Bills Digest no. 113 2015–16

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WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Rob Dossor
Economics Section
29 April 2016

 

Contents

Purpose of the Bills
Structure of the Bills
Background
Committee consideration
Policy position of non-government parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human Rights
Key issues and provisions
Concluding comments

 

 

Date introduced:  17 March 2016
House:  House of Representatives
Portfolio:  Industry, Innovation and Science
Commencement: The Northern Australia Infrastructure Facility Bill commences on 1 July 2016.

The formal provisions of the Northern Australia Infrastructure Facility (Consequential Amendments) Bill 2016 commence on Royal Assent. Schedule 1 of this Bill commences immediately after the Northern Australia Infrastructure Facility Bill commences.

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the homepages for the Northern Australia Infrastructure Facility Bill 2016 and the Northern Australia Infrastructure Facility (Consequential Amendments) Bill 2016, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

Purpose of the Bills

The purpose of the Northern Australia Infrastructure Facility Bill 2016 (the Facility Bill) is to establish the Northern Australia Infrastructure Facility (the Facility). The Facility will be an entity under the Public Governance, Performance and Accountability Act 2013.[1] The Facility will provide financial assistance to the states and territories for the construction of economic infrastructure in Northern Australia.[2]

The Northern Australia Infrastructure Facility (Consequential Amendments) Bill 2016 (the Amending Bill) amends the Export Finance and Insurance Corporation Act 1991.[3] It will allow the Export Finance and Insurance Corporation (EFIC) to deliver administrative services on behalf of the Facility and the states and territories and to charge fees for those services.

Structure of the Bills

The Facility Bill has one Schedule, with seven Parts.

• Part 1 deals with preliminary matters
• Part 2 deals with the establishment and functions of the Facility
• Part 3 deals with the Investment Mandate
• Part 4 deals with consideration given by the Minister
• Part 5 deals with the Board of the Facility
• Part 6 deals with administration and
• Part 7 deals with miscellaneous matters.

The Amending Bill has a single schedule which makes amendments to the Export Finance and Insurance Corporation Act 1991.

Background

In the lead up to the 2013 election, the Coalition committed to produce a White Paper on the development of Northern Australia within 12 months of the election.[4] Prior to the release of the White Paper a number of studies were undertaken by the Government, as well as through the Parliament, into Northern Australia, such as the Northern Australia Infrastructure Audit, the Parliamentary Joint Select Committee on Northern Australia Inquiry into the Development of Northern Australia and the Green Paper on Developing Northern Australia.[5] These studies aimed at promoting the development of Northern Australia as well as understanding the associated challenges.[6]

The state of infrastructure in Northern Australia was a recurring issue in all the resulting reports. The Northern Australia Infrastructure Audit, conducted by Infrastructure Australia, found for example:

• road maintenance backlogs are a feature of the northern road system
• the limited population and often small industry sizes of Northern Australia can make it difficult to capture the economies of scale that allow commercially viable infrastructure services at competitive prices and
• 70 per cent of premises in Northern Australia received the lowest broadband quality rating in 2013.[7]

Similarly the Parliamentary Joint Select Committee on Northern Australia Inquiry into the Development of Northern Australia found that there is an absence of economic infrastructure, particularly water, power and transport, in Northern Australia which impedes opportunities for economic development and liveability.[8]

Announcement

The Facility was officially announced as part of the White Paper on Developing Northern Australia in the 2015–16 Budget (although at the time the White Paper had not yet been released).[9] The initial announcement contained few details around the functions or goals of the Facility other than ‘increasing private sector investment in infrastructure in Northern Australia.’[10]

Some commentators were surprised by the inclusion of the Facility in the 2015–16 Budget, as there had been little forewarning.[11] Others considered it a distraction from Australia’s real infrastructure needs.[12] The Facility was, however, received more favourably by some, with Professor Andrew Campbell of Charles Darwin University (Director of the Research School for the Environment and Livelihoods) stating that it could play a useful role in supporting the smart development of Northern Australia if it:

• uses the evidence in the Infrastructure Australia audit
• supports ‘soft’ and ‘green’ infrastructure
• undertakes transparent cost-benefit analysis on a whole-of-life and risk-assessed basis
• appraises projects using an independent, expert body at arm’s length from government and
• structures incentives and assistance measures to properly reflect the distribution of public and private benefits over time.[13]

However, Professor Campbell also drew attention to potential downsides of the proposal, in particular the ‘risk of unco‑ordinated effort and ill-conceived public investment for short-term political reasons with dubious long‑term public benefits—potentially exceeded by long-term costs…’.[14] He concluded by reserving the right to consider the matter further, saying ‘how infrastructure funding is invested, on what projects and via what governance and delivery mechanisms, is rightly open to policy, academic and public scrutiny.’[15]

More information on the operation of the Facility was made available in October 2015, when Josh Frydenberg, Minister for Resources, Energy and Northern Australia, stated:

We’re looking for infrastructure that services multiple users, predictable cashflows, long economic life, may have a high development cost relative to its operating costs, and there’s also significant barriers to entry …

It’s got to be able to expand the economic capacity of northern Australia, and its ability to support a greater population base over time.[16]

Links to coal mining proposals

Following the 2015–16 Budget questions were raised by the Greens, as well as some commentators, as to whether the Adani Carmichael project and other coal projects would be eligible to apply for loans from the Facility for the construction of mining related infrastructure.[17] The Abbott Government did not rule out the possibility of Galilee Basin coal infrastructure projects (where the Carmichael proposed mine is located) qualifying for Facility loans.[18]

After the 2015 change in Prime Minister, the new Minister for Resources, Energy and Northern Australia, Josh Frydenberg initially continued to leave open the possibility of the Facility providing finance to mining projects in the Galilee Basin, noting that the Carmichael project is ‘a very important project, which will see significant investment in Australia and provide electricity to millions of people in the developing world.’[19]

Minister Frydenberg later changed his stance, stating that Adani was ‘a commercial operation and it needs to stand on its own two feet … this wouldn’t be a priority project for us.’[20]

During the October 2015 Supplementary Budget Estimates it emerged that representatives from Treasury had met with Adani in late September 2015.[21] Treasury officials stressed, however, that the meeting was one of over 100 meetings with ‘potential project proponents’ and that no commitments were made during the meeting.[22]

Consultation

Commencing in November 2015 and leading up to the tabling of the Bills in Parliament, a significant amount of consultation occurred around key aspects of the Facility, including its functions, goals and enabling legislation:

• Northern Australia Infrastructure Facility Consultation Paper, released 9 November 2015
• Exposure draft legislation, released 28 January 2016 and
• Facility Draft Investment Mandate, released 17 March 2016.[23]

The public was invited to provide submissions and feedback relating to the above documents. This feedback was to be reflected in the drafting of the final material (including the Bills).[24]

Concessional loans

The Facility will provide traditional ‘concessional loans’ (loans at concessional rates, below market rates) for the construction of Northern Australia economic infrastructure. These concessional loans will, according to the draft Investment Mandate, be the default form of financial assistance provided by the Facility.[25] The Facility Bill specifies that the Investment Mandate may direct the Facility to provide financial assistance for purposes other than to provide or support loans.[26] In other words the Investment Mandate may direct the Facility to consider alternative funding mechanisms, such as bonds or providing guarantees.[27]

Minimum loan

Neither Bill specifies a minimum loan amount that the Facility may lend. Minister Frydenberg, however, stated on 9 November 2015 that minimum Facility loans should be $50 million and that financing of eligible projects must not exceed 50 per cent of the total project debt, meaning that projects must have a value of at least $100 million.[28] These parameters are reflected in the draft Investment Mandate, which proposes $50 million as the minimum amount of financing as a non-mandatory eligibility criterion and would require, as a mandatory criterion, that the finance provided by the Facility would not exceed 50 per cent of the total project debt.[29] The draft Investment Mandate also stipulates that the Facility must consult Infrastructure Australia when it is deciding whether to provide a project with financial assistance of more than $100 million.[30]

Committee consideration

Joint Select Committee on Northern Australia

The Bill was referred to the Joint Select Committee on Northern Australia for inquiry and report by 22 April 2016. The Committee tabled its Advisory Report on the Northern Australia Infrastructure Facility Bill 2016 on 14 April 2016.[31] Details of this, and earlier, inquiries can be found at the Joint Select Committee on Northern Australia homepage.[32]

The Advisory Report on the Northern Australia Infrastructure Facility Bill 2016, which was largely devoted to explaining the Bill, recommended that the Facility Bill be passed by the Parliament.[33] The Joint Committee received only four submissions when conducting the inquiry, two of which were government departments (the Department of Industry, Innovation and Science and the Department of Agriculture and Water Resources) and two were from business (Seafarms Group Ltd and Suncorp Group Ltd).[34] Both businesses were supportive of the Facility, although Suncorp believed that disaster mitigation projects should be eligible for funding.[35]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing the Senate Standing Committee for the Scrutiny of Bills had not yet considered the Bills.

Senate Standing Committee for the Selection of Bills

At its meeting of 17 March 2016, the Senate Standing Committee for Selection of Bills determined that the Bills would not be referred to committee for inquiry and report.[36]

Policy position of non-government parties/independents

Bob Katter has raised issues with the Facility, particularly around the Facility’s $50 million loan requirement.[37]

The Greens have stated that the draft criteria contained in the Northern Australia Infrastructure Facility Consultation Paper fail to rule out the possibility of the facility ‘becoming a slush fund for big mining companies’.[38]

Gary Gray, the Labor Shadow Minister for Northern Australia, has supported the Government’s focus on Northern Australia, but has outlined concern over the possible lack of rigour in the assessment process.[39]

Position of major interest groups

The Australian Financial Review reports that state governments and the private sector ‘cautiously’ welcomed the Facility, although the Australia Agricultural Company has urged that loans are directed towards existing businesses to ‘avoid building white elephants in remote areas’.[40] Others are less concerned about who gets the funding, with Darlene Irvine of the Far North Queensland Regional Organisation of Councils reported as saying ‘[the Facility is] awesome. It provides an opportunity that the banking industry does not allow in terms of allowing private enterprise to bring forward projects’.[41]

Gina Rinehart is reported to have pushed ‘strongly’ for the Facility and Andrew ‘Twiggy’ Forrest has also reportedly praised the Facility.[42]

Financial implications

The Facility Bill will provide ‘up to’ $5 billion in financial assistance to the states and the Northern Territory. The actual cost of the Facility is estimated to be $39.7 million over five years commencing 2016–17.[43] Over the same period it is estimated that $40.2 million will be recovered through fee revenue. The cost of the Facility is far less than the $5 billion, as the only expenses that the Commonwealth will incur is the differential between the regular and concessional loan interest rates and the expenses associated with operation of the Facility. The Facility Bill also appropriates $5 billion from the Consolidated Revenue Fund.[44]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.[45]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Parliamentary Joint Committee on Human Rights had not yet considered the Bills.

Key issues and provisions

Facility Bill

It is intended that the Facility will provide concessional loans or alternative funding mechanisms through the states and the Northern Territory to the private sector for the construction of economic infrastructure that would otherwise not be built, or would not be built for some time.[46] The Bill frames the powers broadly, making no reference to the private sector but simply stating that the Facility’s role is ‘to grant financial assistance to states and territories for the construction of Northern Australia economic infrastructure’ (paragraph 7(1)(a)).

Definition of Northern Australia

The Facility will only be permitted to invest in projects that are within an area designated by the definition of ‘Northern Australia’ in clause 5. This definition encompasses the entire Northern Territory, together with parts of Western Australia and Queensland. This area is shown in Figure 1, below. The definition refers to the Australian Bureau of Statistics (ABS) concept of ‘Statistical Area level 2 (SA2)’.[47] SA2s are a component of the Australian Statistical Geography Standard (ASGS) developed by the ABS for the collection and dissemination of geographic statistics.[48] SA2s cover the whole of Australia without gaps or overlaps. They generally have a population range of around 3,000 to 25,000.[49] Wherever possible SA2s are based on officially gazetted state and territory suburbs and localities. In urban areas SA2s largely conform to whole suburbs and combinations of whole suburbs, while in rural areas they define functional zones of social and economic links.[50] They also take into account geography.[51]

Figure 1: Main map

 

Source: Facility Bill, clause 5.

Figure 1: Main map, above, shows the definition of ‘Northern Australia’ provided in the Facility Bill does not divide Australia neatly. Some areas of Northern Australia, such as the SA2 of Meekatharra (in Western Australia – see Figure 2: Inset 1 below) contain a very small amount of area north of the Tropic of Capricorn, yet are defined as Northern Australia.[52] This is also true to a lesser extent for the Queensland SA2s of Far Central West and Bouldercombe (Figure 3: Inset 2).[53] The SA2 of Emerald on the other hand, despite being wholly surrounded by ‘Northern Australia’, is not defined as ‘Northern Australia’ and is not, therefore, eligible for Facility loans.

Figure 2: Inset 1

 

Source: Facility Bill, clause 5.

Figure 3: Inset 2

 

Source: Facility Bill, clause 5.

 

Gladstone

The SA2 of Gladstone is included in the definition of Northern Australia (subparagraph(e)(i) of the definition at clause 5—Figure 4: Inset 3 below). The Gladstone Hinterland SA2 is also included (subparagraph (e)(ii) of the definition). Between these SA2s however, there are several SA2s which are not included (Callemondah, West Gladstone, Clinton – New Auckland, Kin Kora – Sun Valley, Telina – Tooloa and South Trees). However all of these excluded areas contain significant portions of the Gladstone Urban Centre, as well as being completely surrounded by the Gladstone Hinterland SA2, which is included. Additionally the SA2s of Gracemere and Bouldercombe are included because of the crossover of small portions (approximately three kilometres and 1.6 kilometres respectively) of their area north the Tropic of Capricorn (as provided in paragraph (c) of the definition of Northern Australia at clause 5).

Figure 4: Inset 3

 

Source: Facility Map, clause 5.

This information about the exclusion of the majority of the Gladstone Urban Centre was provided to the Department, which outlined that it was based on the definition used in the Infrastructure Australia Northern Australia Audit, which included Gladstone due to it being a key coal and liquefied natural gas port.[54] This does not make it clear why the Gladstone Hinterland SA 2 is included.

Functions of the Facility

Investment decisions will be made by the Board, and governed by matters provided in the Investment Mandate.[55] The directions given by the Minister by legislative instrument about the performance of the Facility’s functions (subclause 9(1) and 9(2)) constitute the Investment Mandate. The Bill specifies that the Investment Mandate must not direct the Facility to provide financial assistance for the construction of particular infrastructure or in relation to a particular person (subclause 9(4)). The Explanatory Memorandum specifies that this provision will ensure that the Minister ‘cannot show preference to particular individuals or entities and therefore must not issue an Investment Mandate to the Facility that relates to a particular infrastructure project or individual’.[56]

A note to subclause 9(1) draws attention to the fact that the legislative instrument is not disallowable. Matters which may be covered by the Investment Mandate (clause 10) include:

• objectives the Facility is to pursue in providing financial assistance
• strategies and policies to be followed for the effective performance of the Facility’s functions
• loan characteristics for circumstances in which financial assistance is used to provide or support loans
• providing financial assistance for purposes other than to provide or support loans
• risk and return in relation to providing financial assistance and
• any other matters the Minister thinks appropriate.

The Clean Energy Finance Corporation (CEFC), a similar agency to the proposed Facility, also invests, and is governed by an Investment Mandate.[57] Matters covered in the different investment mandates differ significantly, mainly due to the different objectives of the Facility Bill and Clean Energy Finance Corporation Act 2012 (CEFC Act— the CEFC co-finances and invests, directly and indirectly in clean energy projects and technologies).[58] One difference of note, however, is that the CEFC Act requires that the Board be consulted during the development of the investment mandate.[59]

Another notable difference is that the Facility must not provide financial assistance to any project until the end of the Minister’s consideration period (paragraph 11(1)(a)), or if the Minister has notified the Facility in writing that financial assistance should not be provided (paragraph 11(1)(b)). No Ministerial consideration, approval or veto exists under the CEFC Act. If the Facility proposes to provide financial assistance it must notify the Minister (proposal notification—subclause 11(2)), who has 21 days to consider the proposal, unless the Minister provides written notice to extend the period (paragraph 11(3)(a)). This period must end not later than 60 days after the proposal notice was given to the Minister (paragraph 11(3)(b)).

The Minister may, at any point in time during this period, notify the Facility in writing that the assistance should not be provided (rejection notice—subclause 11(4)). The Minister can only do this if they are satisfied that providing financial assistance would:

• be inconsistent with the objectives and policies of the Commonwealth Government (paragraph 11(5)(a))
• have adverse implications for Australia’s national or domestic security (paragraph 11(5)(b)) or
• have an adverse impact on Australia’s international reputation or foreign relations (paragraph 11(5)(c)).

If the Minister decides that financial assistance should not be provided they must provide, with the rejection notice, their reasons for the rejection in writing (subclause 12(1)) and within 20 sitting days after the rejection notice has been given the Minister must table the notice in each House of the Parliament (subclause 12(2)).

Clause 15 provides that the Minister must appoint Board members, on a part time basis, for a period not exceeding three years (although they may be reappointed–section 33AA of the Acts Interpretation Act 1901). The only requirement that the Minister must adhere to, is that potential members have experience or expertise in one or more of the following fields:

• banking and finance
• private equity or investment by way of lending or provision of credit
• economics
• infrastructure planning and financing
• engineering
• government funding programs or bodies
• financial accounting or auditing and
• law (subclause 15(4)).

By contrast, the CEFC Act also allows Board members to have expertise in government funding programs or bodies, and the environment sector.[60] Considering the importance of Northern Australia to Indigenous Australians (indeed the term ‘indigenous’ is mentioned over 300 times in the White Paper) it is surprising that the Board does not have an Indigenous representative. [61]

Another difference between the Board member requirements in the CEFC Act and those proposed in the Facility Bill is that CEFC Board members must have ‘substantial experience or expertise, and professional credibility and significant standing’ in at least one of the relevant fields,[62] whereas Facility Board members are only required to have ‘experience or expertise’ in one of the fields (subclause 15(4)).

Clause 42 requires that an annual report be prepared by the Board and given to the Minister. The report must include:

• the particulars of any changes to the Investment Mandate and their impact on the operation of the Facility
• a summary of the proposal notices given by the Facility to the Minister
• a summary of the rejection notices given by the Minister and the Minister’s reasons for giving the notices
• details of the financial assistance provided by the Facility, including:
  • the amounts of financial assistance and kinds of economic infrastructure concerned
  • the kinds of loan contracts used and their important features and
  • the risks and returns to the Commonwealth.
• a summary of any adjustments or concessions made by the Facility in relation to projects that have not progressed as planned.

In contrast, the CEFC Act requires that quarterly reports, providing a general summary of each investment made in that quarter, be published on the CEFC website.[63]

Clause 43 specifies that the Minister must cause a review of the Act as soon as possible, after it has been operating for three years. This review must consider whether the time limit for providing new financial assistance, which clause 8 specifies as 30 June 2021, should be extended and the governance arrangements for the facility after that date (subclause 43(2)). The review report must be tabled in each House of Parliament within 15 sitting days after it is given to the Minister (subclause (43)(4)).

The remaining clauses in the Facility Bill relate to administrative provisions around the establishment and running of the Facility. Information on these provisions is available in the Explanatory Memorandum to the Facility Bill.[64]

Amending Bill

The Amending Bill amends the Export Finance Insurance Corporation Act 1991 so that:

• assisting the Facility in the performance of its functions and
• providing incidental assistance to the states and territories (as agreed between EFIC and the states and territories) in relation to arrangements and agreements for grants of financial assistance for the construction of Northern Australia economic infrastructure

become functions of the EFIC (item 2).[65]

Section 9 of the Export Finance Insurance Corporation Act provides that EFIC is not subject to direction by the Minister except as expressly provided by that Act. Subsection 9(2) provides that the Minister may direct EFIC in relation to the performance of its functions or the exercise of its powers if the Minister is satisfied that this is desirable from a public interest perspective. However, subsection 9(5) explains that subsection 9(2) is not intended to authorise a Ministerial direction that purports to:

• require the Minister’s approval for the EFIC to enter into a particular contract, give a particular guarantee or make a particular loan or
• give the Minister power to determine that EFIC is or is not to enter into a particular contract, give a particular guarantee or make a particular loan.

Item 4 of the Amending Bill inserts subsection 9(6) into the Export Finance Insurance Corporation Act, which provides that subsection 9(5) does not apply for the EFIC in performance of its Facility functions. In other words, item 4 allows the Minister to issue directions to the EFIC in relation to its Facility functions which:

• require Ministerial approval for the EFIC to enter into particular contracts, give a particular guarantee or make a particular loan or
• give the Minister power to determine that the EFIC is or is not to enter into a particular contract, give a particular guarantee or make a particular loan.

Concluding comments

Other than the requirement that an annual report be prepared and that rejection notices be tabled, there are few measures in the Facility Bill which promote transparency. For example, there is no requirement that proposal notices be made public after they are provided to the Minister nor any details around which proposals are approved (other than summaries in the annual report). This can be contrasted with the CEFC, which must publish online quarterly summaries of all investments made in that quarter.[66] Similarly, while the Draft Investment Mandate stipulates that the Facility must consult Infrastructure Australia where an investment decision is greater than $100 million, there is no requirement that this consultation be made public, nor that any assessment or assessment summary be made public by Infrastructure Australia or the Facility.

There is also a lack of detail about how the Facility will provide assistance. The Facility Bill states that it will grant financial assistance to the state and territories, but not how this assistance will fund infrastructure projects. This and the general lack of transparency may make the Facility susceptible to abuse.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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