Infrastructure bonds: a capital idea

Following the universal rejection of the proposal to mandate superannuation investment into infrastructure assets, the Government may be searching for alternative methods to meet the shortfall in infrastructure funding and, according to James Lonie, partner at Henry Davis York, treasury or infrastructure bonds may be the scheme of choice.

“I think they’ll make treasury bonds or infrastructure bonds more readily available to individuals (instead of just institutions) and make the terms so attractive (government-backed) that, one, people will want to invest in them and, two, advisers will have to recommend diversification into them for at least part of the portfolio of a superannuant,” Lonie said.

He said we may see the Government being more creative about the types of instruments it offers, “especially bonds with a fixed return but linked to changes in the consumer price index”.

Dennis Eager, portfolio manager at Magellan, agreed it was a possibility, noting the benefits it may provide.

“I think, given that investment in infrastructure is very good for the health of the economy and that markets are still not back to where they were before, it may be a very sensible initiative to stimulate more investment in the sector.”

But chair of Industry Funds Management (IFM) Garry Weaven said that while super funds may want to buy some bonds, it’s not really an attractive proposition for them.

“Super funds need to have some risk in their portfolio in order to get better returns in the long term for their members. They can’t restore their investment performance by simply buying bonds. They will need to be equity investors, and if the Government wants to issue a few bonds and make them attractive to the general public, I’m sure there’ll be many people — including retirees looking for a stable income — who will buy those bonds,” he said.

“But it’s not something that’s likely to be attractive to super funds or organisations like IFM.”

The Government said in April it would use infrastructure bonds to finance a large portion of the national broadband network, but it has not been very vocal about whether such a move is the first of many. When prompted on the prospect of infrastructure bonds, Anthony Albanese, the Minister for Infrastructure, said the Government is awaiting “the advice in terms of the approach to the Henry Review and other future financing options”.

“But it is important, I think, that we look at all of the mechanisms available to encourage future investment given the constraints there are on the public sector,” he said.

Frontier Investment Consulting’s Chris Trevillyan, senior consultant and head of infrastructure research, said his company did not have a specific view about the Government’s next move, but had an open-minded approach.

“We would look at any opportunity to invest in infrastructure, be it equity or bonds, but ultimately it depends on the attractiveness of the expected return for the level of risk, and how that fits within a client’s total portfolio.”

He noted that governments can provide incentives to make certain assets more attractive. “This allows investors to still construct an unconstrained efficient portfolio, which may include a higher allocation to a certain type of investment but without mandating its allocation. A current example of this is franking credits, which is a major support for investors to allocate into Australian equities,” he said.

Lonie also pointed out that the Government could still use infrastructure bonds as a way of raising money, noting that they could still pay what is an attractive return because it would be coming from the Government.

“I think that [bonds] would certainly be an attractive part of an investment portfolio, and I’m not suggesting that you’d have 100 per cent in infrastructure bonds; you wouldn’t have 100 per cent in anything. But if you’re approaching retirement, I sort of look at it and I say, would you have been better off in infrastructure bonds, or are you better off with a margin loan and geared up to the hilt with Storm Financial? So I think there’s a place for them, and it might replace cash management trusts as a more attractive vehicle, particularly with the Government backing guarantee.”

As for other possibilities, Peter Meany, head of global listed infrastructure at Colonial First State Global Asset Management, said we could look to schemes that have worked effectively around the world, including US President Barak Obama’s recent announcement of a $3 billion package to electricity grid operators.

Meany also said in order to help the private sector, we should look at more effective financing options. “Something that’s worked really well in Europe and the US is either the government guaranteeing a portion of the debt that goes against an infrastructure project, and then because it’s got that government guarantee the project tends to be a lower cost; or allowing companies to issue tax-free bonds against a project, like the municipal bond market in the US.”