Infrastructure owners face a time of change
Times have changed, and while we have heard these words in many contexts in the past, they are undeniably true for infrastructure ownership and operation.
Australia was one of the first economies to see infrastructure as an investment class. Today competition for Public Private Partnerships (PPP) and capital recycling opportunities remains high. The market is also becoming more crowded, with the prospective deal flow reduced due to delays in Western Australian and Queensland asset sales.
Infrastructure is a long-term asset, with economic lives in excess of 50 years. However, until recently investment by the private sector has focused on executing the transaction and getting the deal done.
As asset owners progress into the operation and maintenance stages of the asset cycle, they are now taking a longer-term view of their operations, beyond 'sweating' individual assets to optimising the value of their portfolio as a whole. There is recognition that the structures and contracts created for cost-effective and competitive bidding for the build and operate phases of projects may not be providing the optimal solution for a long-term owner. Owners are also focusing on risks emerging over the longer term that could result in unexpected capex requirements. They are investing in audits to identify these gaps and optimise expenditure to match regulatory regimes, with value to be gained from subsequent renegotiation of maintenance contracts.
Technology is also changing rapidly. Infrastructure solutions that were valid five years ago may not be optimum now. For example, large-scale battery storage and renewable generation systems are evolving rapidly challenging traditional power delivery solutions, particularly for remote communities. The ability to gain and analyse data cost effectively, turning big data into business benefits is driving adaptations in the infrastructure sector. Informed by data analytics, capacity upgrades and strategic enhancements can increase infrastructure performance, providing business benefits to owners and operators, and reducing the impact on the community compared to new build disruptions.
The private sector is playing a bigger role in financing and operating infrastructure for the long-term, beyond conventional finance horizons. As investors move away from a "bid to win" to a "bid to own" mindset, the role of advisors is also changing. There is an increased demand for strategic advice that goes beyond the finance and accounting disciplines, and integrates insights from infrastructure design, delivery and operations experience.
In the public sector, the role of advisors is not only to inform individual transactions, but also to deliver solid and meaningful business cases that enable governments to prioritise investment and improve service delivery.
Against this background, more specific challenges facing asset owners in Australia are becoming apparent.
- Changing behaviour - Throughout its long history, the infrastructure sector has been tempted to build its way out of capacity issues without considering options for changing consumer behaviour and managing demand. The approach Infrastructure Victoria is adapting in developing a 30-year infrastructure strategy for the state is to raise public awareness of the pricing implications of current practices, to challenge how we use infrastructure and to consider shifts to a 'user pays' model, which links service outcomes to pricing.
- Managing demand - If demand management becomes widely accepted as a way of deferring capital expansion, these principles can be applied across a variety of sectors. For example, utility companies may challenge design assumptions for achieving peak supply, often for short operating periods, at the cost of low asset utilisation and perceived 'gold plating' of infrastructure.
- Market-led proposals - All states and territories have now established frameworks that enable existing infrastructure owners to develop innovative and more efficient service outcomes from their existing asset base. Efficiencies can be achieved by optimising operations of an increased asset base and seeking synergies across the network. Value for money can be ensured through retaining competitive processes throughout the procurement process and benchmarking service costs against public sector comparators.
- Increased competition - An increase in global funds looking for investments is attracting global and local competitors into the infrastructure market. Governments can benefit from multiple parties interested in investing, potentially leading to improved levels of service, while addressing population growth and continued urbanisation.
- Technology change - Rapid advances in digital technology and use of data are accelerating the rate of technological obsolescence, while also facilitating improved demand management and optimisation of capital and operational expenditure.
- Knowledge transfer - In order to remain competitive, Australia needs to stay at the forefront of technology and financial structures. Our location and small market mean owners need to make a conscious effort to truly leverage global experience.
- Low population / population density - Solutions for Australia are often unique because overseas developments may not be cost effectively applied here. Promotion of local innovation is important to complement global insights.
These challenges are also opportunities to improve infrastructure delivery and operations, and support the long-term sustainability of asset-owning businesses. In the last 10 years, Australia has come a long way in improving the performance of water, wastewater, waste management, transport and clean energy assets. As our urban areas continue to increase in housing density, the ability to learn, adapt and apply knowledge across sectors will become key.
Richard Fechner is the Executive Manager of GHD Advisory's Infrastructure Investment and Economics business, having led a team that has advised on more than AUD95B of infrastructure acquisitions, divestments and refinancing since 2009.
Acknowledgement
This article was first published by Consulting Matters, the magazine of Consult Australia, September 2016.