Funding the Australian infrastructure pipeline

Darren Munton.jpg

Darren Munton

Managing Director, Australia and New Zealand

The challenges facing the Australian infrastructure market today are fundamentally different from those we have faced at any other time. Technology is changing the way we live and use our built environment, and, at the same time, there is a movement towards responsible investment that demands we consider the social and community value created by new infrastructure.

Public sector projects boost economic growth, create millions of direct and indirect jobs and increase productivity in the economy, however, public sector support during the COVID-19 pandemic has resulted in budget deficits that will take generations to pay down. There is now an increased expectation for the private sector to step in and take over to realise the Australian Government’s infrastructure ambitions.

In March 2022, the Federal Government committed $17.9bn to new and existing infrastructure projects across Australia, increasing the rolling ten-year investment pipeline from $110bn to $120bn. Some of the new investments which cover the road, rail, water and recycling sectors include the Melbourne Intermodal Terminal, Sydney to Newcastle faster rail upgrade, Brisbane to the Gold Coast faster rail upgrade and the National Water Grid Fund to improve Australia’s water security.

To fund the significant infrastructure backlog facing governments at state and federal levels will require a diverse portfolio of investment strategies. The public purse has limited capacity to fund in the short to medium term so innovative strategies are essential if we are to ensure the continued socio and economic growth of the communities we live and work in.

In this article, we examine alternative infrastructure funding strategies from around the globe and what this means for the private and public sectors to realise better outcomes for future infrastructure projects.

Funding models for long-term environmental, social and governance returns

Australia, Canada and the UK have embraced public private partnership (PPP) models where assets are placed in private control for a number of decades, with investors gaining their returns from demand risk or availability payments related to the performance of that asset. PPPs definitely have a role to play, however, they are only part of the solution.

There is a massive appetite for investment in infrastructure as vast sums of investment capital in mega funds are waiting to be deployed. This is because infrastructure as an asset class inherently provides stable, long term cashflows to investors, making it attractive to the large pension fund-backed investment funds. Part of the answer is in models that recognise the creation of social and community value as there is a growing trend for environmental, social and governance (ESG) investment. ESG investors believe that investing responsibly will lead to more secure long-term returns and the creation of both financial and non-financial value. 

One such innovation is green bonds. Green bonds have emerged as an alternative form of debt capital to transition towards a low-carbon economy and satisfy institutional investor demand for a competitive return while meeting ESG mandates.

A green bond is essentially a ‘normal’ bond with a specific ‘use of proceeds’ clause that earmarks proceeds for projects with positive environmental and/or climate benefits. Over 70 percent of Australian superannuation funds have committed to responsible investing, and over half have dedicated socially responsible investment options.

If we want inspiration for ways to create social, environmental and economic value, we could look to Scandinavia. Stockholm in Sweden is bringing together academia, local authorities, citizens, consultants and suppliers, to fuse sustainable development and digital technology to create the smart city of the future. Through measures such as the Nordic Smart City Network, which links up 20 cities to trial and develop new infrastructure solutions, these cities plan to attract global investment as it promotes collaboration by sharing experiences to provide innovative solutions with a wider market.

Another approach involves ‘value capture’ models which are based around the concept of ‘beneficiary pays’ rather than the traditional ‘user pays’ approach, spreading contributions among those who gain the greatest benefits.

One example of this is Crossrail in London. It used a Business Rates Supplement (BRS) and Mayoral Community Infrastructure Levy (CIL), collected from new developments and existing businesses that will gain benefit from improved connectivity across the city.

There is an emerging role that asset recycling is playing in some economies and has been used extensively in Australia as another alternative funding strategy. This is when you take assets off the balance sheet by selling or long-term leasing to the private sector freeing up significant equity to reinvest in new infrastructure assets.

The New South Wales (NSW) Government’s successful asset recycling strategy has enabled record levels of capital spending to support jobs and drive economic activity. Capital from the recycling process on WestConnex will be invested in the NSW Generations Fund (NGF) to earn a viable return for taxpayers and facilitate investment into Sydney Metro West. Providing a clear link is made between the asset being divested and the new asset that is created has proved to be acceptable to the general public. Where this strategy has failed is where the proceeds of the transaction are used to fund recurrent government expenditure. 

Collaboration to realise better outcomes

We need to see the creation of new models which respond to both the social value agenda and the technology challenge. These models need built-in flexibility to deal with the risk and uncertainty that new, emerging and radical technologies present. We can’t simply continue to take the view that investments are one-off transactions.

Successful implementation will need new methods of procurement and delivery which harness the very best that private public partnership can offer combining equity funding by government, PPP, value capture and asset recycling. This in turn will require new capabilities and collaborative ways of working which focus on realising better outcomes.

Finding these new models is dependent on cities themselves. Infrastructure plans must be part of urban and smart city planning. Creating an integrated plan will allow for the exploration of opportunities in new PPP models that deliver economic and social ambitions which benefit both the public and the investor.

Meeting Australia’s AU$120bn ten-year infrastructure investment pipeline will strongly rely on the collaboration between the private and public sectors. Private investors now have a unique opportunity and an increased responsibility to ensure their investment delivers outcomes that benefit the community, environment and economy. If we can realise better and more productive infrastructure funding strategies that enhance collaboration and welcome new ways of working, then we can ensure the continued socio and economic growth of the communities we live and work in across Australia.

For further information contact:

Darren Munton.jpg

Darren Munton
Managing Director, Australia and New Zealand

t: +61 (0)2 8245 0000