Federal Register of Legislation - Australian Government

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Directions/Other as made
This direction provides guidance to the Clean Energy Finance Corporation Board in relation to the performance of the Corporation’s investment function.
Administered by: Environment
Exempt from sunsetting by the Legislation (Exemptions and Other Matters) Regulation 2015 s11 item 03
Registered 23 Dec 2015
Tabling HistoryDate
Tabled HR02-Feb-2016
Tabled Senate02-Feb-2016
Date of repeal 10 May 2016
Repealed by Clean Energy Finance Corporation Investment Mandate Direction 2016

 

EXPLANATORY STATEMENT – CLEAN ENERGY FINANCE

CORPORATION INVESTMENT MANDATE DIRECTION 2015 (No 2)

 

Purpose of the Direction

 

Under the Clean Energy Finance Corporation Act 2012 (the Act), the role of the Clean Energy Finance Corporation (the Corporation) is to facilitate increased flows of finance into the clean energy sector.

 

The Corporation will make individual investment decisions independently of the Government. The purpose of the Investment Mandate is to provide a mechanism for the Government to articulate its broad expectations of how the Corporation invests and is managed by the Board of the Corporation (Board).

 

Under the Act the Board is responsible for ensuring the proper, efficient and effective performance of the Corporation. This responsibility is subject to any restrictions placed on the Corporation by the Act and to any directions given by the responsible Ministers under subsection 64(1). Directions issued under subsection 64(1) of the Act are known collectively as the Investment Mandate.

 

Direction

 

Introduction

 

The Corporation will support policies such as the Renewable Energy Target, to mobilise and leverage the flow of funds for commercialisation and deployment of renewable energy, low‑emissions and energy efficiency technologies necessary for Australia’s transition to a lower carbon economy.

 

The Corporation is to invest in financial assets using financial products and structures to address the barriers currently inhibiting investment to help mobilise investment into the clean energy sector. As this is not a grants organisation, these investments must be made with an expectation of being repaid.

 

It is expected that the Corporation will apply commercial rigour when making its investment decisions. By adopting a commercial approach, it is expected that the Corporation will invest responsibly and manage risk so it is financially self-sufficient and achieves the Portfolio Benchmark Return. In achieving this aim the Government has the expectation that the Board will take a medium‑term outlook when setting the investment strategy for the Corporation.

 

As a Government entity and a responsible investor the Corporation has a duty to consider its potential impact on other market participants when making investment decisions. However, in line with its public policy intent, the Corporation should also consider positive externalities when making investment decisions and determining the extent of any concessionality.

 


 

Portfolio Benchmark Return

 

For the purpose of this Investment Mandate, the Government has directed the Board to adopt a Portfolio Benchmark Return for the performance of funds invested by the Corporation based on the five‑year Australian Government bond rate.

 

For each investment, an individual reference rate will first be calculated using the five‑year Australian Government bond rate plus 4 to 5 per cent.

 

The five‑year Australian Government bond rate is the average bond rate as published by the Reserve Bank of Australia for the 15 day period immediately preceding the date a binding investment agreement is executed.

 

The Portfolio Benchmark Return will then be determined by taking the series of individual reference rates and weighting them for each investment.

 

The Portfolio Benchmark Return is a medium‑term target and expected to be earned across the portfolio and over a period of time. Individual investments could be made with expected individual returns above or below the Portfolio Benchmark Return.

 

Proponents should not expect to be able to access the Corporation’s funding at the Portfolio Benchmark Return. The Corporation shall apply commercial rigour in assessing all investments. The actual return the Corporation seeks for any given investment will be a risk‑adjusted return reflecting the individual characteristics of specific projects, the need to cover the operating expenses of the Corporation, the requirement to target the Portfolio Benchmark Return on a portfolio basis and other factors.

 

Performance against this Portfolio Benchmark Return will be measured before operating expenses and will be published in the Corporation’s annual report.

 

The Corporation will follow the Australian Accounting Standards where applicable in measuring its return and determining any impairment, except in the case of concessional loans, where the measurement should exclude any impairment or mark to market adjustments resulting from any concessional component.

 

The Government is conscious of the risks inherent in investing in a large portfolio of financial assets. It acknowledges that in practice this will involve some short-term volatility in the Corporation’s returns, including the possibility of losses in some years.

 

The Government is committed to developing the clean energy sector and it has established the Corporation to invest for the long term. Therefore the Investment Mandate establishes long‑term portfolio performance measures.

 

Portfolio Risk

 

In targeting the Portfolio Benchmark Return, the overall level of risk of the Corporation’s portfolio must not increase above a reasonable level having regard to the terms of the Act and the focus on emerging and innovative clean energy technologies reflected in the direction.

 

The Government has directed the Corporation to include, as part of its investment activities, a focus on emerging and innovative clean energy technologies. This focus may increase the Corporation’s exposure to credit risk as these technologies may have a higher risk profile than more mature technologies and therefore the overall level of risk in the Corporation’s portfolio may increase.

 

The Board is required to agree a suitable investment risk evaluation process to assess the level of risk in the portfolio, and provide the agreed evaluation process to the responsible Ministers within six months of the Investment Mandate being given.

 

Limits on concessionality

 

To ensure that the Corporation can facilitate the flow of finance it is expected that it will use a wide range of investment tools. This includes providing commercial and concessional loans where necessary. Concessional loans have a negative impact on the fiscal balance. The Corporation is therefore limited to providing $300 million of concessionality in any one financial year.

 

A concessional loan is a loan provided on more favourable terms than the borrower could obtain in the marketplace. The concession provided may be in many forms but typically will be in the form of lower than market interest rates, longer loan maturity or additional/longer or more flexible grace periods before the payment of the principal and/or interest is due. Concessionality should be measured as the difference between the present value of a loan provided at the concessional rate and the present value of a loan provided at the appropriate market rate.

 

The market rate is the prevailing rate of interest the borrowing entity would be subject to in the market for a similar instrument (in terms of currency, term, type of interest rate and other factors) with a similar credit rating. Where the terms are not currently available, an estimation of the likely cost will need to be made. A standard bank lending rate would need to be adjusted to take into consideration the risks associated with the borrower.

 

As the Corporation will provide loans where there may not be an explicit market rate, this will be a matter of judgement for the Board. The Corporation is expected to maintain a robust system that is used to determine the appropriate rate, including looking at loans for similar instruments in terms of tenor and risk.

 

The Department of Finance Resource Management Guide No 115 Accounting for concessional loans provides further information on calculating the amount of concessionality as well as worked examples.

 

Limits on guarantees

 

Guarantees are arrangements to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due.

 

Under the Australian Government reporting framework, guarantees are to be accounted for in accordance with the Australian Accounting Standards.

 

Guarantees pose a particular risk to the Commonwealth’s balance sheet and can have unexpected consequences when called. As such, the Act and the Investment Mandate impose restrictions on their use. To limit any risk the Corporation must ensure that all guarantees are limited in nature and quantifiable.

 

The Act requires the Corporation to maintain sufficient uncommitted balance in the Clean Energy Finance Corporation Special Account to meet any potential liabilities in issuing a guarantee. In addition the Investment Mandate limits the amount of guarantees the Corporation can issue to 5 per cent of the total amount that has been credited to the Special Account under Section 46 of the Act.

 

Application of Australian Industry Participation Plans

 

The Corporation will provide significant support to projects in Australia. The application of Australian Industry Participation (AIP) Plans to investments made by the Corporation is aimed at increasing opportunities for capable and competitive Australian and New Zealand small and medium sized enterprises to participate in major projects.

 

An AIP Plan details how a project proponent will provide full, fair and reasonable opportunity to Australian industry to participate in a project. This applies to any subcontracting or purchasing opportunities that may be available. AIP Plans do not mandate the use of Australian industry, but rather aim to provide Australian industry with the opportunity to demonstrate their capabilities and capacity.

 

Corporation must consider impacts from its investment strategy

 

In establishing the Corporation it is the expectation of the Government that the investments of the Corporation should not disrupt the areas where the market is functioning well. That said, the Corporation has the potential to impact on other market participants and the operation of the Australian financial and energy markets. The Corporation should always consider this potential impact when making investment decisions.

 

Given at least half of the Corporation’s investments must be in the renewable energy sector by 1 July 2018, there is a particular risk of impact on the market for Large‑Scale Generation Certificates under the Renewable Energy Target. The Corporation should ensure it is cognisant of these risks when investing in projects eligible for these certificates.

 

As a statutory authority owned by the Commonwealth, the Corporation has a responsibility to act in a way that is not likely to cause damage to the Australian Government’s reputation.

 

Corporation’s activities to include focus on emerging and innovative clean energy technologies, energy efficiency, and the built environment

 

The Government has directed the Corporation to include, as part of its investment activities in clean energy technologies, a focus on supporting emerging and innovative renewable technologies, energy efficiency, storage associated with solar, and energy efficiency technologies for cities and the built environment. These projects will support the Government’s innovation agenda and improve the liveability of our cities and the built environment.

 

The Government has also directed the Corporation to include, as part of its investment activities in clean energy technologies, a focus on offshore wind technologies.

This recognises that, in many circumstances, the financing requirements for mature and established clean energy technologies such as onshore wind technologies may be met from commercial financing sources.

 

These requirements are intended to increase the uptake of emerging technologies such as large scale solar and energy efficiency.

 

They do not mean the Corporation must divest from any of its current investments. The Corporation will consider this direction in relation to new investments only.

 

Corporate governance

 

In undertaking its investment function, the Corporation must act consistent with, and establish policies in relation to, Australian best practice corporate governance. In particular, the Government expects the Board’s policies to include its approach to environmental, social and governance issues.

 

Commencement

 

This direction commences on the day after it is registered.

 

Consultation

 

The Board was consulted on the investment mandate in accordance with section 66 of the Act.

The Office of Best Practice Regulation assessed that the impact of the changes made by the investment mandate are minor and do not require a Regulation Impact Statement (OBPR ID: 20102).