Can Amazon help solve America’s infrastructure deficit?

marcy stationHaving spent the week moving around New York, the evidence of America’s infrastructure deficit is clear to see. Catching a train from Marcy Avenue Subway Station in Brooklyn you can literally feel the station moving as trains approach. I am no engineer but I don’t think that is a sign of infrastructure in its best condition. And although the New York City of Design and Construction Department has new projects to replace water mains and sewers across the city, the sickly sweet smell of sewerage coming up through vents tells me that they have a big job ahead of them.

In a week of news two relatively small articles caught my attention. The first was a story on how Hurricane Irma had resulted in floods in Brunswick, Georgia which have overwhelmed the city’s water infrastructure. The second was an analysis about Amazon’s RFP for cities to support its new headquarters. Amazon’s RFP lists that it is looking for low taxes, incentives and the support of a diverse population in return for potentially $5 billion of investment. An arms race has started with cities competing to attract Amazon.

The articles raise the question is there are connection between infrastructure and large corporations? And should there be?

One of America’s most famous brands, Coca Cola in fact owes must of its success to infrastructure. As Bartow J Elmore discusses in his book Citizen Coke (bought incidentally on Amazon’s Kindle), Coke was able to benefit from two infrastructure investments in the 1880’s – tap water and railroads.

Coke’s syrup was shipped around the US via the new network of railways with bottlers taking advantage of new municipal water supplies to create the final product. The excitement of water infrastructure at the time is hard for us to comprehend today, but a daily reminder for New Yorkers is the Bethesda Fountain in Central Park, topped by a winged Angel of the Waters, which was built to celebrate the first supply of clean water via the opening of the Croton Aqueduct in 1842.

Amazon is clearly indicating in its RFP that good infrastructure is a requisite for new investment. But what role does Amazon have to help cities to procure that infrastructure?

The challenge that US municipal authorities have is that whilst the US has the largest municipal bond market in the world – which some experts are arguing is close to being “tapped out”, the market itself is based on the same credit principles that apply when consumers seek loans from banks. For municipal authorities with good credit ratings there is no problem accessing new debt. But for those whose economies that are struggling debt is more expensive, and in some cases almost impossible to secure. The municipal bond market creates a cycle where growing and prosperous cities are able to afford new infrastructure, and struggling cities cannot.

The question is whether Amazon can help break this cycle?

Amazon is one of the most successful companies in the modern era. Together with Google, Facebook and Apple, Amazon has added $2 trillion of market capitalisation since the global financial crisis.

Amazon has two things that cities could use. The first is an excellent credit rating. The second is cashflow.

Using traditional financial services techniques such as credit enhancement and securitisation, it is possible to bring these two elements together to support new investment in community infrastructure.

For Amazon the question becomes “not what the city can do for Amazon, but can Amazon do the city.” [apologies to JFK for this mangling]

Here is how it could work.

As part of a deal with the city that Amazon selects, it can provide credit enhancement for “community bonds” that would be issued to support the new community infrastructure that would be needed as a result of attracting new employees to the city.

For Amazon the cost of the credit enhancement is literally zero. The credit enhancement guarantees would only ever be called upon in the event of default, which is unlikely given the injection of economic development opportunities. But for the city it reduces the cost of credit and enables the city to finance the community infrastructure it needs.

The community bond would itself be used for soft community infrastructure assets such as sports fields and community facilities. The heavy lifting of roads and bridges would still belong to the municipal authority and Federal Government.

Through a process of activation, community facilities can deliver a range of service including child care and learning and support programs for aging population in the community. A Community Partnership Agreement is the mechanism by which the community would work with Amazon and the city to determine what it is that is needed, and how it would operate.

Finally Amazon would support interest payments on the community bond by for instance committing to paying 50% of interest payments over a ten year period. The remaining 50% would come from the activation of services with the municipal authority only requiring a small contribution on its own part.

The Community Partnership Agreement model is an acknowledgement that we need to move away from the days when we worked in silos. By working collaboratively there is the potential to unlock new investment and deliver economic, social and environmental outcomes.

Amazon’s need for new headquarters is a great opportunity but by developing a collaborative model Amazon can leverage its impact, supporting the development of facilities that its employees and the rest of the community will use, building a deep and lasting connection with the city it selects.

Gordon Noble is the President of the Network for Sustainable Financial Markets which has been working on the concept of community bonds through its Real Assets Working Group.

Originally published LinkedIn September 24, 2017

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Was Australia settled to keep banks happy?

Founding

Before you ask whether I have had one too many beers in the lead up to the Australia Day long weekend there is some history behind this statement.

Once it became known that the British were establishing a colony on the east coast of Australia, both the French and Spanish sent expeditions to investigate. La Perouse famously landed just weeks after Governor Phillip arrived, only to disappear on the return trip home.

The Spanish sent two ships, the Descubierta and Atrevida, landing in Sydney Cove on 12 March 1793.

The commander of the expedition, Captain Alexandro Malaspina, had secret instructions to report back to the Spanish Government not only on what was happening at Port Jackson, but also on what the Russians were doing at Nootka Sound.

In his report, A Political Examination of the English Colonies in the Pacific, which was apparently prepared by Malaspino for submission to the Spanish Government, he explains why he thinks the British were settling in Port Jackson.

He states “ the first is to sustain the public credit with new speculations, which feed the hope of being able to one day to extinguish the public debt; hopes without which it would be impossible to contract new national debts, necessary on the other hand just at the moment when a Rupture is so feared”.

Was Malaspino right? Were the British settling Australia to keep their creditors happy?

There have been endless debates on why Australia was settled. When Lord Sydney announced on 18 August 1786 that a settlement would be established the argument was to house Britain’s growing convict population. But as Geoffrey Blainey says in The Tyranny of Distance “the settling of Eastern Australia was a startlingly costly solution to the crowded British prisons. It was also a very slow solution to what is often said to have been an urgent problem”.

So what was the issue with banks and credit?

At the time the decision was made to settle in Australia William Pitt (the younger) had just become Prime Minister. He had inherited debts from Britain’s war in America.

As William Hague (ex British foreign minister) says in his excellent biography of William Pitt “the financial position he inherited was dire. A country with annual tax revenues of about £13 million was paying £8 million a year interest on a national debt which now amounted to £234 million. The last four years of the American War had added some £80 million to that debt, and it had been further inflated by the habits of Pitt’s predecessors, who sold government stock at a nominally low interest rate but at a large discount. This kept the interest rates low, but eventually gave the lenders a very healthy return by hugely inflating the capital which would one day have to be repaid”.

Pitt raised a £6 million loan through the Bank of England and set out to address the debt through a range of taxes on hats, ribbons, paper, hackney coaches, bricks, candles, linens, calicoes, coal, gold and silver plate, imported silk, exported lead, postage rates, and shooting certificates. All except the tax on coal were accepted by the public, but the necessity of coal for heating led to its quick withdrawal.

As Hague says “It is hard to imagine in a later age the extent of the preoccupation of late-eighteenth-century politicians and commentators with the national debt. We are accustomed to the debt inflating in bad times and being reduced in good ones, and have often seen it greatly diminished as a problem by either inflation or economic growth. But the policy-makers of the 1780s did not know that they were on the brink of an Industrial Revolution which would multiply the size of their economy many times over; their experience of recent decades was of the inexorable growth of the nation’s debt until it was now some sixteen times greater than the annual income of the state. Pitt was therefore responding to what was seen as a national problem of immense importance, and he and his proposals were acclaimed because he not only announced a policy, but also the method and resources by which it could be put into effect”.

In Yuval Noah Harrari’s book Sapiens he outlines the importance of credit to development at that time. “Western Europe witnessed the development of a sophisticated financial system that could raise large amounts of credit on short notice and put it at the disposal of private entrepreneurs and governments. This system could finance explorations and conquests far more efficiently than any kingdom or empire”.

The problem, as Harrari identified, is that for banks to provide credit they needed trust. As the Dutch empire experienced turmoil lenders shifted to France and England. France’s crisis over the Mississippi Company in 1719 cost it dearly with Britain emerging to win the trust of the financial system with Louis XV subsequently finding it more difficult to obtain credit whilst the British could borrow money easily at low rates.

The mercantilist system of the day was fed by constant growth. For Britain whilst it had the trust of bankers, it has lost the American colonies. Where was this growth to come from?

Did Lord Sydney and William Pitt talk about the need to keep bankers happy as one of the reasons to settle? Who knows? But it certainly was a conversation that was on the governments mind at the time.

The First Fleet cost £84,000. In the scheme of the British government borrowing £6 million this was a drop in the bucket. The actual long term government outlay was small.  Out of the 11 ships sent to Botany Bay, 9 were contracted from the private sector. Having finished their duties ships like the Charlotte went off to China to pick up cargo from the British East India Company. The First Fleet sounds a little like a Private Public Partnership. But that is a story for another day…

Sources

William Hague, William Pitt the Younger: A Biography, HarperCollins, 2004

Yuval Noah Harrari, Sapiens, Vintage, 2011

Robert J. King, The Secret History of the Convict Colony, Allen & Unwin, 1990

Originally published LinkedIn on January 24, 2018

Why we need community focused microeconomic reform

Hawke Keating.jpg

Watching the recent Bob Hawke documentary provides a reminder that at one point in Australia’s political history micro-economic reform dominated the national debate.

During the 1990 Federal Election campaign Bob Hawke delivered a speech on micro-economic reform, apologising in advance as he outlined technical details.

In a speech that focused on the intricacies of competition and reforms to shipping and aviation, Hawke closed by stating “Institutions and attitudes can’t be changed overnight.  Results can never be immediate. Public debate will be dominated by the vocal complaints of the minority who are adversely affected, rather than by the vast majority of consumers and taxpayers who are incrementally advantaged. This underlines the need for creative thought, proper consultation and a willingness to ease the burdens on those facing change. It also shows that, at times, a Government needs to stand firm against those groups who, for short-term or selfish reasons, threaten to upset the gains that can be made by the community as a whole”.

One of the problems that we have with the national discourse on infrastructure is an assumption that the electorate can only digest, and support, large infrastructure projects. Hence the focus on multi- billion investments for in-land rail and Snowy Hydro.

The debate on microeconomic reform almost thirty years ago had a wider narrative. Microeconomic reform was, according to Bob Hawke about creating “a modern, growing economy, shaken out of the old complacent dependence on commodity exports, re-equipped and restructured in its attitudes, institutions and technology, to be fully competitive in the world”.

Narrative is important for change. The electorate may not have followed all the details of reforms to aviation and shipping but accepted the broader reason why it was important to focus on these areas.

The challenge for communities is that we have yet to create a narrative on why investment is important to the national economy and society.

We need to tell the story about what is actually happening in the community.

As an example, take recent conflicts in Melbourne over sporting facilities.

  • A bowls club resorts to national media as the council plans to move the club to an unspecified alternative to make way for basketball
  • With netball demand outstripping court availability, a local netball league argues that more courts should be built on the neighbouring athletics track. The athletics association is not impressed.
  • A golf driving range is proposed to make way for netball expansion.

The story in established city suburbs is one scarcity and competition. Meanwhile in the regions the story is a lack of capital.

  • A multi premiership winning football side in a Victorian country town operates with the most basic of facilities.
  • Swimming pools in the regions need significant investments just to keep them to operational standard.

Even when Governments do provide funding it may not be directed at needs.

Take the club that received a $100,000 commercial kitchen when it would have been happy with something for one-twentieth of the cost.

Or the multi- million investment to build new life saving facilities in a marginal seat, when the lifesaving club up the road is unable to get access to capital.

What is going wrong?

As a nation we need to understand the important role that investment in communities can play in unlocking social well- being and economic opportunities. Just as with the debate on microeconomic reform thirty years ago, we need to create a narrative on why we need a different approach to community investment.

The alternative is that conflicts and scarcity of capital will become entrenched.

Hawke’s 1990 Speech: http://pmtranscripts.pmc.gov.au/release/transcript-7919

Originally published LinkedIn February 26, 2018

Journalism needs a new investment model

L'Ami_du_peuple_1We need new capital structures to support new forms of journalism

I confess to being a news junkie. I like nothing better than a pile of newspapers on the weekend. The best thing about travelling to London is that they have even more newspapers than we do – a stack of The Guardian, The Independent, The Times and the Daily Mirror literally takes hours of pleasure to consume. I have tried to go digital but at the end of the day paper is just better. I can read more stories, more quickly with a newspaper than I can online.

But I admit to being very concerned as to whether I will be able to enjoy my addiction in coming decades. But the loss of the smell of news print in the morning is nothing compared to the loss of quality journalism itself.

There is a lot of discussion about the future of newspapers. They not only face the growing threat from social media, but they have investors who demand a return on investment. An additional threat we should be worried about is the Federal Government’s ill-thought idea to legislate prison sentences for journalists that publish restricted government content.

Today’s Fairfax newspaper illustrates the problem. On one hand we have a glowing obituary to one of the icons of Australian journalism, Michael Gordon, who passed away at the age of 62. In the same pages there is a puff piece on drones with the journalist disclosing that Telstra had paid for a trip to the Gold Coast.

Are we witnessing the “passing of the elves”? Will corporate content continue to bleed into papers so that in the future it becomes hard to tell what is independent news and what is corporate spin? Will we produce a next generation of journalists of the same kinds of quality as Michael Gordon?

To answer this I believe we need to go back in history. The small number of corporate newspapers we have today was not always the case, During the French Revolution for instance (between 1789 and 1799) France had over 1,300 newspapers. The image in this post is of the L’Ami du people, complete with the blood stains of Marat who was stabbed in his bath whilst reading the paper .

Diversity of news is a great thing. Different thinking supports a vibrant democracy. Whilst in the last decade we have seen old mastheads struggle, we have seen the emergence of new forms of journalism. One of the best examples is Michael West, one of Australia’s best investigative journalists, who has established his own online publication (which my wife and I are proud to sponsor. See https://www.michaelwest.com.au/)

Outside of the heroic efforts of individuals though we have a structural problem which is that we lack the capital structures to support not-for-profit investment vehicles.

This wasn’t always the way. The structure of capital that we have today has not been fixed over time, and may therefore not stay the same in the future. In the 1870’s for instance cooperatives were a rising form of organisation with 334 cooperatives organised in that decade in the United States. The Knights of Labour, which at its peak had almost a million workers, were responsible for organising around 200 industrial cooperatives around this time. Friendly Societies and mutual insurers were another form of collaborative capital that has been around for hundreds of years with members contributing to a mutual fund which enabled them to receive benefits at a time of need. By the late 1800’s there were around 27,000 registered mutual societies.

Impact investments are rising as an alternative investment opportunity. But to make them scalable we need to develop the products that have the risk and return characteristics that investors demand. If we can do that we can create an impact investment bond market that provides the market structure to support not-for-profit investments. With my colleagues we have been working on a new model of community bonds that is aimed at addressing the risk and return question.

Journalism has been the heart of civil society for the last two hundred years. We not only need to fight to ensure that quality journalism survives, as a society we need to develop the capital structures that can support future not-for-profit news organisations. Journalism needs to be the focus of impact investors.

Originally published LinkedIn February 6, 2018

 

Electric vehicles need their own infrastructure

Model TAlan Finkel recently wrote an opinion piece where he commented that “with the perspective of time we see a failure of imagination”. He was commenting that in the 1880’s the idea of electric street lighting seemed absurd and that today we face the same arguments around electric vehicles.

With new electric vehicle models coming on the market it is becoming clear that technology is reaching a tipping point. But is technology going to be enough for electric cars to dominate the road?

To understand the impediments that electric vehicles face it is worth going back in time, not to the 1880’s when gas lighting was beginning to dominate the streets, but to the turn of the last century when automobiles first began to be commercially manufactured.

The tipping point for car manufacturing was Ford’s Model T which took the automobile from a luxury good to a mass consumer good. In 1904 Ford manufactured 1,708 cars. By 1916, 533,921 cars were manufactured.

In addition to the actual car, drivers needed two things to be able to enjoy their new product; roads and petrol.

Today there are around 6,400 petrol stations scattered around Australia. This is down from a peak of 20,000. But a network of petrol stations wasn’t born overnight.

The first network of petrol stations in Australia was actually the Australian Motorists Petrol Company Ltd in 1936. Before that time distribution of petrol occurred through a variety channels. The first petrol stations were actually a side business for pharmacies in Germany. In Australia country pubs played a role as “filling stations’, taking on a role in transport that they had filled since the network of horse staging posts was established by Cobb and Co.

The point for electric infrastructure is that home delivery of petrol never really figured in the development of the automobile. At the moment however this is the principal mechanism available for electric vehicles. Without imagination, the lack of electric vehicle infrastructure will become the principal reason that could hold up electric vehicles.

There are a number of issues with home based electric infrastructure. The first is that it requires home ownership or enlightened landlords. In addition to buying an electric car, a driver has to install their own infrastructure. The issue is not just the cost, it is the evolution of technology. It is not yet clear how electric charging technology will evolve.  An electric driver can easily be left stranded with out-dated technology which can also be tied to a particular manufacturer. Specialist businesses are much better placed to manage this technology risk than households.

The second issue is around shifting living patterns. The growth of apartment living in particular is notable. Whilst there are examples of charging technology being installed in new apartment blocks, the cost of this technology is effectively paid by all building owners – whether or not they actually use the technology. There are also insurance implications around electric charging facilities that are still in the infancy of being addressed. This don’t stop the growth of electric vehicles, but it will make it harder for individuals to make their own choice. They will need to firstly consider whether their living arrangements can accommodate an electric vehicle.

The third issue is simply the number of cars that are not garaged in Australia but are parked on the street. You only have to drive down any street in a major city to see the number of cars that would struggle to be charged from a household connection.

So what are the options for electric infrastructure?

To understand where there may be opportunities we need to firstly understand the core difference between petrol stations and electric charging stations – and that is time.

With a petrol stations it is possible to fill up and be gone in a few minutes. For electric charging, although technology is changing the fasted charging options are still going to take 30 minutes.

The best opportunity for electric infrastructure is therefore where people park their cars for a period of time.

There are three opportunities that, with a bit of creativity could be developed; shopping centres, train stations and street parking.

It would be possible for instance for Westfield to develop part of its parking facilities to service electric vehicles on a pay for service basis.

Governments could also develop charging stations for electric vehicles at train stations.

There is the capacity that energy companies could offer street side charging. An option could be to trial this with local councils where a charging facility was placed on council land, aiming to overcome the ownership issues around housing and electric charging.

The early development of the automobile resulted in a fundamental changing in living patterns. It was also accompanied by the raft of rules and regulations on road use which we now take for granted.

We need to see electric vehicles as being not just about the car itself, but about the infrastructure. If we do that we can start to focus on all the elements we need to see a transition to electric vehicles.
Originally published LinkeIn Published on February 16, 2018

ASX Research Scheme Should Be Expanded and Regulated

Concerns that the ASX supported broker research on Big Un and GetSwift could lead to the end of the ASX Research Scheme, that would be detrimental to the Australian economy in the long run.

Getting rid of the ASX Research Scheme would be a mistake. Instead the scheme should be expanded to include all ASX listed companies with funding coming from a compulsory levy paid by all ASX companies. The scheme should be managed by an independent group. The ASX Corporate Governance Council would be perfect to take on this responsibility.

It is important to understand the problem that the ASX Research Scheme is seeking to address.

The ASX is in effect two markets. Institutional investors predominantly invest in ASX300 companies. These companies are mostly covered by broker research which is paid for by trading revenues.

The deeper you go into the ASX the less broker coverage there is. The problem that small cap companies find is that they would love to attract institutional investors onto their registers, but there is chicken / egg problem that without research there is a lack of confidence to invest.

The reason that this matters is that Australia’s superannuation system is rapidly outgrowing the ASX. In the next twenty years, for every dollar that goes into superannuation, more will be invested offshore.

Australia’s superannuation system’s choice of fund rules have an impact on the way funds invest. Liquidity is important with each superannuation fund managing its own liquidity budget. Small cap ASX listed companies can be illiquid and must also compete with other illiquid investments such as infrastructure.

For twenty years Australia’s superannuation system and the ASX were joined at the hip. Every dollar that went into super supported the growth of the ASX.

With the superannuation system expected to grow from $2 trillion to $6 trillion, the problem is that there are far more liquid investments offshore than there are in the ASX.

There is nothing wrong with that from an investment perspective. But there is a problem in terms of future growth of the Australian economy.
One of the key problems is that as a publicly listed company the ASX itself no longer has the same public policy responsibilities.

The ASX earns revenues from listing fees. As the CEO of ASX Dominic Stevens says in today’s AFR, the role of ASX is not to pick winners. But where the ASX puts its resources does impact on new listing opportunities. An example was that there was a time when the ASX was attracting a number of small cap miners operating in Mongolia. That wasn’t accidental as ASX was marketing its services directly in Mongolia.

The ASX Research Scheme has been operational since July 2012 but still only sees 100 small-mid cap ASX-listed companies receive in depth research from brokers. This puts ASX in the invidious position of having to select who receives the research and who doesn’t.

It would be far better if every ASX company was subject to broker research. Broker research should also be required to include ESG practices, which would help shine a light on the governance practices of companies such as Big UN.

The ASX has an opportunity to do this voluntarily. But if it is unable to convince market participants then the Federal Government should step in. It is in the interests of the Australian economy that we have a robust functioning small cap market which can provide opportunities for superannuation funds to invest in.