Australian state governments currently privatising public infrastructure may be tempted to restrict future competition to attract higher bids for their assets, according to Standard & Poor’s.

The international ratings agency said privatisation of public assets could be fraught with conflict issues.

“One main conflict is balancing governments’ potential need to build new infrastructure assets against the desire to entice bidders with incentives such as contract terms that limit future competition,” S&P said in a client note.

S&P credit analyst Thomas Jacquot added: “Australian state governments have to balance the desire to extract the best price from bidders through incentives such as competition protection clauses with the need to cater for future growth.”

He said there were three provisions that could be included in a contract to mitigate future competition risks for infrastructure owner.

These were financial compensation, right of first refusal and a non-competing clause where the government ensured no competing assets would be built within a certain distance of the existing facilities.

Jacquot, co-author of the report, titled ‘Australian infrastructure privatisation: Spotlight on future competition protection’, said the provisions boost the valuation of assets, as investors were willing to pay more for greater certainty on long-term competition risk.

But the provisions at the same time restrict construction of new competing infrastructure that could cater for potentially robust future growth.

The issue is pertinent in the light of the upcoming sale of Port of Melbourne in Victoria and Fremantle Port in Western Australia, Jacquot said.

The Victorian government is working through conditions of sale for Port of Melbourne, the largest container port in Australia, which some industry commentators have suggested could fetch up to AUD5bn (€3.3bn).

The Western Australian government has foreshadowed privatisation of its Fremantle Port, hoping to raise as much as AUD1.5bn from the sale, according to media reports.

Jacquot said both governments were grappling with their desire to get the best price for the assets using incentives – such as structures limiting competition risk – against the need to accommodate future growth.

He said competition protection clauses primarily affected equity returns, but that, from a credit perspective, the structures had a marginal impact on debt costs and the credit quality of infrastructure assets.

“We consider the dominant and entrenched position of an incumbent asset as the best line of defence for its credit quality,” Jacquot said.