Mini-Hoon: Simplicity's Sam Stubbs on InfraKiwi

I spoke with Simplicity Co-Founder Sam Stubbs about plans announced this morning to launch InfraKiwi, an NZX-listed vehicle funded from KiwiSaver and borrowing to buy new and existing infrastructure such as water companies, lines companies, airports, ports, hospitals, roads, public transport operators and schools from the Government and councils.

Stubbs sees an oppotunity to use upwards of $295 billion of KiwiSaver funds available over the next 25 years to kick-start a ramping up of investment in building, rebuilding and properly maintaining the infrastructure needed for Aotearoa to grow.

The problem we’re trying to solve is how do we get all this KiwiSaver money into the infrastructure that we use and operate and get good risk-adjusted returns for investors, for KiwiSaver members, and the public generally. And how do you generate also economic growth and jobs and get the infrastructure built that we need? Simplicity Co-Founder Sam Stubbs.

InfraKiwi would be seeded by an investment from Simplicity, but open through the NZX for all New Zealand-based investors and funds to invest in a company buying and running infrastructure assets the Government and councils chose not to own or invest in over the long run. It would be able to borrow on its own behalf to buy existing assets, often shortly after they were built, and then own them over the long-run for stable dividends to investors.

In my view, it creates a pathway for the Government and Councils to solve the problem they currently believe they have, which is:

* they need to borrow and invest to build and properly run infrastructure to cater for still-fast population growth; but,

* they don’t want to take the debt onto the Crown’s or council balance sheets because they fear it will increase interest rates and leave future taxpayers vulnerable if there is a new financial or physical economic shock.

The solution pursued by both National-led and Labour-led Governments over the last 30 years is to try to get the private sector to fund the building and running of the assets, either by selling them individually in whole or partially to local investors or foreign investors (Air New Zealand, BNZ, Telecom, Genesis, Mighty River/Mercury, Meridian, Contact etc), or trying to structure Infrastructure Funding and Financing deals and Public Private Partnerships to get private funders to do the borrowing, investing, building and owning of the assets (Wiri Prison, Transmission Gully).

The trouble is, in my view, these deals are so complicated, slow, expensive and subject to political, market and technical risks that they don’t happen often fast enough or at the necessary scale to solve Aotearoa’s $30 billion-a-year infrastructure deficit.

InfraKiwi doesn’t want to take on the risks of initially funding or building new assets, but sees itself assuring any Government or Council it would buy the asset once built for a certain price, giving Governments, ratepayers and taxpayers some assurance that they wouldn’t be stuck with the long-term debt.

In my view, this process does solve a big current problem that funds building up in KiwiSaver, NZ SuperFund and ACC very fast are running out of things to buy in New Zealand, but New Zealand Governments feel they ‘can’t afford’ to build the infrastructure needed to grow and solve many of our deficits. I think it’s a solution that’s more expensive for taxpayers in the long run, but does reduce the risks of creating new dividend or interest cost streams and drains in our current account deficit from sales to foreign owners or borrowing internationally.

If Governments of both flavours persist, as they are now, in believing they have to constantly drive the size of Government/GDP and Debt/GDP back down below 30%, then this is better than the alternative of pretending or promising to invest to cope with population growth, climate change and ageing, but never actually doing it.

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A lightly edited transcript of our conversation

This a lightly-edited and cut-down version of our 30 minute conversation above for brevity and clarity. A PDF of the presentation referred to in the conversation above is attached below.

I firstly asked Sam what InfraKiwi would be and what problem it was trying to solve.

“We have this massive infrastructure deficit in New Zealand. The Infrastructure Commission says it’s $210 billion. It’s a massive amount of money and a lot of work. And yet on the other side, we have already $130 billion worth of KiwiSaver money saved,” Sam said.

“And our economist, Shamabeel Eaqub, has calculated that in 25 years, if KiwiSaver managers keep their investments in New Zealand at 30%, we will have another $295 billion to invest in New Zealand. The problem with that is that there’s kind of nothing to invest in. It’s very hard to commit a lot of money in that way. So it tends to go overseas. And when it’s invested overseas, that’s fine. You still get the returns, but you don’t generate the jobs or the economic growth than if you have it invested domestically.”

NZ shareholders only and with a Golden Share

Sam said he and others had spent two years iterating 50 versions of the fund.

“We’ve landed on setting up a company called Infra Kiwi. So, Infra for infrastructure, Kiwi for KiwiSaver and Iwi. We’re trying to create a vehicle that makes it as easy as possible for all New Zealanders, KiwiSaver managers, individuals, to invest in infrastructure via this company,” he said.

“The intention is that it will be New Zealand-only shareholders. So foreign investors not required or offshore capital not required in this case, because there’s so much there. That will then allow Kiwi to buy what we would call sensitive assets that might otherwise be unavailable for sale to offshore owners and own and operate it for the long term.

“I don’t want a New Zealand where we’ve saved hundreds of billions of dollars in KiwiSaver and it’s building roads in Aussie. I want that money building roads and buying power stations and operating the water here in New Zealand and creating jobs here and creating growth here.” Sam Stubbs

Simplicity would start by making the initial seed investments and then once it got to a critical mass it would list on the stock exchange, be restricted to New Zealanders, and have a ‘Golden Share’ preventing it from being sold to single and/or foreign interests.

“That means it’s liquid. It means all KiwiSaver managers can invest in it. It means the nature and purpose of the company couldn’t change now you and I are old enough to know the Fay Richwhite issue, which is to slice and dice these assets for the benefit of few to the cost of many.

“The nature and purpose of the company remains the same over the long term. And then it invests in operating infrastructure. So it’s not interested in building the power station, but it might be interested in buying it once it’s built. And then it focuses on very long-term ownership and operational efficiency. And if it’s existing old infrastructure, additional capital will refurbish or maintain the infrastructure as well. But it’s all about owning.

“I’d like this to be the biggest and most boring company in the country. Which means that it’s really big. It addresses that huge pool of money that New Zealanders will have now to invest in what we need. And it just focuses on owning and operating these assets for the very, very long term.”

‘It won’t take big development risks’

Sam says InfraKiwi wants to own and operate assets, rather than develop them, to make it easier to value on the stock market.

“It’s not taking big development risk But the other thing it could do is go to governments and say if you build it, we’ll buy it, and that means it’ll actually get built, because it’ll be a contract between the government and the community to get this thing built.

I then asked about the potential scale of InfraKiwi and who could invest.

“It’s designed for people to participate in several ways. Once the company lists on the stock exchange, Simplicity will step away and be just another shareholder. So it will operate as its own independent company, own board of directors. But because it’s listed on the stock exchange and hopefully big enough to be in the index, all the other KiwiSaver funds will be able to buy it. And typically, if it’s in the index, they will own it so they’ll own at least a benchmark position,” he said.

“So people could participate via their KiwiSaver funds, in the sense all KiwiSaver managers are investing in it. Or, because it’s listed on the stock exchange, if you are a New Zealander, registered New Zealander, for investment purposes, then you can buy and sell shares directly as well. So you could buy and sell it directly via your broker or Sharesies or any platform that sells individual shares as well. So the idea is to make it very broadly available.”

‘We’re not interested in PPP-style financial engineering’

Sam said he’d been in talks with the NZX and Standard & Poor’s to make sure InfraKiwi could only have New Zealand shareholders, which meant it would be able to buy sensitive assets that no one else could for the long term.

“We’re not interested in doing what a lot of PPPs want to do, which is financially engineer the acquisition so that they can exit within a fairly short period of time and have made a lot of money,” he said.

“What we want to do is make a very fair return over a long period of time, which is fair to the investors and the company, but also means that the vendor of the asset knows that you’re not trying to basically maximize return because these are community assets, they’re sensitive assets. Some of them will never make enough money to ever be investable propositions. So for example, a regional airport that only has two or three flights a day is probably unlikely to ever be an economic asset. That council just has to subsidise that from general rates.

“But there are a whole lot of assets where ultimately New Zealanders have to pay. And whether they pay once when it gets refreshed and built, like water assets, you can either have a massive rates bill to refresh it, or build new, or you can run the asset down over 30 years. Or you can own this and actually maintain it and get a fair inflation adjusted return over a long period of time.

‘It’s sort of like public ownership’

Sam said KiwiSaver funds were naturally attracted to long-run assets with constant cashflows. He also compared such funds to the likes of Singapore’s Temasek.

“If InfraKiwi got listed and it was in the index, as soon as it bought something, about 3.5 million New Zealanders would own it from the day it bought it. That is sort of like public ownership, but without government.

He said ownership by such a fund would depoliticise the issue of asset sales.

“If the asset is owned by millions of New Zealanders, the attitude towards the government in terms of regulation will be sensible. And the attitude we will take towards the ownership and operation of the business will also be very sensible too, because when you own something for the long term, you’ve got to maintain it.

“You’ve got to spend money on it. You’ve got to keep the water flowing and the lights on. It’s a different attitude than if it’s a political decision. That’s a sort of pressure, but in a different way. And it’s not the attitude of a short-term owner. A short-term owner doesn’t care about it. They just want to run down the asset and fool the next buyer into taking it at the highest possible price.”

Sam said he had done over 50 public meetings and 90% of people had said they would be happy if a KiwiSaver funded owned the water pipes or the power lines.

“That’s because KiwiSaver is a very popular brand. It’s actually serving a lot of New Zealanders very well.”

‘We are where Australia was in 1985’

Sam compared New Zealand now to Australia in 1985, just before its savings ramped up under its soon-to-be-launched compulsory pension system.

“We’ve never had this option before. Previously, we’ve always had to go to central or local government to fund our infrastructure or at the margin, these PPPs, typically where the money is provided by offshore players. We now have a new reality, which is that we now are where Australia was in 1985.

“We’re just about to see this huge increase in domestic savings, but we have to create the mechanisms by which it gets invested in the economy. And that’s what InfraKiwi is all about. It is trying to bridge that gap.”

Why not just borrow from the Crown’s balance sheet?

I then asked why the infrastructure could not be simply built with funds borrowed by the Government.

“If there’s a $200 billion infrastructure deficit, the government borrows another $200 billion. That’s about 45% of GDP. And that would take our central government debt up by about 45% of GDP. That is a possibility, no doubt about it,” he said.

“It doesn’t seem to be what any one of our political parties or government wants to, because effectively what you’re doing is increasing your sovereign risk rating and debt levels and cost of funding. But for whatever reason, they haven’t chosen not to do this.

“But even if you have the option of central government doing it, local government is really starting to get stretched. And so another source of funding would be useful. I’m not pretending InfraKiwi will supplant everything that central and local government would do, but it’s another source of funding. And it’s very long duration capital.”

Here’s the presentation referred to in the interview above

Ka kite ano

Bernard

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