APPROACH TO INVESTING
The Board is responsible for the development of an investment strategy and approach which is consistent with the Corporation’s obligations under the CEFC Act, Investment Mandate and normal investment risk management practices.
In addition to applying commercial rigour when making its investments, the Corporation is directed to target a benchmark return on its portfolio.
This direction is given with the Australian Government’s expectation that the Corporation is not a grants organisation, that its investments are made with an expectation of being repaid, and that it invests responsibly and manages risk so it is on a pathway to financially self-sufficiency.
During the year, with the change of Investment Mandate, the benchmark return was lifted from meeting the five year Australian Government Bond Rate, net of operating expenses, to meeting a return of the five year Australian Government Bond Rate +4 to 5 per cent before operating expenses.
Achieving financial self-sufficiency means the Corporation needs to keep operating expenses low. The Corporation’s primary expense is its staffing footprint. With just 57 staff (FTE, excluding the Board), the CEFC seeks to leverage the scale and service networks of co-finance partners to assist in delivering CEFC finance to small and medium businesses.
In establishing the Corporation, the then Government confirmed its expectation that the CEFC’s investments should be structured to address the barriers currently inhibiting investment to help mobilise investment into the clean energy sector, and that its investment activities should ‘not disrupt the areas where the market is functioning well’. The CEFC is also directed to ’consider the potential impacts on other market participants and the efficient operation of the Australian financial and energy markets’.
The CEFC has developed its operating model and is undertaking its investment activities fully in accordance with these directions and policy instructions.
In performing its investment function, the CEFC seeks to lend at risk-adjusted rates as close as possible to commercial market rates. The Corporation has adopted an approach of working to create structures which also prove attractive for participation of private sector co-financiers and other capital providers. The combination of the CEFC’s commercial approach and seeking to ‘crowd in’ rather than ‘crowd out’ private sector investment helps create conditions for more efficient deployment of private sector capital. The Corporation’s engagement in transactions in many cases is intended to see the private sector step into a transaction once the investment terms have been fully developed.
The CEFC can also provide concessional loans, Funds in the CEFC’s Special Account are required to either be recycled into new investments, or to special payments to support the work of ARENA. where it is warranted in the circumstances. A concessional loan is one offered on more favourable terms than could be expected to be available between a private sector lender and private sector borrower. The concession(s) provided may take many forms, but typically will be one or more of:
lower than market interest rates
longer loan maturity
longer/more flexible grace periods before the payment of principal and/or interest is due.
The CEFC views concessionality as a precious resource to be applied sparingly. The CEFC may choose to deploy concessional finance to assist in overcoming financial impediments and facilitate realisation of an otherwise bankable project.
This is determined on a case by case basis with reference to the specifics of the project or where the CEFC is lending to public sector organisations like universities and local councils. To 30 June 2015, the CEFC had provided a cumulative $12.9 million of concession on its investments. Within the 2014–15 year, the CEFC provided $1.4 million (2013–14 : $5.6 million) of concession on its investments.
Investments are only made where the CEFC has performed an assessment of the likelihood of repayment and has structured investment terms appropriate to the level of risk to minimise loss.
Once all the CEFC’s requirements have been met, performance of the investment is actively monitored by the Corporation throughout its life.
Loans are repaid with principal and interest. During this year, the Corporation saw a further two loans under management fully repaid. The CEFC also invests a limited amount in equity and equity-like structures.
Any surplus funds in the CEFC’s operating account can be returned to the CEFC’s Special Account, which is in the custody of the Treasury.
Funds in the CEFC's Special Account are required to be either recycled into new investments, or to special payments to support the work of ARENA.