Road bumps ahead for Mr Infrastructure

Tony Abbott declared last night that if he became prime minister he wanted to be known as “Mr Infrastructure”. Given that Canberra no longer has abundant money what he was actually foreshadowing was a massive change in funding infrastructure in Australia, including the role of self-managed superannuation funds and industry funds.

Both Kevin Rudd and Abbott see massive infrastructure investment as the way to cushion the looming major fall in mining investment.

The campaign also foreshadows the biggest infrastructure debate of all: 'What would be best for Australia? A second Sydney airport or a fast rail link between Melbourne and Sydney?' The government goes for fast rail. Tony Abbott is on the fence and is keener on a long series of shorter term projects in each state plus northern and regional development.

Rudd promised to set Australia on the long-term path for a fast train link between Sydney and Melbourne, so igniting the debate between the fast train and the second Sydney airport. A fast rail link would slash the number of planes that are required to land in Sydney, reduce carbon and open up regional centres so that people could live in those centres and commute to Sydney or Melbourne, reducing the need for expensive city infrastructure.

Conversely a $10 billion second Sydney airport, while much cheaper than a $100 million fast train, could become like similar second airports in New York and London which are extremely unproductive and cause great confusion among passengers.

The Sydney Airport Corporation says that it has capacity to service demand needs for at least another 20 years. This is not the place for such a debate but it underlines that while we might have money at the ready, Australia’s great problem will be finding infrastructure projects that yield a satisfactory return for superannuation investors.

As things now stand, neither a second Sydney airport nor a fast train would come into that category. Even less ambitious projects suffer because users of new facilities are often not prepared to pay the tolls, fares charges, etc, required to service the capital outlays. They want the facility free.

At the Australian Leadership Retreat at Hayman I had a fascinating interview with the chief executive of the Association of Superannuation Funds, Pauline Vamos. She explained that of the $1.6 trillion that we have in superannuation some $600 million is in self-managed funds; about $400 million is in the compulsory ‘my super’ type schemes and the remaining $600 million is managed by the various choice schemes. The infrastructure difficulty facing many of the funds in the choice schemes is that their money can be withdrawable so the managers are reluctant to commit too much to illiquid investments like infrastructure.

By contrast I believe the self-managed funds are hungry for infrastructure investment because a great many of the beneficiaries are approaching or in retirement and are looking for yield. 

Similarly the ‘my super’ funds have stability of tenure and are therefore very interested in infrastructure. Industry funds are the significant players in the ‘my super’ space, which is one reason why Industry Funds Management agreed to pay $5 billion for Port Botany.

Industry Funds Management also offered to fund Melbourne’s proposed East West Link, but the project will be tendered. As industry funds look for new infrastructure investments there is considerable activity in the self-managed sector with Macquarie forecasting a new spurt of growth in self-managed funds. Groups like AMP, Colonial, BT and others are fighting to avoid being caught in the middle of the rapidly expanding self-managed fund and industry fund movements.

AMP and the bank-owned superannuation funds are trying to convince self-managed funds to use giants’ investment platforms and to have a big slab of the self-managed fund money managed by the institutions. Whether they succeed in this drive remains to be seen, but easier access to infrastructure investment may help them. But there is a clear streak of independence in the self-managed fund movement, and those seeking to attract self-managed fund infrastructure investment may have to use other techniques.

There is grave danger that longer term some of the bank-owned superannuation funds (Colonial, BT, ANZ and MLC) plus AMP will struggle in the squeeze play between the growth of self-managed funds and industry funds. 

But there is also a struggle to convince users of infrastructure assets that they have to pay a fair amount to justify institutions in investing in infrastructure. In the road networks we have had some very successful road operations but also unsuccessful ones like the Lane Cove Tunnel and the Brisbane Tunnel. It was clear at Hayman that to gain superannuation support governments are going to need to guarantee the construction of these projects and possibly the early stages of returns. Convertible bonds may be used.

New South Wales is looking to sell existing infrastructure (like Port Botany) and use the funds to build new infrastructure which will be sold when the construction and early patronage risks are passed. What was apparent at Hayman was that there had not been enough consideration in how to bring together the willingness of the users of the infrastructure to pay, enabling creation of securities that can offer a return. That will be a big issue for ‘Mr Infrastructure’ should he win office.