OTHER LOAN COUNCIL DEVELOPMENTS

Public Infrastructure Projects with Private Sector Involvement

As discussed in Chapter V of Budget Paper No. 3 1996-97, Loan Council agreed last year to change the basis on which jurisdictions report their exposure to public infrastructure projects with private sector involvement from the previous risk weighted estimate to the full contingent exposure as measured by the government's termination liabilities. This change recognised that the risk weighting approach was producing lower than expected LCA impacts in some cases due to the routine valuation of assets at construction cost. It did not prove possible to find a satisfactory basis for the discounting of asset values to reflect the fact that certain projects would have a value in alternative use lower than their construction cost.

Loan Council also agreed in principle last year that termination liabilities would in future be disclosed as a footnote to, rather than a component of, LCAs. This reflected a concern that the inclusion of contingent exposures as part of the LCA was misleading as they would only be realised in the unlikely event of project failure and are thus materially different from actual borrowings undertaken to finance the public sector deficit.

Loan Council has now confirmed this in-principle decision. The inclusion of termination liabilities as footnotes to the LCA is consistent with disclosure and accountability objectives and will provide financial markets with sufficient information to assess the impact of projects on a jurisdiction's financial position. Government outlays under these projects such as equity contributions and ongoing payments to the private sector will continue to be included in the annual ABS deficit/surplus and the LCA.

Exemption of Telstra from Loan Council Coverage

Loan Council also agreed to exempt Telstra Corporation Ltd from its monitoring and reporting arrangements under commerciality criteria agreed in 1991. The rationale behind the exemption criteria is that some PTEs operate within a sufficiently competitive environment that they respond to market signals - including changes in the general stance of macroeconomic policy - in much the same way as private sector entities so as to substantially reduce or eliminate the need for their borrowings to be included in government aggregates subject to Loan Council oversight.

The criteria provide for two main avenues of exemption:

where a PTE does not have substantial private sector equity, it should be constituted to operate in a commercial manner and have a demonstrated track record of commercial performance; and
where a PTE has substantial private sector equity (of the order of 40 per cent or more), it should be constituted to operate in a commercial manner and have at least a demonstrated commitment to fully meeting the commerciality criteria. The criteria stipulate that a level of private sector equity lower than 40 per cent may be appropriate depending on such factors as the method of sale (eg public float) or the nature of the private sector's holding of equity.

Telstra's commercial orientation will be further enhanced by the sale of one-third of its equity to the private sector and the introduction, from 1 July 1997, of open competition in the telecommunications market. It would then meet the private sector equity test and associated requirement to demonstrate a commitment to commercial performance. However, Loan Council agreed that Telstra currently satisfies the higher standard of a proven track record of commercial performance, demonstrated in a range of competitive and contestable markets. Telstra also complied with other aspects of the criteria such as an appropriate monitoring and accountability framework and the payment of government taxes.

Telstra will remain classified to the Commonwealth PTE sector (including after the one-third equity sale, reflecting continued majority Government ownership). Its net financing requirement will therefore continue to be included in ABS data for the PTE and total public sectors. However, future Commonwealth LCA figures will be adjusted to remove Telstra's net financing requirement.

Revised Uniform Presentation Framework for Government Financial Information

Loan Council agreed to the implementation, from 1998-99, of a revised uniform presentation framework for government financial information. This updated the 1991 Premiers' Conference Uniform Presentation Agreement which increased the uniformity of information published at budget time to assist soundly based fiscal comparisons between jurisdictions. The revised framework addresses the duplication and complexity of current reporting arrangements, particularly in relation to the presentation of uniform budget information and Loan Council reporting. It also introduces some valuable enhancements such as the presentation of general government forward estimates and the publication of a mid-year report by each jurisdiction.

Although the new framework will not be implemented until 1998-99, Loan Council has agreed that quarterly Loan Council reporting may be discontinued immediately on the basis that all jurisdictions publish a mid-year update of their LCA estimate. There will thus be three LCA estimates published each year - following Loan Council consideration of LCA nominations, at budget time, and in a mid-year report - in addition to the publication of actual outcomes. While the frequency of Loan Council reporting will be reduced, users will benefit from the more forward-looking focus and more integrated presentation of data compared to current Loan Council reports. Interpretation difficulties associated with quarterly reports (due to within year variability in the pattern of transactions) will also be avoided.

A paper setting out the new uniform presentation framework has been published and is available from the Commonwealth and State Treasuries. A fuller discussion of the revised framework is provided in Statement 7 of Budget Paper No. 1.

Table 20: Loan Council Allocations - 1997-98 Nominations ($million)(a)

Footnotes: see next page.

(a) LCA nominations for 1997-98 in the main reflect current best estimates of 1997-98 public sector deficits/surpluses on a no policy change basis. In the case of New South Wales, some allowance has been made for expected policy measures. Nominations are based on preliminary estimates of general government finances provided by jurisdictions for purposes of the 1997 NFO Report and projected bottom lines for each jurisdiction's PTE sector. Updated LCA estimates will be provided through publication by each jurisdiction of its budget time LCA as part of its budget documentation. The 2 per cent (of total public sector revenue) tolerance limits around each jurisdiction's 1997-98 LCA are designed, inter alia, to accommodate changes to the LCA resulting from policy change.

(b) Memorandum items are used to adjust the public sector deficit/surplus to include in LCAs certain transactions - such as operating leases - that have many of the characteristics of public sector borrowings but do not constitute formal borrowings. They are also used, where appropriate, to deduct from the public sector deficit/surplus certain transactions that Loan Council has agreed should not be included in LCAs - for example, the funding of more than employers' emerging costs under public sector superannuation schemes, the GFS deficit/surplus of States' central borrowing authorities, or borrowings by entities such as statutory marketing authorities. Where relevant, memorandum items include an amount for gross new borrowings of government home finance schemes from 1996-97.

(c) From 1997-98, government contingent exposures under infrastructure projects with private sector involvement are disclosed as a footnote to rather than a component of LCAs. These exposures, which are measured as the government's contractual liabilities on termination of the project, are unlikely to be realised and are thus materially different from actual borrowings undertaken to finance the public sector deficit. Government outlays under these projects such as equity contributions and ongoing commercial payments to the private sector continue to be included in the annual ABS deficit/surplus and hence the LCA.

(d) University borrowings are included in the general government deficit/surplus and are not additive.

(1) New South Wales has two infrastructure projects with private sector involvement for which contracts are expected to be signed in 1997-98. Neither is expected to involve government termination liabilities.

(2) Victoria has two infrastructure projects with private sector involvement for which contracts are expected to be executed in 1997-98. Neither is expected to involve government termination liabilities.

(3) For Western Australia's 1997-98 nomination and latest estimate for 1996-97, the general government surplus plus PTE net financing requirement does not equal the public sector deficit due to differences in the timing of recording transactions between the (cash based) general government and (accrual based) PTE sectors. These differences often occur in jurisdictions' actual outturn data.

(4) The Commonwealth's 1997-98 LCA nomination incorporates the expected proceeds of asset sales and debt repayments by the States. Adjusted for these net advances, the starting point general government deficit for 1997-98 is estimated at $4,223 million (comprising the underlying general government deficit of $3,476 million shown in the MYEFO plus $747 million increase in provisions). The Commonwealth's 1997-98 LCA nomination includes a component (within the PTE sector net financing requirement) for Telstra, as Telstra's exemption from Loan Council coverage on commerciality grounds had not been agreed when LCA nominations were settled. This component will be omitted from subsequent LCA estimates for 1997-98 - at budget time and in the Mid-Year Economic and Fiscal Outlook - and from the LCA outcome.

Table 21: Commonwealth's Loan Council Allocation for 1996-97 ($million)

(a) For the Commonwealth, memorandum items comprise the change in the net present value of operating leases (with a net present value greater than $5 million) of departments and authorities and an adjustment to exclude the net financing requirement of statutory marketing authorities from the LCA.