Preparing for the next wave

Q: How would you describe the Australian infrastructure market today? And how has it evolved over the past decade?

CS: Australia is a mature and innovative market with a proven procurement model that is increasingly being adopted by other global markets. New South Wales’s recent asset recycling programme, in particular, is certainly a talking point in the offshore market.

Building on the privatisations of past decades, the market has shown a significant progressive evolution across a variety of asset classes, consistently attracting private investment. From traditional economic assets such as ports, electricity distribution and transmission to newer asset classes such as land registry businesses and data centres, today’s Australian market offers a greater depth. That’s reflected in the amount of domestic and international interest it attracts and we continue to see growth in new inbound investment from global infrastructure funds as well as players from Europe, North America, the Middle East and Asia.

Australia is a world leader in infrastructure financing and continues to evolve and set trends globally.

Q: What can we learn from the high-profile privatisations completed by Australian state governments over the past few years?

CS: If you look at Port of Brisbane, which was privatised in 2010, I think it only received interest from two or three bidders at that time and it’s fair to say the price multiple achieved for it was less than what we have achieved in recent transactions. Today, though, you can see multiple bidders in the race for an asset and the prices achieved in recent privatisations reinforce the popularity of Australia as an investment destination. This is underlined when we look at the multiples paid in some of the secondary sales of equity stakes in certain assets post privatisation.

What the incoming bids reflect – on both the equity and debt side – is an appetite for a long-term investment horizon and assets backed by a country underpinned by a strong sovereign rating, stable legal framework, transparency and security arrangements.

Q: What can we expect from the Australian market next?

CS: Firstly, the pipeline of brownfield assets is expected to reduce. Given recent elections in Queensland and Western Australia, in the medium term we don’t anticipate anything major coming to the market from these two states, while Victoria and Western Australia are investigating potential sales of smaller state assets, including land registry businesses. However, in NSW, we do have the very large WestConnex road project, which is currently in play and expected to close this June.

Secondly, with the completion of several high-profile privatisations in NSW and the use of proceeds for new infrastructure, we will see a sound pipeline of greenfield development, in particular large-scale PPP projects in the transport and social infrastructure sectors on the east coast.

However, greenfield projects come with development risk which may or may not fit within an investment mandate.

As the market evolves, some investors are prepared to look at different asset classes and might have to consider moving up the risk curve towards non-core infrastructure in order to continue participating in the market.

In the energy sector, we see opportunities across the whole energy industry supply chain. Australia is also transitioning to a low-carbon economy with the closure of several coal-fired power plants on the east coast.

Q: How does that translate into appetite for equity and debt investments across the country?

CS: There is certainly no shortage of appetite from both equity and debt. However, on the equity side, investors are becoming more selective about what they go for. Minimum equity ticket size may limit appetite for some of the larger funds, while emerging asset classes might not be on everyone’s agenda.

On the debt side, I see competition extending to the traditional debt providers – the banks. Superannuation funds, pension funds and large insurance companies are looking to alternative assets and are stepping in to compete with banks, partly driven by a pressure to deploy investors’ capital.

We can see some of the PPP projects which achieved construction completion turning to the bond market for some very long-dated debt solutions. Typically, greenfield development and privatisations are predominantly financed by bank debt. Asset owners could then take out the bank debt over time and change the debt structure, either by tapping the bond market or securing a debt refinancing from institutional investors to better match their asset liabilities. This is a natural progression and we make sure we are able to facilitate that.

Q: What would you say are the main challenges for institutional investors in the market?

CS: Competition is fierce in Australia and that high level of competition could make some fund managers look elsewhere for better value. Bidding can be quite an expensive process, as it takes up lots of resources. That means investors should really prioritise which deals they want to pursue.

For some offshore investors, it’s key to team with a strong local partner with solid local knowledge and on-the-ground presence. Particularly for transactions involving critical infrastructure, early engagement with the government is essential.

Q: Longer term, in what direction do you see the Australian infrastructure market going?

CS: In the longer term, Queensland and Western Australia are expected to embark on their own asset recycling programmes, which can provide opportunities over the next five years.

On the other hand, energy and water are also set to offer potential opportunities. The energy sector requires substantial investments for the transition to a lower-carbon economy, while the water sector, which has been predominantly controlled by state governments, has the potential to attract private sector for funding and financing some large capex programmes due to ageing water facilities.

Going beyond Australia, I see infrastructure growth as a global phenomenon as requirements for extending, upgrading and renewing infrastructure continue to grow. Nothing will happen overnight, though.