Australian governments are competing against the world for infrastructure equity. “The capital is there, but it has a choice.” So, the ‘trillion dollar question’ is not one of asking super funds to focus on Australia’s infrastructure needs. It’s about committing to a generational infrastructure plan, and making the deals within this pipeline worthy investments. The investors interviewed for this story spoke highly of the Victorian Government’s willingness to absorb substantial development risks in procuring the Peninsula Link bypass and Wonthaggi desalination plant. By doing so, it secured private investment in the midst of the financial crisis. To close the Peninsula Link PPP, a motorway linking Melbourne, Frankston and the Mornington Peninsula, the government took on the patronage risk of the asset so investors were only required to maintain the road to an agreed standard. They would be paid for making the road ‘available’.

In this case, “less risk means less expected return, but the private sector was able to bid at [a] lower [pricing] level than had the government asked it to assume traffic risk,” Frost says. In previous toll road PPPs, investors attempted to make accurate forecasts of motorists’ use of the road and factor this into valuations. They took on this patronage risk, and after some were burned, others shied from attempting to make accurate longterm traffic projections. In the Wonthaggi deal, the state government agreed to pay investors as long as the facility could treat water to certain standards. In an environment where monoline insurers, the traditional suppliers of infrastructure debt in Australia, had failed, the government committed to becoming lender of last resort.

If investors found it difficult to refinance loans with banks which – since the financial crisis – have generally not committed to lending for terms of more than three years, they could buy debt from the government. “In the end, they put the Victorian balance sheet up and said: ‘This deal will close’. That provided instant confidence among the lenders,” Frost says. “The project was over-funded.” The government did not fully transfer the risk of building these assets to the private sector, but it ensured they were built in a difficult investment environment. For now, there are no signs that other states are willing to take similar development risks. But Sam Sicilia, CIO at the $8 billion industry fund HOSTPLUS, says governments should be prepared to guarantee super funds an attractive rate of return for investing in assets as crucial for modern societies as infrastructure.

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