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Australian Business Growth Fund Bill 2019



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ISSN 1328-8091

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BILLS DIGEST NO. 79, 2019-20 10 FEBRUARY 2020

Australian Business Growth Fund Bill 2019 Rodney Bogaards Economic Policy Section Kaushik Ramesh Law and Bills Digest Section

Contents

Purpose of the Bill ........................................................... 3

Background ..................................................................... 3

Committee consideration ................................................ 5

Senate Selection of Bills Committee ........................... 5

Senate Standing Committee for the Scrutiny of Bills .............................................................................. 6

Policy position of non-government parties/independents...................................................... 6

Position of major interest groups..................................... 6

Financial implications ...................................................... 7

Special appropriations ................................................ 7

Statement of Compatibility with Human Rights................ 8

Key issues ....................................................................... 8

Why is government investment necessary in the ABGF? .......................................................................... 8

What rate of return is the Commonwealth seeking for its investment in the ABGF? ..................... 9

How significant are the competition impacts that arise from the ABGF? .................................................. 9

Unique structure of the Fund.................................... 10

Key provisions of the Bill ............................................... 11

Formation of a company as the Australian Business Growth Fund .............................................. 11

Arrangements relating to the Fund .......................... 12

Fund is not a Commonwealth company ................... 14 Governance ............................................................... 15

Requirements under Corporations Act ................... 15 Appropriations of Consolidated Revenue Fund ........ 16 Legislated review ....................................................... 17

Date introduced: 5 December 2019

House: House of Representatives

Portfolio: Treasury

Commencement: The day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at February 2020.

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Australian Business Growth Fund Bill 2019 2

Concluding comments ................................................... 17

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Australian Business Growth Fund Bill 2019 3

Purpose of the Bill The purpose of the Australian Business Growth Fund Bill 2019 (the Bill) is to establish the Australian Business Growth Fund (ABGF or the Fund) to:

• provide a source of ‘patient capital’ for small and medium enterprises (SMEs)1

• authorise the Commonwealth to participate in forming, and acquiring shares in or debentures of the ABGF2 and

• appropriate $100 million for the purposes of paying costs, expenses and other obligations incurred by the Commonwealth in connection with its investment in the ABGF.3

Background The ABGF was an April 2019 Coalition Election Commitment.4 The ABGF policy was developed following research undertaken by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Reserve Bank of Australia (RBA).

In June 2018 an ASBFEO report recommended the private sector establish an investment fund focused on long-term funding solutions for SMEs to address the perceived market failure of financial markets not providing accessible and affordable capital to SMEs. This was one of eight recommendations in the report.5 In September 2018, an RBA report identified some of the reasons why SMEs struggle to obtain finance:

• banks are reluctant to finance startups given the high risks involved

• banks are reluctant to extend finance to SMEs without real estate as collateral, in particular medium-sized enterprises find it hard to obtain additional finance once they have pledged all of their real estate as collateral and

• the administrative process to obtain finance can be lengthy and onerous.6

Both the ASBFEO and the RBA research reports argued that there are not sufficient sources of capital available for high-growth potential SMEs in Australia. The reports argued debt finance for SMEs is impeded because there is usually a time lag between investing in a business’s future growth and realising sufficient profits to repay the debt. Traditional equity finance is also not attractive to SMEs because of the loss of management control of the enterprise. As a result, it is claimed by the reports that many SMEs delay expanding their business until the expansion can be funded from retained profits.7

Business growth funds have been developed overseas to fill this perceived ‘funding gap’ in the market. According to the United Kingdom Business Growth Fund (UK BGF):

1. ‘Patient capital’ does not have a rigid definition but in general refers to investment that is prepared to wait a considerable amount of time before seeing returns. Source: Beauhurst, ‘Patient capital: what is it and why is it important?’, Beauhurst database blog, 4 September 2017.

2. J Frydenberg, ‘Second reading speech: Australian Business Growth Fund Bill 2019’, House of Representatives, Debates, 5 December 2019, p. 7058. 3. The $100m is seed finance by the Government. 4. S Morrison (Prime Minister), J Frydenberg (Treasurer) and M Cash (Minister for Small and Family Business), Backing small and

family businesses to grow and create jobs, joint media release, 23 April 2019; Liberal Party of Australia, Our plan to back small business, Coalition policy document, 23 April 2019. 5. Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Affordable capital for SME growth, ASBFEO, Canberra, June 2018, p. 7; ASBFEO, Business growth fund, Research paper, ASBFEO, Canberra, August 2018. 6. E Connolly and J Bank, Access to small business finance, Reserve Bank of Australia (RBA) Bulletin, 20 September 2018, pp. 3-4. 7. Explanatory Memorandum, Australian Business Growth Fund Bill 2019, p. 7.

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Australian Business Growth Fund Bill 2019 4

Many growing companies say they want a different kind of investor. Someone to help them scale, without taking control. To challenge them, without driving them too hard, too fast. To treat them with the honesty, respect and empathy they deserve. That’s why we exist. 8

On 27 November 2019, the Treasurer announced the establishment of the ABGF at a speech to the Australian Chamber of Commerce and Industry,9 noting that it would be modelled on ‘similar initiatives’ in the United Kingdom (UK) and Canada.10

The ABGF follows the establishment of the Australian Business Securitisation Fund (ABSF) in April 2019. The ABSF is administered by the Australian Office of Financial Management (AOFM) and will:

• fund new and existing warehouse facilities for SME loans alongside the private sector and

• buy and hold securitised SME loans in order to support segments of the market where there are identifiable gaps.11

On 27 November 2019 the Treasurer’s media release provided some information on how the ABGF is expected to operate by describing:

• the overarching financial commitment from the Australian Government and the major banks ($100 million each)

• the size of long-term capital investments in individual SMEs (between $5 million and $15 million)

• the eligible turnover requirements for SMEs (between $2 million and $100 million)

• the ABGF’s proposed investment stake in SMEs (between ten per cent and 40 per cent) and

• the level of independence of the ABGF from its government and corporate shareholders.12

The Treasurer has also stated that this patient capital will be provided to a number of high-potential SMEs and startups (30-50 businesses each year), and these businesses ‘will have to demonstrate three years of revenue growth and profitability and a clear growth vision in order to be eligible to receive capital from the ABGF.’13 Moreover, the abovementioned eligibility requirement of an annual turnover of between $2 million and $100 million means that the fund is not aimed at early stage startups.14

8. UK Business Growth Fund (BGF), Ready for business: a year in review, UK BGF, [London], 2019, p. 2. 9. J Frydenberg (Treasurer), Speech to the Australian Chamber of Commerce and Industry, National Gallery of Australia, Canberra, transcript, 27 November 2019. 10. It should be noted that both the overseas models were established solely with private sector capital—see UK Business Growth

Fund and Canadian Business Growth Fund. 11. Treasury, ‘Australian Business Securitisation Fund’, Treasury website, n.d. 12. J Frydenberg (Treasurer) and M Cash (Minister for Small and Family Business), Agreement to establish the $540 million

Australian Business Growth Fund, joint media release, 27 November 2019. 13. Frydenberg, ‘Second reading speech: Australian Business Growth Fund Bill 2019’, op. cit., p. 7058; Liberal Party of Australia, Our plan to back small business, op. cit. 14. The Government originally announced in its 23 April 2019 election commitment that businesses with an annual turnover of

between $2 million and $50 million would be eligible for investment from the ABGF. This was subsequently revised in the 27 November 2019 media release to between $2 million and $100 million (see: Morrison, Frydenberg and Cash, Backing small and family businesses to grow and create jobs, op. cit.; Frydenberg and Cash, Agreement to establish the $540 million Australian Business Growth Fund, op. cit.

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Established Australian businesses will be eligible for long-term equity capital investments between $5 million and $15 million, where they can demonstrate three years of revenue growth and profitability and a clear growth vision. 15

It is proposed that non-financial support will also be available, ‘for example through the provision of strategic advice, mentoring, talent management and network referrals for small and medium businesses to access.’16

The major banks, that is the National Australia Bank, the Commonwealth Bank of Australia, Westpac Banking Corporation and the Australia and New Zealand Banking Group (ANZ), have each agreed to commit $100 million to the ABGF, and HSBC Bank Australia and Macquarie Group will each contribute $20 million, making an initial investment capacity of $540 million.17

On 9 December 2019, the Australian Prudential Regulation Authority (APRA) adjusted its capital framework for authorised deposit-taking institutions (ADIs) to facilitate banks investing in the ABGF.18 In effect, the change removed the unfavourable treatment of equity investment for regulatory capital purposes—making it commercially viable for the banks to participate.19

Up until that time, one of the reasons put forward as to why a business growth fund had not developed in Australia, as it had in the UK and Canada, was the relatively strict prudential standards governing equity investments made by banks in Australia. According to the RBA, under the capital framework in Australia, equity investments by banks were typically fully deducted from their regulatory capital. In contrast, the UK Prudential Regulation Authority applied a concessional risk weight for equity exposure in the UK BGF.20

The Treasurer noted:

A similar fund has not emerged in Australia, in part, as a result of the unfavourable treatment of equity for regulatory capital purposes. 21

Committee consideration

Senate Selection of Bills Committee On the recommendation of the Senate Selection of Bills Committee, the Senate referred the Bill to the Senate Economics Legislation Committee for inquiry and report by 21 February 2020.22 Details of the inquiry are on the inquiry webpage.23

The Selection of Bills Committee members who sought the referral stated that they were seeking further information on:

• the governance and operational arrangements of the ABGF

15. Frydenberg, ‘Second reading speech: Australian Business Growth Fund Bill 2019’, op. cit., p. 7058. 16. Westpac, Westpac to support the Australian Business Growth Fund, media release, 28 November 2019. 17. Frydenberg and Cash, Agreement to establish the $540 million Australian Business Growth Fund, op. cit. 18. J Lonsdale, ‘Capital treatment of investments in the Australian Business Growth Fund’, APRA website, 9 December 2019. 19. J Kehoe, ‘Regulator opens door to SME growth fund’, The Australian Financial Review, 7 December 2018, p. 8. 20. Connolly and Bank, ‘Access to small business finance’, op. cit., p. 11. 21. J Frydenberg (Treasurer) and M Cash (Minister for Small and Family Business), $2 billion fund to transform small business

access to funding, joint media release, 14 November 2018. 22. Senate Standing Committee for Selection of Bills, Report, 1, 2020, The Senate, Canberra, 5 February 2020. 23. Senate Economics Legislation Committee, Inquiry into the Australian Business Growth Fund Bill 2019 [Provisions], The Senate

Canberra, 2020.

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• the current supply of credit to SMEs, including any particular market conditions or regulations affecting this supply and

• the possible competition impacts of the Bill, including whether it would give preference to bank capital over other forms of capital.24

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.25

Policy position of non-government parties/independents The Australian Labor Party has provided in-principle support for the Bill, noting that a Senate inquiry into the Bill may give them clarity on the governance and operational arrangements of the ABGF as well as relevant stakeholder and expert views.26

Position of major interest groups It is difficult to gauge the position of major interest groups. Public consultation on the ABGF Exposure Draft was short, taking place between 4 and 8 November 2019.27 Further, no submissions were published by Treasury on the consultation website until the Bill had been introduced into Parliament.28

The ASBFEO welcomed the introduction of the Bill to establish the ABGF on 5 December 2019:

The Australian Business Growth Fund was a recommendation in our Affordable Capital for SME Growth report, which identified the need to address a critical funding gap for long-term capital to enable high growth potential SMES to flourish …

We welcome both the government investment in the fund, along with the major banks and financial institutions’ contribution …

The Australian Business Growth Fund will significantly encourage business growth and promote expansion. 29

While the ASBFEO did recommend a business growth fund in its report it was to be larger than what eventuated in the ABGF, given the initial pool of capital sought was $1.5 billion. On the other hand, and more significantly, it did not envisage a role for government in the financing of the fund:

The private sector [is] to establish an investment fund focussed on long-term funding solutions for SMEs.

… Government’s role will be limited to initial promotion of the partnership construct and to assist clearance of possible regulatory barriers. 30

24. Senate Standing Committee for Selection of Bills, Report, 1, 2020, op. cit., Appendix 1. 25. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 1, 2020, The Senate, 5 February 2020, p. 41. 26. See: J Chalmers, ‘Second reading speech: Australian Business Growth Fund Bill 2019’, House of Representatives, Debates, (proof), 5 February 2020, p. 103; M Thistlethwaite, ‘Second reading speech: Australian Business Growth Fund Bill 2019’, House

of Representatives, Debates, 5 February 2020, (proof), p. 106. 27. J Frydenberg (Treasurer) and M Cash (Minister for Small and Family Business), Consultation on legislation for Australian Business Growth Fund, joint media release, 4 November 2019; M Elmas, ‘Four days only? Government’s $500 million Business

Growth Fund rushed through public consultation’, SmartCompany, 5 November 2019. 28. Treasury, Australian Business Growth Fund Bill 2019, Treasury website. 29. ASBFEO, Ombudsman welcomes legislation to establish Business Growth Fund, media release, 5 December 2019. 30. ASBFEO, Affordable capital for SME growth, op. cit., p. 14.

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Australian Business Growth Fund Bill 2019 7

Most of the banks participating in the ABGF welcomed the establishment of the Fund.31 However, various media articles suggested the level of support for the ABGF was uneven across the banking industry, with some banks being more supportive than others.32 It was reported for example, that the ANZ and Westpac banks had originally declined to sign onto jointly investing equity.33 Both banks subsequently signed on, with the media release by ANZ stating that the ABGF will ‘add to the options Australian businesses have to obtain the capital they need to grow and prosper for the good of the country’.34

Joseph Healy, co-founder and chief executive of small business challenger bank Judo Bank, expressed a lack of optimism about the prospects of the ABGF:

I think the prospects of that [Australian Business Growth Fund] getting off the ground are really, really low … Because there’s no skills in the industry to do that in the banks, that is. There are skills in the marketplace, but not in the banks. 35

Financial implications The establishment of the ABGF is estimated to have the following financial impact:

Financial impact over the forward estimates

2019-20 2020-21 2021-22 2022-23

... -$0.1m -$0.4m -$0.8m

Source: Explanatory Memorandum, Australian Business Growth Fund Bill 2019, p. 5.

As the $100 million appropriated for the ABGF will be treated as an equity investment, this amount is not included in the financial impact outlined above. Equity investments, so long as they meet minimum return requirements, do not have direct financial impacts. However, dividends received from equity investments have a positive financial impact and administrative costs and interest costs associated with the investment have negative financial impacts. 36

Special appropriations According to the Explanatory Memorandum, the Consolidated Revenue Fund will be appropriated for $100 million but if an initial amount is not debited within two years, the appropriation will cease:

The Consolidated Revenue Fund is appropriated to the extent of $100 million for the purposes of paying costs, expenses and other obligations incurred by the Commonwealth in connection with its investment

31. National Australia Bank (NAB), NAB welcomes the establishment of the Business Growth Fund, media release, 28 November 2019; Commonwealth Bank of Australia (CBA), CBA puts $100 million towards the Australian Business Growth Fund, media release, 27 November 2019; Westpac, Westpac to support the Australian Business Growth Fund, media release, 28 November 2019; Australia and New Zealand Banking Group (ANZ), ANZ commits $100 million to the new Australian Business Growth Fund, media release, 27 November 2019; HSBC Bank Australia, HSBC to join the Australian Business Growth Fund as a founding shareholder to help stimulate economy, media release, 28 November 2019.

32. K Maley, ‘Bankers have doubts about SME fund’, The Australian Financial Review, 18 November 2019, p. 30; J Durie, ‘Scared banks chip in’, The Australian, 28 November 2019, p. 28; J Hewett, ‘Patience a virtue on growth fund promises’, The Australian Financial Review, 24 April 2019, p. 2.

33. J Kehoe, ‘ANZ joins government's $500m SME bank’, The Australian Financial Review, 5 November 2019 p. 6; J Kehoe, ‘Doubts over small business growth fund’, The Australian Financial Review, 24 April 2019, p. 9. 34. ANZ, ANZ commits $100 million to the new Australian Business Growth Fund, op. cit. 35. C Waters, ‘Frydenberg says $2b small business fund will deliver’, The Sydney Morning Herald, 15 October 2019, p. 27. 36. Department of Finance (DoF), General principles for recognition of expenditure in budget aggregates, Finance advice paper,

DoF, Canberra, July 2018, p. 6.

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in the Fund. This may include, for example, paying the Commonwealth’s costs of acquiring shares in the Fund, or paying amounts payable under arrangements made with the Fund or its members.

There is a time limit on this appropriation. If no amounts are debited within 2 years after commencement, the appropriation ceases. However, if any amount is debited within the two-year timeframe, there is no time limit on debiting any remaining amounts of the $100 million appropriation.

37

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.38

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights had no comment on the Bill.39

Key issues There are a number of key issues that arise from the Bill that have not been addressed in the explanatory material.

Why is government investment necessary in the ABGF? According to the Bill’s second reading speech:

The Australian BGF has been modelled on the established UK and Canadian equivalents where a company collectively owned by financial institutions provides long-term capital and business guidance to small- and medium-sized businesses. 40

However, these overseas business growth funds have no public investment (only private investment). The explanatory materials associated with the Bill do not explain why it is necessary for the Commonwealth to invest public money in private SMEs. As discussed later in this section, an Australian Government Regulation Impact Statement (RIS) would have been helpful in exploring the evidence regarding the perceived market failure, and whether it is necessary for the government to invest in the ABGF to ensure that SMEs have access to affordable finance, or whether there are other alternatives that would achieve this objective in a more effective and efficient manner.

John Roskam, Executive Director of the Institute of Public Affairs, suggested that the use of $100m of taxpayers funds to invest in SMEs was ‘picking winners’ and ‘smacks of state socialism’ and indicated there were more important policy issues to resolve than access to credit for SMEs:

Access to credit is certainly a challenge, but red tape reduction and industrial relations reform are much more important to grow the economy and help business investment. 41

37. Explanatory Memorandum, Australian Business Growth Fund Bill 2019, p. 11. 38. The Statement of Compatibility with Human Rights can be found at page 13 of the Explanatory Memorandum to the Bill. 39. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 1, 2020, Parliament of Australia, 5 February 2020, p. 94.

40. Frydenberg, ‘Second reading speech: Australian Business Growth Fund Bill 2019’, op. cit., p. 7058. 41. Kehoe, ‘Doubts over small business growth fund’, op. cit.

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What rate of return is the Commonwealth seeking for its investment in the ABGF? There is limited detail in the Bill or explanatory material about how the ABGF will operate. Typically, a Commonwealth entity that makes investments in private sector businesses would be subject to an ‘investments mandate’ that outlines (among other things) the expected ‘benchmark’ rate of return that it is required to make.42 The Bill does not provide for the issuing of such an investment mandate in relation to the Fund.

The Bill allows for the Minister, on behalf of the Commonwealth, to enter into arrangements with the ABGF in relation to the operations of the ABGF.43 However, to date, there is no information as to what rate of return the Commonwealth is expecting on its ‘patient capital’ of $100 million.

According to the European Commission, the objective of patient capital:

… Is to provide equity-linked capital to the local entrepreneur and project developer on the basis that is affordable, where there was either no such capital available before or available only on unaffordable terms or with damaging delay.

… patient capital would provide a type of equity that blends public and private sector investment requirements. A patient capital fund … would provide equity funding in the expectation of a return, but on a less demanding basis than pure commercial private equity capital as the returns are either lower or expected over a more deferred time frame than commercial investors would require or accept.

44

It is not clear what rate of return the Government will seek on behalf of taxpayers for its $100 million investment. According to The Treasury, the ABGF is expected to make a commercial return for shareholders.45

How significant are the competition impacts that arise from the ABGF? As reflected in the Senate Selection of Bills Committee’s reasons for referring the Bill to the Senate Economics Committee for inquiry, there are concerns that the ABGF may cause competition issues in Australia’s financial markets. From the supply side, other providers of equity finance may be disadvantaged—it may crowd out their ability to provide equity capital because of the better terms available for those seeking funding under the ABGF.

According to Adam Creighton, Economics Editor at The Australian newspaper:

The Australian Business Growth Fund … will be another case of crony capitalism bringing together the government and the biggest financial institutions in a cosy venture that will crowd out existing private sector investors …

Not content with giving the big banks the right to join a fund that will enjoy artificially low borrowing costs by virtue of government involvement, the banking regulator even has agreed to pervert prudential regulation so the banks can treat high-risk investments through the fund as loans.

This double whammy of market manipulation will ensure the ABGF has a huge advantage in the market for providing equity finance to small to medium enterprises. 46

42. For example, see Clean Energy Finance Corporation Investment Mandate Direction 2019. 43. Australian Business Growth Fund Bill 2019, (the Bill), clause 11. 44. European Commission, The Patient Capital Initiative: a proposal for a global renewable energy fund of funds, November 2004. 45. Correspondence between the Parliamentary Library and Treasury, 31 January 2020. 46. A Creighton, ‘Cosy plan will allow banks to cream off even more cash’, The Australian, 26 November 2019, p. 1.

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From the demand side, those SMEs that receive equity finance—because they meet the eligibility requirements of the ABGF—may gain a competitive advantage over their competitors who have not been able to meet the requirements. Instead, these excluded enterprises will be required to seek finance from more costly traditional funding sources.

On the other hand, there is also a risk that the ABGF may just end up selecting companies that would have received funding anyway (albeit at a higher cost) which would result in the ABGF generating little additional business growth and economic expansion.

These competition issues could have been usefully explored in a publicly available Australian Government RIS. However, according to the Office of Best Practice Regulation (OBPR) the ABGF proposal was assessed as ’being likely to have no more than minor regulatory impacts’ so the responsible agency (Treasury) was not required to prepare a published ‘long form’ or ‘standard form’ RIS. Instead, the OBPR’s advice to Treasury was that preparation of a ‘short form’ RIS was appropriate for the ABGF proposal.47 However, as noted in the User Guide to the Australian Government Guide to Regulation, short form RIS are not published.48

According to The Australian Government Guide to Regulation a short form RIS is appropriate for proposals where:

• the policy issues are simple, clear cut or policy alternatives are limited

• the policy is a matter of national security, public safety, natural disaster or pressing event

• the regulatory impact of the policy is of lower priority than some other factor

• a RIS has recently been completed and only minor modifications have been made to the original policy options under consideration and

• the proposal is non-regulatory, minor or machinery in nature.49

While there are forthcoming changes to the Australian Government RIS process flagged to come into effect in March 2020,50 so that the current RIS labels (short form, standard form, long form) will be removed and there will be a single type of RIS—there will still remain the capacity for some RIS that go to Cabinet not to be made public.51 Public transparency may continue to be an issue for certain regulatory proposals despite the changes to the RIS process.

Unique structure of the Fund The ABGF is set up as a privately controlled company with funding from the Government and other financial institutions. As discussed in the ‘Key provisions’ section below, the Fund will be legally restricted from being Commonwealth controlled, despite the fact that it is in part a vehicle for Commonwealth investment.

Although the ABGF is a vehicle for Commonwealth investment, it is not a Commonwealth company or entity. The ABGF will also involve private investment. These do not reflect conventional arrangements for the Commonwealth. The Fund’s structure is in contrast to the following examples of funds which receive and invest or lend Commonwealth money:

47. Correspondence between the Parliamentary Library and the Office of Best Practice Regulation (OBPR), 30 January 2020. 48. OBPR, User guide to the Australian Government guide to regulation, Department of the Prime Minister and Cabinet (PM&C), Canberra, February 2016, p. 10. 49. Australian Government, The Australian Government guide to regulation, March 2014, p. 12. 50. OBPR, ‘Upcoming changes to the Australian Government’s regulatory impact analysis settings’, PM&C website, n.d. 51. Correspondence between the Parliamentary Library and OBPR, 30 January 2020.

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• the Clean Energy Finance Corporation (CEFC), which is a corporation credited with Commonwealth money to invest in the clean energy sector, is a statutory authority.52 The Clean Energy Finance Corporation Act 2012 provides for governance arrangements for the CEFC, for example in relation to its board members, meetings of the board, Chief Executive Officer (CEO), et cetera

• Export Finance Australia, which provides finance to small and medium enterprises to take on export related opportunities, is a corporate Commonwealth entity.53 The Export Finance and Insurance Corporation Act 1991 provides for functions and membership of the board, terms and conditions of office members, et cetera

• the Regional Investment Corporation (RIC) administers $2 billion for farm business loans and $2 billion for national water infrastructure loans.54 The RIC is a corporate Commonwealth entity and the Regional Investment Corporation Act 2018 provides for its governance arrangements including the establishment, functions of and membership of the Board.

The Bill does not provide such governance arrangements in relation to the Fund. The unique status of the ABGF appears to be reflective of the Government’s intention of working with the banks and having the fund operate ‘commercially’ and independent from Government.55

Key provisions of the Bill

Formation of a company as the Australian Business Growth Fund Subclause 10(4) of the Bill provides that the Fund is formed when the relevant Minister, on behalf of the Commonwealth, takes any of the following actions in relation to a company formed under the Corporations Act 2001:56

• participates in forming the company57

• acquires shares (either by purchase or subscription) in a company, or becomes a member of the company58 or

• acquires debentures59 of a company.60

These actions can only be taken with respect to one such company.61 It is important to note that the Bill does not establish the company that will be formed as the Fund. Prior to being formed as the Fund, the relevant entity will be established as a company under the existing requirements relating to incorporation under the Corporations Act. It is only once the Minister takes one of the above actions that the company will become the Fund.

As such the Bill can be seen as providing the authority for the Commonwealth to invest in the Fund, as opposed to facilitating the establishment of the entity itself. The investment in the Fund

52. Clean Energy Finance Corporation (CEFC), ‘How we operate’, CEFC website, n.d. 53. Export Finance Australia (EFA), ‘What we do’, EFA website; EFA, ‘Our governance’, EFA website. 54. Regional Investment Corporation (RIC), ‘About us’, RIC website, last modified 2 December 2019. 55. Frydenberg and Cash, Agreement to establish the $540 million Australian Business Growth Fund, op. cit. 56. The Bill uses the term Corporations Act company which is defined in clause 5 as a body corporate that is incorporated, or

taken to be incorporated, under the Corporations Act 2001. 57. The Bill, paragraph 10(1)(a). 58. The Bill, paragraph 10(1)(b). Section 231 of the Corporations Act sets out when a person is a member of a company and

includes where a person is a member of a company at registration. 59. Debenture is defined in detail at section 9 of the Corporations Act; as per this definition a debenture of a body is a ‘chose in action’ that includes an undertaking by the body to repay, as a debt, money deposited with or lent to the body. Clause 5

imports this definition into the Bill. 60. The Bill, subclause 10(2). 61. The Bill, subclause 10(3).

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does not sit neatly within the existing categories of authorised investment provided for under the Public Governance, Performance and Accountability Act 2013 (PGPA Act),62 and so the Bill is likely required to provide this authority.

Arrangements relating to the Fund As discussed above, the Government has expressed several intentions regarding the operation of the Fund. In particular, the Fund is intended to:

• provide finance to small and medium-sized businesses

• consist of funding from not only the Commonwealth but also other financial institutions (the relevant financial commitments from these institutions is outlined in the ‘Background’ section above)

• have an initial investment capacity of $540 million (with the intention of growing to $1 billion) and

• provide an investment stake in businesses of between ten and 40 per cent (in other words a minority stake, thereby ensuring business owners maintain a controlling interest in their companies).63

In addition, the Government has announced that business will be eligible for long-term equity capital investment of between $5 million and $15 million where these businesses have generated annual revenue of between $2 million and $100 million.64

Treasury has also provided some limited information on the proposed structure of the Fund.65

Clause 3 sets out the object of the Bill; this objects clause accords with the Government’s above intention that the Fund’s purpose is to increase investment in small and medium Australian enterprises together with other persons (that is, financial institutions).

However, other aspects of the Government’s intentions regarding the operation of the Fund and requirements in relation to investments of the Fund (for example with respect to the eligibility of businesses to receive finance) are not made explicit in the Bill. The Bill in general has little to no detail around how the Fund will operate beyond the broad purposes set out in the objects clause.

Instead, it appears that the Minister’s power to enter into arrangements relating to the operation of the Fund (provided for by clause 11) may allow these intentions to be realised once agreed with the other investors in the Fund.66 Clause 11 provides that the Minister, on behalf of the Commonwealth, may make arrangements relating to the operation of the fund with the following parties:

• the Fund itself, or a company prior to being formed as the Fund67 (see discussion under ‘Formation of a company as the Australian Business Growth Fund’ above)

62. See section 58 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and section 22 of the Public Governance, Performance and Accountability Rule 2014. 63. Frydenberg and Cash, Agreement to establish the $540 million Australian Business Growth Fund, op. cit. 64. Ibid. 65. Treasury, ‘Business Growth Fund’, Treasury website. 66. Under clause 12 of the Bill, the Minister has all the rights, responsibilities, duties and powers of the Commonwealth in

relation to the Commonwealth’s capacity as a member of the Fund, a shareholder of the Fund, a holder of debentures of the Fund or a party to an arrangement made under clause 11. 67. The Bill, paragraph 11(1)(a).

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• a member of the Fund, or a proposed member of the Fund68 (these would likely be the financial institutions involved with the Fund) or

• a subsidiary of the Fund.69

Subclause 11(2) allows such an arrangement to provide for the Commonwealth to make payments and paragraph 18(1)(d) allows the monies appropriated from the Consolidated Revenue Fund to be used for this purpose (see discussion on Consolidated Revenue Fund provisions below).

Subclause 13(2) provides that the Minister must make arrangements requiring the Fund to apply money received from the Commonwealth only:

• with respect to trade and commerce

- between Australia and places outside Australia or - among the states and territories or within a territory or • with respect to a territory.

These arrangements can be made either prior to or following the exercise of the Minister’s powers under clause 10 (actions triggering the creation of the Fund), clause 11 (entering into arrangements relating to the operation of the fund) and clause 12 (exercising powers in relation to Commonwealth responsibilities and duties regarding the Fund). However, the arrangements must be made prior to any actual investment made by the Fund using money appropriated from the Consolidated Revenue Fund. The Government’s intention here appears to be ensuring that any investments made by the Fund do not fall afoul of Constitutional limitations.70 These arrangements can be made using the Minister’s arrangement making power under clause 11 or their general powers relating to the formation of a company as the Fund under clause 10.71

Importantly, the Minister must take steps to divest the Commonwealth of its investment in the fund if these arrangements relating to Constitutional limits are unlikely to be made before the Fund makes any investment or if such arrangements are no longer in force.72

The general arrangement making powers under clause 11 will likely be used to implement the Commonwealth’s intentions regarding the operation of and requirements in relation to the Fund. This is highlighted by the ‘Example’ included in the Bill under subclause 13(2):

Arrangements could allow the Fund to apply money received from the Commonwealth, for the purpose of generating a commercial return for the Fund, in a small or medium Australian enterprise that is engaged predominantly in trade or commerce between Australia and places outside Australia.

Any rules made under clause 22 to give effect to the Bill as enacted may also be used in order to ensure the Government’s intentions regarding the operation of the Fund are met. Clause 16 provides that the rules may relate to the Minister’s exercise of rights, responsibilities, duties and powers under the Bill.

However, to date there is no detail around what these arrangements could entail and it is unclear to what extent the structure of the Fund has been settled with the Government’s co-investors.

68. The Bill, paragraph 11(1)(b). 69. The Bill, paragraph 11(1)(c). 70. See section 51(i) (trade and commerce power) and section 122 (territories power) of the Australian Constitution. 71. This is clarified by subclause 13(3) of the Bill. 72. The Bill, subclause 10(4).

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Fund is not a Commonwealth company Clause 14 of the Bill provides that the Minister must ensure that the Fund does not become a Commonwealth company (that is a company that the Commonwealth controls).

Subsection 89(2) of the PGPA Act provides that the Commonwealth controls a company if it:

• controls the composition of the company’s board

• is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the company or

• holds more than one-half of the issued share capital of the company (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital).

The Commonwealth is also taken to control a company if it can appoint or remove all or the majority of the directors of the company.73 The meaning of Commonwealth company from the PGPA Act is imported into the Bill by the definitions section at clause 5.

Apart from clause 14, subclause 10(1) also provides that when the Minister exercises their powers that lead to a company becoming the Fund, these powers must not result in the company becoming a Commonwealth company. Similarly arrangements made by the Minister under clause 11 must also not result in the Fund becoming a Commonwealth company.74

This appears to reflect the Government’s intention that the Fund operate commercially and be independent of both the Government and the participating banks. The Government has noted that a board and independent management team will administer the Fund.75

While the Bill ensures that the Fund will not be controlled by the Commonwealth, it does not necessarily ensure its complete independence from Government. The ABGF’s independence, for example with regards to the investments it makes, would be dependent upon any arrangements made in relation to the investment of monies from the Fund. The corporate structure of the Fund (that is, the board and independent management team) also cannot be provided for in legislation, given the Fund will be established as an independent company, not a statutory corporation. The composition of the board could also notionally affect the Fund’s independence.76 In addition, while this was noted as an intention of the Government, there is no legislative restriction on any particular bank taking a controlling stake in the Fund.

Apart from not being a Commonwealth company, the Fund will likely also not be a Commonwealth entity under the PGPA Act.77 There remains the possibility that the Fund could be prescribed by rules made under the PGPA Act to designate the Fund as a Commonwealth entity at a future date,78 however there is no indication that the Government intends to take this action. This means that governance and accountability requirements under the PGPA Act that apply to Commonwealth entities will likely not apply to the Fund.

73. Public Governance, Performance and Accountability Act 2013, subsection 89(3). 74. The Bill, subclause 11(1). 75. Frydenberg and Cash, Agreement to establish the $540 million Australian Business Growth Fund, op. cit. 76. In its election policy, the Liberal Party stated that ‘[i]nvestment decisions will be made by professional managers independent

of Government and performance will be assessed on a fully commercial basis according to private sector funding models.’ Source: Liberal Party of Australia, Our plan to back small business, op. cit., p. 4. 77. Commonwealth entity is defined at section 10 of the PGPA Act and includes a Department of State, a Parliamentary Department, a listed entity and a body corporate established by law. 78. PGPA Act, paragraph 10(1)(e).

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Governance As noted above, the Fund will not be a Commonwealth company for the purposes of the PGPA Act. This means that the Fund will not be legislatively subject to oversight mechanisms that apply to Commonwealth companies under the PGPA Act, such as:

• the duty to keep the responsible Minister and the Finance Minister informed of the company’s activities (section 91)

• ensuring the company has an audit committee (section 92)

• preparing corporate plans (section 95)

• providing budget estimates to the Finance Secretary in the case of wholly owned Commonwealth companies (section 96) and

• providing the responsible Minister with certain annual reports (section 97).

Perhaps in recognition of this, clause 20 of the Bill provides that the annual report prepared by the Secretary of the Department that must be provided to the Minister in accordance with the Department’s PGPA Act obligations, must also include a report on the operation of the Bill. However, this is unlikely to have the same level of detail that annual reports provided under the PGPA Act by Commonwealth companies would have as this requirement includes the provision of financial, directors’ and auditor’s reports.

Given the amount of Commonwealth investment into the Fund, it is perhaps arguable whether the lesser reporting requirements under clause 20 represents sufficient oversight in relation to the Fund. Apart from the requirement under this clause, the Bill does not provide for any governance arrangements with respect to the Fund (this is in contrast to other funds that invest Commonwealth money discussed in the ‘Unique structure of the Fund’ section above).

Requirements under Corporations Act Although the Fund is not subject to general requirements of the PGPA Act, it will be regulated by the Corporations Act. Accordingly, the directors of the Fund would be subject to the directors’ duties set out in Part 2D.1 of the Corporations Act. These duties are as follows:

• the duty to exercise their powers with the degree of care and diligence that a reasonable person would exercise in their circumstances (subsection 180(1))

• the duty to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose (subsection 181(1))

• the duty not to improperly use their position to gain an advantage for themselves or someone else or cause detriment to the corporation (subsection 182(1)) and

• the duty not to improperly use information, obtained because they are or have been a director, to gain an advantage for themselves or someone else or cause detriment to the corporation (subsection 183(1)).

In addition, the Fund will be governed by its own constitution or the replaceable rules under the Corporations Act, or a combination of both.79 However, it is not possible to speculate about what those governance arrangements would be. Final governance arrangements of the Fund are likely

79. Australian Securities and Investments Commission (ASIC), ‘Constitution and replaceable rules’, ASIC website, updated 19 July 2017; the replaceable rules provide a basic set of rules for managing a company, an outline of the Rules is on the ASIC website.

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to be subject to arrangements made by the Minister in relation to the operation of the Fund (a power provided for by clause 11 of the Bill).

In terms of reporting, the Fund will also be subject to the financial and audit reporting requirements under Chapter 2M of the Corporations Act. This is in addition to the reporting by the Department that is required under clause 20 of the Bill.

Appropriation of Consolidated Revenue Fund Clause 18 of the Bill provides for the appropriation of the Consolidated Revenue Fund (CRF) to the extent of $100 million. Section 83 of the Australian Constitution provides that money cannot be drawn from the CRF except under an appropriation made by law.80 Clause 18 of the Bill represents a special appropriation—that is it is a provision that provides authority to spend money for particular purposes.81

Clause 18 stipulates that the CRF can be appropriated for the following purposes (to the extent of $100 million):

• paying the costs of, or incidental to, the Commonwealth’s participation in the formation of the Fund (that is the exercise of the powers outlined in clause 10 of the Bill)

• paying the costs of, or incidental to, the acquisition by the Commonwealth of shares (either by purchase or subscription) in the Fund

• paying the costs of, or incidental to, the acquisition by the Commonwealth of debentures (either by purchase or subscription) of the Fund

• paying amounts payable by the Commonwealth under an arrangement made under the Bill and

• paying or discharging any other costs, expenses or other obligations incurred by the Commonwealth exclusively in connection with the Fund.

The appropriation has a time limit so that if no money is appropriated within two years of the Bill’s commencement, then the appropriation ceases to have effect.82 The Explanatory Memorandum, however, clarifies that ‘if any amount is debited within the two-year timeframe, there is no time limit on debiting any remaining amounts of the $100 million appropriation’.83

This provision is reflective of the Commonwealth’s commitment of $100 million to the establishment of the ABGF.84 The Government notes that its investment, together with the commitments from the relevant financial institutions, reflects an initial investment capacity of $540 million for the Fund.85 It should be noted, however, that the appropriation includes expenditure and costs incidental to the obligations incurred by the Commonwealth in connection with the ABGF. As such, it is not clear whether all of the $100 million would go towards the ABGF’s investments in small and medium enterprises. In addition, the Bill only sets an upper limit of $100 million that can be appropriated for the purposes of the ABGF; it does not obligate the Government to reach this threshold.

80. See also: Department of Finance, ‘Guide to Appropriations (RMG 100)’, DoF website, updated 11 December 2019. 81. Ibid.

82. The Bill, subclause 18(2). 83. Explanatory Memorandum, Australian Business Growth Fund Bill 2019, p. 11. 84. J Frydenberg (Treasurer) and M Cash (Minister for Employment, Skills, Small and Family Business), Introducing legislation to establish the Australian Business Growth Fund, joint media release, 5 December 2019.

85. Ibid.

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Legislated review Clause 21 mandates a review of the operation of the Bill as enacted as soon as possible after the third anniversary after its commencement, and must include a review of its effectiveness in meeting its object as set out in clause 3. This review must be tabled in each House of Parliament.86

Concluding comments It is not clear from the explanatory material provided with the Bill that government intervention is justified or necessary. Other countries have established business growth funds without government involvement and the ASBFEO report recommending the establishment of a business growth fund did not foresee government involvement in raising seed capital. It is also not clear that the proposed public investment of $100 million in private sector SMEs through the ABGF will deliver an appropriate rate of return to taxpayers. There is no information available on what return the government has deemed sufficient to compensate taxpayers for the financial risks of investing in SMEs.

Moreover, there is a possibility that the ABGF may result in negative competition impacts in financial markets for the suppliers of finance (that are not party to the ABGF) and for the SMEs who are seeking finance but are ineligible to participate in the ABGF. Negative competition impacts may arise because of the potential distortions in the market the ABGF will create between those who are participating in the ABGF and those who are excluded. Given there is no publicly available RIS on the regulatory proposal, consultation on the Bill was truncated to five days and no submissions on the exposure draft of the Bill were made public prior to its introduction into Parliament, it is difficult to evaluate the evidence and make a considered assessment of the materiality of these potential competition impacts.

The Bill sets out the broad authority for the Commonwealth to invest in the ABGF but does not create the entity itself (which will be a company formed under the Corporations Act). The ABGF is unique in how it is a vehicle for Commonwealth investment while not being Commonwealth controlled.

86. The Bill, subclause 21(4).

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