NSW auditor critical of Ausgrid deal

11 December 2018 - 12:00 am UTC

IFM and AustralianSuper’s AUD 16.2bn (USD 11.7bn) unsolicited bid for the 99-year lease of 50.4% of Ausgrid did not meet the required “uniqueness” test, according to the NSW auditor general.

An audit report of the deal released on Tuesday (11 December) by the NSW Audit Office found three main flaws in the governments processes relating to the deal.

The primary one named was a lack of uniqueness of the unsolicited proposal, a key test for whether the government should accept such an offer without going to tender.

‘Uniqueness is a threshold issue,” the Auditor-General, Margaret Crawford, said in the report. 

“No matter how good a deal seems, to proceed without competition, there must be no doubt that both the proposal and proponent are unique. The standard of proof must be high and competition must prevail in all but the rarest of circumstances.”

The report states: “The evidence did not show beyond doubt that no other proponent could have put in a viable bid or that there was no other way to conclude the lease transaction.”

IFM and AustralianSuper made the bid in September 2016 after two shortlisted Chinese bidders – State Grid Corp of China and Hong Kong-based CKI Group – were both blocked in August that year from bidding for Ausgrid by the then federal Treasurer, Scott Morrison, citing national security concerns.

When the government announced it had accepted the IFM-led bid on 20 October, then Premier Mike Baird said the offer was unique because it was all Australian and would not need approval by the Foreign Investment Review Board. At the time Baird said the NSW government had received no other offer and there was little prospect of FIRB accepting a foreign investor owning Ausgrid.

The auditor also criticised the government’s negotiation process and governance of the transaction.

It said the government disclosed what would be an acceptable price early in the negotiations with the consortium, “reducing the likelihood of achieving a substantially higher price”.

The report discloses the negotiation process between the state and the bidder between 31 August and 22 September 2016.

The consortium initially proposed a price of 1.3 times Ausgrid’s existing regulated asset base, but the government said it would need to meet at least 1.4x its forecast RAB, which equated to an enterprise value of AUD 21.36bn. IFM and AustralianSuper matched that proposal, but later changed it to 1.4x Ausgrid’s actual RAB as updated figures on that were released during the negotiations.

The audit report said the government said it would go on to the next stage of negotiations if the bidder agreed to “split the difference”. By 22 September the state and the consortium had agreed on 1.41x Ausgrid’s existing RAB, or AUD 20.75bn, about AUD 610m less than the government said would be acceptable at the beginning of negotiations.

The audit report also criticised the government for not having any documented reserve price or negotiation strategy, although the auditor conceded the government did seek advice on whether the bid delivered value for money.

The audit report said the government also did not maintain appropriate separation between “the negotiation, assessment and review processes”.

 

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