A further slowing in growth
Reduced government funding and a growing population are forcing local councils to find alternative funding for public assets and community projects. NAB has already started filling the gap, with new mechanisms opening up funding sources usually closed to small lenders.
The Australian Local Government Association (ALGA) estimates $47 billion of community infrastructure currently requires renewal or an upgrade. Such a significant list of overdue projects illustrates the need to find new ways to finance community infrastructure. And as a major investor in Australian infrastructure, NAB is well positioned to champion them.
Steve Lambert, NAB Executive General Manager, Corporate Finance, explains that local governments have historically relied on state and federal government for their infrastructure funding, which has led to communities being largely excluded from identifying and meeting their own infrastructure needs2. “NAB is enabling an approach whereby communities take greater control of their infrastructure needs and collaborate with investors and businesses to realise them.”
In 2015, local councils managed assets with an estimated gross replacement value of more than $438 billion3. These amenities have a direct impact on our communities’ quality of life. However, local government is receiving less and less central government funding to maintain and renovate them – a shortfall compounded by our expanding and ageing population.
NAB has been encouraging new social infrastructure conversations in a number of ways. “Most of the focus is understandably on large privatisations and public-private partnerships,” Lambert says. “But we must also think about community-based micro projects, too.”
Lambert points out that NAB already has a track record of successfully bringing together Australian and international investors on billion-dollar infrastructure projects, adding, “the challenge is to leverage that expertise into financing new sports ovals, parks, schools, hospitals, university projects and social housing”.
“Alone, a council wanting to spend $20 million on a sporting facility will probably struggle,” he says. “But if we combine 50 councils with similar aspirations and raise $1 billion to fund sporting infrastructure across the country, those borrowing costs are a lot lower.”
NAB set the benchmark for this approach in 2014 with a revolutionary financing model for the Municipal Association of Victoria. This innovative Local Government Funding Vehicle (LGFV) enabled domestic fund managers to invest in council debt. It saved millions of dollars for individual councils through lower borrowing costs.
Connie Sokaris, General Manager, Resources, Infrastructure and Government, Corporate & Institutional Banking, National Australia Bank Limited comments: “As we look at mid-term government needs and how we replace public-sector money with private capital, the likes of the LGFV deal will become increasingly important. It’s an issue of scale, about smaller borrowers like councils being able to reach a type of market that they can’t access independently.”
“LGFV is an example of communities working together to raise capital,” Sokaris adds. “It demonstrates the potential of using capital markets to fund community projects through bond issuance. It also shows there is an appetite among investors for these assets.”
Superannuation funds are traditional investors in mid- to long-term income-producing infrastructure projects. Lambert points out that now, they are incorporating social, environmental and government considerations into their investment decisions, which means they’re looking to fund significant community projects that benefit their members.
“Retail fund managers are looking for a new type of asset class that aids portfolio diversification and has an appropriate long-term risk-return profile. Social infrastructure ticks a lot of those boxes.”
NAB has successfully used this type of strategy to fund social housing projects in Australia, Europe and the United States. “We know housing is vital for social inclusion and we know institutions want to fund it,” Lambert notes. “But there’s a lot more still to do, especially in Australia.”
Sokaris explains that NAB’s success at creating new funding pathways is down to treating innovation in deal-making and funding as a business. “NAB’s structure includes a team of very senior professionals who have been in debt markets for a number of years and who now solely work on innovation and delivering cutting-edge funding solutions.”
She points out that when you combine NAB’s expertise in lending to local government and organising capital market deals for Australian universities (and their student housing developments) with social-impact and climate-change bonds, plus Islamic finance, NAB can do something of value to Australian communities. “By integrating our national and international infrastructure expertise with our knowledge of capital markets, we’re well placed to initiate community infrastructure deals,” she says.
NAB’s infrastructure commitment is reflected in its 2016 pledge to help finance $100 billion of Australian infrastructure projects over seven years.
“As an industry, we need to rethink the future of banks in helping build stronger communities,” Lambert says. “And that must begin with finding ways to fund billions of dollars of social infrastructure around the country.”
To learn more about NAB’s infrastructure work, visit nab.com.au
2 May 2017 research paper by Gary Bowditch, Executive Director of the John Grill Centre for Project Leadership at the University of Sydney.
3 Australian Local Government Association (ALGA) National State of the Assets 2015 report
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