Infrastructure debt has the potential to make a strong contribution to the building of Australian infrastructure, but it is not picking up momentum in Australia as it is elsewhere partly because of the structure of the country’s superannuation system, IFM Investors global head of infrastructure debt Robin Miller told the Committee for Economic Development of Australia (CEDA) last week.
As traditional lenders like banks and governments continue to retreat from long-term lending, Australia is in need of fresh sources of liquidity to build and maintain infrastructure in its cities. Miller argued that infrastructure debt funding from private investors should play a key part in developing infrastructure and thus in enhancing the economic capacity and productivity of the nation as a whole.
“Banks are now viewing institutional capital as complementary not competing, and there are some excellent local assets in Australia which are being managed the right way and delivering strong returns,” Miller said in his speech. Indeed, even though the banks may still “like” some particular assets, these often have leases that last 25 years or more – which is not to the taste of all lenders. “Now, the banks are struggling to do seven-year debt,” Miller told Infrastructure Investor separately.
In his view, the long-term horizon of infrastructure as an asset class is exactly why infrastructure debt fits with the needs of institutional investors like super funds: it is long-term, stable, and capable of delivering strong returns that are not dependent on interest rates. For institutions facing growing return gaps, he said, infrastructure debt would make an ideal low-risk alternative.
Yet although Australia could be said to have pioneered the “emerging” asset class – IFM Investors began investing in it in 1999 – allocations to infrastructure debt in Australia haven’t been rising as fast as they have overseas. One of the root causes of that, Miller argued, was the structure of the superannuation system – which is based on defined contributions, instead of defined benefits like most other countries.
“In Australia, superannuation’s greater need for overall portfolio liquidity also impacts on the growth of infrastructure debt for institutional investors,” Miller said. “Domestically we are also constrained by a patchy deal flow in a small economy relative to the major developed economies.”
He concluded: “The liquidity needs of our super system needs to be looked at holistically before infrastructure debt, along with other alternatives, can truly fulfill its potential for investors or the national interest.”