Greenfield infrastructure projects are being increasingly shunned in Australia unless they have government backing through subsidies or guarantees of returns.
Market players and investors have observed that Australian infrastructure projects which have certainty have attracted huge demand, so much so much that bids have gone up while returns have been reduced.
When Australia pioneered infrastructure as an asset class in the 1990s, the first generation of projects produced internal rates of return (IRRs) of 30% to 35%.
Those returns, combined with the low correlation to equities and bonds, have made infrastructure very popular among global institutions with long-term mandates, from Asian sovereign wealth funds to Middle East family offices to Canadian pension funds.
Speaking at the Boao Forum for Asia Sydney Conference in late July, Damian Secen, head of infrastructure, energy and utilities at Macquarie, cited Australia’s transparent legal framework and low sovereign risk, and the stable, blue-chip nature of the assets.
“But not all infrastructure finance works,” Secen said.
Greenfield projects are difficult, with longer lead times and many different risks. “Investors need certainty a project will proceed, which makes it harder to attract capital,” he said.
For example, renewable energy projects will fail without subsidies. Demand for infrastructure linked to the mining sector has also fallen because of fears that lower commodity prices will see more mines close.
Moreover, even in Australia some of these projects have proven disastrous for investors: overly optimistic assumptions by state governments for greenfield (brand new) projects such as Sydney’s Cross City Tunnel.
Investors such as Hong Kong’s Cheung Kong lost money on these deals because the traffic never lived up to projections, and hasn’t been enough to cover interest payments, let alone deliver an IRR.
In fact, most tunnel projects in Australia built over the past 15 years on the back of private-sector financing have gone into receivership or administration, with construction costs far outrunning toll receipts.
Investors therefore now shy away from new projects, which involve a high level of regulatory risk, and prefer brownfield assets (utilities that already exist but are being expanded or improved).
The Queensland Investment Corporation, for example, a domestic sovereign wealth fund, has raised capital for a global infrastructure fund. The head of that team, Ross Israel, told AsianInvestor that the fund could not invest in purely greenfield projects.
The fund seeks brownfield assets that require expansion capital, and is scouring New South Wales (NSW), Victoria and Western Australia for deals, along with North America and Europe.
But where investors have certainty, there is huge demand – so much that the infrastructure trade has become crowded, driving up bids and reducing returns.
Asian investors are also now interested in brownfield, not in riskier new builds.
Gao Xiqing, adviser and former president at China Investment Corporation, told AsianInvestor the NSW infrastructure assets would only be of interest to groups such as CIC if the government could deliver on what it promises.
“Maybe we’ll look at later-stage deals,” he said, noting local politics around land use and labour laws were sensitive issues. Gao said public-private partnerships were proven to work in Europe, but had failed to take off in the US. “We’re not sure if PPP will work in Australia,” he said.
But neither foreign nor Australian investors are willing to get involved in new developments without government guarantees. The emphasis instead is to put capital into projects with a track record.
Nick Sankey, managing director responsible for lending to utilities and infrastructure at Commonwealth Bank of Australia, said greenfield projects were reliable if there was support for them in both major political parties; without bipartisan backing, a long-term asset runs the risk of changing regulations. But such commitment is rare at the greenfield stage, he told Boao Sydney.
For the full feature on Australian infrastructure, read AsianInvestor magazine's forthcoming September issue.