Of all the variables that determine the

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1 The post-crisis reshaping of Australia s bank market has already spurred inflows of liquidity from a new range of lenders to the infrastructure sector. Further promoting this trend including capturing a larger bond bid is likely to be key to the cost-effectiveness of national infrastructure development in the context of constrained public balance sheets. Building bridges B y R o g e r H o g a n Of all the variables that determine the opportunity for private debt finance in Australian public infrastructure, the absolute level of required infrastructure investment can almost be taken for granted. As Dave Stewart, executive director at Projects Queensland in Brisbane, puts it: Our cities and regions continue to grow and we have a lot of ageing infrastructure. So for transport, electricity, water, health, social housing you name it there is a massive need for infrastructure. Attempts to quantify the demand vary widely, however. One frequently evoked figure is A$770 billion (US$794.7 billion) a number that originated as long ago as June 2008 in research by Citi, which projected demand out to It appeared again as recently as September 2012 on a high-profile academic website, although this citation was critical of the figure s use a few days earlier in a newspaper article. The figure is often broken down into A$360 billion to be sourced from the private sector, leaving the remaining A$410 billion to be found by government. Its frequent use, and the context in which it typically appears, suggests it has worked its way in to the Australian infrastructure lexicon as the quantum of the so-called infrastructure gap, wish list or backlog. If A$770 billion is a largely discredited number, estimates produced by Infrastructure Australia are intended to be more helpful. In a report to the Council of Australian s in June 2012, the Commonwealth agency produced a nationwide list of projects with a total estimated capital expenditure of A$76.5 billion. This was no wish list, but an attempt to prioritise projects and so create a pipeline that provided a sense of when, where and how infrastructure projects would materialise. The list covered transformational urban projects, international gateways, the national freight network, water supplies, energy and via the National Broadband Network digital infrastructure. In terms of prioritisation, projects deemed by Infrastructure Australia to be ready to proceed represented total estimated capital expenditure of A$11.8 billion. Those ready to proceed but for some relatively minor outstanding issues totalled A$6.6 billion, and those with real potential, A$10 billion. Meanwhile, projects at an early stage amounted to A$48 billion. The dollar value of absolute infrastructure demand is not the only determinant of the opportunity for private debt in Australian public infrastructure, however. Demand dynamics Some very large super funds have debt mandates and will participate as debt investors. As they grow in size and consolidate I think more will start to play a bigger role in this market. chris jones Westpac Institutional Bank 33

2 It will be interesting to see, when projects come up for refinancing, whether the sponsors will look to the bond market to put in place a longer-term debt solution or whether they will roll the bank facilities for another short period. James Darcy Allens are also important, as they have a direct bearing on the allocation of resources. At the national level, a key driver of current thinking about infrastructure is the need to improve Australia s overall productivity. At the state levels the requirement to replace ageing infrastructure is widespread, both with a view to improving productivity and supporting growing populations. In New South Wales (NSW) and Queensland in particular, fiscal constraints for Queensland reducing debt, for NSW maintaining its triple-a rating point to the need to privatise assets. These are what might be described as the positive determinants of the market opportunity, as they help keep the level of infrastructure demand high. The negative determinants, or the challenges that both the public and private sectors face in bringing projects to fruition, are variously structural, institutional and market-driven. Banks dominate The most immediate and striking is the increased concentration of the market for infrastructure bank debt in Australia since the financial crisis. Other issues are arguably more deep-seated and include the ability to fund projects, the structure of public-private procurement models, and the creation of a deep and liquid non-bank debt market. Easily the biggest impact of the financial crisis on Australian infrastructure was the collapse of the monoline insurers which had done much to help develop the project bond market. According to Infrastructure Australia, about A$6.2 billion of long-term wrapped project bonds were issued between 2005 and 2007, compared with unwrapped issuance of only A$2.3 billion between 2000 and Without the monolines, the Australian market for project bonds effectively closed at the end of Since then, funding for infrastructure public-private partnerships (PPPs) has come mainly from short-term loans provided by the major Australian banks with support from what might be described as a new wave of lenders. These include foreign banks mostly Asian and North American for which the crisis created opportunities in the local market by forcing the departure of over-extended European banks. Export credit agencies (ECAs), or at least those that can lend as well as provide trade insurance, have likewise entered the market. And some Australian super funds are also active lenders. Their efforts have been critical to keeping liquidity flowing for Australian projects in an uncertain global environment. I think it s fair to say that the Australian bank debt market has pretty much fulfilled the needs of project financing since the financial crisis. We know of no transaction that has failed because of a lack of available debt finance, says Swati Dave, executive general manager, specialised finance at National Australia Bank (NAB) in Sydney. Chris Jones, Sydney-based director of property government infrastructure at Westpac Institutional Bank (Westpac), agrees that liquidity has not been a problem. In a competitive situation such as you would get on a A$2 billion PPP, it wouldn t be uncommon to have three competitive bids fully funded. It is the breadth of entities potentially providing funding that allows this situation, Jones adds. With participation from both foreign and domestic banks, ECAs are increasingly getting involved. We also have some very large super funds that have debt mandates and will participate as debt investors. As they grow in size and consolidate I think more will start to play a bigger role in this market. Not everyone is sanguine about the banks ability to meet the demand for liquidity, however. In its Infrastructure Debt Financing Policy Options Consultation Paper, released in January this year, Infrastructure Australia claimed that market capacity was currently limited to approximately A$2-3 billion per project with implications for large projects in the pipeline. The report also noted that the bank loan market had become far more concentrated and less competitive since the global financial crisis. In fact, overall Infrastructure Australia says the loan market share of foreign banks has fallen by almost half since the crisis. Perhaps the key point, as Dave observes, is that the tenor and pricing of bank debt has changed. While unable to generalise on how credit spreads have widened, given the variety of projects and their risk profiles, she notes that where in some circumstances pre-crisis tenors reached the year range they are now more like 5-7 years. And while wider spreads have helped keep the post-crisis liquidity flowing, they also highlight the perennial question of how much value for money public-sector sponsors receive when developing infrastructure with private finance. For some, however, it is the shortened tenor that poses the greater concern. It raises the issue of refinancing risk, says James Darcy, a Melbourne-based partner and infrastructure specialist Allens. It will be interesting to see, when projects come up for 34 kanganews march 2013

3 The Queensland government is very focused on making sure it achieves best value in infrastructure delivery and our role is to provide value. This includes looking at opportunities and innovation. But our primary focus is on projects that have private financing as a key component. Dave Stewart Projects Queensland refinancing, whether the sponsors will look to the bond market to put in place a longer-term debt solution or whether they will roll bank facilities for another short period. Regulatory risk is another worry associated with banks dominance of the PPP market, particularly the impact of changes to capital requirements under Basel III. Our expectation is that, over time, banks will be far less likely or willing to be able to fund longer-term, lower-investment-grade projects though this provides an opportunity for other investors, says Ross Pritchard, director at Hastings Funds Management (Hastings) in Sydney. From the perspective of simple market efficiency, the need for longer-term debt finance for infrastructure projects is clearly evident. Australia s rising pool of superannuation assets is widely assumed to be the obvious source, and indeed industry and government-sector super funds are already the biggest institutional investors in Australian infrastructure. But a number of hurdles stand in the way. One of them is the public-private procurement model. If we assume that the Commonwealth and state governments want more funding from the private sector, then both the public and private sectors need to think of different ways in which these projects will need to be structured and financed, says NAB s Private sector Dave. This will involve flexibility around risk allocation and possibly bidding models. Building a better model Jason Tranter, Melbournebased director, project and infrastructure finance at Westpac, highlights a common misconception that PPPs carry no consequences for the public balance sheet. On the contrary, he says: PPPs are clearly recognised as liabilities in the balance sheet. It is this aspect of the model, however, that allows governments to smooth their expenditure over a number of forecast periods. With the forecast demand for infrastructure development in Australia, this means that multiple projects can be developed Source: National Australia Bank september 2012 at any one time. This appeals to the credit rating agencies and reflects the need for governments to build a diversity of assets over a longer-term outlook. In fact, on most PPPs the public sector makes availability payments to the project operators, and so retains the demand risk. A notable many would say notorious exception to this has been in roads, where full traffic risk has usually been handed to the private sector. This model became tainted by the failure of several toll roads, including Sydney s Cross City and Lane Cove tunnels. This has caused governments and privatesector participants to consider ways of mitigating some of the patronage risk on these projects during construction and the start-up phase, says Peter Doyle, senior project finance partner at King & Wood Mallesons in Sydney. I think that s going to drive some changes in the funding model for projects with patronage risk, not just toll roads. From a government perspective, the issue goes to the heart of the ability to fund projects how to repay capital from project cash flows as distinct from how to finance projects, which involves raising the upfront capital. The issue The traditional view of public/private interactions ownweship & financing risks Shared as tenant risk Public works department Sale & lease back Alliance contracting Franchise outsource Shared Private risk Increasing risk transfer Social PPP Construction & operational risks Economic PPP D&C contract Privatisation as owner Private sector 35

4 westconnex and the challenges of constrained public balance sheets With a target cost of A$10 billion (US$10.3 billion) over the next 10 years, Sydney s WestConnex roading scheme presents challenges in terms of funding, financing and procurement approach which are beyond the New South Wales (NSW) state government s current resources. financiers will be able to take a view on the reference case traffic flows. For greenfields traffic on the central part of WestConnex, a cap-andcollar arrangement may be appropriate for a transitional period. The principal purpose of any arrangement would be to protect debt from traffic risks and preserve the capital position of equity under downside scenarios. Development of the project in the short to medium term will require a tolling structure that can fund the great majority of the delivery cost over time. Initial modelling indicates that around 75 per cent of the funding can be sourced from user charges, based on significant high-value traffic flows, particularly freight, with strong growth characteristics and the substantial mature traffic flows on the existing M4 east of Parramatta and on the existing M5 east. Infrastructure NSW proposes engaging with the market to identify ways of expanding the pool of capital available to finance WestConnex using toll revenues. This will include discussions with domestic and overseas superannuation funds. funding may become available for the approximately 25 per cent of the scheme not funded by users. The precise level of potential government funding is uncertain and will depend on factors such as the outcomes of the asset sales programme and the achievement of spending targets. In addition to any funding contribution, it is likely that the government may have to provide financing support for WestConnex during the construction and rampup phase. This recognises that, in the current market, the necessary quantity of financing may not be available at commercial rates. Additionally, the use of private finance alone may burden the project with higher interest costs than are justified to achieve risk transfer. The NSW government believes WestConnex will provide material productivity benefits to NSW and Australia by improving transport links to Sydney s international gateways. Accordingly, WestConnex is a strong candidate for funding support from the Commonwealth government. Demand risk The financial failure of recent toll roads in Sydney has resulted in private capital now being generally unwilling to take unprotected exposure to greenfields traffic risk. In addition, some contractors are unwilling to participate in processes where traffic forecasting is the principal driver of bid competitiveness, and traffic forecasters are generally concerned about their risk exposure. However, in the case of WestConnex, the majority of traffic will comprise mature traffic flows on the existing M5 east and M4 corridors. Infrastructure NSW recommends that a reference case of traffic forecasts be commissioned and made available to bidders under appropriate reliance conditions. There are reasonable grounds for expecting private-sector Right now, Infrastructure NSW thinks significant and substantial components of traffic risk on WestConnex can be transferred to the private sector. Procurement A disciplined procurement approach is essential if WestConnex is to be delivered within the budget nominated by Infrastructure NSW. The procurement structure must have a rigorous focus on achieving the core project outcomes and providing value for money. Accordingly, Infrastructure NSW recommends that WestConnex be delivered by a special-purpose vehicle, with a project team blending skills across government supported by private-sector consultants. Source: Adapted from First Things First, State Infrastructure Strategy , Infrastructure New South Wales, September was dealt with at some length by Infrastructure NSW in its State Infrastructure Strategy for , published late last year. As the document pointed out: All new infrastructure is ultimately funded via taxation or user charges. Private financing in its own right does not create more money for infrastructure development. Even so, since 2006 the NSW government has doubled spending on infrastructure to A$15 billion a year, and the state now has little scope to increase spending without jeopardising its triple-a rating. The Infrastructure NSW document also acknowledges the need for PPPs to evolve to reflect market conditions, including steps to mitigate the gap between the public and private cost of capital, and limited sharing of demand risks if necessary. At one extreme, the state could wholly retain demand risk and tender an availability-based PPP. Other options include a sharing of traffic risks, notes the paper. This may take the form of a cap-and-collar arrangement on toll revenue for a certain period, or a blending of greenfield and mature revenue streams. Infrastructure NSW provided some insight as to how these strategies would work in practice with a case study of the WestConnex road project (see box on this page). The discussion about risk allocation and procurement models ranges widely. In September last year NAB published an 36 kanganews march 2013

5 article in which John Martin, head of advisory, and Ryan Chua, director, infrastructure and natural resources, argued that fresh insights into the issues concerning models could be revealed if the terms of the debate were reframed. Instead of talking about risk allocation, they said, the discussion should be about the alignment between public- and private-sector interests. They illustrated their argument with displays that mapped out the different conceptual approaches and their implications. The first (see chart on p35) shows how the traditional debate about allocation assumes a rising gradient of risk transfer to the private from the public sector across various infrastructure procurement models, ranging from the public works department where all risk is retained by government, to privatisation which represents complete risk transfer to the private from the public sector. As the authors point out, this model fails to capture some of the difficulties revealed by problem procurements of the past. They fail, for example, to allow for the fact that government is the provider of last resort that is, if a private contractor fails to deliver a service outsourced to it by government, government will step in to ensure that the service continues to be provided. Other factors not captured include capital structure because high gearing in a private-sector procurement may imply little risk for government, but over-gearing may lead to failure and the government acting as provider of last resort the need for flexibility to rescope long-term procurement models during the life of the concession, and the need for governments to retain control of public services. NAB s article provides an alternative view of procurement models (see chart on this page), and some specific infrastructure transactions, by looking beyond the notional contract risk allocation at the degree of alignment between public- and private-sector interests. According to the authors, this requires the respective parties influence over the procurement option to be in line with their respective commitment to it. By viewing these models through the lens of relative commitment and influence, we gain a very different understanding of the respective merits of alternative procurement models, write Martin and Chua. Unlike the risk allocation view, this highlights significant misalignment of interest between the public and private sectors across many of the procurement models. Until we improve this alignment we will continue to see frustratingly slow urban infrastructure development and less-than-enthusiastic participation from the private sector. This implies, at the very least, closer cooperation between the private and public sectors in identifying and developing appropriate procurement models. Key initiatives by Commonwealth and state governments in establishing dedicated infrastructure agencies during the last few years appear to be an encouraging development in this respect. These include Infrastructure Australia at the Commonwealth level, plus Infrastructure NSW and Projects Queensland. Major Projects Victoria has been in existence for some time a legacy of the state s pioneering approach to privatisation and other infrastructure initiatives dating back to the 1990s. While the work of Infrastructure Australia and Infrastructure NSW has to date focused on identifying and prioritising projects, such tasks in Queensland are led by the Department of State Development and Infrastructure Planning. Stewart at Projects Queensland says his organisation is effectively the commercial and private financing area of the state treasury. The Queensland government is very focused on making sure it achieves best value in infrastructure delivery and our role is to provide value, explains Stewart. This includes looking at opportunities and innovation. But our primary focus is on projects that have private financing as a key component. Importantly from the point of view of the risk allocation and procurement model debate, Stewart sees both the private and public sectors as having something distinctive to offer in terms of delivering value for money. Private-sector involvement, for example, can deliver value through innovation and risk transfer. We re involved with the new generation rolling stock project with the Department of Transport and Main Roads The alignment of interests view of public/private interactions government commitment Low Shared High free lunch : significant private commitment, strong government influence Public works department High Tollroad PPPs Franchise outsource control Source: National Australia Bank september 2012 D&C contract Alliance contracting Shared Private control Franchise Social outsource PPP government influence Economic PPPs Sale & lease back Channel of aligned interest Port/power privatisation Sydney Harbour Tunnel Private sector free lunch : significant government commitment, little influence Low 37

6 Infrastructure and domestic bond development the official agency view Infrastructure Australia sees the development of the bond market in Australia as offering a potentially critical source of funds to local infrastructure. In January 2013 it suggested a range of avenues by which that development might be promoted. In a document titled Infrastructure Debt Financing Policy Options Consultation Paper, Infrastructure Australia suggested measures that could be taken on the supply and demand side of the market, both to promote general market growth and specifically to assist the infrastructure sector. General market measures In the overall credit market, Infrastructure Australia s demand-side proposals focus on the Australian superannuation industry s low allocations to fixedincome assets. The industry body suggests this might be cured simply by waiting until demographic or membership profile changes create more natural demand for income securities. But Infrastructure Australia also suggests consideration of a glide path investment allocation structure, under which portfolio allocations become naturally more defensive as superannuation members age. This would move away from the set-and-forget style of superannuation, in which many members remain in equity-heavy balanced portfolios until well past an age where many savers in other developed economies would be rebalancing in favour of income assets. Infrastructure Australia also identifies the idiosyncrasies of the country s tax system as a headwind for the local bond market. Its report suggests government should: Examine the structure, regulation and taxation of pension income products and the way they impact on demand for long-term investments, and explore possible reforms to provide greater incentives for retirees to buy pension income products. On both the supply and demand sides of the wider market, ease of retail access is a focus. Infrastructure Australia suggests an exploration of the scope for extending AQUA rules to allow Australian Securities Exchange-listed exchangetraded funds over broader classes of debt, subject to providing additional appropriate investor safeguards. On the other side of the market, the report proposes consideration of ways of promoting the retail debt market by reducing the barriers between the retail and wholesale markets, such as wholesale investor criteria for issuers that meet certain requirements. Infrastructure specifics In the infrastructure sector itself, Infrastructure Australia s proposals for domestic bond development are even more numerous. These include government involvement via provision of backstop liquidity, a project risk guarantee scheme, a tax-preferred infrastructure bond programme, or even the government itself investing in subordinated infrastructure debt. Also on the demand side, further suggestions from Infrastructure Australia include exploring the possibility of creating an infrastructurespecific sub-index within the UBS Composite Bond Index, the publication of historic sector return data for traded and non-traded infrastructure debt, requiring public-private partnership tender bidders to include non-bank long-term debt solutions, and encouraging or requiring full construction risk guarantees from creditworthy counterparties such as banks. which started as a design, construct and maintain contract with the previous government, says Stewart. We believe there s a value proposition in converting it from that basis to an availability-payment PPP over a longer term. Stewart believes, too, that government can add still more value. One of the things we recommend is a government contribution model, he continues. We think it s often advantageous for the government to put in a contribution of up to 50 per cent of the cost of a project as milestone payments, for example. This lowers the requirement for market liquidity, which has been constrained in the current environment, and really drives the value proposition. Instos on the rise From an institutional investor perspective, the importance of the risk allocation debate is influenced by the investor s appetite for new-project or greenfield risk. There is a common perception, reasonably grounded in reality, that most superannuation funds investing in infrastructure prefer to do so when the assets are operational or in the brownfield stage. There is growing appetite for infrastructure debt in Australia and we ll be seeing more involvement of funds in the sector, says Chris Milcz, from NAB s infrastructure group in Sydney. They have been involved for a long time on the equity side but we are seeing them show more interest in debt funding. Dave adds: Funds have greater appetite for brownfield assets. For somebody who is not a traditional debt provider in infrastructure, the easier route for them is to go into an existing asset that has been refinanced or privatised. This is due to the predictability of the cash flows, the operating history, and the fact that they are getting a return as soon as they have bought the asset. Having said this, she adds, there are still super funds which have accepted risk alongside banks in a number of greenfield infrastructure projects. Fund managers taking an interest include IFM which, according to Kevin Lewis, the firm s Melbourne-based 38 kanganews march 2013

7 investment director, debt investments, sees infrastructure debt as being at the lower end of the risk spectrum. Even if we re getting into the construction phase of projects, the risk can be managed, he reveals. We look at factors like the documentation and security package on offer, and who the contractors are. If we can tick all the boxes to ensure that our risks can be either mitigated or managed, we would still see infrastructure as a lower-risk investment. IFM s view takes into account the relatively high recovery rate for defaulting infrastructure projects. We re very sensitive to default risk. However, generally speaking, we would be prepared to wait and come out whole rather than panic and sell something off cheaply and crystallise losses. We believe there are generally stronger prospects for recovery from defaulting infrastructure borrowers than across broader corporates, Lewis says. Features of the infrastructure sector such as barriers to entry and very high asset value are key to this view, Lewis adds. However, he stresses that the sector is far from homogenous and analysis is required to ensure these characteristics are present. As Pritchard from Hastings points out, adequate credit skills are a prerequisite. We believe the majority of expertise still sits within banks. One of our advantages is that all of our infrastructure debt team members globally have worked in banks in project finance and advisory roles, so we bring the same disciplines [as banks] to bear on the credit analysis and credit control of these projects. For Hastings, these capabilities and the absence of a project bond market in Australia mean the most attractive opportunities for participating in infrastructure debt lie in providing bank-style funding. In Pritchard s words: We provide bank-style loans. We sit alongside banks and bank loan tranches as part of a club or syndicate. This is our preferred form of participation at the moment. One aspect of procurement models that institutions involved in greenfield projects would like to see change is the upfront cost of participation in terms of the time, human resources and cash consumed. Preparing a bid can take more than 12 months and, in a field of three or four competitors with only one winner at the end of the process, the stakes are high. We and our lawyers our internal lawyers particularly spend a lot of time on these deals just to get a chance to participate, confirms IFM s Lewis. We re not a bank and we don t have a huge pool of resources we can dedicate to these processes for any length of time. We have to try to be as efficient and as expedient as we can. Failing to be part of the winning consortium may be less costly, ultimately, for a debt investor than for an equity investor, however. This is because there is always the possibility that a lender supporting the winning consortium will look to sell down debt in the market at a later stage. Allens Darcy notes that, on some PPP projects in the UK, the finance solution proposed by the bankers to the preferred bidder is not necessarily the one that will win the deal. Once the government has chosen a preferred bidder, it runs a debt funding competition based on the preferred bid, he says. The underlying rationale is that during the bidding process the various bidders have their banks tied up with their respective bids. Once a preferred bidder has been identified, however, more banks are able to compete for that bidder s funding. The competition approach has not been favoured in Australia, not least because it risks reducing the appetite of banks to be involved in the bid process. But it appears to offer a transparent and cost-efficient way of sourcing debt. Project bond potential Whatever the structural constraints on improving the supply of private debt finance to Australian infrastructure projects and on creating a more predictable and efficient pipeline of projects, there is a consensus that the current dominance of short-tenor bank debt and the limited involvement of non-bank institutions are far from ideal. While many in the industry expect banks to remain major debt providers, some see their relative influence waning as new bank capital adequacy requirements trim their appetite for less liquid debt assets. A wider range of institutions will step up to fill the gap. The phenomenon of institutions replacing bank finance is still new and a relatively small part of the equation, but it s absolutely happening, says Pritchard. Our expectation is that as Basel III regulation steps up towards 2018, banks will continue to adjust and we will see the proportion of institutional investors increase over time. It s rational to assume that, as institutions play an increasingly significant role, the form of debt will evolve towards something that s more suitable for them, such as bonds or project bonds. For somebody who is not a traditional debt provider in infrastructure the easier route for them is to go into an existing asset that has been refinanced or privatised. This is due to the predictability of the cash flows, the operating history, and the fact that they are getting a return as soon as they have bought the asset. Swati Dave National Australia Bank 39

8 The phenomenon of institutions replacing bank finance is still new and a relatively small part of the equation, but it s absolutely happening. It s rational to assume that, as institutions play an increasingly significant role, the form of debt will evolve towards something that s more suitable for them, such as bonds or project bonds. Ross Pritchard Hastings Funds Management A number of Australian infrastructure projects and infrastructure-based corporate issuers have sourced debt from the US private placement market, and the opportunity to source longer-term debt overseas may grow as bond markets outside the US Canada, for example, which has a strong infrastructure debt market develop appetite for Australian infrastructure risk. The missing link, of course, is a domestic market for project bonds which, ideally, would function as a first line of liquidity for longer-term Australian infrastructure debt. For this to happen, a number of policy reforms would be required, as highlighted by Infrastructure Australia s consultation paper on debt financing policy options published earlier this year. As a preliminary to focusing on the potential for a project bond market, the paper noted the small size and the many limitations of the domestic corporate bond market. Potential demand, particularly from the superannuation industry, may seem large. But although Australian super funds have one of the highest allocation of pension funds globally to direct infrastructure both domestic and offshore Infrastructure Australia notes that this investment is almost entirely made to equity. The investment is also heavily skewed to industry and public-sector funds rather than retail funds. The potential for super funds to invest in infrastructure debt on a large scale appears to be limited, given their overall low allocation to fixed-income assets. This may change over time, as more investors within the super system switch from the accumulation phase to retirement. Infrastructure Australia quoted research by Rice Warner Associates suggesting that by 2024 post-retirement assets will comprise more than a third of total super assets, up from a fifth at present. Indeed, one of the factors identified by Infrastructure Australia as a demandside policy option for growing the domestic bond market is, effectively, to wait for system growth (see box on p38). Infrastructure Australia also notes a number of overseas initiatives aimed at tackling similar challenges in global markets. They include, for example, a government guarantee programme announced in the UK in July last year to support a potential 40 billion (US$60.7 billion) of projects where there are concerns about the availability of debt finance. Also in the UK, the government has backed pension industry plans for a 2 billion platform to pool funds for infrastructure investment. On a more far-reaching scale, in December 2012 the UK government announced Private Finance 2, a major reassessment of its privately-funded infrastructure which proposes the government taking minority equity positions in projects, holding equity funding competitions to attract long-term investors, and faster and more standardised procurement processes. In Europe, key initiatives include the European Investment Bank (EIB) co-lending to qualifying projects and the Europe 2020 Project Bond Initiative, under which the EIB, supported by the European Union, will provide credit enhancement via subordinated debt to project companies raising senior debt in the form of bonds to finance infrastructure projects. Clearly, there is some way to go before the Australian infrastructure sector can develop as a reliable source of longterm investment opportunities for private-sector lenders, be they banks or super funds. While governments and their agencies appear to be making progress in terms of prioritising projects and defining a rational pipeline, some constraints are permanent. As Michael Deegan, executive director of Infrastructure Australia, observes: It s up to governments about where they spend or commit their revenues. Obviously, governments are focused on trying to get their budgets broadly into balance and there is some debate about the economic merits of surpluses versus deficits at the present time. But if they want to spend money on something other than infrastructure that will have a bearing on budgets, and certainly on the ability to pay availability charges. There s only so much money around and so much capacity to fund projects. Even if we re getting into the construction phase of projects, the risk can be managed. If we can tick all the boxes to ensure that our risks can be either mitigated or managed, we would still see infrastructure as a lowerrisk investment. Kevin Lewis IFM 40 kanganews march 2013