Commercial development and natural resource management on the indigenous estate: a profit-related investment proposal

Economic Papers (Economic Society of Australia), Sept, 2005 by Jon Altman, Michael Dillon

Through the IIF Program, the Australian Government has invested over $220 million in nine funds (an average of $24 million per fund) and has attracted $138 million in private investment. Total capital invested is $358 million. The average fund size is almost $40 million.

The commercialisation of early stage innovation and the development of commercial opportunities on Indigenous land both confront market failure, but very different risk profiles. In the venture capital context, commercialisation of early stage innovation is high risk, with few start up firms successfully surviving beyond infancy. (9) However, the potential returns are extremely large, with most start-up firms targeting a share of a worldwide market. In contrast, the commercial risks of development involving established business models on Indigenous land are probably much lower (although still higher than for standard projects). The potential returns are also much lower, in most cases involving a maximum 15 to 25 per cent return on capital, typical of most business opportunities in the economy. (10) Locational and land access arrangements will generally mean that commercial projects on Indigenous land will have a degree of local monopoly power. The key point to note in this context is that the commercial risk profile confronting government and potential private sector investors in supporting a scheme such as we propose is probably lower than in the high-risk IIF program--but so too are the potential returns.

The scheme proposed here takes as its starting point the above-documented existence of market failure in relation to commercial investment on Indigenous land, and the 'public good' rationale for investing in NCRM programs across the fifth of the Australian continent under Indigenous ownership. It also addresses head-on the incentive problems and policy failure that have left Indigenous landowners amongst the poorest and most disadvantaged members of the Australian community.

We propose that the Australian Government establishes a series of new funds for investment in partnership with Indigenous corporations in commercial development projects on Indigenous land. (11) There are two distinct roles for government in establishing such a scheme, first as investor/risk underwriter, and second as a regulator.

Hypothetically, as an investor, the Government could establish up to five funds under a scheme we have termed the IPRIP, with an initial tranche of, say, $100 million. Fund managers chosen by select tender would manage each fund. Fund managers would raise or contribute a minimum of 10 per cent up to a maximum 30 per cent of the fund's starting capital. The amount of private sector capital they can provide, the commercial and track record of the individuals seeking appointment as fund managers, and the range of expertise that they can call upon, would all be taken into account in a rigorous selection process. At least half of the private sector capital should come from sources not associated with the fund manager. Government would contribute the balance--that is, between 70 and 90 per cent of each fund's capital base. Each fund would be required to invest in a number of commercial projects. It would be mandatory for each project to include a minimum Indigenous financial equity holding of at least 30 per cent. (12) Funds would have a finite life, say 10 years, and would have to be wound up on a commercial basis at the expiry of that period. We expect that each fund would, on average, have around $30 million in total investor contributions. (13)