21 Mar 2016

Northern Australia Infrastructure Facility: draft Investment Mandate released for comment

Comment is being sought by 29 March 2016 on a major part of the Commonwealth Government's strategy to tap the potential of Northern Australia: the Northern Australian Infrastructure Facility's (NAIF) Investment Mandate.

The Northern Australia Infrastructure Facility is expected to go live on 1 July, with concessional loans being made available shortly thereafter. The Investment Mandate builds on the project eligibility criteria released as part of last November's consultation paper and contains key structural information relevant for both project sponsors and lenders together with each project's host government.

Financing major infrastructure: The Northern Australia Infrastructure Facility

The economic potential of Northern Australia has been in the spotlight in recent months, especially with its richness in resources, enormous landmass and its agricultural potential, its proximity to our major trading partners in the Asia-Pacific, and the potential application of smart technology and remote renewable energy.

Recognising this opportunity, and as part of its strategy for Northern Australia as set out in the "Our North, Our Future: White Paper on Developing Northern Australia", the Commonwealth Government released a Consultation Paper late last year, setting out the policy framework for the $5 billion NAIF.

Through the NAIF the Government is seeking to partner with the private sector and State and Territory Governments to provide concessional loans to finance major economic infrastructure projects in Northern Australia such as airports, ports, roads, rail, energy, water and communications infrastructure.

The Investment Mandate: mandatory eligibility criteria

The mandatory eligibility criteria which must be satisfied for a project to be eligible for financial assistance from the NAIF are mostly unchanged from November:

  • enhancement of economic infrastructure;
  • public benefit;
  • the project is unlikely to proceed, or proceed at a much later date, without NAIF assistance (more on this below);
  • the project is located in, or will have a significant benefit for, Northern Australia;
  • NAIF finance will not exceed 50% of total debt for the proposed project; and
  • comprehensive financial modelling to demonstrate ability of the project to repay NAIF debt.

An additional seventh mandatory criterion has been added, with the project proponent now required to provide an Indigenous engagement strategy reflective of the Indigenous population in the region of the project.

The Investment Mandate: non-mandatory criteria for preferential status

Additionally, there are two more non-mandatory criteria, which if satisfied will give projects preferential status. The first one is that the project requires more than $50 million of NAIF financing (whereby project proponents are able to aggregate multiple pieces of infrastructure into a single project for this purpose); the second is that the project meets an "infrastructure need" identified through a Commonwealth, State or Territory assessment process.

Loan conditions under the Investment Mandate

As you would expect from a concessional loan, the draft Investment Mandate proposes the following loan conditions:

  • loans will be the default financing mechanism, however alternate mechanisms (eg. guarantees) may be proposed where they may be more appropriate for a specific project or are necessary to encourage private sector financiers;
  • a longer loan tenor than those provided by commercial financiers;
  • below commercial financiers interest rates together with lower or different fee structures;
  • extended loan interest capitalisation periods beyond the traditional completion of construction;
  • deferral of loan repayments or other tailored repayment schedules; and
  • lower ranking security flexibility.

Where the proposed loan is greater than $100 million it requires the NAIF to consult with Infrastructure Australia.

Potential projects and issues

Given the unique risks associated with attracting the significant private sector finance necessary to develop a project in Northern Australia, similar to the strong take-up by private sector renewable energy developers of the concessional debt financing provided by the Clean Energy Finance Corporation (CEFC), we expect the project developers to be very keen to utilise the NAIF.

Projects that may seek to access the NAIF include the North East Gas Interconnector (currently being developed by Jemena), the Darwin ship lift project (currently in the request for proposal phase), and other significant Northern Australia infrastructure projects proposed by the Northern Territory, Queensland or Western Australian Governments.

What will be interesting will be the practical application by the NAIF of the above market based eligibility criteria which requires that the project is unlikely to proceed without NAIF assistance. Potentially at odds with this is a requirement in another part of the Investment Mandate which state that the NAIF will not be available unless "the Board is satisfied the Project would not otherwise have received sufficient financing from other financiers" and in another part, "The Board may elect to support a large-scale project that has been unable to secure sufficient financing from other financiers due to the scale of debt required".

Notwithstanding these potential inconsistencies (which presumably will be clarified) if the intention of the NAIF is similar to the CEFC in that it is designed to help finance a project that otherwise could not be financed by commercial financiers it will be important to watch what effect this has on the commercial financing market for such projects in the future. For example in the more mature parts of the renewables sector (eg. large-scale wind) many projects proponents are continuing to use CEFC finance despite there being an increased amount of willing private sector finance participants keen to fund such projects, albeit with a different risk profile and price.

Submission process and next steps

Submissions on the Investment Mandate are due by 29 March 2016 by email.

In parallel with this consultation process, the Northern Australia Infrastructure Facility Bill 2016 is in Federal Parliament; it incorporates feedback on the exposure draft which was made available to the public in late January. If passed, the Government is proposing the Act would commence on 1 July 2016. with concessional loans being made available shortly thereafter.

If you would like any further details, or help in preparing your submission, please contact us. We'll be continuing to analyse opportunities in Northern Australia, so watch this space.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.