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Client Update: Senate committee endorses 'RuddBank'

26 May 2009

In brief: The Senate Standing Committee on Economics has tabled a report which recommends that the Senate pass the Australian Business Investment Partnership bills. Partner Nicholas Cowie (view CV) and Lawyer Andrew Selim take a closer look at the committee's findings.

Senate committee's report

After drawing on submissions and evidence from industry organisations, academics and other stakeholders over the course of the 61-day inquiry, the Senate committee made the following comments:

  • The Australian Business Investment Partnership (the ABIP) will focus on addressing liquidity gaps in the commercial property sector resulting from the withdrawal of foreign lending in Australia and will help avoid the risk of 'fire' sales. The committee says there is already evidence that some foreign banks are leaving the Australian market;1
  • the ABIP legislation is not intended to raise property prices above market equilibrium but should prevent an 'overshooting' of prices;2
  • the global downturn has affected the Australian job market and evidence suggests that this is in part due to lending restrictions in the commercial property sector;3
  • a sudden drop in commercial property values would affect the superannuation of millions of Australians and would ultimately put pressure on welfare outlays;4 and
  • the ABIP would not have any material impact on residential housing prices because it will only step into the residential sector when institutional investors are seeking loans in order to take risks associated with master-planned communities and suburban developments.5

The committee's report then addressed each of the arguments against the ABIP, concluding:

  • the risk of encouraging foreign bank withdrawal is small and does not warrant opposition to the Bill;6
  • ABIP is a lender of last resort and is set up so that it can finance commercially viable projects when Australian banks are not in a position to invest in a project when a foreign bank withdraws;7
  • ABIP's shareholders (ie the Federal Government and the 'Big Four' banks) are currently developing specific lending criteria. Details of those criteria may be available before the passage of the Bill;8
  • if one of the Big Four banks is involved in a syndicate from which a foreign bank withdraws, conflict of interest issues should not be a concern because the ABIP will be 'buying' that share of the loan at then current market values not prior 'book' values;9
  • there are solid reasons to exempt the ABIP from the anti-competition provisions of the Trade Practices Act 1974 (Cth) (the TPA), one of which is to give certainty to the ABIP;10
  • there are adequate protections to prevent loan arrangements being abused and in limited circumstances, the ABIP should be permitted to consider projects outside of the commercial property sector;11 and
  • there will be sufficient parliamentary scrutiny of ABIP's operations. For example, ABIP's financial report will be tabled in parliament and ABIP's lending criteria will be made public.12

The committee concluded that while the ABIP may ultimately not be needed, if global economic conditions worsen it would be 'prudent' to have the ABIP in place.13

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Dissenting Senators' reports

Reports by Coalition Senators, the Greens and Independent Senator Nick Xenophon14 recommended that the Senate not pass the ABIP bills. In summary, they argued that:

  • the ABIP is an 'unnecessary overreaction to an unlikely possibility';15
  • there is a potential for conflicts of interest, abuse of market power and biased decision-making arising out of ABIP's exemption from the TPA and the proposed composition of the ABIP board;16
  • the ABIP bills should be amended to provide that all officers of private sector bodies receiving ABIP funding must not be paid more than $1 million per annum in remuneration;17 and
  • the risk that foreign banks could use the ABIP as their 'escape card' from Australia has not been addressed.18

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What next?

In light of strong opposition in the Senate, the Government's task of passing the bills in their current form is proving challenging. Several changes to address the concerns of non-Government Senators will be required. For example, recent press reports19 suggest Senator Fielding has negotiated for the lending criteria to be no less strict than that required by any of the Big Four banks. As well, Senator Xenophon has reportedly negotiated for Australian Competition & Consumer Commission monitoring of the effect of the ABIP's anti-competition exemption.We will continue to monitor the passage of, and amendments to, the draft ABIP legislation.

Published 26 May 2009

Footnotes
  1. Paragraphs 3.5, 3.8 and 3.9, Chapter 3, Senate Standing Committee on Economics, May 2009.
  2. Paragraph 3.11, Chapter 3.
  3. Paragraphs 3.14 and 3.17, Chapter 3.
  4. Paragraphs 3.23 and 3.24, Chapter 3.
  5. Paragraph 3.27, Chapter 3.
  6. Paragraph 1.8, Chapter 4.
  7. Paragraph 1.16, Chapter 4.
  8. Paragraph 1.14, Chapter 4.
  9. Paragraphs 1.17 and 1.18, Chapter 4.
  10. Paragraph 1.28, Chapter 4.
  11. Paragraph 1.33, Chapter 4.
  12. Paragraph 1.36, Chapter 4.
  13. Paragraph 1.2, Chapter 5.
  14. These three reports are attached to the Senate Committee's Report.
  15. Paragraph 1.2, Coalition Senators' Dissenting Report.
  16. Paragraph 1.3, Coalition Senators' Dissenting Report.
  17. Paragraph 1.2, Australian Greens Senators' Additional Comments.
  18. Paragraph 1.13, Minority Report by Senator Nick Xenophon.
  19. The Australian, 15 May 2009, page 6.

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