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Deconstructing the problem
A report compiled by law firm Allens places Australia’s colossal and growing infrastructure deficit at $300-770 billion.
Not helping matters is the hefty 11.8 million national population increase forecast over the next thirty years by the Australian Bureau of Statistics; signifying yet more demand for the nation’s already overburdened network of infrastructure assets.
The report shows that a city the size of Canberra – consisting of 150 new schools, five new hospitals and more than 12,000 social housing properties – will be needed to accommodate the influx of new residents every year. That doesn’t include the social and economic infrastructure needed to meet current demand.
With government balance sheets constrained, private sector investment is increasingly being discussed as a means of alleviating the deficit. But while investor appetite for the infrastructure asset class is reasonably strong, there are a number of roadblocks standing in its way:
Immense national and global competition
Throughout Australia and around the world there are a tremendous number of infrastructure projects seeking liquidity. This makes for a competitive playing field in which countries and jurisdictions with the most attractive conditions are favoured by investors. In the past Australia has fared reasonably well in relation to some of its global peers, but a recent report by Infrastructure Partnerships Australia showed a 24 percent year-on-year drop in investment likeliness for Australia with less than half of survey respondents finding the nation ‘attractive’. In a national context, Queensland is at further risk of being marginalized in favour of other states. Why is this an issue? With decreased investor appetite, investors are less inclined and incentivised to bring innovation and take risk on the local pipeline, meaning that less favourable deals (from a government perspective) are being struck.
Size and nature of deals
Further thwarting investor competition is the increased magnitude of infrastructure projects. Comparing the five-year mean values of 2010-15 and 2005-10, the Allens report shows that the average size of a PPP social infrastructure project has more than doubled from $353 million to $753 million. This has created a bottleneck scenario in which only larger players are willing or able to participate in the market. Nationwide and statewide heterogeneity is also an issue; with investors seeking more homogenous project portfolios. Further complicating matters is the additional time taken for projects to proceed from announcement to preferred bidder. Traditionally this process has taken on average 17 months, but at present, the process is currently being stretched out up to 42 months. This longevity is inherently unattractive to investors.
Politics
Pre-election pressure to appease voters can often go against the nation’s best infrastructure interests. Asset recycling for example has shown great success in New South Wales and Victoria, but, since infrastructure privatization can often be superficially unpopular with voters, other states, such as Queensland, have been less willing to adopt this approach. Many experts believe that the politicisation of infrastructure is off-putting to investors. With politicisation comes political risk; and an increased likelihood that deals will be scrapped and withdrawn from the market if political circumstances change. It also leaves investors exposed to the increased risk of unforeseeable changes in law during the delivery phase – increasing the likelihood of distressed projects. Jurisdictions that have depoliticised infrastructure naturally gain a competitive advantage.
Building a bridge and getting over it
Allens Partner David Donnelly will present at the IAQ Queensland Infrastructure Summit – 14 September 2018, Brisbane – alongside representatives from Deloitte, Macquarie Capital and Philips Group, where he will outline his recommendations on how to improve the attractiveness of the state’s pipeline of infrastructure projects.