Deal-making infrastructure needs work itself Investment needs deals, and a crucial factor as the Australian infrastructure sector competes for super fund capital is deal flow: deals can help provide an investment case, and a sound answer to those who might say that grand nation-building schemes do not belong under superannuation’s sole purpose test. But unlocking those deals requires better co-ordination from all levels of government, as SIMON MUMME reports.
“As a sweeping statement, there is a strong case for the exchange of retirement savings to build needed infrastructure,” Greg Roder, AMP Capital Investors head of infrastructure, says. “In terms of what’s practical and what’s idealistic, it’s somewhere between the two.” The ideal characteristics of infrastructure investments – steady earnings flows throughout long investment cycles with low correlations to equities markets – can, if successful, underpin and further diversify portfolios built for the long-haul.
Without deal flow, Australia’s growing pool of superannuation will simply continue to be invested offshore. There are plenty of managers doing good business out of this trend. RREEF Infrastructure, for instance, emphasises emerging infractructure opportunities in China and India, and describes Australasia – given it accounted for 30 per cent of all closed deals in the Asia-Pacific across 2005-2007 – as mature, “richly valued” and over-competed, according to RREEF’s co-head in the region, John Dorrian. “Take electricity distribution in Victoria for example. They’re coming up to their third or fourth owner on some of those assets,” Dorrian says. Lower-yielding it might be, but RREEF research head Peter Hobbs admits the Australian market can provide investors with a regulatory certainty that’s still developing in more emerging markets, particularly in China – where investors essentially have to apply to the Government to be able to liquidate and repatriate their invested capital.
Enduring infrastructure needs, such as freeways, port expansions, sustainable water plants and hospitals, illustrate an investment shortfall in infrastructure that exceeds $90 billion, Mark Birrell, chairman of Infrastructure Partnerships Australia, the national peak body for infrastructure, says. Providing this development capital is well beyond the capacity of Australia’s governments alone. Public-private partnerships (PPPs) are one financing option that governments can use to combat this deficit. Infrastructure Australia, a national co-ordinating body for infrastructure set up by the Federal Government in January, will encourage funding from the private sector to contribute to projects ranked as current and future priorities, Birrell says. These projects will be identified in an audit of Australian infrastructure due at the end of the calendar year.
The Prime Minister, Kevin Rudd, says that long-term partnerships between the federal, state and territory governments and the private sector need to be forged, and that the Federal Government should steer the agenda for infrastructure development. “Obviously our major corporations do most of the work – but there is a role for national government coordination when it comes to the provision of key infrastructure around the country,” Rudd says. As an example of such coordination, the impending audit from Infrastructure Australia will provide the private sector, including super funds, with a “forward-looking picture” of the national infrastructure market, including investment opportunities, Birrell says.
Steve Bickerton, head of infrastructure at Challenger Financial Services Group, says there is interest from Australian infrastructure managers in domestic assets, but an increasingly large amount of money is chasing limited opportunities. “We have a national electricity market that is a combination of public and privately-owned assets. It’s not a great position for investors to be in,” Bickerton says. Sydney Water is a good example of the regulatory impasse facing managers: “there would be no shortage of people willing to invest in Sydney Water, and help to end the water problems, but there has been no incentive coming from the government to do anything .”
Comparatively, much of the United Kingdom’s water infrastructure has been run privately for the past decade. The most recent investment made by the Challenger Infrastructure Fund was in Southern Water, a UK company. The fund bought a $690 million, or 27 per cent, stake in the business from the Royal Bank of Scotland in October 2007. The investment accounts for 36 per cent of the Challenger fund’s portfolio. “There are more opportunities offshore,” Bickerton says. “Major infrastructure managers, like Macquarie and Hastings Funds Management, all hold UK water assets.” The regulatory system, demographics and condition of infrastructure in the UK are conducive to a steady flow of deals in that market, Bickerton says. Clear regulation equates to “support from politicians and access to deals” in a country where 65 million people use infrastructure, much of it privately-owned, that is regulated under one framework.
In contrast, Australia’s 21 million people use infrastructure in different regulatory systems determined by states and territories. The UK also has a secondary market for infrastructure investing, in which many closed-end fund holdings are “re-sold and recycled,” AMP Capital’s Roder says. Australia lacks this dimension in its infrastructure market. However, despite the regulatory difficulties, the Australian infrastructure market is not inaccessible: AMP Capital Investors holds roughly two-thirds of its infrastructure assets in Australia, across portfolios that also extend to the US and the UK, Roder says. If super funds were to bankroll the development of new freeways, water plants and port expansions, it would mean the Australian population – that is, the members – would pay to both build and use some of these assets, costs that will hopefully be offset by the investment returns, Challenger’s Bickerton says.
Given this, AMP Capital’s Roder says that using superannuation money to help build social infrastructure assets – such as schools, hospitals and aged care – would be most appropriate, since these institutions are used by most of the public. “In all of these structures there is an element of user-pays. Only a certain spectrum of people will use a toll road, but we all use hospitals and aged care centres.” But if improvements in economic infrastructure – such as ports, rail and freeways – enable the nation to compete strongly in the global economy, the benefits could reach many people. Roder says that immediate opportunities to invest in domestic infrastructure include PPPs pertaining to the Brisbane airport link and the expansion of the nation’s ports.