Indigenous participation in the North Australia Infrastructure Facility

With silence….be thou politic

1 Henry VI, Act 2, scene 5

The North Australia Infrastructure Facility (NAIF) came into effect on 1 July 2016 as a corporate Commonwealth entity under the NAIF Act, which was passed with bipartisan support.

The Northern Australia Infrastructure Facility (NAIF) is a $5 billion lending facility to provide loans to infrastructure projects in northern Australia. Its website (link here) notes that:

• NAIF investments can be used for the development of new infrastructure or materially enhancing existing infrastructure
• NAIF can lend up to 100% of the debt, providing there is appropriate risk sharing
• The project must have public benefit and have an Indigenous Engagement Strategy. This would usually be projects which will be able to service multiple users

In its first (2017) annual report (link here), NAIF reported (inter alia):

NAIF is here to help grow new businesses, enhance trade and investment opportunities and improve amenity for local communities … By participating in the development or material enhancement of economic or social infrastructure, NAIF aims to contribute to employment and investment opportunities whilst respecting the unique natural environment. This will make northern Australia more liveable, thereby attracting and retaining long term northern Australian residential communities. NAIF designed its Public Benefit Guidelines to capture broad economic and social benefit, to help bring amenity to northern Australia that is taken for granted in the rest of the nation. NAIF recognises, for example, the need for more reliable and affordable energy, communications and water infrastructure to improve productivity and support industry in the north. NAIF also appreciates the importance of those assets in creating better access to healthcare and education, keeping people connected and generating wellbeing for northern populations (page 3).

These admirable sentiments are tempered to an extent by the requirement for the NAIF to operate in a commercially viable context, thus leaving infrastructure needs that do not fit into the commercial category for governments to finance directly.

According to the first Annual Report:

The vision of the Northern Australia Infrastructure Facility (NAIF) is to contribute to transforming northern Australia through financing infrastructure development. NAIF is a ‘market gap’ financier established to provide loans (which may be concessional) to infrastructure projects that are viable in the long term, but which, without NAIF, would be unlikely to proceed, or would only proceed at a much later date or with a more limited scope…

…NAIF is part of the Australian Government’s strategy to develop northern Australia, which was articulated in the Our North, Our Future: White Paper on Developing Northern Australia. The Minister for Resources and Northern Australia is responsible for the development and delivery of NAIF’s policy framework (page 8; emphasis added).

The ‘market gap’ rationale is consistent with a key theme of the White Paper (link here) which noted in a section headed ‘Our Vision’ on page 3:

It is not the Commonwealth Government’s role to direct, or be the principal financier of, development. Developing the north is a partnership between investors (local and international investors who provide capital and know-how) and governments (that create the right investment conditions).

Originally, the NAIF was required to partner with other lenders and was limited to providing only 50 percent of required funding, but this constraint was amended in a revised Investment Mandate issued in April 2018 presumably due to the slow take up of NAIF funding.

The NAIF website outlines the eligibility criteria for accessing NAIF lending, and these include a requirement included in the investment mandate issued by the Minister under section 9 of the NAIF Act for lenders to have an Indigenous engagement strategy. The website links to a guideline document that outlines the specific requirements (sensible but not onerous). I don’t propose to analyse it in detail.

Of more significance is the lack of substantive engagement of Indigenous interests in NAIF as both borrowers and in terms of the infrastructure needs across northern Australia. My previous post (link here) on Infrastructure Australia’s gradual shift to acknowledging the scale of Indigenous need is relevant to this issue.

For its part, the Government has recently appointed Kate George, an Indigenous woman from WA, as a Director to the NAIF Board.

The most significant NAIF decision for Indigenous interests since the establishment of NAIF has been the decision to lend $27.5m to Voyages Indigenous Tourism Australia for the upgrade of the Connellan airport at Yulara in the NT.

According to the ILC 2018 Annual Report:

A major capital project for Voyages in 2018–19 is upgrade of the Connellan Airport runway in early 2019. The upgrade involves replacement of the runway, aprons, taxiways and runway lights. Project mobilisation will commence in October 2018 and the full project will be completed by May 2019. GHD has been contracted as Project Manager and Downer awarded the major subcontracting role. Voyages has sought funding through the Northern Australia Infrastructure Facility for the project (page 43). 

NAIF lists investment decision notifications on its website (link here) and this page indicates that the NAIF Board made a decision to provide finance to Voyages on 28 May 2018. Section 17(2) of the Investment Mandate requires NAIF to publish its investment decisions on its web page within 30 days of a decision being taken. It is not clear when it did so, however the following media releases suggest that this did not occur.

The NAIF loan was announced jointly by Minister Canavan and Minister Scullion on 13 December 2018. Their joint media release (link here) stated:

“The loan will help finance upgrades of the airport’s runway, taxiway and apron, install runway lighting and build contractor accommodation.

“These works are expected to support up to 320 full time equivalent jobs and create around $370 million in economic benefits for the wider community over the next two decades.

“The NAIF Board’s revised Investment Mandate was an important part of giving NAIF the tools it needs to finance 100 per cent of this project’s debt and gave NAIF the flexibility it needs to deliver jobs and economic opportunities in Central Australia.”

Minister for Indigenous Affairs Nigel Scullion said NAIF’s investment to upgrade the airport’s runway would help Voyages Indigenous Tourism Australia employ and retain Indigenous Australians in real jobs.

“Voyages has a real focus on Indigenous employment, with a workforce of around 40 per cent Indigenous people and another 100 Indigenous Australians starting at its training academy every year. This particular project will also source between 3 and 5 per cent of its goods and materials from companies that are Indigenous owned,” Minister Scullion said.

The NAIF Board issued a media release on 20 December 2018 (link here). The loan represents 100 per cent of the project value. See the NAIF investment decision case study on Voyages (link here).  Neither the ILC nor Voyagers appeared to issue a media release announcing the loan.

While this appears on its face to be a good news story, the devil is in the detail.

The ANAO performance audit

As a result of correspondence from an Opposition MP citing concerns regarding capacity for effective management and due diligence in the administration of the NAIF lending scheme (link here) the Auditor General agreed to include an audit of the NAIF in its 2018 audit program. In April 2019, the ANAO released a performance audit report titled Governance and Integrity of the North Australia Infrastructure Facility (link here).

The ANAO audit findings were extremely critical of the NAIF’s management practices. For example, the Summary Findings present the audits conclusions in the following terms (inter alia):

8. The NAIF’s arrangements to support the integrity of decision making were not fully effective. While NAIF has established appropriate governance and policy frameworks, decision support processes were not sufficiently transparent or evidenced to demonstrate projects have been treated in a consistent manner.

10. The NAIF did not implement effective arrangements to support integrity and transparency throughout all elements of its operations … Arrangements for ensuring the integrity of decision support processes were not effective, with insufficient evidence that all applicants were evaluated in a consistent manner throughout the assessment stages. The Board placed reliance on the CEO to present projects for Board consideration, and the Board has not made any Investment Decisions to refuse financial assistance for the applications presented.

In a rather extraordinary exchange, the NAIF ‘entity response’ pushed back against the ANAO findings, which led in turn to a highly unusual rejoinder from the ANAO that included the following statement which I reproduce in full:

Accountability and transparency Principles of accountability and transparency are essential to maintaining public confidence in the quality of public administration. The Australian Parliament and the Australian Government give these principles specific expression in legislative and policy standards that apply to the powers, functions and duties of public sector bodies, including corporate Commonwealth entities such as the Northern Australia Infrastructure Facility (NAIF).

This audit concluded that the NAIF’s arrangements to support the integrity of decision making were not fully effective. While the NAIF established appropriate governance and policy frameworks, decision support processes were not sufficiently transparent or evidenced to demonstrate that projects had been treated in a consistent manner.

It is concerning that the NAIF’s response reflects a view that these findings are unjustified on the basis that they fail to consider the application of ‘expert commercial judgement’ in the decision making process.

The general duty imposed on officials in all Commonwealth entities to act honestly, in good faith and for a proper purpose5 necessitates the demonstration of matters taken into consideration in arriving at a decision. While the use of expert judgement may be appropriate, this does not reduce the expectation that the use of this judgement is transparent and clearly documented. This audit found insufficient evidence of the specific circumstances considered in moving some projects forward in the decision making process in preference to other projects — whether these considerations took the form of expert judgement or otherwise.

The accountable authority of a Commonwealth entity must govern the entity in a way which demonstrates to the Parliament, and the Australian Public, that it is promoting the proper use and management of public resources.6 It is incumbent on the NAIF Board, which has responsibilities with respect to the allocation of $5 billion of public funds, to understand its accountabilities and responsibilities in this regard.

The Commonwealth risk exposure

The NAIF investment mandate issued by Minister Canavan in April 2018 under section 9(1) of the NAIF Act 2016 (link here) included the following requirement:

12. Investment risk (1) The Board must satisfy itself that: (a) the Facility is not the sole holder of financial risk in each Project; and (b) there is a reasonable allocation of risk for each Project between the Facility and other sources of finance for the Project; and (c) it can appropriately manage the Facility’s risk exposure to each Project; and (d) its due diligence also identifies the total exposure of the Commonwealth to a project so as to prevent the Commonwealth overall having the majority financial risk in a project. (emphasis added)

The Explanatory Statement issued by the Minister along with the Investment Mandate is even clearer. It states (link here):

Paragraph 12(1)(d) requires the Board to identify all sources of Commonwealth financial risk in a Project and be satisfied that the Commonwealth does not hold the majority of that risk. Financial risk is borne by equity capital that carries the first loss risk. In assessing whether the Commonwealth holds the majority of the financial risk, the Board should consider the proportion of equity capital held by the Commonwealth.  (emphasis added)

In other words, notwithstanding the change that allowed NAIF to finance 100 percent of a project, the financial arrangements still required NAIF to assure itself that the Commonwealth was not the majority risk bearer. Sub-paragraph (d) prevents NAIF lending to a project where ‘the Commonwealth overall’ carries the majority of financial risk in a project.

While the NAIF Board’s decisions in relation to a project proposal are independent, the Minster has he capacity under sections 11 and 12 of the NAIF Act to veto a loan approval. NAIF must give the Minister at least 21 business days and at most 60 business days to consider his or her decision in relation to rejecting a funding each loan proposal. The ANAO report that it was normal practice for the Minister to seek advice from his or her Department prior to taking a decision to either reject or allow a loan proposal.

In the case of the Voyagers proposal, it appears that both NAIF and the Minister have ignored the requirements of subsection 12(1)(d). The reason this is the case is that Voyages Indigenous Tourism Australia is a wholly owned subsidiary of the Indigenous Land and Sea Corporation, which itself is a Commonwealth statutory corporation established by legislation.

Moreover, the ILSC is carrying extensive debt in relation to its ownership of the Ayers Rock Resort owned and operated by Voyages. In its 2018 Annual Report and financial statements (link here), the ILSC reports the following debt arrangements related to the Resort (emphasis added):

Debt facilities

Voyages has a bank loan with ANZ which is fully drawn to $112.5 million. The loan is a partially amortising senior secured corporate facility maturing in January 2021. Additionally the ILC has a $56.5 million fully amortising concessional loan, provided by the Commonwealth, maturing in March 2023. The loan is secured by a charge over Voyages’ assets and a mortgage over resort assets. Principal and interest payments due on this loan during 2017–18 have been met by Voyages through its operating cash flows (page 42).

ILSC Consolidated Financial statements:

In May 2016, ILC and Voyages entered into a $65,000,000 loan with the Commonwealth Government. The loan is secured by a mortgage over the ARR property, an equitable mortgage over shares in Voyages and a guarantee from Voyages. Principal and interest repayments are made quarterly at $1,462,500 per quarter until 30 September 2018 and $3,428,489 per quarter until the loan is fully repaid, scheduled in 2023. Interest on the loan was initially set at 2.5% per annum; thereafter it is based on the weighted average cost of borrowing for future issuance of Treasury Bonds as published in the Australian Federal Government’s Budget and Mid-Year Economic and Fiscal Outlook.

The $112,500,000 bank loan with ANZ is fully drawn at the balance date; the loan facility expires on 20 January 2021. The loan is secured by a mortgage over the ARR property, an equitable mortgage over shares in Voyages and a guarantee from the ILC. Under a separate, but connected, agreement between the Commonwealth, ANZ and Voyages, the ANZ has ‘priority’ over the Commonwealth should it need to call upon its equivalent security interests in such assets. $12,500,000 of the bank loan is repayable in instalments over the remaining term with equal six-monthly instalments of $2,500,000 until the 20 January 2021. The total amount repayable on maturity is $100,000,000. As at the balance date, $5,000,000 of the bank loan is classified as current with the remainder, $107,500,000, classified as non-current. (page 115 of the 2017-18 Annual Report).

……

Indigenous Land Corporation, which is the Group's parent and controlling entity of the ILC Group also has:

Guarantees entered into by parent in relation to debts of subsidiaries

The ILC provides a guarantee to the ANZ bank in relation to a $120 million facility with Voyages. The ILC has guaranteed the performance of Voyages in relation to a lease of photovoltaic systems at Yulara. The undiscounted cost over the term of the lease is estimated at $19.6 million. (page 127 of the ILSC Annual Report).

Not only is the NAIF loan to a Commonwealth owned entity, but the Commonwealth is subject to contingent liabilities beyond the value of the assets on the ground at Yulara as a result of the ILSC’s inability to raise commercial finance at competitive rates.

This is all an outcome of the decision of a former Board of the ILSC in 2010/11 to purchase the Ayers Rock Resort (ARR), against the advice of the then Minister for Finance and Minister for Indigenous Affairs. The decision has been the subject of sustained criticism over subsequent years (link here) for a range of reasons, not least that it meant that the ILSC has been forced to curtail its statutory functions elsewhere to meet the financial commitments which flow from the acquisition. For reasons that have been difficult to fathom, former Minister Scullion was a strong supporter of the acquisition and the Board that took the decision, and subsequently arranged for the provision of a concessional loan of $65m to the ILSC at concessional rates compared to available commercial finance.

The NAIF decision to direct yet more Commonwealth resources into the Ayers Rock resort, in direct contravention of the Investment Mandate under section 9 of the NAIF Act, is now the second Commonwealth loan to be directed to the Ayers Rock Resort, notwithstanding claims that the acquisition was consistent with the requirement that the ILSC Board operate in accordance with commercial business principles. The NAIF loan brings the Commonwealth’s loan exposure to the ARR to over $90m.  

The bottom line

It seems very clear that NAIF has breached its Investment Mandate Requirements by taking a decision that leaves the Commonwealth exposed to 100 percent of the project risk. This flows form the fact that Voyages is a wholly owned subsidiary of a Commonwealth entity.

Outstanding questions worth pursuing in appropriate forums include:

·       Has the NAIF Board implemented the recommendations of the ANAO performance audit into NAIF governance?

·       Why was there a six month delay between the investment decision in May 2018 and the announcement in December 2018?

·       Did the NAIF publish its investment decision in relation to Voyages within the timeframes stipulated in section 17 of the Investment Mandate?

·       Why did the NAIF Board ignore the explicit requirements of section 12(1)(d) of the NAIF Investment Mandate?

·       Was Minister Canavan or his Office advised by NAIF or his Department of any concerns in relation to the potential breach of section 12 of the Investment Mandate?

·       Was Minister Scullion advised by his Department or the ILSC of any concerns in relation to the requirements of the Investment Mandate?; and finally,

·       Given that this NAIF decision was effectively the Commonwealth financing itself, when will NAIF make an investment directed to assisting the Indigenous citizens of northern Australia to meet the huge infrastructure shortfalls that they are experiencing?

There appear to be extremely strong policy merits in revisiting the NAIF investment rules to facilitate greater access by Indigenous interests to the $5bn fund.

Disclosure: the author was from 2008 to 2011 an adviser to Minister for Indigenous Affairs Jenny Macklin; and from 2013 to 2015 the CEO of the ILC (now the ILSC).