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Australia risks giving off wrong impression on foreign capital

High-profile ‘nos’ to Chinese capital have culminated in a grid sale proposal that completely excludes foreign capital. Are Australian assets the exclusive preserve of Australian investors from now on?

It is very much a sign of the times – while also unmistakably a product of the investment landscape Down Under – that the Western Australian government put out a proposal recently to float 51 percent of state-owned electricity transmission network Western Power that completely excludes foreign capital.

The proposal opens Western Power up to domestic superannuation funds and retail investors and is justified thusly by Treasurer Mike Nahan: “This model will address any national security concerns about foreign ownership. Western Power will not be foreign owned or controlled.”

Those familiar with recent Australian power privatisations will recognise Nahan's allusion to the fraught sale process for New South Wales' Ausgrid, where the two initial Chinese bidders – Hong Kong's Cheung Kong Infrastructure and China's State Grid – were rejected on grounds of national security. Ausgrid was subsequently snapped up by an 'Australian made' consortium of IFM Investors and AustralianSuper, which tabled an unsolicited A$16.2 billion ($12.4 billion; €11.3 billion) bid.

At first blush, it would be tempting to read the state government's decision as a sign of our increasingly protectionist times. But while the current climate might have emboldened the Western Australian government, its decision has to be seen squarely in an Australian context.

Put simply, Australia is being flooded with Chinese foreign investment. Last year alone, according to a KPMG/University of Sydney report , Chinese investment in Australia grew by 60 percent to $15 billion. While most of that capital went into real estate, increasing amounts are being channelled into other sectors, like healthcare and infrastructure. Unfortunately, not all of that capital has flowed smoothly into the latter.

We are referring, of course, to the controversial 99-year lease of Port of Darwin to China's Landbridge Group, awarded in October 2015, which prompted a flurry of condemnation. At the heart of the criticism were Landbridge Group's alleged close ties to the Chinese military, the fact that Darwin happens to be a hub of military cooperation between Australia and the US, and the deal's lack of scrutiny by Australia's Foreign Investment Review Board.

Since then, the federal government and the FIRB have upped their inspection on asset sales, which have resulted in two high-profile 'nos' to Chinese capital: the Ausgrid deal and last year's rejection of the Chinese-led A$371 million bid for the S Kidman cattle business , Australia's biggest landholder.

But while the Australian government has every right to bar foreign investment on national security grounds, the way it's going about it risks giving off the wrong impression. Take Ausgrid. After the federal government rejected the Chinese bids, a flustered NSW Premier Mike Baird told reporters: “My frustration is that this should have been determined much earlier”.

What followed looks less than perfect. Rather than re-open the bid process, NSW decided to go with the unsolicited proposal from IFM/AustralianSuper. One of the requirements of unsolicited proposals is that they be 'unique'. In Ausgrid's case, Baird said the uniqueness could be found in the consortium's “100 percent Australian ownership”. This, of course, is not a knock on IFM/AustralianSuper and good on them for swooping in for the kill.

It's also important to note that not all state governments are being hostile to foreign capital. After all, the Victorian government recently leased Port of Melbourne to a multinational consortium that included a $900 million cheque from China Investment Corporation . But it's hard not to look at the Western Australian government's decision as anything other than a blanket solution to avoid NSW's woes.

The real question is: do authorities want to bar all foreign capital, or just state-backed Chinese capital?

After being rejected from Ausgrid, Cheung Kong Infrastructure is seeking an answer to that very same question, having this week tabled a A$7.3 billion unsolicited offer for listed energy firm Duet Group . If the latter's board of directors ends up recommending the bid, all eyes will be on the federal watchdog's final decision.

Still, it is not great to see a state government decide to completely exclude foreign capital from a bid process to avoid the potential pitfalls of federal scrutiny. As a global publication covering the global flow of private capital into infrastructure, we see this as very bad news indeed.

Write to the author at bruno.a@peimedia.com