Australia’s superannuation industry has welcomed a plan by federal and state governments to recycle infrastructure capital by selling existing assets and using the proceeds to fund new projects.
The government also wants to reform the way bids for infrastructure projects are processed.
The 50-year plan, mapped out in a 140-page report released last Tuesday by the infrastructure and transport ministry, promises to bring a slew of assets to market and meet a growing demand for alternative investments by pension funds.
“Institutional access to assets depends on them being made available and a government decision to sell assets creates an inventory of potential deals,” says Kyle Mangini of Industry Funds Management (IFM), the investment arm of the Industry Super Network (ISN), an umbrella organisation representing 35 of the country’s largest industry superannuation funds. ISN expects industry funds to invest more than A$15 billion ($13.6 billion) in the asset class over the next five years.
The report proposes that the government move away from grant funding of infrastructure to a system that encourages private investment by reducing the costs and barriers to entry that currently prohibit pension funds from playing a greater role in the sector. It also proposes a wider application of user-pays funding arrangements, especially in the freight sector, but on the proviso that users get a say in scoping new projects.
Mangini, who is global head of infrastructure for IFM, says the limited number of available assets has been the biggest obstacle to further involvement by pension funds. “That’s why we’re supportive of the proposal to create more potential infrastructure investments.
“The recycling of government capital is exactly what took place in the case of Port Botany and Port Kembla,” he says, referring to a A$5.07 billion investment in two sea ports made by a consortium of pension funds in April this year. The consortium led by IFM and including AustralianSuper, Cbus, Hesta, HostPlus and Tawreed Investments Limited, a wholly owned subsidiary of the Abu Dhabi Investment Authority, won the 99-year leases for the ports in a competitive bidding process.
As an asset class, infrastructure has a track record of outperforming, according to research conducted by ISN and published last month. The organisation found that $100 million invested in infrastructure 15 years ago would be worth A$562 million now, a rate of return that is 2.5 times more than an investment in cash or non-Australian equities.
That said, not all infrastructure deals bear fruit and Australia’s history of public-private partnerships (PPP) is marred by several botched transactions. A number of high-profile motorway projects tendered to private operators in the mid-2000s – notably Sydney’s Cross City Tunnel and Brisbane’s AirportLink – ran into trouble and had to be refinanced.
Mangini attributes the poor performance of these deals to “a lack of alignment” when they were put together. “Many of these deals were packaged by sponsors who paid themselves large fees and then sold the asset on to longer-term investors,” he says. “The sponsors had an incentive to win the deal, rather than to put together a long-term investment that would provide appropriate risk-adjusted returns.”
He says that past PPP projects need to be scrutinised to avoid a repeat of mistakes.
Craig Lee, who heads the Asian operations of financial insurer Assured Guaranty, says he hopes the government’s promise to reform the way infrastructure projects are funded will lead to the creation of a viable capital market in infrastructure bonds.
Assured Guaranty has spotted a gap in the infrastructure financing market created by changes to global banking laws that have made it more expensive for banks to fund lower-rated, longer-tenor projects. The NYSE-listed firm wants to step into the breach by originating deals for institutional investors, providing ratings enhancements and guaranteeing the payment of principal and interest.
“Institutional investors are interested in the asset class but aren’t all geared up to manage it,” says Lee. “They don’t necessarily have the in-house expertise and they question whether to spend the time and money putting a team together when they don’t know what their future need will be.”
He says institutional mandates often restrict investors to buying debt that is rated single-A or higher. “Infrastructure debt is usually rated BBB, much like corporate bonds, and so is out of reach for a lot of pension funds.”
The difference between investing through an infrastructure fund and buying into a project backed by Assured Guaranty is the ability to “get in at the ground floor on transactions”, says Lee.
“We don’t rely on deals to come to market, we actually go out and work with equity sponsors to bid for government tenders and projects and then structure the deals to best fit their objectives. In this way we can influence credit covenants and maintain decision-making control. You end up with a much tighter credit framework than you might have if you bought into a deal structured by an investment bank.”
Lee says if a viable capital market for this type of asset class can be developed in Asia it will give pension funds access to infrastructure projects at the greenfield stage, rather than buying established, brownfield assets which is currently the most popular investment channel.
The most recent brownfield investment by an Australian institutional investor was announced last week when AMP Capital flagged its intention to buy 42% of New Zealand’s second largest electricity and gas distribution company, Powerco NZ Holdings, from current owner Brookfield Infrastructure.
The NZ$525 million investment will be made on behalf of a number of AMP Capital clients and managed funds, including AMP Capital Infrastructure Equity Fund and the AMP Capital Core Infrastructure Fund.