Once again it was pretty boring overnight action on US share markets. Stocks keep grinding higher on no particular news. It’s late summer in the Northern Hemisphere. Traders are off on holidays, and volumes are down. So there’s not much point reading into the day-to-day action.
Instead, let’s focus on the latest controversy to engulf the Aussie government. That is, the decision to block the majority sale of NSW energy distribution assets to Chinese and Hong Kong investors.
The asset in question is Ausgrid. It owns, maintains and operates the electrical distribution network (power lines and poles) for Sydney, the Central Coast, Newcastle and the Hunter region. These assets service around 1.6 million people.
The NSW government put 50.4% of the company up for sale, hoping to raise around $10 billion to reinvest in various infrastructure projects.
As I’ve pointed out here with boring monotony, Australia doesn’t have enough private savings to bid for many of these large assets, so there were always going to be foreign investors in the mix.
As the Financial Review pointed out in early April, there were no domestic bidders for Ausgrid, and China Southern Power had just pulled out of the process. That left just two rumoured bidders for the asset — a consortium made up of Hong Kong’s Cheung Kong Infrastructure (CKI) and the state owned Chinese company, State Grid.
Now, nearly four months later, the Federal government, along with the Foreign Investment Review Board (FIRB), decide to block the sale on the grounds of national interest.
The decision has created somewhat of a furore amongst the media. According to Michael Pascoe, writing in the Sydney Morning Herald, Australia insulted China with the decision.
Let me defend the government for once…sort of.
The government should be able to make whatever decision it sees fit in the national interest, without worrying about insulting anyone.
These are sovereign assets, owned by the people of Australia…or NSW at least. While our government is incompetent in a lot of things, they are the only government we have, and the only ones in a position (along with the various departments that advise them) to judge whether asset sales are in the national interest or not.
So if the government says it’s not in the national interest, we shouldn’t give a hoot whether that offends anyone else or not.
There is a problem, though. That is, beggars can’t be choosers.
Whether we want to admit it or not, Australia’s economic growth model is built around consuming more than we produce, which means we must borrow or sell off our assets to maintain this model.
When a government puts assets up for sale, then, the chances are that the world’s largest creditor nation (China) will be in the mix looking to invest. As a nation, China produces more than it consumes and, therefore, has surplus funds looking for a home.
Its default investment asset is US Treasuries. But it has plenty of those and the returns are pretty slim these days, so real assets look like a much better deal. In other words, China’s state owned companies’ hurdle rates of return are much lower than what many private investors would have their hurdles rates set at. Which is why Chinese state owned companies can offer the highest prices to secure strategic assets like power distribution networks.
The government’s decision also looks a bit suspect, given the fact that similar sales occurred in Victoria and South Australia. CKI was involved in those sales, but China’s State Grid was only involved in the South Australian asset sale.
So do we take from this that majority foreign ownership of South Australia’s electricity distribution network is not in the national interest, but that a part of the NSW (including Sydney) network is?
That’s one way of looking at it.
Another way is through the political lens. And it makes much more sense. Remember, we had an election recently. It was a narrow victory for the Coalition.
On 9 August, The Australian reported:
‘State Grid, dubbed “the Dragon” in a 2013 deal to acquire electricity and gas assets on Australia’s eastern seaboard, has bought networks as far apart as Brazil, Portugal, Italy and Australia to create an international internet of energy that would shift power around as it was needed.
‘Ausgrid, the latest acquisition in its sights, which is expected to go for about $14bn, would become State Grid’s biggest offshore asset if the Turnbull government approves the proposed purchase.
‘The interest of “the Dragon’’ in Ausgrid is becoming increasingly controversial in Canberra, with crossbenchers including Nick Xenophon, Pauline Hanson and Bob Katter opposing the sale on national interest grounds.’
It seems ‘national interest’ is narrowly defined in this case. It could well mean the interests of a few political players that hold more power than they deserve.
If this is the case, it just goes to show what happens when you have a weak government that divides the electorate. It translates into a lack of a mandate for anything…and, in turn, politics trumps genuine national security debate.
We don’t know what the government’s concerns are. But if they’re about hacking, or strategic use of the asset against Australia, they might be a little paranoid.
From the same article:
‘The deputy director of the Australia China Research Institute, James Laurenceson, said a decision to block State Grid’s further involvement in Australian electricity assets would create diplomatic issues. “The people I’ve talked to in cyber security say ownership and cyber-hacking are two separate issues,’’ he said. “If you want to hack a network, you do not need to pay for the privilege of taking half ownership of that asset.”’
And we could always play the nationalisation card if need be.
While this issue will no doubt blow over in a few weeks’ time, the key takeaway is that this is not about foreigners buying up Australia’s assets…this is about Australia selling its assets to foreigners to maintain our standard of living. And the bottom line is: Beggars can’t be choosers.
For The Daily Reckoning