Chapter 3
INFRASTRUCTURE
[The] return achieved by private investors in infrastructure is purely
monetary and relates only to revenue derived directly from the project,
whereas the return achieved by government also includes social and economic
benefits... [1]
3.1 Infrastructure is a 'broad term for a range of economic and social
assets with some distinctive characteristics'. [2]
The stock of infrastructure in Australia is valued at around $400 billion
or one third of the nation's capital stock. What is normally termed economic
infrastructure accounts for 70 per cent of this figure. This comprises
transport and communication facilities, and the production and transmission
facilities for electricity, water and gas.
3.2 Social infrastructure comprises the other 30 per cent and includes
'hospitals, schools, police stations, day care centres and prisons': [3]
The Commonwealth is responsible for around 25 per cent of public
investment and the State/local sector 75 per cent. The States provide
a broad range of economic and social infrastructure including roads,
railways, schools, hospitals, prisons, and libraries. In addition, State
owned Government Business Enterprises (GBEs) provide most of the infrastructure
in areas such as water and power supply. [4]
3.3 The longer term nature of most infrastructure projects matches the
essentially long term nature of superannuation in providing for retirement
incomes, so there is a natural synergy between the two. The Australian
Mutual Provident Society (AMP) told the Committee that superannuation
funds should invest in infrastructure:
There is in fact a strong argument that superannuation funds
are the natural investors given their capacity to become involved in
patient capital and their limited need for immediate cash flow ...
This has certainly been the case in countries as diverse as Singapore
and Chile, where the national pension funds have been the engines used
to capture national savings and stimulate long term growth. Increasingly,
European and North American pension funds are following a similar pattern
and long ago Canadian life insurance and pension funds disintermediated
the banks in that country. [5]
3.4 Conceptually, infrastructure is a very appropriate vehicle for the
investment of superannuation savings. There are advantages too for the
economy in having the private sector finance those projects which would
otherwise have to be funded directly by government. This releases government
revenue for other spending priorities.
3.5 As governments increasingly privatise existing infrastructure and
look to the private sector to finance new developments, the need for private
infrastructure capital is obvious. According to the Australian Institute
of Superannuation Trustees (AIST), superannuation funds have been 'major
participants in the successful privatisation of many public sector enterprises'.
Examples cited are the privatisation of public energy facilities in Victoria,
and the development of the M2 Motorway in Sydney and the Transurban City
Link Project in Melbourne. [6]
3.6 It would appear that there is no reluctance by the funds to invest
in suitable infrastructure projects, and that there is in fact no shortage
of capital. Rather there is a shortage of suitable projects which meet
the required risk and return criteria. The Australian Council for Infrastructure
Development (AusCID), for example, submitted there was no shortage of
either debt or equity capital for projects and there was 'evidence that
superannuation funds [were] beginning to invest in infrastructure opportunities'.
[7]
3.7 Infrastructure investments are resource intensive and it may be that
only the larger funds 'have the resources and the desire to participate
in their own right'. [8]
3.8 The Committee therefore notes with approval the existence of infrastructure
development funds such as the two established by AMP, one specialising
in equity and the other in debt.Anecdotal evidence indicates that investment
in development capital and infrastructure is growing. [9]
Opportunities in the infrastructure sector are increasingly opening up
to stock market investors and superannuation funds, as the number of intermediaries
offering investment in specific projects or in special purpose infrastructure
funds grows.
3.9 As super funds look more broadly for investment opportunities, and
experience in non-traditional investments increases, their interest can
be expected to continue. Because of the long time frames associated with
such investment, it is difficult at this stage to be definitive about
the value of the returns generally, although experience so far suggests
they are worthwhile. Infrastructure investment, of course, can also offer
considerable social benefits and contribute towards the nation's infrastructure
base.
Infrastructure borrowings tax concession
3.10 The evidence included a number of references to the question of
taxation with respect to infrastructure projects. [10]
Accordingly, the Committee sought expert evidence from officials of the
Australian Taxation Office (ATO) on the operation of section 51AD and
Division 16D of the Income Tax Assessment Act 1936 (the ITA Act).
3.11 The ATO told the Committee that the Development Allowance Authority
(DAA) and the ATO separately administer the infrastructure borrowings
tax concession. Concessional tax treatment is available once an infrastructure
borrowings certificate is granted. The DAA is responsible for certifiying
whether the requirements for a certificate are met. The requirements are
specified in the Development Allowance Authority Act 1992 (the DAA Act).
3.12 There are three kinds of infrastructure borrowing:
- direct infrastructure borrowing - borrowing to spend on constructing
an infrastructure facility (s93F, DAA Act);
- indirect infrastructure borrowing - borrowing to lend to another person
for whom the borrowing will be a direct infrastructure borrowing (s93G,
DAA Act); and
- refinancing infrastructure borrowing - borrowing to refinance a direct
or indirect infrastructure borrowing or a previous refinancing infrastructure
borrowing (s93H, DAA Act).
3.13 There are certain technical requirements to be met by borrowers
in each of these categories in relation to their intention at the time
of borrowing. A direct borrower is also required to own, use or have effective
control of the facility for at least 25 years or to transfer to another
borrower who intends to do so.
3.14 The seven eligible types of infrastructure are a land transport
facility; air transport facility; seaport facility; electricity generating,
transmission or distribution facility; gas pipeline facility; water supply
facility; sewage or wastewater facility in Australia, where the service
is provided to the public at a charge (s93L, DAA Act).
3.15 The special tax treatment for infrastructure borrowings is available
for a maximum period of 15 years (s159GZZZZD, ITA).
3.16 Once an infrastructure borrowing has been certified by the DAA,
the tax effect of the borrowings on borrowers and investors are:
- interest derived under infrastructure borrowings is not assessable
to investors;
- interest paid on infrastructure borrowings is not an allowable deduction
to borrowers;
- any profit or a trading, revenue or capital nature derived on disposal
or redemption of any debt instrument that constitutes an infrastructure
borrowing is tax exempt; and
- any loss of a trading, revenue or capital nature incurred on the disposal
or redemption of any debt instrument that constitutes an infrastructure
borowing is not tax deductible. [11]
3.17 The Committee notes the recent indication of the limits on the granting
of certificates by the DAA. The Treasurer, the Hon Peter Costello MP,
announced on 10 September that he had directed the DAA to not accept further
applications for infrastructure borrowings certificates until 30 June
1997. He said this was consistent with the government's earlier announcement
that it would keep infrastructure borrowings under review to ensure the
program was meeting its objectives. The DAA Act (s93Y) provides that the
intended maximum cost to the Commonwealth of the taxation consequences
of the issue of certificates may be specified in advance. The maximum
amount for 1996-97 had been specified as $150 million and for 1997-98
$200 million. The DAA had advised the Treasurer that it had on hand applications
for total infrastructure borrowings of $26.5 billion. [12]
3.18 The Committee heard evidence that the introduction of infrastructure
bonds had had a positive effect on the market:
We have seen quite a lot of activity in the market relating to
infrastructure bonds and we think that that has been a successful policy
change. Certainly, the superannuation funds have shown a lot of interest
in infrastructure bonds because they do help maximise returns for the
funds. [13]
3.19 Concerns were also noted. The Committee was told, first, that the
types of projects that can be financed by infrastructure borrowings were
limited. It was told, secondly, that the regulatory environment was a
difficult one, and that a person wishing to utilise infrastructure bonds
to finance a project had to deal with both the DAA and the ATO, and that
this was time consuming. Thirdly, there was a 'certain lack of certainty
concerning the infrastructure bond rules'.
3.20 The uncertainty followed a 'possible change in government policy
concerning taxation incentives generally' and a changed interpretation
'of various provisions of the infrastructure bond legislation in order
to give effect to that policy'. The result was that those who had lodged
proposals with the DAA did not have a clear understanding of whether their
proposal was going to be acceptable. [14]
Mr David Campbell of Fay, Richwhite advised the Committee that the taxation
provisions need clarification and defining. Mr Campbell said he considered
that they had been drafted in much broader terms than the problem they
were designed to address:
Consequently, they have captured projects of a different nature
to the projects that the provisions originally sought to affect. [15]
3.21 The Task Force on Regional Development, which reported to government
in 1994, addressed infrastructure bonds in some detail and made a number
of recommendations that were subsequently put into legislative form. Among
these were an extension of the definition of infrastructure and that a
body other than the ATO be responsible for approving projects for infrastructure
bonds. The Task Force envisaged such an agency comprising both private
and public sector representatives and having clear development goals.
Despite the criticism put to the Committee that this involves dealing
with two separate agencies, the Committee favours the role of the DAA
in the approval of infrastructure bonds and would support the clear articulation
by the DAA of the development goals that infrastructure bonds are intended
to achieve.
3.22 The Committee has been told there is confusion in the private sector
about the intent of the infrastructure bond provisions. It is essential
that any confusion be clarified if there is to be a healthy and productive
involvement in the provision of infrastructure by the private sector.
Announcements mid-year that no further applications for the bonds will
be accepted, especially when there is a perception of a lack of clarity
regarding what is acceptable, are also not conducive to the promotion
of private investment in infrastructure.
Recommendation 3.1
| The Committee recommends that the government review
the intent and operation of the infrastructure borrowings concessions
and clarify the position. |
Infrastructure investment in the United States of America
3.23 The Committee looked at how the American experience with superannuation
investment in infrastructure could relate to Australia.
3.24 In the United States, much of the reporting on the experience of
infrastructure investment by the pension funds is in the context of economically
targeted investment (discussed in chapter 2). In the broader economic
context there were clear promises in the 1992 presidential campaign that
the pension funds would be providing the capital backing to heavy investment
in the country's infrastructure:
When the Clinton Administration took office, one of its major
goals was to face the task of global competition head on by pursuing
a strategy of encouraging investment in human and physical infrastructure
so as to enable the United States to compete successfully and create
high wage jobs. [16]
3.25 The sorts of investment projects undertaken are consistent with
what could reasonably be expected to occur in Australia. However, there
has been greater progress in this area than in Australia, and the American
funds could be fairly described as more sophisticated in their infrastructure
initiatives. The following two examples of pension fund investments are
simple illustrations of that:
- $200 million from the Boilermakers and Blacksmiths National Pension
Funds used by the Trust Company of the West investing in energy infrastructure
construction building throughout the country with a projected lifetime
return of 14 per cent; and
- Connecticut state's pension funds entering into a limited partnership
to invest $50 million in job creation and economic growth in that state
and receiving a 15 per cent return in 1993. [17]
Trading in infrastructure
3.26 It was put to the Committee that where there has been listing of
projects on the stock exchange there has been ready acceptance by private
investors. Mr Campbell claimed there was 'a huge market there which remains
untapped at this point'. [18] To list
on the exchange removes one of the big problems for infrastructure projects
given their long gestation period, namely that of marketing them. It also
makes them tradeable, enabling super funds to maintain liquidity while
investing in them.
3.27 The listing of utilities was specifically examined in evidence before
the Committee. At present there are virtually no utilities on the exchange,
although it is seen likely that the Victorian utilities, having just recently
been privatised, might well be listed in 'two or three years time'. [19]
The ASX made the general point about the need for greater representation
on the exchange:
... the more investable products you have available to give you
the diversified spread, the more you will invest here rather than look
overseas to get set in those products. [20]
3.28 The ASX is in the process of developing a new index, indicating
its willingness to assist in creating listable products. [21]
The Committee finds this encouraging and fully supports the initiatives
of the ASX in creating a broader range of listings, especially in assisting
the marketing of infrastructure projects in this way.
Conclusions
3.29 The Committee considers that investment in infrastructure is being
undertaken by superannuation funds at an appropriate rate and considers
the government's role is one of facilitation. It is the government's responsibility
to make this form of investment attractive to the funds, and to not allow
doubts about taxation provisions or other impediments to dissuade the
funds from full consideration of the opportunities for investment in this
area.
[Return to Table of Contents]
Footnotes
[1] Submission (ASFA) SI-11, p3.
[2] Economic Planning Advisory Committee (EPAC),
Private Infrastructure Task Force Report, September 1995 (Task
Force Report), p5.
[3] Task Force Report, p6.
[4] Task Force Report, p6.
[5] Submission SI-15, p9.
[6] Submission SI-18, p18.
[7] Submission SI-5, p2.
[8] Submission SI-14, p6.
[9] For example see 'Development Capital and
Infrastructure Funds' in Super Review, vol 10 no 9, October 1996,
pp26-30, and 'Infrastructure Equity - do big assets equal big returns?'
pp42-3.
[10] For example, Evidence (Mr Nolan), ppS6,
9-10; (Mr Campbell), ppS58-61; (Mr Maroney), pS124.
[11] Description of infrastructure borrowings
tax treatment is based on submission SI-23 (ATO); also see Evidence (Mr
Nolan, Mr Miller), ppS9-10.
[12] Press release from the Treasurer, the
Hon Peter Costello, MP, 10 September 1996. Also see submission SI 25 (The
Treasury).
[13] Evidence (Mr Campbell), pS58.
[14] Evidence (Mr Campbell), pS58.
[15] Evidence, pS60.
[16] Superannuation US - Investment, Practices
and Regulation, speech given to the Evatt Foundation/ACTU conference
'Super 2000 - Investing in the Community', 24-25 November 1994, by Olena
Berg, Assistant Secretary, Pension and Welfare Benefits Administration,
US Department of Labor, Washington DC, Conference Papers, p17.
[17] Superannuation US - Investment, Practices
and Regulation, speech given to the Evatt Foundation/ACTU conference
'Super 2000 - Investing in the Community', 24-25 November 1994, by Olena
Berg, Assistant Secretary, Pension and Welfare Benefits Administration,
US Department of Labor, Washington DC, Conference Papers, p22.
[18] Evidence (Mr Campbell), pS61.
[19] Evidence (Mr Costello), pS49.
[20] Evidence, pS49.
[21] Evidence (Mr Costello), pS48.
Top
|