The theme of this month’s Conference of Major Superannuation Funds (CMSF) is ‘Super: Shaping the Nation for the Future’, and while the adequacy of Australians’ retirement incomes is sure to come up for discussion, the part of our future which depends on decent economic and social infrastructure will also be debated. A big plenary session at the conference will be “To Build A Nation”, where proponents of key pieces in the nation-building puzzle – Industry Funds Management chair Garry Weaven; National Housing Affordability Summit chair Julian Disney; Professional Visiting Fellow at the Climate Change Research Centre within the University of New South Wales (UNSW), Frank Muller and Allen Consulting Group water expert, Mark Burford – will discuss how super funds can become more involved. Over the following pages of our cover story, Investment & Technology will talk to these and other stakeholders about how nation-building projects can make an investment case beyond their obvious patriotic appeal.
Garry Weaven agrees that Australia’s superannuation funds are not investing enough by way of economic, nation-building projects – but it’s not the superannuation funds he blames. “There just hasn’t been all that much in terms of nation-building opportunities to date, with the exception of thing like your standard toll roads – which I guess are addressing our transport deficit, but are somewhat unexciting,” he says.
The creation of nation-building opportunities is dependent on government, Weaven believes, sometimes for subsidies but always for bravery and imagination. “What we need is more politicians who want to do more than be a backside on a seat, who want to leave something of lasting benefit and are prepared to put their political lives on the line to do so,” he says.
The extent of the sacrifice and bravery sometimes required is exemplified by the “whole debacle” around attempts to improve the amenity of Victoria’s ports, culminating in the controversy last month over Federal Environment Minister Peter Garrett’s approval of a dredging trial in Port Phillip Bay. “Look at the crap that governments have had to go through to widen the channels…There’s crowds of people here in Melbourne protesting outside Parliament House, The Age has had a tirade against it every day without necessarily knowing all the facts.”
Weaven understands that truly nation-building infrastructure projects can’t be afraid to upset some sensibilities. For example, notwithstanding all the pioneering work that major IFM asset Pacific Hydro has done in developing alternative energy sources, Weaven is quite happy to talk about IFM’s work in boosting the capacity of the railway line that will link the planned coal mines in Queensland’s Surat Basin to the Port of Gladstone.
Dragging the ‘public’ into PPPs
One problem with getting governments to the table on nation-building projects is their three-to-five year electoral cycle, compared with what Weaven calls the “proven patience” of superannuation fund investors.
“Through IFM we’re already doing 30 year deals and our super fund investors are comfortable…as long as there are contracts in place to take the output or service, and the project can be valued annually with a high degree of certainty, funds are willing and able to wait a long time for a return. “Our forbears invested huge amounts in rail, projects like the Snowy Hydro scheme, and they weren’t thinking about immediate economic or electoral returns, they were thinking 100 years ahead…we won’t know how many economic deals there are out there right now, until we have real government leadership.
“If you have a very small vision, you don’t need public/private partnerships because governments can do whatever they like off their own balance sheet and still have a surplus. If you have a vision worthy of the nation of Australia, a vision worthy of our asset base in super, then it is inevitable that you should have public/private partnerships to realise part of that vision.” There is a dizzying array of potential nation-building projects out there, and the prospects for super funds to invest in some of them are explored in this story.
Weaven, not surprisingly, has a couple of ideas about where to start. The future of Australia’s power supply is one, an infrastructure need which Weaven says has finally been given real impetus by the Rudd Government’s pledge to have 20 per cent of Australia’s energy come from renewable sources by 2020, and the certainty that a national emissions trading scheme will be in place by 2010. Those incentives could make it feasible for super funds to invest in geothermal power, for example. “There are huge reserves in the Cooper Basin in the north of South Australia which could be connected to the national grid, albeit at a cost,” Weaven says.
“There’s already a lot of speculative investment from people mapping geothermal sites and carrying out test drilling.” For instance Geodynamics, a company in which Tim Flannery is on record as being a shareholder through his self-managed super fund, is among those drilling for ‘hot rocks’ which can be used to generate extremely hot water capable of driving electric turbines. In the same region, Pacific Hydro is prospecting for a more conventional source of geothermal power: hot water from aquifers.
BHP Billiton might use Pacific Hydro’s geothermal energy to power a project at nearby Olympic Dam, but Weaven says that “to make all these geothermal projects really nation building you would have to connect them to the Eastern Seaboard power grid”. “If you had all this power from Geodynamics and traditional geothermal sources coming down that channel, the amount of subsidy you would need to create transmission lines might be quite small.” However, he argues that governments would need to play a crucial role, providing guarantees that whichever investors bore the initial burden of building the transmission lines would be fairly compensated by new users of the lines in the future.
The supply-side of Australia’s power infrastructure is not the only facet where super funds could find nation-building investments, according to one of Weaven’s fellow panellists at the CMSF plenary, Frank Muller of the UNSW Climate Change Centre. “The whole way we think about infrastructure needs to change. A lot of the attention is given to coal and gas and their alternatives on the demand side, whereas a lot of gains are to be made from improving end-user efficiency. From the power plant to your fridge at home, it’s all part of one physically connected system,” Muller says. “At this stage probably the biggest difference super funds can make is in their commercial property portfolios.
The traditional approach to direct property was very much ‘we don’t have to work in the building, we don’t have to pay the power bill so who cares’, but I think industry funds in particular have helped turn that around. “Those institutions are often not so disconnected from the people building their building and tenanting them, and apart from that it’s much more common now for people to want to let a green-rated building.
It’s much cheaper to build an efficient building in the first place than buy carbon offsets.” Muller would also like to see more institutional investment to increase supply of renewable energy sources, and says Australia needs to learn from missed opportunities in the past. “There are renewable energy opportunities where Australia has some definite advantages, but with something like solar photovoltaic cells, we saw the technology developed here but commercialised in the US. I wouldn’t blame a lack of venture capitalist spirit for that – I would blame a lack of government policy around renewable energy.” He hopes the signing of the Kyoto Protocol and the arrival of a national carbon trading scheme will help give institutional investors the reassurance they need to take the risk of commercialising such new technologies.
Performance from leakage
Australia’s climate helped create its development lead in solar cells, while the needs of farmers on the world’s driest continent have helped it stay on the cutting edge of irrigation technology. It’s Weaven’s hope that super funds might assist in commercialising a piece of Victorian-developed software to track water flows, to better identify where there are channel leaks in need of repair. “Something like twice Melbourne’s total annual water usage could be saved in perpetuity by a comprehensive overhaul of irrigation infrastructure,” Weaven told the National Press Club last year. “Something like 80 per cent of channel leakage comes from 20 per cent of the channels. It’s fixable as long as you know where it is.”
The software could be used to drive remotely operated “modern flumegates” that would allow into properties only as much water as those properties had been allocated, and reduce the losses currently incurred by “19th century wooden infrastructure” which easily over-supplies water. “So for a spend in the order of $1.5 billion over four or five years, water could be saved at a cost of less than $2000 a megalitre, which compares quite favourably even with our currently under-priced water values.” On that basis, investing in such a nation-building project could be a sound economic decision for super funds, but Weaven knows that a “strong political champion” is required before any fund would risk it.
“In the meantime, it does seem to me a national tragedy that Australia’s greatest river can no longer, unassisted, open its mouth to the sea.” The importance of superannuation assets to funding nation-building projects into the future is not lost on Australia’s peak infrastructure body, Infrastructure Partnerships Australia, which recently lauded the new Government’s efforts to streamline the approval of public-private partnerships, under a new co-ordinating body advising Infrastructure Minister Anthony Albanese.
In a vision statement released late last year, it emphasised superannuation’s potential to “provide a virtuous cycle of cost-effective funding and prudent management over the economic life of an asset that will underpin better quality service delivery. At the same time this forward-looking management of public assets will provide income to retirees into the future. “This win-win formula should be encouraged to take its course, provided governments recognise the opportunities to partner with superannuation funds and the private sector to approach infrastructure with innovative management over the long life of these facilities.”
Whether such a promising, big-picture view can be achieved depends on the regulatory groundwork.