The world is facing huge challenges that demand unprecedented investments. Globally, at least USD 2.5 trillion of investment is needed annually to deliver on the Sustainable Development Goals and address inequality. For Australia to meet its 43 per cent emissions reduction targets by 2030, $76 billion in extra investment in the energy transition will be needed.

But the traditional sources of investment capital – financial markets and banks – are not always designed to meet these challenges. Traditional finance operates best in established industries where they have information about the past performance of companies and can evaluate the possible risk and returns. New industries and technologies require a different financing approach that takes a longer-term view of the broader financial, economic and often social opportunity.

Investment is needed to, as Mariana Mazzucato says, not just help fix failures in existing markets but help power creation of new markets too. Government investors can play a critical role in shaping these markets by deploying their own investments and establishing the rules. By setting the direction of growth, not just the rate, government has the best chance of achieving these ambitious goals while also bringing in private investors with the necessary scale to help.

The Australian Government has been doing this already, and quietly amassed significant financial firepower since 2012. It now has mandates to make more than $70 billon of investments into private unlisted companies – from infrastructure to climate, housing to SME loans – in emerging higher risk markets. This makes it one of the biggest private investors in Australia, alongside the anchors of Australian finance, such as Macquarie Bank, the Australian superannuation funds and big US private equity funds.

But what explains this rise and how can it best deliver for the Australian people in future?

Australia has now built a diverse investment portfolio

The Australian Government established the well-known Future Fund in 2006 that invests in traditional capital markets to pay for unfunded superannuation liabilities, as well as Export Finance Australia that has financed Australian exports since 1991. State governments (such as Victoria through VEDC) have also dabbled in using investment to promote economic development amongst the opening of the Australian economy in the 1980s. However, the Australian Government’s role in directly investing in new industries restarted in 2012.

The Clean Energy Finance Corporation (CEFC) was set up as an independent investment organisation tasked with increasing finance to the clean energy sector with the ultimate aim of achieving Australia’s greenhouse gas emissions reduction targets. It was seeded with $10 billion in capital in 2012, but has now grown to over $30 billion with recent further mandates to deliver $19 billion through the Rewiring the Nation program.

Following CEFC’s efforts, other funds focusing on specific policy challenges have emerged. Housing Australia (formerly the National Housing Finance and Investment Corporation) focuses on delivering affordable housing and the $15 billion National Reconstruction Fund (NRF) is now focused on building domestic manufacturing industries.

Some funds focus on supporting certain types of businesses struggling with access to capital, with the Australian Business Growth Fund targeting SMEs and Main Sequence Ventures targeting early-stage companies undertaking high technology innovation.

Other funds target regions where capital is needed, such as the $7 billion Northern Australia Infrastructure Facility. Funds are now even being deployed in Australia’s development efforts in our nearby international markets, through the Australia Infrastructure Financing Facility for the Pacific and Australian Development Investments.

Together, these funds represent a relatively diverse portfolio of investments across regions, business types, asset classes, types of investment (including equity, debt, concessional loans and guarantees), and purposes. Some are financed through government borrowings, others through cash. Some aim to “fix” markets, others to shape markets. Crucially, they are all helping government officials amass expertise in investing in new markets.

Australia is not alone. The UK has developed a broad suite of investment funds including supporting business through the British Business Bank, development through British International Investment and even social challenges, like housing and early intervention, through Better Society Capital. The US is often regarded as a historical leader, particularly through the US Small Business Administration that has 70 years of experience investing in the early stages of global behemoths like Apple, while also targeting groups that are underinvested in, such as women and ethnic minorities.

Why is this type of investment interesting for government?

Government investment funds offer some attractive propositions:

• They are long-term. Establishing an independent investment vehicle enables it to take a long-term view critical to any technological transition, industry development and social change.
• They are sustainable. Many have requirements to make modest financial returns that enable them to recycle investment to provide ongoing industry investment (if needed), which is important in times of fiscal pressure.
• They attract capital. Most aim to attract capital from outside. CEFC claims to have leveraged 93 times government money. The Australian Business Growth Fund has attracted 4.4 times the initial government capital, drawing from “big four” banks, plus HSBC and Macquarie, to establish the fund.
• They build capability. Focus on a specific theme by a government investor helps drive understanding of a new industry or technology that private investors can also build on.

Interestingly, support for these funds is now widely bipartisan. Notwithstanding some early battles within the government about CEFC with legislation to remove it and then reduce its mandate, both sides of Parliament now appear supportive. Whilst Labor has established some significant funds in the CEFC and NRF, the Coalition established the Australian Business Growth Fund and Main Sequence Ventures. Indeed, then Prime Minister Scott Morrison proudly exclaimed the world-leading efforts of CEFC in 2019.

So, what next?

Australian Government investment funds have grown rapidly since 2012 and now represent one of the biggest institutional and strategic investors in Australia. However, growing pains may be emerging.

Operationally, funds are accountable to many different departments and ministers. Access to information about performance and practice is not always easy to collect and compare. Information about portfolio companies is also hard to extract, which would be extremely valuable for policymakers to understand changing business conditions.

A few changes to operations could help make the most of these funds:

• Establish a trusted platform for appropriately anonymised information-sharing across key business and economic trends arising from portfolio investments.
• Set up a government investor best practice centre within the Commonwealth Treasury to share key practices and help define the distinct capabilities required of government investors.
• Commission the Australian National Audit Office to evaluate what works for government investors.
• Enhance connections between funds through regular fora and engage transparently with investors, building on the new “front door” for investors with transformational investment proposals related to the Future Made in Australia policy.
• Consider opportunities for efficiencies through shared back-office platforms, to help address common challenges around the proportion of funds spent on operational costs – a regular topic of public interest.

Also, a more strategic use of government investment funds can further support Australian industries to successfully compete in the dynamic global economy, notwithstanding a relatively small domestic market. An expanded strategic role could include:

• Building clear pathways to seek investment to scale for companies in priority industries and technologies by enhancing coordination across state and national investment funds to provide certainty to companies and founders to stick it out in Australia.
• Explore opportunities for the Future Fund to expand investment in priority areas where it meets their investment requirements, particularly in larger scale investments. Whilst the $280 billion Future Fund invests 23 per cent of its overall portfolio in Australia, it only invests a relatively small proportion of its private investments in Australia (2 per cent in alternatives and 3 per cent in private equity investments in Australia).
• Consider establishing a dedicated holding company structure like Singapore’s Temasek or the proposed National Investment Authority in the US, that could hold all strategic investments (including investment funds and direct investments such as Psi Quantum) to promote the greatest possible alignment with policy goals.

Government sees investment not just as an opportunity to “fix” market failure, but also to shape markets to drive specific policy goals on transition, industry and business growth. Increasing use of this tool reflects the complex challenges facing Australia amidst a constrained fiscal environment. Australia has now built a powerful platform to drive strategic investment and can push further to best position industry and Australia more broadly for the future.

Simon Rowell recently joined JMI as a Senior Policy Fellow (Public Service Stream) from The Cabinet Office in the NSW Government. Simon is an experienced senior executive committed to driving public impact through economic growth and investment across the public, private and non-profit sectors.

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