AUSTRALIA - The proposed tax incentives announced in this week's budget should enhance the appeal of infrastructure as an asset class, but structure and costs must remain the primary considerations for institutional investors, Towers Watson has warned.
The consultant said while superannuation funds and other institutional investors have considered infrastructure vehicles for their portfolios, some investments have disappointed in their performance because of the financial structure, high fees and costs, which have also compromised the value of some investments.
The warning comes after the Government said in its proposed 2011-2012 Budget that it would encourage private and superannuation sector investment of up to A$25bn by "removing impediments in the tax system to invest in projects listed on Infrastructure Australia's National Priority List". (Global Pensions: 10 May 2011)
Graeme Miller, director, investment services, for Towers Watson in Australia said: "Historically, many infrastructure vehicles have produced disappointing results, more because of the way that that the finances of the project have been structured rather than because of poor performance from the underlying assets. Excessive leverage or ill conceived debt maturity profiles caused significant headaches for otherwise sound long term investments."
In a paper released today, entitled: Investing in Core Infrastructure, Towers Watson grouped infrastructure assets under two key segments - "core" and "opportunistic" in a bid to improve clarity around potential outcomes of investment decisions.
Core infrastructure should be designed to provide access to the attractive economic features of the infrastructure market - a strong long-term link to inflation and diversification from equity market risk. Core infrastructure is also typically characterised by conservative levels of debt and income streams which are predictable and stable.
It said therefore, "core" infrastructure merits consideration as a stand-alone asset class, or as part of a broader asset class including "core" property. In contrast, "opportunistic" infrastructure investments should be grouped with assets such as private equity or development property.
Earlier this month Mercer Australia highlighted the increased Australian appetite for unlisted infrastructure investments. In the first quarter of 2011 alone, Mercer has purchased stakes in a German gas transmission firm, a Czech transmission towers business. (Global Pensions: 4 May 2011)
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