More Pacific infrastructure deals on the horizon

Originally published in The Australian Financial Review

March 27 2022 

The head of the federal agency financing Telstra’s $US1.6 billion ($2.1 billion) buyout of a Papua New Guinea-based telecommunications company has flagged that it plans to invest more in Indo-Pacific infrastructure to assist the government’s Pacific Step-Up strategy.

In her first public comments since Telstra announced last October it was buying Digicel Pacific with government support, Export Finance Australia chief executive Swati Dave said the export credit agency had been given a broader mandate in recent years.

Export Finance Australia chief executive Swati Dave says the infrastructure financing needs in the Indo-Pacific region are “immense”. 

EFA has been empowered to provide loans to Pacific infrastructure projects, inject equity, support defence exports and finance critical minerals projects as the Morrison government tries to counter China’s growing influence in the region.

In an interview with The Australian Financial Review, Ms Dave said: “We’ve worked with government to become a more relevant and impactful agency to add value across a whole range of government priorities.

“Telstra-Digicel is a very large and high-profile transaction, and it showcases what we as an export credit agency can get involved with.

“But it’s also important to know we have been financing many smaller transactions in the Indo-Pacific region and they’re also incredibly important.”

Infrastructure financing needs in the Indo-Pacific are “immense”, she said.

Branching out

EFA has provided loans or bonds for dozens of offshore projects including a Kiribati airport terminal building, a water supply and sanitation facility in the Marshall Islands, a wind power project in Vietnam, a hospital in PNG and a fuel terminal tank in Fiji.

EFA works with banks and other commercial lenders to provide finance such as loans, bonds, guarantees and insurance to fill market gaps.

The agency has branched out beyond its traditional role of providing international trade finance to small and medium exporters to boost their cash flow to finance against invoices or purchase orders.

Ms Dave said there was a “very solid pipeline” of critical minerals projects that EFA was assessing and that it could potentially finance.

“It’s a very important sector for us to provide financing,” she said.

Trade and Investment Minister Dan Tehan last month announced EFA had made its first two loans worth $239 million for critical minerals projects – to EcoGraf in Western Australia and Renascor Resources in South Australia – under the government’s $2 billion Critical Minerals Facility.

Critical minerals are used to make defence equipment, batteries, smartphones, electric vehicles and other technologies.

China produces 70 to 80 per cent of global critical minerals and Western nations including Australia and the United States are working together to develop alternative supplies.

In 2018, EFA began administering the $US3 billion Defence Export Facility, which offers trade finance and financial expertise to help small and medium defence exporters win defence contracts overseas.

EFA is significantly de-risking Telstra’s investment in Digicel through about $US720 million of 10-year debt, $US610 million of subordinated equity and insurance.

Telstra will contribute $US270 million in equity.

‘Commercially attractive asset’

Australian National University economics professor Stephen Howes estimates that the government-backed EFA is providing a $US200 million subsidy on a “high-return, low-risk” deal for Telstra.

Digicel is the South Pacific’s biggest telco business and is being sold by Irish billionaire Denis O’Brien. Headquartered in PNG, Digicel also operates across Vanuatu, Nauru, Samoa, Tonga and Fiji.

The takeover arose after the government’s national security officials became concerned about the potential for a Chinese state-owned enterprise to buy Digicel and use it for strategic influence and espionage on Pacific politicians and elites.

Ms Dave said significant transactions such as Digicel Pacific were referred to the “national interest account” for government consideration “given their size and risk profile, as well as their capacity to contribute to government policy objectives in support of Australia’s national interests.

“We provide our commercial assessment on these transactions to government,” she said.

“While I can’t comment on specific assessments, I can refer you to Telstra’s public announcement that Digicel Pacific is a commercially attractive asset, with a strong market position and high EBITDA (earnings before interest, taxes, depreciation and amortisation) with a strong margin.

“I note that the financing package for the Digicel Pacific transaction is designed to secure a long-term positive return to government over the life of the transaction.”

More broadly, Ms Dave said EFA collaborated with commercial and public partners across the region on various projects, including the Japan Bank for International Co-operation and US Overseas Private Investment Corporation through the Trilateral Infrastructure Partnership.

“Our statement of expectations is very clear that our role is to finance sustainable infrastructure in the Pacific and Indo-Pacific region.

“It’s really about providing a range of options for different countries and counterparties.”

The interview was conducted before Australia last week expressed alarm over a draft security agreement between Beijing and the Solomon Islands that paves the way for a Chinese military presence on the Pacific Island nation.

As well as private financiers, EFA has been working closely with the Department of Foreign Affairs and Trade, Austrade, Tourism Australia, Defence, Department of Finance and the Critical Minerals Facilitation Office in the Department of Industry, Science, Energy and Resources, Finance.

Ms Dave is also deputy chair of the Asia Society Australia, is an advisory board member of the National Foundation for Australia-China Relations and serves on the State Super board.

She has worked in banking and finance for more than 30 years, including at National Australia Bank, Deutsche Bank, AMP Henderson Global Investors, Bankers Trust and Westpac.

EFA was known as the Export Finance and Insurance Corporation until June 2019.