The major risk for equity investors in greenfield infrastructure is not their consortium’s ability to accurately forecast the patronage of assets, such as toll roads, but dealing with the conflicted interests within bidding parties themselves. Investors became exposed to “agency risk” as they engaged with investment banks and construction companies to develop bids to build public-private partnership (PPP) assets, Richard Hoskins, head of unlisted infrastructure at Hastings Funds Management, said. Since builders were incentivised to win the construction contract, and investment banks to earn fees on the transaction, they were driven by the prospects of more immediate payoffs than investors, which earn fees on committed capital over many years. “Australia is a builder-led market.

Generally equity [holders are] the invitee into the consortium, rather than the leader,” Hoskins said. Since some state governments tended to award procurements to the consortium putting forward the biggest patronage forecast – which meant the lowest subsidy required from the government – investors could face expensive bid tickets. He painted a high-pressure scenario in which pricing discipline becomes compromised: “If its 3am, and the deal closes at 9am, what are you going to do? You’ve already spent $30 million doing this bid, so what’s another five?” “Competition isn’t necessarily equity’s friend.”

Pat Lardner, executive director – capital markets at Hastings, said pricing discipline could be further undermined when consortiums only remunerated participants if they won the contract. “Then it’s about success, not the price,” Lardner said. Compared to the US and Europe, Australia’s economy is small and state governments can only afford to procure a limited number of PPPs in an election cycle. As a consequence, when deals come to market, competition among bidders is fierce. These pressures were at play in the competition to build the EastLink toll road in Melbourne. “There were four or five BAFOs [best and final offers],” Hoskins said. Hoskins said the process would be improved if governments changed the rules so that unsustainable bids – those assuming unrealistically low levels of subsidisation or high premiums – were rejected.

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