Appendix C: Statement of Risks (continued)
Significant but remote contingencies
Communications
NBN Co Limited — Equity Agreement
The Australian Government has entered into an Equity Funding Agreement with NBN Co Limited (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. In addition, it 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 Funding Agreement terminates in 2019. As at 30 September 2014, NBN Co's termination liabilities were estimated at $7.1 billion.
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. 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 National Broadband Network as infrastructure is accessed and subscribers to Telstra's existing network are disconnected. As at 30 September 2014, NBN Co had generated liabilities covered by the guarantee estimated at $3.5 billion. 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
Remote contingencies
These significant remote contingent liabilities are restricted in nature and details are not given due to reasons of commercial in confidence and/or national security.
As at 30 October 2014, the Department of Defence carried 1,466 instances of quantifiable remote contingent liabilities valued at $3.8 billion and 23 instances of unquantifiable remote contingent liabilities. In addition, Defence had three instances of quantifiable remote contingent assets valued at $0.6 million and two instances of unquantifiable remote contingent assets.
As at 30 October 2014, the Defence Materiel Organisation carried 70 contingencies that are quantifiable, to the value of $1.8 billion and 473 instances of contingencies (including Foreign Military Sales) that are unquantifiable and are considered remote. While these contingencies are considered remote, they have been reported in aggregate for completeness.
Litigation cases
The Department of Defence is involved in a wide range of litigation and other claims for compensation and/or damages where the matters are not able to be finalised by use of negotiation. The litigation includes common law liability claims, including alleged injuries from workplace systems, practices, conduct and property damage. This includes claims arising out of reviews into Australian Defence Force and Defence culture. A number of claims have also been received for damage caused by the use of a Defence Practice Area. There is also potential for claims to arise from the disposal of assets to third parties where such assets contain hazardous materials or components that have the potential to cause injury.
Treasury
Financial Claims Scheme
The Financial Claims Scheme provides depositors of authorised deposit taking institutions (ADIs) and claimants of general insurers with timely access to their funds in the event of a financial institution failure.
Under the Banking Act 1959, the scheme provides a mechanism for making payments to depositors under the Government's guarantee of deposits in ADIs. Payments are capped at $250,000 per account holder per ADI. As at 30 June 2014, deposits eligible for coverage under the Financial Claims Scheme were estimated to be $732.4 billion, increasing slightly from an estimated $722.8 billion at 31 December 2013, reflecting overall deposit growth in the financial system.
Under the Insurance Act 1973, the scheme provides a mechanism for making payments to eligible beneficiaries with a valid claim against a failed general insurer.
In the very unlikely event of an ADI or general insurer failure, any payments made under the Financial Claims Scheme would be recovered through the liquidation of the failed institution. If there was a shortfall in the amount recovered through the liquidation of the failed institution, a levy could be applied to the relevant industry to recover the difference between the amount expended and the amount recovered in the liquidation.
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 claimants will be made out of APRA's Financial Claims Scheme Special Account. Under the legislation, initial amounts available to meet payments and administer the Financial Claims Scheme, in the event of activation are $20.1 billion per institution.
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 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 31 October 2014, the face value of State and Territory borrowings covered by the guarantee was $13.3 billion, down from $19.0 billion at 31 March 2014.
Guarantee Scheme for Large Deposits and Wholesale Funding
The Australian Government announced the guarantee of eligible deposits and wholesale funding for authorised deposit taking institutions (ADIs) from 12 October 2008 under the Guarantee Scheme for Large Deposits and Wholesale Funding.
On 7 February 2010, the then Government announced that the Guarantee Scheme would close to new liabilities on 31 March 2010. Since 31 March 2010, Australian ADIs 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 until October 2015. 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.
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 Government's budget would depend on the extent of the institution's default and its ability to meet the Government's claim.
As at 5 December 2014, total liabilities covered by the Guarantee Scheme were estimated at $2.5 billion, down from $25.3 billion at 28 March 2014. This is made up of $1.5 billion of large deposits and $1.1 billion of long‑term wholesale funding. All guaranteed short‑term wholesale funding matured in March 2011.
As at 31 October 2014, institutions participating in the Guarantee Scheme had paid fees of $4.5 billion since its inception.
Guarantees under the Commonwealth Bank Sale Act 1995
Under the terms of the Commonwealth Bank Sale Act 1995, the Australian Government has guaranteed various superannuation and other liabilities: $745.5 million is attributable to liabilities of the Commonwealth Bank of Australia, as at 30 September 2014; and $4.3 billion is attributable to liabilities of the Commonwealth Bank Officers' Superannuation Corporation, as at 30 September 2014.
Reserve Bank of Australia — guarantee
The Australian Government guarantees the liabilities of the Reserve Bank of Australia, measured as the Bank's total liabilities excluding capital, reserves, and Australian Government deposits. The major component of the Bank's liabilities is notes (that is, currency) on issue. Notes on issue amount to $62.9 billion, as at 29 October 2014, and the total guarantee is $90.4 billion ($91.7 billion at the 2014‑15 Budget).