Growth, inflation and labour market all easing
Infrastructure Partnerships Australia estimates that $700 billion of funding is needed over the next decade to finance the long term infrastructure investments – the nation building – we need to secure our future. We look at the building blocks that are falling into place.
The dialogue around the provision of infrastructure to sustain the Australian way of life and further development of our modern society going forward is undeniably an important one.
Fostering debate and informed consideration on how to provide sustainable infrastructure funding for society’s future prosperity is a commendable activity taken on by members of government, industry and the community.
The task is significant. We know the Infrastructure Partnerships Australia estimate that is regularly referred to, that there is a $700 billion funding need over the next decade. There are other, larger estimates. Few would deny that there is much work to be done in order to finance the long term infrastructure investments – the nation building – we need to secure our future.
Yet, as always, it raises that inevitable question about how to fund this infrastructure need. And beyond the roads, bridges, and ports, what about the social infrastructure that should go with this – those essential elements of any prosperous society?
At NAB, we see that the financing of large scale, long-term infrastructure projects will need to come from a variety of public and private sector sources. Given the need for banks to diversify their loan portfolios, to avoid excessive maturity mismatches between assets and deposits, and to not have excessive exposure to one borrower or project – this makes particular sense.
Of course, there is no one, easy solution, which is why ongoing engagement between industry, government, the community and regulators is essential. While laying the groundwork for greater accessibility to this market is a challenge, the other major task is in educating investors – and indeed the industry.
NAB believes education provides for a greater understanding of corporate bonds as an asset class – taking us a step closer towards building a deeper corporate bond market. A fully functioning retail corporate bond market will offer investors more choice and an opportunity to diversify their investments – broadening the range of assets available through superannuation funds.
The next step is making those retired savings available to fund essential infrastructure. We need to ensure our vital infrastructure projects are an appealing investment for large pools of super savings. What is now a virtual absence of corporate debt accessible by retail investors will change significantly in the near future. We are seeing the building blocks fall into place already.
There is no doubt that the provision of built infrastructure into the future is essential to our growth and prosperity. However, the best and most useful infrastructure must take a holistic approach, and instinctively consider social impacts and uses. This should be an essential consideration in the provision of infrastructure.
The building of traditional infrastructure and the associated programs they deliver are relevant as a subset of the corporate bond market discussion. It goes to the importance of social infrastructure for our future prosperity, and the role that impact investing and social impact bonds can play in this. It was important enough to feature in the recent FSI Interim Report.
This is an issue close to NAB, and represents an extension of our fair value agenda. Indeed at the heart of our organisation is the belief, the ethos, to do the right thing. NAB is a leading advocate for Impact Investment and we believe the next stage in Impact Investment is the development of an active Social Finance market in Australia.
Global trends and market forces such as an ageing population and a declining tax base support the forecast that impact investment will be a $32 billion market in Australia by 2022 according to IMPACT-Australia, of which NAB is a founding partner.
In line with our values system, we believe we have a responsibility to deliver holistic and innovative financial solutions that help our customers address social and environmental problems through impact investment. Impact Investment makes sense as a commercial business opportunity and can play a vital role in building successful communities and future proofing our nation.
It provides an opportunity for a collaborative approach to addressing the significant growing social issues facing the Australian population. The gap between demand for welfare services and what government can provide is growing and we believe accepting no change to the current arrangement would disadvantage the Australian economy and our prosperity in the future.
Government can play an active role here. Other countries have shown how timely government action can catalyse impact investment market development. The United Kingdom has been a leader in this. A 2010 social impact bond – the first of its kind – was launched in the UK to fund a program to reduce recidivism rates at Peterborough Prison in Cambridgeshire, with promising results. Just this year, the United States Government announced the launch of a social impact bond to reduce teen pregnancy and improve education, while our neighbours in New Zealand are currently exploring a social impact pilot, potentially around reducing recidivism, increasing employment, and improving management of chronic health condition.
The NSW Government has released two social bonds, one to support families to facilitate their child’s return from foster care and another to fund the Resilient Families service that provides support to families and children post-crisis.
Meanwhile South Australia has released a tender to deliver a series of workshops to deliver classroom training workshops and online training materials to build capacity amongst service providers and government staff.
NAB is focused on delivering innovative models for the social sector to access capital, developing investments that are designed with the intent to create a positive social impact beyond financial return, including identifying new ways to fund affordable housing programs, creating a private fund to invest in social enterprises, and working with several not-for-profit organisations to structure deals to bring to the Australian Bond market.
The solutions are there, but the work is ahead of us, and involves collaboration between governments at all levels, industry, and community. We need a funding model that can ensure we have the infrastructure we need to power the growth and competitiveness of our nation well into the future.
And we need to consider not just the tangible, built infrastructure – that will only get us so far. We must factor in the vital social infrastructure needs of our nation as well. With our strong financial system, ready investors, and that growing pool of super savings, we must grasp this opportunity.
NAB is certainly committed for the long term and sees the opportunity to leverage Australia’s leading role in infrastructure across the globe.
This article was first published in “2014 Year in Review: Capital Financing”. For more articles, download the full report.
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