Keeping calm

One needn’t go as far as the North and South Poles to witness the reality of climate change. Australia was proof enough for your correspondent, who found Sydney’s late autumn unseasonably warm as he disembarked the plane (it has since been proved to be the city’s hottest autumn since 1914). Not that he complained: Sydney was a comfortable 10 degrees warmer than the London he’d left 24 hours before, despite being a mere weeks away from a supposedly glorious British summer.

A similar heat wave seems to have reached Australia’s infrastructure markets – but not everybody seems relaxed about it. A handful of privatisations have recently reached prices well above valuations projected by government officials and advisers alike, attracting EBITDA multiples in the mid- to high-20s. And, with much money flowing in from overseas, a number of outsiders are starting to wonder whether Australia is getting a bit too hot.

Questions arose last year when an IFM Investors-led consortium paid A$5.07 billion (€3.5 billion; $4.7 billion) for the 99-year leases of New South Wales’ Ports Botany and Kembla, about A$2 billion above the budgeted proceeds. This was followed by the A$7.057 billion purchase of Queensland Motorways (QM) by Transurban, AustralianSupert and Tawreed Investments last April, against anticipated receipts of between A$5.0 billion and A$6.5 billion.

A week later, Hastings Funds Management (Hastings) and China Merchants won the 98-year lease of Port of Newcastle for A$1.75 billion, again smashing targeted proceeds of A$700 million. Much more may be in the pipeline: Infrastructure Australia, an advisory body, reckons around A$100 billion of public assets could transfer to private hands relatively quickly.

This would be helped by a political class that has been drumming up the role of private investment in infrastructure, with the election of Tony Abbott in September 2013 bringing a self-proclaimed ‘Infrastructure Prime Minister’ to the helm of the country. Just a week before Infrastructure Investor arrived in Australia, the government earmarked A$5 billion in top-up funding for states that sell big assets and reinvest the money in greenfield projects. Other initiatives at the federal and state level suggest Australia is again bringing new ideas to the table.

Our annual Australia roundtable could not have come at a better time: with so much limelight currently being shone on the market, we were pleased to have five industry luminaries help us separate the truth from the hype.

A NEW TOOLKIT

The conversation kicks off with an assessment of the legislative changes recently announced by the government, most of which are geared towards facilitating the funding of new infrastructure through the ‘recycling of public capital’ – that is, the reinvestment of privatisation proceeds in greenfield projects.

Among them is last December’s overhaul of Infrastructure Australia, under which the body is now led by a chief executive – who reports to the board – and is now responsible for developing a 15-year project pipeline as well as passing every Commonwealth infrastructure expenditure exceeding A$100 million through a cost-benefit analysis. The move is seen by our panelists as a reasonably positive step.
“Going to a corporatised model for Infrastructure Australia seems to be the way forward. It seems to be giving it stability, longevity and structure,” says Colin Atkin, chief executive officer of Hastings’ Utilities Trust of Australia. “It’s largely about making sure that a robust process and framework for the evaluation of projects remains in place,” adds Paul Foster, head of infrastructure Australia and New Zealand at AMP Capital.

It will help that the body’s board appointed Mark Birrell as new chairman last April, a seasoned infrastructure professional seen as bestriding the commercial and public sector worlds. Yet the biggest question, cautions Tom Snow, head of institutional and strategic relationships at Whitehelm Capital, “is the willingness of governments to listen to those agencies”.

Another initiative launched at the federal level, the Productivity Commission inquiry into infrastructure costs, looks to address potential bottlenecks in the progress of greenfield projects. “In the draft report, the chapter dedicated to the procurement and construction costs side of infrastructure delivery is significantly larger and more detailed than the one focused on financing. That gives you an idea of where the issues are,” says David Byrne, global head of utilities and infrastructure at ANZ.

Some innovative approaches to this problem are being crafted at the state level, through which governments are trying to catalyse private appetite for brownfield assets towards new-build projects. One such example is Victoria’s unsolicited bid framework – an idea Atkin lauds for opening the door to creativity but sees as unlikely to generate many transactions. “You need to have a unique offering or position in respect of a particular project to make a proposal successful,” concurs Vicki Rigg, investment director at Palisade Partners.

WORK IN PROGRESS

But while their immediate application might be limited, Byrne sees such initiatives as a necessary step – one that brings much-needed flexibility to the procurement process. “It’s the continued evolution of the delivery of infrastructure. This is the next stage of getting the bureaucracy to engage with the private sector in a more dynamic way.”

As far as public-private partnerships (PPPs) are concerned, such progress is needed. “There’s definitely been an increased adoption of the PPP framework. While use of the procurement method was previously patchy it is now being used by almost all states and territories, with increased frequency,” reckons Rigg. “Whilst projects are getting bigger, because of the level of gearing and the increased use of state capital contributions, equity cheques are still relatively small, particularly in the context of the recent large government privatisations. So the pipeline looks great for us but it’s unlikely to attract the big players in the market.”

Part of the dilemma, reckons AMP’s Foster, lies in the time and cost of getting involved in the greenfield state projects. “For long-term equity providers trying to deploy capital in scale the time, cost and uncertainty risk attached to greenfield bid participation often doesn’t work very well.”

Snow agrees. “Greenfield investments with no or limited revenue risk can be good investments for institutional investors. But the time and effort required to go through the bid process can be quite prohibitive.” He thinks getting a fuller PPP pipeline is not just about streamlining the process – there’s also a need to prop up balance sheets at the federal and state levels, through tax increases, spending cuts and asset sales.

SOLID DEAL FLOW

And it’s on that latter point that government efforts seem to be the most effective. Fresh federal incentives as well as new, fairer tax arrangements to redistribute tax proceeds from the sale of state assets provide an enabling climate in which to divest publicly-owned ports, airports and energy networks, and our panellists are optimistic that more such deals are on the cards.

ANZ’s Byrne points at the electricity and generation portfolio of New South Wales as well as the Port of Melbourne, another potentially large transaction. Much more is likely to come as New South Wales and Queensland get ready to go to the polls. “The pipeline seems ok now but it’s really post key state elections in early 2015 that we will be able to say how it’s going to look for the next two to three years.”

Given the relatively small population of Australia, adds Snow, the recent and forthcoming pipeline looks very strong. In fact, he reckons the market should “try and export what are very successful processes to jurisdictions that are much more significant and need more infrastructure investment than we do here”.

In that context, Foster doesn’t think Infrastructure Australia’s A$100 billion benchmark for near-term privatisations is unrealistic. That’s partly because a couple of binary decisions could unlock a sizeable portion of this total, with the sale of NSW’s generation assets, for example, potentially fetching in the whereabouts of A$30 billion.

“We’re talking about a country that’s had 22 years of consecutive growth, an economy that’s growing structurally faster than other developed markets, and an inflation rate that’s also higher than in most comparable economies. That’s a very attractive recipe for infrastructure investors.”

Byrne agrees, underlining the rationale for the high prices reached by recent auctions: Port of Newcastle, the largest coal export facility in the world, seems well placed to benefit from Asia’s growth story; QM was one of the rare motorway networks in the world to be put on the block. “You have to look at the uniqueness and scarcity of the asset.”

PRIVATE PROPERTY

With Australia in the spotlight of many overseas investors, prices could yet climb further. Were that to happen, Foster thinks investors could quite easily start shopping elsewhere again. “The capital we represent is fairly agnostic. It will be invested here if returns are attractive on a risk-adjusted basis and if not then it has proven to be happy to go and invest in other parts of the world.”

And that’s a real possibility, reckons Palisade’s Rigg. “Australia has seen what is almost the perfect storm of investing conditions and that’s not going to last forever. So I expect there will be a time when people’s attention will start to focus elsewhere again.” In that context, adds Atkin, it will be crucial for the government to keep “the settings right” in terms of transparency and supportiveness of the sector – so as to keep it in the focus of large domestic and international investors.

Our panelists are keen to underline that the Australian market is not just about large-scale privatisations. For one, says Byrne, a lot of assets that started their life in private hands are likely to be the subject of transactions in the not-too-distant future. “Some of the natural resources assets will start to unbundle over time as people that have gone through the construction phase, for example in liquefied natural gas (LNG) projects on the East Coast, start to look at whether there’s an opportunity to recycle those assets.”

Rigg also sees great value opportunities down the size scale. “As some investors focus more on bigger-ticket assets, there’s a natural opportunity for others to acquire smaller ones – those that may be too small to impact on a large portfolio but still take time and resources to manage.”

But there is also much to do with what’s already within investors’ portfolios. Hastings’ Atkin explains that high transaction prices are justified because of the growth and efficiencies that can be derived from skilful asset management. And this comes with the need to deploy more money. “I can’t think of any Australian airport that’s been privatised into which its new owners haven’t pumped at least half a billion dollars towards growing the business. Australian airports have consequently been a major privatisation success story,” Snow concurs.

REFINANCING GAP

A potential spanner in the works may be refinancing. Australia has traditionally been a market where long-term debt is hard to come by, and the need to refinance assets after development or acquisition often represents a risk to their owners. And while bank tenures have lengthened a little lately, Snow reckons no clear solution has yet been found to the problem.

This is all the more true in a context where assets bought during or in the aftermath of the Crisis approach refinancing deadlines. “We’ve started to see some of the big deals being refinanced with different tranches of debt, bonds, and some short-term debt but lack of long-term debt is still an issue. Looking at our portfolio we find that we are refinancing at least one of our assets at any given time,” says Rigg. “We are very aware that we could hit another credit crunch, with a lot of privatisations happening at the same time as large refinancings. It could test how much liquidity there is in the market, although we do not currently see liquidity as an issue.”

Fortunately, Foster argues, a number of other solutions are coming to the rescue. “We’ve been pleasantly surprised by the amount of inbound inquiries coming to us, particularly on our mature PPP portfolio. We’ve had approaches from Asian banks, North American insurers, and a broad variety of non-traditional participants that want to lend long-tenor, Australian dollar-denominated funds into these mature-type cash flows.”

What proportion of the total financing they contribute varies depending on the size of the deal. “If you look at entities carrying A$5 billion to A$6 billion of debt – of which there are a limited number – they’re heavily diversified into global markets because you don’t want to have to be refinancing such large amounts every two or three years. But if you’re carrying no more than a billion dollars you can easily do it with the bank market,” says Byrne.

Whitehelm’s Snow notes that investor appetite for ungeared projects has significantly taken off over the last 12 months. “All they’re looking for is a CPI (consumer price index) + X percent return and if they can get that plus a risk-adjusted premium then they’re getting what they want. And having no debt structure makes bidding so much cheaper.” Of course, he says, banks continue to play a key role: even if a greenfield project starts ungeared, debt is often put in once it reaches a certain stage.

MOBILE CAPITAL

Whether they are keen to bet on infrastructure debt or equity, however, today’s investors are seen as having a global outlook: they’ll go to one particular market if the risk-adjusted deal flow justifies the travel.

A number of large overseas pensions are opening offices in Australia, our panellists point out, suggesting they are serious about growing their footprint in the market – even if Atkin thinks one step has yet to be taken for them to plant durable roots. “When these new participants start staffing these offices with Australians is when you start thinking that they’re not going anywhere.”

“In the last 12 to 18 months there have been an awful lot of overseas contractors coming to Australia to look at potential greenfield projects,” observes Byrne. “Time will tell how many get to stay here and execute but they are setting up offices because they see huge potential for what they can do down here.”

But Atkin is keen to underline that direct investors – in Australia as well as in other markets – also act as partners. “If I look at assets we’ve recently bid for, we’re with a Spanish toll road operator in one and a Chinese port operator in another and UK and Europeans in others again; we’ve also got a partnership with a Chinese-Korean entity in airports globally. Whilst a lot of this has intensified over the last two years it is in addition to the existing international partnerships we have built up over many years.” This is also true of Australia’s supers, our panelists reckon, which, despite their increasing appetite for direct stakes, are not rejecting the fund model.

What that means is that many investors, rather, are looking for additional customisation and diversification. And that’s a good thing, reckons Foster, because this is precisely what Australia is able to offer now more than ever.
“Whilst large trophy deals have been obviously apparent over the last 12 months there is also a very strong raft of opportunity across the size and sector spectrum. Given that investors have different things they’re trying to achieve and more tailored requirements, we think this makes the Australian market quite attractive. There’s more diversity coming than we’ve seen for a while.”

Around the table

Colin Atkin
Atkin joined Hastings in 2008 and has more than 20 years of domestic and international markets experience, including extensive work focused on the infrastructure and utilities sectors. He is chief executive officer of the Utilities Trust of Australia and is a member of Hastings’ operating committees including the Equity Investment Committee. Until recently Atkin was chief executive officer of Hastings Diversified Utilities Fund (HDF), which he led and managed through a recent successful sale. Atkin’s responsibilities have also included directorships and implementation of strategies at a number of Hastings investee companies.

David Byrne
Byrne is global head of utilities and infrastructure in the international and institutional banking division of ANZ. His team is responsible for managing the bank’s institutional relationships with utilities, infrastructure, and defence clients globally. With over 20 years of domestic and international experience, Byrne has a track record in working with clients in raising capital across a broad range of markets to finance their operational needs, acquisitions/demergers and development of greenfield infrastructure. He is a member of the National Advisory Board for Infrastructure Partnerships Australia and also served as a member of the Commonwealth Government’s Infrastructure Finance Working Group.

Paul Foster
Foster is responsible for leading AMP Capital’s infrastructure investment activity in Australia and New Zealand. He has 25 years of investment management experience spanning mainstream and alternative asset classes, including more than a decade working in the infrastructure asset class. In addition to leading AMP’s transaction origination, post-acquisition investment management and portfolio construction activities in Australasia, Foster and his team are also responsible for investing capital on behalf of a number of AMP’s largest Australian clients into global infrastructure opportunities.

Vicki Rigg
Rigg is investment director at Palisade, which she joined in 2008 from Perpetual Investments. Her key responsibility is the acquisition and management of social infrastructure assets, including for Palisade’s Australian Social Infrastructure Fund. Rigg also assists with the structuring and governance of Palisade’s investments generally and is a director on the board of a number of Palisade’s investee companies. Prior to joining Perpetual in 2007, she worked for 10 years in the project finance teams of Mallesons Stephen Jacques (now King & Wood Mallesons) in Sydney and Linklaters in London and Hong Kong.

Tom Snow
Snow is a founding shareholder of Whitehelm Capital, responsible for institutional and strategic relationships. He previously ran the Australasian investments team of Access Capital Advisers and spent six years as the executive director of Canberra Airport, overseeing the major redevelopment of the airport after privatisation. A Rhodes Scholar, he has also worked with the UN’s Millennium Project infrastructure development team and as an actuarial consultant at Trowbridge Consulting (now Deloitte Actuaries and Consultants). Snow’s directorships have included Perth Airport, Bankstown Airport, Flinders Ports, Peninsula Link, International Parking Group and Etihad Stadium.