Senator the Hon Mathias Cormann
Minister for Finance
Date: Monday, 29 September 2014
JANINE PERRETT: Here is our own Finance Minister and Acting Assistant Treasurer, the hardworking Senator Mathias Cormann talking to us from the nation’s capital in Canberra. Welcome back to the show Senator Cormann.
MATHIAS CORMANN: Good to be back.
JANINE PERRETT: Now big weekend for you. The first news of that Medibank Private IPO, this is at this stage just a pre-registering, but just tell us the timing of it, what exactly you’re announcing and our viewers are aware there are rules about spruiking but within the context of why this is important.
MATHIAS CORMANN: What we started yesterday as part of our orderly and methodical process to proceed with and progress the sale of Medibank Private is the opportunity for members of the public and also policy holders of Medibank Private to pre-register their interest in a Medibank Private Share Offer prospectus. The prospectus is expected to be released towards the end of October, always subject to market conditions of course. But right now members of the public are encouraged to register their interest and policy holders who do register their interest will have the opportunity to apply for a greater number of shares as recognition of their commitment to Medibank Private.
JANINE PERRETT: Now, I know when we were in the US earlier, the conference, the Australian American Leadership Dialogue, I think you were in New York, I am sure you have been talking overseas. What level of interest are you getting from the global market because this is a global float even though we started with pre-registration here in Australia; this is going to be of interest globally isn’t it?
MATHIAS CORMANN: It is going to be of interest globally. It is a significant float globally and I think I heard you say earlier the second largest this year after Alibaba and that is certainly the advice that I have consistently been receiving. Now the way the process works is that we will conduct the general retail offer directed at mums and dads across Australia first. We will then open up the opportunity to institutional investors both here in Australia domestically and overseas. The fact that we have pressed the button on proceeding with the sale this calendar year is testimony to the fact that our advisers think market conditions are strong and that the interest is expected to be strong.
JANINE PERRETT: Okay how do you break it down between overseas interest and local interest? You said you were opening up to the retail first. Does that mean if you could take it all up locally you would or are you putting aside some and if so what percentage for overseas investors?
MATHIAS CORMANN: Those final decisions will be made once we have a clear indication of the level retail and institutional interest. Right now what we have encouraged all people right across Australia to do is to pre-register their interest on the medibankprivateshareoffer.com.au website or by phone. We still need to put the final touches to the prospectus over the coming weeks and that prospectus is expected to be lodged with ASIC and publicly released late in October.
JANINE PERRETT: But could you say that the majority will go locally? I mean how do you, you will take advice presumably from your advisers, but how do you balance the mums and dads as you say with what will be big global interest?
MATHIAS CORMANN: The way we have structured the sale is that the general retail offer targeted at mums and dads here in Australia proceeds first, it is the first phase of the sale process and then the institutional phase runs second and at the right time we will be taking advice and we will be making some judgments on how to most appropriately structure the final sale arrangements.
JANINE PERRETT: This move to look after the mum and dad investors which is an obvious thing to do, but is it also a smart political move given that the Labor Party is complaining about this, you know, Medibank is a sacrosanct name to them. Does this help ease any concerns the public might have if they think that they can be in there and make a buck?
MATHIAS CORMANN: Our focus here, we have got a series of objectives with the sale. The first objective is we want to contribute to a competitive and vibrant private health insurance market and you have got to remember that Medibank Private is a commercial business which operates in a well functioning, well regulated, competitive market with 33 other health funds. We also want to ensure that service levels remain high in particular in rural and regional Australia. We want to ensure that Medibank employees are well treated and we want to minimise post sale risks for the Commonwealth. Subject to all of those objectives, we want to maximise the net return for tax payers from the sale of Medibank Private. The way we are conducting this sale is as a straight forward initial public offering. It is a process that is structured consistently with the advice, the best advice that we have received from our joint lead managers, who are experts in how to conduct those sales. This is not about politics, this about achieving the best possible net return for taxpayers subject to some of the other considerations that I have mentioned.
JANINE PERRETT: On that basis, where will the funds go if you do get, I think it is up to $4 billion depending on the market. Where do those funds go?
MATHIAS CORMANN: We haven’t put a figure on it as the seller of the asset. What we have said is that it is up to the market to determine the value of Medibank Private and that is why we are engaged in this process now. What we have said for some time is that the proceeds from the sale of Medibank Private will be reinvested in productivity enhancing infrastructure as part of our economic action strategy, our strategy to build a stronger, more prosperous economy.
JANINE PERRETT: So it goes back to consolidated revenue? Does it cut the deficit? Where do you see it being the most benefit?
MATHIAS CORMANN: As I have said, it will be reinvested in productivity enhancing infrastructure and logistically it will be reinvested through our asset recycling initiative. So the way to look at this, if I may, the reason we are proceeding with the sale of Medibank Private primarily is because there is no reason why in 2014 the Federal Government should be involved in running a private health insurance business. Private health insurance is a well functioning and quite competitive market. There is no market failure. So there is no reason for all that capital that is ultimately owned by taxpayers to be tied up in that business. We also believe that Medibank Private in private hands will be able to perform better, even better than what they are performing now and so deliver better services for their customers. Finally, we will be able to release the capital and reinvest it for better purposes as part of our broader strategy to build a stronger economy.
JANINE PERRETT: It is interesting what you say about making it more efficient. Indeed there the managing director said today that he has already flagged cost-cutting as a way to boost profits. You have said you don’t think premiums will go up, but this will then be a private business so you lose that control on that if they want to slash and burn and have to make a profit don’t they?
MATHIAS CORMANN: We are very confident that the sale is not going to push up the cost of premiums. Don't take our word for it, the ABC Fact Check is hardly an apologist for a Coalition Government, they have confirmed that that is the case. And the reason is very simple, Medibank Private whether they are in public ownership or private ownership will have to continue to compete for customers with 33 other funds and if they were to increase their premiums by too much, they would lose their customers. Furthermore in Australia, the premium changes are regulated and those regulatory arrangements won’t change as a result of the sale. When it comes to the cost side of the Medibank Private business, it is a truism that businesses in private hands are likely to be more efficient over time than those sorts of businesses in Government ownership. Certainly we do believe that that is part of being able to unlock better value for both customers as well as for the shareholders of Medibank Private down the track.
JANINE PERRETT: The timing as you said, it will be towards the end of October, the prospectus is out, I think people are looking at maybe late November maybe early December, there is a lot of talk at the moment that the market has got the wobbles. October is traditionally a risky time anyway, there is also the Santa Claus rally in December. Are you a bit nervous in your position watching the market when you have got a big float like this because most people are when they’re floating.
MATHIAS CORMANN: We are responsible and we take that responsibility very seriously. We have taken advice and the best advice that is available to us is that the market conditions are right to proceed with the sale prior to the end of the calendar year. Now having said that, we obviously continue to monitor market conditions and if there was a material change in market conditions, we have the flexibility to adjust the timing or the structure of the sale accordingly. Right now we are involved in the pre-registration process. There are still further steps along the way and all other things being equal, we would expect Medibank Private to list on the Stock Exchange in early December.
JANINE PERRETT: Okay I am going to take a short break here and then we are going to get back to that announcement you made on Friday about the Budget deficit and a few other things if you could just hold on and viewers stay with us too. We will be back in just a minute.
JANINE PERRETT: Welcome back. I’m here in a conversation with Finance Minister Mathias Cormann in Canberra. Senator on Friday you announced the final figure on the budget deficit for the year. $48.5 billion. That was a $30 billion blowout. Now a lot of this is the problem is tax revenues. Given the fall in the iron ore price and as we said mercurial markets, you can never forecast ahead. Do you get worried you’ll have the same problem that your predecessors had with forecasting and declining revenues that you don’t have much control over?
MATHIAS CORMANN: Firstly, I’ve got to correct you there. So the Final Budget Outcome is in relation to Labor’s last Budget. The 2013-14 financial year... interrupted
JANINE PERRETT: Sorry that’s right, yes.
MATHIAS CORMANN: … and so what has happened in recent weeks and months in terms of commodity prices had no bearing on the 2013-14 Budget outcome.
JANINE PERRETT: No, I am wondering if that drop is going to affect your projections in your year?
MATHIAS CORMANN: Look the point I would make here is this, when we came in to Government in September last year we inherited a deteriorating Budget position, a weakening economy and rising unemployment. You might remember that just for the 2013-14 financial year between the Budget being delivered in May last year and the Economic Update just before the election, the Budget deficit deteriorated by more than a billion dollars a week. Our objective before Christmas last year in our first Mid Year Economic and Fiscal Outlook was to provide a true representation of the true state of the Budget. To provide an update which was based on realistic forecasts with realistic assumptions and what you will find if you look back at the figures that we released then is that we predicted a deficit for 2013-14 as we had inherited it of $47 billion. We came in at $48.5 billion which was pretty well on par with what we said would happen. We will stand by our performance against Budget. The previous government lost a lot of credibility because their Budget forecasts inevitably were proven wrong within weeks. Materially proven wrong. The previous government consistently over-estimated revenue and under-estimated expenditure dramatically, so moving forward we will be judged on the extent that our actual Budget outcomes will match our forecasts. And if there are variations, whether we have got reasonable explanations for those variations.
JANINE PERRETT: Okay I wanted to bring up tax because you would have seen the front page of the Fairfax Newspapers today quoting a tax report that claims 84 per cent of the top 200 ASX companies pay below the 30 per cent company tax rate. A full third of them pay below 10 per cent. Was there anything in that report that shocked you?
MATHIAS CORMANN: It was a report that was put forward by the Union Movement so let’s just say that right up front.
JANINE PERRETT: Unions and charities. A number of charities.
MATHIAS CORMANN: Let me just make the general point that obviously from the Australian Government’s point of view we expect every business that generates profits in Australia, be that a domestically operating business, a multinational or whatever, any business that generates profits in Australia we expect them to pay their fair share of tax in Australia. Our advice is that our anti-avoidance laws are among the toughest in the world. That doesn’t mean that we don’t need to keep focussing on making things better and continuing to lift our performance on that front and indeed the tax administration, the tax office itself needs to continue to focus on doing its job better. And at an international level we are working with countries around the world to ensure that there is a coordinated response when it comes to multinational tax related issues.
JANINE PERRETT: I will get to the global situation in a minute. But just on the local side does a report like this, and I agree it does come from the unions and charities and churches, the churches wouldn’t lie I am sure Senator Cormann. But does it undermine...
MATHIAS CORMANN: Just the not for profits, who don’t pay tax.
JANINE PERRETT: Does it undermine the push by the business community to cut corporate taxes when so many of them aren’t even paying the full price anyway? Perfectly legally but they are managing to get away with it.
MATHIAS CORMANN: The thing is, are you suggesting that people shouldn’t be able to claim deductions for legitimate business expenses?
JANINE PERRETT: No I am not. I am saying it is legal but I am wondering why they push so hard to get more tax relief when obviously they can use the system to cut it anyway.
MATHIAS CORMANN: Look, the bottom line is this. Any business that generates profits in Australia should pay their fair share of tax consistent with the laws of the land. But having said that businesses do incur legitimate business expenses as they generate those profits and these are matters that are appropriately, independently and not politically administered by the Australian Tax Office under the leadership of the Tax Commissioner Chris Jordan. I don’t think that the administration of our tax laws ever should be subject to partisan politics. Now when it comes to our anti-avoidance laws, we do have very tough anti-avoidance laws. There’s no two ways about it. We are always looking at whether there are sensible opportunities to improve them, whether there is a need to respond to new and recent developments in the marketplace. Inevitably that is always going to be part of the yin and yang between governments raising revenue and taxpayers paying taxes. But look, the fundamental point as I have said is of course business is expected to pay their fair share of tax consistent with the law in relation to the profits they generate here in Australia.
JANINE PERRETT: So do you think say a Glencorp or companies that aren’t paying anything, do you think that’s fair? If it’s legal that’s fine then?
MATHIAS CORMANN: I am sure that you would not expect me to comment on the individual tax affairs of individual taxpayers.
JANINE PERRETT: No it was just a try.
MATHIAS CORMANN: Well sure, but the point is this. Like, you know, I mean, obviously it is very difficult in any event, even if I wasn’t constrained by privacy considerations, to make generally informed comment without actually being aware of all the ins and outs and the specific circumstances.
JANINE PERRETT: Okay. Let me talk about the broader picture and the issue on the global side because this has become a big issue. It keeps being mentioned at all the G20 meetings. What about the story this week that this global clamp down on tax shifting led by the US President as well as our own, that when Chris Jordan as you mentioned him, our Tax Commissioner has started this, that there has been some push back from the American companies and American Congressmen claiming oh it’s just a tax grab on American companies. Does that concern you that when you actually do start to do what the political will is, that it’s going to run into this problem, this political problem?
MATHIAS CORMANN: No, it doesn’t concern me at all. The truth is that there is nothing wrong with Australia asserting its sovereignty in relation to profits generated in Australia. Profits generated in Australia by businesses operating in Australia are subject to Australian tax laws and of course there is an absolutely appropriate expectation and indeed the Government has the responsibility to ensure that those business pay their fair share of tax here in Australia.
JANINE PERRETT: So you’re standing beside, you’re standing behind Chris Jordan. You would not agree with US criticism. You don’t think he is being too aggressive, our tax office?
MATHIAS CORMANN: Not at all. The Government absolutely stands behind Chris Jordan. He is doing a very important job for Australia in that regard. At the end of the day it is about raising the necessary funds to fund the important services of Government.
JANINE PERRETT: Senator Cormann just a couple of quick ones before we run out of time. The FOFA reforms, there is talk there is still some political argy bargy that needs to go. It is going to go to a vote I gather and there’s talk in the next week. Are you confident the Palmer support will stand, they will go through?
MATHIAS CORMANN: Firstly I am very confident that the Palmer United Party and the Australian Motoring Enthusiasts Party will stick to the agreement that we have reached. I guess the general point I would make is never believe what you read in the newspaper. The newspapers including papers like the Financial Review and the Sydney Morning Herald and so on, they all predicted on several occasions that our improvements to our Future of Financial Advice Laws would go down. They did so in June. They did so in July. They are doing so again now. Look from my point of view we are just working through the Parliamentary process in an orderly and methodical fashion.
JANINE PERRETT: Okay.
MATHIAS CORMANN: These are important reforms. We took them to the last election and we are now quite confident that they still have the support of the Senate.
JANINE PERRETT: Were you concerned your message was undermined by that about-face by the Financial Services Council then claiming that there’s a lack of trust and they need Government help to help the industry get its credibility back?
MATHIAS CORMANN: There was a mixing up of several issues and it was a bit unfortunate for the Financial Services Council how different issues got pulled together. The truth is the Financial Services Council is very strongly supportive of the improvements the Government has pursued to our Future of Financial Advice laws and I encourage you to ask them. I am sure that they would confirm that. What we are having quite separately, is a conversation across the whole industry on how best to keep lifting professional, ethical and education standards across the financial advice profession.
JANINE PERRETT: Okay.
MATHIAS CORMANN: Now a number of organisations have done...interrupted
JANINE PERRETT: I am just going to interrupt you there because we have only got a minute left and I know it is a hard question in a minute, but if you could just do a quick answer. Are you as concerned about this current debate with the RBA, the FIRB on foreign buying of housing in a housing bubble? If you could just sum up where you as Finance Minister, how concerned are you on the housing issue at the moment which is big?
MATHIAS CORMANN: There is an inquiry going on at the moment. I will let that inquiry do its work and we will form some judgements once we have been able to consider those reports.
JANINE PERRETT: So not losing sleep over a housing crisis at the moment?
MATHIAS CORMANN: I have given you the best answer that I can give you at this point.
JANINE PERRETT: A very careful one as usual. Thank you very much for joining us tonight. Look forward to talking to you again Senator Cormann.
MATHIAS CORMANN: Always good to be here and I will be back.
JANINE PERRETT: Thank you very much.