I’ve got no doubt about it. If it’s too risky, de-risk it. None of these things are insurmountable”. captive bidders One of the major barriers to further investment by super funds in greenfield infrastructure, says IPA, is the lack of a clear pipeline of deals coming to market. As strategic, long-term investors in infrastructure, funds should ideally have visibility over an array of planned deals to selectively allocate capital. Is this the case? “Sort of,” Sicilia says. Funds are aware of immediate projects, and those slated for the next year. “But we don’t know anything about the vision.” Commitment to programs must also accompany pipelines. Moves such as the NSW government’s recent abandonment of the CBD Rail project, after five years of planning, undermine investors’ confidence.
“Private capital has to have a high degree of confidence that announced projects will be procured,” says Frost at AMP CI. Another impediment is the expense of PPP bids, and the misaligned interests of investors, who hold assets for the longterm to generate returns, and construction companies and investment banks, which profit from the building of assets and the transactions in deals respectively. They don’t live with the assets. In future deals, equity holders should exert more power in bidding processes, says Findlay at AustralianSuper, because the long-term risks they take on are sometimes not reflected in the forecasts for assets. “We don’t feel there is the right allocation of risk. The pricing tends to assume that everything goes right once the asset is operational, and that’s not always the case.” Sicilia is bolder.
“If super funds have the capital, they should control the terms. We may not have been in that position in the past. I understand the Macquarie [Bank] model. And Macquarie understands that their model is dead. “Never again will we enter into an arrangement which involves capital origination fees. Or where there are fees upon fees. Or fees for spelling ‘fees’.” The PPP bidding process, which suits investment banks’ transaction-focused business models, is likely to persist because major parties in Australia’s adversarial political system do not agree on common infrastructure aims, Weaven says. Supported by governments to achieve competitive outcomes, it is a major inefficiency in the unlisted infrastructure market. “It’s been sub-optimal, for fees coming out.”
All-season assets Even the Victorian Government’s greater risk appetite could not lure some institutional investors to invest in the Peninsula Link and Wonthaggi PPPs. Andrew Elliott, deputy CIO at the $34 billion VFMC, says greenfield assets are too risky given the manager’s liabilities, which are suitably met by tried and tested brownfield – or “seasoned” – assets. “A lot of strategic investors are still interested in traffic risk. They believe they can price it,” Elliott says, and have built infrastructure in expectation of considerable patronage. “This is the ‘build it, and they will come’ approach. They have come, but not in big enough numbers to justify the risk. “If people come, you could be very successful. But if they don’t, you could get wiped out.” Greenfield PPPs, as they are currently structured, are off-limits for VFMC.