Time for access to infrastructure

Andrea Slattery

Andrea Slattery

No one questions Australia’s infrastructure needs. Our population is growing rapidly and is expected to reach 30 million by 2030. That growth will place enormous demands on infrastructure, and when coupled with the need to replenish existing stock, it quickly becomes apparent why the Australian Council of Learned Academies suggests a bill of $350 billion over the next decade will just keep pace with our infrastructure needs.

Much of this capital spending will need to be in the four major capital cities, Sydney, Melbourne, Brisbane and Perth, where the combined population is expected to be about 18 million by 2030. Traffic congestion is a major issue in these cities now, and it’s been estimated if the situation is not seriously tackled, the annual cost to the economy could be as high as $50 billion by 2030.

That’s just traffic congestion. Throw water, ports (air and sea), rail (urban and inter-city), energy and telecommunications into the equation and the enormity of the issue becomes self-evident. All political parties are cognisant of the importance of the issue and why tackling it is critical in terms of underpinning a productive economy.

But infrastructure does not come cheaply and all three tiers of governments face budgetary restraints. Clearly much of the capital will have to come from outside the public purse, with superannuation funds being one option.

In particular, the SMSF Association has been urging government to facilitate the opening up of infrastructure investment to our sector of the superannuation industry. Interestingly, even Australian Prudential Regulation Authority (APRA)-regulated funds have been reluctant to invest directly in these assets. It only accounts for 4 per cent of their funds under management (FUM). We believe there is a natural synergy between SMSF trustees, particularly in the transition-to-retirement and pension phases, and long-term investment goals and infrastructure assets.

Research suggests most trustees make long-term investment decisions. So an asset class with a risk-reward profile between cash/fixed interest and property/equities offering yields more attractive than cash or terms deposits would appeal, especially for trustees where income was the principal priority. In a very real sense, infrastructure assets could act as a quasi-annuity with the added bonuses of moderate capital growth and low volatility.

So the question has to be asked: why are SMSF trustees effectively excluded from this asset class? One reason that can be quickly dismissed is their lack of investment acumen. The evidence continues to mount SMSF trustees are savvy investors; witness the CommSec report late last year that showed them being early buyers after a sharp drop in the share market, or the latest ATO report that said “changes in the composition of SMSF asset portfolios show the ability of (trustees) to adjust to changing circumstances and economic conditions”. No, the reasons lie elsewhere.

In the association’s opinion, there are three key reasons, none of which is insurmountable. Infrastructure asset investments come with a high minimum investment threshold, typically between $100 million and $500 million, a lack of liquidity, and often high entry and ongoing management fees. The latter issue, in particular, could be a stumbling block for cost-conscious trustees.

So what’s required? In the association’s submission to the Financial System Inquiry (FSI) and recent appearance before the Senate economics committee we put several options on the table, such as offering unitised investments in smaller parcels, our figure was $25,000, or issuing small-scale infrastructure bonds. Of course, infrastructure investment comes with its own set of issues: greenfield projects, in particular, can be risky and might need a government guarantee. Investors have long memories and projects, such as BrisConnect and the Lane Cove tunnel, are testimony to the fact these investments are not necessarily gilt-edged.

Liquidity too will need to be addressed. It will be critical to develop a secondary market so that trustees can manage liquidity risk, especially in the retirement phase. One option could be offering Australian Securities Exchange-listed infrastructure funds so trustees have the flexibility to respond quickly if their financial circumstances change. It’s worth noting the issue of liquidity in infrastructure investment was a recurring theme from the APRA-regulated funds to the FSI.

Finally trustees have a strong preference to invest directly. Since the global financial crisis, their investment in managed funds has been falling and now is about 5 per cent of FUM. So it will be vital for them to be able to get the necessary professional advice to make an informed decision about investing in this asset class.

Certainly the evidence shows they are willing to move away from cash and Australian blue chips; witness ETFs. But to do so with infrastructure the investment environment has to change and the right professional advice has to be available. If this can be done, then a $600 billion nest egg could open up for important infrastructure projects.

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