Home' Future Building: The Australian Infrastructure Review : Volume 8 Number 1 Contents futurebuilding
forgoing public sector ownership in the future.
Australia’s attractiveness as an investment destination is a
relative question, as you have to look at what’s happening in
other jurisdictions. How does Australia compete with others?
Globally, the benefits of government asset sales are being
challenged by the question of public acceptance. This was
demonstrated earlier this year in the United Kingdom, when
Jeremy Corbyn came very close to winning the election on a
ticket that included re-nationalisation of infrastructure.
Looking forward, there’s a question of how public acceptance
around asset sales will evolve. I would also observe that there
are only so many assets you can sell, so there’s a question
around how much primary asset sale activity there will be.
DW: Michael, could you share your observations and also
reflect on the Commonwealth Government’s recent tax rules,
particularly for overseas investors?
Michael Cummings (MC): We wrote an article with
Preqin 12 months ago, looking at the Australian infrastructure
investment market, and talking about what the strengths and
attractions were, and they were really fivefold.
Firstly, we’ve had supportive government policy over a period
of time from both sides. Secondly, there has been a strong
pipeline of transactions. Thirdly, we’re using innovative models to
facilitate infrastructure investment with the recent asset-recycling
programme. Fourthly, Australia has a strong track record in
infrastructure investment. And lastly, Australia has proximity to
Asian growth, and we see that continuing. Those are the five
things that we felt put Australia ahead of the pack.
Now, we’ve just done a similar update on the article this year,
looking at how we are going against those criteria. In terms of
the track record, Australia has had another year of growth, and
that’s very compelling. On innovation and procurement models,
we are moving into social housing and continuing to innovate,
which is great.
The pipeline of opportunities is a challenge; however, the
area that is getting more focus is government policy. Getting
investor confidence and certainty are key criteria that we need
to look at.
Overall, 12 months ago, I would have said that we were well
ahead of the pack. Australia is still a very good place to invest in
infrastructure, but our lead has certainly been cut.
DW: We see a trend of money going towards infrastructure,
with institutions putting bigger allocations towards it. There’s a
question about whether the deal flow is as robust as it was in
the past. We also see infrastructure returns coming down, and
some medium-term interest rate risk in the very low interest
rate environment right now. Does that worry you in terms of the
outlook for the sector overall, and the returns and assets being
bid at the moment?
Michael Hanna (MH): There’s a sixth attribute of the
Australian market that makes it so attractive, and that’s the
savings pool that exists within superannuation funds. We have
a savings pool that is the envy of the world, at over $2 trillion.
It’s bigger than the Australian Securities Exchange, and it’s
growing at a steady rate. It could be worth at least $6 trillion
within the next 20 years. That savings pool has absolutely
fuelled infrastructure growth in the nation over the last 30 years.
It’s off the back of that savings pool that we’ve been able to
establish infrastructure as an asset class, invest here and then
export that expertise around the world. That savings pool is
fundamental to this nation’s position today, and going forward.
Regarding your question about returns and the low interest
rate environment, these are challenges for all of us. We’ve
almost generated too much success, to the point where the
asset class is seen as very attractive, and the rest of the world
has woken up to it.
Combined with a low interest rate environment, investors
are asking us if there is still value in this sector. We’re absolutely
fine with that challenge here in Australia; however, that savings
pool is highly mobile, and is moving all around the world for good
opportunities. We are finding them, but it’s more time consuming
to find them, and these deals are often more complex. We can
still get good returns, but it’s a lot different now compared to five
or seven years ago.
DW: Michael, in terms of the deal horizon for you, what’s on
your radar for the next three years or so? Also, how do you draw
the distinction between those assets that you’re going to have a
red-hot go at and others that you will pass on?
MC: That’s a good question and a timely one. Shortly, we will
be assessing with our global team in Europe, which is where we
will be focusing in terms of asset classes within infrastructure.
It is a global asset class, and Australia needs to keep ahead of
the pack to keep attracting funding.
DC: The volume of capital, and the question around what is
structural and what is cyclical in terms of returns are important
considerations. The allocations that you make for direct
investment are changing compared to 20 years ago, when
infrastructure investing was at a very formative stage. It is a more
mature asset class now, and there is more capital available for
infrastructure investment. This is particularly the case overseas,
where some investors have no allocation to infrastructure,
compared to our allocation of 11 per cent. This has implications
on the opportunities you look at and who you partner with.
Regarding our direct investment programmes, we focus on
mid-market opportunities in Australia and offshore, in addition
to Australian greenfield projects. Some of the trends that we
are seeing include increasing partnerships between limited
partners (LPs) in transactions and requests for partnerships by
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