Can G20’s Global Infrastructure Initiative Be a Circuit Breaker?

With the end of the northern summer it is global conference season. Last week the G20 Finance Ministers met in Brisbane, this week the UN Climate Summit was held in NYC and the PRI Annual Conference in Montreal. In the name of global dialogue many frequent flyer points have been earned. But as one delegate to a recent APEC conference stated ‘we have great conversations, and then I get back to my desk and am overwhelmed with the day to day work flow.’

In a modern world international dialogue is critical. How to make it effective is the question.

Out of all the discussions that have occurred in the last week, it is great to see a practical, Australian idea.

Coming out of the G20 Finance Ministers meeting in Cairns is a commitment to establish a Global Infrastructure Initiative.

According to the G20’s communiqué:

Investment is critical to boosting demand and lifting growth. Today we have agreed to a Global Infrastructure Initiative to increase quality investment, particularly in infrastructure. The Initiative will seek to implement the multi-year infrastructure agenda, including through developing a knowledge sharing platform, addressing data gaps and developing a consolidated database of infrastructure projects, connected to national databases, to help match potential investors with projects. The Initiative will also include key measures in our growth strategies to improve investment climates, which are central to our efforts to attract private sector participation. In implementing our growth strategies, we will seek to support quality public and private investment, including by optimising the use of the public balance sheet while maintaining appropriate risk controls.”

The G20 advises that the ‘implementation mechanism’ will be announced at the Leaders meeting in November. The words ‘implementation mechanism’ are unfortunately couched in diplomatic language. An Australian translation would go something like this: ‘we will tell you later how we are actually going to do all this stuff.’

The easiest thing is to come up with a communiqué. The hardest part is to implement it.

What we are likely to see is some form of infrastructure hub. How this will work will depend on the negotiation that occurs between now and November, but it can be expected that given Australia’s hosting of the G20 that the hub will have some anchoring in Australia.

There is a strong need for an infrastructure hub. It has the capacity to become a circuit breaker to link investors to projects.

The problem that we have at the moment is not a shortage of projects, or a shortage of capital. But the projects that are coming to market are mature assets – and there are only so many of these that will come onto the market in coming years. In the Australian context we will see privatisation of energy and port assets. There is significant global interest in these investments and we can expect on the basis of past details that they will attract a premium.

The so called ‘recycling of capital model’ which has been advocated by the Australian Government, after leadership from NSW Government provides an effective mechanism to communicate to the community that the selling of an asset provides the ability to invest in new infrastructure.

Whilst the Recycling of Capital Model is needed there is a limit to its application simply because there is a limit on how much can be sold. Australian Governments are well ahead of their European peers in privatising assets. With the next round of privatisations there will be no much left to sell.

We know that a lot of infrastructure investment managers are sitting on dry powder looking for infrastructure deals. We also know that more money is being allocated to infrastructure all the time. We are seeking European insurers and pension funds looking for yield looking to infrastructure as an alternative to sovereign and corporate debt.

The problem that we have is that investors are interested in the same kinds of assets. Mature, cash flow generating assets in stable economies are sought after. Despite the availability of capital there are many projects that struggle to attract investment. Greenfield construction, particularly where there are uncertain patronage forecasts, is one area where investors are cautious. Another is any infrastructure in developing economies.

The G20’s Global Infrastructure Initiative has the capacity to play a critical role in bringing together all the different partners that have an interest in building a long term pipeline of infrastructure investment. In particular it has the capacity to provide a mechanism to address areas where capital is not flowing. In a week of global discussions it is great to see a practical idea coming out of the G20. An infrastructure hub is a great idea, but to make it work will require that investors are a central part of its operations.

Happy Birthday McKinsey, but, um, excuse me,….you got it wrong

Happy Birthday McKinsey. For a corporation to reach 50 in the modern era is a major achievement.

It is understandable to want to celebrate the birthday by parading your strategic knowledge, which is after all McKinsey’s most recognised strength. To mark the birthday McKinsey released a series of papers, including its report “Management intuition for the next 50 years” that identified three core megatrends that will shape business in the next 50 years; technology, emerging markets and aging.

The reaction to McKinsey’s report has not been kind including FT journalist Lucy Kellaway’s biting assessment that McKinsey are identifying trends of the present. According to Kellaway “if there is one thing that is true of the distant future is that it tends not to be ruled by the same things that rule us now.”

Kellaway argues that the McKinsey report is not a forecast, it is a marketing exercise. Her own forecast is that the future will mean that McKinsey won’t exist as economic growth moves to places where western strategy consultants don’t tend to flourish and executives become much more adept at solving problems without consultants.

The problem with McKinsey’s work is that by reducing a raft of megatrends to an easy list of three, they are discounting the importance of other issues. This is particularly the case with climate change, which science tells us will impact in far less than 50 years. It is true that McKinsey intends to publish a ‘book-length treatment of the issues’ however by down-playing the importance of such an issue they are doing their clients a disservice.

McKinsey would be well advised to re-read Nassim Nicholas Taleb’s classic tome The Black Swan. Taleb’s view on the value of predictions is clear. “I find it scandalous that in spite of the empirical record we continue to project into the future as if we were good at it, using tools and methods that exclude rare events. … we are suckers for those who help us navigate uncertainty.”

Whilst relying on predictions has limited value, Taleb’s cites Pasteur’s motto that ‘chance favours the prepared’. “Knowing that you cannot predict does not mean that you cannot benefit from unpredictability. The bottom line: be prepared. Narrow minded prediction has an analgesic or therapeutic effect. Be prepared for all eventualities,” says Taleb.

From an investment perspective, the raft of global megatrends presents an opportunity. Seizing the opportunity requires a broad understanding of megatrends and a detailed analysis of the companies that are, to use Taleb’s works ‘prepared for all eventualities.’ The future, which will require dealing with a confluence of megatrends, is likely to be one where the quality of a company’s management becomes much more important.

Why Fast Food Strikes in US will not go away – and what McDonalds needs to do about it

Over the last 2 years the SEIU, the trade union that represents US service workers, has been running a campaign for a $15 minimum wage, holding at least seven strikes across the country. In the last week demonstrations across the country led to arrests, including 21 in New York, 50 in Chicago, 50 in Detroit and 27 in Wisconsin. This list goes on.

The strikes have sparked a series of bitter commentary with McDonalds accusing the SEIU of paying strikers. According to quotes in The Guardian a McDonald’s spokesperson stated “We reiterate that these are not ‘strikes’ but are staged demonstrations in which people are being transported to fast-food restaurants. And, we have received reports that some participants are being paid, up to $500, to protest and get arrested.” The Guardian quote the National Restaurant Association as stating the protests were nothing more than “orchestrated union PR events where the vast majority of participants are activists and paid demonstrators”.

Prior to moving into the responsible investment field I worked for trade unions in both Australia and the UK. I have a good understanding of the way trade unions work and the way they campaign. Whilst a trade union may at times run a campaign that is overtly political it cannot maintain a campaign unless there is a genuine issue. The ongoing duration of the campaign, and the depth of passion that is being generated suggests that there is more to these protests that ‘union orchestration.’

To understand what is going on it is necessary to understand the psychological relationship that an individual has with their employer and their trade union. In the main employees like their employers – particularly the people they work with at a local level. Employees will tolerate a lot from employers. They understand the need for businesses to restructure and to make decisions that ensure profitability. They will even accept lower pay increases when times are lean.

What workers want from their trade union can change according to the circumstances of their work. Sometimes they want their union to collaborate with the employer. Sometimes they want the union to stand up and ensure fairness.

There are however times when an employee’s general tolerance for their employer tips over into anger. When this happens history has shown that employees will go to extraordinary efforts to achieve change.

This is one of those moments. The fight for a minimum wage didn’t just appear over night. The trade union movement has been arguing about it for years. But what has changed is that workers have reached the point when they can no longer get by. This happens slowly. Initially workers absorb housing cost increases, food price increases and energy price increases. But over time anger at the fact that it is impossible to ‘get by’ no matter how hard a person works builds.

The SEIU fast food strikes are an example of this. They are not ultimately due to the strategy of a union official. If that was the case the actions would have petered out long ago.

Whilst the SEIU’s focus is on fast food, campaigns on minimum wages are popping up elsewhere across the globe – an example is Unite’s campaign for London hotel workers.


The message for McDonalds, Burger King and other fast food chains is that the campaign for increases to the minimum wage won’t go away. Because it can’t go away.

What the fast food sector must do is something it has never wanted to do – and that is negotiate with trade unions.

But what will happen if it doesn’t? The answer is that the sector will still continue to operate and generate profits for investors, but it will not escape attention. Campaigns will continue, which will mean that the industry will stay in the public spotlight. The sector will also attract increased attention from politicians. Already President Obama has weighed in stating “all across the country right now there’s a national movement going on made up of fast-food workers organizing to lift wages so they can provide for their families with pride and dignity. There is no denying a simple truth. America deserves a raise.”

The impact of attention on the sector will flow to other issues including the sector’s impact on obesity and its carbon footprint.

There is however an alternative path for fast food companies that will in the long term build value. By focusing on engagement not opposition, fast food companies can embrace innovation. There is little benefit in the sector all sticking together in defending increasing minimum wages. Ultimately it will be consumers, who are socially conscious, and whose food habits are changing, that will determine the future winners and losers in the sector.

In simple terms the way that fast food companies react to strikes can be seen as a leading indicator for long term investment returns.

Australia’s Financial System Inquiry: Why this time is different

Every twenty years or so Australia establishes a formal Financial System Inquiry that mucks over the entrails of our financial system.

Australia’s angst at financial services actually goes back to the early days of NSW as a colony under the British Empire when Governor Macquarie sought to address the currency chaos by introducing the famous Holy Dollar – still used as a symbol by Macquarie Bank. Having sorted out the issue of currency Governor Macquarie then fought to establish Australia’s first bank, ultimately wining a battle with the ‘powers at be’ in London to establish the Bank of NSW in 1817.

In the bank’s early days it regularly needed government loans to keep it in business. Concentration was an issue even back in 1826 with the Bank of NSW having half of its loans to three borrowers who were drawers and acceptors of each other’s bills.

Over Australia’s history our finance sector has regularly been front page news of newspapers including the 1880’s housing boom, the 1930’s Great Depression, proposed bank nationalisation in the 1950’s under Ben Chifley, Menzies Bank Credit Crunch in 1960 and finance deregulation in the 1980’s under the Hawke Government.

Over the last 200 years there has been one common factor – and that has been that Australia has been reliant on global capital. The volatile relationship that Australians have always had with the finance sector perhaps relates to the fact that we have been a nation that has been building savings and capital – not a nation that has centuries of accumulated capital.

This is what is different about this Financial System Inquiry. Australia has now reached the point where we have accumulated significant savings in the form of superannuation. Yes, we are still reliant on global capital for investment but we are also contributing capital to global capital markets.

Over the next twenty years we are likely to see changes in the way superannuation funds invest. It will be necessary to invest more offshore in order to diversify portfolios, otherwise major superannuation funds will end up with stakes in companies that will provide effective control and pose risk management and concentration risk problems.

Out of all the submissions to the Financial System Inquiry, the submission by the Australian Council of Superannuation Investors is noteworthy for tackling this issue. ACSI recognise that the growing significance of superannuation funds as owners of capital market assets has implications for the exercise of ownership rights, governance, risk management and accountability frameworks of investee assets.

ACSI’s submission discusses the concept of superannuation as “universal investors”. According to ACSI “the universal investor proposition holds that large fiduciary institutions, once they collectively hold a significant enough proportion of the assets in a given economy, are in effect inextricably bound to the overall performance of that economy, notwithstanding that they also typically seek to vary their exposures to individual asset classes, sectors or securities within that economy’s financial system to optimise their overall financial performance.”

Universal owners, or fiduciary capitalism, as it is also referred to, have the ability to improve the performance of the financial system. But to do this superannuation funds will need to take greater responsibility for the way they invest.

ACSI argue that asset owners need to be held to a fiduciary standard. “The positive force of ‘fiduciary capitalism’ is reliant upon a positive duty of care from the institutional asset owner to the ultimate beneficiary. Consequently, a very high standard of proof should be required before seeking to dismantle or dilute the current foundations for fiduciary oversight of the superannuation system in this country.”

Australia is not alone in becoming a fiduciary capitalist. With over $21 trillion in OECD pension funds alone, long term investors have become a significant part of the global economy. There is an active global debate on the role of universal owners and fiduciary capitalism that will become much more important to Australia as our economy transitions from 200 years of dependence on global capital.


Cambridge Handbook Institutional Investment and Fiduciary Duty

Australian Council of Superannuation Investors FSI submission

Click to access 14%20August%20ACSI%20Submission%20on%20FSI%20Interim%20Report%2026.08.14.pdf