Keynote Address: Sovereign and Pension Funds Annual Summit 2015 Co-investment Roundtable

Speech

WTS025/2015

03 November 2015

Sharaton Grande Walkerhill Hotel Seoul, Korea

What a pleasure it is to be in Korea today to talk to some of the world's most significant investors about Australia's continuing growth over the last quarter of a century, and how we consider ourselves to be a country that investors might like to consider.

Australia is one of the world's most dynamic and best performing economies in the developed world. Australia is a developed Western economy adjacent to the centre of global growth in Asia. Since the days of the first European settlement, Australia has always relied on foreign capital to help our industries.

What continues to make Australia an attractive investment destination is the combination of our natural resources endowment, as well as the drive and the skills of our people. When you invest in Australia, you're investing also in our people and their stable system of wealth creation that has turned a nation of just under 24 million people into the world's 12th largest economy.

When you invest in Australia, you have confidence that you are investing in a country with one of the most transparent and robust regulatory regimes in the world.

So today I'd like to talk a little bit about our economic performance and how our closer integration with Asia has turbo-charged our industries. In turn, that dynamic has created a range of investment opportunities that are being enhanced by the Australian Government's pro-business approach to economic policy. This is especially the case when it comes to infrastructure and infrastructure funding.

It's a remarkable fact that Australia is now in its 25th year of consecutive growth. That is the second longest continuous period of economic expansion of any advanced economy in the world.

Australia is also one of the few countries in the world to hold a AAA credit rating from all three major rating agencies: Standard and Poor's, Moody's and Fitch. And its level of net public debt is one of the lowest in the world at 12.7 per cent of gross domestic product. Low levels of debt, of course, can bring about much more favourable borrowing rates for both public and private funds. According to the IMF, this pattern of growth is set to continue in the next few years with a forecast of three per cent next year and 3.1 per cent in 2017. The IMF pointed out that the foundation of Australia's economic success has relied on several factors, including a flexible exchange rate, its monetary policy, strong financial institutions, and sound regulations. Another way to say this is that our record of growth is testament to the way Australia managed to reform its economy and develop its links with Asia, as well as supporting the value of foreign capital.

Beginning in the 1980s, Australia effectively opened its economy to the world by cutting tariffs and duties, floating its exchange rate, and creating a more competitive domestic economy. These structural reforms had a dramatic effect on national productivity and growth.

They help to steel the economy during global downturns, and ongoing reforms in areas like taxation and the labour market have enhanced these efficiencies. Australia's transition from being a closed and highly protected economy, to an open and internationalised one, continues today under the current government's ‘open for business’ philosophy.

That philosophy emphasises greater self-reliance at the corporate and individual level. We no longer seek growth through excessive spending and public debt.

The Government is eliminating red and green tape by removing the regulatory barriers that stymie private enterprise. Prior to the election, the Government committed to reducing the cost burden of red tape by $1 billion dollars every year and we're achieving above our expectations. Most importantly, being open for business stresses the need to back your own commercial and industrial strengths by focussing on things that we do best.

Australia's record growth has of course benefitted from its proximity to Asia's growth markets. Our strong trade and investment ties with the economies such as Korea's and others in North Asia have energised our exports and domestic growth. Over the last year or so, Australia's intensified its integration with major Asian economies, by reaching historic Free Trade Agreements with Korea, Japan and China. Together with the breakthrough reached in the Trans-Pacific Partnership Agreement, these FTAs will link Australia's economy to dynamic new markets and enhance investment ties.

The impact of these FTAs on the demand for Australian products is likely to be of historic proportions. Australia for instance is already a supplier of many high quality goods and services to Asia's rapidly expanding middle class. At present those middle classes represent about 600 million people. Yet within 35 years that number will grow to more than 3 billion consumers. The process of integration is continuing well. Australia's now seeking a comprehensive economic cooperation agreement with India. That will promote trade in goods and services as well as enhanced investment ties with one of the world's most important emerging markets.

In the period following its historic mining boom, Australia is pushing to diversify its economy into new sectors and industries. The income and wealth from the newly operating mines and gas fields is flowing but it's time to look further afield for new investments. That means discovering and developing fresh sources of economic growth, especially given the backdrop of a growing Asia and stronger trade ties with the Asia-Pacific. Finding these sources means looking closely at the types of things we do well and re-examining the vast international potential of services which employ nine out of ten Australians. That also means attracting the foreign capital that will make things happen [inaudible].

We believe in the power of foreign investment to create prosperity and jobs through the transfer of skills and technologies and entrepreneurial activity. That belief is also based on analysis.

The Economist's intelligence unit for example has estimated that since 2000, every $1 billion of foreign direct investment in Australia creates about 1000 jobs. Our open for business approach is important in this context. It has allowed us to identify with what we do best, or better than most, and to prioritise them on a national basis. Tourism infrastructure, resources and energy, major economic infrastructure, agri-business, and advanced research and manufacturing are our national priorities.

The Australian Government has committed about $50 billion over the next six years to develop the nation's land transport infrastructure—its rail, roads, intermodals and transport links to ports and airports. This spending is not an end in itself. Rather it's a part of a broader economic program to increase productivity, jobs and national prosperity. It's estimated that this $50 billion investment will leverage about $125 billion in new investments across Australian cities, regional centres and rural communities.

Like other economies, Australia needs to provide the capability to underpin the demands of an international economy. That in turn allows the economy to expand when demand starts to grow, thereby avoiding troublesome bottlenecks. All levels of government contribute to Australia's national infrastructure base, including our state and territory governments. The infrastructure pipeline is also a response to a broader demographic and commercial pressure and these are of the utmost importance when assessing the work of new investments.

About 90 per cent of Australia's population lives in the major cities and towns along the coastline and about half in Melbourne, Sydney and Brisbane. In fact by 2055, Australia's population is expected to have grown to nearly 40 million people- an increase of 60 per cent on 2010. Such intense urbanisation is putting pressure on existing infrastructure in the form of congestion, and all the economic inefficiencies that creates.

Unlike the vertical cities in Asia, Australia's cities tend to spread out over large area and so require extensive connecting infrastructure. At the same time, the freight task is growing rapidly.

Over the years to 2030, total domestic freight by road, rail and sea is expected to grow 70 per cent.

Innovative financing and the role of the private sector in major projects represents two important features of infrastructure investment in Australia.

Put simply, the public sector cannot afford to carry the whole financial burden to build the infrastructure pipeline. Co-investment with the private sector such as foreign partners and including pension funds is often a most cost effective way forward. In that light I welcomed the decision by the Korea Development Bank and Korea Investment Corporation to create a pool of funds estimated at US$2 billion for infrastructure investment in Asia, including Australia.

Alongside that was the important recent decision by Korea's National Pension Service to join an infrastructure pool worth AU$3 billion to invest in Australian ports and power companies. A role for the private sector typically requires new methods of financing. Australia has a strong history and experience with public-private partnerships that date back at least 25 years.

PPP deals have brought to life the added innovation and efficiency that the private sector can bring to projects. An estimated $60 billion worth of infrastructure has been developed in Australia using the PPP model.

Concessional lending is another innovative technique that is seeing some application in Australian projects. For example, the Australian Government has committed to providing a concessional loan worth $2 billion to help New South Wales complete the nation's largest urban road project, WestConnex in Sydney. And we're pleased to note that Korea's own Samsung C&T, in a joint venture with Leighton Contractors, John Holland and Dragados has been selected by WestConnex to design and construct a significant proportion of Sydney's M4 East motorway. Companies have been selected in both stages 1B and 2 of that project.

Access to finance is also made easier in Australia because of its sophisticated financial system, notably in asset management. Australia has the world's third largest pool of funds under management, estimated at US$1.788 trillion.

The superannuation or pension funds have been investing in infrastructure for almost 20 years. During that time, they've built up a lot of expertise in negotiating major deals and making significant investments with a good rate of return.

A good example is the China Merchants Group $1.7 billion stake in the 98 year lease of the Port of Newcastle, along with fund manager Hastings. And one major Australian fund with about $150 billion in assets, the Industry Super network, has reported a 12.2 per cent annual return over 15 years of unlisted infrastructure investment.

Allied to innovative financing is Australia's track record of major privatisation projects, which began in the 1990s.

Recent privatisations have included Hobart Airport, the Port of Brisbane, Queensland Rail, the Sydney Desalination Plant as well as the Ports of Botany, Kembla, Newcastle and now Darwin. The Australian Government has created the Asset Recycling Commission that encourages state and territory governments to privatise their existing infrastructure and invest in greenfield projects. The initiative has a fund of $4.2 billion, which provides incentive payments worth 15 per cent of the sale proceeds of the infrastructure, under the proviso that the sale is used to create greenfield infrastructure sites.

Currently, there are several asset privatisations under consideration. They include a portion of the New South Wales electricity network, the Port of Melbourne, and the West Australian Government is looking at the privatisation of the Port of Fremantle. The full pipeline of public asset sales is transparently available through the National Infrastructure Construction Schedule. That's available online, and I urge you to examine it and see for yourself some of the projects and facilities that are likely to be available for privatisation.

The Australian Government has also taken other steps to encourage investment in infrastructure.

Taken together, they make Australia a great investment destination in the years ahead.

Through its white paper Our North, Our Future the Government has also taken bold steps to develop the vast undeveloped northern region of Australia, from Broome in the west to Cairns in the east.

The aim is to develop the north by encouraging investment in a range of industries that will rely heavily on new infrastructure to deliver their goods to domestic and international markets.

We've also established a Northern Australia Infrastructure Facility worth $5 billion to provide concessional lending for projects. At the same time, the G20 has established the headquarters of its global infrastructure hub in Sydney, and Australia chairs the body. The hub provides an inside track to understanding the needs of global infrastructure demands; it will also establish solid international connections for Australia with development banks and private sector organisations involved in project funding.

Finally, Australia offers far more investment opportunities than rail, road, and port infrastructure.

As one of the world's most successful and dynamic economies, opportunities abound across the whole infrastructure gamut in Australia, including energy and telecommunications, health, tourism, water security, and certainly more. And the reasons are easy to grasp: millions of tourists come into Australia every year; we produce some of the cleanest and safest food; our resources and energy sector is a global leader; and our science and research institutions are some of the best in the world. Australia is indeed a land of opportunity, and our increasingly strong ties with Asia and strong economic record make it an ideal investment opportunity.

You're all welcome anytime.

Thank you very much.