ECONOMIC AFFAIRS: by Jeffry Babb News Weekly
Infrastructure and superannuation: a match made in heaven?
, April 26, 2014
Infrastructure is the flavour of the month for both investors and the Commonwealth government.
Former Victorian state Liberal politician, the Hon. Mark Birrell, was appointed in early April to head Infrastructure Australia, replacing Sir Rod Eddington AO.
Prime Minister Tony Abbott has declared that Infrastructure Australian will build a “strong and prosperous economy”, and that the body’s organisational structure will be overhauled.
Way back in 1997, when the Wallis Inquiry was investigating Australia’s financial system, Australia’s population aged 14+ was 14.79 million. In 2013 it was 19.19 million, an increase of 29.8 per cent.
In 1997 the value of consumer financial services was $867 billion. In 2013 it was $3,398 billion, an increase of 291.9 per cent. Australia’s financial services sector during this period has outgrown population growth by a factor of 10.
One of the main contributors to this growth has been superannuation. Superannuation is now worth $1,803 billion. From 1997 to 2013, super funds grew by 368 per cent.
In recent years, self-managed superannuation funds have grown mightily. From 2004 to 2013, total superannuation grew by 103 per cent. By contrast, self-managed superannuation grew by 290 per cent.
Originally, self-managed superannuation funds, which were intended by the government to cater for the wealthy, are now the province of the middle class. They now account for over 30 per cent of all superannuation funds.
Two issues stand out about self-managed superannuation. First, are the beneficiaries able to manage these assets efficiently? And, second, will they be there when they are needed? After all, superannuation is handled by professional managers. Large super funds have highly sophisticated investment models and are advised by internationally-qualified investment bankers.
Typically, the investments made by big superannuation funds are similar. Australian shares and international shares make up around 25 per cent of each of the funds’ assets. Direct property is around 10 per cent, infrastructure is around 15 per cent and hedge funds may account for 2 per cent or more.
Private equity funds, Australian and overseas, are likely to account for around 5 per cent. Global fixed interest and cash on deposit are likely to account for 20 per cent.
The funds’ managers will aim to get a steady return, based on what the financially semi-literate would call “financial engineering”. Running a fund is a highly complex business.
Some funds advertise their superior returns. However, by law, they cannot use their current returns as a guide to further performance, nor use their current returns to induce further investment.
Infrastructure bonds issued by government are an ideal component for the portfolio of a superannuation fund. For the right assets, the government would find the right investors and the right buyers. Not all projects will succeed.
Investors, like superannuation funds and life offices, are looking for assets with a long-term income stream. Shares can, and do, go up and down; but infrastructure assets perform steadily year in, year out.
If a life office or a superannuation fund takes an investment from a policy-holder, the institution wants to know that when it comes to pay out, say in 30 years’ time, it will have money on hand. That’s why infrastructure is popular — ports, railways, electricity cables and water supplies are always going to be in demand.
The trouble is that many infrastructure assets are in the hands of state governments which aren’t overly anxious to let them go. New South Wales and Queensland have been tardy in offloading their infrastructure assets; but Victoria, the first cab off the rank under Jeff Kennett’s Liberal/National Party government (1992-1999), is still trying to figure out if large-scale privatisation was a good or bad thing.
When Mr Kennett came to power, Victoria was almost bankrupt. Large-scale privatisations were a last, desperate measure. “Churn” — in other words, how frequently consumers change electricity-retailers — remains around 30 per cent.
Door-to-door “drummers” seeking to induce electricity consumers to change suppliers have become so pushy and persistent that many householders have taken to placing “No hawkers” signs on their front doors. Hard facts on the economic benefits of privatisation of electricity and gas in Victoria are hard to find.
Private-public partnerships (PPPs) are one form of infrastructure investment that has proved popular at state level. This has the effect of reducing risk to the government, while providing the private partner with a steady return. Some capital projects — for example, outback roads — may have an economic utility but don’t seem to have a readily apparent and convenient method of collecting tolls.
If sufficient infrastructure investments cannot be found in Australia, it is logical that Australian superannuation funds will look overseas, and that is exactly what has happened. Indications are that local super funds have invested hundreds of millions in overseas infrastructure projects.
The superannuation funds and the life offices stand between the savers and the assets. If, as is entirely possible, that link breaks down — for example, a super fund founders — then that asset will more than likely be lost.
So when the small print says, “Past performance is no guarantee of future results”, let the buyer beware.
Jeffry Babb is a Melbourne-based writer.