Overhaul of infrastructure: Super ‘cash cow’ solution?

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Future Australian infrastructure could be financed by tapping into the huge pool of superannuation if ideas floated in a draft report are passed.

The just-released draft report on public infrastructure by the Productivity Commission stresses that there’s an urgent need for a comprehensive overhaul of processes in the assessment and development of Australian public infrastructure projects.

Experience until now has seen numerous examples of poor value for money arising from inadequate project selection. As it stands the country faces increased cost to users, taxpayers, the community, and the provision of wasteful infrastructure; the report says.

“The use of financing options involving the private sector can reduce the call on government resources, allowing scarce public funds to be targeted in a more effective manner,” it stated.

Among other ideas, an overriding theme was the opportunity to use superannuation as one of the vehicles to fund future infrastructure projects.

The report said that Australian (and Canadian) superannuation funds lend themselves well to this because they already have a higher asset allocation to infrastructure than pension funds in the rest of the world, with around 5% of total assets in infrastructure.

However the level of market interest, particularly in greenfields infrastructure, needs to be tested, the commission said.

AMP, Westpac, and Transurban raised serious concerns that greenfields infrastructure is not aligned with the requirements of superannuation funds and other institutional investors. The funds prefer brownfield assets, they said.

A number of other submissions raised the issue of the high transaction costs of such Private Public Partnership bids (PPP), as well as a lack of specialist skills in smaller superannuation funds precluding participation in the bid process.

However the commission outlined a potential solution, whereby a government would issue converting infrastructure bonds to financial investors, and during the construction phase the bond holders would receive a fixed coupon rate.

Once construction was complete, the bond would automatically convert to equity at a predetermined price and the project debt would be removed from the government’s balance sheet.

There is no shortage of private sector capital that could potentially be deployed to finance public infrastructure in Australia at the right price, the report said.

But the commission did issue a warning: “The primary objective of superannuation funds is to provide benefits to its members on their retirement. As such funds must invest on behalf of members to maximise returns. This means investing in a range of assets that meet the risk/return profile required to achieve this goal…Superannuation is not a cash cow to fund particular economic ills in Australia.”

A number of superannuation bodies were quick to voice their thoughts on the draft report.

Both the Association of Superannuation Funds of Australia (ASFA) and Industry Super Australia (ISA) were welcoming of the assessment.

“Coupled with the announcement today of a superannuation investment forum from Treasurers’ Hockey and Baird we are potentially on the verge of a policy breakthrough on how infrastructure is financed and procured,” said ISA CEO David Whiteley.

Similarly the ASFA was supportive, but encouraged an innovative approach to the investment.

The association “urges the government to use the upcoming federal budget to explain its thinking on the development of a project finance market. Such a market would help facilitate superannuation fund investment of infrastructure”.

The Productivity Commission draft report comes hot on the heels of the release of a research paper by ANZ that outlines $220 billion of Australian infrastructure investment opportunities.

Global head of utilities and infrastructure David Byrne said state and federal governments could sell $112 billion in assets in the period to 2020.

“The timing appears right for a new wave of Australian infrastructure privatisations,” he said. “Market demand for these assets is strong and there is an unequivocal desire to repair state balance sheets, while also funding new investments.”

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  • Mike Taylor on 14/03/2014 10:28:09 AM

    This proposal in not entirely new, it is somewhat reminiscent of the old 30/20 rule where superannuation funds were obliged to make funds available to the Government for such matters as infrastructure. I vaguely recall it may have been a trade off for the concessional tax treatment of income earned by super fund. Back then there may not have even been a contributions tax.

  • James Howarth on 14/03/2014 10:33:57 AM

    I imagine there's some demand, but super and infrastructure will not mix.
    Get your hands off super

  • Investor on 14/03/2014 11:04:52 AM

    If David Whiteley (the publics ultimate contrarian indicator) believes in this good. We had better put a lot of thought into it before proceeding. Nothing good for the public came from this man.

  • Malcolm Coxall on 14/03/2014 1:03:22 PM

    Great Idea
    I would like to see the industry funds get behind this instead of the massive funds going into union coffers instead of the members account balances. Did anyone read the weekend Australian article about the small business owner who was visited by the unions, who insisted that if she wanted a contract with one of the larger firms her employees had to pay into the union super fund.

  • Innocent Observer on 19/03/2014 11:00:44 AM

    Time for a bit of defence for Industry Funds Management / ISA...

    Industry Funds Management are already a major investor in infrastructure projects (and project financing). And they do an excellent job of it. Most advisers would be gobsmacked at some of the deals that IFM have done; they have the scale and negotiating power that blows many top-tier investment banks out of the water.

    As I've said many times before, there are some things that IFM & ISA do very well, and this is one of them (remember, product manufacturing is their business...it's just a shame they feel a need to bash advisers to build their brand).

    Whether or not they, or anyone else for that matter, should feel compelled to invest in GOVERNMENT infrastructure investments, well I believe that should be a decision by the relevant investment committee. It should not be mandated.

    An alternative the govt. may wish to consider is to tie infrastructure investments to government-underwritten annuity-style products; many superannuants would jump at such an opportunity, it would free up capital for investment, and provide peace of mind for risk adverse investors.

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