SMSFs can be infrastructure's driving force

Tony Abbott's plan to offset the mining slowdown is to turbocharge infrastructure investment. SMSFs would happily fund new projects if the PM can sell the 'user pays' model.

Australians approaching retirement, or whose superannuation funds are already in pension mode, shiver as they watch the current brinkmanship in the US.

But the American turmoil will underline the opportunity Australian governments now have to harness the power of self-managed funds to drive funding for infrastructure investment (Gear up: it's time to get on the roadsOctober 1). New superannuation minister Arthur Sinodinos is unfamiliar with and nervous about self-managed funds (Is Sinodinos stalking self-managed super?, September 30). But once he understands why Australians have embraced them he will understand that these funds can turn the Abbott infrastructure vision into reality.

It’s unlikely, but if the Republicans are prepared to go all the way then we will see another period of great turmoil in the share market.

Low interest rates have pushed self-managed pension-mode superannuation funds deeper into the equity market increasing their vulnerability to stock market swings which, if severe, can affect their living income.

And self-managed funds comprise more than half those Australian funds in pension mode.

New Prime Minister Tony Abbott believes that the only way to offset the mining investment decline is to kick-start infrastructure investment in all states. To do that governments need to educate their electorates that the infrastructure can only be funded on a “user pays” basis and so there will be extra toll roads, fare rises and other charges.

While this will not be popular, if the retirement income benefits of the toll road or better rail infrastructure go to the local saving community it becomes a much easier sell. And because our self-managed funds dominate pension-mode superannuation, Australia is unique in the world in having this advantage.

We have seen some wonderful toll road infrastructure investments including many of the Sydney toll roads, Melbourne’s City Link and the bonanza of them all – the ConnnectEast toll way (which we sold for a peppercorn to the Canadians because our sleepy institutions did not understand it at that time). But we have also seen horrors like the Brisbane and Lane Cove tunnels.

In essence, infrastructure investments have to have realistic income projections that take account of the fact that many people will seek routes that do not carry tolls. Governments have to guarantee a minimum toll income and a construction cost. New South Wales is selling assets to pay for the early stages of infrastructure investment so it can later sell an established income stream. That’s a good strategy but it’s not available to all and it may cause assets to be sold that the state should own.

In terms of investment sources the industry funds, which have 26 per cent of the total superannuation market, have achieved stability in their fund flows and can make major infrastructure investment. The retail funds, which are mostly owned by banks plus the AMP, control around 20 per cent of the market and are much more vulnerable to swings and have greater difficulty making very long term illiquid investments.

The self-managed funds with 31.3 per cent of the total market – and more than half the pension fund mode market – are ideally placed because they do not have the threat of withdrawal and, while they must have liquidity to pay pensions, they do not need to safeguard against sudden withdrawal because the beneficiaries control the game.

The obvious way to fund infrastructure is to issue bonds and equity. It will be tempting to collectivise investments into one fund but, even if that happens, it will require patronage and construction cost guarantees. Given those guarantees, community opposition will be greatly reduced if their own superannuation funds can benefit from the user pays infrastructure.

Yesterday I explained why Australians have moved to manage their own funds (Is Sinodinos stalking self-managed super?, September 30). Australians did not set up their funds to finance infrastructure but both Federal and State governments have been handed an enormous opportunity.