Submission by Concerned Economists Group to the Senate Economics References Committee Inquiry Into Governance and Operation of T

SUBMISSION BY CONCERNED ECONOMISTS GROUP TO THE SENATE ECONOMICS REFERENCES COMMITTEE INQUIRY INTO GOVERNANCE AND OPERATION OF THE NORTHERN AUSTRALIA INFRASTRUCTURE FACILITY

(a) Introduction

We are a group of recently retired economists with a keen interest in public policy that have worked at senior levels in the public sector (Treasury, Prime Minister’s Department, Finance Department, Department of Climate Change, Productivity Commission) and in financial markets, both in Australia and overseas. We bring to this Inquiry our joint knowledge and experience on a number of fronts of direct relevance to its deliberations, namely:

 understanding the requirements for properly evaluating public expenditure proposals;  understanding commercial criteria used by banks for evaluating private sector applications for financial loans and the risk management processes which should be used to measure and mitigate risk for lending projects;  understanding the importance of an economy-wide approach in assessing whether government assistance to a private sector venture is appropriate; and  understanding how environmental factors need to be taken into account in both private and public decision-making processes.

The focus of our brief submission is primarily on item (b) of the Senate Committee’s Terms of Reference, namely:

“The adequacy of the NAIF’s Investment Mandate, risk appetite statement and public interest test in guiding decisions of the NAIF Board.”

However, consideration of this particular aspect of the Committee’s Terms of Reference has important implications for other aspects of its Terms of Reference as well, which we also comment on.

Section 7 (2) of NAIF’s Investment Mandate Direction 2016 states that the Board must be satisfied that:

(b) There is an expectation that the Commonwealth will be repaid, or that the investment can be refinanced; and

NAIF offers up to $5 billion over five years in concessional finance to encourage and complement private sector investment in infrastructure that benefits Northern Australia. These are substantial amounts of public funds, which puts a heavy onus on NAIF, the Minister responsible for NAIF and the Federal Government more broadly to ensure that NAIF’s governance and operations are up to the task. Whether or not they are is the focus of this submission. 2

The discussion and recommendations (in italics) in this submission are general in nature and relate to NAIF’s capacity to properly and adequately carry out its mandated function. However, the underlying issues have come into especially sharp focus recently due to the widespread public interest in Adani’s application to NAIF for a $900 million government loan to help fund a rail link to serve its coal mine in the Galilee Basin. This submission will also be using this particular case in order to make general points about NAIF’s governance and operations.

(b) What Does NAIF Need in Order to Carry Out its Mandate?

In order to make recommendations to government regarding subsidised loans to commercial ventures in accordance with its investment guidelines, NAIF’s Board and staff must have the necessary processes, information, independence, transparency, skills and resources. We are not in a position to comment on the resourcing of NAIF, and can only comment in passing so far as skills are concerned. However, our backgrounds in both the public and private sectors put us in a good position to comment on the other requirements listed and their relationship to NAIF’s governance and operations.

Processes

NAIF’s processes for considering applications for government loans, or indeed for deciding which applications to even consider, are opaque. There are no clear structures or requirements for public or private meetings, no clear lines of responsibility, no clear framework that sets out when and how it should rely on external expertise; and only limited information on what criteria it applies when making its recommendations. Moreover, the details as to how NAIF deals with risk are not published, and NAIF is on record as opposing their publication.

This lack of clear processes was acknowledged by the then Minister responsible for NAIF, Senator the Hon. Matthew Canavan, when he stated recently, “There is not really a formal submission or application process,” but rather “discussions that occur.”1

NAIF has also shown itself very reluctant to provide information regarding its internal processes, an issue returned to below (see “Transparency”).

As a body responsible for managing up to $5 billion in public funds, NAIF needs to put in place and publish much clearer processes for assessing applications for government loans; determining which ones are in the public interest; and prioritising them.

Information

1 Hansard (2016), Estimates, Economics Legislation Committee, 20 October 2016. 3

Regardless of one’s personal views on whether the Adani coal development in the Galilee Basin should go ahead or not, there can be no doubt that both it and the related proposed rail link to Abbot Point are controversial and generating considerable public debate. That makes it all the more important that NAIF is seen to have all the necessary information it needs to adequately assess whether or not provision of a $900 million loan to Adani to help fund the rail link is in the public interest or not.

If a commercial bank is considering an application from a company for a substantial project finance loan, it will put considerable time and resources into ensuring it knows precisely which legal entity it is lending to; the relationship between that entity and related entities in the corporate structure; the financial track record and reputation of the company; the viability of the project; and the full gamut of risks facing both the company and the specific project.

A large body of information is already publicly available on Adani2. It details many aspects of Adani’s operations that are, or should be, of direct relevance to NAIF in its considerations, including:

 The highly complex and opaque corporate structures Adani uses in its operations, both in Australia and overseas. This can be seen in its Abbot Point coal terminal facilities which are controlled by six companies and a trust, all of which appear to be ultimately controlled by Atulya Resources Ltd, a Cayman Islands company controlled by the Adani family3. Yet neither Adani nor NAIF have responded to requests for information as to which company is applying for the loan, despite the fact that this information is critical: if NAIF, the Government and taxpayers are to have any confidence that a loan to Adani will be repaid, they need to know that the ultimate legal entity to which the loan is made has adequate assets in Australia, rather than in the Cayman Islands;

 Adani’s willingness to use completely unrealistic and unreasonable data and assumptions to artificially boost the supposed profitability of and public benefits flowing from its Carmichael mine in its requests for approval and assistance for the mining operation. This was fully exposed in a 2015 Queensland Land Court challenge4 to Adani’s application for approval of the Carmichael mine, during which it was seen to have wildly inflated both the likely profitability of the mine and the likely job creation flowing from it;

 The large number of court cases filed in Indian courts against entities in the Adani Group relating to environmental issues, including as recently as August 2016 a finding by an Indian tribunal against Adani for failing to clean up environmental damage after an unseaworthy coal ship chartered

2 See for example Environmental Justice Australia, “The Adani Brief”, Feb 2017. 3 See Environmental Justice Australia, op. cit., Executive Summary. 4 Queensland Adani Mining Pty Ltd v. Land Services of Coast and Country Inc., QLC 48 15, December 2015. 4

by Adani sank off the coast of Mumbai. Adani has also been issued with 'show cause' notices relating to alleged overvaluation of coal imports by India's Directorate of Revenue Intelligence.

NAIF’s Investment Mandate includes the following clause:

“ The facility must not act in a way that is likely to cause damage to the Commonwealth Government’s reputation, or that of a relevant state or Territory Government”.

Given the publicly available information on Adani’s reputation, track record and opaque corporate structures, recommending a loan to such a company could well breach this section of NAIF’s Investment Mandate. Indeed, if it does not take all relevant publicly available information regarding Adani into account in making its recommendation, it leaves itself open to legal action.

In recommending a government loan, the NAIF Board must be satisfied that, without it, the investment project would not receive sufficient financing from other sources to proceed. In addition, in determining the extent of concessionality with respect to the terms of the loan, the Board must limit them to the minimum required for the project to proceed. It must also have the expectation that the Commonwealth will be repaid.

This is, in many cases, a fine line to tread, and requires a lot of information if the narrow path is to be properly navigated. In the case of the Carmichael coal and related rail link project, again much of the relevant information is already available. Twenty-three major banks have already said they will not support Adani’s Carmichael mine, on which the commercial viability of the rail link rests. The reasons for this are manifold, but include concerns as to the profitability of the mine (a number of reputable institutions including BIS Shrapnel, UBS, and Queensland Treasury have concluded it is not viable without sustained high coal prices); the associated risk of environmental regulatory change in both Australia and India which could undermine the commercial value and viability of the Carmichael mine in future years; the risk of major environmental damage from either the mine or the company’s coal loading facility at Abbot Point given its proximity to the Great Barrier Reef; a corporate view that financing highly polluting forms of energy production is not in the longer term interests of the company or its shareholders; and concerns regarding the Adani group of companies and their track record referred to earlier.

Given the expertise and resources of the 23 major banks that have reached this conclusion, NAIF would need to be doubly confident that such a loan is still in the public interest. Furthermore, it would need to articulate very clearly and publicly the grounds on which they reached that conclusion, or risk potential legal action.

Risk of environmental damage warrants some specific comments. In February 2017, APRA Executive Board Member Geoff Summerhayes gave an important speech on the risks to financial services companies and boards of not taking fully into account and disclosing climate change risks to its business, including 5

“transition risk” stemming from changes in law, policy, markets, technology and prices resulting from agreed transitions to a low-carbon economy5. Many of his comments are also of direct relevance to NAIF’s Board as it considers a loan application for a project that, if it goes ahead, will contribute substantially to greenhouse gas emissions.

There are, in addition, other factors that NAIF needs to take into account in assessing Adani’s loan application that commercial lenders would not necessarily have taken into account, and which substantially add to the information requirements facing NAIF. One of NAIF’s Mandatory Eligibility Criteria for applications for public loans is that the project “will be of public benefit”. Their Public Benefit Guideline says that this must be a net benefit: in other words, it must take into account negative as well as positive aspects of the proposed project.

Public benefit clearly extends beyond the interests of any one region or state. The Carmichael coal mine is potentially massive, and as a consequence could have significant adverse effects on both the price of coal exports from other companies and regions where mines already exist and future employment prospects for them6 . In addition, even if the risks of environmental pollution of the Great Barrier Reef from a substantial increase in coal loading and transportation from Abbot Point were deemed to be small, the consequences in terms of damage to the Reef, to tourism and to regional employment could be catastrophic. A detailed risk assessment involving both the likelihood and consequences of environmental damage needs to be fully factored into NAIF’s consideration of the project.

Taking these and other potential spillover effects from the Carmichael mine and associated rail link fully into account can only be done by way of a full cost- benefit analysis. NAIF’s Public Benefit Guideline states that such cost/benefit analysis is in fact required for all potential loans of over $50 million. But, particularly in the case of the Adani loan application, such analyses are complex and, to be done properly, require a high level of technical skill. Given its Service level agreement with the Export Finance and Insurance Corporation ( EFIC), it is possible that a large part of this analysis will be done by EFIC. But EFIC, unlike NAIF, is not an independent body: it is part of a Federal Government department, and hence acts at the discretion of its Minister. One of its Board members, Annabelle Chaplain, is also a director of Downer EDI, a company that has a commercial arrangement with Adani and which will benefit if the Carmichael coal mine goes ahead.

NAIF’s Public Benefit Guideline explicitly includes “…positive and negative environmental and social impacts” amongst the factors that “should be included in the cost benefit analysis”. Somewhat worryingly however, it does not include

5 Geoff Summerhayes, “ Australia’s New Horizon: Climate Change Challenges and Prudential Risk”, Insurance Council of Australia Annual Forum, 17 February 2017. 6 See “Federal bankrolling of Adani will damage other Australian coal regions,” http://www.afr.com/opinion/columnists/federal-bankrolling-of-adani-will-damage-other- australian-coal-regions-20170426-gvsrcz 6 environmental impact amongst the costs and benefits listed in its “Benefits and Costs” table set out in Annexure 1 of its Guidelines. Clearly, regardless of who undertakes the work, any cost/benefit analysis of the Adani loan proposal must fully consider potential environmental damage.

When NAIF is considering large and complex loan proposals, including in the case of Adani, it should be required to contract out the relevant cost/benefit analysis to independent experts with the expertise to conduct them, such as the Productivity Commission. In the case of the Adani loan proposal, this analysis must give full consideration to possible environmental damage from the Carmichael coal mine, the rail link to Abbot Point and from transporting large volumes of coal through the Great Barrier Reef.

Independence

The previous Minister for Resources and Northern Australia, Senator the Hon. Matthew Canavan, has put pressure on NAIF’s Board and potentially compromised its consideration of a loan to Adani due to his strong and repeated endorsement of the proposal. In addition, the independence of NAIF’s consideration of the Adani proposal has been further compromised by the fact that the Minister recently appointed to the NAIF Board a Queensland businesswoman, Karla Way-McPhail, who has financial interests in two mining sector related companies.

At a June 2017 Senate Estimates Committee meeting at which the NAIF Chief Executive, Laurie Walker, was asked whether Ms Way-McPhail would recuse herself from deliberations on the Adani loan, Mr Walker replied: “NAIF doesn’t publicly disclose which directors have recused themselves.”7 What Mr Walker did not answer is why, in the interests of transparency and public confidence in NAIF, they do not disclose such information.

In any consideration by NAIF of loan applications, its processes need to be not only independent but be seen to be independent. If there is a conflict of interest involved in consideration of a particular application, NAIF should be obliged to disclose publicly both the nature of the conflict and the action it is taking to deal with it.

Transparency

There appears to be a substantial lack of accountability for the NAIF Board. Accountability requires transparency. With such large potential expenditures of public funds provided in its mandate, it is important that NAIF regularly sets out for the public, either via the Parliament or directly, full disclosure of its activities, including at the time of their receipt all lending requests. We would also note in this context that the present legislation only provides for the presentation by NAIF of a high level Annual Report to the Minister. In our view a fully

7 Matthew Doran, “ Conflicts of Interest Concerns over $900 Million Adani Loan Spark Senate Estimates Questions”, ABC News Online, 2 June 2017. 7 documented Annual Report should be presented to the Parliament and made publicly available.

Taxpayers have every right to know where their tax payments are being used and why. Procedures for making recommendations to government on the use of substantial amounts of public funds therefore need to be as transparent as possible. This is not the case with respect to the way in which NAIF conducts itself, as has been demonstrated already on a number of fronts in relation to the Adani proposal.

The first example of this is the one cited above with respect to disclosure of whether a member of the NAIF Board with a clear conflict of interest will be recused from consideration of a loan proposal.

A second example is NAIF’s unwillingness to publicly release its Risk Appetite Statement (RAS) used in consideration of loan applications. In its Risk Management Framework published on its website, NAIF makes clear that the RAS is an integral part of its investment decision making process, but then states:

“The RAS is not a public document as it describes in detail the manner in which NAIF’s risk appetite and tolerances (qualitative and quantitative) are established and controlled.”

This is an extraordinary statement for a public body, which is responsible for making recommendations for expenditure of public money. NAIF is not in competition with commercial lenders. Taxpayers are fully entitled to know what criteria NAIF are using in its decision making, including critically how much risk NAIF is willing to tolerate in its decision making and recommendations.

A third example of NAIF’s lack of transparency concerns recent Freedom of Information requests for information on dates and locations of forthcoming Board meetings. For a public body responsible for making recommendations on up to $5 billion of public funds, concerns about possible public demonstrations seem an inadequate reason for refusing such requests and do nothing to raise public confidence in NAIF’s independence and transparency.

In considering these issues, the Committee may want to examine closely the operational arrangements and resulting transparency of another body involved in considering requests for government loans to private sector projects, namely the Clean Energy Finance Corporation. CEFC’s transparency and accountability arrangements are far superior to those of NAIF.

NAIF’s governance framework should be amended to require full publication of its Risk Appetite Statement. NAIF should be required to publish a detailed Annual Report on its activities. All requests for funding should be listed publicly upon receipt. 8

Skills and Resources

We are not in a position to comment in any detail on whether NAIF has the necessary skills and resources to carry out its statutory functions. That said, we would note that even a cursory examination of the curriculum vitae of its Board members shows considerable experience in the mining sector but very little if any experience with respect to public administration or environmental issues. Given the very considerable environmental issues and concerns surrounding the Adani group of companies in general and the Adani coal mine and associated rail link to Abbot Point in particular, it is difficult to see how these issues can be adequately assessed in consideration of a possible loan to Adani.

Where a loan application for more than $50 million is being considered and some of the key factors relevant to a proper assessment of that application fall outside the expertise of the NAIF Board, the Minister should be required to appoint an independent expert to the Board for the period of the consideration of that application.

Consideration of a possible loan application by Adani for construction of a rail link from its Carmichael coal mine to the Abbot Point coal terminal has put NAIF’s governance and operations in the spotlight. Given that NAIF is responsible for providing advice to government on potential expenditure of significant amounts of public funds, that is a welcome development.

From our backgrounds in both public administration and the financial sector, we have found NAIFs guidelines, transparency and accountability and its track record for public disclosure to date sorely wanting, and have made some recommendations for their improvement.

We trust our comments and recommendations prove useful to the Senate Committee in its consideration of these issues.

Geoff Weir Director Financial Sector Services

Robert Henderson Policy and Markets Economist Formerly Chief Economist (Markets), NAB

Shelley Cooper Former Branch Manager Clean Energy Regulator 9

Sue Holmes Former Assistant Commissioner Productivity Commission