House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer the Hon Michael Sukkar MP)

Chapter 4 - Funding capital increases for the World Bank Group

Outline of chapter

4.1 Schedule 4 to the Bill amends the IMA Act 1947 and IFC Act 1955 to facilitate Australia making additional capital contributions to the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC) of the World Bank Group.

4.2 To achieve this, the amendments streamline the existing legislative processes under which Australia enters into agreements to fund capital increases to the IBRD and revise the way the existing 'Articles of Agreement' of the IFC are incorporated into the IFC Act 1955. The amendments also establish appropriations to facilitate payments that Australia commits to make under an agreement with the IBRD or the Articles of Agreement of the IFC.

4.3 As a result of these changes, further amendments to either Act will not be required to facilitate future capital increases to the IBRD or the IFC.

Context of amendments

4.4 Australia holds shares in the IBRD and IFC as a member of the World Bank Group. The IBRD and IFC play a vital role in providing financial assistance and advisory services to middle and low income developing countries.

4.5 This assistance creates significant benefits throughout the Indo-Pacific region, allowing countries to reduce poverty and build shared prosperity through investment in much-needed physical infrastructure and improved social outcomes.

Capital Increases for the IBRD and IFC

4.6 In April 2018 the World Bank Group proposed a US$82.6 billion capital increase for the IBRD and the IFC.

4.7 This proposal followed the World Bank Group's latest shareholder review about resourcing, governance and voice reforms. Following this proposal:

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On 27 September 2018, the Treasurer (as Australia's Governor to the World Bank Group) voted to approve the IBRD and IFC resolutions.

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On 1 October 2018, the World Bank Group announced the IBRD capital increase had been endorsed by the Governors.

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On 16 April 2020, the Word Bank Group announced the IFC capital increase had been endorsed by the Governors.

4.8 Under the resolution for the capital increase to the IBRD, Australia has been allocated an additional 7,462 shares in the IBRD at a price equivalent to US$120,635 per share. Under the resolution, Australia is to pay the World Bank Group a proportion of the share value for each share over a five-year period, with a callable capital component attached to the unpaid value of the share.

4.9 Australia's subscription comprises 3,243 shares under a 'general capital increase', and 4,219 shares under a 'selective capital increase' (with different payment arrangements applying to the different increases). Australia's contribution to the IBRD capital increase results in around A$154 million payable over five years starting 2019-20 and a callable capital component of A$1,016.2 million.

4.10 Under the resolution for the capital increase to the IFC, Australia may purchase up to 102,370 additional shares at a price equivalent to US$1,000 each. Australia's contribution would be around A$144 million payable over five years. The IFC also proposes to convert its retained earnings into paid-in capital and so Australia will also receive fully paid in shares to the value of US$313.5 million (around A$402.6 million).

Legislative change required to facilitate subscriptions

4.11 Legislation is required to authorise the appropriations required for Australia to subscribe to the extra shares it has been allocated under the IBRD capital increase package.

4.12 Previous capital increases to the IBRD have been authorised through amendments to the IMA Act 1947. In particular, section 9 of the Act currently refers to the previous capital increase that was authorised in 2010 through the International Financial Institutions Legislation Amendment Act 2010. That section is now redundant as Australia's has already made the payments required to acquire these earlier shares.

4.13 With the exception of section 9, every other provision in the IMA Act 1947 includes a standing appropriation to facilitate payments that Australia is required to make in respect of agreements covered by the Act. Appropriations in these contexts are appropriate because they ensure that Australia is able to comply with any international obligations it has under an agreements to make payments of a particular kind. Importantly, any agreements that impose obligations of this kind constitute treaty actions that are subject to scrutiny through the JSCOT process.

4.14 Other provisions of the IMA Act 1947 also explicitly authorise the Minister to enter into agreements that involve Australia providing financial assistance or payments, and provide appropriations for such payments. For example, subsections 8C and 8CA(1) of the Act authorises the Minister to enter into certain agreements for Australia to lend money to a country, or enter into a currency swap with the country, at the request of the International Monetary Fund, or under a program of the World Bank or the Asian Development Bank. Subsections 8C(3) and 8CA(4) provide that the Consolidated Revenue Fund is appropriated for the purposes of payments by Australia under, or in connection with, such agreements.

4.15 Legislative amendments to the IFC Act 1955 are also required to authorise payments to facilitate additional subscriptions to the IFC .

4.16 The IFC Act 1955 approves Australia's acceptance of membership in the IFC, and provides for the appropriation of moneys for Australia to subscribe to the capital stock of the IFC (see section 5 of the IFC Act 1955). In contrast to section 9 of the IMA Act 1947 (which authorises the last additional share subscription), section 5 of the IFC Act 1955 currently authorises the total number of shares in the IFC that Australia has subscribed to.

4.17 This is achieved by reference to Australia's subscription to the capital stock of the IFC set out in the 'Articles of Agreement of the IFC', which are incorporated into the Act through the definition of Agreement in section 3 and the Schedules to the Act. Under the Agreement, Australia's initial share subscription was 2,215 shares for a total of US$2,215,000 (as per paragraph (a) of section 3 if Article II of the Agreement, by reference to Schedule A to the Articles of Agreement). The definition of Agreement in section 3 also facilities amendments to the Articles of Agreement through resolutions set out in the other Schedules to the Act.

4.18 Unlike the definition of 'Agreement' in section 3 of the IFC Act 1955, the definitions of 'Bank Agreement', 'Fund Agreement' and 'IMF loan agreement 2016' in the IMA Act 1947 provide for those agreements to be amended from time to time. Amendments to the IMF loan agreement are implemented through the Treasurer providing notice of the amendment through a legislative instrument (see subsection 8CAA(3)). Such legislative instruments cannot commence until the end of the disallowance period for the instrument (see subsection 8CAA(4)).

4.19 In contrast, the Bank Agreement and Fund Agreement do not require a legislative instrument to amend their terms. However, the Treasurer is required to table annual reports in Parliament about the operation of the Act, and the operation of the Bank Agreement and Fund Agreement, under section 10 of the IMA Act 1947.

Summary of new law

4.20 Schedule 4 to the Bill updates the IMA Act 1947 and IFC Act 1955 to establish clear legislative frameworks under which Australia may enter into agreements with the IBRD or IFC to buy additional shares of their respective capital stocks. The amendments also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments that Australia is required to make under any such agreements.

4.21 Schedule 4 to the Bill also updates the IFC Act 1955 to revise the way that the 'Articles of Agreement' of the IFC are incorporated into the Act. As part of these changes, the amendments authorise future amendments to the Articles of Agreement to be specified in a legislative instrument. The amendments also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments for additional subscriptions of shares in the IFC that Australia is obliged to make under the Articles of Agreement.

4.22 As a result of these changes, further amendments to either Act will not be required to facilitate future capital increases to the IBRD or the IFC. This approach is consistent with all other agreements, and their related appropriations, covered by the IMA Act 1947.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments to facilitate capital increases to the IBRD

4.23 The amendments in Schedule 4 to the Bill facilitate Australia making additional capital contributions to the IBRD and IFC. This is achieved by introducing clear legislative frameworks under which the Minister, on behalf of Australia, may enter into agreements with the IBRD or IFC to buy additional shares of their respective capital stocks. [Schedule 4, items 2 and 8, paragraph 5B(1)(a) of the IFC Act 1955 and paragraph 9(1)(a) of the IMA Act 1947]

4.24 Under these frameworks, an agreement may contain any terms and conditions that are determined by the Minister. [Schedule 4, items 2 and 8, paragraph 5B(1)(b) of the IFC Act 1955 and paragraph 9(1)(b) of the IMA Act 1947]

4.25 Pursuant to section 19 of the Acts Interpretation Act 1901, the reference to the 'Minister' includes the Treasurer and any other Minister in the Treasury portfolio who administers the IMA Act 1947 or IFC Act 1955.

4.26 The new provisions reflect the process that has been followed in respect of previous agreements under which Australia has acquired additional shares in the capital stock of the IBRD. In this sense, they codify rather than change existing practice.

4.27 The approach is also consistent with other provisions in the IMA Act 1947 relating to agreements that the Minister is authorised to enter in to. As noted above, sections 8C and 8CA also authorise the Minister to enter into certain agreements that provides for Australia to lend money to a country, or enter into a currency swap with the country, at the request of the International Monetary Fund or under a program of the World Bank or the Asian Development Bank.

4.28 The amendments also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments that Australia is required to make under any such agreements. [Schedule 4, items 2 and 8, subsection 5B(2) of the IFC Act 1955 and subsection 9(2) of the IMA Act 1947]

4.29 This approach is consistent with all other appropriations covered by the IMA Act 1947 (including but not limited to the appropriations in relation to sections 8C and 8CA). Appropriations of this kind ensure that Australia is able to comply with any international obligations that it has to make payments under existing agreements, or any new agreements that the IMA Act 1947 or IFC Act 1955 authorise the Minister to enter into on Australia's behalf

4.30 Importantly the new appropriation is only applicable after Minister actually enters into an agreement to acquire additional shares in the capital stock of the IBRD or IFC. The capital increases for the IBRD and IFC that Australia voted in favour of, and that were subsequently endorsed, are not the same as the agreements that Australia must enter into to facilitate the payments to acquire the respective shares. The agreements will both be 'Instruments of Subscription' that Australia must deposit with the IBRD and IFC in order to subscribe to the additional shares.

4.31 As the entering into of such agreements constitute treaty actions, the decisions to enter into those agreements are subject to Australia's domestic treaty making procedures. This means that before the Minster is able to enter into an agreement, the agreement would need to be tabled in Parliament with a National Interest Analysis for consideration by JSCOT. Following JSCOT's consideration of the agreement, the Governor-General must also approve Australia's signing of the agreement.

4.32 These processes will apply to the current share subscription that these amendments are specifically intended to facilitate, as well as any future subscriptions proposed by the IBRD or IFC that Australia chooses to adopt. The processes ensure there is appropriate Parliamentary scrutiny of any decision of the Government to enter into agreements to subscribe to additional shares in the capital stock of the IBRD and IFC.

4.33 In addition to the standard JSCOT processes, the Minister is required to provide details about any payments to the IBRD through the annual reporting requirements in section 10 of the IMAA 1947.

4.34 The amendments also repeal the previous appropriation that facilitated the last subscription to additional shares in the capital stock of the IBRD. [Schedule 4, item 8, section 9 of the IMA Act 1947]

4.35 That appropriation is now redundant as Australia has already acquired the additional shares to which it related.

Amendments to facilitate capital increases to the IFC

4.36 The amendments in Schedule 4 to the Bill also facilitate revisions to the 'Articles of Agreement' of the IFC that are incorporated into the Act.

4.37 Under the revised approach, the Agreement is defined by reference to the original Articles of Agreement and the four amendments to it that are currently in force. [Schedule 4, item 1, section 3 (definition of 'the Agreement') of the IFC Act 1955]

4.38 The amendments in Schedule 4 to the Bill also repeal the Schedules to the IFC Act 1955 that previously contained the Articles of Agreement and its related amendments. [Schedule 4, items 3 to 7, Schedules 1 to 4 to the IFC Act 1955]

4.39 This updates the previous approach in the Act under which the Articles of Agreement and related amendments were replicated in full in the Schedules to the Act. Consistent with modern drafting approaches, these are now incorporated by reference. The revised definition provides full details of the Agreement and the related amendments, as well as where they can be publically accessed on-line through the Australian Treaties Library on the AustLII website ( http://austlii.edu.au ).

4.40 The revised definition also corrects two inadvertent omissions in the previous definition of 'Agreement' in the IFC Act 1955. The previous definition did not refer to the amendments to the Articles of Agreement that were done on 28 December 1992. The IFC Act 1955 also made provision for uncommenced amendments that were enacted with contingent commencement in 2010. Those amendments actually commenced in 2012 but were not listed as being incorporated into the Act.

4.41 The amendments also authorise future amendments to the Articles of Agreement to be specified in a legislative instrument. Where amendments of this kind are made, the Treasurer may, by legislative instrument, update the Articles of Agreement incorporated into IFC Act 1955 by providing notification of the amendment. [Schedule 4, items 1 and 2, section 3 (paragraph (b) of the definition of 'the Agreement') and subsection 5A(1) of the IFC Act 1955]

4.42 This approach for updating the Articles of Agreement consistent with the mechanism for updating Australia's legislated version of the 'IMF loan agreement 2016' under subsection 8CAA(3) of the IMA Act 1947. Amendments to the Articles of Agreement are subject to the voting procedures set out in Article VII of the Articles of Agreement. While Australia is entitled to vote on any such amendments, they can be made despite a vote by Australia to the contrary.

4.43 Allowing the updates to be specified through a legislative instrument means that the Parliament is not required to enact amendments to the IFC Act 1947 to ensure alignment between Australia's legislated version of the Articles of Agreement, and the Articles of Agreement that are actually in force.

4.44 However, any legislative instrument that is made to update the Articles of Agreement cannot commence until after the disallowance period for the instrument has passed. [Schedule 4, item 2, subsection 5A(2) of the IFC Act 1955]

4.45 This deferred commencement ensures that the Parliament can consider and deal with any amendment to Australia's legislated version of the Articles of Agreement before they take effect.

4.46 The amendments to the IFC Act 1955 also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments that Australia is required to make under the Articles of Agreement. [Schedule 4, item 2, section5 of the IFC Act 1955]

4.47 Australia may be required to make such payments because of an amendment to the Articles of Agreement. Appropriations of this kind ensure that Australia is able to comply with any international obligations that it has to make payments under existing agreements.

4.48 However, the deferred commencement rule for legislative instrument to update Australia's legislated version of the Articles of Agreement ensures that the Parliament is able to disallow any amendment to the Articles of Agreement before it can authorise an appropriation. In conjunction with this disallowance process, any amendment to the Articles of Agreement would also constitute a treaty action that is subject to Australia's domestic treaty making procedures. This means that before the Minster makes an instrument to update the Articles of Agreement, the amendments would need to be tabled in Parliament for consideration by JSCOT.

Application and transitional provisions

4.49 The amendments commence the day after they receive the Royal Assent.