When it first privatised a slew of airports in the 1990s, Australia took a one-way ticket. The journey was worth it: the state collected lumps of cash, the airports got a revamp and the 24 million-strong nation became the champion of what would develop into a highly sought-after global asset class.
As our inaugural Australia Forum attested in Melbourne this Tuesday, the risk Australia took as a pioneer is being handsomely rewarded. Even before the conference had officially started, we'd already met two Canadian pension funds that were in the midst of doubling the teams they'd recently dispatched to the country. Alongside global fund managers and Asian sovereign wealth funds, they are among those who now see Australia as an infrastructure market punching well above its demographic weight – and who are ready to put their money where their mouth is to get a slice of the opportunity.
International interest largely derives from a concept as straightforward as most Australians themselves: asset recycling. Australian states are encouraged to sell brownfield, operating assets to institutional investors looking for long-term yield; if they can prove they'll reinvest the sale proceeds in greenfield projects, they get a 15 percent top-up from a $5 billion federal fund. As a result, big-ticket assets like ports and grids are being put on the block, attracting trophy hunters from around the globe. Newbuild specialists are also setting up shop, positioning themselves to surf the ensuing greenfield wave.
But if the idea is simple, the practice is proving more complicated. For a start, not every state has wholeheartedly embraced privatisation: Queensland dropped its A$37 billion ($27 billion; €24 billion) asset disposal programmeafter the Labor party got elected last year on a mandate opposing asset sales. In other cases, it is greenfield projects that are being cancelled. Victoria last year agreed to pay A$339 million to the winner of the A$5.3 billion East West Link project that the new government subsequently decided to scrap.
With fresh federal elections due in less than a month – whose outcome could produce Australia's sixth prime minister in nearly as many years – the end of political volatility is not guaranteed.
Other flashpoints have also been observed at the regulatory level. Revisions to the country's renewable energy target caught some investors wrong-footed (though signs now point to a more solid commitment to clean energy). And last week, the Australian Competition Tribunal effectively barred Port of Newcastle's new private owners from enacting post-privatisation fee increases to access the hub's shipping channel.
All of this means the current asset recycling programme may have difficulties completing if friction exists at nearly all levels, in turn hampering hoped-for dealflow. Some Australian super funds, like UniSuper, are taking a conservative approach to the number of opportunities available in the short-term – and are pondering whether to develop offshore capabilities to start targeting a broader opportunity set.
Yet for all this the lure of Australia is here to stay. Equity returns are being compressed, but debt is cheap. Investors' return expectations and focus on fees put pressure on fund managers, but as the best in class demonstrate their ability to source deals, some leniency is warranted. And while mining has lost much of its appeal, Australia's rapidly growing population means major infrastructure projects are urgently needed.
A couple of days before the Forum started, the strongest rainfall in 15 years thoroughly drenched Sydney. As the Australian market gets ever more crowded, it may also be in for a period of turbulence – but more clement weather probably lies ahead.
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