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Leveraged private investment encourages ‘public’ and ‘private’ markets to work in tandem. Public, or government, NRM investors are ‘in the market’ for environmental and other public benefit outcomes. Private financiers and private equity, are ‘in the market’ to invest in profitable enterprises.
The leveraging approach takes a co-investment (cash, in-kind etc.) approach and targets near-commercial projects with environmental benefits, rather than targeting public goods with primarily environmental outcomes.
A fundamental reason for government intervention in environmental management and NRM is that many existing land use practices, while profitable, can also cause or contribute to degradation of the natural resource base and biodiversity values.
While investment leverage is new to NRM, it is not new in other sectors. As a market-based policy tool, governments have used investment leverage extensively across Australia in areas such as research and development, education services, water and transport infrastructure, and start-up venture capital.
The pilot Land Innovation Fund was established by Greening Australia and CSIRO and tested investment leveraging in NRM for its overall efficacy and value relative to other forms of NRM policy interventions. The leveraging approach may have some of the following characteristics:
- low-interest public finance is issued within a co-investment model—a significant departure from the traditional ‘purchaser-provider’ model
- leveraging focuses investment on ‘near commercial’ projects with an environmental benefit, rather than only public good environmental benefits
- leveraging targets change to enterprises, rather than environmental changes at the margins of existing land uses
- effective leveraging of private funds provides for larger, landscape-scale change than would normally be provided for under alternative approaches.
Some productive land uses or management practices are not only profitable, but can also deliver significant environmental benefits. In theory, many sustainable land uses are possible. For example:
- planting woody perennial vegetation for commercial purposes, (e.g. timber and pulpwood plantations, oil mallee, sandalwood, some cut flower species and broombrush for fencing), may also provide environmental benefits such as salinity management, carbon sequestration, soil health and wildlife corridors and habitat1
- ecotourism in a pastoral lease holdings, accompanied by full or partial replacement of cattle grazing, may lead to improved biodiversity outcomes
- investment in improved grazing practices, such as cell grazing, may enable regeneration of native vegetation species in some locations and a range of associated outcomes such as reduced soil erosion, improved soil health, and moisture retention, and improved biodiversity outcomes.
These examples require significant investment to achieve such big changes to land management.
Greening Australia established a pilot Land Innovation Fund, with some input from CSIRO. The fund sought near-commercial ventures with the potential to also deliver enough ‘public good’ benefits to warrant a contribution of public funds. The ventures had to satisfy two criteria:
- demonstrate a significant environmental value worthy of public funding
- provide confidence to private financiers of commercial viability.
The Land Innovation Fund was an experiment to test two questions:
- to what extent can the investment leverage approach achieve environmental benefits not likely to be achieved by other means?
- how cost-effective is the leveraging approach to NRM issues?
Greening Australia established the pilot fund with $1 million in financial support from the Australian Government’s Round One MBI Pilot Program. A key requirement for the fund was that the $1 million of government support had to be matched by at least $1.5 million in private investment.
For each successful project, public funds were granted to a not-for-profit, non-government organisation that held equity in the project.
The pilot established an expert board that included:
- financial
- NRM expertise, scientific and environmental expertise
- program and project evaluation.
Governance principles were an important consideration. The board was subject to the same prudential safeguards and legal requirements that apply in the finance industry. Good governance was required to ensure a high quality of project and risk management. An expert policy committee and two advisory panels with environmental and agribusiness knowledge also assisted the board.
The initial call for proposals generated 22 diverse proposals. Short-listing and project selection occured over a five-stage process.
The phased selection process assessed both private and public benefits. Initial assessment of public benefits was made against:
- four biophysical dimensions—biodiversity, carbon, salinity and water quality
- three policy dimensions including: significant public environmental benefit, significant land-use change or management change and potential for further regional uptake of the innovation.
Short-listed proposals were then subjected to a more comprehensive environmental evaluation. Assessment of private benefits was progressively undertaken against a range of criteria including:
- business maturity (e.g. seed stage; start-up phase or expansion/ development phase) and track record
- the share of financial risks
- management capability and the quality of the business plan
- project design and feasibility
- the financial rate of return.
Only two of the original were considered suitable for pursuing private sector investment. Changing commercial circumstances combined with time limitations, later reduced this to one project. Co-investors were found for this project (Sandalwood, WA), and a total public-private investment of $1.5 million was made.
The pilot Land Innovation Fund produced mixed results. After an intial review of the pilot, the project’s Policy Committee concluded that investment leverage appeared sufficiently likely to add a valuable option to the existing suite of policy tools to justify more extensive trialling of the approach.
However, the pilot faced practical challenges such as governance and organisational structure, attracting proposals from landholders, selecting projects and attracting private co-investors.
The pilot also required a complex and time-consuming process and a particular set of institutional arrangements. Making relative comparisons of the cost-effectiveness of public sector investments in the projects was difficult due to the lack of a formal metric and variance in projects types.
The committee found from a review of the first part of the project that a leveraging approach:
- can deliver some significant environmental benefits that other policy mechanisms are unable to deliver
- is very useful in targeting innovative landscape-level change and sustainable land use options
- can potentially generate financial returns for future reinvestment in NRM.
The leverage approach is likely to work best at a very large scale, as the supporting framework may be too unwieldy to replicate on a smaller scale.
While this pilot is based on an investment equity model a leverage approach can use other forms of assistance, such as an interest subsidy, tax incentives, to achieve the same results.
Leveraged private investment may have some significance for regional bodies, particularly if they can select projects that contribute to meeting their objectives. Leveraging private sector equity through regional bodies in near-commercial projects may warrant further consideration. |