Contingent liabilities — unquantifiable
Broadband, Communications and the Digital Economy
NBN Co. — Equity Agreement
The Australian Government has entered into an Equity Funding Agreement with NBN Co. The Agreement formalises the Australian Government's intention to provide equity to fund the roll out of the National Broadband Network, with such funding being conditional on the annual appropriation processes. It also commits the Australian Government, in the event of a termination of the National Broadband Network roll out, to provide sufficient funds to NBN Co to meet its direct costs arising from that termination. The NBN Co Equity Agreement terminates in 2021.
NBN Co Limited — Board Members' Insolvency Indemnity
The Australian Government has provided each Director of NBN Co with an indemnity against liability as a result of the Government failing to meet its funding obligations to NBN Co. The liabilities covered by this indemnity would be the same as those covered by the NBN Co Equity Agreement, with the exception of any legal expenses incurred by individual Directors arising from this indemnity. The Directors are also indemnified in relation to claims arising out of their involvement in the negotiation and entry by NBN Co into the Financial Heads of Agreement with Telstra.
Optus Financial Guarantee
The Australian Government has provided a guarantee to Optus in respect of NBN Co's financial obligations to Optus under the NBN Co‑Optus Agreement, which is subject to satisfying the conditions precedent to the Agreement. That Agreement covers the period of the NBN roll out in Optus HFC areas. As at 31 October 2011, the conditions precedent in the NBN Co‑Optus Agreement had not been satisfied and the Guarantee had therefore not come into effect.
Telstra Financial Guarantee
The Australian Government has provided a guarantee to Telstra in respect of NBN Co's financial obligations to Telstra under the Definitive Agreements, which is subject to satisfying the conditions precedent to the Agreements. The Definitive Agreements are long term contracts and, in the case of the infrastructure component, involve terms of at least 35 years. The liabilities under the Definitive Agreements arise progressively during the roll out of the network as infrastructure is accessed and subscribers to Telstra's existing network are disconnected. As at 31 October 2011, the conditions precedent for the Definitive Agreements had not been satisfied and the Guarantee had therefore not come into effect. The Guarantee will terminate when NBN Co achieves specified credit ratings for a period of two continuous years and either:
- the company is fully capitalised; or
- the Communications Minister declares, under the National Broadband Network Companies Act 2011, that, in his or her opinion, the National Broadband Network should be treated as built and fully operational.
Defence and Defence Materiel Organisation
Indemnities and remote contingencies
As at 30 September 2011, Defence carried 9,985 instances of unquantifiable remote contingent liabilities, an increase on the 9,306 reported in the 2011‑12 Budget. As at 30 September 2011, the Defence Materiel Organisation carried 565 instances of contingencies (including Foreign Military Sales) that are unquantifiable, a decrease on the 568 reported in the 2011‑12 Budget. While these contingencies are considered remote, they have been reported in aggregate for completeness.
Finance and Deregulation
Commonwealth Superannuation Corporation — immunity and indemnity
The Governance of Australian Government Superannuation Schemes Act 2011 (the Governance Act) provides for specific immunities for activities undertaken in good faith by directors and delegates of the board of the Commonwealth Superannuation Corporation (CSC), provided these activities relate to the performance of their functions. These immunities do not prevent CSC from being subject to any action, liability, claim or demand. Under the Governance Act, other than in cases where the Superannuation Industry (Supervision) Act 1993 or regulations under that Act do not so permit, any money that becomes payable by CSC in respect of the superannuation schemes and funds for which it is responsible, is to be paid out of the relevant superannuation fund or if there is no fund, the Consolidated Revenue Fund (CRF). Amounts paid from a superannuation fund are reimbursed to the fund from the CRF.
Future Fund Management Agency — indemnity
The Australian Government has provided certain staff members of the Future Fund Management Agency with a Deed of Indemnity in circumstances where they are appointed to act as directors and officers of Future Fund Board of Guardians investee companies and/or subsidiaries. The indemnity is intended to cover liabilities in excess of the insurance policies of those entities and Agency. Agency staff members are indemnified, to the maximum extent permitted by law, in relation to all acts or omissions in connection with the performance of functions or the exercise of powers in their capacity as a director or officer of the investee companies and/or subsidiaries. However, Agency staff members are not indemnified: to the extent they are indemnified by the investee company or subsidiary or they are paid under a Directors and Officers policy of the investee company or subsidiary; to the extent that they are granted and receive financial assistance under Appendix E of the Legal Services Directions; for conduct they engage in other than in good faith; or in respect of any liability owed to the Board or the Commonwealth. Further, a staff member of the Agency is not indemnified for legal costs incurred by the member in unsuccessfully defending or resisting criminal proceedings. The indemnity is financially limited, in broad terms, to the value of the funds under management by the Future Fund Board.
Sustainability, Environment, Water, Population and Communities
Murray‑Darling Basin Reform — risk assignment
The Water Act 2007 (the Act) provides the mechanism for defining liabilities and making payments to affected entitlement holders for the Australian Government's share of reductions in water allocations, or in the reliability of water allocations, in the Murray‑Darling Basin arising from the Basin Plan prepared under the Act.
The Government will provide funding of $310 million per annum from 2014‑15 to bridge any remaining gap between the level of water returned to the Murray‑Darling Basin under existing Water for the Future initiatives and the level required to be returned under the final Basin Plan. The additional funding will be used to continue buying back water entitlements each year beyond 2014, subject to the availability of water for purchase from willing sellers. This funding has been included in the forward estimates.
The proposed Basin Plan is expected to be released in late November 2011 by the independent Murray‑Darling Basin Authority and will be followed by a consultation phase. The final Basin Plan requires Ministerial approval and is subject to the scrutiny of both Houses of Parliament.
The total cost of this commitment is not able to be quantified until the Basin Plan has been finalised.
Treasury
Financial Claims Scheme
The Australian Government established a Financial Claims Scheme to provide depositors of authorised deposit taking institutions and general insurance policyholders with timely access to their funds in the event of a financial institution failure.
The Australian Prudential Regulation Authority (APRA) is responsible for the administration of the Financial Claims Scheme. Under the Financial Claims Scheme any payments to eligible depositors or general insurance policyholders will be made out of APRA's Financial Claims Scheme Special Account.
The Financial Claims Scheme established under the Banking Act 1959 provides a mechanism for making payments to depositors under the Government's guarantee of deposits in authorised deposit taking institutions.
The Government announced that, from 12 October 2008, deposits up to $1 million at eligible authorised deposit taking institutions would be eligible for coverage under the Financial Claims Scheme. The Government confirmed in December 2010 that the Financial Claims Scheme will be a permanent feature of the Australian financial system. The Government announced in September 2011 that a new cap of $250,000 would replace the current $1 million cap from 1 February 2012.
As at 30 June 2011, deposits eligible for coverage under the Financial Claims Scheme were estimated to be approximately $780.8 billion, compared to $731.8 billion at 31 January 2011.
The Financial Claims Scheme established under the Insurance Act 1973 provides a mechanism for making payments to eligible beneficiaries with a valid claim against a failed general insurer.
In the very unlikely event of a failure, any payments made under the Financial Claims Scheme would be recovered through the liquidation of the failed institution. In the even more unlikely event there were a shortfall, a levy would be applied to industry to recover the difference between the amount expended and the amount recovered in the liquidation. Initial amounts available to meet payments and administer the Financial Claims Scheme, in the event of activation, are $20.1 billion per institution, under the legislation.
Guarantee of State and Territory Borrowing
The Australian Government announced on 25 March 2009 that a voluntary, temporary guarantee would be put in place over State and Territory borrowing. The Guarantee of State and Territory Borrowing commenced on 24 July 2009 and closed on 31 December 2010.
Securities covered by the guarantee will continue to be guaranteed until these securities either mature or are bought back and extinguished by the issuer.
The expected liability under the guarantee is remote and unquantifiable. Australian Government expenditure would arise under the guarantee only in the unlikely event that a State or Territory failed to meet its obligations with respect to a commitment that was subject to the guarantee and the guarantee was called upon. In such a case, the Government would likely be able to recover any such expenditure through a claim on the relevant State or Territory at a future date. The impact on the Australian Government's budget would depend upon the extent of the default and the State or Territory's ability to meet the Government's claim.
As at 30 September 2011, the face value of State and Territory borrowings covered by the guarantee was $36.8 billion, down from $50.8 billion at 31 March 2011.
Guarantee Scheme for Large Deposits and Wholesale Funding
The Australian Government announced the guarantee of large deposits and wholesale funding for authorised deposit taking institutions from 12 October 2008 under the Guarantee Scheme for Large Deposits and Wholesale Funding.
On 7 February 2010, the Australian Government announced that the Guarantee Scheme would close to new liabilities on 31 March 2010. Since 31 March 2010, Australian authorised deposit taking institutions have been prohibited from issuing any new guaranteed wholesale funding or accepting new guaranteed deposits above $1 million. Existing guaranteed wholesale funding is guaranteed to maturity. Depositors who covered their balances above $1 million under the Guarantee Scheme can have those funds covered to maturity for term deposits up to five years, or until October 2015 for at call deposits.
The expected liability for deposits under the Guarantee Scheme is remote and unquantifiable. Australian Government expenditure would arise under the guarantee only in the unlikely event that an institution failed to meet its obligations with respect to a commitment that was subject to the guarantee and the guarantee was called upon. In such a case, the Government would likely be able to recover any such expenditure through a claim on the relevant institution. The impact on the Australian Government's budget would depend on the extent of the institution's default and its ability to meet the Government's claim.
As at 21 October 2011, total liabilities covered by the Guarantee Scheme were estimated at $117.0 billion, down from $129.0 billion at 25 March 2011. This is made up of $3.2 billion (down from $3.9 billion) of large deposits and $113.8 billion (down from $125.1 billion) of long‑term wholesale funding. All guaranteed short‑term wholesale funding matured in March 2011.
As at 30 September 2011, institutions participating in the Guarantee Scheme had paid fees of $3.1 billion since its inception.
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