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Statement 10: Australian Accounting Standard No. 31
Budget Financial Statements

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Appendix B: Statement of Risks

Introduction

The forward estimates of revenue and expenses in the 2001-02 Budget incorporate assumptions and judgements based on information available at the time of publication. A range of factors may influence the actual budget outcome in future years. The Charter of Budget Honesty Act 1998 requires these to be disclosed in a Statement of Risks in each Economic and Fiscal Outlook Report. The purpose of this disclosure is to increase the transparency of the fiscal projections.

Events which could affect fiscal outcomes include:

Economic and other parameters

Some degree of uncertainty is attached to budget time and forward estimates for both revenues and expenses. For example, past experience indicates that the actual revenue outcome could vary from the initial estimate by about 2¼ per cent on average for the budget year.

The major factor influencing expected expenses and revenues in any year is typically changes in forecasts of economic and non-economic parameters. Over time, differences between the economic parameter forecasts and outcomes have not caused any clear bias toward understatement or overstatement of expenses and revenue - and therefore the budget balance. The sensitivity of the estimates to major economic parameters (but not other parameters) is discussed in Appendix B of Statement 2.

Differences in non-economic (programme-specific) parameter forecasts and outcomes have been biased towards an understatement of expenses in recent years. Effort has been made to reduce the extent of this bias. Programme specific parameters are assumptions underpinning some particular programme estimates, for example client numbers and/or average rates payable on family payments, family tax payments and disability support pension programmes. The Contingency Reserve contains an allowance for conservative bias.

Fiscal risks

Fiscal risks are general developments or specific events which may have an effect on the fiscal outlook. In some cases, the events will simply raise the possibility of some fiscal impact. In other cases, some fiscal impact will be reasonably certain, but it will not be included in the forward estimates because the timing or magnitude is not known. Fiscal risks may affect expenses and/or revenue and may be positive or negative.

Specific sources of fiscal risk include:

Some fiscal risks are reflected in the Contingency Reserve and are therefore included in the aggregate expenses figuring. The Contingency Reserve is an allowance included in aggregate expenses to reflect anticipated events, which cannot be assigned to individual programmes at budget time. These items are also not included in the Statement of Risks.

Matters that are not currently under active consideration by the Government, or pressure from interests outside the Government for changes in spending levels, are not treated as fiscal risks.

Contingent liabilities

Contingent liabilities differ from fiscal risks in that they are generally more readily quantifiable and clearly defined.

Contingent liabilities are defined as costs the Government will have to face if a particular event occurs. They include loan guarantees, non-loan guarantees, warranties, indemnities, uncalled capital and letters of comfort.

The Commonwealth's major exposure to contingent liabilities arises out of legislation providing guarantees over certain liabilities of Commonwealth controlled financial institutions (that is, the Reserve Bank of Australia and the Export Finance and Insurance Corporation) and the now fully privatised Commonwealth Bank of Australia.

The strategies for managing these exposures are aimed at ensuring the underlying strength and viability of the entities, so that the guarantees are not triggered. Similar strategies apply to entities not subject to explicit guarantees.

Other arrangements are in place to govern the entering into, and monitoring of, contingent liabilities such as indemnities and uncalled capital. Uncalled capital is primarily associated with international financial institutions such as the International Bank for Reconstruction and Development, the Asian Development Bank and the European Bank for Reconstruction and Development. Arrangements for capital contributions, including contingent liabilities, are approved by Parliament and reports on the institutions are provided annually by the Government to Parliament.

Consistent with Australian Bureau of Statistics (ABS) standards, transactions concerned with the management of international reserves and the monetary system are classified as financing transactions (and do not impact on the fiscal or operating balance). Therefore, contingent liabilities (and assets) with the International Monetary Fund (IMF) are not shown below.

Details of fiscal risks and contingent liabilities

Fiscal risks and contingent liabilities with a possible impact on the forward estimates greater than $20 million in any one year, or $40 million over the forward estimates period, are listed below. Information on fiscal risks takes account of decisions of Parliament and other developments up to the close of parliamentary business on 30 April 2001. In general, information on contingent liabilities is based on information provided by departments and agencies and is current to 31 March 2001 (or a later date as indicated where that information is available). However in some cases, earlier dates are used and noted in the relevant section.

Information on contingent liabilities is provided in annual financial statements of departments and non-budget entities.

Fiscal Risks - revenue

Revenue forecasts, like all forecasts, are subject to a margin of error. Over the previous ten years, the average absolute error in the forecast of revenue in the budget year has been in the order of 2¼ per cent.

The average forecast error, measured relative to the tax base being forecast, is higher for some components of the tax base. This is particularly evident for the `Company' and `Other Individuals' tax bases, partly reflecting that there is often greater variability in the timing of income received and deductions taken for these taxpayers than other taxpayers.

The Superannuation tax base is also subject to significant forecasting uncertainty as a result of considerable variability in annual investment returns and in the realisation of capital gains.

An implication of the degree of uncertainty surrounding the revenue forecasts is that, while many of the forecasts are reported to the nearest million dollars for budget accounting purposes, they should not be interpreted as implying an equivalent level of forecast precision.

The various risks influencing the accuracy of the revenue forecasts are outlined below.

Tax Reform
The New Business Tax System

The Government announced on 22 March 2001 a revised implementation timeline for the remainder of its business taxation reform programme. The revised timetable will allow an orderly phasing of the further reforms, assisting business to adjust to the reforms to date and ensure that the benefits of The New Tax System and business tax arrangements can be fully captured, as well as allowing further time for consultation on remaining issues. While the Government is fully committed to the new timetable, there will be an impact on the Budget should the remaining legislation not be passed.

General risks

The forward estimates of revenue are subject to a number of general pressures that can adversely affect revenue collections. These general pressures include: tax avoidance, including the exploitation of tax expenditures; developments in communications technology and workplace arrangements; and court decisions. These pressures may result in a shift in the composition of revenue collected from the various tax bases and/or a change in the size of the tax base. The revenue forecasts make what is believed to be an appropriate allowance for these factors, given the data available.

Tax avoidance involves the use of provisions and `loopholes' in the tax law, which were not intended by policymakers. Without an appropriate policy or compliance response, the revenue base will shrink relative to that projected in the forward estimates. The Government is undertaking a fundamental tax reform programme that has, as one of its aims, the formation of a simpler and fairer tax system that will also reduce the revenue risk associated with such activity.

Developments in communications technology, such as the Internet, also raise a general risk to the forward estimates of revenue. Such developments may allow the purchase or sale of an increasing number of goods and services, including the provision of labour services, in a way that challenges traditional tax allocation rules between countries and mechanisms for tax collection. The Organisation for Economic Cooperation and Development (OECD) has developed a framework of taxation principles to apply to electronic commerce, and is working on options for implementing those principles. Australia is contributing actively to this work. The ATO has sought to raise awareness of these issues in its publications on Tax and the Internet.

Court decisions also increase the risk that revenue will be lower or higher than anticipated. Court decisions can affect the interpretation of tax legislation and may significantly change the level of revenue collected under that legislation.

Tax expenditures are often at risk of being exploited in an unexpected manner, which can also have a significant effect on the forward estimates of revenue. The Government receives a steady stream of calls for new tax expenditures to be granted. As a general proposition, the granting of further tax expenditures will lead to the downward adjustment of the forward estimates of revenue. Equally, the winding back of existing tax expenditures will generally require the upward adjustment of the forward estimates of revenue. Following a review of existing tax expenditures, first announced in the 1996-97 Budget, the Government is undertaking periodic monitoring and evaluation of all tax expenditures through normal budget processes to ensure they deliver Government assistance in an effective manner.

Apart from the general risks mentioned above, which could have a cumulative impact over time, there are general risks to the forward estimates which could have a significant effect in any one year, but not necessarily a cumulative effect over time. In any one year, revenue will be influenced by a number of factors, including for example, the degree to which companies, superannuation funds and individuals realise losses and capital gains, the valuation of stocks, the utilisation of specific tax expenditures and taxpayer behavioural responses to revenue measures. Such factors can have a significant effect on company tax collections and the revenue forgone through tax expenditures. Generally, such factors can not, by their nature, be forecast with a high degree of certainty.

Specific risks

There are also a number of specific risks to revenue that are currently the subject of ongoing analysis and evaluation by the Treasury and the ATO. Such risks include, for example, specific tax minimisation and avoidance schemes. Early detection and Government response to such risks is desirable. It would be inappropriate to explicitly identify such current specific risks until the Government is in a position to respond to the risks. To do so may compromise the Government's policy response and magnify the downside risks to the forward estimates of revenue.

The Government has announced a number of measures to date that have already been factored into the forward estimates of revenue but are yet to be passed by Parliament. Should the passage of legislation relating to these measures be delayed, amended or rejected, the forward estimates would need to be adjusted.

Renegotiation of double tax agreements (DTAs) with the United States and the United Kingdom

Tax treaties promote closer economic cooperation between Australia and other countries by eliminating possible barriers to trade and investment. They reduce or eliminate double taxation of income flows between the treaty partner countries caused by overlapping tax jurisdictions. They also establish greater legal and fiscal certainty within which cross-border trade and investment can be carried on and promoted. Another purpose is to create a framework for the exchange of information and cooperation between the respective tax administrations as a means of combating international tax avoidance and evasion.

Australia has commenced negotiations with both the United Kingdom and the United States to revise the current DTAs Australia has with those countries (which have been in effect since 1967, with amendment in 1980, and 1983 respectively). The aim of the negotiations is to modernise the DTAs to take account of changes in the tax systems and tax policies of each country because these DTAs do not properly reflect modern tax treaty policy and commercial practices. Depending on the negotiated outcome, changes to the DTAs could have positive as well as negative revenue effects, and implications for DTAs Australia has with other countries.

Fiscal risks - expenses

Attorney-General's

Native title costs

The Commonwealth has offered to assist the States and Territories in meeting compensation costs associated with native title. The amounts that might be paid by the Commonwealth will be subject to the terms of financial assistance agreements being negotiated with the States and Territories and liabilities arising from the Wik amendments to the Native Title Act 1993. The Commonwealth's liability cannot be quantified due to uncertainty about the number and effect of compensable acts, both in the past and in the future, and the value of native title affected by those acts. Similarly, it is not possible to quantify the liability for compensable acts for which the Commonwealth may be directly liable.

The Commonwealth has also offered to assist the States with the costs of bodies performing native title functions under State legislation. The extent of this assistance will depend on the existence of such bodies, the timing of their recognition and the extent of their use.

Defence

Litigation cases in train

The Department of Defence is involved in many cases covering a wide range of litigation where either the cases are yet to be heard or damages and costs have not been awarded. The litigation involves Common Law liability, and claims before the Human Rights and Equal Opportunity Commission. Litigation also involves asbestos claims, and alleged defective administration by the Department. In total there are 350 claims, with a value of around $80 million.

Finance and Administration

Member Choice and Commonwealth Superannuation Arrangements

New superannuation arrangements for Commonwealth employees have been provided for in the forward estimates. These arrangements were intended to commence 1 July 1999 although the arrangements have been deferred subject to the passage of legislation currently before the Parliament. These new arrangements provide for the closure of the Public Sector Superannuation Scheme (PSS) to new employees and would allow new employees to join a complying superannuation fund or retirement savings account (RSA) offered by their employer. The arrangements also provide for existing Commonwealth Superannuation Scheme (CSS) and PSS members to choose to join another fund or RSA. Subject to a Government decision for a start date, Budget estimates have assumed a start date of 1 July 2002 for both new and existing employees. A later start date would improve the underlying cash balance from 2002-03.

Commonwealth civilian superannuation liability

Valuations of the Commonwealth's civilian superannuation liability, including the unfunded liability for the PSS and the CSS, are based on a range of financial and experience assumptions. These valuations are subject to revision based on variations between outcomes and assumptions, and the reassessment of the long term assumptions used in actuarial valuations. The next full actuarial review of the Public Sector Superannuation Scheme and the Commonwealth Superannuation Scheme will be undertaken in 2002-03 based on data at 30 June 2002.

Department of Finance and Administration litigation

The Department of Finance and Administration is involved in litigation where two counter-claims for damages have been lodged against the Commonwealth. The counter-claim by one group of defendants claims damages of $4.3 billion against the Commonwealth although the basis for this amount is yet to be provided. The other counter-claim has not specified any particular amount of damages.

Asset sales - Telstra

The forward estimates include the effect of the sale of the Commonwealth's shareholding in Telstra, noting that the level of proceeds will depend, inter alia, on the prevailing levels of world equity markets at the time of the sale. The sale of the Commonwealth's remaining shareholding in Telstra is dependent on the passage of legislation through the Parliament. The Government has committed not to introduce such legislation until it is satisfied arrangements exist to deliver adequate services, in particular to rural and regional Australia. The Government's immediate priority is to get more services into rural and regional areas. At the present time, the Government is not satisfied that such arrangements are in place and believes more work needs to be done, including in the context of the response to the Telecommunications Service Inquiry into the adequacy of service levels in rural and regional areas.

Natural Disaster Relief Arrangements

Payments are made to State Governments under specific criteria relating to costs incurred by the State Governments following natural disasters. An amount has been included in the estimates for future payments. However, the actual level of payments under this scheme would depend on the incidence and severity of natural disasters.

Health and Aged Care

Major new listings - Pharmaceutical Benefits Scheme and Medicare Benefits Scheme

From time to time new items are added to or removed from the Medicare Benefits Scheme and Pharmaceutical Benefits Scheme schedules following independent assessments of cost-effectiveness. Major new developments in medicines or medical procedures could result in increases in expenses that exceed the provision in the forward estimates. Similarly, significant shifts in usage patterns, which may occur for particular drugs or groups of drugs from time to time, could result in increases in expenses that exceed the provision in the forward estimates. It is not possible to quantify the fiscal risk arising from such potential developments.

Litigation cases in train

The Department of Health and Aged Care is presently involved in about 40 cases that could result in a financial liability for the Commonwealth. These cases cover a wide range of litigation, where either the cases have not been heard or damages have yet to be awarded. The litigation now involves Creutzfeldt-Jacob disease, Acquired Immune Deficiency Syndrome (AIDS), Hepatitis C, defective products, personal injuries, the Department as an employer, and a variety of other claims against the Commonwealth. It is not possible to quantify the fiscal risk arising from potential developments.

Immunisation funding mechanism

Future vaccine technology will result in new vaccines substituting for ones already in use (multivalent vaccines which combine several vaccines into one, for example) and, as a consequence, could result in higher unit costs of vaccines within the routine schedule. Given the nature of current vaccine technology and the possible introduction of new vaccines, specific costs cannot be precisely quantified at this stage. Fiscal risks are expected to be small to moderate.

Immigration and Multicultural Affairs

Unauthorised boat arrivals

Unauthorised boat arrival numbers are volatile and difficult to predict. The number of unauthorised boat arrivals to Australia in 2000-01 has not to date reached the unprecedented levels experienced in 1999-2000. The Government's measures to reduce unauthorised boat arrivals appear to be having an impact on people smuggling operations, resulting in a reduction in arrival numbers. If the reduced arrivals level is sustained, the forward estimates will be reduced.

Industry, Science and Resources

Corporatisation of the Snowy Mountains Hydro-Electric Authority (SMHEA) and environmental flows into the Snowy and Murray Rivers

The Commonwealth is providing $75 million over 10 years until 2011-12 as its contribution to water savings projects as part of a commitment with the NSW and Victorian governments to increasing environmental water flows in the Snowy and Murray Rivers. The establishment of a joint government entity to oversee the investment in the water savings projects will not occur until after SMHEA is corporatised. The timing of the expenditure on water savings projects will be driven by the corporatisation process and on how quickly a program of works can be developed and implemented by the joint government entity. There may be a need to bring forward Commonwealth expenditure.

Repayment of Snowy Mountains Hydro-Electric Scheme debt

Corporatisation of the Scheme is expected to occur shortly and will involve the refinancing and early repayment of debt to the Commonwealth. The market value of the debt was estimated to be $922 million as at 1 January 2001. Detailed arrangements are to be finalised between the Commonwealth, New South Wales and Victorian Governments, as shareholders in the new company. The amount and timing of repayments will be influenced by the date of corporatisation and market conditions.

Reconciliation and Aboriginal and Torres Strait Islander Affairs

Hindmarsh Island Bridge damages claim

Judgement is awaited in a substantial damages claim brought by the developers of a marina associated with the proposed Hindmarsh Island Bridge against the Commonwealth and other parties who were involved in the decision to ban construction of the bridge. The plaintiffs are claiming damages of $20 million.

Treasury

International Monetary Fund (IMF) assistance to Thailand

Australia's offer to provide bilateral financing of up to $1 billion in support of the IMF programme in Thailand was taken up in the form of a series of currency swaps between the Reserve Bank of Australia (RBA) and the Bank of Thailand. Under the swap arrangements, the RBA provided $US862 million to the Bank of Thailand in exchange for Thai baht. Repayments of swaps drawn under the facility began in March 2001, with a repayment of $US100 million. Repayment in full is scheduled to occur no later than July 2004. In the event of default, the ability of the RBA to maintain the dividend stream projected in the forward estimates may be affected.

Transitional arrangements for reforms to Commonwealth-State financial relations

The Commonwealth has guaranteed that in each of the transitional years following the introduction of The New Tax System, each State's budgetary position will be no worse off than had the reforms to Commonwealth-State financial relations not been implemented.

To meet this guarantee, the Commonwealth pays the States transitional assistance (known as Budget Balancing Assistance) to cover any shortfall of GST revenue below the Guaranteed Minimum Amount (GMA). The GMA calculates the amount of funding each State would have had available to it under the previous tax system.

As a result of this transitional arrangement, a shortfall in estimated GST revenue may result in increased expenses to the Commonwealth. (Further details are in Budget Paper No. 3.)

Veterans' Affairs

Payments to Prisoners of War of the Japanese

The Government has committed to make a one-off payment of $25,000 to certain former Australian Prisoners of War of the Japanese on their surviving spouse. The intention is to make this payment in the 2000-01 financial year, and an amount has been included in the estimates for these payments. However, the actual level of payments will be dependent upon the response from claimants and the claims assessment process. Those claims not paid in the 2000-01 financial year will be assessed and paid in the 2001-02 financial year.

Contingent liabilities - quantifiable

Communications, Information Technology and the Arts

Australian Broadcasting Corporation (ABC)

The Commonwealth has guaranteed loans by the ABC. These loans were largely used to meet costs relating to the construction of premises for the ABC at Southbank in Melbourne and Ultimo in Sydney. The principal amount covered by the guarantee as at 31 March 2001 was $90 million, a decrease of $53 million since the 2000-01 Budget.

Special Broadcasting Service Corporation (SBS)

The Commonwealth has guaranteed a loan taken out by the SBS. The principal amount covered by the guarantee as at 31 March 2001 was $39 million. The loan was used to pay for the refurbishment and enhancement of the Service's premises at Artarmon in Sydney.

Art Indemnity Australia

The amount indemnified for artworks on loan to galleries participating in exhibitions under the Scheme is $1.5 billion as at 31 March 2001. This figure will vary as participating exhibitions commence and cease, and as exchange rates fluctuate (as indemnities are often fixed in terms of foreign currency amounts).

Defence

Military Compensation

Contingent liabilities exist in relation to military compensation claims to the value of some $27 million. The total amount relates to outstanding claims for non-economic loss as a consequence of the Federal Court decision in Schlenert v the Australian and Overseas Telephone Corporation 1995.

Australian Defence Industries Limited (ADI) - Warranty on sale.

On completion of the sale of ADI Ltd on 29 November 1999, the Commonwealth provided warranties relating to the accuracy of representations to the purchaser regarding a number of matters. Breaches of Commonwealth warranties are subject to limit of liability of $25 million for warranty claims arising from the Sale Agreement, except in relation to breaches of warranty relating solely to Commonwealth contracts or claims where the limit is $50 million. Since last Budget the purchaser, Thomson CSF Pty, has lodged 11 claims against the Defence Force for breach of warranty on sale. The total value of the claims is between $18.8 million and $50 million.

Education, Training and Youth Affairs

Commonwealth loan guarantees - Group Training

The Minister for Education, Training and Youth Affairs is authorised to issue Commonwealth guarantees on a limited number of loans made to Commonwealth-endorsed Group Training companies. These loans provide access to additional working capital required to expand the number of apprentices and trainees that may be employed through Group Training companies. The maximum guarantee of each loan is $175,000 with the total value of all guarantees capped at $30 million. As of 31 March 2001, two Commonwealth Loan Guarantees for $175,000 each were issued by the Commonwealth.

Finance and Administration

ComLand Limited

Bank borrowings by ComLand Limited are explicitly guaranteed by the Commonwealth up to a limit of $60 million, comprising $50 million for principal and $10 million for accrued interest and other costs.

Foreign Affairs and Trade

Export Finance and Insurance Corporation (EFIC)

The Commonwealth guarantees the due payments by EFIC of money that is, or may at any time become, payable by EFIC to any body other than the Commonwealth. As at 31 March 2001, the Commonwealth's total contingent liability was $8.1 billion, comprising EFIC's balance sheet liabilities ($1.4 billion), contracts of insurance and guarantees ($3.6 billion) and national interest account liabilities ($3.2 billion).

Industry Science and Resources

Australian Industry Development Corporation (AIDC)

As at 31 March 2001, the Corporation's contingent liabilities were approximately $126 million in respect of guarantees and credit risk facilities. The Corporation's other guaranteed borrowings totalled approximately $1.50 billion as at 31 March 2001. These have been offset by holdings in Commonwealth Government securities and certain hedging instruments, all of which are fully guaranteed by Warburg Dillon Read (formerly known as UBS Australia Ltd).

Snowy Mountains Hydro-Electric Authority (SMHEA)

The Snowy Mountains Hydro-Electric Power Act 1949 provides that borrowings by SMHEA may be guaranteed by the Commonwealth. The Authority has issued inscribed stock to finance capital works of the Scheme. The borrowings are subject to explicit Commonwealth guarantees. As at 31 March 2001, the face value of guaranteed borrowings was $182 million, having a net value of $122 million after adjustment for the unamortised discount.

Transport and Regional Services

Maritime industry reform

On 18 August 1998 the Commonwealth provided a guarantee to cover borrowings made by the Maritime Industry Finance Company (MIFCo) to finance redundancy related payments in the stevedoring and maritime industries. Outstanding borrowings covered by the guarantee as at 31 March 2001 were $148 million.

Treasury

Guarantees under the Commonwealth Bank Sale Act 1995

Under the terms of the Commonwealth Bank Sale Act 1995, the Commonwealth has guaranteed various liabilities of the Commonwealth Bank of Australia (CBA), the Commonwealth Bank Officers' Superannuation Corporation (CBOSC) and the Commonwealth Development Bank. The guarantee for the CBA relates to both on and off-balance sheet liabilities. Of the existing contingent liability, 40 per cent involves off-balance sheet liabilities. As at 30 June  2000 (the latest available figures), the balance of the guarantee was $19.2 billion, a reduction of $74.9 billion on the previous year.

The guarantee for CBOSC covers the due payments of any amount that is payable to or from the Fund, by CBOSC or by the Bank, in respect of a person who was a member, retired member or beneficiary of the Fund immediately before 19 July 1996. Total accrued benefits at 30 June 2000 have been valued at $3.7 billion following an actuarial review. The outstanding value subject to the guarantee is estimated to be $3.7 billion.

As of 1 July 1996, the Commonwealth Development Bank ceased to write new business and no additional liabilities are being incurred. The existing contingent liability will gradually decline with the retirement of existing loans and exposures. The revised estimate for the balance of this guarantee was $20.3 million as at 30 June 2000 .

Reserve Bank of Australia guarantee

This contingent liability relates to the Commonwealth's guarantee of the liabilities of the RBA. The major component of RBA liabilities relates to Notes (that is, currency) on Issue. This treatment of Notes largely relates to the historical convention of the convertibility of Notes to gold - coins are not treated as a liability in the Commonwealth's accounts. As at 25 April 2001, Notes on Issue totalled $27.3 billion. In total, the guarantee for the Reserve Bank was $54.8 billion as at 25 April 2001, reflecting an increase of around $12.4 billion since the 2000-01 Budget.

Uncalled capital subscriptions - international financial institutions

The liability relates to the value of the uncalled portion of the Commonwealth's shares at 30 March 2001 in the International Bank for Reconstruction and Development ($US2.8 billion - estimated value $A5.6 billion), the Asian Development Bank ($US2.4 billion - estimated value $A5.0 billion), the European Bank for Reconstruction and Development (EBRD) ($US82 million plus EUR77.5 million - estimated value $A306 million), and the Multilateral Investment Guarantee Agency (MIGA) ($US26 million - estimated value $A54 million). The values of the uncalled capital portions for the EBRD and MIGA include Australia's subscriptions to the general capital increases for both of these institutions, as announced in the 2000-01 Budget. These subscriptions did not affect the fiscal balance or the underlying cash balance as the transactions involved are considered to be financing transactions.

Contingent liabilities - unquantifiable

Defence

HMAS MELBOURNE, HMAS VOYAGER and HMAS STALWART damages claims

Some former crew members of HMAS MELBOURNE have instituted legal proceedings against the Commonwealth claiming damages for injuries relating to the collision with HMAS VOYAGER on 10 February 1964. To date, 107 claims remain current. A number of dependency claims arising from that collision have also been made or foreshadowed by the dependants of deceased members of the crew of HMAS VOYAGER. To date a number of claims from dependants have been settled and 33 additional claims have been foreshadowed. There is a possibility that further claims will be made by former members of crew of HMAS MELBOURNE and the dependants of deceased members of the crew of HMAS VOYAGER.

There is also a claim against the Commonwealth for damages for injuries allegedly sustained as a result of the HMAS MELBOURNE/USS FRANK E EVANS collision of 3 June 1969. It is possible that further claims will be made by former crew members of HMAS MELBOURNE arising out of that collision.

Twenty-five claims for damages for injuries allegedly arising out of an incident aboard HMAS STALWART that occurred on 22 October 1985 have been settled. Another five claims are currently the subject of legal proceedings. It is possible that former crew of HMAS STALWART and the dependants of deceased members of the crew will make further claims.

Environment and Heritage

Newcrest Mining (WA) Limited and BHP Minerals Limited v the Commonwealth of Australia and the Director of National Parks and Wildlife

In August 1997, the High Court of Australia found that the declarations of Stage 3 Kakadu National Park in 1987, 1989 and 1991 were technically invalid with respect to 23 small areas in the south-east of the park covered by existing mineral leases held by the Newcrest group of companies. The reason for this decision was that the declaration over these areas had, with the absolute prohibition on mining activities in Kakadu under the National Parks and Wildlife Conservation Act 1975, affected an acquisition of property without payment of just terms compensation, as required by the Australian Constitution.

The Minister for Environment and Heritage has indicated that the lease areas need to be re-incorporated within the Park and that the Government will address the issue of `just terms' compensation. The quantum of compensation payable for the leases and the financial consequences of incorporation of the leases into Kakadu are under active consideration. Regardless of the amount of compensation, there is an obligation for the Commonwealth to pay court costs on behalf of Newcrest. The Government has entered a dialogue with mining company representatives about the matter. The process was still underway as at March 2001.

Finance and Administration

ComLand Limited - land remediation

The Commonwealth has indemnified the ComLand Group in the event that the Group incurs certain land remediation expenses where the need for such remediation was not identified when the land was transferred to ComLand.

Employment National Limited (EN) - board members' indemnity

Indemnities by the Commonwealth have been provided to EN board members to protect against civil claims relating to their employment and conduct as directors. These indemnities are unquantifiable and no expiry date has been set.

Employment National Limited (EN) - letter of comfort arrangements

To protect the Government's investment in EN during the company's restructuring, a letter of comfort has been provided to the company by the Commonwealth indicating continuing financial support for the company. The Commonwealth's exposure under this letter of comfort is unquantifiable.

Indemnities for the Reserve Bank of Australia (RBA) and private sector banks

Under contractual arrangements for transactional banking services entered into by agencies covered by the Financial Management and Accountability Act 1997, the Commonwealth has indemnified the RBA and private sector banks against loss and damage arising out of acts or omissions by the Commonwealth, including by error, fraud, negligence or transactions made without the authority of the Commonwealth.

Australian River Company Limited - directors' indemnities

The Commonwealth has indemnified ARCo Board members and management, in the event ARCo ceased to exist, against civil claims relating to employment and conduct as directors and management of ARCo and subsidiary companies. Liability is subject to the terms of the indemnities.

Australian Defence Industries Limited - officers and directors' indemnities

Under the sale agreements for ADI, the Commonwealth has indemnified the directors, officers and employees for claims and legal costs associated with assistance related to the sale of the Commonwealth's shares in the company. The Commonwealth has also agreed to be responsible for the payment of the amount of any excess in respect of any claim under the policy where ADI Limited is unable to pay the excess post-sale.

Partial sale of Telstra Corporation - second tranche

Certain indemnities have been provided to Telstra, its directors, certain Telstra executives, employees and other parties connected with the sale. Telstra directors are indemnified against liabilities arising by reason of acts or omissions in connection with the offer.

Indemnities relating to other asset sales

Indemnities have been given in respect of a range of other asset sales. Details of these indemnities have been provided in previous Budget and Mid-year Economic and Fiscal Outlook (MYEFO) papers, for example see pages 4-35 to 4-41 in the 2000-01 Budget Paper No. 1.

Health and Aged Care

Commonwealth Serum Laboratories (CSL) Limited

Commonwealth Serum Laboratories Limited is indemnified against claims made by persons who contract specified infections from specified products and against employees contracting asbestos-related injuries. Commonwealth Serum Laboratories Limited has unlimited cover for most events that occurred before the sale of CSL Limited on 1 January 1994, but has more limited cover for a specified range of events that might occur during the period of the current contract. Given the open-ended nature of some of the indemnities, damages and risk cannot be quantified.

Blood and blood products liability cover

The Commonwealth has signed a memorandum of understanding (MoU) with the States, Territories and the Australian Red Cross Blood Service (ARCBS) to establish a National Managed Fund (NMF). The NMF will be established as a discretionary trust. The NMF is necessary to establish a single consistent approach to pooling the liability risks associated with the supply of blood and blood products by the ARCBS within the Commonwealth of Australia. The NMF replaces previous arrangements which were on a state by state basis. The MoU provides for the parties to contribute to the NMF taking into account, inter alia, potential claims payments; the level of funds in the NMF and investment earnings; and a prudential allowance for liabilities incurred but not the subject of claims.

If there are insufficient funds to cover claim costs, the MoU provides for each party to contribute funds in accordance with allocation provisions prevailing at the time.

Under the MoU, the blood and blood products liability cover for the ARCBS is effective from 1 July 2000 and remains in force until all parties agree to terminate the arrangements from an agreed date. The MoU provides for each party to remain liable for: their share of all claims settled with the terms of the MoU including any claims made after the date of termination; and any unresolved claims arising out of events between the commencement date and the date of termination.

Reconciliation and Aboriginal and Torres Strait Islander Affairs
Separation of Aboriginal children from their families in the Northern Territory

Earlier laws, policies and practices in relation to the Commonwealth's administration of the Northern Territory led to the separation of certain indigenous children from their families. There are currently over 2,100 claims pending against the Commonwealth for (largely unspecified) damages in relation to alleged forcible and wrongful separations (mostly by the children of those allegedly forcibly and wrongfully removed). Only two of these claims have so far proceeded to hearing. These were dismissed by the Federal Court in Darwin in August 2000, but are currently under appeal to the Full Bench of the Federal Court.

Transport and Regional Services

Maritime Industry Finance Company Limited - board members' indemnity

Indemnities for MIFCo board members have been provided to protect against civil claims relating to employment and conduct as directors of MIFCo. These indemnities are unquantifiable and no expiry date has been set.

Stevedoring Industry Finance Committee

The Stevedoring Industry Finance Committee (SIFC) faces an increasing number of claims for asbestos related injuries to former waterside workers, and a class action against SIFC was initiated in February 2001 by Slater & Gordon. These injury claims were inherited from the Australian Stevedoring Industry Authority. Costs that may arise from these claims cannot be determined and are therefore unquantifiable. The number of claims likely to be made in the future is also unknown.

Australian Maritime Safety Authority (AMSA) - insurance claims

AMSA is subject to a professional negligence claim seeking unspecified damages arising from a search and rescue incident involving the loss of one life. The flotation device manufacturer is a second defendant. The claim is being defended, although it is not possible to estimate the amounts of any eventual payments that may result. The insurer has indemnified AMSA, although AMSA will be liable for any policy excess.

Australian Maritime Safety Authority (AMSA) - incident costs

In the normal course of operations, AMSA is responsible for the provision of funds necessary to meet the clean-up costs arising from ship-sourced marine pollution. The Commonwealth has agreed that AMSA's responsibility should be limited to a maximum expense of $10 million, and has arranged a stand-by loan facility for this purpose. The Commonwealth will provide funds in the event that costs exceed the limit. In all circumstances the Authority is responsible for making appropriate efforts to recover the costs of any such incidents.

Australian National Railways Commission (AN) - transfer of liabilities

As a result of the wind-up of the Australian National Railways Commission, all associated contracts, assets and liabilities become the responsibility of the Commonwealth. At this stage, it is not possible to quantify liabilities as they involve uncertain legal processes and ex-employee claims.

National codes of practice for railways - Industry Advisory Committee

Under an Inter-Governmental Agreement on Rail Operational Uniformity, an advisory committee has been formed to provide advice to the Australian Rail Operations Unit on all aspects of the development and implementation of uniform operational codes for the defined interstate rail network. The Commonwealth indemnifies members of the Advisory Committee as if they were Commonwealth employees. It is not possible to quantify liability risk.

Tripartite Deed relating to the sale of Core Regulated Airports

Tripartite Deeds apply to the 12 Core Regulated Airports (Sydney, Melbourne, Brisbane, Perth, Canberra, Coolangatta, Townsville, Adelaide, Hobart, Launceston, Darwin and Alice Springs). The Tripartite Deeds between the Commonwealth, airport lessees and lessees' financiers provide for the Commonwealth to usurp control as airport operator in defined circumstances. The Deeds also provide protection to secured financiers where a lease termination event occurs.

The potential liability of the Commonwealth would vary considerably with the specific factors leading to a lease termination. If the Commonwealth entered into possession of an airport site it could seek to recover its costs from a number of sources, including airport revenues, the Airport lessee company and potentially, from the financiers themselves.

Where the Commonwealth takes action to terminate the Airport Lease, secured financiers can recover their loans from funds obtained by the Commonwealth from reselling the airport lease. If not resold, the Commonwealth and the financiers are to obtain a valuation of the airport lease that will set the basis for a repayment of financiers' loans by the Commonwealth.

Federal Airports Corporation (FAC) transfer of liabilities to the Commonwealth

On 24 September 1998 the Commonwealth assumed responsibility for all remaining assets, liabilities and contracts of the FAC on the wind-up of the Corporation. All of the known liabilities have been settled, however there is a risk that undisclosed liabilities remain.

The Commonwealth assumed responsibility on 1 July 1998 for a contingent liability of the corporation which relates to debtors of the FAC who are challenging the validity of network charges made under the Federal Airports Corporation Act 1986. If the network charging approach is found to be invalid, this raises the prospect of further claims from other airport users who have previously paid network-based charges to the Corporation. There is no basis for quantifying potential claims.

Treasury

Changes in value of cross currency swaps and foreign currency denominated debt

Significant net foreign exchange gains or losses could be recorded in the AAS31 operating statement if there is a significant change in the nominal exchange rate. This is because a change in the nominal exchange rate results in a change in the net principal value of cross currency swaps and foreign currency denominated debt. The direction of movement in the exchange rate will determine whether there is a net foreign exchange gain or a loss. A gain is a positive risk to the operating result, while a loss is a negative risk. Net foreign exchange gains or losses do not have any impact on the fiscal balance.

Housing Loans Insurance Corporation (HLIC)

The HLIC was sold by the Commonwealth on 12 December 1997 and all residual contingencies have been assumed by the Commonwealth. The principal amount covered by the guarantee and the balances outstanding are unable to be reliably measured. The guarantee relates essentially to the HLIC's contracts of mortgage insurance and any borrowings approved by the Treasurer up to the time of sale.

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