SENATE - Parliament of Australia...INDUSTRY, TOURISM AND RESOURCES PORTFOLIO In Attendance Senator Minchin, Minister for Finance and Administration Executive Mr Mark Paterson, CEO

COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATEECONOMICS LEGISLATION COMMITTEE

Consideration of Budget Estimates

WEDNESDAY, 20 FEBRUARY 2002

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Wednesday, 20 February 2002 SENATE—Legislation E 1

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SENATE

ECONOMICS LEGISLATION COMMITTEE

Wednesday, 20 February 2002

Members: Senators Brandis, Chapman, Collins, Murray, Schacht and Watson

Senators in attendance: Senator Brandis (Chair), Senators Campbell, G., Chapman, Collins,Conroy, Harradine, Lundy, O’ Brien, Schacht, Sherry and Watson

Committee met at 9.04 a.m.INDUSTRY, TOURISM AND RESOURCES PORTFOLIO

In AttendanceSenator Minchin, Minister for Finance and Administration

ExecutiveMr Mark Paterson, CEOMr John Ryan, Deputy CEOMr Alan Gray

Innovation Policy BranchMs Tricia Berman, General ManagerMs Carolyn Jenkins

Industry Policy DivisionMr Terry Lowndes, head of Division

Tourism DivisionMr Robert Crick, Head of DivisionMs Kerry Rooney, General Manager, Best Practice and Program Development GroupMs Janet Murphy, General Manager, Market Access GroupMr David McCarthy, General Manager, Business Development GroupAlan HendersonJeff Beeston

Business Competitiveness DivisionMs Hellen Georgopoulos, Head of DivisionMr Rob McKeon, General Manager, New Economy BranchMs Janice WykesMs Ruth Gallagher

Energy and Environment DivisionMr Bob Alderson, Head of DivisionMr Kevin O’Brien, General Manager, Electricity and Gas Reform BranchMr Chris Hyman, Manager, Strategic Support

Services and Emerging Industries DivisionMs Patricia Kelly, Head of DivisionMs Sandy Radke, Acting General Manager, Biotechnology Australia

Manufacturing, Engineering and Construction DivisionMr Ken Pettifer, Head of Division

E 2 SENATE—Legislation Wednesday, 20 February 2002

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Mr John Dean, General Manager, Industry Contact and Policy Team 2Mr Peter Clarke, Automotive Policy SectionMr Alan ColemanMr Claude DomainiMs Catherine Zerger

Petroleum and Electricity DivisionMr John Hartwell, Head of DivisionMs Cherie Ellison

Coal and Minerals Industries DivisionMr Malcolm Farrow, Head of DivisionMr Jeff Harris, General Manager, Minerals Access and Rehabilitation BranchMr Les Rymer, General Manager, Minerals Development BranchMr Graeme Barden, Manager, Minerals Industry sectionMr Alan Laird, Manager, Uranium Industry Section

BiotechnologyMs Sandy Radke, General Manager

Office of Small BusinessMs Sue Sadauskas, General ManagerMs Sue Weston, General ManagerMs Virginia Bell, Regulation Reform TeamMs Jennie Dwyer, Regulation Reform TeamMr Peter Chesworth, Environment SectionMr Tony Greenwell, Finance and Tax Policy SectionMr Vince Zilinskas, Information sectionMs Angela DinosMr Simon McCabe

Corporate DivisionMr Philip Noonan, Head of DivisionDr Joe Hlubucek, General Manager, Ministerial and Coordination GroupMr Chris Dainer, General Manager, Corporate Finance BranchMr Simon Murray, Budget Coordination TeamMs Jo-ann RoseMr Graeme HoltMs Janet Wayn, Budget OfficerMr Ivan Meyer, Portfolio Coordination

Business Entry Point Online ServicesMs Marie Johnson, General ManagerMr Paul Griffin, General Manager, Acting

Invest AustraliaMr Barry Jones, Executive General Manager

Analytical and Mapping DivisionDr Terry SpencerMr Mark Nash


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AusindustryMr Drew Clarke, Executive General ManagerMr Bill Peel, Deputy Executive General ManagerDr Russell Edwards, General Manager, Program Management GroupMr Phil Constable, General Manager, Business Development GroupMr Errol Zahnow, Project Management OfficeMr Kevin Noonan, General Manager, Information Management GroupMr Paul Sexton, General Manager, Customer Services GroupMr David Luchetti, Manager, Venture CapitalMs Margaret Wilson, Manager, Project ImplementationMs Michelle JuliusMs Trish CattellMr David BaussmanMr Wayne Kathage

IP AustraliaDr Ian Heath, Director General

Australian Tourist CommissionMr John Hopwood, General Manager, Business ServicesMr Nathan SmythMs Kate Pembroke, Government RelationsMr Ken Boundy

Geoscience AustraliaDr Neil Williams, Chief Executive OfficerMr Tony Robinson, General Manager, CorporateDr Trevor Powell

CHAIR—I declare open this public meeting of the Economics Legislation Committee. On14 February 2002, the Senate referred the following documents to the committee forexamination: particulars of the proposed additional expenditure for the service of the yearending 30 June 2002, Appropriation Bill (No. 3); particulars of certain proposed additionalexpenditure in respect of the year ending 30 June 2002, Appropriation Bill (No. 4); statementof savings expected in annual appropriations made by Act No. 64 of 2001 and Act No. 65 of2001; issues from the advance to the finance minister as a final charge for the year ended 30June 2001; and the final budget outcome for 2000-2001.

Today the committee will examine these documents in respect of the Industry, Tourism andResources portfolio and the Treasury portfolio. I remind officers that the Senate has resolvedthat there are no areas in connection with the expenditure of public funds where any personhas a discretion to withhold details of explanations from the parliament or its committeesunless the parliament has expressly provided otherwise. That resolution is to be understoodsubject to resolutions agreed by the Senate on 25 February 1988, ‘Procedures to be observedby Senate Committees for the protection of witnesses.’ In particular, I draw to the attention ofwitnesses resolution 1, subresolution 9:A chairman of a committee shall take care to ensure that all questions put to witnesses are relevant tothe committee’s inquiry and that the information sought by those questions is necessary for the purposeof that inquiry.

At resolution 1, subresolution 10:


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Where a witness objects to answering any question put to the witness on any ground, including theground that the question is not relevant or that the answer may incriminate the witness, the witness shallbe invited to state the ground upon which objection to answering the question is taken. Unless thecommittee determines immediately that the question should not be pressed, the committee shall thenconsider in private session whether it will insist upon an answer to the question, having regard to therelevance of the question to the committee’s inquiry and the importance to the inquiry of theinformation sought by the question.

I also remind officers that an officer 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 superiorofficers or to a minister. Witnesses should note that the evidence given to the committee isprotected by parliamentary privilege. I also remind you that the giving of false or misleadingevidence to the committee may constitute a contempt of the Senate. The committee hasresolved that the date for the receipt of written responses to questions taken on notice is 30days from the completion of this round of hearings. On that basis, responses shall be providedto the committee by Friday, 22 March 2002. The committee will prepare a report on itsexamination of the additional estimates. The report will be tabled in the Senate on or before13 March 2002.

Before we commence, I request that all mobile phones either be turned off or set to silentoperation, as phones ringing during the hearings interrupt the work of the committee.

A spillover day on Friday has been requested and the deputy chair and I have had adiscussion about how much of Friday is likely to be occupied, if that is of interest to any ofthe officers in the room this morning. Our objective will be to ensure that proceedings onFriday wind up by about mid-afternoon, to enable people who have to catch flights in theearly evening to do so. I welcome to the table Senator Minchin, representing the Minister forIndustry, Tourism and Resources, and officers of the Department of Industry, Tourism andResources. Minister, do you wish to make an opening statement?

Senator Minchin—No, Mr Chairman, but can I clarify your program? As I understand it,you are moving back to the Taxation Office at some point this afternoon. Is that still the case?

CHAIR—Yes, that is the arrangement.

Senator Minchin—Is that happening at a particular time?

CHAIR—We have not specified a time for it, Senator Minchin. We hope that outcomes 1and 2 in your estimates may be able to be worked through before we get to the AustralianTaxation Office. We expect that if the outcomes in the Department of Industry, Tourism andResources are not completed by 2.30, then at approximately 2.30 we will break and call theATO officers.

Senator Minchin—Are you still proposing to bring the Tourist Commission in at 8o’clock?

CHAIR—Yes. Are there any general questions concerning the Industry, Tourism andResources portfolio?

Senator GEORGE CAMPBELL—I have got a series of questions, Mr Chairman. Mostof them are general and run across several of the programs. I might just try to deal with themin generic form rather than breaking them down and trying to deal with them under eachoutcome. That actually might facilitate the process. Welcome, Mr Paterson, to your firstestimates.

Mr Paterson—Thank you, Senator.


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Senator GEORGE CAMPBELL—We will see you here at many more. It is a feat to havethe secretary of the department come to the estimates. I do not think we have seen thesecretary for quite some time. I have a couple of questions on the PBS statement on pages 20and 21. There is a reference to a variation of funding for the TCF development program andto unspent funds of $9.6 million. Can someone explain to us why they underspend in thisarea?

Mr Peel—The $9.642 million for TCF SIP is unspent funds from last year, which havebeen brought forward to this year. An allowance was made last year to pay claims forcompanies that have an end of December financial year close. We were expecting to receive anumber of claims. We did not receive any, so we have rolled the money forward to this year topay those claims, which will eventuate this financial year.

Senator GEORGE CAMPBELL—And does the million dollars that has been allocated todepartmental expenses come under the $9.6 million?

Mr Peel—The million dollars is an additional amount to pay for additional resources to runthe TCF SIP program.

Senator GEORGE CAMPBELL—Where does that come from?

Mr Peel—That comes from the TCF SIP program allocation of $678 million, I think it is.

Senator GEORGE CAMPBELL—And the unspent funds in the enhanced printingindustry competitiveness scheme?

Mr Peel—They are funds carried forward from the previous year. The program had aslower uptake than we expected. We only paid out grants last year of $4.3 million. We wereexpecting more than that. We have rolled forward the unspent funds to this year and we areexpecting more claims this year to call on those funds.

Senator GEORGE CAMPBELL—Are there adequate resources to meet the claims thatyou are expecting this year?

Mr Peel—Yes.

Senator GEORGE CAMPBELL—Under the industry innovation program, you talkabout a transfer from capital funding to expense funding to enable additional grants to be paidfrom the Start program. Can you give us an explanation as to why this was necessary?

Mr Peel—The $11.7 million is an amount set aside for loans or repayable grants under theprogram. The current demand for the program is focusing on the grants element of theprogram and there is a lower than expected demand for loans and repayable elements. So wehave transferred the $11.7 million from the loans elementary grants to take up the additionalgrants this year.

Senator GEORGE CAMPBELL—What is the logic behind that?

Mr Peel—It is fairly flexible how we administer the funds for the R&D Start program. Wemade an estimate of the likely level of loans that we would have this year based on historicalexperience. It has not proven to be the case. We have a higher level of grants than weestimated, so we have simply moved the money around.

Senator GEORGE CAMPBELL—What is motivating people in industry to go for one orthe other? What is causing the change of heart, direction or focus?


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Mr Peel—The loan element is essentially focused on the commercialisation of R&D, andthe grant element is more on the initial stage R&D. I think we are presently seeing a greaterfocus on the R&D side than on the commercialisation side.

Senator GEORGE CAMPBELL—What are the implications of that forcommercialisation of the research and development that is generated?

Mr D. Clarke—As Mr Peel has explained, it is market driven: the market is choosing thegrant program over the loan program. In terms of commercialisation, we are still trackingcommercialisation of the outcomes of these Start projects. Around 70 per cent of Start grantprograms are still tracking as a technical success and proceeding straight tocommercialisation, and a further 10 per cent are classified as a technical success andexpecting to commercialise. So the companies are finding that the funding to commercialisethe outcome of the R&D is within their wherewithal and they do not need to apply for theloans element, noting that the key eligibility criteria in both of these programs is that theactivity would not proceed without Commonwealth support. So I think the headline result isthat the R&D is still moving through to commercialisation without the need for the loanselement.

Senator GEORGE CAMPBELL—Do you keep any statistics on the amount ofcommercialisation that is taking place?

Mr D. Clarke—We track the outcomes of the projects at their conclusion, and it is part ofthe contract with the company that they report to us throughout. The broader issue ofcommercial outcomes and broader economic impact is part of the program evaluationfunction.

Senator GEORGE CAMPBELL—Is it unreasonable or reasonable to draw theassumption from this statement that commercialisation is declining rather than growing?

Mr D. Clarke—No, I think it would be unreasonable to draw that conclusion. Indeed, inthe annual report of the R&D Start program board for last year, we reported on some of theresults of the recent Start evaluation. The numbers are very strong about thecommercialisation of the outcomes of Start projects.

Senator GEORGE CAMPBELL—Is it reasonable to draw the other conclusion that it isincreasing?

Mr D. Clarke—I think the conclusion is that the Start program continues to be verysuccessful in encouraging industry to undertake R&D and to commercialise the outcomes.

Senator GEORGE CAMPBELL—I understand that, but I find it very amusing thatmoney is there and industry is not drawing on it.

Mr D. Clarke—No. They are not entitlement programs, of course. They are competitiveand merit criteria based. The threshold issue for the loans program is the need for the loan: ifnobody else will loan you the money to commercialise this, you cannot access the fundsthrough any other mechanism and you have tried all of the commercial mechanisms and yourown resources, you then are eligible to have a crack at applying for a Start loan. We are seeingthat that element of the program does not need to be accessed anywhere near as much as thegrant element.

Senator GEORGE CAMPBELL—So is this an element of last resort?

Mr D. Clarke—Yes, I think you could characterise it as being like a loan of last resort.


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Senator GEORGE CAMPBELL—So they have to demonstrate to you that they had beenunable to obtain the funds from any other source?

Mr D. Clarke—Yes.

Senator GEORGE CAMPBELL—If you draw that conclusion, then they are able toaccess the money elsewhere, through the banking system, or through venture capitalcompanies?

Mr D. Clarke—Correct. Or through their own resources—through their own cash flow—to support it. That is overwhelmingly the pattern we see in the core Start grant program. As Isay, there is around 80 per cent technical success, either in the process of commercialisationor intending to commercialise.

Senator GEORGE CAMPBELL—Regarding the national food industry strategy, couldyou explain to me what the relationship is between this department and primary industrieswith respect to it?

Ms Berman—The national food innovation strategy was announced before the electionperiod last year. A component of it relates to food grants and that component is associatedwith our department. The other components of it are looked after by AFFA.

Senator GEORGE CAMPBELL—Presumably we are talking here about processedfoods. Is that what we are talking about or are we talking about all forms of production?

Ms Berman—I would have to take that on notice. I do not have that detail with me. Ourinvolvement in this particular strategy announcement is in relation to the food grants. There isstill discussion occurring between our department and the agriculture department on the wayon which that is going to be administered. That is due to start on 1 July 2002.

Senator GEORGE CAMPBELL—Does anybody know what the logic is of keepingprocessed foods in AFFA?

Ms Berman—I am sorry, I cannot comment.

Senator GEORGE CAMPBELL—It is really identified as a manufacturing process.

Ms Berman—If it will help we can talk to AFFA and they can provide you with detail.

Senator GEORGE CAMPBELL—It will be interesting to know. Minister, this isprobably a question more directed to you. I have just been handed a correction to the PBSrelating to the Snowy Mountains Authority. As I understood it, all of these figures on the saleof the Snowy Mountains Hydro-electric Authority were contained in the budget papers lastyear. What has occurred to delay the corporatisation?

Mr Alderson—A very wide range of authorities are required to be agreed in thecorporatisation processes. I think something like 46 or 47 pieces of legislation are involvedand requiring the agreement of the various states. Although the equity owners in this are theCommonwealth, Victoria and New South Wales, because of the water flows et cetera there areimplications for South Australia also. Negotiations have moved down the track in settling thevarious aspects on the electricity and water flow sides of it. The agreement had not beenculminated prior to the calling of an election in South Australia. Negotiations are continuingand we would be hopeful that corporatisation would be concluded before the end of thisfinancial year. It was really a case of getting agreement to all of the jurisdictions to a multipleof details necessary for corporatisation. That delay occurred, but we are still hoping that itwill be concluded to the satisfaction of all jurisdictions before 30 June.


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Senator GEORGE CAMPBELL—So we can assume this will be off the budget in thenext financial year?

Mr Alderson—That is our expectation.

Senator GEORGE CAMPBELL—Have there been any representations to the departmentfrom Incat in respect to their current difficulties?

Mr Pettifer—There have not been any representations to the department in relation toIncat.

Senator GEORGE CAMPBELL—Has the department had any discussions with Incatabout the current situation there? They have just made an announcement in the past couple ofdays about laying off 60 apprentices—which is pretty devastating for southern Tasmania.

Mr Pettifer—The department is keeping an eye on the situation and I understand thatofficers from the AusIndustry Tasmanian office have had some discussions with the company.

Mr D. Clarke—Our Hobart office indicated that they were a customer of the AusIndustryHobart office. Our people talk and meet with them regularly. Of course, I am aware of thematter you are referring to, but that is not directly an issue for AusIndustry, in that we aretalking to them about shipbuilding innovation schemes, tax concessions, Start grants et ceteraand have a good relationship with the company on that. But I am not able to advise on anydiscussion regarding the broader issue to which you allude.

Senator GEORGE CAMPBELL—Is it safe to assume there have been no discussions atthe departmental level with Incat about any potential rescue plans?

Mr Pettifer—That is true.

Senator GEORGE CAMPBELL—So, to use a pun, are we just letting them sink or swimon their own?

Mr Pettifer—I understand that the Prime Minister is intending to meet a delegation fromIncat on Friday and we have provided some information to the Department of the PrimeMinister and Cabinet to help with those discussions.

Senator GEORGE CAMPBELL—Will the minister be involved in that?

Mr Pettifer—No, my understanding is that he will not.

Senator Minchin—Senator Campbell, I think it is a meeting requested by the Premier withthe Prime Minister to discuss the position. From my previous involvement, certainly what Iwanted to ensure was that Incat was fully aware of and had full access to, and the maximumpossible encouragement to ensure that it was accessing, all relevant Commonwealthgovernment programs. I think that was the proper role on our part and we certainly went togreat lengths to ensure that that company, Austal and others understood exactly what wasavailable to them and to maximise their opportunity to participate in those programs.

Senator GEORGE CAMPBELL—I understand that you would, and that would beexpected of you. As I understand the problem with Incat, there are not necessarily supportprograms in that sense. I think there are two issues: one is to get the banks off their back andthe other is market access. This is a company that has considerable resources sitting there tiedup against the wharf and is having difficulty short term getting access to the market for thoseproducts.

Mr Pettifer—It certainly has a large stock of vessels which it is having difficulty selling orleasing.


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Senator GEORGE CAMPBELL—I suppose we will have to await the outcome ofFriday’s meeting.

Senator HARRADINE—The department has prepared a substantial paper on this matterfor PM&C prior to the meeting on Friday?

Mr Pettifer—We provided some background information on the state of the shipbuildingmarket. We did not provide a detailed paper on the issues; it was background information.

Senator HARRADINE—Did the department make any proposals or suggest any matterwhich would overcome the problem that is currently faced?

Mr Pettifer—No.

Senator HARRADINE—Isn’t part of the job of the department: to try and maintainmanufacturing industries in this country?

Mr Pettifer—Part of our job is certainly to provide industry policy advice on varioussectors, and we do that. I am not able to comment in relation to the particular issuessurrounding Incat and what policy deliberations there may have been on that front. I think it isreally a matter for the Department of the Prime Minister and Cabinet, but I imagine Friday’smeeting is to explore various options that may be available for the government, or indeed themanagement of the company, to pursue.

Senator HARRADINE—On the general question of skills training, apprenticeships and soon, your department has a keen interest in that matter, do they not?

Mr Pettifer—It is not my division. I suspect that that requires a response from the IndustryPolicy Division or the Business Competitiveness Division. I can say that in relation to theareas that I am responsible for we have certainly looked at that issue in the context of anumber of action agendas that relate to various manufacturing industry sectors. Generally it isan important issue in terms of industry competitiveness and growth.

Senator GEORGE CAMPBELL—Following up on Senator Harradine’s question, haveyou done anything special with the defence department as far as their potential interest inthese vessels?

Mr Pettifer—There was some discussion last year about whether or not they would beinterested in leasing a vessel. They did lease a vessel in the context of the Timor situation, butthat really is a matter for the Department of Defence.

Senator GEORGE CAMPBELL—Has there been any discussion with Defence about thecurrent situation about whether or not they may be interested in either leasing or purchasingthese vessels?

Mr Pettifer—We have not had discussions recently with the Department of Defence. TheDepartment of the Prime Minister and Cabinet may have had those discussions but that wouldreally be a question for them.

Senator GEORGE CAMPBELL—It is this issue we consistently come back to. You arethe industry department. I would assume there would have been some proactivity in thedepartment about these issues and some assistance to try and facilitate these companiessurviving in what are difficult circumstances. It was certainly fairly logical to point them inthe direction of Defence or talk to Defence about potential orders in that area.

Mr Paterson—I might comment on the general issue. It is an individual company issue asI understand it. It is a commercial model that has been adopted by that individual company


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that presents them with their present difficulties. Certainly no approach, direct or otherwise,has been made to us that I am aware of that suggests that we seek to find a solution to thecommercial challenges they are presently confronting. The meeting on Friday is, in ourunderstanding, at their request, or at the request of the Tasmanian Premier and the company,and their bankers are likely to express their position. We do not know what representationswill be made in those discussions at this stage.

Senator GEORGE CAMPBELL—I understand that you do not know what will be laidon the table. I understand the commercial nature of their operation, which is a bit different toothers and may be in part contributing to their current difficulties. I must say in the reversewhen there was a buoyant market it actually contributed to them being very successful.People did not have to wait around for vessels to meet their needs. It seems to me strange thatwe have an industry department with considerable resources and that we would not have beentalking to them, trying to assist them, pointing them in various directions where they mighthave been able to get potential solutions to their problem or where there might have beenpotential customers. This is a company that employs about 800 people, most of themtradespeople. Sixty apprentices have been laid off this week. Taking an industry of that sizeout of Hobart has a pretty devastating impact upon the whole community.

Senator SCHACHT—Mr Paterson, are they not the biggest single private employer inTasmania?

Mr Paterson—If they are not the largest, certainly I anticipate they are very close to beingthe largest private employer in Tasmania.

Senator SCHACHT—Is it not true that over the last decade on the balance of trade fromAustralia that our success in selling fast ferries and ships has been a major advantage for ourterms of trade? We have sold more than we have imported, haven’t we?

Mr Paterson—That is certainly the case.

Senator SCHACHT—We have always had a problem on the balance of trade and deficits.Would it not be for the industry department to be proactive? Here is one where we are alreadyahead on points and we are leaders of world technology. Why are we not out there proactivelymaking sure we maintain that lead rather than waiting for them to wander up? What do banksknow about shipbuilding other than to close them down?

Mr Paterson—As you are aware, it is a highly competitive market and Incat is not theonly participant in that market. The other major participant, an Australian company, isperforming well in current market circumstances with the same constraints. So there arechallenges in relation to the extent to which an individual company can be provided withassistance.

Senator SCHACHT—Mr Paterson, how many people in your department are dedicated tothe issue of shipbuilding in Australia? Is there one person? Is there a section? Is there abranch?

Mr Pettifer—I am probably best placed to answer that question. There is a shipbuildingand engineering area—

Senator SCHACHT—Shipbuilding and engineering?

Mr Pettifer—Yes. It covers a range of—

Senator SCHACHT—So it is not just shipbuilding; it is engineering also?

CHAIR—Let him finish his answer, Senator Schacht.


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Senator SCHACHT—He is finished. I am just trying to clarify it; it makes it quicker forhim.

Mr Pettifer—There is shipbuilding and engineering. There is no dedicated person onshipbuilding but there would be two people who spend part of their time on shipbuildingissues.

Senator SCHACHT—So when Fred Smith from somewhere rings up about shipbuilding,there is no one person with an institutional memory in the department who handles it?

Mr Pettifer—No, I did not say that, Senator. There is a corporate memory in thedepartment on shipbuilding issues. There is no-one dedicated to the shipbuilding issue, butthere is certainly corporate memory on shipbuilding issues and it is an area that we do watchclosely. Of course, and as Mr Clarke explained earlier on, there are two particular programs tosupport the Australian shipbuilding industry—that is, the shipbuilding bounty and theshipbuilding innovation scheme. The companies in Australia have taken advantage of that andsome of the producers are doing exceptionally well. Austal has a full order book and isactually recruiting staff.

Senator SCHACHT—From Tasmania?

Mr Pettifer—I am not quite sure where they are recruiting staff from, but they arerecruiting staff at this time. As Mr Paterson mentioned, we really need to look at this issue interms of the difficulties that a particular company is facing at this time rather than as anindustry-wide problem in relation to shipbuilding.

Senator SCHACHT—As I recollect a few years ago, there were dedicated full-time staffin the department who dealt with shipbuilding. The department has gone through severalname changes in industry.

Mr Pettifer—It is possible that there were, but there are structural changes in thedepartment. We had to move resources around.

Senator SCHACHT—And you have downgraded.

Mr Pettifer—I am sorry.

Senator SCHACHT—Wasn’t it a policy of this government to downgrade shipbuilding?

Senator Minchin—No, it was not, Senator Schacht. The shipbuilding industry, in fact,receives considerably more support.

Senator SCHACHT—In terms of management support—

CHAIR—Senator Schacht, please stop interrupting witnesses in the middle of sentences.

Senator SCHACHT—Brandis is Genghis Khan now.

CHAIR—Senator Schacht, do not interrupt me and do not interrupt witnesses in themiddle of their answers. Let them answer the questions.

Senator Minchin—Senator Schacht, as I was attempting to say, the shipbuilding industry,as you know, receives very special treatment from the government and there are manyindustries in Australia that would be quite envious of the treatment that the shipbuildingindustry gets. It is one of the issues for industry policy in Australia: when an industry like thisdoes get very special attention and treatment, it upsets others who demand the same. But weacknowledge the importance of that industry to Australia. We acknowledge the internationaldifficulties that industry does face in certain markets, and that is why we have a prettysophisticated scheme to assist it and why the department has always paid special attention to


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it. We employ highly qualified people in the department, of the calibre of Mr Paterson, to runthat department, to ensure that they fulfil government policy. You cannot have two or threeofficers for every single industry in the whole of Australia. Their job is to implementgovernment policy in relation to the shipbuilding industry and, as I say, it is quitecomprehensive.

Senator SCHACHT—You have the policy of the ship bounty which we support. I thinkyou did try to get rid of it and we stopped you in the Senate some years ago, and there is aninnovation program. Mr Pettifer, how much—

Senator Minchin—And they have access to every other industry program that we run.

Senator SCHACHT—Mr Pettifer, how much is the innovation program worth forshipbuilding.

Mr Pettifer—I think, Senator Schacht, that is probably a question to Mr Peel.

Senator SCHACHT—Mr Clarke has a folder there.

Mr D. Clarke—I do have it here, but I—

Mr Peel—There are two elements to assistance in the shipbuilding industry. One is theshipbuilding bounty that you mentioned, and the other is the Shipbuilding Innovation Scheme.This year the estimate for the bounty is $12 million and for the Shipbuilding InnovationScheme it is $10.4 million.

Senator SCHACHT—Could you take it on notice about where you expect that $10million in the innovation program to be spent this year?

Mr Peel—I certainly will, Senator.

Senator SCHACHT—Or is it already in the annual report?

Mr Peel—Not for this year; it will be in the next annual report.

Senator SCHACHT—It is in last year’s annual report for the previous year?

Mr Peel—There was the return tabled in the parliament for the year ended 30 June last,which gives a breakdown of the shipbuilding payments made last year.

Senator SCHACHT—Under the innovation program?

Mr Peel—Under both the innovation program and the shipbuilding bounty.

Senator SCHACHT—I do not know whether someone asked before I came in, Chair, butI understand that the American navy has shown some interest in fast ferries. Has thedepartment been involved in any of those discussions jointly with Defence in Australia orwith the American Pentagon?

Mr Pettifer—No, but the industry has been quite successful in interesting the US navy inleasing fast ferries, and both Incat and Austal have been successful in doing so.

Senator SCHACHT—Do you have an industry liaison officer for the department in ourembassy in Washington?

Mr Pettifer—Yes, Senator.

Senator SCHACHT—What has that person been doing to discuss with the Pentagon theadvantages of leasing Australia’s world-class fast ferries?

Mr Pettifer—To my knowledge that has not been an issue that he has been activelypursuing. I can take that on notice and check, if you like.


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Senator SCHACHT—I cannot see why that person would not be very proactive in usingour 60 or 70 military attaches over there with our strong and powerful friends in the Pentagon.Why aren’t we using all of those connections, in view of the economic importance, and beingproactive?

Mr Pettifer—I think the answer is that we do not need to, because the industry itself issuccessful in those discussions with the US military.

Senator SCHACHT—Has anyone had the wit to pick up a phone, speak to Incat andAustal and make the offer that you could lend a hand if they wanted it?

Mr Pettifer—I imagine that those issues may be discussed with the Prime Minister.

Senator SCHACHT—I did not ask you that.

Mr Pettifer—The direct answer to your question is that we have not spoken to Incat orAustal on that particular issue. We have not seen a need to, in that the companies themselveshave been very successful in demonstrating their capability to the US military and havesecured lease arrangements as part of those discussions.

Senator SCHACHT—So when they went there to talk to the Pentagon, they did sowithout any assistance from the Australian government?

Mr Pettifer—I cannot comment; I just do not know who was involved in thosediscussions.

Senator SCHACHT—Minister, I have to say that I do not know why we employ a liaisonofficer in Washington and have all those military attaches sitting there if we cannot lend ahand or offer to lend a hand. A private company will not always be so successful in getting afoot in the door. In view of our very close relationship with the Americans—we have alwaysbeen at first base with them in every conflict in the last 20 years—surely it can be put on theagenda to say, ‘We have excellent ferries; we want to talk to you about it; the companies arecoming.’ Why aren’t we proactive?

Senator Minchin—That line of questioning is based on an unfounded assertion that nosuch assistance was provided. We will endeavour to provide to you the level of contact,support and cooperation that has been provided out of Washington. Having been responsiblefor the appointment of the industry liaison officer in Washington, I assure you—and as aformer deputy secretary of the department he may well be known to you—that JohnSpasojevic is one of the best officers this department has ever produced—

Senator SCHACHT—John Spasojevic!

Senator Minchin—and I would hazard a guess that he would be doing everything possibleto support Australian industry in Washington.

Senator SCHACHT—With all due respect, Mr Spasojevic has one of the best intellects Ihave come across when I was a minister in the department. I fully support him, and had veryinteresting, robust discussions with him, but he never struck me as being a real interventionist.He always struck me as being one of the old Treasury line—let the free market decide it. Icannot really imagine Mr Spasojevic wandering down to the Pentagon and saying, ‘We havegot three great fast ferries for you and look, if you do not buy them, we might have a look atsomething else we are not going to buy from you instead.’

Senator Minchin—My experience is that Mr Spasojevic and all members of the industrydepartment are wonderful advocates of Australian industry, Senator Schacht. No, they do notharbour the old left wing Labor view—


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Senator SCHACHT—You have convinced him, I was not able to.

Senator Minchin—that it is the government’s job to protect Australian industry frominternational competition. They do believe Australian industry should be internationallycompetitive. But they are great champions of the industry, and that is Mr Spasojevic’s job inWashington.

Senator SCHACHT—But we all know our—

Senator Minchin—This is an esoteric debate. We will get you the facts.

Senator SCHACHT—Our fast ferries are considered, technically and costwise, certainlyequal best in the world, so he does not have to go down and say, ‘We are giving yousomething, we want you to help us out.’ We are actually offering the best product.

Senator Minchin—Again, this is a complete waste of time, Mr Chairman, because—

Senator SCHACHT—No, it is not.

Senator Minchin—we do not know the facts. We do not know what has occurred. We canget you those facts. We do know, as Mr Pettifer said, that the companies have been lobbyingstrenuously as an industry and as individual companies to market their products all over theworld and the Australian government assists them, as it does other industries, in internationalmarkets. My view has always been that the main reason to have a foreign affairs departmentand a trade department is to do that, but where we can assist as an industry department, as wedo in Washington, then we should help.

Senator SCHACHT—He is there to assist.

Senator Minchin—Exactly, and you have no evidence that he is not. We will get you thefacts.

Senator SCHACHT—You will get me the facts that either, up till this date what he hasdone, first of all, to help or offered to help—

Senator Minchin—Or what help has been sought.

Senator SCHACHT—and I think I will send him a copy of this transcript to show that atleast one senator would like to see him very proactive.

Senator Minchin—Next time I am speaking to him I will let him know your concern.

Senator SCHACHT—I would appreciate that. So, Mr Pettifer, what is the arrangementreached with the companies with leasing to the American defense department?

Mr Pettifer—They are commercial arrangements, Senator, and I do not have the details.

Senator SCHACHT—No, but have they actually signed?

Mr Pettifer—Yes.

Senator SCHACHT—The Americans have already got them?

Mr Pettifer—Yes.

Senator SCHACHT—How many? Is it three?

Mr Pettifer—Incat has leased one and Austal has leased at least one. And there areprospects of the Americans, subject to those trials, taking further vessels in the future.

Senator SCHACHT—If the Americans find out these are excellent fast ferries, and theywant another dozen—well, another six or, to be optimistic, a dozen; Americans always buy in


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large numbers and the ferries are very good value—will the department argue very stronglyagainst any move by the Americans that they have to be built in America or they will not buythem?

CHAIR—They could lease them.

Senator SCHACHT—No, they might lease them, but you watch, some congressman fromAlabama will put up an argument that these have to be built—not leased—in America fortheir shipbuilding industry. They might use the Jones Act in a variation. Will we take aproactive stand to argue this is our technology, our advantage, we will make them and sellthem so we get the full advantage?

Senator Minchin—Senator, as you would well know, your government, our government,in all guises and at all levels, have argued long and hard against the American protectionismof its shipbuilding industry. It is a disgrace and we have always, in our representations to theAmericans—

Senator SCHACHT—And that will continue, Minister?

Senator Minchin—expressed our views strongly, and that will continue.

Senator GEORGE CAMPBELL—You wouldn’t confine it just to shipbilding?

Senator Minchin—No, exactly.

Senator GEORGE CAMPBELL—I do not want to disappoint Senator Schacht but I dounderstand Incat have got some partnership arrangement with an American company inanticipation of the Jones Act.

Senator Minchin—We cannot, unfortunately, change American law from here, but we willcertainly campaign to seek a change.

Senator GEORGE CAMPBELL—According to Invest Australia’s web site, the purposeof the program is ‘to attract to Australia projects for significant net economic and employmentbenefits that would have otherwise located offshore’. It then goes on to explain the role of thestrategic investment coordinator—providing advice to the Prime Minister et cetera as part ofthe Industry, Tourism and Resources portfolio, acts as a secretariat for the SIC in the roleformerly attached to the Department of the Prime Minister and Cabinet. Since the programbegan six projects have been offered assistance, ranging from $3.5 million for IBM toestablish an Asia-Pacific e-business centre in Sydney to $100 million for ComalcoAluminium’s proposed aluminium refinery in Gladstone, as well as $100 million offered toattract the Asia-Pacific Space Centre. What are the respective roles of Invest Australia, thestrategic investment coordinator and the cabinet in deciding to award incentives under thestrategic investment coordination program?

Mr Jones—The strategic investment coordinator has the role of advising the PrimeMinister and the cabinet on requests for investment incentives, so he is the one who takes theprocess forward and advises cabinet on whether he thinks the incentive should be granted ornot. Invest Australia’s role is to provide assistance to him in coming up with decision, so wedo a lot of the behind the scenes work, if you like, in assessing the incentive proposals andassisting the strategic investment coordinator to come up with his advice. At the end of theday it is cabinet’s decision as to whether to award the assistance or not.

Senator GEORGE CAMPBELL—What does Invest Australia consist of: one person,three people, economists?


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Mr Jones—Invest Australia has around 95 people around the world in partnership betweenthe Department of Industry, Tourism and Resources and Austrade. The area that supports thestrategic investment coordinator is a branch of less than 20 people who not only support thestrategic investment coordinator but also do a range of other project facilitation andinvestment assistance functions. The skills of those people vary between project manager andclient liaison, and analytical and research skills. We also draw on advice from the industrypolicy area of the department in assessing investment incentive requests and that is wheresome specialist economic expertise is brought to bear.

Senator GEORGE CAMPBELL—What is the nature of the budget appropriation forapproved projects? Does the money come from a contingency reserve or anotherappropriation?

Mr Jones—There is no specific appropriation as such in advance for strategic investmentcoordination processes. When the decision is taken to award an incentive the money usuallycomes from the contingency reserve, although sometimes incentives draw on othergovernment programs as part of the incentive package that is provided.

Senator GEORGE CAMPBELL—Is there a cap on it?

Mr Jones—A cap on the amount of money available—no.

Senator GEORGE CAMPBELL—So it is open-ended?

Mr Jones—Every request is assessed on a case-by-case basis, so I would not characteriseit as open-ended as such, but there is no cap; there is no particular amount of money madeavailable.

Senator GEORGE CAMPBELL—How are the type and the quantum of incentivesdetermined?

Mr Jones—Each request for incentive goes through a rigorous assessment process. Thereis a range of published criteria which are on the web site that you referred to earlier andproject proponents are required to put in a detailed request for assistance detailing their caseagainst each of those criteria. Part of that request obviously will be the amount of money theythink they need to bring the project to Australia rather than a competing location. As part ofthe assessment process, Invest Australia and the strategic investment coordinator form a viewas to whether the amount of money requested by the company is the right amount or whetheranother amount might be enough to bring the project to Australia.

Senator GEORGE CAMPBELL—So the criteria are quite flexible, are they?

Mr Jones—The criteria are quite strict and rigorously applied, but at the end of the day ithas to be a matter of judgment as to what amount of money is required to bring the project toAustralia.

Senator GEORGE CAMPBELL—Are there any controls or restrictions on the amountand type of incentives that are offered, or is it totally open-ended?

Mr Jones—The control, if you like, is the assessment process. There is a rigorousassessment process which has to survive cabinet scrutiny. The type of assistance, however,can be quite flexible. If you look at the range of projects that have been provided withassistance over the years, the type of assistance has ranged quite widely, from infrastructureprovision to direct grants and to the use of other government programs that perhaps theproject proponent was not aware of.


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Senator GEORGE CAMPBELL—What is the biggest assistance package that has beenoffered?

Mr Jones—I think that would be the assistance to Comalco. It was an interest-free loan of$137 million.

Senator SCHACHT—Was that at Gladstone?

Mr Jones—Yes, for the alumina refinery in Gladstone.

Senator GEORGE CAMPBELL—And that was interest free?

Mr Jones—Yes, it was an interest-free repayable loan.

Senator GEORGE CAMPBELL—What conditions were applied to that loan?

Mr Jones—We are still working through detailed contract negotiations with Comalco tofinalise those conditions.

Senator SCHACHT—What is the repayment period for the loan?

Mr Jones—I am not sure.

Senator SCHACHT—Twenty-five years?

Mr Jones—I think it is 25 years.

Senator GEORGE CAMPBELL—Is there any requirement in the conditions for the loanthat relate to Comalco having to source locally for the construction of that refinery?

Mr Jones—As I said, the conditions for the loan are still being worked through in detailwith the company, but there is no requirement on Comalco to source locally. We, of course,encourage local participation in projects wherever possible, but we do not impose that formalrequirement.

Senator GEORGE CAMPBELL—But the reality is that it is going to be built in kit formin Korea, Japan or anywhere else and brought in and assembled like a meccano set.

Mr Jones—My information is that local content on the Comalco project will be about 80per cent.

Senator GEORGE CAMPBELL—So 20 per cent is not local. How is that comprised?

Mr Jones—I do not have that information in front of me. I imagine there are somecomponents that, for one reason or another, cannot be competitively produced in Australia.But, overall, the local content in construction is expected to be 80 per cent.

Senator GEORGE CAMPBELL—Can you take that on notice, because one issue thatconsistently arises in the area of major projects is not so much the content of local skills andtrades but whether Australian engineering companies are getting in at the front end of theseprojects. This would enable them to develop their engineering skills, get into technologytransfer and become competent in bidding for future projects. I am very keen to see what is inthis contract that will ensure access for our engineering firms at the front end.

Mr Paterson—I understand that the project has changed from an original position where itwas likely to be fabricated offshore to full onshore on-site construction. In addition, subject tofinalisation of the contract arrangements and the like, rather than an original work force ofabout 700, there will be a work force of close to 2,900 people. There is a clear indication inrelation to that project that the bulk of the construction is likely to be undertaken onshore withlocal resources and a local work force.


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Senator GEORGE CAMPBELL—I was aware of that, Mr Paterson. I am keen to followup the other end of the argument: to what extent have our engineering companies have hadaccess up front in the design and development of the project?

Mr Jones—I understand there has been a local industry participation plan prepared byComalco for that project, which has been discussed with the Industrial Supplies Office inQueensland. In both Invest Australia and, more generally, the department we work toencourage Australian industry participation in projects wherever possible. A large amount ofwork has been done to develop, for example, an Australian industry participation frameworkover the past year or so and we are working on encouraging all major project developers tolodge Australian industry participation plans. There are some difficulties, however, inimposing that as a formal requirement for government assistance because of WTO rules.

Senator SCHACHT—Did Comalco seek and get a special policy by-law for this project?

Mr Jones—I do not know the answer to that, Senator.

Senator SCHACHT—Was one granted by anybody?

Mr Peel—I would have to take that on notice. I do not have that information here. I am notaware of it.

Senator SCHACHT—I know about these from the 1980s and early 1990s. As customsminister I came across a few of these and they were a rort. The major project got a specialpolicy by-law under the guise of getting the project running and then were able to import awhole range of things for that project and to escape paying tariff. For example, Toyota four-wheel drive vehicles were imported under the policy by-law without having to pay the tariff.We even discovered such ordinary things as toilet paper could be imported under the policyby-law because the policy by-law was given to the whole project. Anything deemed by thecompany running it had a policy by-law. I just want to know whether one of those has beengranted and under what conditions, because if it has been granted it is a loophole which youcould sail the Queen Mary through.

Mr D. Clarke—We will take the question on notice. AusIndustry delivers the policy by-law program. We will take on notice the question as to whether a specific one has been issuedby colleagues.

Senator SCHACHT—Was one sought?

Mr D. Clarke—We will take that on notice. My colleague Ms Hellen Georgopolous needsto inform you in this line of questioning about the new developments in that PBL scheme.

Ms Georgopolous—The new policy by-law system being introduced that will come intoeffect on 1 July this year requires an Australian industry participation plan right up frontbefore the by-law is granted. The purpose of that is to ensure that all of Australian industryhas full, fair and reasonable opportunity to bid for the project and for that information to flowthrough all tiers of the project. That information will be taken into account and assessed aspart of the granting process of the policy by-laws.

Senator SCHACHT—That is good to hear. Mr Jones, is the 20 per cent that is not goingto be made in Australia in any way connected to the actual equipment, such as rectifiers andtransformers, that you use to put the power in? These are big pieces of equipment that arevery specialised. Are they in the 20 per cent?

Mr Jones—I would have to take the details of what is in the 20 per cent on notice. I wouldnot be surprised if it is specialised equipment of that nature. I do not know.


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Senator SCHACHT—When the previous extension—which I think was with Gladstone—occurred back in the early 1990s, the Australian electrical manufacturing industry said that, ifthey had been given enough time, they could have bid to provide these pieces of equipment ata quality that would have been acceptable and at a reasonable price. They would have thendeveloped a broader base in their own industry in Australia to provide what you say is reallyvalue added equipment. But the project or the company at the time said they could not wait;they could not give them an extra 12 or 18 months to get up to speed.

This was the most valuable thing in the project. If the Australian companies could have gotin early and then developed the skill, we would have had a growth in an industry thatsubsequently could have bid for this project and others in building rectifiers, transformers andsome other thing I cannot remember. But they were the real value added things in the project.I want you to take it on notice. I would like you to rapidly find out whether the electricalmanufacturing industry in Australia has been given an opportunity up front and enough timeto put it together. I think we do have the calibre of the companies, given enough time but notundue time, to produce this equipment that runs into millions of dollars or at least manyhundreds of thousands of dollars. They are the best part. I bet we are going to import themfrom Taiwan, Japan or South Korea. Mr Ryan, you might know about this. You have beenaround a while.

Senator Minchin—Mr Chairman, I would not like to see lying on the table a reflection onComalco. I think Comalco are to be congratulated for the very high level of local content,which was a function of people like me and Fergus Ryan as the coordinator, spending a lot oftime with Comalco to leverage that local content up as high as we could. Certainly we willfind out what the 20 per cent comprises, but 80 per cent is very high for a highly sophisticatedalumina refinery.

Senator SCHACHT—But the most sophisticated plant is the actual equipment, thesethings I have just described. As I understand it, they are the most sophisticated pieces ofequipment in an alumina plant. We, as one of the major alumina producers, should be makingsure that we are actually at the world front. It is like we should be the major producers ofdump trucks for open-cut mining.

Senator Minchin—We would be greatly assisted by your party changing your policy ongreenhouse gas emissions, then we really would be world champions on alumina. We willendeavour to maximise the local content, but it would help if the Labor Party would recognisereality and change its position on greenhouse. We will then have a lot more of these peoplewanting to come to Australia to produce here. I suggest you should put your remaining fewmonths in office, Senator Schacht, into changing your party’s policy on greenhouse. In themeantime, we will find—

Senator SCHACHT—The Americans are changing theirs. We are the last country to doanything. Even America is changing. We usually follow them.

CHAIR—We might go back to Senator George Campbell.

Senator GEORGE CAMPBELL—I will just repeat that question. To the extent you can,can you find out what involvement there was of Australian companies in the engineering anddesign of this product? That is the critical area in terms of our capacity into the future. Are thecriteria, the decision making, the processes used by Invest Australia and the reasons fordecisions on these things published or is it a whiteboard exercise?

Mr Jones—The detailed assessment is usually not published, mostly because of thecommercial sensitivity of the information involved. When the government decides to provide


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assistance, in most cases that decision is announced very quickly and the quantum of theassistance to be provided is also announced.

Senator GEORGE CAMPBELL—But not the reasons?

Mr Jones—Not the detailed reasons. Although when a decision is taken to provide anincentive under the SIC process, the project has to have met the criteria. To some extent, thereasons are that the project meets those criteria of being of great economic benefit et cetera.

Senator GEORGE CAMPBELL—Thank you, Mr Jones. I have got a number ofquestions on Backing Australia’s Ability.

Mr P. Clarke—It will be either AusIndustry or innovation policy.

Senator GEORGE CAMPBELL—I want to run through the various programs underBacking Australia’s Ability and get a feel from you where each of those programs are up to atthis point in time. Some I realise are joint programs with other departments and you may notbe able to answer. You can tell me that. We begin with the ARC competitive grants.

Ms Berman—The ARC competitive grants are managed by the Department of Education,Science and Training.

Senator GEORGE CAMPBELL—Their project infrastructure?

Ms Berman—The same department.

Senator GEORGE CAMPBELL—University infrastructure and so on is the samedepartment?

Ms Berman—Yes.

Senator GEORGE CAMPBELL—World-class centres of excellence?

Ms Berman—They are managed by a number of departments. There is a world-classcentre of excellence of biotechnology, which is managed by our department in conjunctionwith the Australian Research Council because some of the funding is coming from that area.There is an officer here who can speak about that if you wish to talk further on that.

Senator GEORGE CAMPBELL—Can you give us a feel for where that is up to at thisstage?

Ms Radke—In regard to the centres of excellence program, as Ms Berman has told you, itis a joint funding effort with the ARC. At the moment we have received final applications forassessment. In fact, the expert panel for the centre of excellence which was established toadvise on the selection criteria and actually make recommendations to government on theassessments is meeting today for the first time to look at those applications.

Senator GEORGE CAMPBELL—How much of the funding has been spent to thispoint?

Ms Radke—Departmental costs plus a grant to the Garvan Institute to establish abioinformatic centre was awarded and the government has decided to provide those funds,$750,000, in August. Half of those funds have been provided under a grant contract to them.Apart from that, there are departmental funds to actually do the assessment process.

Senator GEORGE CAMPBELL—Can you answer the question—

Ms Berman—The rest of the question. The centre for—

CHAIR—I am sorry; Senator Harradine wants to interpose.


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Senator HARRADINE—I have some questions for Biotechnology Australia.

CHAIR—I am just a bit concerned that Senator Campbell has to be elsewhere.

Senator HARRADINE—I am sorry, I did not know that.

Senator GEORGE CAMPBELL—I am just asking about the funding.

Ms Berman—The ITC—information, communications and telecommunications—world-class centre is being managed by NOIE and the Australian Research Council. So that is theworld-class centres of excellence. I understand that the successful bid will be announcedabout mid-year as well.

Senator GEORGE CAMPBELL—And the major national research facilities?

Ms Berman—The major national research facilities process was completed last calendaryear and that is with the Department of Education, Science and Training.

Senator GEORGE CAMPBELL—R&D Start was nominated also.

Ms Berman—That is here, yes.

Senator GEORGE CAMPBELL—The premium rate tax concession?

Ms Berman—The same, this department.

Senator GEORGE CAMPBELL—That is ATO?

Ms Berman—This department and ATO together.

Senator GEORGE CAMPBELL—Have any of those funds been allocated yet?

Ms Berman—No, because, as you would realise, those registrations come in and fundswill be allocated when they are looked at. It is retrospective, as you know. They register thisyear but they do not get paid until in the future.

Senator GEORGE CAMPBELL—What is the $30 million allocation for 2001-02?

Ms Berman—It is the tax concession.

Senator GEORGE CAMPBELL—Yes.

Ms Berman—I beg your pardon, Senator. It will be in relation to small companies and thetax rebate. I imagine it is associated with that. Perhaps I should take that on notice. I wouldlike to get you the right details.

Senator GEORGE CAMPBELL—I am really interested in how much of the money hasbeen drawn down, if any, at this stage.

Ms Berman—Certainly.

Senator GEORGE CAMPBELL—The figure I have for small companies is zero in 2001-02.

Ms Berman—Yes. That is why I think I had better take it on notice and get you the correctdetails on that.

Senator GEORGE CAMPBELL—Okay. CRCs is now with Science and—

Ms Berman—Science and Training.

Senator GEORGE CAMPBELL—COMET?

Ms Berman—COMET is with this department. Implementation is well under way. As youwould know, there was an increase in funding this year because there were three years of $10


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million. That was including this year and the new program started this financial year, whichwas another $10 million, which went $10 million for four years. We now have 17 businessadvisers. That has increased the number of people out there who are helping firms. There isgood progress on implementation, Senator.

Senator GEORGE CAMPBELL—How much of the $10 million has been expended?

Ms Berman—I would have to refer that to my colleagues from AusIndustry.

Mr D. Clarke—Can I go back to your question about tax and try and clarify that issue thatMs Berman took on notice. The two new elements of the tax concession, the rebate and thepremium, will have no financial impact this financial year. When the rebates are paid, ofcourse, that is handled by the Taxation Office, not by this department.

Senator GEORGE CAMPBELL—Yes, I appreciate that. What is the allocation of $30million for 2001-02?

Mr Drew Clarke—I do not know where the $30 million number has come from. Can yougive me a lead on that, Senator? Where are you getting that from?

Senator GEORGE CAMPBELL—We got the figures out of the Backing Australia’sAbility documentation—$30 million, $90 million, $105 million, $110 million and $125million.

Mr D. Clarke—$30 million in 2001-02.

Senator GEORGE CAMPBELL—$90 million in 2002-03, $105 million in 2003-04,$110 million in 2004-05 and $125 million in 2005-06.

Mr D. Clarke—I am sorry, we will need to take that on notice.

Senator GEORGE CAMPBELL—What about the Innovation Access Program?

Ms Berman—That is shared between this department and the Department of Education,Science and Training. The industry component will be managed by this department and thescience and technology component, which is overseas assistance for science and technologyaccess for researchers, will be managed by the Department of Education, Science andTraining.

Senator GEORGE CAMPBELL—Do you know how much of those funds have beenexpended?

Ms Berman—I would not be able to comment on the DEST expenditure. I think we cancomment on the expenditure from DITR. Again, AusIndustry can provide some advice there.

Mr Peel—This year we have budgeted to spend $11.6 million for the tail of theTechnology Diffusion Program which the Innovation Access Program replaces. I think wehave so far committed around $600,000 of the Innovation Access Program budget for nextyear; it does not actually kick in until next year.

Senator GEORGE CAMPBELL—There is an allocation of $1 million for this year. Whatabout the preseed fund?

Ms Berman—With the preseed fund with this department, as you may be aware, there hasbeen a call for applications for that late August last year. There has been assessment underway of 23 original applications, now a short list of seven, and it is anticipated that the fundmanagers will be known within a month.


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Senator GEORGE CAMPBELL—How much of the allocation of $6.4 million has beenexpended?

Ms Berman—That allocation has been reprofiled because this is an equity draw-down, asyou would appreciate. When the funding was announced it was over a five-year period. Wehave since negotiated with Finance to change that to a 10-year period in line with our otherequity type programs. The funding for this year was significantly small because it is notexpected that there will be any awards this year. When the fund managers are announced theythen go into a process of getting contracts in place and that is expected to take two or threemonths.

Senator GEORGE CAMPBELL—When you say it has been extended to a 10-yearperiod, is it still the same amount of money?

Ms Berman—It is, yes.

Senator GEORGE CAMPBELL—Can you give us a copy of this new profile?

Ms Berman—Certainly.

Mr Peel—I can tell you what that is now to save trouble later on, if you like.

Senator GEORGE CAMPBELL—I am happy to take it on notice if you just give me adocument setting it out. What about the biotechnology innovation fund?

Ms Berman—That is within that department, and Sandy Radke can answer that.

Ms Radke—The biotechnology innovation fund was launched in May 2001. We have nowhad two rounds. The first round was announced in August and the second round is beingassessed and is yet to be announced, but we expect that fairly shortly. We have had a verystrong response to this program, which targets early stage commercialisation, and I think todate there have been about 157 applications. AusIndustry manage that on our behalf and theymay be able to give you some details if you have further questions.

Mr D. Clarke—Do you want a profile of the BIF customer base?

Senator GEORGE CAMPBELL—Yes, and also how much of the $5 million has beenexpended.

Mr Peel—In terms of expenditure, we have allowed $9.87 million for this financial year.However, we expect to roll forward about $4 million into next year for the biotechnologyinnovation fund. So we expect to spend only $5 million or $6 million this year. We have so farapproved 57 grant applications and there is a further round, as Ms Radke said, currently underconsideration that will soon be announced.

Senator GEORGE CAMPBELL—What is the average grant in this area?

Mr D. Clarke—The grants are capped at $250,000—that is the maximum. I do not thinkwe have the actual profile after that amount at the table. We will take that on notice.

Senator GEORGE CAMPBELL—What about the New Industries DevelopmentProgram?

Ms Berman—That is with AFFA—Agriculture, Fisheries and Forestry Australia.

Senator GEORGE CAMPBELL—The university places are presumably through theeducation department.

Ms Berman—Yes.

Senator GEORGE CAMPBELL—What about attracting IT&T workers?


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Ms Berman—NOIE. No, I beg your pardon. It is bringing people in with IT&T skills; thatis DIMIA—Immigration.

Senator GEORGE CAMPBELL—Postgraduate education—that would be the educationdepartment.

Ms Berman—Yes.

Senator GEORGE CAMPBELL—What about online curriculum content?

Ms Berman—That is NOIE.

Senator GEORGE CAMPBELL—What about the national innovation awarenessstrategy?

Ms Berman—That is this department and the Department of Education, Science andTraining—shared.

Senator GEORGE CAMPBELL—What is your component of that?

Ms Berman—That program is directed at changing the knowledge base, attitudes andculture across the whole community. The area that we look after is the industry. We areparticularly focusing on SMEs to assist them to build their understanding and positiveawareness of the value of innovative practices and how innovation can help them be moreprofitable. The rest, which is mainly about the education groups—the younger schoolchildren—is with the Department of Education, Science and Training.

Senator GEORGE CAMPBELL—How do you carry out the awareness program with theSMEs? How is that delivered in practice?

Ms Berman—This is a new program. It commenced on 1 July last year. There has been acall for grants. Industry was included in that response. They are grants which industry orothers put forward saying, ‘We believe that we can assist in building awareness either in asmall industry environment or more broadly, or through a school program.’ They are assessedand funding has been provided. There has been one round this year already. There will be asecond round called. As well as that, there is a component that is known as the Innovation andScience Week component. As you know, there have been science weeks held for a number ofyears. We are moving now to also have focus on innovation.

There are other subelements which include things such as the science prize that the PMgives out. There is a National Innovation Awareness Council, headed by David Miles and themembership includes innovators—people who would be potential role models to help buildawareness of innovation around the community. Those are the main areas of it. There is alsosupport given to the ABC to do innovation work in its programming. Just at this point, theyare the things that come to mind.

Senator GEORGE CAMPBELL—Is there any funding going to industry associations?

Ms Berman—There is. In this grants component, industry associations can come forwardand put in proposals and, indeed, they have. I think the Australian Industry Group put aproposal in. I think maybe Australian Business Ltd did too—I am not quite so sure there—butthere are definitely proposals coming in and we are encouraging them to continue to do that.In fact, about three different groups have come through in the last two months seeking adviceon what sorts of things they may be able to put together as a proposal for this competitive bid.

Senator GEORGE CAMPBELL—Is there a set of criteria which they have to meet indelivery of these programs?


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Ms Berman—Yes. I do not have them, but I can provide them to you.

Senator GEORGE CAMPBELL—Yes, thank you. Perhaps we can move onto the autoindustry. Since the report last November-December of Mitsubishi’s claim for $140 million ingovernment assistance, what discussions have taken place with the company over the issue?

Mr Pettifer—We have certainly had a number of discussions with the company about arange of issues, including their plans for a replacement platform. I am unable to comment onany issues that relate specifically to a request for an investment incentive.

Senator GEORGE CAMPBELL—What you mean by that, Mr Pettifer?

Mr Pettifer—I just cannot comment on that particular issue. Those matters, Senator, arecommercial-in-confidence matters, matters that remain confidential until the government—ifthere is such a request—has had an opportunity to consider the particulars of the request.

Senator GEORGE CAMPBELL—Are you saying that the government has notconsidered the request yet, has not made a decision?

Mr Pettifer—I cannot comment on that.

Senator Minchin—It is our clear policy in relation to strategic investment incentives notto reveal, on the part of the government, which companies might or might not haveapproached us for what sort of assistance. If the companies choose to publicise their requests,that is a matter for them, but it is certainly our policy—and an appropriate and sensible one—that we do not go advertising whether or not particular companies have sought assistance.

Senator GEORGE CAMPBELL—It has been pretty public, Minister.

Senator Minchin—Certainly there is a lot of speculation, much of it emanating fromJapan, I think, that the company has approached us, but I hope you would understand ourposition on that, that it is not appropriate for us to confirm or deny such reports. It is a matterfor the company if it wants to indicate whether or not it is seeking assistance, not for us.

Senator GEORGE CAMPBELL—All the reports I have seen indicate that they werecertainly seeking assistance, but my question went more to whether or not there was anyanalysis done by the department as to whether there were any elements of this assistance thatfell within ACIS.

Mr Pettifer—As we have said previously, Mitsubishi would, with any investment itmakes, be able to benefit from the ACIS program, As you know, the program runs throughuntil 2005. So I do not want to comment on any particular incentive request—whether therehas been one all or what discussions, if any, there have been around that—but certainly, as ageneral proposition, if Mitsubishi made an investment, if Mitsubishi produces motor vehicles,it will obtain ACIS benefits under the current arrangements.

Senator GEORGE CAMPBELL—So you are not able to tell me what any of the $140million bid would attract in terms of ACIS?

Mr Pettifer—I cannot comment on that, Senator.

Senator Minchin— The speculation, which I cannot confirm or deny, is to the effect—if Icould speak as a commentator—that the company is seeking incentives over and aboveanything it might otherwise gain from ACIS as a result of a planned investment.

Senator GEORGE CAMPBELL—So this is additionality?


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Senator Minchin—That is the speculation. The company has been made well aware of thebenefits it would receive under ACIS for a given level of investment. The speculation is that itis seeking incentives over and above that in order for that investment to occur.

Senator GEORGE CAMPBELL—There was a report in the Financial Review of 13December about Toyota’s proposed $300 million new model being in jeopardy. Has Toyotaapproached the department in relation to that issue? Have there been any discussions withToyota?

Mr Pettifer—My understanding is that that report is not accurate. Toyota has announced anew investment which relates to the facelift of the Avalon and also the production of a newengine. That investment is not in jeopardy, is my understanding. They have announced theyare going ahead with that and, as far as I know, that is certainly the situation.

Senator GEORGE CAMPBELL—Can you just confirm for me what the funding is inACIS? We have had two different figures given to us here: one was $2 billion and the otherwas $2.8 billion.

Mr Pettifer—The capped element of ACIS is $2 billion and there is another $800 millionof uncapped benefits. So the total is $2.8 billion.

Senator GEORGE CAMPBELL—On 21 December, there was a press release issued bythe Treasurer, advising of the reference of assistance in this industry to the ProductivityCommission, with the inquiry to commence in January 2002, and advising that the terms ofreference and the membership of the inquiry will be released at that time. I still have not seenany terms of reference or any membership of the inquiry. Are you aware of when this is likelyto be announced, and what the cause of the delay is?

Mr Pettifer—Very soon. The Treasurer will make the terms of reference public when anassociate commissioner is appointed to the inquiry. The cause of the delay is that it has takena little longer than we had expected to find an appropriate person for such an importantinquiry.

Senator GEORGE CAMPBELL—Is this about finding an appropriate person from theindustry or finding an appropriate person suitable to the dries in the ProductivityCommission?

Mr Pettifer—I cannot comment on that, but certainly we are interested in getting someonewith industry expertise on the inquiry.

Senator GEORGE CAMPBELL—I am told that there is a fair degree of anxiety in thecommission about not getting another Weber.

Mr Pettifer—I cannot comment about that.

Senator GEORGE CAMPBELL—I do not know if that is to cook the meats or to cookthe commission. You say that that will be announced pretty quickly?

Mr Pettifer—I would expect so.

Senator GEORGE CAMPBELL—What is happening with TCF?

Mr Pettifer—In what regard—with the inquiry?

Senator GEORGE CAMPBELL—Yes.

Mr Pettifer—The government is still considering the appropriate timing and nature ofsuch an inquiry—whether or not it is to be done by the Productivity Commission and whenthe best time to trigger it would be.


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Senator GEORGE CAMPBELL—Why would we treat this industry any differently toauto?

Mr Pettifer—I think that they are totally different industries. The automotive industry hasvery long lead times for its investments and really did need some early decisions in relation tothe post-2005 policy settings. The TCF industry has much shorter lead times, and there is aseries of activities in relation to the textiles, clothing and footwear action agenda and otherdevelopments in terms of market access overseas that suggest that, from a policy perspective,it is probably better to trigger that inquiry slightly later.

Senator GEORGE CAMPBELL—Have there been discussions with the industry aboutthis?

Mr Pettifer—There have been no formal discussions at this point in time, but we have hadsome informal soundings from them. I think we would know what their broad views are onthe issue.

Senator GEORGE CAMPBELL—Are they relaxed about it being delayed?

Mr Pettifer—Yes, as far as I understand. I am not aware of any push to commence itimmediately. But, again, it would be important to have that inquiry completed and to havegovernment decisions on the post-2005 arrangements announced well ahead of the conclusionof the current arrangements, to enable the industry to have some planning certainty. Thegovernment is certainly very conscious of that.

Mr Paterson—Just by way of clarification, there are two other factors that apply at thepresent time. There is a review of the TCF SIP scheme currently under way, and it isappropriate to wait until the outcome of that review before commencing the broader TCFrevenue. There is also a strategic plan being developed by the Textile, Clothing, Footwear andLeather Action Agenda Forum, which is expected to provide a foundation for that inquiry. Sowe are awaiting the outcome of those two processes before any broader inquiry is undertaken.

Senator GEORGE CAMPBELL—What has been the impact of the new regulationsunder the SIP scheme, promulgated by the minister at the last estimates, on the applicants?Has it had a cleansing effect?

Mr Peel—I can give you the current figures on registrants for the SIP scheme. I think atlast estimates we gave you a figure for the first year of the scheme of 437 registrants.Currently, we have 468 applications for registration for the second year, of which 417 havebeen approved. The others are under consideration.

Senator GEORGE CAMPBELL—Have you had any challenges from any of thecompanies that have not been approved?

Mr Peel—Not that I am aware of, Senator.

Senator GEORGE CAMPBELL—I thought I read about one.

Mr Peel—Yes, there was one.

Senator GEORGE CAMPBELL—Where is that challenge up to?

Mr Peel—I think it is in the AAT. It has been heard and we are waiting for a decision.

Senator GEORGE CAMPBELL—Does that go to challenging the regulations?

Mr Peel—From my memory, I think it goes to whether or not they are undertaking aneligible TCF activity.


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Senator GEORGE CAMPBELL—In one of the discussions we had with you, or you mayhave given it to me in a briefing, I think you indicated that AusIndustry is managing ordelivering around about 30 programs. As I understand the way in which some of theseprograms operate, they are essentially stand-alone programs with their own funding and withtheir own administrative costs. Is that correct? Is that the way it functions?

Mr D. Clarke—The number of programs that AusIndustry delivers is a moving feast and itdepends how you count them. If we talk about programs for which Australian companies arecurrently able to make applications, the number is close to 20, but there are several programswhich are closed but there are still contracts and obligations being managed. That pushes thenumber out closer to 30. Funding the service provided by AusIndustry has traditionally beenby the allocation of administrative costs to AusIndustry as part of the programs approvalprocess. They are rolled up into the department’s allocation and the department gives us anadministered budget which we then spread back out over those programs.

Senator GEORGE CAMPBELL—Is there a more economical way of doing it? Are theresynergies that can be achieved that would release funds for program spending rather than theway in which the current accounting process operates?

Mr D. Clarke—The AusIndustry business model, which involves focusing on programdelivery with no policy responsibilities and using our network of regional offices, hasdelivered efficiencies in program delivery. Those efficiencies are harvested by the department,which makes the allocation as to the best use of the administered resources. In most cases, wetry not to have narrow specialist areas that only do one program. Inevitably, we havespecialists in different areas, but we train our staff in all the programs. When our staff aretalking to customers they might be primarily talking about one but they are aware of and areadvising customers on the other 20.

Senator GEORGE CAMPBELL—Is there a capacity within the management of theprograms to be flexible in how you might apply a program or several programs to a particularcompany? Is there any capacity to match companies’ needs rather than the company having tomatch the parameters of the programs, or is what you are able to do fixed?

Mr D. Clarke—That is a very broad question across the 20 programs. I do not think I cangive you a definitive answer. All of the programs have guidelines. First of all, we have toseparate out the competitive programs that are assessed on merit and the eligibility programs.There are always guidelines that we administer, but some of those are more flexible thanothers. It is very hard for me to give a definitive answer. If you would like to pose a particularprogram, I would be happy to give a more detailed answer.

Senator GEORGE CAMPBELL—What I am really getting at is whether or not there is acapacity—or there should be a capacity—built into programs, whenever they are developed,to allow for flexibility to vary the programs to match industry or company needs. I presumethere are many other programs you operate where companies come along and say, ‘Yes, wewould like to have access to that but it does not quite’—

Mr D. Clarke—They are not eligible for some reason.

Senator GEORGE CAMPBELL—Yes, for some reason. But it may be only a minorreason why they are not eligible or it may well be that by varying the program and linking itwith another program you are able to assist companies substantially.

Mr D. Clarke—In most cases, that is right, there will be threshold eligibility criteria:turnover, sector, whatever. Program design evolves. It is not set in concrete at the start and it


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is part of AusIndustry’s role to be advising our policy colleagues when we are seeing, in themarketplace, companies that appear to be consistent with the spirit or objective of theprogram but are failing for some technical reason, if you like. Our protocol is to advise ourpolicy colleagues of that and, through the proper government decision making process, ifnecessary the rules are changed.

Senator GEORGE CAMPBELL—Do you have practical examples of that occurring?

Mr D. Clarke—I think some of those issues with TCF that we have talked about in thepast are the case. I think the flexibility, for example, in the START loans element that wetalked about at the opening of this hearing is another good example.

Ms Berman—This is an issue that is of concern to us because we want to make sure thatthe people who need support are, indeed, given every opportunity to get it. It has arisenrecently in relation to the COMET program. As you know, that is quite a flexible programanyway. It provides assistance to young start-up companies. Not everybody who applies forthat is able to get support and we have, as part of the new BAA initiative, made those peoplewho do not get support immediately available to a case manager in one of the AusIndustryregional offices so that they can be advised of other avenues that they could get support from.That could be Commonwealth or it may even be referring them to a state program. So whatyou are saying is something that the department is interested in and is acting on. You wouldrecall from last year the R& D tax concession amendments. That picked that up exactlybecause we START people who had a history there come into the tax concession, despite thefact that they had not called on the tax concession in previous years to help them with theirhistory. So it is an important issue that we are dealing with.

Senator GEORGE CAMPBELL—My principal concern is that there is not too muchrigidity in the application of these programs and we are actually denying customers—I usethat term advisedly—access because of the rigidity when in fact a bit of flexibility wouldactually allow them into the program.

Mr D. Clarke—The whole issue of whether the design intent, the policy intent, of theprogram is being reflected in its actual delivery in the marketplace is something that we workvery hard on with Ms Berman on the innovation programs and with Mr Pettifer on the sectoralprograms.

Senator GEORGE CAMPBELL—On the research and development issue, Ms Bermanor Mr Clarke, can you explain to me how the tax concession is going to operate with theSTART companies? We had this discussion at the time the legislation went through and myrecollection is that some heads were going from left to right and some were going up anddown.

Mr D. Clarke—Senator, I will ask my colleague Dr Edwards to respond to that.

Dr Edwards—As you are very well aware, the ability to use the START granting programprofile and the research that has been done in the START program as part of the history in the175 per cent tax concession component that was introduced was one of the changes that camethrough when the legislation was passed. The details of how that will be reported to theTaxation Office are still being worked through between us and the tax office. We have ameeting next week in Adelaide with the innovation branch of the tax office to work throughthat very issue about how they report it to the tax office and how it gets picked up in the taxreturns.


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Senator GEORGE CAMPBELL—How they will be defined as having qualified for thepremium?

Dr Edwards—Yes.

Senator GEORGE CAMPBELL—That is my other question. If it is in the process ofbeing worked through, when you do work it through, can we get a copy of the details as tohow it is going to function?

Dr Edwards—I would be happy to provide that.

Senator GEORGE CAMPBELL—Thank you.

CHAIR—Senator Schacht and Senator Harradine each had questions on particular areas.We might take those quickly now and then adjourn.

Senator SCHACHT—Minister, what is the difference in government policy in thestrategic investment plan about the money going to the magnesium plant in Queenslandcompared with the opportunity for a magnesium plant near Port Pirie in South Australia?

Senator Minchin—Subject to correction by officers, my recollection is that thearrangements the government came to with the Australian Magnesium Corporation wereseparate and apart from the strategic investment incentive process. The AMC was dealt withas you would expect the government to deal with it, on a case-by-case basis. Given the specialcircumstances of AMC in that we, through the CSIRO, are 50 per cent owners of thetechnology, we decided to provide a loan to the CSIRO for the further development of thattechnology.

Senator SCHACHT—For the Hansard record, that was how much?

Senator Minchin—I think it was $50 million.

Senator SCHACHT—A $50 million no-interest loan.

Senator Minchin—Yes, we announced the details of that at the time.

Senator SCHACHT—I know that. I just want it so people know what we are talking aboutwhen they read the Hansard.

Senator Minchin—Sure. And then we subsequently agreed to act as guarantor for a loantaken out by AMC in the context of its share raising. That was dealt with separately.

Senator SCHACHT—What was the size of the loan we guaranteed?

Senator Minchin—$100 million.

Mr Jones—We capped our exposure at $100 million.

Senator Minchin—Matters relating to SAMAG fall into the same category as Mitsubishi,and the same policy applies. If a company chooses to publicise an application for a strategicinvestment incentive, that is for the company and not for us. I cannot comment on speculationthat SAMAG may or may not have sought a strategic investment incentive. Certainly I, asindustry minister and as a South Australian senator, have spent an inordinate amount of timewith SAMAG talking about their project. Obviously, I would love to see that project proceed.A lot of time has been spent with that company. But I cannot go into the details of whether ornot it has sought a particular incentive.

Senator SCHACHT—I appreciate the commercial confidentiality of what they may haverequested and what they have said publicly. Does the government have a view that it would beimpossible or difficult to support two major magnesium plants in Australia in view of the


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unpredictability of the magnesium market? Australia may only be able to afford one in thelong term and only one is going to survive.

Senator Minchin—As industry minister, I took the view publicly that the worldmagnesium market was likely to grow quite significantly, given the quite dramaticallyincreasing interest in the car industry in using magnesium and the pressures for more fuelefficient vehicles. Therefore, it was and remains my view that Australia can certainly supporttwo operations, given the world market. But they have to be viable, cost-effective, efficientoperations. I do not think it is a question of the world market. It is a question of whether theparticular project can produce magnesium cost effectively, given input prices and particularlythose for energy. It is a high consumer of energy. The issue with SAMAG really, frankly, isenergy pricing. Can they get energy at a price that enables them to be cost competitive in theworld market? In that sense, they are in a different position.

Senator SCHACHT—Did they speculate that that may be one of the areas of assistancethey would look to either a state or a federal government for to subsidise their costs or getassistance in getting cost-competitive energy provided to them?

Senator Minchin—I do not want to speak on behalf of the company, but I think thecompany has said publicly that energy is the key issue—access to energy and affordableenergy.

Senator SCHACHT—So, whichever state government is in in South Australia at themoment, it may well be a bigger requirement on the state government, which has to providesome arrangement about a competitive energy structure for the SAMAG project.

Senator Minchin—It is always open to a state government to subsidise the supply ofenergy and Australia has a long history of state governments subsidising the supply of energyto big consumers. It goes back a long way.

Senator SCHACHT—We know about that.

Senator Minchin—That, of course, is open to the South Australian government, if it sochooses.

Senator SCHACHT—Does the department believe that that could be contrary to thenational competition rules of the electricity grid if they did?

Senator Minchin—They are using gas; they want gas for this project if they can get gas atan affordable price.

Senator SCHACHT—They want gas to build their own plant to generate the power?

Senator Minchin—Yes.

Senator SCHACHT—Isn’t there a national market in gas being developed undercompetition policy?

Senator Minchin—There is. The growth of the consumption of gas has been quitedramatic, so has the increase in pipelines; there are, as you would well know, two pipelineproposals through the south-east in South Australia. So there is increasing competition andavailability of supply, and SAMAG have to work through what they can obtain gas at andwhether that is going to make it cost effective for them.

Senator SCHACHT—Have SAMAG given the government an indication of their owndeadline that they have to reach for their own work proposal—that such and such a thing has


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to be either yes or no by a certain time such as the end of this year, the middle of next year orwhatever or the opportunity is missed altogether?

Senator Minchin—I am not sure that they would put on a particular date, but certainly inmy discussions with them they have always, not surprisingly, said the matter is urgent.

Senator SCHACHT—They always say that.

Senator Minchin—They always say that; they have not said there is a drop-dead date asfar as I can recall.

Senator SCHACHT—So the stance of the federal government and the industry portfoliois that, though because of the CSIRO connection we have made a major commitment to theAMC, that does not preclude, either through general industry support or an application to thestrategic investment fund, support for SAMAG?

Senator Minchin—I should correct the record, Senator Schacht. I have just been remindedof a press release I issued on 9 August last year headed ‘Government considers support forSAMAG’, in which I confirm that they had applied for support through the StrategicInvestment Incentive Program. That was presumably in response to the company itself statingthat it had done so, and I refer in that press release to the sort of discussions that thegovernment was having with SAMAG about that.

Senator SCHACHT—The main request is through the strategic investment fund?

Senator Minchin—That is right. I am reminded that they have already received an R&DSTART grant of just under $1 million for their technology.

Mr Jones—Coming back to your question in general, as I said previously, the governmentconsiders all requests for incentives on a case-by-case basis, so there is nothing to stop firmsin the same industry coming forward before the review.

Senator SCHACHT—Through the strategic investment fund?

Mr Jones—Yes.

Senator SCHACHT—They can individually apply and then through all the discussionsand negotiations you work out what is best in the national interest, to use that phrase?

Mr Jones—And one of the criteria for providing support under the strategic investmentcoordination process is the effect that any assistance would have on other suppliers in theindustry.

Senator SCHACHT—As I think the minister would well know, Port Pirie and the upperSpencer Gulf have long-term problems of employment, quality jobs et cetera. Is that criteriathat you can put into part of the matrix for the strategic investment bid—that if this was builtin or near Port Pirie it would be a major economic boost to a region that has long-termeconomic problems?

Mr Jones—That kind of consideration would come into our assessment of the proposalbecause the criteria talk about things like the investment providing significant net economicbenefits through substantial increase in employment, business investment, benefit to orinvestment by other industries, either users or suppliers and so on; so in assessing theeconomic impacts of a proposal we could certainly take into account the regional impacts andimpact on local communities et cetera.

Senator SCHACHT—And it is conceded that this would be a major boost for a regionthat has got long-term problems? They made the bid to you and you have acknowledged that


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in your press release. Are they coming back to the department? Is there ongoing negotiationor do they have something else now to put to you before you respond with a proposition?

Mr Jones—Without going into the details of individual incentive applications, there havebeen ongoing discussions in this particular case and the government is giving urgentconsideration to their request at the moment.

Senator SCHACHT—Because it is commercial-in-confidence you are not in a positionyet to indicate what they are asking for, unless they are willing to indicate what they areasking for?

Senator Minchin—It is a matter for the company.

Senator SCHACHT—Have they gone on the record indicating what they have asked for?I am not asking you to say what is on their list. Did they go on the record somewhere sayingwhat they have asked for?

Senator Minchin—My recollection is they have said what they require of governments—state and federal—to make this project—

Senator SCHACHT—It is gas, price—energy?

Senator Minchin—My recollection is they put a dollar figure on what was required, butwhat it was required for was to deliver a gas price that enabled the project to be competitive.

Mr Jones—The figure that is on the record is in a press release on 2 October from SenatorMinchin in his previous capacity as Minister for Industry, Science and Resources where it isstated that SAMAG have asked for a grant of $130 million. I think that is the only figure thatwe have put on the public record.

Senator SCHACHT—That is a straight cash grant they want. Whether it is for gas supplyor building the plant or whatever, they want you to give them the money outright?

Mr Jones—That is the total quantum of assistance they were seeking from governments—

Senator SCHACHT—Governments?

Mr Jones—and there is no indication of the kind of assistance they wanted—

Senator SCHACHT—They have not said how that would be broken up yet?

Mr Jones—Not to my knowledge, Senator, no.

CHAIR—Thank you, Senator Schacht. We might adjourn now until 11.10 a.m. and thenwe will resume with questions from Senator Harradine.

Proceedings suspended from 10.57 a.m. to 11.11 a.m.CHAIR—In order to give you an indication of where we are going with this, questions on

this portfolio will proceed until 2.30 p.m., with the interruption of the luncheon adjournment,obviously. I have spoken to Senator Conroy, and he does not anticipate that his questions onthis portfolio will finish by 2.30 p.m., so we will then excuse the minister and officers of thedepartment until 9 a.m. on Friday. In the meantime, we will get an indication from oppositionand other senators about which officers and agencies can be excused completely and who willneed to return at 9 a.m. on Friday. At 2.30 p.m., we will move to the Australian TaxationOffice, which will occupy us for the rest of the afternoon. Then, as per the program, at 8.00p.m. we will start with the Australian Tourist Commission, APRA, and the Australian Officeof Financial Management. Senator Harradine, I understand you have some questions.


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Senator HARRADINE—Thank you, Mr Chairman. Is it correct that there is almost $10million set aside for biotechnology centres of excellence?

Ms Radke—Did you say $10 million?

Senator HARRADINE—Almost $10 million.

Ms Radke—For the centre of excellence program? The centre of excellence program wasallocated $46.5 million over five years, Senator. The centre of excellence program was—

Senator HARRADINE—I apologise: there will be $46.5 million earmarked over fiveyears for biotechnology centres of excellence; is that correct?

Ms Radke—That is correct.

Senator HARRADINE—You mentioned the biotechnology innovations fund before.

Ms Radke—Yes.

Senator HARRADINE—Could you explain the difference, please.

Ms Radke—The biotechnology innovation fund, which we affectionately call BIF, is agrants program. It is intended to assist early stage commercialisation of research—what wecall ‘proof of concept’. It generally applies to small companies and start up companies, butother larger companies can apply. It provides assistance to enable these companies to attractfurther investment from the private sector as they get further down the track. The centre ofexcellence program basically funds one or more centres of excellence in biotechnology. Itsepicentre is probably more research focused—but research that would give Australia acompetitive advantage in biotechnology and have strong potential for commercialisation. Sothe nature of that program is quite different from the BIF; it gives grants to many applicants,whereas we would be awarding only one or two grants out of the centres of excellenceprogram.

Senator HARRADINE—You mentioned that 57 grants had been approved under the BIFprogram.

Ms Radke—I think that there was a total of 137 applications that have come through thetwo rounds. So far, 57 grants have been approved from round 1.

Mr D. Clarke—I need to correct that: I think there were 57 applications, and there were 30approvals in round 1.

Ms Radke—Yes.

Mr D. Clarke—Under BIF, thirty grants worth a total of $6.7 million have beenannounced. So, to answer the previous question, that would be an average of about $220,000per grant.

Senator HARRADINE—With regard to those grants, would you please provide thecommittee with details thereof; that is to say, the grantees—

Mr D. Clarke—Grantees, value of grant and name of project are all public informationand I would be pleased to provide that to you.

Senator HARRADINE—Thank you. How does that fit in with the R&D program?

Ms Radke—Do you mean R&D Start?

Senator HARRADINE—Yes.


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Mr D. Clarke—The BIF program complements R&D Start very nicely. BIF is about veryearly stage R&D, and addresses those projects that would not be eligible for Start becausethey are not yet operating in a relatively mature commercial structure. So, in many ways, BIFis a precursor to Start support—or perhaps innovation investment fund support. BIF is at thatearly proof of concept stage which does not well satisfy Start criteria.

Senator HARRADINE—In respect of biotechnology, what is meant by that? Does itcover human biotechnology?

Mr D. Clarke—The ministerial directions that govern the BIF program incorporate astatement guideline as to the scope of technologies that are eligible. I believe that the answerto your particular question is yes.

Senator HARRADINE—Do you have a copy of the ministerial directions on you?

Mr D. Clarke—We translate the directions into guidelines for applicants, which is thepublic information.

Senator HARRADINE—Could you just bear with me? I am after the ministerialdirections.

Dr Edwards—I do not have the actual ministerial directions here with me, but I do have astatement about the scope, if that would be of assistance to you:A wide field of biotechnology projects may be eligible for funding, including cell fusion,bioinformatics, genomics, gene technologies, cell and tissue culture, protein engineering and advanceduses of microorganisms and enzymes.

Senator HARRADINE—How many are there and what are the natures of the programs inthe human biotechnology area that are funded by the grants? For example, are any of themdealing with the utilisation of human embryonic stem cells and the like?

Mr D. Clarke—The issue of support for projects involving human reproductive material isone that we monitor very closely, and there are no grants in BIF, round 1 that involve humanreproductive material.

Senator HARRADINE—Are there any that involve stem cell research? Let medistinguish between embryonic stem cells and adult stem cells—

Dr Edwards—The analysis we have done of the programs is that none of those in round 1involved human stem cell research.

Senator HARRADINE—So what type of research in the human area is involved?

Dr Edwards—I would not have the details with me but I think the titles of the project,which we are quite happy to provide, may give you some indication of the type of work that isbeing done.

Senator HARRADINE—And the next round of BIF is imminent?

Mr D. Clarke—Yes, unlike Start, BIF is run in a series of announced rounds and acompetitive assessment of all of the applications simultaneously. The assessment of round 2has been concluded. We are just working through now to the announcement and contractnegotiation stage.

Senator HARRADINE—How is the assessment made? I will be coming to that, too, inregard to the centres of excellence.

Mr D. Clarke—The general assessment process?


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Dr Edwards—It is against a range of criteria and if you just bear with me for a second Iwill look them up for you so I do not get them wrong. The merit criteria that we use whenassessing a BIF grant are: the extent to which the company structure will actually facilitatecommercialisation—is it in a reasonable and good-looking vehicle?—the strength of thetechnology, and that goes to the extent with which the technology contributes to thecommercialisation of leading edge biotech; the extent to which the projects have acommercial or a national benefit that we can identify; and the need for funding, which is theextent to which projects could proceed satisfactorily without grant funding. They have todemonstrate that they could not proceed without Commonwealth assistance.

Mr D. Clarke—They are the criteria. AusIndustry staff make assessments of thesubmissions against those criteria. The decision-making body is the biotechnology committeeof the Industry Research and Development Board that actually makes the final assessment anddecisions.

Senator HARRADINE—Do we have a list of who is on that board?

Mr D. Clarke—Yes, that is on the public record and is published annually in the IR&DBoard annual report.

Senator HARRADINE—Thank you. It is on your web site, is it?

Mr D. Clarke—Yes. It certainly should be, Senator.

Dr Edwards—It is definitely in the annual report, Senator.

Mr D. Clarke—If you bear with me for a moment, I am happy to provide it to you now.There is no problem.

Senator HARRADINE—Thank you. Could I just ask another question on the R&Do.Could you similarly provide a list of the grantees for R&D projects.

Mr D. Clarke— Are you referring to the Start grants, Senator?

Senator HARRADINE—Yes, the R&D Start Program.

Mr D. Clarke—Again, that is a very large list. There are 550 Start grant contracts livetoday and, again, it is public information.

Senator HARRADINE—Are there any which relate to the matter that I raised before—

Mr D. Clarke—Yes there are. There are two.

Senator HARRADINE—There are two which involve experimentation on embryonicstem cells?

Mr D. Clarke—We are just conferring to make sure that we understand the scope of yourquestion as to which grants are in place.

Dr Edwards—There is an R&D Start grant to one company that we are aware of that isusing stem cells in their research. There is another grant that we are aware of, a recent one,where they are doing research in reproductive technology. That is IVF-type technology. It isnot stem cell research.

Senator HARRADINE—Which organisations or companies received those grants andhow much were they?

Dr Edwards—The main grant for stem cell research is to Bresigen.


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Mr D. Clarke—The grant to Bresigen is $4.9 million and the IVF grant is $2.4 million.

Senator HARRADINE—What company was the IVF?

Mr D. Clarke—Sydney IVF Ltd.

Senator HARRADINE—Dr Jansen?

Mr Drew Clarke—I do not have that detail, Senator. Can I respond to your previousquestion about membership of the biotechnology committee?

Senator HARRADINE—Sure.

Mr Drew Clarke—Membership comprises Dr Leanna Read, who is the chair, ProfessorPeter Andrews, Professor Margret Britz, Dr Michael Hirshorn, Dr Cherrell Hirst, Dr RossMacdonald and Dr Deborah Rathjen.

Senator HARRADINE—The Bresagen grant of $4.9 million: could you just provide ussome further information now as to whether that was for human embryonic stem cell researchor for animal models?

Dr Edwards—I can provide you with the title of the project. That is public knowledge.Rather than try and do that from memory, I would rather provide that to you on notice, if Icould, but the details beyond the title of the project I cannot divulge at this time.

Senator HARRADINE—Why?

Dr Edwards—We have a requirement under the IR&D Act to keep certain thingscommercial-in-confidence, and the things that we have agreement to announce publicly arethe amount of the grant, the company that receives the grant and the title of the project.

Senator HARRADINE—This is $4.9 million of public funds. There would be a hugenumber of people concerned if those public funds and taxpayer funds were funding unethicalresearch, that is to say research which involves the destruction of an early human being inorder to obtain their stem cells?

Dr Edwards—I understand your position. I think the title of the project is quite a detailedone and it may go quite a way in meeting your requirements but I just do not have the titlewith me.

Senator HARRADINE—I am asking a question: are embryonic stem cells utilised or arethere animal models?

Dr Edwards—It is quite a detailed and complex project. I just do not have the details ofhow far it goes. I am unsure of how much of that detail is in the title of the project, and that isthe bit I am allowed to put on the public record. I am happy to provide that to you but I just donot have it with me.

Senator HARRADINE—I am asking directly whether any of this money is being utilisedto obtain from early human beings—the human embryo—stem cells for their destruction.Furthermore, is the money being utilised in any way for cloning experiments?

Mr Drew Clarke—I will state what I can about the nature of the Bresagen project. Itinvolves adult stem cells, not embryonic.

Senator HARRADINE—Thank you.

Mr Drew Clarke—And the objective of the project is to develop novel human cell andgene therapies for treating Parkinson’s disease and bone marrow disease.

Senator HARRADINE—In other words, the answer to my question is no.


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Mr Drew Clarke—I believe that is correct. If I have misled you I will most assuredlycorrect it but my understanding is that it is adult stem cells focused on Parkinson’s and bonemarrow therapies.

Senator HARRADINE—I want to move to Biotechnology Australia and the Centres ofExcellence Program. There is a very substantial amount, $46.5 million, involved. Could youexplain to the committee what is happening in that particular area? I understand thatapplications closed on the 15th.

Ms Radke—Yes, they closed on Friday. We have received applications and have nowembarked on the selection process. An expert panel was established mid last year to advise onthe selection process. The expert panel will advise; they will look at the applications andmake recommendations to the Minister for Industry, Tourism and Resources and the Ministerfor Education, Science and Training through the Commonwealth Biotechnology MinisterialCouncil. They will make recommendations on merit, against the selection criteria, togovernment.

Senator HARRADINE—Could you provide us with the selection criteria?

Ms Radke—Sure. I will take that on notice and provide you with the actual selectioncriteria. The general areas they are looking at include leadership and management team,research focus, Australian and international linkages, governance, skills andcommercialisation. But, if you like, I can get you the actual details.

Senator HARRADINE—Thank you. I would like that. You have an expert panel?

Ms Radke—Yes.

Senator HARRADINE—Who comprises the expert panel?

Ms Radke—It is chaired by Dr Peter Jonson. The panel includes Professor Merilyn Sleigh;Dr Ian Pitman, who was ex-Fauldings; Professor Vicki Sara, from the ARC; Mr John Stonier,from Davies Collison Cave; Professor Grant Sutherland, from the Adelaide Women andChildren’s Hospital; and Professor Denis Wade, from Johnson and Johnson. We had threemembers who have resigned from the committee, two because of potential conflict ofinterest—Dr Geoff Garrett and Professor Peter Langridge—and Dr David Gearing due toother commitments.

Senator HARRADINE—On your web site, I see that research would include questions ofbioinformatics. Is bioinformatics one of the areas that you will be looking at?

Ms Radke—In terms of the selection process occurring now, that may be one of them—itis not a mandate but it may be one of the areas.

Senator HARRADINE—Your web site on the Biotechnology Centre of Excellence states:The centre could, for instance, enhance the research capability and outcomes in key areas ofbiotechnologies such as functional genomics, bioinformatics, and/or proteomics with a view to:

- developing commercial applications based on the technologies

… … …

I take it that bioinformatics is included in that.

Ms Radke—It is an example of a platform technology which may, under this program, besupported.

Senator HARRADINE—What sort of ethical evaluation of the applications is donethrough the department?


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Ms Radke—The applications are assessed against the selection criteria, and the recipientsof any grants must adhere to the ethical guidelines that currently exist in Australia, and thereare some, particularly relating to stem cell research.

Senator HARRADINE—But on your guidelines you talk about the NHMRC’s ethicalguidelines on assisted reproductive technologies and the National statement on ethicalconduct in research involving humans. How do those apply to a centre for bioinformatics?

Ms Radke—Are you talking about the Peter Wills Centre for Bioinformatics?

Senator HARRADINE—You have called for applications for centres of excellence inbiotechnology.

Ms Radke—Yes.

Senator HARRADINE—And your web site says that would include bioinformatics. Onethical and other guidelines, you mention two sets of guidelines, and I cannot see anything ineither of those two sets of guidelines that has anything to do with bioinformatics. I amwondering what your ethical evaluation would include?

Ms Radke—I am not sure what issues of ethics bioinformatics comes under, Senator, butthat was an example to give people looking at the web site an idea of the types of researchfocus that might be considered in the centre of excellence program. At the end of the day, thepanel of experts may choose an application that has a shift towards proteomics, for example,or a combination of several things.

Senator HARRADINE—Going to that question, presumably such a centre of excellencewould produce intellectual property in an area of information and communicationstechnology, so that it would contribute to the outcome that you want? Under thosecircumstances, what are the ethical guidelines? What ethical guidelines are used by thedepartment to assess applications for, for example, a centre of excellence of bioinformatics?

Ms Radke—To my knowledge, there are no committees on or issues about ethics andbioinformatics, per se. It is a platform technology that underpins a lot of other research, interms of providing databases and analogs to interpret and analyse that data. I am not aware ofany issues regarding ethics and bioinformatics.

Senator HARRADINE—You would be aware that this is a huge area that could posegrave problems: for example, genetic discrimination in employment and superannuation andthe like. What ethical evaluations are made of the projects that have been submitted to you forconsideration in respect of, say, that matter—the protection against genetic discrimination inemployment or the provision of goods and services, and issues relating to access to geneticinformation about an individual or groups of individuals?

Ms Radke—Any successful proposal to the centres of excellence program will have toabide by the regulations concerning privacy and any outcomes of the current review that theALRC and AHEC committees are looking at now—it will have to operate within thatframework, whether it is to do with stem cell research or, within the privacy acts, disclosureof information.

Senator HARRADINE—That is a minimalist position. These are supposed to be centresof excellent, aren’t they?

Ms Radke—Yes.

Senator HARRADINE—Under those circumstances, shouldn’t they be centres of ethicalexcellence as well?


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Ms Radke—I assure you that they will be, in that when these centres are up and runningthey must operate within the framework that is established at the Commonwealth or statelevel.

Senator HARRADINE—The very fact that the ARC and AHEC are reviewing theirguidelines means that they themselves see that the guidelines are inadequate at the presentmoment. Furthermore, we are talking about a huge amount of taxpayers’ money—nearly $50million—being set aside for these centres of excellence. What I am asking you, simply, is:would biotechnology in Australia expect that these centres of excellence in research wouldalso have an excellent standard of ethics?

Ms Radke—I would in terms of whatever our current position is as they are operating onthese matters. Certainly, I understand that the government is evaluating its position on someaspects of ethics at this moment. But in that interim period there is a regime that operatesthrough the NHMRC guidelines, through state legislation—that is the current position. We aresoon to have a more whole of government position on some of these issues through a COAGprocess. As these things emerge, any research that is conducted in these areas must abide bywhatever is the current best practice.

Senator HARRADINE—Are any of the applications—

Ms Radke—To clarify, we will have this in the contracts. Indeed, AusIndustry cancomment on how contracts for BIF are set up in terms of ensuring that this compliance ismade. But certainly, in the contracts for the centres of excellence, the contractual arrangementwill specify that that is the condition of funding.

Senator HARRADINE—That what is a condition of funding?

Ms Radke—That they operate within the current guidelines and best practice of ethicalissues.

Senator HARRADINE—The current guidelines?

Ms Radke—Yes, whatever is current at the time.

Senator HARRADINE—A minimalist standard.

Senator Minchin—Senator Harradine, you and I have had this discussion in the Senatebefore in my previous capacity as industry minister. I would ask you to recognise and respectthe fact that the industry department cannot—and should not—establish some arbitrary, adhoc, independent moral judgment of its own. Its responsibility is to ensure that the grants itmakes are made on the basis of compliance with existing overall government policy and law,and not to make its own independent moral judgments—that is, its responsibility is to ensurethat all the grants do comply with the government’s overall ethical guidelines and withprevailing state and federal law on the matter and that future changes in guidelines or law arereflected in the way in which grants are administered, but not to apply its own independentmorality to such matters.

Senator HARRADINE—This is a question of ethical evaluation. I ask the officer directly:does the department do an ethical evaluation?

Ms Radke—No, the department does not.

Senator HARRADINE—What was that response by the minister, then? The departmentdoes not do any ethical evaluation on these matters.


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Senator Minchin—The job of the department is to ensure that prospective granteescomply with existing standards. That is its job.

Senator HARRADINE—How does it do that?

Mr D. Clarke—I would be happy to answer that in regard to the START grants, BIF grantset cetera that we have talked about. There are three elements to the way in which weimplement that requirement that the minister has outlined. Firstly, we include a statement inall application forms that must be signed by the applicant warranting that they are complyingwith all the relevant laws, regulations and guidelines. Secondly, we have developed a factsheet for applicants providing general information about these requirements and referringthem to the more comprehensive sources of information about those appropriate laws,regulations and guidelines. Thirdly, we are ensuring that all new contracts bind the grantrecipients to comply with all relevant laws, regulations and guidelines and with the outcomesof the impending COAG process.

Senator HARRADINE—So, in regard to the grants, there will be something in the deed?

Mr D. Clarke—Correct.

Senator HARRADINE—But how is that going to be monitored and how is it going to beenforced?

Mr D. Clarke—AusIndustry undertakes regular monitoring of the companies and projectsthat are funded under the IR&D Act. It is part of our routine contract administration.

Senator HARRADINE—But, given the amount of money, is a separate evaluation to takeplace in respect of whether the companies—bearing in mind this is a commercial activity—are observing the ethical standards that are demanded in the contract?

Mr D. Clarke—Our approach to contract monitoring is based on a risk profile. Clearly thematters that you are raising are sensitive matters within the community and, therefore,compliance with such sensitive matters would receive more attention than perhaps a contractinvolving a simple manufacturing technology.

Senator HARRADINE—How are you going to do it?

Mr D. Clarke—We visit the companies. We discuss the progress of the projects. We talk tothe companies receiving the grants.

Senator HARRADINE—Will there be established an ethical evaluation committee as towhether these organisations are in fact operating in accordance with—

Mr D. Clarke—Compliance with ethical guidelines is a prerequisite for receiving thefunding.

Senator HARRADINE—There is an interpretation of those guidelines. Who is going tomake that interpretation?

Mr D. Clarke—The ethics committees that monitor them.

Senator HARRADINE—What ethics committees?

Mr D. Clarke—Whatever the appropriate structure is for the application. If it is fromwithin a university, then there are ethics committees within them. We rely on the currentNHMRC guidelines to provide the primary structure sitting on top of that.

Senator HARRADINE—So you rely on institutional ethics committees, not onindependent review?


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Mr D. Clarke—We require the applicant to provide us with evidence as to the ethicalapprovals that they have obtained. If we were not satisfied that that was from a duly qualifiedand appropriate body, then we would make further inquiries.

Senator HARRADINE—So the department itself would not be undertaking such anexamination?

Mr D. Clarke—That is correct.

Senator HARRADINE—You would rely on the ethics committee of a commercialcompany?

Mr D. Clarke—No, I am sorry. In assessing the applications, and I am talking aboutSTART and BIF in particular, as I have spelt out to you, it is a requirement that the companywarrant that it is complying with the guidelines, regulations and laws that apply. In makingthat assessment, we will be looking for evidence that they are in fact complying. I do notknow how I can be more specific in answering your question, Senator.

Senator HARRADINE—If it is a commercial company. What I am trying to get across toyou is: how are you going to obtain from that commercial company an indication that it isobserving the ethical guidelines and requirements?

Dr Edwards—Apart from our normal project evaluation where our customer servicemanagers visit the project—as Mr Clarke said, that is done on a risk basis; if it is a high-riskproject we will visit more often—we have no other mechanisms in place that would go to theheart of the issue you are raising.

Senator HARRADINE—I would like to come to Biotechnology Australia and theamounts for centres of excellence. Are there any applications which involve information onhuman biotechnology?

Ms Radke—I have not seen all of the applications yet. The implementation team havelooked at them and the expert panel are looking at them now, so I would have to provide youwith that information later. It is likely that some stem cell research is in those applications, butI cannot tell you that now.

Senator HARRADINE—What about cloning?

Ms Radke—I have not looked at the full spectrum of the applications myself since theycame in on Friday.

Senator HARRADINE—The ethical guidelines that were mentioned on your web site, asI said, do not really deal with the area of bioinformatics, do they?

Ms Radke—Do you mean the current ethical guidelines?


Ms Radke—I suppose not specifically, but there are regulations about use of informationin the broader sense that apply in terms of the Privacy Act and those issues—if that is whatyou are getting at, Senator; I am not quite sure.

Senator HARRADINE—Would the department also be following the United NationsInternational Bill of Rights and, specifically, instruments including the Universal Declarationon the Human Genome and Human Rights, the Convention on the Rights of the Child and theDeclaration on the Rights of the Disabled Person; and how would they be following them?

Ms Radke—I would have to take that on notice to see what our guidelines say, but I do notthink we have any reference to that.


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Senator HARRADINE—Why? These are key international documents.

Ms Radke—The underlying approach is that any funding that is given out, for the durationof that funding, adheres to the current laws or the prevailing regime, whether it is in theethical framework or in any legislation, and that will be firmly entrenched in any contractualobligations that we design with the successful applicant. It goes without saying that anyobligations we have with international treaties or so forth would be part and parcel of that.But, in assessing the applications on their merit, we would put forward the best proposal thatwould give us—within those constraints—what would meet the objectives for the centre ofexcellence program.

Senator HARRADINE—One of the objectives of the centre of excellence program is todevelop information, data, intellectual property. What is the department’s view of financialgains arising from the human genome of an individual or a group of individuals and dealing inthat information?

Ms Radke—In terms of whether the centre of excellence can make profits?

Senator HARRADINE—I am just asking whether you think that it is legitimate orotherwise for ownership of data or intellectual property to be used for financial gain whicharises from the human genome of a group or an individual? Who owns it?

Ms Radke—One of the criteria that we have is that, in terms of commercialisation, theirplans for intellectual property are sound and can be well managed through the life of theprogram. They will be subject to the patent laws and the patent regimes, just like anyone elsedoing research in this area.

Senator HARRADINE—A patent was sought by Stem Cell Scientists Pty Ltd for thetechnique they use to transfer the nucleus of a human somatic cell into a enucleated pig’sovum. We had that discussion in the Senate on the biotechnology area, as far as I recall, andmight I just point out that I raised also at that time the fact that the advice that was given tothe government was incorrect and that is the definition of cloning included identicality. Is thatcorrect or is it not? Is that clone identical to the first being?

Ms Radke—To the parent material?


Ms Radke—It is essentially identical but not entirely identical, my understanding is, yes.

Senator HARRADINE—Because of the mitochondrial DNA.

Ms Radke—Correct.

Senator HARRADINE—That matter was raised by me in the Senate and the advice thatwas given apparently to the government at that time was such that they included identicalityin the legislation.

Ms Radke— I am sorry, Senator, I am not aware of this particular discussion. I wouldimagine it would be the health portfolio that you were having that discussion with. I am notaware of this. The Department of Health and Ageing has overall responsibility for theseissues.

Senator HARRADINE—But the problem is that it renders that part of the legislationinoperable. Your Biotechnology Australia has got a bit to do with that particular legislation.


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Ms Radke—Biotechnology Australia has no legislative responsibility. We do input toprocesses. It is the Department of Health and Ageing who largely have the responsibility forlegislation in biotechnology, covering the biotechnology field.

Senator HARRADINE—There was an amount of $750,000 to the Garvan Institutementioned before the break. Where did that come from and why? Was it a centre ofexcellence program?

Ms Radke—It came from the centre of excellence program, from this year’s programfunding.

Senator HARRADINE—Would you provide the details of that to the committee?

Ms Radke—The government decided to provide $750,000 as a contribution to theGarvan’s Peter Wills Bioinformatics Centre which they are just now establishing. Money waslooked for from various programs and at that time it was determined that the centre ofexcellence program was the most appropriate.

Senator HARRADINE—So that has been taken out of the centre of excellence program?

Ms Radke—For this year’s program funding.

Senator HARRADINE—Would you give us details of what that program is at Garvan?

Ms Radke—The Garvan Institute is building on their own expertise in cell chip technologyand are building a bioinformatics centre. They are getting funding from various sources. Wehave a contract with them in regard to the $750,000. We have provided half of that funding tothem and the money provided from the Commonwealth is to essentially provide some initialkey staff and some software and hardware upgrades as a sort of seed for the centre.

Senator HARRADINE—They are involved in developing biochips, are they?

Ms Radke—They use them in their research.

Senator HARRADINE—Their research on what?

Ms Radke—Various things; I am not really sure of the scope of Garvan’s research. Theyare involved in cancer research, research for the treatment of arthritis and various otherdiseases—quite a wide spectrum.

Senator HARRADINE—The CRC is a Department of Education, Science and Trainingarea isn’t it?

Mr D. Clarke—You were asking questions previously regarding the BresaGen STARTgrant. I need to correct an answer that I gave you; I have been able to get further advice in thelast few minutes. The title of the project, which is on the public record, is ‘Development ofhuman cell and gene therapy for neuronal and bone marrow disease through the use ofpluripotent stem cells’. I am unable to advise you as to the origin of the stem cells. I amconscious that that is an area of interest for you. Under the confidentiality provisions thatprevailed in this program, we have advised you of the name of the recipient of the grant, thetitle of the project and the dollars involved. I cannot give you advice as to the source of thestem cell line in this work.

Senator HARRADINE—Why can’t you give me that information?

Mr D. Clarke—Because, under the confidentiality provisions that prevail in this program,the information that we, the department, are able to put on the public record is the name of therecipient, the title of the project and the value of the grant. All other information about theproject is a matter for the recipient themselves to release, not the department.


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Senator HARRADINE—Isn’t that worrying? We are here to get information as to wherethe taxpayers’ money goes and if BresaGen, for example, is utilising human embryonic stemcells then that is a matter which the parliament should know about—and not only theparliament but obviously this is a matter which relates to the COAG process as well.

Mr D. Clarke—The only information I am able to give you is the three elements that Ihave outlined, but as a matter of principle I can also give you the assurance that all STARTgrants in this field—indeed all R&D board support in this field—must go through the processof ensuring compliance with the laws, regulations and guidelines that apply in the field.

Senator Minchin—The point should also be made, and perhaps Drew Clarke might like toadd to it, that obviously South Australia is one of the three states that does have its ownlegislation in this field and anything BresaGen does must comply with the South Australianregime, which is probably as strict as any in Australia.

Mr Drew Clarke—And, indeed, this grant did comply with South Australian law.

Senator HARRADINE—Yes, I understand what the South Australian law is, but didn’tBresaGen get around the South Australian law and get their embryonic stem cells fromSingapore? The South Australian law prevents the destruction of South Australian humanembryos to obtain their stem cells, so what does BresaGen do but go to Singapore and getSingaporean stem cells.

Mr D. Clarke—I am not able to answer your question. You are asking me a question aboutthe detailed characteristics of the research project and I am not able to respond to that.

Senator HARRADINE—But I am responding to what the minister said about the SouthAustralian legislation. This company went around the back door and got the stem cells fromSingapore. They could not get them from South Australia because the South Australianparliament, quite rightly, believed that the destruction of South Australian human embryos toobtain their stem cells was not on. So what did the company do? It got them from Singapore.

Mr D. Clarke—Senator, that was a statement, I think, not a question. I cannot respond tothat.

Senator HARRADINE—Are you aware of the fact that that has occurred? Are you awareof the fact that BresaGen has been using embryonic stem cells from Singapore?

Ms Radke—Can I add to this.

Senator HARRADINE—I am sorry, I asked the question.

Ms Radke—I just want to clarify something. There is another company, and I amwondering possibly if you are confusing the activities of ES Cell research based in Monashwhich has a linkage with Singapore. BresaGen, I believe, has its own company linkages in theUS and Atlanta and my understanding is that BresaGen works closely with its US team, notSingapore, and is under the sort of guidance of US law. I also understand that this research hasbeen sanctioned by NHMRC committees.

Senator HARRADINE—What research?

Ms Radke—Any research that BresaGen does.

Senator HARRADINE—Has been sanctioned by NHMRC?

Ms Radke—Yes, I believe so. The Human Research Ethics Committee for AdelaideUniversity has approved the research that BresaGen is doing in regard to this grant.

Senator HARRADINE—They are not the NHMRC.


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Ms Radke—They are one of the group—

Senator HARRADINE—You are giving money to BresaGen. I have asked a question: isany of that money being utilised to experiment with stem cells obtained from Singaporeanhuman embryos?

Mr D. Clarke—The nature of your question would require me to divulge information thatI am not able to divulge under the IR&D Act.

Senator HARRADINE—Under the IR&D Act?

Mr D. Clarke—Under the confidentiality provisions that apply to the recipients of supportunder the IR&D Act, as I have said to you, we can only release in the case of START grantsthe name of the company, the name of the project and the value of the support. The sort ofdetailed information you are seeking is a matter for the company. You asked me previously:do we know those details? The answer is yes, of course we do; that is all part of the detailedassessment of the application that we receive. You have asked me: can I confirm a particularpoint? The answer is no, I am not at liberty to do so.

Senator Minchin—Senator Harradine, we can ask the company if they are prepared tomake that information available to you. I am sure we will have no difficulty doing that and wewill do that.

Senator HARRADINE—I am trying to find out on behalf of constituents and because ofthe importance of this matter with its huge ramifications for the whole of humankind. I amtrying to get information.

Mr D. Clarke—As the minister has indicated, I will take your question on notice, but thesource of the information I can provide for you will be from the company itself.

Senator Minchin—Senator Harradine, this goes to the point that I have been making toyou. The job of this department is to ensure that grantees comply with existing law relating tothis sort of research and to the government’s overall ethical guidelines relating to thatresearch. Naturally, there is a wider debate as to what those laws should or should not be, andthe community will go through that. The government is developing its position in relation tothe COAG commitment to get a nationally consistent approach to this matter. Whatever thatnationally consistent approach, it will apply to all research funded by the government. Thisdepartment’s job is to do its utmost to ensure that grantees like BresaGen comply withexisting law and they do not get grants unless they do.

Senator HARRADINE—If they are upgrading on the basis of using taxpayers’ money toengage in research on stem cells obtained from embryos that results in their destruction, isthat not pre-empting the decision of the COAG process? I really want detailed information. Ithink the committee is entitled to detailed information as to where the money goes. It is notchickenfeed; it is nearly $5 million.

Senator Minchin—We are undertaking to supply you with all the information we possiblycan and on the basis that the responsibility of the department is to ensure that grants are notmade unless they are on the basis of prevailing law. No more can be expected of thisdepartment in its administration of such a program.

Senator HARRADINE—I do not suppose there is much more one can do here. I havemade certain requests for information and I believe that the public ought to know thatinformation. If people are going around the back door and circumventing the South Australianlegislation—which prevents them from doing certain things—and they have obtained stem


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cells from Singapore, that is a matter of great concern. It is of some considerable interest topeople not only in Australia but also perhaps in Singapore.

Mr Paterson—I undertake, on behalf of the department, that we will communicate withthe company and seek responses to the questions that you have raised. On receipt of thatinformation, we will forward it to you.

Senator HARRADINE—From the $46 million—or whatever it is—how manyapplications involve stem cell research, including adult stem cell research and/or embryonicstem cell research?

Ms Radke—As I said before, I have not looked at all the applications. We could providethe totals of those applications to you on notice and give you some indication.

Senator HARRADINE—Is the department aware of the work that is being doneworldwide on adult stem cells? If they are pluripotent, and certain of those stem cells arepluripotent, then where is Australia in this industry? It holds out quite some hope for themanagement and cure of certain diseases.

Ms Radke—There is research going on in Australia, I believe, on adult stem cells. I thinkthe current technology is such that it is still very difficult to conduct stem cell research fromadult stem cells. Breakthroughs may occur in this, but it is still difficult to isolate adult stemcells and it is difficult to grow them in culture for research processes. To advance any researchin this area, it is much easier using embryonic stem cells and that is why they are still soughtafter for research purposes.

Senator HARRADINE—How much money is being spent by your department on thedevelopment of adult stem cells and the utilisation of and experimentation with adult stemcells? Is the department aware, as it should be, of the most recent research done in the UnitedStates at the University of Minnesota?

Ms Radke—Yes, we are. It is an exciting development, but my understanding is that thatresearch has not been fully peer-reviewed as yet. It is an exciting development, but there is along way to go to take that further into research.

Senator HARRADINE—How much money is being spent by the department supportingembryonic stem cell research?

Ms Radke—As we told you before, no BIF grants have been given to embryonic stem cellresearch. The centres of excellence will not be decided until later this year. On those twoprograms there has been no funding. We will have to ascertain from the company, fromBresaGen, what the position is there.

Proceedings suspended from 12.18 p.m. to 1.26 p.m.ACTING CHAIR (Senator Watson)—The committee will now resume.

Senator O’BRIEN—I want to ask some questions in relation to the government’s regionalminerals program. During the election campaign the government announced that it hadcommitted to at least four further studies and I want some explanation of what these studiesare, including a likely time frame and the outcome—

Mr Rymer—The regional minerals program guidelines were revised and call for projectproposals has a closing date of 8 March. So until the proposals have been seen it is notpossible to say what studies will receive funding.


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Senator O’BRIEN—Should I understand that statement to have meant commitment to theconcept of four further studies—there were not actually four further studies lined up at thetime?

Mr Rymer—Yes.

Senator O’BRIEN—That is actually what is intended—there will be four studies?

Mr Rymer—The number of studies will depend on the number of applications and theirbids for funding. It is a competitive program. It will depend on the amount of moneyavailable.

Senator O’BRIEN—How much money is available?

Mr Rymer—There is $250,000 a year. The projects are funded partly from theCommonwealth, partly from the state government and partly from industry.

Senator O’BRIEN—Okay. Is it dollar for dollar for dollar or some other method?

Mr Rymer—Usually approximately. It depends upon the nature of the particular proposaland the ability of project proponents to attract funding from industry.

Senator O’BRIEN—What is the life of the program?

Mr Rymer—The program has another two years to run after this financial year.

Senator O’BRIEN—After this financial year?

Mr Rymer—It began, I think, in 1996. It was reviewed and then extended for a furtherfour years.

Senator O’BRIEN—So would I find a history of this program on the department’s website?

Mr Rymer—Yes.

Senator O’BRIEN—Thank you for that. The 1998-99 coalition government policystatement committed an additional $33 million for AGSO Geoscience Australia. Is thisproject still receiving funding?

Mr Farrow—That relates to AGSo Geoscience.

Senator O’BRIEN—That commitment to 1998-99 was $33 million, what has the totalfunding been for that project to date? You can take that on notice if you prefer. What fundinghas been committed to the establishment of a national offshore petroleum safety authority? Ijust want to find out what the 1998-99 commitment of an additional $33 million for AGSOGeoscience Australia brought the funding to and what the situation is now?

Mr Robinson—That funding is a four-year program and it comes to conclusion thisfinancial year. The government will be considering, I guess, what happens from here in thecoming budget.

Senator O’BRIEN—What has happened about the initiation of a review of Australia’spetroleum taxation system which was to report this year?

Mr Hartwell—I guess you are referring to the fuel tax inquiry that was announced inMarch last year. Minister Minchin, in his then capacity, and the Treasurer announced their


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terms of reference mid-year. That is due to report early this year. It is suggested that they willprobably report towards the end of March.

Senator O’BRIEN—That is the responsibility of Treasury. What input does thisdepartment have?

Mr Hartwell—The inquiry is managed by Treasury. There is an independent panel of threerepresentatives. This department has seconded an officer to work as a part of the secretariatfor that review.

Senator O’BRIEN—Following its findings, is there a proposal for an interdepartmentalworking group to make assessments and have further input?

Mr Hartwell—Certainly you could expect that the government will respond to that inquirywhen it brings down its findings. The nature of how that response will be done and whetherthere is an interdepartmental working group is something the government will decide at thatpoint in time.

Senator O’BRIEN—The Minerals to Market policy of the government was to provide $27million enabling 1,000 enterprises to sign the Greenhouse Challenge agreements. I want tofind out how that is progressing and how many enterprises have committed to thoseagreements to date.

Mr Hartwell—That is Bob Alderson’s area. He is on his way here at the moment.

Mr Ryan—In terms of the numbers, we would have to take that on notice.

Mr Alderson—Under previous arrangements the Greenhouse Challenge program didreport to the Minister for Industry, Science and Resources. Under the arrangements whichnow obtain, the Greenhouse Challenge program reports to the Minister for the Environmentand Heritage, and so I am afraid I am not aware of the details of the challenge programinvolved. That would be a matter for the environment portfolio to handle.

Senator O’BRIEN—What is the linkage between resources and environment, in terms ofgreenhouse? Has that issue been totally passed to environment? It is an interesting point fromthe point of view of the opposition and how we look at the advisory responsibilities of theministerial authorities to the departments—in terms of what they cover—but I did not think itwas that clear.

Mr Alderson—When the Australian Greenhouse Office was first established, it wasestablished from funding provided by key relevant departments. The industry department wasone, the agriculture department was another and the environment department was another.Funding from those departments enabled the Australian Greenhouse Office to get going.Subsequently, however, the Australian Greenhouse Office has received funding in its ownright. In other words, the funding from other departments no longer obtains, and theAustralian Greenhouse Office budget is funded directly. You may recall, Senator, that whenthe Australian Greenhouse Office was first established it was staffed by officers from thedifferent departments. They are now directly on the books of the Australian GreenhouseOffice. They are no longer on the various departments’ listings.

Senator O’BRIEN—Is that within the budget of Environment Australia?

Mr Alderson—That is right.


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Senator O’BRIEN—So what input does this department have into energy policy, given theimportance of greenhouse to that?

Mr Alderson—This department has primary responsibility for energy policy, and we workvery closely in a range of matters with other departments such as Environment Australia andthe Australian Greenhouse Office. The Australian Greenhouse Office administers a widerange of programs that are relevant to the energy sector—end use efficiency initiatives,renewables, et cetera—and consults with our department and other departments, such as,where relevant, the Department of Transport and Regional Services, on the activities thatought to be funded through those various programs. So there is very close consultation, bothformally, through interdepartmental committee processes, and informally, through colleaguesworking on various initiatives. For example, many of the energy efficiency activities nowfunded by the Australian Greenhouse Office are actually put into practice by the energymanagement task force of the Ministerial Council on Energy—it used to be the Australia NewZealand Minerals and Energy Council—which is the vehicle by which the variousjurisdictions of the Commonwealth states and territories work together to implement thevarious initiatives. So a lot of that funding is channelled through the energy management taskforce and, with the creation of the Ministerial Council on Energy following the decision lastJune of the Council of Australian Governments, that body will now come under theMinisterial Council on Energy.

So within that organisation you have officials from both the Australian Greenhouse Officeand Industry, Tourism and Resources working together to implement those initiatives. If I canput it this way, the Australian Greenhouse Office does not have responsibility for energypolicy; it does have responsibility for the implementation of a number of programs relevant tothe energy sector.

Senator O’BRIEN—In terms of the historic resource contribution from this department tothat area, what was the value of the contribution from this department to the GreenhouseOffice in the past, and what happened when responsibility for those resources was locatedentirely under Environment Australia? Was there a transfer of resources to EnvironmentAustralia? What effect did it have, if any, on the department’s budget?

Mr Alderson—There was a transfer of resources. I can check this out for you on notice,but it was a transfer of something like $380,000 per annum from existing programs and ofeight or nine staff from the Department of Primary Industry and Energy, as it was then—before resources and energy joined this current department. However, that was supplementedby new programs which came out of the Prime Minister’s November 1997 statement inresponse to climate change. That funding, which had a duration to the end of this financialyear, has now been assumed not as a transfer from the now DITR but within the AustralianGreenhouse Office’s own budget.

Similarly, Environment Australia provided funds to the Greenhouse Office, and essentiallythat is how it was funded. Now, of course, the Australian Greenhouse Office funding arisesnot only from programs specifically announced by the Prime Minister in November 1997, butalso as a consequence of very substantial funding which came out of the new environmentpackage associated with the implementation of the GST. So all in all, the total package overfive years is about $1 billion, the vast bulk of which is administered by the AustralianGreenhouse Office.

Senator O’BRIEN—Where does responsibility for policy advice in relation to the Kyotoclimate change conference lie?


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Mr Alderson—The Department of Foreign Affairs and Trade has the lead in internationalaspects of climate change policy, although you will recall that the environment minister,Senator Hill, took the lead in the negotiations themselves. But the international policy leadwas by the Department of Foreign Affairs and Trade in consultation with other keydepartments that were joint sponsors of submissions, which included the industry portfolio,the environment portfolio and, indeed, the agriculture portfolio—AFFA, as we now know it.

Senator O’BRIEN—So it is a bit like a soap opera, isn’t it? You have got so many inputsinto this policy. Who is coordinating it?

Mr Alderson—Not really, because that enables a whole-of-government view to be broughtto bear on the development of the policy advice that comes forward.

Senator O’BRIEN—So who was coordinating it?

Mr Alderson—It was coordinated by the Ministerial Greenhouse Council, which waschaired by the Minister for the Environment and which had on it the relevant ministers—including, at that time, Senator Minchin as Minister for Industry, Science and Resources; theMinister for Agriculture; the Minister for Transport and Regional Development; and whereinternational issues were concerned, the Minister for Foreign Affairs and Trade.

Senator O’BRIEN—There are two ministers there—Foreign Affairs and Trade are twodifferent ministers. It was both of those, was it?

Mr Alderson—No, it was Minister Downer—Alexander Downer.

Senator Minchin—I would make the point that cabinet, of course, decides the policy andthese departments implement it in their various ways—whether it is foreign affairs or defence.But they are all implementing the same policy, as decided by cabinet.

Senator O’BRIEN—As and when it is decided—yes, I understand that. I was askingwhere the policy advice was coming from, which is what the answer was about. SenatorMinchin, in light of the 1998 policy document from the coalition, you might like to commenton the issue in relation to Kyoto. The policy document from the coalition in 1998 said:The protocol is an equitable, environmentally effective and achievable approach to addressing theglobal climate change.

Is that government policy at the moment?

Senator Minchin—We announced our policy through the course of 2001 and restated it forthe election in 2001. I am not sure why you are quoting a policy from the election before last,because Kyoto itself is a moving feast. The current government policy is as it was enunciatedin relation to the 2001 federal election.

Senator O’BRIEN—Is it, as described in 1998, ‘equitable’?

Senator Minchin—The current policy position of the government is that there are twovery substantial flaws in the Kyoto protocol: (1) that it does not apply to developingcountries; (2) that it clearly is not going to involve the largest economy in the world, theUnited States. We have repeatedly stated that in those circumstances, whatever may be theother merits of the Kyoto protocol, we cannot sign it.

Senator O’BRIEN—I take it from what you have said that it is not equitable; it isinequitable.

Senator Minchin—You can take whatever you like. All I am stating is the policy, which isthat it is not a protocol that we can support, given the continuing deficiencies in that it does


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not apply to a substantial part of the world economy and would result in the destruction ofAustralian jobs.

Senator O’BRIEN—That is what I took as meaning it was inequitable—that it did notapply equally across the—

Senator Minchin—We have certainly said that if it were to be implemented as it stands—without involving developing countries and without involving the United States—it would begrossly inequitable in the sense of its disproportionate impact on the Australian economy and,in those circumstances, we are not prepared to sign it.

Senator O’BRIEN—What about the environmental effect of the proposed Kyoto climatechange treaty?

Senator Minchin—The environmental effect?

Senator O’BRIEN—Yes.

Senator Minchin—We have made the point on many occasions that, in fact, the impact ofthe full implementation of the protocol would be minimal on global greenhouse gas reductionfor the two reasons I just stated.

Senator O’BRIEN—So it is environmentally ineffective.

Senator Minchin—It does not involve the biggest economy or the developing countries,like India and China, so its impact on global climate change is actually very, very small.

Senator O’BRIEN—That is in absolute contrast with a previous policy and I just wantedto be absolutely clear that there had been a complete change in policy.

Senator Minchin—Well, you selectively quoted from a policy from the election beforelast. We have consistently, and for a number of years, stated the problem with Kyoto asbeing—

Senator O’BRIEN—I do not believe that I have selectively quoted.

Senator Minchin—We have said that we believed we got the best deal from the Kyotonegotiations that was possible from an Australian point of view. We have not denied that thereis some merit in the Kyoto protocol, in terms of what Australia was able to negotiate, but wehave always said—as far as I can recall—that it suffers those two major deficiencies thatmake it very difficult for Australia to contemplate signing it.

Senator O’BRIEN—Yes, I understand that. Thank you for that.

Senator Minchin—I would make the point, too, that in 1998 a lot of the so-calledflexibility mechanisms had not been developed. We said back in 1998 that the impact ofKyoto on Australia was subject to the outcome of the negotiations that occurred from 1998 inrelation to those flexibility mechanisms and how that actually operated. We have learnt a lotmore since then, and some of those impacts would be detrimental.

Senator O’BRIEN—So it is non-achievable international policy as far as the governmentis concerned.

Senator Minchin—We continue to regard the Kyoto protocol as a document that could bevery damaging to the Australian economy and to Australian jobs if it were implemented in theabsence of developing countries and the United States. It would result in a flight of capital andthe destruction of potentially thousands of Australian jobs.


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Senator O’BRIEN—I understand that position. Is the Council of Australian Governmentsenergy policy framework still an active framework?

Mr Alderson—Yes, the framework agreed by the Council of Australian Governments lastJune and the decision to establish the Ministerial Council on Energy provide a key platformon which to advance Australia’s national energy policy. The ministerial council met lastDecember and charged senior officials to develop detailed work programs to attend to all ofthe priorities identified by the Council of Australian Governments. The senior officials havemet on two occasions and there is scheduled to be a second meeting of the Ministerial Councilon Energy to take place in March. So that framework and the priorities decided on by theCouncil of Australian Governments are very much the cornerstones on which the MinisterialCouncil on Energy will advance a national energy policy.

Senator O’BRIEN—Has it generally reaffirmed the existing commitments to currentlyagreed electricity and gas market reforms and timetables?

Mr Alderson—Within that council there was a commitment to the principles alreadyagreed to.

Senator O’BRIEN—On the detailing of work to be done, is there a broad agenda uponwhich people are working? I assume that is the case. They have not gone out to make theirown work patterns; there is some broad agenda agreed by the ministerial council.

Mr Alderson—There are two elements to that. The first element is that the Council ofAustralian Governments did agree to an independent review of the future direction of energymarkets, which is a key issue associated with the further development of a national energymarket. That review is expected to take about 12 months and come out with some keyrecommendations in regard to the further reform practices. Quite separate from that—

Senator O’BRIEN—Before you go to the next point, who is doing that review?

Mr Alderson—The government has announced that the independent review will bechaired by Mr Warwick Parer, the former Minister for Resources and Energy, with othercouncil members whose appointments as yet have not been finalised.

Senator O’BRIEN—When will they be finalised?

Mr Alderson—In the very near future, I understand. The Commonwealth is awaitingwritten confirmation from some jurisdictions.

Senator O’BRIEN—How many other appointments will there be?

Mr Alderson—It is expected that there will be three other appointments, so theindependent panel will comprise four people. That is one stream of activity. On the otherstream of activity identified by the Council of Australian Governments so that action goes onpending the outcome of that review, not duplicating it but building on the various issuesraised, we have had senior officials from all jurisdictions meeting together to scope out whatsensibly can be done in an energy policy sense without pre-empting the outcome of theindependent review but to advance the priority issues, for example the potential for greaterharmony of the regulations applying in the different jurisdictions to the energy market. Soofficials have got together to work out those things which make sense to tackle collectively asa priority, and that is the agenda that will be going forward to the next meeting of theMinisterial Council on Energy for approval in March.


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Senator O’BRIEN—What consideration has been given in this ministerial council forum,if any, to other sources of energy: so-called environmentally friendly sources of energy,biomass generation and those issues. Are they on the agenda at all?

Mr Alderson—They are on the agenda—for example, the mandatory renewable energytarget. One of the key issues there will be distributed generation—which, of course, isrenewables and power generated from renewables et cetera—from distributed regions. One ofthe things the council decided to do at its first meeting was to very closely monitor thedevelopment of distributed generation in the context of the mandatory target. Under thefederal legislation, which gives effect to that mandatory target, there is to be a review—frommemory it is either next year or the year after—of how things are progressing. The MinisterialCouncil on Energy has decided that, rather than just wait for that, it will monitordevelopments as they go along to see what policy issues might be thrown up—which, ofcourse, is directly relevant to the development of renewable energy in its variousmanifestations, whether it is biomass or solar or what have you. It has been agreed by thecouncil that that will be carefully monitored and it is recognised that, together withconventional energy sources, renewable forms of energy are an important element in the mix.

Senator O’BRIEN—What is the Commonwealth’s role in the process of linking statejurisdiction power generation sources for the purposes of a truly national energy market?

Mr Alderson—In a nutshell, Senator, it is a leadership role. Constitutionally, as you know,the powers for the production of energy et cetera reside with the states and territories. But allof the examinations that have taken place suggest that there is very significant national benefitto be gained by creating a national energy market with greater contestability and competition.That has gone a long way down the track—it does have further to go—so theCommonwealth’s role is to participate with other jurisdictions in examining those things thatmight sensibly be done—sensibly in an economic way—to advance interconnections betweenjurisdictions and to improve the efficiency of existing networks. So its role is a leadership rolerather than having first-hand constitutional powers to dictate anything.

Senator O’BRIEN—We will not have a debate about what constitutional powers might beapplied, but let us go to an issue which is germane to that subject: the Basslink issue. Whatrole is the Commonwealth playing in facilitating that project—if that is the appropriateword—and assisting in resolving differences, say between Victoria and Tasmania?

Mr Alderson—The Commonwealth has a direct role in terms of the environmentalapproval aspects of the issue. The industry, department and minister have been briefed by theBasslink project people. It is a commercial negotiation and the parties, as you said, areTasmania, Victoria and the commercial partner involved. We have not been the apprised bythe proponents of a role for us at federal level but they have kept informed and have promisedto keep us informed as the track goes down. That is in terms of the broader policy sense;whether there is an issue in terms of investment incentives, my colleague Mr Jones mightanswer.

Mr Jones—The Basslink project has been awarded major project facilitation status by thegovernment. That was awarded in December 2000. What that means is that Invest Australia isworking with the project proponents to help them through the government approvalsprocesses, essentially, and to work as a bit of a coordinating body in working through thoseapprovals issues. So there is that extra element of facilitation that is being provided throughInvest Australia in addition to what Mr Alderson said.


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Senator O’BRIEN—What about issues to do with approvals within states? Does theCommonwealth provide any facilitation in those areas?

Mr Jones—The major project facilitation service aims to bring together the differentjurisdictions involved in getting approvals to the project. We are working in close consultationwith the Victorian and Tasmanian governments, as well as the Commonwealth agenciesinvolved, in coordinating the different approvals that have to be given.

Senator O’BRIEN—It is a unique connection because it is undersea and is obviously notrequired in any other mainland state connection arrangement. I suppose there are precedentswith this that may not need to be revisited and it is a different type of project. How would itcompare to facilitation of a mainland state—say, a South Australia-Victoria—linkage project?

Mr Jones—As you identified, the nature of the project means there are some uniquecharacteristics to it.

Senator O’BRIEN—Otherwise it is the same and the same principles would apply?

Mr Jones—Yes, certainly in terms of the service that we provide.

Senator O’BRIEN—One of the issues with the project is overhead towers for part of theroute. Is that an issue that the Commonwealth has focused on in its facilitation processes,given that I suspect any other interstate connection will use overhead towers?

Mr Alderson—My observation is that issues like that are picked up in the environmentalassessments that have been undertaken within the project. It is my understanding that thecollective federal-state environmental report on this will come out in a month or so. If thereare issues associated with that, or anything like that, they will be reflected in that report. Weare not privy to the content of the report at this stage.

Senator O’BRIEN—As I was intimating, there are enormous potential precedentramifications if the issue of overhead towers for an interstate power supply connection is areason for an environmental restriction or concern. I cannot imagine there could be too manyinterstate power connections that do not require overhead cable carriage.

Mr Alderson—I would not want to speculate on the report. It will become public, as youknow, in a month or so.

Senator O’BRIEN—I am not speculating on anything more than what has been speculatedon broadly in public. In terms of the important policy considerations for the interstate energymarket, I was wondering what policy focus the department has given to the issue ofenvironmental concerns which might be put in the way of interstate power connection,particularly concerns to do with the overhead carriage of powerlines. You were intimating thatthere had not been any.

Mr Alderson—That is right. We are saying that the normal processes have beenundertaken and then we will need to reflect on the outcome of the report. We do not knowwhether there is an issue or not.

Senator O’BRIEN—There certainly is an issue.

Senator Minchin—As the former minister, the danger you point to in relation to apotential outcome concerned me at the time. It would have major implications for cheapenergy in this country, and cheap energy is critical to industry. It is massively expensive to gounderground.


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Senator O’BRIEN—Not just interstate, within states. The carriage of power is a massiveissue in every state.

Senator Minchin—That is right. If we start a movement that everything has to gounderground for aesthetic reasons we are potentially going to cripple Australian industry.

Senator O’BRIEN—Does the government have any strong policies in that regard or is it awork in progress?

Senator Minchin—We have to work through these joint environmental approval processesand deal with those outcomes. My view from an industry point of view is that there are greatdangers in allowing some sort of environmental bandwagon to develop that demands thateverything go underground.

Senator O’BRIEN—Potentially, isn’t that the consequence of such a finding in theproceedings that are now taking place, and of which we are going to get an outcome within amonth? That is why I am asking—

Senator Minchin—Bob can correct me but I think, at the end of the day, that it is a matterfor the Victorian government; it is beyond our power. The Victorian government has theauthority to require it to go underground or not.

Senator O’BRIEN—Yes, but we have just been told that, in relation to the ministerialcouncil, the Commonwealth’s role is really a driving role. I am just wondering how you areproposing to drive that issue, given its—

Senator Minchin—I was talking about Basslink, per se.

Senator O’BRIEN—Yes, I understand that Basslink is a connection between twojurisdictions, but we have flown from a discussion about the ministerial council and theCommonwealth’s role in a particular project and gone back into Commonwealth policy.

Senator Minchin—Commonwealth policy is to maximise the extent to which Australianindustry and Australian consumers can have access to the cheapest possible power. From that,I would have thought, by definition, flow considerable reservations about the unnecessary andunjustifiable additional expense and the costs incurred.

Mr Ryan—In terms of interconnections between different jurisdictions, environmentalconcerns have not been the issue that has been delaying the interconnections taking place.

Senator O’BRIEN—I am sorry; I cannot hear you.

Mr Ryan—The issue with the interconnections and actually making the national energymarket more competitive and more fluid is that it has not been held up because ofenvironmental issues; that has not been the fundamental impediment to delivery. Certainly,through the council and this current independent review, the issue of interconnection is verymuch on the agenda of how we are going to actually move forward and deliver strongerinterconnections between the jurisdictions.

Senator O’BRIEN—The movement of energy of various sorts is a major issue for thiscountry for the future. I wanted to touch on another issue, given the very limited amount oftime I have. That was to go to the other end of the country and, in fact, outside it to the TimorSea natural gas developments. What is the department’s role in advancing this development?

Mr Hartwell—If you are referring to—

Senator O’BRIEN—There are several fields?


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Mr Hartwell—Yes, there are a separate number of issues relating to the Timor Sea, but Iwill start with the Timor Gap Treaty, which is a part of this portfolio. However, negotiationshave been going on with the UN in East Timor towards a new treaty and, as is the case innegotiation of all new treaties, the Department of Foreign Affairs and Trade lead on that issue.Certainly we have been an integral part of the negotiation team.

Senator O’BRIEN—Given the potential for onshore developments arising from thesefields and the fact that we are proposing to bring PNG natural gas through Queensland andinto south-eastern Australia ultimately, I just wondered what your role was. It is obviously infacilitating the Australian base of development, using the resource coming from these variousfields, and I think you have identified them in one of your previous reports as Bayu-Undan.Sunrise is the other one I know about.

Mr Hartwell—In relation to the Timor Sea, there are a number of hydrocarbons and gasdeposits up there. When I say ‘hydrocarbons’, they could include condensate as well as gas.Some of those, and the Bayu-Undan field that you referred to, are totally within what we nowcall the joint petroleum development area with East Timor. You referred to Sunrise, and that is80 per cent in our jurisdiction and 20 per cent in the joint petroleum development area. Thereare other fields up there in the Timor Sea as well. In total, there would be close to 20 millionto 25 million identified as gas—a trillion cubic feet of gas.

Senator O’BRIEN—What is this department’s role in the development?

Mr Hartwell—Through administration of the Timor Gap Treaty Act as well asadministration of the Petroleum Submerged Lands Act, we have a role in advising theminister in the context of the issue of exploration leases, retention leases and pipelinedevelopments in that whole area. Admittedly in the case of the Timor Sea we work with ourNorthern Territory colleagues on that under the model that we administer offshore petroleumand, as you are probably aware, from the three nautical miles out it is in Commonwealthwaters, we do work with the Northern Territory on a partnership basis.

Mr Jones—I add that a number of the prospective projects in the Timor Sea and also beengranted major project facilitation service, which gives Invest Australia and the department abroader role in helping to facilitate any approvals that are required to get those projects going.

Senator O’BRIEN—Could you identify the projects, or would you prefer to do that onnotice?

Mr Jones—There are a number of them I can run through now. The Phillips proposal todevelop the Bayu-Undan field, put a gas pipeline to Darwin and built an LNG plant onshorewas one project that was granted MPF status. The prospective Sunrise development—

Senator O’BRIEN—That is a Shell one, isn’t it, Shell-Woodside?

Mr Hartwell—The operator of the project is Woodside, but Shell, Phillips and Osaka Gashave a share in that project as well.

Mr Jones—They are the major ones in the Timor Sea as such. There are a number of otherprojects for prospective gas pipelines bringing Timor Sea gas once it comes onshore down tosouth-east Australia which have also been given MPF statements status. There are a couple ofgas to liquids projects associated with Timor Sea developments that have also been givenMPF status. All of these projects are prospective at this stage.


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Senator O’BRIEN—I have been given to understand that there is a linkage between Bayu-Undan and Sunrise in terms of viability—common players certainly but viability from thepoint of view of pipeline to Darwin.

Mr Hartwell—This is largely a decision of the operators of those two projects, butcertainly the project proponents had discussed the possibility some time ago of an integrateddevelopment between those two projects. At this point in time, however, they are being seenas separate developments. The operator of Bayu, Phillips Petroleum, have put a proposalforward and the Sunrise joint venturers are still discussing the sort of development plan thatthey might eventually put forward. Certainly there is still that option that the two projects maybe integrated but there are other considerations on the table as well.

Senator O’BRIEN—Is there any viability linkage between the two in bringing the gasonshore in terms of volume or quantity?

Mr Hartwell—That is largely an issue that should be addressed to the commercialoperators of those projects but, as I understand it at least, the various plans have beensubmitted would allow for the viability of both projects either on an integrated basis or asseparate projects.

Senator O’BRIEN—How important to our access to natural gas are the Papua NewGuinea, Timor and north-western Australian gas fields? I am given to understand that thereare limitations on the South Australian and Bass Strait fields that increase the importance ofthese north-western and northern resources.

Mr Hartwell—The additional gas supplies that would come forward from either aconnection to Papua New Guinea or bringing Timor Sea gas onshore would certainly add tothe totality of gas supplies that are available. That being said, there are gas deposits availablefor further development both in Bass Strait and also in the Otway Basin, and in a senseproposals are being developed to also bring them on stream. There is around Australiasomething approaching 100 trillion cubic feet of gas which is waiting to be commercialised,so there is not necessarily a shortage of supply, but you need to develop the markets and someof them have challenges in terms of development of infrastructure and so forth.

Senator O’BRIEN—I am just trying to get a picture as to the importance of those northernfields and bringing that gas into south-eastern Australia. The implication of what you aresaying is that, at this stage, they are not that important and they would be disadvantaged bythe need to bring the gas so far.

Mr Hartwell—I was answering your question from the perspective of the south-eastmarket. If I was speaking as a Northern Territory or Queensland official, those gas suppliescoming from Papua New Guinea or the Timor Sea into that state or that territory would bevery important in terms of underpinning commercial developments.

Senator O’BRIEN—I understand. I am trying to get a picture of where most of the gaswill be consumed in Australia. It should be the south-eastern corner.

Mr Hartwell—Again, gas developments involve such large capital expenditure that theproponents of those projects would need to tie up gas markets. Obviously, Timor Sea gasdevelopers are looking at the Northern Territory. Certainly, there are a number of potentialprojects there, as Mr Jones has outlined. As well, there is a proposal that could bring TimorSea gas into central Australia. That would enable that gas to be distributed into the south-eastmarket as well. The Papua New Guinea pipeline could bring gas down the Queenslandcoastline and all the way into Brisbane, and possibly even further, if markets did exist.


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Senator O’BRIEN—What is the expected life of the South Australian gas resource?

Mr Hartwell—I cannot answer that question specifically. There is a dwindling gasresource there, but the operators of those fields have mounted an increased exploration effort.It could be such that the known life of that field could be extended, depending on what theydo find in the next four or five years.

Senator O’BRIEN—I was asking about known resources.

Mr Hartwell—I could not put a specific figure on that in terms of expected life at thispoint in time.

Senator O’BRIEN—Do you know what known resources remain there?

Mr Hartwell—No. One of my geoscience colleagues might know how much gas is in theCentral Australian Moomba gas deposit.

Dr Powell—The gas resources remaining in the Gippsland Otway area are still of the orderof several trillion cubic feet. The limitation on those developments has been rather to do withaccess to markets rather than a limitation on the resource. The other feature is that there isconsiderable remaining resource potential. Recent discoveries in the Otway Basin offshore atThylacine have probably added another two trillion or three trillion cubic feet. Resourceavailability in the south-east, at this stage, is not yet a limitation.

Senator O’BRIEN—That answers another part of the area. What about South Australia?Can you help me with that one?

Dr Powell—It is true to say that in South Australia the Cooper Basin is a very matureprovince. Of course, there are two parts: there is the south-west Queensland part, and thenorth-east South Australian part. Relatively speaking, the Queensland part is less developedthan the South Australian part. There is potential for some time but, again, the issue becomesthe volumes that are required to be delivered. That is a commercial decision.

Senator O’BRIEN—That is an equation that no-one can put the numbers to. There hasbeen so much talking up of gas as an environmentally friendly resource and there seems to beno end of opportunities being sought for its use, so I wanted to get a clear picture on theimportance of the northern fields in terms of feeding it into our economy rather than its exportpotential.

Dr Powell—I think it is fair to say that in south-east Australia there is considerablepotential—and the exploration potential is far from exhausted—but the companies have notbeen exploring because, at the moment, there has been a surplus of reserves over the need tosupply.

Senator O’BRIEN—So it is not price that is restricting exploration; it is the market.

Dr Powell—By international standards, Australian gas prices are very low and that will bea constraint.

Senator O’BRIEN—We will possibly explore that later. We have been talking about theprojects in the Timor Sea, associated projects and facilitation of any of those projects. Wherewould I see the material on that work—which web site, if any, would contain the informationregarding the projects and the role of the Commonwealth in facilitation of those projects?

Mr Hartwell—In relation to the specific projects, you could see them on the InvestAustralia web site, I would imagine. In terms of developments in the whole Timor Sea gasarea—in particular the Timor Gap Treaty, release of acreage for exploration and any


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developments in relation to production licences and such—it would be on the ITR web site inthe petroleum division part of the site.

Senator O’BRIEN—This may not be with you anymore, but I will ask just to be sure. In1997, the Energy Efficiency Best Practice Program was allocated $10.3 million over fiveyears to support development and implementation. Is that the responsibility of this agency?

Mr Alderson—Yes, it is the responsibility of this agency; it is administered by this agency.That funding will run out at the end of the next financial year but, of course, before then wewill be subject to the normal independent review in terms of its effectiveness and efficiency.

Senator O’BRIEN—So there has not been any review of it to date?

Mr Alderson—There was an interim review undertaken—an internal review—which wecommissioned in order to make sure the program was on track and to see whetherimprovements could be made. A number of recommendations came out of that and they weretaken on board. But the full review, in terms of the value of the program, will take placeduring the course of this next year.

Senator O’BRIEN—How would you reflect its expenditure profile? Where has the moneybeen spent?

Mr Alderson—The bulk of money has been spent, essentially, in three areas. The first is inworking with industry associations and companies to examine where those industry sectorsare expending energy and what might be the opportunities to improve that. The second is in arange of tools—whether they are best practice guides or some software to enable companieswithin those industry sectors to utilise that software or the best practice guides. The third hasactually been in workshops and training sessions so that people within industry and peoplesupplying those industries get up to speed, if you like, on innovative and contemporarypractices. The other part of the component is something in the order of 10 staff within thedepartment who are employed to administer the program. It is a fairly people-intensiveactivity; they are working with various industry sectors and so on. That is the nature of thebeast.

Senator O’BRIEN—So a component of the $10.3 million has gone into the department toadminister the program?

Mr Alderson—Yes, it has gone into the salaries for something like 10 people, several ofwhom are employed as permanent public servants and the bulk of whom are employed oncontract for the duration of the program.

Senator O’BRIEN—How much a year would that be costing?

Mr Alderson—Let me take a wild guess and say that those 10 people are employed on anaverage of $80,000 each—that would make $800,000.

Senator O’BRIEN—So you would expect that 40 per cent of the funding of the programwould be expended within the department?

Mr Alderson—Yes, but those people are the ones actually working with the companiesand the industry sectors.

Senator O’BRIEN—I did not say there was anything wrong with it—I just wanted tounderstand where the expenditure profile was falling. What is the consultancy profile, if I canput it that way?


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Mr Alderson—Indeed, a number of consultants are required to develop the hardware or tobring in key people to run those innovation workshops with industry—I might add that in themalting and the wine sectors, et cetera, these have been particularly successful. They havebeen publicly acknowledged by the industries as bringing some new insights into how theycan better configure their operations to save energy and improve profits.

Senator O’BRIEN—What proportion of the funding for the program would have gonetoward those consultancy expenses?

Mr Alderson—I would have to take that on notice. I would not know off the top of myhead.

Senator O’BRIEN—That is quite reasonable. Were there actually grants to businesses, orawards or the like, arising from the program?

Mr Alderson—Let me explain what they are, rather than define them as grants or whathave you. In a number of instances we have worked with the industry associations and withthe companies within that industry sector. In some circumstances, where it was the most cost-effective way, we have actually funded a person to work within an industry association towork with the companies in that industry. You might say that is a grant to employ a person fora defined period of time to do a particular job connected with the best practice program. So Iguess, in a sense, that is a grant for that type of activity.

We have provided funding to develop best practice guides—for the fleet vehicle area, forexample—and some software to go with that. That has been provided to allow for both hardcopy and software to be developed for that industry sector. So in that sense it is a grant toprovide products for that sector rather than being a grant to a particular company.

Senator O’BRIEN—It would be interesting if you could just give me a broad-brushindication of how that funding is split up into those areas. When is the review intended to beperformed on the program?

Mr Alderson—The review will commence in the second half of this calendar year. So theidea is that the review would be completed before commencement of the budget processes fornext year, in case the government felt it was justified in continuing this. My expectation is thatthe review will be completed before November of this year.

Senator O’BRIEN—It may even be a bit late, as the government has prioritised spendingover current year and out-years in a number of programs, but we will see. What has happenedto the review into improving energy efficiency in Commonwealth operations? Is that still yourdepartment’s responsibility?

Mr Alderson—It is. That review took place, the recommendations were consideredinterdepartmentally and were taken on board, and program was finetuned. But that program,which has as its target improvement of energy efficiency in the Commonwealth’s ownoperations, continues.

Senator O’BRIEN—Thank you.

Senator SCHACHT—I just heard on my monitor when I went back to my office thecomments of the minister about the argument in Gippsland about undergrounding the linkfrom Tasmania. I understand all those arguments of the high cost; there is no argument aboutthat. I grew up in Gippsland and I have a particular liking for the beauty of South Gippsland.In addition, the tourist potential of Gippsland is not exactly enhanced by having pylons strung


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across the countryside. Nevertheless, I do not think you should automatically accept whatelectricity generating and distributing companies say the costs are.

During the build-up to the Olympic Games at Homebush there was a string of pylons rightthrough the middle of the Homebush site. Initially the government said, ‘We’ve got to get ridof those,’ and they were quoted $80 million to put several kilometres underground. They said,‘We cannot afford it.’ A year or so later the head of NBC Television turned up and when hesaw the pylons he said, ‘We haven’t paid $1 billion television rights to send photographs backto America of electrical pylons strung across the site,’ and he demanded they get rid of them.When they really worked at it, the price came in at, I think, under half that originally quoted. Ithink it was around $35 million rather than $80 million. When they had to really put theirmind to the technology, the cost per unit rapidly came down. The department should make itsown investigations than rather rely on what self-interested generators or distributors mightsay.

I have come across this problem elsewhere and I draw your attention to the 1998-99 reportof the communications department chaired by the then former head of Distec—NevilleStevens—on undergrounding the normal electrical wiring into that cabling issue. I think thecost, once you start working at it, can come down. I just warn you: never accept the cost ofwhat electricity companies tell you up front. In the Olympic Games they exaggerated by 50per cent.

Senator Minchin—Mr Chair, that is a fair point that Senator Schacht makes. I am sure thisdepartment has a healthy degree of scepticism when it comes to those matters, but I amsympathetic to Senator O’Brien. Other Tasmanians are very keen, as is the federalgovernment, to see Tasmania become a full part of the national electricity market—and youwould sympathise with that, Senator Schacht, coming from the next smallest state in thefederation. It really is important to the Tasmanian economy that we incorporate it into thenational electricity market. It would be a great pity if undue aesthetic concerns preventedTasmania becoming incorporated in the national electricity market, albeit that there is a properand sensible environmental process to go through.

Senator SCHACHT—I may have got the figures wrong, but I ask you to check whathappened with the state government in New South Wales. They trumpeted very loudly thatthey were able to reduce the cost and I think the new technology is consistently bringing thecost down.

Senator Minchin—Fair enough; fair point.

CHAIR—Can I just indicate to the officers at the table that the examination of theadditional estimates of the Department of Industry, Tourism and Resources will resume at 9a.m. on Friday.

[2.39 p.m.]

TREASURY PORTFOLIOIn Attendance

Senator Coonan, Minister for Revenue and Assistant TreasurerDepartment of the Treasury

Dr Martin Parkinson, Executive Director, Economic GroupMr Greg Smith, Executive Director, Budget GroupMr John Jepsen, Executive Director, Markets Group


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Mr Nigel Ray, General Manager, Financial Markets DivisionMs Sue Vroombout, Manager, Product Disclosure UnitMr Phil Gallagher, Tax Analysis Division

Financial Markets DivisionMr Chris Legg, General manager, International Economy DivisionMr Steve Morling, Manager, International Economics Conditions & Outlook Unit,

International Economy DivisionMs Maryanne Mrakovcic, General Manager, International Finance DivisionMr Blair Comley, General Manager, Macroeconomic Policy DivisionDr Paul O’Mara, General Manager, Domestic Economy DivisionMr Colin Johnson, Specialist Adviser, Domestic Economy DivisionMr Nick Stoney, Manager, Forecasting UnitMs Lynne Curran, General Manager, Financial Institutions DivisionMr Godwin Grech, Special Adviser, Financial Institutions DivisionMs Amanda Goodban, Manager, General Insurance Unit, Financial Institutions DivisionMs Karen Whitham, Manager, Superannuation and Life Insurance Unit, Financial

Institutions DivisionMs Christine Archer, Manager, Banking and Prudential Unit, Financial Institutions

DivisionMr Mike Kooymans, Manager, Accounting Policy and Information Economy Unit,

Corporate Governance and Accounting Policy DivisionMr Phil Gallagher, Manager Specialist, Retirement and Income Modelling Unit, Tax

Analysis DivisionMr Gary HobournRob HeferenMr Bill Keown, HIH Royal Commission Task ForceMs Melissa Cranfield, HIH Royal Commission Task ForceMs Bernadette Welch, Manager, HIH Assistance Scheme ProjectMr Richard Murray, Chief Adviser, Corporate StrategyDr Ken Henry, Secretary to the Treasury

Domestic Economy DivisionDr Jim Hagan, General Manager, Foreign Investment Policy DivisionMr Paul Grimes, General Manager, Budget Policy DivisionMr Bruce Paine, General Manager, Commonwealth State Relations DivisionMr David Tune, General Manager, Business Income and Industry Policy DivisionMr Roger Brake, General Manager, Retirement & Personal Income DivisionMr Ron Foster, General Manager, Indirect Tax DivisionMr David Martine, General Manager, Business Entities & International Tax DivisionMr John Lonsdale, General Manager, Tax Analysis DivisionMr Graeme Davis, General Manager, Strategy & Coordination UnitMr Murray Edwards, General Manager, Board of TaxationMr Peter Martin, Australian Government ActuaryMr Steve French, General Manager, HIH Royal Commission Task Force


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Australian Securities & Investments CommissionMr David Knott, ChairmanMr Carlos Iglesias, Executive Director, InfrastructureMr Ian Johnston, Executive Director, Financial Services RegulationMr Peter Kell, Executive Director, Consumer ProtectionMr Malcolm Rodgers, Executive Director, Policy & Markets RegulationMr Peter Wood, Executive Director, EnforcementMr Ian Mackintosh, Chief AccountantMt Andrew Larcos, Government Relations Adviser

Australian Competition and Consumer CommissionProf Allan Fels, ChairmanMr Brian Cassidy, Chief Executive OfficerMr David Smith, Executive General Manager, Compliance DivisionMr Lee Hollis, General Manager, Enforcement Co-ordination BranchMr Robert Antich, General Manager, Compliance Strategies BranchMr Joe Dimasi, Executive General Manager, Regulatory Affairs DivisionMr Mark Pearson, General Manager, Mergers & Asset Sales BranchMr Paul Palist, Senior Project Officer, Adjudication BranchMr Richard Chadwick, Senior Project Officer, Adjudication BranchMs Helen Lu, General Manager, Corporate Management BranchMs Sarah Clancy, Assistant Adviser to the ChairmanMr Gordon Lister, Director, Finance & ServicesMr Ian Searles, Director, GST Unit

Australian Prudential Regulation AuthorityMr Graeme Thompson, Chief Executive OfficerMr Les Phelps, Executive general Manager, Specialised Institutions DivisionMr Darryl Roberts, General Manager, Specialised Institutions DivisionMr Keith Chapman, General Manager, Diversified Institutions DivisionMr Greg Brunner, General Manager, Policy Development & Statistics, Policy Research

& ConsultingAustralian Bureau of Statistics

Mr Dennis Trewin, Australian StatisticianMr Rob Edwards, Deputy Australian StatisticianMr Graeme Hope, First Assistant Statistician, Population Census GroupMs Marion McEwin, Assistant Statistician, Policy Secretariat BranchMr Garth Bode, Assistant Statistician, Labour Statistics Branch

Productivity CommissionMr Robert Kerr, Head of OfficeMr Stephen Rimmer, Office of Regulation Review

National Competition CouncilMs Michelle Groves, Executive DirectorMr Mick Shadwick, Director

Financial Reporting CouncilMr Jeffrey Lucy, Chairman


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Australian Office of Financial ManagementMr Michael Allen, Chief Executive OfficerMr Peter McCray, Deputy Chief Executive OfficerMr Pat Raccosta, Chief Financial Officer

Australian Taxation OfficeMr Michael Carmody, CommissionerMs Jennie Granger, Deputy Commissioner, Individuals non-businessMs Donna Moody, Chief Finance OfficerMs Erin Holland, Deputy Commissioner, Client Account ManagementMr Neil Mann, Deputy Commissioner – Small BusinessMr Kevin Fitzpatrick, First Assistant Commissioner, Aggressive Tax PlanningMr Paul Duffus, Assistant Deputy Commissioner, GSTMr John Growder, First Assistant Commissioner, ATO TechnologyMr Michael Monaghan, Deputy Commissioner, ATO RelationsMe Bernadette Ryan, Assistant Commissioner, ATO RelationsMr Murray Crowe, Assistant Commissioner, Client & Account ManagementMr Marcus Markovic, Assistant CommissionerMr Rick Matthews, Deputy Commissioner, GSTMr Leo Bator, Deputy Commissioner, Superannuation

Australian Accounting Standards BoardMr Keith Alfredson, Chairman

Superannuation Complaints TribunalMr Graham McDonald, Chairperson

CHAIR—When now turn to the examination of the Treasury portfolio, and we willcommence with the Australian Taxation Office. I welcome to the table Senator Coonan, theMinister for Revenue and Assistant Treasurer; Mr Carmody, the Commissioner of Taxation;and other officers of the Australian Taxation Office.

The basis of the committee’s jurisdiction and power to inquire in relation to the additionalestimates is provided by standing order 26(5) of the Senate, which prescribes:The committees may ask for explanations from ministers in the Senate, or officers, relating to the itemsof proposed expenditure.

I remind officers that the Senate has interpreted that power widely so there are no areas inconnection with the expenditure of public funds where any person has a discretion to withholddetails of explanations from the parliament or its committees, unless the parliament hasexpressly provided otherwise, so long as the questions meet the standard of relevancy.

For the benefit of witnesses, might I also direct their attention to resolutions agreed to bythe Senate on 25 February 1988 for the protection of witnesses before Senate committees andin particular resolution 1(9) which provides:A chairman of a committee shall take care to ensure that all questions put to witnesses are relevant tothe committee’s inquiry and that the information sought by those questions is necessary for the purposeof that inquiry.

Resolution 1(10) provides:Where a witness objects to answering any question put to the witness on any ground, including theground that the question is not relevant or that the answer may incriminate the witness, the witness shall


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be invited to state the ground upon which the objection to answering the question is taken. Unless thecommittee determines immediately that the question should not be pressed, the committee shall thenconsider in private session whether it will insist upon an answer to the question, having regard to therelevance of the information sought by the question.

Resolution 1(16) provides:An officer of the department of the Commonwealth or of a state shall not be asked to give opinions onmatters of policy, and shall be given reasonable opportunity to refer questions asked of the officer tosuperior officers or to a minister.

Witnesses should note that the evidence given to the committee is protected by parliamentaryprivilege. I also remind you that the giving of false or misleading evidence to the committeemay constitute a contempt of the Senate.

The committee has resolved that the date for the receipt of written responses to questionstaken on notice is 30 days from the completion of this round of hearings—that is, Friday, 22March 2002. Minister, do you wish to make an opening statement?

Senator Coonan—No, thank you, Mr Chair.

CHAIR—We will proceed to cross-agency questions. I invite Senator Sherry to begin.

Senator SHERRY—I just wondered whether or not the officers at the table actually heardwhat the chair just read out?

Mr Carmody—I was listening to it, Senator.

Senator SHERRY—Do you recall the reference to 30 days for answering questions?

Mr Carmody—Yes, I do.

Senator SHERRY—I am raising the issue because I am concerned about the lateness ofanswers to questions coming to the committee. I will just give a couple of examples for thebenefit of the committee, and I would appreciate a response. Let us deal with questions from 6June to the tax office. There were two questions asked by Senator Cook to which we receivedthe answers this week; one question from me to which we have not yet received an answer;one question from Senator Conroy which was answered this week; and Senator Faulkner hadthree questions from 6 June answered this week.

From 7 June, Senator Cook had 15 questions for the ATO, with 15 of them answered thisweek; my colleague Senator Conroy had one question to the ATO on 7 June, with oneanswered provided on 17 February; and five questions from me on 7 June last year had oneanswer provided this week. It just goes on and on. It is a similar pattern across Treasury. I justwonder what is the reason for a 32-week delay in answering the committee’s questions thathave been put on notice.

Mr Carmody—I personally became aware of this only recently. From my point of view, Iobviously do not believe that that is satisfactory from us. I can only make that statement andcommit to doing all that I can to ensure that we meet our obligations in the future, as read outby the Chairman.

CHAIR—Thank you. Senator Sherry, do you want to pursue that further?

Senator SHERRY—Yes, I do. What about yourself, Mr Smith, and Treasury?

Mr Smith—I was aware earlier that just recently there have been obviously weaknesses ofprocess.

Senator SCHACHT—Weaknesses of process?


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Mr Smith—Yes. We will endeavour to get the answers in the time frame that the Senaterequests.

Senator SHERRY—What weaknesses of process have you identified?

Mr Smith—As you know, we have to prepare the answers and obtain clearance for them.There was a misunderstanding in some quarters about the implications of the interveningelection. That may have had a contributory effect. Certainly the circumstances of theintervening election between the last—

Senator SHERRY—Why should that be, Mr Smith? The Senate is a continuing chamber.

Mr Smith—Exactly, I know that. As I say, I believe there were some misunderstandings insome quarters along those lines. I certainly did not have that misunderstanding.

Senator CONROY—The election was not until 10 November.

Mr Smith—I realise that. I think that may have only explained the extent of the time gapon this occasion.

Senator SHERRY—It is not as though there were a lot of questions put on notice. Thetotal I have from myself and my colleagues is 99 questions. It is not as though it is hundredsand hundreds of questions. Are we targeting the right people here? Were the answersforwarded to the minister or the minister’s office?

Mr Carmody—It is normal. I do not know the exact time frame for these. As I said, I haveonly just become aware of it. It is normal practice for them to be cleared through theminister’s office, but I do not know exactly on this occasion where they were.

Senator CONROY—Are they released to the committee through the minister’s office, ordo you release them direct to the committee yourself?

Mr Carmody—They go first to the minister’s office, I understand.

Mr Smith—It is the same with the Treasury ones.

Senator SCHACHT—And then the minister’s offices release them to the committee. Dothey go back to you for release?

Mr Smith—I think they approve them for release. Once they are approved the release isdone very quickly.

Senator SHERRY—Was there a delay in the minister’s office? Did you forward answersto some or all of these questions within the 30-day period to the minister’s office? Did theyget stuck there, or were they stuck in Treasury and in the tax office?

Mr Carmody—I do not have on me the precise times when they were forwarded to theminister’s office. I can only say there has been a time frame between ourselves and theminister’s office. I do not believe that, from the point of view of the tax office, we have doneas well as we should. I will endeavour to make sure that that is corrected for the future.

Senator SHERRY—I am sorry, Mr Chairman, I do not know whether you were chairingthe last estimates.

CHAIR—No.

Senator SHERRY—I cannot recall. We were given these assurances at the last estimatesin June last year. We had questions outstanding for a significant time—and not 32 weeks, Ihave to say—and the officers before the committee gave the same bland assurances. It has notgot better; it has got worse.


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Mr Carmody—I did not intend you to take mine as a bland assurance. It was not intendedas a bland assurance. It was a commitment that I will do everything in my position that I canto assure that we meet those time frames.

Senator CONROY—I have a suggestion in terms of the format of the questions on notice.If on the answer you could list the date that you supply it to the minister’s office, that wouldclear up any confusion.

CHAIR—Excuse me, Senator Conroy, I am speaking. It is a matter for the witness.

Senator CONROY—You are interrupting, actually.

CHAIR—It is a matter for the witness to determine how questions upon notice are to beanswered. The criticism made by you, Senator Sherry and Senator Schacht is properly made.It will no doubt be taken on board by the minister and the officers. You have soughtassurances and have received them. May we move on, please?

Senator CONROY—Could I finish asking my question you interrupted to give youropinion?

CHAIR—No. It is a matter for the witnesses or the officers to answer questions. It is not amatter for you or for any member of this committee.

Senator CONROY—They have not been given a chance to answer the question becauseyou interrupted.

CHAIR—You told them how they were to answer.

Senator CONROY—I did not tell them, I offered them a suggestion.

CHAIR—Or you told them in what format or mode they were to answer questions.

Senator CONROY—I did not tell them. I offered a suggestion. I was wondering what theythought of the suggestion.

CHAIR—Senator Conroy, I am not unsympathetic. It is an important issue. It has beenwell and truly agitated by you and your colleagues. May we move on, please?

Senator CONROY—The problem, as Senator Sherry has indicated, has got worse ratherthan better. I am just interested in Mr Carmody’s response to my suggestion.

CHAIR—That point has been made.

Senator CONROY—Can I seek Mr Carmody’s response to my suggestion? I think youcharacterise me as telling him.

CHAIR—I am not going to have members of the committee telling witnesses how they areto answer questions.

Senator SCHACHT—He asked; he did not tell.

Senator CONROY—I am happy to get Hansard to play back the tape, Senator Brandis.Perhaps you misheard the way I phrased my question. I offered a suggestion and I was just inthe process of asking Mr Carmody what he thought of my suggestion. Perhaps it was just thatyou misheard my question.

CHAIR—I do not think I did, Senator Conroy. I propose to proceed.

Senator CONROY—I would like to hear the responses of Mr Carmody and Mr Smith.

CHAIR—I rule the question out of order.


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Senator CONROY—You rule my question out of order. I move dissent from your ruling ifthat is how you are going to start the process.

CHAIR—I propose to proceed with questions.

Senator CONROY—You cannot rule a dissent out of order.

CHAIR—Senator Conroy, order!

Senator CONROY—Sorry. You are vacating the chair. You have got a dissent. See you,George.

CHAIR—Senator Conroy, I propose to proceed with portfolio questions.

Senator CONROY—Sorry, I have moved dissent.

Senator SCHACHT—Standing orders—it is dissent.

Senator CONROY—I have moved dissent. You have just vacated the chair. See you.

Senator SCHACHT—Hand over to Senator Watson.

Senator CONROY—You are the weakest link. Bye.

CHAIR—I propose to proceed with portfolio questions.

Senator CONROY—Dissent. Can you take a ruling from the secretary sitting next to you?

Senator SHERRY—Chair, you cannot refuse to recognise a motion of dissent. You areobliged under standing orders.

Senator CONROY—Is this the Queensland branch of the Liberal Party, Senator Brandis?There is no Brandis ruling in the standing orders.

CHAIR—Excuse me, Senator Conroy, do any senators wish to ask any questions?

Senator CONROY—I moved dissent from your ruling.

CHAIR—We will have a private meeting, Senator.

Senator CONROY—Thank you. That is really simple.

CHAIR—I should report back that a motion to the effect foreshadowed by SenatorConroy, who is a participating member of the committee only, was moved—

Senator CONROY—I have full rights.

CHAIR—Not to move motions, Senator Conroy; that is the advice of the clerk.

Senator CONROY—It is just on a technicality.

CHAIR—It was moved and defeated. Senator Schacht, you wanted to ask a question.

Senator SCHACHT—My question is not on that matter. I will paraphrase what I believewas a suggestion. I think that, if we keep ruling questions out of order, we will be here all daywith adjournments outside and it will not go anywhere. My question relates to the fact that,despite the promises in June of last year—a 30-week delay—it is clear that there has been alack of performance. Whether the performance was the minister’s doing to stop the answersflowing through, we do not know and that will be taken on notice, I hope, by the officers andthey will come back and give us some information. But—and I address this to Mr Carmodyand Mr Smith—if the delay was in the department, will the officers responsible have theirperformance bonuses deducted or adjusted in view of the fact that they are way outside whatwas required by the parliament?


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Senator SHERRY—A thousand dollars per late question.

Senator SCHACHT—I am going to make it $50,000 per late question and get reallyserious for Treasury and taxation. This is a dilatory lack of performance—it is not the firsttime; it is not a one-off. This is a matter about whether there are performance bonuses paid.The parliament has not been served in accordance with its own standing orders, which arewell known. Therefore, will the officers who are responsible have their performance bonusesdeducted accordingly?

Senator Coonan—I can only really speak for myself, of course, and I checked somequestions yesterday so I think my record is about 100 per cent.

Senator SHERRY—It is not in question.

Senator SCHACHT—We will see in six months, nevertheless.

Senator Coonan—The matter of who may be responsible for what delays has been raisedand, now that I am the responsible minister, I will have a look.

Senator SCHACHT—That is for taxation. Mr Smith from Treasury, will you take this upwith the head of the department?

Mr G. Smith—That is a hypothetical question, in my view, Senator.

Senator SCHACHT—What? What is hypothetical? You have admitted they are 30 weekslate—that is not hypothetical. There is a lack of performance. Are you going to pay the fullperformance bonus?

Mr G. Smith—The hypothetical component is that you are surmising that there are officerswhose performance should be assessed on the basis of this outcome.

Senator SCHACHT—But you said before there was a weakness of process. The officersare in charge of the process. If there is a weakness of process, what is being done with theofficers involved in that weakness of process? You cannot have it both ways.

Mr G. Smith—But you are asking me to make a ruling about appraisal, and I cannot makerulings about appraisals of people and their performances.

Senator SCHACHT—This is an issue where the performance of the department is not upto scratch, despite promises. What else can you do to the department as punishment to thosewho do not meet the requirements of parliament?

Mr G. Smith—We have made undertakings and we have repeated that we will take up thematters that you have raised again today, but I could not go any further than that today.

Senator SCHACHT—You might take it on notice, but I want an answer. Will the officerswho showed weakness of process be considered to have their performance bonuses adjustedaccordingly?

Senator CONROY—They might get an extra bonus.

Senator SCHACHT—Do not give them extra money, for goodness sake.

Senator CONROY—For frustrating Senate estimates; that is an extra bonus.

Senator SCHACHT—The Treasurer might give you extra money for frustrating us, butwe actually want it to go the other way.

Mr G. Smith—I will take all of your suggestions on notice, if you ask me to—

Senator SCHACHT—And do not wait 32 weeks to answer.


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Mr G. Smith—I will always take things on notice, but I do believe that there is ahypothetical element to the question.

CHAIR—Thank you. Senator Schacht, anything further on that?

Senator SCHACHT—No.

CHAIR—Senator Sherry.

Senator SHERRY—On the same issue of answers but not relating to the time, I have got acouple of questions of the answers here as examples. Senator Cook asked this question, ‘Doyou have the original estimates of what the cost of the $1,000 bonus would be?’ Answer—andthis took 32 weeks to prepare—‘The government has not published a separate budget estimatefor the $1,000 aged person savings bonus.’ It took 32 weeks to come up with that answer.

CHAIR—What is the question, Senator Sherry?

Senator CONROY—Are you adjudicating on each question, Senator? Are you giving usyour opinion on each question?

CHAIR—No. I am going to be ruling if questions are out of order.

Senator CONROY—I look forward to seeing what your standing orders are.

Senator SHERRY—My question goes not just to the inordinate time to respond to such asimple question with such an extraordinarily brief answer. The content of the answer is notproviding the level of information that could reasonably be expected by an estimatescommittee. It really is not. That is the concern I have in addition to the time delay. There isanother example here. Senator Cook—

Senator SCHACHT—They have got it in for Senator Cook, haven’t they?

Senator SHERRY—He asked for a breakdown of the revenue impact of the deferral ofeach measure included in the revised business tax reform implementation timetableannounced in the budget 2001-02. The Treasurer provided the following answer, ‘Theconsolidated revenue impact of the budget deferral of business tax measures is outlined in the2001-02 budget papers. The government has not published a breakdown of this estimate foreach measure.’ He asked for the information. This highlights the lack of what I think isreasonably expected information in response to questions on notice. It is incredibly brief andit took 32 weeks to get to us. It is just incredible.

Senator SCHACHT—Is that Treasury or tax?

Senator SHERRY—This is Treasury.

Senator SCHACHT—A weakness of process, Mr Smith?

Mr Smith—I was talking about the time frame. As to the content, if you want matters to belooked at again then I will take them on notice.

Senator CONROY—Can I just clarify that, Mr Smith? Is the Treasury’s position that,unless the information is already published, it is not available to the Senate estimates?

Mr Smith—I think you would need to address questions like that to the Treasurer. Myunderstanding is that we obviously do provide to Senate estimates a great deal of informationthat is not published; that is one of the purposes. But the extent to which information that isnot published should be made available is a decision for the Treasurer of the government ofthe day.


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Senator CONROY—So this is your answer to this question? Is this the Department of theTreasury’s answer?

Mr Smith—We have discussed how the answers are determined. When they are taken onnotice in accordance with the 1988 guidelines, they are referred up. Ultimately, as you know,it has been a longstanding practice to—

Senator CONROY—It is your responsibility to answer the questions.

Mr Smith—It has been a longstanding practice to clear answers through the Treasurer’soffice. This has been the practice for as long as I can recall.

Senator CONROY—Are you disassociating yourself from these answers?

Mr Smith—No, I am not disassociating myself from anything. I am saying that that iswhat the answers are.

Senator CONROY—So is the Treasury’s position that, unless something is alreadypublished and is in the public domain, the information is not available to the Senate?

Mr Smith—The Treasury takes its guidance from its minister in accordance withlegislation passed by a former government and repassed recently by the current government.

Senator CONROY—Could I put the question to the minister? Minister, is it thegovernment’s position that, unless material is previously published, it is not available to theSenate?

Senator Coonan—No, Senator Conroy. A lot of unpublished information, as you know, isbrought forward for the purposes of estimates and given to Senate committees. But in so faras it is a matter for the Treasurer, I will refer it and get some advice.

Senator CONROY—Thank you.

CHAIR—May we now move to general questions, please.

Senator WATSON—I refer to a practice in most states sanctioned by state legislationwhereby an independent trustee—in Tasmania’s case it is called Tasbuild—manages thecollection of long service obligations and then makes payments to casual employees in theconstruction industry. Recently there has been a draft ruling which has had the effect ofintroducing the concept of fringe benefits tax. This really has the potential to destroy thisarrangement or, if not, add significantly to the operation of what is a very effective andefficient system for casual employees. It does appear to be an extension of the concept offringe benefits tax. I am quite happy if you take it on notice.

Mr Carmody—I am aware of the general issue but only to the extent that there has been adraft ruling. You would appreciate that we have received a number of representations on thatruling and they will obviously be taken into account by the rulings panel when they come to afinal position on the ruling. I do not presume to question the policy side of it, except that if itwere raised with us that this was seen as inappropriate policy—even if it were a result of thelaw—then in the normal course of our procedures we would raise that with the now ministerfor revenue before the release of a final ruling, if it were to go that way.

Senator WATSON—I refer to section 265 of the Income Tax Assessment Act. Thatconcerns the role of the Taxation Relief Board. The board, of course, fulfils a very importantrole where taxpayers find themselves in a position where they are unable to meet their taxobligations—often due to unusual circumstances, such as health problems and a whole lot ofother reasons. However, the statistics available are really quite sparse and preclude an


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effective external evaluation of the board’s performance. Has that matter been brought to yourattention?

Ms Holland—I have some statistics on the relief board. The board has convened on 30occasions in 2001-02 and has considered 934 cases. It sits twice weekly and considers 31cases on average. There are 363 cases on hand. Most are finalised within four months ofreceipt.

Senator WATSON—What about those in favour—in terms of part resolution, completewrite-offs and that sort of thing?

Ms Holland—A total of 37.6 per cent of the cases are granted full relief, 15.4 per cent aregranted partial relief, 42.8 per cent were refused relief, and 34 cases—that is, 3.6 per cent—have been deferred pending further information.

Senator WATSON—Are there patterns affecting particular states, industries or jobclassifications?

Ms Holland—No, I am not aware of any.

Senator WATSON—Are these figures generally available? They are not in your annualreport, are they, Mr Carmody?

Mr Carmody—I do not believe that detail is there. We would have no problem withpreparing a detailed analysis, to the extent that we can, from those who are making themavailable in response.

Senator WATSON—Thank you very much.

Senator CONROY—Can we make you head of Treasury?

CHAIR—Order, Senator!

Senator WATSON—My next question concerns the problems faced by a lot of very smalltax practitioners. They are finding it quite difficult to cope with so many of the tax changes.Given that 80 per cent of returns are lodged by registered tax agents, concern in my state hasbeen expressed about the reduction in the available help—for example, the tax agents’ supportin the Hobart office has dropped from 25 to seven, and now to one. While there is no criticismof the quality that has been offered in terms of the service by that one person, which isexcellent, access is obviously a difficulty and more help is needed. The problem is reallyaccentuated by the fact that there have been certain delays in forwarding ATO instructions tothe small tax practitioners.

I will give you some examples. First, ‘Individual tax return for 2001,’ reference NAT2413,issued on 3 March was not received by most practitioners in Hobart until 23 July, right whenthey were starting to get busy. Of course, it usually takes a bit of reading before then. So thisdelay between the publication date and getting that vital information into the tax agent’s handsis pretty important. Second, ‘Company tax return for 2001,’ reference NAT0669, issued on 3March 2001 was not received until 30 July 2001. Third, ‘Depreciation schedule,’ NAT4089,published in April 2001 was not received until 6 August. So you can appreciate their concernin not speedily getting this vital information from the tax office. It is really causing someproblems. We are wondering if something could be done to reduce that time delay, whichespecially becomes a hazard for smaller people.

Mr Carmody—Absolutely. I do not know whether we have those specifics. I will havethose investigated to see whether there was anything wrong with our systems in doing that,however you can be assured that we are very conscious of the workload on tax agents through


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the last two years and in particular on the small tax agents. I note the comment about thereduction of direct support in Hobart, however we do have priority telephone lines that aremanaged on a national basis to enable us to offer the best possible response time to tax agents.Over the last six months we have been in a period of close consultation with the professionalbodies to see what we can do to alleviate some of the pressures on tax agents coming out. Icould list a number of things we have done but, short of that, I can assure you that it issomething that is a high priority. I will make sure, from those instances you mentioned, thatthere is nothing systemic that needs to be addressed.

Senator WATSON—The next question is directed to the minister. Recently a shearercomplained about the problems of reconciling the superannuation guarantee from a widerange of his employers. It is not an uncommon complaint in the industry, given that someshearers may have up to 50 or 100 employers during a year because they move from shed toshed and might only be in some sheds for a day. The government’s announcement of itsintention to move to quarterly instalments will certainly help, but I ask whethersuperannuation guarantee information supplied on the old group certificate could be mandatedto be on the group certificates, because that would certainly help these people. They docomplain that, over a period of time, they do not seem to be receiving all their entitlementswhen they look at the total amounts that have been received. That would help a little bit.

Senator Coonan—As you know, you have raised this with me anyway, and it is arecommendation of the committee. It is something that we will consider in line withconsidering the other recommendations of the committee.

Senator SHERRY—Chair, I raise a matter that might ease the process. Senator Watson israising quite legitimate issues—and I have no argument with that—but he appears to bemoving around from area to area. I have some questions relating to the last matter he raised,with respect to superannuation guarantee matters. I do not want to raise them now.

Senator CONROY—They are quite specific to an output.

Senator SHERRY—Yes, but Senator Watson is jumping around.

CHAIR—Senator Watson indicated to me at the start that he had—

Senator WATSON—It was an income tax matter, not a superannuation guarantee matter.That issue related to the tax return—

Senator SHERRY—I saw Mr Bator spring up.

Senator WATSON—So it really had greater importance as far as tax was concerned.

Senator Coonan—You were talking about the group certificate.

CHAIR—Senator Sherry, Senator Watson indicated to me before that he had about 10quite specific questions and, given the small number of questions that Senator Watson wantedto ask, I thought a more efficient way to proceed was to allow him to ask that short bracket ofquestions, albeit they are on a range of different topics.

Senator CONROY—I am not complaining about it. I happen to share that view.

Senator WATSON—My next question concerns IAS and BAS statements. As we know,the tax agent is the primary communication medium between the taxpayer and the tax office.The major problem with this approach is that it can often take 12 to 18 months for someclients to visit their agent and get advice. The commissioner rightly says that the tax agentsare very important in the process but they are worried because, when rules change, clientsonly hear what they want to hear and sometimes this causes difficulties.


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For example, taxpayers often do not know the difference between an IAS and a BAS. Imention this in view of the new penalty regime that is coming up. Some people make apayment and believe they have just discharged their obligation. However, there are quitesevere penalties coming in from 1 July if the form was not also lodged on time. If a clientdoes not know the difference between an IAS and a BAS and the rule changes affect only one,the client simply applies the changes to the other. This occurs particularly with the applicationof matters being done on an annual basis.

The big issue is the ability of the tax agent to accurately acquire knowledge. You havesought to provide this through the satellite forum but the problem with that, I am told, is thatthe forum does not allow feedback on subjects which might not be high on your agenda butcould be high on the tax agent’s agenda. People are suggesting that there is a need forfeedback and that more open forums would be a more effective way for the very smallpractitioners to receive their education, rather than via the satellite medium. You address whatyou believe are the priorities for the tax agents but they may not necessarily be their highestpriorities. Perhaps you could respond to that.

Mr Carmody—When we are developing those satellite broadcasts we work with theprofessional bodies to prepare the sorts of subjects that we would want to cover. The satellitebroadcasts are not the only medium by which we get information to tax agents. We willcontinue to work with the professional bodies and pay particular attention to the smallerpractitioners and see if there is any way we can enhance our services.

Senator WATSON—I draw your attention to the fact that ANZSIC codes are incomplete.Some of the codes used in 2000 returns have disappeared, for example, 84400. So a musicteacher finds themself in a predicament because they had a code the previous year but not thisyear. It is just one of those small details where people run into trouble. We are wary that theATO might use those codes to discriminate and target clients for industry comparison bycomputer. This causes a problem where a music teacher gets thrown into another code as theythen could get discriminated against because they are out of sync in terms of their expenditurepatterns.

Mr Carmody—I do not know the specifics of that code, but I know that we use theANZSIC codes because we provide a lot of information to the Australian Bureau of Statisticswhich enables them to then reduce their information requirements on the community also. Sowe do stick to those ANZSIC codes. I am not sure that the consequence of that wouldnecessarily be discrimination, Senator. When we see what is within that code, we have tomake sure that we have a reasonable balance of information there. In any event, to the extentthat coding leads to looking at a particular occupation or business activity, we might comparethat with some benchmarks. It is always only an introductory issue and, even if we were thento say, ‘This looks out of sync,’ and approach the taxpayer, it should be able to be remediedfairly quickly when they explain those circumstances. I do not think, overall, that it is anissue.

Senator WATSON—It is a worry if a code suddenly disappears in the subsequent year,isn’t it?

Mr Carmody—Yes, but in terms of the best administration of the tax system—and,indeed, for the Australian Bureau of Statistics—I think it is important that we retaincongruence in those codings, and we will have to be sensitive to the consequences.

Senator WATSON—Each GST document—BAS and IAS—has a document identificationnumber, often referred to as the DIN. If a client does not get a document, it is impossible to


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get the number from the ATO in order to lodge electronically. The tax office issues areplacement which takes 10 to 14 days to arrive, and there is often no ability to pay beforethat date. Why can the number not be issued over the telephone?

Mr Carmody—I think DIN is part of the security processes for this whole system. If youwant to go into a detailed explanation of that, I will get Mr Matthews to provide that for you.But, given that it is a security issue, I think the procedures are formulated on that basis.

Mr Matthews—The document identification number is an integral part of the security ofthe statements. I am a little puzzled by the question. I think if a client were lodgingelectronically, they would have their activity statement sent to them electronically with theDIN attached to it, so I am not sure of the connection you are making there between beingunable to lodge electronically and—

Senator WATSON—I am asking what would happen if they did not have a document.

Mr Matthews—If they were an electronic lodger, they would have that documentdownloaded to them on their system and, if there was a problem, my understanding is—subject to checking—that we would replace it in that way and not take a cycle of issuing apaper document in its stead. I would need to check some of the detail of the processes there,but that is the normal system. Certainly in paper, you are correct—we would issue areplacement paper with a new DIN number.

Senator WATSON—And would there be no ability to pay before the due date?

Mr Matthews—I do not believe that is correct. It is certainly possible for a taxpayer at anytime to make payment.

Mr Carmody—We do have a lot of experience of people paying without lodging theiractivity statements, so clearly there is an ability to do that, Senator. Even if the taxpayer feltconstrained, obviously, if this were a genuine case where they had lost their form or theirDIN, there would be no question of penalties or anything like that.

Senator, it has been pointed out to me that the ruling on long service leave funds andredundancy trusts is, in fact, a final ruling, so it represents our final views. But I will lookback on your question and, if there are policy issues that need to be raised, we will do thatwith the government.

Senator WATSON—Thank you.

Senator CONROY—When will the bankruptcy legislation be coming back intoparliament?

Senator Coonan—It is under consideration, Senator Conroy, but I am not able to give youa precise date as to when it will be introduced.

Senator CONROY—Has the bankruptcy task force reported to Mr Williams and SenatorCoonan

Senator Coonan—I have not received any advice about that, Senator Conroy, but I willtake it on notice and get you an answer as to where it is up to.

Senator CONROY—Mr Carmody, how is the ATO coping at the moment with all theseprofessional barristers that have been avoiding tax? How are those cases progressing?

Mr Carmody—We have a detailed outline of what has occurred and what we are doing inmy annual report. I could read that to you, but I can assure you that we are taking a veryprofessional approach in dealing with this. I would compliment the Bar Association and the


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New South Wales government for introducing both new legislation and procedures that wouldsee people exploiting these arrangements being disbarred, which is seen by them as a strongerinducement to meeting their tax obligations than their love of the tax system.

Senator CONROY—How disappointing! You must be disappointed.

Mr Carmody—Absolutely.

Senator SHERRY—Sarcasm does not show in Hansard.

Senator CONROY—It was speculated in the media last year—and I know we have hadprevious discussions with perhaps not you but your officers—that up to 25 per cent of thestate’s barristers were not paying their tax on time. Does that roughly accord with yourfigures?

Mr Carmody—It certainly was a very large percentage, which was very unfortunate.

Senator CONROY—Extraordinary. What is the ATO considering doing to preventbarristers and other professional debtors from using the Family Law Act as a means foravoiding tax obligations? It is apparently common for some professionals to draw up aproperty settlement under the act.

Mr Carmody—I understand that that is a matter that the committee reporting to theAttorney-General has under examination.

Senator CONROY—Is the tax office involved?

Mr Carmody—We are.

Senator CONROY—Can you do anything, short of changing the law, about this?

Mr Carmody—It is a bit hard for me to say here because of the position that we have onthe committee that is going to the Attorney-General.

Senator CONROY—I am not seeking to prejudice your investigation.

Mr Carmody—I would prefer to leave it in that vein.

Senator CONROY—Laws, unless otherwise specified, only go to the future. Therecommendations that would flow from this would only be able to deal with future mattersrather than any of the past matters.

Mr Carmody—I do not know whether it is appropriate for me to comment.

Senator Coonan—I doubt very much whether any such law would have a retrospectiveoperation. It is obviously a matter that, if it is in the recommendations, would be considered.It certainly would be very unusual if it were to have retrospective operation in respect ofagreements that had been certified or otherwise filed or registered in the Family Court.

Senator SHERRY—Coming back to the previous issue of the New South Wales barristers,did you carry out an examination of the practices in other states?

Mr Carmody—Yes. We have looked progressively at other states. My recollection is thatit is not of the same nature, and that has something to do with the way that barristers in NewSouth Wales were able to receive payment which assisted them in ensuring—

Senator CONROY—What was that?

Senator SCHACHT—Was it in brown paper bags or something?


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Mr Carmody—No. It was as to who could be a party to receive it. I will get Mr Mann toprovide a little bit more detail on that. The short answer to your question is that it was not thesame dimension of issue in the other states.

Senator SHERRY—Have you finished moving through each state?

Mr Carmody—We are continuing to keep these under examination. We are also, ofcourse, being alert as to whether other professions present a similar problem.

Senator SCHACHT—In the New South Wales example is there any suggestion that therewas informal networking amongst the barristers to explain to each other how to use thissystem that had developed over years?

Mr Carmody—I would not necessarily be aware.

Senator CONROY—Nothing has sprung up during the investigation to suggest that therewas an informal nudge-nudge wink-wink? Did they all use the same tax adviser?

Senator SCHACHT—Was there a secret handshake or something?

Mr Mann—To complete the answer on the analysis of barristers in other states, wecertainly have looked at that. We are still conducting profiling in some detail, and, as thecommissioner indicated, the problem does not seem to be to the degree that it has been inNew South Wales. However, we will be continuing to work with the relevant bar associationsin other states. The specific issue that made it a little different was basically the process bywhich fees are paid in New South Wales; there is not the same clerk system that is used inother states, for example, in Victoria. That made it a little bit more difficult for us to use ournormal garnishee powers in New South Wales than in other states, which is one of the reasonswhy we believe matters got out of hand.

Senator CONROY—I am afraid I am not an expert in this area.

Mr Mann—Just in terms of barristers receiving payment directly in New South Wales—

Senator Coonan—In New South Wales it is still largely a divided profession, so thatbarristers are paid directly. There is no intermediary, such as a clerk, who you could garnisheeor any other intermediary way that you could attach payments due to a barrister in New SouthWales—at least, it is not an easy process.

Senator SCHACHT—So the client could pay the barrister directly, and the barrister couldput it into any sort of shell or wherever, and hide it?

Senator Coonan—Yes, that is correct.

Senator CONROY—Were they all typically trusts?

Mr Mann—No; there is a full range of arrangements, as for any profession—frompartnerships to sole traders through to company structures.

Senator SCHACHT—Mr Carmody, you did not have any knowledge of any informalnetworking or exchanging of ideas. Has your investigation found any suggestion that therewas an informal discussion, at least, between those who were using this rort?

Mr Mann—I would not put it that way. We have looked at the advisers to the barristers—

Senator CONROY—Is there any pattern?

Mr Mann—that had some of the worst behaviours and we are continuing to look at someof those relationships.


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Senator CONROY—So there was something in common—not for every single one, butwere there three or four ‘tax advisers to the stars’?

Mr Mann—No, I would not put it anything like that—that there was a formal network orassociation—but we certainly are looking at particular advisers to some.

Senator CONROY—Putting aside the informal network aspect, a couple of tax advisersare common to many of these—

Mr Mann—We are looking at a number of tax advisers to members of the profession.

Senator CONROY—Three or four, half a dozen, 10?

Mr Mann—A relatively small number.

Senator CONROY—So you could see a situation where the lawyers might say to eachother, ‘I have got this great tax adviser. Here is his name, give him a ring.’ That does not formthe informal network that Senator Schacht was alluding to?

Mr Mann—In relation to the debt matters, I am not sure that the involvement of taxadvisers is a large contributing factor.

Senator CONROY—When you announced in November that there had been a crackdownon barristers who were avoiding paying tax this apparently resulted in an increase ofsomething like 36 per cent in tax paid by New South Wales barristers, and that has anidentified revenue of $52 million; is that right?

Mr Mann—We certainly have seen an improvement in the lodgment of returns andcollection of tax, but also as those returns have been lodged we have established debt. When Iwas last here the outstanding returns were still quite a problem. I think now we are down toabout 88 barristers with any outstanding return. So there has been quite a significantimprovement in compliance.

Senator CONROY—Eighty-eight barristers out of how many?

Mr Mann—Just over 2,000—I think it was 2,100.

Senator CONROY—Yes, 25 per cent was 500—I think that was the figure that had beentossed around previously.

Mr Mann—Yes, so we are down to 88.

Senator CONROY—Over a period of years have you been able to estimate how muchrevenue has been lost? I presume that, now they have all suddenly discovered that you areactually noticing, they are rushing to put a return in. Are you then able to go back over theirhistories and chase up back-debts? I think you described it as creating some debts by actuallylodging the first time. Is there any estimate as to how much has been lost over the last fewyears? I saw that bloke on the telly who did not appear to have ever paid tax, and he wasabout 50 or 60.

Mr Mann—I do not have a figure here, but perhaps we could take that on notice.

Senator CONROY—Obviously this got a great deal of prominence from a couple ofarticles in the Sydney Morning Herald in particular. Had the tax office been aware that thiswas a common practice before the article?

Mr Carmody—Yes. In my previous annual report, which was before those articles, Iraised this specifically as an issue.


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Senator SCHACHT—How did you get onto it? Without giving away inside information,how did it come to your attention?

Mr Mann—From December 1997 we basically looked at our debt figures and we hadidentified an unusual proportion of legal practitioners, and barristers in particular, in thosefigures. So we formed a project team to start looking into that from that point on. It really gotto the public’s attention after we had exhausted all of our normal recovery methods and thattook about two to three years before we started seeing barristers appearing in bankruptcy—

Senator SCHACHT—When you detected that pattern, was that by running theinformation or a series of names or whatever of the profession through a computer andidentifying on a printout that there was an abnormally low revenue from this group?

Mr Carmody—I do not know the specifics of that but increasingly, obviously, we do notjust deal with individual debts or with individual audits.

Senator SCHACHT—Yes, I understand that.

Mr Carmody—So it would be a matter of running programs to see what patterns, if any,are there. It is part of our general approach of risk identification.

Senator SCHACHT—But the pattern was that you identify the legal profession?

Mr Carmody—That is the most difficult situation, in New South Wales in particular.

Senator CONROY—Twenty-five per cent of the industry of about 2,000 is a fairly smallindustry. It seems pretty incestuous that so many managed to come up with similar tactics butI guess if you are well-informed you are well-informed. Could you advise whether the caseagainst Mr Robert William Cameron had recovered any tax?

Mr Mann—I am unable to.

Senator CONROY—Stephen John Archer?

Mr Mann—I do not have any of those individual case details with me, Senator.

Senator CONROY—Mr Bill Davison?

Mr Carmody—I think Mr Mann has indicated that we do not have those individualdetails.

Senator CONROY—I am happy for you to take it on notice.

Mr Carmody—I guess I would then ask the chairman whether he wants in committeepublic documents for individual tax—

Senator CONROY—No, I am talking about the settlements—this is in court.

CHAIR—Just a moment Senator Conroy, I just want to understand what is being asked ofme by Mr Carmody?

Mr Carmody—I was just not sure whether Senator Conroy was asking for the taxinformation of an individual person that is not on the public record. It would not be normal forus to provide that in a public forum.

Senator CONROY—These are specific cases, I think, that have gone to the federal court.These are federal court cases, so I was assuming that—feel free to correct me—

Mr Carmody—If they are on the federal court as public records—

Senator CONROY—Yes, that is what I meant.

Mr Carmody—then we could look at that—


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Senator CONROY—Each of these are just the federal court cases.

Mr Carmody—but we would not give it out.

Senator CONROY—I appreciate the sanctity of an individual’s tax situation. I was notasking you to breach that. Robert Samosi was the other one. These were just the ones thatwere mentioned in the paper. I was just hoping that you have a good news story for us, thatyou could tell us you have got them.

CHAIR—Sorry, Senator Conroy, is the question whether each of those cases has beenresolved?

Senator CONROY—Yes, that was essentially what I was asking. Hopefully, if thesettlements were court settlements, then they are public and we could be advised. That is all.Sort of like yours. How many bankruptcies has the ATO investigated since the crackdownbegan? I am talking about the other professions there, because I understand you have widenedit to other professions.

Mr Mann—I will see if I can give you that information while I am here, Senator.

Senator CONROY—You may need to take this on notice as well: how many people havenow paid up and how much tax was paid—if that is able to be supplied? Also, how manypeople have not yet paid and how much tax is still outstanding? A little while ago, SenatorCoonan, you advertised for a couple of positions—an insurance adviser. I saw it in the paper.

Senator Coonan—You do not want to apply, do you, Senator Conroy?

Senator CONROY—No, tragically I would fail miserably. I am sure the quality of peoplewould far outstrip my measly efforts, even though you do state you are an equal opportunityemployer and I am sure you would not rule me out on the basis of my political affiliations.

Senator Coonan—Certainly not. I thought that was a multipartisan employer.

Senator CONROY—I did notice you advertised for the position of office receptionist andI am afraid I may not have been able to apply for it because it does not seem to indicate thatthat was an equal opportunity position.

Senator Coonan—Senator Conroy, if you had applied, you would have been treatedequally.

Senator CONROY—I was just saying that the ad for the office receptionist did not specifythat it was equal opportunity. I was just wondering: if I am ruled out from the officereceptionist can I have a go at the insurance adviser?

Senator Coonan—Senator Conroy, I am not sure this is a matter for estimates, but if youwant to apply for any of those jobs you are certainly welcome to do so.

Senator CONROY—It is taxpayers’ dollars in terms of the ad and your office, but I amhappy to move on.

Senator SHERRY—I have some questions about general tax revenue matters. MrCarmody, I pay the compliment to the tax office which has given us some very good briefingsover the last 18 months on non-complying superannuation funds and the problems withrevenue leakage in those areas. Can you provide me with an update about the collection of therevenue that has resulted from the legislation that has been passed?

Mr Carmody—The legislation that was passed was on a prospective basis, I understand.


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Senator SHERRY—Yes.

Mr Carmody—I would not have details of what has been collected on a prospective basis.The particular issue is one that is before the courts now. In the first case before the FederalCourt our view was confirmed by the courts. I understand that that position has beenappealed. There is another case on stream so I think it will be a little while before the courtsconfirm the final position on that.

Senator SHERRY—What has happened with the revenue though?

Mr Fitzpatrick—You are talking about the employee benefit schemes involvingsuperannuation funds.

Senator SHERRY—Yes. It was more than non-complying superannuation.

Mr Fitzpatrick—Exactly. We have discussed it before.

Senator SHERRY—But that was one of the conduits for the employee benefit—

Mr Fitzpatrick—Yes. In those employee benefit schemes, as we have discussed in otherplaces—

Senator SHERRY—You gave us some very thorough briefings on these matters.

Mr Fitzpatrick—Thank you, Senator. I am pleased to hear that. The tax collected inrelation to those four categories of employee benefit schemes is around $330 million to date.As the commissioner was saying, there are now two cases heard on controlling interest from asuperannuation scheme. One has been decided in the commissioner’s favour and is on appealto the full Federal Court. Another case was only heard last week and is awaiting decision.Other cases are at varying stages of progress through the courts and the AdministrativeAppeals Tribunal, but no other cases in those four categories of schemes have been heard todate. We are hopeful of having some cases heard—apart from the full court hearing in May—on the other schemes in the coming months.

Senator SHERRY—What is the outstanding revenue at the present time? You havecollected $330 million. What still remains to be collected, assuming that the tax officeposition is ultimately upheld?

Mr Fitzpatrick—By way of amended assessment tax penalties and interest, we haveraised just under $1 billion to date.

Senator SHERRY—So there is still $670 million to go?

Mr Fitzpatrick—In round figures, that would be correct. I imagine there would still becases where we have not yet raised all of the amended assessments as well. Some are stillbeing investigated to discover the appropriate liability.

Senator SHERRY—Does the raising of the billion dollar figure include penalties?

Mr Fitzpatrick—Yes, it does.

Mr Carmody—And it includes interest.

Mr Fitzpatrick—The statutory interest rate is presently around 12 per cent. There are alsosome cases which have been settled, or the taxpayers have conceded. In the cases where wesettle, we are settling on some reduction, of course, in the liability raised by way of amendedassessments. We need to be very careful of the figures because, as I think we have said before,in our view, some of these schemes give rise to multiple tax inputs—income tax and FBT, forexample. Where we settle, we are settling on one tax input and some reductions in penalties,


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in some cases. So with the just under $1 billion raised we need to have regard to other factorssuch as credit amendments and settlements, et cetera.

Senator SHERRY—Are there many more persons to whom amounts of money have to beraised? Do you have any estimate of what is still to be assessed?

Mr Fitzpatrick—No, I have not with the vast majority of cases we have identified to date,other than to say that I do not think we have amended assessments on FBT in all the cases forwhich we have done income tax amendments.

Senator SHERRY—So it is $1 billion plus, and $330 million collected to date?

Mr Fitzpatrick—That is right, but regarding the $1 billion, I imagine that at the end of theday, if the courts support our view, the liability in some of those cases will be reduced becauseof the multiple taxing points. In most cases we will not be maintaining two taxing points atthe end of the day. That is my expectation of the outcome.

Senator SHERRY—So you are saying that, if your position is maintained by the courts onappeal, the amount will be reduced?

Mr Fitzpatrick—No. In cases where there may be multiple taxing points—income tax andfringe benefits tax—I do not expect that the final outcome will stay as two taxing points.There will be one taxing point. To the extent that we have raised FBT and income taxassessments, one of those will be reduced or excised.

Senator SHERRY—So how will that potentially affect the $1 billion figure?

Mr Fitzpatrick—It will probably reduce but, without knowing exactly what component ofthe nearly $1 billion comprises multiple taxing points in particular assessments, it is hard forme to give you a figure.

Senator SHERRY—But are we talking about halving the figure?

Mr Fitzpatrick—I would not have thought so.

Senator SHERRY—If you give me some kind of indication, I am not going to hold you toit and say, ‘Look, you said that’; I am just interested in knowing approximately how much itwill be reduced by.

Mr Fitzpatrick—It will depend on the outcome of the court cases in the various categoriesof schemes, naturally, as you know. My best judgment would be that the total tax collected, ifwe win through the courts, will be a little bit less than $1 billion—maybe $800 million orthereabouts.

Senator SHERRY—Have you any idea of the time frame?

Mr Fitzpatrick—The first scheme heard, on the controlling interest non-complying trust,is before the full court, I understand, in May. The other scheme is the employer benefit trust,which is the other major one, and the lead case has not been set down, but we expect it to beset down in the first half of this year. So, hopefully, in the second half of this calendar year wewill have some fairly clear indications from the courts on these schemes. It does depend,obviously, on the court processes and whether appeals are made or not from first instancedecisions.

Senator SHERRY—Regarding the revenue instruments, will this impact on the nextfinancial year’s estimate of revenue to be raised?


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Mr Fitzpatrick—I do not think so. As a general rule, we factor in the likely raising ofamended assessments in relation to these and other types of schemes. It does depend,obviously, on how cases proceed through the objections and appeal stages, of course.

Senator SHERRY—Would there be an impact if there was a loss in the courts and yousubsequently were not able to collect a portion of that remaining $670 million?

Mr Carmody—It might have an impact, Senator, but in the revenue estimating processthese sorts of amendments are only part of a broader picture of amendments that we wouldmake under audits and others. We do not attempt to do a dollar for dollar translation, becausethat is too detailed and is imprecise anyway. So what we put into the estimates is a generalfigure of expectations of collections from audit and other amendments, totally, and historygenerally shows that some element might be less than expected and another element might bemore. Therefore, it is a bit difficult to say with any precision what the dollar impact on theforward estimates might be.

Senator SHERRY—I understand the argument but in this case we are dealing with a verysubstantial amount of money in one particular area.

Mr Carmody—We would not have put in a precise dollar for dollar. For example, wewould not have those billion dollars in the estimates for the next year. We know that that isgoing on, we have a general picture that that is going to take a time, we know a lot of otherthings are going on, and, as I have said, they combine to give a figure that we put in, based onhistorical practice and experience.

Senator SHERRY—I have some questions relating to revenue raised fromsuperannuation. Can I be given an estimate of the revenue raised from the contributions tax onsuperannuation?

Mr Bator—Are they the figures for the 15 per cent?

Senator SHERRY—Yes, the 15 per cent contributions tax.

Mr Bator—Were you after the past years as well as the future?

Senator SHERRY—If you have got some revenue figures for the past years as well, andsome historical—

Mr Bator—From the commissioner’s annual report, we have $2.5 billion in 1996-97, justover $3 billion in 1997-98, $3.9 billion in 1998-99, $3.8 billion in 1999-2000, and $4.8 in2000-01.

Senator SHERRY—That is almost a 50 per cent increase in the last six years.

Mr Bator—That is what it looks like. From 1997-98, we have included surcharge in thosefigures.

Senator SHERRY—I had not forgotten that. I was going to get to that. So the surcharge isincluded.

Mr Carmody—Did you all get your letter from Leo?

Senator SCHACHT—Absolutely. The favourite letter! Thanks very much.

Mr Carmody—Talk about taking out performance pay—he is God!

Senator CONROY—Why do you think he is our favourite visitor to the Senate?

Senator SHERRY— Mr Bator, I am thrilled that you have not only pre-empted myquestion but recognised it as a tax revenue.


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Mr Carmody—The Senate recognised that, I think.

Senator SHERRY—That figure includes the surcharge.

Mr Bator—It does. The surcharge was $347 million in 1997-98, $286 million in 1998-99—it went down because of the removal of the advanced instalment—$577 million in 1999-2000 and $690 million in 2000-01.

Senator SHERRY—Are there any projections beyond that date?

Mr Bator—No, none other than the reduction in the measure, I think. We have got aphase-down, which is in the material—

Senator SHERRY—I have read the estimated revenue losses and I was actually able to doa rough calculation of the surcharge revenue, which had previously been denied to me. Thereis a way of getting it but you have confirmed it anyway, so thank you for that. What about thesuperannuation earnings tax?

Mr Bator—The figures that I have given you are the total taxes, as provided for in thecommissioner’s annual report—that is, the 15 per cent contributions tax and the earnings tax.

Senator SHERRY—And the earnings tax. So the figures that you gave me earlier includethe tax on the earnings of the superannuation fund. Could we be clear on that?

Mr Bator—This includes the surcharge; the advance; the revenue from superannuationfunds, including PAYG instalments; and other payments.

Senator SHERRY—So you are absolutely sure that includes the earnings tax.

Mr Bator—I can check that.

Senator SHERRY—If you could double-check it for me.

Mr Bator—Not a problem.

Senator SHERRY—I am a bit surprised about that. What about the revenue from the exittax on superannuation?

Mr Bator—Again, these figures should be inclusive of all superannuation tax. We do notshow that breakdown separately.

Senator SHERRY—I must say I am a bit surprised with that because I would havethought the figure would be higher, but you could double-check it.

Mr Bator—I could.

Senator SHERRY—Of the superannuation contributions tax revenue, how much relates tosuperannuation guarantee payments? Are you able to provide a figure for that?

Mr Bator—That would only be an estimate because, essentially, as you know, it is a self-assessment regime. We do get reporting from the funds via the surcharge information, and wecould probably do an estimate of what that would be. Of course, the effective rate that mostfunds pay is not a straight 15 per cent.


Mr Bator—That would be purely an estimate that we put together there. We do not get thatas a separate reporting to us because you have employer salary sacrifice contributions, youhave SG contributions and other figures included in that.


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Senator SHERRY—You have raised another issue. Do you have any figures on salarysacrifice, and the quantums that are being salary sacrificed and, accordingly, a reduction in taxrevenue?

Mr Bator—In terms of the income tax forgone?


Mr Bator—No, I do not.

Mr Carmody—Of course, you would have to take into account the fringe benefits on theother side of the equation.


Mr Carmody—They would come fairly close, but I do not know that we have the detail.

Senator SHERRY—You could take that on notice.

Mr Carmody—If we have it, we will give it to you.

Senator SHERRY—Has there been any study carried out on the surcharge and the cost ofcollection to the funds?

Mr Bator—There was a study done by ASFA about two years ago.

Senator SHERRY—Yes, I am aware of that.

Mr Bator—Our understanding is that the costs, once bedded in their systems, have nowlevelled out in most funds.

Senator SHERRY—At what figure?

Mr Bator—Of course, most funds are now starting to engage in the transfer of informationelectronically. We have done as much as we are able to provide information to themelectronically and I understand that that has reduced their costs. But we have not done a study,and I think the last one was the ASFA study.

Senator SHERRY—Can you refresh my memory on the figure?

Mr Bator—It was a high figure, but I think there was some dispute about it. I do not knowif that was a correct figure.

Senator SHERRY—But you have raised the issue of the ASFA study.

Mr Bator—I think it was $200 million or $300 million.

Senator SHERRY—You then said it had levelled out.

Mr Bator—Yes. My understanding, from talking to industry people, is that now the systemis built they are more comfortable with the reporting responsibilities and the operation of that.I would imagine, from what they are saying, that the costs are now in the system.

Senator SHERRY—I note that Ms Smith, from ASFA suggested in the AustralianFinancial Review on 5 February this year that it had levelled out at an ongoing cost of $30million a year from the initial start-up costs. In the same article, Mr Hutton of Mann Juddfinancial planners put the cost at $77 million. In terms of your comments about levelling out,a figure between $30 million and $77 million seems to be the ballpark.

Mr Bator—It may well be. The $20 million certainly sounds a lot less than other figuresthat I have previously seen. As I say, we continue to work with the industry to make sure thatthose costs can be as low as humanly possible.


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Senator SHERRY—In terms of industry cost, if we accept the lower figure of $30 million,that is a very significant proportion of revenue collected, isn’t it?

Mr Bator—If those costs are right, it is a high percentage in relation to $690 million.


Mr Bator—One of the things we are finding, of course, is that more and more funds arelodging electronically, and we are getting the information back electronically. We have moveddates around so it is better for the industry.

We tried to link the reporting with other things we can do for the industry, such asproviding information about people that in their fund with vouchers and lost members. I thinkthere is starting to be some benefit or pay back to the industry out of that.

Senator SHERRY—If the figures drop from between $200 million and $300 million tobetween 30 and 77, depending on whose figures you accept, and in the absence of the taxoffice having commissioned any study in this area, these are the only figures we have to goon, aren't they?

Mr Bator—Yes. They the only figures currently provided by ASFA are at the $20 millionmark.

Senator SHERRY—Thank you.

Proceedings suspended from 4.05 p.m. to 4.18 p.m.CHAIR—I call to order the hearing of the additional estimates of the Australian Taxation

Office.

Senator CONROY—Continuing with general questions: when the ATO conducts a GSTaudit of a taxpayer, is a report made of the audit summarising the results of that audit, theissues involved and other relevant matters?

Mr Carmody—That is normal procedure in an audit.

Senator CONROY—Is that report provided to the taxpayer as a matter of course?

Mr Carmody—That is normal procedure.

Senator CONROY—Can such a report be provided to the taxpayer, should they requestit?

Mr Carmody—If there are issues involved, normal procedure in an audit is for those to bedetailed to the taxpayer. That would normally happen, and so it would not be necessary for theentity being audited to request it.

Senator CONROY—Is the tax office allowed to release the audit report of its volition, ifthe results of the audit have been made public by the taxpayer?

Mr Carmody—No, I do not believe it is appropriate, or available under the law, for us torelease that sort of information.

Senator CONROY—If the taxpayer, or a representative of the taxpayer, authorises therelease by the ATO of an audit report, is the ATO allowed to release the audit report?

Mr Carmody—That is a difficult area of law. You shake your head. But I have hadexperience where I have thought or it has been said that something was able to be released bya taxpayer or release has been alluded to by a taxpayer, and it is still not clear to me from thelegal advice I have had that we can release it.


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Senator CONROY—So, even if they give you a letter of release—

Mr Carmody—Yes, I understand that is what you are saying. But it is still not clear to me;I would have to go back and look at our legal advice. I just have a warning in my head that wehave—

Senator CONROY—And if they said, ‘I waive my—’

Mr Carmody—From past recollections, I have a caution in the back of my mind—this iswhy I am hesitating—that, notwithstanding a taxpayer authorising it, we may not be able todo that at law.

Senator CONROY—Mr Matthews is nodding.

Mr Matthews—I should not have interrupted the commissioner. I will let him followthrough. I was nodding in agreement.

Senator CONROY—If a GST audit were conducted against a particular division of anational organisation that showed illegal activity which had resulted in amended assessmentsof the GST, would it be usual for the ATO to conduct an audit of other divisions of theorganisation to ensure that the practices, the subject of the amended assessments, were notalso carried out by other areas of the organisation?

Mr Carmody—Clearly, that would depend on the facts of the particular case that you aredealing with. But, if there were sufficient indications to suggest that it may be an issue thatrelates to related parties and is of sufficient import, yes, we would.

Senator CONROY—What would be the test for that?

Mr Carmody—That would have to be done on the particular case.

Senator CONROY—If someone who was acknowledged as the mastermind of a particularscheme moved from one unit or division to another unit or division, would that be a primafacie case?

Mr Carmody—That obviously would be a prima facie case. If in the initial case, inrelation to that particular organisation, we found that there were issues of concern and weconcluded that and there was a circumstance like you said, then there would certainly be aprima facie issue for looking at that.

Senator CONROY—I now want to talk generally about the operation of the GST law. Is ittrue that, under section 9-5 of the GST law, one of the key features of a ‘taxable supply’ is thatit is ‘made in the course or furtherance of an enterprise that you carry on’?

Mr Matthews—Yes, it is. That is one of the features.

Senator CONROY—I have been contacted by a taxpayer who is a bit concerned abouttheir interpretation. I thought ‘I am going to be seeing the two people who are the experts: MrMatthews and Mr Carmody, and so I will raise this issue on behalf of my taxpayer’. Mytaxpayer is engaged in providing invoices and making payments of bills originally incurred bysomebody else, and describing that behaviour on a tax invoice as being a service of costnetting. Would that be sufficient to be considered an enterprise for the purposes of section 9-5?

Mr Matthews—It is very difficult in these hypothetical circumstances. I would need youto clarify exactly what the nature of these transactions was. I know where you are heading andI am reluctant to try and give broadbrush responses. With transaction based tax, it is veryimportant to have the real details of the transactions in order to give you a proper response.


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Mr Carmody—I think there is a general issue about whether people would freely concludefrom the questions that they are a particular taxpayer as identified in the questions, and I thinkwe would have to be careful about that.

Senator CONROY—I am doing my best to protect my taxpayer. He is consideringrunning a similar business to some other organisations, and so he wants to make sure that hegets equal treatment under the tax law.

Mr Matthews—I think the proper course here is for your taxpayer—if I can put it thatway—to contact us, and we would be more than happy to provide them with accurate andspecific advice for their circumstances.

Senator CONROY—He is very nervous about being caught and accused of beinginvolved in a GST scam.

Mr Matthews—Then even more reason that he should make contact with us.

Senator SCHACHT—And you are there to help him?

Mr Matthews—Absolutely.

Senator SCHACHT—The cheque is in the mail.

Mr Matthews—That is what should happen here, rather than us trying to give responses tohypotheticals which may lead somebody down a wrong path.

Senator CONROY—Isn’t it true that under section 9-10 of the GST law that a supply isdefined to include the following: firstly, a supply of goods; secondly, a supply of services;thirdly, a provision of advice or information; fourthly, a grant, assignment or surrender of realproperty; fifthly, a creation, grant, transfer, assignment or surrender of any right; sixthly, afinancial supply; seventhly, an entry into or release from an obligation (i) to do anything, (ii)to refrain from an act or (iii) to tolerate an act or situation? Is that an accurate summary?

Mr Matthews—I am sure you have read it out accurately.

Senator CONROY—Could you tell me which of these types of supplies that the provisionof cost netting might be?

Mr Matthews—Again, what you have put to me as cost netting is not a concept that—

Senator CONROY—Unfortunately, I have only been shown an invoice.

CHAIR—Senator Conroy, can we let Mr Matthews finish his answer, please?

Mr Matthews—The concept of cost netting is not something I am aware of in acommercial sense, or as a normal transaction.

Senator CONROY—I have never heard of it either.

Mr Matthews—If we have both never heard of it, I think it would be proper for you toactually spell out exactly what it is—

Senator CONROY—I think you actually have heard of it. I am not sure that you havenever heard of cost netting. I would be surprised if you had not.

Mr Matthews—It is not a term that is fresh in my mind at the moment. Again, if it is aterminology that is not in normal parlance, I think we had better both be sure we are on thesame wavelength.

Senator CONROY—It was made famous in Queensland.


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Mr Matthews—I will just refer back to my previous answer to you that in all these cases ifthere is somebody who requires specific advice then that is what we are here for. They shouldwrite to us and we will be happy to provide that advice.

Senator CONROY—What would it take for a series of transactions to actually be treatedas part of a scheme to avoid the GST under division 165 of the GST law?

Mr Matthews—It is a very broad question. Section 165 is, essentially, an anti-avoidanceprovision, as you know. It is open for us to undo or unravel transactions that appear to beapparently within the law, but are there only for the purposes of gaining a tax advantage. Thatis a very general statement, as is your question. It is the anti-avoidance provision. What itwould take would depend, again, on each case’s circumstances.

Senator CONROY—I am going to ask some specific questions, which will probably comeas no great surprise about the Queensland Liberal Party. I appreciate your previous answersand our previous discussion about identifying an individual taxpayer in specificcircumstances, but there are some process questions that I am really wanting to go throughwith you.

Mr Matthews—We will do our best.

Senator CONROY—I am sure you will let me know the limitations.

Mr Carmody—I would just foreshadow that, in identifying a particular taxpayer, I cannottalk about or even confirm whether or not something has occurred in relation to that taxpayer.It will be almost impossible for me to give you any answer in that sense.

Senator CONROY—I appreciate that.

CHAIR—Senator Conroy, that observation from Mr Carmody was directed to the Chair.

Senator CONROY—You are a mind reader now?

CHAIR—Excuse me, Senator Conroy. Mr Carmody, the only way we can do this is to heareach of Senator Conroy’s questions. If you have a concern, on the basis you foreshadowed,would you raise it when we have heard each question.

Senator CONROY—I appreciate that. Can you tell me about the circumstances in whichthe ATO launched an audit into the activities of the Groom FEC and the Queensland LiberalParty?

Mr Carmody—I do not believe that I can confirm whether an audit has been conducted inrelation to a particular taxpayer or not.

Senator CONROY—Is it true that the audit commenced at the behest of the PrimeMinister, as per his media release of 27 August? I am interested in how the Prime Ministergets to ask for an audit of another tax individual. I was hoping you could explain that part tome.

Mr Carmody—No. I do not believe that I can talk about that. If any of these questionsleads to an answer of whether or not a particular event—taxation audit or otherwise—occurred in relation to a particular taxpayer then I cannot answer those.

Senator CONROY—The Prime Minister has indicated in a media release that he hadrequested that you commence an audit.

Mr Carmody—I think someone else indicated in a media release that they had requestedthat I take particular steps too. All I am saying to you is that I cannot answer whether stepswere taken or what those steps were.


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Senator SCHACHT—Is it not taking the Fifth Amendment in American terms?

Mr Carmody—I will not mention it.

CHAIR—I think Mr Carmody has obligations under the taxation law which would be acriminal offence for him to breach, notwithstanding parliamentary privilege. Senator Conroy,I do not want to constrain you. I want you to ask each question you want to ask in sequenceand let Mr Carmody deal with them as he chooses.

Senator CONROY—I am accepting each answer he is giving. I am not arguing with him.I am happy for him to keep a close eye on the questions and give the appropriate answers. Is itnormal to launch tax audits at the request of a member of parliament. Is that something thathas happened in the past?

Mr Carmody—I cannot look back. We have thousands of people who contact us andsuggest that we should audit people for particular events.

Senator CONROY—Is it usually just a bunch of cranks?

Mr Carmody—I did not suggest that at all. In fact, it is often a very valuable source ofintelligence.

Senator CONROY—Could I order an audit of the activities of an organisation?

Mr Carmody—I do not think you could order an audit. If you wanted to suggest to us thatsomeone should be audited, then we would obviously look at that.

Senator CONROY—I am using the Prime Minister’s own words here. In his press releasehe ordered one. Given that the Prime Minister ordered the audit, will the ATO be making theresults of this audit public, as per the PM’s desire to that effect expressed in question time on27 August 2001?

Mr Carmody—Answering that question would cause me to reveal whether or not certainactions were taken in relation to a specific taxpayer. I do not believe it is appropriate that I dothat.

Senator SCHACHT—Did you tell the Prime Minister to go jump when he put the requestin?

Senator CONROY—It was not a request; it was an order.

CHAIR—Just a moment, Senator Conroy. Senator Schacht’s question is not an improperquestion, so please let it be answered.

Senator SCHACHT—When he ordered you—and he was in the parliament—what wasyour response? Was it in any way talking about the rights of individuals?

Mr Carmody—I do not recall there being any communication or response and it wouldnot be appropriate for me to talk about any such communication even if there was.

Senator SCHACHT—So the act itself prevents you commenting about the Prime Ministerin parliament ordering an audit? You cannot even tell us whether the Prime Minister actuallysent it to you in writing or whether you waited till you could hear it in parliament?

Mr Carmody—I do not think in law I can talk about any issues that go to a particulartaxpayer’s affairs. I can explain that in normal circumstances—

CHAIR—Let us listen to the question. Please do not interrupt one another.

Senator SCHACHT—If I or Senator Conroy stood up in the Senate adjournment speechand said that we believed that Mr So-and-so or that such and such company are a bunch of


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crooks diddling the taxpayer and we, as a member of parliament, ordered the tax office toconduct an audit as a matter of national interest, you would not respond to us in any wayabout that? If I then sent you a copy of my Hansard, you would not respond to me other thanto say, ‘Your views have been noted’, or something similar to that. Is that right?

Mr Carmody—That is exactly right. If anyone in the normal course of events approachedus, all we could do would be to acknowledge that. We would properly point out that, underthe secrecy provisions of the law, we could not communicate anything further in relation tothat particular matter.

Senator SCHACHT—So the treatment I would get—which I think is fair and just—wouldbe exactly the same as the Prime Minister, the Treasurer or Senator Coonan as a minister?

Mr Carmody—Absolutely.

Senator SCHACHT—I just want to get that quite clear. Mr Howard has got no right, justas I have got no right, to at some stage say, ‘Mr Carmody, have you done the audit and what isthe outcome?’ Again you would say, ‘None of your business.’

Mr Carmody—I am sure I would not express it quite like that.

Senator SCHACHT—No, of course not. I am just saving time. I might say to the PrimeMinister to go to buggery; nevertheless—

Mr Carmody—We would always make it clear that we are unable to comment on theoutcome and, indeed, whether or not some particular action was taken.

Senator SCHACHT—Were you surprised that the Prime Minister publicly called for anaudit and made comments to that effect in the parliament under privilege?

Mr Carmody—No. Taxpayers are people and, obviously, if they feel strongly thatsomething might have been done incorrectly and that it should be examined, then I wouldhope that a lot more of them would do that.

Senator SCHACHT—Anyway, none of us can order you to do it. From the highest in theland to the lowliest backbencher, no-one can order you to do an audit?

Mr Carmody—The administration of the law is statutorily independent, and it is ourresponsibility to administer the law.

Senator CONROY—I just want to read you Mr Howard’s Hansard, where he made thefollowing statement:I want to make it clear—and I have made this perfectly clear to the Queensland branch—that I think theresults of the audit should be made public.

Are you not able to respond to the Prime Minister’s wishes there and publish a result to thisaudit?

Mr Carmody—I read that as talking to the branch itself, but it is clear that I cannot discussor make public the results of an audit if it occurred of an individual taxpayer.

Senator CONROY—Senator Brandis, you are a member of the Queensland branch of theLiberal Party?

CHAIR—I am.

Senator CONROY—And, repute has it, an influential member.

CHAIR—Senator Conroy, please direct your questions to the witness.


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Senator CONROY—You are too modest, Senator Brandis. Lynton Crosby said on 23November 2001, after Ian Macfarlane was made the Minister for Industry, Tourism andResources, that the results of the audit were available and that he would release a summary inthe next week. How long had Mr Crosby been in possession of this audit report?

Mr Carmody—I do not know whether he was.

Senator CONROY—Did you make the report available to the Prime Minister?

Mr Carmody—The report would have gone to the taxpayer. If there was an audit then, inthe normal course of events, it would go to the taxpayer and we are not at law entitled to makethat result of any audit that might have occurred public.

Senator CONROY—Senator Brandis, I know you make a habit of staring the PrimeMinister down, but is the Queensland branch going to release this report, as per the PM’swishes?

CHAIR—Senator Conroy, please direct questions to the witnesses.

Senator CONROY—There is also a report from Mr Crosby, which indicates that you hadmade a GST determination over the treatment of the transfer of election funds with the partyand sponsorship arrangements totalling about $13,000.

Mr Carmody—I have already indicated—I am sorry, I will not talk over you.

Senator CONROY—He has indicated that you have billed them 13 grand.

Mr Carmody—I have already indicated that I cannot talk about the taxation affairs ofparticular taxpayers.

Senator CONROY—He indicated that there may be an appeal against this. Has any appealbeen lodged?

Mr Carmody—I cannot talk about the affairs of a particular taxpayer.

Senator CONROY—Would that be a legal matter?

CHAIR—Senator Conroy, let him finish his answer.

Senator CONROY—I am presuming it will become a legal matter, as in a court?

Mr Carmody—If an audit were to take place, if the tax office were to make a particularassessment, if the taxpayer chose to contest that and if the contesting of that found a way intothe court system then it would be in the public arena.

Senator CONROY—Has there been a challenge lodged in the Federal Court against the$13,000 instalment?

Mr Carmody—I cannot confirm whether there has been a $13,000 instalment.

Senator CONROY—Has there been a case lodged in court objecting to the ATO’sfindings with the Queensland division of the Liberal Party? It is a factual question: there hasor there has not. You must know that.

Mr Carmody—I have no idea, and I am not able to confirm whether there was a particularfinding by the Australian Taxation Office.

Senator CONROY—I did not say there was. I was just asking whether there has been anappeal lodged in court?

Mr Carmody—I do not know whether there is such an appeal or whether there is cause forany such appeal.


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Senator CONROY—Senator Brandis, you cannot help us out here?

CHAIR—Senator Conroy, behave.

Senator SHERRY—It’s your moment of fame, Senator Brandis.

Senator CONROY—You did not end up president of the Queensland Liberals, did you?You are too smart for that.

Senator SCHACHT—Way too smart for that.

Senator CONROY—Way too smart for that. I have always said he is a smart man.

CHAIR—Senator Conroy, did you have any further questions to the witnesses?

Senator CONROY—I have lots.

CHAIR—Please proceed with them.

Senator SCHACHT—Mr Carmody, I want to ask a couple of questions—and I declarethat they are based on an experience as an investor in the wine industry in South Australia. Iwill not name the vineyard I have invested in. Though I can assure you that it produces verygood wine, I will not use this opportunity to get a free plug for it. I want to raise this as aresult of my own experience. It appears that, if people have taken and successfully got aprivate ruling on a particular investment scheme—and those private rulings in the last fewyears have been for only a year—that private ruling may subsequently be challenged and thetax office says, ‘We’re reviewing it; we don’t accept it any more,’ whereas other investorswho had accepted the advice of their accountants who said, ‘Under the law, these arelegitimate deductions for the investment,’ and did not get a private ruling, may well be gettingtheir tax deduction paid. It could be that the person who had got the private ruling, which hasnow lapsed, does not get another one and therefore loses their deduction. So, in a group ofinvestors in one scheme, you might find an inequality occurring where four or five of themhave got the deduction for the year and one has not got the deduction. Is that a possibleoutcome?

Mr Carmody—I do not believe that is a probable or likely outcome in the circumstancesyou have outlined. Let me take a couple of steps. If we were to say that deductions are notallowable in respect of this particular arrangement, it would most likely be on the basis of thenature of the investment arrangement and therefore, most likely, that would be the result forall investors. In the circumstance you have talked about, if an investor had a private ruling,then for the period of that private ruling they would not have their deductions denied, even ifthe office was subsequently to determine that the arrangements ran foul of the law. However,those who did not have a private ruling—

Senator CONROY—Private ruling.

Mr Carmody—I think I said that.

Senator CONROY—No, you said product ruling.

Mr Carmody—Sorry, I was going to get on to product. Those who do not have a privateruling, under the self-assessment system even if their deductions had been incorporated in theoriginal assessment—which is not an assessment as such but generally accepts deductionsclaimed by taxpayers—could see those deductions denied. I think that is a bit of a reversesituation to what you have talked about. If that were to occur—and this is hypothetical—thenthe person with the private ruling would sustain those deductions for the period that they hada private ruling for; other investors would lose those deductions for that period.


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Senator SCHACHT—But, as the private ruling is only for a year and has now run out andhas to be renewed, the process is to get another private ruling. As I understand it, while thatperson is getting that private ruling, the others have had their deductions accepted and paid forthe same financial year. How do you crosscheck at this stage of the development of theinvestment—someone gets knocked over, fine, but then you have to go back and crosscheckthe system? There will be mayhem, heart attacks and blood transfusions for the others towhom you have said, ‘We’ve changed our mind, you are now going to lose it; pay it back.’

Mr Carmody—The circumstances are such that if there were one of these investmentarrangements, then if, for example, someone applied for a private ruling and we concludedthat the deductions were not allowed, we would obtain information about all the investors sothat there would be equivalent treatment. The suggestion that I would make in the particularcircumstances you are talking about is that it is always preferable to get a product rulingbecause then that applies for investors and you do not have go through the differentarrangements.

Senator SCHACHT—I have heard information that, because of the backlog, people whoare having their private ruling and maybe product ruling queried, there is now a backlogrunning into several months for taxpayers to find out whether they have got their deductionsaccepted. For a lot of small investors, I suspect that creates a bit of a hiccup in their cash flowto pay the running expenses for the next 12 months of the particular investment if it is a fairdinkum investment requiring fertiliser, diesel fuel for the pump, pruning, harvesting, et cetera.Some people would be starting to feel the pinch. Is this just a temporary bulge as you sortthese out—and I accept that there are a lot of bogus ones out there—and over the next 12months the bulge will diminish so that all of these that you are genuinely querying, as youhave the right to, can be dealt with expeditiously and there is not unnecessary delay?

Mr Carmody—There have been comments about delays in some of our product rulings.As you correctly point out, we need to be careful because substantial amounts of money canbe involved. Of course, we always encourage those who are developing to market theseparticular arrangements to come to us as early as they possibly can with the documentation. Imight ask Kevin if he has anything to add on that.

Mr Fitzpatrick—There has been an increase in applications for product rulings in thisbroad area of managed investment schemes. We have found that some have been delayedbecause of the lack of sufficient information. It is true to say that a number of those havetaken some time to get the information so we can then decide whether or not to issue a ruling.We ought to bear in mind, of course, that product rulings are designed to help investorsunderstand the ATO’s view of the tax consequences of an arrangement. It is important for usto ensure that what we are ruling on is the arrangement which will be implemented by theparticular manager or promoter. So we take care in getting the required information from themanager or promoter. Certainly in some cases they can be moved fairly quickly and we try todo that.

It is not in our interest to delay unnecessarily the issue of rulings which can provide somedegree of certainty for investors. That is why we introduced product rulings in the first place.We are continually looking at ways in which we can provide that timeliness in issuing of therulings. For example, we are providing information on our web site about the sorts of issueswhich cause us concern—in other words, some warnings for investors and promoters of issuesor areas they need to be careful about and telling them that if they have any doubts theyshould certainly come to us. We are always looking to improve our practices, to have the


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required resources and the required level of expertise involved in looking at these applicationsand providing the rulings where they are entitled to a ruling within a reasonable time.

Some delays are caused because of changes to the law—there have been some changes inrecent times to the Corporations Law involving managed investment schemes, or changes tothe tax law. For example, the pre-payments provisions in the income tax law were changed inthe last couple of years. That was announced and it took some time to go through theparliament. We had to wait the passing of the law before we could finalise rulings in that area.In some cases we reissued rulings. From the information I have, whilst there has been anincrease in the average time to issue a product ruling from the date of receipt of theapplication to the date of issue of the ruling, there has not been an increase in the time takenfor the date of receipt of the required information to the date of issue of rulings. So a key issuehere is getting the required information as early as possible from the promoter.

Senator SCHACHT—I can understand that most of that information would be about theexpenditure genuinely being expended. Does the tax department actually inspect the sites ofwhere these investments are taking place?

Mr Fitzpatrick—Yes, we often do that.

Senator SCHACHT—I would have thought that, within a year or 18 months, you wouldwork out that this was a scam—because nothing had happened; for example, they plantedthree olive trees and they died—or that there generally people are managing it, growing it andirrigating it, et cetera. An old farming practice is to say, ‘This bloke is on the go, but this mobare a scam.’ There is an old saying, ‘If your neighbour quotes scripture in the bush, brandyour calves early because he is about to rob you.’ I wonder whether you do those sorts ofthings.

Mr Fitzpatrick—Yes, we do.

Senator SCHACHT—Welcome to the Clare Valley soon, I hope!

Senator CONROY—I think there are some serious issues there. As generous as that offeris from Senator Schacht, I can only caution you.

Senator SCHACHT—That is fine. Thanks for that material.

Senator CONROY—Following up briefly on some issues, I did note recently a mediareport about you taking action against Palandry Wines in Western Australia?

Mr Fitzpatrick—I cannot recall that media report.

Mr Carmody—I do not think we can comment on whether we have taken action against aparticular taxpayer.

Senator CONROY—It was in the paper. It was a company that I think you and I talkedabout some considerable years ago.

Mr Carmody—Did you order an audit?

Senator CONROY—Not at all. I was a humble junior gopher back then.

Senator SHERRY—Back then?

Senator CONROY—It is good to have you back on the team, Senator Sherry! I want toturn to the Inspector-General of Taxation. How would the Inspector-General of Taxation bestructured administratively?


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Senator Coonan—That is a matter under consideration. Clearly, the role and functions ofthe Inspector-General have to be very carefully drawn. The matter is under development andconsideration. It will be subject to a process of public consultation through the Board ofTaxation in the near future. Out of that process, no doubt there will be some finetuning, andlegislation will hopefully be introduced a little after the middle of the year. By that stage,hopefully—with your cooperation in the Senate, Senator Conroy—we can get around toadvertising for a new Inspector-General.

Senator CONROY—I appreciate that it is in the draft stage, but I just thought there maybe some things you are in a position to enlighten the Senate as part of letting the public know.

Senator Coonan—It is a fair question. Obviously there are some difficulties in workingout both the powers and the role—

Senator CONROY—That is what I wanted to come to—for your opinion on them. I willjust run through it and you can jump in whenever you think you can add to the discussion.

Senator Coonan—I was just going to say that, clearly, the relationship that this office hasto the Board of Taxation, the Ombudsman’s Office, the Auditor-General and any other pointsof review have to be defined. Clearly, we need to be able to have the Inspector-Generalidentify where the gaps in the process may be so that it can be a meaningful office that canreally assist in improving the administration and accountability of the ATO.

Senator CONROY—To whom would the Inspector-General report?

Senator Coonan—That is a matter under consideration.

Senator CONROY—To yourself?

Senator Coonan—I would expect either to the Treasurer or to me.

Senator SCHACHT—Or the parliament?

Senator Coonan—These matters are under consideration.

Senator CONROY—Is it the intention for it to be a statutory body?

Senator Coonan—Once again, there are some alternatives, and they are underconsideration.

Senator CONROY—Appreciating that there are some complexities, so I am not trying tohold you to what the final outcome is, do you have any thoughts on what the Inspector-General’s relationship would be with the ombudsman? I am particularly interested in that. Iknow it is a complex area.

Senator Coonan—Yes, it is. We are told, and it is public information, that the ombudsmanis taking up to about 80 per cent of time on individual dispute handling. Obviously we wouldnot want to have duplicated roles. They are some of the areas that would need to beconsidered. There may well be systemic issues that need to be addressed that the ombudsmanwould not wish to undertake because of the role with individual dispute handling that couldbe better handled by the Inspector-General. But these matters are certainly underconsideration.

Senator CONROY—So the Inspector-General is not just a rebadging of the taxombudsman; it is a totally separate entity that will stand alone from the ombudsman.

Senator Coonan—Clearly the relationship between the Inspector-General and theombudsman is a work in progress, but certainly it is not intended that there be someduplication of function.


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Senator CONROY—How do you envisage the relationship with the Board of Taxationmeshing?

Senator Coonan—The board of tax has a policy advising role and the concept of theInspector-General was more one directed to looking at tax administration and what might beotherwise described as systemic difficulties in some of the operations of the ATO and toaddress points of review that do not otherwise exist. So we are looking at where the gaps areand how such an office could meaningfully fulfil it.

Senator CONROY—You did say before that there would be no duplication with theombudsman.

Senator Coonan—It is not the intention that there would be duplication of those functionsbut, in giving the Inspector-General powers to look at systemic problems, there obviouslymay need to be very carefully defined powers that would enable the Inspector-General to lookat an individual case.

Senator CONROY—The ombudsman does at the moment look at systemic issues, though,also.

Senator Coonan—Well, some part of the ombudsman’s function can allow looking atsystemic issues, but certainly that is not the way in which the ombudsman appears to bespending most of their time.

Senator CONROY—I appreciate that 80 per cent, as you said, is spent on individualissues.

Senator Coonan—We have to look at the relationship of the existing office holders and tolook at how the operation and administration of the ATO can be assisted.

Senator CONROY—Mr Carmody, has the ombudsman examined any systemic issues? Iam sure you are in consultation with him over individual taxpayers. I just do not have historyof it. Has he made recommendations?

Mr Carmody—The ombudsman has looked at a range of issues. One that comes to mindis our problem resolution service and the handling of that. The ombudsman has looked at that.I think there would be other examples like that.

Senator CONROY—So he has looked at some systemic issues.

Mr Carmody—He has looked at some.

Senator CONROY—Given that the ombudsman has in the past looked at some of theseissues, to avoid this duplication you are describing would you be looking to restrict some ofthe ombudsman’s current areas of examination?

Senator Coonan—That is not something I am prepared to say. The matter is underconsideration and, as I have explained to you in great detail—I think I have responded asgenerously as I can in the circumstances—they are difficult relationships to reconcile. We arelooking at where there are gaps in the array of review mechanisms to assist the betteroperation of the ATO. How the relationship is developed in relation to existing officers is amatter that is under consideration.

Senator CONROY—I have not read the legislation covering the ombudsman in a while,but basically the ombudsman has open slather to look at any issue to do with the tax office. Isthat a fair way to describe it?


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Mr Carmody—My understanding is that the ombudsman can certainly investigateindividual complaints but the ombudsman also has own-motion powers to look at particularissues which might be related to an individual or might relate to our more general handling ofsome things.

Senator CONROY—Do you have any idea at this stage, Senator Coonan, what the budgetallocation for the Inspector-General would be?

Senator Coonan—There was an indication that an amount of $2 million was set aside forthis office.

Senator CONROY—Have you identified any systemic difficulties at this stage that youbelieve should be one of the priorities for the Inspector-General?

Senator Coonan—There are a number of matters being taken into consideration because itis a matter in development. Shortly it will be subject to public consultation. It is notappropriate that I delineate any further what those issues may be.

Senator CONROY—Mr Carmody, do you believe that there are some systemicdifficulties, that Senator Coonan referred to before, with the tax office’s operation?

Mr Carmody—There are always areas in which the tax office can do better. Anyassistance we get in identifying or pursuing those will always be something that we will belooking for.

Senator CONROY—As part of the $2 million, how many personnel will be part of theInspector-General’s organisation? Have you been able to get that detail?

Senator Coonan—I think you are way ahead of the process. Maybe next time.

Senator CONROY—That is okay. Hopefully we will be able to have a longer discussion.

Senator Coonan—I look forward to it.

Senator CONROY—But the legislation itself, you indicated, would not be till the secondhalf of the year. I am not trying to catch you there. You indicated the second half of the yearwhich would be August, so even though we might have a dollar amount, we might not havethe legislation at the next estimates, I am thinking.

Senator Coonan—We are still on track—Senate willing, of course—to have it in place andup and running.

Senator CONROY—I will try to keep Senators Watson and Mason under control for you.

Senator Coonan—It will be in operation by the end of the year.

Senator CONROY—Functional allocation? I guess that is getting ahead a bit in terms ofthe individuals and the roles they play?

Senator Coonan—Just a bit ahead of us.

Senator CONROY—That is all right. If we are still too far ahead, please say. Would someof the areas that you would have envisaged them covering be dedicated to tax advice? Wouldthat be a function you would envisage in the Inspector-General?

Senator Coonan—Advice to whom?

Senator CONROY—To a taxpayer. I am presuming a taxpayer will be able to access theInspector-General. Individuals would be able to broach the—


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Senator Coonan—I think it is best that we wait and see how the powers are defined, howthe Inspector-General is engaged, who can approach and in what circumstances to get theassistance of the Inspector-General.

Senator CONROY—You cannot guarantee that the Inspector-General—

Senator Coonan—I am not giving guarantees and I am not ruling anything out. I amsimply saying that all of these issues are under consideration.

Senator CONROY—I presume that ordinary taxpayers would be able to access theInspector General’s office.

Senator Coonan—You can presume that Senator Conroy, but I am not confirming orotherwise saying, because the matter is under consideration as to what functions and how theInspector-General can be engaged.

Senator CONROY—I am just surprised. I would have thought it would be an easy one toanswer—that, yes, individual taxpayers would be able to access the Inspector-General. Iwould have thought that is an easy yes.

Senator Coonan—It is not an easy yes; it is under consideration.

Senator CONROY—I cannot envisage a circumstance where individual taxpayers wouldbe not allowed to access.

Senator Coonan—Good. I am glad you think that, Senator Conroy, because you may verywell be right.

Senator CONROY—I would not want the Inspector-General just to be available to the bigend of town. That would not be a fair thing to spend money on.

ACTING CHAIR (Senator Watson)—You cannot put words into the witnesses mouth.

Senator CONROY—No, the witness can try to stop me or refuse to, but I can try!

ACTING CHAIR—You could try.

Senator CONROY—Advocacy on behalf of taxpayers or organisations?

Senator Coonan—These suggestions are very helpful. I mean that sincerely. They are veryhelpful, and the matter is under consideration. I am going to be carefully noting what youhave suggested.

Senator CONROY—I have some more. I am full of ideas. Conflict resolution?

Senator Coonan—Good one.

Senator CONROY—This tax inspector is getting sexier by the minute, I tell you! Wherewould the Inspector-General be based?

Senator Coonan—First of all, we have to work out what the inspector will be doing, andwhat powers the inspector will have. We then will look at where an office would be locatedand whether or not some travel would be involved.

Senator CONROY—Mr Carmody, are you ready to make office space available for theInspector-General?

Mr Carmody—I think that is a hypothetical question, Senator Conroy.

Senator CONROY—You are an independent statutory authority; you could charge themrent. Would you be prepared to—


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Mr Carmody—I would not want to prejudge where the Inspector-General might be. Somemight suggest that being housed in the tax office would be inappropriate—

Senator CONROY—I’ve got faith.

Mr Carmody—for someone independently reviewing the operations of the tax office. I amsure, as the minister has pointed out, that there will be a budget that will be sufficient to housethe Inspector-General.

Senator CONROY—So they are not welcome?

Mr Carmody—I did not say that at all.

Senator CONROY—So you would welcome them if they asked?

Mr Carmody—I am sure that, if there were an approach, we would look at that. But, as Ihave suggested, I doubt that it would be seen as appropriate that the Inspector-General behoused by the Australian Taxation Office.

Senator CONROY—Minister, when would you hope that the Inspector-General wouldcommence operating?

Senator Coonan—As I said, by the end of the year.

ACTING CHAIR—Could you clarify that: the end of the financial year or end of thecalendar year?

Senator Coonan—I think that this financial year would be a problem; but no, we wouldhope by the end of this calendar year.

Senator CONROY—When would its first report to parliament be expected?

Senator Coonan—Let us just get the office described, and then we might work out someof the incidences of that a little later.

Senator CONROY—Would it report to parliament?

Senator Coonan—How the office of the Inspector-General will report is underconsideration.

Senator CONROY—Has anything yet been decided about the Inspector-General, apartfrom its name?

Senator Coonan—Yes, I have taken some soundings. But the formal process will be that,once the model is more developed, it will be given to the board of tax and then subject topublic consultation. No doubt that then will be an opportunity for you, Senator Conroy, tomake some suggestions.

Senator CONROY—I have not had an invitation from the board of tax to even chat withthem, never mind be involved in any public consultation.

Senator Coonan—Maybe you should initiate one; they probably would be glad to see you.

Senator CONROY—No, we are hopeful to have Mr Warburton here; has he been beforeSenate estimates at any stage?

Mr Carmody—I do not believe so.

Senator Coonan—I do not know.

Senator CONROY—Are we able to call him? The Board of Taxation is paid for; would itbe appropriate to invite Mr Warburton to come before us?


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Senator Coonan—That is a matter for you.

Mr G. Smith—The Secretary of the Board of Taxation is available.

Senator CONROY—Does that mean that Mr Warburton, or any member of the board, isnot?

Mr G. Smith—Mr Warburton is not a public servant, as you know.

Senator CONROY—But he is expending public moneys.

Mr G. Smith—This issue was raised with us at the last estimates. At that time we did nothave the secretariat here with us, but the secretariat is available this time.

Senator CONROY—Minister, do you have a problem if we invite Mr Warburton or anymember of the tax board to come before us?

Senator Coonan—He is not a public servant.

Senator CONROY—But he is expending public funds. The Board of Taxation expendspublic funds in its duties; it is not a secret society. Do you have a problem if the Senate invitesMr Warburton as the representative? I am happy for you to say, ‘No, he is not available on theday; someone else can come’. But do you have a problem with that?

Mr G. Smith—It is a non-statutory advisory board. It would be unusual for you to call anon-statutory board.

Senator CONROY—Mr Jordan came before us once.

Mr G. Smith—As I say, who the Senate wishes to invite is up to the Senate. But, if thereare questions about the operations of the board, we have made the secretary of the boardavailable.

Senator CONROY—There are some questions relating to board policy and those sorts ofthings that we want to ask, which I am just not sure that the secretary would be in a positionto reveal. I would not want to put the secretary in a difficult position.

Mr G. Smith—The secretary, who reports also to me, is part of the Treasury; the Treasuryprovides the secretariat to the board. The secretary is responsible for the funds andexpenditures of the board. But the board is a non-statutory advisory board, as you know.

Senator CONROY—That does not stop us from asking the minister whether she is happyfor us to invite and her to encourage a member of the Board of Taxation to appear before us.

Senator Coonan—That could be considered, but it is a matter for the senators as to whomyou invite.

Senator CONROY—But if we invited them—and that is a something for us to consider—then would you happily encourage Mr Warburton or a member of the board to come?

Senator Coonan—I would consider it.

Senator CONROY—I will formally write to the secretary for the next Senate estimates. Iintend to invite Mr Warburton. Do I have your support?

Senator Coonan—It is a matter for the committee as to what the committee wants to do.No doubt you will write and there will be a decision taken by the committee. At least that ishow it was when I was over that side of the desk.

Senator CONROY—I cannot remember the last time a witness was knocked off by thecommittee. I hope you are not suggesting that you rely on the tawdry effect—


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Senator Coonan—I am not a member of the committee.

ACTING CHAIR—It is a committee decision.

Senator CONROY—I just do not remember the last time. Did you ever have a witnessdenied by a majority of members on a committee, Senator Coonan, under a similarcircumstance?

Senator Coonan—Which committee?

Senator CONROY—Any committee that you were on at estimates.

Senator Coonan—That is testing my memory. I am not entirely sure. I would have to goand search my recollection more thoroughly than I can do now.

Senator CONROY—Given that we spend taxpayers’ money—

Senator Coonan—Who? Witnesses?

Senator CONROY—and, from that last discussion, quite considerable amounts oftaxpayers money, I cannot see why there would be a problem.

Senator Coonan—That is a matter for the committee.

Senator CONROY—That may just speed up that consultation process for us, given thatwe are not part of the Board of Taxation.

Senator Coonan—It is a public consultation process. Whether or not you participate in itis no doubt a matter for you.

Senator CONROY—Can you give us a guarantee that the Inspector-General will not be aformer MP or senator?

Senator Coonan—Pre-empting who the Inspector-General is going to be is really gettingahead of the process.

Senator CONROY—Michael Baume is available.

Senator Coonan—My view about it is that the Inspector-General should be certainly anindependent person with an excellent knowledge of the tax act and a good knowledge ofbusiness. There probably are many MPs who qualify anyway.

Senator CONROY—You are not suggesting Mr Fahey is an independent.

Senator Coonan—He already has a job, I think.

Senator CONROY—That is true. Senator Watson would be eminently qualified.

Senator Coonan—He has not indicated his availability.

Senator CONROY—I am sure if you had a quiet chat with him—

Senator Coonan—I know he is a rogue on the superannuation committee.

Senator CONROY—He is widely acknowledged as—

ACTING CHAIR—Next question.

Senator CONROY—Would you be available, Senator Watson?

ACTING CHAIR—Next question.

Senator CONROY—So that was a guarantee there would be no former Liberal ministers,senators, state premiers? Is Mr Kerin not available?


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Senator Coonan—I think it is pre-empting who is going to take the office that will beobviously subject to a rigorous process for selection. I would expect it would be a publiclyadvertised position.

Senator CONROY—According to the government’s announcement on 15 October 2001,the proposed Inspector-General of Taxation is supposed to strengthen the advice given togovernment, act as an advocate for all taxpayers, and be an avenue for more effective conflictresolution. That was in the statement and was partially why I was raising those issues. I amsurprised you cannot confirm what was in the statements.

Senator Coonan—How you give shape to it is a matter under consideration. Whether ornot all of those issues or functions are included, and others added, is a matter that is currentlybeing consulted about.

Senator CONROY—So you can confirm that the Inspector-General will act as anadvocate for all taxpayers?

Senator Coonan—Of course, the Inspector-General is an advocate. But how the Inspector-General is an advocate for all taxpayers is a matter for development.

Senator CONROY—He could do that well without meeting any of them?

Senator Coonan—I am not going to pre-empt how the Inspector-General would do his orher job.

Senator CONROY—I am just intrigued how the Inspector-General is going to be able toadvocate on behalf of all taxpayers if they do not have access to him.

Senator Coonan—Senator Conroy, you show very limited imagination.

Senator CONROY—People say that about me all the time.

Senator Coonan—There well may be issues that do not require meeting an individualtaxpayer that are otherwise a systemic problem where the Inspector-General can provide someassistance to all taxpayers.

Senator CONROY—They will just through osmosis—

Senator Coonan—There may be complexity; there may be other issues where you do nothave to meet every individual taxpayer to be able to provide.

Senator CONROY—I am happy to accept they can meet just one individual.

Senator Coonan—You want to have one, do you? Maybe you can have a nominee.

Senator CONROY—I am pretty sure I know some people who are going to get anominee, but I was just hoping taxpayers might get a guernsey as well.

Senator Coonan—The taxpayer is hardly ruled out.

Senator CONROY—I am asking you to rule them in. I am just surprised that you do notwant to rule in that the Inspector-General will accept a visit from a taxpayer and be able to acton a taxpayer’s behalf. I am surprised that you do not want to give us that guarantee.

Senator Coonan—It is a matter of whether or not an individual taxpayer may be betterhelped through the ombudsman’s office. That is why I took some trouble to explain to youthat what is involved in developing the office of Inspector-General is to look at where therecan be value adding in the process and where the individual taxpayer may otherwise not haveredress or a point of review.


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Senator CONROY—Given that they are going to be advocating for all taxpayers, will theadvocacy role of the Inspector-General be one of public advocacy or private representation?

Senator Coonan—Every taxpayer in this country has an interest in the system workingwell. How the Inspector-General carries out that function is a matter under consideration.Obviously if you are dealing with matters to do with people’s private interests there may begood reason for there to be confidentiality attached to that form of inquiry. Obviously, theInspector-General will need to report. The functions of the Inspector-General and theactivities carried out will be public.

Senator CONROY—Will taxpayers be able to phone the Inspector-General and make anappointment?

Senator Coonan—Senator Conroy, the matter is under consideration as to what functionsthe Inspector-General will have. It will be a matter then no doubt for the Inspector-General todevelop procedures and appropriate ways to interact with either individual taxpayers orgroups of taxpayers and how the Inspector-General is to be accessed.

Senator CONROY—With the ombudsman you just phone the ombudsman’s office andmake an appointment to go and see either the ombudsman or their officers. I am justwondering if that is how this model will work.

Senator Coonan—It depends on the functions and what the Inspector-General is doing asto whether it is necessary to have individual appointments or mass appointments, to makeannouncements on the television or to have seminars or forums.

Senator CONROY—Can you give us a guarantee that even one taxpayer will ever get tomeet the Inspector-General? They get to meet the ombudsman. They get to meet MrCarmody. He is very accessible.

Senator Coonan—I would not be as concerned as you are about that because the office ofthe Inspector-General, its functions and powers and how the Inspector-General will operateand what the Inspector-General will address are still under consideration.

Senator CONROY—I am interested in a potential conflict in the role. At the moment thedescription is fairly broad. It may be that when you have refined this you will be able to takeus through it. I am just interested in how the Inspector-General can be an advocate fortaxpayers and an avenue for conflict resolution at the same time. They seem to be inherentlyconflicting roles. Chinese walls?

Senator Coonan—No. I do not really follow where you see the conflict. Can you perhapsjust elaborate a little bit?

Senator CONROY—Would this not be like the lawyer being the lawyer for the defenceand the trial judge.

Senator Coonan—I do not accept that.

Senator CONROY—You think they can balance those roles?

Senator Coonan—Absolutely.

Senator CONROY—What is the status of proposals to move the power to develop anddraft tax legislation from the ATO to Treasury?

Senator Coonan—There is no announced policy to that effect.

Senator CONROY—Is it under consideration?


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Senator Coonan—I do not think so. It is certainly not announced policy.

Senator CONROY—You are the minister. Is it under consideration? You do not think so?Do you know?

Senator Coonan—It has been raised by business with me as an issue that they wouldcertainly like to see addressed and many taxpayers would like to see addressed.

Senator CONROY—Have you had any individual taxpayers knocking on your door to saythat, or just the business community?

Senator Coonan—The business community are individual taxpayers as well.

Senator CONROY—That is true. You have chosen the word ‘individual’ to include a classof people I probably was not including, so I am trying to find another word. Is there a massgrassroots movement out there in the community for the power to be moved from the ATO? Iaccept the point you are making that the business community have long and loud wanted tostrip Mr Carmody of this power. I just had not bumped into people on the street talking aboutit. Is there a grassroots movement for it?

Senator Coonan—You obviously move in different circles to me.

Senator CONROY—There is no question I move in different circles to you. I am justtrying to ensure that those circles of yours get widened, and hopefully the Inspector-General’s.Mr Smith, would you be happy if these powers were transferred into Treasury? You wouldwelcome that?

Mr G. Smith—You are referring to them as powers. Essentially what you are dealing withis the function of developing policy and legislation. In the case of providing policy advice,there has been a long practice for the Treasury and the tax office to be sources of policyadvice to the government. The Board of Taxation is now another source. In the case oflegislation, in many areas of public administration, including within the Treasury portfolio, itis usually the case that the provision of instructing advice to the Office of ParliamentaryCounsel is done by the department rather than by the administering authority. In the case oftaxation, the leadership of the teams that provide those instructing documents and advice tothe Office of Parliamentary Counsel is with the tax office. Of course, the product is in fact notwithin the power of the tax office. The product has actually been produced by the Office ofParliamentary Counsel, and the power to approve or not approve it for submission toparliament is with the government. The Treasury is already involved in advising on that. Thedecision whether or not it becomes the law is the decision of the parliament and thenultimately the executive. That is the system.

You used the word ‘power’. Essentially all you have got here is a bureaucratic arrangementand it is within portfolio. There are a variety of views about the best way to organise that.Some people have been advocating a third place for it. I think the Ralph inquiry advocated amatrix team approach in which you might call the integrated design process. They put that onthe agenda in 1999, I think it was. There have been quite a lot of representations on this overthe last couple of years, I suppose since the Ralph proposal. It is essentially an arrangementfor coordination and leadership of advisory processes; it is not a power process or a decisionmaking process.

Senator CONROY—Thank you for clarifying that at some considerable length.

Mr G. Smith—That is my full answer.


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Senator CONROY—How do I let you know when I want the short answer in the future? Iam aware that there seems to be a growing ABC view on this—anyone but Carmody to be incharge of this area. Mr Carmody, the business community, as Senator Coonan has indicated,are making very strong representations about this. Do you believe that their complaints aboutthis inherent conflict they seem to believe exists are a fair view?

Mr Carmody—On the particular questions you have asked of where the function islocated, that is a matter for government. I think that in the area of taxation there will alwaysbe different views about what the outcome of the law is and how it operates. While we haveresponsibility in this we have been trying to improve the processes and make them more open.

Senator CONROY—But do you think they are fair criticisms of the tax office—I do nothave the exact quotes in front of me but I am sure you have seen them more than I have—interms of this conflict they believe is inherent between drafting and developing—

Mr Carmody—The only comment I would make on that is that I think, whatever theleadership arrangements are on the development of the law—and, as Mr Smith said, ultimatedecisions are not mine or Treasury’s at all—

Senator CONROY—I am not asking about a decision, I am asking about the views of thebusiness community—

Mr Carmody—I believe that the tax office has a very valid, important role in contributingto the development of tax legislation and to the extent it was ever suggested that we would bedivorced from that, I would reject that.

Senator CONROY—The Ralph report recommended the development of integrated teamsbringing together the Office of Parliamentary Counsel, the ATO and Treasury. As I understandit, this has been implemented at least partially, for instance in drafting the consolidationlegislation. Is that correct?

Mr G. Smith—To some extent, of course, there has always been a team approach and thathas continued. I think, essentially, that you could characterise the Ralph proposal as greaterformalisation of it but it is certainly a process that has always been there and certainly hasapplied in the consolidation project. I should also say that, in those processes, I agree fullywith the commissioner that the tax office has a great deal to contribute.

Senator SHERRY—I want to go to issues of SGC enforcement. You were talking earlierabout the breakdown of tax collected on superannuation and—if it was not clearlyunderstood—what I was seeking was a breakdown within the figure given of surchargecollections, fund earnings collections and the tax collected on exit. If you cannot give meprojections, tell me what the historical data is. I would prefer both.

Mr Bator—I can do a few things right now; I can confirm the figures that I gave youearlier are total tax collections from superannuation funds, and I can provide someinformation on the ETP tax for those years that I mentioned: 1997-98 was $430 million; 1998-99 was $405 million; 1999-2000 was $425 million; 2000-01 was $440 million. As to whetherthere are separate figures for contributions and earnings taxes, it is not a figure that isprovided to us. It is not a figure that we have readily available; it would require estimates and,as I said before, they would not necessarily be very reliable.

Senator SHERRY—Given we have total tax collection surcharge details and the exittaxes, we can get some indication of the earnings taxes because it is the figure left.

Mr Bator—There are two figures left.


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Senator SHERRY—The superannuation contributions tax, yes.

Mr Bator—That is right.

ACTING CHAIR—Plus the adjustment for the repayment of the eligible terminationpayments.

Senator SHERRY—The ETP payments, yes. If you have any indicative ratio that can givean indicative figure I would not hold you to it, but I would just be interested in seeing whatthat was. So you will take that query on notice?

Mr Bator—I will have a look at those and see if we can do some estimates for you.

Senator SHERRY—I have some queries relating to SGC enforcement. We have talkedabout the secrecy provision before, and I do want to pose a question to Mr Carmody aboutthat, but before I do that I will give you a couple of case studies, one of which I might havedrawn to your attention. I will do this as quickly as I can before I go to some questions. I havehad a number of employees from a company called Fibretec, located in Devonport, on thenorth-west coast of Tasmania, complain to me about the employer not paying superannuationguarantee. One employee started work in 1997 and, in the two years of his employment,commencing in 1997, he only received $147 in contribution. His balance has been goingbackwards and is now $47, and he believes he is owed a substantial amount of money but it isyet to be paid. The person who has complained to me is not the only one; there is a significantnumber of other employees, according to him, who are owed moneys going back to 1997,which is a long time ago.

ACTING CHAIR—I think they have got that case under investigation.

Senator SHERRY—I believe it is under investigation. I will get to some issues relating tothe general problems shortly. One I have not raised before is Dimech, an auto-electrical firmtrading in Devonport for two years. An employee received no superannuation for his period ofemployment from 7 August 1995 to 30 June 1996. He notified the ATO in May 1997 and isstill to receive any superannuation contributions. In desperation he came to me, and I wrote tothe tax office in May last year; he only came to see me in May last year. I got a response fromthe tax office on 25 January. I will not rehash the debate about response times, but I got aresponse on 25 January. I regard it as a fairly standard letter within the secrecy provisions.However, in the meantime the firm went into receivership, I think it was in August.

One thing that concerned me about a letter was that in the response from the tax office,signed by a Ms McGrath on your behalf, the tax office do not even appear to have been awarethat the employer had gone into receivership five or six months earlier. The former employeeis still waiting for his money. The liquidator was appointed on 26 June 2001. I am concernedat the length of time this issue has taken and at the fact that the tax office do not appear tohave known that the liquidator was appointed, as it is not mentioned in the letter to me.

A couple of other companies are Aardvark Security; Allied South Pacific Protection,another security firm; and Traffic Control Operations. All these firms are located in Brisbane.There is another firm in Perth called Lifestyle Clothing Agency. Before I get to that, I willdetail the issues with Aardvark Security, Allied South Pacific Protection and Traffic ControlOperations. Aardvark Security involves non-payment of superannuation between 1995 andSeptember 1997. There has been $395 recovered for the employee, but $3,000 is stilloutstanding. A complaint has gone to the tax office. Allied South Pacific Protection has$1,000 for an employee from between September 1997 and June 2000 still outstanding.Traffic Control Operations in Brisbane has $3,000 outstanding for an employee. I do not have


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the date from when those moneys are outstanding. Lifestyle Clothing Agency is located inPerth. An employee is owed $7,333.56 dating back to the financial year 1997-98.

Dealing with the secrecy provision first, my understanding is you cannot provideinformation back to the complainant—and in all cases the individuals have complained to thetax office—about what is happening with the collection of moneys that are owed to themthrough their superannuation. It is still the case.

Mr Bator—That is correct.

ACTING CHAIR—Except to say it is under active consideration.

Senator SHERRY—Mr Carmody, there are frustrations. These are not the only complaintsI have had; I have had a lot more. Has there been any consideration given to being able toprovide more information to complainants so that they at least know what is happening withthe treatment of their case?

Mr Bator—I might just start there. The situation is that for some time we have had underactive consideration just how much information we can provide to people. One of the casesyou referred to there, where it appeared that the tax office had information or was not awareof information that a liquidator had been appointed, is an area that I personally had becomeaware of just recently in a case that was coming to me. There was information available thatwould have probably provided a much more suitable outcome for those people at an earlierstage. I have a project going now to make sure that we can get access to information as soonas it is available to the ATO, and through other sources, about the state of a business.

As you would probably be aware, we do get complaints quite late from people. You refer tothe security industry. We have been working with that industry because they are notoriouslydifficult payers. Many people work in the security industry as a part-time occupation. Whilethey are there they are quite happy to receive the payment and some time down the track theycome to us and say, ‘I have not had my entitlements paid.’ We are then dealing withsomething that is a few years old. We are also dealing with situations where businesses havenot gone into receivership or liquidation but they still exist somewhere out there with noassets. They are just a paper sham at that particular point. It is difficult. There is nothing onthe public record to provide people at that stage with exactly what has happened to thebusiness. But we know that there are no funds likely to come out of the exercise.

I am concerned about that matter and I am glad you raised it. It is something we arelooking at. We are concerned about the fact that it seems a bit odd that a person can wait along time and we send a letter that basically says we are still doing the best we can possiblydo. In one case in Tasmania last year, which was a success for us, there was no moneyavailable from the company. Some time down the track we were able to garnishee somemoney. An insurance payment was being made to one of the directors of the company and wewere able to provide superannuation. It was not all of the money, but we were able to do that.

Senator SHERRY—I wanted to go into a bit more detail about the issues you are movingto now. I do not know whether the Taxation Commissioner appreciates the frustration ofindividuals who complain. The secrecy provisions mean that the tax office cannot respond. Itseems to me that when it is the person’s own money, albeit through their super fund, theyshould be entitled to get some feedback about the level of progress, if any, that is occurringwith their case.

Mr Carmody—I can understand that frustration because that frustration would be sharedon our part. To the extent that we have information that is valuable it is frustrating for us to


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have to send a bland letter. However, we are dealing with issues of secrecy which are fairlyfundamental to the operation of our tax system.

Senator SHERRY—Do you believe that in this sort of case it is fundamental—not to beable to give information to a complainant about moneys that are their moneys, albeit in asuperannuation fund?

Mr Carmody—The issue with this is that in giving information about their money you aregiving them information that goes more broadly into the affairs of another taxpayer. That is adifficulty. I would prefer to have another look at this to confirm the position in my mind,because I know that when we were looking at some of these schemes initially the view wastaken that we could not give the individual investors details of particular schemes even thoughit was the whole nature of the scheme that was causing them to lose deductions. That is amuch closer relationship, but on advice we came to the view that we could provideinformation there. I do not know whether that just signals the possibility that we should lookfurther at the superannuation guarantee side, so we will do that.

ACTING CHAIR—It would be helpful if you could.

Senator SHERRY—I know that my colleague from Tasmania Senator Watson gets similarcomplaints. We swap stories sometimes about the feedback. The Senate select committee, asMr Bator would be aware, has conducted an inquiry into the enforcement of the SG. On page843 of the Hansard, it was you, Mr Bator, who said that the ATO was currently undertakingan independent benchmark of compliance to pinpoint changing areas of risk in relation to SGcompliance. What stage are you at with the benchmarking?

Mr Bator—What we have been doing since the last time I reported on that is essentiallyworking through the data holdings of the ATO. By that I mean information such as paymentsummaries, group certificates and the like. We have been comparing that with surchargeinformation and we have been running a couple of pilots that are giving us some insight intowho are compliant and who are noncompliant employers. We have examined a range of thoseemployers and we feel fairly confident now that we are able to identify the noncompliantemployer. Over the years, as you would be aware, we have had research going for nearlyevery year since about 1994-95 with various independent surveys of compliance.

In this work that I am referring to in the data matching we have pretty much been able toconfirm a lot of that independent survey of compliance levels. I am still reasonably confidentthat we have about 27 per cent of employers who are partly compliant. That means they areeither not paying for all of their employees or they are underpaying for some. We have aboutone per cent of employers who are fully noncompliant. The work that we are trying to do isobviously to try to identify that group of employers, and we are hoping to be able to notifythem as soon as we can and basically get a default assessment out to them to make thepayment.

Of course, ongoing intelligence and vigilance by employees at an early stage are crucial.As I have mentioned, it is much harder to collect an old debt than it is to collect a fairly newdebt. Notwithstanding this work that we have been doing, it will still mean that we areprobably six or seven months after the end of the financial year in identifying thesenoncompliant employers. So as much as I possibly can I have been, through whatevermechanisms, through radio and other activities, encouraging people to check with theiremployer to ensure that the employer is paying superannuation, and if they have complaints toget to us on 13 10 20. Over the last year we have been getting large numbers of employeenotifications and our success rate in knocking those over has also improved markedly.


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Senator SHERRY—I am going to get to that in some detail, but 27 per cent partlycompliant—that might be 90 per cent, 20 per cent or whatever—is still a very substantialproportion of employers.

Mr Bator—Yes, but once we bring it to their attention that they have not paid enough for aparticular employee or they have missed a particular employee, a lot of those do pay. We havehad some pretty good success on that. What we are talking about here is that they may haveregarded a particular employee as a casual employee, or there might have been an issue withwhether a person was a contractor or an employee, and there are other calculation errors thatemployers make. That is what we are talking about in terms of partially noncompliant. Theyare not deliberately doing so.

Senator SHERRY—How many employees do we have at the moment, approximately?

Mr Bator—I work on a basis of about 800,000 employers.

Senator SHERRY—No. How many employees?

Mr Bator—More than 7 million, I think.

Senator SHERRY—With 7 million employees, if you have one per cent of employers notcomplying at all we could be looking at anywhere between 35,000 to 70,000 employees whoare not receiving what they should be receiving.

Mr Bator—Yes, we are not happy about it and we are trying to do something about it.

Senator SHERRY—On pages 837 and 838 of the select committee Hansard, Mr DavidDiment, Assistant Commissioner of Taxation, provides the Goulburn region and thehairdressing industry as respective examples of high risk regions and industries in terms ofSG noncompliance. Have you been able to identify other high risk regions and industries?

Mr Bator—Yes. We have identified the security industry, panel beating, hairdressing andcasual industries like cafes and restaurants. Those are ones that we have to be vigilant aboutall the time.

Senator SHERRY—How many staff in the ATO are currently engaged in the SGcompliance activity?

Mr Bator—I think it is about 120.

Senator SHERRY—How many of those are based outside the major capital cities—inregional areas which have been identified as high risk?

Mr Bator—Virtually all the people who work on SG are in either Adelaide, Melbourne,Brisbane or Sydney; however, we operate by and large through either data matching,telephone contacts or employees notifying us of noncompliance, and we also utilise theservices of field staff from other business lines in the ATO.

Senator SHERRY—You do not think it would help to have a greater number of staff inthe high risk regions?

Mr Bator—No, I do not think it would help. We work pretty successfully by contactingemployers, writing to them, visiting them—that is done through other lines—and checkingcompliance levels. We get a fair level of leverage from other parts of the office through theiractivities, and having people together allows intelligence to be gathered, practices to bedeveloped and efficiency.

Senator SHERRY—I think that, if you were prepared to put someone in Launceston orDevonport for a year, Senator Watson and I could keep them pretty busy. We seem to be


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getting our fair share of complaints. You mentioned sharing intelligence with the GSTbusiness line. Are there other steps you have taken to coordinate audit activities between thesuperannuation business line and other business lines? This issue was raised as a concern inAudit Office report No. 16.

Mr Bator—As recently as two days ago, I met with people from other business lines todetermine how effective that strategy can be and whether we can improve on what we havebeen doing up until this point. We have developed, particularly with small business in mind,some questions on SG—such as ‘Are you paying superannuation guarantee out? Who are youpaying it to? What is the fund?’—that we would be asking them to ask of employers as theyare visiting. They would then give us some intelligence back on that, and obviously if theiranswer is no then that would lead to an immediate letter from us saying, ‘You are employingpeople; please give us some information.’ We are trying to enhance those strategies all thetime and I think they will work.

Senator SHERRY—Do you think the proposal to have SG paid quarterly will improve thecompliance?

Mr Bator—At the moment about 83 per cent of employers pay quarterly or better. That isa level of compliance that the quarterly will capture, and we are hoping it will continue. I amconfident that, if that legislation is passed, it will enable us to establish debts more quickly—and that is a big thing—on a quarterly basis. I am confident that would help compliance.

Senator SHERRY—In the evidence to the select committee you referred on page 842 tothere being $75.9 million to collect. How much of that $75.9 million to collect has beencollected? That of course was some months ago.

Mr Bator—It was. Since then we have been doing a fair bit more work on raising debt andestablishing debt, which is an important thing. Currently we have outstanding about $104million in SG. That is since inception of the SG and that is against a base of raising revenue ofabout $568 million. We have collected about $399 million of debt and we have had to,obviously, write off some in that equation because businesses have gone out of business andthe like.

Senator SHERRY—Do you know what figure you have had to write off?

Mr Bator—Yes, I do. We have written off $65 million.

Senator SHERRY—You mentioned $104 million. The last figure you gave us was $75.9million. It has gone up.

Mr Bator—Yes, of course. We have been much more active over the last year or so interms of raising new debt. That might go back to earlier years, and you referred to 1997-98.We have tried to improve our strategies of identification and of raising debt. It is a simplematter to identify debt—it is not that simple, but it is simple. The next question is collectingit.

Senator SHERRY—That was my next question. You have identified more; it is actuallycollecting it or ensuring it is paid to the fund—

Mr Bator—We are collecting at a higher rate, though. Within the ATO it is a high prioritydebt for collection. Again in the last two days I have spoken to our debt area. We workedthrough strategies of how I could work better with them and how we can do better to collectdebt, raise it earlier and the like. Since I reported to you in June 2001 we have certainly raiseda lot more debt and we have collected a lot more debt.


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Senator SHERRY—The figures you gave to the inquiry on 17 October 2000—it may nothave been you personally; I cannot recall—of complaints against employers received sincelate 1998 stood at 20,260. What is the current number of complaints against employers sincethat report in October 2000?

Mr Bator—Those figures were, if I can recall, as at 30 June. Over the last 12 months wehave received something like 11,100 complaints.

Senator SHERRY—The last 12 months from when?

Mr Bator—From 1 January 2001 to 31 December 2001, and we have completed 15,600.Now, apart from dealing with people who are contacting us and are concerned about anemployer potentially not paying, we also, obviously, do our own work on identification ofthat.

Senator SHERRY—You referred earlier to the money that is written off, that you justcannot recover. There are a number of employment protection schemes that the governmenthas. Superannuation is not provided for in those employee protection schemes, is it?

Mr Bator—That is my understanding.

Senator SHERRY—On page 838 of the Select Committee on Superannuation andFinancial Services Hansard, you note that since 1997 the ATO had prosecuted 130 employersfor failing to meet SG obligations. I do not know to what date that was. What is the update onthe number of prosecutions?

Mr Bator—It is not a figure that is readily in my head. I do not have an update of thosefigures here, but I can say that, in line with the ANAO report on our prosecutions and theconcerns of the committee, we have reviewed our procedures for prosecutions and we nowhave in place what I believe is to be a very good process for referring prosecution. What weare talking about here, of course, is prosecuting for failure to provide information. By andlarge, we are trying to get to a point where we get the information from the employer withouthaving to go to that point of prosecutions, because it just does not add if we can getinformation from them. We have streamlined our processes to get information from employersearly on to raise default assessments. I do not have a figure to update that.

Senator SHERRY—You could take on notice the prosecution figure. Could you give me alittle more detail about the prosecution strategy? You did mention it and you mentioned itagain now. In what way have things changed in terms of the attitude to prosecution?

Mr Bator—I guess one of the concerns that the committee and others have had is that weare not prosecuting enough people. I think there was a misunderstanding around the fact thatthere was a view that we were prosecuting for failure to pay. There are legal recovery actionsfor failure to pay; that is not a prosecution activity. What we are talking about is prosecuting ifpeople fail to comply with a request, and largely that is around information. So essentially wehave got a situation where first of all we are trying to ensure that we can get the informationand use the mechanisms to get the information from employers, whether we have the letterswe are sending out to them more readily or whether we are using other sorts of information.We then have a priority in the ATO for people nominated there to do prosecution work whenwe have got it. We have got a new prosecutions policy which is available, and we provided adraft to the committee last time.

Senator SHERRY—And the draft has now been confirmed and is active?

Mr Bator—Yes.


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Senator SHERRY—I have to go back to the earlier questions that were taken on noticeabout the tax paid on superannuation. The other issue that I did not mention at the time but Iask you to take on notice now is the amount of income tax forgone in tax concessions onsuperannuation.

Mr Bator—I refer you to page 104 of the 2001 tax expenditure statement, which waspublished in December 2001. I think that has the level of detail that you are interested in.

Senator SHERRY—Is there no greater detail than that? I had looked at that.

Mr Bator—I checked today with a group of people in the ATO and with the RIM peoplehere and they have referred this document to me.

Senator SHERRY—But there may be unpublished data.

Mr Bator—I can check whether there is unpublished data, but this is the data that wasprovided to me today.

Senator SHERRY—It is not the published data that I am after, as we have actually had alook at that; it is whether there is any additional information that can be made available to theSenate.

Mr Bator—I can certainly check that. I spoke to the people in our revenue analysis branchand others, and they have referred me to this document. But I can check.

Senator SHERRY—There is some draft legislation that I have been shown about thetaxation of temporary residents who move overseas. Is there someone here who is familiarwith that legislation?

Mr Bator—Is this the proposed measure?


Mr Bator—I might be able to answer your question.

Senator SHERRY—Before I go to that specifically, what is the highest tax rate inAustralia at the present time?

Mr Bator—It is 48.5 per cent with the Medicare levy.

Senator SHERRY—Is there nothing else that is effectively taxed at a higher rate than48.25?

Mr Bator—Not to my knowledge.

Senator SHERRY—The draft legislation we are currently having a look at proposes acouple of rates of tax. I think the one that would apply most commonly is the proposed 30 percent rate where moneys are transferred out of the country by temporary residents—howeverthat is defined. My understanding is that, for those persons, when the superannuationcontributions are paid on their behalf to the fund, the fund would be paying the 15 per centcontributions tax on their behalf. Is that correct?

Mr Bator—Yes.

Senator SHERRY—And depending on their income level, they would be paying asurcharge?

Mr Bator—Yes.

Senator SHERRY—So if they were earning—

Mr Bator—Over $72,000 or $73,000.


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Senator SHERRY—I think it is higher than that. It is $85,000, isn’t it?

Mr Bator—It is in the range of $72,000 to $73,000.

Senator SHERRY—But, if they were on about $102,000 or $103,000, they would bepaying the full surcharge of 15 per cent?

Mr Bator—Yes.

Senator SHERRY—So it is 15 per cent contributions tax and, if you are a high incomeearner on full surcharge rate, it is another 15 per cent and if they transfer the money out of thecountry they pay 30 per cent.

Mr Bator—That is correct. That is the proposal.

Senator SHERRY—So that is effectively 60 per cent tax.

Mr Bator—We are talking about 15 per cent on the contribution, another 15 per centpotentially on the surcharge—

Senator SHERRY—If they are at that income level.

Mr Bator—and 30 per cent on whatever amount they are taking out.

Mr G. Smith—You cannot add them, Senator. At the very least you need to apply thesecond 30 per cent to 70 after taking out 30.


Mr G. Smith—So you end up with 51 per cent when you do that, not 60.

Senator SHERRY—Fifty-one?

Mr G. Smith—In addition, the problem is the timing difference. The 48.5 per cent applieson an income tax basis. That is for a transaction in one year, whereas what you have here istaxes spread over a number of years so you have a compounding effect.

Senator SHERRY—So you are claiming that the 51 per cent figure that you justmentioned effectively equates to the value of the tax concession for a high income earner.

Mr G. Smith—It could be equivalent to a significantly lower aggregate tax rate when youtake account of timing effects.

Senator SHERRY—My understanding is that the 30 per cent applies to people regardlessof income level. What about a person who is on only $30,000 or $40,000 a year who is atemporary resident? They are on a much lower income tax rate when they are in the countryand yet the rate that is being applied is the 30 per cent and the 15 per cent contributions tax—albeit the surcharge rate, would not exist for people in that category.

Mr G. Smith—They will not have the surcharge, presumably. This is a voluntaryarrangement; they do not have to do this. What is happening here is that they are being giventhe opportunity to take money; they do not have to take money.

Senator SHERRY—Yes, I understand they do not have to take it.

Mr G. Smith—The tax is being introduced in that context. When you do taxes over time,you have a concessional benefit from the arrangement for a period of time and then there is atax at the end.

Senator SHERRY—I accept that. However, these people by their very nature are only inthe country for a short period of time, aren’t they?

Mr G. Smith—Obviously that will vary with circumstances.


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Senator SHERRY—But they are not in the system for 30 or 40 years.

Mr G. Smith—It might be four or five years.

Senator SHERRY—Yes, that is right. It could be two, three, four or five years—whatever.So the argument about the time frame that you are putting is much more limited in their case.

Mr G. Smith—I suppose it would depend on the circumstances, but it may or may not be.That is why I think it is appropriate to be voluntary. You would not want to have a systemwhere you had to calculate it for each individual, so a simple system, which is voluntary, hasbeen provided.

Senator SHERRY—I understand it is voluntary, but for people who leave the country—

Mr G. Smith—I am not quite sure. Even for someone who is on, say, a 40 per centpersonal tax rate—there is 15 per cent and then 30 per cent on the remaining $85,000; that isthe way to think about it—it is in the low forties. Then you have the timing advantage of theconcession on top of that, so you weigh those up. It is not exact.

Senator SHERRY—But you must have made some assumptions about behaviouralpatterns because there is a revenue projection. Do you have any comment about thebehavioural assumptions that must have been drawn in order to obtain the revenue?

Mr Gallagher—When looking at the costing, we got detailed length-of-stay data from thedepartment of immigration which, by 47 visa classes, gave us the length of stays in doing theanalysis. So we did have data on the distribution by length of stay, but there was not data onthe distribution by income.

Senator SHERRY—Thanks for that.

Senator CONROY—Could we get Mr Matthews back?

Senator SHERRY—I did have some other questions for them but in another area. I wantto put some questions to the RIM task force. I am not sure what the understanding is. We haveagencies coming on after dinner. Is RIM coming back on Friday?

Mr G. Smith—RIM is part of the tax program.

Senator SHERRY—My understanding is RIM are coming back on Friday.

Mr G. Smith—We have not been told anything.

ACTING CHAIR (Senator Chapman)—You are making a request?

Senator CONROY—Yes, we are requesting. Unfortunately, the interstate agencies areafter dinner, at their request. Apologies to Mr Carmody, if I may.

Mr G. Smith—Is it just RIM you want on Friday?

Senator CONROY—No, I think we will want the tax office back on Friday. My apologies.We would appreciate your availability, Mr Carmody, but, if you are not, we understand. Taxwill spill over to Friday now, I suspect.

Senator Coonan—Senator Conroy, that is very disappointing. You did say we would befinished.

Senator CONROY—We are doing our best, but the Chair keeps calling meetings andslowing us down.


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ACTING CHAIR—That will also depend on how we progress tomorrow with otherportfolios.

Senator CONROY—As I said, I anticipate. We have fixed times—for example, Allan Felsis coming at a certain time tomorrow. So we are locked into a program due to interstateagencies.

Senator SHERRY—What time is Mr Fels coming?

Senator CONROY—Two o’clock. I have good news. My taxpaying GST friend has beenwatching and has contacted me with some further details that Mr Matthews was interested inhaving to help me understand on my taxpaying friend’s behalf. I will put it in the first personbecause that makes it easier for me to explain it. He is very concerned about this particulartransaction. He does not want to breach the GST laws. My friend is a public advocacyorganisation that is registered for the GST and he knows of a fundraising organisation that isnot registered for the GST. The fundraising organisation put on a dance and did not chargeGST on the tickets. That organisation then paid $1,100 for the band that performed. I then tellthat organisation to get that $1,100 back. I then pay the band myself and claim the $100 backfrom the ATO as an input tax credit.

ACTING CHAIR—Are you the advocacy organisation or the—

Senator CONROY—I am the public advocacy organisation. Call it Conroy Inc., if youlike—I am relaxed about that.

Senator Coonan—I am glad the fundraising organisation was able to get insurance for thisevent.

Senator CONROY—Hopefully with your goodwill and your initiative to call the statestogether they will have one now because it will get cancelled next year. I then get the otherorganisation to pay me $1,000 and I give them a tax invoice for that $1,000 and I pay $90.90to the ATO as GST. That tax invoice says that the service provided was net costs of the localdance. What kind of supply was that under section 9.10.

Mr Matthews—Was the band registered?

Senator CONROY—Yes.

Mr Matthews—Notwithstanding that your friend has been watching, I tend to find myselfin the same difficulty as before. I think it would be inappropriate for me to try to provide ananswer to a hypothetical question where you are not giving me the full details of thetransactions.

Senator CONROY—This is not hypothetical. He has done this. He is just worried.

Mr Matthews—Even so, I do not believe that we have been provided with the full detailsnecessary to give an answer. Also it would be particularly inappropriate if, for example, thefacts in this case might be emulating the facts of another taxpayer.

Senator CONROY—I cannot help that.

Mr Matthews—Nor would I. But I think you would appreciate that the best thing to bedone in this case is for your friend—

Senator CONROY—He is very concerned. He has approached me as his member ofparliament and asked me to raise it with the Australian Taxation Office.

Mr Matthews—If he would like to phone me either later tonight or tomorrow, I would bepleased to take the full facts and respond to him in the proper way.


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Senator CONROY—Unfortunately, Mr Matthews, you have been willing to answerhypothetical questions in the past. I have here a Taxation Office answer to a question onnotice which was from Senator Cook on a hypothetical situation, which you seemed perfectlycapable of answering. I am just wondering why you are suddenly unable to assist. I havegiven you all the transactions that have taken place.

Mr Carmody—I think Mr Matthews—

Senator CONROY—It is back to the private binding rulings type rubbish, is it?

Mr Carmody—No, Senator, we want to be—

Senator CONROY—One rule for one and one rule for another. I thought we had gonebeyond that.

Mr Carmody—We would like to respond in the appropriate way.

Senator CONROY—I do not mind if you take it on notice. I am happy if you said to methat you would rather take it on notice, then I would say no.

Mr Carmody—Mr Matthews is expressing a concern that the facts and circumstances maybe seen to identify a particular taxpayer and he is concerned about that issue. We will take iton notice and get quick advice as to whether there are any issues in responding to that, and wewill get that as quickly as we can and we will respond according to that advice.

Senator CONROY—But I actually have a public interest issue with you on this, MrCarmody, and that is the question of this being an application of the tax law—it does notmatter who the taxpayer is. I want to know on the public record what the taxable supply is forthis transaction. I have given you all the details you need; you know that.

Mr Carmody—We will take it on notice and provide as speedy a response as possible. Iwill, however, seek advice as to whether concerns that it has the effect of identifying aparticular taxpayer are real. I only want to do that for safety purposes.

Senator CONROY—You have never at any stage released any information about anyother taxpayer or their transactions. You can’t possibly be identifying anybody.

Mr Carmody—I understand that, but this is only for caution. If you will allow me to checkjust for caution purposes, we will get the answer as soon as we can. It is only a matter ofcaution as to whether people can associate with issues that are on the public record, andtherefore lead—

Senator CONROY—But the public record is not your concern; other people have putissues on the public record. You have not even confirmed that a transaction similar to this hasbeen under your investigation.

Mr Carmody—I understand, and you know that I take very carefully our responsibilitiesunder the secrecy provisions. It is not a matter of whether we have revealed what is on thepublic record; the question is can our actions in responding to something that relates tosomething on the public record be identified as applying to a particular taxpayer?

Senator CONROY—This goes to the whole issue of public and private binding rulings.Mr Carmody, you have got to be prepared to publicly state what a ruling is on a set of facts.You cannot just say, ‘There might be a taxpayer somewhere in the 7 million taxpayers outthere that this might reflect on.’


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Senator Coonan—Senator Conroy, the commissioner has said that he will take it on noticeand give you whatever answer he possibly can that is consistent with his obligations. In allfairness, he cannot do more than that.

Senator CONROY—My concern is that you might be revealing—this is a transaction thatevery single Australian may engage in—

Senator Coonan—I think the point is appreciated, Senator Conroy.

Mr Carmody—Can I say that I am coming from the view that I want to be able to helpyou. Out of caution, I just want to get some quick advice. I will do that, and then we will beable to do it with a clear conscience.

Senator CONROY—Can I add a couple of questions?

Mr Matthews—Could I ask you to actually put those facts down for me, and it may be thatbefore the whole of the session is finished—not tonight—

Senator CONROY—I would like to type it up rather than giving you my handwrittenscrawl, that is all. I promise you that it will make it easier for you to read.

Mr Matthews—I would appreciate that; it would give us some clearly understood facts.

Senator CONROY—No worries. I will add two extra questions. What kind of supply wasthat under section 9.10? Am I really doing something in the course of my enterprise for thesake of section 9.5? The concern of my taxpaying friend is that he may have entered into ascheme to avoid paying GST on the tickets sold by the other organisation. That is really whathe is concerned about: he just does not want to get into a position where he is going to have avisit from you, Mr Matthews—as much as he is enjoying watching us now—

Mr Matthews—I understand that.

Mr Carmody—As friendly a person as he is.

Senator CONROY—I agree; I have said to him, ‘Mr Matthews is a top guy.’

Mr Matthews—You will appreciate that, even when you outline the facts for me, theremay be other questions that we will need to know about their status such as whether they areprofit or non-profit organisations, whether they are related entities—

Senator CONROY—I am happy to engage in an interaction with you on my taxpayer’sbehalf.

Mr Matthews—I would need to know all of that, because that is part of the difficulty thatwe have in providing—

Senator CONROY—I am pretty certain that they are all non-profit, but I am happy toclarify any issues you think need clarifying. Thank you for that. I also want to chat aboutsome additional appropriations. You are seeking additional appropriations of $122.2 million.Of that amount, additional funding to administer the new tax system is in the order of $107.5million. The portfolio additional estimates statements refer to significant increases in non-GST transactional lodgment debt and inquiry workloads flowing from the new tax system.Could you take us through the detail of those additional workloads and costs of each? Whatare the increases in transactional workloads?

Mr Carmody—I do not know whether we have the exact correlation of numbers.


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Senator CONROY—I am just after a rough idea. I was hoping you would be able to letme know what the additional costs were, specifically broken down into the transactionalworkloads, lodgment workloads and debt workloads.

Mr Carmody—There is some overlap here between GST and non-GST. In the area ofAustralian business number registrations we expected 2.1 million and we got 3.7 million. Inthe area of GST registrations we expected 1.4 million and we got 2.2 million. We incorrectlyanticipated that the number of accounts we would have to deal with would go down—they areaccounts where people have a liability arising, paid or otherwise—and, in fact, there was agrowth. A lot of that had to do with how businesses chose to register. A number of them choseto register individual operations and that increased substantially the number of accounts thatwe had to deal with. There was a 23 per cent growth in the number of accounts.

Associated with the number of accounts, because the number of occasions on which peoplenow make payments has been increased, the number of debt possibilities has increased, sothere has been increased workload in those areas. We have also seen a substantial increase ininquiries to the organisation, from the tax profession and taxpayers individually. There hasbeen more than 100 per cent growth in some of those areas. We made the best possibleestimates that we could beforehand, but they proved to be wide of the mark.

Senator CONROY—So, all up, the new tax system is costing $107 million more thanexpected?

Mr Carmody—We underestimated the amount for the operation.

Senator CONROY—Does the ATO have any information on what this additional activityis costing businesses or consumers?

Mr Carmody—We have not done research on that. We did conduct what was called costcompliance research a few years ago. I think it related to the 1997 year. We have notconducted specific research of that nature through the implementation phase.

Senator CONROY—Do you think that you should?

Mr Carmody—I think that the cost of compliance is obviously an issue for us. We wouldprobably look at doing it after the new system is bedded in so that we are dealing withongoing cost rather than transitional cost.

Senator CONROY—I am just looking at the time, Chair. I have more questions on atotally different topic. Given that there are only a couple of minutes till the break, there is notmuch point in me starting. Can we call you back on Friday? We can work out a rough time foryou.

ACTING CHAIR—The request is that the tax office return on Friday. The committee issuspended until 8 p.m., when we will have other agencies.

Proceedings suspended from 6.24 p.m. to 8.00 p.m.CHAIR—I welcome to the table the Minister for Revenue and Assistant Treasurer, Senator

Coonan, and officers of the Australian Tourist Commission. The order of proceedings thisevening is firstly dealing with the Australian Tourist Commission. At 8.30 we will deal withthe Australian Prudential Regulation Authority, and later in the evening, at a time yet to bedetermined, the Australian Office of Financial Management. It is hoped to finish the


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examination of those three agencies by 11 o’clock this evening. I am told by Senator Watson,to whom I will hand the chair in a moment, that we will finish by 11.00.

For the benefit of witnesses, I remind them that on 25 February 1988 the Senate agreed toresolutions concerning the procedures to be adopted by this committee for the protection ofwitnesses. Those resolutions include resolution 1(9):

A chairman of a committee shall take care to ensure that all questions put to witnesses are relevant tothe committee’s inquiry and that the information sought by those questions is necessary for the purposeof that inquiry.

Resolution 1(10) states:

Where a witness objects to answering any question put to the witness on any ground, including theground that the question is not relevant or that the answer may incriminate the witness, the witness shallbe invited to state the ground upon which objection to answering the question is taken. Unless thecommittee determines immediately that the question should not be pressed, the committee shall thenconsider in private session whether it will insist upon an answer to the question, having regard to therelevance of the question to the committee's inquiry and the importance to the inquiry of theinformation sought by the question. If the committee determines that it requires an answer to thequestion, the witness shall be informed of that determination and the reasons for the determination, andshall be required to answer to the question only in private session unless the committee determines thatit is essential to the committee's inquiry that the question be answered in public session. Where awitness declines to answer a question to which a committee has required an answer, the committee shallreport the facts to the Senate.

And resolution 1(16) states:

An officer of a department of the Commonwealth or of a State shall not be asked to give opinions onmatters of policy, and shall be given reasonable opportunity to refer questions asked of the officer tosuperior officers or to a Minister.

Witnesses should note that the evidence given to the committee is protected by parliamentaryprivilege. I also remind you that the giving of false or misleading evidence to the committeemay constitute a contempt of the Senate. The committee has resolved that the date for thereceipt of written responses to questions taken on notice is 30 days from the completion ofthis round of hearings—that is, Friday, 22 March 2002.

Before we proceed to the examination of witnesses from the Australian TouristCommission, I wish to make a short statement for the record. At the commencement ofexamination of officers of the Australian Taxation Office earlier in the day, at approximately2.45, I ruled out of order a question directed to those witnesses by Senator Conroy. SenatorConroy moved dissent to my ruling. I declined to accept that motion of dissent. SenatorConroy demanded that I vacate the chair while the dissent motion was dealt with. I declinedto do so. I then called a private meeting of the committee. Senator Schacht moved the motionof dissent in that private meeting and the motion was defeated. I should say that SenatorConroy is a participating member, not a full member of the committee.

I have sought, in the interim, advice from the Clerk of the Senate, Mr Evans, as to thecorrectness of my decision, firstly in declining to entertain Senator Conroy’s motion of dissentand, secondly, in declining to vacate the chair. I have received a letter from Mr Evans dated20 February 2002 which I will hand to the secretary and ask that it be placed with the papers.The substance and effect of that letter may be summarised as follows: firstly, that SenatorConroy, as a participating member of the committee, had no standing to move a motion of


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dissent to my ruling and therefore my action in declining to entertain that motion was correct;secondly, indeed it is inconsistent with the provisions of standing order 198, which governsthe proceedings of this committee. It is not the practice of the Senate that when a motion ofdissent is received, even if the motion is competently moved, the chairman vacates the chair.There is no such practice in the Senate. I pass the chair to Senator Watson.

[8.07 p.m.]

Australian Tourist CommissionACTING CHAIR—Welcome, members of the Australian Tourist Commission. Questions,

Senator Lundy.

Senator LUNDY—Thank you. I was under the impression that the questions this eveningwould be directed only to the Australian Tourist Commission. I note that there are officersfrom the department present, and it is my intention to ask officers of the department and thetourism division questions on Friday. Unless anyone’s understanding is different, that is theway I intend to proceed. If there is any crossover, though, I would of course welcome theparticipation of officers from the department. I am very conscious of time constraints thisevening and I hope that all the agencies listed tonight will be gotten through.

ACTING CHAIR—Minister, you are quite happy with that process?

Senator Coonan—Thank you.

ACTING CHAIR—Proceed, Senator Lundy.

Senator LUNDY—Thank you. I note in the additional estimates statements that anadditional $6 million has been allocated to the Australian Tourist Commission. There is abrief description, obviously, in the budget statements, but perhaps you could provide furtherdetail about how that additional money will be spent.

Mr Boundy—The approval that released those funds has recently come through, and thecommission is proposing, consistent with the government policy in the pre-electionannouncements, to allocate those funds to areas which will provide a short-term benefit toturning on visitors to Australia. I can give you a quick summary of the broad allocations. Wewould be hoping to spend most of this on campaigns, with $1 million going into Japan,$800,000 into the rest of Asia, $750,000 into the United Kingdom, $1 million in supportingthe establishment of the markets to which Australian airlines will be flying, $450,000 to short-term research projects aimed at monitoring markets post September 11 and September 14;$1 million into the business tourism area, and some smaller amounts allocated to campaignsin New Zealand, Italy and France, all designed to regain the momentum and turn the visitorson again quickly.

Senator LUNDY—I will come to a few more questions about that. Thank you. Can youtell me what restructuring has occurred at the Australian Tourist Commission over the last sixmonths.

Mr Boundy—Yes. It started, Senator, with a review of the commission, looking to developa post-Olympic vision for the commission and, given that there was new management andsome resignations at the managing director and deputy managing director level, a need torestructure as part of that review. The result has been to reduce the size of the executive teamand to reorganise the way we approach our programs, which are basically unaffected, to tryand do things more effectively and more efficiently. There have been some retrenchments orsome redundancies as a result of that, and some savings that will be allocated into marketing.


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Senator LUNDY—In terms of those retrenchments, what is the overall impact on thenumber of staff in the commission?

Mr Boundy—There are still some unfilled vacancies, Senator, but the numbers will bereduced by some 10 to 12 when all the positions are filled.

Senator LUNDY—What is that in percentage terms?

Mr Boundy—It is about 10 per cent of the commission staff.

Senator LUNDY—That is quite significant.

Mr Boundy—Yes.

Senator LUNDY—Can you give me a description of the level or band those retrenchmentswere made at, particularly if they were made equally throughout the hierarchy of thecommission.

Mr Boundy—I am sorry, Senator, I should correct that previous percentage because thatreally applies to Sydney, where most of the staff retrenchments or redundancies occurred. Thetotal staff of the commission is 207 or 209 people, so it is effectively around five per cent ofthe total staff. But in answer to your question, the people who left the commission as a resultof the restructuring came from all levels, including management levels.

Senator LUNDY—How many from management were retrenched?

Mr Boundy—Of the former executives there were a number of resignations, including theformer managing director and the deputy managing director. Two others of the executivedecided to leave and the balance of the people were all in competitive pursuit of positionswhich had been nominated. Most of those positions were advertised internally and externally.

Senator LUNDY—Sorry, how many management positions no longer exist as a result ofthe restructure?

Mr Boundy—There were nine on the old executive and there are six on the new executivebut the positions have changed, so it is very difficult to say that particular positions havegone. The reorganisation carved up the set of responsibilities in a very different way, so thereis a smaller executive. The change process was cascaded through the organisation, looking atdifferent sets of skills and capabilities that we required, consistent with that new vision.

Senator LUNDY—You said that the retrenchments were concentrated in the Sydneyoffice. What was the rationale behind that?

Mr Boundy—The rationale really followed some fairly extensive changes to staff numbersin the regions. For example, in Japan midyear last year there were seven people who came outof the consumer marketing area because we had gone below the considered adequatethreshold to be active in consumer marketing. Once again, the funds that were saved weretransferred into the marketplace. There were also rationalisations of numbers in America, inother parts of Asia, and we are currently having a look at the European staff under theleadership of a new general manager.

Senator LUNDY—In terms of that Sydney office then, the reduction in staff at overseaspostings meant that Sydney had to have fewer people? I do not quite follow.

Mr Boundy—That has been the net effect.

Senator LUNDY—Because the Sydney people helped service the overseas offices?


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Mr Boundy—Yes. The real objective of the ATC is to market Australia internationally andto put as much money as we can into the markets. We believed that by making the changesthat we did, we could effectively service those markets.

Senator LUNDY—I think I have leapfrogged an issue here. Could you perhaps go throughstep by step what you were just talking about, and what restructuring and reduction of staffhas occurred in those overseas offices? That seemed to then predetermine the impact on theSydney office.

Mr Boundy—Yes. I should say, Senator, that some of the restructuring had preceded thereview—for example, the decision to take seven people out of the consumer marketing area inJapan and the rationalisation of some of the management positions in the US, where I thinkwe were down net two. These were consistent with good business practice. Then the reviewcommenced in July and we took further decisions on restructuring which were basicallySydney based because we had addressed some of the needs in the rest of the world. As Imentioned, we are still looking at some potential changes in Europe.

Senator LUNDY—Does that mean fewer staff?

Mr Boundy—In Europe? We do not know the outcome but it may be that there is a smallreduction.

Senator LUNDY—So far the US lost two people, Japan seven, and now Europe possibly afew or a couple.

Mr Boundy—We do not know yet.

Senator LUNDY—Are there any other offices out there that will lose staff?

Mr Boundy—No.

Senator LUNDY—Or that are facing significant restructure?

Mr Boundy—No. With the exception of Europe, the restructuring process has beencompleted. But as you would be aware, organisational change is never over and we areconstantly striving to make the ATC more effective in its efforts. One can never rule outfurther change.

Senator LUNDY—Were there any offices where you actually boosted your staff numbers?

Mr Boundy—We have restructured Asia so that the South-East Asian office in KualaLumpur has become more significant. The North Asian subregional office based in HongKong—which used to be the regional office—and particularly the South-East Asian area haveboth seen small increases consistent with our view that the Asian markets are strong growthmarkets.

Senator LUNDY—When you say ‘small’, is that one person, two people, five people?

Mr Boundy—We will follow up and give you accurate figures on this, Senator, but I thinkthe increase in Kuala Lumpur was somewhere in the order of three. There might have beenone or two additionals for the North Asian subregion in Hong Kong.

Senator LUNDY—You mentioned there was a saving realised by the commission withinthis restructuring. What was the dollar figure on those savings?

Mr Boundy—The internal changes, excluding those of Japan, which I have alreadyindicated were in the order of $1 million, were about $5 million. Those funds once again willbe reallocated into the marketplace.


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Senator LUNDY—You mean actually spent on promotion campaigns, advertising—

Mr Boundy—Directly on marketing.

Senator LUNDY—Was that reallocation from human resources to advertisementsgovernment policy? Was that something that was announced and put in place by thecommission or was it more of an internal process?

Mr Boundy—It is an internal process, Senator, which is consistent with my brief, which isto get more bang for our buck and to make the marketing efforts of the ATC more effective.

Senator LUNDY—In your assessment, more ads is better than more people?

Mr Boundy—Effectiveness is the key.

Senator LUNDY—If that is the case, then that is the case. I do not know if ads are moreeffective than people in getting people here. If that was your rationale, then that is what I wantto know.

Mr Boundy—It is difficult to give a black-and-white response to that because people areso important in a lot of the programs. For example, the visiting journalists program, which isone of the most effective marketing activities we do, depends on people. All of our PR aroundthe world depends on people, but we needed to have good people in place to perform theprograms. It was sound organisational change processes that led to these outcomes.

Senator LUNDY—In terms of the allocation of that $5 million, did you have a targetmarket or a strategy built around the reallocation of those funds?

Mr Boundy—No. In fact we did not have any target about reduction in staff numbers atall.

Senator LUNDY—Sorry, target in terms—I mean, you say $5 million.

Mr Boundy—Yes.

Senator LUNDY—Did you aim for $5 million because you had a purpose in mind for the$5 million or are you still working out how you want to prioritise your target groups? I do notknow if I am using the right terminology but I think you know what I mean.

Mr Boundy—I do, Senator. In fact I should say again that there was no preconceived planto reduce staff numbers. We appointed a new executive team who worked with staff indefining how it would be best to meet the objectives that we had and the programs we had,and how we could get impact. The result happened to be a saving of $4.1 million. We arecurrently going through an exercise of corporate planning which will be allocating availablefunds into our global markets. The saved money from the organisational change will go intothat.

Senator LUNDY—As well as the $6 million that you identified?

Mr Boundy—Indeed.

Senator LUNDY—In essence, you have $11 million more to spend out there in promotingdestinations in Australia.

Mr Boundy—It is not as simple as that, because we will come off the additional fundingassociated with the Olympics of $10 million per year at the end of this financial year, socertainly there will be somewhat of a balance. If you take into account the $6 million, we willbe down net $4 million, which is further incentive to be able to find more funds internally toput into the marketplace.


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Senator LUNDY—You are losing the $10 million at the end of this financial year?

Mr Boundy—That is right.

Senator LUNDY—At the moment you would be ahead by $1 million, with the$11 million. You are losing $10 million but you are picking up $11 million through the$6 million and through the $5 million from savings.

Mr Boundy—Yes. The net impact—considering media, inflation and other things—will bethat we will probably be on a par with the previous year. But I need to stress that that isbecause of putting our house in order, as well as additional funding.

Senator LUNDY—That picture is very clear. In relation to your annual budget—and I donot have the overall figures here—what proportion of your overall income is provided bygovernment?

Mr Boundy—I will put it another way by saying that about 75 per cent of the government-appropriated funds—in this case $92 million this year—is contributed by industry, so there isthe $92 million plus another $69 million coming from industry, which means there isexcellent leveraging of the dollars that are put in from the government.

Senator LUNDY—So $92 million is the government appropriation and that represents75 per cent of your overall income.

Mr Hopwood—I will just clarify that $92 million. That was our base figure before we gotthe additional $6 million funding. If you look at that as a base figure, then we got anequivalent of $69 million with industry support for our activities, which should represent75 per cent of that $92 million.

Senator LUNDY—I see. Sorry, I was thinking that it was $69 million plus $92 million.

Mr Hopwood—In actual fact, that is what our total spend would be. We spend $92 millionfrom government funding and an additional $69 million from industry.

Senator LUNDY—I see. So I am right. I interpreted you correctly the first time. I do notknow if you can do this quickly. I know you have already been through the breakdown of the$6 million. How easy is it for you to run through what the breakdown is of the promotionsbudget between the target markets or the target countries? Do you have a figure that you cangive me quite easily about how much money you are spending in each market?

Mr Boundy—Perhaps the best way of answering that is to talk about the currentcampaigns that we are running around the world. The global campaigns once again are verywell leveraged up. The total spend is $29 million, of which the ATC or the governmentcontribution is $13.5 million, and this is all post September 11 activity, some of which wasplanned and some of which was put into place for special programs to regain momentum.Some $13 million of that is in North America, $2.6 million in Asia, $8.1 million in Japan and$5.4 million in the UK and Europe, making the $29 million altogether.

Senator LUNDY—Does that include the break-up of the new $6 million that youdescribed before?

Mr Boundy—No, it does not, Senator.

Senator LUNDY—And it does not include the $5 million that you have saved?

Mr Boundy—No, those savings will really come into place in the next financial year.

Senator LUNDY—How significant an impact have the events of September 11 had oninbound tourism? I am certainly aware of the broad statistics that have changed, so I am not


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so interested in the statistical impact, though could you take that on notice and provide thatanalysis that I know you have done, and respond to the question to talk about how you havechanged your strategic priorities and just how you have been able to build on yourrestructured outfit to tackle those challenges.

Mr Boundy—Yes. Certainly the changes have had a major impact, as you know, ontourism around the world, but we have a belief that Australia is probably better placed thanmost of our competitive markets. We are facing an environment where national tourismorganisations globally are putting more dollars at a shrunken travel market, so our challenge isto try and maintain or win market share in those markets. The way we are approaching it isconsistent with a trend which had occurred before September 11, and that is to put more fundsinto tactical campaigns as opposed to brand consumer campaigns, and that is predicated onthe fact that the awareness of Australia as a destination has never been higher, particular post-Olympics, so it is really a matter of putting travel within reach of particularly long-haultravellers. The tactical campaigns that we discussed there in the previous question are reallystarting to bite, and the inquiry levels are at least as strong as our targets, so that seems to bean appropriate response in the global environment we are facing.

Senator LUNDY—Yes. You mentioned that other countries are spending more money forless return. Have you done any investigation into the increase in the tourism budgets in othercountries just in percentage terms? Are you competing now against other tourist commissionsin other places that have increased their budgets significantly?

Mr Boundy—It is a competitive environment and it is very hard to tell what sort ofpermanent commitments will result from this, Senator, but there have been—as there havebeen in Australia—some short-term responses from a number of destinations to try and getpeople travelling to them again. It is difficult to see what the long-term impact will be.

Senator LUNDY—Are you able to quantify the increases in other budgets?

Mr Boundy—No, not in percentage terms, but I table the fact that we currently have astudy going on the economic impacts of tourism, and as part of that study we will be lookingat global competition.

Senator LUNDY—And will that be made publicly available?

Mr Boundy—The answer to that is yes.

Senator LUNDY—I will look forward to it. With the collapse of Ansett, severalinternational carriers no longer have a seamless distribution network in Australia. Is thatcausing overseas travel agents and carriers to direct business to other countries?

Mr Boundy—There is certainly a lot of evidence that the lack of a Star Alliance partnerhere in Australia has caused people to change travel or perhaps to take shortened travel, so ithas been an issue. The extent of the issue is very hard to determine.

Senator LUNDY—Can you quantify it in dollar terms or have you attempted to?

Mr Boundy—We have attempted to make estimates. As I say, it is very difficult becausethere are so many alternatives, but I guess the major comment is that the seamless bookingsand the flexibility that came from the alliance are no longer there for people booking throughthat alliance, particularly in long-haul markets.

Senator LUNDY—What are you doing about that? What initiatives are you working on?Have you made any recommendations to help the industry overcome this difficult period?


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Mr Boundy—The aviation policy, of course, in the tourism sense, rests with ourcolleagues in the department, and of course at the department of transport, but one of thepractical things we do in a marketing sense is to try and help the distribution system overseasunderstand what is happening and make it known that there are alternatives, and certainly totry and work as much as we can with the airlines to overcome some of the problems.

Senator LUNDY—Do you have a specific damage control strategy that you have put inplace to help inform the overseas market about the situation here and how they can avoid it?Do you have a specific strategy to implement that?

Mr Boundy—We did spring into action, Senator, immediately after this with a series ofinformation bulletins to the industry, but there have been far more proactive one-on-onediscussions with the industry in those key overseas markets since that time.

Senator LUNDY—Have you developed any recommendations or specific ideas from theTourist Commission’s perspective for the department, and, if so, what are thoserecommendations or ideas?

Mr Boundy—I am not sure that I understand the question fully, Senator. Is this for theDepartment of Industry, Tourism and Resources?

Senator LUNDY—Yes, or indeed the government. I am working on the basis that youhave a board and that the board would have opinions on all of these matters. Has the boardand have you given expression to that in passing on any recommendations or formal ideas andurging the government to act in a way that you have expressed formally as an organisation?

Mr Boundy—As a process of the review there are some external issues that we need togive greater emphasis to. I am pleased to say that, following discussions with our minister,many of these will be incorporated in the process that he has just announced of a 10-yearstrategy for tourism, which will be comprehensive and holistic.

Senator LUNDY—What degree of formality does that invitation to participate in thatprocess have? Is there a position available to you as part of that task force or to members ofthe board?

Mr Boundy—I would like to ask Mr Crick to respond.

Mr Crick—Senator, the minister, as you have probably seen, made the announcement lastweek of his intention to conduct this 10-year long-term strategy. It is certainly his intentionthat it will be done in close consultation with industry. We will be putting together a task forceat officer level within the department to support that. It is very much the minister’s intentionto engage very closely with the Australian Tourist Commission at chairman level, board leveland senior executive level, and to be consulting very widely with industry in the developmentof that plan.

Senator LUNDY—Consulting but not necessarily sitting on the task force.

Mr Crick—Consulting with industry, but the Australian Tourist Commission will be verymuch a central player in the development of it, along with the department supporting theminister.

Senator LUNDY—Will they be on the task force?

Mr Crick—Depending on what the task force is. The task force at the moment we arereferring to is the secretariat within the department. We will be certainly talking to theAustralian Tourist Commission. They will be very closely in partnership with it. It is probablyfair to say they will be a member of the task force, in effect.


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Senator LUNDY—But that decision has not been made formally as yet.

Mr Crick—It is not a matter that you really lock in with a formal decision, Senator. Wewill be seconding people from other departments at times, possibly even getting talent fromoutside the government at times. It will be a fairly flexible arrangement. The centrepiece willbe the minister driving his agenda forward in consultation with industry. The key supportersfor him, in both an intellectual and secretariat sense, will be the Australian TouristCommission and the department.

Senator LUNDY—I will follow that up and talk more about that on Friday. Mr Boundy,what changes have been made to the Australian Tourist Commission board recently?

Mr Boundy—The board has been very stable. In my nine months—I am fairly new to thecommission as well—the only change has been the position occupied by the secretary of thedepartment. When that position changed, it changed on our board as well.

Senator LUNDY—What polling or surveys has the commission done or hadcommissioned in the last six months? What issues were canvassed?

Mr Boundy—Polling can span a number of areas. We do research in a number of areas ina systematic and routine way. Perhaps the most significant research or polling we have donehas been of industry post September 11 and to feed back some of those attitudes to theindustry themselves. The thing that we did immediately after September 11 was issue thisglobal markets barometer, which was really well received by industry. It gave people somesort of reassurance and, what they were needing most of all, information. There is, of course,a whole lot of other research but I will stop there because you are probably asking me aboutrecent consumer—

Senator LUNDY—Perhaps the way to do it is ask that you take on notice to provide thecommittee with a table of what surveys have taken place, who did them, the value of thecontract, the purpose and any other information that might be relevant, just for me to get myhead around the work in that area.

Mr Boundy—I would be happy to do that.

Senator LUNDY—Thank you. What initiatives has the Tourist Commission put in place tobetter coordinate with state tourism promotion agencies?

Mr Boundy—There is particular orientation that we had, post our review, of formingbetter partnerships. Partnerships extend from our federal government colleagues through tothe states. There is quite a bit of overlap in some of the activities that the states and theAustralian Tourist Commission undertake, particularly in offshore markets. I am pleased toreport that we have agreed, and currently have under way, a project in Europe where all thestates and the ATC are jointly employing a consultant to explore ways where we can removesome of that duplication and have better cooperation in the European market as a startingpoint.

Senator LUNDY—Do you have a target figure that you hope to achieve in savings as aresult of greater coordination?

Mr Boundy—We do not have a target, Senator. There is $145 million collectively spent inmarketing Australia offshore by the ATC and the states. I would hope there would be asignificant amount that could end up in the marketplace rather than on overheads andduplicated activity.


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Senator LUNDY—If you can find at least a quantitative estimate of what you are aimingfor, that would be useful. Otherwise, thank you very much for your time this evening.

ACTING CHAIR—Thank you very much for your responses this evening. I now callrepresentatives from APRA, the Australian Prudential Regulation Authority.

[8.41 p.m.]

Australian Prudential Regulation AuthorityACTING CHAIR—Welcome, Mr Thompson and staff. Do you wish to make an opening

statement?

Mr Thompson—No, thank you, Senator.

ACTING CHAIR—Questions for APRA, please. Senator Conroy.

Senator CONROY—I am assuming that you are monitoring closely the royal commissioninto HIH.

Mr Thompson—Yes, Senator.

Senator CONROY—Are you joined to it in any way or are you independently observingit?

Mr Thompson—We have standing.

Senator CONROY—Yes, you have standing. The royal commission was presented withevidence from Kim Smith, an Ernst and Young partner, that HIH had used the opportunity ofdeparting some insurance lines to squeeze claims. He is asked:

There’s a class of claimants we can safely squeeze because they no longer matter to us?

Kim Smith said:

Commercially that—commercially, yes ... Could I perhaps put that into context, that there are anumber of other companies in Australia, for example, which adopt a similar approach.

The question to Tim Smith is:

Does that make it legitimate?

Answer:

I believe so.

Question:

I understand that there may be more than one bank robber in Australia. Does that legitimate thepractice?

ACTING CHAIR—I am having trouble understanding the question.

Senator CONROY—I am reading a quote.

ACTING CHAIR—Are you familiar with the quote?

Mr Thompson—No, I am not, Senator. I am not sure how you—

Senator CONROY—Please, do not misunderstand me. I do not expect you to be acrossevery single piece of the transcript.

ACTING CHAIR—Just go a little slower, please.


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Senator CONROY—Sorry.

Mr Thompson—I will make a general point that I really do not believe it would beappropriate for us here this evening to be canvassing issues in relation to HIH, or FAI for thatmatter, or the evidence before the royal commission. APRA will be giving evidence before theroyal commission at some future time. We have been advised of that. We are and will bedevoting substantial resources to preparing our evidence before the royal commission, withlegal support. That process is under way but it is far from complete. When it is complete, wewill be putting detailed statements into the public domain, and our officers will be extensivelycross-examined, no doubt, on their evidence. It is our view that at the moment questionswhich are raised in the committee’s hearing in relation to HIH and FAI will almost certainlybe issues which will come before the commission at some point in the future, and we feel thatto canvass before this committee possible evidence to be put before the commission,including comments on evidence that has already been given in partial form before thecommission, would be to risk prejudicing the rights of APRA parties to those proceedings.

Senator CONROY—I understand your caution, Mr Thompson. I was not planning to go tothe heart of the HIH inquiry. I am drawing on some information which came to light duringthe royal commission, without wanting to canvass the HIH issue on an individual basis. I amlooking at the industry perspective, if that helps set your mind at rest. If I keep going and youstill think I am crossing the line, please say. I would like to ask you some general questions ona couple of macro issues, notwithstanding that you may want to also put a view later to theroyal commission. The question of prudential supervision is why you are here.

Mr Thompson—Sure.

Senator CONROY—If you are saying that I cannot ask you a question at the momentabout any insurance industry issue—which, by definition, is almost the entire insuranceindustry—

Mr Thompson—Senator, obviously we are more than happy to talk about the newprudential regime which is being put into place at present and we can talk about how thatcompares with the regime which it is replacing. There are practical issues and also issues ofpossible prejudice that could well arise out of questions to do with evidence before the royalcommission, a lot of which is not completed, and issues specifically related to FAI and HIH.

Senator CONROY—You are aware, though, that matters raised in parliament underparliamentary privilege cannot be used in courts of law.

Mr Thompson—I am aware of that.

Senator CONROY—Therefore, I am struggling to understand why you think anything wesay or do can prejudice something when they are not allowed to be tendered.

Mr Thompson—I have discussed this with our legal people.

Senator CONROY—I am sure you have taken legal advice and, as I said, if we canproceed along the way a little bit, and if you still have concerns, please raise them.

ACTING CHAIR—Senator Conroy, I might assist. The advice we have received is thatofficers should be reminded that the Senate has resolved that there are no areas in connectionwith the expenditure of public funds where any person has a discretion to withhold details ofexplanations from the parliament or its committees, unless the parliament has expresslyprovided otherwise. If we are looking at the sub judice rule, obviously the Senate looks at itvery seriously because of the impact that it could have on a jury’s deliberations. But I


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understand there is not the same degree of rigidity before a royal commission, because theyare expert witnesses, less likely to be moved by emotional-type issues or matters discussed,because they are very independently minded people.

Mr Thompson—I can only reiterate, Senator, that I have been advised that there would bea risk of prejudice in the future presentation of APRA’s position before the royal commissionif we canvassed issues specifically related to HIH or FAI before the committee.

ACTING CHAIR—Obviously we have to exercise a degree of care.

Mr Thompson—It would be unreasonable for me as CEO of the organisation to riskprejudicing the organisation’s position or the position of APRA staff or former members ofAPRA staff.

Senator Coonan—Chair, perhaps I could suggest that Senator Conroy proceeds with hisline of questioning, and if it strays into areas—

ACTING CHAIR—Yes.

Senator CONROY—That was my suggestion.

Senator Coonan—where there is any serious prejudice, obviously it would be a matter thatwe would bring to your attention, Chair, and I would be very surprised if Senator Conroywould not respect that. Perhaps if we go that way.

ACTING CHAIR—Yes. Senator Conroy.

Senator CONROY—I was referring to the transcript, because as I said I am sure you havenot watched every minute of it. This was the question:

There’s a class of claimants we can safely squeeze because they no longer matter to us.

Kim Smith, an Ernst and Young partner, says yes, that is what goes on sometimes. Myquestion to you is whether APRA has any evidence to suggest, as has been indicated in theroyal commission—and it is Mr Smith who says, ‘Oh, yes, this is common’—that it isindustry practice to delay the payment of claims?

Mr Thompson—I am not familiar with that evidence. I am not aware of any evidence ofthat being a widespread practice and I am not aware of that particular piece of transcript andevidence and the context in which it was raised. Darryl, do you have anything to add?

Dr Roberts—Senator, we would certainly take an interest in anything that comes to us thatmight raise a suspicion that there are systemic issues in the industry, which I think is what youare heading towards.

Senator CONROY—No. I am asking about systemic issues in the industry, not thosespecific to HIH.

Dr Roberts—Yes. For example, in the past there was a period where we surveyed theindustry on derivative usage because derivatives had become topical internationally—andmore recently on Y2K preparation, and more recently than that on terrorism coverage. Therewill, from time to time, come to us issues where we want to know whether there is a systemicproblem within the industry. In that case we would normally survey the industry and demandthat they tell us what they are doing in that regard. The only one of that nature that has beenbrought to our attention out of HIH has been financial reinsurance.

Senator CONROY—I was coming to that next.


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Dr Roberts—The late payment of claims has not really come onto our radar, I think. But ifthere is a suspicion that there is a systemic problem in relation to something like that, then wewould consider surveying the industry to investigate it.

Senator CONROY—Would you have any prudential concerns if this was a commonpractice? Is it potentially an indicator that an insurance company is struggling to meet itscommitments?

Dr Roberts—Claims management is partly a consumer matter for ASIC and partly aprudential matter for us.

Senator CONROY—I am sure ASIC are thrilled to hear that.

Dr Roberts—If it is a matter of treating an individual customer badly, I would suggest it isan ASIC matter.

Senator CONROY—Yes. I am more concerned about the systemic issue.

Dr Roberts—If it is an issue of misrepresenting the state of the soundness of the company,then I think we would take an interest if that was systemic throughout the industry, but I reallydo not know if there is a broad concern about that at present.

Senator CONROY—If you surveyed insurance companies about whether they‘squeezed’—to use the industry term for it; it is interesting that the industry has a term for it,if it is not common—do you think it could be an indicator that a company is struggling withits finances?

Dr Roberts—We would be very cautious about drawing that interpretation, because it is inthe nature of the industry for a fairly tough contest to happen between the policyholder andthe company with a lot of claims.

Senator CONROY—Sure, always.

Dr Roberts—There is a lot of fraud in the industry, so the industry—I think, quiterightly—takes a fairly tough line before it pays claims out.

Senator CONROY—I think the context of the conversation in the royal commission wasto do with departing some insurance lines, and you have this trail afterwards, as you know.You never know how long the tail of claims will go on. The context was ‘Well, we can be justdismissive of them because basically we have dropped that line of business. They’re just oldpolicies and we can just muck them around a bit’, or ‘squeeze’, to use the industry’s term.

Dr Roberts—I do not have a good sense of that one, Senator. Can I take that on notice?

Senator CONROY—Sure.

Dr Roberts—We will give you a view on whether we think that is potentially prudential.

Senator CONROY—Sure. Has anyone heard of the term ‘squeezing’ in that context?

Dr Roberts—I haven’t.

Mr Phelps—Senator, when a reinsurance company goes into run-off —and this is not justin Australia, but generally around the world—the term, rather than ‘squeezing’, is‘commuting’ policies. At that point their policies might not mature for 10 years into thefuture. They might have reinsured something or some event which may not happen for five,six, seven years. To try to truncate the run-off process, this concept of commuting a policy, oroffering the policyholder some amount which is an estimate of what they might—

Senator CONROY—I am not quite sure that is the same thing.


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Mr Phelps—That is the only thing I can think of.

Senator CONROY—I suspect it is not quite that. That is a more honourable approach, tobuy them out, if you like.

Dr Roberts—We will have a look at the quote, Senator.

Senator CONROY—As I say, I think it is page 469, if that is of any help.

Dr Roberts—Yes, thank you.

Senator CONROY—As I said, Mr Smith alleges there are a number of other companies inAustralia which adopt a similar approach. I just draw that to your attention.

Dr Roberts—Thank you.

Senator CONROY—As you say, if there are any individual cases that come to light—Imean, it is an ASIC matter. I was not sure. I thought it might have been ACCC, but if it is anASIC matter then okay. I did not want to come to reinsurance. I am sure you have all enjoyedthe testimony that you have been getting. I wanted to go to the issue of the contract. As I said,I am not looking to do the individual; I am looking at the macro. In relation to theGeneralCologne Re contract on 26 June 1998, the effect of the transaction was that FAI loses.Obviously this is only one side of the story.

Mr Thompson—It sounds very specific, Senator.

Senator CONROY—No, as I said, I am just trying to outline the issue. I want to draw theissue out of this rather than debate this particular issue. FAI was allowed to immediately booka profit, and they also struck a deal with National Indemnity, where again they did the same.Rodney Adler issued a press release arising out of the evidence that was given. Again, I amnot reading it out because I would only be accused of being too specific. He claimed that FAIdid not enter into any reinsurance policies that were not typical of the industry. Is APRAaware of the specific reinsurance policies that have been mentioned in the HIH royalcommission?

Mr Thompson—Senator, I really do not think we should be asked to comment on theevidence.

Senator CONROY—I am just asking if you are aware of them. I will not ask you aboutany evidence that came up. I will ask if you are aware of any reinsurance policies along thelines of Mr Rodney Adler’s press statement.

Mr Thompson—At present? Mr Adler, I think, was referring to 1997 and 1998.


Mr Thompson—I think the short answer to that is no, Senator. But, as you know, we aregoing through an extensive process of relicensing all of the general insurance companiesbetween now and 1 July. As part of that process we will be inquiring exhaustively into theirreinsurance programs and arrangements to satisfy ourselves that there are not contracts thatare then reported as something that they are really not, or purporting to be something they arenot.

Senator CONROY—Sorry, I just missed the very beginning of what you said. You saidyou are now looking at that.

Mr Thompson—I am saying that we are, at present, in the midst of the process ofrelicensing all of the general insurance companies in preparation for the commencement of anew prudential supervision regime on 1 July this year. As part of that process of relicensing


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we will be looking closely at reinsurance strategies and programs of all of the companies priorto relicensing them. The particular issue that you raise, which has emerged in the royalcommission, will certainly be one of the issues that we will look very closely at as part of thatprocess.

Dr Roberts—There is a very generic issue which arises out of this, Senator, which is notjust for insurance—general insurance companies. It is the practice of financial institutions tosell some of their risk sometimes—for example, a bank that securitises a housing loanportfolio, securitisation, or indeed uses derivatives to sell some risk—and quite often we havean interest in that, not only in terms of having an accurate understanding of the strength of thecompany, but because often credit is sought for that, for example, from our capitalrequirements. There has always been, in all our industries, a need for us to ensure that, if riskis purported to be shed, it is actually shed in practice. We would not want to be in the positionof giving regulatory credit to a company for shedding risk if, in fact, the reality down thetrack is that that risk has not been shed for one reason or another. That is something we arecautious of, and in general insurance, going back prior to APRA, there has always been apolicy on the use of financial reinsurance, to the effect that it is a financial transaction. If it ispurely a financial transaction and not the shedding of risk, then it does not belong to alegitimate reinsurance program that involves shedding risk and so we would not give it creditin that respect. It is generically an issue in all our industries which is there all the time, and weare conscious of it.

Senator CONROY—When HIH bought or took over FAI, were the reinsurancearrangements examined? I appreciate that may be hard to answer, not for the reason you maywant to give, but because no-one from the ISC, which was looking at this at the time, hascome across to APRA.

Mr Thompson—That transaction did take place after APRA was formed, but the particularindividuals who were involved are no longer with APRA. They will be preparing witnessstatements for the royal commission about their consideration of that transaction. I am reallyjust not in a position to comment on that process.

Senator CONROY—Presumably, given the merger was approved, there was a tick. I donot want to sound silly, Mr Thompson, but we have discussed this extensively previously.

Mr Thompson—Prior to the royal commission’s commencement, Senator, yes.

Senator CONROY—Prior to its commencement, but certainly in the knowledge of itscommencement.

Mr Thompson—Possibly.

Senator CONROY—I am sure we can get the dates, but I think the royal commission wasannounced yonks ago.

Mr Thompson—I think we did have a discussion about further discussions on HIH on25 June, Senator, which perhaps were inconclusive, but I was making the same general pointas I am making this evening.

Senator CONROY—Yes. It is disappointing that Tom Karp is not here tonight.

Mr Thompson—I will convey that to him, Senator.

Senator CONROY—He is not available.

Mr Thompson—No.


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Senator CONROY—He had a chat with the Financial Review on 20 February, where hetold them:

If you were actually to look at all of the details of the contracts it would be a very resource-intensivejob and it would require a lot of reinsurance specialists to do it. The regulators are not in a position to dothat.

He seemed to be willing to talk about some of the generic issues with the national media.

Mr Thompson—He was responding to some very general questions about reinsurance. Hewas not commenting on particular contracts of evidence before the royal commission.

Senator CONROY—That is what I am trying to do. Was it the practice of APRA toreview any reinsurance contracts at all?

Dr Roberts—I might say, just to follow up Tom’s generic comment, that this is actuallyquite a big issue for us. Greg probably knows better than me on the banking side, but if aninvestment bank goes to a bank with a proposal for an innovative capital instrument,subordinated debt, for which it is proposed to get credit from APRA on the capitalrequirements and it is tax effective for the bank—and investment banks like to do this all thetime—then we can be in a position where the bank comes to us and says, ‘Will you approvethis securitisation or this subordinated debt issue?’ And by that time it might have beenthrough their lawyers and it might come in sort of a foot thick, with a huge amount of legalcamouflage, as well as technical detail. Going through trying to extract the economics fromthat is incredibly resource intensive, and so I think regulatory good practice in this area is tosay that it is the responsibility of the board and the CEO of an institution to ensure that thefinancial instruments and transactions they use are what they purport to be and are notdeceptive, whether that is in terms of accounting treatment or regulatory credit or any other oftheir responsibilities.

Senator CONROY—I appreciate that. I am perplexed because it does lead to a number ofquestions, like how you can tick off when you are indicating that it is very difficult to get tothe bottom of some of these issues. You have created a string of other questions for me that Iwill probably try and come back to, but fundamentally I am accepting your argument that it isresource intensive. It was not the practice of APRA to review reinsurance contracts at all?

Dr Roberts—I cannot comment on that one myself, Senator, because I did not work in thefront-line area in those times.

Senator CONROY—APRA’s resourcing is determined by a levy that you have inconsultation with the government, and the industry to a lesser degree, so you have a choice. Ifthings are resource intensive because it is a complex industry, because it is getting more andmore complicated, you can ask the industry or ask the government about increasing your levyto allow you to bring the expertise in, if it is not already inside. I am accepting very much thepoint you make, Dr Roberts, in terms of the complexities here, and I would not want to belooking at them either.

Dr Roberts—Yes. Graeme mentioned the new general insurance regime, but alsointernationally the regulatory approach is to go about it in a slightly different way. Rather thanhave the regulator go line by line through every commercial transaction of a regulated entity,all the other pillars of the regime that we put in place are supposed to keep the companyhonest. In our now new regime, for example, there are upgraded roles for the auditor and forthe actuary, and whistleblowing obligations on them. There is an attestation from the CEOand board that they have had risk management systems in place. The objective in regulatory


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good practice these days is to ensure that the governance of a company is strong enough thatyou can then rely on the fact that they will comply with the spirit as well as the letter of therules.

ACTING CHAIR—In the case of a merchant bank in terms of acquiring securitisation ofloans, is it APRA’s role to look at the tax consequences or whether it is a scam or a scheme, interms of compliance with tax law, or do you call in the tax office to give you views about thatbefore giving your sign of approval of having oversighted that and okayed it? There are somevery innovative products on the market at the moment.

Dr Roberts—There are. The creativity of merchant banks is endless, Senator.

ACTING CHAIR—But how do you protect yourself against that sort of situation, thatthey are operating within the law, if it is likely to be challenged?

Dr Roberts—I think I would have to say we leave tax matters entirely to Treasury and thetax office.

ACTING CHAIR—Yes, but do you refer these innovative arrangements to Treasury?

Dr Roberts—If they come to us with a subordinated debt proposal, for example, that theysay is tax effective but also suitable for our tier 2 capital purposes, we would take their wordthat they are complying with tax law.

ACTING CHAIR—Why would you take their word in terms of innovative products?Surely there is a bit of a challenge there for everyone, isn’t there? You do not refer it on to thesmell test from the tax office?

Dr Roberts—The tax office and Treasury are already well aware of these products, andthey are in constant communication with the industry on what is acceptable and what is notacceptable, anyway; I do not think we really have a role there.

ACTING CHAIR—I would have thought it might be good stewardship.

Senator CONROY—I appreciate your exercising the chair’s prerogative there and I canonly agree with your questions.

Mr Thompson—I think, Senator, I will just amplify. If we saw something which looked asif it may have been constructed with a tax avoidance purpose in mind—and bear in mind that,not being tax experts, we would not necessarily recognise that—

ACTING CHAIR—I appreciate that.

Mr Thompson—If we did, we would involve the tax office or seek a reassurance from thecompany that had approached us that it had satisfied itself through appropriate channels thatthe product or the service was satisfactory from a taxation point of view. But it is impossiblefor us to become tax experts ourselves or to be second-guessing or shadowing the legitimateactivities of the tax office—or of ASIC or any other agency, for that matter.

ACTING CHAIR—But what I am saying is that you are into the market earlier than thetax office, because they will not see it until perhaps six to 12 months down the track, in termsof some of these new products.

Dr Roberts—I think generally the banking industry does talk to the tax office continually.They spend a lot of effort making sure they stay within the letter of the law, at least. But Ithink the point you are making is true, that we do want our regulated institutions to be goodcorporate citizens generally, and that implies that they should be applying good governance toall their public obligations.


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Senator CONROY—Just going back to this issue of resourcing, you make the choice inthe end of what you want the levy to be and what you want to apply your resources to. Iappreciate you may have brought someone in right now. Pre the collapse of HIH, does anyonein APRA have any reinsurance experience?

Mr Thompson—Pre the collapse? There would have been some people who had hadexperience in the insurance industry.

Senator CONROY—I meant reinsurance, because I appreciate that that is quite a specificarea.

Mr Thompson—I am not sure. I do not know if we had anyone who worked with areinsurance company, but we certainly would have had people on the staff who had practicalexperience in the insurance industry, and if you are in the insurance industry you seereinsurance contracts.

Senator CONROY—Had you encountered any of these sort of reinsurance style policiesthat have been canvassed at the royal commission? Had they bobbed onto your radar screen?

Mr Thompson—Are you referring to side letters?

Senator CONROY—I am saying generically. I think by definition side letters are a bithard to come across, because they do seem to be awfully closely held, but I am saying thestyle of insurance policy that is being referred to.

Mr Thompson—I am not aware of any, Senator.

Senator CONROY—Dr Roberts?

Dr Roberts—The position that has always been made clear to the industry is that if you areembarking on a financial transaction that does not involve transfer of risk—it is for someother purpose: a complicated version of a loan, for example—then it needs not to be countedas reinsurance for our regulatory purposes. It is not so much that we would attempt to prohibitpeople entering any kind of financial commercial transaction they want. If they are seekingregulatory credit for it, then it should involve a transfer of risk. That has always been madeclear, going back to ISC days.

Senator CONROY—How many staff within APRA would we consider reinsuranceexperts?

Mr Thompson—Now? I am not sure we would have any staff I regard as reinsuranceexperts. We have people who are familiar with reinsurance arrangements and know areinsurance contract if they see one. They can ask intelligent questions about reinsurancearrangements. Darryl, would you say that we have anyone you would call an expert in thatparticular specialisation?

Dr Roberts—Probably our position is that we would certainly like to have more peoplewith insurance expertise generally—not just reinsurance, but general direct underwriting andlife insurance. It has been hard for APRA to build up our insurance skills. We have had somepeople who were becoming very good at insurance and then lost them because they travelledoverseas, for example. We have a couple of people who are technically strong but we wouldcertainly like to have more.

Senator CONROY—Can you give me a response to Rodney Adler’s statement that thekinds of reinsurance policies which allow an insurance company to book a profit in return forfuture payment of premiums are common practice in the insurance industry.


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Mr Thompson—We are getting close to that line, Senator.

Senator CONROY—He has made a public statement, that is all. We cannot sit back forsix months and not have public discourse on matters that are raised outside the royalcommission. He is making a fairly bald assertion.

Mr Thompson—I think it was said in response to one of the earlier questions that I amcertainly not aware of contracts of that kind—the kind that I think he was referring to. I amnot even sure exactly what contracts he was referring to, because I am not familiar with theevidence in detail. I am certainly not familiar with the time period to which he was referringeither. I suspect it may have been sometime in the past.

Senator CONROY—Just to clarify the kind, he is speaking of the kinds of reinsurancepolicies which allow an insurance company to book a profit in return for future payment ofpremiums—that style of reinsurance. Putting aside the letter of comfort or whatever you wantto call it, you are saying you are not aware of them; maybe they were sometime in the past.

Mr Thompson—Not aware of contracts that were designed to achieve ends that were notproper ends. I am not sure if that is the sort of contract he is referring to there. I would need torefer to the evidence that he was referring to and to which he issued—

Senator CONROY—I would happily take you there but I am doing my best to avoidtaking you there.

Mr Thompson—I would like to be more helpful, Senator, but I am not familiar with thedetails of this evidence and I am really not familiar with what Mr Adler had in mind in hispress release.

Senator CONROY—If you will indulge me for a moment in terms of a specific piece ofinformation that came out of the royal commission, then I can draw on it and we can have adiscussion after that. Mr Jurgen Graber from Hanover indicated they had been transacting thiskind of business since 1978.

ACTING CHAIR—Senator Conroy, can you clarify whether these statements were madeoutside the royal commission.

Senator CONROY—Mr Adler’s were made outside but, as I said, on this particular one Iam just referring to the fact that Mr Graber says, ‘We invented reinsurance.’ Who careswhether that is true or not. He indicates they had been booking up these kinds of contracts, thekind Mr Adler was referring to, which allow you to book profit in return for future payment ofpremiums. I am trying to stay generic now. He indicates it has been going on since 1978. Thatwould tend to indicate it is a fairly common practice.

Mr Thompson—It seems irregular.

Senator CONROY—It sounds like it. Again, I am not familiar with the sorts of contractsthat he is referring to and I am not familiar with his evidence.

Mr Thompson—I am really not in a position to comment.

Senator Coonan—The other issue, Senator Conroy, is how you would recognise oneanyway if you are just looking at accounts?

Senator CONROY—I thought APRA did more than look at accounts. That is what anauditor does.

Senator Coonan—Even auditors do not necessarily pick up a kind of arrangement like thiswhere a lot of it happens off the balance sheet with a side letter. The way in which reinsurance


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premiums are constructed is, I would think, not really common knowledge. I would not thinkthere would be very many people in this country who would understand them.

Senator CONROY—Rodney Adler seemed to, and he thinks it is common in the wholeindustry.

Senator Coonan—That is his view.

Senator CONROY—He is a practitioner—or he was until recently. Hopefully HIH willdeal with that as an issue. Was APRA aware that finance reinsurance contracts could be usedto bring forward profits with premiums payable in subsequent years?

Dr Roberts—The issue for us, Senator, would be not necessarily the transaction per se,because an underwriter and a reinsurer should be able to enter into any kind of financialtransaction that they wish. The interest to us would be whether the substance of a transactionis what it purports to be. If a company enters into a transaction—an underwriter with areinsurer—that is in effect a loan but dressed up as something different.

Senator CONROY—I am trying not to go to whether or not there is the letter of comfort. Iam just looking at this practice. Let us pretend there was more likely to be an earthquake—and I am not trying to buy into individual arguments, it is just that it is an easier way todescribe it. It is the bringing forward of a profit, it is the massaging of your books that I amreally talking about here. I am not talking about the potentially fraudulent aspect of saying,‘Well, we actually promised not to make a claim.’ There is a chance you can make a claim,but what this does is brings forward and helps you book a profit.

Dr Roberts—The bottom line is that if there is no transfer of risk it is not reinsurance.

Senator CONROY—Even if there is just a minute possibility of a claim. These ones hadletters that said, ‘There will be no claim,’ just in case anyone was worried, just in case theearthquake did hit. Someone described this style of contract as borrowing each other’sbalance sheets for a while to make yourself look good in a round-robin process. That is notquite a technically accurate way to describe it. I am trying to gain an understanding ofwhether APRA had any idea this had been going on—this style of contract which Hanoversay they have been selling for 24 years. Mr Andrew Allison from GeneralCologne Re claimedthat he knew of at least three other questionable reinsurance deals. I presume that is why youare going through each one as part of the relicensing. I hope you are going to tell me you arelooking for them as part of that process. I am really just trying to gain an understanding ofwhether or not APRA was aware that this was a common industry practice.

Dr Roberts—The general answer would be that if a regulated company gives you itsstatutory returns, gives you its accounts and gives you its reinsurance program, we wouldgenerally take their word that what they are telling us they are doing is what they are doing.

Senator CONROY—There is no reinsurance—

Dr Roberts—And on the checks and balances.

Senator CONROY—That does not seem to cover what Senator Watson referred to as thesmell test. I appreciate what you are saying: reinsurance contracts come in, they are this thick,they have legal gobbledegook and they are designed to be hard to understand.

Dr Roberts—That is where the regulatory pillars come into play: checks and balances tokeep people honest. The regime sets the role of the auditor and the responsibilities of theboard member, the committees of the board. Companies that are following good governancepractice should have all these internal checks and balances in place to minimise the risk that


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what is purportedly being done is not actually being done. Senator, we cannot haul people inand give them a lie detector test every time they undertake a transaction.

Senator CONROY—No, but you could have somebody who understood reinsurance readthe contract and tell you what it meant.

Dr Roberts—I do not think it is good regulatory practice to be second-guessing orscrutinising line by line every commercial transaction that the regulated financial sector entersinto. We have to take a more systems based approach.

Senator CONROY—Is it good regulatory practice just to believe everything you are told?

Dr Roberts—No. The checks and the balances are intended to reduce the scope withincompanies for misleading or deceptive conduct to go on.

ACTING CHAIR—Would you expect, with the separation of the audit from theconsulting function, which most of the large auditing firms are now doing—divesting theirconsulting arms—that the auditing function would be a lot sharper in the future, with morequalified accounts? Do you expect that to follow?

Mr Thompson—I think in principle that there is a strong argument for that separation. Inpractice, I am not sure that it has been established that any auditors in Australia to date havenot discharged their responsibilities appropriately because of a conflict of interest arising fromother activities in the firm.

ACTING CHAIR—No. All I am saying is that in future they are likely to be a lot sharperthan maybe they have been in the past. That is not saying that they were not diligent. I am justsaying there is possibly the opportunity there for them to be a lot sharper than they have beenin the past.

Dr Roberts—Yes, I think that is true, and certainly internationally there is a huge effortgoing on to get more robustness into the auditing function. In the reauthorisation process weare going through with the whole industry in the lead-up to 1 July, we are emphasising a fitand proper requirement for the auditor and the actuary. That, at the very least, has four crucialelements to it and we are looking at each of those four elements. One would be the expertiseof the auditor and actuary. The second one would be integrity and some evidence of goodstanding. The third one would be—

ACTING CHAIR—Experience?

Dr Roberts—I would put that in with expertise—expertise and experience in the first one.The third one would be workload, where, for example, we need to look at the auditor and theactuary because of their crucial role to us—a particular auditor or actuary not having50 companies on their books that all balance at the same date and, therefore, the workload isuncomfortable. The fourth critical one is conflict of interest. Obviously, there is a lot ofoutside activity going on within the professions themselves and by the securities regulators,post Enron and so on, to deal with questions of separation and conflicts of interest. Thatprobably will be of benefit to us over the next few years as those standards increase.

Senator CONROY—I want to refer to an internal APRA report. I accept that it has beentendered as evidence in the royal commission. I am not sure that it was written specifically forthe royal commission; I think it was just written as an internal APRA document on whathappened. I am hoping that that is not going to cause you a difficulty, because I want todiscuss some of the issues raised in your own internal report on this matter, notwithstanding


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that it has subsequently become part of the evidence. Can I just test your view on that,Mr Thompson, before we start?

Mr Thompson—My general position is that I do not think it is appropriate for us to becanvassing issues that are specific to HIH or FAI or to evidence that has been presented in theroyal commission. I am happy to talk in general terms about the previous supervision regimefor general insurance companies and the regime that we are now implementing, which is asignificantly improved one. My answer depends on what your question is, Senator.

Senator CONROY—I appreciate that. Tom Karp, in his report—which might have beenwritten in April 2001—is fairly blunt in his assessment. It is not dissimilar to what I thinkMr Karp has said on the public record here. He has probably been fractionally more cautiousas this is a public forum and the report was an internal document, probably written before theroyal commission was even called. The point I am making is that he wrote, I suspect, pre theroyal commission being called. He makes a number of points in relation to FAI, commentsalong the lines of this:

If the ISC/APRA had taken a more robust attitude to FAI and its problems it is likely thatenforcement action—possibly leading to liquidation—would have been necessary as it is likely that FAIwould have been unable to raise extra capital needed to deal with the asset and under provisioningissues.

He makes the point that APRA was ‘insufficiently aggressive in pursuing our concerns aboutits financial condition and prospects’. That is really what I wanted to talk to you about. I referto your speech on Thursday, 2 August 2001 entitled ‘Perils of the prudential regulator’. I thinkthe speech was to an ISA conference. I, unfortunately, was not there because I was overseas.You stated that there was nothing APRA could have done in the past couple of years toprevent HIH’s insolvency. Do you think that is consistent with Mr Karp’s comments thatAPRA was ‘insufficiently aggressive in pursuing our concerns about its financial conditionand prospects’ and that ‘it is not acceptable that we be so patient for so long with a majorcompany that was so unco-operative (deliberately or not), about whose management we hadso many concerns, and about which the market dogs were loudly barking’?

Mr Thompson—I do not think the two are inconsistent, but I really do not want to go intothe detail of Mr Karp’s opinion. As I said, he will be preparing a very detailed witnessstatement for the royal commission, which will no doubt cover his views expressed in thatdocument and will be subject to cross-examination.

Senator CONROY—Do you agree that APRA was insufficiently aggressive?

Mr Thompson—I think I am on the record as saying that we could have dug deeper, but Iam not resiling from anything I said in speeches in August last year.

Senator CONROY—I refer to some further comments in your speech:

The speed with which some people become experts in prudential supervision and related mattersafter HIH’s failure has been breathtaking.

It has been truly humbling to observe some commentators becoming expert in two or three months—without one day’s hands-on experience.

Apart from the fact that this lack of understanding from gifted amateurs is seriously annoying, thereis a more substantive concern for us all if it leads to knee-jerk regulatory over-reactions.

Who are the ‘gifted amateurs’ you are referring to?


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Mr Thompson—I would have to go back to August last year, Senator. I was probablyreferring to various media commentators, possibly some politicians.

Senator CONROY—You mean as opposed to ‘incompetent professionals’?

Mr Thompson—I probably had mostly in mind some media commentators.

Senator CONROY—No, I think the word ‘politicians’ slipped your lips at that time aswell.

ACTING CHAIR—That’s all right. We’re fair game!

Senator CONROY—I accept we are fair game. I was just hoping Mr Thompson mightwant to elucidate for the committee’s benefit.

ACTING CHAIR—You want to be named, do you!

Senator CONROY—Why not? Does APRA believe that a person is not equipped tocomment on prudential regulation unless the person has the experience of a prudentialregulator?

Mr Thompson—No, Senator.

Senator CONROY—Who, in APRA’s opinion, is equipped to comment on prudentialregulation?

Mr Thompson—People who have a basic understanding of the problems, challenges andskills that are involved in prudential regulation.

Senator CONROY—The rest of us should just shut up?

Mr Thompson—Of course not.

Senator CONROY—How good of you.

Mr Thompson—I made that comment with the background that I felt that there was somevery unfair criticism—very wide-ranging and undiscriminating criticism—being made of theorganisation, and I felt that some response was justified. I certainly was not suggesting thatone has to be an experienced prudential regulator or an expert in prudential regulation—

Senator CONROY—I would hope not, given their track record.

Mr Thompson—before one can express a view about it.

Senator CONROY—I am glad, because a lot of experts do not seem to have done so wellin recent times. Is Mr Karp one of these gifted amateurs?

ACTING CHAIR—Far from it.

Mr Thompson—No, Senator.

Senator CONROY—So when he writes that APRA was ‘insufficiently aggressive inpursuing our concerns about its financial condition and prospects’, that would be an expertopinion, would it?

Mr Thompson—That is Mr Karp’s opinion.

Senator CONROY—Coincidence? Your 2001 annual report states that Australia is one ofthe few developed countries that does not have a formal structure of deposit insurance orsupport for insurance policyholders in the event of failure, while poorly designed schemeshave been criticised for contributing to imprudent behaviour, that well-designed schemes canprovide a framework for preventing failure and provide both certainty and continuity to those


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affected, and that APRA has set a high priority in the coming year on reviewing the existingsupport arrangements in the Australian financial system and exploring options withgovernment and industry.

The Wallis inquiry specifically acknowledged that institutional failure was the inevitableprice for maintaining a competitive and innovative financial sector. Does APRA now believethat the absence of industry support schemes represented a failure of Wallis, a failure ofgovernment? I am sorry if I read too fast from the annual report.

Mr Thompson—I do not think you can read that into that quote, Senator.

ACTING CHAIR—Would the recent amendments that were passed by the Senate late lastyear pick up some of those issues in terms of applying to the insurance industry the sorts ofcontrols that were previously applying in banking for risk management? That is what it wasdesigned to do, wasn’t it—that bill?

Mr Thompson—The amendments to the insurance act and the new prudential standardsunder that act certainly moved the prudential regulation of general insurance companies moretowards the model.

ACTING CHAIR—That is the banking model.

Mr Thompson—It is a banking style model with a strong emphasis on internal riskmanagement systems and board attestation, with the regulator focusing not so much on thedetail of individual transactions or quantitative limits and controls but on the quality of thegovernance and the risk management strategy of the institution. The quotation by SenatorConroy—

ACTING CHAIR—It was made prior to that, was it?

Mr Thompson—from our annual report is about explicit protection or compensationschemes that would sit alongside a supervisory regime. In Australia we do not have those atpresent in banking or insurance. As the Senator is aware, there is a limited compensationscheme in the superannuation industry for use in specific circumstances.

Senator CONROY—You have a performance management system that rewards individualperformance? Is that correct?

Mr Thompson—In APRA? Yes.

Senator CONROY—A bonus pool is allocated for distribution to staff on individualperformance?

Mr Thompson—Yes.

Senator CONROY—Can APRA confirm how much was allocated to the performancebonus pool in the last year?

Mr Thompson—I think it is in the annual report, Senator. I cannot recall the number. Inthe last couple of years it has been roughly five per cent of the aggregate.

Senator CONROY—Five per cent of?

Mr Thompson—The aggregate of total remuneration—we operate on a total remunerationpackage basis rather than a salary basis for remunerating staff. I think the bonus pool has beenapproximately five per cent of the aggregate TRP figure. I am not sure what that comes to.

Senator CONROY—Do senior management have a performance bonus pool? Is it all in?

Mr Thompson—Yes.


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Senator CONROY—They do not have a separate one?

Mr Thompson—Sorry. The performance arrangements extend from the most juniormember of staff—

Senator CONROY—There is just the one pool? There are not two pools?

Mr Thompson—One pool.

Senator CONROY—There is just the one pool?

Mr Thompson—Yes.

Senator CONROY—Is the five per cent expended every year?

Mr Thompson—It has only been in operation for two years. I think a smaller amount wasexpended last year than the year before. We are a very young organisation; there is not a longtrack record of these arrangements, Senator.

Senator CONROY—Bearing in mind you were only able to give a rough percentage, doesthat mean the pool has been fully expended in the last two years, or has there been some leftover?

Mr Thompson—You are testing my memory. I think it was fully expended in the first yearof the scheme but not fully expended in the second.

Senator CONROY—Why wasn’t it fully expended in the second?

Mr Thompson—I cannot recall the details.

Senator CONROY—Would you be able to take that on notice and give us a list of theperformance bonuses over the last two years for staff?

Mr Thompson—For all staff—individually?


Mr Thompson—What is the—

Senator CONROY—Because I am entitled to ask and receive.

Mr Thompson—I will take that on notice, Senator.

Senator CONROY—You will take it on notice to get it for us or you will take it on noticeas to whether you are going to supply it?

Mr Thompson—I will take it on notice as to whether it is an appropriate piece ofinformation to provide, taking into account—

Senator CONROY—I thought that was the role of the committee to decide, andparliament. I think you will find that we are entitled to ask—and it is public money.

Mr Thompson—Fine.

Senator CONROY—Hopefully we will get it.

Mr Thompson—I would be remiss if I did not take advice, Senator.

Senator CONROY—I am happy for you to take advice. I think the committee would liketo know, with the spectacular success of APRA’s prudential management, whether or not thesenior executives have felt the need to give themselves performance bonuses in the last coupleof years. We can see exactly how well those professionals are doing and how they rewardthemselves.


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Senator SHERRY—On this issue, is the unexpended portion of the bonus pool transferredover for the following year or the year’s use?

Senator CONROY—I was not going to ask that.

Senator SHERRY—What happens to it?

Mr Thompson—It has only happened once. It was not, as I recall, transferred to the nextyear’s bonus pool.

Senator SHERRY—What happened to it?

Mr Thompson—I think the bonus pool—

Senator CONROY—It should be zero, shouldn’t it?

Mr Thompson—that we will be looking at for this year is again around aboutfive per cent.

Senator SHERRY—What happens to the unexpended allocation? Does it go back intogeneral revenue for APRA?

Mr Thompson—Yes.

Senator SHERRY—It does? Do the bonus payments vary as a percentage of totalremuneration?

Mr Thompson—Yes. There is a range—from zero to 15 per cent.

Senator SHERRY—I will look forward to that with interest.

Senator CONROY—Yes, that will be entertaining for sure. I want to move to the creditcharge interchange fees. Does APRA agree with the RBA statement that credit card issuingand acquiring are more specialised activities and generate risks that are much narrower andeasier to monitor and control than those across the spectrum of activities of an authoriseddeposit taking institution?

Mr Thompson—Is that a quotation from a Reserve Bank document, Senator? I am notfamiliar with it.

Senator CONROY—I do not have it in quotations. It may be paraphrasing some RBAdocuments. I do not think I am making it up, if that is what you are worried about.

Mr Thompson—No. I certainly would not have thought that.

Senator CONROY—I have drawn on some statements when preparing the question.

Mr Thompson—It might help me to understand the context if I knew where it came from.

Senator CONROY—I was trying not to read lots of things out. The document I have saysthat the Reserve Bank has stated in its report Reform of credit card schemes in Australia thatany requirement that a credit card issuer or acquirer must be a deposit taking institution is, onits own, very difficult to defend. It also says that the RBA states that credit card issuing andacquiring are more specialised activities and generate risks that are much narrower and easierto monitor and control than those across the spectrum of activities of an authorised deposittaking institution. It is a quote from their report on reform of credit card schemes.

Mr Thompson—I am not sure that APRA has an official position on that, but I wouldagree with it.

Senator CONROY—You would agree with it?


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Mr Thompson—I think I would agree with it. It sounds like a reasonable proposition. I ama member of the Payments System Board, so I probably have some ownership of the—

Senator CONROY—I was just coming to that.

Mr Thompson—Yes, which I imagine you are well aware of.

Senator CONROY—The Reserve Bank report states that the APRA Board has agreed inprinciple that APRA will authorise and supervise specialised credit card issuers and acquirersand that, to this end, a regulation will need to be enacted under the Banking Act 1959 to deemcredit card issuing and acquiring to be banking business.

Mr Thompson—Yes.

Senator CONROY—Can APRA confirm that it does, in fact, agree that it should authoriseand supervise specialised card issuers and acquirers and that this issue is currently beingpursued with Treasury?

Mr Thompson—The board has made a decision that that would be an appropriate role forAPRA to take on. I think the question of legislative amendments to facilitate it has—we havecommenced discussions with Treasury about it.

Senator CONROY—Any idea when we can expect to see the draft legislation?

Mr Thompson—No. Perhaps I should ask one of my colleagues whether we do knowmore about the timetable.

Mr Brunner—No, at this stage we do not know more about the timetable.

Senator CONROY—Does APRA anticipate that it will produce a prudential standard forspecialist credit card issuers and acquirers? Do you think that is how you are likely to regulatethese activities?

Mr Thompson—The answer to that will depend on the form of legislative amendment, ifany. A prudential standard would be one possible vehicle, yes, and regulations could beanother.

Senator CONROY—Sure.

Mr Thompson—Rules could be specified in the act itself.

Senator CONROY—Do you have a preference?

Mr Thompson—We had a general preference for prudential standards. That is the way theBanking Act operates at the moment for other prudential controls. But other vehicles wouldbe available as well.

Senator CONROY—Yes, thank you. It has recently been reported that there have beentroubles with the reliability of Internet banking. CBA’s banking system was down for fivehours in November; the Westpac system has gone down for a week, now recently blamed on acomputer virus. The FSCPC—I am hoping you know what that means—has asked that APRAconduct an independent assessment of banks’ ability to provide Internet banking services. It isrumoured that at least one financial institution can only provide Internet banking services to300 customers at one time. Does APRA have concerns about the safety and reliability ofInternet banking?

Mr Thompson—There have certainly been some breakdowns over the past couple ofmonths, so there are some questions there about reliability which I know are of great concernto the banks involved and are being addressed. The security of electronic banking systems


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generally is an issue that we have an interest in from a prudential supervision point of view. Itis an issue that we have spent a lot of time talking about with banks and other financialinstitutions over the past couple of years. We have established an operational risk group in ourpolicy research and consulting division and one of the key aspects of operational risk that ithas been working on is security and other risks in electronic banking channels.

It is certainly an area that we believe is an issue of interest from a prudential supervisionpoint of view. I would stop short of saying that it is a matter on our list of current concerns, inthe sense that we worry that a problem there is a threat to the viability of one bank, or thebanking system, but it is certainly an issue that we are looking to the banks to have veryrobust controls over. We think there is room for improvement. These reliability problems thatsome of the banks have experienced in the past couple of months only emphasise to us theimportance of banks giving proper attention to the security and robustness of those systems.

Senator CONROY—This suggestion that one of the banks can only have 300 customerson the Internet at one time—are you familiar with that at all?

Mr Thompson—I am not familiar with it.

Senator CONROY—Mr Brunner?

Mr Brunner—No, it is a new one to me.

Dr Roberts—One of the risks, Senator, that we would like banks to be conscious of isreputational risk. While they do not do it now, if a bank were to have a sequence ofbreakdowns to the extent that some of its customer base lost confidence in the bank, thencertainly that reputational risk is something that the bank should be trying to mitigate.

Senator CONROY—I did want to have a discussion with you about your draft prudentialstandard on outsourcing but I am also conscious that I have my colleague with me. I know heis keen to ask you questions from other areas, so I will just pass over to him in a second. WesLofts’ superannuation?

Dr Roberts—Sorry?

Senator CONROY—My staffer is a Carlton fan. My apologies for the question. Actually,are you aware that Wes Lofts played 167 games at Carlton? I am sorry, Senator Coonan, ifSenator Kemp was here by now he would be on the desk. That was between 1960 and 1970.He is a Carlton life member and a former chairman of selectors. You are a disgrace, Gordon.You will be pleased to know that Gordon is departing my office—not quickly enough afterthis question. Perhaps his greatest contribution to Carlton was to have played in the 1970Carlton premiership team.

Senator Coonan—He will be sorely missed.

Senator CONROY—He is going to be sore and missed. How many Carlton players areAPRA currently investigating? I will leave aside John Elliott. As I said, unfortunately, SenatorKemp is a Carlton fan and he is always much more sensitive, as I am sure Mr Thompsonremembers. Do we have any information about Mr Lofts’ case?

Mr Thompson—Do we have any information?

Senator CONROY—Is it settled?

Mr Phelps—Senator, I do not have it with me but we did issue a press statement whichexplained the situation with the Lofts superannuation fund, which essentially is that—

Senator CONROY—Fifty members, total assets of $1.7 million. Does that ring a bell?


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Mr Phelps—Yes. The issue went to the definition of some in-house assets.

Senator CONROY—I guess that Carlton board just cannot help it. I just feel sorry fortheir supporters—deluded, barracking for a pack of crooks.

ACTING CHAIR—Are you casting aspersions on the players?

Senator SHERRY—Just on that issue, are there any matters relating to noncomplyingsuperannuation funds?

Mr Phelps—Sorry, Senator, is this just generally?

Senator SHERRY—No, in respect to Wes Lofts. Carlton rang a bell in the back of mymind.

Senator CONROY—John Elliott does not have a super fund, does he, that you areinvestigating?

Mr Phelps—The compliance went to compliance with the in-house asset rules and it wasagreed, with court involvement, that these had to be reduced. That is in train.

Senator CONROY—I want to ask about branch closures. This is my last question. Iunderstand that APRA has been working on a statistics project. As part of this project newdata on branch closures will be collected. In November last year I was advised thatinformation on branch closures was not yet publicly available because APRA was stillcollecting the information from the banks.

Mr Thompson—That is correct.

Senator CONROY—On 4 September 2000, APRA official Mr Brian Gray advised theHouse of Representatives economics, finance and public administration committee that thenew statistical forms should be in place by July 2001. Given that it is now February 2002, canAPRA advise what has caused the delay in producing the new statistical forms?

Mr Thompson—Designing a new statistical collection of this kind, Senator, is a verycomplex process. The new data, when they re available, will relate to the date that Mr Grayreferred to. I think we are about two weeks away from publishing the first set of data, whichwill be referred to as the points of presence collection, which will be a much morecomprehensive and useful set of data on the availability of banking services than the oldbranches collection was. There were two main reasons for the delay: firstly, just the design ofthe collection and agreement on definitions, and then the work involved in institutionscompiling the data on the new basis and providing it to us.

Senator CONROY—Thank you. I will defer to Senator Sherry.

Senator SHERRY—We have had a discussion previously about actuarial oversight byAPRA of insurance companies. We had that discussion in Sydney. I am not sure you werethere, Mr Thompson.

Mr Thompson—I remember a discussion at a meeting here. I am not sure if I was at onein Sydney.

Senator SHERRY—You said earlier that you wanted to talk about past regimes and theregime we are now implementing. Have you made any changes since the middle of last yearin respect to actuarial oversight of insurance companies?

Mr Thompson—Our focus over the past 12 months has been to develop the newprudential standards and to develop the legislative amendments in cooperation with Treasuryand others and then to complete the prudential standards that sit underneath the amended


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legislation. Those new standards, which become effective on 1 July, do introduce newarrangements in relation to actuarial investigation and valuation of insurance companies’liabilities. I might ask Dr Roberts to elaborate on that.

Dr Roberts—Yes, I am trying to recollect how that issue unfolded at the time, but myrecollection is that there may have been an exaggerated impression of what used to be done inthe ISC because I think the amount of actuarial expertise and effort that went into looking atgeneral insurance returns was actually pretty minimal. We do think actuaries have a key roleto play in upgrading the amount of science in this industry, but the way that will happen in thenew regime is via the approved actuary that the companies will have to employ to value theirliabilities in particular. We are really trying to institutionalise in general insurance somethingsimilar to the role that actuaries have traditionally had in life insurance, where theirinvolvement has been very useful.

Senator SHERRY—So there would be more rigorous licensing requirements of actuarieswho work within insurance companies?

Dr Roberts—Yes. To perform the role of an approved actuary under the new regime, theywill have to be extensively vetted by the company and approved by us, and we are certainlybeing quite thorough in looking at who we approve and the evidence that is provided abouttheir suitability. I just repeat what I said earlier. The four bottom line elements of that arecompetence, integrity, capacity to do the work and no conflicts of interest, and so it is actuallyquite rigorous. Those actuaries need to be subject to professional discipline. Primarily, almostall of them will be members of the Institute of Actuaries of Australia and so we also put someregard on the fact that they have their professional obligations under the codes of thatinstitute.

Senator SHERRY—But will APRA be increasing the direct actuarial checking by APRAemployees of insurance products?

Dr Roberts—We do not have a team of actuaries in place that would do that, and we donot plan to. We do have actuaries on staff and we would like to have some more actuaries onstaff.

Senator SHERRY—You are just jumping. What is the current level of actuaries on staff?

Dr Roberts—We have just lost Mr Thorburn, who was one of our more important ones.

Senator SHERRY—I do remember an exchange with Mr Thorburn. Where is he movingon to?

Dr Roberts—He is moving on to the World Bank in Washington. Assuming you define asan actuary someone who has not only finished their university course but also theirprofessional training, I think we only have two, but we have a number of people who arejunior actuaries who are part way through the process.

Senator SHERRY—Are you intending to build up the number of qualified staff?

Dr Roberts—Yes, primarily because they tend to have the skills that we would likegenerally for financial regulators, not because we necessarily think we need to have so manycertified actuaries.

Senator SHERRY—But this is part of the regime you are now implementing, is it?

Dr Roberts—No. Regarding the actuarial role in the regime we are going to implement onthe industry side, the companies will have to appoint an actuary approved by APRA.


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Senator SHERRY—No, I understand that, but presumably the check carried out by APRAon the vetting process to some extent will have to take place by actuaries employed by APRA.

Dr Roberts—Yes, and Craig Thorburn did a lot of that in the initial work of thereauthorisation process, and we have another actuary, Rob Thomson, who is the final port ofcall at present in making those judgments.

Senator SHERRY—Mr Thompson, we had a speech by the Reserve Bank on 11 May2001, expressing concerns about small and medium-sized superannuation funds. You havemade a number of comments, I think publicly, in the media and before the Senate committee,expressing concern, and I just quote from the Superannuation Working Group’s issue paper,and it was expressing concern about small to medium-sized corporate funds:

These concerns stem primarily from APRA’s experience with some of the smaller corporate funds,where most of its enforcement action is concentrated. Typical problems encountered in relation to thesefunds include non-arm’s length transactions and poor investment decisions, resulting in large capitallosses. Other problems stem from a failure to develop clear investment objectives and implementappropriately matched investment strategies to the fund’s member profile, poor asset selection andheavy portfolio concentrations in a narrow range of assets, fraud or serious misrepresentationsometimes associated with a trustee’s or director’s use of fund assets for their own benefit.

I agree. I do not disagree with your analysis and the comments that APRA and you have madeabout this area. I assume you still stand by these observations.

Mr Thompson—Certainly.

Senator SHERRY—Is APRA aware of any superannuation fund, corporate or industry, inwhich you have carried out an investigation and found it to be correct, relating to the issuesthat I have just outlined here, which you have gone on the public record about, in respect totrustees who are union officials?

Mr Thompson—Sorry, I just missed the last part of the question.

Senator SHERRY—Has APRA had any reported incidents consistent with the concernsyou have outlined here relating to trustees of corporate or industry funds that relate to unionofficials?

Mr Phelps—Senator, I am not aware of anything in our normal reporting of visits whichwould identify whether trustees were union officials or not. I am not aware of any examplesbut we would have to try to do some research. When my people visit a super fund, they lookat things like equal representation, et cetera, but it is not something that we would record as towhether somebody was a union official or not. Certainly I am not aware of any example of thetype you have mentioned.

ACTING CHAIR—What is the time frame for your question, because there have beencases in the past, haven’t there?

Senator SHERRY—I have had cases brought to my attention through the selectcommittee and other areas, dealing with the sorts of issues that I think have correctly beenidentified by Mr Thompson. Commercial Nominees is an example. We had the hairdressersfund, we had the lawyers fund, and EPAS in Queensland. I think prime facie at least some ofthese issues relate to it. We have had Wes Lofts, and there are some other funds that have beenidentified publicly, but I am not aware of any of the trustees in those funds being unionofficials, and you have not issued any reports about the alleged activities of union officials inthis area?


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Mr Phelps—Not in the last few years in which I have been involved, Senator, and I justcannot imagine where people would get such information from, because it is not somethingwe would collect.

Senator SHERRY—But the reason I ask this is this: I would assume that APRA, being theregulator, would be best placed to make observations about undesirable activities going on insuper funds and who is responsible at trustee level for that.

Mr Phelps—We look at the activities of the trustees on their merits in each case. We do nottry to draw conclusions about people’s backgrounds and whether they make better trustees ornot.

Senator SHERRY—But you have not reported anything that I am aware of, and youconfirm that. That is fine.

ACTING CHAIR—No reason to.

Senator SHERRY—I agree, Chair, there is no reason to. I will come to that in anothercontext shortly. Isn’t it true that with any problems that relate to employee trustees in asuperannuation fund, because you have an equal number of employer trustees, for things to gowrong in the areas that have been identified, employer trustees—if things are going wrong—would probably have a knowledge of that, if not an agreement with that?

Mr Phelps—You mentioned a few funds there which we have all talked about over the lastyear or so. The thing to remember is that there are about 1,100 corporate super funds with lessthan $1 million in them, and another 750 with between $1 million and $5 million. The greatbulk of those under $1 million have less than 10 members, typically four or five people whoare related to the employer somehow or other and perhaps two or three employees. With thatsort of funds, even if equal representation is observed on paper, for it to be serving thedisciplinary function that it is intended to is quite difficult because they might be the only twopeople who work there and they owe their jobs to these people. In saying that the equalrepresentation intentions are not being fulfilled or observed really in the spirit, it is quite acommon observation. We want people to have proper elections and fix that up but you can seethe practicalities in that sort of situation.

Senator SHERRY—Yes. True independence, taking your hat off as an employee, smallworkplace, going into a trustee meeting and not feeling to some extent, at least on someoccasions, perhaps overruled by the employer.

Senator CONROY—It is not uncommon for trustees elected through the employee routeto be promoted not long after they are elected, to become management.

Mr Phelps—Where do you draw the line? When does an employee become a manager orpart of the management team?

Senator SHERRY—They might be the firm’s accountant and they are there as anemployee representative. They are all middle management or whatever. Those observationsand the observations that APRA have made in speeches and in documents have been spot on.I have no criticism of previous observations and the observations you have just outlined to thecommittee. I have read the section of APRA’s paper on page 9 of the Superannuation WorkingGroup issues paper. I was somewhat surprised, if not shocked, that the minister, Mr Hockey,when presenting this issues paper on 2 October 2001, in reference to so-called union trustees,said in reference to the issues paper that the proposals being put forward would force thesepeople to disclose and at times seek approval of members if they are going to engage inrelated party activities, so that, if they are going to give work to mates, they are going to need


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to seek approval of members of the fund. Have you provided any evidence at all toMr Hockey that that criticism of union trustees is correct?

ACTING CHAIR—You are not necessarily obliged to answer a question in terms ofgiving advice to a minister.

Senator SHERRY—Given the discussion we had earlier, are you aware of any evidencerelating to the sorts of activities you publicly expressed concern about that relate specificallyto trustees who are union officials?

Mr Thompson—I think Mr Phelps has already answered that.

Senator SHERRY—You are not? To be balanced in this, are you aware of any criticismsmade of employer organisations who have nominated trustees in this area?

Mr Thompson—Employer organisations or employers?

Senator SHERRY—Employer organisations, if nominated trustees, which is relativelycommon in the industry.

Mr Phelps—Yes.

ACTING CHAIR—You might like to take it on notice.

Mr Phelps—Even some of the ones we have talked about in the other committee—youmight classify some people, but I should take that on notice.

Senator SHERRY—When I talk about employer organisations, there is a requirement forthem to be registered as employer organisations. That is the category of employerorganisations that I am talking about. I am balanced in my approach to this matter and I amnot aware of any criticisms in respect to employer organisations who are registered, who havenominated trustees to industry, or, for that matter, corporate funds—criticisms that areconsistent with the earlier correct concerns that you have expressed as an organisationpublicly. I just wanted to explore the issue because I thought you are best placed to be awareof information that I cannot find anywhere.

Mr Phelps—Senator, for example, the hairdressers association was connected with thehairdressers one, which is quite old. That is 10 years ago.

Senator CONROY—Is there any evidence that you can give the committee that wouldsupport Mr Hockey’s claims outlined by Senator Sherry?

Mr Phelps—That is what we are taking on notice.

Senator CONROY—Union mates, related transactions, any of those sorts of things. Areyou aware of any evidence that you could give to the committee that would support—

Mr Thompson—I cannot call any to mind at the moment, Senator, but I have not read thatpaper for some time and I do not recall that quote now. We can take it on notice.

Senator CONROY—Thank you.

Senator SHERRY—Are you talking about the quote I have read from Mr Hockey?

Senator CONROY—Yes, I am.

Senator SHERRY—Yes. In the issues paper it is a quote that he made at the time.

Senator CONROY—When he launched it.

Senator SHERRY—When he launched it.


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Mr Thompson—I think Mr Phelps has answered the question about any evidence that weare aware of about problems—

Senator CONROY—You are not aware of any evidence.

Mr Thompson—with either of the two groups that we are discussing here. If there isanything further we can add, then we would be happy to.

Senator SHERRY—Yes. I have raised previously with APRA the issue of APRAreceiving data relating to levels of fees, charges and commissions in respect of a wholevariety of superannuation products. You did indicate that you do not receive that information.Is that still your intention? Is there to be a change of policy in this area?

Mr Thompson—We are looking at redesigning the statistical collections that we receivefrom superannuation funds but I am not sure if there is an intention to collect any moreinformation on fees and charges as part of that.

Senator SHERRY—You did not collect any, I think. That is the problem.

Mr Thompson—Our interest is in the prudential issues, in the quality of the investmentstrategies and other related matters, rather than in our fees and charges, which are more amatter for ASIC or for the ACCC. Greg, is there anything to add to that?

Mr Brunner—Certainly the set of new prudential returns which we are designing collectsmore detailed information, including more detailed information on both the profit and lossside of the account and on the balance sheet side. I cannot specifically recall whether we wereasking for those to be separately identified. I would have to get back to you on that. These areonly draft returns at the moment. They will be subject to very extensive industry consultationas well as consultation with others who have an interest in the data.

Senator SHERRY—Have any of you read the Senate select committee’srecommendations in this area?

Mr Thompson—Yes.

Senator SHERRY—You have? Do you agree or—

Mr Thompson—We are providing advice to the government as it prepares its response tothose recommendations, Senator.

Senator SHERRY—But this is something APRA can initiate itself. It does not necessarilyneed government approval.

Mr Thompson—I am not sure which recommendation you are referring to.

Senator SHERRY—The issue we have been talking about: the issue of fees, charges andcommissions being reported to APRA for publication.

Mr Thompson—As Mr Brunner said, the content of the statistical collections fromsuperannuation funds is under review at the moment, but our prime interest must be ininformation which is of relevance to the prudential regulation of those—

Senator SHERRY—I accept that, but the Senate committee—unanimously I might say; itwas not just one side or the other—identified and recommended that APRA is the appropriateorganisation to receive that material.

Mr Thompson—We will certainly take that on board in looking at the collections.

Dr Roberts—The concerns we have always had, Senator, are that we are not a priceregulator.


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Senator SHERRY—I am not suggesting you are regulating price.

Dr Roberts—So to some extent—

Senator SCHACHT—At least collect it.

Dr Roberts—If you are not going to do anything with it—

Senator SCHACHT—Public debate would be useful.

Dr Roberts—But our role is safety and soundness. I guess we have never seen it as a coreelement of our role. Also, with the complexity of the industry, the role of service providers,outsourcing and the amount of layers money can go through, it is incredibly hard. It would bebeyond our capacity to get any kind of sensible macro figure on fees and charges, even if wewere to explicitly ask for it in our returns from each super fund.

Senator SHERRY—I just do not agree with that, Mr Roberts. That is the excuse we getgiven about not disclosing fees, charges and commissions on superannuation products—thatthey are just too hard, technically too hard, and you cannot identify them. These are all theexcuses that have been given in the past about disclosure in a transparent, easily understoodway. Isn’t this what is happening with the regulations in respect of financial disclosure?

Dr Roberts—Yes, that is in ASIC.

Senator SHERRY—Yes, that is right.

Dr Roberts—That is product by product. To have something sensible said about the levelof fees and charges in superannuation, you have got to be able to combine all the elements,which include the administrative charges the fund puts in and the investment charge that thefunds managers do, and then you have got all the other service providers.

Senator SHERRY—You have the commissions, you have the exit fees and the entry fees,and you have trailing commissions. I agree there are a hell of a lot of charges.

Senator SCHACHT—But, Mr Roberts, can I ask this from my own experience, when Iget my rollover fund come through. I have been arguing with my fund now for eight yearsstraight. I changed it and I have still got the same problem. I get written at the bottom thecharge for the year’s administration cost, and it is written in a way that Einstein would havetrouble trying to work out how much was paid. There is 0.9 of a per cent of this and 0.13 ofthat, et cetera. It is not clear whether it is on the total amount in the fund, the total amountinvested, or the income for the percentage of the increase for that year.

When I rang them up, I said, ‘All I want you to tell me is whether it is for $300 or $500 ayear? How much have you taken in dollars and cents to administer my investment?’ Thecompany said, ‘We can’t tell you that because we deduct the money on a daily basis.’ I said,‘Do you mean to tell me that your accountant doesn’t know how much cash a day is goinginto their company to pay for the administration to make sure that they have enough money topay all the salaries?’ They say, ‘Oh, well, probably.’ The next thing is people do not know thatwhat look like very small percentage figures are actually substantial amounts of money.Unless you get really competitive, some people are going to find, over 30 years, that thedifference between paying two per cent compounding compared with 1¼ per cent is going tosignificantly affect their weekly pension payment when they retire.

I want to ask you very simply whether you can administratively instruct that, when they putout their annual report to you, for all the subscribers for the pension funds, they have to put inthere a figure in dollars and cents of how much was deducted. Is that a policy decision you


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can make? To do it, could you do it administratively by regulation, or do you have to amendthe act?

Dr Roberts—That would be an ASIC decision under the FSR—

Senator SCHACHT—But aren’t you the regulator of the industry?

Mr Thompson—We are the prudential regulator. We are not the price regulator or thedisclosure regulator.

Senator SHERRY—We are certainly not advocating price regulation.

Senator SCHACHT—No, we just want the information.

Mr Thompson—It is a question of who has the power under the system—

Senator SCHACHT—So you are telling me that you do not have the power to—

Mr Thompson—I do not believe so, Senator, but I will take it on notice.

Senator SCHACHT—Please take it on notice. I asked this question four years ago here toyour predecessor and it drifted off into the ether and I never got an answer.

Dr Roberts—I think we would agree with the sentiment you expressed. I do not think Ihave ever met anyone who understood their superannuation statement. I just do not think it isan APRA issue.

Senator SCHACHT—Do you think that to change it to what I am suggesting, it would bean ASIC responsibility, and not an APRA responsibility?

Dr Roberts—Yes, Senator. Survival of the fund is our responsibility, not the amount offees they charge.

Senator SCHACHT—All right. In that case, ASIC is on tomorrow and we will get achance to raise that. But I would also ask you to talk to them as well as coming back.

Senator SHERRY—I will raise it with ASIC tomorrow. No-one is suggesting that you bea price regulator. It is just that the committee’s unanimous recommendations went toidentifying you as the most convenient organisation to be able to gather that data so that it waspublished and we know exactly what is going on, rather than being hit continually byanecdotal complaints about fees, charges, commissions and all the other things that go on. Ihave to say that the complaint level in this area has become endemic in the last year or two.

Dr Roberts—I understand that completely. In the returns that Greg mentioned, ourpriorities would be, on that list of items you read out earlier, to get more information than wehave been getting on investment strategies of our super funds than on the fees and charges.

Senator SHERRY—Just so we are clearly understood, it is gathering of information forpublication in a comprehensive, transparent way that is industry wide. That was the intentionof the committee’s recommendation—nothing more than that.

Senator SCHACHT—I just want to ask one question on a prudential matter. In the secondhalf of last year, Australia’s biggest bank, the NAB, lost $4 billion on an investment inAmerica in a thing called HomeSide. People wrote it up at the time as the biggest single lossin Australia’s corporate history. It beat Alan Bond, it might even beat HIH yet; we do notknow. But it was certainly very big. Did APRA, who is in charge of prudential regulation ofour banks, feel it necessary to have any conversations or discussions with the NAB about theimpact of a $4 billion loss directly and indirectly on the standing of the bank?


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Mr Thompson—Yes, we had extensive discussions with the bank about the reasons for theloss, about the subsequent investigation that the bank commissioned and about the outcome ofthat.

Senator SCHACHT—Were you satisfied that the people who were employed in Americato do the investigation about what went wrong were independent enough of the existingmanagement of the bank? Initially they said it was a mistake where a wrong assumption wasfed into a computer and no-one seemed to take responsibility for the wrong assumption. Wereyou satisfied with that response?

Mr Thompson—We have been satisfied with the way the bank has responded to theproblem, yes.

Senator SCHACHT—Initially they did not identify anyone as responsible. There wassuch an outcry in the press that I notice a week later some senior executives did seem to leavethe bank, suggesting that they had paid the price. Whether they were the right people to paythe price for the loss of $4 billion is another question. But until they left no-one was going topay the price, were they, other than the executive of HomeSide?

Mr Thompson—I am not sure what the internal decision-making process was, Senator.But we are satisfied with the way the bank has handled it and the outcome. I think it has donea very thorough investigation. The bank was strong enough to absorb that loss, which, as yousay, was an extremely large one, but its minimum capital requirement was never in question.

Senator SHERRY—It is still a significant loss.

Senator SCHACHT—Four billion dollars.

Mr Thompson—Extremely—but the National Australia Bank is also an extremely largebank. It was a very serious loss, a serious concern, and that is why we spent a lot of timediscussing the causes and the remedial action that the bank took with the senior management.

Senator SCHACHT—Did you make any suggestions to them about what they should doin the future in their own internal processes, so that what happened with HomeSide will notbe repeated as far as is possible?

Mr Thompson—Some deficiencies were identified in the report, and we certainly agreewith the findings of that report about their controls. I think the bank has learned someimportant lessons about the management of overseas operations such as that. And, yes, thereare some lessons as to how those sorts of operations should be run in the future.

Senator SCHACHT—I know you have only had prudential responsibilities for a shortperiod of time, having transferred from the Reserve Bank, but did you make any comment ontheir due diligence, or lack of it, when they bought HomeSide—about the fact that someonemade a mistake with a computer assumption, that they were one per cent out, that it was$4 billion, and that no-one seems to know how that mistake occurred?

Mr Thompson—I think it is known how the mistake occurred, but it was a very complexeconomic and financial model.

Senator SCHACHT—But these characters get paid a million and a half dollars a year!

Senator CONROY—They just punched the wrong numbers in. I think the model wasokay. The numbers were wrong.


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Senator SCHACHT—Mr Thompson, if you look at the annual report, these characters getpaid a million and a half dollars flat salary and took a performance bonus last year of another$2 million. That is in Australia.

Mr Thompson—Yes.

Senator SCHACHT—Don’t you think that is a bit obscene? They lose $4 billion and stillget a performance bonus.

Mr Thompson—I have personal views about that, but it is not something that APRA hascontrol over. Our concern is the viability and strength of the bank. I come back to the pointthat even though it was a very large loss and evidence of some failures within the bank—

Senator SCHACHT—Thank goodness they were a large bank; otherwise you would havehad a collapsed bank on your hands. I want to ask one last question. I draw your attention tothe annual report of the NAB that came out about a month ago. In there—I remember comingup with about 76; it sticks in my memory very well—it lists all the payments to directors,executive and non-executive directors, as required by law. The chief executive of HomeSide,who had to resign, or was asked to leave, when it collapsed, had been paid about $3 millionper year as his salary. He received a performance bonus and a payout, a termination payment,which took his total payment when he left the bank—after losing $4 billion—to $7 million.Do you think that has some effect in the minds of Australians about there being something abit wonky in the way these things are being run—that you can lose $4 billion and leave with$7 million in your pocket?

Mr Thompson—Yes, it does not look right to me, Senator, as a personal view.

Senator SCHACHT—Did you raise that with the bank?

Mr Thompson—It is not a prudential matter, Senator. I am sorry, it is not an issue that wewould raise as a prudential supervision issue with the bank. We can have a view about it, butit is not a prudential issue. It is not something that—

Senator SCHACHT—I would have thought that it affects the standing and the confidenceof the bank in the community. Banks are not purely a formula. In a culture of a community,the banks are about confidence. Once that confidence is lost, as we have discovered over thelast 300 years, you end up with runs on banks, people putting money under mattresses,et cetera. That is why I am raising it, because I think the culture of banks is being abused.They are abusing the culture of Australia, and you think that is something you do not evenwant to comment about.

Mr Thompson—I said we could have a view on it—and I do have a view, and I do notthink some of those practices are desirable practices—but they do not go to the heart ofprudential supervision, which is to do with the safety and soundness of the bank or theconfidence in the banking system. There is no evidence of a loss of community confidence inthe safety of the Australian banking system.

Senator SHERRY—On 28 September last year APRA wrote to the Senate selectcommittee, stating it had engaged junior and senior counsel to advise it and the inspector ofthe ECMT on whether fraudulent conduct or theft had occurred. APRA stated that theinspector’s report would be completed in February and released to the minister. Has the reportbeen completed?

Mr Phelps—No, Senator. The report is very close to being completed.


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Senator SHERRY—Given that I think the application for assistance was sent in Marchlast year and given that the SI(S) Act does not require the same burden of proof for theft andfraud as criminal proceedings, why are the inspector and APRA still unable to report to theminister?

Mr Phelps—The report is being very carefully prepared. One of the reasons that section ofthe act has not been used is that the assumption was always that there had to be some sort ofconviction, or that some sort of fraud had to be proved in a court of law before that piece ofthe legislation could be used. We see that our advice has to be legally robust—I cannot say theequivalent of a court conviction, but something which is going to stand up to quite a lot ofscrutiny. The process by which the inspector has gone about this—in reviewing countlessdocuments, interrogating all of the previous directors, interviewing large numbers of thepeople who had money involved in this thing, and employing junior and senior counsel toconsider what conclusions could stand up against precedent on the basis of this report—iswhat has taken all this time.

Senator SHERRY—Are there any other applications for assistance that you are aware of?

Mr Phelps—Senator, in relation to the AISF—Australian Independent SuperannuationFund from Perth—the acting trustee lodged an application but then withdrew that applicationand intends to resubmit it. One of the key questions which came out of consideration of thatapplication is that the trustee cannot claim for any money that has not been spent yet but isintended to be spent. All of the advice that we received was that you could not interpret theeligible amount as being prospective in any way. So the acting trustee has decided that it isbetter to wait until the whole thing has been cleaned up, then spend all the money that isexpected to be spent, and then make the claim.

Senator SHERRY—And then make the claim.

Mr Phelps—Yes. So they withdrew it, and they are going to resubmit it.

Senator SHERRY—I do not want the details, but are there any other applications that youare aware of?

Mr Phelps—Only in relation to CNA and that one. They are the only two.

Senator SHERRY—Thank you.

Senator CONROY—I will put the rest of mine on notice.

Senator SHERRY—I will put some on notice, too.

ACTING CHAIR—Are there any further questions for APRA?

Senator SHERRY—One final point: was APRA present at the debate or the discussion wehad at the beginning of Treasury this morning about the response to questions on notice?

Mr Thompson—No, Senator, we were not present.

Senator SHERRY—I will draw your attention to the fact that there were some vigorouscomplaints about the time lag in responding to questions on notice.

Mr Thompson—I think our track record has been quite good.

Senator SHERRY—Yours, I have to say, is a lot better—not perfect, but a lot better thanmost others.

Mr Thompson—We are not perfect. We aspire to perfection, but I am sure we are notperfect.


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ACTING CHAIR—I would like to make a concluding remark. I am very concerned abouta lot of these poor people who have suffered as a result of the so-called fraud. I do think itdoes need an expeditious resolution.

Senator SCHACHT—Hear, hear!

Mr Thompson—We are as keen as anyone to achieve that, Senator. As Mr Phelps said, ithas been a very complex matter, involving 480 or more funds, and, unfortunately, it has takenlonger than any of us would have liked.

ACTING CHAIR—We have to find a quicker trigger mechanism; otherwise it is defeatingthe whole purpose. People’s whole livelihoods have been affected; suicide has beencontemplated. It is a terrible situation when people lose their retirement savings in such amanner.

Mr Thompson—Yes. Mr Phelps has been meeting regularly with the action group and wecertainly understand the position of individuals who have suffered quite significant loss insome cases.

[10.36 p.m.]

Australian Office of Financial ManagementACTING CHAIR—Are there questions for Mr Allen or Mr McCray, through the minister.

Senator CONROY—Thank you for your patience. We appreciate you hanging arounduntil such a late hour. I just wonder if you could give me a very brief description of your role.

Mr Allen—Our primary role is the management of the Commonwealth government’s debtportfolio, inclusive of issuance through to the administrative functions that are associated.

Senator CONROY—Could you explain in general terms how Commonwealth debt ismanaged.

Mr Allen—There are numerous definitions of the word ‘management’, Senator, butobviously there is a need to ensure that the obligations of the portfolio continue to be servicedover time, in that we have, for example, interest payments to make on a regular basis inaccordance with the terms and conditions under which those government bonds, for example,were issued. There is obviously an ongoing need to manage refinancing. There is also, inperiods where the government does have a funding requirement, a need to manage theissuance of the required amount of funding, and obviously, in periods of declining debt aswell, to manage the orderly application of funds to the retirement of debt or just toinvestment, for example, as we currently conduct term deposits with the Reserve Bank.

Senator CONROY—Are any of the liabilities or debtors instruments or derivatives in USdollars?

Mr Allen—Yes.

Senator CONROY—Can you confirm, therefore, that the Commonwealth debt is exposedto movements in the Australia dollar?

Mr Allen—Yes, and we outline that in our annual report.

Senator CONROY—I understand from your annual report that you manage the portfolioagainst a benchmark. Could you explain to me the benchmark against which the currencyexposure of Commonwealth debt is managed?


ECONOMICS

Mr Allen—We manage a part of the portfolio to achieve a certain desired currencyexposure, as we outline in the annual report. That is sort of targeted in the range of up toaround 15 per cent in foreign currency exposure.

Senator CONROY—Would I be correct in saying that the neutral or strategic position ofthe fund is 12.5 per cent liabilities in US dollars, but that you can decide to fund up to 15 anddown to 10?

Mr Allen—That would be a representation of the sort of target range, yes.

Senator CONROY—Can you explain the rationale behind the decision to fund liabilitiesin US dollars? Do you believe it would lower funding costs?

Mr Allen—That has certainly been the rationale for why that allocation was made. Wehave been engaging in that funding strategy for quite a significant period of time. Themethodology underpinning that strategy has been developed by independent advisers to theCommonwealth, and certainly we would be happy to provide details on how that process hasoccurred.

Senator CONROY—Can we discuss the upper and lower limits on the currency exposure?The minimum exposure is 10 per cent and the maximum is 15?

Mr Allen—I think it is better expressed that the maximum is 15 and, as we have outlinedin our annual report, in terms of the target benchmark ranges, that 15 per cent is—

Senator CONROY—Could you just explain the rationale behind the 10 to 15, thefive per cent band range. What is the rationale behind that?

Mr Allen—That just enables some degree of flexibility from a management perspective interms of being able to vary the level of exposure—not to take views on the currency but toenable significant changes in the portfolio to be absorbed over a period of time.

Senator CONROY—Do you ever characterise it by saying ‘risk management’? Is that afair way to characterise it, to just use a couple of words?

Mr Allen—Risk management in a sense, but in a very limited context.

Senator CONROY—Your annual report of 2000-01 states on page 30:

... the Commonwealth has deliberately eschewed an approach that would involve taking a view onthe short-term path of interest rates and exchange rates in an attempt to outperform the market.

Is this a contradiction? Does AOFM take a view on currency movements or not? Do you haveto make some judgment?

Mr Allen—No. As we have outlined in our report, we do not aim to take a view on interestrates or currency.

Senator CONROY—It does happen, though. You might not set out to, but that is what ineffect happens?

Mr Allen—I think to draw that conclusion is not representing our management objective.

Senator CONROY—The annual report also states on page 35:

The USD exposure in the Commonwealth debt portfolio hovered around the top of the benchmarkrange of 10 to 15 per cent until mid October 2000...

But it then goes on to say that higher interest rates and a weaker currency pushed the currencyshare outside the benchmark range. What does that mean?


ECONOMICS

Mr Allen—That, as a percentage of the total portfolio, the currency exposure represented aportion which was greater than the 15 per cent targeted range.

Senator CONROY—What did it get up to?

Mr Allen—We indicate in terms of the graph in our annual report on page 34 that it was inthe order of 20 per cent.

Senator CONROY—Can you explain what procedures are normally followed when aninvestment guideline is breached.

Mr Allen—Yes, and again we have outlined in terms of our annual report what action wastaken. In the context of undertaking the ongoing review of our benchmark portfolio, as wehave noted in our report on page 35, the decision was made to suspend the currencybenchmark, so to suspend the target of 15 per cent. From a corporate governance perspective,that is a clear recognition that we are not able to achieve that targeted outcome and we arethen effectively shifting mode from management within a benchmark range to saying, ‘Yes,we’re suspending that particular constraint pending a review.’ Obviously, as we have outlinedin our report, that review was being undertaken, but the currency exposure did increase overthat particular period.

Senator CONROY—I asked what procedures are normally followed when an investmentguideline is breached. Would that be something like closing the exposure out within a certaintime frame, two weeks? Is that the sort of normal procedure?

Mr Allen—No. There are responses to ‘What is the appropriate decision?’ In the context ofour operations we have defined benchmark targets that we have to maintain our exposurewithin. If those exposures fall without the benchmark range, then through our corporategovernance framework we have an advisory board. We would then make recommendations tothe advisory board to determine what a recommended course of action is. In the context of ourstatement on page 35, that recommended course of action was to suspend the benchmark, thenmove forward to review that exposure and assess the desirability of maintaining thatexposure.

ACTING CHAIR—Why didn’t you take steps to try and bring it back to about 15 per centagain?

Senator CONROY—Sorry, Chair, are you jumping in there? I was in the middle of a lineof questioning.

ACTING CHAIR—That is just logical.

Senator CONROY—That is a logical thing to do. If I can allow you to take SenatorWatson’s questions—he has been so helpful to me at the moment.

Mr Allen—One of the reasons that exposure was increasing as a percentage of the totalportfolio was that the currency was depreciating at a fairly fast pace at that particular time.Irrespective of whether it is the Commonwealth or any other liability manager, issues withrespect to how much you can actually reduce your exposure in periods of significant marketvolatility are matters for judgment. At the time, our judgment was that moving quickly toeliminate that exposure would not be the appropriate strategy.

Senator CONROY—I understand from the annual report that you did decide to suspendyour guidelines. That is probably novel. Most people would probably have thought that theidea was to keep the guidelines and suspend your trading. If you had not suspended theguidelines, what would you have had to do?


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Mr Allen—We would have been required to reduce our exposure.

Senator CONROY—Would you have had to close these positions out and recognise aloss? Is ‘reduce our exposure’ code for ‘take the loss’?

Mr Allen—That certainly would be an implication, yes.

Senator CONROY—If you had stuck with the guidelines you would have taken a loss. Soinstead of taking a loss you tossed the guidelines.

Mr Allen—To the extent to which there would be a loss, yes.

Senator CONROY—We are talking mid-October 2000. Why didn’t you close out yourposition?

Mr Allen—The decision to suspend as opposed to moving to immediately reduce theexposure is really one that should be considered in the context of how these exposures werebuilt up. These exposures, to use a rather crude financial market term, were not built up as atrading position as such. They were very deliberate target exposures in the portfolio.

Senator CONROY—The dollar moves. There is nothing deliberate about the dollar goingdown. That was not your deliberate decision.

Mr Allen—No, Senator.

Senator CONROY—You had a position, the dollar went down, so there is nothingdeliberate about your position.

Mr Allen—Certainly. We held the exposure in accordance with our agreed benchmarkparameters. Those exposures had been built up over a long period of time, in terms of closingout five or 10 per cent of our exposure just to take it back to 15 per cent at one particular pointin time.

ACTING CHAIR—Percentage points.

Mr Allen—I am sorry, Senator?

ACTING CHAIR—Percentage points, not five per cent.

Mr Allen—Well, to reduce our exposure down from the 20 per cent to 15 per cent.

ACTING CHAIR—Is five percentage points.

Mr Allen—Five percentage points, sorry. That is obviously a very large volume thatneeded to be executed at one particular point in time, bearing in mind that these exposureshad been built up over very long periods of time. As we have indicated in our review, thephilosophy that we tried to follow in terms of our debt management task is to ensure thattransactions are executed on an orderly basis over time and we are not subject to the particularvagaries of the market.

Senator CONROY—The market has moved against you, so you do not stick to theguidelines; you suspend the guidelines.

Mr Allen—What we actually outlined was that we would suspend that particular target andundertake a review of the exposure in the portfolio.

Senator CONROY—I am trying to work through the sequence. Why hadn’t you reducedit by June 2001?

Mr Allen—By June 2001 we were still in the process of completing that review.

Senator CONROY—What losses were incurred on these positions?


ECONOMICS

Mr Allen—Over the course of the June 2001 financial year it was in the order of$69 million.

Senator CONROY—Who made the decision to suspend the guidelines?

Mr Allen—As I indicated earlier, that decision was a recommendation that AOFM put toits advisory board.

Senator CONROY—Who is on the advisory board?

Mr Allen—The advisory board is chaired by the secretary to the department treasurer. Wehave two other public sector members.

Senator CONROY—Who are they?

Mr Allen—It is the Executive Director, Economic Group, within Treasury, and Mr PhilBowen. I am not sure of his department.

Senator CONROY—He has just changed designation inside Finance.

Mr Allen—That is right, within the department of finance.

Senator CONROY—So he is a Finance official.

Mr Allen—Yes. We have two private sector members: Mr Tony Cole and Mr GregMaughan.

Senator CONROY—I know Tony. He is obviously ex-head of Treasury.

Mr Allen—Ex-head of Treasury, now involved in—

Senator CONROY—And Greg Maughan? Do you know his background?

Mr Allen—Greg has had experience with the public sector but predominantly a career inthe private sector, working for institutions such as Bankers Trust in a range of different areas,particularly funds management.

Senator CONROY—What was the loss on the currency movements specifically, not onthe total portfolio?

Mr Allen—At June 2001 the movement for the year, as we have outlined in our portfoliostatements, is in the order of about $69 million.

Senator CONROY—That is on the currency?

Mr Allen—That is on the currency, yes, bearing in mind that the currency was relativelystable over that period.

Senator CONROY—And the 12 months before that?

Mr Allen—Again, if you look at our statements, the number there was in the order of$1.9 billion.

Senator CONROY—$1.9 billion, did you say?

Mr Allen—Yes, and that was unrealised. In the context of these numbers, it was$1.9 billion of which—I do not have the break-up in terms of last year’s numbers—a verysmall amount was realised. These are unrealised market movements.

Senator CONROY—Usually referred to as losses, not disguised market movements. Inlayman’s language they are losses on your position.


ECONOMICS

Mr Allen—They do actually have to be recognised and, quite obviously, movingstraightaway to close that position may indeed realise those losses. Again, in the context ofthe benchmark framework that has applied to our operations, this exposure—

Senator CONROY—But if you do not apply the rules any more you can defer the lossindefinitely.

Mr Allen—The point I am trying to make is that there is significant volatility in terms ofthe value of that portfolio over time.

Senator CONROY—Have you continued to roll over these positions?

Mr Allen—For some positions, yes.

Senator CONROY—US dollar positions?

Mr Allen—Yes, Senator.

Senator CONROY—This currency exposure was established through the purchase ofcross-currency interest rate swaps, was it not?

Mr Allen—That is right, Senator. There are small amounts of physical foreign currencydenominated debt, but in the overall scheme of things they are relatively small.

Senator CONROY—Can you explain what swaps are and how swap positions are valuedin the portfolio?

Mr Allen—Effectively, in layman’s terms, it is really an agreement between two people intwo different counter-parties in a financial market transaction where you agree to exchangethe obligation that you have. In this case what we have agreed to do, rather than effectivelypay in Australian dollars, is pay in US dollars. The swap is a way in which you can achievethat, and obviously these sorts of transactions are widely used in financial markets.

Senator CONROY—Can you confirm that AOFM value swaps at market?

Mr Allen—We are required to report these portfolios under a number of measures, and weuse market value internally; we report in terms of our statements. GFS is a closeapproximation to a market valuation.

Senator CONROY—It is an accepted accounting procedure to reflect the gain or loss ofsuch positions at their market value, isn’t it?

Mr Allen—And indeed those movements do show up in AAS31 financial statements.

Senator CONROY—What is the total loss that has been sustained on these positions?

Mr Allen—The total realised loss is not a number that I have at the top of my head,Senator. I would be happy to take that on notice—in terms of realised losses?

Senator CONROY—I would have thought that it was a figure that would be familiar toyou. You are not keeping track of the size of the Commonwealth’s losses?

Mr Allen—The second question, if I may be so bold to ask, is in terms of the financial yearbut—

Senator CONROY—I will narrow it down. What is the total size of the loss since thedecision was taken to ignore and suspend your benchmarks after the breach first occurred?

Mr Allen—Over the course of the financial year, our $69 million that we were reporting—

Senator CONROY—That is your realised figure. Is there an unrealised figure?


ECONOMICS

Mr Allen—No. That is effectively an unrealised loss. There was very little movement overthe course of the year in terms of realised gains. My colleague was just reminding me of thenumber: $200 million realised loss over the period from June 2000.

Mr McCray—The realised loss over the two years 2000-2001 and 2001-2002 currently isof the order of $200 million.

Senator CONROY—What is the total value of the portfolio?

Mr Allen—In terms of the face value or the market value?

Senator CONROY—Both, if you have them. Market is probably the relevant one.

Mr Allen—We would be happy to provide a position of what our exposures are.

Senator CONROY—I was actually going to ask for a detailed breakdown, an itemisedlisting of the cost of these positions.

Mr Allen—We are certainly be happy to provide that, rather than me just spiel off thenumbers. But, yes, we do list that in our annual report on page 39. That is at June 2001.

Senator CONROY—Do your losses appear in the budget? Whereabouts?

Mr Allen—They are below the line.

Senator CONROY—So they do not appear.

Mr Allen—No. The financing impact does, but not of any—

Senator CONROY—There is not anywhere in the budget papers I can pick up and justlook to see how you are going, up or down?

Mr McCray—In the AAS31 statements you can see unrealised foreign currency positionsreported. In the GFS framework they are below the line, as the chief executive says.

Senator CONROY—I will take that as a no, then. I cannot have the budget papers?

Mr McCray—Yes, AAS31 statements are in the budget papers.

Senator CONROY—I just wanted to know where exactly to look. I have just got threequestions to go, Senator Watson.

ACTING CHAIR—How about taking them on notice?

Senator CONROY—The annual report states on page 35 that the review of foreigncurrency exposure and the benchmark was completed last year and that its findings are nowunder consideration. What were the findings of the review?

ACTING CHAIR—How about taking this on notice?

Senator CONROY—I have two questions to go, so could you just let Mr Allen finish. Iam sure he is dying to tell me the answer.

ACTING CHAIR—He can take it on notice. It will lead to another question.

Senator CONROY—No, I have two more questions after this.

ACTING CHAIR—On notice. What is it?

Senator CONROY—Just let him finish. Mr Allen.

ACTING CHAIR—He is taking it on notice.


ECONOMICS

Senator CONROY—No, sorry, you cannot tell him to take it on notice. You can eitherclose the committee or let him answer the question as I have asked it, Senator Watson. If youwant to close the committee, then that is in your hands. I am simply saying—

ACTING CHAIR—I do not want to close the committee. I just want answers to all yourquestions to save him coming back first thing tomorrow morning.

Senator CONROY—He will not have to come back if I can finish my last two questions,Senator Watson, and I am sure Mr Allen and Mr McCray would prefer that. What were thefindings of the review?

Mr Allen—The review concluded that the maintenance of a currency position within theportfolio was no longer desirable and that we should move to a—and again, certainlyreinforcing that any move away from our current allocation would be to move towards a zeroallocation over a medium to longer term horizon.

Senator CONROY—Will the report and findings be released?

Mr Allen—We would be intending to provide, as we have done in the past, a full reviewand the reasons underpinning that decision as part of our annual reporting process.

Senator CONROY—Have you guys been taking advice from Nick Leeson from Barings?

Senator Coonan—Senator Conroy, that is three questions.

Senator CONROY—I am glad you can count because maybe—

Senator Coonan—I can count.

Senator CONROY—But, anyway, I will happily pause at that point. If I could justsummarise, because I do not want to get this wrong, we have $200 million of realised lossesand over $2 billion or just on $2 billion of unrealised losses.

Mr Allen—That is correct in terms of the GFS numbers, yes.

ACTING CHAIR—Thank you very much.

Senator CONROY—Thank you for your patience, Senator Watson.

ACTING CHAIR—The committee will resume at 9 a.m. tomorrow morning. Thank you.

Committee adjourned at 11.03 p.m.

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SENATE - Parliament of Australia...INDUSTRY, TOURISM AND RESOURCES PORTFOLIO In Attendance Senator Minchin, Minister for Finance and Administration Executive Mr Mark Paterson, CEO