Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
Funding, finance and risk – insights from the AFR National Infrastructure Summit 2017
There’s a fine balance between risk and reward in major infrastructure projects. Understanding the opportunities and challenges is equally important, as is securing the right kind of funding.
Risk is a reality in major infrastructure projects. At this year’s AFR National Infrastructure Summit, a panel of investors, consultants, bankers and project sponsors explored how risk evolves over the cycle of projects, how to manage it, and how to price for it.
- Tom Mazzaferro, General Manager – Specialised Finance, NAB
- Stephen McIntyre, Executive General Manager – Health & PPPs, Spotless
- Ross Israel, Head of Global Infrastructure, QIC
- Paul Oppenheim, CEO, Plenary Group
- Facilitator: Paul Mountney, Partner, Deloitte
From your perspective, what are the major risks of major infrastructure projects?
McIntyre: From a service provider’s perspective, there are significant risks at most stages of public-private partnerships (PPPs). The most risk comes in the mobilisation phase because that’s when success is determined. The operations phase has risks around the skills we have on board and how well we’ve played out the investment in the mobilisation phase. And finally, the life cycle stage opens a whole new avenue of risk and opportunities with changing technology. Spotless hasn’t experienced handback risk yet.
Israel: I’d rather compare the PPP risks to those of an operating business. There are two key types of risks for us. The first is around the stakeholders you’re managing. We increasingly focus on how to manage local, state and federal government; how you manage regulators; and how you manage customers. Intertwined with that is how you manage governance of the vehicle you’ve invested in. We see different risks as a long-term owner: as a shareholder it’s about who we’re invested with; there’s also the integrity, composition and structure of the board to consider; and the alignment of management in respect of the operating outcomes you want.
As an institutional investor, the long duration of investments has highlighted two other risks: One is around the life cycle of technology in long-duration assets. The second is around climate change and the ever stronger obligation to look at ESG matters and how customers are driving business.
Oppenheim: From a government perspective, the key risks are around implementation. Australia has got better at infrastructure planning but we still need to improve the procurement and delivery of projects.
Regarding PPPs, the central tenant is usually around risk transfer, but it’s also always about innovation and long-term service delivery.
From a private capital perspective, there’s private capital willing to move further up the risk curve and take on greenfield projects. However, we haven’t found a way to harness private sector innovation and capital to revitalise existing assets.
Mazzaferro: As a bank, there are risks around a lack of liquidity. Liquidity has been supplied by Asian banks and they’re becoming more involved on the debt side of infrastructure. However, we can’t afford to be complacent because we’ve seen foreign investors walk away.
There’s also a risk around not utilising the capital pool we currently have, especially at more local levels. NAB sees a long line of stalled community projects where local councils are leaning too heavily on government funding and don’t take advantage of the private equity that’s there.
How can banks and government help local agencies access private capital?
Mazzaferro: It’s naive to assume local councils have the expertise to negotiate private capital deals. Government and banks could advise councils on how to position themselves for private funding and how to negotiate risk allocation. Or government could pay in advance for that expertise to be brought in.
What are the challenges around mobilisation around non-capital city PPPs?
McIntyre: Mobilisation is not about generating commercial returns. It’s not about saving money or sticking to what we bid. It’s about making sure we get it right for long-term success. It’s in the operations phase when you make sure you can generate your long-term returns.
The real challenges often come about in regional areas because of the difficulties in finding people with PPP knowledge and expertise. That scenario drives over-investment in those early days to make sure that we get it right for the long-term.
How do you ensure at implementation phase that you deliver on your KPIs?
Oppenheim: First of all, operational readiness is everything. The key is to mobilise early for success. A clear definition of the government’s objectives is crucial. It’s not just about risk transfer. It’s also about community outcomes, service delivery and even design outcomes.
Considering third party equity is also important. Private capital can help facilitate the government’s outcomes. A lot of it is about flexibility around solutions from all sides. You can’t write it into contracts but it can be a mindset.
What assets cause you the most worry?
Israel: The ones that have been driven off alignment on a number of levels. Challenges around different stakeholder time frames; who has active and passive control of the operating business; whether you can internalise or externalise for economies of scale; and also if the reward drivers of the board and management are not aligned.
Unsolicited proposals very rarely succeed. Why is this?
Oppenheim: Governments apply a uniqueness test to check value for money. In most cases, there are competitors who could do the same thing better and who have a track record.
McIntyre: From a non-PPP perspective, uniqueness is a risk issue. And even within PPPs, new technology still doesn’t get traction very often.
Israel: Government needs to be brave to take the leap. There needs to be an alignment between the political and stakeholder stars for an unsolicited proposal to get up.
As PPPs have longer lives, how do you get comfortable with costs over these time frames?
McIntyre: In our early transactions, it was analytics and estimations plus variation built into the price – and a crossing of the fingers. Now, on the bid side, Spotless has enough internal data to estimate costs. Once you’re established in the operational phase, there are ways to recover within a project or across the portfolio. But in my four or five years of management, there have been no real shocks.