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Australia – New Or Recycled? Predicting The Pipeline Of Super Investment In Infrastructure.

14 November, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Energy & Project Finance

 

Summary

 

Australia’s infrastructure industry is suffering from a capital shortfall that could be met by, and be mutually beneficial for, superannuation industry investors.

 

Australian governments have faced challenges in structuring deals in a way that suits the unique needs of superannuation infrastructure investors.

 

This article considers how the Federal and State governments are working to optimise the possibilities for infrastructure funding including structuring sale processes to best meet the needs of industry fund investors, such as through the recycling of ‘brownfield’ assets. A ‘brownfield’ investment opportunity is one that involves the sale or re-development of an asset which already has an operating history. This is in contrast to a ‘greenfield’ project, which involves the development of a new project without an operating history and which typically also involves construction risk.

 

Background And Context

 

It is no secret that Australia’s infrastructure industry is in need of capital funding. The 2013 National Infrastructure Plan puts a figure of $27 billion on the cost of the list of priority projects alone.

 

Australia’s superannuation industry, valued at over $1.5 trillion and growing, has a constant appetite for attractive, stable and long-term investments. However, only five per cent of Australian superannuation funds’ assets are invested in infrastructure. The Association of Superannuation Funds of Australia (ASFA) suggests that this points to the ‘shortage of well-structured deals’ rather than a shortage in interest.1

 

The issues regarding assets such as BrisConnections, the M7 Clem Jones Tunnel and Sydney’s Cross City Tunnel highlight the risk that has been associated with funds entering into traditional deal structures such as PPPs and user-pay models. As has been well-canvassed in recent commentary, super funds are particularly sensitive to infrastructure deal risks for reasons relating to their investments needs, including:2

 

  • Liquidity risk – The risk of not having enough cash inflows to meet obligations to pay entitlements and other outflows over any given time period has made infrastructure investments, such as investing in unlisted infrastructure and greenfield assets less desirable for super funds;
  • Appetite for risk  – Given their retirement funding purpose, super funds are interested in long-term investments. While this would ordinarily encompass projects with a long life-span, well-established assets with a known cash flow and minimal unknown risk, such as brownfield assets, are better suited to their investment needs than greenfield projects; and
  • Transparent and reliable pipeline – super funds need market certainty and a clear picture of State and Federal government commitments in order to make investments.
 

Changing The Government Focus: Brownfields Get The Green Light

 

The Federal and State governments have been educating themselves on how to appeal to the needs of keen industry fund investors. Recent deals demonstrate the governments’ renewed commitment to recycling mature brownfield assets in deal structures, in order to entice investment.

 

Federal Treasurer Joe Hockey MP has recently confirmed the Federal government’s commitment to capital recycling as a critical part of the government’s infrastructure plan. In a press interview in October 2013, the Treasurer stated:

 

There is now a strong case for hypothecating the proceeds from privatisation directly to new infrastructure in order to win political approval… The privatisation debate is now mature enough in Australia that … people see that they’re getting new additional infrastructure, and they’re not losing the old infrastructure.3

 

The Federal government has also held talks with State governments on how to secure infrastructure developments.4 New South Wales Treasurer Mike Baird has recently stated: ‘there is no alternative: we must move mature assets off the balance sheet so we can reinvest in new ones’.5

 

A great example is the Port Botany and Port Kembla deal. In May 2013, the NSW government agreed to a 99-year lease of Port Botany and Port Kembla in exchange for $5.07 billion from Industry Funds Management (IFM) Australian Super and Tawreed Investments Ltd, a wholly-owned subsidiary of the Abu Dhabi Investment Authority. IFM has $46 billion invested in electricity utilities in Germany and USA and has a strong interest in infrastructure.

 

Critically, the NSW government promised to reinvest capital from the Port Botany/Port Kembla transaction with seed funding for the WestConnex motorway (estimated to have a capital cost of $11.5 billion) and the Bridges for the Bush upgrades (another NSW government initiative for improving road freight productivity by replacing or upgrading bridges over the next five years at 17 key locations in regional NSW).

 

Deal Space: What To Watch Out For

 

Government and industry reports and announcements indicate a growing trend of recycling brownfield assets as part of successful sale processes.

 

Highlights include:

 

  • Infrastructure Australia’s National Infrastructure Plan (2013) has made recommendations that assets such as electricity generators and retailers, port and freight rail assets, regional airport assets and water assets should be sold to the private sector.6
  • The Infrastructure Finance Working Group’s Infrastructure Finance and Funding Reform Report (June 2012) recommends building on the already strong interest from superannuation investors in established brownfield assets.7
  • The NSW government has indicated a strong willingness to offer a diverse pool of State assets as part of investment deals. Indicative bids for NSW’s coal-fired power station, Macquarie Generation, which the NSW government values at about $2 billion, were lodged on 22 October 2013.8 The NSW government is also working towards the sale of the Port of Newcastle. Proceeds would be reinvested into development of light rail for the Newcastle CBD – another potential example of recycling capital.9
  • Business Spectator has reported that the State of Victoria’s Port Melbourne and Port Hastings, presumed to be valued at more than $5.07 billion, will be on the market within five years.10
  • Perth Now has reported an announcement by the Western Australian Premier Colin Barnett MLA that selling assets within Western Australia’s Water Corporation, Western Power, Verve or TAB is a future possibility.11 This follows sustained interest in investment opportunities in Western Australia’s electricity sector.12
  • The Queensland government has released a draft Ports Strategy which considers offering long-term leaseholds on Port Gladstone and Port Townsville (recommended by the Commission of Audit’s 2013 report), as part of a broader plan to encourage greater private investment.13 Queensland’s Commission of Audit 2013 report also recommended to the Queensland government that it privatise its electricity assets.14
  • Both Federal and State governments are very interested to understand the viewpoint of potential investors. Investors are encouraged to provide feedback and to help Federal and State governments learn more ways to better structure deals and meet investor needs.

 

Endnotes

 

  1. G Noble (Director Investments and Economy, ASFA), ‘A reform agenda to address impediments to super fund investment in infrastructure’ (30 September 2013, Address to the International Symposium for Next Generation Infrastructure’).
  2. For more information, see Infrastructure Partnerships Australia (IPA), The role of superannuation in building Australia’s future (April 2010), Ernst & Young (for the Financial Services Council), Financing Australia’s infrastructure needs: superannuation investment in infrastructure (26 October 2011).
  3. D Crowe, ‘Joe Hockey’s nation building strategy’ The Australian (online), 8 October 2013.
  4. S Maher, ‘Treasurer Joe Hockey is exploring innovative ways of funding new projects’ The Australian (online), 22 October 2013.
  5. M Baird, ‘Innovative drive to deliver new motorway’ Australian Financial Review (online), 20 September 2013.
  6. Infrastructure Australia, Commonwealth Government, National Infrastructure Plan (June 2013) see ‘Action 24: Recycling capital from regional assets to much-needed regional infrastructure’.
  7. Infrastructure Finance Working Group, Department of Infrastructure and Regional Development, Commonwealth Government, Infrastructure Finance and Funding Reform Report (13 June 2012) see Recommendation 2.
  8. B Cole, ‘Infrastructure fuel bankers’ revenues’ The Australian – Business Spectator (online), 22 October 2013.
  9. New South Wales Government, ‘Port strategy to revitalise Newcastle’ (Media Release, 18 June 2013).
  10. Super funds, investors size up Port of Melbourne’ Business Spectator .
  11. Power station privatisation on the cards, according to WA Premier Colin Barnett’Perth Now  25 September 2013.
  12. D Mercer and B Harvey, ‘WA power lures super’ The West  Australian  (11 June 2013).
  13. Queensland Government, Queensland Ports Strategy: Draft for consultation(17 October 2013).
  14. Commission of Audit, Queensland Government, Final Report (30 April 2013).

 

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For further information, please contact:

 

Rebecca Maslen-Stannage, Partner, Herbert Smith Freehills
[email protected]

 

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