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Legislative Assembly for the ACT: 1997 Week 13 Hansard (2 December) . . Page.. 4319 ..

MR WHITECROSS (continuing):

In the short term, the committee was able to conclude that under the lease and lease-back arrangements the ACT Government's expenses have actually increased compared to what they would have been if the Territory had borrowed in the normal way. The Office of Financial Management justified the decision to use a lease and lease-back arrangement instead of traditional borrowing by resort to two arguments, but mainly an argument about management of interest rate risk. In relation to that, the Office of Financial Management argued that the most important contributor to lowering debt costs over time is managing interest rate risk; this is more important than changing underlying debt; it is substituting high cost debts with low cost debts at the same maturity without changing exposure to interest rates. The lease and lease-back model is a form of financing that does not involve interest rate risk. In other words, it involves locking in a given interest rate for the next 15 years.

In that regard, the Office of Financial Management put the view that the short-term movements in the long-term interest rate since they entered into that arrangement demonstrated that the decision to go with the 15-year lease and lease-back arrangement was vindicated. However, the committee was reluctant to accept long-term benefits from these transactions based on month-by-month movements in long-term interest rates over the relatively short period that these transactions had been in place. As I said earlier, the committee did conclude, however, that the costs in the financial years 1996-97 and 1997-98 are higher than they would have been had we borrowed on the 90-day bank bill swap rate, as is traditionally done.

The Office of Financial Management also argued that a long-term benefit of lease and lease-back was matching liabilities to assets and that long-term liabilities should be matched to long-terms assets, and short-term liabilities to short-term assets. Although they argued this benefit, the committee was not able to discern any wider policy in relation to the managing of interest rate risks or in relation to the matching of long-term debt to long-term assets, other than these lease and lease-back arrangements under examination. On that basis, the committee concluded that they were not presented with any evidence of a wider plan. That is reflected in the recommendations which I will get to shortly.

One of the consequences of the lease and lease-back arrangement that was entered into is that the Government had to take out external insurance on the Magistrates Court building and the Dame Pattie Menzies Building. Once again, this decision was justified by reference to the idea that it was a good thing for the Government to use external insurance as a way of managing insurance risks and that this was an example of using external insurance in order to manage external risks. However, the committee was not presented, once again, with any evidence of a wider plan in relation to external insurance, other than the arrangements under question.

In this regard, it is interesting to note in Auditor-General's Report No. 9, which referred to the realisation at a late stage in the negotiations for the sale and lease-back of the ACT fleet, that the Government's self-insurance arrangements would not apply to the leased vehicles. On that occasion, the Government took out external insurance. The Auditor-General concluded that the cost of external insurance should be seen as a significant factor in terms of the viability of the leasing arrangement. A similar conclusion could be drawn in relation to the lease and lease-back arrangements here.

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