Infrastructure in a time of uncertainty

Increasing infrastructure capacity in Australia relies on improvements to the procurement process that will, in turn, foster innovation and best practice. More risk sharing and a greater focus on sustainability are among the key goals.

At a roundtable hosted by ANZ and FinanceAsia, we sat down to discuss these themes with Michelle Sichlau, Executive Director at Plenary; Geoff Meulman, General Manager, Infrastructure Development at John Holland, Stephen McDonough, Principal at Tetris Capital and Katherine O’Connor, Director, Corporate Finance at ANZ.. Below are some of the key points touched on during the discussion.

Uncertainty in the wake of Covid-19

Financing is still readily available for infrastructure projects, the panel agreed. Given low base rates, there has arguably never been a better time for governments to procure projects with private finance.

Yet there is less risk appetite in general. At the same time, pricing has changed, as has the ability to get long-term commitments.

Increasing margins have also created a certain amount of uncertainty, impacting larger projects in terms of liquidity and syndication. This has diminished the level of commitment in terms of how long pricing and terms can be held for.

Keeping the balance right in procurement

It is essential to retain confidence in the procurement process in the Australian market, the panel agreed, to ensure it can attract the right partners to help drive innovation.

At the same time, the focus needs to be on opportunities to support efforts to revive the economy based on the risk allocation and reality of delivering a project amid today’s challenges.

More than ever, the delivery and design of new infrastructure needs to make community outcomes a central objective, to help balance the interests of all stakeholders.

Adapting the approach to PPP

The highly competitive nature of a number of bids on PPP has led to the private sector taking increasing risks, the panel found. This has created delays and cost over-runs.

With state governments open to reviewing some tendering processes, market players want to see procurement models that drive best practices and optimal community outcomes.

Not every project is suitable for PPP – it is about selecting the right one to benefit from the process.

An ever-sharper focus on sustainability

Sustainability has become central to project procurement against the backdrop of the current environment. It governs and informs every aspect, especially in terms of design.

Developers and investors are also committed to sustainability as a whole-of-life aspect of projects – from tendering to delivery to asset management.

This journey is required to facilitate – and even accelerate – the shift to a low-carbon economy in a post-pandemic world.

Potential projects to revitalise the economy

Mega projects can take some time, so affordable housing and healthcare-related initiatives present good opportunities, the panel concluded.

Smaller social infrastructure is of particular interest. It can often be more realistic to assess these risks, plus these projects don’t suffer from the same constraints as PPP in terms of contractor capacity.

There is also a role for state governments to drive energy projects across wind, solar and other renewables.

KEY INSIGHTS

On adapting to the market environment

“Flexibility is key in a difficult market landscape. Looking at new assets is increasingly important, such as social housing, since some sectors might become more challenging, for example student accommodation.”

- Stephen McDonough, Tetris Capital

“Our focus is on achieving a better portfolio mix across PPP, design & construction (D&C), and managing contractor projects. We are also looking for more sharing of risk on individual projects. State governments have started to respond to this.”

- Geoff Meulman, John Holland

“Our core business is in PPP, although our existing book consists of adjacent infrastructure projects. In addition to looking at additional potential assets and projects, we also have a strong focus within the business on asset management.”

- Michelle Sichlau, Plenary

“A pipeline of infrastructure projects is needed to stimulate job creation and longer-term economic growth.”

- Katherine O’Connor, ANZ

On preferred changes to the PPP process

“The risk should sit with the party best able to manage that risk. During Covid-19, we have seen a shift in terms of rethinking how to allocate risks. This should be positive for all parties.”

- Katherine O’Connor, ANZ

“We believe there is a real role for private finance within PPP, to deliver the best results in terms of the whole-of-life value of these assets.”

- Michelle Sichlau, Plenary

“Private sector involvement in PPP needs to be more flexible. This is a challenge, but it requires input from structuring at the outset, through to syndication.”

- Geoff Meulman, John Holland

On incorporating sustainability into procurement

“We expect the importance of sustainability to continue to grow. This is in line with an acceptance that achieving value for money, and delivering on ESG objectives, are not mutually exclusive.”

- Katherine O’Connor, ANZ

“State governments have different goals in terms of sustainability, but it is important they are clear and transparent so that all parties can be aligned in trying to deliver the outcome. We are now carbon neutral, so we are committed to sustainable initiatives.”

- Stephen McDonough, Tetris Capital

“Irrespective of the approach of any other party, we want to ensure that any asset we own is sustainable and will therefore be resilient.”

- Michelle Sichlau, Plenary

“We see sustainability as a mix of economic, environmental and community. We are also focused on social procurement via indigenous employment.”

- Geoff Meulman, John Holland

On positive lessons for greenfield infrastructure from the pandemic

“It’s a great time for state governments to leverage opportunities in social infrastructure, where there are fewer constraints in the construction sector and in risk allocation. With financing relatively cheap, it is a good moment for governments to look at delivering in these areas.”

- Michelle Sichlau, Plenary

“A close review of the risk allocations of the mega projects is needed to align expectations of all parties.”

- Stephen McDonough, Tetris Capital

“This is a point in time to ensure the model is enhanced. There are positive signs of this happening, with certain projects looking at the ‘partnership’ element of PPP.”

“This is partly about moving towards a risk-sharing approach, partly to adapt the procuring process to be more relevant to reflect all the views before an RFP goes out, and partly to allow the contest to focus on the best designs and innovation, not just risk appetite.”

- Geoff Meulman, John Holland

“We would welcome a greater volume of social infrastructure projects, to help address some the broader societal issues in Australia that the pandemic has exposed. This would also open up the infrastructure opportunity to a broader array of parties.”

- Katherine O’Connor, ANZ

This story originally appeared on FinanceAsia