Outside the public eye(2)

There’s more to the Australian infrastructure market than mega-privatisations.

Australia is a land of superlatives. A nation 30 times the size of the UK – but with only a third of its population – it has about $1.75 trillion in pension money looking to be invested. Its largest investors – aptly dubbed ‘super funds’ – allocate more to infrastructure there than anywhere else, with 8 percent of their treasure chest said to be targeting the asset class. And this demand is meeting robust supply: nearly $43 billion worth of transactions were sealed in the country over the last 12 months, not far off the $48 billion completed during the same period in the UK.

Part of this dynamism – and a lot of the media limelight attached to it – can be credited to Australia’s pioneering privatisations. Recent transactions such as the A$1.75 billion sale of Port of Newcastle, the A$5.07 billion takeover of Ports Botany and Kembla and the A$7.057 billion sale of Queensland Motorways have put Australia more firmly on the map of overseas investors as well as providing newspapers with handy headlines. With valuations reaching up to 27 times earnings, such deals have also delivered great value to the taxpayer and given states further ammunition to build new assets.

Which is why this privatisation push is likely to continue. The federal government recently announced A$5 billion worth of incentives for states to divest mature infrastructure assets, provided the proceeds are recycled in greenfield projects. Local practitioners expect the dealflow to accelerate as Australia’s most populous states – including Queensland and New South Wales – approach next year’s elections, and a number of large assets in other key regions, such as Victoria’s Port of Melbourne, are due to be put on the block soon. Infrastructure Australia, an advisory body, says assets worth a total of A$100 billion could transfer to private hands relatively quickly.

Yet industry players caution against exclusively relying on mammoth privatisations. A number of them, they reckon, depend on binary decisions by state governments, so could well fail to materialise. Most importantly, these highly-publicised auction processes are attracting new levels of competition, with large pensions and fund managers from overseas willing to sign big cheques for a slice of the prize. Should valuations further climb and risk-adjusted returns start to compare unfavourably with the rest of the world, insiders say, this ‘mobile capital’ could go elsewhere and the market rapidly deflate.

Such fears may not be entirely warranted. While it is true that Australia is currently enjoying a unique window of opportunity – displaying attractive assets and a positive growth story at a time when the rest of the world lacks both investment opportunities and economic traction – the market has more to offer than massive privatisations. Should these suddenly become harder to bid for, industry players – especially locals – reckon there’ll still be enough to keep their teams busy.

Mainly this is because a lot of profitable assets are already in private hands. Some of these, including large energy projects in Queensland, are likely to be recycled in the near future by owners in need of cash to reinvest or looking to refocus their businesses. As institutions focus on bigger-ticket deals, there’s also a natural opportunity for other players to pick up smaller assets that their larger peers have in their portfolio but no longer have time to manage. These span a large array of sectors, from renewable energy and social infrastructure public-private partnerships (PPPs) to intermodal port terminals and smaller airports, and generally reach less exuberant valuations.

But it’s also a lot to do with what’s already within investors’ portfolios, in the form of assets that have been privatised over the last few decades. Buyers are keen to explain that the high valuations reached by ports, airports or road networks can only be justified by the growth and efficiencies that can be derived from skilful asset management. And this comes with the need to deploy more money. “I can’t think of any airport that’s been privatised into which its new owners haven’t pumped at least half a billion dollars towards growing the business,” a Sydney-based fund manager recently told us.

This other side of the privatisation story is an important one to tell – even if it doesn’t make for headlines as attention-grabbing as the initial deals. And it provides further reason to remain upbeat about the Australian market.