Commonwealth Treasurer, the Honourable Wayne Swan MP last night handed down the 2012/13 Federal Budget, delivering a $1.5 billion surplus after four years of deficit. Norton Rose Australia has prepared a review and analysis on some of the key issues arising from the budget for key industry sectors. Those issues centre around the Government's commitment to its stated priority areas of health, education, infrastructure and clean energy but within the tighter fiscal environment required to deliver the surplus.
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No surprises in Defence Budget savings
Author: Alena Titterton and Melissa Carnell
There were no surprises for Defence on budget night, with procurement cuts and delayed defence expenditure released days in advance of the budget. The budget projects Defence will deliver an overall contribution to budget savings of $5.5 billion over the next four years.
Tightening defence spending has become part of routine business, with this year’s budget only the latest development in pressure on Defence to re-evaluate capability expenditure.
How $5.5 billion in savings will be achieved in the context of a defence organisation still in the process of grappling with the Strategic Reform Program (aimed at delivering improved accountability and efficiency of spending and, ultimately, savings of $20 billion over ten years) and a four per cent efficiency dividend remains to be seen.
In effect, much of the fight in terms of the hard decisions on defence savings has been deferred for another day. On 3 May 2012, Prime Minister Julia Gillard and Defence Minister Stephen Smith announced the early release of a new Defence White Paper: a year earlier than expected. The 2013 White Paper will provide an updated roadmap for the realignment of Defence’s strategic priorities.
Those priorities will need to be revisited in light of the defence cuts, which mean the 2009 White Paper’s promise of funding parameters for Defence including “three per cent real growth in the Defence budget to 2017-18” need to be reset.
What is the impact on defence capabilities?
In the lead up to the budget, there was much talk of delivery of the “core” capabilities outlined in the 2009 White Paper. Treasurer Swan’s budget speech referred to the defence cuts only once, offering that budget savings were being achieved through: “deferring some defence expenditure while prioritising support for current overseas operations”. The budget papers repeat that theme, with the promise of $5.5 billion in savings being put down to: “deferring some Defence acquisitions, adjusting the Defence capital equipment program and delivering further operating efficiencies, while delivering priority 2009 Defence White Paper capabilities”.
Among the core defence budget announcements are the following:
DESIGN PHASE for acquisition of 12 new Future Submarines: largest project in Australia’s defence history
COST: $214 million
DELAYING, RE-SCOPING OR CANCELLING projects, including two year delay to the acquisition of 12 Joint Strike Fighters ($900 million saving)
SAVING: $1.3 billion
ACQUISITION of Offshore Support Vessel, the MSV Skandi Bergen, to supplement ADF’s amphibious fleet. MSV Skandi Bergen will be transferred to Australian Customs and Border Protection Service on introduction into service of first Landing Helicopter Dock
COST: $123 million
DELAYING, RE-SCOPING OR CANCELLING projects in the Defence Capability Plan not approved by the Government including cancelling the self-propelled howitzer ($220 million saving), deferring later stages of the Joint Strike Fighter project involving follow-on purchases in addition to the 14 already approved ($700 million saving)
SAVING: $1.3 billion
ADDITIONAL INVESTMENT in Collins Class submarine sustainment
COST: $700 million
DEFERRING lower priority elements of the Major Capital Facilities Program
SAVING: $1.2 billion
ADDITIONAL FUNDING for Navy fleet sustainment for ADF personnel
COST: $270 million
REDUCTION in administration costs for travel, outsourcing and consumable items
SAVING: $438 million
ACQUISITION of additional C-17A Globemaster III heavy-lift aircraft, increasing Australia’s heavy-lift fleet to six aircraft
COST: $280.4 million
REDUCTION of 1,000 APS personnel
SAVING: $360 million
ACQUISITION of 2 additional CH-47D Chinook medium-lift transport helicopters, bringing total Chinook fleet to seven
COST: $39.8 million
EARLY RETIREMENT of the C-130H aircraft
SAVING: $250 million
ADDITIONAL FUNDS for IT remediation activities across Defence
COST: $550 million
WORKFORCE POLICY CHANGES in line with the Strategic Reform Program
SAVING: $46 million
The Defence Force Posture Review
The budget forecasts do not engage with the recommendations of the Defence Force Posture Review released earlier this year. This review’s findings included the potential for greater development at HMAS Stirling to support major surface combatant capability and operations, as well as potential to upgrade bases at Edinburgh, Learmonth, Pearce, Tindal and Townsville in support of aircraft operations. Defence Minister Smith says the findings are under consideration, with these matters to be considered in the preparation of the 2013 White Paper.
What are the impacts on Defence personnel?
In the lead up to the budget, Prime Minister Julia Gillard was keen to emphasise that the government would continue to “protect the men and women on the front line”. The government has promised that there will be no adverse effects on ADF numbers, equipment provided to ADF personnel or existing overseas operations as a result of the 2012-2013 Budget.
The budget papers stress that while Defence will contribute to Government savings, there will be no adverse impact on operations in Afghanistan, East Timor and Solomon Islands. $1.6 billion has been committed to continuing military and civilian efforts in Afghanistan and the Middle East, $79 million for a presence in East Timor during national elections and $46 million for ADF stability support in the Solomon Islands.
While there have not been any direct impacts on ADF personnel numbers, the budget will have a serious impact on the civilian workforce. The budget papers project a decrease of 192 civilian personnel in Defence and 432 personnel in DMO between 2011-2012 and 2012-2013. For the ADF workforce, the Budget papers estimate an increase of 754 personnel to Defence military numbers, and an increase of 400 Defence Reserve personnel.
One hopes that the cuts to be made to APS personnel have factored in the critical nature of the support the civilian workforce provides to ADF operations. Recent reviews such as the Kinnaird Review, the Mortimer Review, the Rizzo Review and the Black Review have consistently identified a number of cultural, organisational and structural issues across Defence that can only be rectified if sufficient resources are provided. Much of the reform work requires APS support.
It remains to be seen how the government will deliver its defence capability priorities for upcoming years in light of the cuts to APS personnel (including in DMO) given that a significant amount of future capability is still under development, including the largest acquisition in Australian Defence history with the future submarines. These are some of the challenges that will be faced by Defence as it gears up for the development of the 2013 White Paper.
It is to be hoped that the presence of the likes of Paul Rizzo on the Ministerial Advisory Group for the 2013 White Paper will ensure that the crucial matter of necessary resources and infrastructure to meet capability requirements will be at the forefront of considerations when further decisions on Defence strategic priorities are made.
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Commitment to the Carbon Tax
Author: Noni Shannon
As expected, and despite mounting criticism, the government has confirmed its commitment to the introduction of the carbon price mechanism (CPM).
None of the key measures announced in the budget are new but, rather, are a restatement of the commitments made in the announcement of the Clean Energy Future (CEF) package in July 2011 (see our earlier alerts at "Carbon pricing mechanism snap shot: key features, certainty and flexibility" and "The carbon pricing mechanism: an industry focus" for a review of the CEF package).
The key measures which the government has chosen to highlight in the budget are:
- $10 billion for the Clean Energy Finance Corporation (CEFC)
The establishment of the CEFC is a key element of the government's CEFC package. The intended focus of the CEFC will be to overcome barriers to private sector support for renewable and clean energy projects and technologies, with $2 billion funding per year for five years starting on 1 July 2013.
The current plan for the CEFC includes a divestment of capital into two streams: 50 per cent or more will be invested in the renewable energy stream and up to 50 per cent will be allocated to the low-emissions and energy efficiency stream.
This funding announcement was preceded by the government release of the report of the CEFC Expert Review Panel on 17 April 2012. This report included 26 recommendations, all of which were accepted by the government. They included:
- investing in clean energy
- the commercial approach of the CEFC
- the structure of funding appropriation
- the operation of the CEFC as an independent statutory authority.
- $3.2 billion for the new Australian Renewable Energy Agency
ARENA will be a new independent statutory body, commencing on 1 July 2012, but it will be administering existing funding that was previously administered through separate programs by the Australian Centre for Renewable Energy, the Australian Solar Institute and the Department of Resources, Energy and Tourism. Approximately half of its funding ($1.7 billion) is currently unallocated, giving it some freedom in making new funding decisions to promote increases in the supply of renewable energy.
- $200 million for the Clean Energy Technology Innovation Program.
The $200 million will be provided over five years from 1 July 2012 to support business investment in research and development, proof of concept and early stage commercialisation of clean technologies. The government’s aim is for this Program to kick start the innovative solutions considered necessary by government for a transition to a low carbon economy.
This program is part of the $1.2 billion Clean Technology Program and will offer competitive grants of between $50,000 and $5 million on a 50 per cent co-contributor basis with the successful grantee.
- $14.3 billion for the Household Assistance Package.
The $14.3 billion in financial assistance to households will be paid over four years, through tax cuts and increased government payments, and targeted to low and middle income families. The government’s stated commitment is for more than 50 per cent of the carbon price revenue to be used to assist households. The Household Assistance Package starts from this month and the tax cuts from July.
- $12.8 million for the ACCC.
Additional funding is to be provided to the ACCC over four years from 1 July 2012 for the investigation of false or misleading claims regarding the impact of the CPM (please see our earlier alert at "The 'carbon cops' are coming" detailing the implementation of this policy).
The only new measures announced in the budget in relation to the implementation of the CEF package were:
- $37.1 million for a nationally-consistent legislative framework for Greenhouse and Energy Minimum Standards to regulate equipment efficiency and replace the existing mix of state and territory schemes, described by the Government as “an inefficient patchwork”.
- $2.8 million additional funding for a range of building energy efficiency activities, for example, the maintenance and improvement of building regulatory and information disclosure schemes
- $3 million additional funding to support the climate change adaptation policy and risk analysis.
While these new measures will provide practical solutions to some existing concerns of business, none is significant in the context of the larger CEF package.
In addition, the government has confirmed that it will not be proceeding with the Tax Breaks for Green Building Program. This will provide a saving of $405.2 million. The scrapping of this program has been justified by the government on the basis that recent changes to the policy environment, primarily through the introduction of the CEF package, will provide for alternative means of assistance for the retrofit of commercial buildings, for example, through Low Carbon Australia and the CEFC.
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What the budget means for public sector employment and managing the risks
Author: Sarah Ralph
What the budget means for public sector employment and managing the risks
The budget has an important focus on cuts to the Australian Public Service (APS) as part of the economic/political strategy of achieving a budget surplus.
Significant public sector cuts in the budget
The budget forecasts that the APS will be reduced from around 182,000 public servants to around 178,000 public servants – a reduction of over 4,000 jobs.
The Canberra Times has estimated that the total job cuts will increase to more than 17,000 over the three-year forward estimates period.
The reductions will come from across government, including the Department of Defence, the ATO, Department of Education, Employment and Workplace Relations, CSIRO, Department of Parliamentary Services and the Australian Bureau of Statistics. It is reported by unions that about 30 government agencies have already announced staff cuts.
The cuts to public servant numbers follow the announcement on 29 November 2011 by the Minister for Finance and Deregulation of a one-off increased efficiency dividend as part of the Mid Year Economic Forecast and Outlook An efficiency dividend is essentially a cut to an agency’s operating budget. The efficiency dividend increased from 1.5 per cent to 4 per cent in the 2012-2013 year. The Minister stated that the “Government’s strong expectation is that agencies will continue to meet the efficiency dividend without resorting to forced redundancies, or reduced services to regional Australia”.
Tips for managing legal risks
The impact of the budget on public servant numbers will mean that there will be significant workplace change in the APS. How well an organisation manages change will largely depend on its engagement with employees and union representatives and compliance with legal obligations.
Some of the key industrial and legal considerations for planning and implementing change in the APS will include:
- compliance with enterprise agreement requirements, including in relation to consultation and redundancy and redeployment procedures
- ensuring that if there are redundancies, they are genuine redundancies for the purposes of the Fair Work Act’s unfair dismissal provisions
- minimising the risk that selection processes for those employees affected by change give rise to adverse action or discrimination claims
Compliance with enterprise agreement provisions is critical as a failure to do so may result in a dispute at Fair Work Australia under the agreement’s dispute resolution clause, or a claim for breach under section 50 of the Fair Work Act, which is a civil remedy provision dealt with by the courts.
APS agencies must take steps to ensure that they meet the genuine redundancy provisions under the Fair Work Act to avoid being subject to its unfair dismissal provisions, which require that a termination of employment is not harsh, unjust or unreasonable.
To reduce risks of adverse action and discrimination claims during a change process, it is important that agencies have clearly articulated – and legitimate - reasons for making changes that impact on employees.
Some of the other risks that APS agencies should consider as they undertake organisational change include:
- an increase in workplace bullying and stress complaints that can arise if employees feel under pressure in their roles as a result of change and uncertainty
- an increase in workers’ compensation claims.
APS agencies should also consider whether casual and contract employees impacted by change may have entitlements that do not form part of written terms and conditions, such as long service leave and notice of termination rights, if the person is likely to be considered at law to be an on-going employee. For example, a casual employee who has been engaged on a regular and systematic basis with a reasonable expectation of continuing employment by the department or agency is likely to have unfair dismissal and notice of termination rights.
Consultation and engagement
Any process dealing with workplace change should incorporate a transparent and considered consultation process that engages employees and the relevant unions as soon as possible.
Consultation that includes one-on-one discussion about the possible impacts of change on employees, as well as an opportunity to receive feedback from impacted employees, can make a significant difference to how successfully a change process is implemented and whether claims or grievances will eventuate.
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Bank Capital Adequacy & Debt Finance - Greater clarity ahead
Author: Tessa Hoser and Petar Kuessner
Basel III Capital Reforms - Taxation treatment
Funding costs on certain capital instruments will be tax deductible under reforms announced in the Federal Budget.
Under the accelerated implementation timeframe previously announced by the Australian Prudential Regulatory Authority, the Basel III capital reforms applicable to authorised deposit-taking institutions will progressively come into effect from 1 January 2013. These reforms aim to increase the amount and quality of capital held by ADIs. The government has now confirmed that, on commencement of the Basel III reforms, certain capital instruments issued by ADIs under the reforms will be treated as debt rather than equity for income tax purposes, thereby allowing the funding costs of those instruments to be tax deductible.
The government has indicated that the change will apply to certain Tier 2 regulatory capital instruments issued by ADIs and other similar entities regulated by APRA. The change should apply to Tier 2 subordinated debt which, under the non-viability requirements to be applied by APRA, may be required to be written-off or converted to equity if APRA makes such a determination. Without the change, these instruments would be considered to be equity under current tax law for income tax purposes and their funding costs would not be deductible.
The market has seen a flurry of bank subordinated debt issuance. This clarification may encourage further issuance of that type, as the tax treatment of these capital instruments was left open following APRA's Response to Submissions: Implementing Basel III capital reforms in Australia (30 March 2012).
Limited recourse debt - amended definition
The government has also stated that it will amend the definition of "limited recourse debt" for the purposes of Australia's taxation legislation. The amendments will clarify that "limited recourse debt" includes arrangements where the creditor's right to recover the debt is effectively limited to the financed asset or property over which security is provided for the debt.
The government’s rationale for making the amendment is to ensure that tax deductions are only available for capital expenditure on assets that have been financed by limited recourse debt where the relevant taxpayer is effectively at risk for the expenditure and makes an economic loss.
The amendment clarifies the intent behind the phrase and moves away from the decision in Commissioner of Taxation v BHP Billiton Limited  HCA 17 (1 June 2011), in which the High Court expounded a narrow view of the phrase "limited recourse debt", as defined in section 243-20 of the Income Tax Assessment Act 1997. The amendment is relevant to a wide range of project, infrastructure and other asset or structured financings where the debt is secured solely against the financed asset, commodity or project company and may encourage financiers to expand capex financing, rather than turning to export credit agencies for the financing of that type of expenditure.
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Information and Communication Technology: Budget Review
Author: Nick Abrahams and Warwick Andersen
Cut to defence spending
The biggest single issue to impact the IT community will be the $5.6 billion general cut to defence spending. Because Defence has significant spending on IT, this cut is likely to have some impact on the industry, though the budget still includes $550 million for IT remediation activities across Defence.
As previously announced, an efficiency dividend of 2.5 per cent will apply to all government agencies as from 1 July 2012. It is believed that this will also hit government IT spending, as agencies have been encouraged to delay IT projects to meet this target.
There were a number of minor IT initiatives announced or extended in the budget:
- an additional $233.7 million has been allocated to progress the national e-Health agenda, including to enable the operation of the Personally Controlled Electronic Health Record system. This extends the previous $466.7 million investment, which runs out in June, and will allow the system to launch in July;
- $240.3 million over four years to build and operate an information technology system to support the national disability insurance scheme. According to the budget documents, the system will collect and analyse data to monitor client outcomes and measure the performance of the new arrangements;
- $82.4 million is being provided to the Australia Prudential Regulation Authority for an upgrade of its ICT infrastructure;
- $19.8 million is to be provided over three years to support biosecurity ICT infrastructure;
- the government is providing over $11 million to support the one laptop per child program which, as part of a 12 month pilot program, will deliver over 50,000 laptops to primary students in regional and remote Australia, particularly to indigenous children.
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Transport sector scores some wins, but the road could be a bumpy one
Author: Ben Allen
In one of the rare wins in an otherwise tough Federal Budget unveiled by Treasurer Wayne Swan last night, the Australian Government reconfirmed its commitment to spend $36 billion on its Nation Building programs aimed at improving road, rail and port networks. Whilst the government's commitment to spending increases in the transport sector will be a winner for communities and commuters, it will raise many issues to be considered in coming years as new agreements are negotiated and various Public Private Partnerships (PPPs) are considered in order to bring to life the initiatives announced.
Budget wins for the transport sector
Last night’s budget included commitments to major transport initiatives such as:
- $232.1 million in new funding to upgrade the Torrens and Goodwood junctions in Adelaide;
- funding of $4.1 billion over the next four years to assist local government to maintain and upgrade roads, the centrepiece of which is the retention of the Roads to Recovery Program until 2019;
- $300 million in new funding to extend the government’s Black Spot Program for a further five years until 2019;
- a commitment to replace the existing 23 separate state and federal regulators covering heavy vehicles, rail safety and maritime safety with just three national regulators, administering one set of modern, nationwide laws;
- funding to start, progress and complete a range of projects in Victoria ($901 million) and Queensland ($879.3 million);
- an allocation of $3.56 billion in new funding which, if matched dollar for dollar by the NSW Government, could be used to complete the biggest, most complex road construction project ever undertaken in Australia within just five years, being the full duplication of the Pacific Highway.
Negotiating the agreements
For each of these commitments, bringing contacting parties from government and the private sector to the negotiating table may be a complex and costly exercise in its own right, whether for the purposes of establishing funding arrangements, entering into complex infrastructure agreements or in establishing PPPs.
Those participating in transport projects have many challenges ahead, including value for money considerations, procurement issues, proper management of time and cost risk, encouraging greater private sector participation and, more generally, ensuring major projects are successful for all participants.
The success of the initiatives unveiled by the government last night will be compromised if these projects are ultimately affected by major disputes. Such disputes can lead to increased costs (both directly relating to disputes and loss of productivity), lack of public support for projects, reduction in future private sector support, increased consumption of court time by the industry, and projects failing to achieve their objectives for the parties.
Considerations for drafting dispute resolution clauses
In the case of funding agreements, careful consideration of the dispute resolution mechanisms to be included will be a key factor in seeking to minimise the potential for escalation of disputes. Ensuring that workable and tailored multi-tiered dispute resolution clauses are negotiated at the outset can save many headaches, should issues arise with the performance of the contract.
For large infrastructure and construction agreements, harmonising dispute resolution provisions between upstream and downstream contracts can be logistically difficult, especially if any of the contracting parties is foreign-based, so that international arbitration provisions are being considered at one level but court or domestic arbitration may be utilised at other levels.
A key lesson to be learned from recent litigation involving high profile transport projects is that while each party is likely to come to the negotiating table believing they are in the superior bargaining position - in reality they may not be. Particularly in the case of PPPs, each party will have access to something that the other needs, such as expertise, capital, public land or rights. Only when organisations recognise their interdependence will contract negotiations move forward to the point where all parties are confident enough to sign the contract and commit fully to the project. Finding ways to achieve that is not always easy.
Increasing use of Dispute Resolution Boards
Increasingly, governments in Australia and overseas have identified the use of Dispute Resolution Boards (DRBs) as an effective device to ensure that projects are better managed during the construction phase. Though traditionally a creature of the construction industry, there is obvious application for major infrastructure projects in the transport sector.
A DRB is established by the parties to a contract to assist in the avoidance and resolution of issues that arise in connection with the performance of work under that contract. It resolves – or prevents - disputes by requiring the participation of the most relevant party representatives at an early stage and encouraging a collaborative “best for project” approach. DRBs are particularly useful for projects which are complex, high risk, high profile or have many parties and stakeholders, such as large PPP projects.
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Pharmaceuticals and life sciences
Author: Bernard O'Shea
Whilst the budget includes some modest spending initiatives relevant to the pharmaceuticals and life sciences industries, it proposes no major reforms – either positive or negative - so far as these industries are concerned.
The Innovation programs appear to have been left intact, and the R&D tax concession also appears not to have been disturbed.
There are a number of significant initiatives in respect of mental health, aged care and hospital infrastructure, all of which might have an indirect flow on to the sector. In respect of the sort of secondary areas, the following are highlighted:
- The government is providing an undisclosed sum to assist the Department of Health and Ageing recover from pharmaceutical companies compensation related to losses incurred by the government as a result of delays in the listing of generic forms of medicines on the Pharmaceutical Benefits Scheme (PBS). This provides funding to give life to the certification provisions inserted in the Therapeutic Goods Act, which can result in significant payments by originator companies, arising from attempts to defend the patented status of their products.
- The government will provide $1.4 million over four years to strengthen the therapeutic industry's codes of conduct for the promotion of therapeutic goods. This is designed to increase the effectiveness of self‑regulated codes of conduct through: development of a standardised framework of high level principles; improving access to information, education and training; and enhancing complaints reporting and handling processes. This might be expected to lead to greater harmonisation amongst relevant codes, and also raise the bar in quite a number of respects.
- Funding of an undisclosed amount is being provided to progress the establishment of the Australia New Zealand Therapeutic Products Agency. This includes establishing a transition agency to facilitate bilateral cooperation and joint planning and implementation.
- Further funding is dedicated to delivering the e–Health agenda, including $161.6 million to operate the Personally Controlled Electronic Health Record (PCEHR) system.
- $49.3 million is to be provided over two years to replenish elements of the National Medical Stockpile to ensure medications and medical equipment are available for use in response to a health emergency or disaster.
- Further funding is being provided to expand the National Bowel Cancer Screening Program.
- The government will provide $3.9 million over four years to implement initiatives responding to recommendations from the Review of Food Labelling Law and Policy. These initiatives support the Government's commitment to refocus the health system towards prevention, including by developing a comprehensive national nutrition policy. This also includes funding for awareness and education activities, consumer and economic research activities, and the development and implementation of an interpretative front‑of‑pack labelling system. These initiatives might provide greater clarity around the regulatory dividing lines between foods and therapeutic goods, a topic that might well vex those seeking to implement the Australia New Zealand Therapeutic Products Agency.
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