How can we marry KiwiSaver funds looking for yield with Government infrastructure projects looking for funding? 

The Government has committed to reducing its debt as a portion of economic growth at a time the country faces an infrastructure deficit.

It can get around its budget rules by loading up Crown agents like Housing New Zealand with debt. Yet the usefulness of this “clever accounting” is arguably limited as it undermines the fiscally prudent image the Government’s trying to portray.  

So, where else can it turn to for funding that it can leave off its books? KiwiSaver.  

The value of KiwiSaver funds under management sits at around $50 billion and is expected to rise to $70 billion by 2020, according to Treasury.

Speaking at the Financial Services Council’s conference last week, Finance Minister Grant Robertson said his challenge was to package up infrastructure investment opportunities so they provide competitive returns and are attractive to fund managers.

He specifically highlighted opportunities around the development of transport and urban infrastructure between Auckland, Hamilton and Tauranga.

Yet the concept is in its infancy, with neither Robertson nor Infrastructure Minister Shane Jones able to produce concrete pieces of work on it yet.

Vacant space

So interest.co.nz asked investors what they’d be looking for if the Government presented them with an infrastructure investment opportunity.

What advice do they give the Government, as it considers how to marry up KiwiSaver funds looking for yield with infrastructure projects looking for funding?

Summer KiwiSaver Investment Committee Chair, Martin Hawes, believes the market would welcome a well-structured infrastructure investment opportunity.

He references Morningstar data that shows just under 10% of KiwiSaver funds are invested in New Zealand equities (excluding property).  

If in the next two years this portion is maintained, the value of funds under management increases by $20 billion and the NZX continues to fail to grow its listings - this leaves a lot of additional capital looking for a home locally.

A fundamental mismatch

Turning to the practicalities of the idea, Milford Head of Investments, Brian Gaynor, says the challenge is that infrastructure investments go for 10, 20, 30 years, but KiwiSaver members don’t lock their money in to investments for this length of time.

While members can’t withdraw their money until they’re 65, they can switch funds whenever they want, or make withdrawals for a first home or due to hardship.

Gaynor says this is a “fundamental mismatch”.

“I don’t think the Government’s worked out exactly how we’re going to get around this issue.”

Liquidity, transparent pricing, diversification

Hawes however sees KiwiSaver investments as more long-term, but like Gaynor emphasises the need for liquidity.

“It would be very difficult for a KiwiSaver fund to simply buy into a toll bridge for example, because how do you get out of that?” he says.

“You can have a little bit of illiquid investment in a KiwiSaver fund, but not too much.”

Therefore both he and Gaynor say the Government’s infrastructure investment fund would have to close-end, meaning investors could only get their money out if they sell their share to someone else.

Like other close-end funds, it should be listed on the stock market to ensure pricing is transparent.

“The problem with private equity and private infrastructure is that because it doesn’t get bought and sold every day, you don’t know what value it is,” Hawes says.

Hawes and Gaynor say the fund would be more attractive if it bundled several projects.

Hawes summarises: “Summer KiwiSaver has an allocation to property, to real estate, but we wouldn’t go out and buy one building, partly because you don’t get diversification and partly because you don’t know what value the building is.

“Whereas if you buy a listed property vehicle, it has diversification (so there are a bunch of different properties in that fund) and also it’s traded every day so you know the value of the units of the shares.”

Hawes says the challenge for the Government will be gathering enough projects to ensure this diversity.

This is particularly the case if it sticks to its line to limit private investment to transport infrastructure, and not schools, hospitals, prisons and so on.

Super Fund big enough to invest direct

Hawes maintains the Government could also open the fund to wholesale investors like the New Zealand Super Fund and ACC. He says the world is hungry for yield and sees infrastructure as an opportunity to provide good cash flow.

However the Super Fund’s Head of NZ Direct Investment, Will Goodwin, says the Fund is big enough and has the partners to invest in infrastructure projects direct. 

“Why would I pay a manager in the middle to go and do what I can do?”

For example the Fund has proposed to assess the viability of partnering with the Canadian fund manager responsible for delivering Montreal’s 67km light rail network, CDPQ Infra, and leading a consortium to fund the Auckland Light Rail Project.

Collaborating to create scale

Yet Goodwin says the Fund could be keen to help develop a vessel it could invest alongside, similar to Australia’s IFM Investment Partners.

IFM was set up by pension fund owners about 20 years ago to create an investor-owned fund manager. Today it has 27 superannuation fund shareholders, 310 institutional investors and A$107 billion of funds under management.

Its portfolio is split between four asset classes – infrastructure (45%), debt (28%), listed equities (25%) and private equity (2%).

Asked why the likes of AMP, ANZ, Milford, and Summer KiwiSaver would bother joining forces to set something like this up, Goodwin says the Government has created white space which capital can come and take advantage of.

“There’s tens of billions of dollars of opportunity for us to invest. How do we aggregate together to offer sufficient scale to be able to participate in that opportunity?”

Goodwin says fund managers would also benefit from being the owners of the fund.

Yet he says it would need to bring in foreign capability: “You’d need to have very skilled, dedicated specialists who can then help deploy that capital.”

PPP expertise there

Tim Brown, who holds a senior position at Morrison & Co - the asset manager behind a number of New Zealand’s public private partnerships (PPPs), as well as Infratil, which invests in infrastructure businesses like Trustpower - agrees scale is vital.

He says there needs to be some sort of overarching vehicle with a big pool of assets that can issue debt and equity.

He points to the New Zealand Social Infrastructure Fund. Established by Morrison and Co and Craigs Investment Partners, it essentially enables New Zealand investors to invest in PPPs.

While the previous National Government was slow to get the PPP model off the ground when it first came into power, Brown says it’s now there and ready to be used.

He doesn’t believe he has a chance of twisting the Government’s arm to open the PPP model back up to social infrastructure, but hopes “they themselves might arrive at an understanding that this is a smart thing to do”.

“The critical thing about anything that’s complicated is it becomes a lot cheaper and a lot simpler and a lot faster the more times you’ve done it,” Brown says, noting a whopping $3 million was spent on documentation building one of the first PPP schools worth $100 million.

“The more you can use the cookie cutter, the cheaper, the faster and the better it will be. If you want to reinvent the wheel, then everyone has to learn and it’s going to take time and it’s going to cost a lot of dough.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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26 Comments

This sounds far too long term for CoL. If they can see to the end of next week I'll be surprised.
And it's idealogically opposed to PPP so it would surprise me if they did anything along these lines.
Long term is getting (surviving) to Christmas for most us.

Long term for some is going 1 day without being a sook due to a Labour government.

A minor correction: the coalition is ideologically opposed to the term PPP . A direct use of the term for public projects could cost them some lefty votes.
Their MPs have been saying that the "not-PPP" assets will be designed and constructed by the private sector but the Crown shall retain its ownership. I am pretty sure that's the description of a "design-build" PPP contract.

Shane Jones' PPP plans

Why Kiwisaver? Why not just offer bonds which return a good rate over the period of the investment and let the market sort out who owns them. If they are a good investment then they will get hoovered up

The only thing I would consider changing is making these bonds directly purchasable like shares and have a listed market for second hand trading.

"The only thing I would consider changing is making these bonds directly purchasable like shares and have a listed market for second hand trading."

Erm.. so something like really really really similar to the NZDX?

The NZX Debt Market (NZDX) is designed to expand and grow the existing debt facilities by offering a range of corporate and government bonds and fixed income securities.

Yes, but with easier access for retail investors, particularly to the initial offerings.Similar to kiwibonds so no broker is required (note Kiwibonds are not tradeable - you have to hold until maturity like a term deposit)

Easy enough to just use a broker.. but I agree about access to initial offerings. Although I often see debt offerings on my asb securities screen.. I just haven't checked them out as I'm after growth rather than bonds.

As soon as you put a broker in the way, it eliminates 90% of the public

Yes , just offer the Development Bonds for sale through the Post Office at an attractive interest rate

Post Office, did someone just dial up the 80's? :-) Online is the way to go forget frontline shops

So we don't want to borrow, so we rename the project and borrow anyway. I call it self deception.

The need for liquidity is a red herring.

Why don't we get treated like adults, and have the option of a portable Kiwisaver account to which we can input our choice of assets, as they do in Australia. Rather than being beholden to a rather limited number of local fund managers with vanilla offerings.

Would love to be able to invest in private equity, commercial property etc for my Kiwisaver, but the government won't allow it - the system is dumbed down.

I agree on the self-managed pension but not on what you can choose to put in it. You should be able to mix and match between providers e.g. if you want 50% in ANZ's growth fund and 50% in Superlife's property fund.

The government wants you to grow a pile of money to pay for your retirement. If you started letting everyone investing it all in moonshots then there will be a lot of poor people wanting handouts in old age (plus a few extremely wealthy who backed the right horse through luck rather than judgement).

Individual properties is another area we should stay out of for Kiwisaver. Australia allowed this and they have effectively doubled down on the housing bubble. The risk is too concentrated for a safe long term investment.

Illiquid and next to impossible to value - those are two really bad attributes for such projects. I'd trust Gaynor and Hawes comments on this, over those of the other contributors who seem to spot a ticket to clip.

KS can be expected to have a relatively high liquidity requirement: a lot of retirees will be using the $x p.a. withdrawal to soften the sticker-shock of existing on the pension alone, and there will be not a few who blow a lump sum on anything from that long-desired cruise/Everest climb/car/good-looking horse, to a downsize or a life-sentence block. Cashing up a road, tramline, bridge, tunnel, sewer, water main or oxidation pond will prove, shall we say Problematical.

And then there's the political issue that given the sort of comments it already has attracted, it reeks of a not-thought-through grab at Grey Powers' pension pots, and FHB's house deposits. Which won't go down well with either voting constituency.

Imagine, as the Minister for Fiscal Hand-wringing, having to sidle up to some investor and mutter, sotto voce: 'Psst - wanna Buy a Bridge?'......

Bonds with a fixed return and period are very easy to value and a robust market exists (although aimed at professional investors).

The main difficulty with infrastructure bonds is deciding on the return they should make as this will dictate the cost to society e.g. the toll payable to generate the return after costs,

Yeah this kiwisaver talk is all to do with getting this stuff off the govt and council's books.
And PPPs have a tendency to go tits up due to forecast revenue being way too low so who would be stupid enough to guarantee the income into the kiwisaver accounts?

Gaynor and Hawes both have a vested interest in the status quo which forces you into their managed funds, with no ability to self-manage.

We're treating the symptoms not the cause:

1) We don't need a PPP light rail system in Auckland that will be one of the slowest in the world & will require ongoing subsidy to operate - https://www.stuff.co.nz/auckland/104412552/Auckland-light-rail-would-be-... (if its going to be built then make sure congestion charging and freed up land use zoning are committed policies and then actually build rapid transit whether it be light rail, metro rail or commuter rail)

2) We don't need an excessively high immigration rate driving the need for PPP infrastructure works faster than we can naturally fund them as taxpayers (unless the infrastructure should be commercial in the first place)

3) We don't need to be spending excessive amounts on potential PPPs funding peak hour road network improvements to reduce congestion, when congestion charging is a better mechanism & delays/defers the need for such works.

Hmmmmmm -

I see Kiwisaver, at this stage in proceedings, a bit like those Companies going down the gurgler which give out shares to their workers - never to be redeemed. KS an't possibly all be redeemed out in the future, and if they were in offshore sharemarkets they're gone.

Better by far to be turned into something useful to the contributors - I like the idea.

As long as the infrastructure is future-proof. More car-centric urban sprawl wouldn't tick the box, for instance. We'll be re-inventing Social Credit next - who'da thought?

Love the investor status of ACC, sorry no cover for that brain injury or broken hip but look we own some public infrastructure instead of making you better! Does that ROI make you feel better?

omg, you just don't get it do you.. Someone breaks their back in a car accident, they don't need ACC for a few weeks, they need ACC funding for the rest of their lives. That is what the investments are there for.. to pay future costs associated with current claims.

Have you actual experience in this? I do, after a year or two, assuming your claim is accepted, you get put into a pool of clients to be actively managed off the books. Its quite insideous and inhumane. ACC don't usually pay long term despite the public perception that they do, they either lump sum you off the books with a pittance of a settlement or review your case then decide you are no longer entitled to cover and if you disagree you have to take them to court at your expense, try doing that when you are a paraplegic. Acc then withdraw your weekly comp at which point you become...a winz client.

Yes, I do have experience of seeing what ACC spends long term on clients. I used to roll $35k wheelchairs out to ACC clients who had been injured many many years before. A new wheelchair every 5-10 years, and many still getting daily help in the home. Ongoing costs in the millions per client.

A large concern of mine is that many people incorrectly claim ACC injury when it shouldn't be covered.

Even the providers can be actively involved in this. I had a chipped front tooth repair that failed after a decade and needed redoing, and went to a dentist and got the repair done. Not that cheap as it was the entire front of the tooth. The dentist tried to coach me about how to claim ACC for this. This bothered me a lot so I didn't follow his instructions and paid for the work.

I've seen many people claim stuff that they shouldn't be claiming... a sad comment on changing mores.

"Oh yeah, I just remembered - I slipped getting out of the shower and banged into the edge of the sink."

I'd love to see some sort of study into how many ACC claims are of this type.

The elephant in the room is fees. Why would a KiwiSaver provider invest in an asset class with higher fees than what they are allowed to charge to the end investor? This is where Grant Robertson is a bit blind, as he wants low fees for KiwiSaver members, plus direct investment in areas like infrastructure. These two things are in conflict with each other.