Privatisation lure gets more attractive

The Barnett government would raise nearly $6 billion by selling the state’s three major ports, if the Western Australian sales attracted the same surprisingly high bidding interest as recent port sales on the east coast.

The NSW government announced last week that it had raised $1.75 billion by selling the Port of Newcastle on a 98-year lease to Australian investment group Hastings Funds Management and its partner, China Merchants.

The Newcastle sale equated to an eye-popping 28 times the port’s underlying profit – measured by earnings before interest, tax, depreciation and amortisation (EBITDA).

That was an even better price than the NSW government obtained last year when it sold Sydney’s Port Botany and Wollongong’s Port Kembla on a 99-year lease.

They were sold for a combined $5.07 billion, or net proceeds of about $4 billion, to a consortium comprising Industry Funds Management, Australian Super and Tawreed Investments, a wholly-owned subsidiary of the Abu Dhabi Investment Authority.

The price equated to 25 times EBITDA.

The keen interest in established infrastructure assets was highlighted by recent transactions in Queensland.

Transurban Group, with co-investors Australian Super and Tawreed, last month paid $6.67 billion, or 27.5 times EBITDA, for some Brisbane toll roads.

Similarly, a Canadian pension fund bought a 26.7 per cent stake in Port of Brisbane for a reported $1.4 billion, which is understood to equate to 27 times EBITDA.

That was a big uptick from the price obtained by the Bligh government in 2010, when it sold the entire Port of Brisbane - the 2010 price was $2.1 billion, or 17 times EBITDA.

What’s happened since then is that superannuation funds in Australia, pension funds in other countries and sovereign wealth funds have been struggling to find secure assets delivering a reliable income.

Infrastructure assets in markets like Australia fit the bill.

Minter Ellison partner Andrew Rentoul, who advised the NSW government on its port sales, said that apart from the “stellar” price, a significant feature of the Newcastle transaction was that the NSW government achieved its preferred allocation of responsibility for the future operation and development of the port.

"This is an important benchmark for governments across Australia considering recycling capital into new projects," Mr Rentoul said.

What does this mean for WA?

The Barnett government established a high-level committee early this year to evaluate privatisation opportunities.

It was led by Department of the Premier and Cabinet boss Peter Conran and included former under treasurer Tim Marney, Water Corporation boss Sue Murphy, solicitor general Paul Evans and Insurance Commission boss Rod Whithear.

Accounting firm EY was hired to help the committee.

The government has been tentative in its approach so far.

Premier Colin Barnett has ruled out selling trading enterprises such as Western Power and the Water Corporation but has flagged the possible sale of specific assets.

These include the Utah Point wharf at Port Hedland, the Kwinana Bulk Terminal, the Water Corporation’s wastewater treatment plants and some small trading enterprises, such as the Perth Market Authority.

It is also looking to negotiate a long-term lease of Dampier Port Authority assets, if the buyer agrees to expand the port facilities, and wants private money to fund an upgrade of the Kwinana Bulk Jetty.

None of these assets will make a big dent in the Barnett government’s debt, projected to hit $21.9 billion by the end of June.

Nor would they go far towards paying for future infrastructure investments, which will be detailed by Treasurer Mike Nahan when he hands down the state budget on Thursday.

However selling entire ports would make a big impact, especially if the earnings multiples prevalent on the east coast could be replicated.

The Port Hedland Port Authority reported EBITDA of $97.8 million for the year to June 2013; if sold at a 27-times multiple, it would raise $2.64 billion.

Fremantle Ports reported EBITDA of $81.3 million; a 27-times multiple would deliver sale proceeds of $2.19 billion.

The Dampier Port Authority posted an EBITDA of $36.3 million, equating to a sale price of $980 million.

All up, the sales would deliver proceeds of $5.8 billion.

If the Barnett government were to head down this path, it would not be alone.

Victorian Treasurer Michael O’Brien confirmed on Monday plans to sell the Port of Melbourne under a medium term 40-year lease, with an expression of interest process to commence in early 2015.

He said the sale was made more attractive by the federal government’s asset recycling initiative, which offers financial incentives where states reinvest sale proceeds in new infrastructure.

In this case, it will be new facilities at the Port of Hastings, which is earmarked as Melbourne’s next container port.

The same lure must surely be looking more attractive for Dr Nahan and his Treasury advisers.