Populism is forcing regulatory shifts that will raise costs for the infrastructure assets super funds hold, First Super CEO Bill Watson says ahead his appearance on a panel at the Investment Magazine Infrastructure & Real Estate Conference
IM: With the rise of populism, do you see that there is an emboldened population demanding better service from the infrastructure assets that pension funds own?
Bill Watson: The rise of populism throughout Europe, and in the US in particular, that for me is just a symptom of the broader issues that the owners of infrastructure assets face.
Consumers have been disadvantaged, and the regulators are now tilting the balance back towards consumers. In the UK [for example] privatisation has not…struck a sufficient balance between the interests of consumers and the interests of investors. There’s been a significant focus on the reliability of water supply, and the wastage that’s occurring through ageing infrastructure.
In the past, the cost has been passed on to the consumers. The regulator in the UK is saying that’s no longer acceptable. [Instead, it is saying] you, the owners of these assets, have to find ways of doing things more efficiently.
IM: What does this mean for superannuation fund investors? How will that affect funds invested in some of these assets?
BW: Investors are going to have to expect lower returns in the short to medium and longer term, and they’re going to have to provide much better service to consumers.
Funds can expect pressure from their members. The most glaring examples are funds that own equity in Transurban Group and Australian airports. The question is, could a superannuation fund look a member in the eye and say that they have been treated fairly with the charges that they experience for parking their car at Melbourne Airport.
Members haven’t joined the dots yet, but [they will]. It’s only a matter of time before members start to hold funds to account for the investments they’ve made in the things that they consume every day of the week.
IM: Given your concerns that populism will lead to members demanding more from their infrastructure providers, how are you approaching those that you have holdings through?
BW: This is a matter that we have raised with the asset owners and will continue to raise with them. They’re starting to listen. We have the opportunity as the asset investor to engage directly with senior staff during investor presentation days…and it’s something that we’ve raised with Melbourne Airport and one of the energy distributors in NSW.
IM: It’s pretty well known that infrastructure is of interest to many funds with a growing pool of investable money. With that on the one hand and the risks on the other, how do you negotiate that?
BW: We’ve made excess returns from infrastructure for the last five to 10 years. And we need to reset our expectations on infrastructure returns, because there will be a balance back towards consumers.
If we continue to expect these excess returns, the pendulum is going to swing back far harder and we will get significantly lower returns. We’ll end up with single-digit returns rather than double-digit returns. Regulatory periods are generally three to five years, so that’s the regulatory time horizon that I’m looking at [for this].
