In an interview with RenewEconomy, the CEO of the Clean Energy Finance Corporation Oliver Yates reveals that the institution has been inundated with funding proposals since it “opened its doors” in April, and says that opposition to the CEFC is based on “preconceptions” about why and how it will operate.
In the interview, Yates says the CEFC will take a commercial approach to lending, will be self-sufficient, will generate returns above the government bond rate, does not have “built-in” losses to its investments, and will not cost the budget anywhere near the savings the Coalition has said could be made by dissolving it.
The following is the product of emailed questions and responses, and some follow up questions.
RenewEconomy: Oliver, the Coalition continues to oppose the Clean Energy Finance Corporation. Do you understand why?
Oliver Yates: It does appear that there have been some concerns about the CEFC, which in part appear to be based on some preconceptions about how we would conduct our investment activities and how this might impact on the Budget through significant loss-making loans.
Now we are operational we’ve made clear that the board takes a commercial approach to our investments. The revisions to early estimates of the budget cost of the CEFC were made in the Portfolio Budget Statements. This means that some of those early expressed concerns are unfounded today, but that message really hasn’t gotten through. We’ve now published our investment policies and are now endeavouring to sit down with everyone concerned, including the Coalition to ensure that they have a clear understanding of how we are operating.”
It would appear that some of the Coalition policy positions around which recent commentary has been based was premised on early projections of how the CEFC might operate. Now we are operational and the board has established our commercial approach, those early estimates which were the basis of their concerns are no longer valid. ”
RE: Let’s look at some of the comments they have made. They want to dissolve the CEFC, and have even threatened to not honour the contracts you will write. (Opposition Climate change spokesman) Greg Hunt repeated that on Friday.
Yates: Anyone can try and dishonour a contract. Whether it will be effective is a question of law. I don’t think it is productive to be discussing that because it is not a concept that any government would usually think of adopting. Imagine a world where every infrastructure project in the country will need to consider an environment that contracts could be ripped up by incoming governments that don’t like the project. It is not a world we want in Australia.
Is that adding to sovereign risk?
Yates: Naturally so, but I think this issue is getting far more attention than it deserves. The value that the CEFC can provide to the nation should be the focus at this time.
The Opposition claim the CEFC will be making substantial losses. Is that true, and if not ,why not?
Yates: The whole concept of the CEFC was to provide stability and independent market-based decision making for financing development of the clean energy sector. The CEFC’s approach is to invest commercially and achieve self-sufficiency. This means that our impact on the Budget and specifically the Underlying Cash Balance is limited.
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 on each loan it wrote. This assumption flowed through government accounts. Once we were established, the CEFC Board and management determined that we would operate commercially and that the CEFC would not make grants or what was termed “immediately impaired loans”. These would be inconsistent with the approach of being self-sustaining and commercial.
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 Board lead by Jillian Broadbent.
The Coalition suggests that you are making loans that no other bank would provide.
Yates: 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 the Special Account with Treasury. Will be operating our own internal accounts assuming funds received were loan funds as we need to be sure we are generating more than we are costing. Unfortunately, we are not able to achieve this approach under our enabling legislation as the funds we drawdown on for investment are treated as equity.
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 Opposition claims that by getting rid of the CEFC they can deliver between $300-450m in Budget savings? Can they?
Yates: The public commentary over the past week about our Budget impact is readily explainable. Early estimates of the budget impact of the CEFC were built on a premise of non-commercial operations, with provisions that the Corporation would “grant” or “lose” 7.5 per cent of its investment portfolio from Day 1. The board has determined that the CEFC will operate commercially.
We will not make grants and will not cost anything like $350-450 million per year. Those previous estimates have been revised. We accept that the change to remove any allowance for grants or “immediately impaired loans” was not specifically highlighted, but once we understood the source of concern we have since moved to ensure that this has been made clear to everyone. We have been totally focused on the establishment and performance of the CEFC.
And just so we are all clear, the 2013-14 Portfolio Budget Statements show that CEFC operating expenses are forecast at $19.5 million and interest earned on its investments to be $15 million as the CEFC builds its portfolio. We are expecting the portfolio to contain a number of construction loans that will capitalise during construction and this explains why cash receipts don’t match or significantly exceed expenses.
You made mention of an accounting charge in your accounts. What is this about?
Yates: The Fiscal Budget contains a non-cash provision for an accounting concessionality charge of approximately $300 million per annum as provided for under CEFC’s Investment Mandate from the Government. This non-cash accounting charge reverses over the life of each investment. As discussed above this charge results from the fact that the CEFC might lend at rates above the Governments costs of funds and the CEFC’s own benchmark, yet below market, in the limited cases where the CEFC judges that there are compelling reasons to do so.
So if you are not “giving away money” what are you doing and why are you needed?
Yates: The difference between the CEFC and a traditional financial institution is that we don’t seek maximum profits. The CEFC expects to earn a positive, risk-adjusted return for taxpayers from its portfolio of investments higher than the government’s costs of funds and the benchmark rate and is intended to operate as a self-sustaining operation within a few years. Our potential to make higher profits helps to secure public policy benefits and reduce the cost of moving to a lower carbon economy.
The big difference is that the CEFC has the ability to offer concessional finance where we consider there are real public policy benefits for a transaction to occur. Typically our 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 aren’t required to look at external costs and benefits of their actions- but we do. We can take a “Singapore Inc” style view, bridging market gaps and helping otherwise bankable projects happen.
So why would you provide any concessional finance and are you not displacing the banks?
Yates: The CEFC considers carefully the additional or external benefits our participation provides for Australia and the clean energy sector especially where offering and concessional rates.
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.
This is all about efficiency. We can impact the development of the sector in two key ways, through increasing both financial efficiency and operational efficiency. Financial efficiency is all about driving down the weighted cost of capital by expanding the sources of finance. This can be through bringing in listed funds, getting in pension fund money. It is about making the capital structure of a project more efficient. This happens where we change the debt profile or the maturity which lowers the debt servicing costs so the project can withstand more debt for a given DSCR. This could mean the ability to introduce inflation indexed bonds. Loan Maturity is critical and Aussie banks are still writing “semi-perms” that could vanish in 5 years. This drives up the risk profile for equity and the cost of equity. The CEFC has the capability to assist in this way working with the Majors on a securitisation of their loan portfolio and issue of longer maturity green bonds. Finance costs are about 30 per cent of the final LCOE (levelized costs of energy) in the renewable sector. If Australia is to make this transition efficiently and competitively we need a “player on the field” like CEFC that is focused on this outcome.
Construction efficiency comes from doing. Unlike most other industries the government has play around with this business like the technology business has demonstrated time after time that scale reduces costs significantly. We need to start to achieve consistent operational scale in Australia. Australia can’t mandate a multi trillion dollar investment program that de-carbonisation involves and not watch, participate and target improved efficiencies. This is not logical nor is it in Australia’s best interest
But what about the role – aren’t you just displacing traditional banks?
Yates: We will participate alongside traditional financiers and look to work with them as we build our market presence and financial self-sufficiency. It is the intent that the net effect of our participation in the market will be to increase available funding opportunities for the private sector. Yes, we might seek a share of a commercial deal as we balance our own book but overall the total collection of deals is bigger as we make more happen. Making them happen is our key job.
You have spoken about renewables, but Greg Hunt at the solar conference was talking about emissions? Where is the CEFC in this space, and shouldn’t that be your focus?
Yates: The CEFC is not just renewables focused. Up to half of CEFC capital is directed at energy efficiency and low emissions technologies. These areas offer significant opportunity for least-cost emissions reductions and major productivity improvements in the way the economy uses energy. In these areas, the CEFC is targeting low cost carbon abatement options that require the least financial assistance to achieve.
We try to ensure that these activities don’t need financial assistance by helping provide commercial facilities tailored to the energy asset needs, working jointly with existing financial institutions to do so. Our involvement helps provide a demonstration of the benefits to encourage others to follow.
We have incorporated all the staff and activities of Low Carbon Australia and are expanding on these activities. The size of our funding allows us to really look at scaling up those efficiency models, across industry, transport, the building sector and into the public sector like local government, universities and the like. This is addressing the market gaps and impediments which exist and working with these sectors to bring down their rapidly rising energy costs and adopt new clean energy technologies now. Greg Hunt was mentioning that this was what they hope to do when elected. This is what we are doing right now-working directly with the market.
So, how is industry responding the CEFC? What sort of interesting are you getting”
Yates: We are getting this message out to everyone so that everyone is fully clear about how we are going about making our investments. It’s unfortunate that the public commentary has focused on a mis-conception about our Budget impact (overstatement of savings from shutting down the CEFC) based on the early hypothetical assumptions of how we were “conceived” to operate, rather than the actual investment policy and investment strategy which has now been determined by the Board and reflected in the 2013-14 Budget.
There has been a resounding positive response to date from the market, demonstrating the positive role which the CEFC can play. Active discussions are underway with over 50 project proponents, who are seeking CEFC finance of circa $2 billion (and total project costs of over $4.5 billion). Further, CEFC has have received proposals from over 100 additional project proponents seeking CEFC finance of over $3 billion (with total project costs of over $6 billion). This represents a significant opportunity for the public and private sector to overcome current market failures in clean energy investment at scale and achieve the type of economic transformation which are required if we are to achieve Australia’s 2020 emissions targets on which both major parties are agreed.
The CEFCs flexible mandate and commercial approach is a huge advantage and an opportunity to achieve genuine market based change. This demonstrates the possibilities we have to make a real impact. The mandate we have secured is highly flexible. It is rare to have available such an organisation. The Board and management are totally committed to its success.
Have any contracts been awarded?
Yates: We are already committed to concluding some transitions and that list is growing. There are many aspects of any transaction that need to be concluded before a deal is “done”.
Does the CEFC have a long term future?
Yates: 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.
My whole team believe this is will play a critical path assisting this nation. We want to do that. We will discharge our mandate as best we can and we hope that this is helps build understanding of our role from the Opposition.