Australia's government infrastructure sales are reaching new heights with Canadian investors.
The Port of Melbourne, Australia's largest shipping gateway, was sold off in a 50-year lease to a consortium of local and international bidders on Monday for more than $9.7-billion Australian ($9.6-billion Canadian) – soaring over the conservative $6-billion (Australian) the government had initially targeted for the sale, according to local reports.
It's the latest indication that international investors are willing to pay handsomely for desirable infrastructure assets – even if it means trimming the returns they can earn on their investment. Canada's Ontario Municipal Employees Retirement System (OMERS) was among the winning bidders in the "Lonsdale consortium" that will control the port, surrounding lands and waterfront for the coming decades. Other investors include Australia's sovereign wealth Future Fund, alternative investment manager QIC of Brisbane and Global Infrastructure Partners (GIP) of the United States.
Large Canadian institutional investors have shown keen interest in infrastructure sales Down Under, driven largely by the Australian government's asset recycling efforts, where about $100-billion in assets are set to be sold off across the country in the coming years in order to fund new building. About 10 per cent of the profits from the Melbourne deal will be put toward other infrastructure projects in the region. Still more of the proceeds will flow to agriculture initiatives, to the state of Victoria and to the removal of 50 dangerous train crossings in Melbourne.
The largest Australian asset sale so far also has a Canadian component as the Caisse de dépôt et placement du Québec participated in a 99-year lease of an electricity distribution business in the Australian state of New South Wales known as TransGrid last year. The Caisse said it would invest $1.15-billion (Canadian) as part of a deal worth about $10-billion. At the time, the pension fund described the competitive environment as "fierce," but highlighted its strategy to grow its infrastructure portfolio.
The environment has only become more fierce as more institutional investors gear their investment strategies toward alternative assets, seeking private investment opportunities where yields are higher and more predictable at a time of low interest rates. Investors are also accepting lower expected returns on their investments than they might have in the past amid heightened competition, and paying higher earnings multiples for these investments in some cases.
But how to value the risk and reward of airports, toll roads, power wire and poles, and other assets over the several decades is a challenge. In the case of the Port of Melbourne, some bidders were deterred by the uncertainty about how the potential construction of another port nearby could squeeze returns in the final years of the lease. Still, that port has met political resistance, and may not be built for many years or at all.
It's clear the consortium is planning to use its collective infrastructure investment experience to wring more profits out of the port.
GIP said it would "drive forward the efficiency and capacity of the Port of Melbourne," and pursue "necessary transformational change" in the way freight moves through the port by road and rail, according to a statement from Russell Smith, partner at GIP Australia.
OMERS' global head of infrastructure Ralph Berg said in a statement that the pension fund would work "with port users and stakeholders to further improve the productivity of this important asset," but declined to comment further on how that would be done.
The Victoria State Government said in a press release that the deal "reflects strong bidder interest and the port's value, as the biggest container and cargo port in the country."