The fall from grace of some infrastructure stocks like BrisConnections has been well documented, and has presumably provided the impetus for ASIC’s recent proposal to significantly alter disclosure in the sector.
However, the highly prescriptive benchmark-based disclosure model proposed by ASIC for the infrastructure sector would reverse twenty years of reform and potentially do great damage to the market for infrastructure investment.
As ASIC prepares to close public submissions on the proposal, it is yet to establish a need for the sector to be singled out for such treatment, let alone how it will help retail investors.
It has been 20 years since Australia abandoned a prescriptive, list-based disclosure regime for prospectuses in favour of a more flexible framework which simply requires disclosure of all information material to a decision to invest in the particular entity. ASIC’s proposals largely reverse this development, at least for one sector of the market. Who knows which sector will be next to have disclosure-by-checklist imposed upon it.
Under the proposed changes, benchmarks would apply equally to all entities, irrespective of structure or asset type – including vehicles which own tollroads (eg Transurban), airports (MAp Airports), gas transmission (APA), and regulated utilities (SP AusNet).
Infrastructure entities will need to disclose against seven sets of benchmarks covering matters like governance arrangements, manager ‘entrenchment’, financial structures, gearing levels, distribution funding, and valuation arrangements. They are detailed and arbitrary – for example, will base fees be 1% or less of enterprise value? Will the net debt/EBITDA ratio at a consolidated level be 6.5 times or less? Are the entity’s assumptions in its debt and equity models consistent?
ASIC also wants disclosure of other information, such as five-year forecasts of operating cashflows, independent valuations, and commercially sensitive information such as the key terms (including pricing and covenants) of all finance facilities for both the infrastructure entity itself and the assets in which it invests.
It would seem that all this information would need to be continually updated and disclosed to the market, and not just when the entity raises capital.
In our view, ASIC’s proposed framework could decrease retail investors’ understanding of infrastructure entities.
Firstly it is dangerous and misleading to judge all infrastructure entities according to a single detailed set of prescriptive benchmarks. ASIC’s proposals will not lead to meaningful comparative analysis.
The detail and volume of additional disclosure will complicate and lengthen offer documents, making them less ‘clear, concise and effective’.
Finally there is a risk that investors will assume that an infrastructure entity which complies with the benchmarks is not ‘risky’, and that further critical analysis is not required. Conversely, any non-compliance will be viewed negatively (no matter how justifiable), and will be treated with suspicion by investors.
ASIC’s proposals will also harm the retail infrastructure investment sector and will push participants even further towards the less regulated ‘wholesale’ sector, depriving retail investors of the opportunity to participate in this asset class directly.
The costs of complying with ASIC’s benchmarks will be significant, while the public disclosure of vast amounts of commercially sensitive information will harm negotiations with off-takers and financiers, impacting asset performance, funding costs and investor returns.
Retail infrastructure funds will also miss out on opportunities, because co-investors will not welcome disclosure of these aspects of a joint investment.
It cannot be in the interests of investors, the infrastructure sector, or indeed the Australian economy, for such a significant source of capital to be impeded from participating in such a vital and substantial asset class.
If ASIC considers that some sort of additional regulation is required, a more appropriate and effective strategy would be to provide more general guidance for infrastructure entities, setting out the topics which ASIC wants to be more fully addressed in public disclosures, to the extent and in the manner relevant to each particular infrastructure entity.
This more general approach would provide retail investors with disclosure which is clearer, more meaningful, and more concise than would be the case if ASIC’s current proposals were adopted.
It would also help ensure that retail investment in infrastructure remains a valid and viable investment class.
This article was first published in Business Spectator on 1 July 2010 under the title ‘Purgatory is no place for infrastructure’. Copyright, republished with permission.
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