“I hear the sound of the stranger's voices/I see their hungry eyes, their hungry eyes”
These lyrics – from rock band Icehouse’s “Great Southern Land” – evoke a sense of what Australia’s original inhabitants must have felt upon encountering the first European colonists over two centuries ago.
Long regarded as a country of abundant wealth, foreign interest in Australia has been a recurring theme throughout its history – one which is now playing out again in the form of infrastructure investment.
REWIND: A SHORT HISTORY OF NEARLY EVERYTHING
Australia’s prominent role in the world of institutional infrastructure investment can be traced back to the early 1990s.
On the demand side, the country’s compulsory pension system introduced in 1992 led pension funds to seek investment in alternative asset classes in order to diversify their burgeoning portfolios.
This was matched by supply in the form of private investment opportunities in infrastructure, driven by:
Structural reform–wide-ranging reforms such as the National Competition Policy promoted the separation of monopoly businesses from contestable elements, which flowed through to infrastructure sectors such as electricity, gas, road transportation and water.
Public sector deleveraging: Federal and state governments at the time operated under a ‘zero net debt’ paradigm. Consequently, they sought to privatise a number of state-owned assets, using the proceeds to pay off debt.
These developments led to a number of infrastructure assets being owned by private investors, including the state of Victoria’s energy transmission and distribution assets, several major capital city airports, as well as toll roads in Victoria and New South Wales.
The final ingredient in the investment puzzle was the emergence of specialised intermediaries, such as fund managers. Colonial First State was one of the true pioneers in this regard, making its maiden infrastructure investment in 1994 in Statewide Roads, owner of the M4 toll road in Sydney.
The 2000s saw demand for infrastructure investments outweigh the supply of available domestic opportunities, leading many fund managers and investors to venture offshore.
From 2002 to the end of 2011, approximately $71 billion of institutional investment was made offshore by Australian investors or fund managers. This compared to $18 billion in domestic investment over the same period.
More recently, the stars have aligned to create the potential for another bountiful period in Australian infrastructure.
Already, there has been an increase in inbound investment, with landmark transactions over recent years including the A$2.3 billion (€1.8 billion; $2.3 billion) Port of Brisbane privatisation and A$1.4 billion takeover of ConnectEast, a listed toll road group. Both Australian and foreign investment in Australia has picked up over the last few years. In 2010 and 2011, inbound institutional investment into Australia exceeded outbound and domestic investment combined.
Looking ahead, further supply opportunities are expected from:
Government privatisations — State governments are looking to improve their balance sheets, with Queensland and Tasmania recently privatising infrastructure assets. New South Wales is looking to privatise around A$5 billion worth of infrastructure assets over the next 12 to 24 months, including Port Botany and electricity generation assets. An additional A$30 billion worth of state-owned transmission and distribution assets are also expected to be privatised in the medium term.
Capital recycling for greenfield projects — Both the public and private sector will look to recycle capital in order to fund new infrastructure requirements, which may be offered to institutional investors at the brownfield stage. Examples include projects on the Federal and state government infrastructure priority lists as well as mining or resource export-related infrastructure.
Listed market takeovers — Despite several major takeovers of listed assets, there remain a number of potential targets for unlisted investors. The current market capitalisation of Australian listed infrastructure stocks is approximately A$49 billion.
We believe that Australia represents a desirable marketplace for institutional infrastructure investors, and anticipate further inflows into the market as supply opportunities arise. However, history and experience suggest that a judicious approach to investment manager or partner selection is prudent.
Airports take off
Investment in airports appears to generate good outcomes – but access to the sector is not straightforward
Australia’s major capital city airports were fully privatised between 1997 and 2002. Since then, the sector has exhibited strong growth, with passenger volumes doubling.
Price regulation has become progressively more light-handed, moving toward a partnership model based on commercial negotiation between airlines and airports. This has promoted significant investment in airport infrastructure, with significant future investment planned.
Indeed, a 2011 Productivity Commission report noted that “compared to other Australian infrastructure, airport investment outcomes rate favourably”.
Not surprisingly, the sector has proved attractive to infrastructure investors. There is a high degree of institutional ownership of these assets, in particular by Australian pension funds (known as superannuation funds), either directly or indirectly through fund managers.
New investors seeking exposure to the sector, however, face a few hurdles. In addition to the limited ability to access stakes in Australian airports, several restrictions apply to investments in these assets. Foreign investors are restricted to a maximum of 49 percent of an airport, airlines may not own more than 5 percent of an airport, and all investors face cross-ownership limits between Sydney, Melbourne, Brisbane and Perth airports.
Colonial First State Global Asset Management manages stakes in Brisbane, Adelaide and Perth airports.
Not only is this exposure to the sector difficult to replicate, it also provides an embedded option for further growth in the sector.
For example, Brisbane Airport’s planned runway expansion – understood to be the first at a fully privatised airport in the world – represents an additional A$1.3 billion in capital expenditure, meeting the demand needs of the resource-rich Queensland economy for decades to come.
Fund managers: Big disparity
Australia boasts a long performance history for unlisted infrastructure fund managers, with data available for a total of eight funds.
Even within this small sample, our analysis of historical performance revealed a surprising disparity in performance between the best and worst manager. On average, the difference in annual returns was 17 percent, rising to as much as 48 percent – astonishing figures for a defensive asset class.
CFSGAM’s track record is 13.7 percent for its core Australian assets since inception. This track record has been built on a breadth of experience, including 31 assets across a number of sectors, including toll roads, airports, gas distribution, electricity generation and rail.
Ritesh Prasad is an infrastructure research analyst at Colonial First State Global Asset Management (CFSGAM), known as First State Investments (FSI) outside Australia and New Zealand. All references to infrastructure experience and capability refer to both CFSGAM and FSI