Challenge for Govt on infrastructure settings

As a number of superannuation funds continue to ramp up their superannuation exposures, major accounting and consulting firm Ernst and Young (EY) has questioned how the banks will be able to gain exposure to the sector.

In an analysis of the banking sector released this week, EY has suggested that the need to attract private sector investment towards infrastructure represents a challenge for the Government.

"In the market recalibration of the post-GFC landscape, bank operating models are not the only systems being reconfigured. The Australian financial system is experiencing unprecedented change in the roles of banks, government and the private sector in monetary policy and funding," it said. "With a growing and ageing population, Australia is facing an increasingly large gap between the need for new and improved infrastructure and the actual level of investment governments can afford. In this context, the role of private sector investors in financing major projects is critical."

However, it said private investors were not motivated by a sense of public good and that to support the infrastructure task, commercially attractive projects needed to be available to provide the opportunity for investors to earn an appropriate return on the risk investors took.

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"This presents a challenge for government. Australian bank debt terms are seen to be materially less favourable than those available in the global market for infrastructure projects. Pricing levels remain higher than pre-GFC, with margins until recently in excess of 200 basis points over the bank bill rate. Our banks are still reluctant to lend longer than 10 years, whereas European and US loans are available for 20-plus years," the EY analysis said.

It said that the result was that, in the last few years, borrowing had been expensive and challenging, driving up the cost of delivering public projects using private finance.

"Recognising this trend, governments are now increasingly seeking innovations within financing structures, while maintaining the preferred level of risk transfer," the analysis said. "We are also seeing projects with innovative financing structures that are expected to drive increased competition, more favourable terms and better outcomes for both public and private partners."

The EY analysis said that in the future it expected to see more user-pays models, and innovation around new revenue streams that could be monetised by capturing the value created for property owners, developers and different levels of government.

"In developing and implementing these solutions, governments will need to work with lenders to ensure the risk and return profile of projects is structured to efficiently leverage the market's appetite," the analysis said.