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Legislative Council - Fifty-Third Parliament, Second Session (53-2)
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State Debt

The Hon. R.I. LUCAS (17:01): I move:

That this council notes the level of total state debt in South Australia since the early 1990s and the factors that have influenced that level of state debt.

In speaking to this motion, I want to trace the history of the issues that relate to the level of the state's debt, going back to the period of the early 1990s, and look at some of the factors that influence that debt. In doing so, at the outset, I seek leave to incorporate in Hansard a statistical table in relation to the level of non-financial public sector debt from 1992 through to an estimated debt in 2019-20.

Leave granted.

Non-financial public sector debt
$ million
1992-93 11,610
1993-94 10,550
1994-95 8,844
1995-96 8,432
1996-97 8,170
1997-98 7,927
1998-99 7,657
1999-00 4,355
2000-01 3,223
2001-02 3,317
2002-03 2,696
2003-04 2,285
2004-05 2,126
2005-06 1,786
2006-07 1,989
2007-08 1,611
2008-09 2,872
2009-10 4,487
2010-11 6,541
2011-12 7,996
2012-13 8,949
2013-14 10,964
2014-15 10,676
2015-16 10,912
2016-17 13,628
2017-18 14,062
2018-19 14,085
2019-20 14,006


The Hon. R.I. LUCAS: Similarly, I seek leave to incorporate in Hansard without my reading it a statistical table on general government net operating balance from the year 2003 through to estimated for 2019-20.

Leave granted.

General Government net operating balance
$ million
2002-03 448
2003-04 385
2004-05 224
2005-06 202
2006-07 209
2007-08 464
2008-09 -233
2009-10 187
2010-11 -53
2011-12 -258
2012-13 -948
2013-14 -1071
2014-15 -189
2015-16 300
2016-17 300
2017-18 382
2018-19 424
2019-20 456


The Hon. R.I. LUCAS: In incorporating those two statistical tables in Hansard, it outlines, in the first instance, in relation to the level of the total non-financial public sector debt, so not just the general non-government sector debt (or budget debt, as the current Treasurer would like to refer to) but the total public sector debt, which includes organisations like SA Water and a variety of other public authorities that are not included in the general government or budget sector.

That table shows clearly that, back at the time of the State Bank financial disaster of 1992-93, the level of state debt was $11.6 billion. It steadily declines over the period through to the change of government in 2001-02, and at the time of the change of government the level of state debt was in and around $3 billion; in 2001-02 it was $3.3 billion; and in 2002-03 it was $2.6 billion. So, the level of state debt during that particular period declines from $11.6 billion to around $3 billion.

For a period of time it then further declines and then steadily increases over the majority of the years of the current state Labor government—the 15 years of the state Labor government—with its latest forward estimate being that it will peak at about $14.1 billion in 2017-18 (next year). Again, in summary, at the State Bank it was $11.6 billion, it declines to about $3 billion at the time of the transfer of government to a Labor government and is now increasing to just over $14 billion.

In looking at that second table I have tabled, which is, in essence, a measure of the net operating balance—which is a technical term for whether or not we are in surplus or deficit in terms of our annual expenditure—that shows that, under the 15 years of this state Labor government and with the benefit of the GST deal that was signed in 2001-2 by the former government, the rivers of gold that flowed into the state from that particular period, 2002 onwards, together with, to be fair, the massive boom in property tax as a result of the property boom during that period of 2002 through to 2007 or 2008, we saw some significant surpluses during that particular period—surpluses over six budgets, on the back of the GST and the property boom—a total accrued surplus in that period of about $2 billion.

Since 2008-9, in six of the eight budgets, we have seen significant deficits. In two of those years we have seen surpluses, in 2009-10, on the back of the federal government bailout of the states—the massive grants that they made to the states post GFC—and as a result of that we had a modest surplus in 2009-10, and then again a surplus in the last financial year that has been concluded—2015-16—of $300 million on the back of the proceeds of the Motor Accident Commission privatisation, which, in total, will add up to about $2½ billion; not all of which impacts on the measure of the net operating balance, but enough to help generate the surplus.

In the six of the other eight years there have been significant deficits, which add up to about $2½ billion. What we have seen is, in part, the growth in the state debt has been as a result of annual over-expenditure; that is, not being able to manage your annual expenses. It is related to the current debate that is going on at the federal level, where there is the debate about what supposedly is good debt and what is bad debt: the definition of good debt being debt which is used to help finance productive infrastructure, for example the building of roads or ports or utilities infrastructure, and the bad debt is the debt that is used to pay your annual operating expenses and bills.

Under that scenario, that $2½ billion over the last eight years is very clearly in the bad debt category. It is the result of government and Treasurers being unable to manage their annual operating expenses and revenue and generating huge deficits which add to the level of debt that the people of South Australia have inherited and will have to continue to pay off for many a year.

Looking at this particular issue, I am minded, as I look at the parliament, both in this chamber and another chamber, that there are only two members of parliament left who were actually here at the time of the State Bank financial disaster: one on the opposition side and one on the government side—the Speaker of the House of Assembly, Mr Atkinson, from the government side, and myself from the opposition side. There has been a huge turnover of membership of the parliament—in particular over the last six to 10 years—in what would appear to be a relatively short period of time, but is not, when one goes back to the early 1990s. It is quite clear that virtually all the members of this parliament, state and federal, were not here and did not live through, in a parliamentary and political sense, the trauma of the State Bank financial disaster and the impact that it had.

In discussions that I have with many new MPs on both sides of the political fence I know that they have little or no knowledge of what actually went on during the State Bank financial disaster. Yes, they know that it was huge and that billions of dollars were lost; yes, they know that it impacted on our debt; yes, they know that it had a traumatic effect on the psyche of the South Australian community, both financial and social. They are aware of those general things, but they do not realise the detail of the financial atrocities that were committed by both the bank and those who were meant to be in charge of the bank, and that was the then Labor government. My purpose in speaking to this motion today is to place on the public record again—for all those members, who, as I said, have little or no knowledge—what actually went on at the time of the State Bank financial calamity.

In summary, on Sunday 10 February 1991 was the first public acknowledgement by the government—by then premier Bannon—of the financial disaster of the State Bank. It did not indicate the final extent of the financial disaster and the bailout that was required—ultimately, that came to be $3.15 billion, and it was not revealed until much later, but it was nevertheless monumental in terms of its impact on that particular Sunday.

It is interesting in looking back; when you look at the history of the time you see that the Premier was squeezing the final details of how he announced on behalf of the government the state bailing out the State Bank while at the same time was busily engaged in the launch of the Adelaide Crows, which was occurring in and around that time of February 1991. History shows he was juggling public announcements in relation to the Crows with private briefings in terms of what he should say and would say in terms of the State Bank bailout. One can certainly say that the Crows have gone from strength to strength over a period of time; subsequently, the impact of the State Bank on South Australia cannot be viewed in the same way.

The first questions in relation to the State Bank financial disaster were raised in February or March of 1989, just prior to the 1989 state election and about two years prior to the first public announcement of the bailout. Having been in the parliament at the time, what occurred within the opposition at that stage was that advice was provided to the leader of the opposition's office—the leader of the opposition at that time was John Olsen. That information came from a prominent person in another bank within South Australia, who gave a briefing in terms of their view of the problems the State Bank was confronting.

At that particular time there had been publicity about the first of some major non-performing loans or investments of the State Bank, in particular in relation to investments in a company called Equiticorp and a couple of other companies as well. At the time banking circles were rife with rumours about what had been the approach of the State Bank in South Australia since the late eighties in terms of its lending practices.

One of John Olsen's senior advisers at the time, Mr Richard Yeeles, who I am delighted to say has come back on board in terms of assisting the Liberal Party at the moment, and the then leadership group decided that the information was so important that the issue needed to be pursued by way of questions in the parliament. The then shadow treasurer, Jennifer Cashmore, the member for Coles, commenced the first of a series of questions on behalf of the Liberal Party in relation to the State Bank.

As you would expect, knowing Adelaide and South Australia, the proverbial hit the fan. It raised a furore in the business and banking circles, in media circles and in political circles. There was quite undisguised anger at the fact that the Liberal Party had raised questions about the lending practices of the State Bank. There was anger from the board level and management and public relations department at the State Bank directed at the Liberal Party. There were calls to the leader of the opposition and to Jennifer Cashmore and to other Liberal members at the time.

There was anger expressed from me at the media in terms of the questions that were being asked. There were significant business people in South Australia and significant donors to the Liberal Party who rang the then leader of the opposition and other members of the parliamentary party telling the Liberal Party to pull their heads in, and that there were not to be any questions raised or asked about the financial performance of the State Bank.

It is a credit to the leader of the opposition at the time, to Jennifer Cashmore and to others that, in the public interest, they were prepared to continue to ask serious, carefully researched questions about the performance of the State Bank and the exposure that the taxpayers of South Australia had at the time. It might have been very easy to have cowered under the avalanche of criticism that descended upon the Liberal members of parliament at that time and to decide not to further pursue any questions for the sake of an easy life.

Of course, that attack was championed by the Labor Party in South Australia. On 13 April 1989—so immediately after those questions were raised in February and March—the later-to-be premier Rann, but then MP Mike Rann (I forget which electorate he represented at the time; it might have been Ramsay), moved the following motion:

That this house condemns the opposition for its sustained and continuing campaign to undermine the vitally important role of the State Bank of South Australia in our community.

In moving that motion, Mr Rann made the following statements:

…the State Bank is one of South Australia's greatest success stories.

No-one of significance in the Australian financial community would not acknowledge that the success of the new bank is, in a large part, due to the brilliance of its Managing Director, Tim Marcus Clark. His appointment in February 1984 was a major coup that stunned the Australian banking world; it was a major coup for this State.

There is hardly any aspect of South Australia's social, cultural and economic life which is not touched by and is not better off because of the activities of the State Bank.

Our bank is entrepreneurial and aggressive as well as careful, prudent and independent.

It is interesting to note that, in one of his reports, the State Bank royal commissioner noted:

The Member of Parliament who proposed the motion condemning the Opposition for attacking the Bank spoke in glowing terms of the Bank's role and performance, so praiseworthy indeed as perhaps to cause the State Bank Centre to blush to a deeper shade of pink.

The royal commissioner also commented about the period during which this motion was moved, as follows:

In the second half of the year, for those who wished to hear, or to ask questions so that they could hear, the noises of impending disaster were reaching a crescendo.

That was the political environment at the time in the late eighties and the early nineties where, as I said, there was an avalanche of criticism of Liberal MPs for raising issues in relation to the State Bank financial performance. During that period there was a massive expansion of lending. You will hear now from bankers—although I am not sure how openly all of them were saying it at the time—that it was quite clear that a number of their customers to whom they would actually say, 'No, your banking proposition or your investment is not bankable, it's too risky, we're not going to provide you with finance,' would immediately turn on their heels and march across to the State Bank and immediately get funding and finance from the State Bank for the exact same deal.

The royal commission highlighted some of the financial practices of the State Bank at the time. At its height, the bank had branches in London and New York, it had tax havens in the Cayman Islands, it was financing ventures such as the new Rundle Mall Myer complex, the renovation of London's Wembley Stadium, mezzanine financing of apartments in New York, office blocks in Sydney and Melbourne, as well as holiday resorts on the Gold Coast.

There was also reference to the management of the bank and the board having access to a lavish Gold Coast apartment for recreation and for business purposes, and access to an $850,000 luxury yacht moored somewhere off Western Australia for some bizarre reason. Again, management and board had access to recreational use of that particular luxury yacht.

In terms of the losses that the bank incurred, there was the Adsteam Group, $83 million; Collinsville Stud Group, $31 million; the Hooker Group, $78.5 million; the REMM development, $290 million written off, plus provision for $129.5 million; the Oceanic Bank, $84 million; UBS, $123 million; together with a range of others. The bank had a 50 per cent interest, subsequently converting to full ownership, in a stockbroking firm, SVB Dave Porter and Co. It had a 50 per cent stake in a private real estate company, Myles Pearce and Co. Pty Ltd in November 1986. It built the State Bank Centre, and the royal commissioner noted:

Despite advice raising 'significant' concerns about the feasibility and negative financial impact of the State Bank Centre, the govt & Treasurer pressured the Bank to proceed w the project…

the decision to finance the project off balance sheet meant the project was immune from public & Govt scrutiny…

'Although, as events will show, the project turned out to be a commercial failure, if not a disaster, criticism of the Govt can be made even without the wisdom of hindsight.'…

In relation to some of the overseas investments, the royal commission noted:

No one, it seems, from the Treasurer downwards, paused to inquire how such operations in London and Hong Kong were of benefit to the people of the State.

'The Treasurer indicated he was enthusiastic about the possibility of an expansion of overseas activity'…

That is a brief summary of some of the investments. There were many more, obviously, that went bad in relation to the government's handling of a variety of those, in particular some detail in relation to the Cayman Island investments, the disaster of the REMM Myer complex and others, but I will not go through all the detail of those. Certainly, the royal commission report makes them available.

In relation to looking at the issues of responsibility for the State Bank, two general themes applied at the time and even since then have applied in relation to political responsibility or accountability for the State Bank financial disaster. The first general theme is essentially that this was an independent body or bank and responsibility was significantly the responsibility of the board and the management. The government operated in a hands-off way and ultimately, whilst the state government was held to account, that was a bit unfair because essentially it was an independent body.

The second theme is essentially that the government did have responsibility, as the ultimate guarantor, for prudential oversight of the operations of the State Bank, and this particular theme does highlight—and I want to highlight in my contribution—many examples of where, when it suited the purposes of the then Labor government, they very much put their hands on and did not adopt the hands-off attitude that would appropriately relate to an independent banking authority. They intervened when it suited their particular purposes.

The nature of the recommendations of the royal commission report was that the royal commissioner certainly supported the second general notion that I have just outlined, and that is that the government did have responsibility for prudential oversight, which it did not, in the end, fulfil.

For example, in the first royal commission report, retired Supreme Court judge Samuel Jacobs QC, in November 1992, said Mr Bannon, also the state treasurer, 'failed to listen to the messages of doom' as the bank headed toward disaster, branding his hands-off attitude 'myopic'. He said Mr Bannon was 'dazzled' by Mr Marcus Clark and a 'plethora of signs of impending peril' in the 1989-90 financial year 'failed to evoke an appropriate reaction' from Mr Bannon.

In terms of looking at the examples of where the government intervened, I turn to the particular issue of the government's role in intervening in the setting of interest rates at politically sensitive periods in the late 1980s. Commissioner Jacobs found that the treasurer was willing and anxious to sacrifice profit-oriented decisions of the bank for the short-term political advantage of his government on the occasion that he influenced the bank's decision to freeze interest rates in September 1985.

Subsequently, the commission looks at similar interventions in 1987 and 1989, and I want to look at those particular interventions in some detail. The royal commission's final report, under the heading of 'Interest rates', states:

As noted in the Commission's First Report, the topic of proposed rises in retail interest rates was one of routine notification to the Treasurer. The Commission investigated three different occasions on which the Treasurer possibly exerted influence to keep interest rates down pending an election.

The first occasion was the State Election in December 1985.

In evidence, [before the Commission], both Mr Clark and the Treasurer confirmed that [in light of the election due on 7 December 1985] the Treasurer had asked the Bank not to raise its rates until after Christmas, unless forced to do so by inexorable pressure of market forces.

The Commission found in the First Report that the Treasurer's involvement then was in marked contrast to the way he had previously approached the issue of interest rates, and in even greater contrast to the equanimity with which he accepted the Bank's decision to increase rates soon after the election.

While the Commission considered it to be an 'irresistible conclusion that the Treasurer temporarily forsook his "hands off" rule and his perception of a commercially independent Bank' the Commission did not suggest on the evidence that the Treasurer gave any specific direction or made any explicit request to the Bank to adopt that interest rate freeze. In addition, there was at the time public reporting referring to the perceived role of the Treasurer in having so acted.

The second occasion was about the time of the Federal election in 1987. The Treasurer confirmed in evidence that in mid June 1987 he urged the Bank not to continue with a proposed interest rate increase until after the Federal election on 11 July 1987. He gave as his reasons that he did not want the Bank to be seen to be taking a political stance by increasing home loan interest rates immediately before a Federal election. As noted in the First Report:

It is difficult to understand or justify his reasoning because his request inevitably did require the Bank to take such a stance.

Whatever the validity of that reasoning, it is the view of the Commission that it did represent the basis upon which the Treasurer communicated to the Bank on the topic, and so long as that reason was genuinely held it does not give rise to the prospect of proceedings, even if the consequence also in fact involved some political benefit.

The third and most significant occurrence of an interest rate freeze related to a $2 million interest rate subsidy paid to the Bank by the Government in exchange for the deferment of an interest rate increase until after the State election on 25 November 1989. The circumstances surrounding this subsidy were dealt with extensively by the Commission in its First Report and there is little point in repeating all of the details here. In brief, there is evidence before the Commission that:

On 15 September 1989 Mr Clark advised the Treasurer that the Bank could not contain its housing loan interest rates at the current level.

On 26 September 1989 the Treasurer requested the bank to hold down its housing loan interest rates for a time (although whether the relevance of the oncoming election was mentioned at the time was not clear).

On 28 September 1989 the Board decided to defer increasing interest rates for a time 'pending satisfactory arrangements with the Treasury'.

The possibility of compensation from the Government was raised with the Bank. The Bank at that time was unable to cover the cost of funds borrowed to provide housing loans. The matter was raised following the Reserve Bank decision which, to some extent, provided a competitive advantage to non-State banks, and the compensation proposed was presented on the basis of getting compensation for the consequences of that decision.

On 2 October 1989 the Treasurer agreed in principle to the Bank receiving a subsidy to compensate for revenue foregone by holding interest rates at their existing level, leaving it to the Bank and Treasury to complete discussions on the topic.

Mr Clark and the Under Treasurer discussed the quantification of the Government's subsidy at a meeting on 31 October 1989. Shortly after this an arrangement was made for the Bank to receive $2 million as compensation.

In a letter to the Bank dated 24 November 1989 the Under Treasurer proposed that $2 million of the Bank's indebtedness to SAFA be foregone.

On 13 December 1989 the Board resolved to increase its interest rates from 1 January 1990.

The Commission commented in its First Report:

It is plain…that, whether or not the election had been announced, Mr Simmons and Mr Clark and the Board all understood that the Treasurer's comments at the meeting of 26 September 1989 were in the context of an imminent election, and that their understanding was shared by Mr Bannon's advisers.

The evidence does not warrant an affirmative finding that Mr Bannon himself made a proposal at this meeting in terms of a categorical request for political favours. But he knew that the proposal to hold interest rates involved the Bank acting to its financial detriment in a way which would avoid political odium and might well attract support to his Government; and he could not have failed to realise that the Bank Board was alive to that implication.

After careful consideration of all of the circumstances surrounding the influence of the Government on the Bank in relation to the holding down of interest rates, the Commission does not consider that those findings disclose a deliberate or wilful decision to act in a manner inconsistent with the respective obligations of the Treasurer and Under Treasurer as public officers. Their actions may be open to political criticism but they do not amount to 'wilful neglect' as that concept applies under the law. The Commission accepts that both the Treasurer and the Under Treasurer acted in the honest and reasonable belief that they were entitled to act in the way that they did, bearing in mind their perception of public interest in holding down interest rates.

That was a summary of the final report of the royal commission. On the way through, in the early report of the royal commission, the royal commissioner said (and this is in relation to the 1985 arrangements in relation to deferring interest rates, prior to the 1985 state election):

But, whatever the attitude of the Bank, the rationale for the Treasurer's intervention is clear. It is not and cannot be suggested on the evidence that he gave any direction or made any explicit request, but it is an irresistible conclusion that the Treasurer temporarily forsook his 'hands off' role and his perception of a commercially independent Bank. Contrary to his expressed desire on other occasions that the Bank's decision-making should recognise the advantage to the State of profit-oriented decisions, he was willing and anxious on this occasion to sacrifice that advantage in the short term for the political advantage of his Government.

The royal commissioner was saying that it was quite clear, from the decisions treasurer Bannon was taking in that period just prior to the 1985 state election in relation to interest rates and the discussions he was having with the bank, that he was willing and anxious on this occasion to sacrifice that advantage in the short term for the political advantage of his government.

In relation to the interest rates decision of 1987, which was prior to the federal election, the royal commissioner's findings are as follows:

It is plain from the above that:

The Bank reversed a commercial decision to increase housing-loan interest rates, and deferred consideration of the proposed increase until after the July 1987 federal election at the instigation of the Treasurer.

It is quite clear. To continue:

The formal Executive Committee minutes are misleading about the reasons given for that decision, or at least do not tell the full story.

The Treasurer requested the Bank to review its decision on the expressed grounds that he did not want the Bank to be seen as taking a political stance. It is difficult to understand or justify his reasoning because his request inevitably did require the Bank to take such a stance. By postponing its decision to increase rates, it avoided the risk of electoral damage to the Government then in office in Canberra, which was of the same political persuasion as Mr Bannon's Government. For the Bank to take a political stance in private if it perceived such a stance to be to its advantage may well be justifiable; it is much less so if taken at the behest of the political ally of a government in office, and in conflict with an earlier decision.

As a postscript, the Bank did in fact reduce some home-loan interest rates shortly after this election. This lends some credibility to the reason for postponement that appears in the Executive Committee minutes, but it does not invalidate the finding that the whole of the evidence compels: that the Bank responded to an initiative taken by the Treasurer to avoid the risk of electoral damage to a particular political party.

But the doozy of the lot is the state election in late 1989 and the conclusions of the royal commissioner. I seek leave to conclude my remarks at a later stage.

Leave granted; debate adjourned.

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