8 minute read
Jim Miller
Investor demand remains strong, and yet Australia’s infrastructure gap continues to grow. The problem is not a lack of capital; it’s a lack of projects, according to Macquarie Capital’s Jim Miller.
Everyone is in unanimous agreement about the need for nation building and the need for big developments, but how do we take that next step?
There are three key points. Firstly, our infrastructure gap is growing, and I think it’s particularly pronounced because of the concerns in the resources sector, which really has been a significant contributor to Australia’s overall growth. Clearly, as that moves through its cycle, there is a challenge to the impetus that it can give our economic situation.
The second point is that investor demand has never been stronger. Everyone’s got a sense of that, and hopefully we can make sure that message is clear.
The third point is looking at how we can reframe the debate with government. The key point – it’s been mentioned before and I’ll emphasise it again – is that there is not a lack of capital; there’s a lack of projects.
So how do we address that project issue? If we look at the delay in addressing the infrastructure backlog, the unfortunate situation is that the government sees spending on infrastructure as a cost. It’s not seen as an investment, even though it creates its own revenue stream for government and therefore should be looked at through those eyes.
Looking at the backlog, in 2011 it was estimated at $750 billion, but now, according to Deloitte, it is $920 billion. Irrespective of how it’s calculated, it is growing, and we’re not getting on top of this issue as an industry, and as a country.
The productivity issue gets talked about a lot, but what does it mean? What is the cost of that lost productivity? McKinsey have done some work, saying that it will cost the government $90 billion per annum in revenue by 2017.
And each year, the shortfall between our current level of productivity and our long-term historical average keeps compounding. The gap that we are
Jim Miller
talking about over the next five years is in the order of 10 to 15 per cent; in 10 years, that will be 36 per cent, and in 20 years it will be 84 per cent.
This is a real issue. That compounding effect is very significant and has a real cost. Doing nothing has a real cost. The McKinsey analysis was great in terms of putting a number on that cost, so that when you’re framing the debate you can actually say there is a genuine cost to not investing in infrastructure.
Looking at listed infrastructure, the market has been very strong, with outperformance over 20 per cent in the last 12 months. Interestingly, a number of assets in the regulated asset base sector – a wellaccepted delivery mechanism for infrastructure – are listed here in Australia, and are now trading comparable to the unlisted infrastructure sector.
That’s really the first time we’ve had that paradigm since the financial crisis, and it’s a very positive development in terms of showing the listed infrastructure market’s ability to participate in these projects. It underscores the point that we don’t have a shortage of capital.
Obviously, the unlisted market has been active and continues to grow.
These are very clear and unambiguous facts.
So what’s the problem? The problem is on the supply side. The fundamental challenge we have at the political level is this fiscal issue. Governments need to get debt down, and they need to generate surpluses.
When government spends on infrastructure, unfortunately the way they generally account for it is as a cost to their profit and loss on their budget surplus position. In a private business, that would go onto your balance sheet as an investment, and then the income or costs would go through the profit and loss. But we need to be clear. Unfortunately for governments, that cost goes straight through to the operating surplus, and therefore hits the budget. We genuinely need the debate about infrastructure being an investment, not a cost. It’s a hard debate, but unfortunately, unless we can start articulating that debate better as an industry, we’re going to continue to see a lack of appropriate funding mechanisms for these projects.
The Federal Government is trying to get back to surplus in the short term, but we’ve got a longterm issue, and it’s a demographic issue; we’re not able to change that. The deficit position is going to significantly deteriorate as the ageing population moves through.
So this debate, again, is a really important debate because this issue is certainly going to be around in our lifetimes and beyond.
Looking at some of the solutions for governments, obviously the good news is that patronage risk models don’t go on the government balance sheet, at least in the short term. But there’s the theory that those models are dead. While we have seen the
Jim Miller
financial failure of some projects, they delivered the infrastructure, even though the private sector lost out.
Patronage forecasting is the nub of the issue, and once again we welcome the initiatives of the various governments in terms of trying to bring that debate out more. The numbers have been poor in the past, and, looking forward, more accurate forecasting is possible.
We say that because it’s the learned experience, and we say that because empirically, if you have a look at the numbers for a number of the roads, you can see that the forecasting error in the short term has been significant, but that the gap has closed materially over time, particularly over the longer term.
The longer-term forecasting has been okay, but it’s not going to be perfect, and not all the projects will respond the same way. But hopefully these numbers give the confidence that the long-term forecasts are getting more accurate.
The key point is that deals are still getting done in that space. There are more than $15 billion worth of transactions happening. Small deals are happening in Australia, like the hospital car park elements, but overseas, larger deals are similarly getting done across a range of sectors.
A quote from former Treasury Secretary, Dr Ken Henry, in my view, is a useful illustration of where we’re at as an industry.
Henry said: ‘Australia does not have the infrastructure – that’s obvious – for another 14 million people... We don’t even have the mechanisms for thinking about what sorts of infrastructure we’re going to need.’
While it’s clear that we don’t have sufficient infrastructure now or going forward, it was interesting to me that Ken went further and stated that we don’t have the mechanisms for thinking about those solutions going forward. The reality is that we do have those mechanisms, and there has been a lot of work done by governments on that in terms of Infrastructure Australia, Infrastructure NSW, Projects Queensland and other initiatives in other states.
But clearly we need to do a better job of getting out there and selling that message and engaging with governments.
Looking at the innovation in the United Kingdom, the momentum and the political will that’s been built up in Canada, and the deals we’re seeing in other markets, there is a real experience that these things can happen, and I’m hopeful that we can contribute to unlocking that backlog going forward.
JIM MILLER Executive Director Head of Infrastructure, Utilities and Renewables, Australia and New Zealand, Macquarie Capital Limited
Jim joined Macquarie Group Limited in 1994, and has over 18 years’ experience across a range of sectors in Australia, New Zealand, Asia, North America and Europe.
In the infrastructure and PPP sector, Jim has led over $100 billion worth of transactions, including transport infrastructure, energy and utilities, and social infrastructure assets.
WELCOME TO THE NEW WORLD OF BILFINGER
The 25th of September 2012 marked a defining point in history for Bilfinger Project Investments. It represented the end of a transformation for Bilfinger, from its traditional construction company roots, to a broader based international engineering and services group. A clear sign of this change is the new logo, which ties together all of the companies in the Bilfinger group under a uniform brand identity. The new logo, with the dual-coloured continuous interlaced ribbon, symbolises Bilfinger’s multi-faceted, interconnected competencies in the lifecycle of a project, as well as self image as a networked company. In addition, the range of Bilfinger’s services will be clearly recognisable through the bond created between operating units and the new brand.
Since subscribing to an investment in Docklands stadium in 1997, Bilfinger has invested over $300M in equity in Australian PPPs. Bilfinger’s Australian construction legacy includes many significant infrastructure assets, including the Graham Farmer Freeway in Perth, the 3rd Runway at Kingsford Smith Airport in Sydney, the CLEM7 tunnel in Brisbane and the CityLink project (including the Bolte Bridge) in Melbourne amongst others. Following divestment of our construction businesses in 2010, Bilfinger’s activities in Australia continue as Bilfinger Project Investments Australia – a specialist PPP sponsor, investor and asset manager, who currently provide asset management services for Australian projects with a value of over $2 billion.
Bilfinger Project Investments as a PPP specialist has sponsored, delivered and provided asset management services for over 40 PPP projects worldwide, with a combined value in excess of $15 billion. Bilfinger has operations in four regions across the globe – the UK, Europe, North America and Australia, with Australia being a key component of Bilfinger’s strategy to invest diversely, both geographically, and across sectors. As such, Bilfinger Project Investments will continue in its role as a long-term sponsor, investor and asset manager in Australian PPPs.
