Australia's asset sales become global model, luring $35b from Canada alone

Prime Minister Malcolm Turnbull greets Canadian Prime Minister Justin Trudeau at the Commonwealths Heads of Government meeting in Malta last month. Photo: Adrian Wyld

NSW reaps $8 billion infrastructure bonanza from Transgrid privatisation

Australia has been the target of a record $US25 billion ($35 billion) in acquisitions this year by Canadian investors who are applauding the nation's strategy of selling state assets to fund new railways, roads and hospitals.

Canadian purchases in Australia jumped more than eightfold in 2015. Caisse de Dépô​t et Placement du Québec bought into the NSW electricity grid through the Transgrid privatisation and opened a Sydney office with six executives this year. Canada Pension Plan Investment Board and the nation's Brookfield Asset Management are part of rival groups competing for the port and rail company Asciano.

Shipping containers sit stacked among gantry cranes at a port in Sydney. Photo: Ian Waldie/Bloomberg

Prime Minister Malcolm Turnbull is encouraging state governments to sell assets and use the money to fund new projects, as tumbling commodity prices and China's slowing economic expansion wreak havoc on the federal budget. Australia trails only the US as a target for Canadian outbound acquisitions that more than doubled this year to a record $US201 billion.

"We're there to invest in infrastructure, and they are the model," said Ron Mock, chief executive officer of the Ontario Teachers' Pension Plan, which manages about C$155 billion ($156 billion). "They've figured out how to attract capital from all over the world."

The world is looking for such models. European Commission President Jean-Claude Juncker outlined a €315 billion ($475 billion) three-year development plan in January seeking to mobilise private investment instead of adding to public debt. US presidential hopeful Hillary Clinton is calling for a $US275 billion boost in federal spending over five years to modernise ailing roads and bridges. Canada's newly elected Liberal government has promised to double infrastructure spending to C$125 billion over the next decade and improve an overwhelmed public transit system.

Global model

Treasurer Scott Morrison, facing a budget deficit of 2.3 per cent of gross domestic product for the year to June 30, is offering regions incentive payments of 15 per cent of the value of any asset they sell provided proceeds finance new infrastructure. The Asset Recycling Fund was created in July 2014 with $5.9 billion of funding.

NSW Premier Mike Baird, a former banker at Deutsche Bank, has funded new roads and hospitals with close to $20 billion of asset sales since 2012, including the sale of power transmission company TransGrid and leases to three ports. Victoria plans to sell the Port of Melbourne to help fund a $6 billion plan to remove 50 railroad crossings.

The creativity in Australia's system should serve as a global model, bridging the gap between investors that favour mature assets and the need for riskier new infrastructure projects, according to Mark Machin, international head for Canada Pension, Canada's country's largest pension plan.

"It's excellent policy," he said. "They're getting tremendous interest and tremendous value from international capital and domestic capital."

Common history

For Canadians, investing their billions here is less complicated than in other destinations, as the two countries share a common history and culture, are largely resource-driven and have a similar legal system, Machin said. Canada Pension has about C$6.7 billion in investments in Australia, equal to 2.4 per cent of its total assets. It is competing with Brookfield, Canada's largest alternative asset manager, in a $9 billion battle for Asciano that would be the countyry's  largest corporate takeover in Australia this year.

"Australia is a market that is about as similar to Canada as you can get," Machin said. "It's a very easy market for us to feel very comfortable in."

Caisse de Depot, Canada's second-largest pension fund, was the biggest investor in the group that last month agreed to pay $10.3 billion for TransGrid. Its real estate arm made its first direct investment in Australia in April with a stake in Sydney's Liberty Place office complex.

"Australia's economy and government are in healthy condition," said Macky Tall, Caisse's senior vice president of infrastructure investments. "The Australia market has been one of the deepest markets in not only public-private partnerships projects, but also a number of major privatisations."

Electricity distributor

Caisse de Dépô​t will have about 20 per cent of its infrastructure portfolio, or roughly $13 billion, invested in Australia after TransGrid, he said. Tall said it was too early to say whether the investment firm would bid for the 50.4 per cent stakes in two other electricity distribution companies NSW is planning to sell. Expressions of interest for the first of those stakes, Ausgrid, are due this month.

Canadian funds need to invest several hundred million dollars of monthly inflows from the country's pension system, said Dominic Hudson, head of investment banking at RBC Capital Markets in Australia, who helped advise Caisse on TransGrid. Borealis Infrastructure Management, an arm of the Ontario Municipal Employees Retirement System, also has an office in Sydney, while Canada Pension and Ontario Teachers service Australia by flying in staff from elsewhere in Asia and abroad.

"They need to look for a home for all that money," said Hudson. "They are looking for alternative assets like infrastructure for that growth, and they can't find those opportunities in North America alone."

Bloomberg