Loan Council has endorsed the Loan Council Allocations (LCAs) nominated by the Commonwealth and each State and Territory for 1998-99. The nominations – based on estimates made in February 1998 – are shown in the attached table.

Under the Loan Council arrangements, each jurisdiction nominates an LCA comprising:

• the estimated general government deficit/surplus (based on its National Fiscal Outlook projections);
• its public trading enterprise (PTE) sector net financing requirement; and
• memorandum items (such as transactions that, while not formally borrowings, have many of the characteristics of borrowings).

These nominations are considered by Loan Council having regard to each jurisdiction’s fiscal position and reasonable infrastructure requirements, as well as to the macroeconomic implications of the aggregate figure. LCAs are on a headline rather than an underlying basis as they seek to measure a government’s call on financial markets.

With the exception of New South Wales and the Northern Territory which included the effects of some budget policy measures, 1998-99 LCA nominations were provided on a no policy change basis. They thus provide an indication of the public sector’s likely call on financial markets. The actual call may vary from the nomination primarily because of changes in economic parameters and policy measures. Updated information will be provided to financial markets through publication by each jurisdiction of its budget time LCA and a mid-year update of its expected LCA outcome. The Commonwealth will provide a budget time LCA estimate in next week’s Budget.

Loan Council considered that the aggregate of LCA nominations is consistent with current macroeconomic policy objectives.

In March 1998 Loan Council agreed to a proposal by Victoria that the publication of monthly and year to date budget sector data (‘Niemeyer’ statements), required under a 1930 Commonwealth-State agreement, no longer be mandatory. This decision reflects the view of some jurisdictions that their monthly ‘Niemeyer’ statements, which have a budget sector focus, do not add significantly to the information available to the markets under the revised framework for the uniform presentation of government financial information, agreed by Loan Council last year.

The revised uniform presentation framework provides for twice yearly reporting – in budgets and mid-year reports – of full year estimates of outlays, revenue and financing transactions, as well as the reporting of full year outcomes, for the general government and public trading enterprise sectors. From 1998-99, all jurisdictions’ budgets and mid-year reports will also include three year forward estimates for the general government sector. These reports use a consistent reporting framework and will enable financial markets and others to assess fully each jurisdiction’s fiscal position.

It will be open to individual jurisdictions to continue to publish monthly budget sector statements if they wish. Under the current cash budgeting and reporting arrangements, the Commonwealth will continue publication of a monthly Statement of Commonwealth Financial Transactions, as required by the Financial Management and Accountability Act 1997. However, the Commonwealth has foreshadowed the implementation of accrual budgeting from 1999-2000. The timing, nature and extent of reporting under those arrangements have yet to be finalised.

CANBERRA

7 May 1998

1. The New South Wales LCA nomination is reduced by around $700 million in expected 1998-99 earnings on accumulated employer balances in its public sector superannuation schemes. Not all jurisdictions able to do so have made similar deductions. New South Wales has five infrastructure projects with private sector involvement for which contracts are expected to be signed in 1997-98 or 1998-99. Details are provided in an attachment.
2. Victoria expects to favourably exceed the tolerance limit applying to its 1997-98 LCA mainly due to the sale of Power Net Victoria for $2.555 billion (excluding licence fees) in October 1997 and the sale of Southern Hydro Limited in November 1997 for $391 million. Victoria has a number of infrastructure projects with private sector involvement for which contracts are expected to be signed in 1998-99. Details are provided in an attachment.
3. South Australia’s 1998-99 LCA nomination excludes the impact of possible asset sales such as electricity generation and distribution. South Australia has provided details (see attachment) of an infrastructure project with private sector involvement for which contracts are expected to be signed in 1997-98.
4. The Commonwealth’s 1998-99 LCA nomination incorporates some expected asset sales proceeds, and debt repayments by the States. The nomination does not include a net financing requirement for Telstra as it has been exempted from Loan Council’s monitoring and reporting arrangements on commerciality grounds.

Project Description:

The consortium Airport Motorway Limited was selected for the financing, design, construction, operation and maintenance of a twin tunnel tollway passing under Taylor Square connecting the Cahill Expressway at Woolloomooloo to Southern Cross Drive, Zetland.

The estimated direct cost of the project is $699.7 million and is made up of a Government contribution of $20 million, a private equity contribution of $173.9 million, project debt of $497.4 million and other private sector revenues of $8.4 million. The Government contribution of $20 million will meet about half the cost of a canopy over the Cahill Expressway to reunite the Domain, the Royal Botanic Gardens and Woolloomooloo.

The construction period is 36 months from August 1997. The term of private tollway operation is 48 years. A $3 toll on opening, increased by the greater of 4 per cent per annum or a composite of the AWE and CPI indices, will be charged one way (northbound).

In the event of default by the Airport Motorway Limited or the Trustee, the RTA may terminate the deed after complying with certain requirements of the project documents. Termination may be suspended by Airport Motorway or the Trustee by up to 12 months in order to rectify the default. The suspension period may be further extended by up to 12 months.

The RTA has no liability under the contract documents to Airport Motorway, the Trustee or the project financiers upon termination arising from default by Airport Motorway or the Trustee. The RTA would complete the project if necessary and seek to recover damages from Airport Motorway and the Trustee.

Project Description:

The construction, financing and operation by the private sector of a permanent 15,000 seat Olympic Multi Use Indoor Arena at Homebush Bay will be undertaken by the Millennium Consortium, six special purpose companies in partnership, all wholly owned by Abigroup Ltd.

The venue will have a flexible seating capacity and be available for international standard concerts and sporting contests after the Games. The package includes an adjoining eight storey, 3365 space car park costing $63 million.

The estimated direct cost of the project is $277.2 million and is made up of a government contribution of $223.8 million, a private equity contribution of $14.9 million, project debt of $33.2 million and other underwritten private sector revenues of $5.3 million.

Construction is expected to be completed by December 1999. The project agreement provides for the Consortium to transfer the Multi Use Arena (MUA) to the Olympic Coordination Authority (OCA) on 31 January 2031.

The Consortium will be responsible for operating, maintaining and repairing the MUA until January 2031. OCA will be responsible for operating, maintaining and repairing the Car Park and the Public Domain. OCA has a right to terminate the project in certain circumstances but no compensation is payable by OCA if the Consortium is in default. After the Games period, the Millennium has limited rights to terminate the project for OCA breaches in which case OCA would be obliged to compensate the Consortium and its financiers for:

• their contract break costs;
• to repay outstanding debt; and
• the net present value of forecast equity returns.

Should OCA terminate the project prior to completion of the MUA, OCA should pay to the partnership’s debt financiers 70 per cent of the then outstanding debt and subsequently pay the remaining 30 per cent of the debt from the operating revenues earned by OCA.

Project Description:

The private sector has been invited to build, own and operate and transfer back (BOOT) a 580 space multi storey car park at St George Hospital campus. The contract period is 25 years. The anticipated total construction cost for the project, including capitalised interest, is $13 million. The successful consortium’s car park operator will manage and operate under licence or lease the whole campus car parking of 1148 spaces, including the 580 new spaces.

Contract negotiations are not finalised for this project. The expected sign up date is July 1998. At this time no government liability is anticipated under the proposed termination provisions of the contract to be negotiated. However, based on previous experience with items of this sort, a conservative estimate of the Government liability, equal to the debt carried on the project, has been included.

Under the proposed termination arrangements, in the event of operator default the South Eastern Sydney Area Health Service would sell and assign the car park operator’s interest in the contract and the purchaser would obtain the rights and assume the liabilities and obligations existing under the contract.

The facility is expected to be wholly debt funded. The proposed term of the project (the minimum period of the contract in which no penalties are incurred) is 25 years.

Project Description:

It is proposed to invite the private sector to fund and build an 800 space car park on the Royal Prince Alfred Hospital campus over a contract period of 25 years. The anticipated total construction cost for the project, including capitalised interest, is $8.4 million. The successful consortium’s car park operator will manage and operate under licence or lease the whole campus car parking of 900 spaces including the 800 new spaces.

The form of the arrangement is expected to be similar to that for the Randwick Hospital Car Park. The expected sign up date is December 1998. At this time no government liability is anticipated under the proposed termination provisions of the contract to be negotiated. However, based on previous experience with items of this sort, a conservative estimate of the Government liability, equal to the debt carried on the project, has been included.

Under the proposed termination arrangements, in the event of operator default the South Eastern Sydney Area Health Service will sell and assign the car park operator’s interest in the contract and the purchaser would obtain the rights and assume the liabilities and obligations existing under the contract.

The facility is expected to be wholly debt funded. The proposed term of the project (the minimum period of the contract in which no penalties are incurred) is 25 years.

The Royal Prince Alfred Hospital car park project is subject to the outcome of a feasibility study and an economic appraisal and project parameters could be subject to change.

Project Description:

The Ultimo Pyrmont Light Rail Transit system (UPLRT) operates between Central Railway Station and Wentworth Park to serve the growing residential, commercial and recreational areas of the Ultimo-Pyrmont peninsula.

The Government has assessed a proposal submitted by the Sydney Light Rail Company Limited (SLRC) to design, construct and operate extensions to the UPLRT. The two extensions proposed are:

The Budget Committee of Cabinet has given in principle support for this project to proceed at no cost to Government and has authorised the commencement of the approvals process. An Environmental Impact Statement has been publicly exhibited and representations in response to this document are currently being considered. A decision on whether to proceed to construction of the extensions has yet to be made by the Government.

The anticipated total construction cost, the financing arrangements and the Government liability under termination provisions of the contract are yet to be determined.

Listed below are details of Victoria’s Infrastructure Projects with Private Sector Involvement where contracts are expected to be signed in the 1998-99 financial year.

In line with the current Loan Council guidelines for the treatment of such projects, the termination liabilities as measured by the Government’s contingent exposure, are to be included as a footnote to the LCA.

As the following projects are still in development stage, full details about the extent and nature of actual payments, forward commitments and contingent liabilities associated with the projects cannot be provided at this stage, but will be included in the 1998-99 LCA outcome.

In October 1997, Government announced a series of water reforms that will benefit all Victorians. The reform package includes a $450 million allocation for capital projects outside the metropolitan area, that is designed to improve the quality of drinking water as well as upgrading waste water management systems.

It is Government’s intention to ensure efficient delivery of these capital expenditure projects and will therefore invite the private sector to participate in their delivery by way of Build-Own-Operate (BOO) or Build-Own-Operate-Transfer (BOOT) financing schemes.

Already, the Coliban Region Water Authority has committed to a BOO project for a waste water treatment plant, with expressions of interest called for the delivery of a water treatment plant that will service their Bendigo, Castlemaine and Kyneton locations. These projects alone will total around $60 million. It is expected that full contractual obligations for these projects will arise during the 1998-99 financial year.

Additionally, projects for the Grampians and Central Highlands Region Water Authorities totalling around $115 million are currently under consideration, with an expectation that contracts would be exchanged by 30 June 1999.

Government has advised the Water Authorities that all demand/usage risk attaching to the various plants must be assumed by the contractor. Additionally, no residual risk will attach to the respective Authorities, or Government, as a result of a default caused by the contractor which leads to termination of the contract(s).

As part of the City Link project, Government approved the creation of an extension of Exhibition Street across the existing Jolimont railyards, so as to join the City Link project at the Swan Street/Batman Avenue intersection. For traffic management reasons, additional slip roads and alterations to other structures are also required.

The capital cost of these works has been estimated at around $95 million. At this time, it is anticipated that the majority, if not all of the financing risk will be assumed by the private sector, preferably by way of a BOOT scheme.

Whilst no firm agreement of the proposed structure has been reached or contracts negotiated, there is an expectation that contracts will be exchanged during the 1998-99 financial year, to ensure a seamless integration with the rollout of the City Link project.

As was the case in the City Link project, all demand risk will be borne by the selected contractor, assuming a BOOT scheme is selected. There will be no residual payment liability attaching to the State, in the event of contractor default leading to contract termination.

The Department of Human Services has announced the development of two public hospitals, to be situated at Berwick and Mildura, that are intended to be under contractual obligations by April 1999. It is the Department’s intention to attract private sector involvement in these hospital projects, by way of BOO schemes, in similar fashion to the provision of the Latrobe Regional Hospital transaction in 1996-97.

Whilst final determination of the optimal number of beds is yet to occur, there is an expectation that the combined capital cost of these projects will be around $100 million. Recurrent funding for public hospital services provided will also be an operational impost upon the State during the anticipated 10 to 15 year operating terms of the respective service contracts. However, demand risk, in addition to the usual construction risks under a BOO scheme, will be borne by the private sector contractor.

Government will possess the ability to exercise a right of ‘step-in’, should the selected service provider/contractor not provide the service standards as agreed. Such a circumstance would be an event of default, giving rise to contract termination. Government is under no liability to effect a termination payment to the service provider/contractor under a default scenario.

The Bolivar to Virginia Pipeline Scheme is a joint venture involving the SA Water Corporation and the private sector to use treated water from the Bolivar Waste Water Treatment Plant for horticultural use in the Virginia area.

The project has an estimated asset value of $22 million, and will be funded by way of an $8.15 million Commonwealth Building Better Cities Grant, $6.7 million from SA Water (in return for non-voting shares in the project), with the remaining costs to be met by the private sector.

It is anticipated that the contract period will be 20 years, and the project will operate under a build, own, operate, transfer back arrangement. At the end of the contract, ownership will revert back to SA Water (for the nominal cost of $1).

In the event of a breach in the contract (by the private sector contractor) SA Water will have the option to terminate the contract and purchase the remaining capital (based on a 20 year life). In the event of SA Water terminating the contract the maximum liability they will face would be the remaining value of the asset less any government contribution. Should SA Water fail to meet any of the performance measures laid out in the contract they would be liable for unspecified damages. The contract, however, would remain valid.

Agreement has been reached between the parties involved and it is expected that the contract will be signed in early 1998.