Projects are fundamental to a company’s ability to deliver long term value to shareholders. When conceiving a project what do project leaders need to factor in to maximise the likelihood that investors will be supportive?
Each night news broadcasters report on the state of capital markets. What is the value of the Aussie dollar against the US dollar? What are the latest GDP figures? What does the Reserve Bank think about the direction of interest rates? All these issues impact the value of bonds and equity which are the two principle investments held by institutional investors. With around USD 67 trillion in global equity markets and USD 127 trillion in global bond markets institutional investors have the capacity to influence government and corporations alike.
What influences investors to make decisions around projects? Four issues are considered that are of particular interest to investors; the time value of money, forward looking statements and environmental, social and governance issues and disclosure.
The time value of money (TVM) refers to the price put on the time an investor has to wait until an investment matures. When considering whether to invest in a company that is developing a project investors are likely to be interested in understanding how long it will be before the project is able to add value to the company. The longer a project takes to reach maturity the more it is subject to changes in assumptions. For instance an increase in interest rates has the capacity to increase the debt servicing costs which can in turn impact on the returns delivered by a project.
Projects that take a long time to reach maturity, even if the value that is created at the end of the project is significant, are not necessarily attractive to investors. A recent example is the development of Western Sydney Airport. Under the deal negotiated by the Federal Government in 2002 Sydney Airport Group (SAG) was given the first right of refusal to build any new airport within 100 km of the Sydney central business district.
For superannuation funds like UniSuper - who publicly advocated against Sydney Airport Group spending the expected $5.3 billion of capital to build the new airport – taking up their rights would have meant devoting cash-flows from the operation of Sydney Airport to servicing construction costs for the new airport. The concern of superannuation investors is that this could reduce investment returns in the short term. An additional consideration is intergenerational equity, that is, as super fund members move in and out of a fund is the investment return delivered to a different group of investors to those that took the initial investment risk.
For project leaders developing new projects it is important to understand investor sensitivity to time. Where possible projects can should be developed in a way which allows revenue to flow from early stages of completion.
Companies that invest in significant projects may need to make Forward Looking Statements (FLS) to investors that make projections based on outcomes expected from a project.
When making Forward Looking Statements companies may need to use independent expert reports to demonstrate that there are reasonable grounds for the statements that are being made. According to Australia’s corporate regulator ASIC what constitutes ‘reasonable grounds’ needs to be judged according to the facts and circumstances of each case.
In formulating Forward Looking Statements project leaders may need to reference industry codes where applicable. An example for investors on the ASX is the Joint Ore Reserves Committee (JORC) Code that provides investors with a mechanism through which resources companies report exploration results, mineral resources and ore reserves.
From a project leadership perspective resources expended to product expert reports should be seen as fundamental to building and retaining investor confidence.
Investors are increasingly integrating environmental, social and governance (ESG) issues into their investment decision making processes. Many institutional investors are signatories to the United Nations backed Principles for Responsible Investment (PRI) which commits investors to incorporating ESG issues into investment analysis and decision-making processes and seeking disclosure of ESG issues from the companies they invest in.
An example of the way infrastructure investors integrate ESG issues into their investment decisions and management of assets comes from GRESB, an international organisation supported by pension funds including the USD 360 billion California Public Employees' Retirement System (CalPERS). GRESB’s Infrastructure Asset Assessment collects and assesses data provided by asset operators, the result of which is high-quality data that investors use in their investment and decision-making processes.
The expectation that new projects will incorporate management of ESG issues is becoming the norm with the bar on what is considered best practice rising over time. For project leaders understanding, addressing and reporting on the ESG issues that investors are most concerned about will be core to successful project development and implementation.
For project leaders who are conceiving and executing projects it is important to understand the role that investors play in determining whether a project proceeds or is shelved. Investors are not homogenous and will have different needs depending on the investment objectives they are seeking to deliver. What unites investors is the desire for information on their investments in order to make their own decisions.
Keeping investors informed about a project, whether at conception stage or implementation, is not just about technical aspects of construction, but should also relate to the broad stakeholder environment.
When conceiving a project the view of investors may not be highly visible. The culture of the investment industry is one where they tend not to telegraph their view publicly. It is therefore up to company executives to work out what it is that an investor is looking for.
For project leaders preparing and implementing projects the advice is simple: