At a time when the US’s new president and EU member states are exchanging swipes across the Atlantic, Australia and the far-flung Pacific seem to be a haven of sanity and pragmatism. It has been true ever since the global financial crisis: while its Western partners have sailed through choppy waters in recent years, Australia in 2016 posted its 25th year of consecutive growth. Its welcoming stance towards inbound investment has also contributed to making it a foreign capital magnet, with institutions from around the globe setting up shop in its financial districts.
Key to this investment surge, however, has been Australia’s nourished and clearly articulated pipeline, with various states engaging in asset recycling programmes that have seen governments put operating infrastructure assets on the block to fund new projects. The market has largely lived up to the hype: over the last two years, New South Wales raised A$26.5 billion ($19.8 billion; €18.7 billion) through the sale of two grids, after collecting A$5.07 billion following the divestment of two ports in 2013. And Victoria last year pocketed A$9.7 billion by privatising the Port of Melbourne.
Still, the total fell somewhat short of the A$100 billion in asset sales over 18 months that were predicted at the beginning of 2015. A chief factor in this was Queensland’s decision, following elections that year won by the Labor party, to scrap the state’s previously planned A$37 billion privatisation plan. Meanwhile the arrival of fresh capital and teams from overseas meant the large-cap end of the market became increasingly crowded.
“Overseas pension funds surely would have liked to deploy a bit more. Multiples observed in recent transactions have also surprised, though some of the newcomers have recently managed to invest,” says Craig Shortus, head of Australian infrastructure and utilities at ANZ. He cites Canada’s Borealis, which was part of the QIC and Global Infrastructure Partners-led team that snapped up the Port of Melbourne’s 99-year lease in September.
Institutional investors intending to capitalise on big-ticket auctions may now have to readjust their sights, argues a Sydney-based adviser. New South Wales still has a couple of big assets to offload: Endeavour Energy, the third of its power grids, and Land & Property Information, a land registry that “doesn’t fit neatly into the infrastructure box” but that the asset class’s usual suspects are targeting regardless. More trophy assets might come on the block, like Western Australia’s Fremantle Port, pending the outcome of state elections.
Beyond this, it is not obvious that the flow of high-profile privatisations will be sustained. “Without any elections this year (WA being the exception), very few assets are going to come to market,” says Roger Lloyd, managing director and chief executive of Palisade Investment Partners. “That’s going to be a change for the trophy hunters. All the offshore capital seeking large assets that has settled into Australia – what are they going to do now? It’s a bit of a mystery.”
OPEN FOR BUSINESS?
Conflicting signals have also come from the Treasury. Cheung Kong Infrastructure and State Grid, the only bidders in the running when New South Wales put Ausgrid up for sale, saw their offers rejected with seemingly little warning in August, on “national security” grounds (IFM and AustralianSuper later snapped up the asset through an A$16.2 billion unsolicited bid). Insiders interpreted the decision as a response to the uproar triggered by the privatisation of Northern Territory’s Port of Darwin, a part-military facility leased to China’s Landbridge Group without proper due diligence, critics said at the time. In China, the “absurd” decision hit like a brick.
“Frustration came from the fact that the two bidders had previously engaged with the state and federal governments, and that no particular concerns had been raised. But Australian authorities are aware of the pressure such U-turns could put on bilateral trade relationships, so they will surely look to avoid similar situations in the future,” says Lauren O’Neil, senior consultant for South East Asia at Control Risk.
Scrutiny over the sale of ‘strategic’ assets, however, is unlikely to go away. Ad-hoc preconditions will be imposed on the most sensitive deals, like the 20 percent local capital rule that will govern the sale of Endeavour Energy, before bids are assessed by the Foreign Investment Review Board. Neither is such attention limited to infrastructure: in 2015, Canberra blocked a Chinese-led A$371 million bid for the cattle business of S Kidman, Australia’s biggest landholder.
Domestic politics partly explain this, observes O’Neil. While the Liberal Party of Prime Minister Malcolm Turnbull won last year’s elections, it did so with smaller margins than expected. That led it to form a coalition with the National Party, whose support base is primarily rural, in the Lower House of Parliament; it also found itself forced to accommodate several smaller factions in the Upper House, including that of Nick Xenophon, who is calling for a tightening of foreign investment rules.
Despite this, concerns should not be exaggerated. “It’s a very stable regulatory environment, and due to historic underinvestment in infrastructure, there’s always going to be significant amounts of capital imported,” says James Abbott, a partner at Allen & Overy. Out of about 1,000 investments put in front of federal watchdog the Foreign Investment Review Board last year, notes Brett Himbury, chief executive of IFM Investors, only three were rejected. And let us not forget that China Investment Corporation is one of the parties co-investing alongside GIP in the Port of Melbourne.
TESTING THE WATERS
A test case of Australia’s continued openness to Asian capital may rest in Cheung Kong’s current efforts to acquire Duet Group, an energy asset manager for which companies owned by Li Ka-Shing, Hong Kong’s richest man, are proposing to pay A$7.4 billion. The deal may also be a harbinger of where some of 2017’s big-ticket acquisitions are going to come from: private-to-private transactions.
“There’s likely to be a lot of natural resources companies looking for financial partners, for example those looking to fund LNG facilities,” Himbury says. But the bulk of deals may now be coming in the form of greenfield projects, as states like New South Wales use proceeds from sales to kick-start ambitious schemes. The latter, for instance, has a wave of hospital and prison PPPs ready to be tendered; Victoria is planning a number of large-scale transportation projects, including a revamp of its suburban arterial roads.
Yet here lies another potential source of concern, according to a greenfield-focused operator. In 2014, after the Labor Party won elections in Victoria, the state government proceeded to cancel the East West Link project, a A$5.3 billion road scheme that had been signed a month before the poll. “Market players thought it sent a really bad signal, but hoped it would be a one-off,” the investor says.
It may not turn out to be so. The precedent this debacle set now risks being used whenever state elections are sufficiently close for polarising projects to be used for political point-scoring, he adds, with threats made to tear up schemes that have already been enacted. “We’ve not witnessed this before. This suggests the emergence of some rather concerning sovereign risk.” He highlights the case of Western Australia, where the opposition has pledged to scrap the A$1.7 billion Perth Freight Link project should it win the March elections.
Not everyone is so alarmed. “There is a need for improved education over the benefits of government expenditure on infrastructure projects, including those that are in partnership with the private sector,” says O’Neil. “Because the political will for PPP projects is still very much there.” She also suggests that legitimate concerns are sometimes raised about costly schemes – the Perth Freight Link, for instance, has been questioned on environmental grounds.
One sector seems to be enjoying a renaissance. After years of uncertainty, renewables are mostly enjoying solid support from the federal government. “It’s going to be busy from now until 2020, even if there is a lack of long-term PPAs in the market. By then we will need 5GW of additional renewables capacity and this will require a lot of investment,” says Lloyd. After a few cloudy years, it seems to be green energy’s turn to be enjoying its time in the sun.