If key barriers are overcome, superannuation funds could hold the solution to upgrading Australia’s infrastructure, including assets in the power and utilities (P&U) sector. But deep sector understanding and local knowledge will be needed to produce a return on investment. Matt Rennie reports.
At the same time Australia’s superannuation funds have grown, the country’s infrastructure gap has widened. Significant new investment is needed in the P&U sector to upgrade aging assets and construct the new assets required, as the sector adapts to a low-carbon future and new business models.
We were engaged by Australia’s Financial Services Council to review the overall profile of superannuation investment in infrastructure, including P&U infrastructure.
Results show that, while superannuation funds may be attracted to P&U assets, they will need to develop deep understanding of both the sector and Australia’s political and regulatory frameworks, or engage with advisers who do, if they are to win these assets and achieve a return on investment.
Barriers to investment
The main function of superannuation funds is to invest member funds to meet members’ future retirement needs by optimizing the level of return. The complex process of allocating funds to investment assets is driven by a desire for low-risk, long-term, sustainable returns.
While infrastructure, including P&U assets, can be an important part of a superannuation fund’s portfolio, we found several key barriers to investment:
- Lack of a clear pipeline and government commitment
- Lack of suitably structured projects
- Inconsistent, complex and expensive bidding processes
- Regulatory and industry pressures
The lack of a clear pipeline of projects and government commitment is particularly relevant to the P&U sector in Australia, where government has been reluctant to release major assets to the market.
As public pressure against rising power prices increases, we expect to see moves toward privatization in an attempt to lower costs and consumer energy bills. We expect generation assets to become available to private investors within one to three years, and network assets within two to four years.
Energy infrastructure assets are long-term investments that can be significantly impacted by political and regulatory pressures. As rising electricity prices drive consumer unrest, the Australian Government is ramping up its pursuit of structural reform.
While regulators are keen for greater discretion to reduce energy costs to consumers, this creates uncertainty for investors seeking predictable returns.
Adding further complexity is Australia’s multi-tiered system of government, which sees the federal government set the regulatory framework for state government-owned assets to operate within.
Political uncertainty over Australia’s carbon tax scheme – at least until after September’s federal election – also makes decisions more difficult and highlights the need for potential investors to partner with local advisers.
If these barriers can be overcome, superannuation investors may be almost the perfect match for P&U assets.
Unlike some other investors, these funds are free of many equity constraints and are prepared to continue to inject capital for many years. Their willingness to enter into a long-term commitment makes them a good partner, especially for electricity and gas assets, which need regular capital upgrades.
The attraction is mutual. Network assets, in particular, offer the predictable and regulated returns that appeal to these investors. While generation assets are subject to more competitive pressure and government intervention, they too are desirable because of their ability to offer predictable, sustainable returns.
However, superannuation funds currently lack the sector knowledge that will be critical to realizing the potential of these investments. These assets will only deliver optimal returns if they are run as efficiently as possible to maximize profits while also being reliable, safe and in compliance with all regulatory frameworks.
As it may be unrealistic for superannuation investors – active in many sectors to develop such sector-specific expertise, a smarter approach may be to partner with experienced advisers.
Time to prepare
While several barriers to superannuation investment in Australian infrastructure, including in the P&U sector, remain, these can be overcome in the short- to medium-term as the sector transforms.
The market for infrastructure assets is global. We expect the predictable returns of these assets to make them attractive to a wide range of investors from many sectors and countries, and competition to acquire them will be fierce.
Potential investors must prepare now to give their bid the best chance of success. All funds will need access to specific knowledge and experience of the sector, particularly in network assets, to maximize the operational performance of these assets.
International funds should also arrange consortiums with local partners to:
- Enhance strengths and minimize weaknesses
- Engage with international tax and finance advisers
- Seek local support to help navigate Australia’s complex regulatory and legal frameworks
How we can help
Our deep practical sector knowledge and global network can help investors, including superannuation funds, understand the complexity of Australia’s infrastructure market and make informed investment decisions.
Read the article Financing Australia’s infrastructure needs.