Agriculture infrastructure development in Australia

In NAB's latest Corporate Finance Insights, Frank Drum and Ben Matigian examine the infrastructure gap in Australian agriculture and the potential for strategic infrastructure investment in the sector.

Critical infrastructure issues

In 2013 NAB Advisory spent time engaging with industry stakeholders to better understand the infrastructure gap in Australian agriculture. The discussions highlighted three key issues:

• the quality of existing road and rail infrastructure and competition at ports is a major constraint on the movement of agri-food products within and out of the country
• the privatisation and regional-based management of infrastructure (such as rural and regional rail networks) presents significant challenges to achieving the aforementioned outcomes - particularly for those industries moving product through sections of the supply chain managed by multiple operators with differing maintenance and management timetables
• the inconsistency in the type and application of regulations across states

Infrastructure investor financial requirements

It is also extremely important to recognise the divergent requirements of investors when considering infrastructure development. Infrastructure investors seek to achieve a total return that comprises both income and capital appreciation that would outperform inflation by a certain margin. In a nutshell, the basic principles for investors in the space would include:

• long duration of the assets
• inflation-linked ‘predictable’ returns
• low risk of capital loss

The challenge facing the agricultural sector is to consider how its infrastructure fits into above categories. Review the historical profitability within the sector and you find significant volatility in returns, so predictability will be a major roadblock.

Key challenges and opportunities

How do we close the gap between the needs of the industry and the requirements of the investment community from a risk and return perspective?

Are appropriate mechanisms in place to alleviate the risk aversion of investors to the inherent volatility in agriculture?

How can industry and government work more closely to develop appropriate valuation models?

In the current fiscal environment, federal and state governments are becoming increasingly cautious around broad-based sector funding, unless large-scale sustainable socioeconomic benefits can be illustrated. Support appears to be shifting to regionally-focused or business-specific assistance in conjunction with co-funding from stakeholders and private third party investors, where tangible economic benefits within a clearly defined commercial framework can be identified.

Given the current fiscal environment and recent trends in funding, how does industry most appropriately negotiate with government on future infrastructure funding requirements?

Is there necessary funding currently available for the research and development to alleviate the drag on productivity from variable seasonal conditions, scarce water resources and finite land resources?

What private investment sources and funding structures are available or can be developed to attract the necessary funds required?

The February 2014 version of Corporate Finance Insights is available on the NAB website.