status of australian privatisations - october 2016
TRANSCRIPT
Status of Australian Privatisations
October 2016
2
1. Commonwealth privatisations
2. New South Wales – Transmission & Distribution
3. Victoria – Port of Melbourne
4. Western Australia – Mixed assets
5. Other States and Territories
6. Regulatory overlay
Overview
1. Commonwealth of Australia
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Political context – ‘Asset Recycling Initiative’
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• Liberal-National Coalition Government elected in Australia in September 2013 and
commissioned National Commission of Audit (NCA) report. NCA recommended further
privatisations, noting little had been privatised at Commonwealth level since 2006.
• In March 2014, Commonwealth Treasurer Joe Hockey announces 'Asset Recycling
Initiative' (API) where Commonwealth Government offers financial incentives to
State/Territory Governments to sell assets and recycle proceeds into new infrastructure.
• States/Territories entered May 2014 National Partnership Agreement on Asset Recycling:
– States/Territories receive a Commonwealth incentive payment of 15% of sale
proceeds from a privatised asset if they reinvest all proceeds into new infrastructure.
– Payments are allocated on a ‘first come first served’ basis from limited pool of funds.
– Sale of asset / construction of new infrastructure must commence by 30 June 2019.
• The 2014-15 federal budget allocated $5.9 billion to an Asset Recycling Fund. Legislation
was introduced into Federal Parliament to give effect to the API, but was blocked.
• The Government subsequently proceeded with the API under existing legislation.
Joe Hockey
NCA recommendations to the Commonwealth
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Short term (2014-2016) Medium term (2016-2020) Long term (After 2020)
Medibank Australian Postal Corporation NBN Co Limited
Australian Hearing Services Moorebank Intermodal
Company Limited
Snowy Hydro Limited (minority
shareholding)
Australian Rail Track
Corporation Limited (ARTC)
Defence Housing Australia Royal Australian Mint
ASC Pty Ltd (Submarines) COMCAR
• National Commission of Audit recommended in favour of the privatisation of 10 entities, plus the
Medibank privatisation already underway at the time.
• NCA commented that other Commonwealth assets, including land & buildings, could be sold
• The Commonwealth Government adopted some, but not all, of these recommendations. If the
recommendations were adopted, Commonwealth Treasury commissioned a Scoping Study.
Status of Commonwealth privatisations
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Asset Comment Status
Medibank Medibank listed on ASX in November 2014 Completed
Australian Hearing Services Consortium proposal under active consideration Underway
Snowy Hydro Limited Requires action by State Governments Did not proceed
Defence Housing Australia Scoping study completed, but did not proceed Did not proceed
Australian Submarines Ruled out given strategic importance to defence Did not proceed
ASIC Share Registry Competitive tender process is underway Underway
Australia Post Ruled out given period of disruption to post Did not proceed
Moorebank Intermodal Under development – privatisation premature Postponed
ARTC Delayed until after Inland Rail project completed Postponed
Royal Australian Mint Scoping study completed, but did not proceed Did not proceed
COMCAR No response by Government to NCA proposal Did not proceed
NBN Co Ltd Under development – privatisation premature Postponed
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Competitive bidding process for privatised assets
EOI stage
• Interested parties invited to submit an EOI with
executed Confidentiality Deed Poll and
• EOIs contain information about the parties and
proposed ownership structure as well as interest,
experience, and capability.
• EOIs indicate financial capability, preparedness and
suitability.
Binding bid stage
• Shortlisted bidders given access to the full virtual
data room and vendor models (including due
diligence information for legal, accounting,
engineering, property, environmental).
• Bidders would also undertake site visits, receive
management presentations, and engage in a
question and answer process with the vendor.
• Bidders would each be issued with pro forma
contract documents. The contracts would be
negotiated independently with each bidder.
• The shortlisted bidders would be invited to submit
their final, legally binding, unconditional bids in
conjunction with the negotiated contracts.
• Bidders must have obtained informal clearance
from the ACCC and must have obtained Foreign
Investment Review Board (FIRB) clearances
• Final bidder selected and proceed to execution.
• Financial close.
Indicative bid stage
• Issue of an Information Memorandum and indicative
bid process letter
• Issue of vendor due diligence reports within
electronic data room (limited access)
• Bidders required to lodge indicative bid
• State will process indicative bids and shortlist
bidders for inclusion in binding bid stage.
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Sale of shares in a privatisation vehicle
• Objective is to create a simple pre-packaged business,
inclusive of lease, that can be easily transferred by way
of a share sale
• Transfer of assets to State Holding Corporation (SHC).
• Implementation of long-term lease between Project
Company and SHC.
• Novation of third party contracts from Existing
Corporation to Project Company.
• Transfer of employees from Existing Corporation
into Project Company.
• Sale of shares in Project Company.
Investor Consortium State
Government
Existing Corporation
State Holding
Corporation (SHC)
Project Company to
be Privatised
Customers
Payment for shares
Transfer of shares
Novation of third party contracts
Transfer of
assets
State ownership
State
ownership
Transfer of some staff
Private
ownership
99 year lease
Third party
contracts
Ownership
Contracts
Transfers
2. State of New South Wales
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Political context to NSW privatisations
• The Liberal/National Coalition government came to power in NSW
in March 2011 (under Premier Barry O’Farrell) and proceeded with
the following privatisations:
• The Coalition was re-elected 28 March 2015 (under Premier Mike
Baird) with a policy that included the privatisation of the NSW
electricity transmission and distribution (T&D) assets.
• Implementing legislation was enacted to authorise the T&D
privatisations in June 2015, following a political deal between the
Government and two independent senators. The Coalition holds
52 of 93 seats in Legislative Assembly (house of reps) but only 20
of 42 seats in Legislative Council (senate).
• Given political concerns, an outright sale of the networks was not
contemplated. Instead, the privatisation is via 99 year leases.
Premier Mike Baird
Privatised asset Price
Port of Newcastle – leased to Hastings consortium $1.75 billion
Port Botany – leased to IFM consortium $4.31 billion
Port Kembla – leased to IFM consortium $750 million
Mt Piper & Wallerawang generators – acquired by EA $160 million
Eraring & Shoalhaven generators – acquired by Origin $50 million
Macquarie Generation – acquired by AGL $1.505 billion
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Transmission & distribution in NSW
• Transmission business for NSW
• 14,000km of transmission lines; 71GWh per annum
• The privatisation of TransGrid was completed in
December 2015 for a sale price of $10.26 billion to a
consortium lead by Hastings.
• Electricity distributor in western Sydney & Illawarra
• 883,000 retail electricity customers
• Endeavour Energy will be sold after Ausgrid. The
precise timing for the privatisation is currently
unknown.
• Electricity distributor in Sydney, Central Coast,
Newcastle and Hunter Valley regions of NSW
• 1.6 million retail electricity customers
• The first attempt at the privatisation of Ausgrid was
blocked by the Commonwealth Government. The
second attempt is now underway .
• Electricity distributor in regional NSW
• 803,000 retail electricity customers
• Essential Energy will not be sold. Politically, The
opposition to privatisation is stronger in regional
NSW than in metropolitan NSW.
100% now privatised 50.4% to be privatised
50.4% to be privatised Will not be privatised
• To appease political concerns, NSW Government has committed to maintain ownership of 100% of
Essential Energy and will also maintain an average ownership of 51% across all four electricity networks.
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Successful privatisation of TransGrid
• Timetable: Transaction commenced 4 June 2015. RFQ was returned on 14 July 2015 and
shortlisting announced on 2 September 2015. Winning consortium was announced on 25
November 2015 with completion occurring on 16 December 2016.
• Financing of winning bid: NSW Electricity Networks (as the Hastings-led consortium) acquired
TransGrid for $10.258 billion, with a $5.5 billion limited recourse financing package provided by
the global syndicate of 12 local and global financiers.
• Outcome: See table below
Consortium Outcome
State Grid – MIRA (State Grid Corporation of China; Macquarie Infrastructure and Real Assets
Ltd)
Shortlisted
AusNet Services (AusNet Services) Did not bid
China Southern Power – CIC – GIP (China Investment Corp; China Southern Power Grid, Global
Infrastructure Partners)
Not
shortlisted
Hastings-led Group (Abu Dhabi Investment Authority (ADIA); Caisse de depot et placement du
Quebec (CDPQ); Hastings Funds Management; Kuwait Investment Authority (Wren House);
Spark Infrastructure), advised by JP Morgan and Royal Bank of Canada
Winner
QIC-IFM (Industry Funds Management (IFM), QIC Global Infrastructure), advised by Barclays Shortlisted
AustralianSuper-led Group (Australian Super; Borealis Infrastructure; Canada Pension Plan
Investment Board (CPPIB), advised by Credit Suisse
Shortlisted
Chung Kong Infrastructure (CKI) Did not bid
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Problems privatising Ausgrid
• Timetable: Transaction commenced 24 November 2015, immediately TransGrid had concluded.
Indicative bids were due on 29 February 2016, but after one consortia withdrew, the two remaining
bidders were shortlisted. The transaction timetable clashed with the Australian federal election in
July, hence final bids were submitted on 25 July, after the election.
• Outcome: Press speculation was that the final bids received by the State for the 50.4% interest
were as high as $13 billion, valuing the 50.4% interest at a multiple of approximately 1.7 x RAB.
However, the Commonwealth Treasurer refused to provide foreign investment approval to both of the
final bidders, effectively eliminating them from the sale process. As a consequence, the initial
attempt to privatise Ausgrid was abandoned. The bidders were as follows:
• Limited bidders: Unlike the TransGrid privatisation, very few bidders were initially involved in the
Ausgrid privatisation. Industry comment is that everyone expected the Chinese to pay a high price
for the asset, so did not consider it worth participating.
• What next? New bid rules are due to be released by the NSW Government in October which are
likely to cap foreign control (probably in the 15-20% range). Meanwhile, domestic Australian funds
are being encouraged to bid for the asset. Industry comment is that many of the funds that did not
participate because of the Chinese participation, may now participate as they expect the asset to be
privatised at a cheaper price.
Bidder Outcome
State Grid Corporation, a Chinese SOE and the world’s largest electricity utility Blocked
Chung Kong Infrastructure (CKI) of Hong Kong Blocked
China Southern Power, Qatar Investment Authority, China Investment Corporation Withdrew
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Foreign investment approvals
• Foreign Investment Review Board (FIRB) approval is required for acquisitions by foreign persons
into Australia that exceed various monetary thresholds. FIRM makes a recommendation to the
Commonwealth Treasurer, who makes a decision on the advice of his advisors. Decisions not to
grant approval are rare, but conditions are often imposed.
• Typically, a requirement of the privatisation process is that shortlisted bidders have obtained an
informal clearance from FIRB before submitting a final unconditional bid. Given FIRB timelines, this
has generally meant that an application is made to FIRB at a much earlier stage in the process.
• However, the FIRB process has been difficult in the context of the recent NSW privatisations,
suggesting a higher level of scrutiny by FIRB than has been the case historically.
• At a very late stage in the TransGrid privatisation process, FIRB announced to the bids for
TransGrid that it would impose various conditions on the bids, including:
1. Foreign ownership restrictions, reputed to be no more than 50% per foreign person
2. Requirement for local management and board representation
3. Control from Australia, given the critical role of TransGrid as the backbone for energy supply
for New South Wales and Canberra.
• In the Ausgrid privatisation process, FIRB reputed to have said initially that it was intending to
impose only minimal conditions on the acquisition. However, it seems apparent that national
security considerations were raised with FIRB. On 19 August 2016, the Treasurer made an order
under the Act prohibiting both State Grid and CKI from acquiring the 50.4% interest in the Ausgrid
business on the basis of national security considerations.
3. State of Victoria
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Political context to VIC privatisations
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• Victoria privatised its electricity generation and retail assets at any early stage:
– In October 1994 the Victorian industry was restructured.
– Five electricity distributors were created and Generation Victoria was disaggregated
down to four individual base load power stations (including Loy Yang B then under
construction), one portfolio of hydro plant and one of intermediate and peaking gas plant.
– During 1995-1997 all of these businesses, except the gas portfolio were privatised
• In 1996, Victoria also privatised two of its major ports, but abandoned plans to privatise
the Port of Melbourne following opposition by users.
• In recent years, Australia has experienced a series of port privatisations. The Port of
Brisbane was privatised in 2010, followed by Port Botany and Port Kembla in 2013,
Port Newcastle in 2014, and the Port of Darwin in 2015. Port of Melbourne remains one
of the few major ports on the east coast of Australia still owned by a State government.
• In the context of the Asset Recycling Initiative, the Victorian Government sought to
revisit plans to privatise the Port of Melbourne.
• The two different political parties in Victoria agreed that a privatisation of the Port of
Melbourne was appropriate. However, they differed in the particular privatisation model
that they each favoured.
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Impact of Victorian politics on privatisation timing
• A State election was held in Victoria in November 2014.
The previous Liberal/National coalition government was
voted out and replaced by a new Labor government. This
has had a significant impact on the privatisation process.
• Victoria has a bicameral legislature. The Legislative
Assembly is the lower house. The Legislative Council is the
upper house.
– The Legislative Assembly is controlled by the Labor party
(47 seats) against a Liberal/National coalition (38 seats)
and crossbench (3 seats). The Labor Party therefore has
control over the Legislative Assembly.
– The Legislative Council has no party with a clear majority.
Labour has 14 seats. The Liberal/National coalition has
16 seats. The Greens hold 5 seats. A mix of
independents hold a further 5 seats. The Labor Party
does not therefore control the Legislative Council.
• In this manner, the Labor Party has been at the mercy of the
Greens and independent candidates in order to secure the
passage of implementing legislation for the Port of
Melbourne privatisation through the Legislative Council.
• After many months of negotiations, a political deal was
finally concluded in March 2016 to allow the implementing
legislation to progress through the Legislative Council.
VIC Legislative Assembly (Lower House)
Opposition
Government
Liberal
Nationals
Labor
VIC Legislative Council (Upper House)
Opposition
Government
Labour
Liberal
Nationals
Crossbench
Greens
Various others
Crossbench
Greens
Independent
• The Port of Melbourne is approaching full capacity.
While a current expansion is addressing immediate
capacity constraints, all political parties recognised
that a second port is now required.
• The key point of difference between the political
parties involved the location of that second port and
the longer-term role of the Port of Melbourne
relative to that second port.
• The Labor Party (now the current government)
favoured selling a 99 year lease over the Port of
Melbourne. The Port of Melbourne would be
supplemented by the development of a second
container port at Bay West.
• The Coalition (previously in government and now
forming the opposition) favoured a 40 year lease
over the Port of Melbourne, following which it would
be decommissioned and the land sold for CBD
development. The Port of Hastings would be
developed as the port to replace the Port of
Melbourne during that 40 year period, gradually
being developed over time as the Port of Melbourne
reached capacity.
The political deal – a 15 year compensation clause
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• The Labor Party initially proposed a 99 year lease
with a 50 year compensation clause if a second port
were built.
• However, the Labor Party’s proposal had the
practical effect of creating a deterrent to the Port of
Hastings while locking in its own proposal.
• The sticking point for negotiations in the upper
house therefore centred around the term of the
lease and the duration of this compensation clause.
• The Coalition initially wanted no compensation to
be paid, but later backed down and offered 15
years – the time in which Infrastructure Australia
estimates the Port of Melbourne will reach capacity.
• Ultimately, a political deal was reached involving a
involved a 50 year lease and a 15 year
compensation clause.
• In practice, this means that the option to develop
the Port of Hastings remains open if the Victorian
government were to change.
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Top 20 Australian ports
Port HedlandPort DampierPort NewcastleHay PointPort GladstoneOther Ports
Port Export Focus Tonnage %National Privatised
Port Hedland WA 99% Specialist: iron ore 288,443,039 25.5% Imminent Utah Point Bulk Terminal only
Dampier WA 100% Specialist: iron ore 180,365,873 16.0% Possible
Newcastle NSW 98% Specialist: coal 148,861,567 13.2% Yes - 2014 98 year lease
Hay Point QLD 100% Specialist: coal 96,540,226 8.6% Yes - 2001 DBCT in 2001; other CT private
Gladstone QLD 76% Multi-commodity 85,293,760 7.6% No Privatisation abandoned 2015
Brisbane QLD 52% Large multi-cargo 37,563,421 3.3% Yes - 2010 99 year lease
Melbourne VIC 45% Large multi-cargo 35,059,320 3.1% Imminent Proposed 50 year lease
Fremantle WA 56% Large multi-cargo 31,980,238 2.8% On hold Privatisation proposed
Weipa QLD 100% Specialist: bauxite 29,041,572 2.6% On hold Associated with Rio Tinto mine
Kembla NSW 77% Specialist: coal 23,935,068 2.1% Yes - 2013 99 year lease
Botany NSW 34% Large multi-cargo 21,582,856 1.9% Yes - 2013 99 year lease
Abbot Point QLD 100% Specialist: coal 17,744,621 1.6% Partial - 2011 T0 & T1 CT privatised only
Geraldton WA 96% Specialist: iron ore 15,444,843 1.4% No
Bunbury WA 89% Specialist: alumina 15,331,906 1.4% No
Adelaide SA 57% Large multi-cargo 15,166,339 1.3% Yes – 2001 99 year lease of 6 ports
Esperance WA 94% Specialist: iron ore 13,875,044 1.2% No
Geelong VIC 38% Regional multi-cargo 12,836,648 1.1% Yes -1996 99 year lease
Townsville QLD 45% Regional multi-cargo 12,105,804 1.1% No Privatisation abandoned 2015
Portland VIC 80% Regional multi-cargo 5,333,712 0.5% Yes -1995 99 year lease
Darwin NT 65% Regional multi-cargo 4,299,008 0.4% 2015 99 year lease
DBCT = Dalrymple Bay Coal Terminal; CT = Coal Terminal
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Location of Australian ports
Port of
Melbourne
• The Port of Melbourne is Australia’s largest
and most important maritime trade hub for
container, automotive and general cargo.
• The Port supports the State of Victoria and
south-eastern Australia. It is one of the top four
container ports in the Southern Hemisphere.
• The Port of Melbourne handles around 36% of
Australia’s container trade, amounting to some
2.579 million containers (TEU) per year in the
year to June 2014.
• During the 2013/14 financial year, the Port
experienced over 3,000 commercial ship visits,
throughput of over 85 million revenue tonnes
(35 million mass tonnes) and handling of over
350,000 automotive units.
• As well as containers, motor vehicles and
general cargo, the Port handles liquid bulk
products (such as crude oil imports and
petroleum product exports), and dry bulk
products (including cement, gypsum, sugar as
imports, and wheat, canola, barley as exports).
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Port of Melbourne
Privatisation of port functions
• Three key port functions
– Regulatory:
– marine services (harbour control, pilotage);
– maritime safety, environmental response.
– Landowner:
– port planning & development, wharves,
berths;
– shipping channels, navigation, breakwaters.
– Operator:
– cargo-handling, warehousing, towage.
• Australian ports have in most cases already
outsourced stevedoring functions to private sector.
• Most common business model in ports globally is
public ownership with a private concession.
• Privatisation in Australia has focussed on transfer of
landowner functions to the private sector via long-
term leases, by market practice normally 99 years.
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Port functions & cash flows
Revenue cash flows
• Land and property rentals:
– Note the recent media coverage of rental charges
• Wharfage / cargo charges:
– Typically a variable charge based on volume;
– Charged per unit loaded/unloaded.
• Berthage / tonnage / channel / ship charges:
– Typically a fixed capacity fee charged per vessel;
– Charged once per visit based on tonnage.
• Miscellaneous charges:
– Cargo handling/stevedoring (normally outsourced)
– Anchorage charges;
– Hire fees / Cargo storage fees;
– Security fees / Inspection fees;
– Pilotage charges (often outsourced);
– Infrastructure and dredging levies.
Focus of port
privatisations
23
Scope of the Port of Melbourne privatisation
Transfer of Landowner functions
• Successful bidder will:
– enter into 50-year lease over majority of current
landholdings and associated fixtures (including
buildings and wharf infrastructure), providing a
long-term leasehold interest in both occupied and
vacant land (including development rights);
– assume the interest in the leases with the existing
tenants, enabling collection of rent;
– lease an interest in the shipping channel seabed,
but with maintenance responsibilities;
– lease selected associated assets;
– have the right to charge port users for the
utilisation of port infrastructure, including
wharfage, channel fees, hire fees, security
charges and other utility charges
– obtain rights to the development of the new third
container terminal at the Port; and
– have the right to charge channel fees for
commercial vessels visiting Station Pier.
Retention of regulatory functions
• State will retain various functions within the
Victorian Ports Corporation (Melbourne) (VPC).
• VPC will:
– employ the Harbour Master;
– manage and own the Vessel Traffic Service;
– manage shipping anchorages and retain
related charging powers for anchorages;
– manage towage regulation;
– perform safety and environmental functions,
including for dangerous goods, waterside
emergency management and marine pollution.
• The State will retain the operation and associated
revenue streams of Station Pier and West Finger
Pier.
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Competition restrictions
• Shortlisted bidders are typically required to have obtained an informal clearance from the Australian
Competition and Consumer Commission (ACCC) before submitting the final unconditional bid, or
otherwise identify why such clearance is not required:
– The key consideration for the ACCC is whether the proposed acquisition would have the effect,
or likely effect, of substantially lessening competition in any market in Australia.
– The informal clearance process is a clearly defined process and involves appropriate scrutiny
by the ACCC based on submissions, followed by potential public consultation.
• We also understand that additional restrictions have been applied to any entities that provide any of
the following services at the Port of Melbourne or any other Australian capital city port:
– stevedoring services
– container handling services
– services of an automotive terminal
• The restrictions will apply to owners and subsidiaries of the bidding entity, based on the standard
Corporations Act concept of ‘control’.
• The precise details of the restrictions are not yet publicly known, but the restrictions seem intended
to avoid any competition issues arising with the ACCC.
• The ACCC has no practical ability to block or
approve a particular privatisation structure, but its
view can be influential in some instances.
• Recent comments and submissions by the ACCC
regarding infrastructure privatisations:
– The ACCC is generally supportive of
privatisations on the basis that the private sector
can more efficiently operate assets.
– The ACCC’s primary concern is that the
privatisation structure needs to be set so as to
maximise competition and ensure any monopoly
assets are subject to effective regulation.
• The ACCC’s view has the potential to diverge from
the views of State Treasurers, who are seeking to
maximise the value of the privatised asset.
• The ACCC has raised concerns regarding some
historical privatisation structures:
– Privatisation of Telstra as a vertically-integrated
telecoms business.
– Privatisation of Sydney Airport inclusive of an
option for developing a second airport (rather than
having two competing airports).
Comments by the ACCC
• “There have been very high multiples paid for
some of these ports and the worry is that the
buyers may only recoup their outlays if they push
up prices quite a bit more than otherwise would
have happened,” Mr Sims told The Australian
Financial Review.
• “Governments should avoid the temptation to
attempt to maximise sale revenue by privatising
without appropriate price and access regulation in
place”: ACCC’s Container Stevedoring Monitoring
Report No. 16, October 2014
• “The regulator warns that “restrictions on
competition” inserted into sale conditions “may be
unlawful and could be unenforceable”. Its points of
reference were the sale of Port Botany and Port of
Newcastle, which included conditions that prevent
the world’s biggest coal port from building a
container terminal. The problem for the regulator is
that there is significant doubt over whether the
behaviours of government are contained by the
competition law”: The Australian Financial Review.
25
Views of the ACCC on privatisations
Views of ACCC on privatisations
4. State of Western Australia
26
Balancing the WA budget after the mining boom
27
• Mining and petroleum royalties are an important
source of the WA Government income. Those
sectors dominate the WA economy.
• Since 2013, royalties from these industries have
significantly decreased. Investment and production
in commodities has stalled following a fall in
commodity prices, particularly iron ore.
• As a result of these declining revenue streams, the
Government’s debt position has increased. Moody’s
downgraded the credit rating of the WA Government
from Aaa to Aa1 in August 2014.
• The WA Government is under significant political
pressure to restore the State’s credit rating and
bring the State’s debt back under control.
• As a part of the Federal Budget in May 2015, the
WA Government announced an asset investment
program totalling AUD 6.3 billion in 2015-16 and
AUD 24.1 billion over the subsequent four years.
Much of that investment will be funded by the sale
or privatisation of existing state-owned assets.
• In the 2015 State Budget, the WA Government
announced that: “The orderly disposal of State
assets has begun and will be significantly
expanded. Sales proceeds will be used to fund
existing infrastructure initiatives and reduce debt”.
Announcements by WA Government
28
• The WA Government announced the privatisation of a first tranche of (minor) asset sales in May 2014. The
first successful privatisation was the Perth Market Authority, but the other two have not yet occurred.
• In the 2015 WA Budget, the WA Government allocated funding to WA Treasury to progress the sale of the
first tranche of assets over the period to 30 June 2017.
• In addition, the WA Government has announced that its asset sales program will be “significantly
expanded”. The WA Government will investigate the potential privatisation of further assets.
First tranche (current) Second tranche (future) Not yet included
Kwinana Bulk Terminal* Fremantle Ports Western Power (remainder)
Utah Point Bulk Handling Facility WA TAB Synergy (remainder)
Perth Market Authority Forest Products Commission Horizon Power (remainder)
Portfolio of GRO housing stock Water Corporation (some assets)
Securitisation of KeyStart loans Dampier marine services facility
Vehicle feet sale and leaseback
Various Government buildings
Selected assets of Synergy,
Horizon Power, Western Power
We understand Kwinana may be
subsumed into Fremantle Ports
We understand Utah Point has
temporarily been placed on hold.
29
Delays to privatisations caused by WA politics
• WA has a bicameral legislature. The Legislative Assembly
is the lower house. The Legislative Council is the upper
house.
– Legislative Assembly is controlled by a Liberal/National
coalition (38 seats), against Labor (21 seats).
– The Legislative Council is controlled by a
Liberal/National coalition (22 seats), against Labor (11
seats), Greens (2 seats) and shooters & fishers (1 seat).
• In this manner, the Liberal/National coalition has a majority
in both houses of parliament in WA. Enactment of
legislation to implement the proposed privatisations should
therefore be provided.
• The last general election occurred in March 2013 and the
next general election is due in 2017.
• The Government will be a wary of potential electoral
concern regarding privatisations, hence the 2017 elections
could result in a pause in the privatisation programme to
avoid political backlash.
• The WA Government may also wish to avoid potentially
controversial privatisations, such as water and electricity.
WA Legislative Assembly
Government
Opposition
Liberal
Nationals
Labour
WA Legislative Council
Government
Opposition
Labour
Liberal
Nationals
Crossbench
Greens
S&F
Utah Point Bulk Handling Facility
30
• The Utah Point Bulk Handling Facility, located in Port Hedland, is
one of 4 berths at the Port owned by Pilbara Ports Authority.
• The Facility is new, commencing operation in September
2010. The Facility was designed specifically for small and
mid-tier miners and comprises:
– a single multi-user mini-cape berth and shiploader; and
– two stockyard product storage facilities and supporting
infrastructure, including a purpose built 10 km access
road and 13 independent stockpiles over 24 hectares.
• The Facility is used to export various bulk products, mostly
iron ore, manganese, and chromite. A total of 18.7 Mtpa
was exported through Utah Point during the FY 2013-14
financial year. The Facility had a design capacity of 20
Mtpa, but has operated at annualised rates of 22 Mtpa.
• The Facility earned AUD 86.5 million in revenue in FY 2012-
13 with expenditure of AUD 44.1 million on throughput of
12.4 Mtpa.
• Indicative DD issues: ‘Junior miners’ are the primary users
of the Facility and have been the hardest hit from the iron
ore price crash and hence are most exposed financially (eg
Atlas Iron).
31
Fremantle Ports
• Fremantle Ports is a WA Government trading enterprise that
strategically manages the Port of Fremantle. Fremantle Ports
was not part of any of the recent port amalgamations in WA.
• Fremantle Ports consists of two harbours: the Inner Harbour and
the Outer Harbour (see next slides). Fremantle Ports is the
State’s biggest general cargo port and Australia's fourth largest
container port.
• Fremantle Port’s Inner and Outer Harbours currently handle
around 91% of the WA’s sea imports and 30% of exports. The
value of this trade is estimated at AUD 12 billion annually.
• The port is a mix of facilities and services managed by
Fremantle Ports and private operators. Fremantle Ports provides
and maintains shipping channels, navigation aids, cargo
wharves at common user areas and leased terminals, the
Passenger Terminal, road and rail transport infrastructure in the
port area, moles and seawalls and other infrastructure such as
storage sheds, water, power and public amenities
• Services such as towage, pilotage (under contract to Fremantle
Ports), line boats and bunkering are provided by the private
sector. Fremantle Ports also cooperates with Commonwealth
Government agencies responsible for customs, quarantine and
maritime safety.
Sources of revenue (2013)
$135.6m
$19.0m
$17.5m
$12.3m
$11.1m $6.6m
Charges on cargo
Rentals and leases
Charges on ships
Shipping services
Miscellaneous revenue
Port utilities and services
Regulatory overlay
32
Legal and regulatory context for ports in WA
• There is no formal State-based direct regulation of ‘third
party access’ to port infrastructure in WA or of pricing for the
use of port infrastructure.
• A threat of regulation exists. The WA government may
request the Economic Regulation Authority of WA (ERA) to
inquire into matters relating to both regulated and non-
regulated industries, including pricing, quality, business
practices and compliance costs.
• To date, to prevent excessive extraction of economic rent by
port authorities (in public ownership), relevant provisions
have existed in statutory governance arrangements for the
port authorities.
• The PAA requires port authorities to “act in accordance with
prudent commercial principles [and] endeavour to make a
profit”. The PAA’s focus on efficient resource allocation and
accountability has arguably limited scope for port authorities
to extract excessive rent.
• The PAA will not apply to privatised entities, so the threat of
regulation by the ERA will be the primary form of regulation.
Not yet clear if this will be enhanced.
Port Authorities Act 1999 (WA)
• The Port Authorities Act 1999 (WA) (PAA) governs
WA port authorities, covering their functions,
responsibilities, concept of operations and related
matters.
• Under the Act, the port authorities may operate as
Government Trading Enterprises.
• Prior to the passage of the Act, each port authority
was established under its own individual legislation.
• The State Government announced on 2 February
2012 that seven of the State's eight port authorities
would be consolidated into four regional port
authorities.
• The resulting consolidation involved the creation of
the new Pilbara Ports Authority, for example.
However, Fremantle Ports was not subject to the
consolidation.
• It is not yet clear how the PAA will be modified to
address the privatisation, although it is possible that
the privatisations may follow the NSW model.
Electricity sector privatisations in WA
33
• In 2006, the WA electricity sector was reformed by
disaggregating WA’s vertically-integrated electricity
utility, Western Power Corporation into four
separate state-owned entities:
– Verve Energy, originally responsible for power
generation in the SWIS, later merged with
Synergy;
– Western Power, responsible for transmission and
distribution of electricity in the SWIS;
– Synergy, now responsible for the retailing of
electricity and power generation in the SWIS;
– Horizon Energy, responsible for generation,
distribution and sale of electricity outside the
SWIS.
• WA operates an energy market known as the
South West Interconnected System (SWIS),
governed by the Wholesale Electricity Rules (which
are a bespoke variant to the National Electricity
Market Rules on the east coast of Australia).
• As yet, little electricity sector privatisations have
occurred in WA.
• In March 2014, the WA Government launched a
review of the WA electricity market. An options
paper was released on 24 March 2015, including a
report and conclusions.
• In the WA Government’s response to the review, the
WA Government indicated:
– Synergy would not be privatised or restructured as a
gentailer, rather the WA Government will consider
sales of specific generation assets;
– the WA will implement full retail contestability (hence
choice of electricity suppliers) once the Government
subsidy for the electricity market is reduced to zero –
this is expected to occur within the next four years;
– Retail tariff and other regulatory functiosn currently
undertaken by the Economic Regulatory Authority
(ERA) will be transitioned to the Australian Energy
Regulator;
– some wholesale electricity market reform will occur,
including reforms to the current capacity charge,
potential introduction of facility bidding, transfer of
system management to the independent market
operator, and reforms to regulation of Western Power
Synergy – energy retail & generation
34
• Following the re-merger of Synergy with Verve
Energy on 1 January 2014, Synergy is WA’s
largest integrated generation-retailer.
• Synergy over 1 million industrial, commercial
and residential customers, generating total
annual revenue of around AUD 1.5 billion.
• The WA Government determines Synergy's
generation capacity, which is currently capped at
3,000 megawatts (MW). Synergy produces
about 10,000 gigawatt hours (GWh) of electricity
each year, or 60% of the electricity sold to
households and business customers in the
SWIS and about 45 per cent of the contestable
gas load in the industrial and commercial market
• The Government has indicated it has no current
plans to privatise or restructure Synergy.
• However, in its recent Energy Market Review
Report, the WA Office of Public Utilities
concluded that it would be desirable for the
State-owned generation assets to be privatised.
Western Power - lines
35
• Western Power is the WA State Government
owned corporation that builds, maintains and
operates the transmission and distribution
network in the SWIS.
• Recommendations have been made by key
stakeholders to establish a clear pathway for
the privatisation of Western Power.
• In December 2014, the WA Office of Public
Utilities released its Energy Market Review
Report. This report suggested a full or partial
privatisation of the network in order to reduce
the State’s net debt exposure.
• However, the WA Government response
indicates that selected sale of generation
assets from Synergy is instead favoured.
• If privatisation occurred, it is estimated that
the business could be restructured and split:
– the transmission business is estimated to have a
value in the order of AUD 6.5 billion;
– the distribution network is estimated to have a
value in the order of AUD 2.5 billion. Source: Energy
Market Review
Options Paper
36
• Horizon Power is a fully vertically-integrated electricity
generator, distributor and retailer owned and operated by
the WA Government.
• Horizon Power services the remainder of WA not
included in the SWIS, this includes:
– the entire North West Interconnected System (NWIS); and
– non-interconnected systems in regional towns and remote
communities.
• Horizon Power manages 38 separate systems: the NWIS
in the Pilbara and the connected network between
Kununurra, Wyndham and Lake Argyle, and 34 stand-
alone systems in regional towns and remote
communities.
• Horizon Power supplies around 100,000 residents and
10,000 businesses.
• Although no firm statement has been released at this
time, reports suggest the WA Government has been
considering a privatisation of Horizon Power.
• The asset sales announced by the WA Government
include the sale of certain generation assets.
Horizon Power – regional WA
Selected generation assets in second tranche
37
• In its May 2015 Budget announcements, the WA
Government indicated it would be selling certain individual
electricity generation assets owned by the State-owned
electricity generators, Synergy and Horizon Power.
• The generation assets sale are expected to include:
– the 55MW Mumbida wind farm, owned by Synergy;
– the 10MW Greenough solar farm, owned by Synergy;
– possibly Synergy’s 240MW Muja AB coal-fired power
station;
– Horizon Power’s 86MW Karratha simple-cycle gas
turbine power station.
• However, the WA Government has not yet released a
definitive list of the various generation assets that it is
intending to sell.
• The WA Treasurer commented in his budget speech that
the privatisation would include:
“individual generation assets of Synergy and Horizon
Power, and Wester Power’s non-core assets”.
Muja AB 240MW coal-fired power station
• Muja Power Station is situated 225 kilometres south
east of Perth and 22 kilometres east of Collie. It is
Synergy's largest power station. Muja Power Station
is coal-fired and is comprised of Stages A, B, C and
D, dating from 1966.
• Muja Stages C and D produce 854 megawatts (MW)
of electricity.
• Stages A and B have been undergoing refurbishment
and have recently been recommissioned. This
refurbishment has been controversial. Corrosion
problems and a problematic joint venture resulted in
a $308 million cost overrun.
Water Corporation
Wastewater assets
38
• Water Corporation operates 106 wastewater
treatment plants across Western Australia,
including three large, metropolitan plants –
Woodman Point, Beenyup and Subiaco – which
collect and treat about 80% of the state’s
wastewater.
• In August 2014, a confidential report revealing
that the plants are the “most notable examples”
of Water Corp assets being examined for
privatisation was mistakenly tabled in the WA
Parliament.
• If privatisation occurs, it will most likely involve
packages of wastewater plants that are
progressively sold over a period of time.
• However, Water Corporation has not specifically
been mentioned in the context of the
privatisation tranches identified to date. It is
likely that any announcements will be delated
until after the sale of the C&E business.
Construction and Engineering
• In January 2015, Water Corporation announced
that it would pursue a private buyer for its
engineering and construction services team in
order to shift its focus to building new infrastructure
to support Perth’s rapid growth and meet the
demands of the drying climate.
• The team comprises 152 permanent employees
who provide in-house civil construction and
mechanical, and electrical fabrication and
construction services.
• Water Corporation expects to determine the new
owner by mid-2015.
• The sale of the construction and engineering
business was not specifically mentioned in the WA
budget in the context of the WA privatisation
programme, presumably to de-politicise the sale.
• Concerns have been raised, for example, by the
relevant union (United Voice WA) regarding job
losses.
5. Other States and Territories
39
Queensland abandoned its privatisations
40
• Queensland has experienced a range of privatisations, including Queensland TAB (1999), Sun
Retail (2006), PowerDirect (2007), parts of Queensland Rail (2010, 2013), Port of Brisbane
(2010), Forestry Plantations Queensland (2013), and Queensland Motorways (2014)
• The previous government, lead by Premier Campbell Newman, was pursuing a range of further
privatisations. The government was formed by the Liberal National Party (LNP) and had the
largest majority in QLD history, holding 73 seats compared to Labor’s 9 seats.. Assets
contemplated for privatisation included:
– Port of Gladstone coal terminal;
– Port of Townsville and associated rail;
– SunWater’s industrial pipelines, being the key water business in Queensland;
– Powerllnk, the key transmission business in QLD;
– Energex, the electricity distributor for Queensland, except south-east Queensland
– Ergon Energy, the electricity distributor for south-east Queensland
• However, asset privatisation became a key election issue in the February 2015 elections in
QLD. Contrary to expectations, the Labour Party clawed back the seats it had lost and was
elected into power under Premier Annastacia Palaszczuk.
• A key election promise of the Labour Party was that it would no proceed with any privatisations.
As a consequence, all QLD privatisations have been abandoned.
South Australia, Tasmania and the Territories
41
State of South Australia
• SA has already privatised its electricity and port infrastructure assets, so has not been a major
participant in the current wave of privatisations.
• Historic privatisations undertaken in SA have included: Pipelines Authority of South Australia
(1995), State Government Insurance Commission (1995), Bank SA (1996), Forwood Products
(1996), Adelaide Airport (1998), ETSA transmission (1999), Torrens Island power station
(2000), and Electranet (2000)
State of Tasmania
• Tasmania unsuccessfully attempted to privatise its Aurora electricity business in 2013, but the
business was withdrawn from sale as the bids received were not considered sufficiently high.
This Aurora business is still a candidate for future privatisation.
• Otherwise, the Premier of Tasmania, Will Hodgman, has stated “Let me be clear: we will not
be selling any government or public owned assets” and has maintained this position since
2014.
Northern Territory and Australian Capital Territory
• Port of Darwin was successfully privatised in October 2015 to Landbridge Group for $506
million by way of lease. The privatisation was controversial given concerns raised by the US.
• The NT and ACT have been considering privatisation of smaller assets.
6. Regulatory overlay
42
43
Managing the federal balance of power
States defer to Commonwealth
• Under the Constitution of Australia, certain
infrastructure services (namely post and telecoms)
are the subject of Commonwealth regulation rather
than State-based regulation.
• The Commonwealth also has power to regulate
certain significant national infrastructure on the basis
of its importance to inter-state trade or commerce or
to the national economy. The national access
regime has been enacted on this basis.
Commonwealth defers to States
• Otherwise, the power to regulate infrastructure lies
primarily with the States. The States have then
agreed with the Commonwealth and between
themselves to adopt various consistent regulatory
approaches (as mentioned in the previous slide).
• In relation to nationally significant infrastructure, the
States and the Commonwealth have agreed a
certification regime in which the State-based regime
has primacy if certain minimum criteria are met.
44
Hilmer Reforms and National Competition Policy
• The relationship between the Commonwealth and States in
relation to infrastructure regulation has been heavily influenced
by the National Competition Policy, dating from 1992.
• The ‘Hilmer Review’ of 1993 recommended a series of reforms to
harmonise infrastructure regulation across Australia, leading to
three key agreements between the Commonwealth and States in
1995.
• Competition payments were made by the Commonwealth to the
States in consideration for the implementation of various
competition policy reforms. The result has been the adoption of a
broadly consistent approach to infrastructure regulation
throughout Australia.
• Pursuant to these agreements, a co-operative approach between
the States lead to the adoption of the National Electricity Law and
the National Gas Law by most States based on the simultaneous
enactment of identical State-based legislation.
• WA is an exception and has tended to follow its own path,
although it is broadly similar to other states.
• Infrastructure regulation harmonisation issues are currently
pursued through the Council of Australian Governments (COAG).
45
Australia’s regulation of infrastructure types
• INSERT TABLE • [ ].
Infrastructure Exclusionary conduct
(ensuring non-discriminatory access)
Exploitative conduct
(preventing monopoly pricing)
Gas National Gas Law – negotiate / arbitrate
model for natural gas pipeline access (a
variant applies in WA)
Distribution businesses must submit
reference tariffs for approval that are derived
using the BBM/RAB approach.
Water A range of state-based access regimes
exist, typically involving the use of a
negotiate-arbitrate model
A range of state-based regimes exist, but
they typically use either the BBM/RAB
approach or a retail minus methodology.
Electricity National Electricity Law – negotiate /
arbitrate model with some standard terms
(a variant applies in WA)
Distribution businesses are subject to
revenue caps and retail price caps derived
using the BBM/RAB approach.
Telecoms Telecoms Access Regime – ex ante access
determinations
Telstra has been subject to CPI-X retail price
caps, but deregulation is occurring.
Wholesale pricing is determined by a number
of means, including BBM/RAB.
Airports Airports are potentially subject to access
regulation under the national access
regime.
ACCC undertakes price monitoring of the top
four leased federal airports against various
benchmark financial metrics
Ports Generally lightly regulated – reliant on
threat of regulation
Generally lightly regulated – reliant on threat
of regulation
Rail State-based access regimes – negotiate /
arbitrate model with some undertakings
Below-rail access pricing has generally been
based on the BBM/RAB approach.
Overview of State-based regulation
• Ports are not heavily regulated in Australia.
• If regulation exists, it is generally directed at:
– channel access;
– vertically-integrated facilities (eg
wharves/berths);
– non-contestable services.
• Most regulation of Australian ports involves price
monitoring. In some cases access regimes apply.
• Some port access regimes have been certified as
effective under the national access regime:
– Dalrymple Bay Coal Terminal, QLD;
– South Australian Ports.
• Regulation may also apply to specific
infrastructure associated with ports, including:
– grain silos (a new Code is under review);
– railway systems (eg Aurizon QLD undertaking);
– gas pipelines (National Gas Law).
Approach of different States
• NSW – NSW removed Ministerial approval of port pricing in
the NSW port privatisations and implemented a price
monitoring regime by the Minister. If the Minister is
dissatisfied, an IPART investigation can be requested.
• VIC - The VIC regime is adjusted every 5 years on review
by ESC. The ESC review for 2014 favours continued
reference tariffs, price monitoring, increased transparency
and a credible threat of greater regulation.
• SA – SA currently has a price monitoring regime, although
ESCOSA has the power to make pricing determinations. SA
also has a port access regime that has been certified under
the national access regime.
• QLD – QLD has applied access regulation to DBCT. Other
ports are not currently subject to access regulation or
monitoring, although declaration by QCA could occur (or an
undertaking ‘voluntarily’ sought). Open access is a condition
of the WICET lease. Port Brisbane has given a voluntary
access undertaking.
• WA – Relies on Government ownership and policy to control
pricing, so will need to reform their regulatory regimes when
privatising ports. In WA, certain port services could become
regulated services subject to ERAWA oversight.
46
Example – ports, primarily subject to State regulation
• CIRA was agreed by the Council of Australian
Governments (COAG) to achieve a simpler and
more consistent approach to the economic
regulation of significant ports.
• The States agreed to review the regulation of ports
to ensure they were consistent with the CIRA
agreed principles (see right).
• The various reviews resulted in a range of
conclusions. Generally, the conclusions of the
various reviews favoured:
– Commercial negotiations;
– Light-handed regulation and price monitoring;
– Threat of greater regulation if a light-handed
regulatory approach failed.
• KMPG undertook an audit for COAG in 2009 of the
various State-based ports reviews and confirmed
the veracity of the reviews – although WA failed to
make the deadline.
Agreed principles set out in CIRA
• Where possible, commercial negotiations and
outcomes should be promoted.
• States should create the structures and settings for
competitive markets, rather than regulating ad hoc.
• Regulation should only be applied only where
evidence of a market failure, such as:
– monopoly pricing / substantial market power;
– risk of upstream or downstream discrimination.
• Price monitoring to improve transparency is a first
step where price regulation is required.
• Any regulation should occur via an independent
State regulator acting within binding time limits.
• Third party access regimes should include
consistent regulatory principles (as listed in CIRA).
• Access regimes must be capable of national
certification under the national access regime.
47
Ports - consistency between State-based regimes
Competition and Infrastructure Reform
Agreement 2006 (CIRA)
• The national access regime is set out in Part IIIA of
the Competition and Consumer Act 2010 (Cth).
• Any person can apply to the National Competition
Council (NCC) for the access regime to be applied
to any port service.
• The NCC will undertake public consultation and
make a recommendation to the relevant State
Treasurer whether statutory criteria are met.
• Once regulated, a port service would be subject to
a negotiate/arbitrate regime before the ACCC.
• To date, this regime has been applied to rail but
not yet to ports. Possible it could be applied.
• Ability to offer access undertakings.
• A State can seek a declaration that its existing
ports regulatory regime is “effective”. By doing so,
it can formally displace the Commonwealth Part
IIIA regime so that only the State’s access regime
will apply. South Australia has achieved this for its
State-based Ports regime.
Price surveillance (Part VIIA)
• Price surveillance can apply to supply of goods or
services in any industry, including ports.
• Price inquiries: Commonwealth Treasurer can
require ACCC to hold price inquiries. ACCC has
ability to prevent price increases during the inquiry.
• Price notifications: Commonwealth Treasurer or
ACCC (with approval) may notify goods or services
and hence restrict price increases.
• Price monitoring: Commonwealth Treasurer may
direct ACCC to monitor prices, costs and profits in
relation to the supply of goods or services.
• At present, no Australian port infrastructure is
subject to either Part IIIA or Part VIIA. However,
either regime could potentially be applied if
concerns arose from the public or port users.
• The Part VIIA regime has been applied to
stevedoring operations at various key ports. The
ACCC currently monitors prices, costs and profits
of stevedores at those ports.
48
Ports - Commonwealth regulatory overlay
National Access Regime (Part IIIA)
49
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