End of an era? Not so fast

With large-scale projects in the pipeline, add-on investments to be done, a promising renewables market and interesting opportunities for those willing to venture off the beaten path, tales of the Australian market’s death have been greatly exaggerated.

I wouldn’t say it’s ‘over’, because at the moment, we’ve got one of the largest-scale privatisations in Australia under way,” answers Roger Lloyd, chief executive at Palisade Investment Partners when asked whether the country’s large-scale privatisations have come to an end.

The deal he’s referring to is the sale of a 51 percent stake in the Sydney Motorway Corporation, the New South Wales state-owned entity charged with developing and operating WestConnex, a A$16.8 billion ($13.2 billion; €10.7 billion) road project – Australia’s largest – which will improve east-west connectivity in Sydney and which is currently under construction.

“It’s a really big opportunity in a major East Coast city,” comments Ross Israel, QIC’s global head of infrastructure. “It certainly would provide the opportunity to create a platform in Australian toll roads. It’s got that scale which is likely to attract a number of strategics.”

Another mega-project currently in the works is the A$5.4 billion Cross River Rail. Last June, the Queensland government committed to fully funding the 10.2 km north-south link in Brisbane, allocating A$2.8 billion in the 2017-18 budget, while the remaining A$2.6 billion will be committed in subsequent years.

Split into two packages, the second and larger component – the Tunnel, Stations and Development package – will be procured as a PPP. The concession period is set to last between 20 and 30 years, and Queensland expects to launch the RFP phase early this year, with a view to reaching contractual close in mid-2019. The project will become operational in 2024.

Spanning 1,700 km and traversing three states – Queensland, New South Wales and Victoria – Inland Rail is the largest freight rail infrastructure project in the country and one that is likely to draw investors’ attention when the federal government begins procuring part of it as a PPP.

The A$9.3 billion project, which will become operational by 2024-25, will accommodate double-stacked trains up to 1,800 metres long and achieve a travel time of less than 24 hours between Melbourne and Brisbane.

Follow-on investments

But, it’s not just new mega projects that comprise Australia’s infrastructure opportunity universe. As Michael Cummings, partner and global co-head of asset management at AMP Capital points out: “privatisations and long-term leases are only part of the story. There’s still significant investments going on in the existing assets.

“For example, we’re the largest investor in Melbourne Airport,” Cummings continues, referring to an asset the firm initially invested in when it was privatised in 1997. “We’ll be spending billions of dollars over the next few years, investing in runways, terminals, roads. And so, just because there are no new privatisations per se, doesn’t mean there isn’t ongoing investment by government or the private sector in Australian infrastructure.”

Frank Kwok, co-head of Macquarie Infrastructure and Real Assets Asia-Pacific, offers an additional perspective: “Privatisations are always more public and appropriately so, because of the importance of community understanding and endorsement.

“I think the Australian market is one where governments are continuously looking at the assets they hold, which can be operated by the private sector and monetising them to fund other infrastructure projects.”

Kwok goes on to cite recent announcements by the governments of Victoria and Western Australia, which are looking at the potential long-term leases of their respective land registries.

Outside the infrastructure ‘box’?

The mention of land registries inevitably brings up the question of whether such assets qualify as infrastructure. For MIRA, the answer is ‘yes.’

Last August, the fund manager, in partnership with Canadian pension PSP Investments, paid A$1.6 billion for the right to run South Australia’s land registry for 40 years.

“We believe that land registries have characteristics that are very attractive to our underlying investors who are looking for long-term, stable cash flows,” Kwok explains. “Land registries provide an essential service and have very high barriers to entry, especially here in Australia, as they are the single source of truth in terms of verifying ownership,” he adds.

“Privatisations and long-term leases are only part of the story. Just because there are no new privatisations per se, doesn’t mean there isn’t ongoing investment”
Michael Cummings, AMP Capital

But assets such as land registries or lottery systems do not satisfy everyone’s definition of infrastructure.

“There are characteristics that could qualify [land registries] as infrastructure but not under the investment mandates that we have from investors,” QIC’s Israel notes. “We would frame registry opportunities more as private equity than infrastructure.”

For AMP Capital the answer is a bit more open-ended.

“We invest very heavily in our asset management capability,” Cummings says. “We look for opportunities where we can add value as an investment manager. And, yes, that means we look at opportunities that wouldn’t be regarded as core infrastructure, but they would be in areas where we have both the capability and the experience to actively manage those assets – such as energy, transport, communication and health infrastructure,” he explains.

While the industry professionals we spoke to may have differing views about how strict they and their organisations are in how they define infrastructure, they all agree that the ‘intensity’ of previous years – both in terms of privatisations but also PPPs – is tapering off. One reason for that is that the Asset Recycling Initiative, a scheme the federal government launched in 2014 that provided state governments incentives to privatise state-owned assets, has ended. The other reason is politics. Queensland and Victoria, for example have Labour governments in office, which tend not to be pro-privatisation.

“But that doesn’t diminish the fact that there are still opportunities in terms of infrastructure growth,” QIC’s Israel comments. “There’s certainly the prospect of a pipeline in the future in each of these states, but we don’t, in the short-to-medium term, have as much definition on a brownfield privatisation agenda as we did, particularly in NSW, in 2016 and 2017,” he concedes.

MIRA’s Kwok doesn’t consider political persuasion to be an issue: “Australia has privatised infrastructure assets for more than 20 years, during which time a variety of political parties have been in government, at both a state and federal level.”

Resetting renewable targets

One sector where a political divide is much more evident is renewables.

With the current Renewable Energy Target, which aims for 23.5 percent of Australia’s overall electricity being generated from renewable sources expiring in 2020, many investors and industry observers have complained about a lack of certainty in the market. While the federal government is working towards formulating a scheme to replace the current one, its approach has sparked intense debate.

Following a state-wide blackout that left South Australia’s 1.7 million residents in the dark in September 2016, the Australian government commissioned its chief scientist, Alan Finkel, to draw up a proposal that would address the country’s energy needs.

In June 2017, Finkel presented his recommendations in what came to be known as the ‘Finkel Review’, focusing on increased security, reliability and lower emissions. Key among his recommendations was establishing a Clean Energy Target, which would require electricity producers to provide a set percentage of their power from clean technology sources, such as renewables and natural gas.

In October, however, Malcolm Turnbull’s administration presented its own plan – the National Energy Guarantee. While the NEG also provides for a reliability and emissions guarantee, it shifts the onus to energy retailers and large power users to acquire a certain percentage of generation that is sourced from lower emissions technology.

Another key difference between Finkel’s ‘blueprint’ and the government’s proposal is that, while the former called for a long-term emissions reduction trajectory beyond 2030, the NEG aims to reduce emissions by between 26 percent and 28 percent on 2005 levels – enough for Australia to meet its commitment to the Paris Agreement by 2030.

Critics of the National Energy Guarantee, which includes the federal Labour party, claim that it will hurt the renewables sector due to a lack of incentives for new investments while favouring coal-fired generation and large power monopolies.

At a meeting of energy ministers last November, Tom Koutsantonis and Shane Rattenbury, energy ministers of South Australia and the Australian Capital Territory respectively, had urged the government to provide detailed comparisons between the NEG and other alternatives, such as Finkel’s CET as well as an emissions trading scheme. However, they were outvoted by their counterparts in New South Wales, Victoria and Tasmania as well as federal energy minister Josh Frydenberg.

Instead, the energy ministers decided that further work on the NEG would proceed without detailed comparisons of alternative options as directed by the energy ministers’ council within the Council of Australian Governments, an inter-governmental forum, consisting of the federal government, the governments of the six states and two mainland territories and the Australian Local Government Association.

There are a number of elements surrounding the NEG that the government needs to define. One of the key questions is at what threshold the emissions reduction target will be set. According to Bloomberg, which last November produced its own independent modelling, “the outlook for renewable energy depends squarely on the ambition of the emissions reduction target”.

“The government’s -28 percent by 2030 target could decimate large-scale wind and solar construction, whilst Labour’s -45 percent (two degree pathway) would continue the current boom,” Bloomberg said.

Still, despite the NEG being a work in progress, “we’re still keen on the sector”, Palisade Investment Partners’ Lloyd says. “Whilst the Renewable Energy Target doesn’t currently have a successor past 2020 – and with that comes revenue uncertainty post-2030 if you don’t have contracted cash flows, which we target, the states have set ambitious targets.”

According to Climate Council, an independent non-profit organisation, state and territory governments are leading Australia’s electricity transition from fossil fuels to renewable energy and storage, setting targets and scheduling coal plant closures that would be enough to achieve the country’s emissions reduction target of 26 percent to 28 percent on 2005 levels by 2030 “even without any action from the federal government”.

“Look, the federal government has sort of been mired in this policy uncertainty for so long that the rest of the country and the rest of the globe has overtaken them,” a source, who spoke on the condition of anonymity, told Infrastructure Investor.

“Remember that we are a country that makes a lot of money off our resources and that includes coal. So, you’ve got conflicting agendas and that’s one of the reasons why the federal government is not providing the level of support it should to the renewables sector,” the source said.

“I think that a policy, despite its pros and cons, is better than where we were before,” Israel of QIC remarks. “To some extent, the uncertainty has been dissipated by government policy and the Finkel Review coming together in 2017.”

MIRA’s Kwok is also optimistic that the government will have a successor in place before the RET expires in 2020.

“I think in Australia there will be a policy of some sort, which will replace the RET,” Kwok comments. “But, I think more importantly, in the longer term – not just in Australia, but globally – we won’t be talking so much about the need for subsidies or policies for renewables as we have in the past.”

Cummings of AMP Capital agrees on that last point. “I think government policy only goes so far. I think technology and disruption are going to be much more of a driver for investments in the sector.”

“Land registries have characteristics that are very attractive to our underlying investors” Frank Kwok, Macquarie Infrastructure and Real Assets Asia-Pacific

While AMP Capital likes investing in renewables – it has done so in Ireland and the US – it is sceptical about doing so in Australia at the moment.

“We’ve had a look at some renewables deals in Australia, but the dynamic is such that while demand is high, the supply of good deals is quite limited with prices having gone through the roof as a result,” Cummings explains.

“We see ourselves being the second owner of a number of these. We think there’s going to be a bit of a shake up in the industry, because we think some of these investments have been made at a price that is not sustainable,” he continues.

“Having a global team, we believe a better strategy has been to look at the sector on a global basis; assess risk in the long term and invest in the sector when and where we believe we can add value and the price is reflective of the risk, which we don’t think it is currently in Australia.”

Tightening regulations

Energy policy is not the only topic sparking debate in Australia these days. Another, is the country’s tightening rules around foreign ownership of infrastructure assets. Shortly before going to press, Australia’s Treasurer Scott Morrison announced the government is implementing new rules on foreign investors seeking to acquire electricity assets.

“This approach will allow the government to actively manage the level of ownership and control from investors in a single asset or within a sector,” the Treasury said in a statement, adding that each case will be assessed individually, taking into account such factors as the cumulative ownership within a sector, the need for diversity of ownership and the asset’s critical importance.

The announcement comes a year after the Australian government launched the Critical Infrastructure Centre, which falls under the jurisdiction of the newly established Department of Home Affairs, and is tasked with identifying which assets are considered critical infrastructure as well as their vulnerabilities.

One of the objectives of the CIC is to provide investors with greater clarity early on in the sales process. The industry professionals we spoke with agreed that recent government measures may indeed have that effect.

“We’ve got a very large pension industry here, as well as a lot of offshore capital that’s interested in large-scale critical infrastructure assets,” Palisade Investment Partners’ Lloyd comments. “Being aware of the rules upfront will make life easier.”

“I think for foreign investors it’s important to assess the ownership restrictions that may apply and decide if partnering with local capital makes sense for them,” Israel points out.

“But, I don’t think it’s a theme that exists only in Australia,” he continues. “We believe there’s always a case to be made with respect to regulated assets that having local investors provides a level of political insurance, and it is prudent to be connected with local stakeholders – regulators, customers and governments.”

Macquarie’s Kwok echoes that view. “Every country in the world, I think, probably has more discussion on foreign investment in infrastructure than they did five years ago. I think it’s the reality of the world, but I’m not sure it’s changed anything in terms of investor sentiment.