The Australian Financial Review, 9 December, 2008.

Super chiefs dump public-private deals
Distressed overseas assets may prove more tempting to investors than local infrastructure projects, writes Duncan Hughes.

Governments’ ability to raise private funds to pay for their billion-dollar infrastructure projects has been dramatically reduced because of the global credit crunch and investors’ growing disenchantment with public private partnerships (PPPs), investment expert says.

Industry superannuation fund chiefs, responsible for more then $250 billion under management, say they are abandoning investments in new PPPs in favour of opportunities to aquire distressed assets, often from overseas, in the fallout from the global financial crisis.

Industry Funds Management chairman Garry Weaven said PPPs would have to compete with “bargain basement” investments coming onto a depressed market.

“With existing assets available on a global basis at reduced prices, investment in new local projects becomes less attractive in terms of immediate returns,” said Mr Weaven, whose IFM has about $17 billion under management and is owned by 37 non-profit super funds.

Mr Weaven is also one of five private-sector appointees to the federal government’s Infrastructure Australia, a national body intended to develop a blueprint for unlocking infrastructure bottlenecks and modernising assets. His comments are a blow to the state and federal governments, which have admitted they will have to delay badly needed infrastructure, spend rapidly shrinking surpluses, or enter into politically risky deficits because of the financial crisis.

The Council of Australian Government is finalising an overhaul of the public private partnership funding rules by cutting red tape, abolishing anomalies between state plans and overhauling expensive tendering processes to fast-track infrastructure in investment.

Federal opposition infrastructure spokesman Andrew Robb said the overhaul did not go far enough and accused the federal and state governments of obstructing infrastructure investors’ access to potentially hundreds of billions in super assets. Mr Robb said reforms would make it more attractive for fund trustees, who must approve asset allocations in the interests of scheme members, to increase exposure to infrastructure investments.

David Atkin, the chief executive of Cbus, which manages $13 billion for construction industry workers, said the PPP system was “inflexible, convoluted and expensive”.

“We would like to invest in Australian infrastructure, but it has to be a good return on the risk you take,” he said. “If we have better overseas opportunities, than we are obliged to take them.”

Darren Olney-Fraser, the CEO of Australian Public Trustees, a boutique investment company specialising in government leased assets, said PPPs would be “dead in the water” for at least the next 12 months, until liquidity returned to the markets.

“Banks are not able to give bidders sufficient funding support, so bidders cannot step forward,” Mr Olney-Fraser said. “Banks” appetite for debt is severely constrained, so they will be rationing debt and equity to their clients in smaller amounts. Large PPPs needing hundreds of millions, if not billions, of dollars just can’t be supported.”

The chief executive of the $15 billion First State Super fund, Michael Dwyer, said the fund was underweight in infrastructure and would consider offers “if they are well priced”.

PPPs currently in the pipeline, such as the Victorian government’s $3.2 billion desalination plant, might have to be funded by government debt for at least the next two years, My Olney-Fraser said.

The banks are not to give project bidders suffient funding support.
Darren Olney-Fraser

The Victorian government is reviewing a final shortlist of two applicants for the nation’s largest PPP, and a spokesman for Treasurer John Lenders said market volatility would not prevent the private sector from “helping us deliver good-value-for-money PPPs”.

The chairman of Infrastructure Australia, Rod Eddington, recently warned that the financial crisis had “profound implications not only for the businesses of today that require credit to keep going but also for infrastructure projects of tomorrow”.

Mr Weaven said that since super funds had experienced falls in their listed share portfolios, their better performing holdings in infrastructure and private equity were now a larger percentage of total holdings.

“Conventional asset allocation models will tend to underinvest in infrastructure in these circumstances,” he said. “We need to find a way to encourage longer-term thinking by funds as well as getting a focus on underpriced quality assets.”

Plenary Group principal John O’Rourke said: “Clearly, debt funding for public private partnership has dried up globally.”