15/07/2019

This article was first published in The Australian on the 15  July 2019. 

 

The re-elected Morrison government has a terrific opportunity to bring together two of its completely different priorities and provide momentum to both — encouraging private capital to tackle disadvantage and stepping up Australia’s role in the Pacific.

Australia is strategically pivoting (coming home might be a better way to describe it) to our own backyard. It started under Malcolm Turnbull and has gathered momentum under Morrison.

Late last year the Prime Minister underlined this refocus by announcing $3 billion for Pacific infrastructure loans and extra funding for Australia’s export financing agency. An unrelated item in this year’s budget was funding for a , to be chaired by Michael Traill, to review the commonwealth’s social impact investment strategy. Impact investing, which means investments chasing positive social outcomes as well as financial returns, gets a lot of press in the market here is still way short of what has developed overseas.

The focus will rightly be on fixing disadvantage at home, but the timing of this initiative seems incredibly opportune for a government with a commitment to do something different in the Pacific.

There’s no doubt that countries like PNG and Fiji urgently need funding for infrastructure, some of which is being met by China’s BRI initiative, which prompted some of the recent concern.

But growth capital for SMEs in developing countries encourages different types of wealth creation, and once developed, more intrinsically linked to our economic and political system. Successful private businesses will always want to be engaged with other open, capitalist markets in their own .

Australia has dipped its toe in the water recently with impact investment in the region.

In 2017, then foreign minister Julie Bishop announced a $40 million Emerging Markets Impact Investment Fund to help plug financing gaps for regional SMEs that generate social impact, including by benefiting poorer communities through supply chains or employment practices.

DFAT also released an Operational Framework for Private Sector Engagement earlier this year.

The paper was premised explicitly on the intersecting benefits for Australia’s economy of the international rules-based order and a stable and prosperous region and acknowledged the private sector as a fundamental partner in fulfilling DFAT’s regional development objectives.

Pacific RISE was another pilot innovation to demonstrate how impact investments with a gender-lens could be made in Pacific countries. The combination of the Pacific pivot and the impact , both with pre-election mandates, provide a great opportunity for the newly returned government to give these types of small-scale initiatives real force.

There are lots of potential levers — early stage venture capital limited partnership/VC style tax concessions for regional venture investment, de-risking Australian institutional impact money in the Pacific or even building a meaningful fund to make direct investments and crowd-in private capital.

It’s not as as it might seem. An Australian, Sydney-based Andy Kuper, leads the world’s most successful impact fund manager, which has delivered top-tier returns by focusing on scalable businesses that serve people in developing countries who earn less than $10 a day.

This manager, LeapFrog Investments, announced its latest billion-dollar raise last month and is backed by major Australian institutions including HESTA, Christian Super and QBE.

This is where the development in Australia’s capital pools becomes important.

With the relentless growth of our super funds, our nation will become a major exporter of capital for the first time in history.

It makes sense for the government to help facilitate conditions for some of this capital to flow to wealth and prosperity in our region.

The US approach in this area is instructive and, true to form, very capitalist. OPIC, America’s Overseas Private Investment Corporation, has been around since is having a major re-boot this year, doubling its budget, changing its mandate to allow equity investments and merging into the new US International Development Finance Corporation in October. In the last few months alone OPIC has written for investments in institutes in Myanmar, access to clean water in Cambodia, Indonesia and The Philippines and wind farm projects in Egypt.

This is impact investing with a foreign policy overlay. Importantly, OPIC makes money: it was constituted to operate at no net cost to taxpayers while not being permitted to make investments that cause job losses in the US.

Some of the biggest investors in the world — Bain, KKR, TPG — have raised billions from institutions for impact investing. If Australia is serious about helping Pacific nations while building our reputation and deepening our integration, Australian capital flows are a real opportunity.

There are many ways to investment and many international precedents. Meaningful impact investment in the Pacific, in addition to our aid program, would help local people, provide significant diplomacy benefits and has the potential for financial returns to boot.

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