Medibank was chickenfeed compared to looming state sell-offs

A wave of state asset privatisations in the new year will provide big opportunities for global infrastructure investors, and could even eclipse the Medibank bonanza.

The federal government’s $5.7 billion sell-off of Medibank Private stole the limelight for investors in the second half of this year. But that deal will be dwarfed by the state asset privatisations that will be set in motion in the new year.

Among the assets on the block via long-term leases will be New South Wales’ electricity transmission and distribution networks, known as the poles and wires; Queensland’s electricity generators and distributors; and the Port of Melbourne.

The enterprise value of the assets is approaching $50bn.

These large deals will be the preserve of large infrastructure investors: Australian super funds, overseas pension funds and sovereign wealth funds. Most of the international players won’t take part in a deal unless they can invest at least $750m, and several are established investors in local infrastructure, including Canada’s largest pension fund Canada Pension Plan Investment Board, China’s State Grid Corp, and the Abu Dhabi Investment Authority.

There aren’t many opportunities of this size around the world in the current environment, meaning that the Australian states will likely steal the limelight in 2015 as one of the biggest opportunities for infrastructure investors anywhere in the world.

“This is a once-in-a-generation opportunity for investors like us,” says Michael Bessell, global head of origination at fund manager AMP Capital.

Many Australian super funds are considered early movers in buying into these assets, with asset allocations to infrastructure of 10 per cent to 15 per cent, Bessell says, well above their international counterparts.

AMP Capital’s infrastructure business has some $8.3bn in funds under management, and is raising a new global infrastructure fund aimed at international investors with a target of US$2bn, which will fold in existing European infrastructure businesses. January is the target for the first close of the new fund.

Long-term investors such as super and pension funds like non-listed infrastructure assets for their steady returns, linked to GDP growth and inflation. The lack of volatility has also been a big drawcard for institutional investors, who are keen to reduce risk and increase allocations to alternatives.

Some assets, such as the ports, have the added attraction of being monopolies.

The Port of Melbourne, which could fetch more than $5bn for its long-term lease, is the last major publicly owned port on the eastern seaboard and handles about 37 per cent of the country’s container trade. Victorian Labor had supported the lease plan ahead of the state election.

In Queensland, the government of Campbell Newman has changed plans from an outright sell-off to long-term leases of power distributors and generators, which it will take to the upcoming election. It says the total program of sales including the ports of Gladstone and Townsville and electricity is worth $37bn.

The chair of the Australian Energy Regulator, Paula Conboy, helped to make the case for electricity privatisations recently when she found that the most efficient networks were the privatised ones of Victoria and South Australia. She said the least efficient were Queensland and NSW.

The New South Wales distributors Ausgrid, Endeavour Energy and Essential Energy and the transmission network operators TransGrid and Directlink also came in for a hammering. Conboy slashed their revenue requirements by between 23 per cent and 34 per cent, asking them to justify their operating costs and capex plans.

While the companies will be working overtime through the Christmas break to respond with arguments by January 14, the writing is on the wall. New owners will demand a much higher standard of efficiency, and the sales will fetch a much lower price than initially thought.

The Australian Competition and Consumer Commission chief Rod Sims has also said he expects retail prices would be “significantly lower” now if the networks had already been privatised.

NSW Premier Mike Baird is taking his plans for a 49 per cent lease of the networks to the state election. The outcomes of a scoping study, including the structure of the sale, will be out before Christmas.

Baird already has outlined new infrastructure spending plans of up to $20bn, including a second Harbour rail crossing to be funded by the sell-downs.

Under asset recycling initiatives, the proceeds from the state treasuries’ sell-offs will be recycled by cash-poor governments into new road and rail infrastructure projects. And these, in turn, will require a new round of private investment. For funds scouting for investment opportunities, Christmas will last all year.