Laurence Davison:

Hello, and welcome to this funding and post budget update from South Australia and the South Australian Government Financing Authority. I'm Laurence Davison, I'm editor and head of content at KangaNews and I'm delighted to be joined, first of all, by the Honorable Rob Lucas, the Treasurer of South Australia. I'm going to hand straight over to Rob, to give an update on South Australia after the budget and then I'll come back on the other side for some Q and A with the Treasurer. So, over to you Rob, thank you very much.

Hon. Rob Lucas:

Well look, thanks very much, Laurence. I guess we're all getting used to the challenges of COVID-19 and Zoom meetings and this is my first Zoom webinar where I'm going to speak evidently into the screen, talk to myself for 15 minutes and the audience will see this later on. So, please enjoy this particular experience because it's new to me. Look, the budget we brought down yesterday is the first of four state budgets in the next two weeks with Tasmania, New South Wales and Victoria, all to release their state budgets. We're all going to be reporting positive, very similar, messages in terms of our financial position. We are reporting a very significant increase in the short-term in deficit and a very significant increase in the level of the state debt. We're responding, of course, to the views that have been strongly put by, Reserve Bank Governor, Dr. Philip Lowe, and Treasury Secretary Steven Kennedy.

Hon. Rob Lucas:

I guess most other respected national commentators, which are saying or who are saying, look, monetary policy has basically done almost as much as it could. The heavy lifting is now required of Federal, State and Territory governments in terms of providing a significant fiscal stimulus, or as we term it in South Australia, a jobs state economy to try and jumpstart it for the next couple of years. So, our debt levels will jump from $17 billion, approximately, to $33 billion over the forward estimates period, funding a very large infrastructure program, which I'll outline in a minute. In the short-term, we're looking at significant increases in the deficit to as high as $2.6 billion this year, as we're looking at $1.3 billion less in GST revenue in this year alone. So, a very significant impact on our state budgets as a result of their GST write-downs.

Hon. Rob Lucas:

The approach that we've adopted is that we are not doing anything other than a short-term stimulus that is a two year stimulus period in South Australia. So, we're not locking in ongoing funding, which is unsustainable. So, by the end of the forward estimates period, we're looking at a modest budget surplus of $406 million on the basis that all of the spending that we're locking in is short-term. Projects, which can essentially be completed or significantly completed within a two year timeframe and we'll stage various parts of our stimulus activities over that two year period continuously. But at the end of that, that's the end of what we're currently budgeting for in terms of assistance. The aggregate effect of our stimulus package is essentially $5 billion, $4 billion of state stimulus, either direct funding or cashflow support by deferral of taxes but we'll leverage also another billion dollars in Commonwealth government support, local government support and support from non-government schools and the likes. So, we're seeking to leverage from our state government funding as much as we can.

Hon. Rob Lucas:

So, for example, in the area of regional roads where we're doing hundreds of millions of dollar’s worth of additional regional road activity in South Australia. With every $100 million, the $20 million is funded by us and $80 million by the federal government and that's part of that $1 billion extra stimulus that comprises the $5 billion stimulus package that we've put together. It's the most significant budget that I've ever seen in my time in public life. I've been involved in seven budgets as a Treasurer, I've been in government for 11 budgets and I've been in public life for almost 40 budgets and nothing compares to this. Having lived here in South Australia through the calamity of the State Bank and the GFC and the other ups and downs that we've had. There's been nothing like this particular budget, where we are spending as much as we can to save as many jobs and businesses as we can over the... as we emerge from COVID but continuing to keep our eye on what we see as the long-term goal of the state in terms of economic growth and jobs growth in particular.

Hon. Rob Lucas:

So, the long-term narrative of our government, to some of you, would be away from previous contributions I've made to audiences like this, is that we have a very strong view that the only way there's going to be long-term economic growth and jobs guys in a small regional economy like South Australia is that the cost of doing business in our state have to be nationally and internationally competitive. We can't expect our small and medium sized businesses in our state to sell more goods and services nationally or internationally, if they're disadvantaged in terms of the cost of doing business. So, everything we're doing up to COVID-19 and since COVID-19 is predicated on that basic assumption. So, in our two years in government, we've significantly reduced emergency service levy costs in South Australia, we've taken significant action in terms of reducing land tax. The top rate of land tax in South Australia, which has been reduced from 3.7% to 2.4% so that we are nationally competitive now, whereas before we were just uncompetitive. Stamp duty on commercial property transactions has been removed in South Australia and we're competitive in terms of payroll tax.

Hon. Rob Lucas:

Part of our stimulus packages, short-term payroll tax incentives through to June of next year, that will remain compared in terms of payroll tax and - credit to the former government - which we supported some long-term reforms to work as compensation, have meant that instead of paying almost 3% premium in workers' compensation costs in South Australia this year, we are further reducing it to 1.65%. So, we are significantly more competitive in terms of workers' compensation. We've spent the last two years here to continue to work hard at what has been the job killer in South Australia, that's the cost of electricity. We've taken significant action in terms of grid scale, storage schemes, battery schemes, home battery incentive policies, renewable energy policies but we've also strongly supported the new interconnector from South Australia to the Eastern States. As some of you have heard me before, when the sun's shining and the wind's blowing, we have bucket loads of renewable energy, which we can export to the Eastern States to help stabilize the market but also to place downward pressure on national pricing.

Hon. Rob Lucas:

But when the sun's not shining and the wind's not blowing, we need the additional stability and security of being able to import electricity from something other than one major interconnector that we've got through the southeast of South Australia. So, we're making significant progress on electricity pricing. The average household price of electricity in the last two years has declined by $158 a year, so we are making significant progress in terms of reducing both at the wholesale and the retail level electricity pricing. And the initial interconnector, when that's constructed in four years or so, will certainly provide long-term stability and security in terms of pricing for electricity in South Australia. So, that's the sort of action we've been taking so far but even the middle of COVID-19 and the carnage that's being brought on our finances, we've also taken the decision again this year to drive down water pricing in South Australia.

Hon. Rob Lucas:

The former government took a decision to artificially jack up the regulated asset base of SA Water by half a billion dollars because it drove through high water prices for businesses and households in South Australia but it also meant extra money coming into the state budget, through SA Water. We've taken the decision that our first opportunity, as from July 1, to reduce the regulated asset base valuation of SA Water, which is helping drive down water prices in South Australia. So, for an average South Australian, a household is looking at about $200 a year saving. For the average business in South Australia, it's a saving of $1,400 a year. There's some high volume water users in our state whose water bills have dropped by a million dollars or more as a result of the more sensible water pricing policy that we've adopted. Now, the impact of that is, it's a $200 to $250 million a year hit to our budget because we're not getting as a higher quantum of dividends and income tax equivalent payments from SA Water into our state budget.

Hon. Rob Lucas:

But it's consistent with our narrative that for long-term economic and jobs growth in our state, we have to reduce the cost of doing business, with water and utility prices a key component of that. And so, we're continuing to work out and we'll continue to work out in terms of trying to drive down the cost of doing business in the state.

Hon. Rob Lucas:

In addition to the $5 billion stimulus program, which as I said, is time limited to two years. And as I said, that's demonstrated by the fact that we're budgeting for a surplus in 2023-24 of $406 million. Even the federal government hasn't budgeted for surplus in the forward estimate years. So, we've specifically taken actions, which we believe to unlocking unsustainable long-term commitments in terms of funding. But the big job we're giving is in terms of infrastructure, we had a record $12.9 billion infrastructure programs. We now... Increase that by another $4 billion to $16.7 billion over the next four years. The big project that we've announced yesterday in terms of the final design is the North-South corridor project. It is the biggest economic infrastructure project in our state, very positive BCR. It's a sort of project which is going to help freight movement from North to South in Adelaide, just on this particular component of the North-South corridor.

Hon. Rob Lucas:

It would reduce traveling times by 24 minutes and over the 78 kilometre North-South corridor, those travel time savings will be up to an hour or around about an hour in terms of travel time savings. So, this is a key economic infrastructure project, we will finish it by 2030 and we have to stage it, we've got to manage our debt profile sensibly, manage our investment and the detail of that's available on our government websites here, in terms of that particular project. There are a number of other major projects, the Women's and Children's hospital early next year, we should finalize the business case and the design with budget at $686 million in the out years of our forward estimates towards the final cost of that. Now the estimate last year was up to $2 billion, with the Treasurer's hat on, we're hoping with this additional work we're doing might be able to reduce significantly that estimated cost but we won't know that until the early part of next year.

Hon. Rob Lucas:

There's some other big projects, the Aboriginal Art and Culture centre on Lot Fourteen, and there are a range of other projects there, commercial building opportunities, innovation centres, and hubs. It's where the National Space Agency is located. But the Aboriginal Art & Cultures Centre there, which would be a major driver of our visitor economy when it's completed. We've increased by $50 million, the funding for that. So it's now an estimated budget cost of $200 million.

Hon. Rob Lucas:

There are a whole series of other budget line infrastructure projects. A lot of regional road works projects, which are more locked and loaded to be done in the next 12 to 18 months as a central stimulus, but a significant number of hospital upgrades right across the state, and our existing but ongoing $1.3 billion capital upgrade program in the education sector is going to continue apace as well. And as many of you will know, we've got away successfully PPP’s in relation to two big new schools in the north and the south of the metropolitan area. Again, I think an attempt from us to demonstrate that -  after the calamities of the PPP project under the former government for the New Royal Adelaide Hospital - we wanted to be able to demonstrate to the market that we were capable of handling sensibly PPP projects in South Australia, and we think we've demonstrated that with a modest project, obviously, in relation to the two school projects.

Hon. Rob Lucas:

I can sort of wrap up this end. We've looked at our economic forecasts for this year, and we're forecasting that GSP in South Australia will decline by three quarters of 1%. The Commonwealth budget estimates, GDP decline at twice that level, one and a half percent. And the reason why it's different, I think is pretty obvious. We believe that we've as successfully as anyone managed COVID-19 in South Australia. And as a result of that, we've also eased restrictions earlier and been much more flexible than many other jurisdictions in the nation. And as a result of that, we've seen pretty strong employment growth since the worst of COVID-19 in South Australia. So we lost about 50,000 jobs during those three months, and we've now retrieved or regained almost three quarters of those over the last three to four months.

Hon. Rob Lucas:

So it's for those reasons, we think that the impact in South Australia will be less significant than the national figures. I mean, clearly, the national figures have had to absorb the impact on their figures of the dilemma, the trauma of Victoria in terms of the second lockdown there. And we've not had to see that as a direct impact on our state GSP figure here in South Australia.

Hon. Rob Lucas:

So, look, we're optimistic that we can manage the stimulus over two years. We also see this as a transition from the jobs of the past in Mitsubishi and Holden, and sadly the decline of West End in recent times. But in two years onwards, we're going to see very significant job growth in the exciting jobs of the future in South Australia in defence and shipbuilding, space and cyber security.

Hon. Rob Lucas:

I think the one advantage if I can leave the audience with that South Australia has got which no other state has got - and I think we've got many of them - but one of them is we've got locked and loaded $90 billion worth of Commonwealth defence spending on shipbuilding and on submarines. We've got the National Space Agency here. So for the next 30 or 40 years under Liberal or Labor governments, South Australia's got the advantage of a new base of ongoing long-term funding in a very important industry sector. We've successfully won the Space Agency, so the synergies between space and defence is going to assist us in terms of growing jobs in those particular sectors. So in this next two-year period, the stimulus, short-term stimulus we're providing is going to help us emerge from COVID, but also manage the transition to these exciting jobs of the future.

Hon. Rob Lucas:

So thank you for that. I'll pause there and hand back to the moderator, and as I understand it, endeavour to respond to some questions.

Laurence Davison:

Thanks very much for that intro, Minister. Indeed, we have got a few questions here to add a little bit of colour around what you've already given us. The first question is you mentioned that this is an unprecedented budget and that it also keeps an eye on some of the long-term goals, but what is the government's appetite for structural reform given the pretty uncertain current economic environments?

Hon. Rob Lucas:

Well, I think we can, in our view, we can chew gum and walk at the same time. So we have to cope with COVID and emerge from COVID, but we are prepared to look at structural reform. We're continuing to argue, it's peculiarly a South Australia argument, shop trading hours. Before we had the most restrictive shop training hours in the nation. And clearly we're seeing with COVID-19, a move to more online retailing, bricks and mortar retailers just need to be given the flexibility for being able to compete. And so we'll continue to that particular battle.

Hon. Rob Lucas:

But the one that we announced yesterday, which seemed to attract national attention, because we're the first government to have the courage to put our toe in the water and say there needs to be reform in terms of road user charging for electric vehicles. Clearly, at some stage in the future - we aim to have 100% of our vehicles - are going to be electric vehicles. At the moment, road maintenance, our road funding is being funded through fuel excise. And in the end, unless there is a road user charge for electric vehicles, we'll have no funding mechanism for road maintenance and upgrades. So it's an important reform. Treasures have talked about it for years. No one's been prepared to do anything thus far. We are consulting with a number of other jurisdictions, but we will be introducing legislation early in the new year to test the will of our parliament to see whether or not there's an agreement, but over the long-term there has to be sensible reform, structural reform in this particular area.

Laurence Davison:

Okay. Thanks for that. Brings us on quite nicely to the revenue side of the equation. Obviously that's got a lot of uncertainty around it at the moment. And a complicating factor is the picture for GST distribution, which I noticed that one of the rating agencies referred to a couple of times in its immediate update after the budget. How are you responding to the revenue story in general for South Australia?

Hon. Rob Lucas:

Well, we see the only solution to revenue growth in our state is to grow our economy. So we were pre-COVID, very strong supporters, unlike the former government who had a view that Adelaide shouldn't end up like Sydney and Melbourne, and therefore didn't support population growth. We're strong supporters of population growth in South Australia. It's not necessarily electorally popular, but we have said at the national forums that as Sydney and Melbourne and Brisbane have said, look, they want a smaller share of the national migration intake, we've put our hand up and said we'll have a bigger share of the national migration intake, both in Adelaide and in regional areas of South Australia.

Hon. Rob Lucas:

We see population growth as an important part of the economic growth message in our state. We want to reduce the extent of the net migration, interstate migration inflows, and we've seen that occur as a result of COVID. We had more people coming back to South Australia, but we want to see that continue post-COVID as well. So that's important in terms of if you're going to have revenue growth, you've got to grow the economy.

Hon. Rob Lucas:

Clearly, the GST is critical, and for that to occur the national economy has got to continue to grow strongly. I mean, what's happened with Victoria has gutted national GST collections. And so all of us suffer because GST revenues are down nationally, and whatever our share is it's going to be a smaller share as a result of that. So we want to see successful management of GST nationally. We want to see national economic growth because if that grows national, the GST pie grows, and whatever our share is of the GST pie will grow as well. They're the only long-term solutions. We're not interested in jacking up taxes in our state, because as I said, that is not a recipe for growing jobs and growing our economy. We've got to be competitive in terms of our tax and our cost base in the state.

Laurence Davison:

I mean, when you talk about increasing population, obviously the easiest way to do that is to have lots of attractive jobs for people to come to so they'll want to move to South Australia in the first place. You mentioned in your presentation, things like cybersecurity, tech, more generally in defence, but what is the main focus for economic growth in South Australia and how are you directing spending to support it?

Hon. Rob Lucas:

Well, the short-term, we're doing the stimulus activity, which is short-term public sector funding and infrastructure growth. But we're talking long-term, and what we're talking about are where are the jobs of the future, and you've just identified some of those. We've obviously got our stable sector base in terms of minerals and resources, agriculture, and food production. So we're obviously going to continue to try and grow jobs growth in those sectors. We see in terms of the creative industries, the arts community, and the capacity to grow our jobs in those particular sectors.

Hon. Rob Lucas:

But one of the other areas that we're highlighting and particularly to the big corporates in the eastern states, sitting in a big buildings in Sydney and Melbourne and taking an hour and a half to get to work and back to work again, what we're saying is what COVID has demonstrated to us is that whilst the headquarters might stay in the big cities of Sydney and Melbourne, there's no reason why back-office functions can't be located in more cost competitive locations like Adelaide, particularly with the advent of Zoom meetings and the like.

Hon. Rob Lucas:

So from our viewpoint, we're highlighting the fact that the cost of living in South Australia is much, much lower. Your corporate office costs in the CBD are significantly lower than in Sydney and Melbourne. The churn rate of employees in South Australia, if that's a fact of your business, are much, much lower. There's the stability of the workforce. The liveability of Adelaide in South Australia is, in our view, much more attractive than Sydney and Melbourne and the bigger eastern state's centres. So we think there are some attractions for certain types of businesses and activities. And increasingly, we see in that particular sector, but also at Lot Fourteen with our space agency and high-tech innovation hubs down there, that sort of area we're seeing significant growth as well.

Laurence Davison:

Well, thank you, Minister. The next one is about the stimulus specifically. You mentioned that you're not trying to lock things in for the long-term and that the stimulus is sort of looking at a two-year horizon, I believe. But how did you decide on the level of stimulus and what to target?

Hon. Rob Lucas:

Look, it was a challenge. I mean, we've been given a rough measure from the Reserve Bank Governor and the Federal Treasury Secretary in terms of a doubling of the previous stimulus that we'd done, that was essentially the broad parameters. We weren't governed by that. We essentially looked at what we believed was sustainable, even with the doubling of our debt. As you'd probably understand, we borrowed six and a half billion dollars in the last 10 months at an average interest rate of 1.3%. So our interest cost in 2022-23 is actually $200 million less in this year's budget than it was last year, even though we're doubling the size of our debt in the state.

So we looked at what we believed was sustainable, we looked at what we believed was necessary, we were guided a bit by the Reserve Bank and Federal Treasury, in terms of doubling the extent of our stimulus, and our stimulus, announced earlier in the year, was up to about $2 billion. We've now factored that up to $4 and $5 billion, if you include the federal government, local government leverage as well.

Hon. Rob Lucas:

And what we sought to do was not just use state government money, but to try and leverage local government money, federal government money as well. So there's a hundred million dollar infrastructure program we're putting in, as long as local government puts in a hundred million dollars or more, so we're trying to leverage funding. Non-government schools, we've given funding to non-government schools for activity, as long as they put in some money as well.

Hon. Rob Lucas:

So we're trying to leverage not just the state money, but other buckets of money that other organisations or levels of government might have.

Laurence Davison:

Speaking of that infrastructure package, infrastructure is always a good thing to talk about, but it's not operational till it's operational. So what are the risks to projects being delivered on time and on budget?

Hon. Rob Lucas:

Look, it's a perennial problem with government - state, federal, and local - in terms of delivering projects on budget and on time. What the Premier has done in the last three months, he's actually taken our Department, which was a very big department which had responsibility for planning, local government, and a variety of other responsibilities as well. He's taken all those responsibilities away and give them to the Deputy Premier and myself, and the Transport and Infrastructure Department now has sole responsibility for delivery of those programs.

Hon. Rob Lucas:

The Premier has also established an infrastructure committee in Cabinet, where the Minister and the CEO report, at the moment, weekly, and in may well turn out to be fortnightly, on the progress of all of these key infrastructure projects.

Hon. Rob Lucas:

So from the Premier and myself downwards, there's regular monitoring now with the delivery of the projects, so there's a greater focus on the delivery of these key projects. North-South corridor is our biggie, but there are a whole series of other projects, which all inevitably run into problems with planning and protest groups and compulsory acquisitions, all of those dilemmas you have with intersection projects in the metropolitan area or the like. So there is a laser-like focus now, on trying to deliver projects on time and on budget, in a much better fashion than governments have in the past.

Laurence Davison:

Okay, thank you. And last question, you mentioned, obviously, the debt issue, that's the nature of the beast at the moment. But do you have a degree of concern that with the increase in debt level, it could bring the state credit rating into risk? And if so, would that change your plans on spending?

Hon. Rob Lucas:

Look, that was always a concern, I think, as we were looking at COVID a few months ago, but we're encouraged by the initial responses from the two rating agencies, S&P and Moody's, in the last 24 hours after our budget. And they've left our rating as it is, with a stable outlook. So we accept that it's an initial response, and there'll be a more considered response from the rating agencies in time.

Hon. Rob Lucas:

But we're pretty confident that we're demonstrating, perhaps unlike some other levels of government, we are firmly committed to a jolt to the economy for two to three years, but then returning to sustainable levels of funding, and spending no more than we earn from 2023-24 onwards. We've demonstrated our willingness to take on union leaders right across the board, in terms of reasonable enterprise bargaining arrangements, and we've settled those agreements, even after 18 months of industrial disruption.

Hon. Rob Lucas:

So we've demonstrated a firmness and a resolve to keep our budget under control. Yes, we are massively smashed by COVID-19, as everyone has been, but we're having to absorb that, respond to that, but we intend, firmly, to return to the fiscal discipline that we've demonstrated in our first two years.

Laurence Davison:

Okay, thank you very much, Minister. I'd like to say thank you to Hon. Rob Lucas, the Treasurer of South Australia, for sharing those insights and giving us that time. So thank you very much, Treasurer.

Hon. Rob Lucas:

Many thanks, thank you.

Laurence Davison:

We're now going to go over to Andrew Kennedy, Director of Treasury Services at the South Australian Government Financing Authority, who is responsible for funding all this. Andrew's going to talk us through the funding forecast and plan, and then, again, we're going to have brief Q&A at the end. So over to you, Andrew.

Andrew Kennedy:

Thanks, Laurence, for the introduction, and thanks to KangaNews for hosting this forum for SAFA. I'd also like to thank the Treasurer for taking time out of his very busy schedule to be available to present a budget update, especially as he was in Parliament, delivering the budget, only yesterday.

Andrew Kennedy:

What I'd like to outline is SAFA's indicative funding program and future funding requirements, along with some other issues regarding how SAFA will be conducting its funding program, and other issues that it sees as critical for being able to deliver on its funding program.

Andrew Kennedy:

So on the first slide, you'll be able to see the 2019-20 actual funding program that SAFA undertook. And at the time of the mid-year budget, when it was delivered in December last year, SAFA had a term funding requirement of $3 billion. However, due to the impact of drought, bush fires, and then the coronavirus, SAFA actually embarked in markets to raise significantly more funding than what was initially projected, due to the uncertainty of the funding requirement, and also the delay in the budget from June out to November. We actually raised $5.261 billion during the 2019-20 financial year, which, upon reflection when we received the 2020-21 budget, put us in a surplus position, or pre-funded position, of just over $1.3 billion.

Andrew Kennedy:

The review of the 2020-21 budget identified that SAFA's gross funding requirements still was estimated at just over five and a half billion, and which, including a refinancing requirement of nearly two billion - because SAFA pre-funds its maturities 12 months prior - sees the total 20-21 funding requirement still of $6.224 billion. Of that number, SAFA has already raised in markets $2.89 billion, leaving a remaining $3.36 billion to raise over the rest of the 2020-21 financial year.

Andrew Kennedy:

In its funding update released post budget, we identified that we would be looking, over the second half of November, to tap into our 2024 and 2026 lines, for up to $500 million each, via tender, leaving us a requirement from December through to the end of June of another $2.36 billion.

Andrew Kennedy:

When we look across the forward estimates for the funding requirement, SAFA's got a reasonably heavy lifting program for the 2021-22 financial year of just over seven and a half billion, and then near six billion again for the 2022-23 year, and then dropping down to around $5 billion for the 2023-24 year. In gross terms, that puts SAFA's total debt outstanding change from 30th of June 2020, at $20 and a half billion. By the time we reached the end of the forward estimates in June 2024, SAFA will have about $37 and a half billion of term debt on issue.

Andrew Kennedy:

Looking at how we're going to fund on the next page, the 20-21 task, SAFA's primary objective is to ensure that we hold sufficient levels of liquidity to ensure that we can meet the State's financial obligations. Even during the dislocated markets that we saw during March and April, SAFA'S minimum liquidity requirements saw that we were able to smoothly operate and stay out of markets for a period of time, and then still be able to meet the obligations as required.

Andrew Kennedy:

SAFA's short term program, we previously had targeted two billion in short term maturities, we've increased that number to two and a half billion dollars maintaining in our short term program. That's just consistent with the overall level of increasing debt, and maintaining an equal proportion of short dated paper on issue.

Andrew Kennedy:

Our short dated paper program will continue to focus on issuing AONIA FRNs, to complement our existing CP program.

Andrew Kennedy:

The other initiative that we are continuing to endeavour on is to maintain or build existing even calendar year benchmark Lines up to $3 billion. And in the odd calendar years, have an aggregate between fixed and floating rate of getting up towards that $3 billion mark, consistent of what we did in the 2023 Line over the course of the 2019-20 year.

Andrew Kennedy:

It's also our intention to issue a new 2034 bond, consistent with client borrowing requirements for longer dated debt. Beyond the 2034 Line, during the last couple of months, SAFA has issued a 20 year bond, maturing in May 2040. SAFA's further investigating issues beyond this existing 20 year maturity, consistent with a requirement to spread out SAFA's refinancing profile, so we're not having any concentration risk within any of our shorter dated maturities.

Andrew Kennedy:

Further, we're also having a look at what we may do around buying back our shorter dated Select Line, in order to mitigate some of that potential refinancing risk.

Andrew Kennedy:

The chart on the following page highlights where we see our borrowings of what we've done to date, and what we project that we may do, although there's no guarantees these will be the actual debt projections for the balance of the 2021 financial year.

Andrew Kennedy:

We've already issued into the 2028 Line and the 2032 Line, and, as just discussed, we plan to tap into the 2024 and 2026, and issue a new 2034. We've already started seeding the 2040 Line, and we'll continue to investigate opportunities to tap into that, as well as potentially adding to the 2030 and the 2032 benchmark Lines.

Andrew Kennedy:

As I discussed just previously, we are considering options to issue beyond 20 years, although we haven't factored that into our debt profile. And we'll consider those opportunities, should the State have the appetite for longer dated risk, and investors also have demand for bonds.

Andrew Kennedy:

Now, the charts on this page provide distribution details of SAFA's primary transactions conducted during the 2019-20 financial year. The patterns for all the transactions are different, due to different investor demands at any point in time when we issue, and also dependent on the volume that we're trying to print, or the maturity in which we're trying to issue.

Andrew Kennedy:

So we tend to just like to provide aggregated data of the financial year's primary issuance. As you can see, the majority of the issuance by distribution did go into balance sheets via bank books, primarily due to their requirements for high quality liquid assets. That said, a large portion of bonds did go to asset managers, who have been an increased supporter of the fixed income markets. And also there was distribution of bonds into trading for liquidity purposes, and also official institutions, central banks who have bond holding requirements.

Andrew Kennedy:

In terms of geographical distribution, the majority of bonds are still going into the Australian based investors. However, there is significant portion - 30%, - that do go into offshore investors out of Europe and Asia, predominantly.

Andrew Kennedy:

Looking a bit further ahead at what we see as some of the key market developments and objectives for SAFA over the course of the 2021 year, is that we're continuing to investigate the delivery of the framework for an environmental, social, and governance strategy. I am happy with the way that we communicate with investors, although we're always looking to do what we can to enhance and maintain that communication. There's a number of developments that continue to require monitoring outside of SAFA's immediate business.

Andrew Kennedy:

We focus very strongly on what's going on in the geopolitical environment. We're very concerned about liquidity in markets. The actions of credit rating agencies impact the way that we're able to do business. There are significant changes going on in the regulatory environment of which SAFA needs to ensure that it stays well aware. And internally, we have to ensure that we're managing our operational risks consistent with SAFA's risk appetite statement, and that is that we have a very low appetite for risk. One of the things that we've obviously been quite supportive of and done significant lifting in is the promotion and development and adaptation of risk-free rate benchmarks and their products. They're the key things that SAFA is looking at. And I hope that helps describe what our funding program looks like for the 2020-21 year, and how are we going to be delivering it.

Laurence Davison:

Thanks for those. So those insights sound true. Good to hear that there is some interesting plans for delivering this bigger task. Just a few questions here. You talked about issuing before, beyond 20 years. Sorry. And that that's going to be explored and it will be subject to client demand. But do you think it's got potential to be a significant part of the overall funding task? Or is it very exploratory at this stage?

Andrew Kennedy:

Yeah. Thanks, Laurence. Look. SAFA's issuance in the 20 year part of the curve was seen as being a little bit opportunistic and a chance to spread some of our refinancing risk. And there has been significant demand for longer dated debt from offshore investors. So we are investigating ways that we can continue to spread out our refinancing risk, provide debt to the Treasurer to spread out his maturity profile and also meet investor demands for that particular product. We're well aware that there's investor demand beyond 20 years out towards 30 years and in some cases 40 years. And we're just considering what that looks like for SAFA, both in terms of that investor appetite, but also ensuring that we're being responsible in the rates which we raise debt as well. We don't want to be putting significant amounts of long-term debt and adding to the Treasurer's interest cost unnecessarily.

Laurence Davison:

Sure. And then obviously we've spoken on a number of occasions over the last couple of years about the AONIA program, and it's good to hear that you remain committed to that. I'm particularly interested in some of the technicals around that. There's been a bit of chat in the market about the potential for BBSW to go negative, whereas presumably AONIA's going to stay in just about positive territory. Have you got any thoughts about how kind of the dynamics in that market might change and whether there's a bit more juice in it, if any of those things come to play?

Andrew Kennedy:

Look. I think there's a number of different moving parts there to have a look at. The first is we have seen the Reserve Bank state that at this point in time that they're not looking to implement negative rates. And if that remains the case, then you won't see the daily cash rate, the AONIA rate, go sub-zero. However, the RBA has acknowledged that BBSW rate may go negative at some point in time, and we're very aware of that dynamic. Our interest and investigations was about what was appropriate in terms of risk management for SAFA. And we still think that that's the underlying theme that we want to continue to run with for why we're using AONIA. If the rate for BBSW does go negative, that may impact some investor appetite and may lead to a change in behaviours.

Andrew Kennedy:

I think we've got to be well aware that in global markets we are seeing that IBOR’s are coming to an end. Even in this COVID environment, there has been no pullback from any of the regulators in terms of the end of the IBOR’s.  And whilst the Reserve Bank has continually stated that they see Australia's having a multiproduct, multi-benchmark market approach - of which we're completely supportive - it would provide better sense for investors to consider diversification within their portfolio. And certainly the concerns around how investors manage, or issuers or other parties to the market manage, cross-currency risk and cross-basis risk in light of the end of the IBOR’s. So we continue to think AONIA will be an important product for SAFA, but we also think the development of the benchmark is important for markets.

Laurence Davison:

Okay. Now, staying on those market dynamic issues, there's been a lot of moving parts as well on the demand side in Australia caused in a lot of ways by government and central bank action. We've had the Term Funding Facility. We've had the RBA buying mostly sovereign, but also a bit of semi-government bonds at the three-year point, and now QE further out the curve and potential changes to the Committed Liquidity Facility. How does all that influence the dynamics, particularly around demand for your program and then the funding strategy?

Andrew Kennedy:

Yeah. Keeping abreast of all these changes in markets is very, very important for the way that we want to structure our program in terms of where we're targeting to issue, because this will also affect the way that the state's clients borrow from SAFA. And as people are hopefully aware that we try and run a very risk-adverse portfolio with matched funding to our clients. When the RBA came in and provided support through its targeted three-year bond program and what it did for the state governments at that point in time was very, very essential to maintaining a market that was functional and was able to provide liquidity.

Andrew Kennedy:

Since then, we've seen the introduction of other programs that have had impacts on markets and their functioning. The Term Funding Facility, for example, has certainly changed the dynamics and the way banks go about issuing in primary markets. And that has impacted demand for HQLA of which SAFA is a part of that, along with the other states. So there's constant changes in the way that it's going to affect the supply-demand dynamic. We know with the RBA recently starting its QE program and that will affect demand for government and semi-government bonds.

Andrew Kennedy:

With the $100 billion that's been announced and circa 20% of that being allocated towards buying semi-government, that is going to clean up a lot of the supply-demand issues that people have seen as being a little bit misbalanced in the short-term, and will keep and continue to add support for the sector on top of the fact that we've seen strong offshore demand and we've seen excellent support from asset managers, as well as, the requirement from banks, as you mentioned, due to the change of the Committed Liquidity Facility and the increase in the HQLA requirements. So the supply-demand position is shifting rapidly and continuously. So being aware of what all those changes are and how it affects investor appetite and having the RBA as a supplementary buyer in the market that will change the way that semi-governments are traded and hopefully will continue to add support and add legitimacy to the semi-governments as a sector, and as an issuer in their own.

Laurence Davison:

Now, we're coming up very close to the end of the time that we said we'd use, but I would be in trouble, and I'm sure you would, too, if we didn't mention ESG. You mentioned in your presentation that you're exploring it. Maybe just a little bit of colour on how you think that might develop. I mean, are you talking specifically about Green, Social, Sustainability Bonds, or ESG more broadly? What might we expect to see from SAFA in the year ahead?

Andrew Kennedy:

SAFA's always had a very, very big agenda in this space. And that is that we've steered away from doing single issues of green or social or sustainable bonds, primarily because we've only got a very small program. And my concern is about having orphaned issues with limited liquidity where we're trying to focus on having benchmark liquidity. One of the things that we always highlight is that SAFA's not responsible for the setting of policy across government. We're an agent of government. So we're working with government to ensure that they understand what investor needs are in this space. So what we're attempting to do is work with government to build out an ESG framework that will sit over SAFA's debt program, because governments are ultimately responsible in everything they do. They meet all the criteria across every sector. We just heard the Treasurer talk about all the different programs that they run and everything that they support.

Andrew Kennedy:

South Australia's known for being the leader in renewable energies in Australia. We run strong social programs. You talk about health. You talk about education. You talk about housing. And then of course, on the governance side, the strict government framework that overlays the government and the way that it operates, the way that it's responsible. The Treasurer talks about returning to surplus where the federal government is not. Those sorts of things in terms of that strong governance framework that overlay what is being done. But SAFA considers that when you look at the UN Sustainability Development Goals that there is strong alignment with those goals across everything that government does, which would therefore underpin being able to build a framework where all of SAFA's issuance is covered under that particular project. And that's what we're working towards. So we are very, very aware of investors' demand and investors' requirements in this. And we want to do something that is going to be sustainable for SAFA, as well as, delivering for investors.

Laurence Davison:

Well, thanks very much for that. You'll definitely be getting calls from me and my editorial team on all those points in the year ahead, but we appreciate the heads up as I'm sure do the audience. So thank you very much for working with us on this. Thank you, Andrew Kennedy, and we'll see you soon.

Andrew Kennedy:

Thanks very much, Laurence, and appreciate KangaNews for being able to host this particular forum for us. And again, thanks to the Treasurer for making himself available.