National Reconstruction Fund Corporation (Investment Mandate) Direction 2023

The central organising concept is the portfolio benchmark return defined in section 8: a target average return of 2 to 3 per cent above the five year Australian government bond rate, measured before operating expenses and weighted to the size and timing of investments. The Ministers intend to review this benchmark three years after commencement. The Corporation’s investment practices encompass both the performance of its investment functions and the exercise of its investment powers. The Corporation’s portfolio means all investments of all Corporation bodies at a given time. The instrument uses the defined term financial accommodation from the Act, which includes loans, guarantees, equity and other instruments. Concessional terms are not defined but the direction imposes conditions on their use. Targeted financing levels in section 15 are not caps but targets: the Corporation must allocate investments to achieve the specified sectoral funding levels over the medium to long term. The note clarifies these target areas do not correspond directly with the priority areas of the Australian economy declared under a separate instrument, meaning an investment in a single priority area could count toward multiple sectoral targets. The concept of control for equity limits adopts the meaning from the Public Governance, Performance and Accountability Act 2013 definition of “subsidiary”. The instrument also introduces the idea of crowding in finance from section 7: the Corporation will crowd in finance to transform and diversify Australia’s industry and economy, and support market leading enterprises that deliver high value, internationally competitive products and services across the value chain. The Corporation must have regard to public policy outcomes when making investment decisions. Portfolio risk is to be acceptable but not excessive in aggregate, with periodic review required. The instrument distinguishes between the portfolio benchmark return (pre expenses) and the actual net return. Displacement avoidance under section 12 requires the Corporation to consider effects on other market participants and the efficient operation of the Australian financial market, and seek to avoid displacing alternative financing to the extent reasonably practicable. The instrument also introduces Australian Industry Participation plans and consultation with the Department of Finance on the Buy Australian Plan.

The primary entity bound is the National Reconstruction Fund Corporation, including all Corporation bodies and their subsidiaries. The Board must take all reasonable steps to ensure compliance with the Investment Mandate. The Ministers (Industry and Science; Finance) are the direction givers and have powers under the Act to require explanations for non compliance and to direct specified action to achieve compliance. Entities seeking investment from the NRF are directly affected because they must meet the conditions imposed by the mandate: they must accept the Corporation’s commercial approach, due diligence requirements, and the restrictions on concessional terms, equity caps, and guarantees. Other Commonwealth entities are affected by the collaboration and cooperation obligations in section 14, which specifically names the Australian Renewable Energy Agency, Clean Energy Finance Corporation, Northern Australia Infrastructure Facility, Export Finance Australia, Housing Australia, Regional Investment Corporation, and the Net Zero Economy Agency. The Corporation must seek to cooperate with these entities where practical and appropriate. State and Territory entities are also within the cooperation framework. Private sector investors are affected indirectly through the displacement avoidance duty: the Corporation must seek to avoid displacing alternative private and public sector financing in each priority area. This creates a competitive buffer for private capital. The Australian Government is the ultimate beneficiary of the positive return requirement. The Department of Finance is consulted on application of the Buy Australian Plan. The instrument also affects the Account (the NRF Account) because guarantee liabilities are capped as a percentage of its credit balance. The Australian public is affected as taxpayers bearing the risk of the portfolio and as recipients of the public policy outcomes the Corporation is directed to achieve. Because the instrument is a direction under the Act, the Board individually may face accountability measures if the Corporation fails to comply with the mandate.

The Corporation’s primary duty is to target the portfolio benchmark return of 2 to 3 per cent above the five year government bond rate over the medium to long term (section 8). It must operate with a commercial approach including due diligence and risk assessment, and develop a diversified portfolio with acceptable but not excessive risk (section 9). The Corporation has the right to accept higher risk than commercial banks and private sector investors if that supports the objects of the Act and the instrument, particularly for emerging technologies, strategic interests, and long term payback periods (section 9(2)(3)). It must have regard to the matters set out in subsections 17(3A) and (4) of the Act, plus sustainability and circular economy principles, regional development, and national security (section 10). The Corporation must take a medium to long term outlook but is not prevented from shorter term realisations when consistent with the Act and the mandate (section 11). A critical duty is to consider the potential effect of its investment practices on other market participants and the efficient operation of the Australian financial market, and to seek to avoid displacing alternative private and public sector financing to the extent reasonably practicable (section 12). The Corporation must not act in a way likely to damage the Commonwealth’s reputation (section 13). It must seek to cooperate with named Commonwealth entities and state/territory entities where practical and appropriate, and must consider opportunities raised by the Net Zero Economy Agency (section 14). The Corporation must allocate investments to target the specified sectoral funding levels (section 15). For concessional financial accommodation, the Corporation must satisfy itself that it is the most appropriate way to achieve particular public policy outcomes, that concessionality is commensurate with anticipated economic benefits and policy outcomes based on a reasonable qualitative assessment, and that it is the minimum necessary to allow the investment to proceed (section 16). The Corporation must not acquire equity interests that result in it and other Commonwealth entities holding a majority or controlling an entity; if it becomes aware of such a situation, it must divest as soon as reasonably practicable (section 17). Guarantees may only be given if the Corporation is satisfied they are the most appropriate way to achieve public policy outcomes, must be appropriately limited and quantifiable, and total guarantee liabilities cannot exceed 5 per cent of the Account’s credit balance (section 18). The Corporation must ensure an Australian Industry Participation plan is completed where required by government policy and consult with the Department of Finance on the Buy Australian Plan (section 19). The Board has the duty to take all reasonable steps to ensure compliance by the Corporation and its subsidiaries.

The instrument itself does not create criminal offences or civil penalties. Enforcement mechanisms arise from the National Reconstruction Fund Corporation Act 2023. Under subsection 74(3) of the Act, the Ministers may direct the Board to explain any failure to comply with the Investment Mandate and to take specified action to ensure compliance. This is a powerful enforcement tool because non compliance can lead to ministerial direction that the Board must follow. The Board’s investment policies must also be consistent with the Investment Mandate (section 71(2) of the Act). Failure to comply could expose the Board to scrutiny under the Public Governance, Performance and Accountability Act 2013, which imposes general duties on accountable authorities (the Board) including duties of care, diligence, and proper use of information. The Corporation is a Commonwealth entity for PGPA purposes. If the Board fails to take reasonable steps to ensure compliance, individual directors could face consequences under the PGPA framework, including potential civil penalties for breach of duties. The instrument notes that neither section 42 nor Part 4 of Chapter 3 of the Legislation Act 2003 (disallowance and sunsetting) applies to this instrument, meaning it is not subject to parliamentary disallowance and does not automatically sunset. This gives the direction enduring force until amended or revoked by the Ministers. The portfolio benchmark return is subject to a ministerial review commitment after three years, but that is not a penalty mechanism. The caps on guarantees (5 per cent of Account balance) and equity (no majority or control) operate as automatic compliance obligations; breach of those limits would require immediate remedial action. The requirement to avoid damaging the Commonwealth’s reputation is subjective but could lead to ministerial intervention if reputational harm occurs. There is no private right of action for affected parties under this instrument; enforcement is entirely ministerial and administrative.

This instrument is made under the National Reconstruction Fund Corporation Act 2023 and must be read in conjunction with that Act. The Act establishes the Corporation, defines its functions and powers, and requires the Ministers to give at least one direction. This instrument is that direction. The Act defines many key terms used in the instrument, including priority areas, financial accommodation, and uncommitted balance. The instrument incorporates by reference the definition of control from the Public Governance, Performance and Accountability Act 2013 for the purpose of the equity cap. This means control is assessed under PGPA principles, which may be broader than general corporate law concepts. The instrument requires the Corporation to have regard to matters set out in subsections 17(3A) and (4) of the Act, which themselves cross reference other considerations. The direction to collaborate with other Commonwealth entities (section 14) potentially creates coordination obligations with entities operating under their own enabling legislation: the Australian Renewable Energy Agency Act 2012, Clean Energy Finance Corporation Act 2012, Northern Australia Infrastructure Facility Act 2016, Export Finance Australia Act 1991, Housing Australia Act 2018, Regional Investment Corporation Act 2018, and the Net Zero Economy Authority Act 2023 (which replaced the Net Zero Economy Agency). The instrument does not override those statutes but requires the NRF Corporation to seek cooperation. The Australian Government’s Buy Australian Plan and Australian Industry Participation Policy are not legislated in this instrument but are given effect through section 19; those policies may have their own administrative frameworks. The instrument also interacts with the Legislation Act 2003 in the limited sense that the note confirms disallowance and sunsetting do not apply. The portfolio benchmark return references the five year Australian government bond rate, which is determined by market conditions and not by any law. The instrument does not purport to override competition law; the displacement avoidance duty encourages the Corporation not to crowd out private finance, which aligns with competition principles. The instrument’s object references supporting Australia’s greenhouse gas emissions reduction targets, which are themselves defined in the Act by reference to Australia’s commitments under international law and domestic policy.

This instrument was made on 27 November 2023 by the Minister for Industry and Science and the Minister for Finance. It commenced on the day after it was registered on the Federal Register of Legislation. There have been no amendments to date. The instrument includes a note that the Ministers intend to review the portfolio benchmark return three years after commencement, which would be around late 2026. Any future amendment would require a new legislative instrument under subsection 71(1) of the Act, made by the Ministers jointly. Because the instrument is not subject to disallowance, any amendment would also not be disallowable (the note confirms the same exclusions apply). The instrument does not contain a sunsetting provision, so it will remain in force until repealed or replaced. The targeted financing levels in section 15 are expressed as targets, not caps, and could be adjusted by amendment. The Act itself may be amended by Parliament, which would affect the instrument’s operation. As of the current date, we have no evidence of any amendment or proposed amendment. The stability of the instrument is notable: it provides a fixed framework with only one scheduled review point. The lack of amendment history means the original Ministerial intentions as expressed in the second reading speeches of the Act remain the primary interpretive guide.

There is no publicly reported litigation concerning this instrument as of the time of writing. The instrument is relatively new (commenced in late 2023) and has not been tested in court. Because it is a legislative direction made under a specific statutory power, it could be challenged on administrative law grounds such as ultra vires (if the Ministers exceeded the scope of subsection 71(1) of the Act), procedural error in the making (though the instrument appears to have been properly made and registered), or unreasonableness. However, the instrument grants the Ministers broad discretion and the object is framed in wide terms. Any challenge would likely require an affected party with standing, such as a private investor who claims the Corporation’s investment practices unfairly displace them despite the displacement avoidance duty. The note confirming that disallowance and sunsetting do not apply may reduce the avenues for parliamentary scrutiny but does not immunise the instrument from judicial review. The portfolio benchmark return and the risk tolerance provisions could give rise to disputes about whether the Corporation is complying with its duty to operate commercially while accepting higher risk. The concessional finance conditions (section 16) contain subjective elements (“satisfied”, “reasonable qualitative assessment”, “commensurate”) that could be litigated if a recipient challenges a refusal or a competitor challenges a concession. The equity cap (section 17) uses the PGPA definition of control, which may generate interpretive disputes. Guarantee caps (section 18) are formula based and less contentious. Overall, the litigation history is blank, but the instrument contains several provisions that could become the subject of future judicial interpretation.

Several provisions contain traps for the unwary. Concessional financial accommodation (section 16) imposes three cumulative conditions: the Corporation must be satisfied that concessional terms are the most appropriate way to achieve particular public policy outcomes, that the level of concessionality is commensurate with anticipated economic benefits and policy outcomes based on a reasonable qualitative assessment, and that the concessionality provided is the minimum necessary to allow the investment to proceed. This triple test is stringent and requires rigorous documentation. Equity investments (section 17) have a strict prohibition on the Corporation and other Commonwealth entities together holding a majority of equity interests or being in a position to control the entity. This is not just the Corporation’s own holding; it aggregates holdings of all Commonwealth entities. If the Corporation becomes aware that it has crossed this threshold, it must divest as soon as reasonably practicable. This creates a continuous monitoring obligation. The definition of control is drawn from the PGPA Act, which may capture arrangements not traditionally considered control. Guarantees (section 18) are capped at 5 per cent of the amount standing to the credit of the Account. That means as the Account balance fluctuates (due to drawdowns, returns, or capital injections), the cap moves. The Corporation must continuously monitor total guarantee liabilities against a moving benchmark. A sudden drop in the Account could put existing guarantees over the cap, forcing a choice between breaching the direction or unwinding guarantees. Portfolio benchmark return is pre operating expenses, so the net return to the Government will be lower. The 2 to 3 per cent above the bond rate may appear modest but is a target aggregation; individual investments may underperform. Displacement avoidance (section 12) is qualified by “to the extent that this is reasonably practicable”, but the duty to “consider the potential effect” on other market participants and efficient operation of the financial market is unqualified. The Corporation must have documented evidence of such consideration. Targeted financing levels (section 15) are targets, not minimums or maximums, but political pressure could arise if a sector is under allocated. The note that a single investment may count toward multiple targets creates an incentive for the Corporation to design investments that serve several purposes, which may distort investment selection. Australian Industry Participation plans (section 19) must be completed where required by government policy, which may change over time. Consultation with the Department of Finance on the Buy Australian Plan is mandatory but the instrument does not specify the consequences if the Department disagrees with the Corporation’s approach. Not damaging the Commonwealth’s reputation (section 13) is a broad, subjective duty. An investment that is otherwise commercially sound but politically controversial could breach this provision. The instrument does not define “reputation”. Higher risk tolerance (section 9(2)) is permissive, not mandatory, but the Corporation must still operate with a commercial approach. There is tension between taking higher risk and maintaining an acceptable but not excessive level of risk in aggregate. The requirement to periodically review practices (section 9(4)) adds administrative burden.

For the Corporation and its Board, compliance begins with establishing investment policies that are consistent with every provision of the direction. Those policies should set out how the portfolio benchmark return will be targeted, including weighting methodology and expense treatment. The Board should adopt a risk management framework that documents the acceptable level of aggregate risk, how emerging technologies and strategic investments will be assessed for higher risk tolerance, and the periodic review cycle. Due diligence and credit risk assessment processes must be commercial in nature. Before making any investment, the Corporation must document how it has had regard to the matters in section 10 (including sustainability, circular economy, regional development, national security) and the Act’s subsections 17(3A) and (4). For each investment decision, a written assessment of the effect on other market participants and the efficient operation of the financial market should be prepared, along with a reasoned conclusion on whether displacement of alternative financing can be avoided and, if not, why not. Collaboration with Commonwealth and state entities should be actively sought; a compliance log should record outreach efforts and outcomes. The sectoral funding targets require a tracking system that allocates each investment to one or more target areas, with clear rationale. For concessional financial accommodation, a separate memorandum must be prepared addressing each of the three conditions in section 16: why concessional terms are the most appropriate means to achieve the intended public policy outcomes, a qualitative assessment of concessionality against anticipated benefits, and evidence that the level of concessionality is the minimum necessary for the investment to proceed. This documentation must be of a standard that would survive ministerial scrutiny. Equity investments require pre transaction legal analysis that no Commonwealth entity (not just the Corporation) would hold a majority or control post investment. Ongoing monitoring of all investee entities must detect any aggregation of Commonwealth holdings that triggers the divestment obligation. Guarantees must be individually justified as the most appropriate means, limited and quantifiable, and the total liability must never exceed 5 per cent of the Account’s credit balance. Real time reporting of guarantee exposure against the Account balance is essential. The Corporation must ensure that any investment requiring an Australian Industry Participation plan under government policy has a compliant plan before funds are committed. Consultation with the Department of Finance on the Buy Australian Plan should occur at a policy level, with documented engagement. Finally, the Board must receive regular compliance reports and be prepared to explain any deviations to the Ministers if requested.