Darrin Grimsey Partner Infrastructure Advisory Global Perspective on PPPs RMIT, Advanced Construction Management 24 March 2011
Introductions: Darrin Grimsey, partner PFA based in Melbourne etc
Introduce the presentation: 1.Brief
History
2.Impacts 3.What
Page 1
of the GFC
does it mean going forward
May 22, 2008
Presentation title
Banking video
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Š 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Washington Mutual was the United States' largest savings and loan association until its collapse in 2008. It prided itself on its record in customer service. On September 25, 2008, the United States Office of Thrift Supervision (OTS) seized Washington Mutual Bank from Washington Mutual, Inc. and placed it into the receivership of the Federal Deposit Insurance Corporation (FDIC). The OTS took the action due to the withdrawal of $16.4 billion in deposits, during a 10-day bank run (amounting to 9% of the deposits it had held on June 30, 2008). Washington Mutual Bank's closure and receivership is the largest bank failure in American financial history. Before the receivership action, it was the sixth-largest bank in the United States and held assets valued at $327.9 billion.
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May 22, 2008
Presentation title
A Brief History…early roads
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Toll roads are no new thing The Greek historian and philosopher Strago (63 BC – AD 21), writing in Geographia at the time of Caesar Augustas records there being tolls on the Little Bernard’s Pass Middle Ages, tolls were used to support the cost of bridge construction In 1286 London Bridge had tolls Turnpikes were the precursors to the modern build, operate, transfer system The name comes from the hinged barrier that was stretched across the road and prevented passage The first turnpikes in the UK were establishes in 1663 From the first in 1663, and with a great expansion in the 1750s-70s, there were thousands of trusts and companies established by Acts of Parliament with rights to collect tolls in return for providing and maintaining roads; turnpike trusts. A General Turnpike Act 1773 was passed to speed up the process of setting up such arrangements. Just how trustworthy and effective was the provision and maintenance can be imagined. Opposition was strong and turn;pikes were seen as a transfer from the poor, who had been able to travel for free, to the rich, who had the most to gain travelling long distances The first US turnpike to be constructed and operated by a private corporation was the Philidelphia-Lancaster turnpike, chartered in Pennsylvania in 1792 and completed 2 years later It was envisaged that ownership would revert to the states typically at the end of a 99 year lease Few made it this far and were abandoned or decommissioned Earely 1900s remaining toll roads were acquired by state and local governments to establish the state highway system Much the same in the UK with none paying off debt in their 21 year term
May 22, 2008
Presentation title
A Brief History…railway mania
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Railways had a serious impact on long distance road traffic from the 1830s, and many turnpike trusts were discontinued. Many think of the railway mania of the mid nineteenth century as the grand era of private sector involvement in infrastructure investment Engineers of the day like Isambard Kingdom Brunel were in fact entrepreneurs and project financiers Story of the Great Western – lobbying government – raising finance – using the telegraph as additional commercial revenue stream Still went broke! The London Underground – between 1894 and 1907 companies engaged in building the new “electric tube” Some had great difficulty raising the capital and eventually it consolidated ownership into two companies Technological and regulatory changes led to financial difficulties By the time the underground system was finally in place in 1907, buses were more reliable and the advantages of running on public roads, operated at considerable profits while the underground lines were struggling to pay Trams also provided another source of competition In 1933 the companies were effectively nationalised
May 22, 2008
Presentation title
A Brief History…French Concession
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The French PPP model goes back more than a hundred years Known as Concessions In 1995 75% of the population was provided with water under PPP contracts. Two operators, Lyonais des Eaux and Vivendi (now Veloia Environmental) controlled 62% of water distribution, 36% of sewage disposal, 75% or urban central heating, 60% of refuse treatment, 55% of cable operation, and 36% of refuse collection. Elsewhere this would be remarkable, but not in France Most of the railway network, water provision facilities and street lighting were developed as PPPs The first concession for the construction and financing of the Canal du Midi in 1666 Since then entrepreneurs were effectively given a franchise to provide public services for specified periods In 1782 the Perrier brothers were granted the first water concession to provide water distribution system to parts of Paris Another famous example is the concession for the 160km long Suez Canal completed in 1869 under a 99 year concession Apart from the war periods concessions have been and continue to be a featuer of public service delivery in France Veolia, Suez Lyonnaise, Bouygues, Vinci, SAUR, Sodexho and Connex are household names not just in France and all grew on the back of the concession model High speed rail, toll roads, followed and at the local level almost all public services are open to concession arrangements
May 22, 2008
Presentation title
A Brief History…Recent Developments
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Privatisation in the 1980s Private Finance Initiative in the 1990s DBFO roads first Then PFI prisons – full operating model Waste Water in Scotland and Northern Ireland – full operating model Finally PFI in hospitals and schools – serviced infrastructure model Similar story here Power privatisation Toll roads – economic infrastructure Private health We already have private schools of course Hospitals, schools, court houses, TAFE, prisons etc The pictures – a sort of cv....
May 22, 2008
Presentation title
Project Finance
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What underpins the model today Firstly PPPs are not the same as privatisation Firstly under PPPs the public sector effectively acquires and pays for services by contrast a privatised body takes over the business and also takes responsibility for service delivery The private firm is subject to disciplines from both product and capital markets in the form of competition form other firms and competition when raising finance Even if these disciplines do not exist in the market the government will impose regulatory disciplines to manufacture them A PPP is a formal contract Regulation through contract and the lack of government disengagement define much that is distinctive about a PPP Essentially PPPs are about sharing the risks of public service delivery that require significant investment in infrastructure Project finance is the glue that holds the risk allocation together A feature of PPP is the commitment of private sector finance to the construction or renovation of facilities. Private risk capital leads to a harder-nosed approach to project evaluation, risk management and project implementation. The aim of project finance is to achieve a financial structure with minimum recourse to the sponsors, while at the same time providing sufficient support so that financiers are satisfied with the risks. Financing of PPP projects must be engineered to take account of the risks involved. It must then be designed and implemented under strict management to ensure that the risks are managed and the capital investment in protected The combination of upfront engineering and downstream management of project execution plays a defining role in bringing about the required outcomes and delivering value for money
May 22, 2008
Presentation title
Project Finance Purchaser Public sector
Project agreements
Direct agreement
Private sector
Operating Company (SPV)
Senior Lenders
Construction & Lifecycle “Hard” Building Equipment Contractor Provider 7
Equity Funding
Operation/FM “Soft”
Design/spec
Services Installer
FM
Cleaning
Other
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Without the market disciplines highly geared project finance might simply be dismissed as just another exotic financing game The PPP process is about assessing risks and putting in place appropriate contractual structures to deal with them In effect having the privately provided finance at risk acts as a catalyst to inject risk management techniques into the project in a way that is simply not possible under government financing The contractual structure that flows out of the project finance model is just as important as the private finance itself •Explain diagram •Traditional approach •Financier led approach
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May 22, 2008
Presentation title
8
What does financing mean for PPP projects
$ Interest
Capital Costs
And Fees
PPP Service Fee Other Costs – FM, life-cycle etc. Interest Loan Repayments
Yrs 1-4 8
Yrs 4-30
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Simple representation of how the PPP cashflows work
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May 22, 2008
Presentation title
What does financing mean for PPP projects – Simple illustration of impact of the GFC
$ Interest
PPP Service Fee Capital Costs
Other Costs – FM, life-cycle etc.
And Fees
Interest Loan Repayments
Yrs 1-4 9
Yrs 4-30
© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Then along came something called the Global Financial Crisis The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail. The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others. Rating agencies were paid to rate these products (risking a conflict of interest) and invariably got good ratings, encouraging people to take them up. High street banks got into a form of investment banking, buying, selling and trading risk. Investment banks, not content with buying, selling and trading risk, got into home loans, mortgages, etc without the right controls and management. Many banks were taking on huge risks increasing their exposure to problems. Perhaps it was ironic that a financial instrument to reduce risk and help lend more—securities—would backfire so much. PPPs didn’t cause the GFC. Most PPPs are highly insulated from the affects of the GFC. Nevertheless PPPs or more specifically project finance has been caught up in the aftermath of the GFC
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May 22, 2008
Presentation title
The Impact of the GFC Prior to GFC
During GFC
Certainty and Availability of Finance Sources of Finance
Finance available in large volumes Overseas and local
Financial volumes for both debt and equity restricted Greater reliance on local banks
Type of Funding
Debt only – club arrangements
Cost of Finance
Mixed funding type eg, bonds and bank debt As low as 75bps
Terms and Conditions
Long term
Short term
Government Contribution/Support
Usually not required
Required for certain projects
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Up to 400 bps
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When people did eventually start to see problems, confidence fell quickly. Lending slowed, in some cases ceased for a while and even now, there is a crisis of confidence. Some investment banks were sitting on the riskiest loans that other investors did not want. Assets were plummeting in value so lenders wanted to take their money back. But some investment banks had little in deposits; no secure retail funding, so some collapsed quickly and dramatically. The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out. New capital was injected into banks to, in effect, allow them to lose more money without going bust. That still wasn’t enough and confidence was not restored. (Some think it may take years for confidence to return.) Shrinking banks suck money out of the economy as they try to build their capital and are nervous about loaning. Meanwhile businesses and individuals that rely on credit find it harder to get. A spiral of problems result.
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May 22, 2008
Presentation title
Impact on recent PPP projects Costs
Risk Transfer – Victoria Desalination Plant
Syndication guarantee Refinancing protection Material adverse change clause
Reduced Competition Notes: NPC at December 2008 NPC at current market conditions – optimistic (300 bp margin during Construction and 150 bp during Operations) NPC at current market conditions – mid case (300 bp margin during Construction and 200 bp during Operations) NPC at current market conditions – pessimistic (300 bp margin during Construction and Operations)
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Ararat Prison New Royal Adelaide Hospital
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May 22, 2008
Presentation title
GFC and the impacts on financing
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© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Pricing has increased dramatically; similar trend across the regions Higher cost of capital a key issue for the value for money equation; requires more attention to technical aspects of bid evaluation This approach has implications for all aspects of the financing for a PPP project. That is: ▶ tighter debt terms surrounding a range of parameters including gearing, margins, fees, covenants, cover ratios, debt tenors, security, reserve accounts and performance bonding ▶ bid validity periods on recent transaction have been in the order of 30 to 45 days A requirement for lower leverage (or higher equity contributions) is also evident. The average debt:equity ratios of project finance transactions over the past four years suggest a dramatic shift towards equity during 2008 as the GFC reverberated. Gearing ratios moved from an average of 84:16 to 73:27 (based on data complied by Infrastructure Journal). In Asia and the subcontinent, the comparative data suggests that gearing ratios, which typically are lower than those observed in Europe, are still low, with average ratios of 69:31 in 2007 and 72:28 in 2008 (also based on data compiled by Infrastructure Journal). As could be expected from even a quick snapshot of the extent of market dislocation outlined above, the pricing of finance has increased dramatically. The impact has been on both equity and debt finance. Equity investors are seeking higher risk premiums. Note that falling underlying interest rates have meant that the observed level of real returns appears to have remained stable; in effect, the pricing of risk has increased substantially. Debt pricing is arguably a greater concern to both sponsors and to the public sector. There has been a significant step up in debt pricing as the GFC progressed. The graphic refers to data from the United Kingdom but it illustrates a trend that has been mirrored in Asia Pacific. For example, in Australia recent projects have seen margins of up to 300 basis points.
May 22, 2008
Presentation title
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GFC resulted in increase in relative cost of finance for riskier projects and companies (BBB vs AAA debt) In Australia, this effect has been sustained. In contrast, in some overseas jurisdictions, GFC spike has eased
Source: Bloomberg © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
What is interesting is that here in Australia credit spreads have remained higher than elsewhere. Explain...
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May 22, 2008
Presentation title
Components of the cost of finance
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Initial term debt margin costs account for relatively small portion of overall NPC for PPPs Equity and refinancing costs drive most of the NPC. This is particularly the case given low gearing and high DSCR requirements (being driven by debt financiers)
Note: Reflects interest and fee costs (NPC). Source: EY indicative modelling. Actual results will vary depending on financing structure and pricing. © 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Explain what is eroding value for money for PPPs Essentially a different view on risk Is the market right? Is Government right? Is the theory right?
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May 22, 2008
Presentation title
What is the data telling us? (source Infrastructure Journal)
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Starting with a look at debt by sectors, nearly all those covered by IJ recorded an uptick by debt volume compared to 2009 with the notable exception of water and wastewater sector which saw a substantial decline and telecoms which remained at a near similar level. The Oil & Gas sector (with a debt value of US$47.4 billion), followed by power (US$31 billion), renewables (US$29.3 billion) and transport (US$28.2 billion) were the leading four sectors in that order. The improvement by debt volume on an annualised basis was more pronounced in Oil & Gas and mining sectors which recorded 61 per cent and 398 per cent growth respectively, with latter returning to 2008 levels albeit from a dismal 2009; something which is very visible in the stated three-figure uptick percentage. Comparing the entire dataset since IJ began the current series - only the Oil & Gas and renewables sector PF debt volumes have capped their respective sector performance levels recorded prior to the financial crisis in 2007. Total cross sector project finance (PF) debt for 2010 came in at US$170.6 billion up from US$121.5 billion in 2009 but some way off the pre-crisis level of US$253.3 billion.
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May 22, 2008
Presentation title
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What is the data telling us? (source Infrastructure Journal)
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Š 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Moving away from debt volumes and switching focus to the number of PF deals involving debt transactions, the renewables sector (with 264 deals), social infrastructure (103 deals), transport (71 deals) and power (67 deals) were the leading sectors. The number of transactions rose across all sectors except water and wastewater. Overall, IJ recorded 614 transactions in 2010 up from 499 transactions in 2009; but again the total is some way off the total figure of 735 transactions recorded in 2007. A glance at IJ's figures, using either of the datasets by volume or the number of transactions, suggests that many sectors saw good access to capital markets and continuing improvements in availability and terms of bank debt facilities - the renewable and power sectors for instance. However, it is puzzling why the water and wastewater sector has taken a beating. There appears to be no paucity of demand; quite the contrary the need for wastewater infrastructure and potable water projects has never been greater. The decline in project debt volume for the water and wastewater sector has nothing to do with bank market demand, according to market commentators. One theory is that with a big ticket deal in Australia having reached financial close and the Murray Darling basin water rights issue being dealt with, the figures for 2009 were inflated. Truth of the matter is that this sector was not a particularly active one before the crisis and the trend continues even during the current market recovery phase. The one sector which appears to have no such pressing concerns is the renewables sector where debt finance has never been healthier and it saw the highest number of PF debt transactions close. Switching to a regional focus, Western Europe remains the leading market with PF debt rising from US$33.32 billion in 2009 to US$54.72 billion last year; the highest for all regions covered by IJ. as Malaysia, Thailand and the Philippines, a blend of international and local banks are supporting projects, along with corporate bond markets," he concludes.
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May 22, 2008
Presentation title
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What is the data telling us? (source Infrastructure Journal)
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Š 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
North America (with US$32.29 billion) and Asia Pacific (US$35.6 billion) also recorded impressive annualised growth rates of 63.4 per cent and 178 per cent from relatively low positions, especially in case of the latter. The uptick in activity in the Asia Pacific region is largely driven by activity in Australia whose market is in turn dominated by mining and oil & gas projects. Senior debt pricing is generally higher than Europe with 230-250 bps common across recently closed PPP deals, predominantly driven by high funding costs as Australian banks source nearly 35 per cent of funding offshore. However with some European banks keeping a presence in the Australian market directly or via Asia, margins have begun to contract. Asian banks have also been providing medium-term debt to export-related Australian infrastructure projects, typically backed by off-take agreements from sponsors domiciled in their home markets, Byrne notes further. Elsewhere, PF debt levels for last year were near similar to 2009 in Africa & Middle East and Eastern Europe. However, Latin America and the Indian subcontinent posted a decline from 2009. Part of the decline may be attributed to the fact that both Brazil and India - the largest economies in both regions - continue to remain very insular for foreign financiers and regional PF is heavily skewed towards domestic players. In case of the latter, foreign banks also struggle with the level of corruption, red tape and the painfully long time required to get deals done and putting financing structures in place. China, India, Korea and Japan the local banks can lend large volumes over longer tenors and liquidity is not seen as an issue. Local banks in these markets currently represent around 75 per cent of the Asian project finance debt markets. In countries without deep local bank markets, like Indonesia, Vietnam, and Laos, we are still seeing the presence of international banks in transactions as providers of long-term capital. Similarly, in countries with solid local banking markets such as Malaysia, Thailand and the Philippines, a blend of international and local banks are supporting projects, along with corporate bond markets,
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May 22, 2008
Presentation title
18
What is the data telling us? (source Infrastructure Journal)
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Š 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
A break-up of figures by sources of funding predictably suggests that loans, government and multilateral support followed by bonds accounted for most the PF debt market in that order. However, it is the rise in valuation across all three sources of funding which tells different tales. Beginning with loans, 2010 saw US$155.99 billion worth of commercial lending for infrastructure projects, up from US$111.82 billion recorded over 2009. In itself, this represents a bounce back of sorts, but commercial lending for projects still has some distance to travel before it caps the 2007 figure of US$228.23 billion; hitherto the highest on record in IJ's dataset. Multilateral agency and government support has been rising steadily since the global financial crisis, as governments and agencies stepped up to take some of the infrastructure finance space vacated by private financiers. This trend is clearly visible in the figures for multilateral and government loans either side of the crisis. For instance, in 2007 the figure stood at US$7.5 billion but by the end of 2010 this had risen to US$31.63 billion. In the interim, 2008 and 2009 witnessed multilateral and government loans to the tune of US$22.41 billion and US$21.68 billion respectively. The fact that multilateral agencies are not in retreat even as the debt market returns to health can only be a good sign. Another encouraging sign is the recovery in the bond markets. In all fairness, bond markets and refinancing go hand in glove for some commentators. In 2007, bond finance volume came in at US$24.93 billion, but as the crisis took hold and monoline insurers took a beating, by the end of 2008 the annual volume fell to a mere US$3.56 billion. After limping along 2009 with a volume of US$8.32 billion, a renewed sign of life of was seen in 2010 with an uptick in bond finance volume to US$13.46 billion. IThe demise of the monoline model created an associated closure of the long term bond markets for infrastructure projects. Investors such as insurers and pension funds, etc are looking for long term, stable assets to match their long term liabilities. Hence, there is a noticeable uptick in bond market activity, as we see from IJ's figures, albeit that uptick is from a low point 2009
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May 22, 2008
Presentation title
19
Financial market influences ▶
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Current trends ▶
Foreign banks re-entering the PPP market
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Bank lending has improved – $100M to $200M each
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Validity periods have improved – 90 days
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Underwriting market and bond market remain closed
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Margins remain at 200bp-300bp (up-from 80bp to 100bp)
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Short-term debt remains at under 10years (from 30years)
Impact on infrastructure ▶
More banks needed by bidders
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Ensuring a competition process for larger projects ($1.5B+)
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Sharing of future refinance gains an important issue
© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
May 22, 2008
Presentation title
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More expensive Less certain Less risk transferred Less competition as a result of bank influence
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May 22, 2008
Presentation title
VFM Considerations
Headlines
The Australian, 16th May 2009 The Australian, 8th December 2008
Australian Financial Review, 16th February 2009
Sydney Morning Herald 17th September 2009 The Australian, 27th August 2009 The Australian, 18th May 2009
The Australian, 12th June 2009
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© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
Infrastructure assets are low risk and can give good returns over long periods. The GFC has not changed the performance risk profile of infrastructure assets procured through PPP, but it has exposed the frailty of some of the highly-engineered transaction structures used to fund those assets. That is, the listed funds model, which in Australia has most commonly been used to structure investment in ‘economic’ infrastructure for which the private sector bears demand risk, notably toll roads and airports, and utilities and communications assets. The listed funds model relied on attracting and refinancing large volumes of shorter-term debt in an attempt to deliver as much yield as possible. The sudden change in the availability and cost of debt for infrastructure assets inherent in the GFC has exposed several aspects of the listed funds model, notably the mismatch between short term debt cycles and long duration assets, and opaque asset management arrangements without ‘arms length’ pricing principles. In this sector, it is perhaps time to get back to basics and look for a simpler model that recognises the underlying quality of the infrastructure asset and matches investors’ requirements. As Australia’s aging population reduces the taxation pool, governments will need to find new sources of funds for long-term infrastructure projects. Unlisted funds, dominated by superannuation institutions, appear to be the way forward for infrastructure. While such projects appear to be an excellent fit with the investment appetite of Australia’s trillion dollar superannuation industry, a new Ernst & Young survey reveals superannuation funds are unlikely to increase infrastructure investment while projects are offered in their current form.
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May 22, 2008
Presentation title
Is superannuation a silver bullet? EY Survey revealed barriers to investment for the delivery of new infrastructure ... ▶Where
is the value?
▶Problems ▶Poor
with liquidity
alignment with investment strategies
▶Greenfield
projects (particularly with revenue risk) are less attractive ▶Complex,
expensive bidding process
▶Lack
of a clear project pipeline
▶Lack
of specialist expertise
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© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
The reality is of course somewhat more complex than the headlines would suggest. Not unsurprisingly superannuation funds have the best interests of their customers in mind when they make an investment. Nation building and the needs of government or for that matter the country are not factors. Nor should they be. The first myth is that there is a a trillion dollar available. Fact is that one third of the super in Australia is in self managed funds. These funds are not available for direct investment into infrastructure. We’re also only talking about the new money coming in every month. The rest is already invested. Even the funds held in cash aren’t available as cash serves an important function to a fund. Retail is another big component and whilst it might include some infrastructure it’s not a great deal. We’re not actually left with much of the trillion dollars that is actually available for infrastructure. Ernst & Young’s survey reveals a number of hurdles to the industry investing in infrastructure assets. Some, such as the likelihood for asset valuations to fall further and the peculiarities of individual investment strategies, are beyond the influence of government. Others, such as lack of transparency, uncertainty and process complexities point to strategies that would enable governments to attract more superannuation investment to infrastructure projects. The slow and lumpy deal flow in Australia is also cited as a barrier to greater participation. The lack of consistent deal flow undermines the case for superannuation funds investing in the skills to engage earlier in procurement processes for PPP projects and to take on risks as a bidder. Governments are in a position to influence deal flow to an extent but would ultimately be constrained by the relatively small size of the market in Australia. Finally, the industry itself has an opportunity to improve expertise in this specialist area.
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May 22, 2008
Presentation title
Boosting superannuation investment in infrastructure §
Infrastructure bonds
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Better transparency
§
Certainty of regulation in new markets
“Infrastructure bonds would be more attractive risk/ return wise. Although it may be difficult to convince superannuation funds of their merits. It weathers premiums and inflation” Superannuation Investment Officer
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© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
In encouraging news for governments seeking infrastructure investment from the superannuation industry, while many funds were at or even over their strategic asset allocation to infrastructure, many say they will still consider new opportunities on a case-by-case basis. In this regard, they are looking for reliable, long-term returns. Governments have opportunities to attract superannuation as a long term infrastructure player by looking at other credit instruments, reducing risk, increasing transparency, standardising processes and clarifying regulation. Unless they do so, superannuation will continue to channel much of its infrastructure investment overseas, putting our national savings to work for other countries. If it can achieve this shift in its own superannuation industry then Australia has a real opportunity to once again be the market leader in the region. Australia could become a centre of excellence. Most recently, this potential has been recognised by the Victorian Government in its Growing Victoria’s Financial Services Sector (August 2009). The statement proposes measures which aim to establish Melbourne as a global centre of excellence in pension and funds management.
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May 22, 2008
Presentation title
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Looking beyond the GFC ▶ ▶ ▶ ▶ ▶ ▶ ▶ ▶
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Permanence of changes Bond Markets Cost of Capital Competition Policy Interventions Equity Investors Operating Focus PPP Exports
© 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
GFC has not undermined the PPP model; the opposite is true – it has been robust and nimble to absorb the challenges to value for money of illiquidity and the repricing of risk and flexible - to adapt to innovative financing structures to address changes in investor appetites Interesting debate about the extent to which changes will prove to be permanent: ▶ market disruption clauses: a risk the private sector can manage with stable and liquid wholesale funding markets Key consideration is the speed of recovery in capital markets, which are a typical source of bank funding. Return of capital or bond markets – positive signs including corporate sector activity and two PPPs in Canada. Further recovery may also require the re-entry of credit enhancement providers. Will the cost of capital recede - arguably the pendulum of risk pricing has swung too far. A key consideration for improved pricing will be further stability in wholesale funding markets and higher levels of competition among lenders to projects. Greater competition likely to be a driver for reducing (or in the case of smaller transactions, eliminating) the need for direct government support such as guarantees Key focus is attracting new classes of long term equity investors. Superannuation or pension funds have the funds but challenge is removing barriers to participation. Barriers identified are the lack of transparency of returns and pricing of assets, lack of a clear and consistent pipeline of projects, and concern about the extent of risk transfer. Turn the focus to the operating phase as more projects reach maturity. Assess delivery of value against expectations, and draw out lessons. Emerging issues include the role of facilities managers and the design of payment mechanisms These issues cross sectors and jurisdictions so building knowledge offers wide benefit Encourage participation of contractors, sponsors and lenders outside their home markets Wrap Up: GFC has had significant impact. PPP survived and adapted to changed environment. Role of private sector changing. Extent to which risk changes permanent oand pricing. Will we see new models emerging that facilitate access of new investors? Interesting times ahead.
May 22, 2008
Presentation title
Banking video
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Š 2009 Ernst & Young Australia. Liability limited by a scheme approved under Professional Standards Legislation.
May 22, 2008
Presentation title