Investing in Indigenous Success - Talking up Indigenous enterprise

For tens of thousands of years my ancestors lived lives of abundance in this place. We were wealthy. We maintained the Indigenous estate to build and retain wealth. Central to this abundance was prudent Indigenous management of resources, trade, commerce and practices of wealth creation within a continent and on country. It could be argued that the rise of Environment, Sustainability and Governance (ESG) standards and impact investing is a return to these indigenous prudential practices.

Burgeoning numbers of fund managers are insisting on higher standards of ESG practices. Forbes magazine recently published that:

As of June 2019, there are 2450 signatories representing over $80 trillion in [assets under management]...The emphasis on ESG is increasingly growing as major institutional investors are making it clear they expect the companies they hold to commit strongly to ESG criteria.

The growing list of companies willing to apply principles of responsible investing and higher standards of prudential management represents a structural shift. It also represents an opportunity for Indigenous peoples globally. There is now alternative avenues for Indigenous interests to seek out suitable investors into many activities happening on Indigenous lands or land that has active Indigenous interests.

The growing, global pool of impact investing capital is looking to make a difference and to generate a sustainable financial return. Last October, the Global Impact Investing Network reported that the pool of impact investing funds has clocked $US715 billion - over $1 trillion Australian dollars!

If new sources of impact investment were to flow into Indigenous Australia we could see investment capital available for Indigenous enterprises that lift social impacts and grow sustainable businesses. Mobilising capital investment at this level would offer scale never before realised in Australia.

It's for these reasons that its beyond time to talk-up the prospects for Indigenous enterprise in Australia that is supported through private sector investment and guided by Indigenous led and controlled entities including Indigenous advisors and intermediaries.

Notwithstanding all this principled-talk, standard-setting and sustainability-screens fund managers still have to get their capital invested.

They need to identify good investments worthy of their time and money. They need to build pipelines for deal-flow. Ways and means to research and to collect market intelligence. It's a discipline designed to identify ventures that are best placed to use limited allocation from each respective fund. Today, more so than ever before Indigenous Australia understand this drive.

Indigenous people understand investing for long term sustainability.

We understand that the discipline requires a pipeline of prospective candidates for investment.

We understand that the hard part isn't raising the new investment fund but that the real work is in the sourcing, uncovering, testing and vetting ventures for investment.

We know that for every ten investment decisions made ninety other proposals didn't pass muster.

Warren Mundine AO recently wrote in the Australian Financial Review:

[Indigenous Australians] needed a new approach to grow prosperity. Business was needed. Private, commercial, profit-making business and especially small business. 

He goes on to add:

...wouldn’t you think there’d be room for Indigenous businesses or representatives of the Indigenous business sector?

If Coalition governments are for liberty, free enterprise, private businesses, jobs, welfare to work and self-determination through work and economic prosperity, why not for Indigenous Australians?

Mundine has revived an important conversation in Australian national affairs.

It's a worthy discussion important to 800,000 Indigenous Australians (a number that will rise to 1 million Indigenous citizens within a decade). We are ready to build companies and to seize opportunities for wealth creation on our own lands in our own ways again.

Indigenous wealth-creators and managers are resuming prudential practices of investment, stewardship and good governance. With this in mind, are there new ways to supporting Indigenous enterprise, what is the true value of Indigenous business and Indigenous wealth creation, and how should we encourage Indigenous investment?

Indigenous Australians are ready to decolonise wealth in Australia.

Three inquiries in this economic reconciliation movement present themselves:

1. How much private investment could be unlocked for Indigenous controlled enterprise and business?
2. What is compelling about bringing private investment to Australia's Indigenous estate?
3. Is the seven year old Commonwealth Indigenous Procurement Policy contributing to a viable Indigenous enterprise sector as good as it could be? Or is it time for a refresh, and the expansion and extension of Indigenous business opportunities?

Unlocking Private Sector Investment

How much is potentially at stake when we encourage greater private investment?

With the aforementioned $AUD1 trillion in impact investing looking for a home much of what happens in the Indigenous estate could be considered a starting-point for considered investment. Private investment into new or expanding enterprises on Indigenous lands could be a neat match with respective investment mandates. If just 1% of global impact investing funds move into Indigenous Australia then this brings a not so modest $AUD10 billion to the table.

This would be new, previously untapped, investment capital provided from private sector funds. Would the Morrison Government and Treasurer Josh Frydenburg consider 10:1 a fair return for a $AUD1 billion public sector investment to build the architecture and to facilitate this private sector investment. Many public sector projects secure funding with cost-benefit ratios nominally better than 1:1.

Australian Free-Trade Agreements

An untapped opportunity in the universe of Australian trade and commerce are Australian Free-Trade Agreements. These important windows for commercial activity create private opportunity for investment and economic growth.

Yet until August of this year those negotiations have proceeded with little, or no, Indigenous interests being present. Earlier this year IGNITE achieved a significant milestone with little fanfare when Indigenous interests joined Australian trade agreement consultations for the first-time since Lt James Cook sailed along the east coast.

With the right level of support through formal trade negotiations on instruments such as free-trade agreements Australian governments could open further export opportunities to Indigenous companies and bring greater opportunity for private investment into the Indigenous estate of Australia.

Take the current negotiations on an Australian-UK Free Trade Agreement. DFAT indicates that the value of trade and investment to Australia tallies about $AUD160 billion per year. Composed of about $AUD15 billion in export goods and a further $AUD15 in services sold by Australian firms into the UK. The lion's share though is the $AUD127 billion of direct foreign investment flowing from the UK into Australian companies, businesses, development and infrastructure.

Give credit where its due - the English know how to invest for returns. Let's see it as a strength and go with it. If just a few Indigenous enterprises could wrest just 1% of these capital inflows then we'd add $AUD1.27 billion to the tally of private investment to Indigenous ventures. We'd also open up export markets. And, again with a modest stake, the value of just 1% of those export opportunities would equal $300m per year to Indigenous companies and exporters.

Thanks to BREXIT, the European Union also needs a renewed FTA. DFAT's estimates on the EU-Australian value of trade and investment is substantial greater than the UK. Some estimates are as great as $AUD1.6 trillion per year. If 1% of those flows move into Indigenous controlled enterprise then Australia would see a further $AUD16 billion move into Indigenous investments & trade.

Across the three opportunities - impact investing, a UK FTA and then an EU FTA - is a potential pool of $AUD27.6 billion from international sources of private sector investment and trade.

In 2019, the Commonwealth government budget allocation for all of the portfolio of Indigenous affairs was $AUD5.2 billion. Bringing these modest levels of private sector investment to Australia represents a 530% increase in available capital in just one year. If this trend was for the next five years the difference becomes an eye-watering $112 billion!

I'm happy to discuss the case with anyone that suggests that a 1% inflow is too ambitious, or over-cooking it.

The Business Case to Support Investment

To the second question: what is the compelling business case for bringing private investment to Australia's Indigenous estate? Answer: return on investment. The same as it ever was.

Nowadays we have an expanded universe of investment and finance that includes investors seeking out social impact AND returns. And this brings up an important acknowledgement. Investment is not for every Indigenous company at the same time on the same terms. There are a galaxy of investors and fund managers. Each with different investment mandates and expectations. We'll need to support those Indigenous executives looking for investment with the appropriate architecture. The role of intermediaries is critical. Hence the leading effort to create Australia's first ever Indigenous intermediary - the Indigenous Network for Investment, Trade and Export (IGNITE). It stands ready to help - to help private investors to navigate and to invest into Indigenous Australian opportunities.

Boosting the Indigenous Procurement Policy

The last question goes to the centrepiece of the Commonwealth Government's Indigenous enterprise support. Is the seven year old Indigenous Procurement Policy (IPP) doing its best to advance a viable Indigenous business sector?

When the recently retired Minister for Finance the Hon Mathias Cormann and then-Treasurer Joe Hockey crafted this ground-breaking policy many held high-hopes for its eventual impact. All credit to Hockey and Cormann. It was bold and creative. And, like all good things, it deserves to evolve to fulfil its potential.

After seven years of implementation it's time to enhance and extend the Indigenous Procurement Policy.

The IPP has been praised by many for its potential. However, that potential is being overwhelmed by commercial reality - as is the power of the market. There is a very serious shortcoming that if addressed boosts the impact of the IPP.

The current policy has set a value-of-contract target of 3% off into the blue yonder of 2027. Look at what's happened to Australian industry in just seven months, seven years in business is an eternity!

There is a compelling, cost-neutral case to bring the mandatory 3% of contract value target through to actively support Australian Indigenous companies to grow and to lift employment numbers and real job outcomes. There is scope for the Federal government to make the 3% mandatory target apply to new contracts from the 1st January 2021.

We shouldn't have to wait until 2027 for the Commonwealth to deliver on the mandatory target of 3% of contract value. In Australia 60% of small businesses fail within their first three years. If you're in business in another seven years you clearly don't need this policy.

There are over 12,000 Indigenous companies in Australia in 2020 that deserve a fairer shake then being told to wait on the bench for another seven years. Today there is an opportunity to bring a little more commerciality to the policy's formulation and application.

Last year it was reported that:

"...since the IPP began in July 2015 1,500 Indigenous businesses have been awarded 12,000 government contracts worth $2 billion, Sen Nigel Scullion said."

Lets put some perspective on those numbers.

The IPP offered $2 billion across four financial years. Its been estimated that in FY18 the big four consulting firms earned $7.81 billion amongst themselves.

Nearly $8 billion split four ways versus $2 billion split amongst 1,500 "Indigenous" companies. I invite you to do the maths on that announcement and you tell me how much it contributes to commercial viability of these Indigenous companies?

12,000 contracts from $2 billion is $166,667. Divide that by four financial years. That's $42,667 per FY per contract. But not all companies are equal and not all contracts are equal in value so the reality is a handful of companies got a handful of very rare large contracts.

The rest....well the rest failed and joined the 60% of small businesses that hit the wall within the first three years.

With a single stroke of the pen new Finance Minister Birmingham and Treasurer Frydenburg could do more for Indigenous small businesses, black entrepreneurs and Indigenous enterprise than at any other time in modern Australian history.

Commercial Impact of an Enhanced Indigenous Procurement Policy

Bringing the 3% target forward to 2021 would effectively triple the value of available contracts, boost competitiveness in the sector, lift viability and see a massive increase in the numbers of jobs created within Indigenous companies.

It would undergird the viability and emergence of medium-sized Indigenous companies and contractors. These companies would seek out growth opportunities, bringing diversity and sustainability to government supply-chains and lifting value-for-money and impact for government spends.

Many of these same companies as they grow will become prime candidates for investment capital. Growing businesses need working capital to grow, need to employ more people, creating new jobs as they forge their way ahead.

And all of these extra jobs, small and medium size business growth wouldn't cost the Government one extra cent.

This is money the Government is spending on contracts, goods and services anyway. Plus the policy framework, regulations and staff have been in place in for seven years already. I'm confident that the public service procurement areas could handle the increase. Sensible, prudent policy changes could attract tens of billions of additional private sector investment into Indigenous Australia, all without spending one extra dollar.

Summary

I've covered a lot of ground in this article. The thread is clear - deploying a coherent set of economic policy reforms supporting Indigenous enterprise development will build Australian enterprise and create more jobs.

Indigenous Australian business people are ready to join the COVID recovery period.

Its time to talk-up the potential for Indigenous enterprise to attract greater private sector investment from impact investors, free-trade agreements, export markets and expanded business opportunity from a cost-neutral enhancement of the Indigenous Procurement Policy.