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By Jonathan Barrett and Jamie Freed
SYDNEY, Nov 1 (Reuters) - Australia's increasingly protectionist stance is dissuading Chinese and other foreign investors from bidding in major asset sales, political and corporate advisers say, potentially reducing competition and hurting prices.
The New South Wales state government's decision last month to accept a $12.5 billion offer from local pension funds for major electricity grid Ausgrid - after the federal government previously vetoed higher China and Hong Kong-based offers - has irritated some investors and their advisers. It has left them confused by an apparent change in rules that means the highest priced bid no longer wins.
The successful bid was approved without a competitive process and investment bankers involved in negotiations told Reuters it represented up to $2.3 billion less than offers from Chinese-government owned State Grid Corp of China STGRD.UL and Hong Kong-listed Cheung Kong Infrastructure Holdings Ltd 1038.HK that were both knocked back over "national security issues". we, as a country, leave money on the table - probably," a member of Australia's ruling Coalition told Reuters. "But the price was more than acceptable and it can be plowed back into the economy, fast," said the senator, who asked not to be identified.
The Australian government is encouraging the states to sell assets by offering them up to A$5 billion ($3.8 billion) in cash grants as incentives if they then quickly re-invest proceeds in infrastructure projects. Given that the payments are on offer until 2019, this may trigger a wave of sales over the next three years.
Endeavour is the next New South Wales state-owned energy asset slated for sale with a majority stake in the network that powers parts of southern Sydney expected to attract bids of around A$4 billion. The Western Australian government is also considering the possible sale of its electricity network, previously valued at A$15 billion by lobbying group Infrastructure Partnerships Australia.
A spokesman for the New South Wales government declined to comment on whether the confusion over whether foreign investors were welcome bidders was eroding future asset values. A spokesman for the Federal Treasurer also declined to comment.
FOREIGN OWNERSHIP BACKLASH
While the assets are offered to the market by state governments, foreign bids must be approved by Federal Treasurer Scott Morrison who takes advice from the Foreign Investment Review Board (FIRB), which consists of prominent business people and former government officials with finance, mining, agricultural and national security backgrounds.
Morrison, who is part of a centre-right government, has been involved in high profile rejections of foreign-led bids for both Ausgrid and major cattle empire S. Kidman and Co, since taking over as treasurer just over a year ago. has been no government guidance issued as to why the Ausgrid bids by State Grid Corp STGRD.UL and Hong Kong billionaire Li Ka-shing's Cheung Kong Infrastructure 1038.HK represented security risks, nor whether operational control of similar assets by overseas investors will be acceptable. the absence of any clear communication from the government, advisers could only assume it did not want a foreign operator to have a controlling stake in assets like Endeavour, said a senior investment banker specialising in the infrastructure sector, who declined to be named because he wasn't authorised to speak to media.
He said this was likely to limit interest from rejected Ausgrid bidders.
POLITICAL CONSIDERATIONS
More members of parliament than in the past are concerned that foreign investors - and the Chinese in particular - have been buying up too many strategic Australian assets, including the 99-year lease to Darwin Port in the country's north. is also growing unease within the ruling Coalition that China is becoming a geo-political threat due to its militarisation of the South China Sea, and that might not make it suitable to be a controlling investor in key Australian infrastructure, the senior government member told Reuters.
It all contrasts with the investment environment of just a few years ago when China's State Grid was able to purchase a majority holding in energy company Jemena JEMLTD.UL , which has electricity, gas distribution and transmission assets across Australia's eastern seaboard, with little concern expressed by politicians or the public.
Nicholas Moore, Chief Executive of Macquarie Group which advised State Grid on its bid for Ausgrid before later representing the winning consortium, said while Macquarie supported the flow of capital across borders, he understood governments had to consider other issues.
"We very much recognise in all of the different countries where we carry on business that there are genuine political issues and concerns that governments have to deal with," Moore told Reuters in a phone interview.
The New South Wales government has yet to receive advice from the FIRB on what types of bids and bidders for Endeavour will be acceptable and will not launch an auction process until that occurs, a source familiar with the situation said.
"[The government is] still waiting for that kind of guidance," this person said.
Infrastructure Partnerships Australia CEO Brendan Lyon said it was a critical time for the country to avoid deterring overseas investors given the pipeline of potential privatisations.
"It would be a real shame if we see poor process and political interests interfere with that," said Lyon, who noted that Australia had only recently entered into a free trade agreement with China. ($1 = 1.3080 Australian dollars)