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Arguments about the need to invest more in Australia’s ageing infrastructure are pretty common these days, with the big pot of money held by super funds often seen as the solution.
But the reality is super funds are already big investors in infrastructure assets and if you’re a member of a big super fund, chances are you are a part-owner in an airport, a pipeline or a major shipping port.
So why have super funds embraced infrastructure and what’s in it for you as a super fund member?
What is an infrastructure asset?
Around the world, large superannuation and pension funds have been keen on investing in infrastructure since the 1990s. This coincides with the trend by governments to sell off their key assets to balance their budgets.
One of the big attractions of infrastructure investments is that they are tangible assets and represent many of the public utilities we need for everyday essential services, including:
- Regulated utilities: Electricity and gas supplies and water distribution systems.
- Transport: Roads, bridges, airports, seaports and railways.
- Social: Hospitals, courts, prisons and schools.
- Communication assets: Radio and TV broadcast towers, cable systems and satellite networks.
Examples of the infrastructure assets currently owned by large super funds include many of our airports, the major motorways in our capital cities, the key port facilities in Sydney and Brisbane, oil pipelines in the US, shopping centres in the UK and several European electricity and gas networks.
Who’s investing in infrastructure?
Over the past decade, industry super funds in particular have made a point of investing in Australian infrastructure. According to Industry Super Australia, in 2018 industry super funds had direct equity investments in major infrastructure assets valued at around $17 billion.
Industry super funds directly invest in Australian and international airports, railway stations, electricity generators, gas pipelines, water treatment plants, roads, shopping centres, schools, aged care facilities, hospitals and courts.
Retail super funds (such as those managed by the major banks) and SMSFs, tend not to be direct infrastructure owners, but often invest in these assets via the shares they hold on the Australian Securities Exchange (ASX).
Why do super funds invest in infrastructure?
Super funds have been placing a portion of their members’ savings into infrastructure investments because these assets tend to be relatively safe investments providing steady – if a little dull – investment returns.
Infrastructure assets also have several other appealing characteristics:
- Market dominance: As many infrastructure assets are monopolies (such as a capital city airport), they do not face significant competition.
- High barriers to entry: The high construction cost of these assets makes it very costly for potential competitors to try to move in and grab a slice of the action.
- Low ongoing operational costs: Once these assets open, the costs of operating and maintaining them are relatively low and predictable.
- Longevity: The assets generally have a long life (often longer than 30 years) and generate an income for their entire lifespan.
- Predictable cash flows: The income stream from these investments is generally secure, as they frequently include long-term contracts with the government.
- Protection from inflation: Often the rate of return from infrastructure investments is linked to changes in the inflation rate, so the value of an investor’s money is protected against the impact of inflation.
Spreading the risk: How super funds protect your retirement savings
One of the significant benefits of infrastructure investments for a super fund is that their investment returns are much less volatile than those from growth investments like listed shares.
Investment returns from shares tend to bounce around depending on what’s happening in the share market, but with infrastructure it’s more a case of slow-and-steady returns.
Even when the share market declines, investment returns from infrastructure assets usually continue to chug along as their income stream is more stable (for example, drivers still continue using toll roads and homes continue using the electricity network).
By mixing the usually higher – but more volatile – investment returns from growth assets, with the usually lower – but more stable – returns from defensive assets like infrastructure, super funds can smooth out ups and downs in the investment returns credited to fund members’ accounts.
How do infrastructure assets generate a return for your super account?
You receive investment returns from your super fund’s infrastructure assets in two ways:
- Cash flow from the asset: The income stream received from the infrastructure asset (such as rental income from shipping firms using a port facility) is received by investors as regular distributions. Your super fund then adds these to the daily crediting rate applied to your super account.
- Capital growth: Infrastructure assets are appraised on a regular basis by independent valuers to determine their market value. If the value is higher than when the previous valuation was conducted (usually every six or 12 months), the asset has experienced capital growth. This capital growth is added to the total value of your super fund’s assets and is reflected in its daily crediting rate to members.
What are the risks with infrastructure investments?
Although infrastructure is generally considered a relatively low risk investment, like all investments it involves an element of risk.
The main risks with infrastructure investments are:
- Political and regulatory change as governments are usually involved in these assets. For example, electricity prices are often set by a regulatory body, while an airport requires government permission to expand the number of flights or hours the airport can operate.
- Construction risk as new infrastructure assets often face problems due to unexpected cost over-runs or delays in the construction process.
- Operational risks once the asset is up and running (such as if the traffic volume on a toll road is lower than forecast, or the asset requires unplanned repairs).
- Interest rate risk if the project requires large loans to get it through a lengthy construction phase. Interest rates can increase or loans cannot be refinanced, creating unexpected costs.