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Published 18 June 2013 11:43, Updated 20 June 2013 00:45
Private investment in motorway infrastructure has not paid off in recent times. Photo: Patrick Cummins
The NSW government decision to fund the first stage of the $10 billion WestConnex road project before selling bonds to fund subsequent stages sets a welcome precedent, engineering groups and infrastructure consultants say.
The government’s move to pay for the four-year, $1.8 billion first leg of the 33 kilometre motorway, rather than ask private funders to bear the so-called patronage risk of traffic volumes that has seen projects such as Brisbane’s Clem7 tunnel and Sydney’s Cross City tunnel fail spectacularly, will make it easier for superannuation funds to put money into subsequent stages, observers say.
“It is a significant shift and I think a very good one,” says consulting firm Hyder’s Australasia managing director Greg Steele. “Being able to de-risk these projects enough – that’s the missing ingredient in getting super funds to tap into infrastructure funding.”
The move that Treasurer Mike Baird will outline in Tuesday’s state budget means a state-owned company would only sell bonds to fund the second stage of the 33 kilometre highway once traffic and toll revenues from the first are known, The Australian Financial Reviewreports. The state government would later look to fully or partially privatise the operator.
“It is a shift recognising the realities of the marketplace,” says Michael Coffey, the head of corporate finance for infrastructure advisory firm Pacific Road. “[Investors say] ‘We don’t want to take these kinds of risks going in. We’re looking for investments that provide a predictable cash flow. If you can package that and present that to us, we will bid reasonably aggressively’.”
Hyder has been doing forecasting work for the receiver of Brisbane’s Clem7 tunnel, which took it over from failed owner RiverCity Motorway Group in 2011.
“When you’re modelling transport on existing road with existing traffic, it’s much easier than forecasting for a brand new road that doesn’t exist,” Steele says.
When you’re modelling transport on existing road with existing traffic, it’s much easier than forecasting for a brand new road that doesn’t exist.
Funders such as super funds are looking for assets in which to invest. Last month the Industry Super Network, an association of non-profit-making pension funds, said its members should be allowed to buy more public infrastructure assets to increase their already-strong focus on infrastructure assets and to help close the gap on Australia’s estimated $770 billion shortfall in infrastructure.
Industry super funds – which account for over 9 per cent of Australia’s $1.6 trillion funds under management – expect to invest up to $15 billion in new infrastructure assets over the next five years and if other funds, such as retail and in-house pension funds, invested in the same way that figure would rise to more than $100 billion, the report says.
“Superannuation fund ownership of existing public sector assets provides a unique alternative model to enable governments to build new infrastructure that might have long lead times and economic pay-offs.”
The issue, however, is finding assets that provide long-term stable cash flows that will grow with inflation and help the funds pay their super liabilities.
In this case, the NSW government intends to use some of the proceeds from the $5.1 billion sales of the 99-year lease on Port Botany and Port Kembla to fund the first leg of the motorway. The state also has other assets, such as its electricity transmission and distribution networks, which investors would be keen to buy, Coffey says.
Industry association Consult Australia, which has been lobbying for more public spending to boost infrastructure projects, welcomed the NSW decision.
“It’s fantastic news,” chief executive Megan Motto said. “It’s a very sensible approach.”