A pipeline of opportunities in infrastructure
There's never been a better time to invest in infrastructure, with low interest rates and competition among investors making the cost of accessing the large pool of available debt and equity capital more affordable – in particular, Australia's superannuation funds.
During a series of events hosted by Engineers Australia and Macquarie Group, experts brought their own perspective to the infrastructure challenges presented by the demands of a growing urban population, and the different financing models that could take major projects from the drawing board to reality.
Global growth is back on the agenda
The Australian economy needs new industry investment to replace the significant growth gap created by the end of Australia's mining boom. Martin Lakos, Division Director, Macquarie Private Wealth, shared his insights on the current state of global economies, and how Australia is faring in comparison.
The US has successfully reinvented its economy around IT and innovation, and economic settings are now tracking at 'normal settings', with a rally in consumer confidence.
Europe remains steady but unspectacular, while Japan (still the world's third largest economy) is now on target for growth for the first time in decades. Meanwhile, India is poised for 7.4 per cent growth while it embarks on ambitious reform – and its population is expected to overtake China by 2025.
And it seems the reports of China's decline may have been exaggerated.
"China is defending a more stable 7 per cent GDP growth as it continues to shift millions of people from agrarian poverty to urban middle class," Lakos explained, noting the government's investment in infrastructure includes 16,000km of high speed railway, 230,000km of new roads and connecting 66 million people with clean drinking water. Purchasing manager indices show China's manufacturing is not falling off a cliff, as predicted.
So, how does Australia's economy measure up?
Despite interest rates at historic lows, improved business confidence and hiring intentions, and a more competitive Australian dollar, consumer confidence is still weak.
Given household spending drives 50 per cent of economic activity, weakened wages growth and the shift from spending to saving is holding back growth.
Global business cycle
The key ingredients for infrastructure investment
What Australia is missing is new types of investment. John Pickhaver, Co-Head Infrastructure, Utilities and Renewables with Macquarie Capital, explained that while mining investment has fallen since 2010, other infrastructure spending is failing to come through.
"Residential construction is up, but it's not enough to fill the gap. Transport and utility construction is not replacing mining investment," he said.
Australia: Engineering construction activity
Australia: Engineering construction pipeline
One of the main drivers for infrastructure demand will come from our increasingly urbanised population, most of whom are participants in our services-based economy.
Services are now powering Australia's economy, and contribute 73 per cent of Gross Value Added (GVA, a measure of economic output).
Australia: annual gross value added by industry since 1982 ($Abn)
The UN forecasts Australia's urbanisation rate will increase to 93 per cent by 2050, well above the rate in other developed nations. And by 2055, Sydney, Melbourne, Perth and Brisbane will all have doubled in size.
Population density v size
The challenge lies in sustainably managing that growth, given the current undersupply of housing and greenfield sites, and the associated infrastructure to support that growth. We can expect to see higher density cities and we'll need more investment in transport, in itself an enabler of jobs and economic growth.
An appetite for new infrastructure investment
Australia's superannuation funds currently have assets of around $2.0 trillion, and this is forecast to double in the next decade. They have an increasing allocation available for infrastructure assets, as they are looking for long-term and stable cash flow, predictable and consistent demand and high barriers to entry, all of which are hallmarks of infrastructure assets. However, there are a limited number of projects to invest in relative to the capital that is available.
As a result, the cost of funds has reduced due to competition, and the definition of infrastructure has evolved, with 'non-core' assets such as renewables, waste and telecommunications now a greater part of the mix, as investors look for opportunities outside the 'core' areas of airports, toll roads and regulated utilities.
Pickhaver also expects further investment in renewables to meet the revised Renewable Energy Target of 33TWh, and increasing opportunities to purchase private resource or energy related infrastructure, including exploration, production and non-core assets, as oil and commodity prices remain low.
The current state of play
Each State government is currently in a different position regarding their ability to spend capital on new infrastructure projects.
Western Australia and Queensland have been impacted by falling iron ore, oil and gas prices, while South Australia is feeling the pressure from manufacturing closures. These factors have strained the State balance sheets restricting their ability to fund new projects. NSW and Victoria are in stronger positions due to their higher credit rating, but all states remain keen to explore ways of involving the private sector in the financing of new infrastructure.
And that's where government will need some ingenuity in financing models.
'Value capture', where the land value gains that urban infrastructure can provide is used to fund infrastructure, is a model governments have signaled they are keen to explore. PPPs (public-private partnerships) also remain a key procurement tool to involve the private sector.
Given the appetite for infrastructure amongst investors, the talent and expertise ready to be redeployed from the resources sector, and the demand of a growing urban population, infrastructure could provide the investment gap Australia's economy needs – and also build the foundations for our future economic success.