Funds wary of big projects

The report, by Ernst & Young and commissioned by the Financial Services Council, confirms that Australian super funds are willing to channel more of the nation's $1.3 trillion super nest egg into infrastructure projects such as roads, rail and power stations.

But barriers stand in the way, the report claims, including a lack of government-backed projects of a suitable size and structure. The underperformance of a series of toll road projects had also dented the sector's confidence in infrastructure investment, especially in new or "greenfields" projects, Ernst & Young found.

And when potential projects did emerge, super funds were often turned off by lengthy, costly and complex tender processes, uncertain timetables and poor co-ordination between state and federal governments, which led to "unacceptable risk" around some projects.

It meant some super funds had failed to build expertise in infrastructure investment, believing that due to the lack of suitable projects and complexities involved it was not viable to do so.

Uncertainty surrounding government policies such as carbon pricing and renewable energy initiatives was cited as another risk. The reluctance of governments to borrow money to pay for infrastructure was also raised as an issue, with suggestions it had resulted in a "volatile" investment environment and cynicism about government infrastructure pipelines.

The Financial Services Council, which represents for-profit, or retail, super funds that manage about 28 per cent of the nation's $1.3 trillion super pool, commissioned the report amid long-running and growing calls for more of Australia's super savings to be used to fund new infrastructure, including by lobby group Infrastructure Partnerships Australia.

It also follows a call from the government's infrastructure adviser, Infrastructure Australia, for an "urgent" rethink of how infrastructure projects are financed in Australia, calling for a more "mature" and "challenging" debate on the issue. It warned last week that Australia would need $300 billion in infrastructure spending over the next decade some of which would need to come from the private sector, it said.

Infrastructure Australia has set up a new financing working group, aimed at packaging infrastructure projects especially greenfields projects to make them a more attractive investment for superannuation funds.

The Ernst & Young report was based on talks involving about 20 industry figures, from funds managing about $300 million.

Australian super funds are estimated to have between 5 per cent and 10 per cent of their assets invested in infrastructure typically higher for industry funds working out to between $40 billion and $80 billion, excluding self-managed super funds. About $6 billion of this is estimated to be invested in Australian airports. But a significant proportion has also been channelled into office buildings, rather than widely used transport, energy or water infrastructure.

The super industry has repeatedly warned of a series of impediments to further, large-scale investment in infrastructure, including the illiquid nature of infrastructure assets.

Some participants in Ernst & Young's research also warned that the introduction of the no-frills MySuper default funds could deter funds from investing in infrastructure, saying it could be too expensive given MySuper's focus on low-cost investing.

A continued reluctance by Australian banks to lend for terms longer than 10 years was cited as another factor.

Financial Services Council chief executive John Brogden said superannuation should not be seen as a "cash cow" to solve Australia's infrastructure needs, saying fund trustees were required to invest in projects that offered members a commercial return.

"It's very easy for people in the public policy debate to simply say more super money should be spent on infrastructure," he said. "That rolls off the tongue very easily."

He said that the challenge was finding funding vehicles or models that would share risk between governments and investors "whether it's a [public private partnership], whether it's fully privately owned, [the question is] what model is going to work to build the next round of infrastructure in Australia?".

But he warned there was no "one-off, magic solution . . . otherwise, we would have found it by now".

The report calls for a national pipeline of infrastructure, with a "robust and time-efficient" selection process enforced by a national body, possibly a reshaped Infrastructure Australia.

It also suggests that the tender processes of PPPs be "streamlined".