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China walking a tightrope with Australian investment

CIC made its investment in the Port of Melbourne through an Australian infrastructure fund.

Wealth fund takes back seat in bid for Port of Melbourne

China Investment Corp.'s low-profile participation in the recently announced $7.3 billion winning bid for Port of Melbourne points to the balancing act facing Chinese investors and the governments of countries in which those investors are ramping up allocations.

Strictly as a matter of capital deployed, the $810 billion Beijing-based sovereign wealth fund stands in the first ranks of the deal's stakeholders — committing roughly the same 20% share of the total as Australia's A$122.8 billion ($92 billion) Future Fund, Melbourne, and the C$77 billion ($58.3 billion) Ontario Municipal Employees Retirement System, Toronto.

However, one month after Australia's government nixed a bid by Chinese investors — led by State Grid Corp. of China — for a controlling 50.4% interest in electricity distribution network Ausgrid on national security grounds, all parties to the Port of Melbourne transaction appear willing to play down the Chinese role.

Against that backdrop, one industry veteran familiar with the bidding process, who declined to be named, said CIC officials “were specifically encouraged to be at a certain level that wouldn't be an issue” for the winning consortium.

There was no mention of the CIC in separate news releases announcing the deal on Sept. 19 by Melbourne's Victoria state government and the winning consortium of Future Fund, OMERS, Brisbane-based money manager QIC and New York-based Global Infrastructure Partners. News of CIC's involvement was broken later that day by Victoria state Treasurer Tim Pallas. Mr. Pallas couldn't be reached for further comment.

With CIC opting to get its exposure through Global Infrastructure Partners' Australia fund, the Chinese sovereign wealth fund will have less influence than a full-fledged member of the consortium, noted one veteran infrastructure manager in Melbourne, who declined to be named.

CIC spokesmen didn't respond immediately to e-mails seeking comment.

It remains to be seen whether CIC's low-key success in snaring a minority stake in Australia's biggest port will smooth the Chinese feathers ruffled by the Australian central government's Ausgrid intervention. Following Australian Treasurer Scott Morrison's official decision Aug. 19 to short-circuit State Grid's bid, Sun Jiwen, a Beijing-based spokesman for China's Ministry of Commerce, said on the ministry's website that while China respects the right of countries to take national security into consideration, Australia's intervention in “the final stage of open bidding” would discourage Chinese investment in the country, negatively affecting bilateral trade and economic relations.

Mr. Sun could not be reached for further comment.

In a Sept. 23 interview, Helen Sawczak, the Melbourne-based CEO of the Australia China Business Council, said that with the bidding process facing foreign investors in big transactions such as Ausgrid or the Port of Melbourne costing millions of dollars, any lack of clarity in how bids are run could prove a deterrent.

“Hopefully, the success of (the Port of Melbourne) sale will be a signal to Chinese investors that every sale and every bid will be examined on its merits and with due process,” she said.

Australia's openness to Chinese investors looks set to continue to depend on the details.

"All-Australian proposal'

In the latest Ausgrid development on Sept. 23, Sydney-based infrastructure manager IFM Investors and AustralianSuper, a Melbourne-based superannuation fund with more than A$100 billion in retirement assets, announced they had submitted an “all-Australian proposal” to acquire the 50.4% interest in a 99-year lease for the New South Wales' electricity grid the Chinese bidders had been denied in August. Details comparing the two bids were not available.

One veteran infrastructure manager in the region, who declined to be named, noted that foreign ownership of assets such as infrastructure or land remains a hot-button issue in Australia, whether the buyer is Chinese or Canadian, forcing local governments to tread carefully in pursuing overseas capital.

The state government of Victoria has been among the more proactive in opening its doors to Chinese capital. On April 19, Victoria outlined its “new China strategy,” which included attracting investment “into the government's infrastructure pipeline, to support Victoria's continued economic growth.”

A day after Victoria's government awarded a 50-year lease for the Port of Melbourne to the winning consortium, Daniel Andrews, the state's premier, flew to China on an annual trip to strengthen economic ties.

A state news release noted the importance of bolstering ties with “Victoria's biggest trading partner (with) more than A$20 billion in two way trade — accounting for almost a quarter of Victoria's total food and fiber export market, including dairy, beef and wool.”

Neither Mr. Andrews nor Mr. Pallas, the state's treasurer, responded to e-mailed questions asking whether CIC's involvement in the winning consortium was a factor in its bid emerging victorious over a competing bid by IFM, Macquarie Infrastructure and Real Assets and Heerlen, Netherlands-based money manager APG Group.

According to sources familiar with the IFM, Macquarie and APG consortium, who declined to be named, the two bids were separated by only A$15 million.

Victoria officials said the healthy price the state garnered for the lease points to continued success for the government's asset recycling program, under which brownfield infrastructure assets are sold off to fund investments in new infrastructure.

Port of Melbourne's A$9.7 billion price and 25-times earnings before interest, taxes, depreciation and amortization valuation reflect a continued pickup in demand for core, monopolistic infrastructure assets, said Peter Siapikoudis, principal consultant, head of infrastructure with Melbourne-based investment consultant Frontier Advisors Pty Ltd.

The port's unique regulatory framework, latent capacity and size “all contributed to the appeal of the asset,” he said.

Industry sources predict the Victoria government's windfall from the Melbourne port sale could lead to more big infrastructure assets being brought to market in coming years.

Mr. Siapikoudis said for his firm's clients already invested in infrastructure, “we expect strong demand coupled with limited supply to support prospective returns for global core infrastructure over the short to medium term.”

For new allocations, while infrastructure is always case-by-case, greater competition for attractive, high-profile properties is generally compressing investment returns but those returns might still prove relatively attractive on a risk-adjusted basis, he noted. n

This article originally appeared in the October 3, 2016 print issue as, "China walking a tightrope with Australian investment".