New Australian govt aims to bridge infrastructure deficit

Reuters

* 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 TonyAbbott's ambition to be known as "Mr Infrastructure" is raisingexpectations of financing reform to open up tens of billions ofdollars in construction contracts and pension fund investmentopportunities.

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

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

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

A rapidly growing domestic pension pot of A$1.6 trillioncould fund that deficit almost twice over, while leadingoffshore funds including Canada's CPPIB are also keen to invest.But financing so far has been stymied by the structure of thedeals - 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-miningsectors such as housing - a key driver of growth - where shortsupply and record low interest rates are fueling fears of aproperty price bubble.

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

"The Coalition's election and its commitments are broadlypositive for infrastructure," said Guy Templeton, Australiacountry manager for London-listed global construction firmBalfour Beatty Plc. "The onus needs to be on projectstructures and the way they pass the investment thresholds ofthe super funds."

The chief reform under consideration is the issuance of newtypes of "infrastructure bonds" to entice domestic andinternational pension, or superannuation, funds. Thegovernment-backed, long-dated bonds would be issued via anindependent authority at discounted rates.

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

CUTTING RED TAPE

A report released in June by government-backedInfrastructure Australia, which is charged with oversight of thesector, identified red tape and multiple layers of government asbeing among the other significant impediments to infrastructureprojects.

It cited research showing resource projects cost about 40percent more in Australia than in the United States, and notedthat a single liquefied natural gas project potentially required390 regulatory approvals before it could proceed.

Abbott has promised to give Infrastructure Australia moreclout and independence as a coordinating body. He's alsoproposed a financing advisory arm to work with state treasuriesand the private sector to develop business cases for importantprojects.

Another change Abbott has flagged is policy reform. He hastoned down his hawkish rhetoric in opposition about the need torapidly return the federal budget to surplus, giving thegovernment leeway to fund greenfields projects, potentiallyunder public-private partnerships.

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

TOLL ROADS

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

But the sector is notorious for high-profile failures due toinflated estimates of toll earnings. The latest came last monthwhen the owners of Sydney's Cross City Tunnel - Royal Bank ofScotland Plc, EISER Infrastructure and LeightonContractors - placed the business into voluntaryadministration for the second time.

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

Under the deal, around five million Australians own a sharein the facilities via a consortium including Industry FundsManagement (IFM), pension fund AustralianSuper and TawreedInvestments Ltd, a wholly owned subsidiary of the Abu DhabiInvestment Authority.

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

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

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