Australia Has Room to Raise Debt for Projects, Colonial Says

Australia’s federal and state governments have the capacity to increase debt levels to fund infrastructure projects, according to Colonial First State, the fund management arm of Commonwealth Bank of Australia.

Increasing Australian government debt by more than A$220 billion ($217 billion) by June 2014 would keep debt at an internationally-low 30 percent of gross domestic product, according to research led by Stephen Halmarick, head of investment markets research at Colonial, which oversees about $135 billion.

“The increase in government debt would be unlikely to have a negative impact on Australian interest rates or ‘crowd out’ the private sector, while the positive benefits to the economy from a ramp up in infrastructure could be substantial,” Halmarick wrote in a report.

Australia’s net government debt is expected to peak at A$90 billion, or 6 percent of GDP, in the financial year ending 2013, compared with an average high of 90 percent among members of the Organization for Economic Cooperation and Development, Halmarick said. Adding state government debt takes the figure to A$250 billion in 2014, from A$133 billion in June, he said.

Australia, which is experiencing the biggest mining boom in more than a century and expects its population to expand to about 36 million by 2056, needs better infrastructure to transport goods, services, capital and labor to meet ongoing demand, Halmarick said. A priority list for this year released by Infrastructure Australia, the government’s advisory body, in June identified about A$83 billion of projects, in addition to the A$43 billion national broadband network.

Lost Productivity

Australia must spend more than A$770 billion until 2017 on services to support its economy, about half of which must come from government sources, Citigroup said in June 2008. Without this expenditure, the world’s 13th-largest economy is expected to lose some A$7.8 billion in productivity by 2020 from traffic congestion alone, industry group Infrastructure Partnerships Australia estimates.

To meet the shortfall between the funding needed and government spending, private investors must step in, Halmarick said.

Australian pension funds, which are expected to raise their infrastructure allocation to 15 percent by 2020 from the current 5 percent, boosting funds available to A$240 billion, can be a major player in bridging the gap, Michael Carapiet, group head of Macquarie Capital, said at a conference in Melbourne in August.

International pension funds too can be a source of financing, Infrastructure Partnerships said in a report in April on the funds’ contributions to projects. The Canadian Pension Plan Investment Board acquired Sydney-based Intoll Group for A$3.44 billion on Aug. 27, after failing in its efforts to buy Transurban Group, Australia’s biggest toll-road operator.

International Funds

Japanese private pensions, which oversee more than 60 trillion yen, are starting to invest in toll roads, ports and pipelines for the first time as they seek higher returns to meet the retirement needs of the world’s fastest-aging population. For pension and sovereign wealth funds, which are on the lookout for investments that deliver steady returns to meet future payouts, infrastructure assets fit the bill.

International lenders are also seeking out Australian infrastructure assets that are built by private companies in partnership with the government, Royal Bank of Scotland Group Plc’s head of infrastructure advisory Geoff Daley said in June.

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