Note:
- This Toolkit item relates to Part 2 - Investment Governance, Funding and Financing of the Commonwealth Investments Resource Management Guide.
Key considerations when choosing an investment instrument
Alternative financing using the right investment instrument can provide benefits to the Government including increased involvement in project delivery decision-making, the opportunity to build and recycle capital and the opportunity to better allocate risk between parties.
- Where there are barriers to the private sector achieving commercial returns, well-directed and well-timed Government financing can unlock private sector investment. Options include:
Equity: involves the Government taking an ownership interest in a business with an expectation of financial returns over the longer term. Having the Government as an equity partner can reduce costs and risks for private investors. Alternatively the Government may be the sole owner at the early stages of greenfields projects, but bring in private investment once a project is more mature and less risky. In general, equity investment requires that the Government has a higher tolerance for risk and loss than other investments like loans. For example, the Commonwealth provided the NBN Co equity in exchange for ordinary shares. NBN Co only has fully paid ordinary shares in issue, all of which are owned by the Commonwealth.
Guarantees: involves the Government taking on financial obligations if certain risks eventuate. Government guarantees reduce the risk to private sector partners and can strengthen a project’s credit profile to attract private sector financing instead Government financing. For example, the Government provides guarantees through the Accommodation Payment Guarantee Scheme for the repayment of aged care residents’ refundable accommodation payments if the approved provider becomes insolvent or bankrupt and defaults on its refund obligations.
Commercial Loans: to support projects and priorities as a debt partner until projects are sufficiently developed to be wholly supported by private sector financing. Government debt financing is generally used to bridge a commercial market finance gap. For example, the Government has provided a loan on commercial terms to NBN Co so it can focus on the remaining rollout as it significantly scales up toward completion in 2020.
- Where there is no private financing compatible with the Government’s policy objectives, investment options include:
Concessional Loans: which can be provided when a proposal is expected to generate some financial return but private financing is either unavailable or unaffordable. Features of concessional loans include more favourable terms than terms offered by private debt markets. For example, the Commonwealth provides a concessional loan facility to a company wholly owned by the Sydney Motorway Corporation to finance a motorway.
Characteristics of investment instruments
There are a number of considerations to be balanced in determining the most appropriate alternative financing option (or blend of options). The pros and cons outlined for each option listed below are assessed from the perspective of the Government taking the role as investor.
The stated policy objectives of the project or program will help guide which considerations carry the greatest weight.
Investment Instrument |
Equity Injection
(Part-Ownership) |
Equity Injection
(100% Commonwealth ownership) |
Commercial Loan
(Market Gap Finance) |
Grant |
||
---|---|---|---|---|---|---|
Ability to influence financed objective Ability for the Government to provide direction in relation to the investment |
Medium control |
High control |
Low control |
Medium control – depends on loan conditions |
Medium control – depends on loan conditions |
Low-medium control |
Level of market intervention The significance of the intervention in the market and how determinative the instrument will be on future market conditions |
Medium intervention |
High intervention |
Low-medium intervention – depends on the value of the risk guaranteed |
Medium intervention |
Medium intervention |
Low-medium intervention |
Commercial discipline incentive The financial discipline achieved through the structure of the investment |
Low-medium incentive |
Low-medium incentive |
Low incentive |
High incentive |
Medium-high incentive |
Low incentive |
Certainty of financial return Probability of the investment making a financial return |
Low certainty |
Low certainty |
Nil or high certainty (if fee charged) |
High certainty |
High certainty |
Nil certainty |
Opportunity to realise upside gain The ability for the financier to benefit from over performance |
Medium-high capacity |
High capacity |
Nil capacity |
Nil capacity |
Nil capacity |
Nil capacity |
Level of financial risk The potential loss of the investment instrument |
High risk |
High risk |
Medium risk |
Medium risk |
Medium risk |
Not applicable |
Security of asset The reduction of financial risk that can be achieved through the ability to structure the instrument |
Low security |
Low security |
Nil security |
High security |
High security |
Nil security |
Administration cost Governance and management costs of the investment |
High administration |
High administration |
Low administration however Medium-high if called |
Medium administration |
Medium administration |
Low-medium administration |
Budget classification
In addition to the Finance Advice Paper - General Principles for Recognition of Expenditure in Budget Aggregates, the below table sets out the implication on key Budget aggregates of the different investment instruments:Note - the PDI impacts are reported as a consolidated line item at the Whole-of-Government level.
Statements | Cash Flow Statement | Operating Statement | Balance Sheet | ||||
---|---|---|---|---|---|---|---|
Metrics | Underlying Cash Balance | Headline Cash Balance | Net Operating Balance | Fiscal Balance | Net Debt | Net Financial Worth | |
Initial |
No impact |
Worsens by value of equity injection |
No impact |
No impact |
Worsens by value of equity injection |
No impact |
|
Ongoing |
Dividend improves PDI worsens |
Dividend improves PDI worsens Sale improves |
Dividend improves PDI worsens |
Dividend improves PDI worsens |
Depends on differential between PDI and dividends |
Depends on valuation of equity and differential between PDI and dividends |
|
Initial |
No impact on establishment |
No impact on establishment |
Worsens as recognise obligation to pay |
Worsens as recognise obligation to pay |
No impact on establishment |
Worsens as recognise obligation to pay |
|
Ongoing |
Worsens if guarantee is exercised |
Worsens if guarantee is exercised |
No impact (assume value of guarantee remains constant) |
No impact (assume value of guarantee remains constant) |
Worsens if guarantee is exercised |
Improves after guarantee expires |
|
(Market Gap Finance) |
Initial |
No impact |
Worsens by value of principal payment |
No impact |
No impact |
No impact |
No impact |
Ongoing |
Improves by differential between interest and PDI |
Improves by differential between interest and PDI, and principal repayments |
Improves by differential between interest and PDI |
Improves by differential between interest and PDI |
Improves by the differential between interest and PDI (assuming no revaluation) |
||
Initial |
No impact |
Worsens by value of principal payment |
Worsens by value of concession (which is unwound) |
Worsens by value of concession (which is unwound) |
Worsens by the value of the concession |
Worsens by the value of the concession |
|
Ongoing |
Interest improves PDI worsens |
Interest improves PDI worsens Principal repayments improves |
Interest improves PDI worsens Value of concession unwinds over course of the loan |
Interest improves PDI worsens Value of concession unwinds over course of the loan |
Improves/Worsens depending on differential between interest and PDI (assuming no revaluation) |
||
Worsens by value of grant (and PDI impact) |
Worsens by value of grant (and PDI impact) |
Worsens by value of grant (and PDI impact) |
Worsens by value of grant (and PDI impact) |
Worsens by value of grant (and PDI impact) |
Worsens by value of grant (and PDI impact) |
Note - the PDI impacts are reported as a consolidated line item at the Whole-of-Government level.