The Albanese government remains tight lipped on the target rate of return for its $15 billion National Reconstruction Fund, despite an interim figure surfacing ahead of the introduction of the flagship investment fund.
Treasury officials last week revealed the rate of return for the National Reconstruction Fund (NRF) as the “bond rate plus two per cent”, below that of the benchmark set for the Clean Energy Finance Corporation (CEFC), which the fund is modelled on.
The CEFC has a benchmark rate of return of the bond rate plus three to four per cent for investments through its special account, with the benchmark rate for its Clean Energy Innovation Fund and Advancing Hydrogen Fund set slightly lower at one per cent.
Industry minister Ed Husic would not confirm the rate of return for the NRF when asked by InnovationAus.com, suggesting there is more work to be done on the investment mandate before a figure is settled on.
The investment mandate, which is being worked through by Mr Husic and Finance minister Katy Gallagher, will specify the final rate of return and be used by the NRF Board to make independent investment decisions.
“What I can confirm is that we are taking into account advice around the rate of return, and ultimately that will be contained within the investment mandate that will be recommended by us to the board, so we’ve got a bit more to go before we get to that point,” Mr Husic said.
Mr Husic added that the vision for the fund was to “revitalise Australian manufacturing and build new capability” but in a way that ensures companies “can fully access that capital at very competitive rates”.
A spokesperson for the Department of Industry, Science and Resources would not comment on the rate flagged by Treasury, but said the National Reconstruction Fund Act “requires the board to be consulted on the investment mandate”.
According to the NRF discussion paper, the government intends to set the target rate of return “at a level that provides the NRF Board with the flexibility to appropriately manage risks and return across the NRF portfolio, while also delivering on the NRF’s purpose”.
At Senate Estimates, officials from the Industry department were repeatedly asked by Liberal Senator Jane Hume about the assumptions underpinning the 2023 federal Budget estimate that the fund will return $188.7 million over its first four years.
Secretary Meghan Quinn said that with the NRF board not yet in place and the investment mandate still to be finalised, the department had used a series of “bottom-up assumptions” based off interest received on loans, revenue from fees and charges.
Division head of Manufacturing and NRF, Narelle Luchetti, said the department had “looked at other special investment vehicles (SIVs) and their early days of establishment”, as well as benchmarked industry practices, to model the NRF return.
Senator Hume described the $188.7 million in earnings on the initial funding $5 billion allocated to the NRF, an effective rate of return of 3.77 per cent, as “crappy” and less than the current target cash rate.
“If I put money in a term deposit over the forwards, I’d get 4.8 per cent, so that looks like a pretty crappy rate to me. Beyond that crappy rate of return, it’s also less than the cash rate,” she said.
The forthcoming creation of the NRF comes as economic headwinds pick up, with growth expected to slow to 1.5 per cent in 2023-24, before recovering to 2.25 per cent the year after, according to the federal Budget.
Returns on the government’s Future Fund, for instance, have collapsed over the past 12 months, returning just 1.1 per cent against a benchmark return of 11 per cent due to “higher interest rates, and international and domestic market conditions”.
Ms Luchetti also told the committee that it will take a “couple of months” to establish the NRF Corporation and that an origination team would need to be set up before it can “start thinking about the pipeline [of investments] coming through”.
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