June 2 (Bloomberg) -- Australia's government scrapped plans to sell Snowy Hydro Ltd., the nation's second-biggest hydropower producer, bowing to protests led by farmers and politicians that the company may fall into foreign hands.

The sale, announced in December and worth as much as A$3 billion ($2.2 billion) according to EL & C Baillieu Stockbroking, began to unravel last week as public opposition mounted. Prime Minister John Howard today said he was ``surprised by the level of public disquiet'' and would withdraw the federal government's 13 percent stake from the initial public offering.

Australia joins the U.S., France and Spain in contesting overseas ownership of key industries, including energy companies and ports. Work on Snowy Hydro, which also supplies water to farms in dry inland areas of Australia, started in 1949 and took 25 years to complete, employing more than 100,000 workers.

``This is an unique piece of infrastructure with a cultural ethos,'' said Bernie Fraser, governor of the Reserve Bank of Australia between 1989 and 1996, and whose father Kevin worked on the Snowy. ``The plan to sell related around short-term fiscal gains, and that is mad ideology for this icon,'' he said in an interview.

Fraser, 65, was one of 57 signatories, with former Liberal Party Prime Minister Malcolm Fraser, former Labor Party leader Bill Hayden and Oscar-winning actress Cate Blanchett, to a letter yesterday urging parliament to scrap the IPO.

Budget Deficit

The New South Wales state government, which owns 58 percent of Snowy Hydro, announced plans to sell its stake in December and spend the proceeds on hospitals and schools. State Premier Morris Iemma today said in a statement that the national government's withdrawal made the sale ``impractical.''

New South Wales, the nation's most-populous state, is likely to forecast a deficit for the fiscal year starting July 1 when it releases its budget next week, said Saul Eslake, chief economist at Australia & New Zealand Banking Group Ltd.

``They now have a tough task to revitalize the state's finances,'' Eslake said.

Remaining under government ownership may make it harder for Snowy Hydro to fund further expansion outside New South Wales, because Iemma doesn't want to spend money that won't benefit voters in his state.

``This company needs capital to grow,'' Iemma said at a media conference broadcast by Sky News.

State Spending

``The choice is taxpayers dollars in New South Wales tied up in this company making investments in Victoria and South Australia, or do we free it up so we invest in New South Wales infrastructure, hospitals, schools and roads?'' he said.

Being owned by investors rather than by governments would allow Snowy Hydro to make faster decisions should they identify potential acquisitions, said Mark Legge, associate director, infrastructure finance ratings at Standard & Poor's in Melbourne.

``The other big thing is that unless you're going to get an equity injection from your government shareholders you're going to have to fully debt fund your acquisitions,'' he said.

The Victorian state government, which owns 29 percent of Snowy Hydro, also withdrew from the planned sale, state Premier Steve Bracks said in an e-mailed statement.

``Apart from the respective governments, I don't think anyone thought it was a particularly good idea,'' said Gavin Wendt, senior resources analyst at Fat Prophets Funds Management in Sydney.

Australian Icons

``The Snowy Hydro is regarded as more than just a piece of infrastructure,'' Wendt said. ``People talk about it in the same tones as the Sydney Harbor Bridge or the Opera House, and you wouldn't be selling those off.''

Australia joins a rising tide of protectionism around the world.

The U.S. forced Dubai's DP World to sell ports obtained in the takeover of Peninsular & Oriental Steam Navigation Co. on national security concerns, and barred China's Cnooc Ltd. from buying Unocal Corp.

France has engineered a merger between Suez SA and Gaz de France SA to stop Suez falling into Italian hands, and Spain is trying to keep power company Endesa from German ownership.

In Korea, where no overseas investor has ever succeeded in an unsolicited bid, billionaire Carl Icahn faces organized opposition as he attempts to take control of KT&G, the country's biggest tobacco company.

Overseas Ownership

Other overseas companies, including Hong Kong billionaire Li Ka-shing's Cheung Kong Infrastructure Holdings Ltd. and Singapore Power Ltd. have bought Australian utilities without rising public ire.

CLP Holdings Ltd., Hong Kong's biggest power producer, paid A$2.13 billion for gas and electricity plants and an energy retailing business in Australia in June 2005.

Macquarie Bank Ltd., UBS AG and Goldman Sachs JBWere Pty were managing the IPO, which would have been the largest in Australia in at least five years, according to data compiled by Bloomberg.

``There's a huge amount of sentiment attached to this issue, in the end it became clear that it was going to be a political negative for state and federal governments and they're averse to that kind of political backlash,'' said Angus Gluskie, who manages the equivalent of about $262 million in Australian stocks at White Funds Management in Sydney.

Howard's government faces an election by early 2008. New South Wales voters go to the polls in March 2007 and Victoria will hold a state election in November.

Snowy Hydro, which owns a 3,756-megawatt hydropower system in the Southern Alps in New South Wales state, supplies about 74 percent of the renewable energy in eastern mainland Australia.

The system includes seven power stations, 16 large dams, 225 kilometers (140 miles) of aqueducts and tunnels, and a storage capacity of 7,000 gigaliters of fresh water, or 13 times the size of Sydney Harbor.

To contact the reporter on this story: Gemma Daley in Canberra at gdaley@bloomberg.net;

Last Updated: June 2, 2006 02:39 EDT