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Print FriendlyRegional Infrastructure - linking local champions with institutional investors
Funding for regional infrastructure - ports, airports, roads, water treatment, pipelines, transport terminals, tourism facilities, hospitals, schools - is a recurring issue in the run up to virtually every Federal and State election. The debate inevitably focuses on whether there really is a shortage of capital for infrastructure projects, and buck-passing as to whose responsibility it is to fund them. The end result is continued disillusionment among project champions at the local government level - and a lament for the days of the Snowy Mountains Hydro Scheme.
To their credit, the Commonwealth and certain State governments have spent the last year working with the major institutional investors to better understand the situation. To date, 50 regional infrastructure projects have been examined at 14 workshops in venues ranging from Bunbury, to Townsville, to Traralgon, and Dubbo.
The participating investment groups include the AMP, the CBA, Macquarie Bank, Lend Lease and the ANZ - now the major custodians of the nation's savings. Their workshop findings were reported to participating governments and the peak industry body, the Australian Council for Infrastructure Development (AusCID) in December. The six main findings are summarised below.
1. Regional markets often lack critical mass
The most important factor in attracting institutional investment to regional infrastructure projects is evidence of robust revenue streams. Due to the lack of sufficient critical mass (ie. enough business) in many regions, investor risk is affected. As one investor succinctly stated:
"Economies of scale are the key....the cities have it....but there seems to be a stigma on the rural sector which somehow must be overcome if the confidence of investors is to be gained" (Ballarat workshop, 16.9.97)
It was suggested that proponents need to continually consider how revenue streams can be generated to assist their projects, and that industry associations and governments be mindful of the benefits of industry clustering.
2. The preponderance of 'public interest' in regional projects
The majority of the 50 projects had significant public interest aspects. This leads to wariness among private sector investors - why should they pay the government's way, and carry additional risk?
A good example is the Sydney-Canberra High Speed Train project, which has significant public benefits by way of reduced pollution and congestion for Sydney, increased road safety and urban amenity for the whole corridor, and potentially huge regional benefits. Since these benefits accrue to the public (they cannot be readily 'captured' by the private sector), there are doubts that this project can be 100% privately financed.
The notion of 'cocktail' funding was discussed, together with the need for tenderers, which are often local government authorities, to be more adept at identifying the respective public/private mix of a project. However to do this requires a good understanding of the myriad of government programs and how to access them.
3. The relevance of politics
Regional projects often become political footballs, particularly in marginal electorates. While the locals are adept at lobbying for political patronage, this can cut directly across calls by financiers for the development of well-argued, properly documented projects.
To address this problem, the suggestion was made that Commonwealth and State governments apply particular rigour in applying government funds (ie. focus on economic and social objectives). For their part, local government and regional development bodies must continue their role of undertaking feasibility studies, infrastructure audits etc. The major financial institutions felt that this would help considerably in winning their attention.
4. The Orphan Syndrome
There is considerable evidence that infrastructure projects less than $20 million in size will not attract the major institutional investors, unless they can be bundled into bigger projects. Some of the smaller water treatment, airport and tourism infrastructure projects do offer very good rates of return. However, the costs associated with tendering can often run to 10% of total costs on smaller projects, due to accountability/probity requirements associated with Compulsory Competitive Tendering etc. Until these hurdles are somehow lowered, the smaller projects will maintain their orphan status.
For non-infrastructure projects, the problem is not as acute. However there are signs that the provision of venture capital and banking finance to the smaller projects would be enhanced by better project documentation (See 3 above).
5. Interdependence of Projects
Given the high level of interdependence between regional projects, a helicopter view is useful in seeing how various pieces of infrastructure and business projects can coalesce. An example is in Gippsland, where the economics of a new port at Port Welshpool will arguably depend on timber and coal export projects (and vice versa). Moreover the achievement of required timber tonnages will depend on best practice water conservation and farm forestry technologies. Properly conducted infrastructure audits are becoming increasingly valuable in this regard.
This interdependence also provides a hook for regional development. It lies in the fact that infrastructure projects are funded by revenue streams (not by balance sheets) and are long-term, which means that their owners want growth in their customer base. The overseas power and water utilities that have recently entered the Australian market have impressive marketing and commercial links back into Europe and the US. Accordingly, there may be a significant win-win by their involvement in energy-intensive regional projects - paper plants, milk factories, smelters, refineries. Certain regional development organisations are pursuing such opportunities.
6. The Need to Understand Risk & Think Outside the Square
The workshops have illustrated why regional (and urban) projects hit the proverbial 'brick wall'. The fundamental reason is the risk assessments of the private investor - the four main categories are construction risk, operating risk, revenue risk and regulatory (policy) risk.
What appears to be happening with numerous projects is that project proponents - many of whom are local government bodies - are not fully appreciating and thus assisting with these 'risk' elements. One part of the solution is to think on a broader, holistic scale in order to better link agendas and address issues on a more concerted basis. Among the 50 projects examined, there are clear instances where 'government' could be more proactive in brokering issues eg. planning approvals, Native Title, hydrology tests, R&D support.
A related suggestion is that regional proponents need to think outside the square - relatively small impediments appear to close down people's thinking much too early. The workshops highlighted examples where projects stall due to the misreading of signals/feedback from government agencies, loss of corporate memory due to the transfer of one person, inability to galvanise the interests of benefitting companies etc. The successful proponents seem to be more persistent, flexible and more adept at using project champions to tackle these problems. They tend to network better and think outside the square.
The investor workshops have also been an important eye-opener for the institutional investors. As the big energy and water privatisation deals are progressively concluded, the focus must shift to the smaller regional projects. However, the interplay of economic, social, cultural factors in these projects can be quite complex - and there is a very important task for local government to help institutional investors cope with this complexity.
* Rod Brown is Managing Director of Australian Project Developments Pty Ltd. -phone/fax 02-6231 7261. Based in Canberra, his company specialises in strategic advice on industry and regional development, and the negotiation of funding 'cocktails' between public and private sources. Mr. Brown organises the workshops under the Institutional Investor Information Service (IIIS) banner.