Enabling greenfields investment by super funds in Australia Minter Ellison
With Australia's infrastructure deficit now estimated at A$770 billion, the lack of infrastructure spending is impacting Australia's productivity according to Nicole Green, a specialist major project partner with Minter Ellison.
Ms Green says that while tapping into Australia's superannuation funds (estimated at $1.6 trillion) as an investment channel has long been much mooted as a potential solution, there are barriers preventing superfund investment in greenfields projects.
"Superannuation funds have shown a strong willingness to invest in brownfield infrastructure assets - the most recent example is AustralianSuper's investment in Port Botany and Port Kembla," she says.
"These kind of investments free up capital for governments to then recycle into other infrastructure projects."
According to Ms Green, the average Australian super fund invests between 10 and 16 percent of its portfolio in infrastructure projects but only a small percentage occurs at the greenfield stage. Australia's infrastructure backlog could be significantly reduced through investment by the superannuation industry in greenfield infrastructure projects she says.
"Greenfield projects are attracting the attention of super funds, particularly where there is an availability payment mechanism. But it is vital that we not only recognize the barriers to super fund investment in these projects but also take action to make that investment a reality."
Liquidity issues, lack of a clear greenfields project pipeline, risk/return frameworks, complex bid processes and the requirements of the super funds themselves are just some of the key barriers.
"These barriers can be addressed, for example, by the Government providing backstop liquidity for certain infrastructure debt instruments. Alternative financing options could also be used to address the liquidity issue," says Ms Green.
She notes the limited number of projects coming on line each year is also a barrier.
"Infrastructure Australia was intended to help overcome this issue by prioritizing the multitude of infrastructure projects identified by the various governments. But there also needs to be bipartisan support for projects that are announced. This will ensure there is not only a clear priority, but certainty as to the deal flow and timing."
Infrastructure assets generally have relatively inelastic demand curves and are often relatively recession proof. Despite these factors, super funds are less willing to bear the risks associated with investing at the greenfield stage of a project because there are high levels of risk both during the design and construction stage and during the ramp up phase where the return is uncertain.
There is also the allocation of risk by governments in the concession documents. "In the past, there has been a tendency to try to shift all project risk and the funding burden to the private sector. Given some recent significant failures, governments are coming to realise there needs to be some adjustment to that risk allocation to attract participants to the market, and to ensure governments receive competitive tenders," Ms Green said.
The tender process for greenfield infrastructure investment can extend beyond 18 months and cost at least 1% of the value of the transaction, which is not necessarily considered a prudent use of members' funds. High bid costs and long timeframes are yet another deterrent to super funds investing in greenfield infrastructure.According to Ms Green, there are a number of options that could be used to minimize these impacts.
"One option is to streamline the bid process and associated documentation. If governments (at all levels) standardized a substantive part of the documentation required for a bid so that tenderers only needed to focus on risk issues particular to the project, and the technical information relevant to that particular project, this would unquestionably lead to a reduction in bid costs."
She said another strategy was to reinvent the procurement process. Ms Green said that a recent Industry Super Network (ISN) report suggested that the most effective model could involve the owner/operator bidding on a contract price including a margin that accounts for any construction cost overruns.
"This inversion selects fit-for-purpose operators on each project and subsequently invites construction companies to bid against each other under terms set by the providers of funding. The recent bid for the M2-F3 motorway link, using the NSW Government's unsolicited proposal's option, is arguably a more economically efficient process than the traditional bid process."
QIC teamed with Transurban and Canada Pension Plan Investment Board to submit a $3 billion proposal to the NSW Government to build an eight kilometer toll road from Sydney's M2 motorway to the F3 freeway. This kind of approach ensures that capital that would otherwise be spent on bidding can be spent on construction.
"Australia boasts the fourth largest pension fund system in the world," Ms Green said. "This should be a key source of financing for major Australian infrastructure projects.
"The increased Superannuation Guarantee as well as ongoing population and wages growth will increase the savings pool of super funds. The current barriers can be overcome - but the system needs reform and innovation from the private sector needs to be encouraged. I firmly believe that adoption of these measures would open the flood gates of Australian super funds investment in greenfield projects."