National Partnership Agreement on Asset Recycling

In brief

The National Partnership Agreement on Asset Recycling between the Commonwealth and each of the states and territories firmly entrenches asset recycling for the next five years (at least). In last night's Budget, the Federal Budget announced $5 billion will be made available to fund payments to the states and territories. This could see existing state-owned infrastructure assets sold off to invest in significant major new works. Partner John Greig looks at the Agreement's implications.

Loss of NTER payments an impediment to asset sales?

The states and territories have regularly grappled as to whether to divest themselves of government-owned assets, whether for policy reasons (to exit non core government functions or assets, or to facilitate the introduction of private sector competition) or to raise funds/reduce debt.

Traditionally, one impediment to a decision to divest assets has been the perceived loss of National Tax Equivalent Regime (NTER) payments received by the state and territory governments from their corporatised entities.¹ State and territory owned corporations typically are not subject to Commonwealth taxes, but so that they are not left in a comparatively advantageous position compared to their private sector competitors, state and territory owned corporations are usually required to pay to the relevant state or territory a notional tax equivalent payment, in the amount they would have paid to the Commonwealth had they been subjected to the Commonwealth tax regime.

On divestment, the entity typically commences paying tax to the Commonwealth but no longer subject to any NTER obligation. The loss of this NTER payment ('leakage of "taxes" to the Commonwealth') has often been thought to be a disincentive to the states and territories to effect divestments.

The National Partnership Agreement removes, at least to some degree, that impediment by committing the Commonwealth to 'compensate' the divesting state or territory for some of the lost NTER payments.²

Basic features of the agreement

• The Commonwealth will make a payment to a state or territory that effects a divestment of agreed assets.
• The payment equals 15 per cent of the proceeds received by the State or Territory and which are reinvested in additional infrastructure investments.
• The payment is paid in two instalments:
  • an initial payment of 50 per cent of the estimated amount described in the paragraph above (based on agreed book value), payable once there is commencement of the sale process and commencement of the planning and approvals for the additional infrastructure project; and
  • a final payment, payable once the sale has been completed and construction of the agreed additional infrastructure project has commenced, equal to a top-up amount sufficient to take the initial payment up to the agreed total amount.
• There are protective provisions benefiting the Commonwealth:
  • the payment by the Commonwealth can be reduced if the state's asset sales results in a direct cost to the Commonwealth;³
  • given the initial payment is based on 50 per cent of the agreed book value, as the final sale proceeds may reflect a price greater or lesser than that book value, the final payment may not be proportional to the initial payment.
• If an asset sale does not proceed, the Commonwealth is entitled to claw back the initial payment made.

Limitations of the Agreement

The Agreement has built in constraints:

• Funding by the Commonwealth will be allocated on a first in, first served basis. The Commonwealth Budget announced $5 billion would be made available to fund payments to the states and territories (implying divestments contemplated in excess of $30 billion).
• States and territories have two years to reach agreement with the Commonwealth as to the specific assets to be divested and the additional infrastructure which is to be pursued.
• The Commonwealth must be satisfied the additional infrastructure will support economic growth and enhanced productivity or it will not accept the infrastructure.
• The sales must be completed and construction of the additional infrastructure must commence on or before 30 June 2019.
• While divestments may be by way of 'sale', alternative means of unlocking funds eg long-term leases⁴ are eligible to attract funding if the method is agreed between the Commonwealth and the relevant state.

Other features

The Agreement makes the financial contributions conditional upon:

• relevant builders and contractors being accredited under the Australian Government Building and Construction Occupational Health and Safety Accreditation Scheme; and
• compliance with the Building Code 2013.

Being existing features of Commonwealth funding regimes, they are almost universally accepted by the market though participation by offshore builders/contractors unfamiliar with the regime can, at times, see them grappling with the implications of compliance in parallel with their work on bids for particular contracts or projects. This, on occasion, places those offshore parties at a comparative disadvantage.

Implications

Together with the reports of various Commissions of Audit⁵, this Agreement is likely to see significant divestments by states and territories over the next five years as well as new infrastructure (indeed more than five years, given that construction of the additional infrastructure need only have been commenced within the five-year period).

The publication of an agreed list of:

• assets slated for divestment; and
• new infrastructure to be constructed,

is likely to provide the private sector with clear targets on which to concentrate their research and effort in the coming years.

It remains to be seen whether the Commonwealth adheres to the 'first in, first served' allocation of funding. It would be unfortunate and likely to have significant long-term impacts for the various states and territories (impacts both adverse and beneficial) if some states and territories were more 'successful' in accessing those funds to the exclusion of others.