$15b National Reconstruction Fund allowed to back 'losers' in push to cut emissions

A $15 billion fund will be allowed to back green projects that could end up making a loss under loosened rules that Liberals say will further fuel inflation.

The National Reconstruction Fund has been slow to invest in green projects since it was established in 2023 — and major investors have argued the unwillingness of government funds to invest in riskier projects was holding back more than $100 billion in private investment.

Industry Minister Tim Ayres has already redirected the fund's focus once, and this morning announced a more aggressive investment strategy that would allow the massive fund to invest in riskier projects to cut emissions.

Senator Ayres said a requirement for the $15 billion taxpayer fund to make a return 2 to 3 per cent above the cost of borrowing in the case of emissions-reducing projects would now be loosened.

Instead, a $5 billion sub-fund would be allowed to make returns of 1 per cent below the cost of borrowing, allowing it to invest in more projects at the risk of potentially making a loss overall.

"That means the fund can take on more risk than commercial finance and help Australian industry adopt the technologies that cut industrial emissions, and crowd in private capital," Senator Ayres and Climate Change Minister Chris Bowen said in a statement.

Pressure on Australian manufacturing driven in particular by China's massive subsidies of its industries, high industrial power prices and global trade tensions have pushed the government to more directly intervene in Australia's heavy industries — including direct bailouts in some instances.

The government considers its more aggressive stance in the National Reconstruction Fund to be a "vote of confidence" in the investment decisions it will make, and that the new rate of return would be a floor, not a ceiling.

"Backing Australian heavy industry and manufacturing to reduce its emissions and lower energy costs is a big national challenge that demands leadership, planning and an appetite for risk," Senator Ayres said in a statement.

The government notes that overall the $15 billion fund will still be required to at least break even if not return a profit, and the remaining $10 billion outside the green fund would have to make returns of at least 5 to 6 per cent on current borrowing rates.

Liberals warn loose rules could fuel inflation

Manager of Opposition Business Alex Hawke said however the government was now "explicitly directing the NRF to back 'losers'" and the loosened rules would pump more money into an overheated economy.

"This is reckless, inflationary spending. Instead of driving productivity, this decision by Labor is using money we don't have to gamble on investments that won't make a return," Mr Hawke said.

"You don't fix a productivity crisis by subsidising failure. You fix it by getting the fundamentals right — something this government has proven they are unable to do."

Governments of all persuasions have used funds like the National Reconstruction Fund in order to make investments that are not formally accounted for in the federal budget because those funds are expected to make a profit.

Mr Hawke said the NRF's designation as a so-called "off-budget fund" meant it was very difficult for Australians to know "exactly how much loss and profit the mega fund is making".

"Key stakeholders, including the Productivity Commission, have consistently warned that a lack of transparency can undermine confidence in industry funds, leading to greater reputational risk".

The government denies that concern since the remainder of the fund would be expected to offset any loss within the $5 billion sub-fund.

Grattan Institute energy senior fellow Tony Wood said it was very unusual, if not unique, for a fund to be able to invest in loss-making projects.

"All of the funds I know of are expected to earn at least the government bond rate plus a couple per cent," Mr Wood said.

"One would have to ask what sort of risks are we taking on here and what sort of potential liability does that expose taxpayers and the government to if some of these things just don't turn out to be viable?"

The government has pointed to the European Investment Bank, the Canada Growth Fund and the UN Green Climate Fund as comparable examples to the new NRF mandate.

Mr Wood said if the NRF's climate sub-fund became a drag on the government's balance sheet, it would have to be balanced by another fund achieving an even higher rate of return — or else it could raise the eyebrows of economic ratings agencies like Moody's and Standard & Poor's.

"It seems to me we would be better off having good climate change and energy policy rather than the government continuing to effectively subsidise [these projects]," he said.