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ASIC makes official its disclosure requirements for infrastructure entities

After a long public consultation process spanning over a period of 21 months and including various industry members, law firms and accounting firms, the Australian Securities and Investments Commission (ASIC) has released its Regulatory Guide 231: Infrastructure Entities: Improving disclosure for retail investors (RG 231). 

RG 231 introduces, for those entities that fall within what the regulatory guide defines as an “infrastructure entity”, requirements to disclose against 9 benchmarks on an “if not, why not?” basis and also to make disclosure in 11 prescribed areas called “disclosure principles”.  These new disclosure requirements apply to infrastructure entities in addition to the existing disclosure framework. 

ASIC believes that the new disclosure regime, as set out in RG 231, will assist in ensuring that infrastructure entities identify the key risk areas and provide information that ASIC believes that retail investors need in order to make an informed investment decision. 

ASIC is of the opinion that it is important to refine disclosure in this area as infrastructure entities typically have complex characteristics and in the past few years, there has been significant deterioration in the value of some infrastructure entities, resulting in a loss of retail confidence in the infrastructure sector.  The new disclosure framework will hopefully inspire greater retail investor confidence, noting that it is anticipated that significant amounts of capital will be sought from the public over the next decade for investment in infrastructure entities. 

ASIC’s final position

Following the consultation process, ASIC has taken account of many industry concerns.   An overview of ASIC’s refined position on the key aspects of the new disclosure framework, as set out in RG 231, is as follows:

Key principles of RG 231 Commentary​
1. Definition of infrastructure entity and infrastructure assets​ ​
An “infrastructure entity” is defined as a “listed or unlisted registered managed investment scheme, company or stapled structure investment that has been offered to retail investors on the basis that its primary strategy or investment mandate is to invest in any of: (a) the physical plant, property or equipment of infrastructure assets; (b) the right to operate infrastructure assets; or (c) other unlisted entities which, either directly or indirectly, primarily invest in the assets referred to in paragraph (a) or (b) above.”
Infrastructure assets include “roads, railways, ports, airports, telecommunications facilities, electricity generation, gas or electricity transmission or distribution, water supply or sewerage, and hospitals.”

​ASIC’s initially proposed definition of infrastructure entity was broad and may have had unintended consequences. 

ASIC has now clarified that the definition clearly excludes managed investment schemes and investment companies whose assets primarily comprise listed infrastructure assets and infrastructure management businesses that provide services to an infrastructure entity.

It is worth noting that the definition extends to both listed and unlisted entities that make offers to retail investors.

2. Forecasts ​

​An infrastructure entity is required to prepare and have approved by its directors an internal 12 month operating cashflow for which an ‘independent suitably qualified person or firm’ provides, in accordance with accounting standards, negative assurance on the reasonableness of the assumptions used in the forecasts and also a positive assurance that the forecast is properly prepared on the basis of the assumptions and consistent with accounting policies adopted by the entity.

The entity is also required to prepare an internal unaudited cash flow forecast for each new significant infrastructure asset acquired by it.

There is a concession for infrastructure assets in their first year of operation. 

​This benchmark no longer requires the originally proposed disclosure of an entity’s 5 year operating cash flow forecast (conceded by ASIC to be at odds with RG 170).  This is a positive result.  On the other hand, there is a question mark over whether accountants will be able and willing to provide the relevant assurances in all circumstances.   
3. Valuations ​
​Infrastructure entities are required to disclose details of their valuation policy.  Specifically, disclosure is required as to whether valuations and supporting documentation are available to investors.  If not, then a detailed summary of the valuations is to be provided.  ​Although ASIC is no longer insisting on disclosure of full valuations, but instead only a summary of the valuations, there remains a concern that what is required to be disclosed is information which is commercial-in-confidence and may place entities at a commercial disadvantage.
4. Base-case financial model

​Before any new material transaction, and at least once every three years, an “assurance practitioner” must perform an agreed upon procedures check on the infrastructure entity’s base-case financial model that, essentially, verifies the mathematical accuracy of the model and includes no findings that would, in the infrastructure entity’s opinion, be materially relevant to the infrastructure entity’s investment decision.

In addition, an infrastructure entity is also required to disclose, in prescriptive detail, certain information concerning its base-case financial model used in respect of the acquisition of a “significant infrastructure asset”.  Contentiously, ASIC also calls for disclosure of a reasonable estimate of the operating capacity of the entity’s significant infrastructure assets, and disclosure of any material discrepancies between the assumptions contained in the entity’s base-case financial models used for each of debt and equity raisings. 

​ASIC has separated out the requirements for disclosure of information in relation to base-case financial models into a benchmark and a disclosure principle.  There is a question mark as to the value of the benchmark, given that what is being performed by the assurance practitioner is in essence a calculation exercise.

ASIC has persisted with a prescribed list of disclosures for base-case financial models, even though it notes that the submissions it received with respect to these disclosure requirements were “largely unsupportive”.

Of particular note, is the requirement to disclose material discrepancies between the assumptions used in the models used to raise debt and equity.  This is because there will necessarily be differences between those assumptions due to the distinction in the nature and requirements of debt and equity investors. 

5. Financial ratios ​
​Infrastructure entities should disclose, if target financial ratios have been disclosed, the financial ratios actually achieved and how those targets and ratios are calculated, an explanation of what the ratios mean in practical terms and guidance to investors on how to decipher the ratios so to understand the infrastructure entity’s level of       debt-related risk.

​ASIC’s thinking behind this disclosure is that investors should be better able to compare relative risks and returns of infrastructure entities.

There has been a significant movement by ASIC in this regard as, originally, ASIC proposed prescribed financial ratios considered by many industry members to be too narrow and potentially misleading.  Now ASIC provides “guidance”, as opposed to prescriptive financial ratios, for entities to disclose against and leaves the door open for entities to use other financial ratios that they may deem appropriate for their particular circumstance (or to make no disclosure of ratios at all, if they so choose).

6. Related party transactions ​
​Infrastructure entities are required to disclose related party arrangements relevant to the investment decision. The regulatory guide sets out a detailed list of the level of disclosure required with respect to such an arrangement. ​It was originally unclear whether this disclosure applied to both listed and unlisted infrastructure entities. Industry members sought clarification on this, with the concern being that unlisted entities should not be subjected to what is effectively a listing rule requirement type of disclosure. It is now unequivocal that this disclosure is applicable to both listed and unlisted entities.


General observations

There remains some scepticism among industry players and observers about this additional disclosure regime and what some regard as the inherent bias against the infrastructure sector.  That said, we think that RG 231 represents a real compromise, taking account of the lessons of previous market failures and the views of industry participants.  

It is important to note that the new disclosure framework is also consistent with ASIC’s approach to selecting what it deems to be key high risk areas and rolling out its “if not, why not?” disclosure framework (as modified to the particular area of concern). 



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