rudd flags $4b construction jobs fund, page-4

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Banks issued fund warning

Jennifer Hewett, National affairs correspondent | January 27, 2009
Article from: The Australian

THE Rudd Government's handpicked financial adviser, David Murray of the Future Fund, has told Canberra strict conditions must be developed for its intervention in the commercial property market to avoid unnecessary costs for the commonwealth.

The Australian has learnt that Westpac and ANZ asked the Government last Friday to avoid creating the impression that its multi-billion-dollar commercial property fund was aimed at assisting new construction rather than existing projects.

But Kevin Rudd emphasised the construction angle in his announcement on Saturday, as part of his determination to prove Canberra was doing all it could to protect jobs.

This is despite Westpac noting in an email to the Treasury on Friday that loans to projects under development would only be "on an exception basis" and even then without any intention "to take on contruction risk", and ANZ warning that the "focus on construction was overplayed".

Under the scheme, the Government is to put $2billion and the big four banks $500million each into a new commercial property facility with the capacity to lend up to $30 billion if necessary, to be paid for by the sale of government bonds.

However, it is clear many crucial and contentious details of the fund's structure and the protection for the commonwealth still remain to be sorted out. "The proposal could be useful in arresting some of the potential decline in commercial property prices, but only if its structure is carefully thought through so any cost is not borne only by the commonwealth," Mr Murray told The Australian yesterday.

"In these circumstances, you have to be ready to do things quickly, but there is no reason to do this at such a speed that it's badly designed."
This is likely to make the next period of negotiations with the banks particularly difficult, because the Government wants the scheme in place by March.

The rationale for the proposal, originally suggested by NAB, is to compensate for any funding gap caused by the potential withdrawal of foreign banks from the syndicated loans common in the commercial property sector.

But the focus will be on rolling over loans for the shopping centres, office blocks and factories already built, rather than for those under construction or in development.

Mr Murray, who used to head the Commonwealth Bank, was asked by the Prime Minister last month to work with Treasury officials and give his advice on the funding scheme. He provided this to the Government on January 15.

Mr Murray said in his advice there was no immediate case for intervention in the commercial property market, but that the Government should work with the banks to amend and improve their proposal - a process that has started.

His recommendations concluded that the Government should not put in any direct injection of money, as this was unnecessary to make any such scheme effective.

And he warned that the Government should insist on separate approval by ministers of the underwriting standards, expected losses and final structure of the scheme before commencement.

Mr Murray said the Government needed to resource Treasury with independent skills to support the fund's decisions and operations.

Mr Murray pointed out in his advice that the proposal would do almost nothing to ease the liquidity constraints in the domestic market, particularly for the small and medium-size businesses having increasing difficulties in getting credit.

And he said the idea of issuing government bonds for the loan facility should be weighed against the overall priorities of the Government in what would be a difficult year, with a slowing economy and the need to issue bonds for other purposes.

According to Mr Murray's advice, any commonwealth intervention should be carefully evaluated by the Government to protect its credit rating, bond issuance and budget priorities.

And he warned that the proposal could require detailed management of assets and loans by the Government, without it having independent advice or appropriate resources.

There is no evidence yet of funding problems caused by the withdrawal of foreign banks, but the Government decided to announce the commercial property proposal as a pre-emptive move.

Mr Rudd said the scheme would save up to 50,000 jobs in a sector where many of those employed were tradespeople, such as plumbers, electricians and carpenters.

But Opposition Leader Malcolm Turnbull argued that the scheme had nothing to do with protecting jobs and was about protecting the banks' balance sheets by propping up the value of commercial property loans.

The banks were clearly apprehensive at any suggestion the Government would over-emphasise the construction aspect of the scheme.

The email from Westpac warned the Treasury against creating any impression that construction projects were a central focus of the initiative.

"As we all discussed (and is reflected in the latter parts of the release), the focus is on refinancing of existing properties, and development would only be considered on an exception basis," the bank's email to Treasury officials said. "And even in those cases it is not intended the vehicle would take on construction risk."

An email from ANZ to Treasury said: "The focus on construction is overplayed, and does not reflect the initial spirit."

A spokesman for Wayne Swan said the Government's media release had clearly addressed both the issues of completed projects and those under construction.

"There is no inconsistency between Mr Murray's advice and the policy announced last week to support jobs in the commercial property sector," the Treasurer's spokesman said.

NAB's initial proposal to the Government, put by the bank's then Australian CEO Ahmed Fahour on December 15, warns of the risk that foreign banks would look to "aggressively reduce Australian exposures in 2009".

"If this funding shortfall is not urgently addressed, many property companies will be forced to deleverage by raising equity or selling assets," he wrote. "A number of vulture funds are already being formed with significant capital to take advantage of next year's firestorm."