Without funding, no pipeline

Over the next 10 years, approximately $700 billion in greenfield infrastructure investment is required to fund the economic and social infrastructure Australia needs to keep the economy and the nation moving forward. 

Over the six years up to 2013-14, the Australian government has committed around $36 billion to Australia’s transport infrastructure. That’s a great start, but governments simply do not have the budgets to fund the level of infrastructure required.

And here lies the problem. All players recognise the need for a pipeline of projects, prioritised to address this massive investment, and to give industry certainty. However, governments are understandably reluctant to commit to a project pipeline without knowing that they have the required funding capacity.

Privatising brownfield assets

Traditionally, institutional investors have been reluctant to invest in greenfield projects but are hungry for brownfield assets – as demonstrated by the recent $5 billion New South Wales Ports privatisation. In an environment where it seems inevitable that the role of government is evolving from being an operator of infrastructure assets to more of a custodian, it seems a logical solution to privatise brownfield assets through long-term concessions and recycle capital into greenfield projects.

Australia still has a number of government businesses, including those operating in the energy, utilities and ports sectors which could be suitable privatisation candidates. However, the list of possible brownfield assets available for privatisation need not be confined to existing commercial enterprises. 

There is also a significant amount of government equity held in many assets such as roads, bridges and tunnels, which could be tolled and subsequently sold to the private sector. The recently opened Peninsula Link road in Victoria, which is structured as an availability public-private partnership (PPP), is one example of an asset that could potentially be tolled and privatised when a patronage track record has been established.

Financing greenfield projects

Financing Greenfield projects remains problematic, particularly for projects that involve any kind of demand risk. A series of high-profile toll road failures has certainly diminished the appetite of banks for projects with patronage risk.

In fact, across the board there are clear volume and tenor constraints within the banking sector when it comes to greenfield projects – even those without patronage risk. With the introduction of Basel III and the demise of monoline insurers, banks have been reducing their exposure to the infrastructure sector and reducing their loan tenors to periods of five to seven years.

Given the above constraints in the bank market, a range of other financing sources are emerging.

Export credit agencies and development banks

Australia has seen a rise in export credit agency (ECA) financing of projects, particularly mining-related projects linked to national interests.

ECAs have been prepared to offer longer-term, competitively priced finance for these projects, particularly where the finance has been tied to the participation of contractors or equipment suppliers from the country in question.

In December 2012 one of Australia’s largest-ever project financing deals, the $20 billion Icthys project in Darwin, involved an unprecedented eight ECAs from six countries. 

Infrastructure bonds

The Commonwealth government introduced tax legislation in 1992 to create an infrastructure bond market. These bonds were used to underwrite Melbourne’s City Link and Sydney’s M2 Motorway, and provided projects with the ability to access tax deductions on their borrowing costs during the construction and early operations phase of projects.

The programme was discontinued in 1997. However, with the presence of monoline insurers, the infrastructure bond market continued until they disappeared in the global financial crisis.

The Federal Coalition opposition is considering offering tax breaks for infrastructure bonds used to finance approved projects.

Conclusions

With so much to be done – and overcome – to be able to fund and finance this infrastructure, policymakers and developers alike need to consider how the changing financing and political environment is impacting traditional sources of capital, and what new avenues are emerging to provide the funding capacity to enable governments to develop a pipeline of priority projects that will withstand changes in the economic and political cycle.