Federal Government guarantees state debt to fast-track big projects

The Federal Government has said it will guarantee about $170 billion in state debt in a deal that will protect the states against infrastructure project delays due to lending shortages.

Federal Treasurer Wayne Swan says that the plan will help guarantee jobs by enabling states to raise the funds needed to pursue major infrastructure projects.

“Like bond markets around the world, state government bond markets have been hit hard by the global recession,” he says. 

“This important measure recognises that pulling back on critical nation-building infrastructure investment now would mean ever slower growth and higher unemployment into the future.”

The guarantee works by charging a fee for the use of the Federal Government’s AAA credit rating. States that will benefit from the new plan include NSW, whose AAA rating has been on “negative watch”, while Queensland’s rating has been slashed to AA+.

The move was largely accepted by the states. “The credit market has been dysfunctional,” Queensland Treasurer Andrew Fraser said at the treasurers’ meeting yesterday. “This will allow us to deliver infrastructure.”

The Loans Council has already approved $13 billion in bond issues for this year and another $26 billion next year.

Treasurers must decide whether they will take up the Government’s offer within 28 days, with Swan saying that the guarantee is “time-limited and voluntary”. He also says states will be charged 0.3% annually on new bonds to ensure the scheme lasts no longer than necessary.

States with lower credit ratings, such as Queensland, will pay higher fees of 0.35% annually.

“There’s no free ride here – that fee will be charged,” Swan says. “And, of course, it is put in place to provide a disincentive for states to use it when financial conditions normalise. Linked to this is the fact that states must invest in infrastructure for the future.”

Shadow Treasurer Joe Hockey welcomed the proposal, saying “there is now a massive incentive for the states to borrow and spend”.

The plan has also been welcomed by industry experts. Infrastructure Partnerships Australia chairman Mark Birrell approved the new scheme yesterday, while analysts from the Commonwealth Bank, UBS and Leighton Holdings have also expressed support.

Australian Industry Group associate director of economics Tony Pensabene also approves of the plan.

“In this environment when people are concerned about credit, a guarantee is essential. It provides a reasonable degree of certainty for business to proceed with investment.”

“Given the key issue now is about access and availability to funding and financing, it’s probably a necessary move to get projects moving and boost the economy.”

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