How Pension Funds Are Nickel and Diming Australia
Think Facebook Inc., or Amazon.com Inc. or Alibaba Group Holding Ltd. are growth businesses? They've got nothing on the Port of Melbourne.
The government of Australia's Victoria state sold a 50-year lease to the port's commercial operations last year for A$9.7 billion ($7.6 billion). That's an enterprise value of about 32 times its forecast Ebitda, based on a 2014 KPMG analysis of the privatization. Even at the more manageable 25 times multiple quoted in media reports at the time, the world's 50th-busiest container port has a higher valuation than most of Silicon Valley's tech darlings.
That's by no means out of the ordinary for Australian unlisted infrastructure deals. The privatizations of ports in Sydney, Brisbane and Newcastle and a suite of freeways in Brisbane in recent years all came in at multiples in the mid-20s, according to AMP Capital -- well above typical ranges for such assets in the low-to-mid teens.
In August, South Australia state received A$1.61 billion for a 40-year contract to run its land titles registry, versus initial estimates it would garner only A$400 million. The government of New South Wales got A$2.6 billion in April from the sale of its own land titles registry, similarly well over the A$700 million mooted in initial media reports.
One might ask: What's not to like about all that?
The sales have generated cash for state and federal governments to invest in building new schools, hospitals, and roads. They've also helped mint hometown heroes: Macquarie Group Ltd. has raked in more money for new infrastructure than any other company in the past five years, while Australian outfits' $70 billion of cash and debt raised in the period account for about a third of new investment among the global top 20 funds, according to rankings by Infrastructure Investor magazine.
Extracting maximum value from selling off state assets is something that governments typically see as a mark of pride, not shame. When they fail on that front, as when the U.K. privatized Royal Mail Plc in 2013, they're accused of short-changing taxpayers and can end up facing official inquiries.
The transactions make sense for the buyers, too. The low interest rate environment in developed countries has left funds hungry for assets that deliver inflation-proof cash flows decades into the future, and infrastructure fits the bill perfectly. With bond yields rising in the U.S. and Europe -- a dynamic that tends to hurt infrastructure valuations -- Australia is a rare country that combines cheap borrowing costs with the prospect of strong long-term economic growth. Canadian pension boards and Middle Eastern sovereign wealth funds have been beating a path Down Under as a result.
That's all very well, but the extreme valuation multiples at which Australian assets are changing hands suggest something else is going on.
Private owners are often able to wring efficiencies out of businesses that weren't apparent when they were in public hands, but such plain-vanilla improvements can't account for the way the states are shooting the lights out with these deals. A better explanation is that, in their eagerness to raise short-term cash, governments are letting private owners take larger and larger clips of the ticket for access to monopoly assets.
The clearest example of this is Newcastle port, the world's biggest coal export harbor. NSW sold a 98-year lease to Hastings Funds Management Ltd. and China Merchants Group Ltd. for A$1.75 billion in 2014. Within nine months, the new owners jacked up key access prices between 40 percent and 60 percent, and revised the valuation of the asset up to A$2.4 billion. One of the port's biggest users, Glencore Plc, was so outraged it sued to force Australia's Treasurer to order an antitrust review, a case that was ultimately decided in its favor in August.
That sequence of events should send a chill through infrastructure investors prepared to pay big multiples for control of monopoly assets. If the courts and regulators are going to take a larger role in setting prices, those businesses may not be worth as much as they thought.
The bigger worry, though, is for Australia itself. From Roman roads to the internet, the dynamism of modern economies is built in part on the way that the costs of doing business tend to decline over time. The inflation-linked or inflation-plus charges that most infrastructure owners require to cover their costs of capital, especially at these heady valuations, all but guarantee that won't happen for years into the future.
That could nickel-and-dime the country as a whole, throwing sand in the gears that keep the economy humming along while a myriad of fees transfer wealth from productive businesses toward rentier funds. Just as too much rich food can clog our body's arteries, so too do rich valuations threaten to clog the arteries of Australia's economy.
As Bloomberg News has reported this week, dysfunctional politics have caused Australia to squander its luck over the past decade in fields as diverse as real estate, energy, telecommunications, equity markets and economic reform. If governments and their advisers fail to recognize the advantages of selling off state assets more cheaply, you'll one day be able to add infrastructure to that sorry parade.
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Katrina Nicholas at firstname.lastname@example.org