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National Housing Finance and Investment Corporation Bill 2018 [and] National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018



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ISSN 1328-8091

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BILLS DIGEST NO. 132, 2017-18 25 JUNE 2018

National Housing Finance and Investment Corporation Bill 2018 [and] National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018 Paula Pyburne Law and Bills Digest Section Matthew Thomas Social Policy Section

Contents

Glossary .......................................................................... 3

Bills Digest at a glance ..................................................... 4

Purpose of the Bills ......................................................... 5

Structure of the Bills........................................................ 5

Background ..................................................................... 5

Division of government responsibilities ...................... 6 Decline in housing stocks ............................................ 6

Policy development......................................................... 7

Preferred model .......................................................... 8

Box 1: How a bond aggregator works ....................... 8

Budget commitment ................................................... 9

Precursor funds ....................................................... 10

Committee consideration .............................................. 11

Senate Standing Committee on Economics .............. 11 Senate Standing Committee for the Scrutiny of Bills ............................................................................ 11

Policy position of non-government parties ..................... 12

Greens ....................................................................... 12

ALP ............................................................................. 12

Position of major interest groups................................... 12

Date introduced: 15 February 2018

House: House of Repesentatives

Portfolio: Treasury

Commencement: the day after Royal Assent

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the Bills’ home pages for the National Housing Finance and Investment Corporation Bill 2018 and the National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, 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 June 2018.

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Financial implications .................................................... 12

Table 1: Establishment of NHFIC and National Housing Infrastructure Facility ................................ 13

Statement of Compatibility with Human Rights.............. 13

Parliamentary Joint Committee on Human Rights ... 13 Key issues and provisions .............................................. 13

NHFIC ........................................................................... 13

Functions of the NHFIC ............................................. 13

Powers of the NHFIC ................................................. 14

Box 2: Explanation of financial terms ...................... 14

Delegation ............................................................... 14

Legal basis for the programs to date ........................ 15

Constitutional underpinning of the Bill ..................... 15 Corporations power ................................................ 15

Other powers .......................................................... 16

Investment Mandate ................................................. 16

Scrutiny of Bills Committee comments ................... 16 Draft Investment Mandate ....................................... 17

Box 3: Key features of the draft Investment Mandate .................................................................. 17

Board............................................................................ 18

Establishment and composition ................................ 18

Appointment and termination .................................. 19

Committees ............................................................. 19

Box 4: Roles of Committees .................................... 20

Observer ....................................................................... 20

Nature of corporate governance ............................ 21

Chief Executive Officer .................................................. 22

Appointment and termination .................................. 22

Staff and consultants ............................................... 22

Delegation ............................................................... 23

Comment ................................................................... 23

Finance ......................................................................... 23

Maintain adequate capital reserves ......................... 23

Borrowings ................................................................ 24

Commonwealth guarantee ..................................... 24

Miscellaneous ............................................................ 25

Review ..................................................................... 25

Rules ........................................................................ 25

Consequential amendments .......................................... 25

Concluding comments ................................................... 26

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Glossary Bill National Housing Finance and Investment Corporation Bill 2018

Board Board of the National Housing Finance and Investment Corporation

AHBA Affordable Housing Bond Aggregator

Chair Chair of the National Housing Finance and Investment Corporation

CEO Chief Executive Officer of the National Housing Finance and

Investment Corporation

CHP Registered community housing provider

Consequential Amendments Bill National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018

CRA Commonwealth Rent Assistance

CSHA Commonwealth-State Housing Agreement

NAHA National Affordable Housing Agreement

NHHA National Housing and Homelessness Agreement

NHFIC National Housing Finance and Investment Corporation

NHIF National Housing Infrastructure Facility

NRAS National Rental Affordability Scheme

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Bills Digest at a glance The National Housing Finance and Investment Corporation Bill 2018 establishes the National Housing Finance and Investment Corporation (NHFIC) as a Commonwealth commercial entity operating with the aim of improving housing outcomes for Australians. The NHFIC will engage in two core activities to support investment in Australian housing:

• the establishment and operation of an Affordable Housing Bond Aggregator (AHBA) to provide finance to registered community housing providers by aggregating their lending requirements and issuing bonds to institutional investors and

• the establishment and operation of the National Housing Infrastructure Facility (NHIF) to provide grants and finance to support the creation of housing-related infrastructure.

The NHFIC may also provide support for capacity building.

Affordable housing bond aggregator

The AHBA will provide loans to registered community housing providers. The initial reserve for the AHBA is up to $150 million. The NHFIC must repay to the Commonwealth an amount equal to the amount allocated to the AHBA by 30 June 2023.

The NHFIC may only provide finance to registered community housing providers in the form of secured loans. The NHFIC is required to take security for its loans on commensurate terms to commercial financiers such as banks and other lenders.

National Housing Infrastructure Facility

The NHFIC may use the NHIF to provide finance in the form of loans, equity investments and grants to eligible infrastructure projects which support housing development such as:

• new or upgraded infrastructure for services such as water, sewerage, electricity or transportation and

• site remediation works including the removal of hazardous waste or contamination.

The NHIF will not finance housing projects directly nor will it finance community infrastructure such as parks or libraries.

Investment mandate

The Minister may, by legislative instrument, give the Board directions about the performance of the NHFIC’s functions—called the Investment Mandate. This may include directions about:

• strategies and policies to be followed for the effective performance of the NHFIC’s functions

• decision-making criteria for making loans, investments and grants; granting financial assistance to states and territories; and providing, to registered community housing providers, business advisory services and other assistance in capacity building

• limits on making loans, investments and grants, and granting financial assistance to states and territories

• risk and return relating to NHFIC’s investments.

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Purpose of the Bills The purpose of the National Housing and Finance Investment Corporation Bill 2018 (the NHFIC Bill) is to establish the National Housing Financial and Investment Corporation (NHFIC).

The National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018 (Consequential Amendments Bill) is a companion Bill containing minor consequential amendments.

Structure of the Bills The NHFIC Bill comprises six Parts:

• Part 1 sets out preliminary matters including relevant definitions

• Part 2 establishes the NHFIC and sets out its powers and functions

• Part 3 establishes the NHFIC Board and contains provisions relevant to the appointment of its members and the convening of meetings

• Part 4 relates to the role of the Chief Executive Officer of NHFIC, and the staffing arrangements for NHFIC

• Part 5 contains provisions relating to finance and

• Part 6 sets out miscellaneous matters including the power to make rules and the requirement for a review of the NHFIC Act three years after its commencement.

The Consequential Amendments Bill comprises two Schedules:

• Schedule 1 to the Bill amends the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act) and the Freedom of Information Act 1982 (FOI Act) and

• Schedule 2 sets out the transitional provisions.

Background There is ongoing debate as to whether or not Australia has an overall housing surplus or deficit, and what the size of this surplus or deficit might be.1

Nevertheless, the data clearly suggest that housing affordability2 is lower than it has been in the past.3 This is especially so for low- to middle-income Australians who wish to buy a house for the first time or rent in the private market in the cities where most employment opportunities are

1. The National Housing Supply Council (NHSC) estimated that in 2011 there was an Australia-wide shortfall of 284,000 dwellings, when compared to the underlying demand for housing. NHSC, 2013 State of supply report: changes in how we live, NHSC, 2014, p. 1. Subsequently, the Reserve Bank of Australia (RBA) estimated a housing supply shortage of between zero and 30,000 dwellings in 2015. M Kohler and M van der Merwe, ‘Long-run trends in housing price growth’, Reserve Bank of Australia Bulletin, September Quarter 2015, p. 26. More recently, estimates from ANU researchers have suggested that there is no housing shortfall in Australia as a whole, but rather, a housing oversupply. Based on an analysis of housing supply and demand in Australia at a regional level, Ben Phillips and Cukkoo Joseph have estimated that between 2001 and 2017 the Australian housing market experienced an oversupply of 164,000 dwellings. B Phillips and C Joseph, Regional housing supply and demand in Australia, Working paper no. 1/2017, Centre for Social Research and Methods (CSRM), Australian National University College of Arts and Social Services, Canberra, 2017, p. 1. Grattan Institute researchers John Daley and Brendan Coates have taken issue with such assessments, arguing that estimates such as these ‘typically ignore how rising prices and worsening affordability pushed people into larger households than they otherwise would have chosen. Therefore, these estimates underplay the number of dwellings needed to accommodate Australia’s growing population’. J Daley and B Coates, Housing affordability: re-imagining the Australian dream, Grattan Institute, Victoria, 2018, p. 46.

2. A number of different sources assess housing affordability in Australia, and many of these sources use different measures to do so. Measures include, for example, the dwelling price to income ratio (a higher number generally means it is harder to purchase a house) and rental vacancy rates (a lower number indicates a tighter rental market, which is likely to be less affordable). Generally speaking, housing affordability refers to the relationship between expenditure on housing (prices, mortgage payments or rents) and household incomes. 3. See for example, Australian Bureau of Statistics (ABS), Housing occupancy and costs, 2015-16, cat. no. 4130.0, ABS, Canberra,

2017; Anglicare Australia, 2018 Rental affordability snapshot: Anglicare Australia, Anglicare Australia, Canberra, 2018.

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concentrated. In these areas many low-income households are experiencing housing stress—that is, spending more than 30 per cent of their gross income on housing costs.

While the jury may still be out on the question of whether overall housing supply is sufficient to meet demand, the data indicate that there is a need for increased affordable housing.

Division of government responsibilities The causes of housing affordability problems are multiple and complex, arising as a result of a combination of demand-side and supply-side factors. While a number of these factors are beyond the immediate control of governments—such as changing rates of household formation and household size—governments nevertheless have responsibility for various policy areas that impact more or less directly on housing markets and housing affordability.4

Generally speaking, the Federal Government is responsible for national housing and homelessness policy and for financial sector regulations and taxation settings that have some influence on housing affordability. The Federal Government provides Commonwealth Rent Assistance (CRA) to low- to moderate-income households who experience difficulty in meeting private market rental costs. The Federal Government also provides financial assistance to the states and territories to support them in the delivery of social housing through the National Affordable Housing Agreement (NAHA). This Agreement is to be replaced by the National Housing and Homelessness Agreement (NHHA) which will commence on 1 July 2018.5

Social housing is housing that is made available at below market rates to people who are unable to access suitable accommodation in the private rental market. It is comprised of public housing, community housing, state-owned and managed Indigenous housing (SOMIH) and Indigenous community housing. While public housing and SOMIH are owned or leased by state and territory housing authorities, community housing and Indigenous community housing are managed by community housing providers.6

In addition to the delivery of social housing, state and territory governments are responsible for land use and supply policy, urban planning and development policy, housing-related taxes and charges (such as land taxes and stamp duties) and residential tenancy legislation and regulation, each of which have more or less impact on housing affordability. Local Governments are mostly responsible for building approval, urban planning and development approval processes and rates and charges.

Decline in housing stocks For some time, successive Federal Governments have placed a greater emphasis on CRA to support eligible renters in the private rental market than on providing support for social housing.7 This prioritisation of funding contributed to declining Commonwealth outlays on social housing,

4. For a detailed account of government responsibilities see Department of the Prime Minister and Cabinet (PM&C), Reform of the Federation: roles and responsibilities in housing and homelessness, White paper, Issues paper no. 2, December 2014. 5. For details see M Thomas, Treasury Laws Amendment (National Housing and Homelessness Agreement) Bill 2017, Bills digest, 83, 2017-18, Parliamentary Library, Canberra, 2018. 6. Productivity Commission (PC), Report on government services 2018: volume G: housing and homelessness, PC, Canberra, 2018,

p. 18.2.

7. J Yates, ‘Evaluating social and affordable housing reform in Australia: lessons to be learned from history’, International Journal of Housing Policy, (13)2, 9 May 2013.

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and, by the mid-1990s, CRA expenditure surpassed Commonwealth-State Housing Agreement (CSHA) expenditure.8 This has been the case ever since.

Faced with decreased funding for social housing, and unable to charge market rents for public housing, state and territory governments have been unable or unwilling to maintain existing public housing stock or fund new dwellings.9

Over the past decade or so state and territory governments have increasingly been either selling public housing stock or transferring the stock itself or its management to community housing providers. Such transfers are in line with a target to increase community housing stock to make up 35 per cent of the social housing sector by 2020, set at the 2009 Housing Ministers Conference.10

Part of the rationale behind this approach is that community housing tenants are eligible for CRA whereas public housing tenants are not, and this enables community housing providers to charge higher rents without reducing tenant net incomes. Not-for-profit community housing providers also have access to exemptions from council rates and tax concessions that can help to reduce their costs. Where they have a sufficiently sized asset base, community housing providers are able to use this to leverage financing and further expand their housing stock.

The key to community housing providers being able to expand their stock to cater to existing and future demand for affordable housing would appear to be access to a pool of low-cost, long-term private funding. However, as the Affordable Housing Working Group has observed:

… the community housing sector is not currently viewed as a mature asset class, and as such private financing institutions offer finance at unfavourable terms compared to other private sector businesses … community housing organisations continue to experience difficulties in building the balance sheets and cash flows necessary to operate at the scale required to secure finance for expansion, except by relying on the transfer of public housing dwellings.

11

It is this finance problem that the Government is seeking to address with the establishment of the NHFIC and affordable housing bond aggregator.

Policy development On 7 January 2016, the Government announced that the COAG Council on Federal Financial Relations would form an Affordable Housing Working Group (Working Group).12 The Working Group was charged with identifying ways of increasing the supply of affordable housing for people on low incomes through innovative financing models.

In an Issues Paper released in February 2016, the Working Group sought input on four possible models, namely, a housing bond aggregator, a housing trust, housing cooperatives, and social impact investing bonds.13 Following a consultation process the Working Group delivered its report,

8. Australian Institute of Health and Welfare (AIHW), Australia’s welfare 2007: the eighth biennial welfare report of the Australian Institute of Health and Welfare, AIHW, Canberra, 2007, p. 222. 9. Yates, ‘Evaluating social and affordable housing reform in Australia: lessons to be learned from history’, op. cit. 10. See H Pawson, C Martin, K Flanagan and R Phillips, Recent housing transfer experience in Australia: implications for affordable

housing industry development, AHURI final report, 273, Australian Housing and Urban Research Institute, Melbourne, 2016, p. 2. 11. Council on Federal Financial Relations (CFFR), Affordable housing working group, Issues paper, Treasury, Canberra, January 2016, p. 6. 12. C Porter (Minister for Social Services) and A Hawke (Assistant Minister to the Treasurer), Strengthening the Government’s

Affordable Housing Agenda, media release, 7 January 2016. 13. CFFR, Affordable housing working group, op. cit.

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Innovative Financing Models to Improve the Supply of Affordable Housing, to Heads of Treasuries.14

Preferred model On the basis of its research and consultation the Working Group determined that a bond aggregator model offered ‘the best chance of facilitating institutional investment into affordable housing at scale, subject to the provision of additional government funding’.15 Essentially, an affordable housing bond aggregator is ‘designed to aggregate and source large amounts of capital from the bond market so as to provide lower interest, long-term loans to not-for-profit community housing providers (CHPs) developing housing for lower income households’.16 The use of a housing loan or bond aggregator was the preferred model because it ‘provides a vehicle for affordable housing providers to aggregate their debt financing requirements, assisting them to obtain funding from the wholesale market at a better price and longer tenor than is available to them individually’.17

The Working Group’s outline of how a bond aggregator model would potentially operate is set out in the Box below.

Box 1: how a bond aggregator works

The establishment of a housing bond aggregator would require the establishment of a specialist financing intermediary, whose function would be to liaise with affordable housing providers to determine the amount of debt they are seeking to raise. The intermediary, or entity acting on its behalf, would then source these funds in aggregate from wholesale markets by issuing bonds to investors. The funds generated would then be loaned to the relevant housing providers in return for ongoing interest payments. Source: Council on Federal Financial Relations, Innovative financing models to improve the supply of affordable housing: affordable housing working group: report to heads of treasuries, Treasury, Canberra, October 2017, p. 24.

The Working Group did stress, however, that establishing an aggregator would not be sufficient in itself to result in substantial growth in affordable housing. Complementary reforms would also be required, perhaps the most significant of which relate to closing the financing gap.18 The financing gap, alluded to above, may be described as ‘the difference between the costs of delivering new supply of affordable housing (such as the costs associated with acquiring new stock, managing

14. CFFR, Innovative financing models to improve the supply of affordable housing: affordable housing working group: report to heads of treasuries, Treasury, Canberra, October 2016. 15. Ibid., p. 1. The Working Group also noted that the housing trust model had significant stakeholder support. 16. Australian Housing and Urban Research Institute (AHURI), ‘What is a bond aggregator and how does it help build affordable

housing?’, AHURI website, 4 December 2017. 17. CFFR, Innovative financing models to improve the supply of affordable housing: affordable housing working group: report to heads of treasuries, op. cit., p. 24. 18. Various other means may be used to encourage institutional investment in affordable housing. These could include lowering

the perceived and actual investment risks associated with affordable housing through changes to regulatory and taxation arrangements. The Working Group noted that the Government had announced as a part of the 2017-18 Budget a number of tax concessions for investors in affordable housing that could help to promote such investment. However, it went on to recommend that the Commonwealth and state and territory governments should progress a range of further initiatives aimed at closing the funding gap ‘including through examining the levels of direct subsidy needed for affordable low-income rental housing, along with the use of affordable housing targets, planning mechanisms, tax settings, value-adding contributions from affordable housing providers and innovative developments to create and retain stock’. CFFR, Supporting the implementation of an affordable housing bond aggregator: affordable housing working group: report to heads of treasuries, op. cit., p. 2.

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tenancies, dwelling maintenance and depreciation) and the income received (from concessional rents and [CRA])’.19

While the Working Group provided no indication as to the size of the gap that would need to be closed by Australian governments, housing experts Michael Perusco and Guy Johnson have suggested that this would be in the order of $2.5 billion per year.20

In the view of the Working Group, any such government support would need to be ongoing in order to send the signal to institutional investors that affordable housing is an asset class worth investing in:

Creating and maintaining a rental housing portfolio targeted to people on low incomes requires explicit ongoing subsidies to bridge the gap between operating costs (including debt servicing) and rental incomes. This is a feature of overseas models, supported by research to date in Australia and evidence from actual projects. The size of this gap increases depending on where user groups sit along the housing continuum, requiring more support (in various forms) from governments, the lower the income profile and complexity of need.

21

In defending its decision to support a bond aggregator model the Working Group cited broad support from stakeholders for an affordable housing bond aggregator, and the success of the UK’s The Housing Finance Corporation (THFC). THFC is an independent not-for-profit organisation that

has since 1987 made loans to housing associations that provide affordable housing throughout the UK. THFC has raised long-term funding through the issue of bonds to private investors and by borrowing from banks.22

Accordingly, the Working Group recommended the establishment of an expert taskforce to design a proof of concept for a bond aggregator model. The taskforce was to report its findings to Heads of Treasuries by mid-2017.23 These findings are outlined in the report entitled Supporting the implementation of an affordable housing bond aggregator.24

Budget commitment Treasurers agreed to the Working Group’s recommendations and in the 2017-18 Budget the Government provided $63.1 million over the forward estimates period towards the establishment of a National Housing Finance and Investment Corporation to operate an affordable housing bond aggregator and a National Housing Infrastructure Facility (NHIF).25 It should be noted that the

19. CFFR Supporting the implementation of an affordable housing bond aggregator: affordable housing working group: report to heads of treasuries, op. cit., p. 10. 20. M Perusco and G Johnson, ‘What the Federal Budget 2017 means for housing and homelessness’, ProBono Australia, 10 May 2017. 21. CFFR, Supporting the implementation of an affordable housing bond aggregator: affordable housing working group report to

heads of treasuries, op. cit., p. 2. 22. A number of other countries have also established financing instruments to support the supply of affordable and social housing. These have been considered in a series of Australian Housing and Urban Research Institute (AHURI) research projects that have examined international models for financing affordable and social housing. See for example J Lawson, The use of

guarantees in affordable housing investment—a selective international review, AHURI positioning paper, 156, AHURI, Melbourne, 2013; J Lawson, T Gilmour and V Milligan, International measures to channel investment towards affordable rental housing, AHURI research paper, AHURI, Melbourne, 2010; V Milligan, J Yates, I Wiesel and H Pawson, Financing rental housing through institutional investment—volume 1: outcomes from an investigative panel, AHURI final report, 202, AHURI, Melbourne, 2013; V Milligan, J Yates, I Wiesel and H Pawson, Financing rental housing through institutional investment— volume 2: supplementary papers, AHURI final report, 202, AHURI, Melbourne, 2013. 23. CFFR, Innovative financing models to improve the supply of affordable housing: affordable housing working group report to

heads of treasuries, op. cit., p. 3. 24. CFFR, Supporting the implementation of an affordable housing bond aggregator, op. cit. 25. S Morrison (Treasurer), Turnbull Government establishes affordable housing taskforce, media release, 10 March 2017;

Australian Government, Budget measures: budget paper no. 2: 2017-18, p. 169.

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Australian Government is not the only jurisdiction establishing a fund for social housing growth; both the NSW and Victorian Governments are in the process of instituting government-supported funds that would support growth in those jurisdictions’ stock of social and affordable housing.26

Funding of $118.0 million over three years from 2018-19 has been allocated towards the NHIF.27 The NHIF is to provide financial assistance of up to $1 billion over five years from 2018-19 to local government for infrastructure that supports the development of new affordable housing.

Precursor funds The NHIF bears some resemblance to the Housing Affordability Fund which was introduced by the Rudd Government as part of a package of housing affordability measures in 2008. Through the fund, the Rudd Government intended to make available $500 million over the five year period from 2008-09 to 2012-13 to support proposals that would improve the supply of new housing and make housing more affordable for home buyers entering the market.28 The focus of the fund was proposals that reduce holding costs incurred by developers as a result of long planning and approval waiting times and infrastructure costs related to water, sewerage and transport.

While a 2011-12 Australian National Audit Office (ANAO) assessment of the fund found that it had delivered ‘positive early signs of assistance to home buyers and their associated communities’ it also determined that there had been ‘serious shortcomings in [the Department of Families,

Housing, Community Services and Indigenous Affairs’] administration of the program’.29

The 2017-18 Budget also introduced other measures specifically intended to increase the supply of affordable housing through concessional tax treatment for investors in such housing.30 These incentive-based measures are similar in their essentials to the National Rental Affordability Scheme (NRAS).

The NRAS was established by the Rudd-Gillard Government in the context of the 2008-09 Budget as a part of its broader package to address housing supply pressures and as part of the stimulus package in response to the Global Financial Crisis (GFC). Under the scheme, the Australian Government provides an annual incentive to investors for up to ten years as a refundable tax offset or payment, augmented by a state or territory annual contribution. Properties developed

under the scheme are made available to low- to middle-income earners at 20 per cent below market price for each of the ten years for which an NRAS incentive is received.31 As at

26. In 2016 then Premier Mike Baird announced that $1.1 billion in cash reserves would be placed into a new Social and Affordable Housing Fund. These funds are to be invested by NSW Treasury Corporation and the returns used to encourage developers, infrastructure firms and community groups to deliver housing projects over a period of up to 25 years. It is anticipated that Phase 1 of the fund will result in the delivery of between 2,000 and 3,000 additional social and affordable housing dwellings. S Nicholls, ‘Baird unveils details of $1.1 billion affordable housing fund’, The Sydney Morning Herald, 30 January 2016, p. 12. The Victorian Government is to establish a Victorian Social Housing Growth Fund which is intended to support partnerships between the Government and the community, private, not-for-profit and local government sectors to deliver social and affordable housing. The fund will be set up using seed capital provided progressively by the Victorian Government over a period of four years, reaching $1 billion in the 2019-20 financial year. The fund value is to be maintained over time with the investment returns being used to fund the construction of new social and affordable housing and the lease of existing residential dwellings for people in need of short-term housing assistance. It is anticipated that the fund could support around 2,200 households over the next five years. 27. Australian Government, Budget measures: budget paper no. 2: 2017-18, p. 170. 28. Department of Social Services (DSS), ‘Housing affordability fund’, DSS website, last updated 11 March 2016. 29. Australian National Audit Office (ANAO), Implementation and management of the housing affordability fund, Audit report, 11,

2011-12, ANAO, Barton, ACT, 3 November 2011. 30. Namely, the affordable housing through Managed Investment Trusts and expanding tax incentives for investments in affordable housing measures see Australian Government, Budget measures: budget paper no. 2: 2017-18, pp. 26, 29. 31. For further details see Department of Social Services (DSS), ‘National Rental Affordability Scheme’, DSS website.

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31 December 2017, 34,413 dwellings had been built and were either tenanted or available for rent under the scheme.32

The NRAS did not deliver the number of dwellings originally anticipated and exhibited some problems.33 As a part of the 2014-15 Budget, the Government decided to discontinue the scheme.34

Committee consideration

Senate Standing Committee on Economics The Bills have been referred to the Senate Economics Legislation Committee (Economics Committee) for inquiry and report by 7 May 2018.35 The Economics Committee received 16 submissions.

The Economics Committee recommended that the Bills be passed.36 The Labor senators made additional comments to the report. They agreed that the Bills should be passed subject to certain recommendations, including:

1. the Government develops, as a matter of urgency, a policy and funding framework that bridges the funding gap that had been identified by numerous submitters

2. the legislation be amended so that the scheduled review of the operation of the NHFIC Act be conducted no later than two years after passage of the legislation and that the review include specified terms of reference

3. the legislation be amended so that at least one director on the Board of the NHFIC Corporation has relevant skills and experience in social and affordable housing gained in the community housing provider sector and

4. the legislation be amended to remove the consideration of payment of dividends to the government unless the significant unmet demand for community housing for the vulnerable is adequately addressed.37

The Bills in their current form are the outcome of extensive consultation. The comments of stakeholders are canvassed under the heading ‘Key issues and provisions’ below.

Senate Standing Committee for the Scrutiny of Bills The Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) published its comments in relation to the Bills on 21 March 2018.38 The various matters raised by the Scrutiny of Bills Committee are canvassed under the heading ‘Key issues and provisions’ below.

32. DSS, National Rental Affordability Scheme—quarterly performance report, DSS website, 31 December 2017. 33. PricewaterhouseCoopers (PwC), Internal audit review of affordable housing programs, report prepared for the Department of Families, Housing, Community Services and Indigenous Affairs, December 2009. 34. See M Thomas, ‘Housing and homelessness’, Budget review 2014-15, Research paper series, 2013-14, Parliamentary Library,

Canberra, 2014, p. 147. 35. Details of the terms of reference, submissions to the Economics Committee and the final report of the Committee (when published) are available on the inquiry homepage. 36. Senate Economics Legislation Committee, National Housing Finance and Investment Corporation Bill 2018; National Housing

Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, Final report, Senate, Canberra, 7 May 2018, p. 18. 37. Ibid., pp. 19-23. 38. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 3, 2018, 21 March 2018, pp. 28-31.

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Policy position of non-government parties The Bills passed in the House of Representatives on 1 March 2018 without amendment. The second reading speeches in relation to the Bill give some insight into the views of the non-government parties.

Greens Australian Greens (the Greens) member, Adam Bandt, indicated that he looked forward to the Bill being scrutinised by the Senate ‘because there are a lot of questions to be answered as to whether it's going to do anything useful or whether it has the appearance of doing something useful’.39 He expressed concern that the measure would be unlikely to fully address Australia’s housing problems whilst ‘our tax system pushes up house prices’.40

ALP Speaking in relation to the Bills, Australian Labor Party (ALP) member Matt Thistlethwaite acknowledged that they gave ‘effect to the government's announcement in the 2017-18 Budget that it would establish a national housing finance and investment corporation and operate an affordable-housing bond aggregator and administer the national housing infrastructure facility’.41

However, he concluded by saying that ‘whilst this is a step in the right direction, we do have some misgivings about whether or not it will fulfil those obligations’.42 This view is reflected in the additional comments by Labor Senators in the Economics Committee report on the Bills.

Position of major interest groups Submissions by community housing providers to the Economics Committee broadly supported the Bills—although with some qualifications.43 For instance, Compass Housing Services opined:

The creation of the NHFIC, and in particular the Bond Aggregator, will represent a significant milestone in the evolution of the social and affordable housing sector … Compass remains concerned however, that the potential impact of the NHFIC and the aggregator on the supply of social and affordable housing will be negligible unless attention is given to addressing the funding gap.

44

Financial implications The measures have the financial impact shown in the table below.

39. A Bandt, ‘Second reading speech: National Housing Finance and Investment Corporation Bill 2018 [and] National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018’, House of Representatives, Debates, 28 February 2018, p. 2420.

40. Ibid. 41. M Thistlethwaite, ‘Second reading speech: National Housing Finance and Investment Corporation Bill 2018 [and] National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018’, House of Representatives, Debates, 28 February 2018, p. 2406.

42. Ibid. 43. PowerHousing Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the National Housing Finance and Investment Corporation Bill 2018 [and] National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, April 2018; Venture Housing Company, Submission to the Senate Standing

Committee on Economics, Inquiry into the National Housing Finance and Investment Corporation Bill 2018 [and] National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, 11 April 2018, p. 1 44. Compass Housing Services, Submission to the Senate Standing Committee on Economics, Inquiry into the National Housing

Finance and Investment Corporation Bill 2018 [and] National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, 13 April 2018.

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Table 1: establishment of NHFIC and National Housing Infrastructure Facility

Financial impact

2017-18 2018-19 2019-20 2020-21

Establishment of the NHFIC and NHIF

-9.6 -53.6 -55.7 -55.0

Source: Explanatory Memorandum, National Housing Finance and Investment Corporation Bill 2018, National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, p. 10.

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.45

Parliamentary Joint Committee on Human Rights In its scrutiny report of 27 March 2018, the Parliamentary Joint Committee on Human Rights stated that the Bills did not raise human rights concerns either: because the Bills either do not engage human rights; or because they promote human rights, and/or permissibly limit human rights.46

Key issues and provisions

NHFIC Part 2 of the NHFIC Bill establishes the National Housing Finance and Investment Corporation as a body corporate which has its own seal and which may sue and be sued.47 The NHFIC is a Commonwealth entity to which the Public Governance, Performance and Accountability Act 2013 (PGPA Act) applies.48

Functions of the NHFIC The functions of the NHFIC are:

• to make loans, investments and grants to improve, directly or indirectly, housing outcomes

• to determine terms and conditions for such loans, investments and grants

• to provide, to registered community housing providers, business advisory services and other assistance in capacity building

• any other functions conferred on the NHFIC by the NHFIC Act (when enacted) or any other Commonwealth law and

• to do anything incidental or conducive to the performance of the above functions.49

In relation to the first of those functions—that is, to make loans, investments and grants, the Bill makes clear that the functions of the NHFIC include making grants of financial assistance to states

45. The Statement of Compatibility with Human Rights can be found at pages 43-5 of the Explanatory Memorandum to the Bills. 46. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 3, 27 March 2018, p. 137. 47. National Housing Finance and Investment Corporation Bill 2018, subclauses 7(1) and (2). 48. PGPA Act, paragraph 10(1)(d). 49. National Housing Finance and Investment Corporation Bill 2018, subclause 8(1).

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and territories for that purpose and to determine terms and conditions for the grants of financial assistance.50 (Relevant comments by the Scrutiny of Bills are canvassed below.)

Powers of the NHFIC The NHFIC has the power to do all the things that are necessary for it to perform its functions. In particular it may:

• enter into arrangements and contracts with Commonwealth entities and Commonwealth companies to obtain services to assist in the performance of its functions51 and

• enter into arrangements known as swaps, foreign exchange agreements, forward rate agreements, options or hedge agreements or arrangements which have a similar purpose or effect.52

Although the NHFIC Bill gives the NHFIC the power to enter into a range of financial agreements, it does not contain relevant definitions. The nature of the financial arrangements in which NHFIC may engage are explained in the Box below.

Box 2: explanation of financial terms

Explanation of financial terms Swaps are a financial derivative in which two counterparties agree to exchange one stream of cash flows for another stream. For example, in an interest rate swap a flow of payments at a fixed interest rate is swapped for a flow at a variable interest rate.53 Foreign exchange agreements are agreements between two parties to exchange a specified amount of one currency for another currency at a specified foreign exchange rate on a future date. Forward rate agreements are agreements between two parties who want to protect themselves against future movements in interest rates. By entering into a forward rate agreement, the parties lock in an interest rate for a stated period of time starting on a future settlement date, based on a specified notional principal amount. Options are contracts giving the holder the right, but not the obligation, to trade in a commodity, a share, or a currency on some future date at a pre-agreed price. An option is contrasted with a futures contract which carries the obligation as well as the right to trade.54 Hedge agreements are activities designed to reduce the risks imposed by other activities. For example, if a business has to hold stocks of a commodity, it runs the risk of making losses if the price falls. This loss can be avoided by hedging, which involves selling the good forward, that is, for delivery at an agreed price on a future date.55

Delegation The NHFIC may, in writing under its seal, delegate to a Board member or the CEO56 all or any of its powers or functions including:

• to make loans, investments and grants to improve, directly or indirectly, housing outcomes

• to determine terms and conditions for such loans, investments and grants and

50. National Housing Finance and Investment Corporation Bill 2018, subclause 8(2). 51. Ibid., paragraph 9(2)(a). 52. Ibid., paragraph 9(2)(b). 53. J Black, N Hashimzade and G Myles (eds.), Dictionary of Economics, 5th edn., Oxford University Press, United Kingdom, 2017,

p. 507.

54. Ibid., p. 375. 55. Ibid., p. 239. 56. National Housing Finance and Investment Corporation Bill 2018, subclause 53(1).

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• to provide, to registered community housing providers, business advisory services and other assistance in capacity building.

In addition, the NHFIC may, in writing under its seal, delegate to a Board member or the CEO its powers to enter into arrangements and contracts to obtain services and to enter into those complex financial arrangements set out in Box 2 above.

Legal basis for the programs to date The Constitution divides the legislative authority in Australia between the federal and state governments. The federal government is responsible for the matters allocated to it in the Constitution—primarily in sections 51 and 52—although there are other relevant sections. If the matter is not one which has been allocated to the Commonwealth under the Constitution, then it is for the states to legislate.

Neither section 51, nor 52, of the Constitution provide the Commonwealth with a head of power which specifically allows it to make of laws to provide housing. That being the case, the Commonwealth has traditionally made loans to the states under section 96 of the Constitution which deals with the provision of financial assistance, otherwise known as ‘grants’. Similarly, the Commonwealth has made loans to the Northern Territory and the Australian Capital Territory based on the territories power of section 122 of the Constitution.

Constitutional underpinning of the Bill The NHFIC Bill establishes a body corporate to make loans, investments and grants to improve, directly or indirectly, housing outcomes. In order to do so it relies on a combination of heads of power. According to the Explanatory Memorandum to the Bills:

The Bill ensures that it is not implied that the NHFIC can perform functions that exceed the Commonwealth’s legislative power under the Constitution. The Bill expressly enables the NHFIC to perform its functions only for purposes related to specific constitutional powers. 57

Corporations power The key power is the corporations power which is set out in section 51(xx) of the Constitution. That section refers to foreign corporations and trading or financial corporations, formed within Australia.

Essentially, to be considered a trading or financial corporation, an entity must be first, incorporated and second, engaged in ‘substantial’58 trading59 or financial60 activities. Under the NHFIC Bill, the National Housing Finance and Investment Corporation will be a corporation formed within Australia which will be engaged in financial activities. Since the High Court handed down its decision in the WorkChoices Case in November 2006,61 the corporations power has been interpreted broadly so that, as long as a law is addressed to a ‘constitutional corporation’, the

57. Explanatory Memorandum, National Housing Finance and Investment Corporation Bill 2018, National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, p. 18 58. See R v Federal Court of Australia: Ex parte WA National Football League (1979) 143 CLR 190, [1979] HCA 6. 59. Trading refers to the business of buying, selling, exchanging or bartering goods or services, or being engaged in the business of

commerce. 60. Financial dealings are acts such as borrowing, lending, banking or insurance and the provision of management and advisory services in relation to financial matters. 61. NSW v Commonwealth (2006) 231 ALR 1, [2006] HCA 52.

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Commonwealth can regulate any aspect of what that corporation does, including any relationship the corporation may have with a third party or its employees62

Other powers However, in the event that the corporations power is insufficient, the NHFIC Bill sets out an extensive list of additional Constitutional powers to support the functions of the NHFIC. For instance, the postal, telegraphic, telephonic or other like service power in section 51(v) of the Constitution63 and the railway construction or extension power in section 51(xxxiv) of the Constitution64 will underpin NHFIC’s function to improve, directly or indirectly,65 housing outcomes in its operation of the National Housing Infrastructure Facility. (See the discussion of the Investment Mandate below.)

Investment Mandate The Minister may, by legislative instrument, give the Board directions about the performance of the NHFIC’s functions, and must give at least one such direction. The directions together constitute the Investment Mandate.66 The Legislation Act 2003 establishes a comprehensive regime for the registration, tabling and parliamentary scrutiny. Under the Legislation Act most, but not all, legislative instruments are disallowable. In the case of the proposed Investment Mandate, the NHFIC Bill operates so that the Investment Mandate will not be a disallowable instrument.

The NHFIC must take all reasonable steps to comply with the Investment Mandate.67

Under the NHFIC Bill the Investment Mandate may include directions about a range of matters. These are:

• strategies and policies to be followed for the effective performance of the NHFIC’s functions

• decision-making criteria for making loans, investments and grants; granting financial assistance to states and territories; and providing, to registered community housing providers, business advisory services and other assistance in capacity building

• limits on making loans, investments and grants, and granting financial assistance to states and territories

• risk and return relating to NHFIC’s investments and

• any other matters the Minister thinks appropriate.68

Scrutiny of Bills Committee comments The inclusion of the decision-making criteria for granting financial assistance to states and territories69 drew the attention of the Scrutiny of Bills Committee which noted:

… the Bill contains no guidance on its face as to the terms and conditions that will attach to financial assistance granted to the states by the NHFIC. The Bill does, however, seek to allow the Minister to direct, by legislative instrument, the Board of the NHFIC in relation to the performance of its functions

62. L Roth and G Griffith, The workplace relations case: implications for the states, NSW Parliamentary Library Research Service, Briefing paper, 18/06, NSW Parliamentary Library, Sydney, November 2006, p. 9. 63. National Housing Finance and Investment Corporation Bill 2018, paragraph 10(1)(f). 64. Ibid., paragraph 10(1)(g). 65. Ibid., paragraph 8(1)(a). 66. Ibid., subclause 12(1). 67. Ibid., subclause 12(3). 68. Ibid., clause 13. 69. National Housing Finance and Investment Corporation Bill 2018, subparagraph 13(b)(ii).

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and provides that these directions may, among other matters, set out decision-making criteria and limits for the granting of financial assistance to states and territories. 70

The Scrutiny of Bills Committee expressed its concern at the limited Parliamentary scrutiny afforded to grants made by the NHFIC to the states and territories. As section 96 of the Constitution confers the power to make such grants and to determine their terms and conditions on the Parliament rather than the executive, the Committee recommended that the Bill be amended to include high level guidance as to the terms and conditions under which financial assistance may be granted to the states and territories; and to require that the Investment Mandate be a disallowable instrument.71

Draft Investment Mandate In February 2018, Treasury issued a draft of the Investment Mandate for consultation.72 Whilst the final form of the Investment Mandate has not been settled, an examination of the terms of the exposure draft provides some insight as to what is intended.

Box 3: key features of the draft Investment Mandate

Activities and allocation of funds The NHFIC is required to engage in two core activities to support investment in Australian housing: • the establishment and operation of an Affordable Housing Bond Aggregator (AHBA) to

provide finance to registered community housing providers by aggregating their lending requirements and issuing bonds to institutional investors73 and • the establishment and operation of the National Housing Infrastructure Facility (NHIF) to provide grants and finance to support the creation of housing-related infrastructure.74 The NHFIC may also provide support for capacity building.75

Affordable housing bond aggregator The AHBA will provide loans to registered community housing providers.76 The initial reserve for the AHBA is up to $150 million. The NHFIC must repay to the Commonwealth an amount equal to the amount allocated to the AHBA by 30 June 2023.77 The NHFIC may only provide finance to registered community housing providers78 in the form of secured loans. The NHFIC is required to take security for its loans on commensurate terms to commercial financiers such as banks and other lenders.79

National Housing Infrastructure Facility The NHFIC may use the NHIF to provide finance in the form of loans, equity investments and

70. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, op. cit., pp. 28-9. 71. Ibid., Scrutiny digest, op. cit., pp. 28-9. 72. Treasury, ‘National Housing Finance and Investment Corporation—draft Investment Mandate’, Treasury website. 73. NHFIC—draft Investment Mandate, clause 6. 74. Ibid., clause 7. 75. Ibid., clause 8. 76. Ibid., clause 16. 77. Ibid., clause 11. 78. National Housing Finance and Investment Corporation Bill 2018, clause 5, defines the term registered community housing

provider as a community housing provider (however described) that is registered under a law of, or under a scheme administered by, a state or a territory. 79. NHFIC—draft Investment Mandate, clause 17.

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grants to eligible infrastructure projects which support housing development.80 Examples of housing-related infrastructure include: • new or upgraded infrastructure for services such as water, sewerage, electricity or transportation

• site remediation works including the removal of hazardous waste or contamination. The NHIF will not finance housing projects directly nor will it finance community infrastructure such as parks or libraries.81

Support for capacity building The NHFIC may purchase capacity building services for registered community housing providers. These services can assist registered community housing providers to develop their financial capability and undertake new developments.82 A cap of $1.5 million applies to the amount of money the NHFIC can spend on capacity building activities.83

General governance matters The draft Investment Mandate sets out a number of governance matters including but not limited to: • the NHFIC must publish guidance on its website to assist potential applicants to lodge NIHF

financing proposals and to ensure the NHFIC’s decision-making process is transparent84 • the NHFIC must publish details of each of decision to make a grant, loan or investment under the NHIF within six months of the decision—subject to its obligation to maintain the

confidentiality of commercial-in-confidence information85 and • a cap of $2 billion applies to the amount of government-guaranteed liabilities—however, the Treasurer and the Minister for Finance may approve a higher cap.86 Source: Treasury, ‘National Housing Finance and Investment Corporation—draft Investment Mandate’, Treasury website.

Board

Establishment and composition Part 3 of the NHFIC Bill establishes the Board of the NHFIC (the Board)87 which is an accountable authority under subsection 12(2) of the PGPA Act. The PGPA Act regulates certain aspects of the financial affairs of Commonwealth entities. In particular, it has detailed rules about reporting and accountability. It also deals with other matters such as banking and investment and the conduct of officers. The Board’s functions are:

• to decide, within the scope of the Investment Mandate, the strategies and policies to be followed by the NHFIC

• to ensure the proper, efficient and effective performance of the NHFIC’s functions and

• any other functions conferred on the Board by the NHFIC Act (when enacted).88

80. Ibid., clauses 23 and 24. 81. Ibid., clause 23. 82. Ibid., clause 29. 83. Ibid., clause 15. 84. Ibid., subclause 32(1). 85. Ibid., subclause 32(2). 86. Ibid., clause 34. 87. National Housing Finance and Investment Corporation Bill 2018, clause 15. 88. Ibid., subclause 16(1).

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The Board comprises the Chair and at least four, and no more than six, other members.89 Board members are appointed by the Minister by written instrument, on a part-time basis.90 In order to be eligible for appointment, a person must have appropriate qualifications, skills or experience in one or more of the following:

• banking and finance

• law

• housing (including social or affordable housing)

• infrastructure planning and financing

• local government

• public policy or

• an area of expertise prescribed by the rules.91

The Board may, in writing, delegate to a Board member or the CEO any of its powers or functions.92

Appointment and termination A Board member holds office for the period (not exceeding five years) specified in the instrument of appointment. However, there is no legal bar to the person’s reappointment.93

Under the NHFIC Bill, the Minister may terminate the appointment of a Board member for a range of reasons, including but not limited to misbehaviour,94 an inability to perform the duties of his, or her, office because of physical or mental incapacity,95 or if the Minister is satisfied that the performance of the Board member has been unsatisfactory for a significant period.96

Committees The Board may establish committees to advise or assist in the performance of the Board’s or the NHFIC’s functions. In that case, a committee may be constituted wholly by Board members, wholly by persons who are not Board members or by a combination of each.97 Given the complexity of the financial arrangements into which the Board may enter and its requirements under Part 5 of the NHFIC Bill (see discussion below) it is likely that the most important committees for the NHFIC Board will be the audit and risk committee and the finance committee. A general outline of their respective roles is set out in Box 4, below.

89. Ibid., clause 17. Note that at a meeting of the Board, a quorum is constituted by a majority of Board members, subclause 30(1). 90. Ibid., subclause 18(1). 91. Ibid., subclause 18(2). 92. Ibid., subclause 54(1). 93. Ibid., clause 20. However it should be noted that section 30 of the Public Governance, Performance and Accountability

Act 2013 also provides for the termination of a Board member. 94. National Housing Finance and Investment Corporation Bill 2018, paragraph 25(a). 95. Ibid., paragraph 25(b). 96. Ibid., paragraph 25(e). 97. Ibid., subclause 47(2).

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Box 4: roles of committees

Audit and risk committee An audit and risk committee is accountable to the Board for its performance. The committee’s work is supported by the Chief Executive Officer (CEO) and his or her nominees, principally the Chief Financial Officer (CFO). Generally speaking, the purpose of the audit and risk committee is to assist the Board in the effective discharge of its responsibilities in the areas of statutory reporting, internal control systems, risk management systems, insurance and legal proceedings, and the internal and external audit functions.98

Finance committee A finance committee is accountable to the Board for its performance. The committee’s work is supported by the Chief Executive Officer (CEO) and his or her nominees, principally the Chief Financial Officer (CFO). Generally speaking, the primary responsibility of the finance committee is to provide the Board with advice and guidance on issues affecting the financial strategy of the business including, amongst other things: • review the operational and capital budgets as prepared by management and recommend it to

the Board for approval, including, but not limited to preparation of pricing policy across major business units and financial modelling • reviewing the investment guidelines and monitoring the financial performance of funds invested by the organisation • monitoring foreign exchange guidelines and management of associated risks • monitoring the taxation strategy and obligations • reviewing investment/divestment strategies (including financial implication of business cases

and material commercial contracts) • reviewing transaction or financial issues that management or the Board requests that the Committee review.99 This is consistent with the requirements of section 16 of the PGPA Act, that the accountable authority of a Commonwealth entity (in this case, the Board) must establish and maintain an appropriate system of risk oversight and management for the entity as well as an appropriate system of internal control for the entity.

Observer The Minister may, by written instrument, appoint a Commonwealth officer to be an observer,100 being a person who:

• is entitled to receive notice of meetings of the Board

• may attend any meeting of the Board and take such part in the proceedings, not including voting, as the observer thinks fit

• may report to the Minister on any matter relating to the operations of the NHFIC or the Board—including where the Minister has requested a report on a matter and

98. CPA Australia, Audit and risk committee charter, CPA Australia, 1 December 2014, p. 1. 99. CPA Australia, Finance committee charter, CPA Australia, 1 December 2014, p. 1. 100. National Housing Finance and Investment Corporation Bill 2018, subclause 27(2).

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• is entitled to access to such information held by, or under the control of, the NHFIC as the observer requests for the purposes of taking part in proceedings of the Board or reporting to the Minister.101

The period of the appointment must not exceed six months—although there is no legal bar to the person’s reappointment.

The provisions relating to the observer are likely to be the first time such arrangements have been formalised in Commonwealth legislation. Similar arrangements between portfolio departments and corporate Commonwealth entities are likely to have been in place on an informal basis in a number of portfolios, so the practice is not without precedent. In the 1990s, a similar arrangement was provided for in regulations in South Australia.102

Curiously, none of the stakeholder comments to the Economics Committee have referred to the role of the observer.

Nature of corporate governance The term corporate governance describes:

… the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. 103

The NHFIC Bill provides that the Minister must not give a direction which is part of the Investment Mandate that is inconsistent with the NHFIC Act (when enacted) or that has the purpose, or has, or is likely to have, the effect of directly or indirectly requiring the Board:

• to make, or not to make, a particular loan, investment or grant

• to grant, or not to grant, financial assistance to a state or territory for a particular project

• to take, or not to take, particular action relating to a particular loan, investment or grant or

• to take, or not to take, particular action relating to financial assistance granted to a state territory for a particular project.104

The clause ensures that the Minister is at arms-length from specific financial decisions that are to be made by the Board (or which have been delegated by the Board to the CEO). The appointment of an observer by the Minister may operate to undermine the Board’s independence.

According to the Explanatory Memorandum to the Bills:

The capacity to appoint an observer strikes a balance to support appropriate Government oversight of NHFIC at critical times, while maintaining Board independence. It is particularly important when the Commonwealth is guaranteeing the NHFIC’s liabilities, as a way of providing oversight of the Commonwealth’s financial exposure. This position is intended to support Government visibility of

decision making, particularly in exceptional circumstances such as the establishment phase of the NHFIC and/or during periods of financial market uncertainty. The Board would however remain the decision maker in all circumstances relating to the performance of the NHFIC’s functions. 105

101. National Housing Finance and Investment Corporation Bill 2018, subclause 27(1). 102. Public Corporations (Seventh Australian Masters Games Corporation) Regulations 1998 (SA). 103. ASX Corporate Governance Council, Corporate governance principles and recommendations, 3rd edn, 2014, p. 3. 104. National Housing Finance and Investment Corporation Bill 2018, clause 14. 105. Explanatory Memorandum, National Housing Finance and Investment Corporation Bill 2018, National Housing Finance and

Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, p. 27.

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These are sound reasons for the appointment of an observer, especially given the reserve for the AHBA is up to $150 million.

However, as the observer can take part in all aspects of the Board meeting except voting—without actually being a Board member—it is foreseeable that he, or she, could exert influence over the Board to vote favourably (or unfavourably as the case may be) on individual proposals, thereby

diminishing the perception that the Minister is arms-length from deliberations.

Chief Executive Officer

Appointment and termination There is to be a Chief Executive Officer (CEO) who is responsible for the day-to-day administration of the NHFIC.106 The Board may give written directions to the CEO, consistent with the Investment Mandate, about the performance of the CEO’s duties.107 The CEO must comply with such a direction.108 The CEO is to be appointed by the Board, by written instrument, for the period not exceeding five years (although there is no legal bar to the CEO’s reappointment).109

The Board may terminate the appointment of the CEO in the following circumstances:

• for misbehaviour

• if the CEO is unable to perform the duties of his or her office because of physical or mental incapacity

• if the CEO becomes bankrupt, applies to take the benefit of any law for the relief of bankrupt or insolvent debtors, compounds with his or her creditors or assigns his, or her, remuneration for the benefit of creditors

• if the CEO is absent, except on leave of absence, for 14 consecutive days or for 28 days in any 12 months

• if the CEO engages, except with the Chair’s approval, in paid work outside the duties of his, or her, office

• if the CEO fails, without reasonable excuse, to comply with section 29 of the PGPA Act (which deals with the duty to disclose interests) or

• if the Board is satisfied that the performance of the CEO has been unsatisfactory for a significant period.110

Staff and consultants The NHFIC may employ such persons as it considers necessary for the performance of its functions and the exercise of its powers under the terms and conditions which it determines. Those persons may be officers or employees, the Commonwealth, a state or a territory, an authority of the Commonwealth or of a state or territory or any other organisation or body.111 Notably there is no requirement that staff be engaged under the Public Service Act 1999.

106. National Housing Finance and Investment Corporation Bill 2018, subclause 36(1). The CEO is an official in accordance with subsection 13(3) of the PGPA Act. 107. Ibid., subclause 36(4). 108. Ibid., subclause 36(5). 109. Ibid., clause 37. 110. Ibid., clause 44. 111. Ibid., clause 45.

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In addition, the NHFIC may engage consultants to assist in the performance of its functions.112

Delegation If the NHFIC or the Board delegates a power or function as set out above to the CEO, the CEO may, in writing, sub-delegate the power or function to a senior member of the staff.113

Comment The NHFIC Bill creates an organisational structure in which the CEO plays a pivotal role in the day to day activities of the NHFIC and reports to the Board. The Board has the overarching responsibility to manage the risks of the Corporation and to set its strategic direction. There is no question that the skills and abilities of the Board members will have to be of the highest level— particularly in relation to banking and finance.

The Observer will interact with the Board to ensure that there is compliance with the Investment Mandate. The Observer will also act as a conduit between the Board and the Minister should it emerge that the Investment Mandate needs fine tuning or if there are concerns that the Board is exercising its powers and undertaking its functions inadequately or inappropriately.

Finance The NHFIC Bill imposes stringent financial responsibilities on the Board.

Maintain adequate capital reserves The Board is required to exercise sound commercial principles to ensure that the capital and reserves of the NHFIC at any time are sufficient to meet NHFIC’s likely liabilities and, in relation to loans, to make adequate provision for default in the repayment of principal, in the payment of interest or other charges.

In the event that NHFIC’s the capital and reserves are not sufficient to meet the likely liabilities or that there are reasonable grounds for believing that, at a time in the future, the capital and reserves of the NHFIC may not be sufficient to meet the likely liabilities, then the Board must advise the Minister in writing to that effect, as soon as practicable.114

This is a critical feature as it mimics the duties of directors under the Corporations Act 2001 which provide that the corporation must not trade if it is insolvent.115

Annual dividends to the Commonwealth Within four months after the end of each financial year, the Board must give a written notice to the Minister, recommending that the NHFIC pay a specified dividend, or not pay a dividend, to the Commonwealth for that financial year.116

Within 30 days of receiving the notice the Minister must, by written notice given to the NHFIC approve the recommendation. In the alternative, the Minister must direct the payment of a

112. Ibid., clause 46. 113. Ibid., clause 55. 114. Ibid., clause 48. 115. A company is classified as being solvent if, and only if, it is able to pay all of its debts as and when they become due and

payable. Otherwise the company is insolvent. Corporations Act, section 95A. 116. National Housing Finance and Investment Corporation Bill 2018, subclause 49(1).

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different specified dividend or, where the Board has recommended that no dividend be paid, it is open to the Minister to direct the payment of a specified dividend.117

The NHFIC’s dividend for a financial year must not exceed its profit for that year.118

As stated above, the Investment Mandate may include directions about the risk of and return to the NHFIC from its investments. If there were any doubt that the NHFIC was expected to operate on a sound commercial basis, the responsibility of the Board to report to Government about the potential to pay a dividend to the Commonwealth, should dispel it.

According to Michael Sukkar, Assistant Minister to the Treasurer:

The Housing Finance and Investment Corporation will be able to reinvest the capital and earnings gained through the infrastructure facility, allowing it to grow over time. It will be able to tailor its provision of finance to best suit the needs of individual projects, with any concessions calibrated to the particular circumstances of the project, and will provide the minimum amount of assistance required to enable a proposal to proceed.

119

However, there is an internal tension between the intention to reinvest capital and earnings and the need to pay a dividend which may be equal to, or less than, any profit generated in a financial year. If not closely monitored, this may unintentionally operate to stifle the Board’s capacity to carry out its investment strategy. As stated above, the Labor Senators on the Economics Committee inquiry into the Bills recommended that there should be no consideration about the payment of dividends to the Government unless the significant unmet demand for community housing for the vulnerable is adequately addressed and the community housing sector has achieved the necessary scale and capability to deliver on the unmet demand.120

Borrowings There are a number of options available for NHFIC to borrow being:

• the Finance Minister may, out of money appropriated by the Parliament for the purpose, lend money to the NHFIC121

• the NHFIC may borrow money otherwise than from the Commonwealth or

• raise money otherwise than by borrowing—for instance by dealing with securities.122

However, the NHFIC must not borrow or raise money except in accordance with these approved methods.123

Commonwealth guarantee An amount due and payable by the NHFIC to a person other than the Commonwealth is guaranteed by the Commonwealth.124 In relation to the guarantee, it was stated:

117. Ibid., subclause 49(2). 118. Ibid., subclause 49(4). 119. M Sukkar (Assistant Minister to the Treasurer), ‘Second reading speech: National Housing Finance and Investment Corporation Bill 2018’, House of Representatives, Debates, 15 February 2018, p. 1621.

120. Standing Committee on Economics, Inquiry into the National Housing Finance and Investment Corporation Bill 2018; National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, op. cit., pp. 22-3.

121. National Housing Finance and Investment Corporation Bill 2018, subclause 50(1). 122. Ibid., subclauses 50(2) and (3). 123. Ibid., subclause 50(5). 124. Ibid., subclause 51(1).

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Another important feature of the Bill is that it provides a legislative guarantee for the Housing Finance and Investment Corporation's liabilities. The Bill provides for the capacity for the guarantee to be withdrawn in the future if it's no longer needed for new contracts. This of course would be dependent on both the corporation achieving sufficient maturity and scale and the community housing sector taking on a large-scale and more prominent role in sub-market rental housing, including through

partnerships with the private sector and, again, institutional investors.

To provide certainty to investors it may only be withdrawn by the government on a prospective basis after 1 July 2023 and with at least 60 days’ notice. The availability of the guarantee will strengthen market confidence and thereby improve the Housing Finance and Investment Corporation's ability to achieve its ultimate purposes.

125

Miscellaneous

Review The Bill requires the Minister to cause a review of the operation of the Act to be undertaken as soon as possible after the period of three years beginning when it commences. The report of the review is to be tabled in each House of the Parliament within 15 sitting days of that House after the report is given to the Minister.126

As stated above, the Labor Senators on the Economics Committee inquiry into the Bills recommended that the review should take place within two years, rather than three and that the relevant provision should be amended to include specified terms of reference.127 However, it is not certain that this would provide enough time in which to demonstrate the NHFIC’s operations.

Rules The Minister is empowered to make rules by legislative instrument for the purposes of the NHFIC Act (when enacted).128

Consequential amendments Section 5 of the ADJR Act provides that a person who is aggrieved by a decision to which that Act applies may apply to the Federal Court or the Federal Circuit Court for an order of review of the decision. In that case, section 13 of the ADJR Act authorises that person to seek written reasons for the decision from the decision-maker. However Schedule 2 of the ADJR Act sets out specified classes of decision to which section 13 does not apply.

Item 1 of the Consequential Amendments Bill amends Schedule 2 of the ADJR Act to insert a reference to decisions relating to the activities of the NHFIC under the NHFIC Act.129

The object of the FOI Act is to give the Australian community access to information held by the Government of the Commonwealth by requiring agencies to publish the information and by providing for a right of access to documents.130 However, there are some exceptions to that

overarching rule. Subsection 7(2) of the FOI Act provides that the persons, bodies and

125. Sukkar, ‘Second reading speech: National Housing Finance and Investment Corporation Bill 2018’, op. cit. 126. National Housing Finance and Investment Corporation Bill 2018, clause 57. 127. Standing Committee on Economics, Inquiry into the National Housing Finance and Investment Corporation Bill 2018; National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, op. cit.,

pp. 22-3.

128. National Housing Finance and Investment Corporation Bill 2018, clause 58. 129. ADJR Act, Schedule 2, proposed paragraph (zd). 130. FOI Act, subsection 3(1).

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Departments which are specified in Part II of Schedule 2 to the Act are exempt from its operation—but only in relation to certain documents.

Item 2 of the Consequential Amendments Bill amends the FOI Act to insert a reference to the NHFIC in relation to documents in respect of its commercial activities into Part II of Schedule 2.131

According to the Explanatory Memorandum to the Bills ‘this is a similar exemption that applies on the commercial activities of the Export Finance Insurance Corporation, NBN Co and other entities such as Indigenous Business Australia’.132

The Economic Committee acknowledged that some submitters had raised concerns that the measures in the Consequential Amendments Bill could undermine the transparency and accountability of the operation of the NHFIC. However, the Economics Committee noted:

… the advice of the Office of the Australian Information Commissioner, that it directly considered the provisions in the NHFIC consequential Amendments Bill relating to the FOI Act, and concluded that the proposed amendments are similar to and consistent with existing provisions that operate to exempt particular agencies from the operation of the FOI Act in relation to documents in respect of commercial activities.

133

Concluding comments There is no doubt that housing affordability in Australia is lower than it has been in the past; and that this is especially so for low- to middle-income Australians who wish to buy a house for the first time, or rent in the private market, in the cities where most employment opportunities are concentrated. Accordingly the NHFIC Bill establishes the NHFIC as a commercial entity operating with the aim of improving housing outcomes for Australians.

It is intended that the NHFIC will engage in two core activities to support investment in Australian housing:

• the establishment and operation of an Affordable Housing Bond Aggregator to provide finance to registered community housing providers by aggregating their lending requirements and issuing bonds to institutional investors and

• the establishment and operation of the National Housing Infrastructure Facility to provide grants and finance to support the creation of housing-related infrastructure.

There is much at stake here—particularly since this is the first occasion on which the Commonwealth, using a combination of Constitutional powers, has been directly responsible for providing finance to registered community housing providers.

Both the CEO and the Board will need high level skills in banking and finance in order to ensure that the loans it makes, the investments it enters into and the grants that it issues are made appropriately. They will need to be conscious of the financial risks and manage them accordingly if the NHFIC is to be effective in its objective of improving housing availability for Australians.

131. FOI Act, Schedule 2, Division 1 of Part II. 132. Explanatory Memorandum, National Housing Finance and Investment Corporation Bill 2018, National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, p. 41.

133. Standing Committee on Economics, Inquiry into the National Housing Finance and Investment Corporation Bill 2018; National Housing Finance and Investment Corporation (Consequential Amendments and Transitional Provisions) Bill 2018, op. cit., p. 18.

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