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Australian Government Coat of Arms

Budget | 2015-16

Budget 2015-16
Australian Government Coat of Arms, Budget 2015-16

Statement 8 (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. Although the NBN Co Equity Funding Agreement will terminate in 2019, the Commonwealth's obligations to meet NBN Co's direct costs arising from termination of the roll‑out will continue. As at 28 February 2015, NBN Co's termination liabilities were estimated at $7.3 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 original Definitive Agreements. The Agreements were amended on 14 December 2014 and further agreements were entered into at that time, which will also be covered by the guarantee. The amendments and new agreements will not take effect until the conditions precedent within the agreements are satisfied, which is expected to occur in June 2015. The liabilities under the agreements between Telstra and NBN Co arise progressively during the roll‑out of the multi‑technology mix National Broadband Network as infrastructure is accessed and subscribers to Telstra's existing network are disconnected. As at 28 February 2015, NBN Co had generated liabilities covered by the guarantee estimated at $3.7 billion. The guarantee will terminate when NBN Co achieves specified credit ratings for a period of two continuous years and either:

  • the company is capitalised by the Commonwealth to the agreed amount; 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.

Termination of the funding agreement with OPEL Network Pty Ltd

Following the termination of its agreement with OPEL Network Pty Ltd (OPEL) under the Broadband Connect programme, the Australian Government made provision towards costs incurred by OPEL in producing its Implementation Plan. OPEL was wound up on 13 March 2009. Proceedings were commenced in the New South Wales Federal Court by the OPEL Liquidators and Optus on 5 September 2013 in respect of the termination of the funding agreement (including a claim relating to the costs for the preparation of the Implementation Plan). The court timetable for the trial hearing has not yet been determined.

Defence

ADI Limited — Officers' and Directors' indemnities

Under the sale agreements for ADI Limited, the Australian Government agreed to indemnify the Directors, officers and employees of ADI Limited for claims and legal costs associated with assistance related to the sale of the Australian Government's shares in the company. The Australian Government has provided an indemnity to ADI Limited for uninsured losses relating to specific heads of claims.

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 31 March 2015, the Department of Defence carried 1,440 instances of quantifiable remote contingent liabilities valued at $3.6 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 31 March 2015, the Defence Materiel Organisation carried 70 contingencies that are quantifiable, to the value of $1.8 billion and 420 instances of contingencies (relating to Foreign Military Sales) that are unquantifiable and are considered remote. While these contingencies are considered remote, they have been reported for completeness.

Litigation cases

The Department of Defence is involved in a wide range of litigation and other claims for compensation and/or damages that may result in litigation 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. A number of claims have also been received for damage caused by the use of a Defence Practice Area. There is the potential for a number of claims to arise out of reviews into Australian Defence Force and Defence culture and from the disposal of assets to third parties where such assets contain hazardous materials or components that have the potential to cause injury.

Employment

Job Services Australia — Employment Pathway Fund

The estimates for the Department of Employment Job Services Australia (JSA) programme include anticipated expenditure for the Employment Pathway Fund (EPF). The EPF provides a flexible pool of funding available to JSA providers to deliver assistance to job seekers to help them find and keep a job. Amounts are credited to the EPF based on a job seeker's assessed level of disadvantage. Experience with the EPF suggests that all credits will not be used during the life of the JSA contracts. The forward estimates do not include the value of residual credits from the EPF that are not expected to be spent during the current contract period. The EPF will cease on 30 June 2015 and will be replaced by the Employment Fund.

Industry and Science

Liability for damages caused by space activities

Under the United Nations Convention on International Liability for Damage Caused by Space Objects, the Australian Government is liable to pay compensation for damage caused to nationals of other countries by space objects launched from, or by, Australia or Australian nationals. The Government requires the responsible party for a space activity approved under the Space Activities Act 1998 (the Act) to insure against liability for damage to third parties for an amount not less than the maximum probable loss or a minimum amount of insurance determined by an insurance analyst, up to a maximum of $750 million indexed for inflation. Under the Act, the Government also accepts liability for damage suffered by Australian nationals, to a maximum value of $3 billion above the insured level.

Infrastructure and Regional Development

Maritime Industry Finance Company Limited — Board Members' Indemnity

Indemnities for Maritime Industry Finance Company Limited (MIFCO) board members were provided to protect them against civil claims relating to their employment and conduct as Directors. MIFCO was placed into voluntary liquidation on November 2006 and was deregistered on 24 April 2008. The indemnity is not time limited and continues even though the company has been liquidated. Until the indemnity agreements are varied or brought to an end, they will remain as contingent and unquantifiable liabilities.

Moorebank Intermodal Company Limited — Board Members' Indemnity

The Australian Government has provided certain indemnities for the Directors and Officers of the Moorebank Intermodal Company Limited (MIC) to protect them against civil claims relating to their employment and conduct. The indemnities apply to the period of appointment as Directors or Officers of the company. Until the indemnity agreements are varied or brought to an end, they will remain as contingent and unquantifiable liabilities.

Tripartite deeds relating to the sale of federal leased airports

The tripartite deeds between the Australian Government, the airport lessee company and financiers amend airport (head) leases to provide for limited step‑in‑rights for financiers in circumstances where the Australian Government terminates the head lease to enable the financiers to correct the circumstances that triggered such a termination event. The tripartite deeds may require the Australian Government to pay financiers compensation as a result of its termination of the (head) lease, once all Australian Government costs have been recovered. The Australian Government's contingent liabilities are considered to be unquantifiable and remote.

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 31 December 2014, deposits eligible for coverage under the Financial Claims Scheme were estimated to be $766 billion, increasing slightly from an estimated $732 billion at 30 June 2014, 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.

From 2016, subject to the Government's response to the Financial System Inquiry, any payment under the Financial Claims Scheme relating to ADIs would initially be met from the Financial Stability Fund announced in the 2013 Economic Statement. In this case, a levy could be applied to ADIs to recover the difference between the amount expended by the Government (excluding amounts drawn from the Financial Stability Fund) and the amount recovered in the liquidation.

The Australia Prudential Regulation Authority (APRA) is responsible for 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 March 2015, the face value of state and territory borrowings covered by the guarantee was $12.3 billion, down from $13.3 billion at 31 October 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 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 seek to recover any such expenditure through a claim on the relevant institution. The impact on the budget would depend on the extent of the institution's default and its ability to meet the Government's claim.

As at 27 March 2015, total liabilities covered by the Guarantee Scheme were estimated at $1.4 billion, down from $2.5 billion at 5 December 2014. The total liabilities are comprised entirely of $1.4 billion of large deposits. All guaranteed short‑term wholesale funding matured in March 2011 and all guaranteed long‑term wholesale funding matured in March 2015.

As at 28 February 2015, 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: $473.6 million is attributable to liabilities of the Commonwealth Bank of Australia, as at 31 December 2014; and $4.4 billion is attributable to liabilities of the Commonwealth Bank Officers' Superannuation Corporation, as at 31 December 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 $65.6 billion, as at 25 March 2015, and the total guarantee is $101.9 billion ($90.4 billion at the 2014‑15 MYEFO).