Australian economy, foreign investment, Government bonds, Telstra, Free Trade Agreement, cross-media laws, Iraq

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IMF/World Bank Meeting, International Economy, Australian Economy, Exchange Rate
September 29, 2002
ACCC Appointment Consultation
October 10, 2002
IMF/World Bank Meeting, International Economy, Australian Economy, Exchange Rate
September 29, 2002
ACCC Appointment Consultation
October 10, 2002

Australian economy, foreign investment, Government bonds, Telstra, Free Trade Agreement, cross-media laws, Iraq





Press Conference

Merrill Lynch Australasian Investment Conference

St Regis Hotel, New York

Tuesday, 1 October 2002



SUBJECTS: Australian economy, foreign investment, Government bonds, Telstra,

Free Trade Agreement, cross-media laws, Iraq


Ladies and Gentlemen, over the period I’ve been in Washington and New York,

I’ve found that there’s been considerable interest in investment in Australia

— probably more than at any time since I’ve been coming to these meetings over

the last seven years or so, and I think principally that’s because the Australian

economy is perceived as one of the few growth economies in the world. In 2001

– 2002 our growth has led nearly all of the developed economies of the world

and the Australian economy does stand out in a pretty bleak world economic picture.

The bleak economic picture has partly been reflected from the American recession

of 2001, the corporate governance scandals and the volatility on the equity

markets and difficulties in both Europe and Japan. Australia has managed to

grow and grow strongly through this period. That’s the pay-off from economic

reforms in the last five or six years. And the lesson we can learn from that

is that just as the reforms to our tax system and our labour markets and our

budget, just as the reforms in the financial sector and corporate governance

in the last five or six years have delivered strong results today, so the reforms

of the today will deliver the results of tomorrow. And it’s important that we

continue to work on reform in Australia. Any questions?


Treasurer, you mentioned in your presentation earlier about the strong fiscal

position of the Australian government. In fact you said that within two years

the government will have the capacity to eliminate all central government debt.

I see that as a very good position, however, some Australian capital market

observers out there are concerned that you run the risk of hollowing out the

Australian capital markets and infrastructure if you continue to retire debt

much further. So, how do you manage the two?


The debt to GDP ratio in Australia at the moment is about 5%. Subject to improving

services in rural and remote Australia, the Government proposes to offer further

equity in Telstra and with the proceeds of that we would have the capacity to

retire all debt. Some of the financial markets, as you have said, believe that

it’s important that the Government keeps securities on issue, either as a safe

haven, or as a pricing mechanism. The argument is that even though you don’t

need the money you should have these securities on issue for financial market

reasons. I’ve not been convinced by that argument. But, in order to test the

argument, we will be releasing a paper setting out the pros and cons and giving

the financial markets the opportunity to put their argument as to why you would

run securities even though you’re in a position to retire all debt. The onus

will be on those financial market participants to convince us. If they don’t,

and we’re in a position to retire debt, we will. If they’re very persuasive,

then we’ll take account of their arguments. It’s something that I intend to

address when I get back to Australia.


Could one alternative for the Government be to (inaudible)…unfunded superannuation



If you were in position to retire all debt, I see two alternatives. One is

you do retire all debt, which is my preference. Why would you borrow if you

don’t need to? The other is you could maintain some securities on issue matched

by an asset position and the asset position would be in relation to superannuation.

Now that would raise governance problems all of its own. They are the two alternatives.

The onus is on the financial markets to dissuade me from my preference, which

would be the retiring of debt.


Mr Costello, who have you spoken to about the free trade agreement while you’ve

been in Washington and New York and also, do you feel that we’re advancing on

that issue at all?


In the course of meetings in Washington, I met with some of the Administration’s

economic advisers and we discussed the free trade agreement. I didn’t meet with

the Trade representative because Mr Vaile is coming through Washington in the

next day or so and I imagine he’ll be doing that. But yes, I thought it was

in my discussions quite positive that the Administration is conscious that it

has Trade Promotion Authority now and that it can advance this agenda. There

are other countries that are also pressing for free trade agreements and they

have to work through it in an orderly way.

Let’s not fool ourselves, there will be very difficult areas here, particularly

in relation to agriculture. However, we intend to start, and we intend put our

case very strongly and we call on Australian business and US business to support



Where in the queue did you feel that you were?


Well there are some other countries that have been talking about this a little

longer than us, but we’re pretty high up in the queue.


Could you just give us an idea of the reaction you’ve had in relation to the

sale of the third tranche of Telstra, and whether there is any preference that

be done in one hit rather than a number of (inaudible)?


Well look, we have a policy of, subject to improving services in rural and

remote Australia, of offering further equity. Before that can be done, the Australian

Senate has to vote that through. And as you know the Labor Party and others

are using their Senate numbers to try and frustrate that policy. So there’s

a pre-condition before any of this occurs. Do I find interest in this in international

markets? Yes. The answer is, very considerable interest. But you have to bear

in mind that it’s our policy to keep Telstra majority Australian owned and we

have limits on foreign shareholding. But in relation to that amount which would

be available for foreign shareholding, yes, extraordinary interest. Would it

be done in one tranche or several? Well, let’s not run ahead of ourselves here.

The legislation has to be passed first before there’s any sale at all, and,

then the Government will consult to ensure that we get the best, if that should

come about, to ensure that we get the best deal for Australian shareholders.


Some US fund managers have spoken about the desire for Telstra to buy back

some of their shares as part of that sale?


What, that Telstra would buy back some shares?


Buy back Telstra shares because it’s gearing, say, is too low for example,

and that might be an efficient capital management strategy?


Well, I’m not getting into Telstra’s capital management strategy.


Could you elaborate a bit about when you said that this is the most interest

you’ve seen in Australia in seven years in international financial markets.

What kind of people are saying this to you? And what kinds of things do these

institutions or people ask you about Australia?


Well, I think from the official level, from meetings at the World Bank and

IMF, there’s considerable interest in Australia from the point of view of its

growth performance. `Why is it that Australia continued to grow strongly in

2001 and 2002?’ That is always the first question you’ll get asked. `Why is

it that when the US went into recession in 2001, your economy didn’t?’ `What

happened in Australia that was different?’ From the investment community, it’s

a similar interest that Australia appears to have defied the world economic

slowdown of 2001 and 2002, and that’s why I think there’s a lot of interest

in Australia because of that overall economic performance. What was the second

part of your question?


I’m just trying to find out, can you say specifically what type of questions

they ask you?


Well, that question. `Why did Australia outperform the world in 2001 and 2002?’

That’s the question. `Why weren’t you affected by the American recession?’ `What

did you do to avoid that?’ `How are you finding that the changes you’ve put

in place have contributed to growth?’ `Where is the growth coming from?’ Those

are the questions that you get asked because it really does appear to be quite

different to Europe, Japan or America, and they’re the questions you get asked.

I think this is given a lot of interest in Australian companies as well but

it’s the macroeconomic performance that people find interesting.


Treasurer, would you expect to see Australia’s cross-media laws go in, say,

the next year and how soon would you anticipate that Australian media could

be open to foreign investment?


Well, the Government’s proposal, in relation to media, is to move in tandem

on restrictions. That is foreign ownership and cross media. We’ve put proposals

together and we’ll put legislation into the Parliament. And you asked me how

soon would it go through? Well, that depends very much on the hostile Labor/Democrat

majority in the Senate. If the hostile majority defeats it, then it won’t occur.

But it’s beyond the Government’s control on the timing.


Just to follow-up on that question, it’s in completely your control to lift

the rules on (inaudible) foreign newspaper (inaudible) could you ever exercise

that right to lift that on it’s own?


No, because we think it should go on in tandem. We think that it’s important

that if we’re going to free up ownership restrictions in relation to Australia’s

media that you do it in a concerted way, not restrict Australian ownership at

the same time as freeing up foreign ownership. That’s a proposal that goes in



Is there any tangible evidence that this high level of interest is actually

translating into more investment in Australia?


I think that foreign investment in Australia is pretty strong. I haven’t got

the aggregate numbers, but when I look around at some of the proposals that

are going on in relation to construction of gas pipelines and electricity links

and corporations that are pioneering big new mineral investments, I think it’s

pretty strong. I don’t think Australia has had a problem attracting foreign

investment. That’s not the impression I get at all.


Mr Costello, do you rule out the implementation of a war tax should Australia

become involved in a military campaign against Iraq?


I don’t speculate on a war tax.


Are you doing any forward planning towards the possibility of military action

against Iraq?


Towards a possible…no, the Government’s position is that this is a matter

that has to be processed through the United Nations. The Government’s position

is this: there should be open inspection and not just inspection but dismantling

of weapons of mass destruction. We support the US administration in its efforts

to negotiate that through the United Nations. We await the outcome. You asked

me what would happen after that? Well, let’s see what happens in relation to



How would we pay for possible involvement given the budget deficit?


Well you’re speculating on something that hasn’t occurred. You’re asking me

about something, which has not been announced by the Government. And, as I think

I said, I don’t speculate on it.


Treasurer, is there some contradiction between your quest for foreign investment

in Australia and the policy to keep Telstra largely Australian owned? Has that

been raised by any of the markets?


No. I think it’s traditionally been a feature of privatisation, where it’s

a government owned instrumentality to have a foreign ownership restriction.

That’s what happened in relation to Qantas. And, you can imagine why that’s

the case, because the public would say if this is being put out into private

ownership, we’d like it to stay in Australian hands. That was the view in relation

to Qantas. That is our view in relation to Telstra, and there’s no shortage

of Australians that actually want to own some of the shares. I mean this is

not a situation where you would have to offer the shares on the international

market because you can’t get Australians to buy them. The experience that we’ve

found is that many Australians want to take an equity position.

So we don’t find that to be a contradiction. That’s been our policy all along.

I imagine that the public supports that position and I think it’s a reasonable

position in relation to a government owned entity, which is put out to private


Okay. Thank you.