Push for Reconstruction Bank gathers momentum

James Nason, 03/02/2014

Dr Mark McGovern addresses the rural crisis forum in St George on Saturday.It has yet to secure required political support, and the prospects of that happening remain far from guaranteed.

However, the push to re-establish a rural reconstruction bank in Australia has emerged as one of the few sources of hope for a financially stressed rural sector that now feels desperatley short of options.

For many years reconstruction and development banks were operated by Federal and State Governments in Australia to help borrowers in nationally important industries and operating in uncertain environments to obtain long-term credit at reasonable terms, and where the support would lead to an increase in productivity.

However a shift in prevailing economic policy in Australia away from public support for the private sector saw Government-overseen reconstruction finance services sold off or phased out, leaving small business and family farmers with the option only of dealing with commercial banks.

In recent years though a new push has emerged for the development of an Australian Reconstruction and Development Board within the Reserve Bank of Australia, led by the Rural Finance Working Group, chaired by Condamine-district farmer Rowell Walton.

Mr Walton, economist Ben Rees and Queensland University of Technology economics professor Dr Mark McGovern floated the idea at a high-level rural debt forum organised by member for Kennedy Bob Katter and Federal Treasurer Wayne Swan in Brisbane in October 2011. It has since been supported at five large-scale rural debt forums in regional Queensland, Western Australia and Victoria.

The concept is now before Federal Parliament after a bill was introduced by Independent Senator Nick Xenophon and Democratic Labour Senator John Madigan in December 2013, which aims to establish an ARDB under the Reserve Bank with the task of implementing rural reconstruction and development policy.

Foundational problems behind current crisis

Dr McGovern told Saturday’s rural crisis forum in St George that foundational problems including unbalanced markets, inappropriate finance, untoward practices and inept policies over 40 years had led to a squeeze on viability and an asset devaluation crisis across the primary production sector today.

A catalyst for the current crisis was the highly competitive lending environment in the 2000s when many rural operations were encouraged to take on debt that was effectively beyond the capacity of the underlying asset to repay.  “A lot of debt was never serviceable because, if you look, the banks didn’t actually ask the question (of) can you repay the debt…. The two parties (the lenders and the borrowers) convinced themselves that we didn’t have to worry about income, we just had to worry that the assets and liabilities looked nice on the books. This was the build up to the current sub-prime situation in Australian agriculture.”

Since the GFC unworkable balance sheets had led to plummeting asset values. Fire sales now threatened which would depress asset values and worsen the debt-to-equity ratios of all landholders even further.

The purpose of the ARDB proposal was to stop the looming crisis before it gets too far and to provide the breathing space required to enable the effective reconstruction of rural enterprises and a transition back to income-based servicing of loans. He said the lack of profits at the farm gate had effectively been caused by ongoing policy failures, and that had to be addressed.

The Reserve Bank already had the powers to establish and operate an ARDB as a financial organisation and to offer credit.  The proposal would also have little impact on the Government budgetary process.

Dr McGovern said the financial issues affecting the rural sector today could only be addressed through a financial arrangement such as the ARDB. The banks by themselves were not in a position to address what was now a serious and systemic issue. 

The QUT economics professor said genuine solutions to the problems in the rural sector were available and achievable, but they needed political support now.

“If we do nothing we will end with our own financial crisis in Australia,” Dr McGovern said.

“(We need to) at least signal our attempt to act – if we say hey, we’re going to get on top of this problem, things will change very quickly. If we say we’ll just try and think about it for another three years, well, goodbye.

“I’m not being cynical when I think Australian’s all let us rejoice. It is quite possible and achievable and it has been done by countries before, including by Australians in previous eras, of getting problems like this and sorting them out.”

Dry arguments dominate paddocks and policy

Both seasonally and politically, supporters of the push for a new reconstruction bank are facing a dry argument. Drought is dominating their paddocks while the ‘economic dries’ seem to be holding the whip-handle in Federal cabinet, judging by last Friday’s decision not to provide $25m to support the retention of jobs at the Coca-Cola Amatil owned SPC Ardmona cannery at Shepparton.

The ARDB issue will again pit the so-called ‘wets’ within Cabinet – those more supportive of government intervention including the traditional ‘agrarian socialists’ in the Nationals – versus the more hardline free-marketers or ‘dries’, said to include Joe Hockey and finance minister Mathias Cormann.

Agriculture Minister Barnaby Joyce told Saturday’s crisis forum that proponents of the ARDB needed to mount an argument that could convince at least 10 members of the 19 member Federal Cabinet to support the proposal.

In the meantime supporters of the concept currently have an opportunity to mount a case in its favour via a Bill that is currently before the Senate.

The Reserve Bank Amendment (Australian Reconstruction and Development Board) Bill 2013 was introduced to the Senate by Nick Xenophon and John Madigan in December last year.

It is currently being reviewed the Senate Economics Legislation Committee which is now taking submissions.

People wishing to lodge a submission have just seven days left to do so before submissions close on February 10 – and only seven have been received to date.

For more information about the bill or how to lodge a submission click here

The organisers of Saturday’s rural crisis forum said a series of 16 resolutions passed at the event, including one calling for the Federal Government to support the formation of an ARDB, presented a clear guide to the Government of the need for rapid action.

“This is indeed a drought, but not only of water and feed, but also of cash, of equity, of hope, of profit, of good appropriate policy, of appropriate support, but also a drought of understanding. Many have lost as much in the recent floods as in the droughts. We need a climate or extreme events policy, not just a drought policy; we need to remember that Australian is a land of extremes,” the ‘Cranky Cockies’ said in a press release following the event.

“Australia, there is a rural crisis, do not turn your backs on rural Australia.”


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