Note:
- This Toolkit item relates to Part 2 - Investment Governance, Funding and Financing of the Commonwealth Investments Resource Management Guide.
What is a guarantee?
A guarantee is a contractual undertaking where one party assumes responsibility for the debt, or performance obligations, of another party should that other party default in some way – for example, where the Commonwealth guarantees repayment of borrowings by a Commonwealth or other entity in favour of a third party.
When should I use a guarantee?
There are a number of considerations to be balanced in determining the most appropriate alternative financing options (or blend of options).
There may be different policy reasons for providing a guarantee. In the investment context, one reason is guaranteeing financial obligations of a party to strengthen the recipient’s credit profile to enable private financing instead of providing direct Government financing.
By underwriting the risks that the private sector is unsuited or unwilling to bear, Government can “crowd-in” financing to projects earlier or to projects that would otherwise have difficulty in obtaining private financing (whether at all or on reasonable terms) by enhancing the credit profile of a third party or project.
A guarantee can only be given by an accountable authority of a non-corporate Commonwealth entity in accordance with section 60 of the Public Governance, Performance and Accountability Act 2013 and the Finance Minister’s delegation of this power to accountable authorities. For example – the Commonwealth can provide guarantees in relation to the obligations of the private sector. Further guidance on Guarantees is available in Indemnities, guarantees and warranties by the Commonwealth (RMG 414).
Characteristics of guarantees
| Characteristic | Details |
|---|---|
|
Ability to influence financed objective
Low |
Strategic influence limited to guarantee conditions. |
|
Level of market intervention
Low-Medium |
The level of intervention depends on the value of the risk guaranteed. By reducing riskiness Government can attract financing to projects earlier or to projects that would otherwise have difficulty in obtaining private financing (whether at all or on reasonable terms). |
|
Commercial discipline incentive
Low |
Low incentive |
|
Certainty of financial return
Nil or High |
Nil or high certainty (if fee charged) |
|
Opportunity to realise upside gain
Nil |
Nil capacity |
|
Level of financial risk
Medium |
Depending on the guarantee terms and scope, there is the opportunity to share risk with the private sector party. If called, the Commonwealth will need to pay the amount of its liability as per the terms of the guarantee. |
|
Security of asset
Nil |
Nil security |
|
Administration costs
Low-Medium |
Generally, low administration. However, if called, the Commonwealth will incur additional administration costs. |
Accounting and budget classification and reporting of guarantees
Guarantees are classified as contingent liabilities for balance sheet purposes Legislative requirements for reporting contingent liabilities are contained in the Charter of Budget Honesty Act 1998. Contingent liabilities with a possible impact on the forward estimates greater than $20 million in any one year, or $50 million over the forward estimates period are disclosed in the Statement of Risks in Budget Paper 1 – Budget Strategy and Outlook. More information on recognition in Budget aggregates is available here.
Commonwealth entities other than companies are required to report contingent liabilities in their annual financial statements in accordance with the PGPA Financial Reporting Rule 2015. Commonwealth companies are also required to report in accordance with the Corporations Act.
Examples of Commonwealth guarantees
The Accommodation Payment Guarantee Scheme was introduced in the 2006-07 Budget and guarantees the repayment of aged care residents’ refundable accommodation payments (including deposits and accommodation bonds) if the approved provider becomes insolvent or bankrupt and defaults on its refund obligations.
The Guarantee Scheme is covered under the Aged Care (Bond Security) Act 2006 and the Aged Care (Bond Security) Levy Act 2006. There is no current expiry on this guarantee scheme.
As at 30 June 2018, the figure for lump sum accommodation payments held by the residential aged care sector sits at $27.5 billion. This means that the Commonwealth’s total possible liability for this guarantee as at 30 June 2018 was $27.5 billion.