The Australian Federal Parliament has approved an amount of A$15 billion National Reconstruction Fund, designed to turn around the country’s dwindling manufacturing sector. It is the “first stepin Prime Minister Anthony Albanese’s election pledge “to revive our ability to make world-class products.”
The fund will focus on investments in high-tech manufacturing. There are seven priority areas:
- clean energy
- medical science
- value-added production in agriculture, forestry and fisheries
- value-added production in mining
- military equipment, and
- “enable capabilities.”
The fund is expected to operate commercially and provide a return on its investments. The approach will be similar to the Clean Energy Finance Corporationwhich has provided more than $10 billion in grants and loans to low-emission energy projects over the past decade.
Investments will take the form of loans, equity and guarantees. It will be a co-investment model, meaning that private investors will have to match the funds provided.
It starts with $5 billion. The remaining $10 billion will be provided in installments over the remainder of the decade. After 2030, investments are expected to generate sufficient revenues to support new projects. These decisions will be made by a council that is independent of the federal government.
Criticism of the fund
More generally, some economists argue that government-backed investment programs misallocate resources, give certain firms an unfair advantage, and slow innovation over time by overinvesting in one area and starving other innovative ideas of resources. If The economist has said, trying to “pick winners” can also mean investing in losers.
But government-backed investment plays a vital role in providing financial support for commercializing new technology, for which it is typically difficult to attract private investment.
The federal opposition has complained the Albanian government should focus on more immediate challenges faced by manufacturers, such as high energy prices and labor shortages.
Opposition frontbencher Paul Fletcher has expressed concern the fund will finance projects that “would fail to obtain private sector funding – but which the government wants to fund for political reasons”. A factory in a marginal seat, for example.
But it’s also true that no such hog trade happened with the Morrison administration’s $1.3 billion Modern Manufacturing Initiative, which provided grants in roughly the same priority areas as the new fund.
Despite political and financial incentives to find fault with it, the Albanian government approved the expenditure of the Modern Manufacturing Initiative. It has only criticized the way Morrison’s government has put the timing of funding announcements.
Nor has the Clean Energy Finance Corporation, set up by the Gillard government in 2012, faced such criticism. It is considered a success story across the political spectrum, from groups such as the Australian Conservation Foundation to mining magnate Clive Palmer.
The establishment of the National Anti-Corruption Commission should further inspire confidence that Albanese, a long-time champion of making things in Australia, is sincere about “full transparencyfor the National Reconstruction Fund.
3 ways to improve the fund
To increase the fund’s chances of success, there are three things that can be done.
First, to achieve the transparency Albanese has promised, the fund would need to publicly share the reasoning behind its investment decisions, similar to how the Reserve Bank of Australia board publishes minutes of monthly policy meetings. Openness about decision-making will increase public confidence in the fund’s transparency and fairness.
Second, the National Reconstruction Fund investment board will need to clearly outline investment priorities while remaining flexible so that projects spanning multiple sectors or applications do not fall through the cracks. Breakthrough ideas may not fit neatly into a single category. For example, synthetic biology technology can be used in food production and plastic recycling. It does not belong to just one priority area.
Thirdly, it is not enough to support individual projects. Here those “enabling capabilities” are crucial. Changing the manufacturing trajectory in Australia requires a supportive ecosystem that aligns issues such as funding and policy priorities in education and training, university research, immigration environments and natural benefits.
Projects will not succeed without skilled workers, strong research support and easy access to suppliers and customers.
The renewable energy sector in Australia is an example of a supportive environment that can lead to success. Australia has plenty of sun and wind, a growing number of skilled renewable energy workers, top research institutions, a knowledgeable investor base thanks to the Clean Energy Finance Corporation and a growing number of people who care about environmentally friendly energy solutions.
By setting clear goals, encouraging innovation and making decisions transparent, the fund has the best chance of achieving what it was created to achieve.