Water Journal : Water Journal April 2015
water APRIL 2015 80 Feature article EquIty fundIng and prIvatE publIc partnErshIps Around Australia there have been many small, independently funded and developed shared irrigation schemes such as weirs and local pipeline systems. Privatised irrigation businesses such as those in New South Wales (e.g. Murray Irrigation Limited) may, in time, have surplus funds available that they could apply to irrigation development. While major irrigation projects are essentially off-farm, water diversion-based farms such as Cubbie Station, a privately funded project that uses an average of around 200GL a year, are comparable to mid-sized irrigation systems. In North Queensland, there is a proposal for the private development of a project in the Gilbert River catchment. At this stage it is intended to be entirely privately financed, but some concessions may be sought from government in providing water entitlements. The project proposes $500 million of water infrastructure for an integrated project of total value around $2 billion (De Lacy, 2014). Obtaining a competitive return on equity invested limits potential private investment, given the low returns from irrigation projects and the borrowings that may require government support. The benefit of private sector funding is more in the project development, operation and entrepreneurial capability the private sector can bring to a project. The most common form of private equity funding for infrastructure projects is PPP (Public Private Partnerships), where the private sector typically takes responsibility for the overall funding of the project and for project development and operation over a franchise term. Public private partnerships (PPP) This funding structure has been applied extensively in Australia to infrastructure such as hospitals and freeways. The proponent, following a competitive bidding process, commits to build and operate infrastructure, usually transferring the infrastructure to government at the end of the franchise period. The benefit it offers is that governments can commit to building projects without the need to apply significant government funding. Further the franchisee, based on a comparator calculation, commits to building and usually operating the project at a lower cost than would a government agency. PPP projects obtain some of the revenues from user fees, but most receive government support by way of an initial contribution or continuing availability or tolling payments. While now common internationally, PPP has a mixed history in both the UK, which originated many of the models, and in Australia. The most frequent criticisms are that: PPP proponents pay higher interest rates than governments; legal and commercial costs can be high (say 5 per cent of total project cost, more for smaller projects); and that the PPP contracts lack the flexibility of projects funded and developed directly by government. The extent to which risk is actually transferred to PPP proponents has also emerged as an issue. Notwithstanding any such limitations, PPP is now often the way large infrastructure projects are funded. PPP projects vary in the extent to which revenues are underwritten by governments. For irrigation projects there might be a perception by PPP proponents that they will be exposed to irrigated commodity viability risk and to the capacity of irrigators to seek variation in contractual conditions. PPP proponents might in the circumstances seek more government revenue protection than might be available, say, for a freeway project. This reduces the risk transferred to the PPP proponent. The critical difference between a PPP project and typical government supported project is that normally with a PPP project the private sector proponent assumes a defined risk for the project such as in market, construction, operating revenues and costs. Projects such as those developed by Tasmanian Irrigation that are sometimes described as PPP, where irrigators buy water entitlements, are not so, because funding and the development and operations risk are not transferred to the private sector. fInancIng optIons Sources and methods of financing that will contribute to overall project funding include the following: salE of watEr EntItlEmEnts Irrigators contribute to overall project funding through purchase of water entitlements provided by the government funder. With the purchase of water entitlements, irrigators obtain permanent access to water as an asset that can be sold on water markets. Tasmanian Irrigation has developed, or is developing, 19 generally smaller (Midlands at 38,500ML/y and Meander at 36,000ML/y are the only two schemes of more than 10,000ML/y) projects with both State and Federal contributions. Irrigators are contributing around 40 per cent of project cost through purchase of water entitlements. The present high levels of government support of operating costs should reduce as more schemes come into operation. A major benefit of this structure is that farmers, by paying for water entitlements, are allaying concerns of governments that farmers enjoy a windfall. However, the contribution to capital cost still demands a substantial government contribution, such as grants or concessional interest rates. supErannuatIon funds Superannuation, with just under $2 trillion invested, offers a potential source of funding for infrastructure in Australia. However, infrastructure investment by superannuation funds is only around $50 billion. Australian superannuation funds, compared with their international counterparts, have a bias towards equities rather than infrastructure investment, fixed interest and other securities. Returns from equities in recent years have exceeded returns that might be expected from infrastructure. Superannuation funds can provide financing, but are unlikely to be funding proponents for projects. The Financial Services Council (FSC), whose members invest for mainly professionally managed superannuation funds, released a report (Ernest & Young & Financial Services Council, 2014) recommending the following actions to increase superannuation fund investment and improve accessibility of superannuation funds to infrastructure projects: • Increasing the number of suitable investment opportunities in projects and the certainty that they will proceed; • Improved and earlier consultation between states and superannuation investors to allow planning of investment; • Providing opportunities for capital recycling where states develop projects and then seek investment from superannuation funds; states use the proceeds of the financing to develop new projects; • States provide a more dependable “pipeline” of projects; • The Commonwealth provides more certainty about longer-term superannuation regulation taxation policy. Without this certainty, superannuation funds need to provide allowances for sovereign risk related to change in policy.
Water Journal February 2015
Water and CSG