Revisiting Revenue Contingent Loans for Drought Relief: Government as Risk Manager

18 Pages Posted: 18 Jul 2017

See all articles by Linda Courtenay Botterill

Linda Courtenay Botterill

University of Canberra

Bruce Chapman

Australian National University, Research School of Social Sciences (RSSS) - Economics Program; Australian National University (ANU) - Crawford School of Public Policy

Simon Kelly

University of Canberra

Date Written: July 2017

Abstract

It is clear that Australian governments will provide assistance to farmers in drought, which is a rational political judgement supported by recent survey work suggesting strongly the pervasive existence among voters of agrarian sentiment. In this context, a reasonable question relates to what forms of assistance are most equitable for taxpayers and also have desirable properties for farm businesses. In this study it is argued that traditional and current approaches to drought assistance are not equitable and do not provide sufficient protection to farmers from default and thus insolvency risk. But there is an instrument available to government which can be designed to minimise taxpayer subsidies while at the same time delivering insurance for farmers against default: a Revenue Contingent Loan (RCL). Following the principles inherent in the Higher Education Contribution Scheme, a RCL is financial assistance repaid contingent on a farm's capacity to pay, meaning that loan defaults can be avoided. We model the revenue streams associated with a hypothetical loan of this type and illustrate the advantages for a farm business of these kinds of debt.

Keywords: revenue contingent loans, drought, equity

Suggested Citation

Botterill, Linda Courtenay and Chapman, Bruce James and Kelly, Simon, Revisiting Revenue Contingent Loans for Drought Relief: Government as Risk Manager (July 2017). Australian Journal of Agricultural and Resource Economics, Vol. 61, Issue 3, pp. 367-384, 2017, Available at SSRN: https://ssrn.com/abstract=3004198 or http://dx.doi.org/10.1111/1467-8489.12213

Linda Courtenay Botterill (Contact Author)

University of Canberra

Canberra, Australian Capital Territory 2601
Australia

Bruce James Chapman

Australian National University, Research School of Social Sciences (RSSS) - Economics Program ( email )

HC Coombs Building
Australian National University
Canberra, Australian Capital Territory 0200
Australia

Australian National University (ANU) - Crawford School of Public Policy

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

Simon Kelly

University of Canberra

Canberra, Australian Capital Territory 2601
Australia

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