Infrastructure the route for DIY super

Australian super fund trustees are ready to fund infrastructure … it’s a matter of making it available.

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Summary: Interest in Australian infrastructure assets by offshore pension funds highlights their attraction. Self-managed superannuation funds have the capacity and desire to buy in to long-term income-producing assets so their members can fund their retirement with a lower-risk exposure.
Key take-out: It would be much more politically attractive to have residents in their state owning toll roads and other infrastructure.
Key beneficiaries: Self-managed super fund trustees. Category: Superannuation.

It’s time for self-managed funds to be counted. In the chaos of Canberra you can feel an attack coming on those who wish to fund their own retirement.

Hopefully if such an attack takes place it will assist a Coalition victory and Tony Abbott will reverse that attack. If there is a vicious Gillard Government attack on Australian retirement savers, we will do our best to lock in the Coalition to reversing it.

But there was another development this week which also requires self-managed funds to stand up and be counted and helps to explain some of the wild gyrations we have seen in our stockmarket.

First some background. Industry funds and the big bank-based operators obtain most of their business through working people contributing to superannuation. At least half of people who retire make sure they have their own self-managed fund, and that percentage is likely to grow further as time goes on. In other words, the established superannuation elite are about providing lump sums for retirees and self-managed funds are the groups who are looking for long-term retirement income.

The established funds are always frightened of a run on their funds so are reluctant to invest large sums in infrastructure. Conversely, self-managed funds do not have a liquidity problem and if they’re investing to provide a pension in retirement then infrastructure is an excellent investment. What made me angry this week was the proposal from some Canadian pension funds – the operators of what was once Australia’s best listed infrastructure asset, ConnectEast.

The Canadians want the Victorian government to put a toll on one of its main freeways. They would then buy the rights to that toll for the next 30 or 40 years and the Victorian government would use the money to build another road, which would also yield a toll.  The politicians ran a mile but the Canadians are right – the only way to fund massive investment in new infrastructure is to toll existing infrastructure.

In principle, putting a toll on an existing asset and selling that asset to fund a new asset makes a lot of sense, but why sell such a prime asset to the Canadians when the self-managed funds need those assets to fund their retirement?

The problem is that because the industry and bank superannuation funds are not big players in the retirement business and they are not major infrastructure investors. That is why they let ConnectEast go to the Canadians for little more than a peppercorn. We need to tell our politicians that it would be much more politically attractive to have residents in their state owning toll roads and other infrastructure and gaining the benefits from that infrastructure to help their retirement.

Immediately you will say, what about BrisConnections, which was a total disaster? The answer is that you have to price infrastructure correctly and make sure that the infrastructure makes sense. The BrisConnections facility didn’t make sense and was priced crazily. Sometimes there will need to be some government guarantees in the early years to make sure that there is not a hiccup at the beginning.

Because Australia has so few infrastructure assets, Australians have had to chase yield via bank shares and Telstra. Bank term deposits are no longer attractive to long-term superannuation holders. The chase for Australian yields has sent the Australian market share price earnings ratio to much higher levels than the US and led some US analysts to say our stocks are overpriced. Refer to my previous Eureka article, The US fund manager with a danger alert. The belief amongst global institutions is that Australian shares are much too expensive compared to US shares, and this view tends to multiply the downward thrust when there is a global scare. So Australian shares reacted more savagely than American shares during the crisis in Cyprus this week.

Asian shares were also hit, but I suspect their decline most closely related to the clear evidence that we are looking at a long-term China change in direction, which will see less emphasis on infrastructure and more emphasis on consumer goods and services. That is not good news for our miners in the longer term. In fact, we are likely to see steep falls in the iron ore price in a couple of years. BHP will need its US shale gas and oil to provide growth.

Australian retirees are ready to fund infrastructure. There is no need to make it compulsory.

And so I urge all self-managed fund people who know state or federal politicians to explain to them that if they want to sell and rent back a school, railway lines, railway carriages or to put a toll on the road, then look first to the self-managed funds as the source of the capital.

Of course, many state-owned enterprises are used to receiving taxpayer money to achieve their funding so no capital costs are attached. Once you have sold the asset, of course you must pay the cost of the capital, which is what infrastructure is all about. But the simple problem is that there is not going to be enough tax revenue to fund infrastructure and too much debt lifts the cost.

Infrastructure is going to have to be funded by the superannuation movement. And, provided the infrastructure is priced correctly and fairly, that’s a good thing for those looking for a retirement income. They will not have to push up bank shares to the point where they have a danger element to them.

But given that the Canadians know so much more about the value of our infrastructure assets than we do, this is a dangerous time for the Australian self-managed superannuation movement. We need access to first-class infrastructure assets that governments have decided to sell. And those assets will enable retirees to fund their retirement at a far lower risk exposure. Everyone wins.

It’s time for self-managed funds to be counted. In the chaos of Canberra you can feel an attack coming on those who wish to fund their own retirement.

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