How to rise to the challenge?(3)

Twelve months ago, ANZ forecast a AS$600 billion infrastructure task for Australia over six years, with the majority of funding to come from the private sector. Against a backdrop of constrained liquidity in global financing markets and investor conservatism, this task has become even more ambitious. With the European sovereign debt crisis continuing to cast a shadow over the financing environment, and the infrastructure investment pipeline continuing to grow, attention is now focused on how a liquidity-constrained private sector and a budget-constrained public sector will rise to the challenge.

PUBLIC PURSE CONSTRAINTS AND THE PPP MARKET

By global comparisons, the Australian federal government has a strong balance sheet and GDP growth is anticipated at 3.3 per cent – exceptional by global standards. However, with federal government committed to achieving a budget surplus by 2013, it is only committed to funding ‘nationally important’ infrastructure.  More importantly, it is the states – with the exception of Western Australia, which is well funded through mining royalties – that are challenged by their fiscal positions.

Monetisation of suitable public assets is a potential source of capital to fund infrastructure development and provide for investment opportunities for international investors. Craig Shortus, ANZ’s head of infrastructure, Australia, says: “There is an opportunity for the state governments to add to the available capital by ‘recycling’ assets that transfer certain infrastructure to the private sector.”

New South Wales (NSW) recently announced the completion of the sale of the Sydney Desalination Plant to a consortium that included a large Canadian pension fund. It has also signalled an intention to sell Port Botany and the remaining NSW generation assets.

There’s a strong expectation that PPPs will need to play an important role in delivering whole-of-life, cost-effective funding for social infrastructure. In 2011, A$5.8 billion of PPPs were executed and there is a solid PPP pipeline for 2012/13. “We have seen a significant increase in demand from international specialist equity PPP investors for Australian PPP investment opportunities recently, as well as a number of new entrants,” comments ANZ’s global head of utilities & infrastructure, David Byrne. 

Most of the optimism for the PPP market is predicated on higher deal flow potentially arising from changes of state governments in Queensland, NSW and Victoria. However, it is the limitations of the funding capabilities of the state governments that will continue to threaten the timely advancement of many of these projects.

CAPITAL AVAILABILITY

Banks and capital markets remain the key financing tools for the sector. The bank market remains in a state of transition, with the big four Australian banks continuing to anchor the market. The European sovereign debt crisis has resulted in a reduction of European debt capital.  “While European banks have reduced appetite for new infrastructure debt, other bank players are stepping into the void, particularly the North Asian and Canadian financial institutions,” notes Byrne.

Given the increasing cost of liquidity and the regulatory requirements Basel III will impose, bank funding will get more expensive and there will be greater pressure for shorter tenors. The change in pricing dynamics is driving some Australian borrowers to explore different funding options and to target international investors, particularly in the case of brownfield operational assets with proven track records and exhibiting investment grade profiles. At present, banks remain best suited to finance greenfield infrastructure projects containing construction risks.

The availability of longer tenors has seen borrowers actively pursuing capital from the US private placement and US144a markets. However, the investment criteria required limits the appetite of these investors with respect to many projects, particularly greenfield infrastructure. As a consequence, borrowers are examining alternative options, like export credit agency (ECA) financing for greenfield projects or tapping alternate debt capital markets.

In January 2012, for example, ANZ lead managed APA Group’s Samurai financing. “Borrowers have realised the merits of having access to alternate sources of liquidity in their debt capital structure. In this case, the Japanese market offered a new capital source for our client with extended tenor and competitive pricing,” says Shortus.

The appetite from equity investors for Australian infrastructure remains strong, with participation from operators and financial players. This is a function of the strong performance of most infrastructure assets over the course of the global financial crisis and a risk profile that is well-understood by investors. “There is strong appetite for infrastructure assets from financial market participants,” notes Byrne. “Offshore interest in equity stakes is robust, particularly out of Canada and Europe, but interest is also emerging from Asia.”

POWER AND UTILITIES: FUNDING OUTLOOK

The power and utilities sector is the second-largest user of capital in Australia after the resources sector, so financing is a critical issue. The power generation sector will require around A$$15 billion in refinancing and new capital over the next five years; transmission and distribution A$$75 billion; and retail A$$5 billion to A$10 billion, excluding upstream oil and gas.  The water sector will require at least A$10 billion.

“Sourcing the capital will be challenging, but ANZ is well-placed to source additional pools of liquidity from Asia for Australian-domiciled issuers,” says Rob Koh, ANZ’s head of power & utilities, Australia. “We pioneered the Asian syndicated loans market, which our clients have used to diversify funding sources and lower their costs. We are currently working on opening up a number of other pools of liquidity including Asian debt capital markets.”

For power generation, the key challenge is getting new investors comfortable with the different regulatory and technical risks these projects present; as well as the uncertainty around the impact of the proposed carbon price regime currently being implemented in Australia.

“Decarbonisation of the Australian economy will require a lot of work on existing coal-fired power stations, and a lot of investment in new gas peakers and renewables. In addition to the normal challenges of building and running power stations, investors need a deep understanding of the Renewable Energy Target (RET), the Clean Energy Future Plan and Australian spot and contract power markets,” says Koh.

Some estimates forecast that in excess of A$20 billion in investment in renewable energy generation will be required for Australia to meet its RET by 2020. “Opportunities for renewables have been relatively limited in recent years, but renewables are a long-term play and we see good sponsors continuing to invest in the sector,” he adds. The development of major projects in the resources sector will also continue to drive a significant need for investment in remote power generation capacity.

REGIONAL INFLUENCE

While domestic population pressures and development priorities are key considerations, the Australian infrastructure agenda remains strongly driven by exports of hard and soft commodities to Asia. Potentially, these could reach as much as A$482 billion per year in real terms by 2030. This demand growth will continue to underpin the requirement for developing more multi-user facilities, such as the Wiggins Island Coal Export Terminal (WICET), an essential piece of infrastructure for developing Australia’s coal export capacity.

“The development of this project provided a range of investment opportunities across the different parts of the capital structure to a range of international infrastructure investors,” comments Shortus.

In sum, Australia offers some solid investment metrics which the international markets have grown to appreciate. “Attracting significant levels of investment from international equity and debt investors will be essential to funding the epic Australian infrastructure task,” says Byrne.