26 Apr 2018
Changes to the Northern Australia Infrastructure Facility Investment Mandate
By Margaret Michaels, Nicole Besgrove
The Australian Government will be making changes to the Northern Australia Infrastructure Facility Investment Mandate to accelerate investment in northern Australia.
On 18 April 2018, the Minister for Northern Australia, Matthew Canavan announced that changes would be made with respect to key elements of the Northern Australia Infrastructure Facility (NAIF) Investment Mandate to increase its flexibility and improve its potential to support projects that deliver more jobs and economic opportunities to Northern Australia.
The changes are in response to the recommendations made in the final report of the independent expert review of NAIF which was provided to the Government in January 2018.
Expert Review of the NAIF – final report
In December 2017 an expert review of the NAIF was undertaken by Anthony F Shepherd, AO, the aim of which was to recommend ways to accelerate project development and ensure the NAIF can best meet its legislated objective to enable, “the construction of northern Australia economic infrastructure which provides a basis for economic and population growth in northern Australia.”
In January 2018 the final report for the expert review was delivered to the Government and in it, Mr Shepherd made 15 recommendations:
- Recommendation 1 – Market Expectations: The Government and NAIF should work together to communicate to the market the time it takes in Australia (and most countries) to bring a properly considered project to market. The role of NAIF as a provider of concessional finance and not as a promoter should also be emphasised.
- Recommendation 2 – NAIF Continuation: The Government should assure NAIF and the market that it intends the continuation of NAIF but as foreshadowed will review progress and make any necessary adjustments to ensure it successfully fulfils its goals.
- Recommendation 3 – Freedom of information: Freedom of information and transparency within the limits of sensible commercial confidentiality are essential to good government and good governance. However, NAIF is diverting significant resources and cash for a small organisation to deal with FOI requests which in some cases can be described as vexatious. The Government should review what it can do to alleviate this pressure on NAIF.
- Recommendation 4 – Infrastructure: The definition of "economic Infrastructure" should be broadened in the Mandatory Criteria to recognise that in remote regions economic infrastructure stretches far further than the traditional roads, rail, power, water, ports, communications and airports. The definition needs to be broadened to include all those facilities, services and supplies, which are essential to the establishment of business in the location. The multi user test should be relaxed so that all that is required is for the proponent to contract on the basis that it will provide services to other users on reasonable commercial terms.
- Recommendation 5 – Crowding Out Test: NAIF should rely on its own judgement on the impact on the market and market information and submissions by the proponents on whether NAIF participation is essential to facilitate the project or bring forward its delivery. NAIF should also make it clear that they are prepared to step back if the private sector can demonstrate that the project can be delivered in a timely manner without NAIF support.
- Recommendation 6 – Debt Cap: NAIF Mandatory Criterion 5 should be relaxed to allow NAIF to provide more than 50% of the debt of a project provided there is a reasonable level of private sector funding and risk in the project. NAIF should not be the major risk taker in an investment.
- Recommendation 7 – Concessional Finance: The role of NAIF is not to make a profit, at least in the short term, but to provide concessional finance to projects which would otherwise not proceed or not proceed for some time. In doing so, NAIF’s prime consideration should be that there is a reasonable expectation that NAIF will be repaid. This gives NAIF great flexibility as to the level of concessions it can provide and it should fully exploit this flexibility within the constraint of only providing concessions to the level necessary to facilitate timely delivery of the project.
- Recommendation 8 – Equity: Subject to resolution of the complex Constitutional issues, the prohibition on NAIF taking equity in a project should be removed with the proviso that NAIF cannot be the major risk taker and there must be an exit mechanism for NAIF at least in the medium to long term.
- Recommendation 9 – Local investment: Subject to our International Trade Obligations the NAIF Mandate should be clarified to make it clear that all else being equal preference will be given to the project, which has the highest relative level of domestic equity.
- Recommendation 10 – Relationship with States and Territories: The working relationship with the States and Territories on NAIF should be strengthened at both the Government level and the NAIF level. The responsible jurisdiction should be consulted as early as practicable in the assessment process by NAIF and kept appraised of all relevant developments. It is important that NAIF remains the point of contact with the jurisdiction and the Government acts in a facilitating role.
- Recommendation 11 – Commonwealth Role: The Commonwealth should adopt a "whole of Government" approach on active NAIF projects and facilitate cooperation from other Commonwealth Departments or agencies, which may have a role in the project or its approval. The Department is best placed to act as coordinator.
- Recommendation 12 – NAIF Board: Strengthen the NAIF Board by the inclusion of an additional Director who has successful project development experience in one of the States and Territories and who understands the State and Territory perspective and is respected.
- Recommendation 13 – Development Hubs: Without in anyway reducing the opportunities for investment in remote locations, the Government in consultation with NAIF should explore with the States and Territories the establishment of longer term plans for the development of economic infrastructure in identified Regional Development Hubs and seek to establish priorities.
- Recommendation 14 – Clean Energy Finance Corporation (CEFC): The two responsible Ministers should agree on a Memorandum of Understanding between NAIF and CEFC on their modus vivendi on projects falling under both their mandates. The goal is to establish a partnership approach using the skills and experience and mandates of both organisations.
- Recommendation 15 – NAIF Focus: New potential projects should be reviewed quickly by NAIF in consultation with the relevant jurisdiction and NAIF should decide if the project is likely to proceed to the investment phase with NAIF support. If its assessment is that this is unlikely then the proponent should be advised what is required to bring the project to investment.
Key changes to the NAIF Investment Mandate
The key changes to the NAIF Investment Mandate currently proposed include:
50% limit on NAIF finance
Currently the NAIF Investment Mandate limits finance (provided by way of a Financing Mechanism from the Facility) to 50% of the total debt for the proposed Project. It is proposed that this limit be removed to allow the NAIF to finance up to 100% of the debt for appropriate infrastructure projects in response to Recommendation 6 of the Expert Review Report.
The aim of this change is to ensure that those projects which would have an economic and public benefit for northern Australia, but would be prevented by the 50% limit, can proceed. Proponents must still be able to repay or refinance the loan, but the NAIF can provide them with finance on concessional terms.
Mandatory criteria for financial assistance (the "gap test")
Currently the mandatory criteria to demonstrate eligibility for NAIF financial assistance requires (amongst other things) that the Project Proponent demonstrate to the NAIF Board’s satisfaction that financial assistance is necessary to enable the Project to proceed, or to proceed much earlier than it would otherwise.
The expert review found that this was imposing unnecessary and onerous requirements to demonstrate a genuine finance gap. Accordingly, in accordance with Recommendation 5 of the Expert Review Report, it is proposed that more flexibility be provided to allow the NAIF to rely upon its own expert judgment as to whether NAIF financial assistance is essential to facilitate the project or bring forward its delivery.
Definition of "economic infrastructure"
The mandatory criteria to demonstrate eligibility for NAIF financial assistance refers to "economic infrastructure" which includes, but is not limited to, rail, water, energy and communications networks, ports and airports.
Recommendation 4 of the Expert Review Report provides that this definition should be broadened to include all those facilities, services and supplies, which are essential to the establishment of business in the location so that the infrastructure needs of regional and remote areas are better reflected.
Currently the NAIF Investment Mandate provides that the NAIF will not offer an alternative Financing Mechanism that would provide for equity to be provided for any Project (section 11(5) of the Northern Australia Infrastructure Facility Investment Mandate Direction 2016).
Recommendation 8 of the Expert Review Report provides that this prohibition of the NAIF taking equity in a project should be removed provided that:
- NAIF cannot be the major risk-taker; and
- there must be an exit mechanism for NAIF at least in the medium to long term.
It is understood that the Government will further consider this recommendation as part of the broader scheduled review for 2019.
If you would like further information about the NAIF and the Investment Mandate please contact us.