The National Reconstruction Fund – Australia’s newest vehicle for advancing industrial development

In the October 2022 Budget, the Federal Government allocated resources to establish the National Reconstruction Fund (NRF). The NRF is a government-owned finance corporation that will support industrial projects that diversify and transform Australia’s industry and economy. Its aim is to help Australian industry move up the value chain toward higher value-added activities, support the transition to a net zero economy and improve supply chain resilience through an expanded national industrial base.

How will the NRF provide funds?

The NRF will be modelled on the Clean Energy Finance Corporation (CEFC), a government-owned ‘green bank’ that has invested $10 billion in clean energy projects in Australia since 2012.

The NRF adopts the CEFC’s ‘co-investment’ model, under which it will join with other investors to make targeted investments in seven priority areas. These co-investments are intended to ‘crowd-in’ additional investment from the private sector, including banks, superannuation funds, venture capital and private equity.

Multiple investment options will be offered by the NRF, including loans, guarantees and/or equity investment.

Investment decisions will be made by an independent board, guided by an “investment mandate” that sets out the Government’s broad expectations for how assets will be invested.

What are the NRF’s seven priority areas?

1. Value-add in resources
2. Value-add in agriculture, forestry and fisheries
3. Transport
4. Medical science
5. Renewables and low emission technologies
6. Defence capabilities
7. Enabling capabilities

Several of the NRF priority areas are already serviced by government investment vehicles, such as CEFC (renewables) and Export Finance Australia (defence and critical minerals).

What are the NRF’s resources?

The Government has announced the NRF will be provided $15 billion for investment. However, by adopting a co-investment model with the private sector, the NRF will leverage a much greater amount of total investment into Australian industry.

For comparison, the $10 billion co-invested by the CEFC since 2012 has supported $37 billion of total investment in clean energy projects.

The Government has earmarked $8 billion of the NRF’s $15 billion to the following purposes:

• Up to $3 billion to support the Powering Australia plan
• $1.5 billion for medical manufacturing
• $1 billion for value-adding in resources
• $1 billion for critical technologies
• $1 billion for advanced manufacturing
• $500 million for value-adding in agriculture, forestry, fisheries, food and fibres

What are the next steps for the NRF?

The October 2022 Budget has allocated $50 million over two years to establish the framework and institutional mechanisms for the NRF. The Government is presently consulting with industry and unions regarding design, structure and targeting.

Shaping NRF’s investment mandate will be of particular importance as it will provide the independent board direction in how and where to invest its funds.

The Government has indicated it is presently selecting a board and chair, which will help develop the investment mandate. It intends to have this work completed by the May 2023 budget, which will make capital allocations for investment.

The NRF is intended to be operational in July 2023.

What ‘financing gap’ might the NRF fill?

Many industrial businesses in Australia report difficulties in obtaining project finance from conventional sources. These can include:

• R&D-intensive manufacturing, where intellectual property is embedded in the product rather than in (commercialisable) patents;
• Industrial clusters, where local networks effects create synergies between businesses in different stages of the value chain;
• Emerging technologies and industrial processes, where the market for new products has yet to be proven and
• ‘Adaptable capabilities’ where an industrial project is sufficiently flexible to service distinct markets (for example, civilian engineering capabilities that can be applied to defence industry applications).

The NRF has a role to play in filling the financing gap facing these industries. NRF investment will provide direct support to such projects and help to crowd-in additional sources of private investment.

Does the NRF telegraph a shift from ‘grants’ to ‘investment’ for industrial policy?

The October 2022 budget redirected approximately $500 million from industry grants programs toward the NRF, including uncommitted funding under the Modern Manufacturing Initiative and Entrepreneurs’ Programme.

Industry Minister Ed Husic has indicated this does not indicate a wholesale shift from a grant to investment model for industrial policy but a rebalancing of emphasis between the two approaches.

Grants and investment target projects at different stages of the life cycle. Government grants typically support new projects to advance to the commercialisation phase, while investment aids commercial projects to scale up for market.

Where will the NRF’s project pipeline come from?

It is likely that the initial NRF project pipeline will be developed from prior industry grant recipients that have successfully commercialised new technologies. Both Commonwealth and state government industry grant programs are potential sources.

As the NRF is established and matures, it will develop a project pipeline of its own.

Establishing alignment between the NRF and industry grants programs – where grants functions as incubators taking projects from concept to commercial, and NRF investment then helps them scale – will be crucial in ensuring the NRF’s success.