The weak link

What’s the main difference between disappointment and anger? The former is what grips you when you feel unlucky to lose a game, the latter is what makes you berate someone when you believe you’ve been cheated.

In the grand game of infrastructure investment, Australia has recently given private players occasions to display both. Disappointment is what many fund managers and the institutions they represent must have faced when Queensland’s Labor government, upon sealing an unexpected win during last January’s elections, decided to cancel a good chunk of the state’s A$37 billion (€26.6 billion; $28.6 billion) programme of privatisation. A tough outcome that’s not likely to win the public sector many friends among private investors – but not one they can legally object to.

Anger, by contrast, must have shaken the winning consortium when the Victoria government threatened to introduce fresh legislation to try and avoid paying any compensation on the state’s cancellation of the A$5.3 billion East West Link project. Not only did the likes of Lend Lease, Capella Capital and QIC stand to lose a big chunk of revenue when the toll road project was scrapped by the newly elected Labor administration, they were also going to miss out on hundreds of millions in contractually agreed reparation.

It is thus good news for their purse and morale that Premier Daniel Andrews eventually agreed to pay A$339 million to the consortium. Refusing to describe it as compensation – which according to the letter of the contract could have reached A$1.2 billion – the payment was seen as a form of reimbursement of costs already incurred by the companies. It is nonetheless reassuring that, in the end, the government refrained from changing the rules of the game to evade its obligations.

“The Andrews government is right to avoid legislation, because it needs investors to be confident that government contracts are worth the paper they’re written on. Finalising arrangements to cancel the East West Link road will allow the Andrews government to refocus on the projects that it will build,” commented Brendan Lyon, chief executive of industry body Infrastructure Partnerships Australia, at the time.

Skies have also brightened on the privatisation front, letting some investors believe that Queensland’s volte-face may be a one-off. The re-election of Mike Baird’s Liberal-National Coalition in New South Wales in March opened the way for the sale of its poles and wires businesses, through which it hopes to raise as much as A$13 billion. The deal was a key plank of Australia’s original A$100 billion asset disposal programme, the proceeds of which were to be recycled in sizeable greenfield projects.

Yet on that precise subject, uncertainties remain. In another sign that political risk is still clouding prospects Down Under, the opposition Liberal party in Australian Capital Territory (ACT) threatened to retroactively terminate the planned A$800 million Capital Metro project if it wins state elections next year. This is despite two groups, whose members include fund managers Aberdeen Infrastructure Investments and Partners Group, having already been chosen as preferred consortia following an Expressions of Interest stage.

Most investors seem so far unphased. It emerged last month that US firm Global Infrastructure Partners, having beefed up its local team, is preparing to launch an Australian dollar-denominated fund to better target the market next year. Dutch-based DIF is in the process of opening an office in Sydney, while blue-chip Canadian pensions are bulking up their presence in the country. In a world where competition rages across most developed markets, investors seem to think feeling disappointed or angry remains a risk worth taking.