Why I will be voting against the National Reconstruction Fund

The Albanese Government wants to allocate $15 billion to its ‘National Reconstruction Fund.’ The plan, apparently, is for the fund to invest in businesses in manufacturing and advanced technology and in turn boost the economy.

I’ll be voting against this plan.  Let me explain my reasons why.

To start with, the $15 billion is all borrowed money. To make things worse, this is not the only fund Labor plans - there are two others, also funded with borrowed money. In fact Labor plans to borrow a total of $45 billion. 

The Australian Government has a substantial debt.  Much of it was run up by Labor when last in Government (2007-13), the rest is due to the extraordinary spending needed to combat COVID. At the moment our priority needs to be getting that debt under control - not borrowing extra money to put into ‘nice to have’ spending.

The International Monetary Fund, no less, has been critical of Labor’s plans, saying that ‘a proliferation of such vehicles should be avoided.’

This massive borrowing spree will worsen the Commonwealth’s budget position. Currently the ten-year bond rate is around 4 per cent. Hence the Commonwealth will be up for an annual interest bill of $1.8 billion on borrowings of $45 billion.

Such additional borrowing will also put additional upward pressure on inflation and interest rates - at exactly the wrong time. 

My second problem with this plan is that it exposes the taxpayer to a lot of risk. According to the Labor government these investments will be in the form of equity or debt going into companies using new technology, and there will be a return on the money invested.  Maybe - but I am very dubious.

It may very well be that some or all of the $45 billion is lost, because it gets invested in projects which do not generate a return.  But whether these funds generate a positive return, lose one hundred cents in the dollar, or come somewhere in between, it will be the Australian taxpayer who is on the hook to repay the borrowed money with interest.

We know from Labor’s track record that the promises they are making are very unlikely to be delivered on. Labor’s rhetoric today about the NRF reminds me of what they were saying in 2009 about the ‘national broadband network’ (NBN). 

Labor told us all that the NBN was going to attract private sector investment and there would be 10.7 million premises connected within eight years. Actually, when Labor left power four years later there was no private sector investment and barely more than 50,000 premises were connected to fibre.  It took our Liberal National Government a huge amount of work, money and reshaping of the project to turn it around.

Thirdly, I am very suspicious that Labor is using accounting tricks to avoid the normal scrutiny that would apply to this amount of money being spent. None of the $45 billion which Labor is allocating to these funds will show up as an expense in the budget, because the theory is that it is a capital investment.

If the NRF loses money in a particular year, that loss will not be included in what is publicly reported as the budget surplus or deficit.  To be specific, when you see reports on budget night that the deficit is, say, seven billion dollars, this is technically what is called the ‘underlying cash balance.’ But if the National Reconstruction Fund loses money in a particular year, that loss will not be included in the underlying cash balance.

The simple fact is that while this spending may be less visible, it costs real money and that money needs to be paid by taxpayers. There is no free lunch.

Prime Minister Albanese seems to have a particular enthusiasm for these kinds of special funds. For example, in the 2016 election, when he was Shadow Infrastructure Minister, he put forward as an election policy the establishment of a $10 billion fund to contribute to the cost of infrastructure projects. 

At the time Mr Albanese claimed the fund would generate a return.  But it was a nonsensical claim. When he gave examples of the projects the fund would invest in, most of them were expansions to suburban rail networks such as Cross River Rail in Brisbane.  Worthy projects to be sure - but running rail networks in Australia is loss making. There would never have been a return on Mr Albanese’s $10 billion dollars.

A fourth reason I oppose the NRF is the fundamental confusion about its role. Much of what it does will simply replace equity investment and lending which otherwise would come from existing private sector investors and banks. 

That has certainly been the experience with the Clean Energy Finance Corporation, which Labor cites as the model for the NRF.  Many of the loans and investments made by the CEFC could equally well have been provided by the private sector - there is a thriving private market for financing renewable energy projects. 

If the NRF simply displaces equity investment and lending which would otherwise come from the private sector, that is a pretty good reason to question the point of it. But there is an even more serious reason to raise questions: the risk that the NRF will put money into projects which would not succeed in getting private sector finance - but which for political reasons the government wants to fund.

If there is a factory proposed in a marginal seat, or championed by somebody who has been a major donor to the Labor Party, there is a real danger of a decision being made to fund the factory even when the business case does not stack up.

By their very design, funds like the NRF are exposed to a fundamental tension between two opposing principles. On the one hand they are supposed to operate on a commercial basis and generate a return. On the other hand they are supposed to fill a gap by putting money into projects that the private sector would not invest in.

Certainly it makes sense for government to support manufacturing and other businesses using innovative technology, particularly at an early stage in the life of the business or technology.  But the sensible approach is to provide direct government grants, with no expectation of a commercial return.  This is the approach the Coalition used with our $1.5 billion Modern Manufacturing Strategy. This included $1.3 billion for the Modern Manufacturing Initiative, allocated through a competitive grant process across six target industry sectors. 

The last reason I oppose the Bill to establish the NRF is that so much remains unclear about how it will operate - and once the Bill is passed very little more information will be forthcoming.  The Bill gives the Minister for Industry an enormous amount of discretion over the NRF, deciding everything from the appointment of its CEO and board and what its priorities should be.

One thing sadly is certain: this government will use the NRF to implement the priorities of the union movement. Under the Bill, experience with industrial relations (for which read, being a union official) is one of the factors in choosing board members.  The Minister himself, as a former union official, is fully signed on to those priorities.

We can expect the NRF therefore to pursue a traditional union agenda of assisting certain favoured industry sectors for essentially political reasons. Of course it will also be used to seek to compel more Australians to join unions.

Effectively the Parliament is being asked to sign a $15 billion blank cheque for whatever the Minister decides he wants to spend money on. It will be very difficult for the Parliament or the Australian public to know how good or bad a job is being done of managing this $15 billion, with the Bill saying a report need only be provided when an asset invested in by the Fund comes to the end of its life cycle.

Labor is making big promises about what the NRF will do.  Experience teaches us that the reality will fall a very long way short of the big promises.  But taxpayers will get stuck with a very large bill.

The NRF is not a good idea, it is not well justified spending, and I will be voting against it.