The new face of frontline responders
If anything can test an asset class’s resilience, it’s a pandemic which – literally – prompts parts of the economy to switch off. For community infrastructure, the last 12 months has demonstrated the resilience of these assets and made the AMP Capital team hungry to invest more.
Community infrastructure is largely taken for granted in society. Schools, hospitals, roads, gaols, parks, water assets – they’ve always been there.
What has changed, though many might not realise it, is how public infrastructure is funded.
Apart from toll roads – where the ubiquitous beep of the toll tag is a constant reminder that we pay for the roads we use – the general public has little understanding of how much private money is invested in what are normally considered public assets.
If done well, investing in public infrastructure has a positive community impact and provides institutional-grade returns.
Investing is often done via long-term government-backed public private partnerships (PPPs), which have consumer price index linked payments and are normally lowly correlated to traditional asset classes.
PPPs themselves offer many attractive characteristics. They are long-term, government-backed contracts, often involving the design, building, financing and maintenance of an asset. They are less exposed to patronage risk, competition or changes in economic activity. And as long as the facility is available for the public, revenue is normally paid by the government.
All of this is predicated on a normal economic cycle. But what happens in a year like 2020, when the cycle collapses and patronage risk soars? What happens when you invest in schools and the students don’t turn up?
“Well, it’s fair to say there was a lot of uncertainty in the early days of the pandemic,” says Australian-based Andrew Jones, AMP Capital’s Associate Director, Infrastructure Equity. “Principals and teachers were concerned, as were parents, as to what immediate actions should be taken.”
“As the infrastructure owners of several schools, we were receiving regular updates from our onsite facilities managers and there was a lot of emotion and uncertainty as to how the pandemic would impact our school communities and whether to send their kids to school or not,” he adds.
Jones is part of the infrastructure team that oversees several funds, including one that has interests in 36 schools across South Australia, Victoria, south-east Queensland and New South Wales. It serves more than 30,000 children.
“The situation began to settle down once the various state departments of education provided clearer direction that schools were not going to be required to immediately shutdown, and instead we saw a shift to a hybrid learning model. This meant students were encouraged to learn from home, while the children of essential service workers and vulnerable parents were able to come to school.”
As an owner of schools, it meant AMP Capital had to view the disruption not just from a health and education perspective, but also from a financial one.
“We certainly had to think about worst-case scenarios, such as schools closing down,” Jones says. “However, we knew that would be an extreme outcome as these projects are complex and they are not like a tap that you can simply turn off one day, and on again the next. We worked closely with our government counterparts to understand their thinking and to pre-empt any extreme measures that may have arisen.”
In the end, schools remained open.
“It became clear that the government didn’t want to shut them down. We had to implement changes to deal with the situation such as maintaining hygiene, physical distancing and additional cleaning. There was a cost up front but we decided to wait for later down the track to deal with that. Initially, it really was a call to arms and our teams on the ground stepped up and did a great job.”
AMP Capital has been investing in schools since 2010.
“We are the second largest owner of public schools in Australia next to the state governments,” says Kathlyn Crafford, Senior Associate, Infrastructure at AMP Capital.
The pandemic was a stress test of AMP Capital’s view that schools should be considered an essential service.
“Pre-COVID-19, I don’t think educators would have been considered frontline workers. They definitely are now because they were at the coalface of the outbreak,” Crafford says.
“From an investment viewpoint, it was interesting to see how schools played out in the community. People naturally think of hospitals, water treatment plants and utilities as essential services. But during the pandemic, it really demonstrated that schools were an essential service, confirming our philosophy.”
AMP Capital’s community infrastructure strategy focuses on essential services. Outside schools it invests in wind farms, medical and vocational education facilities, prisons, a desalination plant, water assets and a sporting stadium.
One of the most attractive attributes of this strategy is it aims to provide more than a financial return.
For example, some of the schools which receive funding from AMP Capital are located in disadvantaged areas. The private funding hasn’t only improved facilities, it has also propped up educational outcomes.
From an investment viewpoint, it was interesting to see how schools played out in the community. People naturally think of hospitals, water treatment plants and utilities as essential services. But during the pandemic, it really demonstrated that schools were an essential service, confirming our philosophy.”
– Kathlyn Crafford, AMP Capital
There is an example of this in one Australian school. In 2010, completion rates at the school were 57 per cent. In 2017, they were 100 per cent, with four students achieving the top ATAR in the state1.
It’s part of the reason why schooling is an essential service.
Jones says it wasn’t just educating children that was considered essential during the pandemic. Freeing up parents, who were essential workers, was also critical.
“Around 80 per cent of healthcare workers are female2. Consider the ripple effect of what it means to close schools, and how many resources you would potentially drain from the healthcare system as a result of parents having to stay home and look after their kids,” he says.
One of the key lessons to emerge from the COVID-19 pandemic, Crafford says, is technology investment within the school system.
“As an investor in a PPP, we enter into a 30-year contract. During that period, we have to replace infrastructure like-for-like. But technology doesn’t really fit well into that structure as it changes so quickly,” Crafford says.
“Keeping up with changing technology in thousands of schools is a challenge for government, to put it in perspective, some of our schools were built before WIFI was readily available and teachers used whiteboards. Now teachers use interactive whiteboards and smart TVs. I’m hopeful that a positive outcome from COVID-19 in the education sector, will be further investment in technology in schools to support and enhance learning outcomes.”
Another lesson, Jones says, is that AMP Capital believes schools are worth investing in.
“Our strategy provides both a community service and a financial benefit. Our suite of assets are classified as essential infrastructure, and if you look at performance during COVID-19, it’s done well and been extremely resilient3,” he says.
“The pandemic has fuelled our appetite to invest more and build more schools particularly given the overpopulation of schools we seen across all states.”
Jones says he expects the community infrastructure strategy to continue growing, in part because the pandemic has demonstrated the defensive characteristics of investing in essential community assets.
“It’s proven to be a very resilient approach to investing.”
Footnotes:
1. Source: AMP Capital, additional reference https://www.uac.edu.au/future-applicants/atar#:~:text=The%20Australian%20Tertiary%20Admission%20Rank,not%20your%20Year%2012%20group)
2.https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/4125.0~Sep%202018~Main%20Features~Economic%20Security~4
3. Source: AMP Capital
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Important Notes
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While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.