Investors in Hong Kong listened to Pitt talk about the state’s plan to boost infrastructure spending by A$2 billion to a total of A$42.75 billion ($34 billion) over four years while munching on a breakfast of organic beef and eggs from Queensland. Many were flush with cash and looking for investment grade opportunities, but voiced concern about the risk of funding greenfield projects. Some were worried about policy risk in Australia, especially the lack of coordinated energy goals between states.
In the audience were representatives from Hong Kong’s MTR, which operates the new North West Metro elsewhere in Australia, in Sydney, as well as conglomerate Far East Consortium, which has invested in residential property in Melbourne.
Investors have been burnt before on projects. Privately owned group Rivercity Motorway went into receivership in 2011 with its M7 Clem Jones Tunnel under the river of Queensland's capital city Brisbane owing about A$1.34 billion of debt after toll revenues turned out to be less than a third of what was forecast.
One area of investment that looks set to chime with institutional investors is Queensland’s plan to sell more green bonds, earmarked to refinance environmentally conscious projects.
That's because money managers across Asia are gradually making room in their portfolios for such instruments to meet the demands of their green-minded pensioners or policyholders.
Queensland issued an inaugural A$750 million 7-year green bond in March this year, the largest and longest tenor from an Australian issuer in Australian dollars at the time. And more are set to follow.
“With our renewable energy target of 50% by 2030, I think that there’ll be a number of opportunities,” said Pitt, who as well as treasurer is also the state's acting energy minister for trade and investment.
Overall Queensland Treasury Corporation (QTC), the entity that issues debt on behalf of the state and state-owned corporations, estimated that it would need to borrow A$6.8 billion of term debt in its 2017-2018 financial year.
“Investors are still looking for very high quality yields, and Australian issuers very much provide that,” said Philip Noble, QTC's chief executive.
Their sweet spot in terms of bond tenors seems to be from 8 years to 12 years said Noble after a marathon run of meetings over three days, during which the Queensland delegation conducted 12 individual meetings and hosted four events, engaging with around 180 people.
A source of constant suffering was the decision by credit rating agency, Moody’s Investor Services, to downgrade Queensland’s credit rating from Aaa to Aa1 in 2009 and then to cut its outlook to “negative” after the state’s 2012 budget was handed down.
It has meant that the larger and more diversified states of New South Wales and Victoria, both on Aaa, have been able to raise funds more cheaply from investors.
Queensland has managed to reduce its debt burden from the highest of all states in 2015, to below Western Australia, and its deficit is still trending downwards helped by the recent surge in coal prices. Moody’s subsequently revised its outlook on the state’s finances to “stable” in April. But it has been tough going in the post-mining boom economy.
Premier Annastacia Palaszczuk’s Labor government made an election-winning promise in 2015 not to sell public assets such as electricity and port assets. So while New South Wales and Victoria have been able to amass billions of dollars in asset sales and then invest in public infrastructure, Queensland hasn’t had the money to do this.
Moody’s downgraded Western Australia in February last year to Aa2 from Aa1, citing the state’s heavy debt burden.
Pitt put a brave face on the decision not to allow its state-owned energy providers Ergon Energy and Energex to appeal against the Australian energy regulator’s decision around how much they could recoup off their customers to support their capital program. “That potentially cost the budget between A$1 and A$2 billion. What it meant, though, was that the electricity price froze,” said Pitt.
With a touch of schadenfreude he pointed out that in contrast, in New South Wales, privately owned electricity companies won their appeal and prices are going up by more than 11.7% this year he said.
Then, there have been acts of God which have also strained finances.
“Life gets in the way,” shrugged Pitt referring to the severe tropical cyclone in March dubbed Debbie, which created a A$1.1 billion hole in the state’s budget.
Hence, the importance of attracting overseas investment, maximising new sources of economic growth as well as maintaining fiscal discipline.
One revenue stream that seems to be steadily growing is tourism, China remains the state's largest and fastest growing international market in terms of overnight visitor expenditure. The latest data shows Chinese visitors increased 6.7% to 472,000 over the past 12 months, injecting A$1 billion into Queensland’s economy. The number of visitors last year is almost triple that of 2010. Japanese visitors in the past 12 months increased 13.7 per cent to 202,000.
Tourism from Asia looks only set to grow. In July China Southern Airlines agreed to operate three flights a week direct from Guangzhou to Cairns, opening up direct year-round access to Cairns and the Great Barrier Reef from mainland China for the first time.
To further boost the service industry, Queensland is seeking investment for one of its biggest ever infrastructure projects, dubbed Cross River Rail, to ease transport and commuter passage in Brisbane.
After a decade since planning began the government stepped in to fully fund the $5.4 billion project in June and said it expects shovels in the ground by year-end.
However, the state continues to try and draw in private investment. Pitt is about to start sounding out investors to see if other funding structures are possible, such as long-term leases.
“It really comes back to the question of risk, if there’s too much risk transferred to the state then we would be better off having it as a fully-funded government project,” said Pitt.
PPPs have a long history in the country and remain the preferred structure for infrastructure investments, particularly those using an availability-based model where the government assumes patronage risk.
There are examples close to home for Queensland to draw upon. There have been innovations in PPPs – the ability to pay down half of the project’s debt as it nears completion – is now widely used by sponsors, most recently on bids for Melbourne’s Metro Tunnel project.
“In the face of tightening fiscal balances, we expect that PPPs will remain an important means through which state governments will be able to execute their capital projects,” said Moody’s senior credit officer John Manning in a research report.
Below are edited excerpts from the transcript of FinanceAsia’s Q&A with Queensland Treasurer, Curtis Pitt and Philip Noble, Chief Executive, Queensland Treasury Corporation (QTC).
Q. How was the road trip?
A. Philip Noble
We have been issuing to these investors for over a quarter century, so we have a very long relationship with these people, and a deep history of them buying our bonds through various economic cycles and across the yield curve.
Investors are still looking for very high quality yields, and Australian issuers provide that at the moment.
Their sweet spot seems to be from 8 years to 12 years, in terms of interest in our issuance.
The market is very positive about the removal by Moody’s Investor Services of the negative outlook [in April 2017]. That was a big positive.
Q. What was their appetite for green bonds?
A. Philip Noble
We gained a greater knowledge of appetite for green bond issuance, which was greater than actually we understood.
We issued the largest and longest green bond done in Australia. And it was really quite interesting to note that traditional investors that you wouldn’t think would be buying green bonds actually are interested and asked further questions about our green issuance over the coming years.
Our response to that was we would look to tap that market once, maybe twice, a year, and we have plenty of green eligible assets so we can look to further diversify our yield curve in green bonds, as well as the type and number of investors.
The other thing is that people are very keen to ensure there is a certification process.
We’ve been seeing bank balance sheets and bank treasuries - who obviously hold semi-government bonds for their high liquidity - are actually allocating a percentage of that portfolio to green bonds.
From a possible green project perspective, we’ve had more than A$2 billion worth of renewables investment in Queensland over the last two-and-a-half years. And with our renewable energy target of 50% renewables penetration by 2030, I think that there’ll be a number of opportunities.
Q. When do you expect to obtain a AAA credit rating?
A. Curtis Pitt
We certainly won’t try to return to AAA at any cost. So really, that has come down to getting that balance right between strong fiscal management as well as ensuring that we continue to make the investments to drive the Queensland economy.
One of the really encouraging signs from the credit rating agencies was that upwards rating pressure could occur over the next two years based on the successful implementation of our debt action plan, and containment of expenditure growth.
So recent discussions with both ratings agencies since I’ve handed down the most recent state budget have been very positive.
We do look forward to try to return to AAA, but as I said, that won’t be at any cost. We have seen what happens when we had cuts to jobs and services, and what that’s actually meant in terms of the economy.
Q. Will private investor be able to invest in Cross River Rail? Do they want to?
A. Curtis Pitt
We’ve had interest in potential PPP or third-party financing of Cross River Rail for some time. That’s even before we announced in the most recent budget that we’re going to fully fund the project out of the general government sector.
Just taking a step back, we’ve maintained a commitment to the people of Queensland, who have clearly stated that they don’t want these income generating assets, our government businesses, privatised.
We will be engaging with a market sounding of what’s going to occur with Cross River Rail, whether it remains a project fully funded by the general government sector, or whether we can look at other options.
It really comes back to the question of risk. If there’s too much risk transferred to the state then we would be better off having it as a fully funded government project.
We want to get an understanding of what private investors’ expectations are around what sort of a return on investment and over what duration.
The big threshold is on-going ownership. We will not be looking at selling brown field assets. Where we can partner with the private sector to deliver on necessary pieces of public transport infrastructure or other social infrastructure, we’ll do it.
A. The important point of Cross River Rail is the value uplift in terms of how this project boosts opportunities for development outside of the CBD as well.
It’s not just about the actual tunnel itself and pushing trains through it and who funds that. It’s really around the broader investment into infrastructure around the tunnel as well.
Q. How does China’s Belt and Road Initiative impact Queensland?
A. Curtis Pitt
We’ll be looking for opportunities to have greater integration between our policy here and the belt and road initiative.
Q. How can Australia achieve energy policy stability?
A. Curtis Pitt
We of course have had the Australian government’s chief scientist Professor Alan Finkel hand down a report, which spelled out a number of recommendations.
Much of what we put forward aligns quite well with what we’ve seen from the Finkel review. So that’s probably the best step forward we’ve had in terms of having more agreement as a nation on the sort of energy policies we need.
It is clear that we need a coherent energy policy.
Q. How will you limit the impact of Carmichael coal mine’s struggles on the economy?
A. Curtis Pitt
Clearly there’s going to need to be some work done on all of our high energy using industrial customers to make sure that they remain competitive, so that’s something we are doing work with now through our department of energy and water supply.
We, as a government, demonstrated our support for the project and the jobs that we expect it will generate.
But in the longer term, we know that there’s going to need to be a shift. We’re just making sure that we, as a state, will be well positioned to transition our own energy usage to renewables.
In the case of the Adani Carmichael Mine, it is my understanding that 80% or thereabouts of the coal that is mined and exported will go directly to India to support coal-fired power stations there.
Additional reporting by Ernest Chan