This briefing originally appeared on RenewEconomy, 30 March 2016
Could Australia’s sovereign wealth fund be the key source of finance that enables Adani’s Carmichael mega coal mine in the Galilee Basin? News has emerged that India’s Finance Minister, Arun Jaitley, will meet with Finance Minister Mathias Cormann and Chairman of the Future Fund, Peter Costello, on an Australian visit aimed at trying to secure subsidised government funding for Adani’s proposed coal mega-mine.
Having utterly failed to attract finance from the commercial banking sector for the initial A$10 billion required for the mine, rail and port project, Adani is now looking to its friends in the Indian and Australian government for a little sugar. The Abbott-Turnbull Government has remained staunch supporters of the Carmichael mine but, knowing how unpopular it is with the electorate, would want to find a way to finance it that flies under the radar. A direct handout in the form of a grant is too obvious, but the Future Fund presents several opportunities for a sly multi-billion dollar investment.
“How could the Future Fund finance the Adani Carmichael coal mine?” is a question worth asking from a moral and common sense perspective as much as anything else, but here we will take a look at the practical side of how the Future Fund could end up investing in Carmichael.
The Future Fund manages $120 billion of assets on behalf of the Australian Government. It is created similarly to many Australian superannuation funds, investing in Australian and international equities (shares), debt securities and cash, among other assets. A key point about the Future Fund is that it acts like a defined benefits fund, and its beneficiary is the Australian Government. Its mandate is therefore to deliver a certain return to the Government, which loses out if the Future Fund fails to deliverer necessary returns. As the Government uses returns from the Future Fund to support the pensions of public sector employees and enable “nation building” projects, we all lose out if the Future Fund fails to deliver returns.
Breaking down the components of the fund reveals an array of means by which Australia’s sovereign wealth fund could end up invested in the economic and environmental disaster-in-waiting that is the Carmichael coal mine.
The mine, rail and port components of the Carmichael coal project are each estimated to cost several billion dollars. Funds often look to invest in infrastructure assets (roads, ports, rail) as they are normally considered to represent sound long-term investments. The Future Fund could become owner of the port or rail line, relieving Adani of the need to secure a partner or financier for that part of the project.
Let’s say that Adani decides to create a new, unlisted, special purpose vehicle for the Carmichael Coal project, or use one of its already unlisted companies as the vehicle to own and manage the Carmichael mine, rail and port project. The Future Fund could take a stake in that company, again investing potentially billions into the project by becoming a part-owner of it.
Should Adani find a bank to provide debt to the Carmichael project, the Future Fund could then buy that debt from the bank as a “fixed income” product. While none of these options listed here for investing in Carmichael make any financial sense, surely the Future Fund has noticed what has happened to bank debts to the resources sector lately. The thought that they would purchase debt used to finance a greenfield thermal coal export project that has been described as financially unviable by Macquarie Group while the likes of Goldman Sachs and Deutsche Bank are describing thermal coal as in structural decline would be criminally incompetent.
Back to the “how” question
From a practical perspective, the Future Fund could invest in Adani’s Carmichael project any number of ways. But going back to the common sense question: how could the Future Fund finance the Adani coal mine, when the private finance sector and even the Government owned State Bank of India considers it untouchable?
When there is a political imperative, rational economics and sound governance will be pushed to one side. The exceptionally high transportation costs mean that the mine would supply coal so expensive that its electricity would immediately cost more than wind and solar in India. Coal that would have to be sold at a loss and never generate a commercial return on the proposed A$10bn investment. And with rest of the world paring back its plans for new coal power leaving only Adani as a credible buyer for their own coal. Even the Future Fund’s Board of Guardians Statement of Investment Policies allows for investment exclusions based on, among other things:
Australia has ratified a number of international conventions and treaties that limit certain activities. Where the Board becomes aware that the activities of an entity or funding activity may contravene such a convention or treaty, the Board will consider the exclusion or removal of the investment from the portfolio generally having regard to the nature of the limitations.
The legally binding Paris climate change agreement would surely mean investing in opening up one of the world’s largest untapped coal reserves would be out of bounds for the Future Fund.
But there is a political agenda at play, so it is entirely conceivable that the current Federal Government might make a massive gamble on the Carmichael mine – the largest carbon bubble under proposed development in the world at a time when we’re finally seeing serious climate change action taking hold around the world.
The question, though, is whether the bigger gamble would be financial or electoral. Because as we gear up for a Federal Election in the coming months, Australians could be asked to provide a major financial subsidy for a massive new coal mine owned by a foreign billionaire that would worsen global warming, deliver further harm to an already fragile Great Barrier Reef, tear up the lands of Traditional Owners who refuse to consent to the mine, and leave a multi-billion hole in our sovereign wealth fund.
That’s one hell of an election platform.