Infrastructure Asset Owner Fee Increases Raise Long Term Questions

The Australian Financial Review reports that “Glencore has gone to the competition regulator seeking arbitration on the latest pricing dispute between Australia’s biggest coal miner and the new owners of the world’s biggest coal port, the Port of Newcastle”.

The background to this is that in April 2015, Hastings Fund Management’s The Infrastructure Fund and China Merchants Group acquired the Newcastle Port on a 98 year lease for $1.75 billion. As part of the deal The Infrastructure Fund owns 50% of the Port, with China Merchants Group owning the other 50%.

According to reports at the time, the Port’s new owners include 2 million superannuation fund members with The Infrastructure Fund’s unit holders reported to be BUSS(Q), QIEC Super, Australian Catholic Super and Retirement Fund, Energy Super, Sunsuper, Club Super, Suncorp Life & Super, AAI Limited, Mercy Super, Meat Industry Employees Super Fund, AustSafe Super, Motor Accident Insurance Board (Tas), NGS Super, Australian Super, LG Super, Cambooya, and CIRT. It is not clear at the time of writing who are the current unit holders.

Acquiring an infrastructure asset that has long term contracts on a long term lease is an attractive proposition for investors. But it is the actions since the Port was acquired that are continuing to raise eyebrows.

No sooner were contracts signed than the Port’s new owners increased the fees at the Port gate. This led the Port’s main customer Glencore to take the new owners to court under s 44K(2) of the Competition and Consumer Act 2010, seeking to have the Port declared as a service. Glencore’s appeal was successful. The AFR reports however that the declaration is being disputed and Hastings Funds Management have now lifted shipping channel fees for a third time.

Glencore has now gone to the ACCC seeking arbitration. According to the AFR the Port’s new owners are defending the increases, arguing that ”the total increase in fee flow was about $20 million and that was not going to make or break anyone serious in the coal digging game.”
What is going on here?

The first point to note is that the actions of the new Port owners have not gone unnoticed in regulatory and policy circles.
This raises the question of whether there is a disconnect between the conversations that investors actively participate in, and those of other stakeholders.

In investor conversations around infrastructure, the discussion is principally around investment returns and the price of acquiring an asset. But in stakeholder discussions, including government, the focus is much broader, in particular there is a strong focus on the role of infrastructure in the broader economy.

There is no doubt that in investor circles that infrastructure is flavour of the month.

Low yields are pushing investors that have predominantly invested in fixed interest investments, to consider infrastructure.

According to Preqin, the amount of ‘dry powder’ – investments that have been committed by asset owners to fund managers but not allocated due to the shortage of available opportunities – is currently US $147 billion, which is an all-time high.

There has been an ongoing conversation on how we can create a long term pipeline of investable opportunities for asset owners.
As the recent sales of assets, including AusGrid in NSW and the Port of Melbourne, demonstrate, investors have a strong interest in mature, cash flow generating assets.
Countries around the world have many assets on government balance sheets, that investors would love to own.

But as Paul Clement Hunt (founding UNEPFI board member of the PRI) said at the recent International Forum of Sovereign Wealth Funds annual conference in Auckland “a pipeline of investments will not create itself but needs investors to take leadership.”

In our recent Policy Outlook No.2, the Better Infrastructure Initiative, at the University of Sydney’s John Grill Centre for Project Leadership, has proposed the need for an Investor Accountability Protocol.

We are currently consulting a range of stakeholders on what this would look like, but a key element is that a long term focus requires investors to actively manage infrastructure assets.

The way investors manage an infrastructure asset post privatisation is perhaps just as important as the original acquisition. Actively managing assets may require making decisions to increase fees, but where it does, investors need to communicate, not just to their direct customers, but to a wider stakeholders.

Australia is in the fortunate position where the world looks to us for leadership around infrastructure. It is commonly said that in the offices of infrastructure investment managers around the word, you can always hear an Australian accent. Asset recycling, a term that was developed in Australia as a way to communicate to communities the benefits of privatising infrastructure, is now been considered by other jurisdictions.

What this means is that how investors manage infrastructure assets in Australia will be watched and commented on, not just by Australian regulators and policy makers, but internationally.

If investors want a long term pipeline of investable assets then they need to be seen to great custodians of the assets that they have already acquired. In short, trust is key to opening up a pipeline of investment opportunities.

Whether we like it or not it means that Australian super funds have a leadership role around active infrastructure asset management.

Flexible Petrol Levy the solution to addressing congestion

A flexible petrol levy that rises and falls with global petrol prices, is a better way to address congestion than the cost reflective road pricing model proposed by the Harper Competition Review.

According to the Competition Policy Review new technology provides an opportunity to introduce cost reflective road pricing. The Review states:

More effective institutional arrangements are needed to promote efficient investment in and usage of roads, and to put road transport on a similar footing with other infrastructure sectors. Lack of proper road pricing leads to inefficient road investment and distorts choices between transport modes, particularly between road and rail freight.

The advent of new technology presents opportunities to improve the efficiency of road transport in ways that were unattainable two decades ago. Road user charges linked to road construction, maintenance and safety should make road investment decisions more responsive to the needs and preferences of road users. As in other network sectors, where pricing is introduced, it should be overseen by an independent regulator.

Cost reflective road pricing would essentially involve different charges for different roads, with the potential to even charge different prices at different times.

The core rational behind cost reflective road pricing is that if a person is charged to drive on a particular road at a particular time they will assess whether the fee they are being charged is worth it. From an economic perspective those who have lower value uses, would shift their behaviour and travel at different times.

In economic terms the problem with cost reflective road pricing is the inelasticity of demand.

As a concrete example consider an employee who must arrive at their job at 8.00am. If they are late they will receive a warning and potentially dismissal. Theory would suggest that this employee would shift their behaviour, by perhaps taking public transport to their job. But the reality of where many jobs are located in Australia’s congested cities of Melbourne and Sydney, and increasingly Brisbane, is that public transport does not offer a realistic alternative at peak times. The problem is that with the exception of CBD based employment, jobs are distributed across the city. And it is the employer, not the employee, who has power over starting and finishing times.

Those employees that are employed with fixed working hours will simply absorb any road pricing increases on their particular transport route. Pricing will therefore not impact congestion.

Cost reflective pricing may result in some individuals shifting their behaviour ,but before we race to implement technology that will not be costless we need to understand where the burden of pricing would fall.

The problem with cost reflective road pricing is that it does not take account of the structure of cities, nor of the individual circumstances of road users. It does not take into account the way the control of employment exercised by employees.

There is an alternative that can provide the funding to address congestion.

My suggestion is to establish an infrastructure levy on petrol prices that would vary according to global petrol prices.

Now is the perfect time to introduce such a levy, which would be in addition to existing petrol taxes.

According to investment analysts, oil has been hoarded in around the world in empty tankers and we are now close to the point where all available storage facilities have been used. Once this point is reached there are predictions that the price of oil will fall again.

The problem with volatile oil prices is that they send exactly the wrong signals at the wrong times. If we believe that congestion can be addressed through pricing mechanisms, and we believe that the economic benefits of introducing cost reflective road pricing are worth it, then it would also make sense to regulate the current oil price volatility.

One of the challenges that governments have in building new infrastructure, whether rail or road, is how to fund them. One option is to introduce a new infrastructure levy on petrol prices.

If we want to send a price signal re congestion through pricing then it makes sense for the government to collect any windfall from reduced prices.

If, and when oil prices increase then the levy should be automatically reduced, which would result in a steady price at the petrol pump. Given the significant benefit to consumers from the recent falls in petrol prices, it is arguable that a levy price could be set at a rate that is modestly above the existing global oil price.

In terms of administration, establishing a flexible industry levy would not require a new regulator or the use of technology on every road and every car. It would simply require a piece of legislation mandating the collection of the levy at the wholesale point of production or import.
The flexible petrol levy would go straight into a national infrastructure fund that would provide the Federal Government with an additional bucket to fund projects aimed at reducing congestion.

Congestion in Australia is largely the product of the design of our cities, which were designed in an era of low petrol prices when the invention of the motor vehicle enabled urban sprawl. We have now reached the limits of sprawl, but we have not developed the efficient public transport systems that we commonly see in Europe.

Turning Sydney or Melbourne’s public transport system into something that compares to London or Paris may be decades away. The key will be finding the money for the necessary infrastructure investment, some of which may not be able to be financed by the private sector, would nevertheless have significant productivity benefits.

With global oil prices on the tip of another fall there has never been a better opportunity to capture funding in a way that doesn’t hurt consumers.