Massive infrastructure projects and a renewed push towards privatisation will be key areas of focus for business following the announcement of the first federal budget for the Abbott Government on 13 May 2014.
Sales of government assets will coincide with a $11.6 billion Infrastructure Growth Package, as the Australian Government pushes to stimulate the economy and create new jobs to balance the decline in construction work tied to the resources industry.
Federal Treasurer Joe Hockey said in his maiden budget speech that the government was delivering a “contribute and build budget”, with big new investments in medical research and infrastructure, particularly through major road projects.
“If we all contribute now, we will build the equivalent of eight Snowy Mountain schemes in new infrastructure over the next decade,” Mr Hockey said, while a new $20 billion Medical Research Future Fund would be created to “find the discoveries and cures necessary to underpin the health system of the future’’.
An analysis by Norton Rose Fulbright Australia reveals considerable business opportunities for Australian companies as the government re-engineers the economy to help reduce the size of the deficit. It also reveals change for the machinery of government itself, as major shake-ups to agency organisation and the provision of services and funding were announced.
Much of the media spotlight has focussed on adjustments to taxes and welfare and cuts to the public service, including a deficit levy on high-income earners, the closing of dozens of government agencies and a rise in the fuel tax excise. This is part of what Prime Minister Tony Abbott described on budget day as “pain with a purpose”.
But there remain a number of key measures that will give business access to lucrative government-owned assets or involvement in some of the nation’s biggest infrastructure projects.
The big potential of privatisation
Privatisation measures will affect many business sectors and will be divided into short term (2014- 2016), medium term (after 2016) and long term (no fixed date) projects. The realisation of assets in the long-term could generate more than $11 billion for the government.
This follows the recommendation in the National Commission of Audit report, released on May 1, that government enterprises such as NBN Co, Snowy Hydro Limited (13 per cent stake), Defence Housing Australia and the Royal Australian Mint be sold to the private sector. The government has held off on decisions for now on a number of those targets for privatisation, but it has announced in the budget that “‘scoping studies” will be undertaken into the current ownership of Australian Hearing, Defence Housing Australia, the ASIC registry function and the Royal Australian Mint with only the previously-announced Medibank privatisation definitely to proceed. The government enterprises up for sale are those that are seen to operate in contestable markets.
Norton Rose Fulbright partner Iain Laughland says that a number of methods of privatisation may be used. For instance, the ASIC registry function could be privatised by a single asset sale, while other sales, such as Defence Housing Australia could be the subject of an initial public offering.
“One of the outcomes of the scoping studies announced is likely to be a recommendation on the method of sale which will be the method that provides the best opportunity to government to maximise value on the realisation of the asset,” he said.
“Until the scoping studies have been completed it is difficult to determine with certainty what business sectors are best placed to benefit. But prospective buyers or investors in the assets that have been ear-marked for privatisation should maintain a close eye on developments and announcements regarding the implementation of the privatisation program by the government.”
While the National Commission of Audit mentioned ASC Pty Ltd as one potential sale target, it was omitted from the list of enterprises for which a scoping study will be commissioned from the budget overview papers. Norton Rose Fulbright partner Alena Titterton says that the omission is a logical one “given the significance of the future submarines project for Defence and the naval shipbuilding industry”.
In relation to any proposed privatisation of Defence Housing Australia, the issues for government might not be straight forward. Ms Titterton says that the Military Superannuation and Benefits Act 1991 (Cth) and Defence Housing Australia Act 1987 (Cth), which respectively establish the Military Superannuation and Benefits Scheme and the Defence Housing Australia body, will need to be repealed if the National Commission of Audit recommendation is to be adopted.
There are benefits to industry, though, from these potential sales. “Any sales following the commissioned scoping studies represent a windfall for the road infrastructure industry given that any funds arising from the sales will go towards the government’s Asset Recycling Fund (see below) with funding targeting major road infrastructure projects”, Ms Titterton said.
However, Ms Titterton said that as part of any focus on “strategic and nationally significant infrastructure, high speed rail ought to be somewhere on the agenda”.
Getting Australia moving
The $11.6 billion Infrastructure Growth Package, including a $5 billion Asset Recycling Initiative (see below), has a large focus on big road projects in NSW, Victoria and WA and is being touted by the government as a much-needed benefit of a controversial revenue raising budget measure – the re-introduction of indexation of the fuel tax excise. This is part of the federal government’s commitment to spend $50 billion over seven years on transport infrastructure.
Mr Hockey labelled this expenditure “the biggest increase in road expenditure in Australian history”. This comes after successive years of growth in the construction of roads, bridges, railways and harbours in Australia.
Growth in Transport Engineering Construction*
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* Includes roads, bridges, railways and harbours. Break in series between Dec 06 and Mar 07.
Source: Engineering Construction Activity, Australia, Dec 2013 (ABS cat no. 8762.0)
Norton Rose Fulbright partner James Morgan-Payler says that the “roads projects in the populous eastern states have attracted the most direct federal funds, with Victoria’s East West Link and NSW’s Badgerys Creek airport-related road projects receiving the lion’s share”.
The second stage of the East West Link in Victoria will receive $1.5 billion, while $2.9 billion of federal funds will be spent connecting Sydney with the long-awaited second airport to be built at Badgerys Creek. This is on top of a $2 billion concessional loan for the NSW WestConnex Stage 2 project, an extra $866 million for the Perth Freight Link, $500 million for the North-South Road Corridor project in South Australia and funding for the Toowoomba Second Range Crossing in Queensland.
As promised before the 2013 election, the federal government will also establish a new $1 billion National Stronger Regions Fund to provide grants for the construction, expansion and enhancement of infrastructure across Australia.
“The federal government’s direct investment in roads projects will add further impetus to the construction and infrastructure sector, which is reeling from slower investment in mining and commodities,” Mr Morgan-Payler said.
“A critical issue for state governments now will be to program the proposed mega projects, especially road and rail projects in Melbourne and Sydney, to avoid resourcing shortages and price hikes. Some industry commentators have suggested that it would be better to stagger these mega projects to maximise competitive bids and efficient resourcing.”
Builders, project sponsors and other private sector organisations wishing to participate in new government infrastructure projects should “undertake due diligence and planning for the relevant projects, keep abreast of the government’s announced plans for the projects and, if possible, maintain direct contact with the relevant state government representatives to understand their plans, timing, scope and budgets for upcoming projects,” Mr Morgan-Payler said.
Recycling across the federal-state divide
A new $5 billion Asset Recycling Initiative will enable the federal government to offer incentives to state and territory counterparts to sell government-owned assets and use the proceeds to pay for new productive infrastructure.
States and territories stand to gain 15 per cent of the asset value if they sign a bilateral agreement with the federal government that locks in future spending on agreed projects, rather than taking other measures, such as paying down debt. Time is also an issue; state and territory governments will only have until 30 June 2016 to form agreements with the federal government.
The government will establish an Asset Recycling Fund to provide funding and financial incentives to states, territories and other bodies to invest in new productivity enhancing infrastructure, including through the Asset Recycling Initiative. It will start with $5.9 billion (uncommitted monies from other funds) and will grow with the addition of proceeds of the Medibank Private sale and any future privatisations.
“The federal government’s Asset Recycling Initiative will delight private sector infrastructure asset companies and major builders, who will have new opportunities to buy blue chip government assets and to build new roads, rail and infrastructure co-funded by the scheme,” Mr Morgan-Payler said. “Banks, superannuation funds and infrastructure asset operations and maintenance businesses will also benefit from the opportunities to participate in these new projects.
“The initiative will favour states and territories that still own significant assets, such as major ports, water assets and electricity transmission, distribution and generation assets. Infrastructure Australia has estimated that Australian governments currently own at least $100 billion in such commercial infrastructure assets, which could be sold.”
Norton Rose Fulbright partner Keith Redenbach says that the Asset Recycling Initiative borrows heavily from the experience of NSW and the new NSW Premier, Mike Baird.
“Mr Baird's background as a banker and manager of the financial affairs of the state have no doubt forged the way forward. This means the lion's share of funding has been allocated to NSW, where the model has been in operation since Mr Baird was appointed to his former role as Treasurer in March 2011.”
Investing to cure disease
A new Medical Research Future Fund (MRFF), intended to grow to $20 billion, will have its earnings allocated by the National Health and Medical Research Council (NHMRC). The fund will be created from multiple sources, including $5 of the new $7 patient charge for GP visits, an uplift in the Pharmaceutical Benefits Scheme co-payments, and savings from not indexing Medicare Rebates and the Private Health Insurance Surcharge.
Norton Rose Fulbright partner Bernard O’Shea says that this fund will result in a “significant boost to the level of research funding for the academic sector with an expected consequence of new technologies to be commercialised”.
“The other side of the ledger will be of great interest to the sector,” he adds. “This will largely be dictated by the mandate given to the Future Fund as to how the [fund] is to be invested. It would be a very significant departure from existing investments under the control of the Future Fund to see these dollars coming back into local entities seeking to commercialise health-related technologies.”
The fund has the potential for both increased NHMRC funding as well as greater certainty of funding in the short term, but Mr O’Shea says there must be some concern that this is regarded as a complete solution to research funding in this sector. This might not be as attractive in the medium to longer term – even if this is premised on the existing level of NHMRC funding remaining intact (noting that the budget states that the MRFF monies are in addition to existing funding).
“Perhaps the best news for the commercial sector is that the R&D concession appears to have been left intact (apart from what appear to be minor adjustments to reflect the reduced company tax rates),” he said. “This however is counter-balanced by the cessation of Commercialisation Australia and the Innovation Investment Fund.”
Mr O’Shea also says that there is no specific mention in the budget to address the well-recognised commercialisation gap for those looking to commercialise emerging research, as well as nothing to suggest that research which is actually translated into practice will be rewarded. While “the avowed intent of the MRFF is to fund research directed to delivering improved health and medical outcomes for all Australians”, he adds that “it will be interesting to see how this manifests itself in practice.”
Agreements with government
Mr Hockey noted in his budget speech that the government would be abolishing over 230 bureaucratic programs in the coming year. One side effect of a reduction in the size of government, including the abolition or merger of more than 70 government agencies, will be the need to review all contracts between industry program and service providers and the Commonwealth.
Norton Rose Fulbright partner Ben Allen said the federal government may need to rely on termination for convenience clauses in funding and procurement contracts to enable it to scrap some of its programs. These may be a cause for concern for many businesses engaged with the government, which would benefit from an urgent review of their contracts. The government must also take care not to give rise to contractual disputes for wrongful termination if it does not act in good faith or provide reasonable notice periods, among other obligations under the law.
“By their very nature, termination for convenience clauses sit uneasily with the way in which commercial parties do business,” Mr Allen said. “The contractual right of the Commonwealth to terminate a contract where other parties are otherwise performing their obligations gives rise to wider policy issues that affect the way in which government and business interact.
“Where a Commonwealth agency gives notice of its intention to rely on a termination for convenience clause, legal advice should be sought in relation to the reasonableness of notice and the legal grounds on which the agency is relying,” he said. “Wrongful termination constitutes repudiation of a contract which may give rise to considerable damages for an affected party.
Coping with an ageing population
Increasing the pension age to 70 by 2035 and a higher-threshold single asset test for eligibility for the age pension are further National Commission of Audit recommendations the government has seized on to help it meet the cost of an ageing population.
Projected population aged 65 years and over, Australia
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Projected population, Median age, Australia
Source: Population Projections, Australia, 2012 (base) to 2101 (ABS cat no. 3222.0) Note: Series A, B and C vary due to differing assumptions made about future fertility and mortality rates, and net overseas and interstate migration made by the ABS. A detailed explanation can be found here.
Norton Rose Fulbright partner Zein El Hassan said that “while the proposed changes to the age pension provides economic relief in theory, the real economic benefits will only truly be realised, if the changes encourage more and more Australians to be self-funded in retirement”.
He also says that the proposed changes “could potentially have an adverse impact on the behaviour of those approaching retirement due to the uncertainty the proposed changes inevitably create in their preparation for retirement.”
However, Mr El Hassan considers that “the increase in the pension age means an opportunity for the financial services industry to develop products and tailor their services to help those approaching retirement better prepare for the uncertain future. Financial advisers, in particular, will have greater opportunities to help their clients better prepare for their retirement in relation to changes impacting the age pension eligibility criteria.”
Downsizing government, supporting new parents
Cuts to the Department of Defence, the ATO and other Australian Public Sector (APS) departments and agencies will flow from a general reduction in the size of government and the abolition or merger of various government agencies. This is in addition to a wave of public service staffing cuts under the previous government. The total number of Australian public service job losses identified in the budget is 16,500 across the four years to 2016 17, which includes 14,500 positions that had been flagged for reduction through the previous government’s efficiency dividends.
Norton Rose Fulbright partner Sarah Ralph says public service employers will need to ensure that genuine redundancy obligations under the Fair Work Act 2009 (Cth) are met in order to avoid unfair dismissal claims, which apply to public service employees covered by modern awards or enterprise agreements or those employees earning less than $129,300. Employers will also need to make sure that they comply with enterprise agreement provisions.
Ms Ralph says that “APS employers should ensure that they are compliant with their obligations including enterprise agreement requirements. These obligations can include consultation requirements as well as specific redeployment and redundancy procedures. A failure to comply with a provision of an enterprise agreement is a breach of the Fair Work Act, and can lead to civil penalties”.
“Other key areas of risk during periods of workplace change are increases in employee stress and workplace tensions arising from uncertainty, which can result in workers’ compensation claims and allegations of workplace bullying,” she says. “These risks can be reduced by clear communication about the selection processes for redundancies and how work will be performed after the changes have taken place”.
It was also announced that the introduction of the government’s paid parental leave scheme, with a maximum payment of $50,000 for women earning more than $100,000, will be funded by a 1.5 per cent levy on big business and taxpayers. The existing paid parental leave scheme, set up by the former government, pays eligible mothers the minimum wage for 18 weeks, regardless of whether they earned more or less than this prior to going on maternity leave. People are only eligible for the payments under the current scheme if they earn less than $150,000.
Ms Ralph says that “the paid parental leave legislation has not yet been introduced into Parliament, and will, from 1 July 2014, require the support of the Greens or five out of the eight Independents and micro-parties in order for the government to pass the legislation. The government’s paid parental scheme is likely to face significant hurdles and there is a real likelihood that it won’t make it through Parliament without changes”.
A different approach to the climate debate
The Abbott Government’s Direct Action plan has at its centre the repeal of the carbon price mechanism (CPM) and the introduction of the emissions reduction fund (ERF), which aims to deliver on a commitment to reduce carbon emissions by five per cent on 2000 levels by 2020.
The Climate Institute has estimated that the repeal of the CPM and its replacement with the ERF will have a negative fiscal impact of more than $15 billion over the forward estimates.
Norton Rose Fulbright partners Elisa de Wit and Noni Shannon note that the ERF may provide opportunities for private and public sector organisations to receive a form of government funding to implement registered emissions reductions projects. This could involve those in the land, waste, industrial, mining, commercial building, housing, transport and government sectors.
Those organisations involved in the CPM should monitor the repeal of legislation, especially those that have entered into contracts with carbon price pass-through provisions.
“Any business which has passed through the carbon price down the supply chain will also need to be aware of the role that the Australian Competition and Consumer Commission will play in monitoring prices, costs and profits associated with the supply of regulated goods (such as natural gas, electricity, synthetic greenhouse gases) by corporations and the supply of goods by liable entities under the CPM,” Ms de Wit said. The legislative process for, and potential benefits from, the ERF should also be monitored closely by business over coming weeks.
The government has also confirmed that it intends to abolish the Australian Renewable Energy Agency (ARENA) to achieve expected savings of $1.3 billion over five years from 2017-18. Ms Shannon says that this may lead to an interesting few months, as any such abolition will require the repeal of the Australian Renewable Energy Agency Act 2011. The legislation to abolish ARENA is unlikely to be presented until the new Senate is installed on 1 July 2014 and, even then, it is not clear at this stage whether a majority of the Senate would support such legislation.
Aside from the unresolved question of its immediate future, Ms Shannon highlighted the tensions between budget announcements and the spending obligations of agencies under their legislation and the impact this can have on industry. As ARENA chief executive, Ivor Frischknecht, has noted in the press prior to the budget, his organisation may find itself caught between its legislative obligations to fund (and continue to fund) renewable energy projects and the government’s announcement tonight of the changed policy. In terms of future funding, $1 billion over eight years will remain available to support existing priority projects although it is not clear at this stage which projects will qualify as a “priority project”.
In further changes to the administration of climate change policy in Australia, funding will be reduced for the National Greenhouse and Energy Reporting Scheme (savings of $2.0 million over four years) and the Carbon Capture and Storage Flagships Programme (savings of $459.3 million over three years from 2017 18).
Defending the nation
Mr Hockey’s budget speech recommitted to the Coalition’s election promise to build “Defence spending to two per cent of GDP within a decade”. The previously announced $12.4 billion expenditure to buy 58 Joint Strike Fighter jets and related equipment demonstrates the government’s commitment to military capability. The budget says that more detail will be provided in the 2015 Defence White Paper and this appears to be a direct response to comments in the National Commission of Audit regarding Defence expenditure.
Defence will also be included in general Australian Public Sector (APS) staff reductions, with Defence civilian staff numbers to be reduced by 1200 APS staff and 300 service provider staff by 2017-18. This measure is expected to result in savings of $606 million over four years, which will be reinvested in Defence capability with the focus on increasing efficiency.
Norton Rose Fulbright partner Alena Titterton says that while the plan is for voluntary redundancies and natural attrition to deliver many of these reductions, “Defence senior leadership have personal obligations under the Work Health and Safety Act to exercise due diligence. That due diligence obligation requires ensuring appropriate resources are in place to manage safety risks. Many Defence civilians perform necessary safety support functions and those functions need to be maintained, even in these challenging times. That is also critical to Defence capability.”
The National Commission of Audit recommended a number of matters be subject of review including Defence structure, accountabilities, efficiency and funding and Defence Materiel Organisation realignment and reintegration to Defence .The budget announcements include a “first principles review of Defence” intended to make decision making “more streamlined and less bureaucratic”, something that the National Commission of Audit acknowledged was already a government commitment. Ms Titterton observes that “a streamlined approach to dealing with the issues is sensible” and “the issues identified by the Commission of Audit are all likely to be closely examined in the single first principles review.”
Ms Titterton also says that “there is an overabundance of Defence strategic reviews that have been carried out over the years. Perhaps review terms of reference should focus on the extent to which efficiency reform recommendations have been implemented following those reviews and causal analysis of why those have not been implemented or not delivered the dividends instead of constantly reinventing the wheel in strategic reform.”
There have been substantial changes to the Office of the Australian Information Commissioner (OAIC) and Freedom of Information (FOI) functions. The Privacy Commissioner, who received greater powers under the Privacy Act reforms that were introduced earlier this year, is to be moved to the Australian Human Rights Commission. The OAIC itself will be disbanded. The Attorney-General’s Department will take responsibility for issuing FOI guidelines and providing explanatory material while the Administrative Affairs Tribunal will oversee the external merits review of FOI decisions. Norton Rose Fulbright partner Nick Abrahams said that it will be interesting to see what impact this change has on the Privacy Commissioner’s ability to effectively enforce his new privacy powers.
The government will provide $10 million over four years to improve the protection of children online, including the establishment of a Children’s e-Safety Commissioner. Mr Abrahams, who sits on the government’s Consultative Working Group on Cyber-safety, said that the increased funding to keep kids safe is very welcome. The implementation of the e-Safety Commissioner will need to be carefully handled to ensure policy objectives are met but the right to freedom of speech is preserved.
Media and telecommunications
The Australian Broadcasting Corporation (ABC) and the Special Broadcasting Service Corporation (SBS) will be subject to a one per cent reduction in base funding ($43.5 million over four years). Norton Rose Fulbright partner Martyn Taylor considers that “this one per cent reduction in funding is controversial, but is less severe than many commentators had expected”. He also notes that the ABC and SBS will remain exempt from the so-called ‘efficiency dividend’ that imposes budgetary reductions on other government entities.
However, the budget confirms that the government’s contract with the ABC for the Australia Network will be terminated. The Australia Network has been Australia’s international television broadcasting service and has been supplied on a 24/7 basis across the Asia-Pacific. The Australia Network has to date been run by the ABC under a 10 year contract.
The budget also identifies that the Telecommunications Universal Service Management Agency (TUSMA) will be dissolved and its functions will be transferred to the Department of Communications. TUSMA was an independent entity established in 2012 to manage the allocation of universal service funding and the ongoing delivery of universal service obligations for voice-only and payphone services in the context of the rollout of the National Broadband Network. The intent of this measure is to realise administrative synergies.
The government will also provide $100 million over four years to improve the coverage and competition in the provision of terrestrial mobile voice and wireless broadband services in regional areas of Australia. Both allocations of funding meet election commitments.
Reforms for shipping in Australia
From 1 July 2014, the government will decrease the Protection of the Sea Levy (PSL) to 11.25 cents per net registered tonne for defined vessels on an ongoing basis. The PSL revenue was levied to establish a $10 million pollution response fund to enable the Australian Maritime Safety Authority to respond quickly to pollution incidents at sea. The government will now achieve savings of $39 million over four years by rephasing lower priority maritime safety initiatives and these savings will offset the reduction in revenue.
Norton Rose Fulbright partner Ernie van Buuren says that the reduction of the PSL will assist to reduce the cost of conducting shipping business in Australia. He adds that in recent years shipping rates in Australia have surged and this reduction in the levy on ships entering Australian ports will be a welcome measure.
The government is also committed to supporting the recent Review of Coastal Shipping by the Department of Infrastructure and Regional Development, which aims to optimise the regulation of the coastal shipping industry. The review recently gained momentum and on 8 April 2014 Warren Truss, the Deputy Prime Minister and Minister for the department, announced the release of an options paper on approaches to regulating coastal shipping in Australia.
In May 2014, the department also held an open consultation session in relation to the options to reform the legislation which manages cabotage regulation, which preserves freight routes from one Australian port to another for Australian flagged ships. The government is committed to finding a solution to balance the interests of Australian industry participants requiring competitive shipping services, and the interests of shipping stakeholders seeking to develop an Australian flagged fleet.
Mr van Buuren also says that the Australian maritime industry is an unfortunate casualty of the government’s funding cuts. The maritime industry’s long awaited funding injection to support future workforce training needs of local seafarers has been now been cut, with the government set to achieve savings of $5 million over three years by not proceeding with funding for the Sustaining Australia’s Maritime Skills measure announced in last year’s budget.
The decline, over a number of decades, of the Australian maritime workforce has made it difficult to competitively recruit, train and employ Australian crews. Mr van Buuren considers that this budget measure will significantly increase the challenges that already exist to rebuild a strong Australian maritime capability. The shipping task through Australian waters is forecast to double by 2029-30 which will substantially increase demand for maritime technical skills.