The forward estimates of revenue and outlays in the Budget incorporate assumptions and judgements based on information available at the time of publication.

A range of factors may influence the actual budget outcome in future years. The Charter of Budget Honesty requires these to be disclosed in a Statement of Risks in each Budget. The purpose of this report is to increase the transparency of the fiscal projections.

Events which could affect fiscal outcomes include:

• changes in economic and other parameters;
• matters which have not been included in the fiscal forecasts because of uncertainty about their timing, magnitude, or whether they will eventuate; and
• the realisation of contingent liabilities.

Some degree of uncertainty attaches to budget time and forward estimates for both revenues and outlays.

The major factors influencing expected outlays and revenues in any year are typically changes in forecasts of economic and non-economic parameters. Differences between the economic parameter forecasts and outcomes have not caused any clear bias toward understatement or overstatement of outlays and revenue — and therefore the budget balance. The sensitivity of the estimates to major economic parameters (but not other parameters) is discussed in Appendix B.

Differences in non-economic (programme specific) parameter forecasts and outcomes, however, have been strongly biased towards an understatement of outlays in recent years. Programme specific parameters are specific assumptions underpinning specific programme estimates eg client numbers and/or average rates payable on family payments, family tax payments and disability support pension programmes. A conservative bias allowance is made in the contingency reserve for each year, in part to account for this tendency (see the outlays discussion in Part II for more detail on this issue).

The projected values for programme specific parameters are determined jointly with the relevant spending portfolio, drawing on trends in actual payments and information which the portfolio is able to provide on the impact of policy changes on the programme estimates.

Fiscal risks are general developments or specific events which may have an effect on the fiscal outlook. In some cases, the events will simply raise the possibility of some fiscal impact. In other cases, some fiscal impact will be reasonably certain, but it will not be included in the forward estimates because the timing or magnitude is not known. Fiscal risks may affect both outlays and revenue and may be positive or negative.

Specific sources of fiscal risk include:

• litigation currently before the courts; and
• possible Senate rejection of budget measures.

Some fiscal risks are reflected in the Outlays Contingency Reserve and are therefore included in the aggregate outlays figuring. The Contingency Reserve is an allowance included in aggregate outlays to reflect anticipated events which cannot be assigned to individual programmes at budget time. These items are also not included in the Statement of Risks. Fiscal risks in the Contingency Reserve include expected running costs carryovers from 1998-99 to 1999-2000, and allowances for the established tendency for estimates of some programme expenditure to be overstated in the budget year and understated in the forward years.

As part of its decision to sell the Commonwealth’s remaining equity in Telstra, the Government has announced it will apply the overwhelming majority of sale proceeds to debt reduction, and has said some of the proceeds will be used to deliver a ‘social bonus’. As the details of this social bonus expenditure, including timing, amount and portfolio involved, are yet to be determined, no provision has been included in the forward estimates.

Matters that are not currently under active consideration by government, or pressure from interests outside the government for changes in spending levels, are not treated as fiscal risks.

Details of known fiscal risks which may have an impact on fiscal forecasts, but are not reflected in the forward estimates in the 1998-99 Budget, are provided below.

Contingent liabilities differ from fiscal risks in that they are generally more readily quantifiable and clearly defined.

Contingent liabilities are defined as costs the Government will have to face if a particular event occurs. They include loan guarantees, non-loan guarantees, warranties, indemnities, uncalled capital and letters of comfort.

The Commonwealth’s major exposures to contingent liabilities arise out of legislation providing guarantees over certain liabilities of Commonwealth controlled financial institutions (ie the Reserve Bank of Australia (RBA) and the Export Finance and Insurance Corporation) and the now fully privatised Commonwealth Bank of Australia. Other substantial non-loan guarantees include guaranteed payments from Telstra Corporation Ltd to the Telecom Superannuation Scheme.

The strategies for managing these exposures are aimed at ensuring the underlying strength and viability of the entities with respect to which guarantees have been provided so that the guarantees are not triggered. Similar strategies apply to entities not subject to explicit guarantees.

Other arrangements are in place governing the entering into, and monitoring of, contingent liabilities such as indemnities and uncalled capital. Uncalled capital is primarily associated with international financial institutions such as the International Bank for Reconstruction and Development, the Asian Development Bank and the European Bank for Reconstruction and Development. Arrangements concerning uncalled capital are approved by Parliament and reports on the institutions are provided annually by the Government to Parliament.

Consistent with Australian Bureau of Statistics (ABS) standards, transactions concerned with the management of international reserves and the monetary system are classified as financing transactions (and do not impact on the budget balance). Therefore, contingent liabilities (and assets) with the International Monetary Fund (IMF) are not shown here.

Fiscal risks and contingent liabilities with a possible impact on the forward estimates greater than $20 million in any one year, or $40 million over the forward estimates period, are listed below. Information on fiscal risks takes account of decisions of Parliament and other developments up to the close of parliamentary business on 8 April 1998. In general, information on contingent liabilities is based on information provided by departments and agencies and is current to 31 March 1998 (or a later date as indicated where that information is available). However, for the guarantees under the Commonwealth Bank Sale Act 1995 the latest reliable information available on the balance of guarantees outstanding was at the end of June 1997.

Information on contingent liabilities is provided in annual financial statements of departments and non-budget entities.

The Department of Defence is involved in several cases covering a wide range of litigation where either the cases have not been heard, or damages and costs have yet to be awarded. The litigation involves claims before the Human Rights and Equal Opportunity Commission, and claims relating to HMAS Stalwart, HMAS Voyager, asbestos litigation, and alleged defective administration by the Department. The value of these claims is $49 million.

The Government’s asset sales programme has a significant impact on the Commonwealth Budget through proceeds from sales (in most cases impacting largely on the headline budget balance), the cost of implementing sales, the reduction in public debt servicing charges and the loss of any future dividends from the enterprises/assets no longer being owned by the Commonwealth.

The estimates of the proceeds from asset sales are based on current market information. However, the actual amount realised will depend on the market conditions at the time of sale. The estimates of sale costs are based on experience in selling other Commonwealth assets and enterprises. Both the proceeds and the costs of sales estimates are highly dependent on assumptions about how the sales might be structured. Savings in public debt interest depend on the structure of sales, net proceeds received and the manner in which the proceeds are applied to reducing net debt.

The major asset sale provided for in the 1998-99 Budget figuring is the sale of the Commonwealth’s remaining equity in Telstra Corporation. Draft legislation to facilitate the sale is currently before the Parliament.

Other significant asset sales included in the 1998-99 Budget are:

• ADI Limited;
• National Railway Corporation Limited;
• National Transmission Network;
• Australian National Line Limited;
• oversight the collection of the second instalment for the sale of shares in Telstra Corporation;
• the Commonwealth’s domestic office estate (that which has already been identified for disposal but is yet to be sold); and
• overseas staff accommodation (stand alone, non-representational).

New superannuation arrangements for Commonwealth employees have been provided for in the budget and forward estimates. These new arrangements involve the closure of the Public Sector Superannuation Scheme (PSS) from 1 July 1998 and the choice for employees of either a complying superannuation fund or a Retirement Savings Account. The impact of incorporation of the new superannuation arrangements in the estimates has been to bring forward future superannuation liabilities for existing employees in the amounts of $12 million in 1998-99, $40 million in 1999-2000, and $290 million in 2000-01, without increasing the superannuation costs to employers. It therefore represents no net cost to the Budget on an accruals basis.

The bringing forward of these outlays is subject to legislation before the Parliament and, depending upon Parliament’s consideration of the Bills, the timing of some or all of the outlays could be delayed.

The Commonwealth has offered the States and Territories new funding arrangements to replace the existing Medicare Agreements which expire on 30 June 1998. The offer is based on a funding formula in which the Commonwealth shares financial risk in relation to changes in the private health insurance participation rate and changes in the measured national average output cost for public hospital treatment. Under this formula, the Commonwealth payments to the States and Territories vary after 1998-99, by about $85 million a year for every one percentage point change in the private health insurance participation rate relative to the 1998-99 level, and by about $45 million for every one percentage point change in the measured hospital cost, relative to the budget assumption of 0.5 per cent.

A joint agreement between the Treasurer, Minister for Finance and Administration and the Prime Minister is required when the cost of listing a new drug on the Pharmaceutical Benefits Scheme is over $10 million. Similarly, new medical services costing more than $10 million a year need to go to Cabinet before listing on the Medical Benefits Schedule. New drugs can only be listed after an assessment of comparative effectiveness and value for money. New medical services are considered by the Medical Services Advisory Committee before listing. The listing of new high cost drugs and services has the potential to increase Commonwealth outlays by up to $200 million over the four years to 2001-02.

As part of the Government’s aged care reforms a new Resident Classification Scale (RCS) has been developed and implemented. The RCS is used to assess the need of each resident for care and the appropriate level of subsidy. It replaces two separate instruments previously used in nursing homes and hostels and was designed to be cost neutral. However, there is a risk that the measured dependency of residents under the RCS will be greater than was originally expected. An initial review has identified a number of differences between the predicted and actual distribution of residents across RCS categories, but modelling based on data over a longer period than the first three months is necessary before the quantum of the risk can be firmly established. As an illustration of the magnitude of the possible impact, if outlays were 1 per cent higher as a result of the new instrument, the impact would be about $30 million per annum.

The Department of Health and Family Services is involved in around 90 cases covering a wide range of litigation, where either the cases have not been heard or damages and costs have yet to be awarded. The litigation involves Creutsfeldt-Jakob disease, Acquired Immune Deficiency Syndrome, Rehabilitation Services, Hepatitis C, benefit payments, defective products, the Professional Services Review Scheme, and the Department as an employer. It is not possible to quantify the liability arising from the cases.

Agreement between the Minister for Health and Family Services and the Minister for Finance and Administration is required when the cost of new vaccines under the immunisation funding mechanism is between $10 million and $20 million. Cabinet approval is required when this cost is over $20 million. Future vaccine technology will result in new vaccines substituting vaccines already in use (eg multivalent vaccines which combine several vaccines into one), and as a consequence will result in higher unit costs of vaccine within the routine schedule. Given the nature of current vaccine technology, and the possible introduction of new vaccines required for a full cohort and several doses, specific vaccine costs cannot be precisely quantified at this stage. However, the inclusion of new essential vaccines within the routine schedule between 1998-99 and 2001-02 has the potential to increase Commonwealth outlays by up to $120 million in total over the four years.

Legal action through the Administrative Appeals Tribunal and the Federal Court is being pursued by a range of companies involved in quarrying activities for payment under the Diesel Fuel Rebate Scheme in respect of diesel fuel used in the extraction of sand and rock undertaken prior to 1 July 1995. Possible claims on the Commonwealth from a successful legal challenge could amount to some $90-$100 million. The likelihood of this liability arising has diminished as a result of the Commonwealth’s success in a recent action. The Excise Act 1901 and the Customs Act 1901 were amended with effect from 1 July 1995 to remove sand and rock extraction from eligibility under the Scheme.

In response to the Industry Commission report on the TCF industries, the Government has announced a pause in tariffs at levels scheduled for the year 2000. A TCF investment programme was also announced. As at 31 March 1998, the timing and the details, including the cost, of the investment programme had not been established.

Additional expenditure on drought relief is subject to climate variability which cannot be predicted with any degree of certainty. The number of Exceptional Circumstances Relief Payment recipients and exceptional circumstances interest rate subsidies approved will vary significantly each year, depending on the severity of drought and other exceptional circumstances conditions.

The Commonwealth has previously offered to assist States and Territories in meeting compensation costs associated with their validation of past acts under legislation complementary to the Native Title Act 1993. Following the High Court’s Wik decision, the Commonwealth offer has been extended to cover intermediate period acts and future acts arising under the 10-point plan. The extent of Commonwealth payments to the States pursuant to this offer will depend on the compensation liabilities arising from actions by the States to acquire native title rights. Those liabilities cannot be quantified at this time. The Commonwealth has also offered to assist States and Territories with the costs of alternative arbitral bodies and regimes approved under the Act. The extent of this assistance will depend on decisions to establish such bodies and regimes, the timing of their recognition and the extent of their use. Negotiation of financial assistance agreements with the States is unlikely to be completed until the Native Title Amendment Bill has been passed.

Earlier laws, policies and practices led to the separation of many Aboriginal and Torres Strait Islander families. Legal actions are under way against the Commonwealth concerning the separation of Aboriginal children from their families in the Northern Territory. The plaintiffs are claiming damages and if any or all of the actions are successful, the Commonwealth may be liable for payments.

The Government is continuing negotiations with Greece on a social security agreement which would cover those people who have lived part of their working lives in both countries. Depending on its terms, such an agreement would cost Australia an estimated $25 million a year. If agreement on the terms is reached in 1998, it would not commence before July 1999 at the earliest.

The Youth Allowance, a new social security payment to be implemented on 1 July 1998, will provide an integrated income support payment for young people which will be available regardless of whether a person is in education, training, unemployed or sick.

The legislation package to provide for the Youth Allowance and the transfer of programme elements for older students from the portfolio of the Minister for Employment, Education, Training and Youth Affairs to the portfolio of the Minister for Social Security, is contained in two Bills. The first of these, the Social Security Legislation Amendment (Youth Allowance) Bill 1997, is awaiting Royal Assent. However the second Bill, the Social Security Legislation Amendment (Youth Allowance Consequential and Related Measures) Bill 1998, passage of which is critical to the implementation of Youth Allowance, is not scheduled for debate in the Senate until 12 May 1998.

In addition, final incorporation of programme elements such as fares allowance, the Student Financial Supplement Scheme and the Youth Allowance actual means test depend on approval of disallowable instruments and tabling of regulations. This subordinate legislation cannot be tabled in Parliament until passage of the Social Security Legislation Amendment (Youth Allowance Consequential and Related Measures) Bill 1998.

Any legislative impediment to the full implementation of the Youth Allowance and related measures would constitute a potential fiscal risk to the forward estimates.

Compensation claims relating to disputes arising from the compulsory acquisition of properties acquired for the proposed Second Sydney Airport at Badgerys Creek which have not been finalised at 31 March 1998 give rise to a risk of $41.1 million. The properties were acquired under the Lands Acquisition Act 1989.

Loans of the Northern Territory Government (Private Treaty Loans, Public Loan Flotations, and Private Placement of Northern Territory Stock) are covered by Commonwealth guarantee under sections 47 and 47A of the Northern Territory (Self Government) Act 1978. As at 31 March 1998, the value of these loans was $162.2 million.

The payment of interest on the money borrowed by the Northern Territory Government is also guaranteed. As at 31 March 1998, no interest payments were overdue.

In response to recent instability in regional financial markets and economies, Australia has offered to provide bilateral financing in support of IMF programmes in Indonesia and the Republic of Korea. Australia has agreed to provide supplementary financing or ‘second tier’ financing of up to $US1 billion in each case. This financing would be provided via a loan on a non-concessional basis that would be repaid to the Commonwealth. Whilst no funds have yet been disbursed to these two countries, the forward estimates provide for $US300 million for Indonesia and $US330 million for the Republic of Korea, as required, in 1997-98 and 1998-99 respectively. Amounts additional to this — and up to the $US1 billion agreed by the Government — constitute fiscal risks to the headline forward estimates.

In response to recent instability in regional financial markets and economies, Australia has offered to provide bilateral financing in support of the IMF programme in Thailand. This support has taken the form of a currency swap between the RBA and the Bank of Thailand for $US1 billion which is being drawn down over a three-year period and repaid. In the event of default, the ability of the RBA to maintain the dividend stream projected in the forward estimates may be affected.

The forward estimates of revenue are subject to a number of general pressures which can result in risks to revenue collections. These general pressures include: tax minimisation and avoidance, including through the exploitation of tax expenditures; financial innovation; internationalisation; developments in communications technology and workplace arrangements; salary sacrifice arrangements; and court decisions. These pressures may result in a shift in the composition of revenue collected from the various tax bases and/or a change in the size of the tax base. The revenue forecasts make what is believed to be an appropriate allowance for these factors, given the data available.

Tax minimisation and avoidance involves the use of provisions and ‘loopholes’ in the tax law which were not intended by policy-makers. With evidence of greater taxpayer focus on tax avoidance and minimisation schemes, and in the absence of closing these off, the revenue base will shrink relative to that projected in the forward estimates. The Government is committed to addressing these problems through its fundamental tax reform programme which has, as one of its aims, the formation of a simpler and fairer tax system. At the same time, the Government will continue to take legislative action to close off such schemes as they are identified. In addition, the Australian Taxation Office (ATO) will continue to undertake extensive compliance enforcement work, including pursuing matters through the courts, to maintain the integrity of the tax system.

Financial innovation has increased dramatically during the past two decades and the tax system has generally not kept pace with these innovations. Consequently, uncertainty has arisen over the application of existing laws to new and often complex financial arrangements. Also the scope for tax minimisation and avoidance through the application of financial arrangements has expanded. An Issues Paper on the taxation of financial arrangements was released by Treasury and the ATO in December 1996. The paper has provided a vehicle for ongoing consultations between officials and taxpayers as to an appropriate basis for any reforms in this area.

The internationalisation of the Australian economy also introduces a general risk to the forward estimates of revenue. Income tax collections from capital are subject to increasing downward pressure due to increasing ‘tax competition’ among jurisdictions and ‘profit shifting’ in the context of the relatively free international flow of capital. The ATO is undertaking a series of compliance improvement measures to ensure that Australian companies deal with their international parties at ‘arms length’. Income tax collections from labour are also coming under increasing downward pressure as a rising proportion of labour becomes more internationally mobile and subject to tax competition. The further integration of economies also means the integrity of each country’s tax system will increasingly rely on international co-operation on tax matters.

Developments in communications technology, such as the Internet, also raise a general risk to the forward estimates of revenue. Such developments may allow the purchase or sale of an increasing number of goods and services — including the provision of labour services — in a way which avoids the traditional tax bases (and indeed most alternative, reasonably sophisticated, tax bases). Such developments pose a major challenge in tax system design in most countries. The ATO has sought to raise awareness of the issue in its December 1997 publication Tax and the Internet. Further, Australia will be participating in the October 1998 OECD Ministerial Conference on Electronic Commerce in Ottawa at which an international co-operative approach to regulating ‘e’ commerce will be discussed.

Developments in workplace arrangements may also affect taxation collections. Australia’s tax system is characterised by a progressive system of personal income tax rates, combined with a flat company tax rate. Typically, the top marginal tax rate has been higher than the company tax rate. The divergence between the rates of personal and company tax provides an opportunity for some individual taxpayers, who would otherwise be subject to progressive marginal rates of tax, to derive income through a corporate structure. This may allow an individual taxpayer to take advantage of features of the corporate tax regime (for example, a lower company tax rate) which are not available to individual taxpayers. In response to such activity (termed ‘alienation of personal services income’), the Commissioner of Taxation is taking appropriate steps to safeguard the intended operation of the law, including testing the law in the courts.

Salary sacrifice arrangements involve employees agreeing to forgo part of the remuneration they would otherwise receive in the form of salary or wages in return for benefits of a similar value. The objective of Fringe Benefits Tax (FBT) is to ensure that where an employee receives less salary and wages in exchange for a fringe benefit, the employer is subject to FBT on the benefit provided. Where FBT is payable (and costs to the employer are fully deductible), the total level of tax received by the Government (income tax and FBT) is generally the same as if an equivalent amount was provided in gross salary and wages. In this case there is no cost advantage for the employer to provide fringe benefits rather than an equivalent amount of wages and salaries. This does not apply, however, in respect of employers where the FBT applies in part or not at all. In this case, salary sacrificing represents a risk to revenue. Salary sacrificing may also be used to defeat income tests on social security and other benefits as well as surcharges, for example those relating to superannuation and Medicare. As with other areas of the tax system which can be used for tax minimisation, the Government reviews the operation of the FBT on an ongoing basis to ensure that it is meeting its objectives.

Court decisions also increase the risk that revenue will be lower or higher than anticipated. Court decisions can affect the interpretation of tax legislation and, in the absence of Government action, can significantly change the level of revenue collected under that legislation.

Tax expenditures are often at risk of being exploited in an unexpected manner, which can also have a significant effect on the forward estimates of revenue. The Government receives a steady stream of calls for new tax expenditures to be granted. As a general proposition, the granting of further tax expenditures will lead to the downward adjustment of the forward estimates of revenue. Equally, the winding back of existing tax expenditures will generally require the upward adjustment of the forward estimates of revenue. In the future, all tax expenditures will be subject to ongoing monitoring and evaluation to determine whether they remain relevant to meeting the Government’s priorities (see Appendix C to this Statement).

Apart from the above-mentioned general risks, which could have a cumulative impact over time, there are general risks to the forward estimates which could have a significant effect in any one year but not necessarily a cumulative effect over time. In any one year, revenue will be influenced by a number of factors, including, for example, the degree to which companies and individuals realise losses and capital gains, the valuation of stock, the utilisation of specific tax expenditures and taxpayer behavioural responses to revenue measures. Such factors can have a particularly significant effect on company tax collections and the revenue forgone through tax expenditures. Generally, such factors are not, by their nature, able to be forecast with a high degree of certainty.

There are also a number of specific risks to revenue that are currently the subject of ongoing analysis and evaluation by the Treasury and the ATO. Such risks include, for example, specific tax minimisation and avoidance schemes. Early detection and Government response to such risks is desirable. It would be inappropriate to explicitly identify such current specific risks until the Government is in a position to respond to the risks. To do so may compromise the Government’s policy response and magnify the downside risks to the forward estimates of revenue.

The Government has announced a number of measures to date which have already been factored into the forward estimates of revenue but are yet to be passed by Parliament. Should the passage of legislation relating to these measures be delayed, amended or rejected, the forward estimates would need to be adjusted. Two important measures from the 1997-98 Budget are still awaiting passage through the Senate. The Government announced in the 1997-98 Budget, measures to address the unintended usage of franking credits through dividend streaming arrangements and trading in franking credits. In the 1997-98 Budget, the Government also announced changes to the taxation of distributions disguised as loans from private companies. If these measures are not passed, as announced, there will be an impact on future revenue collections.

The Commonwealth has guaranteed loans taken out by Telstra Corporation Ltd. The principal amount covered by the guarantee as at 31 March 1998 was $275.1 million.

Under section 30(2) of the Australian Federal Police Act 1979, all Australian Federal Police (AFP) appointees who complete a fixed term appointment are entitled to a payment upon separation from the organisation. The entitlement is payable subject to, and in accordance with, eligibility conditions determined by the Commissioner of the AFP. Funding has been provided for the costs expected to be incurred over the next five years, but actual expenditure is subject to the number of staff separations.

Communications and the Arts

Telstra Corporation Ltd — Superannuation Guarantee

Telstra Corporation Ltd has agreed to make additional employer contributions to the Telstra Superannuation Scheme. The Commonwealth has guaranteed that it will cover any benefits that may have to be paid from the Fund in the event that the Telstra Superannuation Scheme or Telstra is ever bankrupted and wound up.

Defence

HMAS Melbourne compensation

The recent decision in the Mewett case which went against the Commonwealth may be used by up to 900 crewmen of the HMAS Melbourne, in relation to the Voyager incident, to lodge claims against the Commonwealth. There is no basis for quantifying potential claims (92 have been lodged to date).

Finance and Administration

Superannuation Act 1976 and the Public Sector Superannuation Scheme (PSS)

Under the Superannuation Act 1976 (for the Commonwealth Superannuation Scheme (CSS)) and the PSS Trust Deed and Rules and determinations made under them, the Commonwealth guarantees payment of the amounts of members’ contributions and productivity contributions with interest allocated to those amounts by respective Boards of Trustees.

The CSS and the PSS guarantee the accrued contributions and interest so there cannot be a negative crediting rating on invested funds. The funds maintain a reserve which covers the possibility of negative returns. The Commonwealth has not had to make a payment in relation to this guarantee.

Sale of ADI Limited

An indemnity was provided on 15 January 1998 to ADI Directors, officers and employees in respect of claims and legal costs that may arise from assistance provided to the Commonwealth in relation to the proposed sale of the Commonwealth’s shares in, or the business or assets of, ADI. The indemnity is ongoing.

Review of the Commonwealth’s beneficial shareholding in the Australian Submarine Corporation

An indemnity was provided on 17 February 1998 to Mr Barry A C Hilson and BACH Pty Limited in respect of claims and legal costs that may arise from assistance provided to the Commonwealth during the conduct of the review of the Commonwealth’s shareholding in the Australian Submarine Corporation. The indemnity is ongoing.

Sale of the former Department of Administrative Services Business Units

Eight business units of the former Department of Administrative Services (DAS) were sold in the second half of 1997. The businesses were DAS Distribution, Works Australia, Asset Services, Australian Operational Support Services, Australian Property Group, Interiors Australia, DAS Centre for Environmental Management and DASFleet. The sales agreements incorporate warranties and sale price adjustments. Commonwealth liabilities for these matters are limited in accordance with sales contracts.

Indemnities relating to other Asset Sales

Indemnities have been given in respect of a range of other asset sales. Details of these indemnities have been provided in previous Budget and MYEFO papers. A summary of these indemnities is provided below.

• Aerospace Technologies of Australia (ASTA) Pty Ltd — a number of indemnities have been given to the purchaser of ASTA to protect ASTA and the purchaser from any reasonable losses or liabilities incurred in respect of actions of ASTA prior to, or at the time of the sale, or from circumstances arising from the sale. These indemnities were issued on 20 June 1995 and will not extend to any claim which either accrues, or is made, more than four years after that date or is for an amount less than $100,000.
• Australian Industry Development Corporation (AIDC) Limited — an indemnity was provided on 30 May 1996 to the Directors and nominated officers of AIDC Ltd and the AIDC Corporation to indemnify them against claims and reasonable costs in respect of assistance provided with the sale on 3 February 1998. Indemnities have been provided to the purchaser against claims from employees, claims relating to premises and tax liability arising before the sale contract was signed.
• Commonwealth Funds Management (CFM) and Total Risk Management (TRM) — an indemnity has been provided to the Directors and certain officers of CFM and TRM to indemnify them against certain claims in relation to assistance given to the Commonwealth in the sale process. This indemnity was issued on 28 August 1996. The Commonwealth has indemnified the purchaser of CFM from certain losses and liabilities as a result of the exercise of powers under the CFM Sale Act 1996 and against any stamp duty payments related to the transaction other than the basic share transfer duty.
• Avalon Airport Geelong Pty Ltd (AAG) — indemnities have been given to the purchaser of AAG to indemnify them and AAG against certain liabilities and claims arising out of the actions of AAG prior to the sale, or relating to Avalon Airport prior to closing.
• CSL Ltd — indemnities have been given to Potter Warburg/Price Waterhouse on 14 October 1992, and to Arthur Anderson on 7 June 1993 for circumstances relating to performance of the consultancy in the sale of CSL Ltd. An indemnity has been given to CSL Ltd on 14 September 1992 to protect CSL Ltd from any claim made against them for breach of confidentiality as a result of CSL Ltd having provided information to the Commonwealth.
• Lease of Federal Airports Corporation (FAC) Airports — indemnities have been provided to:
• Ernst & Young on 15 July 1996 to indemnify them against legal costs incurred in respect of their obligations for legal compulsion to disclose;
• the Board of the FAC on 3 October 1996 to replace the extension of Finance Direction 21 to FAC Board members;
• Mallesons Stephen Jaques on 13 September 1996 to indemnify them in relation to all reasonable costs incurred in complying with any requests or directions by the Commonwealth; and
• BZW Australia Limited on 18 August 1995 to indemnify them against legal costs and disbursements incurred in respect of BZW’s obligations for legal compulsion to disclose.
• Moomba Sydney Gas Pipeline — an indemnity has been given to East-Aust Pipeline Ltd on 30 June 1994 against losses sustained due to a claim by an employee of the Pipeline Authority for negligence or accrued salary or other entitlements arising prior to the ‘Transfer Day’.
• Snowy Mountains Engineering Corporation (SMEC) — an indemnity has been given to Tinbury Ltd on 21 October 1993 against certain liabilities and costs which they may suffer from the Commonwealth’s non-observance of any of the express representations, warranties, covenants or undertakings contained in the sale agreement.
• Commonwealth Bank Public Share Offer — in 1996 the Commonwealth provided an indemnity to the Commonwealth Bank, its directors and certain officers to cover the civil liability in relation to providing assistance to the Commonwealth in the offer context.
• Partial Sale of Telstra Corporation — Telstra Scoping Study — An indemnity has been provided on 23 September 1996 to the present and certain former Telstra directors and officers to protect them against certain liability incurred in connection with the Telstra Sale Scoping Study.
• Partial Sale of Telstra Corporation — Telstra Share Offer — indemnities were provided in 1997 to:
• present and former directors, and certain executives of Telstra to protect them against certain liabilities in connection with a Telstra Sale Scheme; and
• to Telstra Corporation to protect against:

(i) certain liabilities which may arise in connection with a Telstra Sale Scheme; and

(ii) any penalty or additional tax within the meaning of Division II of the Income Tax Assessment Act 1936 or any loss or cost incurred by Telstra arising from the payment of Franking Deficit Tax or Franking Deferral;

• the international underwriters to the Telstra Share Offer to protect them against any Australian documentary, stamp, transaction or registration or similar taxes;
• the Joint Global Coordinators and Lead Managers to protect them against any claim arising from the acts of other parties where the Commonwealth requires them to rely on those acts in the performance of the consultancy services;
• the Telstra Instalment Receipt Trustee and its directors to protect against certain losses and liabilities arising from performance of its functions under the Trust Deed governing the administration of the instalment payment;
• the Bank of New York and its Custodian to protect them against certain losses that may arise in the performance of their obligations relating to the issuing of Interim American Depository Receipts in the United States of America; and
• to Coopers & Lybrand and Price Waterhouse by the Telstra Instalment Receipt Trustee, on behalf of the Commonwealth, in relation to performance of certain of their functions as the Instalment Receipt Registrar and Manager of the Instalment Receipt Trustee, respectively.
• Australian Multimedia Enterprise (AME) — an indemnity, effective from 3 July 1997, has been provided to the Directors and Chief Executive Officer of AME to indemnify them against certain costs in respect of assistance provided by the director for the purposes of investigating or conducting the sale of AME.
• Housing Loans Insurance Corporation (HLIC) — the sales agreement, effective on 15 December 1997 incorporates warranties, indemnities and sale price adjustments. Commonwealth liabilities for these matters are limited by total value and, in some cases, are also limited to time.
• Indemnities for banks

The Commonwealth has indemnified a number of banks in Europe and North America and the RBA against loss and damage arising from the acceptance of certain Commonwealth cheques bearing a facsimile signature having been impressed thereon without the authority of the Commonwealth.

New Commonwealth Insurable Risk Managed Fund

Under the current non-insurance policy, the Commonwealth is exposed to risks with the operations of agencies, such as government departments, under the Financial Management and Accountability Act 1997. These risks cover loss or damage to property, consequential losses, court awards and out of court settlements, for which the costs are met from existing agency appropriations or supplemented as required from the budget.

The Government proposes to replace its non-insurance policy with one of self-insurance via a managed fund, with effect from 1 July 1998. Commonwealth insurable risks that are not currently insured will be systematically identified and costed, and the risks will be funded by provisioning over time. The managed fund will produce better risk management and therefore reduce costs over time.

Similarly, the insurable risks of some bodies under the Commonwealth Authorities and Companies Act 1997 within the general government sector will also be progressively covered by the new managed fund from 1 July 1998. Premiums will be charged by the fund to cover the long-term cost of risk and associated administrative costs and an allowance has been made in the Budget and Forward Estimates to cover the expected payment of claims to these bodies. However, given the unpredictable nature of insurable risk, it is possible that this estimate could be exceeded in any particular financial year.

Foreign Affairs and Trade

Australian Trade Commission

Under the Australian Trade Commission Act 1985 the Commonwealth guarantees payment by the Australian Trade Commission of money that is payable to any person other than the Commonwealth.

Health and Family Services

CSL Ltd

CSL Ltd is indemnified against claims made by persons who contract specified infections from specified products and against employees contracting asbestos related injuries. CSL Ltd has unlimited cover for most events that occurred before the sale of CSL Ltd on 1 January 1994, but has more limited cover for a specified range of events that might occur during the period of the current contract. Given the open-ended nature of some of the indemnities, damages and risk cannot be quantified.

Transport and Regional Development

Civil Aviation Safety Authority (CASA) — indemnity in relation to the Authority's safety regulatory functions

Under a Deed of Agreement, CASA is indemnified against claims incurred in carrying out its responsibilities for aviation safety regulation. Under existing arrangements, this indemnity is subject to annual renewal on payment of an annual premium by CASA to the Commonwealth. The current CASA safety regulatory indemnity expires on 5 July 1998.

Civil Aviation Safety Authority (CASA) — indemnity to officers of the Authority administering the Carrier's liability insurance requirements

An indemnity has been given to those officers of CASA who administer the carrier's liability insurance requirements under Part IVA of the Civil Aviation (Carrier's Liability) Act 1959 and complementary state legislation. This indemnity is unquantifiable and no expiry date has been set.

Tripartite Deed relating to the sale of Phase 1 Airports

The Tripartite Deeds between the Commonwealth of Australia, airport Lessees and Lessees’ financiers provide for the Commonwealth to ‘step-in’ as airport operator in defined circumstances. The potential liability of the Commonwealth in the event varies considerably with the specific factors leading to such an action.

If the Commonwealth entered into possession of an airport site it could seek to recover its costs from a number of sources, including airport revenues.

Sale of the Australian National Railways Commission (AN) and National Rail Corporation Ltd (NR)

An indemnity has been provided to each of the Commissioners of AN in relation to their assistance for the purposes of the sale of AN, its business units or assets, including the provision of information about AN at the request of the Commonwealth or its advisers.

An indemnity has been provided to Directors and certain specified officers of NR in relation to their assistance during the Scoping Study into the possible sale of the Commonwealth’s equity in NR, including the provision of information about NR at the request of the Commonwealth or its advisers.

Treasury

Housing Loans Insurance Corporation (HLIC)

The Commonwealth guarantees the liabilities of the HLIC which provides mortgage insurance to lenders. Whilst it is possible to measure the total value of all insurance contracts on the HLIC’s books at any given time, this does not realistically reflect the potential risk to the Commonwealth. The HLIC has never suffered a claim for the total value of any insurance contract in its 30-year history; claims amounts on policies usually amount to 10 to 20 per cent of the policy value.

Workplace Relations and Small Business

ANL Ltd

The Commonwealth has issued a guarantee for all ANL's major lease facilities. If the risk materialised, the full termination value of the leases may be largely offset by the value of ANL’s lessor loans and the value of assets that ANL would assume in the event of termination of the leases.

ANL Ltd Board

An indemnity for ANL Board members was provided to protect against civil claims relating to employment and conduct as a director of ANL Ltd and subsidiary/associated companies. This indemnity is unquantifiable and no expiry date has been set.

Australian Maritime Safety Authority (AMSA) — in relation to ship-sourced marine pollution.

In the normal course of operations, the Authority is responsible for the provision of funds necessary to meet the clean-up costs arising from ship-sourced marine pollution. The Commonwealth has agreed that the Authority’s responsibility be limited to a maximum outlay of $10 million. The Authority entered into a stand-by loan facility for this purpose. In the event of costs above that limit, funds will be provided by the Commonwealth. The Commonwealth’s risk is unquantifiable. In all circumstances, the Authority is responsible for making appropriate efforts to recover the costs of any such incidents.

Possible increased workers’ compensation costs to the Commonwealth

In December 1997, the NSW Court of Appeal found that Commonwealth employees, who were previously considered to be covered solely by the provisions of the Safety, Rehabilitation and Compensation Act 1988, could choose to claim compensation under State workers compensation legislation (the case is Telstra Corporation v Worthing & Anor).

The Commonwealth has applied to the High Court for leave to appeal this decision; the hearing is scheduled for 19 May 1998. The Australian Government Solicitor advises there are good prospects of the High Court overturning the Court of Appeal’s decision.

If the Court of Appeal’s decision is not overturned, the Australian Government Solicitor considers that there is some risk, although probably not a substantial risk, of Commonwealth exposure to financial liability under State workers compensation legislation.

 

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