New Australian govt aims to bridge infrastructure deficit

Wed Oct 2, 2013 4:09am EDT

* New Australian PM wants to be "Mr Infrastructure"

* Funding reforms to free up huge infrastructure backlog

* Foreign pension funds and construction firms circling

By Jane Wardell

SYDNEY, Oct 2 (Reuters) - Australian Prime Minister Tony Abbott's ambition to be known as "Mr Infrastructure" is raising expectations of financing reform to open up tens of billions of dollars in construction contracts and pension fund investment opportunities.

Abbott is targeting infrastructure to counter a hit to economic growth from Australia's fading mining investment boom, boosting earnings prospects for construction companies including Leighton Holdings Ltd, Asciano Ltd, Macmahon Holdings Ltd and Downer EDI Ltd.

Australia is in need of everything from roads and rail to ports and utilities to cope with expected demand over the next four decades, when the country's population of almost 23 million is projected to double and Asian demand for its goods and services is forecast to soar.

Industry estimates of the infrastructure deficit range as high as A$700 billion ($655.10 billion), or as much as 50 percent of GDP, even though significant development has already taken place over the past decade as the country enjoyed a once-in-a-century mining boom.

A rapidly growing domestic pension pot of A$1.6 trillion could fund that deficit almost twice over, while leading offshore funds including Canada's CPPIB are also keen to invest. But financing so far has been stymied by the structure of the deals - which leaves funds exposed to early construction risk - and the lack of a deep, liquid domestic corporate bond market.

The bottlenecks are hampering investment in non-mining sectors such as housing - a key driver of growth - where short supply and record low interest rates are fueling fears of a property price bubble.

Construction and pension industry insiders hope some of the obstacles will be overcome following the election last month of Abbott's conservative Coalition government, which has pledged to spend 26 percent, or A$4.6 billion, more than the previous Labor government on infrastructure in its first year in office.

"The Coalition's election and its commitments are broadly positive for infrastructure," said Guy Templeton, Australia country manager for London-listed global construction firm Balfour Beatty Plc. "The onus needs to be on project structures and the way they pass the investment thresholds of the super funds."

The chief reform under consideration is the issuance of new types of "infrastructure bonds" to entice domestic and international pension, or superannuation, funds. The government-backed, long-dated bonds would be issued via an independent authority at discounted rates.

This would provide investors with an alternative to Australia's A$360 billion corporate bond market, which is essentially an investment-grade market dominated by financial borrowers. The average size of an offer in Australia is A$500 million with a three- to five-year maturity - not ideal for long-term infrastructure projects.

CUTTING RED TAPE

A report released in June by government-backed Infrastructure Australia, which is charged with oversight of the sector, identified red tape and multiple layers of government as being among the other significant impediments to infrastructure projects.

It cited research showing resource projects cost about 40 percent more in Australia than in the United States, and noted that a single liquefied natural gas project potentially required 390 regulatory approvals before it could proceed.

Abbott has promised to give Infrastructure Australia more clout and independence as a coordinating body. He's also proposed a financing advisory arm to work with state treasuries and the private sector to develop business cases for important projects.

Another change Abbott has flagged is policy reform. He has toned down his hawkish rhetoric in opposition about the need to rapidly return the federal budget to surplus, giving the government leeway to fund greenfields projects, potentially under public-private partnerships.

"The thing to do is to actually extend the fiscal consolidation and bring on a lot of infrastructure spending, financed by long-term bonds that foreigners are willing to throw money at us for, and use that to actually manage the demand-side of the economy," argued Warwick McKibbin, an economist and former Reserve Bank of Australia board member.

TOLL ROADS

Abbott has vowed to splurge A$11 billion on highways around the vast island continent almost the size of Brazil.

But the sector is notorious for high-profile failures due to inflated estimates of toll earnings. The latest came last month when the owners of Sydney's Cross City Tunnel - Royal Bank of Scotland Plc, EISER Infrastructure and Leighton Contractors - placed the business into voluntary administration for the second time.

Analysts say public-private partnerships would avoid such pitfalls, pointing to the strong example of the New South Wales state government's April auction of long-term leases worth A$5.1 billion to operate two major ports.

Under the deal, around five million Australians own a share in the facilities via a consortium including Industry Funds Management (IFM), pension fund AustralianSuper and Tawreed Investments Ltd, a wholly owned subsidiary of the Abu Dhabi Investment Authority.

The government, meanwhile, has recycled the proceeds to invest in a new toll road.

Among the foreign investors circling Australian infrastructure opportunities, Spain's Acciona Group expects to bid on around A$7 billion of projects including toll roads in Melbourne and Sydney by the end of the year.