A fiscally responsible approach to decarbonise the economy: CEFC

In an email to the Coalition's Andrew Robb, CEFC chief executive Oliver Yates puts forward an argument for why the CEFC will play a useful role in enabling the economy to decarbonise, one superior to government grants.

Below is a reproduction of an email from the Clean Energy Finance Corporation's CEO Oliver Yates to the Coalition’s shadow finance minister Andrew Robb.

In it Yates explains that the CEFC will take a commercial and responsible approach to allocating its funds that will have minimal impact on the federal government budget. It provides reassurance that its five year funding allocation of $10 billion could not be spent within the short time frames suggested by the Coalition.

In addition Yates puts forward an argument for why the CEFC could play a useful role in enabling the economy to decarbonise, in conjunction with private sector participants, that is superior to the use of government grants. 

I also got the chance to speak to some of your colleagues last week and I have expressed how critical it is that the concerns they have about the CEFC are discussed. It is important that all decisions are informed and obviously, given what has transpired with the federal budget, extra attention needs to be paid to how we actually operate rather than how we were "conceived" to operate. The CEFC’s flexible mandate and commercial approach is a huge advantage to any government. It is rare to have available such an organisation.

The industry needs stability and only an organisation that is self-sufficient like the CEFC will be able to provide this. The CEFC’s impact on the federal budget and specifically the underlying cash balance is limited as the mandate we agreed is to achieve self-sufficiency within two years. In the early planning stages of the formation of the CEFC an assumption was made that the Corporation would 'grant' or 'lose' 7.5 per cent of the investment portfolio. This assumption flowed through government accounts. This assumption was removed with the support of the CEFC board and management, once in place. We determined that to operate commercially the CEFC would not make grants or what was termed “immediately impaired loans”. The making of such are inconsistent with the approach of being self-sustaining and commercial. However, these changes were not specifically highlighted, which with hindsight, would have assisted in building the understanding for you and your colleagues. 

The design of the CEFC is built on the CEFC Expert Review, after extensive public consultation and expert input. The CEFC’s investment decisions are made on a rigorous commercial basis independent of government by a pre-eminent commercial board.

The CEFC operates transparently and accountably under its Act and obligations under the CAC Act and under a range of other regulation applicable to the Australian financial sector entities. There is no basis to claims that the CEFC is providing “low cost high risk loans” that “no other financial institution would provide” or that we are a “lender of last resort”. We don't have or hold "10 billion dollars". Any money we have is either in investments or swept back to Treasury.

The CEFC is required under our investment mandate to “apply commercial rigour when making investment decisions, focusing on projects and technologies at the later stages of development. By adopting a commercial approach, it is expected that the Corporation will invest responsibly and manage risk so it is financially self-sufficient and achieves a benchmark rate of return". 

The difference between the CEFC and a traditional financial institution is that we don't seek maximum profits but seek to cover operating and funding costs and use the potential to make higher profits to secure public policy benefits and reduce the cost of moving to a lower carbon economy. We will participate alongside traditional financiers and may from time to time “rub shoulders” as we build our market presence and financial self-sufficiency.  That said, the net effect of our participation in the market will be to increase available funding opportunities for the private sector, not reduce them.

We are currently working on a dozen projects in Victoria that will deliver jobs and growth, but all are now in question. These projects have a total expected size of nearly $2.5 billion. Conservatively assuming that 50 per cent of the project cost is labour and estimate PAYE at 35 per cent, these projects will have a significant impact on the Victorian economy. ABS data indicates that the multiplier across the economy for this type of labour would be around five times and therefore the GDP impact of domestic product will be more than $2.0 billion.

It is true that the CEFC has the ability to lend at rates lower than commercial banks. The Investment Mandate requires the CEFC to conduct a comprehensive evaluation of investment proposals in arriving at any investment decisions and consider a wide array of factors that a private sector financier would be unlikely to consider. Private sector financiers don't look at external costs and benefits of their action...we do. 

These external benefits include contributing to technologies moving faster along the innovation chain, down the cost curve and through greater acceptance in financing markets. Externalities can also flow from improvements in technology design, supply chain depth, construction practices, operating skills, financing structures and market risk appetite. Through its activities, the CEFC will play an important part ensuring the development of the capabilities and capacity of a globally competitive Australian clean energy sector. This contributes to up-skilling business and the workforce supplying clean technology goods and services.

It is true that the CEFC has a challenging task. The CEFC Expert Review said that management will be tested in achieving its objective as there is a tension between funding transactions with public policy in mind, applying a commercial filter, achieving financial self-sufficiency and a return on capital. It takes time to solidly establish such a sophisticated institution and to inform and develop sound commercial relationships with key parts of the market. The CEFC board and management are now fully engaged in meeting this challenge and fulfilling the responsibilities and expectations of the CEFC in its Act and Investment Mandate.

Over time, the clean energy sector has built up a 'grants' culture and large bureaucratic infrastructure.  The array of 'programs' and buckets is astounding, with consequent inefficiencies. The CEFC’s commercial approach is far simpler, more flexible and cost effective (hopefully almost no cost). In a carbon-intensive economy with limited capital sources for the clean energy sector, the investment-based discipline of the CEFC is a better way for fiscally responsible governments to decarbonise the economy than grants.  

There has been a resounding positive response to date from the market, demonstrating the significant role which the CEFC can play. Active discussions are underway with over 50 project proponents, who are seeking CEFC finance of circa $2 billion (representing total project costs of $4.6 billion). Further, CEFC has received proposals from some 119 additional project proponents seeking CEFC finance of over $3.3 billion (with total project costs of over $6 billion). This represents a significant opportunity for the public and private sector to achieve the type of economic transformation which is required if we are to achieve Australia’s 2020 emissions targets and competitive transformation at the lowest economy wide cost. It is all about cost and you have in the CEFC a commercial player of significant strategic value to lowering that cost.

I look forward to discussing the above further with you when you have time.

Oliver Yates is the Chief Executive Officer of the Clean Energy Finance Corporation.

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