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Commonwealth Finance Ministers Meeting, IMF World Economic Outlook, Australian Economy, Iraq, Telstra, Corporate Governance, Final Budget Outcome, Stock Market, Overseas Aid, Kyoto, Public Private Finance, Leadership




Media Conference

Commonwealth Finance Ministers Meeting


Thursday, 26 September 2002

SUBJECTS: Commonwealth Finance Ministers Meeting, IMF World Economic Outlook,

Australian Economy, Iraq, Telstra, Corporate Governance, Final Budget Outcome,

Stock Market, Overseas Aid, Kyoto, Public Private Finance, Leadership


Ladies and gentlemen, thank you for coming today. As you know I’ve been here

in London for the last couple of days meeting with economic policy makers and

discussing economic developments as well as attending the Commonwealth Finance

Ministers Meeting, before going on to the annual meeting of the IMF/World Bank

in Washington over the weekend. The IMF has recently released it’s World Economic

Outlook which has indicated that threats to the global economy mean a downgrading

of growth next year in 2003, and the threats to the global economy are coming

essentially from volatility in world stock markets, corporate governance confidence

effects, and the possibility of rising oil prices. The good news however is

that the Australian economy continues to grow and is forecast by the IMF to

be one of the strongest growing of the developed economies of the world. We

will not be immune from international developments but our economy is a flexible

and strong economy and continues to outperform the other centres in Europe and

America and Japan. So, the important thing for us in Australia is to keep focused

on reforming our domestic economy to cope with the external shocks – which we

have seen on stock markets – which I expect to also provide a challenging environment

in the year which is ahead.


Treasurer, we’ve got the problem of the stock markets globally, the drought

in Australia, possible military action. What are the threats to the bottom line

for us, for the budget?


Well the volatility on world stock markets where you have seen American and

European stock markets fall by about 30 per cent this year, means that there

will be confidence effects, particularly in America. You would expect that to

have some effect on business confidence and investment as well as consumer confidence

and six months ago we were expecting the US economy to come out of its recession

with some strong growth. It looks like that growth will be weaker, and the United

States is the engine for the world economy, so it looks like the world growth

will be weaker. The effect for Australia will mean that demand for our exports

will be weaker than we were previously expecting and so that’s a negative effect

from the global economy back on the Australian economy but having said that

we forecast the Australian economy to grow about 3¾ per cent and that is

still very strong growth by international standards.


What sort of effect do you think a war in Iraq might have?


Well the most immediate effect that you would expect from instability in the

Middle East will be on oil prices. That will probably be negative for global

growth prospects and the uncertainty which comes from that will probably affect

stock markets. So, I don’t want to anticipate something that hasn’t occurred

but if you ask me what the likely economic effect would be, it’s likely to detract

from growth.


Given the relatively strong performance of the Australian economy, do you think

international investors see Australia as something like some kind of safe haven,

perhaps, and what have you been hearing in the City of London about what it

would take to get more investment into Australia?


Look, there’s a general view in the City of London, as there is in all of the

major financial centres, that Australia is a strongly performing economy which

not only managed to survive the Asian downturn, but the US recession of 2001,

so the economic performance of Australia is well understood. A growth economy,

low inflation, flexible economy with a very strong fiscal position and so people

are interested in investment in Australia. I think they are probably looking

for new investment opportunities, a lot of interest obviously in Telstra and

other Australian companies here as there is right around the world but I don’t

see any shortage of people who recognise the Australian economic achievement

of the last couple of years.


Do you think that (inaudible) particular international interest in investing

in Telstra in the future and what did you tell them about the prospects of that?


Well, as you know, we restrict foreign shareholding in Telstra because it’s

our policy to keep Telstra in majority Australian ownership but in relation

to the 49 per cent which has already been offered to the public, there was a

lot of international interest and should further equity be offered I imagine

it would be the same.


Have you changed your growth forecast as the result of the (inaudible) knock

½ per cent off growth? Does that mean 3¾ per cent is now 3¼ per

cent for this year?


No, we haven’t changed our growth forecast. In the budget we said it would

grow at 3¾ per cent. The most recent IMF report actually was a little higher

than that and at the time I warned against being overly positive on the back

of the IMF report because I said there would be two negative factors which they

hadn’t fully taken into account in my view. One was world stock market volatility

and the other was drought, the effect of drought in Australia. So, we will update

that forecast with our mid-year review in November and I won’t be changing the

forecast until then.


Treasurer, corporate governance. Before you left I understand you wrote to

States about company directors who award themselves bonuses and then go broke,

getting back some of that money, and also …so, I’d like to know what’s developed

on that front and also are you absolutely certain that the measures that you

have and will put into place will stop any kind of an Enron in Australia?


Well, the government is proposing legislation to allow the recovery of unreasonable

bonuses from company directors and in Australia, for constitutional reasons,

you require the consent of the States to enact this legislation. We have an

agreement by which we have to seek the consent of the States. We’ve written

to the States and asked them to give their consent and I expect that they will

and that legislation will go ahead. We have also announced significant proposals

for improving auditing standards in Australia coming out of the Enron Worldcom

experience. An independent body with oversight on the auditing profession, increased

surveillance on auditing practices, requirements for the certification of independence

and I’ve obviously had discussions here in the United Kingdom around this issue

and I am confident that Australia is at the leading edge of this, comparing

what we’re doing with what’s happening in the United Kingdom. We will take any

additional lessons which arise out of the HIH Royal Commission into account

and hope to have legislation in this area passed early in the new year.


What about criticisms? I think I saw a former US regulator saying that you

hadn’t learnt the lessons that they’ve learned recently in the States and that

these things should be tougher.


I think that it’s conceded that Australia’s corporate regulation is being managed

better than the United States and that’s not just me saying that. I think the

Opposition has also conceded that point in Australia. For example, the United

States has quarterly reporting, we have continuous disclosure. We don’t want

to get complacent about it but one of the lessons that we learnt out of the

late 80s was the importance of corporate standards. We did a lot of work with

our CLERP program – Corporate Law Economic Reform Program – starting in 1996

and we were ahead of the United States in significant respects. Now, we have

to learn the lessons internationally and continue that program but I am confident

that we are doing that.


In its submission to the HIH Royal Commission the APRA has said it needs more

teeth and that it needs to be more independent of government in order to properly

supervise the insurance industry, which is obviously one of the sectors under

most pressure internationally. Do you rule out those kinds of changes or what’s

your general view towards those ideas?


Well, I’m not going to go into the detail of it obviously, but I’ll make this

point – APRA is fully independent of government. We were one of the first countries

in the world to set up a prudential regulator which went across the whole deposit

taking institutions, you know not just banks but deposit taking institutions,

insurance, superannuation, and in many respects the UK modelled itself on Australia

with the FSA. So, again we were leading in relation to the prudential regulator.

The prudential regulator is fully independent of government. So, people can

have confidence that its decisions are not influenced by the government in any



But it’s still the government that does the licensing and the government to

which the licensee can appeal, isn’t it?


No, if you are talking about licensing in the financial area, it’s done by

the Australian Securities and Investment Commission. So, that’s licensing dealers

and so on. But I want to assure people, and I don’t think it’s ever been questioned,

that the Australian Prudential Regulatory Authority, APRA, is fully independent

of government. Government doesn’t influence it. It doesn’t tell it what to do.


Mr Costello, you have a deadline on the Monday, I believe, for releasing the

real budget for 2001-2002. Are you going to be able to make that?


For releasing the what did you say?


The budget deficit for 2001-2002. Out of your Charter of Budget Honesty.


Yes, well, for releasing the Final Budget Outcome. When you say the `real’,

a Budget sets out what you intend to do over the course of a financial year

and at the end of the end of the financial year you set out a Final Budget Outcome

as to what the actual outcome is and that will be released in accordance with

the Charter of Budget Honesty. I was just taking dispute with your use of the

word `real’ there.


Treasurer there is a bit of a push on in Australia, it seems, for subsidising

the ethanol industry. Are you entirely happy about that and how bottomless is

the pit do you think?


Well the government’s made its announcements and I fully explained my attitude

to them in the Parliament and obviously I’m not going to add or detract from

those comments here.


Given your warnings, Treasurer, the potential volatility of stock markets,

what would you say to small Australian investors that had their nest egg invested

in the Australian market. What would be your advice to them?


Well let me make one point about the Australian market. The Australian market

has out-performed nearly every other stock market in the last 12 months, that

the FTSE, for example, and the Dow are down about 30 per cent and the Australian

All Ordinaries or the ASX 2000 is down less than 15 per cent. Ok, so it’s down

but it has out-performed both of those markets. Now, part of the reason for

that is that the ASX didn’t rise as high as those other markets did during the

technology bubble and as we now look back that was a positive thing for the

Australian economy. We avoided the worst excesses of the technology bubble.

We avoided it on the way up so we avoided it on the way down but I wouldn’t

pretend to give advice to investors. Once I do, I’ll be constituting myself

a financial dealer and I’ll need a licence. So, I think people have got to make

their own decisions in this area.


One question on the Commonwealth. I mean, there have been some complaints that

Australia has been involved in watering down the ODA and tied ODA issue from

other governments. Is that true? You wish to keep a large proportion of the

ODA tied?


Nobody made that …no Minister raised that with me. So I don’t know which

governments you’re referring to.


Do you want to want to keep ODA tied to some extent or would you rather completely

untie it to the model Brown has outlined in his speech?


The Australian government actually has a very large part of its aid untied.

I don’t know how it compares with the United Kingdom but by world standards

a very large part is untied and we don’t tie aid in relation to goods at all,

as I understand it. In relation to services, there may be some requirement but

not in relation to goods.


Treasurer, one issue that a lot of Commonwealth members are very concerned

about is global warming and here in Europe the trade in carbon emissions is

well under way. Are you concerned that we might miss out on any economic advantages

in that trade?


Well, as you know, the government has an obligation to the people of Australia

to act in their interests and we are moving towards our Kyoto targets but we

think that there are some weaknesses in the Kyoto agreement and we’ll continue

to argue for improvement there.


There’s a big debate in the UK at the moment about the government’s PFI and

PPP programs. Have you discussed that at all with your British counterpart while

you’re here and what’s your view in general about the way that that policy has

been proceeding and the debate that’s happening here?


Here in the UK? No, it’s not something I’ve discussed with the UK authorities.

No, it’s a matter for them, it’s a domestic policy.


But generally, the PFI model? Have you …


Ah well, as you know in Australia we have had some experience with private

investment in infrastructure. I guess the best example is tollways which have

been set up principally in Sydney and Melbourne and I think done very successfully

by Macquarie Bank and others and some of the infrastructure that the private

sector has provided has been very good. I think Macquarie Bank are, just to

name one company, are now recognised as leaders around the world. I think they

are quite active here in the United Kingdom in the area. So, there are some

areas obviously where private investment in infrastructure is very welcome and

will add to services. I think it is a case by case analysis.


What if you take the case of hospitals or schools – where it is a long-term

commitment by the government to pay back a debt to the …


Well, look, the way in which we look at it in Australia is, the question is

the transfer of risk. If the risk is transferred to the private sector then

it becomes a private initiative but if the risk remains with the public sector

then obviously it’s still a commitment from the public sector and under our

rules would be shown as such. So, the critical thing in all of these is to work

out where the ultimate risk lies, who is going to take the ultimate responsibility

and whether the risk can be transferred to the benefit of the public.


So, you’re saying that if under a scheme like a couple of those that operate

here in Britain where a public operator builds a hospital and runs it for a

length of time, under Australia’s idea of this that debt should be shown on

the public books?


I’m not getting into advising on British finances. I want to make that clear.

I am not involved and that’s a matter for the British authorities. You asked

me what the Australian situation is, the Australian situation is that if the

risk is transferred to the private sector then it becomes a private sector investment

but if the risk remains, even though you have some private sector involvement

with the government, then we treat that on the Government’s balance sheet.


With patrol boat project in Australia recently, you’ve had a lot of trouble

working out just where that risk is made (inaudible). Has that made you less

keen on the whole thing?


That’s the classic example, the patrol boats. When we got to the end of that

process the question became who was going to bear the risk if one of these patrol

boats went to war and was blown up. Since the answer was that in the event of

going to war if you lose one of your assets the government bears the risk, you

would not in fact be moving it off to the private sector in any event and with

these things, and this is what our accounting rules say and this is the way

we handle it, where does the ultimate risk actually lie.


Treasurer, both yourself and your colleague Gordon Brown, are widely seen as

being the likely candidates to replace the current Prime Ministers. In these

discussions do you ever get a chance to personally reflect on the frustrations

of your current jobs and the possible future?


Well, Finance Ministers always reflect of the difficulties of their jobs, Matt,

and the biggest gripe that they have is that when they’re in a Cabinet there

are generally sixteen or seventeen people who want to spend money and one that

wants to save it and this is an occupational hazard of Finance Ministers which

we all have in common and share around the world.


What about the leadership aspirations? Are there any at the back of your mind

there after July next year as Mr Howard’s successor.


I’m very happy doing what I’m doing and that’s what I’m focused on this week

and obviously as we go to the IMF and World Bank Annual Meeting, I’ll be focusing

on financial issues as well.


And you’ll be happy to go to another Commonwealth Finance Ministers Meeting

next year?


Well, Commonwealth Finance Ministers Meetings are interesting experiences.

If I may say so, I haven’t been to every one over the last seven years so I

make no undertakings as to Commonwealth Finance Ministers Meetings. If I can,

I will. I don’t want to give an understanding to the contrary. I don’t make

a commitment to go to every Commonwealth Finance Ministers Meeting.


Would you rule out the possibility of a Timor-style levy if there is conflict

with Iraq and has that been discussed?


Look, on Iraq. The Australian government position is we are concerned about

weapons of mass destruction in the hands of Saddam Hussein. We believe that

the world would be a safer place if those weapons are not in the hands of Saddam

Hussein. We hope that the international community will come to an agreement

in relation to that. Now beyond that, at this stage, it is speculation as to

what the international community will do and what Australia will do and I don’t

want to go further than that in speculating either on the outcome or the financing

of that.


But in the past there have been military, obviously military draws, Timor was

the classic example. We thought we’d needed the extra taxes but ended up not

doing it. Obviously contingency planning is very important in government, have

there been any preliminary thought or discussion on this issue of the possible

need of an extra revenue funding for possible conflict with Iraq?


Well, look, I’m not going to speculate on the issue. Thank you very much.