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Legislative Assembly for the ACT: 1999 Week 2 Hansard (9 March) . . Page.. 425 ..

Arbitrage

MR OSBORNE: My question is to the Chief Minister in her capacity as the Treasurer. It is regarding OFM's arbitrage trading transactions. Mrs Carnell, would you please explain to the Assembly the principles of arbitrage, how it works and to what extent we are currently involved in this scheme? I must let you know that I have had a discussion with the Under Treasurer about this, but I do feel it important that you explain it in the Assembly, given the publicity of the last few days.

MS CARNELL: Certainly, I am very happy to, because I am sure that certain members of this Assembly did not have a very large understanding of arbitrage transactions prior to the last day or so. Possibly one or two members of the media have been through a serious learning curve too. Mr Speaker, there are two major objectives for undertaking arbitrage transactions in the ACT. I suppose the two major reasons for doing it are market exposure and financial gain.

For the information of members of the Assembly who are still not overly aware of how arbitrage is done, basically the ACT borrows money using our AAA credit rating, then on-lends that to certain specific organisations at a higher interest rate so that we make a profit in the middle. It is a well-established process, one that was used by the previous Labor Government. It started in the ACT in 1992 and has been used ever since.

By way of the arbitrage process, ACT commercial paper is issued to investors, which results in the ACT program maintaining a strong recognition in the marketplace. This ensures that on occasions when there is a significant funding requirement, for whatever reason, the ACT is able to continue to use its paper at competitive levels. The main benefits to the ACT are improved liquidity and increased market awareness.

In a little place like the ACT we need to ensure that the market is aware of the ACT. In other words, we need to be in the market and trading, so that when from time to time we need to refinance, I suppose to enter into a significant funding requirement of some description, we actually have market recognition generally.

Mr Kaine: An AAA rating does not give you that?

MS CARNELL: Actually, no. There is also a financial benefit. The financial benefit has historically been about $80,000 a year. As members would be aware, the ACT Government has quite definite and quite strong requirements on how this particular process is conducted, and we deal with only the strongest organisations. It is also true that the ACT does not initiate any of these transactions. We are approached by organisations. The sorts of organisations we are talking about are the National Bank and Telstra. Certainly, there is no chance of these organisations ending up floundering. The ACT arbitrage transaction approach would be the least of the worries of the Australian economy if those organisations were under any pressure. This is something that is done by a number of other governments in Australia. It produces some dollars and allows the ACT to use its credit rating appropriately for the people of the ACT and to maintain our position in the marketplace.

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