, has established. That is one option that ASIC could take. I do not know the affairs around the Cobra matter itself, but we will give any more information on notice. Mr Adams has made the point that you could have taken injunctive action. I am not a lawyer, but I presume to take injunctive action you would have to go to a court. You would have to employ counsel. The Takeovers Panel is sitting there and is able to deal with things in an efficient manner, and Senator Conroy has agreed that we got the regulatory outcome we wanted. One of the reasons why the Takeovers Panel is there, and one of the reasons why the parliament established it, is to ensure that these matters can be dealt with efficiently and inexpensively. In those circumstances, ASIC should be commended for using the panel in a way that saved the taxpayer money and got the regulatory outcome we were looking for.

Senator WATSON—Hear, hear!

CHAIR—There is another dimension to it. I appreciate I came in on the end of the discussion, but this is what I was getting at. I think it is not sufficiently appreciated by people who are not lawyers that injunctions are always discretionary remedies. There is no such thing as a regulator or anybody else going to a court and saying, ‘There has been a breach; therefore, we have a right to an injunction.’ Injunctions are never issued by right. They are issued at the discretion of the court. One of the grounds on which that discretion can be exercised to decline an injunction is if there is an alternative mode of dealing with the matter which has not been sufficiently pursued by the applicant for the injunction. I would have thought that, without pretending to know a lot about ASIC’s processes, if you wanted to resist an injunction at the suit of ASIC, the first thing you would say is, ‘Well, they haven’t gone to the Takeovers Panel.’

Senator CONROY—In a recent article in Company Director magazine, it is reported that the ASIC Chairman, David Knott, requested that sanctions apply to those companies that fail to comply with the ASX corporate governance guidelines. I was wondering if you could advise what types of sanctions Mr Knott had in mind for people who breach the ASX guidelines.

Prof. Collier—I am sorry, I am not familiar with that article or that quote. Mr Knott is overseas at the moment and has not communicated to me what sorts of sanctions he had in mind.


ECONOMICS

Senator CONROY—Senator Campbell, has he had a chat with you before he went overseas about what he had in mind?

Senator Ian Campbell—No, but on compliance with the guidelines I understand that one of them in relation to audit committees is already actually a listing rule and I think compliance with many of the others will be required to report against the guidelines, and I think that comes in next year. Mr Knott and I meet regularly and discuss these things regularly but I do not think we have had a meeting to discuss these things since the guidelines came out.

Mr Lucy—I can add that I have been involved in discussions with the chairman in a public arena in Brisbane where, in referring to those guidelines, he said that it is important that the community recognise that they are only guidelines and that there would be many instances where companies can legitimately not adhere to them but explain the reasons for that. He expressed anxiety that the market did not mark those companies automatically down and that there needed to be maturity in recognising the fact that guidelines are guidelines.

Senator CONROY—I am sure that the market is mature enough to handle that. Does anyone have any idea what type of sanctions Mr Knott had in mind for people who breached the guidelines? I am happy for you to take it on notice and Mr Knott can forward a response.

Prof. Collier—We are happy to do that.

Senator CONROY—ASIC has made a determination under the Corporations Law which exempts Munich American Risk Partners from complying with parts 7.6, 7.7 and 7.8 of the Corporations Act in relation to the provision of financial product advice and instead the now repealed Insurance Agents and Brokers Act 1984 applies. Could you advise the committee why ASIC has granted this exemption to Munich American Risk Partners and let me know what they actually provide?

Prof. Collier—We will have to take that on notice.

Senator CONROY—Mr Johnston, are you aware that you have done this?

Mr Johnston—No.

Senator CONROY—It is a fairly major thing to do, exempting them from 7.6, 7.7 and 7.8 and allowing them to keep the old rules.

Mr Johnston—We grant relief fairly frequently under various powers. I am not familiar with that particular case and that particular company.

Senator CONROY—Could you take on notice what financial services this particular company provides and why it was that you gave them the exemption?

Mr Johnston—I am happy to do so.

Senator CONROY—Thank you. I did have some questions on your corporate insolvency initiative, but I will put them on notice. I am conscious of the time.

CHAIR—Perhaps this is a good time for us to have a housekeeping discussion. How much longer do you think you will be with ASIC?

Senator CONROY—I have only three or four issues to cover and they are relatively short.

CHAIR—Would you be finished with them by 12.30?


ECONOMICS

Senator CONROY—I hope so. I am moving towards trying to achieve that.

Senator WATSON—I have a couple of questions on ASIC. Financial planners will play a very central role in the new FSR regime. Are you currently licensing people who have not yet completed their financial planning courses?

Mr Johnston—To get a licence there are a number of obligations which must be met. We will not grant a licence to people unless they comply with the licensing requirements. The licensing requirements include competency to run a business. In terms of individuals who are giving advice, they then have to meet specific advice competencies set out in our policy statement 146. So no-one would be able to be granted a licence unless they met the licensing requirements, and a licensed entity is not allowed to appoint an authorised representative unless they meet the competency requirements.

Senator WATSON—Do you think that people meet the competency requirements if they have not yet completed their courses?

Mr Johnston—It depends what courses they are doing.

Senator WATSON—Financial planning courses.

Mr Johnston—Yes, but there are various levels of course. For example, someone could be working towards what is called the CFP, which is an international certified financial planner designation. They might not have completed that but might have done enough of that to meet the requirements under policy statement 146. There are certain standards. There are a lot of courses on our register that comply with policy statement 146 requirements, but no-one is able to give advice unless they meet those requirements.

Senator WATSON—It is something of a worry, though. We have accountants excluded unless they are appropriate financial planners, yet they know a lot about the intricacies of people’s particular businesses. We are registering financial planners, who have a very important role and an enhanced role under FSR in terms of making decisions about business assets; yet they have not completed their course.

Mr Johnston—Let me be quite clear about that. They cannot give advice unless they meet the policy statement requirement for competency.

Senator WATSON—But what I am suggesting is that you might be setting the bar a little too low.

Mr Johnston—The requirement under 146 was set after a great deal of consultation. The industry criticised us for it being set too high. There were a few ways that we could have gone with the competency requirements, and we have taken what I think is a course that is tougher than almost every other jurisdiction in the world. I would not say the bar is set too low. But we have always said that meeting 146 is a minimum requirement and that we would expect people to in fact do more than that.

Senator WATSON—Yes, but you are still licensing them.

Mr Johnston—We do not specifically license individual advisers. It is up to the licensee to make sure that the adviser complies with or meets the requirements of policy statement 146.


ECONOMICS

Senator WATSON—You talk about the other jurisdictions, but I am not sure if the other jurisdictions give quite the same prominence, importance and central position to financial planners. I just want to make sure that their standards are no less than the standards of such professions as law or accounting, given the central role that they have.

Mr Johnston—I think all I can say is that we have a policy statement out there and there is a requirement that people meet it. It is a policy that was consulted on widely and one that I think sets quite a high standard, but we have emphasised that it is only a minimum standard that people must meet. They must meet 146 requirements, and we would encourage them to do more than that.

Senator WATSON—Let us go further. You are still licensing people who are going to make decisions which have taxation implications and you are not insisting that they complete at least the taxation module. I find that extraordinary.

Mr Johnston—It depends on what areas they will give advice in. The various training courses that people have to complete have to be aligned with the matters for which they are authorised to give advice. If someone is giving advice, for example, in respect of retirement savings then they will have to have done modules that talk about not only the tax consequences but also the social security consequences of those types of investments.

Senator WATSON—From that I understand you are giving qualified licences so that, if a person has not completed a taxation module, their ability to advise a retiree about the quantum and timing of an allocated pension or matters relating to reasonable benefits limits are going to be limited. You are putting a restricted licence out there, are you?

Mr Johnston—No, it is not a restricted licence.

Senator WATSON—Once you have given the licence, people will move into these other areas. There is no doubt about it. People will go to them and say, ‘You’re a licensed person—’

Mr Johnston—No, that is not right. When we issue a licence, the licence will have certain authorisations on it. People are allowed to give advice only in respect of the products for which they have been specifically authorised under licence. When the licence application comes in, it needs to be demonstrated that they have the competencies and the ability to advise in respect of those types of products for which they seek authorisation.

Senator WATSON—What oversighting will ASIC be doing to ensure that, when Joe Blow comes up to one of these people who has just got a new licence, that person is not exceeding the authority of his licence?

Mr Johnston—We have in place a system of what we call ‘verification surveillances’ for new licences whereby, if someone applies for a licence under FSRA, they know that there is a certain percentage chance—a reasonably high percentage chance, in fact—that they will receive a verification surveillance visit. The purpose of those visits is not to do a full-on compliance visit but to check that what they have told us in their licence application is in fact what is in place in their business. So if someone came to us looking for authorisations to advise in respect of specific products, we would be checking that they in fact do have the competency requirements to advise on those products. It is done by compliance visits.


ECONOMICS

Senator WATSON—So you will be doing audits on financial planners to ensure that they are not exceeding the licence restrictions that you have imposed upon them?

Mr Johnston—Yes, and there is also an obligation under the law for licensees to advise ASIC if they are in breach of any of their licence requirements.

Senator Ian Campbell—Furthermore, I think it is right to say that if an investor, a customer or a citizen were given advice which led them to invest in something that was outside that licensing competency, the investor can sue the licensee for damages to the extent of the loss.

Mr Johnston—Yes, there would be rights between the investor and the adviser, but also we would then have the power to look, firstly, at the individual who gave the advice and see whether or not they should be in the industry and, secondly, the licensee and see whether or not there should be some licensing action taken—including a condition on a licence, or a revocation in a more serious case. We have taken action against licensees, and we have banned people from the industry where they have given advice outside of the terms of their appointment. Where they are allowed to advise only in respect of specific products, we have banned people from the industry if they have gone outside that range of products.

Senator SHERRY—I am conscious of the time, and you may care to take this question on notice and provide me with a written response. Can you indicate whether or not ASIC is intending to upgrade its surveillance of financial planners? If so, in what way? I am interested in the allocation of resources, the number of planners to be checked, the time period over which planners are to be surveyed—those sorts of details.

Mr Johnston—In terms of the specific numbers et cetera, I would have to take that on notice. I can confirm, though, that we are upgrading or increasing—however you want to express it—our surveillance of the industry. The industry is well aware of that; we have discussed it with them. But in terms of resources, numbers et cetera, I would have to take that on notice.

Senator SHERRY—If you could.

Senator Ian Campbell—I think, Senator Sherry, we actually allocated specific resources in last year’s budget. I think it was a four-year program of some many millions of dollars specifically for that purpose. We are happy to provide more detail on that.

Senator SHERRY—Good. One other issue I wanted to raise is a totally different issue. I have been approached by a constituent on the north-west coast of Tasmania who has been defrauded by a share-trading Internet company by the name of Kearns Investments. I will give you her name later; I cannot give it publicly for family reasons. She has spoken to ASIC about this matter and she has provided me with some details. This Kearns company operates out of Tokyo, Shanghai and Kuala Lumpur via the Internet, and they are continuing to operate in Australia. I have now been made aware that a number of Australians outside Tasmania are also victims of this share scam, this defraud operation. What are your powers to act in these circumstances to prevent a company operating over the Internet and continuing to trade? These people cannot get their money back, despite persistent requests—they just cannot get it back. They cannot recover it. It seems to me to be clearly a fraud operation. I wonder whether or not their communications, at least, can be shut down.


ECONOMICS

Mr Lucy—Senator, I would be very pleased to take that on notice and provide a prompt response.

Senator Ian Campbell—There might be some comments that we could make about the general issue of international Internet based share scams, because—

Senator SHERRY—They are difficult, I know.

Senator Ian Campbell—there are many operating.

Mr Johnston—It really depends on the jurisdiction, and not just the jurisdiction but also how lucky we are—and, frankly, sometimes it is luck—as to whether they have any operations in Australia that we can touch. Anyone who is offering securities or a financial product in Australia does need to be licensed. We have had some success working with international regulators in shutting down people who are based overseas but who are offering, through the Internet or other means, products in Australia without a licence. We rely on our international regulatory regime to do that, and we have had some success with it. If you think of the cold calling matter going back over the past 12 or 18 months, we have been able to shut down a number of those. With others, some are domiciled in jurisdictions where, frankly, we cannot get to them, because there is no equivalent regulator who will cooperate. Sometimes it just depends on the circumstances of where they are.

Senator SHERRY—These people—it was a family on the north-west coast of Tasmania—were cold called. I understand that others were cold call canvassed. You can give me a response to this on notice. Once there are a significant number of cases—and there are—I think it is clearly fraud. I am usually reasonably cautious about making a call but, from all the material I have seen, it is fraud. The only way to deal with this issue is to shut down the communications—either the cold call canvassing by telephone or the Internet. Do you have the powers to do that?

Mr Johnston—I would have to take on notice the legal and technological aspect of how we shut down a web site. I am personally not aware of that.

Mr Kell—We have no direct capacity to shut down someone who is telephoning in from a foreign jurisdiction in most instances. I think that the telephone cold calling scam showed the damaging impact, as you say, that can occur when people are tricked into throwing their money into these sorts of promotions. Again, as Mr Johnston said, our best course of action there is to work closely with overseas regulators who typically seek to shut down the operations rather than the means of communication. It would be very difficult to work out how to establish which calls coming into Australia, for example, were coming from cold calling operations. It is better to actually target the operators themselves, and that has worked in Thailand.

Senator SHERRY—Particularly with the Internet connection, because it was a cold call canvass. It was not high-pressure cold calling. This is a fairly sophisticated operation, looking at the types of communications and the fact that people were given time to consider the material that was provided. I understand you have the material that I have. It is a pretty sophisticated type of operation which, on face value, looks substantial but is in fact a fraud operation.


ECONOMICS

Prof. Collier—Another strategy of ASIC is to publish details of known web sites or perpetrators from overseas as part of ASIC’s education process in the community. As you will recall, last year ASIC published a cold calling report, which was launched by our chairman. I am conscious of the fact that, on a fairly regular basis, we issue media releases and have other communications with the media, primarily through our executive director, Peter Kell, warning the public about the risks of investing in schemes of this nature.

Senator Ian Campbell—I have just thought of an interesting idea, Senator Sherry. I know senators here would remember the debate around Internet gambling. I think some senators were concerned about the power that I think we were giving the minister for communications to issue takedown notices, as I recall. It may be well worth us looking at whether ASIC could be provided with some powers, or whether it could be done in consultation with the minister for communications, in relation to being able to attack the Internet site and use the Communications Act.

Mr Kell—We can talk to some of the Internet service providers if it is an Internet scam, but what we have found—

Senator Ian Campbell—Do you have powers to act there at the moment, Peter?

Mr Kell—It would have to be a voluntary arrangement, as I understand it.

Senator SHERRY—That is as far as we can take it today. I will give you the name of the individual and Kearns investments. I know she has spoken to you. If you could have another look at it for her, that would be good. Her concern is, obviously, not just the recovery of her family moneys but also to put a stop to this operation, because it is still going. I have one final question. At the last ASIC hearing one of you informed me that a financial planner had actually invested moneys in that Nigerian money scam, which I found quite astonishing. Has there been any progress as to whether the money has been recovered?

Mr Kell—There has been some progress but unfortunately the money has not been recovered. Since our last appearance, ASIC has successfully taken enforcement action that has ensured that the advisor in question was permanently excluded from the industry. As you can probably imagine, we have a series of follow-up investigations continuing.

Senator WATSON—Can you obtain the money—

Mr Kell—The money has not been recovered.

Senator WATSON—from the adviser?

Mr Kell—The money has not been recovered from the entities in Nigeria that may have some of it.

Senator WATSON—I am not interested in entities in Nigeria. What action has been taken to recover the money from the financial planner?

Mr Kell—There is further work continuing on that matter. So far—

Senator WATSON—It is all very well to wipe him off.

Mr Johnston—I do not think we can comment.

Mr Kell—There is further enforcement action under way.


ECONOMICS

Senator SHERRY—Do you have any idea—just a ballpark figure, and I would never hold you to it—how much money has been drawn into this Nigerian money scam? It has been on the Internet ad nauseam. I get it here every week.

Senator CONROY—I get emails inviting me to participate. I do not know where they think I would get the money from.

Mr Kell—Very quickly on that, there is quite a lot of information about this on ASIC’s consumer web site. These days we receive very few complaints—I am not aware of any in recent times—from consumers who have actually lost money through Nigerian letter scams. We do receive a lot of complaints from consumers who are sick to death of getting Nigerian letters and emails—or more recently, as we have seen, Iraqi letters sent to them via email. Globally, the estimate is somewhere in the order of $US5 billion.

Senator Ian Campbell—I was told it is a scam that originated in France in the fifteenth century.

Senator CONROY—As they say, it is an oldie but a goodie.

Senator Ian Campbell—It was long before Al Gore invented the Internet.

CHAIR—Have you finished, Senator Sherry?

Senator SHERRY—Yes, I have finished.

Senator WATSON—For many purposes it is almost obligatory to seek a financial planner for advice because you cannot go to a lawyer and you cannot go to an accountant—you cannot go to another professional person—if, for example, you want to do a whole list of seven or eight things, such as you outlined. But for a lot of those matters—for example, changing your investment strategy in a superannuation fund from a balanced fund to a growth fund or something like that—it is not necessarily all that complicated as an exercise. But there is this overriding requirement now for a financial planner to know the person, to know the business and to understand the person’s complete financial arrangements.

Under the circumstances, where the focus is so limited, I just wonder whether knowing all the financial circumstances of the person really is justified. All you are really doing is adding a mountain of cost to get to that position in the first place, maybe having not one interview but a series of two or even three while he collects all that information in regard to something as simple as, for example, the changing nature of even exercising choice if that should come in. Is it possible—I think the Financial Planning Association are interested in this—to dispense with this overall requirement where the nature of the advice and the impact of that advice are going to be not necessarily a significant matter?

Mr Johnston—I will begin by saying that the short answer is no, it is not possible to avoid the key things that are required when giving financial product advice. That is for good reason. The key things required are, as you alluded to, the know your client rule and the know your product rule and then making full disclosure of anything that could influence the advice that you give, so coming up with appropriate advice. However, we have made it clear in our policy statements and commentary generally that the nature of what is appropriate advice is in fact scalable. So if someone goes with a relatively simple need for advice, for example if they wanted to arrange general insurance of some type, non-life insurance, then we would not


ECONOMICS

expect that the fact-find that the adviser needs to undertake would be anywhere near as extensive as the one that would be involved for advising someone what to do with their retirement lump sum. So the concept of scalable is that, yes, you would still need to understand the client circumstances but you only need to understand the client circumstances in proportion, if you like, to what the need is for the advice that is being sought.

Senator WATSON—Have you issued an edict on that?

Mr Johnston—I think our position is well known on that. We regularly meet with the key industry bodies and speak at their conferences, and it is also dealt with in a policy statement that we have coming out shortly. But I think our position would be well known on that.

Senator WATSON—Yes, but there is nothing written, is there?

Mr Johnston—There have certainly been lots written in speeches, but the policy statement that comes out shortly deals with it and I think we also refer to it in writing in some of our earlier policy statements.

Senator WATSON—The Australian Taxation Office has almost become the de facto regulator for consumer protection in terms of a number of products such as capital protection products in addition to its primary role of protecting the revenues of the Commonwealth in terms of not only products but schemes and businesses that may have tax avoidance consequences. Putting your consumer hat on, what has been the role of ASIC in terms of these new hybrid products—for example, the warnings you issue to potential consumers of capital protection products on the downsides of these products in terms of interest rate adverse movements or the business risk consequences of using these products? You have got at least two downsides and you could probably mention more. I am a little bit worried that perhaps the consumer protection division of ASIC has not been as prominent as maybe it should. We notice that the lead advocate in many cases is the tax office, and their primary purpose is to protect the revenue and as a secondary consequence also to protect the consumer. I feel that you cannot necessarily just leave it to the Taxation Office in terms of tax avoidance products, because I think your responsibilities should be pretty wide in this area.

Mr Johnston—I have a couple of comments. If it is a product that has been offered which is structured as a managed investment, as some of those are, then we look at the provisions as to what needs to be disclosed in a product disclosure statement—a prospectus, if you will. The key thing that has caused us to put stop orders on product disclosure statements in the managed funds area has been the description of the risks of the product. That has been the No. 1 thing that has caused us to issue stop orders. I do not think it is accurate to say that we are not active in consumer protection with those types of products. There are specific examples which we could take on notice to provide.

ACTING CHAIR (Senator WATSON)—That would be helpful, because your profile in this area is probably lower than in some of your other areas, and it is an important role of consumer protection that you have.

Mr Johnston—My second comment would be regarding some consumer warnings that our Consumer Protection Division under Peter Kell has issued recently in respect of fixed interest type products. Mr Kell will talk about that.


ECONOMICS

Mr Kell—We have been paying considerable attention to this issue. We recently issued a warning, which received quite a lot of attention, about investments in fixed interest products, because we realise that, in the current market uncertainty, people are looking for so-called safe haven investments. We want people to understand that, even within that range of investments, there are still different levels of risk and return that people may be facing. The aggressive advertising that is going on in relation to some of those products is something that we are also addressing. We are also putting information out through our web site. I would note that, on our consumer web site alone, we have had well over three-quarters of a million visitors this financial year, which is up 75 per cent from last year.

ACTING CHAIR—On consumer protection issues?

Mr Kell—Yes. I would also note some of the brochures we put out that directly or indirectly address some of these issues or inform people about how to get advice in this area such as our Don’t Kiss Your Money Goodbye brochure. We have distributed another 100,000 copies of that this year, which brings us up to about 800,000 copies since it was first published. So I think it is an area in which we are aware that we need to continue doing work. We are happy to provide you with a bit more detail in some follow-up communication, if you wanted more briefing as to what we have been doing in this area. We would say that we have been taking a high profile and getting some good results.

ACTING CHAIR—I think examples are the best way of convincing the committee that you are active.

Senator CONROY—I would like to ask a few questions about the Atlantic 3-Financial matter.

Mr Lucy—I will respond to those questions.

Senator CONROY—I appreciate that the matter is before the Queensland Supreme Court, so you will want to be careful in your comments. My questions will, hopefully, be careful. Could you provide some background on the nature of the case brought by ASIC?

Mr Lucy—As you have rightly suggested, the matter is before the courts. We have sought the appointment of Ferrier Hodgson to take control of assets. They have a responsibility to report back to ASIC and, at this stage, we are waiting for that report.

Senator CONROY—Does this case involve offences against the Corporations Law?

Mr Lucy—Can I invite Peter to answer that particular point.

Mr Wood—I do not think we would be in a position to make any comment at the moment. It is very early in our involvement in that matter. We have obtained some injunctive relief and we are now proceeding to assess the matter.

Senator CONROY—What is the injunctive relief grant?

Mr Wood—To put a liquidator in control of the assets and to make sure that there is no disbursement of the funds. But it is very early, and I do not think we understand the full story.

Senator CONROY—That is a fairly serious step, though—you must be very concerned if you have taken even that step.

Mr Wood—Yes, there were concerns.


ECONOMICS

Senator CONROY—What were your concerns?

Mr Wood—It might be best if I were to call on Ms Redfern, who has a more detailed knowledge of the matter.

Senator CONROY—She has desperately been trying to avoid getting to the table all morning and, with 10 minutes to go, you drop her in it!

Mr Wood—I could just feel her wanting to come forward and help you!

Ms Redfern—What we alleged in that case and why we sought injunctive relief was that we were alleging that there were a number of mortgage schemes that were required to be registered that had been operating. We were seeking declarations in relation to section 601ED of the Corporations Act.

Senator CONROY—When did you first begin investigating this matter?

Ms Redfern—I cannot tell you the precise date—in fact I would have to take that on notice—but it was earlier this year. I think it was in about February of this year.

Senator CONROY—For how long does ASIC allege that Atlantic has been operating an unlicensed scheme?

Ms Redfern—The allegations go back to 1999-2000.

Senator CONROY—Have any investors in the schemes that are the subject of this action lost money?

Ms Redfern—We are not aware at this stage. It is part of what the investigative report will be about.

Senator CONROY—Has ASIC questioned former directors of the company about this matter?

Ms Redfern—I do not want to go into to much detail as the matter is before the court and the subject of evidence, and part of the investigative report will deal with some of those issues. We have made our usual inquiries and issued notices.

Senator CONROY—And that would be to not just existing directors but former directors?

Ms Redfern—It would be to the company. As to the detail of who we have particularly issued the notice to, I do not have those details.

Senator Ian Campbell—I think there is a legal issue that we should be aware of and that is that there is not a quorum here and if you want to have privilege applying to matters that are subject to investigations—

Senator CONROY—The bad news for you, Senator Campbell, is that only the committee under the new rules passed by the Senate can draw that matter to the attention.

ACTING CHAIR—There is a quorum.

Senator Ian Campbell—There is a quorum—so privilege applies?

ACTING CHAIR—Under the new rules of the Senate, I understand that there is now a quorum.

Senator Ian Campbell—I am sure you would want privilege to apply.


ECONOMICS

Senator CONROY—Definitely.

ACTING CHAIR—In fact, participating senators—of which Senator Conroy is one—can now make up a quorum, so we are within the quorum provisions and witnesses are protected by privilege.

Senator CONROY—Dr Jeff Carmichael was a co-founder of this company and a director until 2002. Is that correct?

Ms Redfern—Yes.

Senator CONROY—Senator Campbell, given that Dr Carmichael is the subject of an investigation by ASIC, is it appropriate for him to stand down from his position while this matter is being considered by the courts?

Senator Ian Campbell—He is not the subject of an investigation.

Senator CONROY—He is a director for the period in which the investigation is taking place. Are you saying that he is not part of the investigation?

Senator Ian Campbell—Yes, that is what I am saying. He is not subject to an investigation.

Senator CONROY—He was a director until January 2002 and, as has been indicated by Ms Redfern, matters involving periods while Dr Carmichael was the director are under investigation.

Senator Ian Campbell—Senator Conroy, you said that Dr Carmichael was the subject of an investigation. The fact is that he is not the subject of an investigation.

Senator CONROY—The company that he is a director of is the subject of an investigation.

Mr Lucy—Was a director of.

Senator CONROY—I appreciate that, was. What I am asking is: is it appropriate for him to stay as the chair of APRA, notwithstanding the fact that parliament has got legislation before it today to make some changes to the arrangements? Do you think it is suitable for him to remain in this position, or should he step aside while the investigation of the company of which he was a director takes place?

Senator Ian Campbell—He is not under investigation; you said he was, he is not. He is the chairman of APRA and that is where he will remain.

Senator CONROY—You believe that it is appropriate for him to remain in the chair while the company that he was a director of is under investigation. I keep saying the company—I am taking Mr Lucy’s point and your own point. The company that he was the director of is under investigation. Do you feel that it is appropriate for him to stay in the position?

Senator Ian Campbell—I do not think my personal views should make any difference to it.

Senator CONROY—What is the government’s view?

Senator Ian Campbell—He is the chairman and that is where he will remain.


ECONOMICS

Senator CONROY—So the government does not care?

Senator Ian Campbell—Can I say for the committee’s benefit that I have not read details about the investigation. I have not focused my mind to it and my views are irrelevant on this issue. Next question.

Senator CONROY—It is a very serious matter, wouldn’t you say?

Senator Ian Campbell—Obviously matters that ASIC deem important enough to investigate are important, yes.

Senator CONROY—They have sought an injunction.

ACTING CHAIR—It depends how wide the investigation is—whether it is a narrowly focused investigation.

Senator CONROY—They have appointed someone to look after its assets.

Senator Ian Campbell—Mr Chair, it is Senator Conroy’s job, as part of an opposition that has few policies, to pursue character assassinations.

Senator CONROY—I wish you would make your mind up.

Senator Ian Campbell—This morning he decided to go after Graeme Samuel; this afternoon he wants to go after Dr Carmichael. That is a game for Senator Conroy to play. I am not going to play his game. Next question.

Senator CONROY—So it is okay for the chairman of ASIC to remain—

ACTING CHAIR—No, not ASIC.

Senator Ian Campbell—He is not the chairman of ASIC. The chairman of ASIC is in Washington at an IOSCO meeting.

Senator CONROY—It is okay for the chairman of APRA to remain in a job while ASIC are investigating a company during the period in which he was a director. That is your contention.

Senator Ian Campbell—Mr Chair, I have said that I am not going to proceed down the path that Senator Conroy is inviting us to go down. He is playing his little political games which he is known for across the political divide. He has been called a rooster by his own colleague.

ACTING CHAIR—Next question.

Senator CONROY—As I said, it is better than being the feather duster that you are.

Senator Ian Campbell—Mr Chairman, just before we get to a quarter to one, I did say that I would put on record the details about progress with the adoption of international financial reporting standards. I have a copy of page 2 of the report of the International Accounting Standards Board. It shows that Australia is, as I remembered, in a category of nations that have indicated they will adopt IFRSs from 2005—contrary to Senator Conroy’s assertions this morning when he said that we are in a group including Bolivia, Botswana and others. As I recall, those countries already permit IFRSs. Another group of countries have indicated that they require them for domestic listed companies. A further group expect IFRSs to be used from 2003 and yet another group from 2004. Australia is in the final group which includes not


ECONOMICS

Botswana but Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Lichtenstein, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom. I think all in this room would agree that we are in good company. I seek the committee’s agreement to table the document listing IFRSs around the world.

Senator CONROY—I will move that.

ACTING CHAIR—Senator Campbell, it might be appropriate for our committee to acknowledge the important contribution made by the recently retired chairman of the standards board.

Senator Ian Campbell—I think they are appearing later.

ACTING CHAIR—I just thought it would be appropriate in relation to the statement you have just put down.

Senator CONROY—Mr Chairman, I have a couple of questions. You took up a good 15 or 20 minutes a little earlier and I was hoping that we might just sneak past a quarter to one. With your indulgence, I have only got a couple of issues and a couple of questions left. I just want to knock them over.

ACTING CHAIR—Will you be quick?

Senator CONROY—I will be as quick as is possible for me. What powers did ASIC have in relation to dispute resolution bodies such as the General Insurance Claims Review Panel? Does ASIC monitor such organisations to ensure that they are operating fairly?

Mr Kell—As you may be aware, under the new FSR provisions, it will be a licence requirement for all licensees who wish to deal with retail clients to belong to an ASIC approved external dispute resolution scheme. Therefore, any dispute scheme that wants to satisfy those FSR requirements must satisfy a set of approval conditions that ASIC has set out in its policy statement 139 and which has been elaborated on in, I think, policy statement 165.

So our powers go, in effect, to approving such schemes for the purposes of FSR, and we set out a range of conditions against which we will assess schemes for approval which go from everything from their independence, to how they deal with complaints, to what sort of information they provide then to the regulator. If they do not satisfy the conditions of approval, we have the power to withdraw that approval down the track. Finally, I will add one point: one of our conditions of approval is that an independent review of those schemes is conducted every three years.

Senator CONROY—I am interested in a case involving Mr Norman Rattenbury. The case concerned an allegation that an insurer, NRMA Insurance, produced false evidence in a proceeding before the General Insurance Claims Review Panel. Mr Kell, I understand you are familiar with that case.

Mr Kell—Broadly speaking, yes.

Senator CONROY—I believe that Mr Arnold of the Institute of Public Insurance Adjusters wrote to you about the case.

Mr Kell—He has written to us many times on this matter.


ECONOMICS

Senator CONROY—Can you outline your understanding of the case and the concern that Mr Rattenbury and Mr Arnold seem to have that ASIC declined to take action or get involved?

Mr Kell—I can give you a brief overview. Before I do, perhaps I should clarify one point about our role in relation to EDR schemes, which is directly relevant to this matter—that is, we do not review individual decisions made by schemes. We are not a review body for that purpose, whether it is the banking ombudsman, the general insurance complaints scheme or whatever scheme is in question.

Senator CONROY—This does though involve false evidence.

Mr Kell—My understanding of the dispute involving Mr Rattenbury is that it was taken to the IEC scheme; it was considered by the decision making panel under that scheme. They found in favour of the insurer rather than the complainant. One of the conditions of approval that ASIC has in relation to these schemes is that, while final decisions are binding on the insurer, the consumer always has the opportunity to take the matter further if they are not happy with the final decision. Mr Rattenbury took his complaint to one of the fair trading tribunals, and it was found in his favour. In our view an excellent reflection on the way that the dispute resolution framework operates in the financial services system is when someone like Mr Rattenbury has had the opportunity to have his matter considered before these two bodies, in effect.

Following that episode, Mr Arnold made allegations to us that the insurer involved had undertaken fraudulent activity in relation to the material it presented to the Insurance Inquiries and Complaints Scheme. We carefully assessed the material that he had given to us, and we saw no evidence that warranted an investigation into that sort of activity.

Senator CONROY—You acknowledge though that, if there is an allegation of false evidence, you are unable to look at it. You just said that you did.

Mr Kell—No. I said that we looked at the material that Mr Arnold had sent to us. We assessed it, as we normally do complaints, to look at whether it warranted further action, and there was nothing there that warranted further action.

Senator CONROY—The New South Wales Department of Fair Trading reversed the decision and ordered that the claim be paid and acknowledged that—

Mr Kell—To clarify this matter, the fair trading tribunal have no ability to reverse a decision. They effectively heard the case fresh. They are two quite distinct bodies.

Senator CONROY—What evidence came to light? Did NRMA fess up that they had provided false evidence?

Mr Kell—I am not in a position to comment on the deliberations that the fair trading tribunal made. We do not oversee that body.

Senator CONROY—But you acknowledge that they found that there was false evidence provided by NRMA Insurance?

Mr Kell—Again, I do not know the deliberations that they made, but my understanding is that the issue of false evidence was irrelevant for their consideration.


ECONOMICS

Senator CONROY—Senator Campbell, I was wondering whether we were any further down the track to appointing a full-time head of the AASB.


Senator CONROY—Can you give us an indication as to whether or not the head is an accountant?

Senator Ian Campbell—No, because we have not appointed anyone yet.

Senator CONROY—Can you give us a commitment that the chair or the head of the Australian Accounting Standards Board will be an accountant?

Senator Ian Campbell—I do not think there is a legal requirement. I am looking at making sure we appoint the best person. I have a list of names, and most of those on it are accountants. I think it is highly likely. I know there has been a bit of speculation around—

Senator CONROY—I understand you have been written to.

Senator Ian Campbell—because I have consulted with a couple of people and I have raised the question of how the profession would react to having a non-accountant. Some accountants have said that would be a very good idea and others have in, I guess, an archetypal way said, ‘Oh no. How dare you think of that!’ I think we should have an open mind. I would be interested in your views. Do you think we should have an accountant or do you think we should think about non-accountants?

Senator CONROY—Just before I answer your question, I understand—as it was in this morning’s papers—that the National Institute of Accountants have written to you expressing the view that there should be an accountant heading up the board.

Senator Ian Campbell—You would expect them to say that. A lot of accountants disagree. Do you have a view, Senator Conroy?

Senator CONROY—For the position of chair, I probably lean that way, to be honest.

Senator Ian Campbell—I am leaning that way too, but I do not think we should rule out a non-accountant who has financial and corporate skills.

ACTING CHAIR—With wide experience, yes.

Senator Ian Campbell—It is a very important role. Mr Alfredson has done a tremendous job there.

Senator CONROY—It does require a lot of technical experience in accounting standards.

Senator Ian Campbell—Some people say that.

Senator CONROY—It is only the head of the Australian Accounting Standards Board!

Senator Ian Campbell—I am very prepared to consider non-accountants. We have a number of very well-qualified people with accounting and non-accounting backgrounds, and we would hope to make an appointment in a timely manner. Again, these are not things to rush. Ruth Picker, to her great credit, has agreed to act as chairman in the interim.

Senator CONROY—She is highly regarded.


ECONOMICS

Senator Ian Campbell—We are very pleased that Ruth has decided to do that. It makes the job of appointing a full-time chairman easier for the government, because we do not feel a necessity to rush into an appointment.

ACTING CHAIR—I have a final question on commission driven selling. What is your view on trail commissions and on commissions vis-a-vis up-front fees?

Mr Johnston—Sorry; I missed the first part of your question. What is our view on what type of commission?

ACTING CHAIR—What is your view on trail commissions and general commissions, given the problems of providing adequate transparency in terms of these sorts of products—particularly trail commissions—vis-a-vis up-front fees for services rendered?

Mr Johnston—The act is quite clear that any remuneration—be that a commission, an up-front fee, a trail commission or any other type of remuneration—has to be fully disclosed to someone who is receiving financial product advice. In the statement of advice prepared by an adviser, they need to outline exactly what remuneration they will receive, including future remuneration that is payable by trail commission. It is appropriate that that be completely disclosed.

ACTING CHAIR—Do they always accurately disclose the full extent of, say, a trail commission? Evidence given to our superannuation committee indicated that consumers generally pay very much more in a trail commission over the life of a product than they would in terms of an up-front fee.

Mr Johnston—We make comment in some detail on this in the forthcoming policy statement that we are issuing on adviser conduct. We go into a bit more detail there as to how we think trail commission ought to be disclosed, particularly where the actual quantum might not be known at the time the advice is given. We take the position that you should then follow up with disclosure of specifically what that trail commission would be.

Senator CONROY—I have one last issue with three questions. I will hopefully get through them very quickly. ASIC has indicated—and this is a matter I understand has been raised with you by Mr Joel Fitzgibbon, the member for Hunter—it will not be investigating issues relating to a related party transaction between Nardell Coal Corporation and Macquarie Trust 3 and the issue of whether Nardell traded while insolvent. Can you advise the committee of the reasons for your decision not to investigate?

ACTING CHAIR—They can take it on notice.

Mr Lucy—Perhaps if I respond to that. In the first instance, I think, importantly, there was a meeting of Nardell Corporation in April 2003 where the gentleman that you referred to—the federal member for Hunter—was present. The press was also present. He asked a particular question to the administrator of the company:

You indicated that you have been in contact with ASIC regarding Nardell. Why does ASIC see no grounds for investigation? Surely Nardell knew that no funding would be forthcoming?

The response was:

I have had approximately 20 years in insolvency and dealing with ASIC. They do have limited resources which they allocate accordingly.


ECONOMICS

Importantly, though:

The grounds for insolvent trading is inconclusive at this stage and therefore their decision not to pursue further at this stage is not surprising.

In that particular case, we received the 438D report from the administrator. The administrator is required to comment upon whether or not there have been any breaches of the Corporations Act. We received that and, following that, we took no further action. That gentleman has now been appointed the liquidator of the company and, in that capacity, he is obliged to provide a 533 notice, which also requires him to address whether or not there have been any breaches of the Corporations Act. We are waiting on the receipt of that document.

Senator CONROY—So, up to this point, the administrator-liquidator has not indicated there was insolvent trading.

Mr Lucy—Correct.

Senator CONROY—In your letter to Mr Fitzgibbon, ASIC said that one of the factors it considers when contemplating action is the likely regulatory effect of any available action. What does that sentence mean?

Mr Lucy—It is difficult to respond out of context without having seen the letter in its entirety, but our responsibility is, in the first instance, to see whether an officer of the court—that is, a liquidator—has identified any breaches of the Corporations Act. They are in the company. They are fully aware of what has gone on as far as the conduct of the administration and the conduct of the directors. I can assume, therefore, that the letter that you have just picks up the fact that we would have a high regard as to any direction or lead that was provided to us by either the administrator or the liquidator.

ACTING CHAIR—Although the chair indicated he would like to resume at quarter past one, I think, in the interests of staff and others, we should take the full half hour. The committee will stand suspended until 1.30 p.m.

Committee suspended from 12.58 p.m. to 1.33 p.m.

Australian Bureau of Statistics

ACTING CHAIR (Senator Watson)—I welcome the witnesses from the Australian Bureau of Statistics and I invite you to make an opening statement. As there is none, we will go to questions.

Senator CONROY—Can I confirm that the budget is prepared on two sets of external accounting standards, the IMF GFS framework and the AASB AAS31?

Mr R. Edwards—That is correct, yes.

Senator CONROY—Last Wednesday officials from DOFA described the ABS as the keeper of the GFS and said that DOFA refer to the ABS for the GFS interpretation. Has anyone let you know?

Mr R. Edwards—Yes.

Senator CONROY—Could you explain to me what that means? Does it mean that the ABS is responsible for interpreting IMF GFS as it applies to the preparation of data or accounts in Australia?


ECONOMICS

Mr R. Edwards—That is correct. Our role is that we contribute to the international discussions on establishing the IMF standards. We adapt those standards as appropriate to Australian conditions for statistical purposes and, to the extent that interpretation of the standards is sought by anyone, then we would interpret those standards.

Senator CONROY—There are two things I want to tease out a little further. You mentioned something about Australian conditions. Could you take me through that again?

Mr R. Edwards—The international standards are written in fairly general terms to be internationally applicable. They do not necessarily cover all of the issues that might arise in Australian circumstances, so we would need to establish the application of those standards to Australian—

Senator CONROY—So in some areas they are silent?

Mr R. Edwards—That is right.

Senator CONROY—And, therefore, you step in and fill in the hole?

Mr R. Edwards—That is correct.

Senator CONROY—And the interpretation question?

Mr R. Edwards—On the interpretation side, if any of the jurisdictions seek our advice on classification of particular transactions we would provide such advice. If they ask us, ‘What does this aspect of the international standards mean?’ we would explain.

Senator CONROY—I understand that the IMF published a GFS manual in 2001 based on accrual accounting.


Senator CONROY—Is there an IMF manual on cash accounting?

Mr Harper—No.

Mr R. Edwards—A government finance statistics manual was published around the mid-eighties, I think, by the IMF.

Senator CONROY—So there was one; but I think Mr Harper answered no.

Mr Harper—The accrual manual has superseded that.

Senator CONROY—So there is no existing cash standard?

Mr Harper—There is no cash standard.

Senator CONROY—I understand that the ABS published an information paper called Accrual-based government finance statistics in 2000.

Mr Harper—That is correct.

Senator CONROY—Do we have the lucky author here?

Mr R. Edwards—I cleared the publication.

Senator CONROY—Excellent. Has the ABS published a more recent document that interprets the GFS as it applies in Australia, particularly since the IMF’s GFS manual was published in 2001?


ECONOMICS

Mr R. Edwards—No, we have not, but we are in the process of completing a document called Concepts, sources and methods for the government finance statistics area. Our hope is to publish that document early in the new financial year.

Senator CONROY—What will be the status of that when it is published? Will it supersede any of the things we have talked about?

Mr R. Edwards—No, not at all; rather, it sets out what is in the IMF manual, explains the conceptual basis for government finance statistics and then goes on to explain how the ABS compiles those data—the sources from which we obtain the information and the methods we use in putting the statistics together.

Senator CONROY—So it will be a bit of a guide?


Senator CONROY—Has there been any reinterpretation of the GFS as it applies in Australia since the information paper was published in 2000?

Mr R. Edwards—No, but as issues come up we are constantly being asked, ‘How would you treat those transactions?’ That is not necessarily reinterpretation; rather, accruals based GFS is relatively new to all of us and issues constantly arise.

Senator CONROY—Do you keep a log of those questions and publish the interpretations so that the interpretations—I will not say ‘reinterpretations’—the ABS has at the time are available to everybody?

Mr R. Edwards—That would be the aim of the Concepts, sources and methods document I explained earlier. Our intention is, once we have produced the first edition of that document, to keep it up to date as required.

Senator CONROY—And you said that this will come out early in the new year?


Mr Harper—Sorry, it will come out in July.

Mr R. Edwards—Early in the new financial year.

Senator CONROY—Are the interpretations that you have made since 2000 publicly available anywhere?

Mr R. Edwards—Any that we may have made would be included in the Concepts, sources and methods document. You asked earlier whether we kept a log of these things; the answer is no.

Senator CONROY—If I were to ask you, for instance, for a list of interpretations that you have made since the information paper in 2000 and since the IMF’s GFS manual was published in 2001, would you be able to do that?

Mr R. Edwards—With great difficulty, because we would not have kept a log as you have described it.

Mr Harper—Anything that has a material impact on our statistics we note in the first issue of the publication to which the change applies. If you have a look back through our government finance statistics publications over the last few years, you will see that we have


ECONOMICS

introduced some changes as a result of this interpretation process. They are documented in the public arena via our publication process.

Senator CONROY—How would parliament know when the interpretation changes on interest rates swaps, to pick an example? There have been a couple of iterations—can I call them that?—or variations in the treatment. Where would parliament be able to track down what the existing status was?

Mr R. Edwards—In that particular case, there was change treatment at the international level which we have adopted here in Australia. Those changes would be in the relevant publications.

Senator CONROY—The ABS publications?


Senator CONROY—I would like to discuss departures from the GFS. I understand that the Charter of Budget Honesty requires that departures from external accounting standards be reported in the budget. Can you explain the difference between an ‘interpretation’ and a ‘departure’?

Mr R. Edwards—No, Senator. To the extent that there is a legal issue there, it is not really appropriate for us. A ‘departure’ for us in would be where a GFS standard has not been followed. An ‘interpretation’ would be as the word is defined.

Senator CONROY—Where an IMF GFS standard is specific about the treatment of a certain transaction, a different treatment would be required to be reported in the budget papers. Is that correct?

Mr R. Edwards—We are not responsible for the budget papers.

Senator CONROY—I am just reading from the Charter of Budget Honesty.

Mr R. Edwards—That has nothing to do with the ABS as such.

Senator CONROY—Are there any departures from the GFS that are not reported in the budget papers? You may give your interpretation and then not worry about what happens next. Do you follow it at all?

Mr R. Edwards—Yes, we do. Not that we are aware of, no.

Senator CONROY—Has the ABS been approached by any agency to give its interpretation of the application of GFS in the last two years? You indicated that you were in discussions.

Mr R. Edwards—Yes, we have.

Senator CONROY—Which agencies have been chatting with you about it? Off the top of my head, I could imagine that there are two.

Mr R. Edwards—At the Commonwealth level, Treasury and the Department of Finance and Administration; at the state level—

Senator CONROY—I am only interested in the federal level, thank you. What were the issues that Treasury and Finance raised with you?


ECONOMICS

Senator Ian Campbell—Chair, I would be interested to know the state ones—to be comprehensive. I do not think we should cut off an officer in the middle of an answer.

Senator CONROY—My question was only relating to Commonwealth agencies.

Senator Ian Campbell—My question is relating to state agencies. I would like to know what the state ones are.

Mr R. Edwards—Typically, the state departments of treasury and finance.

Senator Ian Campbell—Any particular states?

Mr R. Edwards—All states. The GFS applies to all jurisdictions.

Senator CONROY—Has Senator Campbell finished with his questions?

Senator Ian Campbell—Thank you, yes.

Senator CONROY—What were the issues that were raised by the Commonwealth Treasury and Finance departments?

Mr R. Edwards—Premia and discounts would be one that comes to mind.

Senator CONROY—You might want to take this on notice if it is too difficult and complex, but could you give us a run-down on what the discussion was around. I am very conscious of the time. I am actually genuinely interested in your answer, but can you do it in a quick way?

Mr R. Edwards—Yes. Treasury passed a document to us which set out their understanding of how interest, premia and discounts are treated in government finance statistics, and they asked us whether their understanding was correct. We responded to the effect that, yes, their understanding was correct.

Senator CONROY—So you agreed with their interpretation?


Senator CONROY—On premia and discounts. Are there any others that come to mind?

Mr R. Edwards—Not readily, no.

Senator CONROY—Is the agency bound to follow your interpretation about the GFS? If you said to Treasury on that issue, ‘No, you’re wrong. Here is how it should be interpreted,’ do they have to follow your advice?

Mr Trewin—It is not really up to us to answer that. I think you probably should ask them.

Senator CONROY—Are they bound to?

Mr Trewin—We cannot make them.

Senator CONROY—So the agency themselves will take the decision to depart? You could not give them the tick to depart. You just say, ‘No, this is what the standard is. It’s up to you what you do next.’

Mr Trewin—We provide an interpretation.

Senator CONROY—Do you ever seek legal or expert advice on the appropriate interpretation?


ECONOMICS

Mr R. Edwards—We never seek legal advice. Our business is compiling statistics in this, and we need to keep that in mind. We have sought advice from the International Monetary Fund at various points about application of the standards.

Senator CONROY—So you have not sought any other independent expert advice? There is nobody here in Australia or internationally that you would also consult?

Mr R. Edwards—As I said, we have spoken to the International Monetary Fund on various occasions, but no-one else in Australia.

Senator CONROY—You might want to take this on notice, but could you give us a run-down on what you sought advice from the IMF on in, say, the last two years? If there is anything that comes to mind readily, please tell us.

Mr R. Edwards—We sought advice from the IMF on the treatment of the GST.

Senator CONROY—And very good advice it was! Are there any others?

Mr Harper—We also sought advice—and I am not sure whether it is in the two-year time frame, but it was within the last few years—on the treatment of investments in IDFIs, the International Development Financial Institutions.

Senator CONROY—Can you just take on notice whether there were any others in the last two years. That would be great.

Mr Harper—We will need to check our records.

Senator CONROY—Thank you very much. I would like to discuss table B4, which relates to other economic flows on page 2-17 of this year’s Budget Paper No. 1. Page 43 of the IMF GFS manual 2001 states that the statement of economic flows presents influences on government net worth that are not the result of transactions. Is that right?


Senator CONROY—Could you explain what is meant by ‘influences on government net worth that are not the result of transactions’?

Mr R. Edwards—The IMF manual classifies all flows into one of two broad categories. The first category is what is called transactions, and any flow which does not satisfy the definition of a transaction is regarded as another economic flow. It is a primary classification within the GFS system.

Senator CONROY—Has the ABS been asked for interpretation as to whether any transactions shown in this table should be shown here as a revaluation or above the line in the budget as revenue or expense?

Mr R. Edwards—I cannot answer the question as such. If you are alluding to the revaluation of superannuation—

Senator CONROY—I am coming to that, but I am asking in a general sense.

Mr R. Edwards—I cannot recall.

Senator CONROY—Could you take that on notice?



ECONOMICS

Mr Harper—You are interested in consultation about the preparation of this particular statement?

Senator CONROY—Any transactions shown in that table. If so, which transactions and from whom was the interpretation sought? Could you take that on notice? And was the ABS’s interpretation followed in all cases? You may not know the answer to that one. As you said, it is up to the department what they do after that. But if you do know, that would assist. Was any interpretation sought—I think you have already indicated it was—on the treatment of premia on the repurchase of debt?

Mr Harper—Yes.

Senator CONROY—What was your interpretation?

Mr R. Edwards—We agreed with the Treasury view on that matter.

Senator CONROY—Was any interpretation sought on how to account for a revaluation of debt due to a move from historic to market prices?

Mr Harper—Not on that particular issue that I am aware of, although we were consulted on the change in the valuation method of debt in the budget.

Senator CONROY—So you were consulted over the treatment of debt, did you say?

Mr Harper—The valuation of debt.

Senator CONROY—I might come back to that. Was any interpretation sought on actuarial revaluations as they relate to superannuation? I think you were starting to indicate earlier that perhaps there was.

Mr R. Edwards—I cannot answer that, but revaluations of superannuation funds have come up in the past and we have always treated them as another economic flow.

Senator CONROY—What was Treasury’s view of that?

Mr R. Edwards—As I understand it, that is the way it was treated in the budget.

Senator CONROY—Is that the way it is treated in the IMF GFS 2001?

Mr R. Edwards—It is the way we treat it in our government finance statistics, yes.

Senator CONROY—That is not what I asked, though. I asked how it is treated in GFS manual 2001.

Mr R. Edwards—It does not explicitly deal with that particular issue and we have interpreted the IMF manual as consistent with treating that as another economic flow.

Senator CONROY—Okay. I may return to that. Was any interpretation sought of the appropriate valuation of assets, including equity holdings such as Telstra?

Mr Harper—No, I do not think so. Certainly not in the preparation of the current budget.

Senator CONROY—I want to move on. I note from page 8-8 of Budget Paper No. 1 2003-04 that repurchase premia are no longer included in interest expenses as they were in 2002-03. They have become below the line revaluations. This is the one on which you mentioned there was a change internationally.


ECONOMICS

Mr R. Edwards—No, the change internationally related to interest rate swaps and financial derivatives more generally.

Senator CONROY—Was the ABS consulted on this change in accounting treatment?

Mr R. Edwards—Yes, it was. As I mentioned earlier, Treasury asked us whether their understanding of this was correct and we responded positively.

Senator CONROY—I would now like to discuss superannuation. Page 75 of the DOFA PBS reports that due to an actuarial revaluation the opening balance of the unfunded superannuation liability has been revised upward by $4.6 billion. Is that correct?


Senator CONROY—Paragraph 4.51 on page 43 of the IMF GFS manual 2001 states that the statement of economic flows presents influences on government net worth that are not results of transactions. Is that right?

Mr Harper—That is correct.

Senator CONROY—Can you give examples of influences on government net worth that are not the result of transactions and explain why they are not considered transactions—for example, movements in exchange rates?

Mr R. Edwards—Paragraph 4.51 of the manual, as you have said, does give examples of other economic flows. That is correct.

Senator CONROY—That would include movements in the exchange rates?


Senator CONROY—Any others? I have not got that document handy.

Mr R. Edwards—An example would be if there were a national disaster and public assets were destroyed. That would be another economic flow that would be treated that way, for example. Revaluations are other economic flows.

Senator CONROY—Page 43 of the IMF GFS manual states that changes in the volume of assets and liabilities may arise for a variety of reasons, including a change in the liability of a defined benefit pension scheme due to a change in the benefits covered. That is just reading off the page. I was told by DOFA at estimates last Wednesday that there have been no significant changes in the scheme rules and, hence, the actual benefits provided in the sense of what the scheme rules say. Are you familiar with that?


Senator CONROY—Paragraph 10.21 of the GFS manual states:

... a holding gain—

or loss—

is recorded with respect to the liability for a defined-benefit retirement scheme where there is a change in the value of the liability because of a change in the interest rate used to discount the future benefits. The liability should be reviewed periodically and revalued as necessary for changes in market interest rates. A holding gain—

or loss—


ECONOMICS

is recorded with respect to the liability for a defined-contribution retirement scheme whenever a holding gain is recorded with respect to the assets of the fund.

That is correct? That is just off the page.


Senator CONROY—I understand from DOFA last Wednesday that, while there was a change in the discount rate, the change in the discount rate did not have any effect on the change in the unfunded liability. Are you aware of that?


Senator CONROY—I asked DOFA why it was that, when neither of the GFS rules for treating an increase in superannuation liability expenses as a below the line revaluation had been met, the $5 billion increase in expenses in 2002-03 had been treated as a revaluation and not as an error to expenses above the line. Dr Ian Watt, the Secretary of DOFA stated:

I think we can solve this fairly quickly. I think the point is that the ABS do not necessarily accept the IMF’s views on this and that Finance is consistent with the ABS treatment.

You might have read that in the papers. Is it the case that the ABS does not accept the IMF’s view?

Mr R. Edwards—No. I would not describe it like that. As I said very early on in this discussion, the international manual is written in very general terms. The point of it is to try to get across what the broad principles are with respect to these sorts of things. We do not see that the manual as such has necessarily established definitively what is in and what is out in respect of individual transactions. It is setting out some general principles.

In the case of the superannuation fund, you said yourself that there had been an actuarial revaluation. The first question we ask ourselves in these cases is whether that particular transaction should be included as a transaction within the GFS system. Our answer to that question is no, it does not meet the criteria to be treated as a transaction. If it is not a transaction, the only way to treat it is as another economic flow. In this particular case we are quite satisfied that that is the appropriate treatment.

Senator CONROY—I know you say that the IMF document deals with general principles, but it is fairly specific on defined benefit schemes. I do not think there was anything particularly general about the couple of paragraphs that I read to you; to me they seem very specific. They are not general principles; they are very specific about what transactions are in or out. Is that fair to say? If I were reading that, I would say, ‘That is pretty specific; that is not general.’

Mr Harper—They are specific in relation to the two types of things they talk about. But there are a lot of other events that affect defined benefit schemes, such as the types of revaluations that we are talking about, on which the manual is silent as to whether they are transactions or whether they are other economic flows. We use our judgment on the principles which underline, and are espoused in, the manual in order to make what we consider to be the correct interpretation in the case of Australia’s GFS statistics.

Senator CONROY—But they deal with two events that deal with other economic flows.


ECONOMICS

Mr Harper—They give examples of two things that should be treated as other economic flows but they are not exhaustive in telling us how to deal with the full range of things that can affect defined benefit superannuation schemes.

Senator CONROY—Did you seek any advice from the IMF when this issue came up?

Mr R. Edwards—That is interesting. Australia is, I think, the only country in the world where unfunded superannuation liabilities have been brought to account within an accruals based government finance statistics system. The IMF approached us some time ago and asked us to set out how these things have been treated in Australia so that they could pass the benefit of Australian experience on to other countries. We prepared a paper on our treatment of superannuation, including the circumstances under which we treat revaluations as other economic flows, and the IMF has made no comment whatsoever to the effect that we may have this wrong.

Senator CONROY—The interpretation adopted for superannuation expenses would appear to set a precedent for all expenses. For example, an expense is estimated to be a certain amount—say, $1 billion—based on certain assumptions. The assumptions turn out to be wrong and hence the expense is revised up by, say, $4 billion. However, the additional $4 billion is not treated as an expense that hits the budget bottom line but as a revaluation below the line. This treatment could encourage expenses to be deliberately underestimated. Would you agree that that is a potential problem?

Mr R. Edwards—No. I think the example you have given confuses expenses with balance sheet items. In the case of revaluations, we are talking about revaluations of assets or liabilities. The purpose of explicitly identifying the other economic flows is to reconcile the balance sheet from the start of the accounting period to the end of the accounting period. Essentially, there are two flows you need to take account of to do that reconciliation. The first is the transactions, and the second is the other economic flows. Expenses in the example you gave in your question would be treated as transactions.

Senator CONROY—I think the point I am trying to highlight is that it is possible for this confusion to arise, and a clever accountant—and there are lots of them around—could find a way to mix these things up. That is actually my point, that what seems to be an expense to one person can seem to be an increased liability to the other on the balance sheet. That is actually my concern about this particular issue. You mentioned a paper that either you had produced for the IMF or that the IMF were consulting on.

Mr R. Edwards—The IMF asked us to prepare a paper on this, which we did.

Senator CONROY—Is it possible to get a copy of that?


Senator CONROY—What we are talking about is the fact that half of the same expense has been treated as an expense and half as a revaluation. There actually seems to be a bit of a split treatment, which is why I am worried about this. Some of it seems to have been shunted into the expenses, and some of it seems to have been shunted into a revaluation on the balance sheet. That is what I am really worried about.


ECONOMICS

Mr Harper—There is a superannuation expense which is recorded as an expense in the operating statement in each period. It just happens that, in this particular period, there is a revaluation which is being recorded in the—

Senator CONROY—So, in your mind, these two things are not connected at all.

Mr Harper—No, only to the extent that they help reconcile the change in the liability at one point in time and at the other point in time, but they arise for different reasons. Therefore, they are treated differently in the system.

Mr R. Edwards—The transaction that is recorded is the accruing superannuation expense during that financial year. That is treated as the transaction.

Senator WATSON—I am confused. I thought these revaluations under the new standards all come above the line now.

Senator CONROY—Thank you, Senator Watson. They are actually identical; they are both the notional interest expense on super.

Mr R. Edwards—The revaluation that we are talking about here is associated with a changed set of assumptions used by the actuaries to assess what the value of the superannuation liability is at a particular point in time. That is what the revaluation is associated with. The superannuation expense, which is treated as a transaction, is the additional superannuation costs that are accumulating, associated with the employment of people during that financial year.

Senator WATSON—I think we might need a clarification of that, because I think in modern parlance now that they are both treated the same way—but I could stand corrected.

Senator CONROY—I agree with you, Senator Watson—that is why I am having this debate. Let me return to my example. An expense is estimated to be a certain amount, say, $1 billion, based on certain assumptions. The assumptions turn out to be wrong and, hence, the expense is revised up by, say, $4 billion. However, the additional $4 billion is not treated as an expense that hits the budget bottom line but as a revaluation below the line.


Senator CONROY—That is the problem. There is a capacity here to move between the two—and even Senator Watson, who is far more eminent in this area than I will ever be, acknowledges that there is—

Senator WATSON—I must say, I like your interpretation. I think that accountants have probably got it wrong on this particular issue but, nevertheless, I think the standard now is for it to be above the line.

Mr R. Edwards—It is in the accounting standards but, in the GFS, there is the distinction between the accruing expense during the year and a revaluation, if it is a revaluation. In our judgment, this particular one is.

Senator CONROY—The full $9 billion is included in exactly the same appropriation in DOFA’s PBS. It is entitled ‘expenses’, and then half has gone off as a revaluation and half has gone off as an expense.


ECONOMICS

Mr R. Edwards—We need to be careful here as to whether we are talking about the accounting standards or the GFS standards. In the accounting standards such a revaluation would be brought to account in the operating statement in the period in which the revaluation occurs. In the GFS standards revaluations are treated as other economic flows and—

Senator CONROY—Page 25 of the PBS says that it is an expense, and then they have been allowed to split it. It is just extraordinary.

Mr R. Edwards—I do not have the document in front of me.

Senator WATSON—Why are we using the GFS when we have a fairly explicit standard?

Senator CONROY—That is the standard that is used. We are only talking about GFS, Senator Watson.

Mr R. Edwards—There is another point that must be made here, and that is if—and this is a very big ‘if’—that revaluation were to be treated as a transaction, as distinct from another economic flow, we would then revise the superannuation expense back over history. It would not be brought to account as an expense in the period in which the revaluation was made. So in this particular case, if you were to treat the revaluation as a transaction, you would be revising the history back over the life of the superannuation fund.

Senator WATSON—Corporations do not treat it that way.


Senator CONROY—The last actuarial review was in 1999.


Senator CONROY—So you would only revise it back to 1999?

Mr R. Edwards—No, you would revise it back over the life of the superannuation fund.

Senator WATSON—I think they were endeavouring to align with normal accepted accounting corporate standards.

Senator CONROY—Why would you do that? Why would you take it all the way back to the—

Mr R. Edwards—I keep repeating this, Senator: if you were to treat it as a transaction, essentially you would be saying that the amount that had been treated as a transaction over the life of the superannuation fund was an underestimate of what the true value of that transaction was, and so you would then go back and revise the data.

Senator CONROY—But that is what it is; it is an underestimation of the true value. I do not want to sound silly, but that is fundamentally what this is recording.

Mr R. Edwards—In this particular case the actuaries have done another actuarial assessment of it—

Senator CONROY—And they have come up with the fact that there has been an underestimation of the expenses of the Commonwealth.

Mr Harper—No, there has been a revaluation of a liability, which has been recorded in the statement of other economic flows.


ECONOMICS

Senator CONROY—Apologies to the ABS, but I am just conscious that Professor Fels only has a limited amount of time. I know you do not want to be here tomorrow, and we are doing our best to fit you in to avoid that particular problem. So I was just wondering if we could go on hold here and come back after Professor Fels.

CHAIR—That is probably an appropriate course. We will deal now with the Australian Competition and Consumer Commission and we will resume with the Australian Bureau of Statistics at 8 p.m.

[2.18 p.m.]

Australian Competition and Consumer Commission

CHAIR—I welcome Professor Allan Fels, Chairman of the Australian Competition and Consumer Commission, and officers of the commission. This is Professor Fels’s valedictory appearance in this capacity before this committee. I know, Professor Fels, that you have appeared before this committee over many years in different capacities—as Chairman of the ACCC and of its predecessor body, the Trade Practices Commission. I place on the record—and I am sure I speak on behalf of all senators—our acknowledgement and appreciation of your very considerable and distinguished service to the Australian people over so many years as an economic regulator. We wish you well for the next stage in your career. Would you like to make an opening statement?

Prof. Fels—Thank you very much; and I thank the Senate Economics Legislation Committee in general. In our case, the committee’s estimates hearings have assisted in getting out there in public many important issues about competition law and have been able to at least clear up some of the issues which various constituents and interest groups may have raised, so I believe that it has been a useful process—if occasionally uncomfortable for those of us who have had to answer questions. It has more positives than negatives, even from our point of view.

By way of an opening statement, the commission continues to be active across the board. As you know, its main activities are in relation to applying and enforcing the competition provisions of the act on cartels and misuse of market power mergers. We also note in relation to that part of the act the age-old questions about the extent to which there are exemptions under section 51. I think the government has broadly adopted and is proposing to introduce into the parliament some easing back of the restrictions in relation to intellectual property. With regard to consumer protection, the commission is also quite active. It is involved in a number of cases there. It has been doing quite a lot on small print disclosure that qualifies advertising claims in ways that should be disclosed more openly to consumers. We also do some product safety work.

With regard to the small business provisions of the act, we continue to treat as high litigation priority the taking of cases on unconscionable conduct laws to the courts. We want to try to assist courts to develop a body of precedent to clear up an area of the law where, obviously, there needs to be a good deal of case development, with terms like ‘unconscionable conduct’ needing more filling out. As you know, the provisions of the Trade Practices Act differ somewhat from those of the common law, so there are new factors to consider in this area of law other than just what comes up under common law. In industry codes of conduct,


ECONOMICS

the franchising code is the key one. There is talk at other times of having other codes of conduct.

We have these kinds of enforcement activities from the commission. The commission’s philosophy generally is that if parliament has passed a law then our job is to uphold and apply it. If parliament passes a law and there are sanctions attached to it, such as fines and so on, then we believe that on the whole where we come across breaches of the law we should pursue them in court. We should not just do private settlements or things like that.

On the question of merger law, the commission continues to block or oppose very few mergers. We also note that the Dawson committee did not suggest any change in the test that is applied for merger law. I believe that that spells the death of the dominance test in merger law. In any case, in Europe, which was the home of the dominance test, the test in practice has become very similar to our own.

The other activities we are involved in are adjudication and authorisation. As you know, with the wide range of anticompetitive behaviour, it is possible for it to be authorised under the Trade Practices Act when it can be demonstrated to be of sufficient benefit to the public. In recent years, the commission has been trying to get on a bit more with the business of authorisations. There have been resource pressures on the commission over the years, and the bit that has tended to fall behind has been authorisations. They have less urgency about them. However, of late, we have been really trying to catch up on backlogs and deal with authorisations more quickly.

A trend we have noted is that, since the Hilmer inquiry and the competition policy reform act of 1995, the act applies a lot more widely and a lot of the people now covered by the act have been seeking authorisation. These are people like farmers, growers, small businesses and others. The act has a lot of automatic prohibitions on price fixing, collective boycotts and the like, and many of these people get concerned that they could be at risk under the law, so they have sought authorisation. One of the other matters being talked about now is the possibility that there be a better process for dealing with that for small business. That was also picked up in the Dawson report.

The other set of activities we have are regulatory—that is, regulation of telecommunications, of national aspects of electricity and gas, and of airports and rail to some degree. These take a great deal of time and resources and are really important decisions. They get less airplay because it is not exactly riveting to hear the commission’s latest deliberations on the optimal rate of depreciation of certain telecommunications equipment or that kind of thing. However, over the longer term, they make a pretty important contribution. It seems to me that it is basically a good system to have the competition regulator making these regulatory decisions influenced by a competition culture rather than having them done as a separate matter.

The commission is also involved in more international activities these days. There has been a considerable stepping up of international activities at the OECD and the WTO. In the WTO trade round, their competition is an element—as it is at the new International Competition Network, which is a new international body which the US and the EU in particular are promoting very strongly as a good forum.


ECONOMICS

There have been a number of reviews. We have had the Dawson review and the Wilkinson review. Over the last year or year and a half, we have also had quite a few Productivity Commission reviews. We have had at least four major reviews into telecommunications, access law, airports and prices surveillance—and I think there are one or two other slightly less significant ones. We are awaiting the findings of the Uhrig review, which may or may not have some implications for the commission. I think that is the immediate set of reviews, other than one or two which have arisen out of the deliberations of the parliament itself.

CHAIR—Could I draw you out a bit on section 46, which Dawson basically left alone, and invite you to share with the committee your views on where section 46 stands after Boral and what scope you see for legislative reform to the section after Boral?

Prof. Fels—I could give you a scorecard, which includes Boral and covers other cases as well. The first point I want to make is that the commission cannot point to success in section 46 cases in the past 10 years other than in relation to CDs—and that case is on appeal at the present time. As you know, the commission is quite an active litigator. It never hesitates to go to court when it believes there is unlawful activity, so the rate of litigation is quite high. In addition, the commission has been a successful litigator, in that it wins most cases, but it has been losing cases in section 46. To mention a few, we have lost Boral; we have lost Safeway, although that is on appeal; and we have now lost Rural Press, although we have leave to appeal and it will go to the High Court. We won that case, but we lost on the section 46 issue, which was an important issue. We did intervene in the Melway case—although we were not involved in that—and ultimately Hicks lost against Melway.

CHAIR—You intervened in support of Hicks, didn’t you?

Prof. Fels—We supported Hicks. As a matter of fact, we felt, or almost understood, that if you intervene in a case, on the whole there is, at least as I understand it, a kind of a pressure to take one side or the other. So, on balance, we thought we would support Hicks. We were, however, more interested in that case in pursuing a couple of points. But Hicks lost, for what that is worth.

CHAIR—Have you won any since you intervened in Queensland Wire about 15 years ago?

Prof. Fels—We intervened in Queensland Wire back in 1988 or thereabouts. The commission had some success in terms of what it said being accepted. I do not know whether we took sides. Do you remember, Mr Smith?

Mr D. Smith—We had some submissions we brought to the court. But we also ran—

CHAIR—You took sides in Queensland Wire?

Prof. Fels—We were on the side of Queensland Wire, I would expect. My attention was drawn just yesterday—and I have not been able to check it—to the fact that we took a section 46 case in about 1992. But I think this was settled without going to court—

Mr D. Smith—There were two major cases: the South Australian Brewing case and the CSR case in Perth. Both went to court and both were settled.

Prof. Fels—Yes, they were settled. There was not much case law. I would begin by saying that, one, there are not many runs on the board by us in terms of wins under section 46 and,


ECONOMICS

two, the cases take a very long time. So, if the purpose of the law is not just to have litigation and long interesting cases but to protect the process of competition, if it takes six or eight years to get a result, then the law is unlikely to be achieving the purpose of protecting the process of competition. So we have a concern that results are not coming through and that they take a very long time to get. All the matters that we are running under section 46 are on appeal. We are in court also against Qantas on alleged predatory behaviour, but the hearing has not started.

CHAIR—You have not initiated any section 46 cases since the Boral decision came down last year?

Prof. Fels—That is correct.

Mr D. Smith—I think we have one, a very small one in Queensland—Fraser Island Barges—which we have instituted.

Prof. Fels—That was after Boral?

Mr D. Smith—I think it was after Boral. We would have to check that.

CHAIR—Does that reflect a change of policy on the part of the commission or do you simply say, ‘We have an enhanced appreciation of how difficult these are to win but, nevertheless, we will go after them anyway if we think we have a fair prospect’?

Prof. Fels—Boral has had an effect on our approach to litigating under section 46 in itself, not just through an accumulation of cases that we have been unable to win. That has affected our selection of cases and everything. The commission’s philosophy is that it does not go to court over a matter if it thinks that the behaviour is lawful. So the commission would never go to court if it believed that the behaviour was lawful but it would be useful to have a debate in court about a matter. It is true that the commission will push the envelope in terms of interpretation of the act but only so long as it believes that it has a case in the first place.

To understand the law, obviously we look not only to the act but to the decisions of the High Court. If they take a particular view of a matter, then that will affect the way in which we enforce the act. We have had a look at Boral and it has affected some cases. We have pulled some investigations; we have decided not to proceed with them to litigation.

CHAIR—Coming back to my initial question, Professor Fels—and this might involve a slight canvass of the ACCC’s submissions to Dawson—what legislative reform, particularly in view of Boral, does the commission assert ought to be undertaken in relation to section 46?

Prof. Fels—The Dawson inquiry had a fairly full look at section 46, as you know. To a degree, I suppose, it could be said that the umpire has spoken on the matter.

Senator CONROY—Who appointed you an umpire? I reject that absolutely. The parliament is the umpire of what the law should be.

Prof. Fels—Fair enough. The Dawson report has, in any event, looked at section 46 and has said that there should be no change, but there is some flavour in there that, after a few more section 46 matters, maybe there is scope for a further debate.

CHAIR—I think, Professor, that a lot of people—and I am one—really regard the High Court’s decision in Boral as, for all practical purposes, a post-Dawson event, even though the


ECONOMICS

Dawson report was published after the High Court’s decision. Plainly at the time that Sir Daryl Dawson was turning his mind to these issues, he was not to know what the High Court would decide in Dawson. The game changed a bit after the High Court delivered its decision, even though that was prior to the public release of the Dawson report. Don’t you agree?

Prof. Fels—Trying to both agree and disagree—

CHAIR—Very Jesuitical of you, Professor Fels.

Prof. Fels—the Dawson report was submitted to the Treasurer and then the Treasurer heard about the Boral decision, which was after that, and he asked Dawson if he would add a comment on Boral. Dawson looked at Boral and he thought that the High Court had got it right, and so he said that he did not see any need to change his recommendations. To that extent, it could be said that Dawson faced off on Boral, but it is also true to say that there was no process of discussion or debate really. The matter was just sent to Dawson. I do not know who he spoke to, actually. He certainly did not talk to us about Boral. I do not know who else Dawson may have spoken to. It just appears that he read the case and said that it did not alter his report. It is true to say that, in a broader sense, the Dawson review did not go into all the questions that were gone into in some detail and depth by the High Court.

CHAIR—I was just going to say, Professor Fels—as you and I and others know—that for years most of this debate about section 46 has been largely about whether it should be an effects test and yet Boral would have been decided the same way whether there was an effects test or not, wouldn’t it?

Prof. Fels—Yes, that is right. The whole focus of Dawson—

CHAIR—So it sort of changes the ground of the discussion, doesn’t it?

Prof. Fels—Yes, I agree with you on that. I will spell out a bit of what is involved. As you know, Dawson basically considered whether two words should be added to the act: ‘or effect’. There are arguments about whether or not that would have been a big change, but it did not really change the structure of the act. We were perhaps being pedantic, but it was just about the relationship between a couple of concepts—whether you were going to talk about ‘purpose or effect’. It slightly changes the relationship between a few concepts when you add on two words like ‘or effect’ but it does not amount to an overall change to that section of the act.

Let us have a look at the section. There are quite a few other questions. The first is that section 46 applies to a firm with a substantial degree of power in the market. I would like to comment on that element in a moment. The second question is whether the firm takes advantage of that power; that is another issue. The next issue is whether it takes advantage of that power for a purpose. There has been a debate about purpose or effect. Finally, there is the question of whether it does those things in relation to particular types of activities which we can say involve lessening competition. Even on that reading of the act there are four broad areas, of which three were not really looked at in the Dawson inquiry. I should add for the sake of completeness that the inquiry also had a bit of a look at just one aspect of the process question. We put up a cease and desist proposal which was rejected, but there is a wider question relating to the fact that, even if you do not like cease and desist, the present law is not delivering results quickly. So that matter is on the table too.


ECONOMICS

I will go back over these different elements of section 46. The idea in the act is that it applies to firms with a substantial degree of market power. In this case, the High Court concluded that the firm did not have a substantial degree of market power. As a matter of fact, the situation in the Boral case is that seven judges—six of them on the High Court—found that there was not a breach of the law. I think all of them also said that Boral did not have market power. I could be wrong about Hely, but it does not matter much. Basically you have a line-up of seven judges who looked at the matter one way and then you have a line-up of four judges who looked at the matter the other way, plus six commissioners at the ACCC.

CHAIR—It should also be observed that—with all due respect to the judges in the majority in the High Court—those who resolved the matter the other way in the full court of the Federal Court were in each case acknowledged trade practices specialists of great eminence.

Prof. Fels—That is correct. On the question of market power, it is worth reviewing the history of section 46. Until about 1986 the test was dominance. In shorthand, dominance is a bit like a monopoly. It means that there is only one firm and it is free from serious competition and can do what it likes to a fair degree. That was the dominance test. It was changed by parliament to ‘a substantial degree of market power’. I think it was pretty clear to everyone at the time that the purpose of that was to catch groups of firms which between them possessed market power, like oil companies, banks or, as people used to think, these very players in the building industry—the famous Boral, CSR, Pioneer and so on. These are industries where there is what is often called tight oligopoly, where it is fairly concentrated and there is some lack of full-blooded competition.

It had always seemed to us that this section 46 would mean that these firms were covered; they were regulated by section 46 and you would fairly quickly move on from the question of market power to having a look at what the behaviour was in order to see if you were concerned about it. This notion of market power relates particularly, in my view, to the collective market power of firms. In other words, there are some industries in which no one firm can, for example, raise a price unless the others do. You would not call it dominant because dominance means that a firm can do it irrespective of anything. There are a number of areas where firms cannot raise prices unless everyone else or its main competitors do. They do not need to collude or do anything unlawful, they are just able—in parallel—to raise prices. But they were not caught by dominance. The purpose of the 1986 change was to try to catch those situations, so it came as a surprise that Boral was not found to have market power.

If one reads the judgments in the High Court, the flavour of them is quite strongly towards a view of market power that is not very distant from the dominance test. That is, there are frequent references in the High Court decision to the position of a firm. The question is whether the firm, on its own, has the power to raise prices, and they concluded that it could not, on its own, put up prices. The first point is that you have to look at this question of whether the interpretation of market power by the High Court is so uncomfortably close to dominance that thought needs to be given to whether something should be done to clarify what the parliament wants in relation to market power.

The second issue is that, as I said, the firm has to take advantage of its market power. There has been quite a lot of case law on it. I will give you my view of the essence of it. The essence


ECONOMICS

of it seems to be that if the firm is able to show that the behaviour going on is something that could have occurred in a competitive market, then it is not taking advantage of market power—it could have happened in a competitive market. This is a very tough test because there are many forms of behaviour which could occur in a competitive market. That is almost a defence under section 46—it could have happened in a competitive market.

CHAIR—After the Boral decision, it is a complete answer, isn’t it?

Prof. Fels—Yes. The commission has tended to favour a slightly different way of putting section 46 and that is that the words ‘take advantage’ sort of mean that if you have market power, in some way, you use it—it facilitates what you want to do. We would have leant to an interpretation of ‘take advantage’ which says that if the market power facilitates—makes easier—some form of conduct then that is what is intended by ‘take advantage’. But we have had this fairly different interpretation of it coming through from the High Court. As I said, there is a bit of subjectivity in all of this and these are my views about it. Just on the effect test, there has been such an extensive debate about it—

CHAIR—I do not want to press you on that, but I am inviting you to express your views about what legislative change might now be made to section 46 or ought, in your view, to be made.

Prof. Fels—I think I am trying to set out for you the issues around which there might be debate over section 46. I have identified market power; I have identified ‘take advantage’. I did forget to mention in relation to market power that there are also some comments in there about the fact that having financial resources is not itself an indication of market power.

CHAIR—Is this the recoupment issue?

Prof. Fels—Yes, this takes us on to recoupment. Recoupment comes up at a couple of points. There is the question that I have just mentioned under market power. It also comes up under that bit of the act which sets out behaviour that is deemed to lessen competition—those (a), (b) and (c) elements in section 46 that I am sure you all know about.

The High Court gets extremely close to saying that recoupment is a necessary element in proving predation. In the Boral case, it seemed to us, just as a practical example, that recoupment in that market would have been irrelevant from the point of view of Boral. Boral is in 100 markets like that in Australia, and it would be sending out a signal in that one market to the other 99 markets that, if a small player enters and competes fiercely, it is going to meet a strong response like that from Boral. There were signs that the decisions were made at fairly high levels in the company. They probably were not fully preoccupied with what was happening in that particular market but would have had a wider view.

So recoupment in a particular market does not seem to me to be an appropriate way of looking at things where you are dealing with someone who is supplying 100 markets or who may be supplying many different product markets. These days, in the economics literature, that would be accepted quite a lot. So there is scope for the legislative clarification of the fact that recoupment is not necessary as an element in the proof of predatory behaviour. So that would be another issue about which there could, maybe, be some political decision making.

CHAIR—On another topic, Professor, and then I will pass the call to Senator Conroy—


ECONOMICS

Senator CONROY—You have almost finished my brief, so feel free to keep going.

CHAIR—On section 45D, have there been any proceedings in the last year against unions by the commission?

Prof. Fels—Yes. I just want to check up where we are. There is quite an important case before the Federal Court at the present time. I do not know if we have the details here but it is about a building project. Maybe Mr Cassidy could give you the facts.

Mr Cassidy—It relates to the Patricia Baleen Gas Plant that was under construction in Victoria where there was a series of picket lines involving three different unions. We alleged that that involved secondary boycott conduct, and we filed against the three unions in the Federal Court in Melbourne, I think about two or three weeks ago. So that matter is currently before the court.

CHAIR—Do you think that the commission’s capacity to take action under section 45D has had a noticeable or salutary effect on industrial conduct in the years since those powers have been available to it?

Prof. Fels—Yes. It has been openly said to me by trade union leaders that it has had a very significant effect on their attitude to the law. The commission has made it clear to one and all that, if a parliament passes a law, in its view it must be upheld and, where there have been breaches of the law that have met our normal enforcement criteria for going to court, we have gone to court. We have had about eight or nine cases. That may not sound a lot, but in our terms that is quite a lot. Our cases generally have a much wider effect, so there is a very high degree of union consciousness about the law. In all areas, of course—businesses with price fixing and so on—there continue to be cases where people do not comply with the law. You get this in 45D and 45E areas still, but it is definitely having an effect.

Senator CONROY—I am not sure that you have left me much in my brief there, Mr Chair. That was an excellent around the world tour of the issues here. I have a couple of basic questions, so I will go back to the beginning. Also, on behalf of the rest of the committee members, I endorse the Chair’s comments which he made at the beginning.

Prof. Fels—Thank you very much.

Senator CONROY—I wish you luck and hope that you appear before us on many other occasions with a different hat on—but preferably not a blue hat!

Prof. Fels—That is the deepest graciousness from a person who does not support the same football team as I do!

Senator CONROY—I wanted to talk about a lot of the issues you have just covered, but I will try to strike out the ones you have already looked at. What has been the impact of the Boral decision on your section 46 investigations? In February, Mr Cassidy indicated that there were around 15 section 46 investigations under way. Have any of those actions been terminated?

Prof. Fels—Yes. I will let Mr Cassidy give you the details. He quoted 15 last time and now it is down because of Boral.


ECONOMICS

Mr Cassidy—As I said last time, at the time of Boral, we had 15 reasonably advanced investigations on foot relating to section 46. The commission has reviewed those. At this stage, we have ceased four of those as a result of the Boral decision—or partly as a result of the Boral decision. There are at least a few more which are looking fairly marginal. At some point, we may decide to cease those as well, for the same reasons.

Senator CONROY—I did not quite catch that. How many are left?

Mr Cassidy—We had 15. At this stage, we have dropped four.

Senator CONROY—Four are left. So you have struck out 11?

Mr Cassidy—We have struck out four, so we have 11 left. I was saying that at least a couple of those are looking a bit marginal in light of the Boral decision. At some point, we could decide to drop a few more, partly as a result of the Boral decision.

Senator CONROY—How many section 46 cases have you won since 1986?

Prof. Fels—In recent times, we have won just one: CDs. That is on appeal. We have absolutely lost Boral. We have lost Safeway, but it is on appeal by us. We have lost Rural Press, but we have leave to appeal to the High Court. We have lost it on the section 46 question; we have won it on some other matters. In the 1980s, we had two successes which Mr Smith can tell you about.

Mr D. Smith—There was South Australian Brewing, as I mentioned, and CSR in Western Australia.

Prof. Fels—They were in the late eighties, early nineties.

Mr D. Smith—Yes, the late eighties and early nineties.

CHAIR—I suppose you are also entitled to count cases like Queensland Wire, where you intervened successfully in support of the party advancing the section 46 argument.

Prof. Fels—Yes.

CHAIR—I also think you have to count those cases which may have been resolved before a full hearing in which you took or intervened in support of an interlocutory injunction and that intervention produced a settlement favourable to the interests of the applicant.

Prof. Fels—Yes.

CHAIR—There have been quite a few of those.

Prof. Fels—I am not sure that there have been in my time. There have been very few. I do not argue with you at all about the BHP v. Queensland Wire intervention, because the TPC intervention there did make a difference. I am starting to think about this, but I cannot remember section 46 cases where we have instituted proceedings and things have been settled out of court. I cannot even remember cases where you might say we got serious about section 46, started talking seriously with a party and they have then backed down, but there may have been some.

CHAIR—I can remember one where you intervened successfully: O’Keeffe Nominees v. BP Australia. It was resolved in favour of the applicant.

Mr D. Smith—That is correct.


ECONOMICS

Prof. Fels—If it would be of any help, I can do a search to give you some information on it.

Mr D. Smith—Our recollection is that it would have been an injunction only. Was the remedy a mandatory supply injunction?

CHAIR—It was.

Mr D. Smith—But there was no substantive hearing.

CHAIR—No, it was resolved before a final hearing. But you did intervene.

Mr D. Smith—Yes, but to my recollection that would be probably the only one.

Prof. Fels—I heard yesterday of an obscure case in Queensland in the early nineties that we might also have to let you know about. I cannot even remember it myself. While your point is a good one, it is worth noting that section 46 interventions tend to be resisted more than those in some other areas. There is a tendency to fight them. Some firms have said to us that it is a mark of dishonour to be found to have abused their market power, and therefore they would fight all the way. The fact is that in this area, more than in other areas where we intervene and something happens and you do not have to go to court, we get resistance. I have also just remembered the case of Sims Metal, which I think we will have to let you know about. That was mainly about price fixing, but there was a bit of grudgingly conceded section 46 in that. Of course, as you would well understand, if it is perceived that the High Court is not taking a particularly supportive line on section 46, our bargaining power goes right down.

Mr D. Smith—I wish to correct one thing: the Fraser Island barge matter was certainly not filed when I said it was. I am sorry about that.

Senator CONROY—In the ACCC’s response to Dawson, you noted:

It defies belief that there has only been one instance since 1990 where big business has used its market power to harm competition. So this part of the law works poorly and the committee has failed to come up with any useful suggestions for change.

If section 46 is not fixed, what sort of impact do you think it will have on the Australian economy and consumers over the long term?

Prof. Fels—If section 46 does not work, then one of the most important protections of competition is missing from the Australian economy, because the universal view of competition law is that it has three basic legs: one is cartel behaviour, another is mergers and another is where someone who already has market power is misusing it. Cartels are about getting market power, so you try and stop that. Mergers are also about getting market power, and you try and stop it. Our one protection once people have market power and could abuse it is section 46. As you know, the origins of antitrust law in the US arose from Rockefeller and his monopolistic behaviour.

Traditionally, competition has often been thought of more as section 46. Many countries around the world which start competition have their eyes very much on this abuse of market power. We have quite a concentrated economy, so there is quite a lot of market power in Australia. Another contextual point is that, when one studies the topic of market power and its abuse, you normally note that the first problem is that there may be excessive prices. That is the first thing that happens when people have market power. It so happens that the first


ECONOMICS

problem caused by monopoly power is one that we really do not do much about anyway. We do not have a particularly strong prices surveillance power, although we do regulate some pure monopoly prices. When you think about the problem of the abuse of market power, the first concern is prices. We do not do that much about that, because in a market economy we do not like to unduly interfere with prices.

The second thing you learn about market power is that it stems from the structure of the industry. People have market power because it is a concentrated industry. In some countries, there is a divestiture power—an ability to break up industries with market power. We do not have this power in Australia. All of this means that the one power we have is a rather important one, and we put a lot of weight on it. That is the kind of behaviour that is meant to be proscribed by section 46—namely, someone who has market power acting anticompetitively. As I have said, one could imagine a much fuller regime for tackling problems of market power, but we do not have it. It has been decided that we will focus on just one aspect of the misuse of market power—anticompetitive behaviour. In that context, one sees that it is really important that we have an effective section 46.

Senator CONROY—The issue of price discrimination is an area of concern to the grocery industry. Independent operators say that they are not able to obtain goods at prices comparable to those charged by suppliers to the two major chains and that there should be like terms for like customers. When the price discrimination provision—section 49—was repealed from the TPA following the Hilmer report, it was argued that anticompetitive price discrimination would be captured by section 46. Dawson reached the same conclusion. In your view, does section 46 adequately capture anticompetitive price discrimination?

Prof. Fels—The commission and I have always felt that section 49 did not work well and would be better dropped. It conceivably tended to even discourage genuine price competition. Price discrimination is certainly not listed as one of the factors in section 46. It says, ‘(a), (b), (c)—these forms of behaviour are prohibited outright.’ It does not explicitly mention price discrimination. It could be debated whether there would be a price discrimination vision written into section 46 as an additional leg or whether one might just go onto a predatory pricing leg, which covers some overlapping ground and some different ground from price discrimination. We have never been tremendously keen on putting explicit price discrimination clauses into section 46. There are circumstances where anticompetitive price discrimination would be unlawful under section 46. It would be a much narrower range of cases than might have been picked up under section 49.

Senator CONROY—I want to discuss some of the merger changes proposed by the government following the Dawson report. It is proposed to create an authorisation stream which bypasses the ACCC in favour of the Australian Competition Tribunal. Does the ACCC have any concerns with this proposal?

Prof. Fels—We have consistently opposed that over the years. We are unclear on what role, if any, there would be for public or small business participation in public interest determinations under this proposal. The tribunal is headed by a judge of the Federal Court and firms are generally represented by legal counsel. The hearings are in an informal legal style. It is a rather poor venue for consumers and small businesses to use. I can recall that in the Davids-QIW and Davids-Composite Buyers authorisation cases the small businesses there—


ECONOMICS

and there were a lot of them—got a very short shrift indeed. The current open and transparent process for considering merger authorisations which facilitates the right of participation in the processes by all interested parties would cease—in other words, where small people can come to us or we can go to them and find out their views, concerns and so on.

Senator CONROY—Do you think many Federal Court judges have met any consumers in recent years? Would they be used to a process as you just described, where people could come and knock on the door and say, ‘I think I’ve got a problem’?

Prof. Fels—That probably has not happened. I am not aware of many, if any, cases where the consumer movement has appeared in the tribunal—even the organised bit of it.

Senator CONROY—Are you aware of any small businesses that have managed to get this far and have appeared?

Prof. Fels—Yes, in the newsagents case, but they had full-scale legal representation because they were the applicant. If you are on the receiving end, less so. The one case that does spring to mind is, as I mentioned, the wholesale grocers merger application by John David. There was quite a lot of opposition from Queensland retailers. They made some sort of attempt to get into the tribunal. They were not thrown out, but they certainly got very short shrift.

Senator CONROY—So we have established it as very user-friendly for consumers and small business! That is sarcasm for Hansard’s benefit.

Prof. Fels—How about a sarcasm icon beside that one. This would contrast with other authorisation processes. If someone wants authorisation of something other than a merger, then this more open process occurs.

It is a fact also that one of the most fundamental problems in the analysis of competition matters is that the applicant has a great deal of information and people assessing it. The people on the receiving end do not have a great deal of information. The best processes tend to work in favour of powerful applicants who have all the information.

The commission’s own experience over the years is that the most valuable information that it gets, the most valuable understanding of the likely consequences of a merger, is obtained from talking to, hearing from or having as witnesses other parties—often small businesses, customers or whatever. If this is to be proceeded with as a tribunal matter, there would have to be some pretty revolutionary change to make sure that that all-important source of information is properly harnessed—the customer view. Typically, if there is a merger, we would go and interview customers. Many of them do not want to speak on the record.

Senator CONROY—I cannot see the Federal Court judge wandering off to interview customers, can you?

Prof. Fels—It is a time-consuming process. You have to spend a whole day with them to understand the businesses and to find out what the effects of behaviour will be. Sometimes you get a very unpopular merger, and you go and talk to the customer and it takes you half a day to find out that their concerns are not ones that should worry you. At other times, it can be extremely revealing—in a very detailed discussion. Typically, in a merger, we would ask the customer, ‘Supposing these two firms got together and tried to increase price, what would you


ECONOMICS

do? Would you have some other source of supply to which you could turn? Could you go to imports? Are there other products?’ You cannot get to the bottom of that in a short time. As I have said, a lot of people are very reluctant to talk about these things in public. They want confidentiality. They do not even want it to be known that they have been talking to you. They do not want to be seen visiting the ACCC. That is the issue about direct application to the Australian Competition Tribunal.

Another issue is the right of appeal point. At the moment, there is a right of appeal on matters that go to the commission. If the commission gets it wrong either way, people can appeal to the tribunal, and they often do. Things are really sorted out in the tribunal. Under this proposal, there would be no right of appeal by anyone on a tribunal decision. We think that is a serious issue.

Senator CONROY—The ACT already conducts merit reviews of some ACCC decisions. Is that correct?

Prof. Fels—That is correct.

Senator CONROY—How often has a business gone to the tribunal to seek a review over one of your decisions?

Prof. Fels—There are general adjudication decisions and then there is a tribunal on mergers. This is about mergers. On adjudication generally, there is only one on appeal at the moment—a decision about nurses in Victoria. Some of the regulatory decisions are also in the tribunal at the moment. But there is a low in appeals on our decisions.

Senator CONROY—What is the success rate of overturning your decisions?

Prof. Fels—For mergers it is fairly high. I have never done an analysis of it, but someone who used to be on that tribunal—not an academic—commented informally that the rate of upholding commission decisions was running at about 60 per cent, with 40 per cent overturned. That probably would not be far off for mergers.

Senator CONROY—I would like to turn to another aspect of the existing merger law: the question of whether section 50 captures creeping acquisitions. I understand that the ACCC’s merger guidelines express the view that section 50 of the TPA is broad enough to deal with creeping acquisitions. Is that right?

Prof. Fels—We may have expressed that view, but no-one would want to disguise the difficulties of dealing with creeping acquisitions. The issue comes up most often in regard to big acquisitions of retail stores one by one. It is more the case that, while we feel uneasy about this part of the act, we have not been able to come up with a proposal that would in our view solve our concerns. When a big retailer, say, is going to buy a very large number of outlets at a given time, if they bunch them all together it is possible for us to look at them as a whole and say, ‘This could substantially lessen competition.’ But most often acquisitions are made in small parcels or one at a time, so each case as you look at it does not seem to amount to a substantial lessening of competition. It has to be a substantial lessening of competition in a market.

Having said that, I would like to emphasise one positive point about the commission’s activities here. We do look very closely at acquisitions by the big two retailers. They come to


ECONOMICS

us about them in advance. We have just about always stopped them making acquisitions in markets where they are already players or occasionally required them to sell off the shop they have if they are already players and want a new shop. Most often if they were going to move into a country town, say, where they already had a store of their own and buy out an independent store, they would be opposed by us. There have been very few—hardly any—cases in which that has not happened. If you really dug deep you would find one or two which we have not opposed but in general there have been hardly any cases where, in a very local market, we have allowed a doubling up by a big chain.

On the more general steady increase in market share of the big supermarkets, the more typical scenario is that the supermarket will move into a town where it is not represented, take over from an independent and often offer better prices, service and range and quality of goods than the independent may have done. For that reason and others, it is rather difficult to argue that this is going to substantially lessen competition in that town. But the accumulation of these acquisitions means that the national market share of these players has steadily been increasing. That has had some repercussions, including on their buying power. The big two seem to have quite a lot of buying power, but there is also some evidence which we presented in a report to the Senate about whether or not Coles and Woolies get better prices compared to Metcash. This is quite a difficult matter to sort out.

The report had some answers in it that found a bit of truth in virtually all propositions. There certainly were instances where the big two did not get the best deal. I think that, in more cases than not, they did get the better deal. Also, there are some very tricky measurement problems of a very real kind about which prices you look at. Do you look at the price at the point of delivery to the wholesaler or do you look at it a bit more broadly? Because the big retailers take the view—and most of their suppliers, I have to say—that the big retailers tend to service, promote, package and sell the products a bit more and therefore, because of that after-sales service, they can get a slightly better looking price than does a big wholesaler. So, if you just take prices and ignore after-sales service, you will find that the big people tend to get a slightly better price than, say, a wholesaler. But it is not comparing like with like. We talked to many manufacturers about this and they regarded this as a fairly important point.

Senator CONROY—In an interview in January, you were reported as saying that one of the ACCC’s top priorities in 2003 would be creeping acquisitions. Can we assume that your investigations in this area are continuing? In an article by Toni O’Loughlin, who is here with us today, up the back, you said:

The creeping-acquisitions issue with Woolworths and Coles, and not just liquor retailing—it’s a very big problem, we are quite worried about it.

What sort of work are you doing at the moment? I saw a reference in the Weekend Australian to quite a bit of work that you appear to have done in this area, because this is what you were suggesting earlier in the year. Could you just give us an outline of what work has gone into where you are at?

Prof. Fels—I will make a few comments. I was slightly mystified at that article in the Weekend Australian but maybe you know more about it. On the creeping acquisitions, there are a couple of general background points: when Franklins disappeared from the market, we


ECONOMICS

spent a huge amount of time on who got their shops, because it was a pretty momentous change in Australian retailing. Basically we had had 3½ serious retailers, counting Franklins as a half towards the end because they got weak and then disappeared from the market; they had always had a different offering from the others. We would have liked all their shops to have gone to independents. But basically the independents were not prepared to pay enough to make it worthwhile for Franklins to sell to them; there were very high close-down costs. So Franklins could have just disappeared from the scene. When they did, many of those shops would have gone to Coles and Woolworths.

However, another outcome occurred, partly as a result of pressure from us, and the result was that a majority of Franklins outlets went to independents and really gave them a boost, although Woolies did collect quite a significant number of stores from Franklins. This made us look very closely at the question of what happens when the big people actually acquire numerous small stores.

At the time of that comment to the Australian Financial Review, over the Christmas-January period, we were starting to shape up to look at the liquor acquisitions and in particular at the Coles acquisition of Theo’s. We spent a great deal of time on that. We spent twice the normal time on it. We did far more inquiries than we normally do, and we still decided not to oppose that. We believe that, had we even wanted to oppose it, we would not have been able to win a case in court.

The Theo’s acquisition involved the sale of quite a few liquor stores, particularly in New South Wales. The market share of the two big people is of the order of 30 per cent now. That meant that Coles would have gone up to about 15 per cent as a result of this acquisition. From memory, it was not operating terribly much in the area of New South Wales where Theo’s is strongest, so the local effect was not a very big one. It was argued that in a number of ways this was pro-competitive, but basically the market share is still so low that it did not trigger concerns under the act. We do have a certain nervousness about the fact that you have big, powerful retailers extending their tentacles into new markets. Each time a transaction does not on the surface do harm and may promote competition, but they seem to be moving to positions of near market power in quite a range of markets. You wonder what the combined effect of all of that is.

Mr Cassidy—In addition to the work that the chairman referred to, we are at the moment doing some theoretical work supported by some market inquiries to see whether we can put together a case to then present to counsel in relation to creeping acquisitions. That is with a view to getting senior counsel and possibly the court to rule on or indicate what the application of the merger law is in creeping acquisitions. We think it would be useful in the current debate or discussion to get some clarification of, in a practical sense, how useful the current merger law is in relation to creeping acquisitions.

Senator CONROY—Is that a major project? Professor Fels described it as one of the ACCC’s top priorities.

Mr Cassidy—Yes, we are putting a fair bit of work into it.

Senator CONROY—What would you define as a fair bit of work: officers, time, resources?


ECONOMICS

Mr Cassidy—A combination. I could not say to you that we have an enormous team working on it, because we have a number of other things happening in the mergers area, but we have got a few officers working on it and they have been working on it for some time. If you add that up over a period of time, we are putting reasonable resources into it.

Prof. Fels—In the Theo’s case, for example, we had about double the intensity of inquiry in terms of talking to customers, competitors, suppliers and so on. We probed more deeply than we normally would into internal company documentation and other things about why this merger was occurring, and we spent more time analysing it.

Senator CONROY—Would you call the process your officers are going through rigorous?

Prof. Fels—In the case of Theo’s, it was very rigorous.

Senator CONROY—You are working up a legal brief, from the sound of it?

Mr Cassidy—Yes, it is a fairly rigorous piece of work because we are hoping that, if you like, it will give a definitive answer on just what—

Senator CONROY—You are looking for an outcome at the end?

Mr Cassidy—Yes, that is right.

Senator CONROY—Professor Fels has indicated and you are indicating that this is an issue that you have been aware of, monitoring and looking at for a considerable period, particularly since the Franklins collapse, which really did bring it to a bit of a head, if I could use that phrase. You are an independent statutory authority, aren’t you?

Prof. Fels—Yes.

Senator CONROY—Would you call yourselves transparent?

Prof. Fels—We are accused of being too transparent as a rule, but in the case of some merger matters we cannot disclose everything we are doing because of commercial confidentiality.

Senator CONROY—So within commercial confidentiality constraints, you are a pretty transparent organisation?

Prof. Fels—Very.

Senator CONROY—Would you agree with the following statement? A question was asked:

ALAN KOHLER: Do you have an opinion on the growing power of supermarket chains?

GRAEME SAMUEL: It’s an issue I know has been the subject of increasing concern by small business sector and, in particular, the retail grocers. If there is a cause for concern then I think it ought to be subjected to an independent, rigorous transparent examination ...

ALAN KOHLER: So will you initiate a review into supermarkets?

GRAEME SAMUEL: Well, there’ve been a number of reviews but most of them have not been conducted in, what I call, that independent, rigorous, transparent and objective manner. I think it would be a very, very valuable review ...

Prof. Fels—We have basically, in this and other matters, dealt with things on a case-by-case basis. We have not issued a fully general report on supermarket dominance and so on


ECONOMICS

over the years. We have made submissions to the several parliamentary inquiries, particularly the Baird committee—the joint inquiry into retail dominance. We also did a very focused report recently under the requirements of the Senate on the question of pricing that I have mentioned. Those are the main things that we have done.

Senator CONROY—The ACCC is an acknowledged independent entity. I agree with you: it is acknowledged as pretty transparent within commercial constraints, it is usually regarded as conducting fairly rigorous inquiries and, if you have taken a matter to court, a rigorous brief has been prepared. You have been monitoring this area for a considerable period and particularly since Franklins went down. Do you think we need another inquiry into the retail sector?

Prof. Fels—We look at cases very intensively and that is what has been happening with us. As I have said, we made a very large study of the Franklins transaction. That is an aspect of the market. We made a very intense study before that of the wholesaling in relation to Metcash—the old Davids. We were in quite a few cases there. However, we have not conducted an across-the-board review of the whole structure of the retailing industry; it has been a little more case driven. It has been quite rigorous.

Senator CONROY—You have this rooster here who has just decided that he is going to ignore all the work that you have done.

CHAIR—Senator Conroy, what did you say you had?

Senator CONROY—I said we have this rooster here.

Senator JACINTA COLLINS—Just one?

Senator CONROY—Just one rooster.

CHAIR—They usually hang around in trios, Senator Conroy.

Senator CONROY—So I have heard.

Senator JACINTA COLLINS—There is a lonesome one too, who likes Chris Pyne.

Senator CONROY—It is just an affectionate term I have heard! You have this rooster who is prepared to dismiss all the work, the years, the rigorous independent inquiries you have been making and who thinks it needs to be sent off to another review.

Prof. Fels—As I said, we conduct a type of inquiry which is case driven. Our inquiries are a little different from, say, parliamentary inquiries. There have been some parliamentary inquiries and they have, at times, sent off particular issues for us to look at—like this question of pricing and whether there are differential prices and so on.

Senator CONROY—Do you think we need the Productivity Commission to tell the ACCC the problems in the retail grocery and liquor market?

Prof. Fels—The situation is that we do case studies. We get an issue that arrives on the desk: does this transaction breach section 50? For example, with the Franklins matter, which was an important one, it dealt with things that arose specifically and in a practical way out of the Franklins matter. It was not, however, a fully comprehensive inquiry into the whole retail industry from top to bottom.


ECONOMICS

Senator CONROY—In April, the High Court handed down its decision in the Berbatis case, which concerned an allegation of unconscionable conduct. What is the commission’s reaction to the judgment and is the commission likely to bring any more actions under section 51AA or will you rely on 51AC in the future?

Mr Cassidy—In a way, the judgment of the High Court in Berbatis did not particularly surprise us. It relates to the old section 51AA, which picks up the unwritten law of the states on unconscionable conduct. We had a decision in the first instance in the Federal Court which looked as if it had extended the boundaries of section 51AA. I think that the High Court decision put 51AA back to where it was. As far as we are concerned, 51AC is the more operative section in relation to unconscionable conduct, and we only really revert to section 51AA when the conduct occurred before section 51AC came into force in 1998. So 51AA is becoming less and less relevant insofar as unconscionable conduct is concerned.

Senator CONROY—After this case, do you feel that section 51AC needs to be strengthened?

Mr Cassidy—Section 51AC is a relatively new section and we still, I think, have about half a dozen cases before the courts. We would probably like to see how some of those cases play out before making a definitive call on whether section 51AC is adequate or not. There are, I know, some concerns around the adequacy or otherwise of section 51AC, particularly in relation to contract terms and the way in which contracts are negotiated sometimes, and there may be an area there where 51AC could be clarified or strengthened. But, beyond that, as I said, we would like to see a few more of the cases resolved before making any broader judgment in relation to section 51AC.

Senator CONROY—How many matters involving 51AC do you have under investigation at the moment?

Mr Cassidy—I might take that on notice. There are a fair few, but I am afraid I cannot put a precise figure on it.

Senator CONROY—Were you surprised by Dawson’s recommendation and the government’s endorsement of the idea that you develop guidelines on your approach to the unconscionable conduct provisions in the TPA?

Mr Cassidy—I suppose it puzzled us a little in the sense that we already have guidelines in relation section 51AC.

Senator CONROY—That is right. Does this document look familiar?

Mr Cassidy—Yes, that looks like our guidelines.

Senator CONROY—It is titled Guide to unconscionable conduct in business transactions.

Mr Cassidy—We are not quite sure exactly what that recommendation relates to. It is something we are going to have to investigate.

Senator CONROY—The government have endorsed it. Justice Dawson seems to have recommended it. Did you not draw it to their attention sufficiently? Have you posted a copy of your guidelines to them since?


ECONOMICS

Mr Cassidy—No, we have not posted a copy to them since—although it is freely available; we do not charge for these useful publications.

Senator CONROY—Just email it to them—[email protected].

Mr Cassidy—I do not recall that we particularly canvassed unconscionable conduct in our discussions with or in our submission to the Dawson committee, basically because it did not seem to be within the committee’s terms of reference. I am afraid I cannot cast any light on that particular recommendation.

Senator CONROY—It was a little embarrassing, I thought.

Senator Ian Campbell—I sought to extend the provision to the rent being charged for office buildings in Barton as unconscionable, but it apparently does not stretch that far.

Senator CONROY—You are always prepared to give anything a stretch, though. Can you briefly outline your understanding of what the ACCC’s powers will be in relation to the proposal to introduce a notification procedure for small businesses to collectively bargain with big businesses. In what circumstances will the ACCC be able to withdraw the protection offered by the notice?

Prof. Fels—As I mentioned, the background to this is that, because of the universal application of the act since 1995, more small businesses are covered by the Trade Practices Act than used to be the case. Perhaps not surprisingly, that has given rise to more pressure from small businesses to be able to have a better process for not being at risk for a lot of their behaviour under the Trade Practices Act. Instead of the somewhat expensive and time consuming authorisation process, Dawson has essentially recommended that, instead of getting permission for something from us after a long process with the possibility of appeal to the tribunal, they can just notify us and get the protection they want. We have 14 days under the proposal to say, ‘We don’t like this,’ but if we do not act within 14 days they then get the protection for the behaviour. The behaviour might breach the Trade Practices Act. After that time, if we feel that it is behaviour that should not be protected and we consider that the behaviour is not in the public interest then we can remove the protection. I think there is a right of appeal on that decision.

Mr Cassidy—That is right.

Prof. Fels—Small business can just tell us that they are doing this and, provided we do not object within 14 days, they are protected under Dawson. But we can decide at any time that the behaviour is against the public interest, and the onus will shift to us. For example, say a group of farmers want to collectively bargain. At the moment, they could breach the Trade Practices Act. They would have to apply to us in advance under this somewhat complex authorisation process; gain permission from us, as it were, and get it okayed; and they would pay quite a lot for that. Under the new process, they tell us they are going to do it and they automatically get protection from the Trade Practices Act after 14 days, but we can have another look at it later on and say, ‘We don’t like it.’

Senator CONROY—So you can revoke it?

Prof. Fels—Yes; we can chuck it out.


ECONOMICS

Senator CONROY—Would you describe this as a procedural change rather than a substantive change?

Prof. Fels—In essence, we would certainly see it as a procedural change because—

Senator CONROY—There is no behaviour that was unacceptable before but is acceptable now?

Mr Cassidy—Senator, we actually put this to the Dawson committee, as you are probably aware. We basically saw it as a procedural change to make it easier for small businesses to collectively bargain. There is a technical aspect to it in the sense that under the authorisation process the applicants need to convince us that what they want to do is in the public interest, whereas under the notification process we actually need to decide and be able, if called upon, to prove that the conduct is against the public interest. If you like, there is a reverse onus of proof.

Senator CONROY—There is a reverse onus, but what about the actual conduct that they can engage in?

Mr Cassidy—Just to round that off, the point I was going to make is that it may be at the margin, in whether something is in the public interest may be lineball. Under the authorisation process, those sorts of cases probably would not get up, because the applicant would not be able to make their case to us. Under notification, those sorts of situations probably would stand, because we would not be able to make a sufficiently robust case against them. If you like, there could be some marginal collective bargaining arrangements which would stand under notification but may not stand under authorisation, but I am talking about the margin. Really we saw it as basically a procedural change which was intended to make it easier for small businesses to get immunity for collective bargaining.

Senator CONROY—You submitted that 30 days was necessary. They have only given you 14. You are almost going to need a rapid response team to try and assess the impact in an entire industry in 14 days. Is that 14 working days? Is that 14 calendar days?

Mr Cassidy—That is one of the things that has to be resolved, because I do not think the report was clear about the 14 days. It does worry us a little, because at the moment under the notification process, in order to stop immunity occurring, we are required to get out a draft notice within 14 days indicating that we have a problem and we also need to give reasonably robust reasons as to why we have a problem. We are worried that we could be notified of some potentially nasty forms of collective bargaining with boycotts involved, and we could struggle to go through the processes we need to go through within the 14 days. Maybe the 14 days is something that needs to be given further thought.

Senator CONROY—Thank you.

Proceedings suspended from 3.54 p.m. to 4.13 p.m.

Senator LUNDY—I want to focus my questions on telecommunications competition and in particular the upshot of the legislative changes last December in relation to appeals. Can you give me an overview of the impact of those changes? I note that recently you amended a guide to reflect the legislative changes. I am particularly interested in what opportunities now


ECONOMICS

exist for Telstra to appeal either determinations by the ACCC or the rejection or other treatment of undertakings by Telstra to the ACCC?

Mr Dimasi—The main changes in relation to appeals basically involve ensuring that arbitrations conducted by the ACCC—and there are now not what might be described as merit appeals, or rearbitrations as we have described them in the past—do not take an inordinate amount of time to complete. However, Telstra does have the option of submitting undertakings to the ACCC and they are able to appeal the commission’s determinations of those undertakings. I guess the incentives from those changes are that we would expect Telstra to present undertakings to the commission rather than then go through large numbers of arbitrations. Indeed, we have draft undertakings on a number of the core services in front of us at the moment which we are considering.

Senator LUNDY—Can you step me through this scenario: if as a result of receiving those undertakings from Telstra for core services the ACCC makes a determination that varies from what Telstra has put to the ACCC, Telstra has a right of a appeal to the ACT, doesn’t it?

Mr Dimasi—That is right. If we do vary the undertakings, Telstra can appeal. Depending on the outcome of that appeal, arbitrations could then take place if there are still disputes. But the undertakings would have set the basic conditions on which we would be arbitrating. Telstra have the option of taking the undertakings. The main changes as we would see them would be that while there was little incentive for Telstra in the past to work through the undertaking process now there is a much greater incentive for them to do that.

Senator LUNDY—The concern was—and it was expressed by competitors of Telstra at the time of the consideration of the legislation—that it would push the appeal forum from arbitrations effectively into another area—in this case, appeals surrounding the acceptance, rejection or modification of undertakings provided by Telstra. Do you think that is effectively what has happened or is potentially what could happen?

Mr Dimasi—Potentially, it could happen. But Telstra have always been able to appeal both the undertakings and in the past the arbitrations as well. We felt that there was a real problem with that. While we have never argued that there should not be a right to appeal on the undertakings, because fairly significant decisions are made on those core services, our concern was that with the arbitrations—which led to a great number of disputes—there was an incentive for these things to be drawn out and it took a long time for things to be resolved. Your question implies that that will possibly happen through the undertaking process. If that is what you are asking, that has always been the case; that has always been possible. Our expectation is—

Senator LUNDY—Except that Telstra never made undertakings previously, because they waited until a dispute occurred and then appealed the arbitration.

Mr Dimasi—They did actually propose a number of undertakings in the past, which were rejected. Telstra decided not to pursue those undertakings to completion. As a result, we saw a great number of arbitrations because there were then disputes with other parties. The legislation as it now exists has remedied that problem. We will have it resolved once and for all with the undertakings, whether they are taken to appeal or whether they are accepted. That is something we have yet to see.


ECONOMICS

Senator LUNDY—Can you confirm with me that, in terms of having received undertakings from Telstra, there is no appeal as yet? Are you still considering those undertakings?

Mr Dimasi—Those draft undertakings are in front of us. The undertakings are for three core services. We will have to make a determination before Telstra would consider whether to accept or not accept our decision.

Senator LUNDY—Do you have a time frame for your consideration of those draft undertakings?

Mr Dimasi—It is still fairly early days. We would expect that it would probably be very late this year when we would have final determinations on those. I might add that under the new legislation we are also required to publish indicative prices for those three core services.

Senator LUNDY—I was going to ask you about those as well.

Mr Dimasi—We are about to publish those. We would expect next June or July to be the time frame.

Senator LUNDY—So this is the capacity for you to produce model terms and conditions under the legislative amendments.

Mr Dimasi—That is right.

Senator LUNDY—You are doing that as well as having received draft undertakings?

Mr Dimasi—Indeed.

Senator LUNDY—You are hoping to publish those model terms and conditions for the three core services in June or July?

Mr Dimasi—Yes. We are working on those now. Under the suggested time frames we hope June-July is the date we publish.

Senator LUNDY—What is the relationship between your model undertakings for those core services? You are preparing those for the same core services that Telstra have provided you with draft undertakings for?

Mr Dimasi—Indeed; we are.

Senator LUNDY—Can you tell me what they are again?

Mr Dimasi—Those undertakings are PST and originating and terminating services. That is the access to Telstra’s public switch network system. It is the unbundled local loop, ULLS services, and the resale services—so the local call services.

Senator LUNDY—What impact does the production of those model terms and conditions have on Telstra’s ability to appeal a determination on their draft undertakings, if any?

Mr Dimasi—I cannot see that there is any obvious impact. I will certainly check that. If it is any different, I will let you know, Senator, but my understanding of it is that they are stand alone. They are indicative prices. We then have to assess the undertakings that are presented on their merits. I guess we publish those indicative prices first and that gives an indication to our thinking and our assessment. But they are indicative, and Telstra could come in with


ECONOMICS

variations, differences, and we would have to assess what they might be. So I guess there is a relationship, but we will just have to see how they work out.

Senator LUNDY—When did you receive the draft undertakings from Telstra?

Mr Dimasi—I will have to get back to you on that, Senator. I do not have the date in front of me but I know we have had them for a little while. We have been looking at them.

Senator LUNDY—January? February?

Mr Dimasi—I do not remember the month, Senator. I will have to get back to you on that.

Senator LUNDY—But some time this year—it was not last year.

Mr Dimasi—Yes, some time this year.

Senator LUNDY—Okay, if you can take that on notice, the date that you received them. In the context of the legislative changes late last year, was it the ACCC’s expectation that Telstra would immediately provide you with draft undertakings for the core services? I ask that in the context that the legislation also provided you with the ability to produce model terms and conditions for those same services.

Mr Dimasi—Yes, it was our expectation that Telstra would provide us with undertakings. Whether those undertakings would come after the terms and conditions have been published, as asked, or whether Telstra would submit them in advance of those, we weren’t quite sure. As it turned out, Telstra chose to submit the undertakings in advance of us publishing those model terms and conditions.

Senator LUNDY—How does that impact on your understanding of how the legislative members were to operate, particularly in creating an environment that reduced the incidence or possibility of appeal? If I may make the observation, it seems to me that the timing is designed such that Telstra preserve for themselves the optimal circumstance in which they could justify an appeal on the ACCC’s determinations in response to their undertakings.

Mr Dimasi—Sure. I guess the options have been available to Telstra to come in either before or after the model terms and conditions were published. We basically were not surprised that Telstra came in before we published our model terms and conditions. Clearly they wanted to give an indication of where they felt the prices for those services would sit and it is not entirely surprising, I guess, that they did that. I guess we are working through both processes at the moment.

Senator LUNDY—We will watch with interest. I would now like to go to telecommunications services that are not defined as core services for the purposes of the legislative amendment, in particular, broadband services and ADSL. As you are probably aware, I wrote to the ACCC on 3 June, two days ago, raising serious concerns about Telstra’s behaviour with respect to connections for ADSL services and the distinction in the treatment of both ADSL connections via Telstra’s retail arm and indeed ADSL connections via Telstra’s wholesale arm to resellers of the ADSL service. I am sure you are following me.

Mr Dimasi—Yes, I am following you.

Senator LUNDY—What scope, if at all, is there for the ACCC to make determinations, to handle a dispute, relating to ADSL in that circumstances? From my reading of the act, there


ECONOMICS

needs to be demonstrable anticompetitive behaviour for there to be a mechanism under the act for the ACCC to take any action. Can you comment on that scenario?

Mr Dimasi—I guess the issue that would concern us would be if there were evidence or a suggestion that Telstra were favouring its retail services over the wholesale services and therefore disadvantaging competitors who were competing with it at the retail end. That is probably the angle that would be of interest to us. We have received your letter, Senator, and we are looking at the issues that you have raised. It is something that we will take on board and we will examine what scope there is or what issues that might give rise to.

Senator LUNDY—Thank you. I would like to go into a little more detail over what constitutes disadvantaging competitors. The act talks about the need to identify a systemic failure in the conduct of Telstra in allowing a competitive regime to exist. I have not got the words in front of me; I am sure you know them very well. As you know, I have received some 13 complaints, which qualify as formal complaints, where the allegation is that Telstra have favoured their retail arm over their wholesale and that that is directly disadvantaging their competitors who are reselling the ADSL service. How many complaints of that nature do you have to see before you can take some action? I guess I am asking this using that as an example but asking you in general terms: how big does it have to be before you consider it systemic and have the ability under the act to do something about it?

Mr Dimasi—I guess the issue for us would be to establish that it was not some isolated instance or that it was not some mistake by a technician or something along those lines. I guess, if we see that the systems are structured in such a way that there is a disadvantage to customers, then obviously that becomes an issue that we then take up. As you build on the number of complaints, as they increase—I do not think there is a golden rule about what that number might be—then obviously that escalates the level of interest and concern that that may give rise to. So as we do see complaints increased, clearly we will investigate and find out what the explanation is for those complaints, whether they are a number of isolated individual breakdowns or whether there is something more fundamental that is coming into play that might be disadvantaging Telstra’s competitors.

Senator LUNDY—When you are investigating a complaint like this or any complaint, how do you get your information? Are you reliant upon TIO reports? Are you reliant on people like me writing to you with specific complaints or individuals writing to you about it, or are you able to be far more proactive about your research in investigating the extent of a problem if you have reasonable grounds to think that it might be more extensive?

Mr Dimasi—Normally if we receive complaints we will go and talk to the complainants. We will contact the individuals, the people who have written to us with their concerns, and get to understand what their concerns are, how they have arisen and what is behind those. So, yes, we do not just rely on Ombudsman’s reports and other reports. We will always contact the people involved.

Senator LUNDY—What about the TIO? Does a mechanism exist where the Telecommunications Industry Ombudsman can formally present you with reports about complaints? Do you have a system where you look at what issues are occurring out there that may have some systemic attributes and are potential breaches of the Trade Practices Act?


ECONOMICS

Mr Dimasi—I would not describe it as a system necessarily, but certainly there is interaction between us and the TIO. If concerns are brought to our attention, we will have a look at them.

Senator LUNDY—So there is regular contact?

Mr Dimasi—There is, yes.

Senator LUNDY—More generally, what current discussion papers and initiatives has the ACCC got active at the moment in the communications and telecommunications area? I know a couple of them, but if you could run through the list that would be helpful.

Mr Dimasi—I will try to remember them. We have quite a number of things at the moment. We basically have a mobile telephony discussion paper and we are reviewing mobile telephony this year. The main issue there is the fixed to mobile termination charge, which we have looked at in the past, but we still receive significant comment on that, so we are examining that issue.

Senator LUNDY—What is the time frame for that discussion paper and your report?

Mr Dimasi—We are planning to finalise that this year. We have asked in our discussion paper for submissions from interested parties until 13 June, and we will be looking to progress it from a draft to a final, which would not be until the end of the year, optimistically.

Senator LUNDY—So December is the best-case scenario?

Mr Dimasi—I will not say that December is necessarily the best-case scenario, but we do have a number of these things in front of us. We certainly hope to do it before the end of the year. We will certainly be looking to do it as speedily as we can, and I guess it also depends on the issues that are raised and the matters that we need to have a look at.

Senator LUNDY—Going back to the legislative amendments, what scope do you have to have model terms and conditions in that kind of issue? There is no ability for the ACCC to come up with model terms and conditions on that issue, is there?

Mr Dimasi—No, the model terms and conditions are specified for us in the legislation. For those services that—

Senator LUNDY—Which are the core services only that you went through before.

Mr Dimasi—Yes, core services only. For other services it is a question of, first of all, whether they are regulated. Then, if they are regulated, the act comes into play in terms of potential undertakings or arbitration and so on.

Senator LUNDY—And they are all of the things that you will obviously be canvassing in this paper.

Mr Dimasi—Yes.

Senator LUNDY—The obvious one is the bundling issue relating to Foxtel and so forth—the one everyone has been waiting for! What is happening with that paper?

Mr Dimasi—There has been a paper on the Foxtel-Optus issue. The discussion paper that we put out related to a request for exemption prior to digitisation, and that is something that


ECONOMICS

we have in front of us at the moment. We are working on that right now. A draft of that paper is not expected until later this year.

You also asked about broadband. We have Internet interconnection—the pairing arrangements, as they are known—which has been an issue that remains contentious. We looked at this back in 1988, I think, where what are referred to as the tier 1 Internet service providers were concerned that they had to pay to access Telstra’s systems. Those Internet providers and Telstra are now peer—that is, they move customers across each other’s networks and each wear their own costs. Now a growing number of smaller Internet service providers are asking that this issue be looked at, so that is also under review at the moment.

Senator LUNDY—Right. What is happening with the report to the minister regarding bundling?

Mr Dimasi—The report to the minister is very close to finalisation—

Senator LUNDY—You have been saying that for a while.

Mr Dimasi—Yes.

Senator LUNDY—It is still very close, is it?

Mr Dimasi—It is still very close, Senator. We would expect that report to be finalised very shortly.

Senator LUNDY—Can you just confirm for me the status of that report that will be given to the minister? Does it become a public document at that point?

Mr Dimasi—I think it is a question for the minister. The minister wrote to us asking for the report—

Senator LUNDY—So you are reporting to the minister, and it will be up to the minister to determine whether or not it becomes a public document.

Mr Dimasi—That is right.

Senator LUNDY—Or parts or modified bits thereof. We will see. We are waiting for that one as well. Apart from those three discussion papers—the mobile telephony discussion paper, the Internet peering discussion paper and the Foxtel-Optus digitisation discussion paper—are there any others that are on your agenda or radar that you are planning?

Mr Dimasi—I should mention one discussion paper that we have released, which is on the access deficit contribution, the ADC. That is a fairly technical issue, which affects the pricing for the PSTN originating and terminating. That issue has a significant effect on prices. That issues paper was released as part of our consideration for one of those core services—the PSTN originating and terminating. That is there as well. They are the main ones that I can recall. If there are any others that have slipped my mind at the moment, I will certainly let you know, but they are the key things that we are working on at the moment.

Senator LUNDY—Thank you. Going back to where we started, with the publication of the guide to the industry about the legislative changes, my understanding is that that guide has now been released—

Mr Dimasi—Yes.


ECONOMICS

Senator LUNDY—and that it details what the ACCC sees as the significant changes in what it means for industry. The only other questions I had for the ACCC were of a more corporate nature. Are you in a position to answer them?

Mr Cassidy—Yes, fire away.

Senator LUNDY—Thank you. My questions relate to the IT outsourcing arrangements for the ACCC, in particular the current status of your IT outsourcing contract with Telstra Enterprise Services—or, indeed, with Telstra.

Ms Lu—The current status of our IT outsourcing contract is simply that we are in the first five years of a contract of five plus two. It is perfectly clear that the option for the two will not be exercised, because the group will not remain a group and the basis of the contract is that it be a group. That is the answer to the second part of your question. The answer to the first part of your question, which I think was about what we are doing, is that we and our colleagues in group 5 have each separately decided to market test.

Senator LUNDY—When is the group 5 contract with Telstra due to terminate?

Ms Lu—The first five years ends on 30 June 2004.

Senator LUNDY—So you have another year to go?

Ms Lu—Yes.

Senator LUNDY—Are you currently market testing?

Ms Lu—Yes.

Senator LUNDY—Do you have a request for information or a request for tender out?

Ms Lu—We have a two-stage process. We conducted an open forum with an open invitation to companies to express interest. We received what felt like hundreds of inquiries. After that invitation to express interest we conducted a seminar in a public place, which was well attended. In the follow-up to that we received 29 expressions of interest. Our process involves examining those in terms of corporate capability. That was completed at the end of April. We short-listed those 29 expressions down to five, and it is those five that we will invite to respond to our tender.

Senator LUNDY—Thank you for that. I have a couple of questions about Telstra’s performance, in particular the obvious point about the level of confidence the ACCC has in the confidentiality provisions and the obvious Chinese walls that I know other members of group 5 claim exist. For the record, I should state the obvious: it is the perception that for the ACCC, given its involvement in telecommunications competition issues, having Telstra providing all of its IT services is odd and would raise concerns, at least at the level of perception. I would like to hear first-hand from the ACCC about how it feels those confidentiality issues are managed and whether or not it still has confidence in Telstra’s ability to provide it with professional ICT and related services.

Ms Lu—Five years is a long time, and the original provider has undergone some changes to its structure and ownership. I think that is what you are alluding to. That has had the consequence that within the last year or so our provider is totally owned by Telstra. For Telstra employees to be in physical proximity to any of our servers or systems would have


ECONOMICS

constituted a breach of the deed of confidentiality that we had especially constructed on account of our particular business in relation to the regulatory role and to the Department of Communications, Information Technology and the Arts. So we had a fairly well structured deed to deal with those issues. Given the closeness to the end of our time with this provider, which has not given an expression of interest to continue to provide services to us and is therefore not on any short list for a future tender, we have managed to come to an agreement with TES on the proviso that they accept they are actually still in breach of the original basis on which we entered into the contract.

That restructured deed to which we have agreed provides all sorts of protection for us in the sense that Telstra employees who come into the proximity of our systems and file servers will give certain undertakings and undergo certain checks and so on. As I said, given the closeness to the time that the contract would end, it was really the only practical thing we could do. I believe the commission feels that the protections are sufficient and that the track record in relation to confidentiality has been fine.

Senator LUNDY—Have you had any breaches of confidentiality that have if not been proven then required investigation—or indeed been proven?

Ms Lu—No. Even in relation to the recent problem with loss of tapes, this organisation was actually not affected because its backup tapes are still made on our premises.

Senator LUNDY—Do you have a dollar figure on how many service credits—financial penalties are what they really are—have been applied to Telstra Enterprise Services in providing services to the ACCC?

Ms Lu—An aggregate dollar figure over the last four years? No, I am sorry, I cannot tell you that, but our contract management office could provide that information.

Senator LUNDY—Can you take that on notice?

Ms Lu—Yes, I will take that on notice.

Senator LUNDY—The Department of Communications, Information Technology and the Arts, which is also part of group 5, informed me that, whilst TES, or Telstra Enterprise Services, is the wholly owned entity engaged for the purposes of providing the service, it subcontracts work to Telstra employees, or engages or seconds Telstra employees to do the actual work. Is that expressly prohibited via the deed you described with the ACCC?

Ms Lu—Secondment was never prohibited as long as certain protections and actions happened, such as certain checks and undertakings. In general terms the deed provided that no Telstra employees should come into physical proximity with our systems; that is now no longer practical or possible because TES draws on Telstra employees to provide the services. As I said earlier, we have agreed on a whole new regime of protections for that purpose.

Senator LUNDY—Can you provide the committee with a copy of this deed of protection?

Ms Lu—Yes I can.

Senator LUNDY—I want to make a general reflection. You mentioned the timing. You have got a year to go on the contract, and obviously that was a factor in persisting with Telstra as the provider. Am I interpreting you correctly in that the optimal circumstance would have


ECONOMICS

been for the ACCC to relinquish that contract with Telstra Enterprise Services—had you not been in the position of, I presume, having to pay increased costs to do so—or to terminate that contract early?

Ms Lu—It is quite a protracted business to obtain a provider of IT services and so there would have been a practical issue. There would always have been a practical issue in the event of a change of ownership compared to simply swapping to a new provider. It is a great sort of tangle in terms of the infrastructure. For example, all our hardware is owned by TES.

Senator LUNDY—I was just going to ask you for confirmation of that. It is my understanding that all your computing hardware and software would be an asset of Telstra.

Ms Lu—Yes; either they own the leasing arrangement or they own the hardware outright. It is not an easy business to shift, which is why we have allowed as much time as we have for our own market testing exercise. We started to look at a new model early this year and we are now going out, so we are allowing a lot of time. Plus, we expect a transition phase of at least three months when we may have to have two service providers to ensure that we get the appropriate service. I do not think that it was an option to simply change providers.

Senator LUNDY—Did you do a cost analysis of what it would have cost the ACCC to get out of that contract early? And did you attempt to negotiate with Telstra for an early termination of that contract?

Ms Lu—No, we never did, not because of this change of ownership. We knew at the time at which the change of ownership was discussed with us that the end of the contract was in sight. We realised by that time that we would be market testing for a replacement provider very soon, so we did not attempt to have such a discussion.

Senator LUNDY—Are you confident that all of the data and information processed within the ACCC either remains on-site or certainly does not go off-site—perhaps to TES’s or indeed to Telstra’s computing hardware elsewhere?

Ms Lu—I cannot answer that question categorically.

Senator LUNDY—Could you take it on notice?

Ms Lu—I can take it on notice. In our particular case, I think there is a mixture.

Senator LUNDY—So there is some off-site processing?

Ms Lu—Yes, I think so.

Senator LUNDY—Would you provide the details of how you have arranged both the physical hardware and also the software management of databases and their physical location?

Ms Lu—Yes.

Senator LUNDY—Thank you. If I think of any more questions I will put them on notice.

CHAIR—There are no further questions for the ACCC. Thank you, ladies and gentlemen.



ECONOMICS

Productivity Commission

CHAIR—I welcome officers of the Productivity Commission to the table. Mr Kerr, would you like to make an opening statement?

Mr Kerr—Our activities by and large are in the public arena, so what we are doing and what we are saying are fairly well known. We have an active inquiry and research program under way. The current commissions from the government cover things like industry assistance, the TCF inquiry, social policy issues such as disabilities discrimination, environmental issues such as the native vegetation inquiry, and regulatory issues such as mutual recognition. The research program helps to support inquiries of that sort.

Senator CONROY—I have a few questions on a staff working paper, The trade and investment effects of preferential trading arrangements—old and new evidence. Could you summarise in your own words the findings of the paper?

Mr Kerr—This staff working paper is a technical paper, prepared basically for a research audience. The paper does two things. Firstly, it reviews the traditional issues to do with bilateral versus multilateral trade agreements and their effect on trade flows, and tries to inform those issues with some fresh modelling. The second thing it does is to break some new ground in empirical research on the consequences of the inclusion of investment in various of these preferential trade and investment agreements. The findings of that piece of the research are cautious but relatively positive—that is, investment flows are generated in an efficient manner.

Senator CONROY—Is it correct to say that the paper found that, out of 18 preferential trade agreements over the last few decades, 12 diverted more trade from nonmembers than they created among members?

Mr Kerr—That is correct. The paper is backward looking rather than forward looking; therefore it looks at some existing preferential trade agreements, and it has a finding of that sort. The test it uses is a fairly strict one. It is a counterfactual test—that is, it is testing against what would otherwise have occurred. It does have that finding.

Senator CONROY—What does that mean in terms of the economic benefit of those preferential trade deals?

Mr Kerr—For that part of the sample, where there was trade diversion, if the expectations were that trade creation was the objective not as much was created as might have been expected.

Senator CONROY—The report found that, even what would appear to be quite liberal PTAs, the EU, NAFTA and Mercosur—which I presume is Mexico and the US—failed to create significant additional trade among members. Is that right?

Mr Kerr—Yes, that is broadly correct. Mercosur is the South American one.

Senator CONROY—Page 77 of the paper says that, overall, the main PTAs—the ones I have already mentioned and CER—as well as many bilateral agreements not considered previously are found here to have created negative net trade effects. Does the PC agree?

Mr Kerr—That was the finding of the paper.


ECONOMICS

Senator CONROY—What are the economic benefits or consequences when a preferential trade agreement fails to create significant additional trade amongst its members but diverts more trade from nonmembers?

Mr Kerr—It is probably a net disadvantage. It certainly does not live up to the expectations that people entering the agreement would have had, I would presume, at least as far as these tests are concerned. These are particular statistical tests. They do not necessarily capture some of the broader dynamic consequences of these sorts of agreements.

Senator CONROY—‘Dynamic consequences’. Why do you think this happens with preferential trade agreements as opposed to non-preferential trade agreements?

Mr Kerr—The natural price signals that would be guiding trade are limited by the preferential arrangements, with the result that trade flows are distorted from what would otherwise have occurred.

Senator CONROY—I notice the term used is ‘preferential’ trade agreements rather than ‘free’ trade agreements. Is this because free trade agreements are not really free?

Mr Kerr—It is a semantic point. The samples were used in the study because the purpose of the paper was to look at the consequences of giving preference between particular sets of countries through these agreements. ‘Free’ trade agreements is a rather imprecise term and can cover quite a variety of different types of arrangements, some of which might be in this sample, but we were using a more specific description.

Senator CONROY—So it is possible that something can be called a free trade agreement but that many items within it are not free—as in free-flowing?

Mr Kerr—I do not think I know of any agreement that is entirely free. Indeed, the very process of defining what is to be covered may in itself have some consequences over rules of origin and things of that sort.

Senator CONROY—The report also found that bilateral agreements have a more negative impact on members’ trade flows than do plurilateral agreements. Could you explain why that is? I tried to get my head around that one.

Mr Kerr—Because of the greater degree of restriction on the trade that occurs. If you have an agreement between two, less is permitted than if you have an agreement between many.

Senator CONROY—Okay. I am not asking you to pass a judgement on the government’s trade policy; I am just asking you for a factual clarification—and I am trying not to draw you into a policy debate, because that is not your province and Senator Campbell would not let you. Is the Singapore-Australia free trade agreement recently completed by the Australian government a bilateral preferential trade agreement?

Mr Kerr—We have not studied the agreement, but from the very little I know about it, yes, I would presume it is.

Senator CONROY—Is the proposed US-Australia free trade agreement currently being negotiated also a bilateral preferential trade agreement?

Mr Kerr—Similarly, I have not looked at it, but from the press reports I have seen I presume it is a bilateral agreement—or a proposed one.


ECONOMICS

Senator CONROY—Given your experience from looking at these agreements previously in the study, would you expect similar results from the US-Australia free trade agreement as you found in two-thirds of the other preferential trade agreements around the world, particularly given that you found some of the worst trade results in some of the most liberal agreements overseas?

Mr Kerr—Not necessarily. I think the principal conclusion one would draw from this technical staff working paper is that the devil is in the detail of these agreements and it depends what is in them, both their coverage as between the countries concerned and whether they inhibit any wider trade flows—for example, whether other countries have similar access. So, no, I do not necessarily think that.

Senator CONROY—Based on your wide examination of the impact on all the other agreements, you think this one could be counterintuitive?

Mr Kerr—I am not quite sure which counterintuition you are pointing to. As I said, the staff working paper rehearses the traditional, well-known cautions amongst economists as to the possible consequences of bilateral trade agreements and then adds some encouragement that the broader the agreement—for example, with respect to investment—the greater likelihood of beneficial consequences. I think that is about as far as I could go.

Senator CONROY—Given that the US-Australia FTA is likely to be a preferential deal and given that it is particularly a bilateral preferential deal, would you expect it to have a similar trade outcome to the other bilateral preferential trade deals you found?

Mr Kerr—Not necessarily. It depends what is in it. I think that is yet to be established.

Senator CONROY—I thought you said that, by definition, the fewer countries in them, the worse the trade outcome. That is what you said earlier.

Mr Kerr—There are multiple considerations. The most important consideration is what is in them, I would think. With a consistent inclusion of coverage, the plurilateral agreements may have some benefits over the bilateral ones; but, as I also said earlier, it depends whether a bilateral agreement of itself prevents or permits trade with others.

Senator CONROY—I think by definition it is about creating a favourable regime between the two, though, isn’t it? I am just surprised to see you being a little less confident that the economic principles which you found in your study and which we talked about will work in a relatively similar circumstance. I appreciate you have not seen the final agreement, but the principle of bilateral preferential—

Mr Kerr—I am confident in my understanding and ability to explain the principles. I am not confident in drawing a simple conclusion about an agreement, the details of which are not yet available.

Senator CONROY—On page 6, the report also raises the prospect of Australia being excluded from any preferential trade deals in Asia. It says:

Japan’s recent acceptance of regionalism is of great potential significance to Australia, because both Japan and its main bilateral trade partners (currently Singapore, potentially ASEAN, South Korea and China) are, or are becoming, significant trading partners for Australia. There is clear potential for Australia, as an excluded party, to be harmed by any resulting geographical shift in trade patterns.


ECONOMICS

Is the paper saying that Australia will lose out if we are not part of any regional trading bloc in East Asia?

Mr Kerr—I do not think it goes that far. I am trying to put myself in the mind of the particular author of the staff working paper. I think it is just an observation that—

Senator CONROY—It is an observation that, if half a dozen countries that we currently trade with form a bloc and, from the other issues we have talked about, the bloc by definition diverts economic trade from countries that are outside the bloc to countries inside the bloc, then by definition it seems logical that Australia will be economically a little worse off by not being inside the bloc.

Mr Kerr—It depends how exclusionary those blocs are. I hesitate to criticise the author of the paper, because I think it is technically a very good paper, but the particular sentence that you have read out is in some ways a little tautological. It talks about the potential to be harmed by any resulting geographical shift in trade patterns. The very fact that there is a geographical shift in trade patterns may itself be the harm, so in that sense it is tautological.

Senator CONROY—I think you are playing with words with me there, Mr Kerr.

Mr Kerr—You asked me about the words. I am doing my best to interpret them for you.

Senator CONROY—Can you explain the other claim on page 100 or 101 of the paper, which is that, while preferential trade agreements might have an impact on investment flows, the fact that they are preferential means that investment can be diverted from a low-cost to a higher-cost country and that such investment diversion can also be harmful.

Mr Kerr—It would be a distortion from investment following usual price and rate of return signals, and those distortions in that sense would be harmful and the outcomes would be less good than would otherwise be the case. That is the proposition tested by the paper. In fact, the conclusion is that there is little harm and may be some benefit. For example, the summary says:

Although it is a weak test, this suggests that on balance, the non-trade provisions of these PTAs have created an efficient geographic distribution of FDI.

FDI is foreign direct investment. It goes on:

This is consistent with the fact that at least some of the non-trade provisions (eg commitments to more strongly enforce intellectual property rights) are not strongly preferential in their nature.

Senator CONROY—I think you said earlier that the Productivity Commission supports the findings of the working paper.

Mr Kerr—It is a technical working paper and it is meant to be a building block for the science in this area. It is not produced in the normal stream of Productivity Commission publications which present findings for public debate; it is a staff working paper. Its existence is listed on our web site but the text is not. It is available on request.

Senator CONROY—Has anyone requested it?

Mr Kerr—Yes.

Senator CONROY—Are you aware of any criticism or critique of the paper or its methodology?


ECONOMICS

Mr Kerr—Not of a substantive academic nature. We have seen references in the press. We would welcome such criticism.

Senator CONROY—Is it fair to say, then, that it is robust and would stand up to a good critical analysis?

Mr Kerr—It was well refereed before production, but that does not mean that there will not be further insights. The paper, for example, will be presented before possibly one of the most rigorous academic audiences later this year at the East Asia conference of the NBER—the National Bureau of Economic Research in the United States—which they hold each year. At that stage, it will come under additional scrutiny from a panel of economists who could scarcely be more eminent in the area.

Senator CONROY—Have you done any similar analysis or modelling on Australia’s bilateral preferential trade agreements, such as the proposed US free trade agreement or the Singapore-Australia Free Trade Agreement?

Mr Kerr—No, we have not.

Senator CONROY—Has the government asked the commission to model the impact of either of these two preferential free trade agreements?

Mr Kerr—No, it has not.

Senator CONROY—That is a bit odd—you are clearly one of the most expert in this field. Do think it is surprising?

Mr Kerr—There are, no doubt, many useful sources of advice on these things. The government has its own—

Senator CONROY—You are being modest, Mr Kerr. Your organisation is clearly the pre-eminent organisation in this field.

Mr Kerr—The government could ask us, if it wished, and we would be happy to respond. It is not obliged to. This is not the opening of a book on trade issues. We have been working on trade issues for years and we are pretty confident from our discussions with the Department of Foreign Affairs and Trade that they are drawing on our published works to help inform their preparations. The government, for example, gave us an inquiry last year on removing tariffs on least-developed countries. We produce information each year on effective rates of assistance to Australian industries. Our reports on issues such as pharmaceuticals and other things would no doubt be informing the advice going to government on issues that might come up in the prospective trade agreement with the US. And the government has asked us to prepare for the receipt of a study into a component part of future agreements in relation to rules of origin, which will have both a historical analysis with respect to New Zealand and a forward-looking analysis with respect to perhaps the US agreement and the Thailand agreement—and, for that matter, to the extent that the rules of origin will be an issue, it would be relevant to the Doha Round, too.

Senator CONROY—Thank you very much.


ECONOMICS

[5.25 p.m.]

Australian Accounting Standards Board

CHAIR—Mr Thomson, would you like to make an opening statement?

Mr Thomson—First of all, I would like to offer an apology for my acting chair. Ruth Picker was appointed only recently to fill the vacancy left by Keith Alfredson and, due to long-standing commitments, she is unable to attend tonight. I would also like to say that there is an enormous amount of work for the AASB to do, particularly between now and about the middle of next year. I would like to table a number of documents: the short form of our work program and two documents which relate to that. The first of the latter documents is the AASB’s adoption strategy in respect of international accounting standards for 2005. It was prepared pursuant to the Financial Reporting Council’s strategic direction to the board to adopt IASB standards in this country by 2005. The second document is the board’s plans in respect of the other FRC strategic direction to converge generally accepted accounting practices with government finance statistics reporting in Australia.

CHAIR—Do you wish to table those documents now?

Mr Thomson—Yes, I do. They are all available on our web site and, in effect, are living documents in that they change as the work program moves on.

CHAIR—Thank you. Is that all you want to say by way of an opening statement, Mr Thomson?

Mr Thomson—Yes.

Senator CONROY—Thank you for coming tonight. On 7 May 2003, ASIC released draft guidelines on how listed companies should include the value of options given to directors. IASB’s exposure draft ED2 on share based payment has received a lot of attention in light of ASIC’s decision to base their guidelines on valuing options on the IASB’s draft standard. Is the AASB concerned that the IASB’s draft standard does not mandate a specific formula for valuing options?

Mr Thomson—Did you say, are we aware?

Senator CONROY—Are you concerned?

Mr Thomson—The board responded to the IASB’s ED2, and in that exposure draft a method was included in the implementation guidance to the standard, which I guess we read as meaning that this is how it would be done. It was what is called the service units method. Based on criticism from the AASB and a wide range of constituents, the IASB changed its mind just a couple of weeks ago and is going to pursue a different option.

Senator CONROY—What was your criticism?

Mr Thomson—The board’s criticism was that the method seemed overly complicated, would be costly to implement and, in some respects, contradicted some of the main principles that they wished to achieve.

Senator CONROY—I remember having a discussion with Mr Alfredson—and hopefully your punishment for not being at previous estimates was that he did not make you read


ECONOMICS

Hansard—over the last year or so in which he indicated that the AASB believed that options should not be valued or possibly expensed until they are vested.

Mr Thomson—That was the initial position of the board, but they have since accepted the grant date as the measurement date but, having accepted that, there were still other issues in relation to ED2.

Senator CONROY—That is okay. So they have gone away to do it again. You have convinced them that—

Mr Thomson—A range of constituents, obviously, have convinced them that they need to rethink the proposal.

Senator CONROY—Senator Campbell would have been interested in that answer, I am sure. Where does that leave us with the early implementation of a valuation and, more importantly—with the announcement the government made—an expensing position for these options? Senator Campbell and I had a bit of a discussion earlier today with ASIC over this sort of issue. We do not even have an ED valuation method at the moment, so how likely is it that we can meet the government’s earlier timetable?

Mr Thomson—My understanding—and I am basing it on publicly available information—is that the IASB has decided to run with pretty much the model they have in the US under Statement of Financial Accounting Standards 123. That model is readily available—it is being used in a jurisdiction—so they may be able to get that up quite quickly, but time will tell.

Senator CONROY—But, in terms of your consultation process for it to be adopted here, I think the government’s desire was for it to come in basically a year earlier than the other standards—a 2004 date rather than a 2005 date. Do you think that, given there has now been this change and they will have to reissue the draft for consultation, we will have a problem with that?

Mr Thomson—I do not know whether they will reissue it for consultation. I gather quite a number of constituents argued for FAS 123, so you could argue that you may not need to re-expose it, that you could still proceed to a standard without—

Senator CONROY—It would be courageous not to re-expose it on an issue as sensitive as this. Personally, I am probably more comfortable with the US model but without having a full understanding of it. I suspect that there would be other people who would not quite fall into my views of it.

Mr Thomson—I should clarify that FAS 123, at the moment, offers an option to either expense or just disclose. My understanding of the decision of the IASB is to go along with what is in 123 substantially but only with a recognition requirement. So they are not proposing disclosure. They have reaffirmed their decision that these things must be expensed. I guess that is the most controversial aspect of this project, and that aspect of it is not changing. You could mount an argument that further due process is not necessary, but the IASB has to make that decision.

Senator CONROY—So the US standard has the choice to expense and disclose and the IASB has adopted its model for valuation and expensing and said, ‘Do away with the option to simply disclose.’


ECONOMICS

Mr Thomson—In a nutshell, yes.

Senator CONROY—The Institute of Company Directors are concerned, and they have written to ASIC about their paper. Given that there has been a significant variance from the original accounting standard, does ASIC’s paper now have any relevance to the debate?

Mr Thomson—I assume these are the proposals to use the IASB’s proposals as a basis for disclosure?

Senator CONROY—ASIC issued a paper saying that they wanted to use what was then the existing standard, which has now changed. To my mind it sounds like ASIC need to withdraw it and do it again, because the basis on which they wanted to use it has gone. Is that a fair interpretation?

Senator Ian Campbell—CLERP 9 may well change the law—one would expect that it will change 300A by the end of the year.

Senator CONROY—Hopefully we will have a chat about it. I am trying to help here to make sure that it is a valuation method that can be implemented on the due date that Senator Campbell wants it to be implemented.

Mr Thomson—I cannot answer for ASIC, but I know that the AASB staff put in a submission to ASIC on what they released. It was along the lines that it was inappropriate to have a requirement to measure a disclosure in a particular way based on proposals because those proposals may change—and indeed they have.

Senator CONROY—They have; it was prescient.

Mr Thomson—I do not know where that leaves ASIC; they may wish to pick up where the IASB has got to now.

Senator CONROY—You are obviously familiar with what ASIC promulgated. In their report, the Australian Institute of Company Directors said they were concerned that, in the absence of a reliable measurement methodology, inconsistent and unacceptable financial reporting practices would emerge because there was a choice. Under the new system there is no choice: this is it, take it or leave it. Company directors may be happy, but I doubt it. Were you consulted before ASIC decided to issue the guideline?

Mr Thomson—My understanding was that it was a consultative document that was issued. We were not consulted before that document was issued.

Senator CONROY—Have you heard any commentary from the business community about this change in the international accounting standards? Do you think the Australian business community are aware they have just been roped into the American system?

Mr Thomson—Do you mean are they aware of the most recent change?

Senator CONROY—Yes. I have not heard any screaming, so I am assuming they have not worked it out yet.

Mr Thomson—I do not know. They are certainly aware of the original ED and the proposal to expense share based payment—for example, the AASB and the stock exchange ran seminars on this topic, which were well attended. There has also been quite a bit of


ECONOMICS

publicity over the expensing issue. The most recent decision of the IASB is probably not well known yet.

Senator CONROY—I refer to an article that appeared in the Financial Review on Wednesday, 12 March. Again, this would have been prior to the change, so it may not be as relevant. It says:

The submissions on the proposed new international accounting standard have also asked whether Australia’s smaller listed companies could comply and have called for tax changes to allow deductions for options costs.

That would be an entertaining one to debate in parliament. In February this year, when BHP Billiton reported its interim numbers, it adopted the US dollar as its reporting currency, subject to some specific exceptions, its functional currency. Keith Alfredson raised this issue when he was here. He said that the issue is of such significance that an exposure draft accounting standard is required to discuss whether Australian companies should be free to choose their currency reporting requirements or whether there should be some restrictions. Have you issued that?

Mr Thomson—A draft exposure was considered at the meeting of the board last week. They decided on some amendments, which will be presented to the July meeting, and we will issue it then.

Senator CONROY—Was it in favour of allowing a functional currency?

Mr Thomson—It is in the form of an invitation to comment, which provides arguments both ways and then asks constituents for their views.

Senator CONROY—What are you defining as a constituent here? Are the shareholder representatives going to be consulted—for instance, the Australian Shareholders Association and the like? Are they going to be invited to participate? Given they are a relatively small organisation compared to some of the monsters who are going to have a view on this, how are you going to balance between the interests of half a dozen of the biggest companies in Australia and half a dozen mums and dads from the Australian Accounting Standards Board? The issue I asked ASIC about this morning was whether they could point to a single complaint they had had from a BHP Billiton shareholder about the fact that the accounts were not in US dollars. They had to confess that no, they had not received a single complaint.

Mr Thomson—This is a problem with any document you expose to the public—you cannot force people to respond to it. But we usually get a reasonable spread of respondents, and the Shareholders Association has often been one of those. I would be surprised if it did not respond on this particular issue.

Senator CONROY—Does the draft standard put forward an argument allowing companies to do this?

Mr Thomson—I guess the catalyst for this happening is the 2005 convergence issue and the fact that the IASB has issued a document on foreign currency translation, the spirit of which is that you can choose your presentation currency. The board considers that it may not be within the spirit of that document to require a particular presentation currency such as


ECONOMICS

Australian dollars—that is the argument for opening it up—and that a company would choose, presumably, a currency which best suits the users of its accounts.

Senator CONROY—That would be a very brave assumption.

Mr Thomson—It may be, and so there are arguments against in the invitation to comment on as well.

Senator CONROY—Essentially, you are saying that you believe that the international accounting standards are silent on this issue and therefore everybody should be allowed to pick and choose?

Mr Thomson—They are silent on the specific issue of which currency you choose, but what they will say is that you may choose one or more presentation currencies. I guess when you put yourself in the IASB’s shoes, they have a worldwide constituency and so they are not going to specify any particular currency. But the spirit of the document is that an entity should be able to choose the currencies that it presents in. I guess there is an underlying assumption that they will do so in the best interests of their users.

Senator CONROY—Do you envisage that companies may pick what is in the company’s best interest and what is of least cost to the company, rather than the users of its accounts? Is that a dynamic you suspect may be at play?

Mr Thomson—Indeed, that is one of the arguments against that we present in the invitation to comment.

Senator CONROY—If I gave you a set of financial reports that were in US dollars, would you readily be able to understand them and convert them in your head?

Mr Thomson—My answer depends on what the relationship was between the currency that the entity operates in and the currency that it presents in. If it were purely what I would term a convenience translation, I would be able to get my calculator out and work out the Australian dollars. But the way this works is far more complicated than that because you work out your functional currency, which, for example, may be UK pounds, and then you decide you are going to present in US dollars. The translation from pounds to dollars will give rise to movements during the year and balances at the end of the year that reflect the relationship between the UK pound and the US dollar. They will bear only by coincidence a relationship between UK pounds and Australian dollars. I think that is quite a powerful argument for saying that you have to think very carefully before you allow people to use any currency they wish to present their financial statements.

Senator CONROY—I think that is a very balanced presentation. Senator Campbell, do you have any concerns about Australian shareholders not being able to follow a company’s financial reports that are denominated in other than the Australian dollar? It is a threshold question.

Senator Ian Campbell—Yes, I do. Angus described the pros and cons, and when you have a very big company such as BHP Billiton that is operating in markets across the world, I think ASIC were forced to look at what is best for shareholders, and the company is the shareholders. They had to make the decision. They informed us that they were leaning towards this decision. It is a decision they make; they do not get direction from us in those


ECONOMICS

things. I know the Treasurer had some concerns and I have not discussed it with him since the decision was actually made.

Senator CONROY—I could probably only invite you to join me in opposing a standard that allows companies to report in other than Australian dollars.

Senator Ian Campbell—The standard does not actually give that much discretion. Within Australia ASIC had to approve what BHP Billiton did.

Senator CONROY—No. I am saying that when this standard comes forward, if it allows an option to report in other than Aussie dollars, I am inviting you to join with me now and save a lot of time and effort from people like Mr Thomson by saying, ‘We’re not going to cop it.’

Senator Ian Campbell—Australia is going to sign up to international accounting standards and we are going to have an entire set of international accounting standards; we are not going to cherry-pick.

Senator CONROY—The Liberal Party of Australia is going to advocate that. That is not the position that I have advocated for six months on the front page of the Financial Review.

Senator Ian Campbell—If we do not do that, we will lose the benefit of moving towards international accounting standards. We will not be a country that gets the benefits of moving to international accounting standards. There is a very strong argument for companies reporting in their functional currency, to the great benefit of shareholders.

Senator CONROY—This is something that we will no doubt debate extensively in the parliament, so I do not want to waste Mr Thomson’s time by rehashing it now. I was just offering you the opportunity to reassure Australian shareholders—

Senator Ian Campbell—Australian companies have the benefit of being able to move to a functional currency with ASIC’s approval at the moment, and one company has done that.

Senator CONROY—I was offering you the opportunity to get on board and look after Australian shareholders. But I will not bore Mr Thomson with the debate any further.

Senator Ian Campbell—Reporting in the functional currency does look after shareholders.

Senator CONROY—In a recent interview, the outgoing chairman of the AASB, Mr Alfredson, said that the FRC should have consulted with the community more before it decided to adopt international accounting standards. Are you familiar with that, Mr Thomson? Did you see that?

Mr Thomson—Yes.

Senator CONROY—Do you think that the time frames at the moment are just a little tight?

Mr Thomson—I think it is very tight. I think we have drawn up a plan that can achieve that timetable. Both the International Accounting Standards Board and ourselves, as I said earlier, are going to be working very hard in the next 10 months or so.


ECONOMICS

Senator CONROY—I am glad it is you and not me. Good luck. Senator, we had a brief chat earlier about this. Do you have an idea when a permanent chair of the AASB will be appointed?

Senator Ian Campbell—It will be as soon as we identify the right person and that person wants the job.

Senator CONROY—You have been knocked back, have you? You might be able to tempt Senator Watson to give up his Senate position.

Senator Ian Campbell—I think the reality is that it is a very demanding position. My view is that the Remuneration Tribunal should look very seriously at what we pay people such as the ACCC chairman, the ASIC chairman and the AASB chairman. The sort of people that you are looking for are generally in the private sector earning two, three or four times what they would earn as chairman of the AASB. You are trying to find people who have to make a significant personal and financial sacrifice to do it and it is particularly hard. I do not think we are going to make an appointment overnight. We want to find the right person and we are going through a diligent process to do that.

ACTING CHAIR (Senator Watson)—I have a question that is probably slightly off accounting standards but in a sense could fundamentally affect the audit statement. In the royal commission, the commissioner said:

The audit process should be designed to provide the company and users of its accounts with early notice of potential risks affecting the company’s short- or long-term viability.

Should we be pressing that that acknowledgement by the commissioner be incorporated in terms of the audit reports because it is not there at the moment? He has taken the auditor’s responsibility to a new level. That is how I read it. Would you like to comment?

Mr Thomson—I am not an auditor any more. I think that does raise the audit to another level. In respect of the financial reports themselves, I am not sure whether that recommendation also means that he was thinking that more should be added there as a sort of early warning system or whether he was simply trying to impose more obligations on auditors. I think it is probably the latter.

ACTING CHAIR—Maybe we should get a comment from Senator Campbell. Is Senator Campbell around?

Senator CONROY—We appear to have lost him. Did you have a question?

ACTING CHAIR—Yes. The issue that I am raising is that, following the report of the commissioner in the HIH royal commission, he has indicated a new higher level of reporting by auditors.

Senator CONROY—The Treasurer has indicated that we will be adopting all the HIH royal commission report recommendations. I am like you; I am hoping that Senator Campbell can come and confirm the Treasurer’s position to us. It is not in Mr Thomson’s hands. The Treasurer has made an announcement about—

ACTING CHAIR—Have you got another question in the meantime?


ECONOMICS

Senator CONROY—The members of the AASB met on 28 and 29 May 2003 without a quorum, I understand. What is the status of the matters agreed at that meeting?

Mr Thomson—They are subject to approval—

Senator CONROY—They have to be reapproved?

Mr Thomson—Correct.

Senator CONROY—I will finish now, but I look forward keenly to the debate that you have just raised.

ACTING CHAIR—We can raise the issue in a different forum.

Senator CONROY—Now that you have jogged my memory, I am going to.

ACTING CHAIR—Which forum?

Senator CONROY—I will have to ask Senator Campbell.

ACTING CHAIR—Are there any further questions for Mr Thomson?

Senator CONROY—I have unfortunately run out of questions for Mr Thomson, so we are just waiting for Senator Campbell. I am sure he will not be long; I think his office have let him know that we are waiting for him.

ACTING CHAIR—Perhaps you would like Mr Thomson to take the question on notice. I suggest that the minister might like to get back to the committee on that matter. That might resolve the issue.

Senator CONROY—I do have a couple more questions for Mr Thomson. In the draft standard on cash flow statements which the AASB has put out for comment, companies are required to apply one method of presentation for cash flows; while in the draft standard on borrowing costs, the AASB has given companies two treatments to choose from to account for borrowing costs. Why have you adopted an inconsistent approach to options in accounting standards?

Mr Thomson—The policy position of the board is that, where possible, it does not allow options. That is the reason for removing the option from the international accounting standard in respect of cash flow statements. In this country, we presently require people to use the direct method of preparing a cash flow statement; the IASB permits the direct method or the direct method. We propose to continue requiring the indirect method. With respect to borrowing costs, we presently have a standard that requires capitalisation of borrowing costs where there are relevant qualifying assets. The board is proposing to go to a position where there is actually an alternative to either do that or expense all borrowing costs. I would say that there are two factors driving the board. One is the strategic direction of the Financial Reporting Council to have converged GAAP and GFS standards.

Senator CONROY—Unfortunately, they have retracted that.

Mr Thomson—They have retracted part of it.

Senator CONROY—They cannot keep breaking the law and forcing you to do things that they are not allowed to force you to do, Mr Thomson. I hope you have read at least one Hansard on that subject.


ECONOMICS

Mr Thomson—Certainly. However, I think it is within the spirit of what remains of the strategic direction to try to get GAAP and GFS as close as possible, and the board is mindful that GFS requires the expensing of all borrowing costs. I think there is a second reason why the board has gone to the option—that is, it wants to keep the requirement to capitalise to qualifying assets, because that is consistent with US GAP, but conceptually it prefers the solution of requiring expensing all borrowing costs. I guess at a conceptual level the board is torn between the two treatments.

Senator CONROY—I am very uncomfortable with allowing options like this. I think it is confusing. You may be aware that I have raised issues about comparisons across years in particular accounting standards and disallowed an accounting standard over this very issue where you were allowed to pick and choose. It does not give comparability for investors and users of financial reports when you can pick and choose between years. It does not give you a satisfactory basis of comparison.

Mr Thomson—You would certainly be permitted to choose. One entity may choose one method and another entity may choose a different one and a single entity may decide to choose a different option from period to period, but in that latter case it would have to justify it as an improved accounting policy under the accounting policy standard. That is a fairly high hurdle. In respect of the option to change over time, that would be fairly limited.

Senator CONROY—At the end of the day, they tell you that it is justified and they need to. If you have allowed them the option, unless you have got some criteria, you have got to approve every company’s accounts that want to swap from year to year—which is not a realistic proposition, Mr Thomson—and then you are allowing them to swap.

Mr Thomson—I guess the market would become fairly suspicious of an entity that does swap.

Senator CONROY—Just this week, IBM had a bit of a problem and they had to suspend their shares rather than face the pummelling. At the moment there is a high degree of scepticism and nobody wants to put themselves in that position. But it would be better not to let the market get into that position in the first place.

Mr Thomson—As a standard setter I have great sympathy with your view. It is a proposal and the board will be very interested in seeing the comments that we get back from users and preparers and others.

Senator CONROY—If you are an investor looking to invest in one of two companies and they, again, have different treatments of the same transaction, it is going to get pretty difficult to know which one is your best option to invest in. Is that a fair point?

Mr Thomson—It is a fair point. Standard setting is about getting people to produce comparable financial reports.

Senator CONROY—Thanks. I will not torture you any more; I get the message. Senator Campbell, Senator Watson had raised some issues arising out of the HIH royal commission.

Senator Ian Campbell—I apologise. I had to go and do a short phone interview to discuss stealing VCRs compared with insider trading. The media seem to have taken interest in that.

Senator CONROY—I did see that it made AAP. Hopefully you are giving them heaps.


ECONOMICS

Senator Ian Campbell—I tried to catch Senator Watson’s eye and I thought he was asking Angus a question. So I apologise. If you could repeat the question, I will try to answer it, Senator Watson.

ACTING CHAIR—It was slightly out of Angus’s territory. It raises a new issue in terms of the responsibilities of auditors and how the royal commissioner believes they should report. The report indicates the important role in the financial reporting process of auditors et cetera. It says:

A properly conducted audit should enable users of the financial report of the company (including regulators, shareholders, policyholders, lenders and other creditors) to rely upon the accounts with a degree of confidence.

There is no big problem with that. It continues:

The audit process should be designed to provide the company and users of its accounts with early notice of potential risks affecting the company’s short- or long-term viability.

That is going to introduce concepts of judgment. I agree with the royal commissioner. How can that be implemented in appropriate wording of the audit report in terms of lifting the bar for auditors to encompass this new platform that has been suggested by the commissioner?

Senator Ian Campbell—I would have to read it in context. I do not think what the commissioner is saying—the way you put it—is really extending or lifting the high bar that much. I think what he is really saying there—I would have to read it in context—is that the audit is a quality assurance on the financial reports and if the shareholder or regulator or potential shareholder is reading an audited report the value that the auditor brings to that is that they create some assurance that those reports are in fact accurate and in line with accounting standards. Of course, if the audit is not of high quality—

ACTING CHAIR—That is the traditional view.

Senator Ian Campbell—I think he is perhaps presenting that in a slightly different way.

ACTING CHAIR—But I read it as raising the bar very much higher—because, while you have got to outline contingent liabilities and record those, he does use the word ‘notice’:

provide ... early notice of potential risks affecting the company’s short- or long-term viability

Maybe it is an issue that you should be taking up with the auditing profession.

Senator Ian Campbell—The HIH royal commission report is being considered by the government. We have obviously made some initial responses, but the detail if it is being considered and parts of it—

Senator CONROY—Can I just clarify, when you say ‘initial response’, the initial response from the Treasurer was that you would implement all recommendations of the HIH royal commission.

ACTING CHAIR—This was not a recommendation; this was just—

Senator Ian Campbell—Yes, and we also said, in relation to policy, many of them will be dealt with in the context of CLERP 9.

Senator CONROY—But you support the Treasurer’s statement that you will be implementing all—


ECONOMICS

Senator Ian Campbell—There is no difference between me and the Treasurer on the response to the HIH royal commission.

Senator CONROY—Every recommendation of the royal commissioner will be implemented?

Senator Ian Campbell—I support, word for word, what the Treasurer said in his response to the HIH royal commission.

ACTING CHAIR—This was not a recommendation; it was just an observation and what he believed is desirable in terms of an audit report and an auditor’s responsibility. I am interpreting it as introducing a new dimension into auditing, and I think it is probably important that the government furthers this discussion with the accounting and auditing professions.

Senator Ian Campbell—That is a very good suggestion, Senator Watson. I am just not sure where that discussion was reflected in a recommendation.

Senator CONROY—He said it was not. He said it was not a recommendation.

Senator Ian Campbell—I know. I am just wondering if it did flow through to one. It is an interesting point.

ACTING CHAIR—It then goes on to talk about how sometimes it is not always the auditors’ fault and we accept all that follows. I do not have any problem with that. I was interested in this new platform that he introduces for auditors.

Senator CONROY—I have one further question. I understand that the AASB recently wrote to the government about certain issues that need to be resolved in our tax laws. One concern related to share based payment and expensing of options. Could you advise the committee of what your concerns are?

Mr Thomson—We wrote last year to Senator Coonan about the share based payment project whereby, as we discussed earlier, an expense will be required to be recognised. Apparently there is a likelihood that that would taint the share capital and create problems for a company paying franked dividends. I am not a tax expert, but we became aware of this in the process of working on that project. We thought was our duty to write to Senator Coonan.

Senator CONROY—Did you take any tax advice on that? Did you send out for an expert, or did you have a couple of—

Mr Thomson—I do not regard that as our job, so we decided we would advise the relevant senator that it should be looked into. Indeed, some time after that, we were visited by a couple of tax office people who discussed the issue with us. Then, more recently, we became aware of the fact that, apparently, the tax law relies on general purpose financial reports in respect of determining what is thin capitalisation.

ACTING CHAIR—That is a different issue.

Mr Thomson—It is. But, having become aware of that, we then decided to write another letter which said that probably the whole tax act needs to be reviewed and, where it relies on general purpose financial reports, there is a need to examine whether the changes that are going to occur between now and 2005 will affect the operation of the tax act—because we do


ECONOMICS

not claim to be tax experts, and we think that that is a job for the tax office. We are quite happy to assist them in any way possible by identifying the areas where there will be a change to general purpose financial reporting.

ACTING CHAIR—Fair enough.

Senator CONROY—Thank you for that, Mr Thomson. I come back to Peter Costello on the 7.30 Report, Senator Campbell. He said, ‘Every finding of the royal commission has been accepted and will be implemented.’ Do you support that?


Senator CONROY—Great.

Senator Ian Campbell—We are very close on these things.

ACTING CHAIR—Thank you, Mr Thomson.

[6.11 p.m.]

Australian Bureau of Statistics

Senator CROSSIN—Who can answer questions on Northern Territory population census statistics?

Mr Trewin—I will start. I have some people here who can help me if we get into detail.

Senator CROSSIN—Could you describe the main features of the Northern Territory population. What is your understanding of them?

Mr Trewin—Its unusual features are the relatively high Indigenous population and the fact that it has got a fairly high mobile population. In relative terms, the level of internal migration is higher than it is for other states and territories. It also tends to have a younger profile than other states and territories.

Senator CROSSIN—Are they the particular features you would see that would define the Northern Territory population as different from other states and territories?

Mr Trewin—Yes.

Senator Ian Campbell—Do we have a social atlas for Darwin?

Mr Trewin—Yes, we do.

Senator Ian Campbell—Have you been given a copy of the social atlas, Senator Crossin? It is a document which I think is tremendous for—

Senator CROSSIN—I have about two dozen publications from the ABS in my office. One of them may be the social atlas; I am not sure.

Senator Ian Campbell—One of them could be. It demystifies things. It pulls together all of the census data and communicates it in a way that really is a lot more readable for the community generally. I commend it to you.

Senator CROSSIN—All right. My line of questioning is not about that. I am sure that the people before us from ABS know exactly where I am coming from tonight. A couple of weeks ago, in the National Capital and External Territories Committee, I asked representatives from the ABS to provide me that committee with information about dates and times that census


ECONOMICS

forms were given out around certain areas of the Territory. I do not remember exactly where I mentioned. Homeland centres around Elcho Island was one place. I do not suppose you have got the answers to those questions?

Mr Williams—That document is in preparation. It should be with the committee in the next day or so.

Senator CROSSIN—Thank you. What are the factors that decrease the reliability of the estimated residents population and the census data?

Mr Trewin—The census data or population estimates?

Senator CROSSIN—Both.

Mr Trewin—The census itself is going through a process of continuous improvement, and we believe the 2001 census was better than previous censuses. I know the Indigenous population is of particular concern in the Northern Territory, and we put significantly more effort into enumerating the Indigenous population than we have in previous censuses. In fact, if you look at expenditure on a per capita basis, it was 10 times as much per capita for the Indigenous population as it was for the rest. That is not saying that it is perfect; it is not. None of our measurements are perfect; they are all subject to some error, but we are confident that our Indigenous enumeration was certainly better than it was in previous censuses in the Northern Territory.

Senator CROSSIN—What are some of the factors that you think decrease the reliability of the ERP and the census data?

Mr Trewin—The ERP is rebased every five years based on the census, so the census itself is the base. For the periods between the censuses, we use births and deaths to update the ERP, and those things are generally pretty reliable.

Senator CROSSIN—I will go to some of that methodology in a moment, but can you succinctly indicate to me what you think are the factors that impinge, decrease, undermine or question the reliability of the resident population data.

Mr Trewin—I was trying to get to that. Births and deaths data is generally pretty good. International migration data is generally pretty sound, although where people say they are going is not always 100 per cent accurate, so there is a bit of adjustment that you have to do there. The area where there is most concern is internal migration, and that is where we have to use indicative data like registration for Medicare.

Senator CROSSIN—Can I just ask you about that. How many Indigenous people does ABS collect statistics on that do not have a Medicare card or Medicare number?

Mr Trewin—I will get Paul Williams to answer that, but we do not rely entirely on that data; it is one of the indicators that we use to update our population estimates.

Senator CROSSIN—But it is an indicator you use, so can you tell me if you have a handle on how many Indigenous people do not have a Medicare card or number?

Mr Williams—There are a couple of issues there. The first is the census counts and the estimated resident population. Every five years, we rebase the estimated resident population based on census counts, and we do not need to use Medicare data to do that. I believe that our


ECONOMICS

process to get to the estimated resident population every five years based on the census is a highly reliable one. What Dennis was talking about there is how we come up with the population base after the census, and that is where we have to use Medicare data. But we do not use Medicare data to establish the total number of people; we actually use Medicare data to try to pick up those people who have actually moved either into or out of the Northern Territory. We realise that the Medicare data is deficient and we make adjustments—in particular, for young people, who we know do not change their address when they move either into or out of the Northern Territory. In addition, Defence Force personnel quite often are not registered for Medicare. So we do make adjustments to the Medicare data to come up with our intercensual population estimates after the census.

Senator CROSSIN—My question, though, was: does the ABS have an indication of how many Indigenous people in the Northern Territory do not have a Medicare card or number?

Mr Williams—No, we do not. We do not use Medicare data to arrive at our population estimates and our population counts.

Senator CROSSIN—What about those Indigenous people who might live at Kintore or Docker River who move across the border to Western Australia?

Mr Williams—We may not be picking up small numbers of Indigenous people who do move, but every five years we conduct a census which allows us to recalibrate the Medicare data so we can make adjustments to the Medicare data to take into account the people that we do know Medicare data does miss because of movement.

Senator CROSSIN—What margin of error would you put on that?

Mr Williams—The Medicare data is the most reliable data source we have. For the intercensal period to 2001, the Medicare data probably understated moves out of the Northern Territory. Twice as many people in the census data were recorded as moving in the five-year period as were recorded in the Medicare data. If anything, Medicare understates the number of people leaving the Northern Territory, so there are still problems with the Medicare data.

Senator CROSSIN—Is it correct that the ABS does not have a number or a percentage of Indigenous Territorians without a Medicare card or number?

Mr Williams—No, we do not; but that is not relevant to the way we are using the Medicare data.

Senator CROSSIN—You told me you used Medicare data as one source of the numbers of people who move in and out of the Northern Territory.

Mr Williams—For our intercensal population estimates. That is exactly right.

Senator CROSSIN—How accurate can your assessment be if you do not know how many Indigenous people living on the borders in the north-west of the Northern Territory going into Western Australia—in that Warburton-Kintore area—do not have a Medicare card and it is one of the measures that you do need?

Mr Trewin—Between each census, we compare population estimates we projected forward from the previous census to what we get with the most recent census. The difference between those two numbers is known as the intercensal discrepancy. For Australia it is very


ECONOMICS

small, so it gives us great confidence in the reliability of those models. For the Northern Territory, the intercensal discrepancy was only about 200 people.

Senator CROSSIN—What is ‘very small’? The issue we are talking about here is the difference between one or two federal seats in the Northern Territory. You would be well aware of the controversy around this—it means that, at the end of the day, the Northern Territory loses a federal seat on the basis of a discrepancy of only 291 people. You might say it is very small but, with respect to Northern Territory representation, it is a huge discrepancy. We do not consider 200 to be very small at all.

Mr Trewin—My job is to put out the best estimate possible. If the measurement error around those figures is greater than 200 people, I have been quite open about that. We do the best job we possibly can, but we cannot give a precise estimate.

Senator CROSSIN—Do any of these factors affect the reliability and validity of the ERP? Would remoteness affect it?

Mr Trewin—The biggest factor that affects it in the Northern Territory is the mobility of the population. In relative terms they have a much higher population moving in and out of the Northern Territory than do other jurisdictions.

Senator CROSSIN—Are the ERPs in the Northern Territory less reliable than in other states because of that?

Mr Trewin—In relative terms they are. Northern Territory is a smaller jurisdiction, and it has a more mobile population.

Senator CROSSIN—So it would be more volatile than other states in absolute or relative terms?

Mr Trewin—Yes; not in absolute terms but in relative terms.

ACTING CHAIR (Senator Watson)—Given the consequences of your decision in terms of the electoral outcome of losing a seat, what sort of extra integrity measures did you apply to address the issues that Senator Crossin is now raising?

Mr Trewin—We checked and rechecked all the figures. We had an external review of all our figures, not just those for the Northern Territory. We were very aware of the sensitivity, but my job is to put out the best estimate based on the numbers available.

Senator CROSSIN—I have a whole lot of questions that will probably take us beyond 6.30 p.m. Was there any error associated with the ERPs in respect of the Northern Territory?

Mr Trewin—We are confident of the quality of those estimates. We think they are the best estimates possible, but I cannot guarantee you that they are precise. There are lots of statistics that are based on sample surveys and other things, and there are measurement errors associated with them. So there is a margin of error around that number, but it was the best number we could compile, based on the information available.

Senator CROSSIN—Isn’t it the case, though, that at the last census, in 2001, this error, combined with the undercount in the Territory, was determined to be plus or minus 1,000 persons?

Mr Trewin—Yes. That was a sampling error.


ECONOMICS

Senator CROSSIN—In statistics, the conventional level of certainty is determined to be about 95 per cent confidence. Is that correct?

Mr Trewin—That is the general convention that is used.

Senator CROSSIN—That is approximately one or two standard errors. In this case, that is 2,000 people. Is that right?

Mr Trewin—Yes.

Senator CROSSIN—Therefore, how can you be certain that your estimate of the Northern Territory population at June 2002, some six months or so after the census, includes a level that would be required for both one and two federal seats?

Mr Trewin—We have been quite open about this. There is a confidence level around those figures, and that confidence level did cross over the difference between the Northern Territory having two seats or one seat. But in my job I cannot artificially add a number; I have to put out the best possible estimate and try to describe the quality of that estimate in the best terms I can.

Senator CROSSIN—Did you use plus or minus 1,000 or plus or minus 2,000 in your estimates?

Mr Trewin—No; but we were open about the quality of those estimates and the error range that might be possible.

Senator CROSSIN—Do you think there was an error associated with the undercount?

Mr Trewin—It is based on a sample, and there is sampling error associated with that undercount. It is the same as when we put out retail sales. We put out a figure and that is our best estimate, but there is a sampling error associated with that figure. It is a similar sort of situation here.

Senator CROSSIN—Was there an error associated with the census undercount in the Northern Territory?

Mr Trewin—There was a sampling error associated with the undercount.

Senator CROSSIN—Which was what? The plus or minus 1,000?

Mr Trewin—I have not got the figures off the top of my head, but the figures you have quoted sound reasonable.

Senator CROSSIN—Was it 1,000 or 2,000? Do you remember?

Mr Williams—I am not certain. We could look it up for you.

Senator CROSSIN—What I want to know is: if it was 1,000, should it have been 2,000?

Mr Trewin—The 95 confidence interval would be about 4,600, with a range of 2,600.

Senator CROSSIN—What did you use in adjusting the undercount in the census? Did you use 1,000 or 2,600?

Mr Trewin—I think we are talking at cross-purposes here. To estimate the undercount in the census, we run what we call a post-enumeration survey—


ECONOMICS

Senator CROSSIN—We will get to that in a minute. I am just wondering what figure you used to make the adjustment.

Mr Trewin—It was 7,800 people.

Senator CROSSIN—What implications did that have for the ERP in September 2002?

Mr Trewin—That adjustment was included in that ERP figure.

Senator CROSSIN—Is there any way in which the undercount in the Northern Territory may have been greater than has been estimated?

Mr Trewin—Yes, it could have been less. It was subject to a sample survey, which has a confidence range around it. It could have been more or it could have been less. Our best estimate is what we have produced.

Senator CROSSIN—Did you take into account the difference between the remote Indigenous communities and the rest of the Northern Territory in determining the undercount in 2001?

Mr Trewin—We actually did not. It is very difficult to run a traditional post-enumeration survey in traditional Indigenous communities.

Senator CROSSIN—The fact is that in your post-enumeration surveys none of those forms actually go to remote Indigenous communities, do they?

Mr Trewin—No, they do not, but we estimate it for other—

Senator CROSSIN—They only go to the major centres in the Northern Territory, or to smaller places than that, to Darwin and Alice Springs.

Mr Williams—No, urban places such as Tennant Creek are included in the post-enumeration survey.

Senator CROSSIN—But they do not go to any of the 220 communities or 200 or so out-stations.

Mr Williams—That is correct.

Mr Trewin—But we still make an estimate of the undercount in those communities. It is not as if we are assuming that those counts are perfect.

Senator CROSSIN—When you determine the undercount post census, you do not take into account remote Indigenous communities, do you?

Mr Trewin—We do.

Senator CROSSIN—But not through the post-enumeration process.

Mr Trewin—Not through that process; we use other methods.

Senator CROSSIN—What methods?

Mr Williams—For the Northern Territory, you are quite correct in that we use the results that are derived from the post-enumeration survey in the urban areas to correct for the assumed underenumeration in the Indigenous communities. In the studies we have undertaken independently of the Indigenous communities—and the last study we did on that was in 1996 but we were undertaking similar studies for 2001—we used a technique which ages the


ECONOMICS

population, uses age-sex cohort analysis, and looks at births and deaths and migration assumptions, which allows us to come up with an estimate for underenumeration for the population not covered by the PES. Certainly for 1996 the underenumeration was in fact less than the adjustment we made for the overall population. So we believe that the four per cent we adjusted the overall Northern Territory population by probably takes into account the underenumeration—

Senator CROSSIN—Probably, or does?

Mr Williams—Does, I would say. We have other research—for instance, observational studies undertaken by the Centre for Aboriginal Economic Policy Research—which again points to the fact that the methodology we use for counting in remote Indigenous communities has a tendency to lead to, if anything, overenumeration rather than underenumeration. So a combination of factors lead to the conclusion that we might be overadjusting for remote Indigenous populations.

Senator CROSSIN—At this point in time, as we go around the Northern Territory and speak to people on the ground the ABS are the only people who seem to have that view, particularly about the 2001 census data. Based on our belief that there is still a marginal error, what impact does that error have when you are determining the 2002 ERP and a number 300 greater than this is significantly different?

Mr Williams—The subsequent ERPs are updated from the census based estimated resident population. Whatever estimated resident population we come up with at the time of the census is the base from which we later update the quarterly estimated resident population. For that purpose we use information such as births and deaths from the registrar of the Northern Territory, overseas migration figures from processing passenger cards and, as has been mentioned before, we have come up with an estimate of interstate migration, using adjusted Medicare data. That is the method used.

Senator CROSSIN—I assume that the ABS takes into account the uses for its data release of information.

Mr Williams—Indeed it does. We use statistical methods et cetera to arrive at the figure but we certainly understand the importance of the estimated resident population for both electoral and funding purposes. That is very well understood.

Senator CROSSIN—What was the purpose of releasing the September 2002 quarterly estimates in February this year?

Mr Trewin—What was the purpose of it?

Senator CROSSIN—Yes.

Mr Trewin—I am required by law to produce population estimates for each state and territory at the end of each quarter. That is why we produce them every quarter.

Senator CROSSIN—Is it a fact that your September quarter figures are released in February of every year?

Mr Corr—They are ready and available and are being prepared for publication in February and normally they are released in March.


ECONOMICS

Mr Trewin—There was a special release in February this year because they were required for electoral purposes. That is something that we have done in the past when there has been a similar sort of requirement.

Senator CROSSIN—So the Australian Electoral Commissioner actually requested the population statistics for use in February; is that correct? Do you get an official request from the Australian Electoral Commission?

Mr Trewin—Yes, we do.

Senator CROSSIN—What type of statistical information did he ask for?

Mr Trewin—He asked for the estimated resident population. I presume it was as at the end of the September quarter 2002. What is the reference period?

Mr Corr—The requirement in the legislation is for the latest available statistics available within a month period and that month period started at a date in February and ended at a date in March. It is for the total population of each state and territory plus Cocos and Keeling Islands, Christmas Island and Jervis Bay territory.

Senator CROSSIN—Who makes the decision to provide the September 2002 figures rather than the census figures or the post enumerated figures?

Mr Corr—It is set down in the legislation that it is the latest available statistics available to the statistician at the time, and on 18 February they were the latest available statistics.

Senator CROSSIN—The September 2002 statistics?

Mr Corr—Yes.

Senator CROSSIN—Are there any other statistics that would have been more fit for the purpose, other than those?

Mr Trewin—They are the statistics that are prescribed by law.

Senator CROSSIN—Are you saying they are the only latest and current statistics you had at the time? There was nothing else available?

Mr Trewin—They were our best estimates at the time of the population at the relevant period.

Senator CROSSIN—You do not have a rolling average of the population base?

Mr Trewin—We could compile that but the law is quite specific about what the requirement is.

Senator CROSSIN—Why don’t you provide a rolling average rather than the September 2002 quarterly figures?

Mr Trewin—Because the electoral law requires the—

Senator CROSSIN—The electoral law, as I understand it and as this gentleman said, is just to provide the latest available figures that you have. Who makes a decision about what latest available figures you have that you will provide?

Mr Corr—The legislation just says the latest available statistics to the statistician on the day that he makes the determination.


ECONOMICS

Senator CROSSIN—And I am asking you who made a decision to use the September 2002 quarterly figures rather than a rolling average?

Mr Trewin—From memory, I think the request we received from the Electoral Commission was for population estimates at a particular time period.

Senator CROSSIN—Can you provide this committee with a copy of that request for information?

Mr Trewin—Yes.

Senator CROSSIN—Thank you. Do you think a rolling average would have been a better use of statistics, bearing in mind you said to me earlier that you are mindful of your data releases and that you take into account what they are used for? Would a rolling figure have been better?

Mr Trewin—I can see some advantages in that, particularly in a relatively small jurisdiction like the Northern Territory where there are seasonal population flows. I can see the advantages of that for some purposes.

Senator CROSSIN—You do realise that the figures provided by you, even though you might say it is a small number, has actually resulted in the loss of $25 million to the Northern Territory from the Commonwealth Grants Commission? I am wondering why at the time, if you are mindful of the use for which your figures are used, when you were asked for these figures someone did not actually ask, ‘September 2002 or rolling figures? Which is the best information to provide that would benefit the Northern Territory?’ Does someone not make that assessment?

Mr Trewin—It is the people who use these numbers for their purposes who make the judgment on the best statistics to use. I think in many cases it is defined by law.

Senator CROSSIN—If you had used a rolling average, what would have been the figures you would have provided in a rolling average calculation?

Mr Trewin—It depends on what period you are averaging over.

Senator CROSSIN—One would assume you would take it from the last census data. That is your baseline, isn’t it? Can you do a calculation of those and provide them to this committee?

Mr Trewin—We could, but I am not sure it would make a lot of sense, because as we go forward in time the census is going to be further away.

Senator CROSSIN—We are actually talking about a period between the 2001 census and when you were asked for this information, which I assume would have been around what time—early this year?

Mr Trewin—Yes.

Senator CROSSIN—I am asking you to do a calculation for me based on the rolling average.

Mr Trewin—We can do that.


ECONOMICS

Senator CROSSIN—Again, who makes a decision about whether you take a set point in time—September 2002 quarterly figures—or a rolling average? Who is responsible for choosing one or the other?

Mr Trewin—I think you will have to ask the Electoral Commission that, because I am not familiar with the ins and outs of their legislation. I am not sure whether precisely what figure they should use is prescribed or whether there is a judgment involved.

Senator CROSSIN—Don’t they simply ask you for the latest figures that you have at hand?

Mr Trewin—Yes.

Senator CROSSIN—So who makes a decision about which latest figures you will give them?

Mr Trewin—I answer requests I get from the Electoral Commissioner.

Senator CROSSIN—But if that is to just provide them with the latest population statistics you have, what makes you decide to give them the rolling average figures or a September 2002 quarterly figure?

Mr Corr—I have looked into this. For every electoral determination that I have looked at, the determination is based on the latest available population for the latest available date. If you do a rolling average of, say, three quarters, four quarters or five quarters, that is not the latest available, because you are impacting on the latest quarter’s data by the last three, four or five quarters.

ACTING CHAIR—I think the point she is making is that it should overcome seasonal movements, because there is a big seasonal movement in terms of population in the Northern Territory.

Senator CROSSIN—My understanding is that the Electoral Act and the Constitution simply state the latest statistics of the Commonwealth. That is all it says.

Mr Corr—Yes, and the latest available in February were September 2002 estimates.

Senator CROSSIN—Or they were the rolling average from the census figure in 2001.

Mr Corr—Well, that has not been specified in the act.

Senator CROSSIN—But the latest quarterly figures are not specified in the act either.

Mr Williams—If the Electoral Commissioner chooses to make that decision, I presume he could choose to use a rolling average. Historically—

Senator CROSSIN—He did not say the latest quarterly figures either, did he?

Mr Williams—No. Historically it has been the latest available, which is the latest point in time available. That has been the tradition now over many, many years—certainly as far back as we have been able to research it.

Senator CROSSIN—Is there any way in which that decision can be reviewed?

Senator Ian Campbell—Mr Acting Chair, it is actually a matter for the Electoral Commissioner. I do not think Senator Crossin is trying to do this, but I think it is a bit tough to


ECONOMICS

blame the ABS, who are responding to a request—as they do from a number of other agencies of government—to provide a figure. I think the parliament would be disturbed if the Australian Bureau of Statistics decided to use a range of different measures and pick the result that suited them. If it is the latest available statistic and that is what it has been traditionally, then that is what it should be.

As a government and as a parliament, if you use a rolling average for the Northern Territory, you would then have to go back and use a rolling average, no doubt, for all of the other states. That may change the distribution of seats across the whole nation. I know, for example, in Western Australia, we just snuck in under the requirements of the Electoral Act to make sure we retained our number of seats. I think, again, there were only a few hundred people in it. It may well be that WA’s position was unchanged with a rolling average. But it is ultimately up to the Electoral Commissioner. If that person thinks that, under his or her act, they can ask the statistics bureau for a statistic and they determine that it is within their act to ask for a rolling average, then the ABS are not going to be concerned. They will provide it to them. Make a rolling average back for the last 10 years and see what that does.

Senator CROSSIN—With all due respect, Minister, the Electoral Commission do not ask for that. They simply ask for, in accordance with the wording of the Electoral Act, the latest statistics of the Commonwealth. It is actually the ABS who determine which latest statistics they will provide to the Australian Electoral Commission. What I am trying to determine is this: there were, I am assuming, two statistics available. Why did the ABS choose one and not the other?

Mr Trewin—I am going by memory here but I am pretty sure I was not just asked for the latest population estimates; I was asked for population estimates for a particular period.

Senator CROSSIN—If you could provide us with the letter that you received from the Electoral Commission, I would appreciate it.

Mr Trewin—We will do that.

Senator Ian Campbell—I have to say, though, I have a lot of sympathy with Senator Crossin’s arguments. It is the Electoral Act we need to look at. The Bureau of Statistics said they are happy to provide whatever statistic the Electoral Commission wants. The same thing nearly happened in WA. We just got the seat of Hasluck in the last redistribution. It would be a very perverse outcome and an undesirable outcome to be given a new federal seat, as the Northern Territory was, and then have it taken away because the population fell by a couple of hundred.

ACTING CHAIR—Because of seasonal conditions?

Senator Ian Campbell—Particularly with the Northern Territory it is seasonal. I do not think Western Australia would be affected by that much. We have a much larger population and obviously any seasonality—

ACTING CHAIR—The Northern Territory has big seasonal movements.

Senator Ian Campbell—It does but if you have to write that into the Electoral Act it is a different thing. Seasonally, a lot of people move from Victoria up to Queensland and back again. What has happened means we should have a bit of a look at the Electoral Act. It is not


ECONOMICS

desirable to redraw a whole set of boundaries in a state like Western Australia to fit a new seat in and then literally a couple of years later have to take it back out again. It is not good for the representation of the people. It is an issue that needs to be addressed by the Special Minister of State, not by the Parliamentary Secretary to the Treasurer.

Senator CROSSIN—I have about eight pages to go so we will keep going with the questioning because I do not think the ABS are coming back. With all due respect, Minister, while what you say is right and the Electoral Act may well have to be changed, the issue is that there are very serious concerns about the accuracy of the figures collected in the Northern Territory by the ABS. That in turn has had implications in terms of the loss of one of the two Northern Territory federal seats and $25 million going to the Northern Territory. When you are talking about Indigenous people and their needs, this is a substantial unfortunate circumstance for the Northern Territory. I wonder if Mr Trewin can explain it to me. I understand the method used to collect the census data in the remote Indigenous communities in the Northern Territory is totally separate from the general method. That is correct, isn’t it?

Mr Trewin—Yes, it is.

Senator CROSSIN—I understand that process was intended to take a month but this ballooned out to three months. Is that correct?

Mr Williams—There were a couple of cases where we did take longer than the one month. There were a couple of communities where we did have some cultural and other issues that we had to address. Part of the reason that we undertake this special enumeration strategy is in fact to fit around the way Indigenous people live.

Senator CROSSIN—Can you provide me with a list of those communities where it took longer than a month, please?

Mr Williams—Yes, we can. We are happy to do that.

Senator CROSSIN—You would be aware that in 2001 the ABS was forced to increase the undercount in the community of Arakun in Queensland to 17 per cent when your own figures showed the undercount used in that state was eight per cent. Is that correct?

Mr Williams—Could you rephrase the question? Sorry.

Senator CROSSIN—The undercount in the community of Arakun in Queensland in 2001 was readjusted to 17 per cent when the total Indigenous undercount used in that state was eight per cent. Is that correct?

Mr Williams—The issue with Indigenous enumeration is, as Mr Trewin mentioned, that we know we have problems every census and we are prepared to adjust population when we have empirical evidence that these problems exist. Indeed, for 1996 there were 18 communities in Australia where we identified problems with the count. Some of them were in the Northern Territory. For the 2001 census our evaluations so far have indicated problems with three communities: two in Queensland and one in New South Wales. At this stage we have not found any in the Northern Territory which we believe we under-enumerated severely. We do make adjustments if we find that we have problems.

Senator CROSSIN—I do not have time to go into this with respect to Katherine West. I do, though, want to use a much smaller example: the audited records of Elko Island. That


ECONOMICS

island has a database of clients of 2,500. During my recent visit to Elko Island and four of its 20 out-stations I found that people on those out-stations do not remember seeing anyone at all connected to the census. Your census count showed a total of only 1,728. We know that your census also appears to have missed many visitors in the town camps of Alice Springs. Weren’t these problems that were brought to your attention at the time?

Mr Williams—Firstly, I will address the comparison of administrative lists with population counts. Typically we find that in any community in Australia a list of people who are using a service does not necessarily represent the number of people who are usually resident in that community or indeed are in that community at census time. That phenomenon occurs in both Indigenous and non-Indigenous communities. Regarding the way we enumerate out-stations, we do attempt to visit out-stations but we do not get to them all. Where we know there is a small out-station we will enumerate that from information provided from the main community, but we do get to the larger out-stations. If there is a family or whatever out there, we will use the telephone or information provided by the community. One of the great features of our Indigenous enumeration strategy is the use of local people. I have been out there during enumeration and seen the sorts of checks we make, and the local people know who is there. The local people provide us with information about who is in the community and not in the community, and that provides a good check on our methods.

Senator CROSSIN—Do you acknowledge that the enumeration problems in the Alice Springs town camps reflected a lack of resources allocated to this task?

Mr Williams—The ABS undertook an evaluation of the enumeration there—it was in fact the ABS that set up the studies that led to that observation. The problem was not so much a lack of resources as the highly mobile nature of the population. The methodology we tried to use there was the methodology for a more settled community. We tried to use this methodology in a very highly volatile situation, and the report we received from the Centre for Aboriginal Economic Policy Research certainly indicated that there were problems there. One of the things the CAEPR study acknowledged was how quickly we adapted our methods as soon as we recognised that there were problems and we needed to adapt to the fairly difficult situations we experienced there. The CAEPR reports on the other two communities where we had observers both commented that the methodologies we used were sound and were the best possible methodologies they could think of for coming up with a count of the population. Part of the difficulty is generalising from a very difficult, unique situation to what was happening throughout the Northern Territory. Certainly we document those sorts of issues, and a publication will come out later this year which will do that fully.

Senator CROSSIN—Are there plans to include Indigenous people in remote communities in your post enumeration survey in the future?

Mr Williams—For 2006, we are looking at methods of trying to directly measure the quality of the count in Indigenous communities. There are reasons why we do not believe that a traditional post enumeration survey would work in remote Indigenous communities, but it does not mean that we are not looking at other methods. The problem is actually trying to achieve independence of the post enumeration survey from the census processes. Experience in countries where this independence has not been achieved—that is, you end up using the same collector for the census as you do for the post enumeration survey, which would be the


ECONOMICS

case in some of these communities—is that you end up with a very low measured under-enumeration rate. We do have some international experience that tells us that, if you are going to have a proper post enumeration survey, you would need to establish independence. We are looking at other methods of directly measuring. I doubt very much whether it will be a traditional post enumeration survey.

Senator CROSSIN—I might need to put quite a lot of questions on notice because we are running out of time. I do want to ask you: on what basis did you derive the size of the non-contact households in the Territory?

Mr Williams—The non-contact household only applies in urban situations; it does not apply—I want to emphasise this—in remote Indigenous communities. In remote Indigenous communities, where, for whatever reason, we do not get a census form back from a household, we will use local knowledge. Again, I want to emphasise that, in our remote Indigenous communities, we have got one collector for every 10 households, so it is very intensive. We will use the knowledge from the group of collectors that we have got in order to come up with an estimate of the population—

Senator CROSSIN—What you mean by a household in a remote community? Do you mean a house or a household?

Mr Williams—No, it is not necessarily a household. It is a group of people who are living together. That can be in a conventional house, in traditional dwellings or even camping out.

Senator CROSSIN—So, Mr Williams, you have got one for every 10. Is that what you said?

Mr Williams—One for every 10, yes.

Senator CROSSIN—So, in a place like Wadeye-Port Keats, where there are 2,500 Indigenous people, how many counters would you have had?

Mr Williams—We would have had something like 13 or 14 enumerators. Wadeye was one of those communities that you asked us earlier about that we did have problems with, but those would have been the numbers of local people we would have employed in a place like Wadeye. It would have been 14 or 15 people. We would probably have employed about two or three collectors to enumerate the same number if that had been an urban community.

Senator CROSSIN—When these people say, ‘Ten people might live in that house, but we think 22 live in that house,’ how accurate is that assumption?

Mr Williams—We need to separate what you call non-contact houses from the houses in which most people participate in the census. The collector does visit every household and tries to assert how many people are there. The census is collected by people visiting the households. It is not collected by people sitting around and making the data up.

Senator CROSSIN—But individual Indigenous people in a remote community do not fill out a form, do they?

Mr Williams—No, the—

Senator CROSSIN—It is collective data, isn’t it?


ECONOMICS

Mr Williams—Individual people in mainstream Australia do not fill out a form. A form in mainstream Australia is delivered to the householder, who then completes it on behalf of all people in the household. The same method is used in Indigenous communities. The collector visits the household and questions the people who are present when the collector is visiting as to who lives in the household and the nature of that household.

ACTING CHAIR—The time being 7 o’clock, do you wish the witnesses to come back at 7.30 or do you want to put your questions on notice?

Senator CROSSIN—In order for you to get through your program, I think I will need to put the rest of my questions on notice.

ACTING CHAIR—The officers from the Bureau of Statistics are discharged. Thank you very much.


Australian Office of Financial Management

CHAIR—I call to order this resumed hearing of the Senate Economics Legislation Committee considering the Treasury estimates. I welcome to the table Dr Henry, the Secretary to the Treasury, and officers from the Australian Office of Financial Management. My understanding of the program is that we will proceed this evening with the Australian Office of Financial Management and, when they are exhausted, go to Treasury outcome 1, but we may interpolate the Takeovers Panel, depending on—

Senator CONROY—I suspect we will have enough to go through to the end of the evening.

CHAIR—All right. Can we ask the secretary to excuse the Takeovers Panel and ask them to be here in the morning?

Senator Ian Campbell—I thought the Takeovers Panel was based in Melbourne.

CHAIR—They are, but they are stuck here anyway. Other than the Office of Financial Management, Senator Conroy, will you want the Treasury officers concerned in outcome 1 as well this evening?

Senator CONROY—Yes. I think we will get through AOFM and then we will move on to the Treasury.

CHAIR—All right. Anybody who is not in one of those categories can come back tomorrow morning at 9.00. Does anyone want to make an opening statement?

Dr Henry—No, thank you, Mr Chairman.

Senator CONROY—I wrote to you, Mr Comley, asking you to bring with you some specific details. Have you been able to compile them?

Mr Comley—I received a letter from you on 2 June—that is, earlier this week. Given the nature of the information, I sought to consult with the minister regarding the release of that information on the basis that we do not normally publish that information. I have yet to receive a response from the minister and therefore I am assuming that I will take the request for information on notice.


ECONOMICS

Senator CONROY—Okay, we will do it the hard way, one by one. In an answer to a question from estimates in June 2002, I was told there were 14 cross-currency swap contracts that matured in 2001-02. The total notional value of the swaps was $A1.7 billion of receivable principal, and $US1.4 billion payable principal. I do not think you wrote that response, Mr Comley. Maybe you did, but I think it would have come out of Mr Allen’s—

Mr Comley—If that is an answer to a question on notice, I have no reason to dispute those figures.

Senator CONROY—I would like to turn to page 161 of the AOFM annual report.

Mr Comley—The 2001-02 annual report? That is the last one.

Senator CONROY—Yes, I think so.

Mr Comley—This is note 17(c)?

Senator CONROY—Page 161. Could you please confirm that the $A2.7 billion paid in 2001-02 under the Loans Securities Amendment Act 1998 is the $US1.4 billion payable principal referred to in your answer—that is, the previous answer?

Mr Comley—Without doing a calculation, it would be the amount that we paid out; given that we only pay out US dollar legs, that would be correct. The one thing I would qualify there is that that line item would also include any forward contracts.

Senator CONROY—Forward contracts?

Mr Comley—Yes.

Senator CONROY—I did not think you had any back then.

Mr Comley—I will just check. I think that in 2001-02 we may have had, but I would have to confirm that.

Senator CONROY—Dr Henry, just on a point of general interest: you might be aware that earlier this week with Mr Smith we had a similar conversation to the one we are probably going to have now, when we asked a question about a figure in the budget, seeking to go behind the figure that is listed in the reports or the budget papers and those sorts of things. I am consistently receiving responses from Treasury saying, ‘We don’t publish that.’

Earlier in the week Senators Faulkner and Ray asked PM&C to go behind a particular figure to do with expenses incurred by PM&C, and it was revealed—although it was not published in the papers—that the Prime Minister had a good time over in Rome to the tune of $40,000. That figure was not published in the budget papers. I am just wondering whether you think you only have to answer questions about what is published in there or whether you believe you are actually in a position where you can answer questions about information not published in the paper—say, Budget Paper No. 1 or any of the others. I am interested in what, from a point of principle, you actually think is the role when you are here at the table.

Dr Henry—I think we are pretty clear about what our role is when we are here at the table, and that is to assist the Treasurer discharge his accountability responsibilities to the parliament in respect of the Department of the Treasury. Without knowing precisely which areas your questions might go to, may I say that it has been the practice in this department for a considerable period of time that, where further information is sought or information additional


ECONOMICS

to what is published in the budget papers in particular is sought, we as officers of the Treasury would seek to take such questions on notice so that we would have an opportunity to consult with the Treasurer and obtain the Treasurer’s guidance on what further information he thinks appropriate to make available to the committee.

CHAIR—Dr Henry, for the sake of consistency, let me tell you a little more about the exchange with Mr Smith to which Senator Conroy alluded. Senator Conroy, please jump in if I am not putting this fairly to you. Senator Conroy asked Mr Smith in effect to disaggregate certain figures, as I understood it, and Mr Smith basically said that he wanted to refer his response to the Treasurer. As I understood him, he adverted to what he understood to be a convention about the extent to which Treasury officers would be prepared to speak to figures behind the figures appearing in the forward estimates and in the budget. We had a debate about that.

I consulted the Clerk of the Senate and I then made a series of not exactly rulings but guidelines. I will paraphrase for you what I said then so that the same principles can be observed this evening. As I understand the position, there may be said to be four grounds on which a witness might decline to answer a question. The principal and governing ground is relevance, so a witness cannot be asked a question which is not relevant to the subject of the estimates committee’s hearings. As I said in the opening statement, the Senate has resolved that there are no areas in connection with the expenditure of public funds where any person has the discretion to withhold details or explanations from the parliament or its committees unless the parliament expressly provides otherwise. Secondly—and this appears in resolution 1(10) of the Senate resolutions of 25 February 1988—there seems to be an exception created in relation to self-incrimination. Thirdly—and this appears in resolution 1(16):

An officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy, and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister.

That provision, which obviously is extremely badly drafted, has been interpreted broadly to extend to a prohibition against inquiring into the formation of policy. Fourthly, there appears to be a loose and generic category of exceptions based on convention or on the custom of committees.

That is what I said then, and I went on to say—and I did not understand Senator Conroy to be disputing this—that, under resolution 1(16) of the Senate’s resolutions of 1988, witnesses have an absolute right to be given a reasonable opportunity to refer a question to the minister. You would therefore say, ‘I’ll take that on notice so that it can be referred to the minister.’ You having done that—and I do not think that can be called into question—if the minister then provides a written response with which the senator asking the question wishes to take issue, that is a matter for that senator to raise either privately within this committee or in the Senate. We will adhere to those guidelines this evening.

Senator CONROY—Back to the question I was asking you, Dr Henry. Are you indicating to the committee at the beginning of the process that any question that I ask you about a figure that is not contained in the budget papers you will take on notice?

Dr Henry—Senator, you are referring to the area of the AOFM’s commitments—


ECONOMICS

Senator CONROY—I am talking in general. I had this problem with Mr Smith yesterday, but he had a specific instruction. I asked about a net figure, and Mr Smith indicated that the government had made a particular decision not to release the disaggregated figure—the gross figure, if you like, rather than the net figure—so you at least had that sense. You seem to be putting forward a different proposition that, if the item is not specifically spelt out in the budget papers or the annual reports or whatever—if there is just a one-line item with a number and I ask you what is behind that number—you believe that it is convention, or whatever else you would like to describe it as, that you will automatically take that on notice.

Dr Henry—No, I do not believe I have said that, Senator.

CHAIR—In fairness to Dr Henry, Mr Smith perhaps came a bit closer to saying that. The point I was at pains to make is that if Dr Henry wants to do that he is entitled to, but he may choose not to. That is entirely a matter for him.

Senator CONROY—I am not disputing that at all. It is of course, as you have pointed out, completely within Dr Henry’s purview to take on notice every question that is asked of him. I am simply seeking to establish which ones he feels that he will be answering—whether he has a blanket position or he will put independent judgment to each question.

CHAIR—With respect, Senator Conroy, I think that is a bit unfair to Dr Henry, because he cannot anticipate what your questions are going to be. Nor do I think it is fair to a witness to ask him to, in an anticipatory way, make a blanket declaration of the basis upon which he will consider your questions. I think the thing to do is for you to ask your questions and for Dr Henry to respond to them in the manner in which he chooses. If it emerges from your line of questioning that there is a kind of generic category of questioning to which a particular response will be routinely elicited, that will appear.

Senator CONROY—Thank you, Chair. I gained an impression from something Dr Henry said; I am offering him the opportunity to clarify it so that we do not have a misunderstanding about the process. When you come here, what do you believe the process of Senate estimates is for if not for us to ask you questions?

CHAIR—Hang on a second; you have already asked him that and he has answered. I really do not think it is fair to a witness to ask him to make declarations of intent about procedural issues, which can only arise in any event on a case by case basis in relation to particular questions. I think, Senator, that the ball is in your court. You ask your questions and Dr Henry can respond as he thinks appropriate.

Senator CONROY—If you would give him that opportunity, he might be able to respond without you jumping in.

CHAIR—Ask the questions.

Senator CONROY—What I did was offer Dr Henry the opportunity to clarify an earlier statement, because I appear to have misunderstood it. I was offering him the opportunity to clarify it, but you keep interrupting before he gets a chance to speak.

CHAIR—Do you want to say anything, Dr Henry?


ECONOMICS

Senator Ian Campbell—Mr Chairman, Dr Henry already clarified that statement, and I think it is insulting to ask Dr Henry about what he thinks the role of the Senate estimates committee is.

CHAIR—Senator Campbell, I do not think it is insulting, but I think you are right—

Senator Ian Campbell—It is entirely insulting, Mr Chairman, for a junior senator to ask the head of Treasury, who has been coming to Senate committees a lot longer than Senator Conroy has, about the role of Senate estimates.

CHAIR—He is not a junior senator; he is the Deputy Leader of the Opposition in the Senate.

Senator Ian Campbell—He is this week!

CHAIR—I am in charge tonight, and I will decide what questions are proper.

Senator CONROY—Do you think you will even keep the parliamentary secretary position in the reshuffle, or do you think they will just dump you in the reshuffle?

CHAIR—Senator Conroy, you asked the question of Dr Henry. He responded. I do not think it is appropriate to engage him in a debate about procedure. There are a limited number of hours. I am really trying to protect your interests, Senator Conroy.

Senator CONROY—I appreciate you are.

CHAIR—Ask him the questions, and, if there are issues of principle as to the mode of response, no doubt they will emerge from his answers.

Senator CONROY—Because, I guess, I am a little slower than Senator Campbell and yourself, I appear to have misunderstood Dr Henry’s answer about the process of taking questions on notice, so I was just asking him to clarify it.

Dr Henry—It is, as the chairman has indicated, rather difficult to anticipate how I would choose to respond to every question that you might want to ask this evening, Senator. There is, in my mind, no blanket rule such as you have described. There may be cases where I feel we are able to add further information to what is contained in the budget papers without the need to consult with the Treasurer. I will be seeking the opportunity to consult with the Treasurer in those cases where it is not clear to me that the Treasurer would automatically consider that the information should be provided. There will, no doubt, be cases this evening where I will seek the opportunity to take the question on notice in order that I can check with the Treasurer as to whether he would be comfortable that additional information be provided. I can anticipate that much, but whether I will seek an opportunity to take all of your questions on notice I cannot say without knowing exactly what the questions will be.

Senator CONROY—Thank you for clarifying that. Returning to those numbers I was talking about earlier, the $A2.7 billion and the $US1.4 billion: can I use the word ‘outgoing’ without us spending hours debating what is a loss and what is a gain? Can I say ‘outgoing’? Was the outgoing on cross-currency swaps in 2001-02 $1 billion? When you convert into similar currencies, 2.7 less 1.7, it gives you $1 billion outgoing.

Mr Comley—I am not trying to muddy the waters, but I refer you to page 146 of the same financial statements in the annual report. The category ‘Other’ under ‘Financing activities’ in


ECONOMICS

the cash flow statement there refers to cash received and cash used. The cash used is the same number that we have just talked about from page 161, which is $2.701 billion, and the cash received is $1.889 billion, so the difference between cash received and cash used in that year, for principal payments on cross-currency swaps and any associated forwards, is not exactly $1 billion. I would have to do the rough calculation in my head—which might be risky—but it would be in the order of $912 million. That would be my rough calculation.

Senator CONROY—I want to ask you about a press release from AOFM on which Dr Parkinson was listed as the contact at the time. I think he had responsibility for it. The press release stated that in 2001-02 the foreign currency exposure generated a realised gain of $43 million.

Mr Comley—One of my colleagues has that press release, so I will get it; it would probably be easier if I had it in front of me. To make sure we are looking at the same press release, can I confirm that it is a Commonwealth Treasury press release that I have.

Senator CONROY—Yes.

Mr Comley—The title of the press release is—

Senator CONROY—Foreign exchange exposure in Commonwealth debt portfolio.

Mr Comley—That is right.

Senator CONROY—We are on the same page.

Mr Comley—Yes.

Senator CONROY—The press release states that in 2001-02 the foreign currency exposure generated a realised gain of $43 million.

Mr Comley—Yes.

Senator CONROY—I am a little confused, given that we have just talked about the same time period and it seemed, to take your figure, there was a $912 million cash outflow in that year.

Mr Comley—There are two issues here, Senator. My recollection of the basis for that amount of $43 million is that it is the AAS31 basis gain to date in that financial year. The other point to make is that the number we have just discussed—$912 million, roughly—is purely on principal repayments, whereas when you are thinking about other concepts of realised gain that we have talked about in the past you also have to consider the interest payments within that year associated with the swaps. The reason the $43 million is there is essentially that that is a AAS31 number.

Senator CONROY—The $43 million is a realised gain?

Mr Comley—It is a realised gain on a AAS31 basis.

Senator CONROY—The $912 million would be a realised loss in cash?

Mr Comley—In cash, it is the difference between the amount we have paid out and the amount we have received. It is a cash payment.

Senator CONROY—Yes. So there was $912 million more paid out than came in?


ECONOMICS

Mr Comley—Is it $812 million? Did I get my maths wrong? Sorry, $812 million.

Senator CONROY—In front of everybody!

Mr Comley—Yes. My grade 3 maths teacher would be very disappointed.

Senator CONROY—Let me email Ted; he has been on the line! So it is $812 million?

Mr Comley—Yes.

Senator CONROY—That is a realised figure? That is cash out the door so that would be realised?

Mr Comley—It is the difference between the cash we have received on the principal and the cash that we have paid out.

Senator CONROY—We are still on the same page, which is good news. I would like the answer to the same questions for 1998-99 as were provided for 2001-02.

Mr Comley—That may be slightly more challenging. I have our annual report from last year and our portfolio budget statement and the budget from this year, but I do not have the 1998-99 document with me.

Senator CONROY—Does anyone have the 1998-99 document?

Mr Comley—I am not getting any nods.

Senator CONROY—Everyone is shaking their head. I might have a copy of the relevant pages. I am not sure I have the right page, but from my notes moneys paid out in the settlement of swaps is public money appropriated under the Loans Securities Amendment Act 1998 swaps?

Mr Comley—I believe that is correct, Senator.

Senator CONROY—Money received on the settlement of swap contracts are received into the CRF under section 81 of the Constitution and this act is administered by AOFM.

Mr Comley—Yes.

Senator CONROY—Can you tell me how many cross-currency swaps matured in 1998-99?

Mr Comley—I would have to take that on notice, Senator. I do not have that in front of me.

Senator CONROY—I did write to you asking for that information, so you must have it handy.

Mr Comley—I do not have that information with me, Senator.

Senator CONROY—I wrote to you two days ago and asked you to have it handy. Dr Henry, is this a situation where you need advice to be able to give this to me? I think you indicated that you were referring the contents of the letter to the Treasurer.

Dr Henry—That is correct.

Senator CONROY—Do you need advice about whether or not you can inform the parliament of that?


ECONOMICS

Dr Henry—Let me put it this way, Senator: if you are referring to the request that you made in the letter addressed to Mr Comley, as Mr Comley has already indicated he has sought to obtain the Treasurer’s guidance on what further material should be made available. If you are asking now for us to provide you with part or all of the information sought in that letter, and it is information that is not in front of us, publicly available, then yes, indeed, I suspect that the answer to each and every one of your questions would be that we would seek to take the question on notice.

Senator CONROY—This is money that has gone into the consolidated revenue fund. One-half of this transaction is money going into the consolidated revenue fund, and under the Constitution and under the Parliament Act and all of that I am entitled to ask about it.

Dr Henry—I have not denied that, Senator.

Senator CONROY—I am curious as to why you think the Treasurer is entitled to veto your answer.

Dr Henry—That is a judgment properly to be made by the Treasurer, Senator.

Senator CONROY—I can ask you about public expenditure in the Senate estimates process, and you believe the minister has the right to veto my receiving the answers?

Senator Ian Campbell—The secretary is saying he has a right to refer it to the Treasurer. The Treasurer then makes a decision.

CHAIR—That is right, Senator Conroy. That is what I understand him to be saying. There is no doubt that he has that right under rule 1(16).

Senator CONROY—I am asking about information published in your annual report. It is actually a published number.

Senator Ian Campbell—If it is already published, you already have it.

Senator CONROY—I do not have it handy.

Senator Ian Campbell—This is back to the issue of using the Senate estimates as a research service.

Senator CONROY—Thanks, Senator Campbell!

Senator Ian Campbell—That is it: if it is published, it is published.

Senator CONROY—The point I am trying to clarify with Dr Henry is this: it is part of the information I think you indicated that I wrote to you and asked you about and that you believe needed clarification on whether you needed the advice of the Treasurer.

Dr Henry—I said that, if it is information that is not already in the public domain and it is information that is covered by your letter, then yes, I expect that we will seek the opportunity to get some guidance from the Treasurer on whether that further information should be made available.

Senator CONROY—You understand the nature of the role of Senate estimates? Senator Brandis, would you read out the opening paragraph again about what we are entitled to ask about and the purpose of this hearing? The purpose of this hearing is to gain an understanding and some transparency.


ECONOMICS

CHAIR—Senator Conroy, if you want me to, I will. I take it you are referring to the one that says witnesses do not have the discretion not to answer questions.

Senator CONROY—That is the rough one.

CHAIR—That is subject, as I said before, to the other provision which says they have a right to refer those questions to the minister and the overriding rule about relevance.

Senator CONROY—The problem with this process is that we get into an emotive argument about what you are trying to hide. Frankly, I do not want to waste any time having an argument like that. I just want to get some factual information which should be absolutely straightforward. I have written to you previously; I have asked you to bring it today. I think the function of Senate estimates is for departmental officers to provide information. This is not about policy advice; we are not having a debate about policy advice. This is about a policy decision and the outcome of a policy decision, so it is not about policy advice. It is not for departmental officers to say the Treasurer can tell us what we can and cannot say at estimates. The Treasurer cannot.

Dr Henry—I do have to disagree with you there, Senator.

Senator CONROY—The Treasurer can direct you not to answer. I accept he has the power to do that, and, in that situation, you are right not to answer, but in this situation you have the discretion about whether or not you need to ask the Treasurer. You are choosing to deliberately, in my view—and it could lead to an argument—frustrate the processes of the Senate.

CHAIR—Senator Conroy, that is really a—

Senator CONROY—And I consider you the most pre-eminent public servant in the Commonwealth, Dr Henry.

CHAIR—Order! I am speaking. Senator Conroy, that is really a point to be made to me by way of a point of order rather than to the witness. I will direct the witness as to what his obligations are. If you think the witness is not fulfilling his obligations and you think I have been deficient in sufficiently enforcing his obligations, you should take a point of order and direct that to me. What do you say and what do you ask me to do?

Senator CONROY—Be consistent with your earlier allowance of some latitude in the discussion around the issue.

CHAIR—I have allowed a lot of latitude in discussion—

Senator CONROY—Yes, you have.

CHAIR—but we are having a sort of free rein into procedural issues now.

Senator CONROY—I am asking you just to be consistent in the free rein. I am simply making a point to Dr Henry, who I consider genuinely to be the most pre-eminent public servant in the Commonwealth, about whether he thinks he is truly complying with the spirit of the Senate estimates process.

CHAIR—Let us not worry about the spirit; let us worry about the letter. The letter is that this witness, like all witnesses, is obliged to answer all relevant questions, and the arbiter of relevance is me as chairman. Unless I overrule a question, you can assume it is a proper


ECONOMICS

question. But the witness also has a right under procedural rule 1(16) to refer any answer to the minister. As I read the rule, one cannot go behind that or question his good faith in taking that course. The secretary has been kind enough to find for me the rule I think you were directing me to. It is rule (9), which says:

A chairman of a committee shall take care to ensure that all questions put to witnesses are relevant to the committee’s inquiry and that the information sought by those questions is necessary for the purposes of that inquiry. Where a member of a committee requests discussion of a ruling of the chairman, the committee shall deliberate in private session ...

That is the relevancy rule, which I have paraphrased already this evening. You can ask any relevant question, Senator Conroy, and if I do not overrule it you may take it that I consider it to be a relevant question—‘relevant’ meaning that it is relevant for the purposes of the consideration of the Treasury estimates for the 2003-04 year. If Dr Henry says, ‘I want to take that on notice so that I can refer it to the minister,’ he has an absolute right to do that, and I do not think it is proper to impeach his good faith or motives in taking that course.

Senator CONROY—Thanks, as always, for your opinions, Senator Brandis.

CHAIR—You asked me to make a ruling or give you some guidance and I have done it.

Senator CONROY—I did not ask you to make a ruling. The point I was discussing with Dr Henry was the issue of choice. I am not disputing any of the guidance you have given. I am not even disputing Dr Henry’s right to take questions on notice. What I am trying to have a discussion with Dr Henry about is the issue of choice and whether or not, as the pre-eminent public servant—and there are hundreds of officers of the Commonwealth watching you today, Dr Henry—he wants to give the lead in, in my view, deliberately frustrating the Senate estimates process.

CHAIR—Senator Conroy, I will not allow that. That is insulting to the witness. He is, as you say, the most senior public servant in the country, and I will not allow gratuitous displays of discourtesy or polemical sorts of remarks to be made to him. Get on with your questions.

Senator CONROY—The only polemics are coming from the chair.

CHAIR—Get on with your questions, Senator Conroy.

Senator CONROY—What happened to treating people with courtesy?

CHAIR—Just ask your questions.

Senator CONROY—What happened to treating people with courtesy, Senator Brandis?

CHAIR—Senator Conroy, I am asking you to ask your questions.

Senator CONROY—That does not apply to you?

CHAIR—Yes, it does, Senator Conroy. I am asking you to ask your questions.

Senator CONROY—The information that I am asking for today is exactly the same as you have already provided for a different year, so I do not believe it is highly contentious. I appreciate we have a problem at the moment because we do not have a copy. Hopefully that is about to be solved.


ECONOMICS

Dr Henry—Senator, if you can solve that problem for us, and you are referring to information that is already on the public record, I imagine—

Senator CONROY—You keep making an inference about it being ‘on the public record’; if it is not on the public record, you seem to infer—and I am happy for you to correct me—that that means the question goes on notice. I find that unacceptable. Senator Brandis will dispute it, but I am entitled to express my opinion. There are no polemics there; I am just saying that I find it unacceptable.

Senator Ian Campbell—Chairman, I think it would help proceedings if Senator Conroy got to the actual questions. Senator Conroy’s own words were ‘these are published records’, as I recall.

CHAIR—Senator Campbell, the problem I am having with Senator Conroy is the same problem, I dare say, Dr Henry is having. That is, until we know the specific question it is difficult, in the abstract as it were, to have a discussion about whether or not Dr Henry should answer that question or what course he should adopt. That is why I have said it about a hundred times now, Senator Conroy: just ask the bloody question.

Senator CONROY—The problem we have is that I have asked the question. I have written to the Treasury officers asking them to bring certain information to the table.

CHAIR—All right, and they have not.

Senator CONROY—I gave them three days notice.

CHAIR—You have had a go at them.

Senator CONROY—It goes to the heart of the—

CHAIR—Perhaps that conduct is able to be criticised; I do not know. You have made your point. Now get on to your next question.

Senator CONROY—I guess I can ask about 2000-01 and we could make a copy of that for you.

Mr Comley—That would be good, thanks.

Senator CONROY—I will start with 1999-2000. How many cross-currency swaps matured in 1999-2000? I have the annual report here if you need it to assist with the answer.

Mr Comley—If you are prepared to hand over that copy of the annual report on a temporary basis—

Senator CONROY—No, that could cause all sorts of chaos, Mr Comley, but I am happy to share. Which pages do you think you would need? They are falling out anyway, so I could easily get you a photocopy.

Mr Comley—Believe it or not, I do not recall precisely which pages in an annual report I did three years ago—

Senator CONROY—How many cross-currency swap contracts matured in 1999-2000?

Mr Comley—Senator, this might be a little difficult. I am not sure exactly where I would find that number in this annual report. If we go to the financial statements, we might discuss the information that you were after previously.


ECONOMICS

CHAIR—Stop, Mr Comley. I know what is going to happen. I will suspend the hearing while we photocopy the pages.

Senator CONROY—That is an excellent idea.


Senator CONROY—I understand from page 2-12 that, in the 2003-04 budget, AOFM has overcome the technical issues that we talked about at some length at the last couple of rounds of estimates and is finally valuing government debt at market prices rather than historic costs. Is that correct?

Dr Henry—Yes, Senator, that is correct. Mr Murray will be able to answer questions in this area.

Senator CONROY—Is all government debt at market prices?

Mr Murray—Yes, that is correct, where market values are available. For debt, they are fairly readily available. There may be some areas of debt—

Senator CONROY—Most of the debts are liquid, with relatively easy comparisons. I understand that the budget is now prepared in line with the GFS accounting standard that requires all liabilities to be valued at market prices, for the first time since accrual accounting was introduced in 1999-2000.

Mr Murray—Certainly the debt liabilities, Senator.

Mr Roe—The GFS framework requires you to market assets and liabilities in the balance sheet at market prices, where market prices are available, or a suitable proxy where market prices are not available.

Senator CONROY—I understand that if there is not a market price available it is the best available proxy.

Mr Roe—That is what we have done across the balance sheet.

Mr Murray—Can I just clarify, Senator? I am a bit hesitant, because—

Senator CONROY—I am a bit worried because you are a bit hesitant!

Mr Murray—there are things like deposits held and whatever. I do not know, but certainly—as just confirmed—wherever there is a market value available, that is what we—

Senator CONROY—I appreciate you have indicated there could be some qualification.

Mr Murray—I do not want to mislead you, that is all.

Senator CONROY—No, I appreciate that. The AOFM annual report for 2001-02 states on page 41 that the market value of debt as at 30 June 2002 was $60 billion and the face value was $53.7 billion. In other words, the market value was $6.3 billion higher than the face value. Is that correct?

Mr Murray—Yes.

Mr Comley—I suspect we know where you are going, Senator, and we can give you an explanation of—


ECONOMICS

Senator CONROY—I will keep going, because I would not want you to answer a question I have not asked, Mr Comley. You know what bad form that is! You will be in real trouble if you do that, so let me save you potential embarrassment by trundling on through my questions. I am sure you have anticipated me, but let me trundle away. I would like to turn to table B4 on page 2-17 of Budget Paper No. 1 2003-04. Footnote A states that the opening net worth includes a reduction in the net worth of $2.5 billion due to the adoption of market valuation of debt. Does that mean that the opening net worth of the government has fallen by $2.5 billion, because the government has now valued debt at market prices and recognised a $2.5 billion increase in government debt? Is that a fair way to describe it?

Mr Murray—Senator, that is correct. Back-casting to 1999-2000, I can say that is correct.

Senator CONROY—Thank you. The footnote also states that this change has been, as you said, back-cast to 1999-2000. What increase in debt has been recognised in each of the financial years 1999-2000, 2000-01 and 2001-02?

Mr Murray—Do you mean from historic costs to—

Senator CONROY—You say you have back-cast it for a number of years.

Mr Murray—Yes.

Senator CONROY—What was the individual number put into those years?

Mr Murray—Senator, I refer you to box No. 1 on page 2-12, ‘Market valuation of net debt’. The figures are in table 6.

Senator CONROY—Budget Paper No. 1. Page 2-12, was it?

Mr Murray—Yes.

Senator CONROY—They are net debt figures. I was talking about gross debt, and those are net debt figures; would they be different?

Mr Murray—Between gross debt and net debt?


Mr Murray—They are. These are the net figures.

Senator CONROY—I know we are talking about net worth—the $2.5 billion I have just been talking about in terms of government debt. You consider that to be a net debt figure?

Mr Murray—That is the net debt figure, Senator. Of course, the definition of net debt is—

Senator CONROY—I have had that at considerable length. It excludes two-thirds of liabilities. I do not want to go there again.

Mr Murray—I just wanted to point out where it was, Senator.

Senator CONROY—Thank you for drawing my attention to that table. As I previously noted, the AOFM annual report states that the market value of debt, as at 30 June 2002, was $6.3 billion higher than the face value of the debt. Can you confirm that the full $6.3 billion has been recognised and, if so, where?

Mr Comley—You are comparing the market value with the face value. Historical cost book value is not the same concept as face value. Book value is equal to the face value plus


ECONOMICS

the unamortised issue premium, plus the accrued interest still to be paid on that debt within the accounting period. So there is a difference between book value and face value.

Senator CONROY—Is that significant in terms of—

Mr Comley—It is significant enough to reconcile the $6.3 billion in this table and the $2.5 billion difference you were looking at in the other table. In fact, it explains the difference.

Senator CONROY—Okay.

Mr Comley—So those three components of book value are the three components for a Treasury fixed coupon bond—that is, for a nominal bond. There is also an additional component for Treasury index bonds which we call the KT value. With the Treasury index bond, through time it will have a face value and then, as inflation increases, we increase the value we will repay at the end of that period. At any point in time, that KT amount is the amount you have essentially accrued because CPI has changed from the time you issued the bond. That component is also part of the book value of the debt but it is not part of the face value. Those three components in the case of the Treasury fixed coupon bond, and the four components in the case of the index bond, reconcile the difference between the $6.3 billion difference in table 3 on page 41 of the AOFM annual report and the difference in the net debt series between historic cost and market value on page 2-12 of the budget paper.

Senator CONROY—Thank you for that, Mr Comley.

Mr Murray—When you put those extra amounts in, it lifts you from that face value to the actual carrying value at historic cost, to approximately $57.6 billion. That is the gross AOFM debt.

Mr Comley—There is a little bit of rounding, but it is essentially the $2.5 billion.

Senator CONROY—I want to go back a couple of steps, because you have jumped well ahead of my questions. Could you explain why the revaluation has been included over four years and not just reflected in full in 2002-03?

Mr Comley—My understanding is that it is the way the GFS accounting standards apply a change in methodology. The GFS accounting standards are different from those of AAS. The GFS approach is to assume that the methodology always existed and therefore reflect the numbers that would have been in those years if that methodology had existed throughout the whole period. That is in contrast to AAS31 where, if you have a methodology change—if, for example, on 30 June you decide to change your methodology—and if you change the balance sheet, you have to have a corresponding revenue or expense item that fully hits on that day. It is purely a reflection of the different way the accounting standards treat a methodological change.

Senator CONROY—I had a lengthy debate with Finance about superannuation treatment and they actually did not do it that way. I will not draw you into it at this point. I may quote you back to them, but I will not draw you into it any further.

Mr Murray—Could I just clarify that, Senator. Clearly here we have market values available on those balance dates, so we are not talking about actuarial revaluations that may relate to various years. From historic data, we can go back and calculate these amounts. The


ECONOMICS

government did decide that 1999-2000, with the introduction of accrual accounting and properly constructed accrual balance sheets, was the appropriate date to take those revaluations back to with a view to being as transparent as possible, recognising that there would be a discontinuity, if you like, in the net debt series. But, of course, you have all of the historic series as well.

Senator CONROY—Can you explain why, when you did other revaluations—although ‘revaluations’ is probably the wrong word when I want to talk about Telstra and superannuation—they are reported as separate line items in the body of the table, but the revaluation of debt at market prices has not been reported as a line item but simply as a change in the opening net worth?

Mr Murray—Are you referring to table B4?


Mr Murray—That is, the general government sector statement of other economic flows. It is because we back-casted it, Senator. If we had just started in the year 2002-03, then there would have been a line adjustment. I do note, however, that when you get then to your closing net worth it has made no difference. If you read table B4 in conjunction with our table 6, you get a complete picture of what has been happening.

Senator CONROY—Except that we have had to have a correction issued by the department of finance and Senator Minchin; they have issued corrected figures for B4 and B2. At the risk of throwing us into chaos, I thought I might now, given Mr Comley has the tables handy, return to the fray. Can we start with 1998-99?

Mr Comley—Sure. Which page would you like me to consult?

Senator CONROY—As I said, you have given answers previously for 2001-02—not you, but AOFM has given me an answer to a question on notice—and I am essentially after the same information. I started to ask a question before and you said you did not have the individual amount with you but you thought that, if we went to another table, you might be able to assist. I was asking how many cross-currency swap contracts matured in 1998-99 and you suggested that there was a table we could go to, similar to the table we had been playing with earlier.

Mr Comley—What I thought I said was that, if we were looking at the cash flow in and out, I would expect there to be a similar table, but I am not sure if there is a table for the number of swaps.

Senator CONROY—Can we just go to the cash flow in and out. That was what enabled us to come up with an answer previously. Can you take me through that table.

Mr Comley—I apologise: I was too bold. I cannot find a table that replicates that information because that would have been prior to us producing the separate accounts.

Senator CONROY—Yes, I understand. We may have to eventually put on your tombstone the saying ‘I may have been too bold’. We will remember Blair Comley!

Mr Comley—It may not have been the first time.

Senator CONROY—That is what I am worried about for you!


ECONOMICS

Mr Comley—So I do not think I have that information from the report, Senator. I cannot completely rule it out, but without doing a painstaking reading and going through all the tables—there is a lot of information about government securities—I cannot find a table that would replicate that amount.

Senator CONROY—1999-2000?

Mr Comley—AOFM exists at that point in time, so I think our chances—

Senator CONROY—There is a good chance.

Mr Comley—As an FMA Act agency, there will be financial statements, so I suspect we are going to be in luck. Page 76 of the 1999-2000 annual report shows the administered cash flows for the period ended 30 June 2000.

Senator CONROY—What was the total cash receivable principal in Australian dollars?

Mr Comley—Cash received, $1.417 billion.

Senator CONROY—Total cash payable, principal in US dollars and then principal in Australian dollars?

Mr Comley—I do not have it in American dollars, Senator, because these accounts are just prepared in Australian dollars.

Senator CONROY—I will just take the Australian.

Mr Comley—Australian is $1.677 billion. Dr Henry has done the sums this time, so they are probably more reliable, at $260 million.

Senator CONROY—More paid out than received in cash?

Mr Comley—On principal, that is right.

Senator CONROY—2000-01; we have done that one already. That is the one you took on notice.

Mr Comley—My colleagues just said it is probably easier to go straight to the 2001-02 because it has the previous year number in it. Cash received was $789 million.

Senator CONROY—This is 2000-01 or—

Mr Comley—That is 2000-01.

Senator CONROY—Cash receivable principal was how much?

Mr Comley—It was $789 million. I am assuming you do not want the other three figures, just the round million?

Senator CONROY—Yes. And the total cash payable in Australian dollars?

Mr Comley—$1.046 billion.

Senator CONROY—Dr Henry, you are zooming away with your pencil!

Mr Comley—It is around $257 million.

Senator CONROY—Is it possible to do this for 2002-03?

Mr Comley—No, Senator.


ECONOMICS

Senator CONROY—Not yet?

Mr Comley—There is an estimate of the equivalent number provided in the portfolio budget statement.

Senator CONROY—As in cash receivable, principal and cash payable?

Mr Comley—Yes. I turn to the portfolio budget statement of the Treasury and to the AOFM amount in table 3.8 on page 111, 2002-03. The cash received from the swap principal, which includes the forward foreign exchange contracts associated with the swap program, is $7.051 billion; and the cash used is $7.148 billion.

Senator CONROY—You probably will not be able to do this, but I will ask anyway. That is an aggregated figure, with your forwards in?


Senator CONROY—Is it possible to get a disaggregated figure with the forwards out?

Mr Comley—We do not provide in the papers a disaggregation of the swaps and forwards.

Senator CONROY—I appreciate that you do not provide that figure in this paper. What I asked was: is it possible to get?

Mr Comley—I can take that on notice, Senator.

Senator CONROY—You will provide it, or you will take it on notice as to whether you are able to provide it?

Mr Comley—I will take it on notice, Senator.

Senator CONROY—No, I would like an answer to that particular question: you are taking on notice that you will provide it, as in you can just go back and get it, or you are taking it on notice as to whether you can provide it?

Mr Comley—I am taking it on notice, Senator, and I think it is likely that I will refer the question to the Treasurer—

Senator CONROY—All questions go through the Treasurer.

Mr Comley—and seek advice on whether he would like to provide that information.

Senator CONROY—If, when Senators Ray and Faulkner had asked for the figure on hotel expenses to be disaggregated out of the Prime Minister’s travel expenses, PM&C had said, ‘We’ve got to ask the Prime Minister whether or not we can release that,’ do you think that would have been an acceptable way to go?

CHAIR—Senator Conroy, that is not a fair question. You do not—

Senator CONROY—It is an identical question.

CHAIR—Order! I am speaking. It is not a fair question because, for a start, you cannot know that Dr Henry is familiar with that testimony. You cannot ask him, even subject to the rule of relevance in this committee, to be a commentator on other witnesses’ answers to other questions put in another committee. The question is out of order.

Senator CONROY—I was asking—


ECONOMICS

CHAIR—I know what you are asking and I have ruled. The question is out of order. Next question.

Senator CONROY—You would have the currency swap figure back in the office? You would have a disaggregated figure? To create an aggregate figure, by definition you must have the disaggregated figures that go into it.

Mr Comley—Yes, we have a disaggregated figure.

Senator CONROY—Can you confirm that this number only includes currency swaps and forwards? It does not include interest rate swaps, for example?

Mr Comley—Yes, I can confirm that it is only currency forwards and cross-currency swaps. Interest rate swaps do not have principal exchanged, and that is why you do not have any principal numbers here for interest rate swaps.

Senator CONROY—Can I confirm what exchange rate is assumed in the budget projections?

Mr Comley—I think you will find, Senator, it says a little over 60c. I can direct you to the page.

Senator CONROY—No. I think that is roughly what Mr Smith said yesterday or the day before.

Mr Comley—Yes. It is in ‘Economic parameters’.

Mr Murray—Senator, it is in statement 3 on the economy at the beginning of ‘The outlook for the domestic economy’. It is pages 3-11 and 3-12. It is a little over 60c.

Senator CONROY—How many cross-currency swap contracts will mature in 2003-04?

Mr Comley—I would have to take that on notice.

Senator CONROY—I think I wrote to you about that issue, did I?

Mr Comley—I interpreted your letter, correctly or incorrectly, as requesting all the details, effectively, including the return on basically all swaps.

Senator CONROY—This year would fall within it?

Mr Comley—I interpreted your letter as encompassing all swaps that had been entered into in the past or were currently on the books—the whole gamut.

Senator CONROY—I am asking about future contracts as well.

Mr Comley—I interpreted it as being about future contracts as well.

Senator CONROY—Dr Henry indicated that you had decided to consult the Treasurer. Did you prepare the answers to consult the Treasurer with or did you just show him my letter and say that it should be answered? What was the process that you went through?

Mr Comley—I forwarded the letter and sought guidance on the right answers to the questions.

Senator CONROY—You did not say, ‘Look, here is his letter; here is the answer—it is up to you’?


ECONOMICS

Mr Comley—No, I did not do that. I would note in that respect, Senator, that some of the information you sought is not information that we would hold in that form. There would have been work required to prepare some of that material.

Senator CONROY—I will just run down my questions, and we will go through this process where the ministers of the day get to decide what is revealed to parliament. I have asked how many cross-currency swap contracts will mature in 2003-04. What was the total receivable principal in Australian dollars at the exchange rate assumed in the budget?

Mr Comley—That information is provided in the budget papers. It is the same table I was referring you to before. Do you want me to run through the numbers for the forward years?

Senator CONROY—Yes, please. It is published. We know you can definitely talk about it; you have written about it.

Mr Comley—It is table 3.8 on page 1-11 of the Treasury portfolio budget statement. In 2003-04 the cash received is $5.535 billion; the cash used is $6.010 billion. In 2004-05 the cash received is $7.662 billion; the cash used is $8.276 billion. In 2005-06 the swap principal received—swap and forwards—is $3.456 billion; the cash used is $3.498 billion. The corresponding figures for 2006-07 are both zero.

Senator CONROY—Thank you. I am not quite sure how you will be able to chase this, but I was after those 1998-99 figures.

Mr Comley—I will have to take it on notice and see if I can find the equivalent numbers.

Senator CONROY—Sure.

Mr Comley—They would have been incorporated generally within the Treasury administered items. I suspect what I would have to find is the equivalent to the Treasury portfolio budget statement for that year, which would incorporate those.

Senator CONROY—I think you said that in the last year there were no zero figures.


Senator CONROY—There are some swaps maturing in those years, or not?

Mr Comley—The longest maturity of the swaps is 2008. What that indicates is that the net position of the portfolio will be zero in that year. I believe that is correct.

Senator CONROY—You have closed it out, effectively, in advance of the final year.

Mr Comley—Yes.

Senator CONROY—I guess you have to leave yourself a little bit of flexibility there.

Mr Comley—I think we have previously said that there is an agreed run-down schedule with the Reserve Bank. On the budget projections, what is implied by this is that the run-down schedule effectively ends with the full gross position closed out in 2005-06.

Senator CONROY—I want to move on to the net funding requirement. At previous estimates I asked about a table called ‘Net funding requirement’, which has been included in all of the AOFM annual reports except the 2001 report. In answer to a question on notice, you kindly provided it, so thank you for that. I now have ‘Net funding requirement’, ‘Headline budget balance’, ‘Other financing’ and ‘Cumulative’, 1996-97 through to 2001-02.


ECONOMICS

Mr Comley—You are saying you have it?

Senator CONROY—Yes. That is the information that was forwarded to me. Can you confirm the meaning of this table. What does it show?

Mr Comley—I was going to say that it was trying to get at the net funding requirement, but I realise that would not be too helpful! It is trying to show, essentially, the amount of money that needs to be raised or the accumulation of additional financial assets of the Commonwealth that will occur in a particular year.

Senator CONROY—Can you confirm that this table represents net cash receipts and payments, not accrual?

Mr Comley—That is my understanding, Senator. It is a cash concept.

Senator CONROY—Over the period 1996-97 until 2001-02, other financing totalled $4.7 billion.

Mr Comley—I think we have been through this before, Senator. I am not going to verify the number here, but I have no reason to doubt that you have correctly added those numbers.

Senator CONROY—Can you confirm that ‘Other financing’ include receipts and payments relating to swap transactions?

Mr Comley—Yes.

Senator CONROY—Would the difference between the face value of debt securities and the cash value of transactions involving debt securities and other transactions not otherwise identified be in there?

Mr Comley—Without trying to sound oblique, I can confirm that it includes the things in footnote B to the table, which is receipts and payments relating to swap transactions, and the difference between the face value of debt securities and the cash value of transactions involving debt securities and other transactions not elsewhere identified. I am not sure I can go much further than that.

Senator CONROY—That is fine, Mr Comley; thank you. Can you confirm that part of the $4.7 billion was cash paid out in excess of the incoming for realised swap losses?

Mr Comley—I am not sure I can confirm that, Senator. My understanding is that, for example—and I could be corrected by someone else at the table—the headline budget balance does not include the swap interest receipts, which would also be part of that other financing. Whether there is a net loss or gain overall on swaps, I could not confirm or deny. I do not have the numbers with me.

Senator CONROY—We have talked about the cash in each of the years.

Mr Comley—I may have misheard your question, Senator. If the question was, ‘Does it include amounts on principal of cash flows being greater than cash receipts?’ my understanding is that it does include those.

Senator CONROY—It does?

Mr Comley—Yes.


ECONOMICS

Senator CONROY—As I said, I will not ask you to sign up to the word ‘loss’. I am happy for it to be ‘outgoings’ or ‘outgoing greater than principal incoming’. Again, it is an aggregate figure, but can you provide me with a breakdown of the $4.7 billion into the three categories: swaps, premiums and other financing?

Mr Comley—I will have to take that on notice, Senator.

Senator CONROY—I would now like to discuss those contracts which have not yet matured, on which any gain or loss has not yet been realised. Contract No. 87 was due to mature in June 2003. Has it matured yet?

Mr Comley—I do not have that information in front of me, Senator.

Senator CONROY—This is, I think, off the AOFM web site.

Mr Comley—I would have to take on notice whether that contract has matured.

Senator CONROY—At what exchange rate was the contract entered into?

Mr Comley—I do not have that information in front of me, Senator. If I recall correctly, the web site would have that information.

Senator CONROY—Is it not in the table?

Mr Comley—I do not think it is in the table you have given me, Senator. You have the amount of principal exchange.

Senator CONROY—Given that it was 75c, it would suggest—

Mr Comley—The only reason I am hesitating is that this table—and I am not suggesting at all that there has been any change in transcription—looks to be in a different format to that with which I am familiar from the web site. I am not saying we should get bogged down on that.

Senator CONROY—No, I do not take any inference at all there, Mr Comley. I have not looked at it on the web site; I have only seen the printout, so I am at the other end of the description.

Mr Comley—Why don’t we proceed?

Senator CONROY—Sure. If those numbers represented there are correct—$A100, $US75—it would tend to suggest 75c.

Mr Comley—Sure.

Senator CONROY—At what exchange rate will the contract mature? If it were to do so tomorrow, sure, it would be tomorrow’s exchange rate. If it were yesterday, it would be yesterday’s exchange rate. Is that a fair way to describe the process?

Mr Comley—Yes, Senator.

Senator CONROY—I presume that the rate is whatever the value is on the day it matures.

Mr Comley—That is generally the case. I think you had a discussion with Mr Allen in a previous estimates that there are times when there may be adjustments to contracts in the middle, so there can be variations on that, but generally speaking that exchange of principal


ECONOMICS

would occur at whatever the exchange rate is. I am flagging that I cannot completely rule out that the contract was not modified in some way during the life of its term.

Senator CONROY—I think today’s exchange rate is 65. I saw that on the news before I came up. Because the US are talking about lowering their interest rates again, the dollar went up a bit.

Mr Comley—The last I looked it was 66. We tend not to try and track the exchange rate on very short periods of time; we take the longer view.

Senator CONROY—Would you agree that, provided these numbers are accurate and reflect the numbers that are on the web site, the exchange rate at which the contract was entered into was 75c?

Mr Comley—That is my understanding, Senator.

Senator CONROY—Today’s exchange rate is 66. If it were to mature today, what would be the unrealised loss on this contract at an exchange rate of 66?

Mr Comley—Sorry, Senator, you just went from saying it is about to mature to—

Senator CONROY—Let us say it matures tomorrow, so we are talking today and it is to mature tomorrow. It is unrealised, because it has not matured.

Mr Comley—Yes. The unrealised loss on principal would—

Senator CONROY—I will not say loss; let us say the principal going out versus the principal coming in. What would be the balancing figure? I will use a new phrase to try not to get you caught.

Mr Comley—I do not really want to do this calculation on the spot, because my earlier answers show that there is some unreliability in that estimation, but there is a difference in the exchange rates, if it were at 66, of approximately nine cents, so it would be that amount multiplied by the relevant principals.

Senator CONROY—That is 9c times—

Mr Comley—What you are effectively doing is paying out $US75 million—I assume these are millions—and receiving $A100 million. Whatever 75 divided by 0.66 is would give you the amount of cash that would be paid out.

Senator CONROY—Dr Henry, have we left you behind in terms of your pencil calculations? It is quite all right if we have. I saw you were scribbling, and I thought you might be doing the calculation for us. Mr Comley and I, between us, are proving incredibly inept at maths!

Mr Comley—If we assumed it was 66.67, the maths may simplify a little.

Senator CONROY—Let us do that. I am prepared to take that number if it is easier for you.

Mr Comley—Then I think you would add 37.5 to the 75 and end up with 112.5.

Senator CONROY—So 12.5 outgoing?


ECONOMICS

Mr Comley—The outgoing cash would exceed the incoming cash on the principal of 12.5. I stress, Senator, that I have given an answer which would generally break the rules in terms of engaging in a hypothetical on a range of assumptions—

Senator CONROY—I am not sure if this counts as a hypothetical; it is an existing contract and the numbers are there. To give you the flavour of how I calculate, I appreciate what you are doing. There are 105 contracts and we are up to No. 87. But can I take it that the general principles you have outlined would apply to each of them? Picking the next one, which is No. 88—

Mr Comley—The general principle, just with the one caution that if there has, during the life of contract, been some—

Senator CONROY—What would lead to that? What decision would be—

Mr Comley—Generally it would be a credit policy exposure issue. For example, if we were in a situation where a particular counterparty was in a position where there was a significant unrealised gain that we were in, and we were in a position where our credit limit said, ‘We don’t want that level of exposure to the person,’ we might renegotiate the contract to try and take some of the money out of the unrealised part and receive it up-front. It would generally be a function of credit policy.

Senator CONROY—I was just about to ask about the 90c contract. Is that what happened there?

Mr Comley—That is essentially what happened.

Senator CONROY—You had too much exposure to one counterparty?

Mr Comley—It was seen that it was better to handle the credit counterparty by taking some additional cash up-front, effectively. Mr Allen gave at the time quite a detailed explanation. I would not pretend to be able to—

Senator CONROY—On the 90c one, I am not sure we did get a detailed explanation at the time, but certainly we received a written response that was detailed. How often would that occur, Mr Comley? I appreciate you are only acting in this position. When are you off to Paris? Don’t tell me they talked you into staying!

Mr Comley—Believe me, Senator, they have not talked me into staying. I am off to Paris in late November.

Senator CONROY—Late November? I thought it was earlier than that. You have this job until November?

Mr Comley—No, Senator. Dr Henry might comment. I am acting until the position is filled.

Senator CONROY—Okay. I think he just kicked you under the table, Dr Henry! I will come to the appointments questions later. Would it be a common occurrence?

Mr Comley—I would have to take it on notice, but it is not that common.

Senator CONROY—If I generally work through the principles we just talked about there, for each of these other contracts—I do not want to put you through it individually—I could


ECONOMICS

work out the figures if they all matured at today’s currency; I could come up with similar sorts of figures. I appreciate they do not and they go out to August 2007, but the general principle we are talking about is that I could do that.

Mr Comley—There are two issues you would come across if you did that, Senator. One is the issue of a change in the contract and the second issue is this: you will note that some of the entries on the web site include a multiple number of swaps in a particular month. Take, for example, 73: it is saying that there are three swaps with an average tenor of eight.

Senator CONROY—What would that mean?

Mr Comley—That could be nine, 10 or 11, or it could be three eights. You would not be able to form a precise date at which they—

Senator CONROY—Thank you very much. In January 1997, No. 94, there are four numbers with a tenor of 8.5.


Senator CONROY—But the principal is shown in the total for each contract; that information does not vary.


Senator CONROY—All right, thank you for that, Mr Comley. I will not, as I said, torture you. More importantly, I will not torture our maths and humiliate us both completely. I will not go through each individual one, but thank you for that. Could I turn to page 111 of the AOFM PBS for 2003-04. I think I might have already covered this before. Explain why you do not show any swap principal under cash received and cash used—that goes with your run-off with the Reserve Bank?

Mr Comley—That is right, yes.

Senator CONROY—Net interest payments.

Mr Comley—Are we still on swaps, Senator?

Senator CONROY—No, net interest payments.

Mr Comley—Which page would you like to direct me to?

Senator CONROY—I would like to ask about the net interest payments in table 5 on page 2-10 of Budget Paper No. 1. The table shows that net interest receipts are projected to increase from $3.2 billion to $3.7 billion, or by $500 million, between 2004-05 and 2005-06. Is that correct?

Mr Comley—Correct.

Senator CONROY—The footnote states that these are net cash receipts. Why are cash receipts shown in this table when all other figures shown are accrual?

Mr Comley—I do not know. Senator, I am not sure.

Mr Murray—I think we will have to take that on notice, Senator. These come out of the cash flow statement.


ECONOMICS

Senator CONROY—Perhaps we can break at this moment. We are due to break right now anyway.

CHAIR—We will break until 9.30, and you can collect your thoughts.

Proceedings suspended from 9.16 a.m. to 9.31 p.m.

Mr Murray—Chairman, I said I would take a question on notice. However, I do not think it is necessary to take it on notice. That is the traditional way that we have presented the net interest payment figures in this format and certainly that is the effect on the underlying cash balance. Given the focus on the underlying cash balance, which we spoke about a couple of days ago, we have continued to present this net interest payment series in cash terms. However, we are not hiding the accruals, so I did want to point out to you, Senator Conroy, that if you then turn to table B1, the general government sector operating statement, you have the gross flows there. So there is the revenue under ‘interest income’ and the expenses under ‘other interest expenses’—and they are the accrual numbers.

Senator CONROY—I appreciate that this is just a historical anomaly.

Mr Murray—Yes. I just did not think it was worth taking on notice, that was all.

Senator CONROY—I appreciate your answer. In terms of preparation of next year’s budgets, would it be something you could look at, just to try and smooth—if I can use that word—out the anomaly?

Mr Murray—We could look at that.

Senator CONROY—Having cash and accrual figures together in the same table confuses my head.

Mr Murray—Yes, but it is relevant for what the effects are on the underlying cash balance. As I said, given the focus on the underlying cash balance, there is considerable worth in this measure.

Senator CONROY—Thank you for that. I want to go to table B2 on page 215. It shows that GFS net debt falls from $27.6 billion to $14.1 billion—or by $13.5 billion between 2004-05 and 2005-06. Is that correct?

Mr Murray—Correct.

Senator CONROY—I would like to understand better why the net debt falls by $13.5 billion yet net interest payments rise by $500 million between 2004-05 and 2005-06?

Mr Murray—The fall in net debt is a combination of asset sales, which predominantly, as you know, in that year were the first part of T3, the Telstra third phase, and similarly in 2006-07, together with the operating surpluses that would be in that year. Why then the difference with this jump in interest payments? The interest payments are really being knocked around, if you like, by the fact that there is the maturing of a Treasury index bond in that year. In cash terms, it is what is called the capital accretion component which, as Mr Comley indicated, is that accumulated inflation guarantee, if you like, in the bond, that then is paid out on maturity. That is footnoted, Senator, in footnote C on table 5 on page 2-10. You can then see, Senator, that interest payments then fall to $2.1 billion in the following year.


ECONOMICS

Senator CONROY—I am sure you will understand that, if you look at a figure and the net debt goes down and suddenly interest payments are going up, it is just counterintuitive.

Mr Murray—Yes.

Senator CONROY—I note that the premia on the repurchase of nominal bonds are no longer included in net interest payments, as they were in 2003-04, and I wanted to come back to that.

Mr Murray—This is repurchase premia?

Senator CONROY—Yes. However, I note that the footnote states that the 2005-06 estimates include recognition in cash terms of the capital growth on inflation indexed bonds maturing in that year, which is what you were mentioning.

Mr Murray—That is what I just referred to.

Senator CONROY—Can you confirm that this refers to an expense equal to the increase in the principal payable on capital indexed bonds and interest indexed bonds since they were issued?

Mr Comley—It is getting late but, having listened to the question, I think the answer is yes.

Senator CONROY—What is the amount of the increased principal included in net interest payments?

Mr Comley—I think that is part of the interest accretion on page 145. Can you repeat the question?

Senator CONROY—Sure. What is the amount of the increased principal included in net interest payments?

Mr Comley—Net interest payments?


Mr Comley—We will have to take that on notice, Senator, for the maturing value in that year.

Senator CONROY—For maturing?

Mr Comley—I think that is the question you are actually after. We will take that on notice.

Mr Murray—I am not sure that I understand the question, Senator. Is this in relation to the indexed bonds?

Senator CONROY—Let me give you an example that might make it clearer. If the interest rate payable on the net debt is very conservatively assumed to be five per cent, a $13.5 billion reduction in net debt should amount to a net interest reduction of almost $700 million. However, net interest payments increased by $500 million. Do the losses on the index bonds account for the entire difference of approximately $1.2 billion?

Mr Murray—We would have to take that on notice to get that disaggregation.

Mr Comley—Yes, we will take that on notice. If you are asking how much the TIBs are contributing in that year—as an interest payment in that year—I will take that on notice.


ECONOMICS

Senator CONROY—The way I have described the example—

Mr Murray—Yes, I fully understand your example.

Senator CONROY—there are two numbers and there is a difference. One goes that way and one goes that way, and I am asking what the total amount between those two figures is.

Mr Murray—Yes.

Senator CONROY—I have picked a conservative interest rate and it could be anything. I appreciate, if you do not have that handy, you would need to take it on notice.

Mr Comley—Yes, we will take that on notice, Senator. I think we understand the question.

Mr Murray—We do follow your mathematics in that, Senator, but it is probably a lot trickier than that.

Senator CONROY—I was hoping you could explain it.

Mr Murray—It is when the debt is retired during the year, and all of that would have to be taken into account in terms of working out what the interest payment is—or the reduction in the interest payments from the reduction in net debt.

Senator CONROY—Is there something else that would make up the number? I know you are saying there might be. Are there other things that you could suggest would influence that figure? You have said, ‘When it is repaid during the year.’ What other factors would impact?

Mr Murray—The major factor, Senator, would be when the Telstra shares were sold and when the receipts came in from that. I am just giving that as an example of the sorts of things that would complicate your mathematics, Senator.

Senator CONROY—Sometimes we do just ask the questions because we do not know the answers.

Mr Murray—Your example is giving an order of magnitude, but I am saying that it might be a lot more complicated than that.

Senator CONROY—Thanks. I am happy to take it on notice and see where it comes out at the other end. I would like to refer to the ANAO report No. 14, Commonwealth debt management: 1999-2000. You probably do not have a copy. ANAO stated at the time of their report that there were four capital indexed bonds on issue, maturing in August of 2005, 2010, 2015 and 2020. Does that ring a bell?

Mr Comley—That statement from the ANAO does not ring a bell, but those maturity dates accord with my recollection of when TIBs mature.

Senator CONROY—I note from the AOFM annual report on page 74 that there were still $6.4 billion on issue at 30 June 2002, but they had a face value of $8.1 billion—or $1.7 billion higher than when they were issued.

Mr Comley—Sorry, yes. I think we are coming back to the point we talked about—the difference between book value. Effectively, whenever you issue a TIB with its original face value and there is an indexation—which is the principal repayment the person is entitled to—

Senator CONROY—Yes, by definition, an indexed bond is—you pay book value plus whatever the inflation rate was.


ECONOMICS

Mr Comley—Maybe not by definition, Senator. There are different types of indexed bonds. With some of them you do not index the capital; you just get coupon payments that are—

Senator CONROY—I will accept that there is more than one type—more than the obvious one to me. I understand that the ANAO estimated the increase in principal due to inflation at $2.8 billion?

Mr Comley—I do not have the report with me.

Senator CONROY—That $2.8 billion—if you assume that I am not giving you a bum figure, and I have a copy of the page—what explains the difference?

Mr Comley—Without looking at the page, Senator, they may be talking over the life of the bonds until they mature. So this is the nominal value, as I understand, at 30 June 2002. Obviously those contracts have a period to run.

Senator CONROY—We are only asking about capital indexed bonds.

Mr Comley—Yes. The point is, Senator, when you have an indexed bond, obviously the value of it is going to depend on what has happened to inflation at that point in time. Are you referring to a report from 1999-2000?

Senator CONROY—Yes, I think it was in 1999.

Mr Comley—A report for 1999-2000?

Senator CONROY—For 1999-2000, yes.

Mr Comley—So we are talking about a report that is somewhere between three and four years old, and this is just the latest estimate at June 2002.

Senator CONROY—There is still a wide variance, though.

Mr Comley—To provide some sort of decomposition of exactly what might account for that difference—I would not want to hazard that on the run—I would have to take that on notice. I suspect it is just a change in either market expectations of inflation rates from then till now. There could be a range of factors.

Senator CONROY—I just thought the Reserve Bank target rate has been pretty much on track for most of the period from then to now, so I would not have thought there was a great shift in expectation there. There wasn’t the idea that it was going to be one figure and in fact it turned out to be another figure over that three years you are talking about.

Mr Comley—I will just have to take it on notice, Senator.

Senator CONROY—I appreciate that that is a complex one. I was just wondering if the ANAO extended to the bonds’ maturity rather than the current value.

Mr Comley—That is something I have to take on notice. That was what I thought might be part of the explanation, but I will have to check.

Senator CONROY—Sure. I would like to examine the treatment of these bonds in the budget. Paragraph 9.29 on page 144—you will not have it—of the IMF GFS manual—I am sure you do not have it. It reads:


ECONOMICS

Index linked securities are instruments for which either the interest or principal is linked to a price index. When the value of the principal is indexed, then, as with discounted bonds, each increase in principal is a transaction reflecting the payment of interest by the issuer.

Can you confirm that the increased expense due to the increase in the principal on all four capital indexed bonds is reflected in interest expense in each individual year in the budget and not simply as a lump sum in the year that the bond matures?

Mr Comley—Unless Mr Murray can shed light on this, I will have to take that on notice, Senator.

Mr Roe—The interest expense would be recorded for each period over the life of the indexed bond.

Senator CONROY—It would be?

Mr Roe—Yes.

Senator CONROY—Is the increase in the principal on capital indexed bonds that ANAO estimated at $2.9 billion included in the calculation of government liabilities?

Mr Comley—Yes, Senator, I think the answer to that is yes. I am just turning to my PBS and finding the line item that that would be in.

Senator CONROY—I know that is what is required. If you want to update—

Mr Comley—Yes, sorry. I am looking at table 3.7 of the portfolio budget statement. It is captured in the liabilities, and it is in the provisions line of the liabilities in table 3.7 on page 110 of the Treasury portfolio budget statement.

Senator CONROY—Page 110?

Mr Comley—It is on page 110 of the Treasury portfolio budget statement, in the AOFM section, and it is included in the provisions.

Senator CONROY—Thanks very much. Can I just go back to that question I asked before, confirming that the increased expense due to the increase in the principal is expensed in each individual year, not simply as a lump sum—are we confident about that answer?

Mr Comley—Yes, it is expensed each year. I have just been advised.

Mr Murray—And then included in the provision for—

Senator CONROY—And then included?

Mr Murray—The other side to that is the provision in the two entry—

Senator CONROY—I did not know there were two sides to an expense.

Mr Comley—Sorry, I think what Mr Murray is pointing out—

Mr Murray—This is double entry accounting, Senator. It has to be paid out in cash at a future date.

Senator CONROY—That seems to differ from the footnotes on the net interest table.

Mr Comley—But the net interest table we are talking about is a cash measure. The point is that is a cash number, so it hits in the year the cash is paid out. What we are describing here are the accrual measures, which are done on a continuous basis.


ECONOMICS

Senator CONROY—That makes more sense.

Mr Murray—And I think, Senator, it would be right to say, if you replicated the net interest payments on accruals, you would not get that lump in a 2005-06, because it would have already been expensed over time.

Senator CONROY—I would like to turn to table 3 on page 2-9 of Budget Paper No. 1, 2002-03.

Mr Murray—2002-03?

Senator CONROY—Last year.

Mr Murray—Did you say page 2-9?

Senator CONROY—Yes, table 3 on 2-9. Hopefully I have all the correct numbers. This table includes a figure for net interest payments?

Mr Murray—Yes.

Senator CONROY—The footnote to table 3 says this number is cash interest payments, less cash interest receipts. Can I confirm that this is a net cash expense that hit the cash balance?


Senator CONROY—The footnote on table 3 says net interest payments also include losses due to repurchase premia paid on nominal bonds repurchased in earlier years and held to their maturity in 2005-06.


Senator CONROY—Can I just confirm that these premia represent cash that was paid out at the time the bonds were repurchased because they were bought back at a price higher than the price at which they were originally issued?

Mr Murray—That is correct.

Senator CONROY—Can I confirm that this cash was paid out when the bonds were repurchased but the expense was not recognised until the bonds matured?

Mr Murray—Again correct.

Senator CONROY—I’m on a roll! I would like to turn to page 10-13 of Budget Paper No. 1, which sets out the GFS accounting treatment for public debt net interest.

Mr Murray—Are we in the same year, Senator, or have you switched years?

Senator CONROY—Yes, I think we are in the same year.

Mr Murray—Sorry, what page was it?

Senator CONROY—Page 10-13. It says that the GFS cash flow statement includes repurchase premiums and discounts, ‘... in the year that the repurchased stock is cancelled or matures.’

Mr Murray—Yes.


ECONOMICS

Senator CONROY—Can I just confirm, therefore, that the treatment of repurchase premia as part of net interest in the 2002-03 budget papers was consistent with ABS GFS treatment?

Mr Murray—It was, insofar as the year that it is cancelled or matures.

Senator CONROY—I understand from page 77 of the AOFM annual report that the premia amounted to $1.1 billion as at 30 June 2002. I am not sure if that is this year’s or last year’s.

Mr Comley—I am just trying to check, Senator. I have looked at page 77 of 2001-02.

Senator CONROY—I suspect it is the one after, because I am talking about a figure for 30 June 2002.

Mr Comley—Yes.

Senator CONROY—On page 77 of the annual report, the premia amounted to $1.1 billion as at 30 June 2002. That is the difference between the market and the face value of debt repurchased but not cancelled.

Mr Comley—I am struggling to find that on page 77.

Senator CONROY—It says, ‘total Treasury fixed coupon bonds,’ and I think that is a subtraction between the two of them.

Mr Comley—Sure.

Senator CONROY—It amounted to $1.1 billion—within a few decimal points?

Mr Comley—Sure, Senator. That is roughly right.

Senator CONROY—Now I would like to turn to Budget Paper No. 1 for 2003-04. I note from table 5 on page 2-10 that there is no longer any reference to repurchase premia under ‘Net interest expenses’, and I note from page 8-8 of Budget Paper No. 1 in 2003-04 that repurchase premia are now no longer included in interest expenses which impact the cash and fiscal balances but as revaluations in the statement of economic flows.

Mr Murray—That is correct, Senator, under the GFS framework.

Senator CONROY—Can I just confirm that market revaluation of debt totalling $1.566 billion between 2003 and 2006-07 represents those repurchase premia? That is where they have gone, in terms of being listed and accounted for in the budget paper?

Mr Murray—Yes. If you think about it, if you move to the GFS framework and you have your debt in there at market value, then when you purchase it early it is already at that market value, so there are no repurchase premia. What has happened is that all of those increased expenses are already recognised in the revaluation of the debt that you have already done, and that flows through the statement of other economic flows.

Senator CONROY—Now that you have it handy, let me go to page 43 of the IMF GFS manual 2001. It says that the statement of economic flows presents influences on government net worth that are not the result of transactions. Is that correct?

Mr Murray—Yes.


ECONOMICS

Senator CONROY—Could you explain to me what is meant by influences on net worth that are not the result of transactions?

Mr Murray—I am certainly not an expert in this GFS framework, but I think that the ABS earlier today indicated what that meant. If you take here the example of the revaluation on net debt, there is no transaction involved.

Senator CONROY—But it is cash paid out. If cash paid out is not a transaction, what on earth can it be?

Mr Murray—But it is not an expense transaction, Senator. If you think about it, the transactions you are referring to are the ones where we might have actually repurchased, but the revaluation is going across the whole stock of the debt in your balance sheet, and there is no transaction in any of that. It is just that that stock has been revalued at market value.

Senator CONROY—But I guess cash is king, and cash has been paid. That is a transaction. I note you used the words, specifically, ‘expense transaction,’ but I did not read into the IMF that there was a subqualification there. Cash has been paid.

Mr Murray—Cash may have been paid, Senator. Cash is paid for—

Senator CONROY—It is no longer considered an expense if cash is paid?

Mr Murray—No, Senator, please just let me finish. If you look at the cash flow statement, there are a whole lot of transactions there that involve you paying things, but they are not expense transactions. They might be capital transactions or financing transactions—and this is a financing transaction.

Senator CONROY—Did you consult the ABS on any of this?

Mr Murray—We did.

Senator CONROY—They failed to mention it to me earlier in the day. I asked them about what you had been consulting them on.

Senator Ian Campbell—Senator Conroy, I recall that very well, and I gave you an indication—

Senator CONROY—They indicated they would come back if there were any others that they had not mentioned. It is just that they did not naturally recall this particular one. But I willingly take your word that you did talk to them.

Mr French—My recollection was that they used that as an example.

Senator CONROY—They used that one as an example?

Mr French—Yes.

Senator CONROY—I thought we were talking about a $9 billion split—the only example that we were arguing about at length today. I have had a long day as well, Mr French, so it may be that you noticed it more than I did, but I do not remember that that was an example.

Mr Murray—My mind may be going, Senator, given my advancing years, but I recall quite clearly that they did mention this and they did indicate that we had consulted with them.

Senator CONROY—I will happily take your word for it.


ECONOMICS

Mr Roe—I recall the conversation, as well, with the ABS.

Senator CONROY—I happily stand corrected by all of you.

Mr Roe—The ABS clarified, I think, as part of that discussion that the GFS framework is an accruals framework and there is no explicit cash manual, as such. In order to interpret the cash transactions—

Senator CONROY—That is right. I recall that now. Thanks. You have jogged my memory on the phrase now. That has come back to me, so thank you very much. According to a press release in March 2002 about foreign currency swap transactions, foreign currency transactions were suspended at the request of the Reserve Bank in late 2000 and ended by the current government from September 2001. Does that ring a bell, Dr Henry or Mr Comley?

Mr Comley—The general discussion rings a bell. I think a colleague is about to pass me the press release. I assume you are referring to a press release that is merely titled ‘Debt management’ and is dated 4 March 2002?

Senator CONROY—Yes, that sounds about right. It says that foreign currency transactions were suspended at the request of the Reserve Bank in late 2000. It is the one that I think we were talking about a little earlier in the day.

Mr Comley—I think earlier in the day you were referring to the Treasury press release.

Senator CONROY—Yes, sorry.

Mr Comley—Dr Parkinson was the contact person. There is a Treasury one, and there is the Treasurer’s one, which is dated 4 March. The sequence, as I understand it, is that the Treasury one, from my recollection, predates the Treasurer’s one.

Senator CONROY—I have it. It is a 22 February one.

Mr Comley—That sounds right.

Senator CONROY—Does the Treasurer’s one have the statement that foreign currency swap transactions were suspended at the request of the Reserve Bank?

Mr Comley—I think actually you might be missing a nuance that is important here. From recollection, and Dr Henry may want to pick up on this, new cross-currency swaps had been undertaken previously.

Senator CONROY—I was just about to go to that point.

Mr Comley—Yes. What had happened is that, because of the decline in net debt, the proportion of the bench of the portfolio that was subject to US dollar exposure had increased.

Senator CONROY—Yes, it had gone over 15 per cent.

Mr Comley—It had gone over the benchmark of 15 per cent.

Senator CONROY—The famous 15 per cent benchmark.

Mr Comley—So the decision at that point was to suspend the benchmark, not to stop the swaps—because that in fact had happened earlier than that as the 15 per cent was already in—

Senator CONROY—Can I confirm that the last cross-currency swap contract was entered into in April 2000, as reported on the AOFM web site?


ECONOMICS

Mr Comley—There is an issue of the last swap that increased US dollar exposure. I do recall an issue with another swap that did not increase US dollar exposure because it was matching a swap that had been exited on a reverse inquiry basis. That is my recollection. I am just being careful because Dr Henry now has my web site copy that you kindly provided.

Senator CONROY—I am not sure that is on the web site. The AOFM web site, I understand, says explicitly that no contracts were entered into between May 2000 and April 2003. Senator Campbell has his trusty computer there and he might be able to pull up the web site. I do have a print-out showing cross-currency interest rate swap transactions and giving an explanation of the table—this has come off the web site. Down the bottom it gives a list of them and says that there were no transactions in the period May 2000 to April 2003.

Mr Comley—Sure. I am not disputing that.

Senator CONROY—Okay. So no cross-currency swap transactions have been entered into since May 2000, as stated on the web site. Would you agree?

Mr Comley—Yes.

Senator CONROY—Thanks. So what is the break-even exchange rate of the outstanding cross-currency swap contracts listed on the AOFM web site, the last one of which was entered into in April 2000 according to the Treasurer?

Mr Comley—I will have to take that on notice, Senator. If I were to provide you with some guidance on this and be as helpful as possible—

Senator CONROY—Please.

Mr Comley—Bearing in mind that I am going to be helpful within the confines of published information, page 20 of the AOFM annual report 2001-02 provides the clearest statement of the position of the portfolio effectively. If I just recap, it essentially provides three numbers which are summary measures of where the portfolio is. The three numbers are the realised gain on the portfolio—this is to 30 June 2002—which it does in nominal terms and then in net present value terms, recognising that the cash flows occur at different points in time and there is a financing benefit, having made money earlier on. So it provides two numbers. It says at 30 June 2002 the realised gain on the total portfolio was $144.3 million in nominal terms and $777.4 million in net present value terms. That is essentially a snapshot of what has been realised to date. When I say ‘realised’ in this context, I am not using the AAS31 concept of that; I am using what a lay person like myself—

Senator CONROY—Cash in and out, as I have often referred to it.

Mr Comley—Cash in and out, but the net present value also recognises that, if I received cash in an earlier period, that would save me financing costs through time.

Senator CONROY—Sure.

Mr Comley—The next sentence is: ‘On a broader economic return basis the economic performance of the strategy since it commenced in 1987-88 was a loss of $898 million as at 30 June 2002.’ The way that number is constructed is to take the net present value realised to 30 June and then, in a sense, conduct the thought experiment that I liquidate my full portfolio at that point in time—assuming I could do that without changing interest rate exchange rates.


ECONOMICS

As I think we have discussed previously, that is an interesting thought experiment, but not one you can actually carry out. Another way of thinking about that is to say: what is the market value at that point in time?

Now, in the same annual report, there is a table that indicates the sensitivity of effectively that economic return number to changes in the exchange rate. I cannot find the table immediately, but the number you will find in that table is that, at that exchange rate—and I think the annual report also says the exchange rate assumed for the purpose of the annual report was US56.48c; and in fact it is not assumed because it was an annual report issued after 30 June—

Senator CONROY—Take your time, Mr Comley.

Mr Comley—I know the number. It is on page 43 of the 2001-02 annual report. It indicates that on the currency swaps and forward contracts the sensitivity of the market value to a 1c change in the US dollar-Australian dollar exchange rate is $181 million. So, if you were trying to come to a conclusion of where a break-even number was or, indeed, if you were trying to form at least a first guess, on the basis of the information that is publicly available, about the position of the portfolio, you could take that sensitivity as an indication of the change in the market value from that exchange rate of 56.48c.

Now I would put one cautionary note in: that is that that is a sensitivity number for a 1c change around that number. There are some non-linearities so you cannot do a straight extrapolation. The other point is, obviously, that the nature of the portfolio has changed since 30 June 2000 as a result of the orderly unwind schedule. So, with those two caveats, that is the information that would give the best publicly available indication that might give you an idea of where break-even might be.

Senator CONROY—Regarding those two caveats you have put on it, if I was going to sit down and work it out—or more importantly, as you would understand, if my office were to—would they cause significant deviations in your view? Would they be of any magnitude? Would it be a minor deviation, or would they really throw the magnitude out completely?

Mr Comley—I am not sure I can comment on that. I just say that caution would have to be exercised in that number. To provide a more detailed answer, I would have to try and give you an idea of the sensitivity of a range of scenarios which would go beyond information I feel able to provide.

Senator CONROY—I wonder if you could explain forwards to me.

Mr Comley—Yes. What would you like to know?

Senator CONROY—Sorry, just before I go there, previously we discussed exchange rate at entry—for example, 100 versus 70 makes 70c.

Mr Comley—Yes.

Senator CONROY—If we repeated this exercise over the remaining 18 contracts, does that give me an average break-even rate?

Mr Comley—No, Senator. This is the point: this calculation—which is on page 20 and is effectively the calculation you would have to do for the portfolio—has three components to it.


ECONOMICS

It has the cash in or cash out on principal exchange—that is what your calculation there would give you; it has the gain or loss or the cash out or cash in of the net interest payments associated with those cross-currency swaps; and it has the financing benefit recognising where it occurred in time. It is very important to stress one thing about the policy: when the policy was first entered into, because there was an interest rate differential—and there still is an interest rate differential—

Senator CONROY—Well, there is now. There was not for a long time, but there is now. It is almost worthwhile, some could argue, to get back into the game.

Dr Henry—Is that a recommendation, Senator?

Senator CONROY—I am not recommending it. I am just saying some could argue it. Perhaps Dr Henry might want to argue it. Good luck.

Mr Comley—We could have a discussion about what the interest differential was. It was a small negative for a short period of time, but over the whole period it has been a positive differential, and it is sometimes quite significant. When the policy was entered into it was actually foreseen that, on exchange of principal, cash out would be more than cash in but that that would be more than compensated for by the interest differential that you pick up in that period. So, if you go to the web site and do a calculation on those principal exchanges, you are only picking up one of the three elements. You are not picking up the cash in and out on the interest payments, nor the financing that effects the period in time it occurs. I suppose what I have tried to point out—indirectly, and maybe somewhat obliquely—is that the economic return basis that captures all those three elements was around minus $900million at an exchange rate of 56.48c. There has been a sensitivity. At the time it was around 180 and we have had about a 10 cent exchange rate movement since then.

Senator CONROY—Okay, if I exchange the original cash flow of 70 for 100, just to use that example again, and the exchange rate does not change over time, I break even on principal. Is that right?

Mr Comley—That is right. But, if there was no change in the exchange rate and there was an interest differential on the way through, you would actually over the life of that individual swap—and we would stress that it is not really appropriate to look at individual swaps, because you have to think about the portfolio—have a positive economic return for that swap. With no change in principle and an interest differential, you would essentially take the cash flows you receive throughout the life of that swap, sum them up in present value terms and that would give you the economic return of that swap. That is essentially what the economic return number that is on page 20 of the annual report is capturing.

Senator CONROY—Okay. So have you calculated a break-even or does AOFM have a break-even rate for them?

Mr Comley—We do calculations from time to time, Senator.

Senator CONROY—Is it a state secret?

Mr Comley—Dr Henry pointed out that we have calculated a number, and it is below where the current exchange rate is, if that is of interest to you.


ECONOMICS

Senator CONROY—So other people may have heard about it on the grapevine and written about it, but you cannot tell the parliament?

Mr Comley—If you are asking—

Dr Henry—Sorry, Senator, that went over my head!

Senator CONROY—That is all right. Does that include forwards?

Mr Comley—It is the whole swap program, which includes forwards, yes.

Senator CONROY—I will just go back to a question I was asking about the forwards: were forwards entered into prior to the program being shut down by the Treasurer—or the decision by the RBA? When did you start getting into forwards?

Mr Comley—The decision to take forwards was part of the unwind schedule that was made.

Senator CONROY—When would you have entered into your first forward? It may be on that press release that I was waving around before. They probably start showing up under the heading ‘New FX forwards’ on the graph.

Mr Comley—I do not have in front of me the date when those forwards were first entered into. I would have to take on notice when we first entered into a forward, looking at that graph that we have there.

Senator CONROY—That is all right.

Mr Comley—Do you want me to explain why we take forwards as part of the unwind?

Senator CONROY—I think I understand it, but I might come back and take you up on that in a second. Now you have been willing to venture the break-even on the whole portfolio, and you have indicated numbers below where we are at now. Have you done a calculation without the forwards in there?

Mr Comley—No. We do not think it would be sensible to separate out the two, on the basis that we manage the whole portfolio. The forwards are entered into to manage the unwind from the swap program.

Senator CONROY—It is possible though. While it might not be sensible, it is arithmetically possible to calculate such—

Mr Comley—It is certainly arithmetically possible to make a calculation.

Senator CONROY—If you wanted to take a wild punt, Mr Comley, would you say it is above or below the exchange rate at the moment?

Mr Comley—I said I have not calculated it, Senator, so I am unlikely to take a wild punt.

Senator CONROY—Best guess? Best estimate?

Mr Comley—I do not think it is appropriate for me to make a best guess or estimate of that type.

Senator CONROY—Would it be above 70 cents?

Mr Comley—Senator, if you are asking me what my best guess is and I have said I am not prepared to make a guess, then we could play higher or lower—


ECONOMICS

Senator CONROY—I have quite a long time still. I can keep going until tomorrow afternoon, if you like, and ask that you stay and keep going with me. But let’s not.

Senator Ian Campbell—What time is the Collingwood game?

Senator CONROY—Sorry?

Senator Ian Campbell—Is Collingwood the Saturday game?

Senator CONROY—No. It is Monday afternoon, so I have a long period.

Senator Ian Campbell—I am free till Sunday night.

Senator CONROY—So it is just not sensible to calculate, without the forwards?

Mr Comley—That would be my view—that you would think about the portfolio as a whole. You are managing down the risk, essentially, in a consistent way—managed with the exchange rate and the unwind schedule. To execute that unwind schedule, forwards are a necessary part of the portfolio. They are an integral part.

Senator CONROY—You were going to help me out with the use of forwards. I was wondering if I could take up that—

Mr Comley—Take up that kind offer?

Senator CONROY—kind offer on using forwards.

Mr Comley—The basic rationale for using the forwards is that, when managing down the exposure with an ultimate target of zero, what we have agreed with the Reserve Bank is that there will be an unwind that essentially sets the amount of US dollar exposure unwound in a period, such as a month. That unwind schedule is not going to perfectly match the maturity of the swap contracts. So, if it happened that the swap maturities were running off faster than the unwind schedule agreed with the Reserve Bank, we would take a forward that effectively had US dollar exposure put back on to match the unwind schedule and, if one moved to a point where the maturity schedule was not fast enough to meet the unwind schedule, you could take out a forward that effectively would more quickly degrease US dollar exposure.

Senator CONROY—I see.

Mr Comley—Concretely, Senator, if I have what is known as a sell forward, which is a forward in which I have an obligation to sell US dollars in the future, I still have a US dollar exposure. If I have an obligation to buy—or, in other words, a right to buy at a fixed price—then I have less US dollar exposure than I otherwise would, because I do not have any exposure in terms of a risk that there might be a change in the US dollar.

Senator CONROY—Dr Parkinson's statement mentioned that there was no increase in the net exposure.

Mr Comley—Can you direct me to the part of his statement that says that? It sounds familiar.

Senator CONROY—I guess that is why he has the word ‘net’ in there. You have articulated that there is new exposure, albeit you would probably argue it is—

Mr Comley—It is not increasing net exposure.


ECONOMICS

Senator CONROY—no increase in net.

Mr Comley—For example, Senator, if I had a swap that was maturing—it was maturing and it was a $300 million swap—and I was trying to run my currency exposure off at, say, $100 million, then I would put a forward on of $200 million so the net exposure would be running down in line with the schedule.

Senator CONROY—Is it possible to enter into new exposure that leaves you with no potential risk that it could get worse?

Mr Comley—The point about the level of the US dollar exposure is that your net exposure determines how much you are exposed to changes in the exchange rate. So what the run-down schedule is doing is essentially seeing the rate at which your net exposure declines, which is the amount that you are exposed to US dollar variation. So, if you are still reducing your net exposure, you are reducing the risk to US dollar volatility. The question is at what pace you are reducing that net exposure.

Senator CONROY—Is it not the case that, if you had a portfolio of swaps worth $100 million with a break-even of 70c and you entered into forwards of $100 million at 50c, you would lower the break-even rate in the whole portfolio to 60c, without having any impact on the value of the portfolio?

Mr Comley—That is a level of ifs and assumptions that I cannot digest. I could try and take this down with a pen and a piece of paper and calculate it, but I am not sure that is actually going to be possible, because, apart from anything else, you have just sought the calculation on a break-even, with no regard to the interest differential of the cross-currency swap contract. Without the cross-currency swap contract, the interest payments, the timing of those interest payments and the level of interest rates that allow me to calculate the net present value, I cannot calculate the break-even number.

Senator CONROY—When the Treasurer said he did not want you engaging in any further currency speculation—

Dr Henry—I do not recall that, Senator.

CHAIR—Is that a direct quotation, Senator Conroy?

Senator CONROY—I did not quote him exactly. What is your recollection of the Treasurer’s views on the currency swaps?

Dr Henry—That is set out in the press release of 4 March, to which you referred earlier, Senator.

Senator CONROY—I thought he said that he had ended the program. If he said that he had ‘ended it’, what did you take that to mean in terms of the program.

Dr Henry—There were two stages to it, to the ‘ending’. The first stage related to a breaching of the 15 per cent benchmark, to which we earlier referred.


Dr Henry—And, as is noted in the Treasurer’s press release of 4 March 2002, my predecessor, Mr Evans, directed the AOFM on 17 October 2000 to maintain its foreign currency exposure on economic policy grounds, and that was at the request of the Governor of


ECONOMICS

the Reserve Bank. So that was the first stage. In November of 2000—the next month—the issue of whether that suspension or that breaching of the benchmark should remain in effect was raised with the Treasurer, and the Treasurer agreed that it should on 6 December. He instructed the AOFM to review then whether there should be a benchmark of 10 to 15 per cent and, indeed, whether there should be any cross-currency swaps at all. This is now the second stage. The review was completed in June 2001, and in September 2001 the Treasurer agreed to the findings of the review. That review recommended that there should not be a US dollar exposure in the debt portfolio and that the AOFM should enter into an orderly run-down of the exposure.

Senator CONROY—I remember at the time the Treasurer was making a number of public comments on this—a year ago—as you would remember, I am sure, and I think you engaged in extensive correspondence with Ken Davidson, if not others. I am trying to understand how you fit using forwards into the Treasurer’s description. To me, a complete ignoramus on these issues, a forward seems to be leaving you with exposure to US currency. Help me out, Mr Comley.

Mr Comley—I think the point, Senator, is that, as was said a number of times in the various discussions on this, you cannot suddenly be in a position where you have $4 billion or $5 billion worth of US dollar exposure and exit it on one day, because you would be very concerned at the impact that would have on the foreign currency market. So, once you have made a decision to exit, you need an exit strategy that may in fact take some time to play out, taking into account the capacity of the foreign exchange market to absorb it. So the agreement and the schedule that was set out said: what is the level of the change in the net US dollar exposure that can be readily absorbed by the foreign currency market? It is the net exposure which really determines the impact on the foreign currency market. All that the forwards do is provide a management mechanism to ensure that you, in an orderly fashion, reduce the net exposure. So each point in time you are reducing the net exposure to an ultimate target of zero, but in a way that can be absorbed by the foreign currency markets. So forwards are an efficient execution strategy to manage the unwind to the schedule.

Senator CONROY—But they are still an exposure to US dollars.

Dr Henry—But what Mr Comley is saying—that is the reason I set out the two stages to this—is that our foreign currency exposure was going above 15 per cent of the total portfolio. Had there been no breaching of the benchmark, then the AOFM would have been obliged to exit some swaps in order to get back under the 15 per cent of the portfolio. That was the issue that concerned the Governor of the Reserve Bank, because his view was that, if that sort of action was taken, that would be inappropriate for broader economic reasons. Now, sometime later, we have a review of the benchmark which says, ‘Well, we do not actually want any US dollar exposure at all.’ To close it all out at that time would have been even worse.

Senator CONROY—Even I am not suggesting that was a remedy.

Dr Henry—But, in order to avoid that—

Senator CONROY—Sorry, I am just trying to understand the interaction of these things. That is what I am trying to get to.


ECONOMICS

Dr Henry—Sure. In order to avoid that, the most sensible way to achieve an orderly run-down in the US dollar exposure was to use forwards. That is the only reason that they have been used—not to increase our US dollar exposure but, in fact, to facilitate an orderly run-down of our US dollar exposure.

Mr Comley—Maybe to make it clear in terms of the practicalities of this, Senator, in practice you put on a forward essentially at the time a swap is maturing, so you are doing a transaction at a matching point in time. For example, if I had a $300 million swap maturity and I wanted a run-down of $100 million, then I would put on a $200 million forward in the opposite direction. So that at every point in time I am getting a steady reduction in the US dollar exposure.

Senator CONROY—I want to go back to estimates on 6 June 2002, if I may. I asked about the use of forward foreign exchange contracts at the estimates. I asked:

Have any contracts of any type been entered into ... that established any new exposure to foreign currencies?

I was told that there was no new net exposure to foreign currencies and that:

The forward foreign exchange contracts are used to smooth that lumpy profile—

of swaps. I was told that:

... they do not generate any new exposure.

Dr Henry—That is more or less what I have said this evening.

Senator CONROY—Okay. Well I asked the officials why, when the Treasurer had said that he had ended the policy of swapping liabilities into US dollars, the Treasury was using forwards to maintain currency exposure, and Dr Parkinson said:

There is no increase in the net exposure; the net exposure is falling every month.

Dr Henry—That is correct. As I said, the forwards have been entered into in order to facilitate a reduction in the US dollar exposure.

Senator CONROY—But t is a new exposure?

Dr Henry—No.

Senator CONROY—It is not an expansion in the net; I accept that point.

Senator Ian Campbell—Surely it is just a way of managing the existing exposure.

Senator CONROY—But it is a new exposure. It is a new exposure that you have taken that does not increase the net—but it is a new exposure. I cannot quite get around that. I follow you all the rest of the way. I accept the net argument, but what has got me confused is what I specifically asked about was new exposures, and there is a new exposure. Even though I accept that it falls within the definition of ‘no net’, it is a new exposure, going down this path.

Dr Henry—We are really into semantics there. As Mr Comley was indicating earlier, you have an exposure under one instrument—a swap—and you replace part of that exposure with a different instrument—a forward. In our minds that is not a new exposure to foreign currency. You had the foreign currency exposure.


ECONOMICS

Senator CONROY—I might come back to that.

Dr Henry—It might just be the language, but that is what we would have had in our minds on 6 June 2002.

Senator CONROY—I think we had, and still have, a lot of, asymmetric informational problems here. You knew what you meant.

Dr Henry—I see.

Senator CONROY—And I am sure I did not know what you meant! But that is the game. I just struggle on. Dr Parkinson explained at the June estimates that the forwards are executed through individual contracts with the Reserve Bank.

Mr Comley—Yes, that is correct.

Senator CONROY—The forwards are executed through individual contracts with the Reserve Bank?

Mr Comley—That is correct.

Senator CONROY—So any profit you are making represents a loss by the Reserve Bank?

Mr Comley—I do not think you can necessarily say that, Senator, because that would presume that the Reserve Bank just take on that exposure and take no other action. In the same way that, when we have a swap mature and we take on a forward, we do it conscious of the fact that those two transactions are happening exactly—

Senator CONROY—So the Reserve Bank went out and hedged instead?

Mr Comley—They may well have. That is a question for the Reserve Bank.

Senator CONROY—What I am asking you is: where did your profits that you made on your forwards come from?

Mr Comley—Ultimately there is a counterparty to those forwards that has taken an exposure.

Senator CONROY—And the counterparty in this case is the Reserve Bank.

Mr Comley—But the point I am making, Senator, is that I do not think you can presume that the Reserve Bank took that exposure and took no other action. You would have to put the question to the Reserve Bank as to the way they conducted their management activities. In fact, to go one link down the chain, let us say, for example, that the Reserve Bank took some hedging activity with respect to that exposure, with a counterparty, you could not even necessarily presume that that counterparty took the full exposure, because they in fact may have gone and hedged that exposure themselves.

Senator CONROY—But in terms of money in and money out, money left the Reserve Bank and came to you?

Mr Comley—Senator, this is more than just a point of clarification: to think of these transactions in isolation misses the point that they would be considered as part of a portfolio, which I assume is the way the Reserve Bank would deal with it, but I would have to ask them that question.


ECONOMICS

Senator CONROY—Yes, but I am here to ask you about your portfolio. You are, because of your use of forwards, saying, ‘Look, we have made a lot of money.’ They may have offset, they may have laid it off, that is entirely possible. But in terms of the individual contract, one on one, winner or loser, in terms of your portfolio, the money that you have made came from the Reserve Bank. By definition your counterparty is the Reserve Bank.

Mr Comley—I am not disputing that, Senator, but what I am saying is that to give it the interpretation that the Reserve Bank lost money on that forward contract—

Senator CONROY—Can I rephrase it, then, to make you more comfortable: ‘They gave you money.’ So that we have not said that they have lost it, let us say that they gave you money—it is just that they have transferred money from their account to your account.

Mr Comley—But the implication that there is, for example, some change in the Reserve Bank’s profitability or returns is not an implication that should be drawn, because I do not know what other action they would have taken.

Senator CONROY—But I have not asked you to draw an implication. I have simply said the money that you received that you have defined as profit—and I am pleased that you like the word ‘profit’ all of a sudden—

Mr Comley—I cannot recall using the term ‘profit’. I will avoid it in future, if that helps.

Senator CONROY—The money coming in has come out of the Reserve Bank.

Mr Comley—The Reserve Bank is the counterparty to those forward contracts. That is correct.

Senator CONROY—So, when you had an excess of money coming in over money that went out, that came from the Reserve Bank. Is that in a tight enough box for you, Mr Comley?


Senator CONROY—If I had had a chance to go on to say, ‘so there is no net impact on the Commonwealth,’ then I think all your protestations would have been relevant, but you did not even let me get that far.

Mr Comley—Sorry.

Senator CONROY—Just stopping looking over my shoulder when I am out in the coffee room. Let us move on to the bond market. It is almost two months since Mr Allen departed. What is the status of the process for finding a replacement?

Dr Henry—That issue is with me, Senator.

Senator CONROY—How is it going? Is it one that you advertised?

Dr Henry—I have not advertised the position as yet, but it is my intention to do so shortly.

Senator CONROY—Have you been trying ways other than advertising? Have you been sounding people out? Have you had a short list?

Dr Henry—No.

Senator CONROY—At this stage you have not begun the process?


ECONOMICS

Dr Henry—I have begun the process in the sense of drafting selection criteria and that kind of thing, but, no, I have not been actively seeking people to do the job, if that is what you had in mind.

Senator CONROY—While I appreciate that you are very confident about the person you have acting in the position, you did indicate or AOFM indicated in its press release that accompanied Mr Allen’s departure that a permanent replacement would be found as soon as practical. And I appreciate you have every confidence in trying to poach Mr Comley and keep him from Paris. When would you hope to complete the process?

Dr Henry—I imagine the process will take some months.

Senator CONROY—Before November? I am doing a little lobbying on Mr Comley’s behalf here.

Dr Henry—That is certainly my intention.

Senator CONROY—The budget papers and Dr Henry’s speech narrowed the reasons for retaining a CGS market down to managing interest rate risk, financial sector stability during times of uncertainty and, to a lesser extent, the pricing of other financial products. Has Treasury estimated what the potential interest rate impact would be as a consequence of not having a CGS market?

Mr Comley—No, Senator, not in the sense of providing a point estimate.

Senator CONROY—In November you indicated that you had not done it at that stage. You also mentioned in the budget papers that the gross level of CGS outstanding is likely to decline further. Can you indicate any more precisely what the level of gross CGS is expected to decline to for each year over the forward estimates period?

Mr Comley—If you are looking for a very rough indication over the forwards estimate period, Senator, we have said in the budget papers that there will be issuance of around $2 billion to $3 billion in 2003-04. It is also true that there is a maturity in August 2003 of around $5 billion, so there will be a reduction in gross CGS in that year of in the order of $2 billion to $3 billion. After that it is a little difficult to say, because we do not provide issuance programs beyond the next program.

Senator CONROY—Is there a level you expect to see to stabilise that?

Mr Comley—The answer is yes and no. The reason I say that is that if you go to budget statement 7 there is actually an indicative profile of the level of bond lines that will exist. In a steady state—if you look at the chart—the intention is that there will be around eight and a half bond lines on issue at any particular point in time. The other piece of information that I would direct you to, which might allow us to make a calculation fairly quickly, is that on page 7-6 of budget statement 7. The second sentence of paragraph 2 says:

It is envisaged that around $5 billion will need to be issued into each new line of Treasury bonds over the two-year period.

I make two comments. If you did the simple multiplication of eight and a half times five, you would get a number that is around 42½. That is not, though, in a sense, a desirable target. It is saying that, on the basis of the information available at the moment, there seems to be a high degree of confidence that around $5 billion is sufficient to have a liquid and efficient market


ECONOMICS

in those lines, but it makes it clear in budget statement 7 that there is, in a sense, no target level of CGS and that the government will continue to monitor the efficiency and liquidity of those lines. So there is no fixed point, but if it came to pass that $5 billion continued to be judged as around the right level per line, then implied by the issuance program that is foreshadowed would be a bond market consisting of a little over $40 billion of treasury fixed coupon bonds.

Senator CONROY—Thank you, Mr Comley. The sale of Telstra is factored into the forward estimates for 2005-06 or 2006-07?

Mr Comley—You will find that it is 2005-06 that it starts to come through.

Senator CONROY—In relation to the proceeds from the Telstra sale, how are they factored into the general government balance sheet? Do the budget papers assume that Telstra proceeds are used to retire debt or are they parked at the RBA on term deposit?

Mr Comley—The budget papers do not make a judgment on that, Senator. It is note 11, and it states that beyond 2002-03 there is a netting assumption applied to the proceeds—in fact, a debt and assets. So, in a sense, there is no assumption. That is on page 10-10. Note 11 is a note that has actually been in the budget papers for some time.

Mr Murray—Senator, you can clearly see that netting effect in the balance sheet.

Senator CONROY—I had some troubles with a particular balance sheet in Telstra recently, so I thought I would get you guys to clear it up. You did not help Finance do that number, did you? Or was the Treasurer responsible? That must mean it was you. Come on, fess up!

Mr Murray—Sorry, Senator, I did not hear the question.

Senator CONROY—I was wondering whose table that was, with the Telstra valuation. Is that a Treasury assumption?

Mr Murray—The Telstra estimates, being asset sales, are the responsibility of the department of finance.

Senator CONROY—Dr Henry is looking particularly sheepish there. I am just wondering, Dr Henry, if you have anything you want to add?

Senator JACINTA COLLINS—He probably saw The 7.30 Report.

Dr Henry—Nothing at all, Senator.

Senator CONROY—The budget papers suggest that, should the amount on term deposit at the RBA exceed $25 billion on an ongoing basis, the Commonwealth will consider allocating funds to other liabilities, possibly superannuation. Can you explain what this statement means in practical terms?

Mr Comley—I do not think I could expand further than that, Senator. If the government has balances that exceed $25 billion on an ongoing basis, it will consider allocating to liabilities. I do not think it can be any plainer that.

Senator CONROY—Could you give me an example of the liabilities, other than superannuation?


ECONOMICS

Mr Comley—It says ‘possibly superannuation’.

Senator CONROY—Other than superannuation. You might have done this once before—taken me through what the other liabilities could be.

Mr Comley—I would not want to expand on any other examples at this stage.

Senator CONROY—Does it mean that the Commonwealth could be investing in other financial assets, such as shares? That would seem to be the logical conclusion.

Mr Comley—I cannot add anything more to that statement.

Senator CONROY—You dare not say it again? Okay. In your consultations with interested parties, did you consult with overseas interests?

Mr Comley—Yes, we did.

Senator CONROY—Who did you speak to and what were the messages provided to you in relation to the prospect of closing down the CGS?

Mr Comley—The overseas people?


Mr Comley—I am happy to take that on notice and provide you with a list of the people we spoke to.

Senator CONROY—What was their general sentiment?

Mr Comley—There was a geographical difference in the views. That is why I am hedging a little. Certainly consultations in the United States and in the United Kingdom—where it was fairly similar but to a lesser extent—tended to have the view that the winding down of the CGS market would be relatively benign. In the Asian region, the views tended to be that it was a more significant part of the economic infrastructure and therefore we should seek to maintain it. So there was a divergence of views between different regions.

Senator CONROY—I notice from Dr Henry’s 20 May speech that he chastises stakeholders for this. These are my words, so feel free to jump—

Dr Henry—I did use different words.

Senator CONROY—You talked about stakeholders not having sound analysis to back up their arguments and trying to convince Treasury of their arguments through sheer force of will and not giving sufficient consideration to the wider implications of policy proposals. Is that too unfair a characterisation of your sentiment?

Dr Henry—I think it is quite unfair, yes. I know it was interpreted by some journalists that way, but I did not see myself as chastising participants in the consultation process for having behaved in particular ways, but rather emphasising that there were a number of lessons that all participants in the consultation would have learned—and you have just mentioned three of them.

Mr Comley—Maybe I should add, Senator, that—

Senator CONROY—I was going to say that I know Dr Henry was not as centrally involved as you were, Mr Comley.


ECONOMICS

Mr Comley—The experience of the review team was very positive in terms of the stakeholder engagement. We got an enormous amount of help and support from members of the financial sector, in particular, and they were very generous in giving their time in providing information and resources to the process. The observations that Dr Henry was making were almost, I would say, reflecting the best practice of some of the stakeholders who had particularly positive roles in the process and the attributes they brought to the process—and saying that all stakeholders in, say, future policy processes could learn some lessons from that, if you like, best practice that was exemplified by a number of people in the consultation process.

Senator CONROY—Before releasing your discussion paper, did you have extensive consultations with stakeholders?


Senator CONROY—That is what I thought. You were aware of the concerns of a variety of stakeholders prior to releasing it?


Senator CONROY—What new information came to light from those extensive consultations before the release of the paper and extensive consultations afterwards? Was there some new paradigm that became clear?

Mr Comley—Senator, I think I would describe the process as refining the areas that were particularly significant, and that was quite important. You have quoted Dr Henry, and if you go back to the discussion paper, we canvass eight possible reasons why you might want to think about maintaining a Commonwealth government securities market. That drew on the little international literature that existed, plus some of those discussions.

Senator CONROY—Plus, of course, your paper.

Mr Comley—It drew on a range of sources. During the process, I think stakeholders as well as ourselves narrowed down the issues that we thought were the particularly significant ones and probably explored the arguments on the others and asked whether they were of great significance. But also the financial market participants provided significantly more detail and, if you like, an analytical basis on the linkages within the financial system.

Senator CONROY—So they lifted their game.

Mr Comley—I think that they put in a substantial intellectual effort to try and provide information on the benefits of the market.

Senator CONROY—So they won you over?

Mr Comley—The question of winning over suggests we changed our view. We came into this process with open minds. We collected the information, we consulted with a range of industry participants in good faith and we got an enormous amount of information which did enhance our understanding of the markets—which I think is exactly what a consultation process should do.

Senator CONROY—So the Treasurer was won over?


ECONOMICS

Mr Comley—Again, the use of the term ‘won over’ implies that there was a change of heart. I think it was pretty clear, even in the discussion paper, that the Treasurer said that he welcomed views and was prepared to listen.

Senator Ian Campbell—Practically speaking, if he had made up his mind, he would not have had a consultation process or a consultation.

Senator CONROY—Thank you. If I could return to my earlier Telstra questions, I was asking whether you assume the Telstra proceeds are used to retire debt or are parked at the RBA on term deposit. You explained that you have an assumption that they do not do either.

Mr Comley—It is netted out. That is right.

Senator CONROY—Could you explain to me what you mean by ‘netted out’?

Mr Comley—For estimation purposes, you reduce the amount of gross securities that are notionally on issue and you reduce the amount of term deposits. Therefore, for estimation purposes, the gross debt becomes the net debt, but it is purely an estimation forecasting assumption. I will give you an example, Senator. If you go to page 110 of the portfolio budget statement and look at the investment line for AOFM, in 2002-03 investment is $8.5 billion—essentially the term deposits at 30 June. That becomes 000 after that point in time.

Mr Murray—Can I add to that, Senator?

Senator CONROY—Please do.

Mr Murray—I will add to that. If you turn to table B2 on 2-15 of Budget Paper No. 1, you will see that investments for loans and placements from 2002-03 go from $18.2 billion down to $9.9 billion, and that is reflected in the fact that government securities fall, under liabilities, from $61.9 billion down to $51.6 billion. Then you will see that those liabilities fall quite dramatically in 2005-06 and 2006-07 from the sale of Telstra. That is how you trace through that netting process from the AOFM—

Senator CONROY—I am just trying to get my head around it. I am a little confused. I could be on the wrong track here, but bear with me. If the money is parked at the RBA—and you are saying it is not—on term deposit, what rate of return is estimated?

Mr Comley—That is not a number we actually publish, and we might be going back to where we started.

Senator CONROY—If I go to my next question, it may help with this and the next answer. How does the term deposit rate of return compare with the foregone Telstra dividends?

Mr Comley—I do not have that—

Mr Murray—I am not sure that I understand the question, Senator. Could you repeat it?

Senator CONROY—For asset sales more generally, does placing the proceeds of asset sales at the RBA instead of retiring debt alter the cost benefit formula for determining whether asset sales proceed or not?

Mr Murray—I am not quite sure how Finance do all of this, Senator, but I presume that they do the full calculations and that would be the interest savings. First of all, the dividend is


ECONOMICS

foregone—and the up-front cost of the sale, so there is the financial market’s cost—and that is compared with the savings in interest payments.

CHAIR—Senator Conroy, it is past 11 o’clock.

Senator CONROY—If I can just finish this point, I will be happy to wrap up. As I say, I could have completely wrong end of the stick here, so I am trying to get my head around this. I appreciate you cannot give me a possible rate of return—

Mr Comley—Senator, I think there are two questions in your head. I do not want to pre-empt anything by looking over your shoulder again.

Senator CONROY—I will not mind this time, I promise.

Mr Comley—One question is: what is the mix between gross assets, gross debt and net? Without talking about precisely what we do, we try to make an assumption that means that we do not change the budget significantly, whether it is gross or net. We try to make sure that we do not introduce a bias there. Your second question is how does that—in a sense, either savings on debt or assumed rate of return on assets—compare with a dividend stream? That is a separate question that comes down to: what are the dividends versus those interest payments. But if you are assuming that dividend payments or foregone dividends are constant then that rate of return assumption will affect the impact on the budget. I think that is the question you are asking.

Senator CONROY—Yes. I am essentially trying to get there in my own inarticulate way.

Mr Comley—Yes. Does that answer the question?

Senator CONROY—I am not sure I have got the information necessary to make the calculation, that is all.

Mr Comley—As I say, we do not publish that number.

Senator CONROY—Can you take that on notice?

Mr Murray—Senator, that is a question for the department of finance—in terms of what might have gone into the calculations.

Senator CONROY—I think Mr Comley knows what it is. He is just taking it on notice.

Mr Comley—I can assure you, Senator, that at this point in time I do not know what that number is.

Senator CONROY—Could you take it on notice? I appreciate that Mr Murray is indicating that it might be a Finance transaction. I am seeking his indulgence: if you are able to obtain it relatively easily, I am asking that you go through the process of passing it to the Treasurer and letting him write back and telling me he does not publish it. But thank you.

CHAIR—Thank you, Senator Conroy. Is that it for this evening?

Senator CONROY—As Mr Comley is not going to be here tomorrow, that is all I have on the bond market and for AOFM.

CHAIR—Yes, Mr Murray.


ECONOMICS

Mr Murray—I know it is very late, but there were a couple of issues I will cover very quickly, from a previous session on Commonwealth-state financial relations. There were some questions asked.

CHAIR—Will you be coming back tomorrow, Mr Murray?

Mr Murray—No, I will not, and this is very quick. We were asked, on the First Home Owners Scheme, about evaluation. I think it was mainly Senator Bartlett who asked these questions. I just want to make the point that the legislation set up by the states for these schemes does provide for administrative review and appeal mechanisms and also for provisions to prevent fraud and abuse. I did outline that certainly there are guidelines and mechanisms on fraud and abuse. The piece that I left out which escaped me at the time was that, while we have not done any performance audit at the Commonwealth level, the state legislation and schemes do require auditing of the schemes at the state level and those are then published audit accounts.

I will just give information in relation to another couple of very quick questions that were asked. We were asked whether we had postcodes of the homes being purchased: we do understand that that information is collected by the states. We have not requested that information, but it is available. The second one related to income levels of the First Home Owners Scheme recipients. As we indicated, that information is not collected and accordingly that is not available, it being a non-means tested scheme.

CHAIR—Thank you, Mr Murray.

Senator CONROY—Can I beg the indulgence of the chair? I want to ask one question which you will not have the answer to, so you can take it notice. I will just read it out. Thank you. Could you provide me with an estimate of the total cost to Treasury of the CGS exercise and, as part of that, a breakdown that includes the level of resources spent on domestic and international travel, accommodation, travel allowances and external consultancies, including the costs associated with the references committee, publication costs and staffing costs, including the number of hours spent by Treasury staff on this exercise.

Mr Comley—Sure.

Senator CONROY—Thank you very much.

Committee adjourned at 11.08 p.m.

commonwealth of australia official committee hansard · professor allan fels, chairman mr brian...

Documents