06 December 2017
David Hastie: Commentator
Melanie Bond: Corrs Chambers Westgarth Senior Associate, Construction
John Denton: Corrs Chambers Westgarth - CEO
DAVID: Hello and welcome to a two part series of Corrs High Vis – Corrs Construction’s podcast series. My name is David Hastie, Associate with Corrs Construction practice group and I’m joined today by Corrs Senior Associate – Melanie Bond. We sat down recently with Corrs CEO John Denton who was also First Vice Chair of the International Chamber of Commerce and Co-Chair of the B20’s Financing Growth & Infrastructure Taskforce. As Co-Chair of the B20 Taskforce John provides recommendations around global business issues and initiatives to encourage global investment and economic growth with the aim of fostering business development.
Mel – we were lucky enough to be drawing on some of John’s insight with regard to infrastructure, both locally and globally and in particular this first podcast deals with issues with regard to three key areas, and this is the need for transparency, consistency and liquidity.
MELANIE: That’s right David it’s a really interesting and important conversation. As we all know since the GFC economic growth has been quite subdued despite the best efforts of government and infrastructure is well recognised as a key driver for economic growth and we know that demand for infrastructure is only going to increase over time and whilst governments have traditionally funded it themselves, we are going to increasingly have to look to the private sector for assistance. But at the moment there is already a considerable investment gap in infrastructure investment, so it is important that we understand what the ingredients for investment are.
DAVID: Very true Mel. So let’s get to our sit down with John.
MELANIE: So John I thought one of the very interesting things that arose from the B20 is a paper on financing and infrastructure growth was that the investment gap in infrastructure is not actually the result of a shortage of capital, in fact you’ve got ideal conditions for investment – long term interest rates are low, there’s ample supply of long term finance, there’s a lot of interest from the private sector in infrastructure and the benefits of infrastructure are fairly obvious so what is holding back investment?
JOHN: Well I don’t think it’s – there are not enough conferences to talk about it and there are not enough papers written about it and there are not enough portals to actually examine this. There’s plenty of those and I suspect a number of your listeners or our listeners are conferenced out on the subject of infrastructure but also big numbered out on it as well. The usual number you hear and see is in APAC there’s something like three trillion dollars’ worth of pent up demand and opportunity and if only the super funds would get their act together.
The overriding issue frankly goes down to a lack of political will and we might come to that later on – and why is there a lack of political will because often with the development of capital it requires some domestic reform and we can talk about that and it also requires some trade-offs. So it also requires a political discussion in the community about why some infrastructure is frankly uneconomic. We said that we understand that to make it commercially viable we may need to look at politically unpalatable issues like user pays or some form of costing in order to make this attractive enough to engage with the public sector.
What is interesting, and coming out of the G20, each G20 leaves behind a G20 ‘child’. In this case it was the Global Infrastructure Hub based in Sydney and it is relatively uncomplicated again typically to figure out these things in global movements you are actually only getting things done when you uncomplicate things and focus on a small group of things and actually measure them, monitor them and make them visible and talk about them in a coherent and consistent basis. So, the global infrastructure hub was designed to be something really uncomplicated and picks up a lot of the three issues that came out of the B20 which was around transparency.
It was to identify the opportunities and help people prioritise them and use best practice across the globe from other experiences to help emerging economies in particular and some developed economies to get their act together on infrastructure because investment and bringing on infrastructure projects was seen as critical to actually helping support this increased global growth. The truth is the global world does not move at lightening pace other than we go to war or we’re going to have a big barney over a trade dispute, but it moves slowly when it comes to developing global approaches and you see a lot for example, you see this on the environment as twenty or thirty years with jawboning to get anything done, but here on infrastructure and in the G20 context this is slow stuff. But slow stuff with building blocks and the B20 which is the business arm of the G20 which I have been one of the founders of has actually been involved in this global conversation has over the years sought to direct leaders’ attention to liberating the opportunity infrastructure as a way of helping them untrack this economic growth and so when we meet with the Germans and Germany is the President this year – we identify and frankly there’s a lot more than three – but to actually get the attention of leaders you actually have to reduce it down to three because basically have five minutes of their time and the three are pretty uncomplicated. One is this lack of transparency, it needs to be addressed, the other is lack of consistency and we use different terms – we don’t understand what we’re talking about and the final one which is very important but is a really hard issue to grapple with which is liquidity.
If I could, the final one is actually the hardest one to deal with – liquidity constraints because you know that these are long term investments with long term applications or allocations of capital. One of the challenges to attract the amount of capital that is available is that the secondary markets that underpin movement of that capital in and out of the projects are underdeveloped. The instruments just don’t exist in some economies. The classic example is that when I go back to this big number of three trillion with the pent-up demand in APAC one of the critical issues in APAC is that there is actually a very shallow capital market operating which makes it very difficult for people to actually fund these projects outside government balance sheets and of course as you know many of those balance sheets are pretty weak and the alternative is private lending from private banks and of course if you go to Indonesia the most significant lender in Indonesia at anything is private banking. They actually don’t use a lot of debt instruments.
So one of the challenges is how will we develop up that secondary market? So bringing that to the attention of leaders is important and ensuring work has commenced on that. Work is going on in the Asia Pacific region. I together with a guy called Mark Johnson is one of the founders of Growbank founded a group called the “Asia Pacific Financial Forum” and that’s its purpose – is to actually help find ways in a collaborative setting – all the key players that can help deepen the capital markets because our eyes are on the prize which is actually how do you support them for the shift to investment in and not just talking about infrastructure. The absence of a secondary market is really the key issue I think and then on top of that is how you get political leaders to actually – how do you help them understand there will be some trade-offs?
MELANIE: And John what do you see those trade-offs as being?
JOHN: Well there’s the argument around – what is the point of the infrastructure investment? What is the public good that’s being served by it? If you can’t – well here’s the thing if you look in East Africa at the moment I don’t know how many of our listeners think about East African economic history, but if you think about Tanzania these were post Second World War, post-colonial independence movements, but if you actually look at the economic structures and underpinning infrastructure pre-date under colonialism, the actual infrastructure of tenure for example was all directed towards taking what they produced to a port or ports and then enabling that to go back to the British Empire. So it was actually directed that way. The great opportunity in Africa is to shift that infrastructure investment now to intra African trade if you think about it. So you actually don’t have a lot of intra African rail networks which would have effected intra African road networks are effective. But this is a big shift, so anything we can do to support that is important and it’s actually critical for economic growth for the East African region to enable infrastructure investment across the region not simply to the ports and that will actually help people get out of poverty.-
MELANIE: So in a sense what you are saying is governments need to spend/invest the time in thinking about what their actual needs are going forward but also to take the political risk in announcing those things to the market and providing signals so that the market can then respond.
JOHN: Yes, and look part of this is building political capital and spending it on these sorts of issues, but how do you have the discussion with citizens that we need this infrastructure to make it market ready. We will actually make it attractive to the private market we will need to look at X, Y and Z as well and classic will be on university housing in… I’m focusing on Africa at the moment… but I know there is a real challenge at the moment in terms of underpinning and education improvement or if you improve human capability in Madagascar. One of the issues is that there is no one for anyone to stay when they go to the University. In Malawi the same thing. So part of it you actually have to create public housing or your university housing to support that or tertiary housing to support that, but the governments want the private sector to build that, but it’s a completely unattractive proposition unless there is some form of cost impost to actually give signals and certainly over a period of time and also the way in which they are organised means that it’s actually very hard to bring market proposals to governments as well, so there’s a lot of things that needs to change to enable this to happen. If you can get a single minded focus around these three critical issues – around transparency, consistency and liquidity and you actually build programs etc around that and you get frameworks to support that. These things are… and we’ve seen it before, we’ve seen it in parts of Asia Pacific.
DAVID: Melanie, John thanks for joining us. My name is David Hastie and thank you all for listening. We look forward to joining us for the next part of this two part series. This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain advice about your specific circumstances.
This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.