Investment Instruments

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.

1. 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.
    
2. 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.
   
   Conditional Grants: where grant funding is structured in a way that on the attainment of certain milestones there is a recoupable trigger for the initial capital. Conditional grants are generally used to support social policy objectives when there is no expected financial return or where imposing a return would conflict with policy objectives. For example, the Asset Recycling Initiative provided a competitive pool of grants to states and territories which was conditional on the privatisation of government assets and the use of the grants for investment in new infrastructure.

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.

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.

Note - the PDI impacts are reported as a consolidated line item at the Whole-of-Government level.