Super infrastructure: What makes infrastructure assets attractive to investors?

Roads & Infrastructure Magazine speaks with Professor Rodney Maddock about what makes an infrastructure asset attractive to investors.

Superannuation funds manage the retirement savings of Australia by investing contributions into shares, bonds and property, including infrastructure assets.

Only a small percentage of superannuation funding ends up going towards infrastructure. However, at the end of the June 2018 quarter, the total amount of superannuation assets totalled $2.7 trillion. Even though it makes up a fraction of overall investment, it still represents billions of dollars of possible funding for the right project.

Professor Rodney Maddock, Chief Economist of the West of Melbourne Economic Development Alliance, says super funds diversify their investments to mitigate risks to long-term growth, which can make infrastructure assets potentially strong investment.

“Super funds are tasked with the job of making sure that employees retirements are well funded. This means they invest across a range of assets, inside and outside Australia, as we are only two per cent of the world’s market,” he explains.

“Infrastructure assets in particular can be attractive to these super funds, as they tend to have very long lifespans and are likely to grow at the same pace with the population of the city,” Prof. Maddock adds.

Investments into infrastructure tend to focus on projects that are able to make a return on the investment, meaning assets without a clear method of charging users tend to remain government funded.

Lighthouses, for example, are not usually funded by investors as they have no way of identifying and charging for the services the provide. Prof. Maddock says that this is why most super funds invest in infrastructure that has a well-defined method of capturing revenue.

“The state and federal governments have the largest capacity to fund megaprojects and basic road networks, whereas investors will support infrastructure that allows them to isolate it to provide a clear source of revenue,” he says.

“For example, a toll road that bypasses a significant number of traffic lights provides a service that motorists are unable to get anywhere else and allows the investor to charge its users.”

Infrastructure assets tend to have high barriers to entry, costing millions if not billions to construct, which makes it difficult for competitors to cut into the profits generated from an investment, according to SuperGuide. These assets also tend to have predictable income streams from long-term contracts with governments often with low, predictable ongoing maintenance costs.

Prof. Maddock says it can be difficult to predict how profitable an infrastructure asset will be if it doesn’t already exist, which means investors could face higher risks.

“In some of these situations, instead of building a road a government could instead help allay some risks by providing investors with a guarantee, which could be upfront funding or providing fund to fill in the gaps if the predicted use is higher than the actual use.”

One project that has garnered interest from investors is Melbourne’s Airport Rail Link project. The Victorian Government said in a statement that private sector contributions will play a part in the delivery of the project and has sought Registrations of Interest for investors and financiers on the project.

Danny Broad, Australasian Railway Association CEO, says the project had sat on the shelf for long enough.

“The Victorian Government has said the door is open to private infrastructure funding and after debating for more than 50 years, AirRail Melbourne has a solution on the table that needs to go ahead,” he adds.

Superannuation-backed consortium AirRail Melbourne bid to match the federal and Victorian governments’ $5 billion commitments in September. Comprises IFM Investors, Melbourne Airport, Metro Trains Australia, the group’s proposal would see the project ready for construction in late 2020 – two years ahead of the current plan.

The proposal aims to provide reliable travel times under 20 minutes with trains running around the clock every 10 minutes. AirRail estimates its plan would remove 15,000 vehicles a day from roads in Melbourne’s north and west and could integrate ticketing with the city’s public transport system to charge up to $20.

Prof. Maddock says the airport rail link has a significant number of strategic advantages that makes it stand out as a long-term investment.

“Sydney’s airport has certain restrictions that have impacted its growth, leading the NSW Government to construct a second airport in the city’s west. However, two airports are not as effective as having one large airport, which could mean Melbourne’s airport could grow significantly for Australia’s air transit sector,” he explains.

“The rail link project has the characteristics investors are looking for, as it is currently separate from the rail network with an easy way of charging users through a ticketing system.

“It is clear the consortium is confident of the population growth and the revenues that will come from that as the city’s airport becomes more connected, which takes away some of the investment risks to repay the long-lived obligations to their members.”