The people of New South Wales (NSW), Australia, are in an infrastructure renaissance driven by an energized state government with a vision for fully functional economic infrastructure assets that actually deliver value. With US$14.6 billion in funding from asset sales and leasing earmarked to roll out the Rebuilding NSW infrastructure plan – which will deliver road, rail and social infrastructure across regional and metropolitan NSW – the state is about to undergo its most significant rebuilding phase in decades.
To learn more about the’ Rebuilding NSW infrastructure plan and the asset recycling initiative, Paul Foxlee, National Head of Transport and Infrastructure, for KPMG in Australia, spoke with New South Wales Premier Mike Baird.
Paul Foxlee (PF): What will the NSW Government achieve with the Rebuilding NSW infrastructure plan (which includes a significant investment in new infrastructure) and how do asset recycling and asset leases feature in the plan?
Premier Mike Baird (MB): The Rebuilding NSW plan was an overall strategy to bring together the infrastructure requirements of the state with the funding needed to achieve it – and present a strong message to the community about the future of infrastructure.
The funding mechanism is important because we all know we need the infrastructure and we had plans in place for the M4, the M5, a number of hospitals and railways. But with debt levels right at the top end of our AAA rating and a relatively modest operating balance, we had nothing near the US$22 billion we needed to address the infrastructure backlog we inherited. So we had to take a new approach. We looked at the balance sheet and asked ourselves, can we turn our old assets into new assets? The overall narrative for the Rebuilding NSW plan is that if we do this on a large scale we have the capacity to make a real dent in the infrastructure we all need. The US$14.6 billion program is a once-in-a-generation opportunity to get ahead of the infrastructure curve.
The key is that this kind of asset recycling creates a tangible benefit. The taxpayers understand this is not a standalone fiscal measure; this is about the capacity to fund the infrastructure that makes a difference to their lives.
PF: How do you determine which public assets are appropriate to be considered for asset recycling?
MB: There are a number of parameters we use to identify the right assets. We look at assets that are attractive to the market and appropriate in terms of regulatory oversight. Pension funds are looking for defensive infrastructure-style assets at the moment, so there’s an almost unprecedented market opportunity.
The NSW ports and now the electricity “poles and wires” fit the bill. These are the types of assets super funds around the world are seeking, particularly in a low interest rate environment. Right now we have an ideal situation where there is real interest in these assets, appropriate regulatory oversight and protections in place to safeguard NSW taxpayers.
PF: How do you intend to use the proceeds from asset sales and how will projects be prioritized?
MB: Of the US$14.6 billion proceeds from the “poles and wires” transactions, Rebuilding NSW plan will deliver US$4.4 billion in infrastructure for regional NSW and the balance for metropolitan areas. The focus is on rail, with the Sydney Metro the biggest ticket item. The key items we’re funding include:
We need to make sure the investment we are making is focused into economically productive infrastructure. The prioritization of the program is based on a plan created by Infrastructure NSW, which was set up to report on priorities to government. The first report was completed in 2012 and then updated once the additional US$14.6 billion in infrastructure funding was made available.
PF: How did you obtain a mandate from the public to enter into long-term leases for the electricity transmission and distribution assets and how important is that mandate in pursuing the transactions?
MB: For 20 years this has been a very contentious issue in state politics. We took the view that if we were going to do it we needed to outline the arguments clearly and we wouldn’t do it unless we received a mandate to do so. So we outlined the plan and strategy to the people of NSW and obviously they agreed. By winning the election in March 2015 we secured the mandate we needed. The funding for infrastructure is now available and the plan we have has been endorsed.
PF: How will you ensure public interest is protected once public assets become privately leased and managed?
MB: There is a strong regulator in place but there are also a number of other protection measures, including obligations around reliability and capacity for us to step in if the operator is in breach, or if we are unhappy with what is being delivered. There are also service level standards around things like response during a crisis.
There are protections under the Foreign Investment Review Board and the Australian Competition and Consumer Commission, and there is the independent Pricing Commissioner in place to sign off on the lease to say this will not put upward pressure on prices.
PF: The large new road project (WestConnex) is a very innovative asset recycling initiative. How is the project being funded and how it is intended to be ‘recycled’?
MB: State governments have to be adept to respond to market conditions. A number of public-private partnerships (PPPs) burned markets, so banks and institutional investors in particular are very unlikely to take traffic risk. Forecasts have proved very difficult to get right.
As a result, there was a shift in appetite from greenfield to brownfield investment – with established rather than projected cash flows. But there is a capacity – once there is some robustness around cash flows – to continue to participate with the private sector.
We have structured WestConnex so that rather than just government providing a grant, we make an equity contribution and that provides the capacity to build the first part of the project. Then the cash flows are built up and from those cash flows we are able to raise non-recourse debt to the state government and use that to fund the next element of the project.
Once we get to the end of the project we will have a standalone entity where the NSW government has an equity position it can recycle capital out of for additional use.
PF: What advice would you give to other governments around the globe with regards to asset recycling and asset leases?
MB: It’s not for me to give advice other than to say the process works. When you have pressing needs of your constituents to meet, you have the capacity to do much more than you think if you look at all the resources of your state. If you don’t have the operating budget you need you may well have capital on the balance sheet that can address those needs.
You need to be prepared to look holistically at the finances and use capital that is just sitting idly on the balance sheet. You need to be upfront with the community, and clearly articulate the challenges involved and how you intend to deal with them.