Should global infrastructure investors worry about Australian protectionism?
In the latest step to increase the regulation of foreign investment in Australian real assets, Treasurer Scott Morrison last week tightened the screws on overseas investment in electricity transmission assets and agricultural land.
Morrison said “all future applications for the sale of electricity transmission and distribution assets, and some generation assets, will attract ownership restrictions or conditions for foreign buyers”. And agricultural land must be marketed to Australians for at least 30 days before being sold to foreign investors.
In April 2016, Morrison scuppered an attempt by New South Wales to sell its largest electricity distributor Ausgrid to China’s State Grid and Hong Kong’s Cheung Kong Infrastructure. But he later approved the sale of the listed DUET electricity company to a Cheung Kong-led consortium for AUD7.4bn (€4.69bn). Ausgrid eventually went to what were ostensibly domestic investors. AustralianSuper, the country’s largest superannuation fund, and IFM Investors, a homegrown infrastructure fund manager, bought the asset for AUD16.2bn.
Should global institutional investors worry that Australia’s real assets markets are becoming less accessible?
Brendan Lyon, chief executive of Infrastructure Partnerships Australia, told IPE Real Assets, the latest announcement was “a good step that is about giving upfront assurance and certainty to foreign investors about how and which types of investors can access regulated infrastructure”.
He said: “Everyone, including the government sector, would admit that the Ausgrid decision was not handled well by the existing foreign investment process, so it’s very welcome to see these changes… This process is designed to make the rules much clearer at the start and to facilitate – not frustrate – foreign investment by providing clear rules and practices.”
Brett Himbury, CEO of IFM Investors, said. “With Australia’s broader strengths and attractiveness, I would not foresee this move reducing foreign investment in Australia. There remains an enormous amount of capital around the world seeking long-term stable investment opportunities.”
Lyon believes the new rules should increase the level of competition for Australian assets. “These changes are not about restricting foreign investment,” he said. “They’re about guiding and shaping that investment while protecting national security issues and also ensuring that approvals are timely and policies clear.”
But not everyone agrees. While the new rules may be good for Australian investors, which could face less competition, there could be a smaller pool of buyers when they choose to sell, according to other fund managers. And foreign investors looking to sell stakes in electricity assets may now decide to hold, as they might worry about being able to re-enter the Australian market.
One industry source said the new rules leave it unclear what is at the heart of the government’s concerns: “Is it an issue of control or of influence on the market? We do need greater clarity of guidelines in the rules.”
There might be good reason for that lack of clarity. While the winning bidders of Ausgrid were ostensibly Australian, in reality it is clear-cut. The capital underlying IFM Investors – and other Australian fund managers like Hastings Funds Management, AMP Capital and QIC – is increasingly global.
“Some [ownership] structures are very complicated,” said one fund manager. This inconvenient truth explains why the specifics of the new rules have not been made clear.
Power distribution assets tend to be large and often require consortia to acquire them. There appears to be an emerging consensus that Australian fund managers will need to be more careful in the formation of consortia to acquire assets.
“We need to know the limit for foreign investors in these consortia,” one fund manager said. “We do not know if it means there can be no foreign participation – or, say, 20%.”
Himbury said IFM Investors always assesses potential regulatory issues when determining the most appropriate consortium structure.
Australia is attempting a troubled transition from coal to sustainable energy. In the process, electricity prices have been soaring, due to a fall in production. The worst hit states – Victoria and South Australia – have had power blackouts, repeatedly causing political grief for state and federal governments. Coincidentally, Victoria and South Australia happen to have the highest level of foreign ownership in their power sectors. Hong Kong’s Cheung Kong and Singapore Power have majority stakes in Citipower, Powercor and SA Powers Networks, which run the distribution networks there.
To many casual observers, the latest round of tightening is aimed pointedly at Chinese investors. Chinese investment in Australian farmland and infrastructure has escalated, heightening security concerns in some quarters.
The government created a register for foreign ownership of agricultural land in 2015. The register’s second annual report, released last July, showed that Chinese ownership of Australian farmland has increased 10–fold to 14.4m hectares in 12 months. China is poised to become the largest owner of Australian farmland, overtaking the UK. Morrison has also acted against foreign buyers land banking rural land for future residential development, mandating that development must commence within five years of purchase.
Of particular concern has been the sale of the port of Darwin by the Northern Territory Government to China’s Landbridge and electricity assets to Chinese groups such as, China’s State Grid.
Bilateral relations between Beijing and Canberra have been rocky due to endless revelations of perceived Chinese interference in Australian politics and academia. The Chinese have been accused of attempting to influence political decisions, with Chinese intermediaries seeking to buy influence through donations to political parties and individual politicians.
Australia is not alone, though. Foreign ownership of key infrastructure is an emerging global issue. “It is happening in other parts of the world,” said one fund manager.