There is a critical debate under way about funding
Australia's $700 billion infrastructure deficit during the next
The tax base is shrinking and superannuation money has emerged
as an opportunity for funding big infrastructure projects, provided
the structural issues of funding can be ironed out.
One school of thought holds that if the government can get super
funds to pay for infrastructure, it can free up public funds for
other national priorities.
Pension funds are generally no different from other sources of
equity, except that they represent a different tax profile for the
investors. Super funds typically seek investment opportunities that
are low risk and offer returns over a long period. In this respect
they are well suited to big infrastructure. Roads, rail projects,
bridges and tunnels are touted as generating stable returns over 15
to 25 years.
At a practical level, however, there are several impediments to
super funds investing in infrastructure projects.
Although there are more than a trillion dollars under management
in superannuation funds, about 30 per cent is tied up in small
self-managed super funds. These funds typically invest in
Australian listed shares and commercial property to retain
The superannuation market is also fragmented. A substantial
number of small funds make it impossible to gain the critical mass
needed to bankroll big engineering and construction projects unless
it's through some form of infrastructure bonds scheme.
Also, the cost of bidding for infrastructure projects is
becoming prohibitive and the risk profile of projects is
The relative position of contractors, financiers, operators,
consultants and governments presents a substantial hurdle. At the
moment everyone is trying to rid themselves of risk instead of
engaging in meaningful debate about who is best placed to bear and
manage certain elements of risk.
Until this is resolved, super funds will be reluctant to invest
directly and other private sector money will be withheld from
investment in such projects.
The highly publicised nature of these projects also makes them
more risky. For example, the economic feasibility of the Sydney
desalination plant deteriorated rapidly when heat was applied to
the New South Wales government by community groups and the
Initially the desalination plant was to be built, owned and
operated by the private sector. However, as the project developed
and political sensitivity increased, the NSW government decided it
would operate as a publicly owned asset within Sydney Water.
This kind of uncertainty makes private sector investors
(including superannuation funds) nervous. Governments, both state
and federal, need to convince the private investment community that
they're prepared to hold a line regardless of the pressure
applied to them by the opposition and the electorate. A higher
degree of public consultation in the planning stage could help in
Another complication is the regulatory environment. Invariably
infrastructure projects are highly regulated in terms of pricing
and tolls. Although this might reduce risk, it also limits
Finally, there is the issue of the public's perception of
super funds' capacities to manage investments properly.
For this idea to work, the important challenge is to develop and
successfully implement and investment framework that economically
and responsibly meets the requirements of superannuation fund
members- that is, to grow wealth to fund retirement.
About the Author: Peter Fagan has more than 35 years of
experience and is MWH's Asia Pacific Sustainability Practice
Leader. His extensive experience spans the technical and
organisational aspects of sustainability through public and private
sector roles, including more than 30 years with New South
Wales' largest water provider. Mr Fagan currently serves as a
member of the Technology and Sustainability Standing Committee of
the University of Sydney's Warren Centre for Advanced
This article first appeared in Business Review Weekly (BRW),
February 25 – March 31 2010.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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