01 Mar Business factors to consider when investing in infrastructure

By Brad Sewell

It wasn’t until I completed a 4,220 klm trip to visit 16 clients in 8 days that I realised how much investment in agricultural infrastructure is going on around our country.

Examples of current infrastructure projects being undertaken by RSP clients visited in that 8 day trip are:

• New 150 Kms exclusion fence for $1 million.
• New 5 stand shearing shed for $300,000.
• New 5,000 tonne silo complex for $1.5 million.

Probably the most impressive infrastructure project I have seen in recent years is a 330 kilometre exclusion fence protecting 14 landholders from wild dog predation. It wasn’t the length of the fence or the cost ($2.3 million) that impressed me, but the fact that 14 landholders were able to join forces and achieve a mutually beneficial outcome.

So what are the key factors you need to consider when investing in infrastructure.

Finance

Infrastructure is generally fixed to the land, so forms part of a banks mortgage over the property. This and the medium to long lifespan of most structural improvements (up to 50 years or more) means that the traditional 15-25 year term loan from your main bank is normally the best option.

If you are leasing land, items like portable yards or movable silos can be considered for an equipment finance loan as long as the loan term sits within the lease term. Be aware of the potential for disputes between lessee and lessor lenders if for example a ‘portable’ silo is bolted to a concrete slab on the lease property.

Tax management considerations.

If you have purchased a property in the last 1-2 years that has fences, gates, sheds, a house etc (i.e. as most do), then obtain a depreciation schedule prepared and signed off by a Quantity Surveyor (QS). Following is an example of the tax deductions that can be achieved with a certified depreciation schedule:

• 8,500 acres purchased 2016 for $850,000
• $357,000 structural improvements value listed.
• The owner had two depreciation schedule options to choose from:
  1. $350k tax deductions over 40 years on a diminishing value basis, mostly loaded into the first 15 years, OR
  2. $375k tax deductions over 40 years on a prime cost basis, mostly loaded into the first 30 years
• $3,300 was the cost of the report

RSP has a farm depreciation consultant on hand to discuss your needs. Call Michael Stout on 0427 692 418.

If you are building new infrastructure on your existing property, then your accountant can apply depreciation without the need for a QS report, needing only the receipts covering the various components of the build (i.e. materials and labour).

Land value matters to consider.

Most structural improvements are valued lower than the cost to build due to:

• Reducing life expectancy from day one
• Wear and tear and appearance
• Does the new structures capacity exceed or fall short of the properties capacity (i.e. have you over or under capitalised). An example of an over capitalised structure would be a set of cattle yards that can handle 5,000 head when the property carrying capacity is only 500 head.
• Are there alternative uses for the structure (eg machinery sheds can be hayseeds, whereas shearing sheds have limited to low alternative use).

Insurance

Beware of storing hay in structures not classified on your policy as a hay shed, as this will likely void your insurance for that structure if there is a fire.

How to estimate the return on the investment:

Financial Returns

• Infrastructure that allows for quicker processing of produce speeds product to market and increases potential marketing and pricing options.
• Conversely, an asset like a silo allows you to store produce longer and take advantage of longer term price movements.
• Bankers will judge your management skills and perception of success in part by how well you maintain and invest in your structures. This feeds through to your credit rating and subsequent interest rates.
• Produce is better secured, processed, and protected by using the better designed  modern equipped infrastructure.

Examples

• New rounded rails and better yard design = less bruising in cattle = less discounting at abattoir
• Silos reduce the risk of pest infestation and associated discounting or rejection (e.g. mice)
• Machinery sheds protect expensive machinery from weather deterioration and subsequent effects on value and maintenance costs.

Return on asset examples:

1. Leasing a neighbour’s shearing shed costs $1/hd/per shearing = $5k pa for 5,000 head. A new 5 stand shearing shed costs $300k. With an 80 year lifespan, annual costs = $3,750 pa capital cost + $1,000 pa maintenance = $4,750 pa cost. The landowner is also getting a new, on site, multi-function shed.
2. Silo costs $300/tonne @ 25 year lifespan = $12/tonne pa capital cost = 8 months of warehousing at a corporate site, plus potential double freight.
3. Exclusion fence: 150 klm erected at $7,000/klm = $1million. With a 30 year life = $35,000 pa capital cost + $5,000 pa maintenance cost = 400 rangelands goats pa @ $100/hd that need to be captured/contained.

Operational Returns

• Improved safety
• Faster and more efficient movement of produce (eg livestock through yards or grain through new silo system).
• Easier to attract staff and contractors, e.g.
• Covered livestock races
• Better workers/contractor quarters
• Better ventilation in shearing shed

Emotional returns

• Enhanced enthusiasm for your enterprise
• Sense of pride in your business

How to tie the above issues into the decision making process

Test your infrastructure project with your:

• Accountant
• Financial adviser
• Banker
• Agronomist/ livestock adviser
• Mentors and respected landholders

Collate all the advice received, weigh up the key aspects of the project (financial; operational; strategic; emotional), make a decision, obtain the finance, and proceed with the project.

“Decisions are always the right ones on the day they were made”.