The arduous road ahead

Soufflé may not be an Australian speciality, but symbolises the recent fortunes of the country’s infrastructure markets rather well. The light, fluffy baked dish is famous in France for looking huge when it comes out of the oven, but suddenly deflating when the tip of a knife pokes its surface. The event causing this kind of mischief is a surprise turn in Australia’s political climate – which threatens to derail much of its promised privatisation programme and puts billions of planned projects in doubt.

Up until recently, the cake looked very big indeed. As the country’s most populous states prepared to auction off about A$100 billion (€68 billion; $78 billion) of infrastructure assets in the space of 18 months, investors were bolstering their teams to bid for a slice of what many saw as an unprecedented opportunity. The prizes varied greatly in size and nature, from six ‘poles and wires’ businesses and electricity generators to ports and bulk ports. But for the governments involved, they all served a similar purpose: replenish state coffers with a view to funding new infrastructure projects.

Australia’s privatisation story had another distinctive twist to it. Not only was the timing for sales an especially good one, with investor demand likely to push valuations to very high levels and generously compensate governments for parting with public assets. It also happened that the majority of new owners would be domestic superannuation funds or asset managers acting on their behalf. Assets, it was said, would thus effectively transfer from the hands of taxpayers to those of superannuants – and, as such, remain a property of the general public.

This concept, popularised by Mike Baird, New South Wales’ Premier, had a name: “social privatisation.” But as the story later proved, not everybody believed it. The first cracks appeared when Victoria’s new Labor government, elected in November, vowed to cancel Melbourne’s A$6.8 billion East West Link toll road. Although the move did not come as a surprise – it had been part of the party’s manifesto since September – it showed the investor community that elections could cause promised projects to be revoked overnight even after contracts were signed. The consortium previously chosen to develop the motorway, which includes Capella Capital, QIC, John Laing, Lend Lease, Acciona and Bouygues, has since begun legal proceedings against the government.

But the real thunderbolt came when Labor, in a surprise reversal of electoral fortunes, earned the right to form a minority government in Queensland at the end of January. Plans to privatise A$37 billion of assets, to which Labor objected, were consequently shelved. Crucially, however, these looked dead in the water even before it became clear that the Liberal party was leaving government: the election results were seen across the political spectrum as a resounding vote against the privatisation programme, and, in its last hopes of forming a minority coalition, the outgoing party dropped its pledges to honour it.

The Queensland developments matter a great deal to the rest of the country – and in particular in New South Wales, where the incumbent Liberal party faces a similar contest in elections due this month. Labor leaders are planning to fight the battle partly along infrastructure lines, declaring their intention to pursue a “modest” set of projects – worth half the A$20 billion promised by the outgoing Premier – and cancel the privatisation of electicity assets. Among other implications, the move would delay construction of a second Sydney Harbour rail crossing and radically alter plans for the A$500 million WestConnex motorway. Meanwhile, polls show ebbing support for Baird’s privatisation programme, potentially putting pressure on the leader to drop its most controversial aspects.

There are no signs of this for now. But investors are closely watching: 50 percent of respondents to a poll posted on InfrastructureInvestor.com at the beginning of last month think the dampening effect of elections on asset sales will be the market’s defining feature over the coming year. A quarter reckon bidding wars will push prices over the edge, possibly as a result of fierce competition for a reduced pool of assets. Australia clearly has some appetising assets to sell – but it no longer seems able to deliver the privatisation banquet it once promised.