Asset-sale privatisation bonanza runs out of steam

By Giles Parkinson

Sydney View


The sale yesterday of the South Australian Government's electricity retail and distribution businesses to a Hong Kong consortium for $A3.5 billion ($4.42 billion) was notable for two reasons.

The price was less than had been hoped for, and secondly, it signalled the last big-ticket privatisation of a state-owned infrastructure asset in Australia for many a year.

After five years and more than $A35 billion of deals, the great asset-sale binge of the 1990s has come to an end.

The industry cycle has turned and the political cycle as well. Overseas groups no longer have bottomless pockets and Australian politicians no longer have the will to push the issue any further.

For those who did not get their assets on the sale block, the moment has passed. For those who participated in one of the biggest privatisation bonanzas in the world, the time has come to count their blessings as well as their bank accounts.

In Victoria, where most of the assets have been sold over the past few years, the state has just about run out of businesses to sell, and the people who managed the breakup of the electricity and gas assets have gone their separate ways.

Former Premier Jeff Kennett has quit politics. So has Treasurer Alan Stockdale, who so enjoyed his taste of the world of big business that he has now landed a role with the high-flying Macquarie Bank.

Even the merchant banker who masterminded the Victorian asset sales, Credit Suisse First Boston's John Wylie, has quit his role to enter a new venture in private equity after picking up tens of millions of dollars of fees along the way.

The New South Wales Labor Government has toyed with the idea of putting its electricity assets up for sale but the rank and file of the party will not have a bar of it.

Any thoughts that the proposal might get back on the agenda, either in New South Wales or any other state, were crushed after the emphatic and surprising loss suffered by the Kennett Government.

Now South Australia is witnessing how the privatisation issue can be a political football and a potential embarrassment for the Government.

The opposition parties in Adelaide have made a lot of political capital out of the huge fees paid to the merchant bankers, lawyers, accountants and other advisers in a large asset sale.

So far, the sale of South Australia's electricity assets has attracted fees of over $A60 million, and that was without the success fee negotiated by merchant bankers Morgan Stanley.

Link that with cutbacks in education and road funding and there is a lot of political capital to be made.

The state's auditor-general has also waded in, questioning the tender process, raising issues about conflict of interest and the terms of the lease that forms the basis of the privatisation. That scrutiny will certainly increase after the state Government said yesterday that it had agreed to change the lease from 97 years to 200 years.

It was all too much for Australia's biggest and most aggressive infrastructure group, Australian Gas Light (AGL), which two weeks ago pulled out of what turned out to be the winning consortium, citing concerns over the value of the assets.

That, with the withdrawal of other overseas bidders such as PowerGen of Britain and Consolidated Edison of the United States, has meant that Morgan Stanley had to lower its sights.

At the start of the process there were expectations that the electricity assets could reap $A4 billion.

After five bids were received and due diligence began in early October, there were hopes of $A4.5 billion or more.

When two consortiums and AGL dropped out, those expectations were lowered to about $A3.5 billion.

In the end they did well to get that price.

In Western Australia, the Government's efforts to sell AlintaGas, a $A1 billion asset, have been stymied by the demands of a maverick independent MP.

Voters in Queensland and New South Wales, however, are now having cause to reconsider their opposition to asset sales.

In the past few months it has been revealed that their respective power companies have lost $A1.6 billion through electricity trading contracts that have gone horribly wrong.

Power distribution companies buy electricity from the generation companies in the newly deregulated national market and then sell it to their consumers.

But a change in the expected weather, from a cold snap or a heatwave, can cause a big leap in power costs.

This has caused huge losses for the state-owned distributors that have been broken up and corporatised but not privatised in recent years.

If those losses continue the result will undoubtedly be a rise in retail electricity prices.

That will be food for thought for those who missed the boat.

* Giles Parkinson is deputy editor of the Australian Financial Review.