The Cost of Blocking China Being Discovered by Australia

In a deal valuing the entire company, including debt, at about A$20.8 billion ($16 billion), the New South Wales state government announced Thursday it had sold a 50.4 percent stake in power network Ausgrid to two local funds.

Citing national security concerns, an offer from State Grid Corp. of China that was said to value the asset at about A$25.1 billion was barred to be accepted by New South Wales by the federal government two months earlier.

Amid public opposition to overseas investment, particularly by state-owned Chinese firms, the difference shows the cost to the nation of limiting ownership of sensitive infrastructure to local buyers. Confusion about Australia’s regulatory regime is caused and doubts about Australia’s openness to foreign investment are raised after the Ausgrid sale.

Hans Hendrischke, a professor at the University of Sydney Business School who specializes in Chinese investment in Australia said that the process “was not run as well as it could have been”. “It possibly has cost the government a considerable sum of money.”

According to Brett Himbury, the chief executive officer of IFM, about 1.4 times Ausgrid’s regulated asset base value was agreed to be paid by AustralianSuper Pty, the nation’s biggest pension fund, and IFM Investors Pty, the country’s largest manager of infrastructure assets. According to people familiar with the bid, StateGrid offered a multiple of 1.7 times. According to the state government, in the 2016 financial year, the power network’s regulated asset base stood at A$14.75 billion.

State Grid didn’t immediately respond to an e-mailed question for comment on its bid.

In August, the State Grid offer and a separate bid from Hong Kong-based Cheung Kong Infrastructure Holdings Ltd. were blocked by Australia’s Treasurer – Scott Morrison.

While China said the decision would “severely” reduce the appetite of Chinese companies to invest in Australia and hurt bilateral trade ties, CKI, controlled by billionaire Li Ka-shing, issued a statement at the time saying it was perplexed by the ruling.

New South Wales opted not to run a second public tender process after it received an unsolicited offer from AustralianSuper and IFM last month. New South Wales is selling assets to fund investment in schools, hospitals and roads. New South Wales Premier Mike Baird said that net proceeds of about A$6 billion and A$16.2 billion in gross proceeds would be generated by the deal.

“We think it’s a very competitive price. We are comfortable with the price. We think it will prove to be a good long-term investment for members of our fund,” Ian Silk, CEO of AustralianSuper, said in an interview.

Himbury said that the deal is “very good value for our investors and obviously it’s a good deal for the state”. “The process has run for 10 to 11 months, so the state would have a pretty good indication as to what they think they can get.”

Against increased opposition to sales of farmland, real estate and strategic infrastructure to foreign investors, Australia is seeking to balance its need for foreign investment to drive economic growth. Claiming that the deal could be against the national interest, Morrison vetoed the sale of the nation’s most iconic cattle company, S. Kidman & Co., earlier this year to a Chinese-led group.

The government is arguably making it harder for foreigners to invest despite overseas capital being vital to Australia’s future expansion. Scrutiny of sales of farmland to Chinese, Japanese and Korean buyers was tightened by it last year. A former spy chief is now a member of the government’s Foreign Investment Review Board that vets investments.

“There’s reason to still be concerned about a lack of clarity around Foreign Investment Review Board processes,” Peter Jennings, executive director of the Australian Strategic Policy Institute, said in an interview.

(Adapted from Bloomberg)

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