Putting the ‘social’ into ‘privatisation’

When the New South Wales (NSW) government announced in April this year that it was selling the state’s largest and most economically important ports – Port Botany and Port Kembla – many might have expected the public reaction to be overwhelmingly negative. 

The Australian electorate, like most electorates across the globe, has generally been reflexively opposed to the privatisation of government-owned infrastructure. 

People have heard of and experienced the effects of privatisations that have not been well aligned with the public interest. They are also generally suspicious of the idea that a private operator with a profit motive will serve the community’s interests better than a democratically accountable government. 

Yet when it was emphasised by the NSW Treasurer that over 80 percent of the consortium buying the ports comprised Australian pension funds, led by Industry Funds Management (IFM), the public reaction took on a different hue. 

News reports and public reaction were generally favourable.

‘Virtuous circle’

A new term is starting to catch on in the Australian media to describe this form of privatisation that sits far better with the community: ‘social privatisation’. 

It describes an idea IFM has been pushing for some time, that of the ‘virtuous circle’ created when infrastructure investment comes from an investor which is value-aligned to the community interest. The circle is completed when proceeds raised from the ‘social privatisation’ are utilised to invest in essential new infrastructure. 

IFM is owned by 30 Australian pension funds that collectively manage the retirement savings of around 50 per cent of the adult population. It is able to secure strong returns for these pension funds and their members through sound investment in and management of essential infrastructure assets such as seaports, airports, transport hubs and power stations. Those same members benefit from the utility of the long-term improvements and upgrades IFM is able to deliver. 

That’s the virtuous circle of social privatisation. For an often sceptical public, the concept has taken some time to catch on. But the reaction to the government's A$5 billion (€3.5 billion; $4.7 billion) sale of Port Botany and Port Kembla is indicative of a change.

Short-term obsession

Governments and the community are increasingly recognising that an investor like IFM does not suffer from the market’s obsession with short-term results, which encourage a fixation on short-term returns often driven by higher prices to users, usually to the detriment of jobs and customer service. 

They are also realising that a value-aligned fund manager is in a much stronger position than government to invest in upgrades. While a government-owned infrastructure manager must lobby a typically cash-strapped treasurer if it wants to upgrade its facilities, a responsible pension funds manager like IFM will invest in an upgrade if it makes sense through the lens of long-term success. 

IFM now has A$45 billion under management and infrastructure investments account for roughly a third of these funds. Infrastructure is a primary capability of IFM and its approach is driven by a clear philosophy: responsible, long-term investment in and stewardship of major infrastructure is an ideal match to the long-term liabilities of pension funds.

IFM is not a closed-ended fund, is not focused on “profit at all costs” and its unique ownership model enables it to be patient. 

Infrastructure is a long-term investment, so you have to ensure you have a long-term fund structure that matches that. Our view is that infrastructure shouldn’t be overly geared and infrastructure managers should focus solely on the interests of their clients. 

We believe our commitment to, and expertise in, long-term infrastructure improvement is best demonstrated through our track record.

Major hub

Southern Cross Station provides one such recent example. The Station is a major intermodal hub for Melbourne, connecting metropolitan and country services, interstate trains, bus, coach, tram, taxis and hire cars. 

It is one of the busiest multi-modal transport hubs in the southern hemisphere, with 40 million people using the Station in 2012. 

IFM took 100 percent ownership of the 30-year concession in 2006 to operate and maintain the Station. 

In 2011, IFM identified that a poor customer service environment was hindering the Station and that public transport users would be much better off with an improved range of retail services.  To address layout shortcomings and to capitalise on tremendous patronage growth, IFM proceeded with a comprehensive retail redevelopment. 

The project included exchanging an indexed, fixed revenue stream for a variable revenue stream, comprising long-term base rents from quality tenants and a component of percentage rent. This enables the Station to participate in the benefits of increased patronage. 

IFM progressed a complex series of integrated activities including multi-stakeholder negotiations, feasibility analysis and approval processes. In parallel, the redevelopment required the exit of the station’s retail concessionaire, which IFM negotiated. IFM also drew on its airport retail development experience and ability to bring that experience to bear. 

The results have been impressive. 

Retail revenue at Southern Cross Station increased by approximately 55 per cent in the first full trading year. Today, all redeveloped sites have long-term tenant commitments.

Stronger returns

The development at Southern Cross Station will deliver stronger returns to IFM’s clients, who manage the retirement savings of half of their members, and to the millions who use the station each year. 

The Southern Cross Station experience is not in any way unique. 

IFM also invests in Melbourne, Brisbane, Northern Territory, Adelaide and Perth airports. 

At Melbourne Airport – Australia’s second-largest airport, in which IFM is the second-largest shareholder – growth has been steady and has delivered significant gains to investors and to the broader economy.  For example, the number of people employed by Melbourne Airport has increased by more than 20 per cent since 2007.

More broadly in the Australian airport space, IFM’s five investee airports have collectively approved capital expenditures of over A$2.9 billion over the past decade to improve the passenger experience. The result is new runways, improved transport access and revitalised retail precincts.  

In return, shareholders received total distributions of around A$1.2 billion from these assets during the period. The net outcome of the investments by Australian pension funds is improved essential infrastructure for all users. 

This long-term, client-focused approach is a central tenet of what IFM does. 

By staying true to our approach and being disciplined about our alignment, we are confident that ‘social privatisation’ will continue to grow in popularity with governments, investors and the broader public.