SMSF trustees looking to invest in infrastructure via a fund manager must examine the nature of the underlying assets in the portfolio to ensure they are not exposed to sovereign risk, according to a specialist investment house.
Speaking at the recent smstrusteenews SMSF Trustee Empowerment Day 2018, Magellan Asset Management key account manager Emma Kirk used the Chengyu Expressway as an example of when sovereign risk can significantly affect an infrastructure asset.
“In 2012, the Chinese government introduced toll-free days across the national holidays, and there were eight national holidays, for small passenger vehicles. Absolutely great for those people with small passenger vehicles, but there were a couple of second-order effects that occurred as a result,” Kirk said.
“Firstly, maintenance costs went up because there were more people using the road. The trucks that were paying the tolls couldn’t get on the road, so therefore they actually had a lack of trucks using the road and therefore a lack of tolls.
“And the biggest impact was the toll revenue went down. The next year the government increased the number of toll-free days to 20 and therefore that had another impact.”
She pointed out the Chinese government then embarked on a program to increase the toll roads across the nation by another 30,000 kilometres, increasing the area covered by toll roads to 150,000 kilometres.
“In 2013 they completed three new expressways and that once again changed the distribution of vehicles and had an impact on this particular expressway and decreased its revenue,” Kirk said.
She noted though that regulation was a completely separate issue with regard to infrastructure investing and should not immediately be considered a negative factor.
“For example, in the US there are 51 regulated infrastructure assets and one federal regulator. Across these assets there is a return band between 9 and 13 per cent.
“So the US allows these utilities to earn a set rate of return and it’s supposed to be a fair rate of return and a fair return is deemed to be 10.5 per cent.”
Kirk added these returns had remained consistent over time and regulation had played a major role.
“So we are very happy with regulation, however, where there is sovereign risk associated with it, we don’t want to be there.”