Northern Australia Infrastructure Facility (NAIF) Expert Review Report

Anthony F Shepherd, AO

ContentsExecutive Summary...............................................................................................3Review Recommendations....................................................................................9Terms of Reference.............................................................................................12Introduction.........................................................................................................13Impediments to deals and deal acceleration.......................................................16Co-operation and coordination with the States and Territory..............................22Commonwealth cooperation................................................................................25Project selection models/pipeline........................................................................28

Executive Summary1. Introduction The Terms of Reference for the Review of NAIF was to recommend ways to accelerate project development to meet its legislated objectives. Those objectives are tied to the construction of new economic infrastructure as a basis for economic and population growth in Northern Australia.

The post war development of Northern Australia has been disappointing with some notable and worthwhile exceptions. Although the region does well in terms of the GDP generated compared to the population compared to our South East Asian neighbours with similar geography, climate and resources we have lagged. As a nation, we are not reaping the full economic benefits and the strategic imperatives of the development of northern Australia, a diverse, beautiful and resource rich region of Australia.

With this obvious market failure, the Government has established the NAIF with a degree of bipartisan support to help kick start development of Northern Australia through infrastructure investment.

Northern Australia is diverse geographically, climatically, demographically and also in terms of its relative state of development across the region. Its strongest industries are resources extraction, agriculture (including meat and livestock, fishing, aquaculture), and tourism, which draws on some of the most beautiful and pristine scenery in the world. There are also some specialist and meritorious research and education institutions.

My point here is that one size does not fit all and the nature of development varies significantly from location to location. For example, development of the Port in Townsville is quite different from the development of the Fitzroy River Agriculture Precinct.

A corollary of this would be to look at creating, with the States and Territories, Development Hubs in those regions where development is already underway or there is a significant established base. For example Townsville, Darwin and Port Headland are already well established but have significant infrastructure challenges. Realising those challenges could add significantly to wider Northern growth.

This of course should not distract from investment in remote locations such as Fitzroy River. Seeds must continue to be planted throughout Northern Australia to make up for past neglect.

2. ConsultationI consulted extensively with NAIF through its CEO and Chairman and with the Department of Industry, Innovation and Science (DIIS). Both organisations were very helpful, cooperative, enthusiastic and knowledgeable.

I met also with Efic and talked to bureaucratic representatives of each of the States and Territory. I spoke also to a small representative sample of organisations seeking financial assistance from NAIF. I met also with Macquarie Capital and BAML both of whom have extensive global practices and expertise in infrastructure. I have spoken to a sample of proponents and this Review reflects the comments I have received.

3. Organisational Assessment of NAIFThe organisation, including the Board, has been established quickly and professionally. The alliance with Efic was a master stroke and provided the back office and transaction support which otherwise would have cost time and money in a wasteful duplication of established Commonwealth expertise.

NAIF has recruited well and their ‘originators’ all have had long and successful careers performing similar roles in investment banking. The CEO has extensive experience in project finance, infrastructure, commercial lending and public-private partnerships.

They have developed a suite of internal policies and processes covering inter alia project appraisal, credit approval and risk management, which are best practice. They have closely followed their Mandate and legislation, which are quite specific and stipulates in Section 3 of the Act construction of Northern Australia economic infrastructure. NAIF has been scrupulous in their approach as a new organisation and given the intense public scrutiny.

Post their involvement in the Adani project, NAIF have been relentlessly attacked by activist groups and the Chairman has suffered very public and personal vilification. This has taken the form of numerous vexatious FOI requests and requests for Judicial Review. In the last 18 months, they have expended some $350,000 on external legal advice and diverted senior internal resources in dealing with these matters. This money could have been invested in more origination capacity.

In this context, and as a new organisation with a tight Mandate, the NAIF have been careful in the interpretation of their legislation and Mandate. They have been concerned not to leave the projects they support and NAIF itself open to challenge and delay. NAIF should focus on not being distracted or deterred by what outsiders may think or do.

I believe the organisation would be strengthened by the appointment of an additional Director who has successful project development experience and who understands the State perspective. Relevant experience and success in at least one of the three jurisdictions is essential.

Projects NAIF has a long list of projects it has reviewed, has under consideration or is progressing. The simple fact is that not many of them are investment ready. By which I mean they lack a reasonably sound business case including suitable offtake arrangements or a sensible market analysis, a P50 construction cost estimate, firm interest from equity and senior debt providers and a proponent with the experience and capability to bring the project to financial close.

Many projects on the NAIF long list are unlikely to ever reach investment stage. It is a truism in development that your success varies inversely with the size of the list you are working on.

It is apparent that one of the biggest problems for NAIF is finding proponents with a bankable feasibility study(BFS). There would appear to be a need for some form of government support to assist proponents to get to the BFS stage. This may be in the form of a grant.

It may be sensitive from a public relations perspective, but it would be more productive for NAIF to concentrate its limited resources on less projects. For example, those projects that are investment ready or are closer to investment readiness and are assured of support from the relevant State or Territory.

NAIF has relaxed its requirements for issuing Term Sheets and should continue this approach. Even a highly conditional Term Sheet from a body such as NAIF is valuable to a proponent. Such a Term

Sheet can be issued without compromising its Risk Appetite Statement and helps create public and market confidence.

In launching NAIF there was an unreasonable market expectation as to how long a viable deal takes to develop and close. All market participants interviewed confirmed, and my own experience shows, that it takes two years, and up to five years, to close a deal – even one with a solid business case. If you are a concessional debt provider then your ability to influence the outcome and speed up the transaction is limited.

Creating a realistic market expectation is a communication task for NAIF and the Government. For example, we are investing taxpayers’ money and we must be thorough and careful. We are not the project promoter or owner and our role is to assist in getting the project over the line.

The US Transport Infrastructure Finance and Innovation Act set up the TIFIA Credit Program in 1998 designed to fill market gaps and leverage substantial private sector investment. In the first six years it invested in only two projects despite the size of the US market and the relatively poor state of a lot of US transport infrastructure. It took time for the new organization to get established, for the market to factor TIFIA into its planning, and to form and close transactions.

NAIF advises that subject to Board Approval another seven projects will be the subject of indicative Term Sheets by the end of February 2018 across a range of projects and jurisdictions.

Legislation and MandateThe Legislation and Mandate are specific and restrictive to ensure responsible spending of taxpayer’s money. NAIF must find a reasonable developed project which qualifies as the construction of economic infrastructure in Northern Australia, which has equity and senior debt, a proponent capable of producing a BFS and eventually project delivery, a project which the State or Territory supports, and a transaction where up to 50 percent of the debt on concessional terms from NAIF makes all the difference and does not crowd out the private sector.

Experience has shown this is an unlikely set of circumstances and is at the heart of the challenge facing NAIF. There are a dearth of investment ready infrastructure projects in Northern Australia. Therefore I recommend adjustments be made to the Mandate and to its interpretation through certain of the operational processes of NAIF.

The key characteristics of a concessional loan in order to receive the accounting classification that the Commonwealth requires is the expectation of being repaid at inception. For example, if repayments are contingent on project performance then there must be an expectation at inception that this will occur. I am not sure whether there is any benchmark on other Commonwealth concessional finance programs but one would not wish to be too far outside of those. The Clean Energy Finance Corporation (CEFC) is directed to endeavour to achieve an average return in the medium to long term of +3% to +4% above the five year Australian Government Bond Rate.

Under Mandatory Eligibility Criterion 6, the NAIF Board must be satisfied that the project is capable of repaying or refinancing any loan. This is a reasonable requirement.

That said, I believe that if the situation arises there is room for NAIF to offer relatively deeper concessional finance upfront and still live within the required Commonwealth accounting treatment and the Mandate. Of course, the concession would still be the minimum required to get a viable project across the line or to bring the project forward. This may require amendment of NAIF’s Risk

Appetite Statement, which guides its Investment Decisions.

NAIF also may be able to accept more market risk (e.g. patronage) than the private sector because it is providing more patient capital. This has been the case with TIFIA with toll road patronage risk.

Most developmental projects are at their most vulnerable in the early years. The NAIF loan concession could be in the form of a holiday, for a specified period, on the payment of interest and the repayment of principal. This could make all the difference to the viability of a project. As an offset, this type of transaction could be set up like quasi equity with a kicker for the sub debt provider if the project eventually exceeds a target level of equity return, or it could mean earlier payment of interest or repayment of principal. Such an arrangement could also include Board representation or Board Observer status on the project vehicle.

The Mandatory Criteria in the Investment Mandate could be loosened giving the Board more discretion. For example, Criterion 1 relating to the definition of infrastructure and Criterion 5 relating to the major source of financing. In this regard, it should be recognized that NAIF has established procedures and an experienced and sensible Board and management team and good processes.

The restriction to 50 percent of debt (Mandatory Eligibility Criterion 5) is too tight on some projects and should be loosened. Provided there is material true risk equity in place there is no philosophical reason why NAIF could not go to 100 percent of the debt. If a project can attract 50 percent of the debt from the private sector and has equity it begs the question of whether the deal requires concessional finance. We should recognise that we are in a market where there is far more capital available than bankable transactions.

If these mandatory criteria are relaxed, then it may be prudent to cap the limit of NAIF investment in a project at say no more than 50 percent of the total capital but that again may be overly restrictive.

There has been some focus within NAIF on crowding out the private sector and the so-called ‘gap test’. I believe this has been over-emphasised.

The Board and NAIF management should rely on their own expertise and experience to make the judgement. NAIF is required to request proponents to demonstrate that financial assistance is necessary to enable the project to proceed or proceed earlier. NAIF was clear in their discussions with me that if they were in a transaction and a private proponent provided evidence that the NAIF concessional finance was unnecessary they would quite happily withdraw.

NAIF is prevented under its Mandate (Section 11(5)) from providing equity. This is an unnecessary restriction. As I have said, the restrictions imposed on NAIF reduce significantly the field of possibly viable projects in which they could invest. It may be unwise for them to take more than 50 percent of the equity as it would no longer be a private sector transaction.

There are Constitutional issues with taking equity but these seem to have been overcome in Western Sydney Airport, the Inland Rail Project, CEFC and Moorebank Intermodal Terminal. Options for NAIF to take up to 50 percent of the equity in a project should be explored. Section 99 of the Constitution relating to no discrimination between the States is an issue but there have been different rates of taxation in Northern Australia in the past.

The NAIF five-year horizon with a three year review is already creating a wait and see public and proponent attitude and is not helpful for internal morale. Without subverting the legislation, the Minister may consider a public statement of intent confirming the three year review but stating that its focus will be on how NAIF can be strengthened and enhanced to fulfil its core mandate of Northern development.

With a wider interpretation of their Mandate and loosening of some of the criteria, NAIF will be in a position to be more pro-active and to drive projects.

I note that many similar overseas funds have a focus on local content, similarly NAIF requires that projects comply with the Australian Industry Participation Policy. Subject to our international trade obligations, the NAIF Mandate should also preference transactions with Australian investment or co- investment particularly at the equity level. This would not preclude co-investing in foreign led projects but would establish a ranking if there were a competing project led by an Australian proponent.

Relationship with States and Territory I spoke to departmental representatives in each jurisdiction. They were unanimously in favour of NAIF and thought positively of the executive and Board. However they all considered the NAIF Mandate to be too restrictive and wondered just how many projects would fit the profile as legislated, mandated, and as applied by NAIF.

Some of the jurisdictions considered that NAIF was overly bureaucratic and did not consult early enough on specific projects. They believed the Mandate or eligibility criteria were too narrow. They felt the same way about the definition of infrastructure. They believed that NAIF would be much more use as a Development Fund as distinct from an Infrastructure Fund.

There is no doubt also that the States and Territory, as well as the proponents, would rather receive a grant for some projects than a loan and this can act as an inhibitor to investment by NAIF. This issue should be dealt with early in the consideration of a project by NAIF. It may be that there could be an element of a grant together with a concessional loan from NAIF, for example, Commonwealth support for the WestConnex Project in Sydney contains both a grant and a concessional loan.

The relationship with the States and Territory has been clarified and simplified by the execution of the Master Facility Agreement.

However, the relationship should be strengthened at the political and bureaucratic level. This is a partnership and it will only succeed with full cooperation, honesty and transparency. The Commonwealth may be able to provide more support and assistance to NAIF in this relationship.

For example, as early as practicable in the assessment process NAIF should endeavour to find out from the jurisdiction whether they support the project so that they waste no further time on it if not. This should be in the Preliminary Assessment Stage.

Sometimes there is a wider Commonwealth involvement particularly in larger projects. It makes good sense for the Commonwealth to provide support or facilitation for a project backed by NAIF on a whole of government approach. This could include such matters as approvals, grants, native title,

foreign ownership, and export approvals. The Department is the appropriate organisation to coordinate at the Commonwealth level.

Clean Energy Finance Corporation An overlap has emerged between NAIF and CEFC on a number of projects in Northern Australia. Obviously renewables have some attraction as an energy source particularly in remote locations given the high cost of transporting fuel.

Apart from the inefficiency of two Commonwealth bodies pursuing the same transaction, it does not engender public confidence.

It would seem sensible for the two responsible Ministers to agree the key terms of a formal MOU between the two organisations. I believe a partnership approach makes sense given CEFC has more experience in power projects and NAIF is building its portfolio and profile in Northern Australia.

Transparency and FOIIn the current climate it would be difficult to seek a Freedom of Information (FOI) exemption for NAIF. However, it must be recognised that vexatious requests are time consuming and a major distraction. The Minister may want to consider how this pressure on NAIF might be alleviated noting that the Opposition has expressed support for a continuing role for NAIF.

Definition of Infrastructure Economic infrastructure itself can be restrictive in remote development projects. For example, in remote parts of Northern Australia if a proponent is setting up a plant or facility of some type they must provide all the infrastructure for example, power, water, roads, ports, airports, accommodation, medical centre. NAIF has already indicated a preparedness to support the infrastructure component of such projects.

NAIF will only invest in the infrastructure component of a project provided it is multi-user. In such remote locations, it is highly unlikely that there will be any other users at least initially.

This could be taken one stage further, and I understand Government has agreed, that NAIF should be able to fund for example, an operating asset which includes infrastructure and has the potential once established to provide infrastructure services to multiple users.

For example there is a major fishery business established in Madang PNG which now provides marine services, acetylene and oxygen to local industry all services which qualify as ‘infrastructure’ in a philosophical and economic sense but would not qualify under the NAIF Investment Mandate.

Again, greater freedom in the definition of infrastructure would open up new opportunities for NAIF and enable them to be more proactive.

Review 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 percent 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 - 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.

Terms of ReferenceThe aim of this review is 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.”

The review will draw on its own considerations, and information and analysis provided by the NAIF and the Department of Industry, Innovation and Science and feedback from the States and Territories, Efic, the market and proponents.

The review will consider and assess the NAIF policy settings, with particular reference to the Northern Australia Infrastructure Facility Investment Mandate 2016 and its implications for the NAIF’s project identification, selection and assessment processes, including risk settings.

The review will be conducted over a three to four week period, commencing 4 December 2017, with recommendations provided to Government by 20 January 2018.

Reviewer The review was conducted by Anthony F Shepherd, AO who has extensive infrastructure related experience, including the development of the Moomba to Sydney gas pipeline, the Sydney Harbour Tunnel project, EastLink, and the Lane Cove Tunnel. Tony also chaired the National Commission of Audit (2013 to 2014) and the WestConnex Delivery Authority (2013 to 2015).

Introduction The NAIF seeks to address challenges established in the White Paper on Developing Northern Australia (White Paper) and the Northern Australia Audit: Infrastructure for a Developing North report. Together, these documents outline a need for greater infrastructure investment in the north, noting that characteristics such as low population density, dispersed industry, extreme weather and remoteness, hamper investment and development by creating risk and uncertainty.

NAIF was established to support the development of economic infrastructure that provides a basis for economic growth and stimulates population growth in Northern Australia. It does this by offering finance or guarantees, which may be on concessional terms, including: longer loan tenors; lower interest rates; extended periods of capitalisation; deferral of loan repayments; lower fee structures; or other concessional arrangements.

Key establishing and governance documents for the NAIF are:

- The Northern Australia Infrastructure Facility Act 2016 (the Act), which outlines the corporate structure, functions and administration of the NAIF. The Act also provides the NAIF with the power to act and make Investment Decisions independently of government.

- The Northern Australia Infrastructure Facility Investment Mandate Direction 2016 (the Investment Mandate). This is a key element of the legislative framework that directs the NAIF on the Minister’s expectations, including giving directions to the NAIF on matters to be considered when making investment decisions, and determining concessions and loan conditions.

- The Public Governance, Performance and Accountability Act (2014) (the PGPA Act). The PGPA Act establishes a framework covering governance, accountability, performance and the use of resources across Commonwealth bodies, including Corporate Commonwealth Entities such as the NAIF.

The NAIF is a Corporate Commonwealth Entity (CCE) established on 1 July 2016. The responsible Minister is the Minister for Resources and Northern Australia, and policy support for the NAIF is provided by the Department of Industry, Innovation and Science (DIIS).

This review was commissioned by government to make recommendations on ways to accelerate project development and ensure the NAIF can best meet its legislated objective now that it has been in operation for 18 months. In order to consider and make recommendations on these matters, multiple stakeholders including the NAIF, the DIIS, the Export Finance and Insurance Corporation (Efic), the jurisdictions, financiers and project proponents were consulted and research completed in conducting this review. A list of stakeholders consulted can be found at Appendix A. Some stakeholders preferred to remain anonymous.

It is important to highlight that given their complexity, infrastructure investments take time to develop and bring to financial close. The period from concept to close can span up to five years. Even a reasonably well developed proposal with no financials can take up to two years to close. Truncating this process is possible, but would introduce significant risk to the taxpayer.

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.

More practically, the five year horizon for investment decisions with a three year review about policy settings does not provide the policy certainty necessary for infrastructure projects, particularly those that are transformative, to effectively factor in the NAIF to their project considerations. The uncertainty associated with the five year period is also not helpful for the internal morale of the NAIF and is a disincentive to attracting the best quality staff. Without subverting the legislation, the Minister may consider a public statement of intent confirming the three year review but stating that its focus will be on how can NAIF be strengthened and enhanced to fulfil its core mandate of Northern development.

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.

NAIF operating contextThe NAIF is a start-up organisation which has faced considerable additional challenges over the last 18 months. The NAIF has worked extremely hard to build their pipeline of projects, and develop the robust stakeholder relationships required to be effective, against a backdrop of, at times, hostile opposition to its activities from environmental lobbyists.

Targeted environmental activism and, for example the use of vexatious Freedom of Information (FOI) claims, has placed significant pressure on the day to day operation of the NAIF. This has diverted significant resources from NAIF’s core business and likely impacted the morale of the organisation in a negative way.

Although this has not prevented the NAIF from getting on with fulfilling its objectives and building a healthy pipeline of projects, the intense scrutiny and potential for legal challenge may have led the NAIF to commence operations in a somewhat conservative manner.

The NAIF does not currently have any exemptions from any components of the Commonwealth’s transparency regime. The primary elements of that regime that impact upon the NAIF are:

Administrative Decision Judicial Review (ADJR), which provides individuals that are adversely affected by an administrative decision of the Commonwealth with an opportunity to seek review of those decisions, and

Freedom of information (FOI) framework, which provides the public with the opportunity to access information and records held by the Commonwealth, with limited protections for situations where public release of information would be harmful.

Granting the NAIF an exemption would have the following advantages:

the NAIF would be better able to promise confidentiality to project proponents,

the ability of environmental and other community action groups to inundate the NAIF with FOI requests (commonly known as ‘lawfare’) would be greatly reduced, and

the NAIF would not have to devote resources to requests for statement of reasons and review applications.

However, without access to a statement of reasons, information about NAIF’s activities and the right to review, the public cannot be certain that the NAIF is acting properly or lawfully within the Act and its Mandate. Allegations of secrecy and lack of accountability when dealing with public funds are a

key risk, particularly because the NAIF is currently criticised on the grounds that it acts in an opaque manner. Potential drawbacks of an ADJR or FOI exemption include:

public money would be distributed without the right to request justification through a statement of reasons (NAIF would be seen to be ‘above the law’),

a reduction in transparency into how public money is handled,

the ability to request a statement of reasons generally promotes better decision making and this would be lost,

without access to a statement of reasons and the right to review, the public cannot be certain that the NAIF is acting lawfully within the Act and its Mandate, and

without the right to request a statement of reasons, an individual is denied the opportunity to get information that will inform their decision whether or not to launch legal proceedings.

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 can mainly be described as vexatious. The Government should review what it can do to alleviate this pressure on NAIF.

Impediments to deals and deal accelerationInterpretation of ‘infrastructure’Due to the lack of mature industries and infrastructure, greenfields developments in northern Australia often involve construction and operation of associated infrastructure. Making distinctions on which aspects of a project can be considered infrastructure is subject to interpretation. The meaning is context dependent, and from a policy perspective, was not intended to be used as a mechanism to limit eligibility. In the context of northern Australia economic infrastructure, a narrow reading would unnecessarily reduce the project pool.

The aspects of a project that can deliver public benefit or which could be considered ‘infrastructure’ due to their capacity to service multiple users may be difficult to establish because the initial user is the only existing identifiable user. However, these projects provide a basis for further industrial and economic development and it is important that the definition of infrastructure used by the NAIF is interpreted with reference to the operating environment of northern Australia and particularly in remote environments.

LegislationThe principal function of NAIF is to grant financial assistance to the States and Territories for the ‘construction of Northern Australia economic infrastructure’ (s 7(1)(a) of the NAIF Act).

Section 3(2) defines ‘Northern Australia economic infrastructure’ as follows:

(2) Northern Australia economic infrastructure is infrastructure that:

(a) provides a basis for economic growth in Northern Australia; and

(b) stimulates population growth in Northern Australia.

The term ‘infrastructure’ is not defined in the NAIF Act.

There is often a distinction between what is referred to as ‘economic’ and ‘social’ infrastructure:

economic infrastructure might be described as the internal facilities of a country that make business activity possible, such as communication, transportation, and distribution networks, financial institutions and markets, and energy supply systems.

‘Social infrastructure’ might be described a subset of the infrastructure sector that typically includes assets that accommodate social services; examples include schools, universities, hospitals, prisons and community housing.

Given the way in which the term is used in the NAIF Act, and in particular the use of the word ‘economic’ in section 3(2), it is likely that infrastructure to be funded under the Act is most likely to come within what may be regarded as ‘economic infrastructure’ rather than ‘social infrastructure’ as those concepts are outlined above. This was the intent of the legislation and this is referenced in both the Explanatory Memorandum and the Minister’s second reading speech.1

However, these subcategories of infrastructure do not carry any particular legal meaning and, while providing for a broad distinction, these concepts are not necessarily mutually exclusive. It is possible that a project that might be referred to as ‘social infrastructure’ may come within the definition of ‘Northern Australia economic infrastructure’ in section 3(2).

Investment MandateOnce a project is assessed as falling within the definition of ‘Northern Australia economic infrastructure’, the NAIF must consider the Mandatory Criteria in the Investment Mandate. In 1 See Northern Australia Infrastructure Facility Bill 2016 - Explanatory Memorandum (House of

Representative Print) pp 1 and 4 and House of Representatives Hansard 17 March 2016, p 3441

particular, Mandatory Criterion 1. That criterion contains the term ‘economic infrastructure’. The description also relevantly states:

The Project Proponent must demonstrate that the Project incorporates physical structures associated with the flow of people, goods, services and information between buyers and sellers or that enables an increase in economic activity, including efficiency in developing and connecting markets, and population in a region. It includes, but is not limited to, rail, water, energy and communications networks, ports and airports.

Operating AssetsGiven that a definition of ‘infrastructure’ is not provided in the NAIF Act, the NAIF Board, on legal advice, have determined that a normal interpretation of ‘infrastructure’ should be applied in determining eligibility. It is unlikely that a court, adopting the ordinary meaning of ‘infrastructure’, would consider the operating assets of an individual company to be infrastructure. However, operating assets that were made available to other users may be considered ‘infrastructure’. Such assets would then also have to satisfy the definition of ‘Northern Australia economic infrastructure’ as well as satisfying Mandatory Criterion 1 in the Investment Mandate.

The NAIF’s interpretation of infrastructure means they are not able to contribute finance to the broader operational components of ‘mixed projects’. However, as established, these mixed developments can be a significant driver of economic and population growth and are in need of NAIF finance for the whole project to proceed, particularly where those mixed projects also have the potential to be multi-user infrastructure assets at a point in the future.

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 normal 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.

Gap and how its assessedThe underlying objective of the NAIF is to encourage private sector finance in a way that, “will ensure that economic infrastructure that otherwise would not be built, or would not be built for some time, will be delivered.”2 This ensures that any NAIF supported project represents an additional project that would not have otherwise commenced, or brings forward economic activity that would not otherwise have immediately occurred.

Investment MandateThe requirement for ‘project additionality’ is imposed on the NAIF through several sections of the Investment Mandate, including:

Subsection 7(1) – The Facility must not provide a Financing Mechanism unless the Board is satisfied the Project would not otherwise have received sufficient financing from other financiers.

2 J Frydenberg, “Second reading Speech: Northern Australia Infrastructure Facility Bill 2016”, House of Representatives, 7 March 2016, page 3442

Subsection 7(3)(e) – In making an Investment Decision, the Board must have regard to the necessity of the investment to encourage private sector participation in financing a Project.

Subsection 9(1)(a) - In determining any concession to be granted in an Investment Decision, the Board must have regard to the extent and mix of all concessions necessary for the Investment Proposal to proceed.

Guidance is also given as to how this must be enforced through Mandatory Criterion 3, which requires that:

The proposed Project is unlikely to proceed, or will only proceed at a much later date, or with a limited scope, without financial assistance.

ImplicationsIn practice, the Mandatory Criterion is leading the NAIF to conduct a comprehensive analysis of finance market appetite for a project to ensure that a gap exists. This can take between two and three months to establish.

While the policy goal of ensuring additionality is worthy and should be retained, implicit protections beyond the Mandatory Criteria exist to ensure project additionality. The Investment Mandate requires that the NAIF consider the impact of a financing decision on infrastructure financing markets (Subsection 7(3)(d)) and that 50 percent of total debt for a project is sourced from other sources (Mandatory Criterion 5). In practice, this provides a natural protection against the NAIF providing finance unless a project is unlikely to proceed, as other financiers are provided with the opportunity to assess the project and will offer to fill the ‘gap’ where they are willing to take on the entirety of the project.

The NAIF Board recognises that the NAIF is not designed to compete with the private sector and has advised that they would happily stand aside from a transaction if it subsequently became apparent that the private sector could fund the project without NAIF support. This could be written into their operating procedures.

Recommendation 5 - Crowding Out Test

NAIF should rely on its own judgement including the impact on the market, 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.

50 percent debt cap The policy settings require that NAIF partner with other financiers to ensure that:

the risk profile of a project is sufficiently low to be able to attract investment from other sources;

individual project risks are diversified across investors and are not held solely by the NAIF; and

infrastructure investment is ‘crowded-in’ by ensuring that support is only given to projects that would not have otherwise proceeded.

Investment MandateThis requirement is established through the Investment Mandate’s Eligibility Criteria, with Mandatory Criterion 5 requiring:

Facility’s loan monies are not the majority source of debt funding.

However, this protection may be resulting in a number of worthwhile transformational projects capable of delivering significant public benefits being delayed or not proceeding. Experience also suggests that NAIF has limited ability to encourage other sources of debt to fund at least 50 percent of a project without NAIF taking a fully subordinated security position, which increases repayment default risk. For example, NAIF providing more than 50 percent of the debt of a project may actually be a lower risk than 50 percent subordinated debt given superior security.

Relaxation or removal of the 50 percent debt cap may support the NAIF to utilise its higher risk tolerances to drive projects with significantly higher public benefit and to take more secure, lower risk positions in debt structures. Subsection 7(3)(e) of the Investment Mandate would still require that the Board must have regard to the necessity of the investment to encourage private sector participation in financing a project.

Conceptually, it is difficult to make an argument for why there should be a cap based on the amount of debt in a project, rather than a cap on the amount of third party finance in a project. Provided there is material, true risk equity in place there is no philosophical reason why NAIF could not go to 100% of the debt of the infrastructure aspects of a project. If a project can attract 50% of the debt from the private sector and has equity, it begs the question of whether the deal requires concessional finance.

Recommendation 6 - Debt Cap

NAIF Mandatory Criterion 5 should be relaxed to allow NAIF to provide more than 50 percent 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.

Concessional termsIt is envisaged that the majority of the financial assistance provided to projects by the NAIF will be provided by way of concessional loans. The form of the concession can play an important role in assisting project viability, while achieving the other policy goals of the NAIF, primarily that there is a reasonable expectation of repayment.

Most developmental projects are at their most vulnerable in their early years. NAIF loan concessions in the form of a holiday for a specified period on the payment of interest and the repayment of principal create space for increased utilisation in the later years of an infrastructure asset’s life. This could make all the difference to the viability of a project in the immediate term. As an offset this could be set up like quasi equity with a kicker for the sub debt provider if the project eventually exceeds a target level of equity return or it could mean earlier payment of interest or repayment of principal. Such an arrangement may also include Board representation or Board Observer status on the project vehicle. This would need further legal consideration given the conditions established in the existing MFA.

Loan concessions are readily available under the existing legislative framework and NAIF should ensure that they are appropriately used.

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.

Equity optionsThe NAIF is currently prevented by the Investment Mandate from providing any financial assistance that, “would provide for equity to be provided for any project” (Subsection 11(5)). There is nothing in the NAIF Act that restricts NAIF financial assistance being provided for the purpose of equity investment. Accordingly, giving the NAIF the ability to make equity investments would only require a change to the Investment Mandate.

NAIF is a supplier of debt (possibly subordinated) in a transaction developed by others who have provided or arranged the equity and in a project which is subject to the approval and cooperation of the relevant State or Territory.

It is not uncommon for the Commonwealth government to provide an equity stake in a company that is involved in building significant infrastructure. The Western Sydney Airport, the Inland Rail project and the Moorebank Intermodal Terminal project are recent examples of where the Commonwealth has provided financial assistance to a project by way of equity investment, although all these projects are 100 percent Commonwealth owned. The Commonwealth government also provided financial assistance for these projects beyond the equity contribution.

The ability to make equity investments into projects alongside other equity holders could be an important addition to NAIF’s investment options. However, it is not without challenges, both from a constitutional and an ongoing operational and management standpoint. Crucially, in order to co-invest with private equity, the NAIF will have to find projects that are willing to share the potential up-side with the Commonwealth. This could prove difficult.

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.

Local InvestmentGiven that NAIF is public finance, it is appropriate that NAIF seek to maximize the public benefits associated with the concessional aspects of their financing arrangements. In particular, there is an opportunity for the Investment Mandate to clarify that, where competing projects are in place or where there is oversubscription of NAIF’s allocation, a preference exists for local investment from which benefits are likely to be dispersed to the Australian community. This is consistent with the approach of US TIFIA scheme.

Recommendation 9 - Local Investment

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.

Co-operation and coordination with the States and TerritoryLegislative frameworkAll Commonwealth legislation must have a constitutional head of power. The NAIF Act relies upon the states and territories power of the Constitution (Sections 96 & 122). As a result of this, even though the NAIF is intended to grant financial assistance to individual projects, it must do so by making grants of financial assistance (which includes loans) to the Northern Territory, Western Australia and Queensland. Those grants are conditioned on the relevant jurisdiction on-loaning those funds to a particular identified project. The NAIF is not empowered to grant financial assistance to projects directly. This, coupled with the lack of ability to influence the development of a deal or the speed of its development severely limit the NAIF’s ability to achieve its objectives.

Jurisdictions’ right of vetoThe Commonwealth cannot compel a state or territory to accept a grant of financial assistance, including a NAIF loan. Since NAIF cannot provide funds to projects directly, this ability to refuse a NAIF loan means that a state or territory has an effective right of veto over the granting of NAIF assistance to a project located in that jurisdiction. This right of veto is reflected in the Investment Mandate. Subsection 13(5) of the Investment Mandate directs the NAIF not to make an Investment Decision if the relevant jurisdiction has provided written notification that financial assistance should not be provided to a particular project. The NAIF has already received such a notification from the Queensland government in relation to the North Galilee Basin Rail project. Although this is regrettable, the sooner it is done in the process the better for all parties.

Master Facility AgreementsThe role of the States and Territory is also reflected in the Master Facility Agreement (MFA). The MFA is a three party agreement between the NAIF, the Commonwealth and each jurisdiction. The MFAs recognise that it is the relevant state or territory that will enter into the loan agreement with the project proponent. The MFA provides both the NAIF and the jurisdiction with the appropriate rights, protections and assurances to allow each party to play their role in the provision of NAIF finance to projects. However, the MFAs cannot compel a jurisdiction to enter into any particular loan, and they may exclude certain projects from consideration, as for example in Western Australia, where all projects covered by a State Agreement have been excluded by the Western Australian government. The three MFAs were released publically by the Senate on 18 December 2017.

Need for cooperationUnder the NAIF framework described above, the States and Territory are partners in the NAIF funding model and their co-operation and assistance is vital to the successful operation of the NAIF. Even though the jurisdictions do not bear the credit risk of the loan not being repaid, under its current legislative framework, NAIF must work with the northern jurisdictions and cannot fund any project without their approval and active cooperation.

State and Territory governments under the Constitution are sovereign and responsible for the economic management and service delivery in their individual jurisdiction. As such, they will have their own priorities for infrastructure development, will bear any network risks associated with infrastructure, and may bear future maintenance risks of infrastructure assets. The jurisdictions are also responsible for a range of approvals, can be key offtakers and can be key promoters of transformative infrastructure projects. Given the risks they do bear, and the critical role they do play, jurisdictional governments must be fully active partners to facilitate development of NAIF supported projects.

The lack of strong engagement from the States and Territory governments at commencement has adversely impacted on the progress of the NAIF. Relationships with the jurisdictions have evolved

since the commencement of the NAIF, particularly through the development and execution of the MFAs. While these agreements have helped to establish roles and responsibilities with the relevant jurisdictions, there is a need for an earlier, closer and more coordinated approach to project development.

Full and effective engagement with the northern States and Territory is vital to the success of the NAIF. Responsibility for this lies both with the NAIF and the Commonwealth. At the NAIF level, continued engagement with the relevant State or Territory, starting very early in the NAIF assessment process would significantly improve co-ordination and increase the likelihood that the jurisdiction will accept the project. The department can support this by playing a key role in facilitating relationships at all levels within and across the jurisdictions.

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.

Whole of Government approachThere is also an acknowledged role for the Commonwealth, both at the departmental and Ministerial level, to facilitate and ‘smooth the way’ for identified priority projects. The Department can play a key role in navigating Commonwealth and State or Territory processes, notwithstanding that projects will continue to be subject to the requirements of the processes. This model is already used by the department’s Major Project Facilitation Agency (MPFA) and this role could be expanded to cover NAIF projects. The Minister can also play a critical role in facilitating and advocating for projects in the north with jurisdictional counterparts.

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.

It may also be worthwhile appointing Board members that are familiar to and with the State and Territory governments. This would provide the jurisdictional governments with a degree of assurance that the NAIF Board will share their priorities but at the same time be bound by the NAIF Investment Mandate and governance procedures. A more cooperative and bipartisan approach would be worthwhile in an organisation with a mandate likely to exceed the terms of the current parliament at both jurisdictional and Commonwealth level.

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.

New approaches to public sector investmentsOne barrier to the successful involvement of the jurisdictions with the NAIF funding model is that it is a new financing and operating model, which takes time to bed down. Transformational economic infrastructure has been traditionally funded by grants, particularly in the northern Australian jurisdictions. This means there is reduced appetite for financial assistance in the form of loan, even on concessional terms, by both State and Territory governments and private industry. A lack of desire for loan funding may translate to delays in the progression of projects. The rationale behind providing financial assistance rather than one-off grants is to reduce the fiscal impact and impose more commercial terms on recipients, but not at the expense of delivering economic infrastructure that would not otherwise be built, or not be built for some time.

In the case of WestConnex, the Commonwealth moved from grants initially to a concessional loan and now is seeking quasi equity.

While the jurisdiction and the Australian government typically support the same transformational projects, the messaging and momentum around the project may more closely reflect the disagreement between the parties on who should finance and how. Addressing this issue with the jurisdictions earlier in the process and more flexibly has the potential to reverse this situation.

Providing clarity to the State and Territory governments that, despite its time limited decision making phase, the NAIF is a long-term initiative with substantial Commonwealth seed funding is important. As the committed funds are repaid to government, those funds are therefore available again for further public investments, including for example, in further developing northern Australia, and other areas which will continue to benefit the jurisdictions for years to come.

Commonwealth cooperation A strategic approach to infrastructure developmentFor the NAIF to be considered successful, it must provide the transformative infrastructure required to stimulate economic and population growth in northern Australia. To cut through and get transformational infrastructure developed in the north requires a focused and concentrated effort – not just from the Commonwealth and the jurisdictions, but local government, private industry and finance.

Focusing limited resources and facilitating and leveraging government linkages will lead to enhanced public value over multiple, scattered areas of focus. Effective government partnerships will strengthen the projects in the eyes of the private sector, raising their profile as a genuine priority with real prospects of progressing. Given that transformational infrastructure will generally be linked to regional economic hubs capable of supporting sufficient economic scale and providing low-cost access to external markets, a regional hub focus is appropriate. The development of these hubs will require dedicated effort to develop and require momentum generated by broad political support across the Commonwealth and the jurisdictions.

The NAIF can play a key role in supporting the financing of infrastructure projects identified in the strategic regional hubs. They can also provide an expert advisory and facilitation role with other private sector entities and financiers.

The Minister and the department must take responsibility and coordinate the Commonwealth in bringing all of its resources to bear on key strategic regions, referred to in this Report as ‘Regional Development Hubs’ (RDHs), and key projects within these RDHs. This targeted approach and focus on a RDH within each jurisdiction, provides an effective potential model for cooperative infrastructure development in northern Australia.

The formation of RDHs must be a long-term, shared development agenda, as States’ and Territory governments will also need to focus on these regions. There is much to gain from this approach with benefits able to be attributed to both parties, creating opportunities for constructive working relationships.

Key considerations of this model include:

Commitment (and potentially resources) would be required at the political level from jurisdictional ministers, as well as the Commonwealth, and local councils where relevant.

The NAIF can consider existing government policies relating to the development of northern Australia, including specific priorities, focus areas or regions, noting that the Minister cannot direct the NAIF to fund specific projects (the NAIF is an independent decision making body).

Actual investment decisions on all NAIF projects would be taken in accordance with the NAIF Act, the Investment Mandate and NAIF’s governance framework.

To best facilitate and leverage private sector (both finance and other business) interest and commitment, the RDHs would need to be publicly known.

The purpose would be enabling the reinvigoration and transformation of regional hubs. Strong regional hubs equates with strong regional development, and this is backed by economic evidence. For example, OECD research on the main determinants of regional growth showed that population density, specialisation and diversity were all positively associated with Gross Regional Product per capita growth.

Dedicated NAIF staff would work on the RDHs for the duration of the development phase to push through the projects.

Joining up the other relevant government agencies (local, state, and commonwealth) would be an important aspect, and co-location could be required – e.g. the Infrastructure Project Facilitation Agency (IPFA), Major Projects Facilitation Agency, Office of Northern Australia etcetera.

City Deals (such as the existing Townsville deal and the Darwin deal in progress) would provide substantial leveraging potential and capitalize on the existing buy-in of the State and Territory governments to the regional development concept.

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.

Importantly, RDHs would in no way prevent the NAIF from maintaining a focus on important localised projects that create the basis for future business growth in remote locations. These opportunities must continue to be exploited in order to realise the full benefits that Northern Australia offers. RDHs are envisaged as a mechanism to link the operations of these remote and localised ventures with the global economy.

Renewables projectsMany of the most progressed projects in NAIF’s pipeline are associated with the renewable energy sector. Projects in this sector that are located in (or connected to) northern Australia can pursue a range of options in terms of seeking Commonwealth support, including finance from the Clean Energy Finance Corporation (CEFC).

Acts and Investment Mandates that are substantially similar govern the activities of the NAIF and the CEFC. However, there are fundamental differences both in terms of the risks they are designed to address and the investment mechanisms available to them, for example the CEFC can provide equity. There are opportunities for both parties to work together to facilitate project development by taking on the relevant risk components of a project that they are best able to address and/or better coordinating their respective activities.

Despite projects potentially meeting the eligibility requirements for both NAIF and CEFC finance, there are no set principles or agreement on the relationship between the two bodies, or further with the Australian Renewable Energy Agency (ARENA).

The lack of an agreed operating model can result in an inefficient competitive model between two Commonwealth financiers, which could deliver sub-optimal outcomes. There were examples cited by the NAIF of projects that have approached both the CEFC and NAIF for finance. Both organisations had committed significant resources to assessing the projects and were competing through the level of concession that they could provide to a project. This is not an optimal outcome for taxpayers.

The CEFC will undergo its legislated review in early 2018, and it is expected that the operating relationship and model with the NAIF, as well as with the broader finance sector, will also be considered as part of that review.

The Commonwealth would be best served by a co-operative operating model and relationship between the NAIF and the CEFC, with clearly defined roles and responsibilities in the north. In order for this to occur, Ministerial expectations on the agencies working together collaboratively to achieve the commonwealth’s overall policy objectives should be made clear.

Recommendation 14 - 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.

Project selection models/pipelineThe resource intensity of monitoring and supporting projects in the pipeline, despite a low number being potentially viable and eligible projects, may not be the best use of resources. The NAIF’s approach to maintaining a diverse pipeline by industry sector and geographic spread may be attributed to Subsection 7(4) of the Investment Mandate which requires:

The Board, in making an Investment Decision, must consider a preference for a diversified portfolio, including with respect to industrial and geographic spread across the States and Territory that comprise Northern Australia.

By concentrating on likely successful projects that will deliver significant public benefit, NAIF’s resources can be focused on progressing high probability projects. Detail about these projects could be shared with the department so that they can assist in facilitating projects.

While high value projects deliver the best payoff in terms of input costs, the impact of driving smaller projects which will deliver localised public benefit also need to be considered. NAIF should have a low-intensity approach to smaller, less progressed projects. This may closely mirror the existing proponent-led model and be supplemented by providing proponents with a NAIF developed, standardised and heavily conditional loan term sheet that would spell out what the NAIF is able and willing to provide. This could then be used to crowd-in private sector financiers.

NAIF can also play an important advisory role. Where project proponents with underdeveloped ideas come forward, NAIF originators can use their experience in infrastructure financing and development to advise projects about what is required to proceed. Typically it could be expected that this advice would include establishing a sound business case including suitable offtake arrangements or a sensible market analysis, a P50 construction cost estimate, firm interest from equity and senior debt providers and a partnering with experienced and capable partners to bring the project to financial close.

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.