Australian Infrastructure: Opportunities Abound, But Beware China Risks
BMI‘s Infrastructure team has identified Australia as our favourite developed market, and here are the crucial reasons why I like Australia.
- Sophisticated Project Finance operations: Australia comes top in BMI’s global Project Finance Ratings. The country was one of the first to embark on the public private partnership (PPP) scheme using private funding to develop infrastructure projects. This has brought with it a strong precedent, and unlike the US, which is only just coming round to the idea, Australia has had plenty of time to get the regulations right, and has done so – unlike the UK, which still seems to fumble.
- Attractive Business Environment: Australia has the second-most attractive business environment globally, according to BMI‘s Infrastructure Business Environment Ratings. Strong potential for infrastructure investment – there is lots of land still to develop – and a stable and business orientated government with sophisticated financial and legal regulations limits investor risk.
- Infrastructure investment potential: Despite being a developed market, the sheer size of Australia means there is still plenty of demand for infrastructure. Around US$100bn is needed for electricity generating and transmission infrastructure over the next decade, and the metropolitan area of Sydney alone has a US$45bn 10-year investment plan for urban transport. Added to this is growing investment in freight transport. From ports to railways, investment is being expedited in order to take advantage of current insatiable demand for raw materials from China.
These three factors mean that Australia has fundamental strengths which I believe are not matched in any other developed market covered by the Infrastructure Team. Other contenders for the top spot are weakened by the limited potential for investment (Japan, France, Germany), problems with the business environment (Greece), and a lack of precedent for successful PPPs (US). The UK is perhaps the biggest challenger for the position, especially with the 2012 Olympics preparations, but a recent spotlight on failing PPPs (for example the Tube Lines debacle) and continued financial instability mean that Australia pulls ahead.
Key Risks
Despite all of the positive indicators for Australia, there are a number of risks to take into consideration:
- Demand for freight infrastructure is extremely closely tied to China. Therefore, a slowdown in China in 2011, which BMI believes will be the case, will hit demand for raw materials, and could stymie investment plans in export terminals and freight railways. Furthermore, the imposition of a new mining tax by the Australian government could hinder production, and therefore the need for increased freight transport capacity.
- Another threat is the government’s position on the Carbon Pollution Reduction Scheme. Uncertainty surrounding the scheme – most recently a decision on the scheme was put on hold until 2012 – is threatening investment into new electricity capacity.
- Finally, a relative slowdown has hit the construction industry over the past month, with the Australian Construction Index, based on activity, orders, new business and employment, contracting in March 2010. It is unclear if this is the beginning of a downward trend, or a mere blip in the growth story.