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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