A further slowing in growth
After the recent investor jitters triggered by the failure of some Public Private Partnership (PPP) toll roads, it looks like a new wave of infrastructure PPPs, kick-started by Federal and State Government investment, are making a strong comeback.
The 2017 Federal Budget saw $75 billion dollars earmarked for infrastructure spending over the next decade. Projects given an immediate green light include the Western Sydney Airport, the inland rail link and the Snowy Hydro upgrade.
Tom Mazzaferro, General Manager, Specialised Finance at NAB, points out that these projects are needed to increase Australia’s productivity and service our growing population. “It’s also great to see that governments understand how infrastructure PPPs can play a role in curbing public debt while stimulating the economy.”
Brendan Lyon, CEO, Infrastructure Partnerships Australia (IPA), agrees. “It’s difficult for private companies to commit to projects like the inland rail link because there is no mechanism, such as a toll, to ensure their debt and equity is repaid. That’s when you really need government backing in the ‘greenfield’ or construction phase.”
Both Mazzaferro and Lyon agree that the recent upswing in infrastructure building is due to the NSW and Victorian State Governments’ recycling of ‘brownfield’ (operational infrastructure) assets to the private sector.
“By selling their existing operational assets, governments can increase their funding capital for future projects,” says Lyon.
Mazzaferro adds that it is important to understand that projects such as the Western Sydney Airport and the inland rail link would never get off the ground without initial government finance. “These large projects carry complex risks and do not immediately provide viable minimum returns for private capital.”
For Tom Mazzaferro, West Connex is a classic example of how asset recycling benefits the physical and social infrastructure needs of society.
“The Federal and NSW Governments invested significantly in the early greenfield construction stage. And as West Connex gets closer to generating income, the governments are preparing to sell a portion of their equity stake to the private sector. This allows the NSW government to recoup taxpayer funds to use on future infrastructure projects in the state.”
Mazzaferro believes PPPs will become increasingly prevalent in Australian funding models.
“Their ability to spread project payments over longer time frames and shift certain risks from tax payers to the private sector benefits tight government budgets and delivers the upgrades needed to maintain and enhance Australia’s productivity.”
NAB has a long history of participating in infrastructure PPPs for transport, health and prisons.
“Social infrastructure PPPs often work best when a strict mandate governs private capital investment,” says Mazzaferro.
“In the prison space, for example, NAB has financed transactions where incentives payments are based on reduced recidivism targets. “
IPA’s Brendan Lyon adds that PPPs work best when the government is very clear about what it is buying, both socially and physically. “The government has to be very definite about what it wants from the infrastructure. Ensuring the best outcomes for everyone means processes, risk allocation and accountability have to be very well defined.”
NAB’s Tom Mazzaferro sees potential for loan growth in the smaller PPP space. NAB has already lent to PPPs for public hospitals, prisons and university student accommodation, but it is the affordable and social housing sector that he believes could benefit from PPP investment.
Lyon agrees, pointing out that NSW and Victoria are already investigating ways to fund social housing reform. “Today, they need to fund asset building plus service delivery. The social component is moving from family housing to fulfilling the accommodation and social service needs of vulnerable groups.”
Another untapped market is local government. NAB is actively meeting with Councils to help them better structure their funding through outcome-dependant PPPs. The recent NAB article on the role PPPs could play in unlocking under-utilised council assets is here.
Tom Mazzaferro is also excited by the growth of infrastructure as a service export. “Australia’s experience of recycling physical assets to fund new projects is being adopted overseas. NAB has been financing PPPs and brownfield projects in the United Kingdom, the European Union and the United States for some time. We have a niche capability to assess the risks involved and local US banks don’t heavily focus on this part of the market. Australian infrastructure equity is becoming a large player in these jurisdictions. The US is looking closely at the Australian model. Some of our US customers are now on Trump’s business advisory council, advising on best practice for PPPs and Infrastructure.”
Back home, Mazzaferro warns that many of our own large infrastructure transactions are still going offshore for capital markets term outs.
“The challenge for Australia is to continue to build the domestic infrastructure bond market so we can keep that fixed income investment in Australia for our own investors. NAB is playing a large role in the development of this sector.”
Alex Stephen, Senior Portfolio Manager at Redpoint Investment Management, reminds us that greenfield infrastructure projects such as those announced in the 2017 Budget carry complex risks and cannot create a return in their early years.
“These projects won’t touch the listed market for some time. Listed infrastructure companies are unlikely to become involved until the projects enter the brownfield stage and there is the possibility of generating income. That could be quite a few years down the track.”
Stephen adds that the companies included in the Redpoint Global Infrastructure Fund are already generating stable incomes. “We look for the highest quality and most reliably yielding listed infrastructure companies worldwide. At the moment, we only have around five per cent of the fund with Australian companies.”
Stephen says the main attraction of infrastructure investments is that they can offer steady, decent yields over a 20- to 30-year period. “The Redpoint Global Infrastructure Fund provides protection from volatility while returning a better yield than global equities. We invest in a globally diversified portfolio of infrastructure stocks and look for companies that have strong cash flow, quality earnings and can deliver those over the long term.”
Find more information on the Redpoint Global Infrastructure Fund here.
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