On November 27, the commonwealth passed one of the most important pieces of legislation of 2023 with surprisingly little public comment. It was the National Reconstruction Fund (Investment Mandate) Direction 2023 (the NRF Act).
Landmark legislation
The NRF Act called into being Australia’s new National Development Bank — one of the most important institutions a government can have. Development banks give policymakers the power to mobilise finance and channel it towards crucial national missions. The primary mission of the NRF, as stipulated in the act, is to strengthen the nation’s manufacturing base and to build and grow globally competitive, export-ready firms in the high-tech industries of the future.
Why Australia needs a development bank
Development banks are always important for governments, especially those with ambitious visions for national progress. But they assume even greater importance in times of uncertainty and instability. In such times, private finance starts to shun long-term investment opportunities in “productive” sectors like manufacturing or commodities processing. Instead, finance starts to chase short-term profits in highly speculative activities like derivatives markets, or else highly secured investments like infrastructure. In other words, finance abandons the “productive” economy, starving local firms of the funds they need to invest, innovate, make things, employ people, and sell their wares at home and abroad.
Such times are now upon us. Thanks to years of policy uncertainty and instability (more on this below), Australia finds itself in the grip of a debilitating ‘productive’ investment drought, with disastrous implications for our national prosperity and security.
Should it work as intended, the NRF will help the government reconnect the financial and productive sectors of our economy. Finally, investment will flow to firms in industries that “produce things”. This will diversify our economy, create valuable new export engines and skilled jobs, enhance Australian prosperity and resilience, and bolster national security. The NRF could truly, then, be a landmark piece of legislation.
Catching Up with global leaders
With its new development bank, Australia finally joins the ranks of advanced economies that embrace the productive sectors of the economy and see them as a cornerstone of national security and prosperity.
In countries like Germany, Japan, and South Korea — that had to rebuild from war and have since transformed themselves into techno-industrial powerhouses — development banks have long sat at the centre of their national financial systems. These same development banks are now being turned towards 21st-century challenges, not least the green energy transition. They are helping establish these countries as leaders in the high-tech industries of the future.
The governments of Germany, Japan, and Korea understand that without a national development bank it would be virtually impossible to pursue ambitious transformative goals. What makes these countries’ development banks so successful is that, through their investment experience, they have developed deep industry knowledge, expertise, and linkages (just as the Australian CEFC has in the clean energy sector, see below). They are staffed with bankers who are already well-integrated with the industries they seek to support, and who know what it takes to make projects commercially successful.
But more than this, these countries’ development banks are staffed with bankers who believe that finance has a higher purpose. Bankers who understand that their mission is to support the productive economy and, in doing so, to strengthen the nation and deliver security and prosperity for its people: bankers with a developmental mindset.
Without developmentally-minded bankers, national development banks risk falling into the same damaging patterns as private financial institutions. Rather than seeking to advance the national interest, they become more concerned with enriching their chief executives and chasing short-term wins for their ‘masters’ (read: the politicians of the day for public banks, and shareholders for private ones).
Why Australia needs the NRF to work
Australia’s investment drought has gone on for far too long, and reached crisis point years ago. In fact, it has lasted so long that the financial sector, we’d argue, has developed a psychological aversion to investing in Australian manufacturing and processing sectors. The causes of this drought date way back to the highly celebrated deregulatory efforts of the 1980s and 1990s. Ironically, these efforts included the dismantling of Australia’s original development bank, The Commonwealth Development Bank, under then-prime minister John Howard.
Since then, short-term or highly secured investment has become pretty much all that private investors can stomach in Australia. This is because Australian manufacturing and processing firms face a barrage of uncertainty. The risks they face from exchange rate, industrial relations and policy fluctuations and instability — especially but not only on the climate and energy front — makes them a risky bet for investors.
The negative headwinds facing Australian firms (and spooking their potential lenders and investors) have been compounded by repeated government efforts (mostly LNP) to use so-called free trade agreements as weapons to drive home macro-economic reform. With each new agreement, any surviving Australian manufacturing businesses faced intensifying competition from foreign firms, ones that could rely on a raft of support from their own governments — typically through their national development banks.
Meanwhile, Australian policymakers stood by, refusing to even match the support competitors were able to secure from their own governments. If you were building a new facility in Australia, why would you select an Australian-made piece of machinery when the foreign alternative came with a 20-year fixed-rate loan from a (foreign) government-owned export agency? In so many ways, Australian firms have been trying to play on an unfair field domestically and globally, with the government ignoring their plight.
Australia’s government-induced investment drought has now seriously eroded Australia’s manufacturing capacity, created dangerously weak strategic supply chains and exacerbated the brain drain of our best skills overseas. Manufacturing as a share of GDP and employment has reached an historic low. Australia imports in dollar terms more food than it exports because so much of its basic food is processed overseas and then imported back, with all the value-added work being done overseas. And the nation’s logistics would grind to a halt in just two weeks if the country experienced an interruption to diesel imports.
Therefore, it is not an exaggeration to say that Australia’s investment drought now constitutes a serious threat to national security, broadly defined. The successful establishment and operation of the NRF should be mission-critical for all Australians.
The NRF is being established on a successful precedent — the CEFC — and there are learnings here
In 2012, the Labor government, led by then-prime minister Julia Gillard established the Clean Energy Finance Corporation (CEFC), which was to play the role of a ‘green’ development bank. By directing capital towards clean energy investment it was anticipated that it could assist with the necessary energy transition and support green industries of the future. The aim was to help Australia emerge as a global leader in this crucial new sphere while creating thousands of new jobs and combatting climate change. The CEFC’s establishment signalled that a developmental mindset existed in segments of the ALP policy community, and was a taste of the ALP’s developmental ambitions.
From the outset, however, then opposition leader and climate change denier Tony Abbott pledged to dismantle the CEFC. Abbott and his supporters argued that the CEFC was a slush fund, that it would make reckless investments, and that it would cost the taxpayer billions. They were proven wrong on all counts.
The successes of the CEFC are now well documented and acknowledged, nationally and internationally. The CEFC is widely praised as the world’s largest and most successful green bank. By 2019, even the LNP could no longer deny its effectiveness and had started to publicly boast that Australia hosts “the world’s most successful green bank”.
However, beneath the facade of support, LNP white-anting of the institution continued. Having conceded that abolition was impossible, the LNP tried (unsuccessfully) to change the CEFC’s mandate to require it to fund fossil fuel projects. Eventually, when the terms of the foundational CEO and the Board were up, the LNP took the opportunity to spill and replace the entire leadership. In the days before the last election, the LNP even locked the new board into extension contracts so that the ALP would have no chance to make changes while in power.
It is now clear that, since that leadership change, the approach of the CEFC has also changed significantly. The most recent Annual Report reveals a massive slowdown in investment activity. Specifically, the net amount of CEFC investment fell from about $2 billion a year in 2018 to around negative $300 million in 2023 (see figure 1). In other words, the CEFC made a negative net contribution to investment in clean energy projects at the very time when investment conditions were improving under the ALP government. It is also noteworthy that over the same period, employee expenses have almost doubled — even though the CEFC is investing less in net terms than it was previously.
Evidently, despite the change of government and the ALP’s more sympathetic approach to the CEFC and its mission, the impact of the LNP’s ambition to sideline the CEFC appears to still be playing out.
Can the Albanese government future-proof the NRF?
So will the NRF be immune from the kind of political pressure that has plagued the CEFC? It is clear that the LNP does not support the NRF or its mission; in line with its past policy position, the LNP voted against the establishment of the NRF in 2023.
The establishment of the NRF should stand as a crowning achievement of the Albanese government. It symbolises the government’s ambition to break Australia’s investment drought, rebuild our nation’s depleted techno-industrial base, and establish the country as a leader in the high-tech, high-wage, export-orienting industries of the future. This means not just clean energy, but other technology-intensive arenas like intelligent robotics, medical devices, advanced agriculture, and beyond.
Like the CEFC, the NRF will achieve this by ‘crowding in’ private investment. It will use its initial $15 billion capital injection to make investments in industries deemed critical to Australia’s national security and prosperity, broadly defined. The six areas identified as strategic in the NRF Act are:
- renewables and low-emission technologies (which will receive up to $3 billion in NRF funding);
- medical manufacturing ($1.5 billion);
- value adding in resources ($1 billion);
- critical technologies in the national interest (such as AI and quantum, $1 billion); advanced manufacturing ($1 billion); and
- agriculture, forestry, fisheries, food and fibre ($500 million).
Like the CEFC, the NRF will only be permitted to invest in commercially viable projects. It will also be required to deliver an average return of between two and three per cent more than the five‑year Australian government bond rate over the medium to long term. This means that going forward, the bank should be self-sustaining.
However, the challenge of building serious industry expertise across the six identified areas to enable well-informed investment decisions should not be understated. The CEFC was able to do this very capably in its relatively confined area of green energy. But it will take exceptional leadership to achieve the same across such a diverse range of investment targets, and the pressure will be on the NRF to demonstrate early success.
To guard against political manipulation or pork-barrelling, the Albanese government has determined that the NRF will be governed by an independent board of directors, like the CEFC. The independent board will decide which projects the NRF will support through loans, equity investments and guarantees.
The CEFC has demonstrated that this model can work very well, under developmentally-minded leadership. The original board and management of the CEFC knew their mission and followed their statutory responsibilities. Under intense pressure from a hostile LNP government, they resisted efforts to water down their ‘green’ mandate, constantly reminding their LNP detractors that they reported to a statute that came from Parliament, not the government of the day. The willingness of the CEFC leadership to prosecute their mandate in the face of hostility created policy stability and made the CEFC a strong and independent institution, one that could only be undermined by the appointment of a differently-oriented board.
For the NRF to function effectively, it will be the mindset, tenacity, and ability of its leadership to work with the senate, and skills of the Board and management that matters. The first 12 months will be critical. How the Board operates during this establishment phase will determine whether Australia’s much-needed development bank delivers on its promise.
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