Ausgrid: Chinese, NSW scramble to keep bid process alive

The NSW government and the two Chinese bidders for Ausgrid are scrambling to keep the $14bn bid process alive.

Scott Morrison has raised national security concerns over the Chinese bid for Ausgrid.

The NSW government and the two Chinese bidders for Ausgrid are scrambling to keep the $14 billion acquisition of the poles and wires network alive, including by possibly bringing in an Australian partner, after a provisional snub on national security grounds.

The move comes as risks mount that revenue at the electricity network could be cut by hundreds of millions of dollars, which could slash the value of the business.

David Leitch, the former utilities analyst at UBS, which advised the NSW government on the Ausgrid sale, said Ausgrid faced a court hearing over electricity prices brought on by regulators that could cut its value by $4bn.

“If you were looking at buying these assets you would not be seriously looking at them before you had a clear view of how the ruling is going to affect their revenue,’’ said Mr Leitch, the founder of consultant In the Know.

State Grid Corporation of China and Cheung Kong Infrastructure on Thursday were all but knocked out of the auction for 50.4 per cent of Ausgrid after Scott Morrison raised national security concerns.

The two bidders have until next Friday to respond to concerns. Sources said both parties wanted to keep their bids alive and may consider taking on local partners to dilute their control of the asset and increase their chances of winning the auction.

Sources said State Grid, the $257bn giant that supplies 88 per cent of China’s network, may be prepared to drop its interest to between 15 per cent and 20 per cent in order to stay in the race.

But the Treasurer said there had been “no suitable mitigations’’ identified that would address the national security risks.

Meanwhile The Weekend Australian can reveal that in December last year Foreign Investment Review Board boss Brian Wilson phoned potential bidders, including the two Chinese firms, and said there were no restrictions on any of the bidders in the process.

This apparent green light to the Chinese was the reason why the Australian-based super fund-backed bidders withdrew on the belief that the Chinese would pay top dollar.

It is understood the FIRB also made no mention of the concerns in the run-up to last month’s federal election.

NSW Treasurer Gladys Berejiklian yesterday said she was confident of being able to bank proceeds for the Ausgrid sale before the June 30, 2017 financial-year end. It is believed the state is keen to keep the current bid process alive rather than end it and start a new process with costs in the tens of millions of dollars.

The Australian Energy Regulator last year handed down swingeing cuts to revenue allowances for electricity market operators on the grounds that they were inefficient, and dramatically cut the interest rates used to calculate returns, reflecting drastically lower official rates around the world.

The ruling cut Ausgrid’s revenue by as much as 31 per cent a year over the five years to 2019 — or nearly $800 million a year less than Ausgrid was seeking.

Ausgrid and other distributors won an appeal against the AER, but that decision is now being appealed to the Full Court of the Federal Court next month, raising risks to the value of the business.

Mr Leitch, who left UBS last year after writing a report saying the sale would hurt the NSW budget, said the AER made a credible argument for revenue cuts and that the appeal posed a serious risk to the price.

According to ITK’s figures, Ausgrid is worth $22bn based on the $2.4bn revenue Ausgrid was seeking for 2016-17, but just $14.3bn at the $1.6bn revenue proposed by the AER. “I completely don’t understand how the buyers could be prepared to pay the $22bn value when you are still taking all of the risk the court will cut your returns,’’ Mr Leitch said.

The preliminary rejection has provoked widespread concerns in the business community, with the FIRB allowing several foreign bidders provisional clearance to bid for 50.4 per cent of Ausgrid last December.

Sources said the approval for CKI — a Hong Kong-listed company controlled by billionaire Li Ka-shing — and State Grid, which is owned by the Chinese government — was enough to discourage other bidders, who believed they lacked the financial firepower to compete with the Chinese operators.

Both have previously been cleared to own or invest in similar assets in Victoria and South Australia, while State Grid was part of a consortium that entered an unconditional bid — meaning it had FIRB approval — for TransGrid, the more strategically important high-voltage transmission business sold by the NSW government last year for $10.3bn.

Business groups have called for the federal government to give a more detailed explanation of the concerns about the Chinese bidders because of concerns a lack of clarity could deter other potential investors.

“I cannot understand the Li Ka-shing decision,’’ said Rod Eddington, a prominent company director and former chief executive of Hong Kong-based Cathay Pacific. “He is a sensible, global player”.

David Moore, a foreign investment specialist with law firm Minter Ellison, said the decision may raise broader concerns for investors as it came just four months after Mr Morrison blocked the sale of the Kidman pastoral empire to a Chinese bidder.

“Foreign investment decisions made by the Treasurer are increasingly viewed by investors as having a domestic political dimension” Mr Moore said.

James Pearson, chief executive of the Australian Chamber of Commerce and Industry, said the FIRB process was expensive for bidders and a risk to their reputation.

“We need to know the reasons for the recommendations that it makes. If there are assets that are beyond the reach of foreign investors, that should be made clear at the outset,’’ Mr Pearson said.

Ausgrid would have been the biggest single offshore investment by State Grid, which has set a target of increasing the share of its assets outside China to 20 per cent by 2020.

Rejecting State Grid would also deny NSW access to the Chinese company’s state-of-the-art high-voltage electricity technology, Sydney University China expert Hans Hendrischke said.

Speaking from Shanghai, he told The Weekend Australian that State Grid had developed technology that could be vital to reshaping Australia’s electricity grid to accommodate a growing share of renewable energy. That included ultra-high-voltage electricity technology that could transport larger amounts of electricity over longer distances with less wastage.

“This is one aspect — the technology aspect — which should have been part of the consideration of State Grid’s bid,” said Professor Hendrischke, who is professor of Chinese Business and Management at the university’s business school.

Additional reporting: John Durie