Concrete Analysis

Australia a good case study for use of private capital in infrastructure projects

PUBLISHED : Tuesday, 22 August, 2017, 3:41pm
UPDATED : Tuesday, 22 August, 2017, 7:41pm

Investors may be forgiven for being frightened of the unknown.

Major political shocks have heightened risk and uncertainty in the public markets. Populist developments dominated 2016 in defiance of expert predictions, setting the stage for an equally unpredictable 2017. These developments gave long-term investors reason to pause, reflect and in many cases reevaluate risk and their portfolios even as equities climbed since Donald Trump’s election in the US – a feat repeated more recently with Emmanuel Macron’s victory in the 2017 French presidential election.

Uncertainty in the equity markets has been coupled since 2008 by a consistently low interest rate environment, which limits the appeal of traditional fixed income investments for long-term investors. All this has occurred as Asia’s economies are maturing with an increasingly large pool of pension assets to manage. These circumstances have increased the appeal of real assets, particularly infrastructure, as an asset class for Asian investors.

Australia was one of the first countries to embrace private investment in critical infrastructure projects, and AMP Capital was one of the first participants, making its first investment in 1988 when the New South Wales government raised funds from private investors for the construction and operation of the Sydney Harbour Tunnel. Many more privately-funded infrastructure projects have followed, from roads to large-scale electricity transmission.

Australia was one of the first countries to embrace private investment in critical infrastructure projects

This same period has seen the privatisation of many Australiangovernment-owned assets, with gas transmission, power generation, major airports, shipping ports and much rail infrastructure now owned and operated by the private sector. More recently, partial privatisations of electricity transmission and distribution assets have featured.

The private sector in Australiahas also been heavily involved in the delivery and operation of social infrastructure. Public-Private Partnership (or PPP) concessions are now common means of delivering assets such as schools, hospitals, student accommodation and water and waste water treatment assets.

In comparison to most other developed economies, Australianprivate sector involvement in infrastructure provision has achieved bi-partisan political support. There is now a long track record of the successful delivery of high-quality assets, operating to high standards, supported by a body of effective contracts forms and regulation.

From a government perspective, private sector involvement in infrastructure provision allows them to more flexibly allocate financial resources while improving service provision and standards at a lower cost than traditional approaches. Most importantly, private investors help to diversify risks away from taxpayers.

For private investors, infrastructure assets often form natural monopolies with high barriers to entry for competition

For private investors, infrastructure assets often form natural monopolies with high barriers to entry for competition. They typically provide an essential public service, and have long usable durations with enduring, stable cash flows and a low rate of volatility. PPP concession assets are also frequently operated under contracts from governments that are inflation-linked, protecting investors from inflation risks.

Currently, Australia’s spending on infrastructure amounts to approximately 3.5 per cent of GDP with about 0.9 per cent of GDP provided by the private sector.

Australia’s success in attracting private investment in its infrastructure assets has been built on the following:

•Broad political support, which in turn stems from its successful track record

•Effective collective asset delivery IP

•Fair and transparent regulation and governance within an effective rule of law

•Robust procurement processes

• Low perceived levels of corruption

With major infrastructure projects on the horizon in Asia’s developing economies, many are likely to be considering using private capital to support these projects, and global investors are eager to support projects that will transform the region’s economy. But without robust governance and a sound legal system, infrastructure investors may find funding of these projects too risky.

Governments would do well to examine Australia’s success in getting infrastructure projects up and running swiftly and efficiently with the help of private capital.

Kerry Ching is managing director for Asia of AMP Capital