The Infrastructure Footrace: Why Australia is Way Ahead
Many governments around the world tout their infrastructure credentials, promoting their plans to increase spending on the sector and escalate the contribution from private investors.
The degree of success of these plans, however, is mixed. For instance, Europe has seen investment in the sector stagnate in recent years despite an extensive need for new and updated infrastructure (The Infrastructure Footrace: Why is Europe Stuck in Neutral?). And infrastructure investment in the US, even with a huge backlog of crumbling roads, bridges, and other assets, along with a current administration that has made the sector a priority, is going backward (The Infrastructure Footrace: Why is the US Stuck in Reverse?).
Yet Australia continues to power way ahead. As can be seen in the chart, the value of its infrastructure sector has been well above many of its peers over the past several years, with outperformance expected to continue over the medium term.
What’s driving the ongoing robust investment in the infrastructure sector?
Positive Demographics
Compared to many developed countries, Australia’s population is growing rapidly. Over the past ten years annual growth has averaged 1.7%, as compared to 0.8% in the US, 0.3% in the Euro area, and 0.7% average for OECD countries according to the World Bank.
A substantial portion of the increases are due to net immigration into Australia. Over one quarter of the country’s residents were born overseas, one of the highest percentages in the OECD. In the last 15 years up to 2005, natural increase made up the bulk of population growth, particularly during the last recession in the early 1990s. However, in the subsequent ten-year period to 2015, net overseas migration contributed most of the increase in every year.
Strong growth is expected to continue over the coming decades, with the Australian Bureau of Statistics (ABS) projecting that population will increase from the current 25 million to more than 42 million in 2066. And the greater number of people will naturally translate into greater demand for infrastructure, particularly since the growth is concentrated in urban areas where many transportation assets are already at capacity. The chart illustrates the substantially higher proportional increases in the number of residents in Australia’s four largest cities as compared to the national growth rate.
Robust Economic Growth
Infrastructure development is closely tied to economic growth, both as a contributor and a beneficiary. Greater economy activity — whether from government spending, business investment, or private consumption — requires greater infrastructure capacity in terms of transport, energy, and telecommunications. Adding new infrastructure, in turn, boosts the economy by creating new jobs to build and operate the assets, and also helps the economy run more efficiently.
In terms of economic strength Australia is again an outlier among developed countries, going 27 years since the last recession. Over that period Australia’s economy grew at an average annual rate of 3.3%, as measured by real GDP. The rate of increase has slowed somewhat since 2000, but has been well above economic growth in many other developed economies as shown in the chart below.
While many other countries were suffering recessions during the global financial crisis in 2008–2009, Australia was buoyed by the resources boom driven in large part by continuing strong demand from China. The government also increased its level of spending in order to avoid the downturn experienced in other parts of the world. After running budget surpluses for nine of the ten years through FY07 (the year ending 30 June 2007), the federal government incurred a deficit of 2.1% of GDP in FY08, increasing to 4.2% in FY09. The deficits have continued through the current fiscal year (FY19), but Fitch expects that the budget will return to surplus in FY20. Fitch also forecasts solid economic growth to continue, with real GDP growth of 2.0% in 2019 and 2.5% in 2020.
Government Support for Private Sector Participation
Australia has a lengthy history of government support for private investment in infrastructure. Generally considered the first major PPP in the country, the Sydney Harbour Tunnel was the result of an unsolicited proposal to the New South Wales state government in 1986 from a joint venture, and was successfully completed in 1992. In the mid-1990s, privatisations took off, initially in the energy sector in Victoria followed by the sale of more than 20 airports by the Commonwealth government. According to the government’s Bureau of Infrastructure, Transport, and Regional Economics (BITRE), 197 PPPs and privatisations were completed between 1980 and 2017.
This lengthy track record of private investment in infrastructure has produced substantial resources to facilitate future projects, including well-established frameworks and policies as well as embedded transaction experience in both the public and private sectors. There are a number of government and private organisations that have been created to promote and monitor infrastructure investment, including Infrastructure Australia, Infrastructure NSW, Partnerships Victoria, and Infrastructure Partnerships Australia. These bodies are sources of information on successful transactions but also on projects that have run into trouble, since not all assets in Australia have had smooth sailing. Between 2006 and 2013 four greenfield road tunnel projects, two in Queensland and two in New South Wales, became insolvent, largely as a result of overly-optimistic traffic forecasts. The current Sydney light rail PPP project is reportedly running more than a year behind schedule and more than AUD1bn over an initial budget of AUD1.6bn. The difficulties of such assets are closely scrutinised, with the lessons learned being taken into account for future projects.
Continuing Momentum
Infrastructure investment in Australia has accelerated in the past several years, particularly in the transportation sector as shown in the chart above. Many major road projects are underway, including the AUD17bn Westconnex and AUD2.9bn NorthConnex projects in Sydney and the AUD6.7bn Westgate Tunnel project in Melbourne. In the rail sector, the AUD8.3bn Sydney Northwest Metro project is due to open in May this year, while the AUD8.5bn City & Southwest Metro began construction in 2018. And the federal government has commenced works for the AUD5.3bn second Sydney airport, which is scheduled for completion in 2026.
The transport sector doesn’t show any signs of slowing down. In the March 2019 election campaign in NSW, each of the two major parties pledged to build between AUD50bn and 70bn of new rail and road projects. With the federal budget expected to move back into surplus next year, the Commonwealth government is also keen to make a contribution. As part of the FY19 budget it committed AUD75bn towards new and upgraded transport infrastructure over the next ten years.
The energy sector has also seen a pick-up in activity in the last two years, with considerable demand for renewable energy including wind, solar, and hydro generation. While overall energy consumption is not growing quickly, the requirements are also driven by the closure of older fossil fuel generators, including the 1,600MW Hazelwood brown coal fired power plant in Victoria that was decommissioned in 2017. The charts below illustrate the proportion of electricity that was generated from renewable energy in FY18 as compared to FY08, with the increase almost entirely from wind and solar power. However hydro generation is expected to jump by 2024 as the federal government has approved the 2,000MW expansion of the Snowy Hydro pumped hydro scheme in New South Wales at a cost of around AUD5.1bn.
With half of the ten largest infrastructure fund managers globally based in Australia as of 2017, the country also benefits from knowledge gained in overseas markets. In particular, Macquarie Infrastructure and Real Assets (MIRA) and IFM Investors have each been active in the infrastructure sector for more than twenty years, and now have offices across APAC, Europe, and the Americas. The transfer of skills and experience within such firms helps share best practices and lesson learned across all regions of the world.
Conclusion
Australian infrastructure will provide abundant opportunity for private investors in the coming years. The country’s population and economy should both continue to grow strongly, with the federal budget expected to return to surplus in the next fiscal year. There is a solid pipeline of new assets, both proposed and currently under construction. In its Infrastructure Risk/Reward Index, Fitch Solutions ranks Australia as number one among countries in the Asia Pacific region and number two globally, a solid indication that it will continue to be an attractive location for investment.
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