Sold to the highest bidder

Two recent transactions may come to be seen as a tipping point for the approach to infrastructure in Australia.

For some time now, the country – with varying degrees of commitment in different states – has been promoting the idea of “social privatisation”. This implies some ongoing benefit to the public when “their” assets are sold into private hands.

Another word oft-used in the Australian context is “recycling” – which is really the method by which the country is seeking to realise this equitable transfer from public to private.

What it means is that, when existing assets are sold, at least a portion of the proceeds (if not the whole lot) goes towards spending on new infrastructure. This is a neat solution and provides an obvious public benefit for a country with a hefty infrastructure deficit (it has been estimated that it needs to double its infrastructure spending over the next decade to close that gap).

This week’s sale of a 98-year lease of Port of Newcastle by the New South Wales (NSW) government ticked two very important boxes. Firstly, the A$1.75 billion (€1.2 billion; $1.6 billion) price paid for the asset by Hastings Funds Management and China Merchants far exceeded the A$700 million sale receipts that the government had budgeted for.

Secondly, the chunky proceeds – as a press statement from the winning bidders was keen to stress – were to be put to highly visible public use. “It was important to us that a large part of the proceeds being provided by the Consortium will be reinvested to revitalise the City of Newcastle,” noted Hastings’ executive director Peter Taylor.

Moreover, this week’s deal follows the previous week’s A$7.057 billion sale of Queensland Motorways to a consortium of private investors by QIC on behalf of the Queensland government. This deal also delivered inflated returns. The asset had a market value of A$3.1 billion when it was placed in QIC’s care in 2011 and analysts had expected it to change hands for between A$5.0 billion and A$6.5 billion this time around.

Nor are these unexpected windfalls solely a 2014 phenomenon. Back in April last year, 99-year lease sales at NSW’s Ports Botany and Kembla delivered A$5.07 billion – compared with a budgeted A$3 billion – with the proceeds set aside for high-profile infrastructure road projects such as WestConnex.

Such successes are bound to give encouragement to those who are now setting their sights on a range of other assets that may come up for grabs in the near future. Among these are the Queensland ports of Gladstone and Townsville, Port of Melbourne, port and water assets in Western Australia and the “jewels in the Crown”, the electricity transmission and distribution assets in NSW and Queensland. The NSW poles and wires business alone is tipped to fetch a value in excess of A$30 billion.

“The Port of Newcastle outcome confirms the very strong demand for quality assets in the infrastructure sector, and there will be more deals to come,” said Andrew Rentoul, head of infrastructure at law firm Minter Ellison, in a recent statement. “Australia is a very attractive destination for funds and operators, with quality assets, a stable economy, proximity to Asia and low sovereign risk.”

Controversial

If such confidence makes privatisation sound like a home run in Australia, it’s worth considering that it is – as in most places – a controversial subject. The much-touted sale of NSW’s electricity networks has met with staunch resistance despite the expected windfall – with a Fairfax/Nielsen poll of NSW voters earlier this year showing 74 percent opposed to the move. It may take more than clever branding to turn that around.

Nonetheless, the success of recent auctions – coupled with newly introduced tax incentives whereby corporate tax charged to private buyers goes to state rather than federal government – can only give confidence to the sellers and momentum to the market.