A valuable contributor to infrastructure

The steady rise in KiwiSaver balances creates a unique opportunity in New Zealand to match long-dated domestic capital with similar duration infrastructure assets. Photo / Kenny Rodger

Both central and local government face a significant infrastructure funding dilemma. We believe the listed capital market has an important role to play in this, by adopting innovative structures which can simultaneously meet investor and political objectives.

In our view the Mixed Ownership Model (MOM) provides an excellent template for how public assets can combine with private investors.

The MOM entrenched government control, released significant public capital for investment into new projects, and — with the benefit of several years' hindsight — has been a positive experience for private investors.

The steady rise in KiwiSaver balances and a low interest rate outlook creates a unique opportunity in New Zealand to match typically long-dated domestic capital with similar duration infrastructure assets.

But it's an opportunity that appears unlikely to be realised, with an apparent insistence on no further part-privatisation of public assets.

We believe two observations are relevant here.

First we see a really strong preference by KiwiSaver managers for liquidity and a transparent market price, versus unlisted alternatives. This was underlined recently by several large funds citing the importance of maintaining "trust and flexibility" for their members.

Second, we see a strong bias by listed investors for developed, income producing assets — as opposed to taking meaningful project development risk.

To this end we note the four international examples of listed Public Private Partnership (PPP) vehicles which typically limit assets under construction to 25-30 per cent of asset value, but in practice maintain a much lower level.

Efficient funding of a large new infrastructure programme will inevitably be best achieved by allowing a range of funding sources and models to be matched to specific projects.

We believe the listed capital market is, at least initially, most suited to supporting the "recycling" of public capital from developed assets (those with an established commercial model and governance, and effective regulation, if relevant), with proceeds used to part or fully fund new development projects.

Once these new projects have been developed the cycle can be repeated.

Many large public assets would meet this "developed" criteria, and released capital would make a meaningful contribution to the broader funding challenge.

MOM was an innovation which should reassure stakeholders of the ability to balance multiple interests. There are many proven variations which could be used to accommodate specific concerns — including separation of publicly-owned freehold land from a privately owned leasehold interest.

We would argue that whatever the measures taken to ensure long-term public control, the capital market provides a valuable source of highly aligned New Zealand capital to develop the infrastructure of tomorrow.

● Mark Pearce is Director, Investment Banking at Forsyth Barr