Article: Building byways, bridges and bus lanes is a hard road to hoe

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Building byways, bridges and bus lanes is a hard road to hoe

Building byways, bridges and bus lanes is a hard road to hoe
Jacob Saulwick
December 21, 2008

Although not given to displays of self-doubt, it still surprised his audience three weeks ago when Kevin Rudd launched into his meeting with state premiers by proclaiming that, as everyone knew, his Government had all the money and therefore all the power.

In distributing the federal purse for health, education and housing, Rudd was probably right. But retiring the "blame game" between Commonwealth and states might be one of the simpler tasks next year as he attempts to join the dots between promises and accomplishments.

A looming challenge for Rudd, the Treasurer, Wayne Swan, and the Infrastructure Minister, Anthony Albanese, will be to rally the private sector in support of infrastructure projects - the byways, bridges and bus lanes that will establish their credentials as a Government of nation-builders.

This will be tricky.

Infrastructure is all the rage as the economy wilts. But the world has shifted since the budget in May hatched a Building Australia Fund. In these straitened times the Government will have neither all the money nor all the the power. And in its negotiation with private money managers it might have to give more than it would otherwise like.

From the get-go the Government's infrastructure agenda rested on the assumption that taxpayer money would tag-team with private cash. Even before the Building Australia Fund's initial allocation of $20 billion was winnowed back to $12.6 billion, Commonwealth investment was only ever going to be a starter to the main event.

As Friday's report by Infrastructure Australia, the body set up to advise on the right sort of projects to invest in, makes clear, the Government needs alternatives to simply paying out of its own pocket. It will, instead, try to use its money to lure private sector operators into co-operating with it, either as co-investors or as managers of infrastructure.

This is, or was, a big game for the big end of town. The membership of Infrastructure Australia itself acknowledges the vested interests involved. Among public servants like the Treasury Secretary, Ken Henry, there are merchant bankers, Babcock & Browners, and proselytisers for the harmony of interests between private finance and essential social services.

A year ago governments would only have to whisper "toll road" and investors would line up to tip money in. Merchant bankers jostled to organise the deal and then hived the management rights to the road off to a related entity.

But the $190 billion question - to take the total cost of Infrastructure Australia's preliminary list of 94 projects provided on Friday - is how willing private firms will be to

co-invest with the Government. And if they are not willing, what will the Government have to do to entice them?

Albanese, for his part, has talked about the possibility of using superannuation savings to pay for local projects. In some respects Australia is uniquely well suited to harnessing private funds for national ends. Other countries do not have the quantum of forced savings available for potential investment.

But enlisting superannuation funds to co-invest may be a struggle. For one, funds have mandates laying out where they can put their money. So 60 per cent might be allocated to local shares, 20 per cent to direct infrastructure and 20 per cent to fixed-income, as an example.

But the sharemarket's descent has thrown existing mandates off balance. With the All Ordinaries half what it used to be, infrastructure might now represent about 40 per cent of the value of funds under management for some.

These funds, therefore, might be looking to get rid of infrastructure assets - to keep their mandates in order - instead of hunting about for new opportunities. In the jargon, they are already "overweight" infrastructure.

And super funds that do want to invest in infrastructure - attracted to the relatively stable yields of roads, bridges, wind farms - have plenty of existing assets to purchase on the cheap.

Deals could even be stitched up after board meetings of Infrastructure Australia. Rather than risk money on a start-up government project, Garry Weaven, the chairman of Industry Funds Management and a member of IA, could approach a fellow IA-er and head of the debt-addled Babcock & Brown Power, Ross Rolfe, about taking some of his wind farms off his hands.

Put another way, it will become harder to attract investors to new projects as distressed sellers place old assets on the market.

At least superannuation funds have money. As long as Australians are in work, and earning, a portion of their pay will flow through to the industry. It will always need somewhere to put it.

In contrast, there seems little hope of using the sharemarket to raise cash for infrastructure. The debacle of BrisConnections, the publicly listed Brisbane toll-road project - and barnacle on the reputation of all involved - suggests this funding model is dead for the foreseeable future.

A fortnight ago there was a suggestion that a weekend dash to China by Swan might have been about spruiking Australian infrastructure projects there. This would seem unlikely. Chinese investors would still like to buy Australian mining assets on the cheap, but they could probably think of better uses for their money than an expansion of the M5.

So what will happen? Some say the Government will have to make infrastructure projects more appealing for the private sector. Investors who funnelled cash into recent toll roads - such as Sydney's Cross City or Lane Cove tunnels - have mostly done their dough.

If it wants private money, the Government will be under pressure to guarantee it. In doing so the risk would increase that investors could enjoy exorbitant returns at taxpayer expense. It has been reported that Rudd does not like lamb. It will be interesting to gauge his attitude to carrots.