Australia and New Zealand withstood shocks in global markets from the US election and Brexit, and continued to welcome investors into infrastructure, albeit with a few hurdles, as Kate Burgess reports.
The global economy suffered back-to-back jolts in 2016 with the United Kingdom’s decision to leave the EU and Donald Trump’s election win.
The combination of these two events might have proved disastrous for existing and aspiring infrastructure investors, if it were enough to distract them from the enormous pools of capital looking for a home.
Importantly, neither event triggered a financial market meltdown. Global investor instability tends to reinforce Australian infrastructure as a safe haven, and 2016 was no exception said Whitehelm Capital’s head of Australia and Asia, Saji Anantakrishnan.
“Australia is still attractive versus the rest of the OECD world, as it has positive growth. The US has positive growth and momentum but starting from a low base in the infrastructure universe.”
The cream of the world’s fund managers continue to monitor Australia for potential investments. Global Infrastructure Partners, Brookfield Infrastructure, QIC, Hastings Funds Management and IFM Investors all raised capital at some point during the year and dominated the many auctions alongside Asian heavyweights Cheung Kong Infrastructure, China Investment Corporation and State Grid Corporation of China.
Infrastructure’s popularity combined with a relative scarcity of deals meant prices paid and valuations continued to defy vendor expectations. Some commentators believe the market is at peak value and expect prices to trend south after the US Federal Reserve starts raising interest rates again.
But many believe the pools of capital are getting larger as more institutions – including investors based in Japan and Korea – allocate more to infrastructure and that this will continue to push investors to pay more.
Hastings executive director Colin Atkin says this is resulting in a compression of yields, meaning investors are paying more for assets but earning less from them.
State government privatisations continued to offer a steady stream of deals although, as in previous years, they took time to come to market.
Victoria sold Port of Melbourne in September, a full two years after it first engaged investment banks. Expected to fetch in the region of AUD 5bn (USD 3.7bn), eyeballs popped when Treasurer Tim Pallas announced the Lonsdale Consortium’s AUD 9.7bn winning bid. In a rare crackdown on the highly successful asset recycling program, Victoria’s hopes of snaring 15% of the sale proceeds as a bonus from the federal government proved elusive, however. Now closed to new entrants, New South Wales stands to be the last beneficiary of the grants when it privatises Land and Property Information and Endeavour Energy.
Feast and famine
As promised, New South Wales and Victoria ploughed the proceeds of state asset auctions into new infrastructure schemes. New South Wales used money raised from the sale of TransGrid in 2015 to pay for the second stage of the Sydney Metro, but has not yet made it clear whether it will also tap private financing. The state also revealed plans for a second Sydney Harbour road tunnel and an underground metro line to connect central Sydney with the business hub of Parramatta.
Victoria is also enjoying the spoils of privatisation, ploughing billions into the Melbourne Metro unbundling project, the removal of dangerous level rail crossings and the Western Distributor.
“New South Wales is the shining light – it is continuing to go gangbusters. It has a lot of projects in different stages of planning and delivery and procurement,” EY Oceania infrastructure leader John Matthews says.
Playing catch up
But in the former resource powerhouses of Western Australia (WA) and Queensland (QLD), it was a very different picture. Already in election mode, WA Premier Colin Barnett has promised to float half of the AUD 16bn electricity utility Western Power if elected next March. The proceeds are to be used to fix local schools and expand the state’s transport system.
“Ports will potentially be back on the table if Colin Barnett is re-elected but it is a bit of a political hot potato and ultimately they are smaller than a power network so selling them will not make a massive dent in [WA’s] fiscal position,” PwC partner Clara Cutajar says.
Queensland, meanwhile, eschewed privatisations and is planning to self-fund its infrastructure program that includes the Cross River Rail project. This year it completed a business case for several projects and is awaiting an offer of federal funding, which has so far not been forthcoming.
“It’s a simple question of maths,” Matthews says. “The big infrastructure investment transactions that we’re seeing in NSW and Victoria are primarily getting underway because of the benefits of asset sales or very strong budget positions that NSW and Victoria are enjoying on the back of their property market, and QLD is seeing neither of those things.”
Landmark transport deals inked this year include the Canberra Light Rail and Melbourne’s High Capacity Metro Trains rolling stock procurement.
Ever a world leader in social infrastructure, New Zealand continued to push the boundaries of public procurement.
Treasurer Bill English helped progress long-held plans to address a social housing shortage, resulting in transfers of state homes in Tauranga in the North Island to private operator Accessible Properties in August.
Now the South Island wants to echo this success, with Christchurch calling for the private sector to take over up to 2,500 subsidised homes. Tamaki, the largest housing scheme, had moved ahead into EOI stage by December.
The country also tied up the procurement of Puhoi-Warkworth Motorway and put another schools PPP out to tender.
The signing of the Paris agreement at COP21 in November 2015 set an optimistic tone for would-be renewables investors who continued to buy and sell potential sites.
The AUD 2bn sale of Pacific Hydro was finalised in January, precipitating a string of other auctions including Origin Energy’s wind farms Cullerin Range and the still in progress Stockyard Hill.
Investors continued to target renewable projects with feed-in tariffs or power purchase agreements. The Australian Capital Territory handed out feed-in tariffs to Hornsdale, Crookwell Two and Sapphire Wind Farms in the final rounds of its reverse auctions.
Solar projects moved onto investors’ radars after the Australian Renewable Energy Agency awarded grants to 12 projects worth a combined AUD 1bn in September. The funding propelled Genex’s Kidston project, the Whitsunday solar farm and Manildra solar farm to begin talks to secure project finance. Origin Energy was spurred into a part-sale of Darling Downs solar farm.
“We’re seeing so much demand from banks to provide debt to renewable deals and so much demand from institutions to own renewable assets, if anything you’re seeing returns get too compressed in that space,” HRL Morrison chief investment officer Paul Newfield says.
However, even though the funds are flowing, investors are sticking to projects backed by long-term contracts where the electricity is not sold on the merchant power market.
Not enough power retailers and electricity users are offering long-term contracts, meaning most investors face a long wait for a suitable project. Impatient ones have moved to develop merchant projects, including First Solar which has acquired the Manildra Solar Farm from Infigen, and Eco Energy World, developer of a 140MW plant near Maryborough in Queensland.
Even through the Renewable Energy Target is now locked in, a fresh policy fracas looms over the energy sector and could derail progress. The federal government has ruled out putting a price on carbon as part of its 2017 Climate Change Review. Intended as a way of screening out the most emissions intensive electricity generators, it would offer a means of phasing out older coal-fired plants and put Australia on track to reach its 2030 climate goals. But infighting among the ruling Liberal-National coalition prompted Prime Minister Malcolm Turnbull to rule out a focused approach to reducing emissions in December, fueling uncertainty for owners of renewable plants.
Newfield says he expects the states to fight back with their own rules. “The federal government is trying to get to a coherent national policy framework. If they push for a coherent framework that is not sufficiently aggressive I think you will see the states acting independently which is good but not perfect.”
Two electricity behemoths vying for the Ausgrid distribution network were also at the mercy of federal politics in an election year.
After being welcomed with open arms to the auction, China’s State Grid and Cheung Kong Infrastructure (CKI) received the shocking news that they were both barred from acquiring the power network on fears Australia’s national security would be compromised if they did.
The ensuing move from IFM Investors and AustralianSuper to lob an unsolicited proposal for AUD 16.8bn with solely domestic money was surprising, PwC partner Clara Cutajar says.
Foreign investors of all stripes were left reeling, with many unsure about what rules would apply to future asset sales, including Endeavour Energy. But the Foreign Investment Review Board (FIRB) stepped in and clarified the rules for investors before the process began in early December.
“What people want is clarity and to know in advance what the landscape is. The more clarity we can have on policy settings and what they mean and how they are going to be interpreted, the better value for investors and markets generally,” EY’s Matthews says.
With the auction in the early stages, foreign investors are believed to be interested, which Cutajar says is a good sign.
CKI was also a protagonist in perhaps the final plot twist of the year. In early December it swooped on the ASX-listed Duet Group with an AUD 7.3bn takeover offer, a reminder that its interest in Australian utilities goes unsatiated.
If it goes ahead, the transaction will be the first important test for the FIRB since the Ausgrid debacle, and will show the extent to which the Australian government really fears foreign ownership of its power grids can compromise national security.