Superannuation takes the wheel

Herald Sun: Superannuation takes the wheel. John Beveridge. 25 April 2014

Transurban can drive organic growth through its roads as well as earning the inflation-linked tolls. Source: News Limited

The $7.1 billion Transurban bid for Queensland Motorways clearly demonstrates two things that should delight Treasurer Joe Hockey.

The first is the future of funding retirement incomes will increasingly switch away from government pensions and towards privately funded superannuation pensions and/or lump sums.

And the second is the absolute flood of money now available to fund Australian infrastructure.

Added together, the four cash bids for Queensland Motorways totalled almost $28 billion, which shows the size of the opportunity to get much-needed Australian infrastructure built if the right structures can be arrived at.

On the first point, the real “buyers’’ of the 70km of Brisbane toll roads were actually millions of individual superannuation savers in Australia, plus a few others such as the Abu Dhabi Investment Authority (ADIA).

As direct members of the winning bid consortium, Australian Super’s two million fund members plus ADIA are tipping in $400 million in fresh equity into Transurban to help fund the purchase.

Australian Super is also investing $1.1 billion of the acquisition cost as a 25 per cent owner of the roads and part of the bid consortium.

Add in the $2.34 billion being raised in the underwritten Transurban rights issue and debt of $2.8 billion and the entire massive deal should be digested by early June — which is remarkably fast.

Indirectly, if you look down the Transurban share register, there are a host of other funds including Unisuper and the Future Fund that together make up the around 80 per cent institutional ownership of Transurban.

There is no doubt that the handsome price paid, which represents a stellar 27 times 2013 earnings, would not be possible without super funds which are now by far the biggest and most far-sighted long-term investors.

Super funds need to match the time frame of their investments with the lifespan of their members, which is measured in the multiple decades rather than a few years.

That makes this sort of infrastructure investment perfect because it soaks up a lot of capital in the early years, but provides inflation-linked returns well into the future,
in this case ranging between 2051 to 2065 for the four Brisbane roads.

Transurban is a natural partner for the super funds for this purchase because it already runs toll road networks in Melbourne and Sydney and should be able to get synergies of scale and run the roads more efficiently to increase traffic flow.

It should also be able to save money on tolling systems and back office costs.

The other really good thing for Transurban is that this deal extends its toll road franchise much further into the future, with the 2065 concession comparing with the 2034 maturity of the CityLink concession in Melbourne.

By continually adding to its toll roads and investing in them through lane widening and similar projects, Transurban can drive organic growth through its roads as well as earning the inflation-linked tolls.

And like a company that sensibly organises its debt so that it matures gradually, having a range of concession dates for its toll roads gives Transurban extra diversification.

In the case of the Brisbane roads, some of which have a particularly chequered history, Transurban should also be able to enjoy the benefits of increased usage over time as the Brisbane population and traffic grows — something earlier owners did not benefit from because overly optimistic traffic forecasts left them financially unviable.

The broader issue for Joe Hockey — who has been championing the idea of state governments privatising assets — is that there is plenty of money around to buy these assets at good prices.

The problem is that superannuation funds are investors and not developers.

The missing link in the infrastructure equation is the funding and structure to develop worthwhile projects to the stage where super funds feel comfortable buying a chunk of them.

If that problem can be solved — and there is no reason why it can’t with the right policy settings — then the current rationing of infrastructure projects could end.

So Melbourne could get an East-West link AND a Metro rail project AND an airport railway AND grade separation at many busy railway crossings at the same time, with the obvious benefits to employment, productivity and the removal of bottlenecks they would all bring.

The other side of that coin is that Joe Hockey should be able to sell his changes to the age pension in a way that stresses a positive alternative.

He is absolutely right that the growth in pension spending is unsustainable in the long term, with a staged raising of the pension age to 70 and imposing a stricter means test some of the ways to ration scarce government funds as the population ages.

That is particularly the case when the whole idea of offering generous tax concessions for superannuation was to reduce the reliance on the age pension — not to offer both in tandem for wealthy retirees and their creative financial planners to enjoy.

Obviously there will always need to be a pension safety net, but as the Transurban deal shows, superannuation funds can play a big part in not only providing retirement incomes but in helping to fund vital infrastructure.

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