Observers may remark that Australia’s infrastructure corporates find themselves between the proverbial rock and hard place. Regional economic conditions could become temporarily subdued in the near term. Following years of robust growth for Australia’s infrastructure market, this could well mean softer passenger footfall through airports or slowing export volumes departing from its ports.
This confronts the sector at a time when enormous investments are needed to build new runways, terminals and better-maintained roads to position for long-term growth – which also bring significant operational and maintenance obligations. Amid volatile market conditions, it prompts the question: are the country’s infrastructure corporates well prepared to manage these pressures?
Encouragingly, it seems so. While the sector has significant capital expenditure either under consideration or in progress, companies spanning the airport and port sectors have some liberty to alter the timing and levels of spending in response to the volatile economic environment – a luxury that holds considerable importance should the region’s economic slowdown truly draw in.
Narrowing the deficit
Indeed, this is because strong population growth, as well as forecasted capacity constraints, are testing the limits of the incumbent infrastructure networks of Australia’s largest cities. Already, the need to narrow the infrastructure deficit is widely documented. Over the next decade, federal and state government plans will raise infrastructure spending to A$100 billion ($70.2 billion, €62.3 billion), up from A$75 billion, while private investment will be sought to deliver several mega-road and rail projects. This expanded infrastructure spending, though hiking state borrowing towards record levels, could help ease congestion and improve connectivity access, particularly for the country’s gateway cities.
Capital-fuelled expansions are on the private sector’s agenda, too. Australia’s toll-road operators and investors will need significant debt and equity capital to finance the present and future development pipeline. The underlying driver of such expansion will be the cities’ and toll-road network’s traffic growth. Urban congestion should continue to support toll road usage in major cities, in our view. Earlier this year, operator Transurban reported average daily traffic growth for the current financial year of over 4 percent for its Melbourne toll roads and over 2 percent for its Sydney toll roads. Also supporting the network’s development is Australian operators’ sound access to capital, and the fact that toll roads enjoy high operating margins, especially once early phase traffic ramp-up is completed.
Investors, however, may be keen to look before they leap – and are likely to monitor the number and complexity of projects available on the market (and their scale) ahead of any investment decision. An important cue will be whether the latest road projects are planned and built effectively – with a consequent impact on their on-time delivery. Though project sponsors enjoy relative protection against time and cost over-runs, any extended delays could impact traffic on existing roads and also result in cashflow delays.
Elsewhere, significant capital investment is also being touted as a partial remedy for other asset classes. For instance, despite some headwinds for inbound passenger growth, Melbourne airport, the major asset belonging to Australia Pacific Airports Corporation, is expected to follow through with its commitment to debt-funded capital works worth some A$2.5 billion until fiscal year 2023. The bulk of these investments are to support modest growth in international traffic and to position the airport for long-term growth. Domestic routes are subdued as airlines manage their yields closely and any investments to support domestic traffic will be airline-specific. In turn, APAC is committing to capex between A$500 million to A$600 million over the coming year.
Timing flexibility: the effective counterweight
A period of such heightened investment may give cause for doubt about the timing and extent of capex. Yet our review finds that Australia’s rated infrastructure companies are in reasonably good financial shape to face the challenges over the next few years – with most of our rating outlooks currently stable. For airports, we see no immediate effect to credit quality, while ports’ committed capital spending (broadly for landside development and new handling and logistics facilities) is modest and manageable.
All matters considered, the key for corporates battling through softer revenues amid a challenging economic climate will be timing flexibility. Transportation operators, in our view, have afforded themselves discretion to alter spending commitments if and when the economic slowdown changes pace. This is perhaps most notable for airports, which have timing flexibility on several discrete projects – thus providing greater operational headroom. We therefore expect infrastructure corporates to maintain proactive debt refinancing, balance distribution payouts with capital requirements and, more broadly, continue with their prudent approach to investment commitments during this spell.
The airport, port and railroad sectors in Australia have all performed well in recent years. By continuing their measured, prudent approach to capex commitments during any spell of upcoming volatility, the country’s infrastructure corporates are on course to preserve “battle-ready” status.
Parvathy Iyer is senior director and lead analyst, APAC infrastructure and utilities at S&P Global Ratings.