Bringing it back home

Super funds disinterested in local infrastructure investment

By Alice Uribe
Thu 03 Dec 2009

A new report shows Australian super funds are looking offshore for infrastructure investment. Can this be changed?

Chairman of the super system review Jeremy Cooper has been vocal about superannuation funds throwing their weight behind domestic infrastructure projects.

At the recent Association of Superannuation Funds of Australia (ASFA) conference held in Melbourne, Cooper told the audience that due to lack of scale funds were missing out on opportunities to own assets directly.

He pointed to the recent bid by two Canadian pension funds to buy the Australian-owned Transurban, which operates toll roads in Sydney, Melbourne and the United States.

As reported in The Australian, the bid from the Canadian Pension Plan Investment Board and the Ontario Teacher's Pension Plan was unsuccessful, but what is interesting is that there were no counterbids from Australian super funds.

Frontier Investment Consulting head of infrastructure research Chris Trevillyan said scale was definitely a factor in Australian funds not considering investment in larger domestic infrastructure projects.

"It would certainly help funds to invest in Australian infrastructure if they were bigger," he said.

However, Trevillyan said it is not that funds were not interested in infrastructure, but were investing globally for diversification reasons.

"Institutional investors have been and are investing significant amounts of money in infrastructure ... some of that infrastructure money is being invested overseas, but that is partly about diversification," he said.

"Certainly, improving the terms of infrastructure investment in Australia will make it more attractive to invest locally, but investors will still look to diversify globally."

A recent report by Ernst & Young found super funds were also cautious about investing in local infrastructure assets due to a number of risk and return issues.

"The risk/return profile of many of these investment opportunities, the lack of a national pipeline of infrastructure projects and the complexity and disparate nature of bid processes are preventing the nation's savings from being channelled into economic development," Ernst & Young Asset Management leader Graeme McKenzie said.

Trevillyan said some of the issues revolved around greenfield projects.

"When considering an investment we are very aware of the construction risk. Infrastructure investment for us is about long-dated, stable, regular cash flows. We do not exclude greenfield investing but we need to limit the exposure to manage the overall risk in the portfolio," he said.

The Ernst & Young report argued that if changes were made to infrastructure investment, more of Australia's super savings could be directed towards domestic projects.

"In many ways the long-term timeframe of infrastructure projects seems a perfect fit for superannuation and the Canadian pension fund bid for Transurban demonstrates this. However, this survey clearly shows that changes are needed to attract more Australian superannuation investment." McKenzie said.

However, at this stage mandating investment into infrastructure would be an unpopular move.

The Investment and Financial Services Association (IFSA) chief executive John Brogden has been quoted in the media saying such a move is "dangerous".

Minister for Financial Services, Superannuation and Corporate Law Chris Bowen has said he was not in favour of mandating particular investments.

"We have to ensure they (the super funds) act in their members' interests and that we remove any barriers to them investing in infrastructure - but that doesn't mean mandating or forcing them to invest in anything in particular," he told The Australian.

ING executive director of wealth management Ross Bowden said super funds should not be forced to invest in certain sectors.

"Our view on that is that if the investments are attractive enough for super fund trustees to invest in, then let the investments stand on their own merit," he said.

Trevillyan said making infrastructure more appealing to the retail investor through the issuance of infrastructure bonds was one solution.

This is a solution endorsed by the Ernst & Young report.

"Governments have opportunities to attract superannuation as a long-term infrastructure player by looking at other credit instruments, reducing risk, increasing transparency, standardising processes and clarifying regulation," Ernst & Young infrastructure leader Bill Blanks said.

"Unless they do so, superannuation will continue to channel much of its infrastructure investment overseas, putting our national savings to work for other countries."

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