Take nothing for granted

In the introduction to the July/August 2014 issue of Infrastructure Investor, we reflected on what appeared to be two impressive victories for Australia. One was the racehorse named Australia, which sprinted clear of the field to collect the winner’s prize money in England’s prestigious Epsom Derby. At around the same time, we nominated Australia as the world’s top infrastructure “hot market”.

Since that feature was published, we received some feedback from readers pointing out that our accolade was at best a mixed blessing. And we can only agree with that assessment. On the debit side, Australia’s healthy current deal pipeline – which we focused on in the feature in question – has attracted so much interest that there is of course the danger of unwise deals being struck as bid prices soar to unexpected levels. Being a hot market is not necessarily the same thing as being a rational or sustainable market.

What we did not question, however, was what seemed to be the inevitability of Australia delivering the goods when it came to deal flow. With states needing to sell off assets to help balance the books – and with multi-billion-dollar deals such as Queensland Motorways and Ports Botany and Kembla already signed and sealed – fund managers were, quite justifiably in our view, licking their lips in anticipation of what lay ahead.

Asset recycling fund

One of the main reasons for optimism was a federal government plan to spur state asset sales through a A$5 billion (€3.5 billion; $4.7 billion) asset recycling fund which involves paying the states incentives if they sell existing assets and reinvest proceeds of the sales into new infrastructure. However that scheme, the brainchild of Liberal/National coalition government Treasurer Joe Hockey, recently came under threat.

The Australian Senate refused to allow the plan to proceed as originally slated, with opposition parties demanding key changes including powers to block incentive payments, the removal of one of the scheme’s funding sources (involving a A$3.5 billion transfer from the Education Investment Fund), and the requirement for a cost-benefit analysis for all projects worth more than A$100 million.

Eventually, the scheme was passed only by incorporating amendments allowing Parliament to veto incentives on a case-by-case basis and the requested cost-benefit analysis – to be conducted by government advisory body Infrastructure Australia – before payments are approved. The eventual agreement does not scupper the scheme, but does introduce more checks and balances into the process. While this may be seen as a good thing from a governance point of view, it will also almost certainly go hand in hand with unwelcome delays.

The Australian Senate tussle is a reminder that, even in markets where infrastructure is at the top of the agenda and appears to have the benefit of strong tailwinds, the need for political compromise can throw a spanner into the works.

In another famous English horse race, the 1956 Grand National, Devon Loch – owned by the Queen Mother – had cleared the final fence, was clear of the field and had the scent of victory in his flaring nostrils. At which point, for reasons probably known only to the horse, he suddenly jumped into the air and – legs splayed – landed on his stomach. Devon Loch’s erstwhile pursuers galloped past the stricken animal.

The conclusion, of course, is that nothing should ever be taken for granted. “Oh, that’s racing,” was the Queen Mother’s famously relaxed reaction afterwards. “Oh, that’s politics,” is the similarly stoic response sometimes required of infrastructure investors – even in the world’s hottest markets.