The ratings agency is confident that privatisation opportunities will arise out of a state government push to fund and develop large greenfield assets with long lead times.
In a research note this week, Moody’s Investors Service noted that Australia has an ongoing need for new infrastructure investment, primarily to address the concentration of population growth in a few major cities.
Moody’s can see the country’s infrastructure development fitting into one of four broad categories: greenfield infrastructure developed by governments; privatisation of certain state-owned assets as their development risk abates and governments seek to recycle capital; governments’ use public-private partnerships (PPPs) for selected assets; initiatives led by the private sector.
The ratings agency pointed to the proposed Western Sydney Airport (WSA), which will be Sydney’s second international airport, an example of the type of asset that could be privatised.
“The WSA will likely face strong competition from the incumbent Sydney Airport (Sydney Airport Finance Company Pty Ltd, Baa1 stable) when the WSA begins operating in 2026. The Commonwealth government announced in 2017 that it would make an equity investment of up to 5.3 billion in a government-owned entity, WSA Co, to fund the construction of the WSA.
WSA construction is due to begin in late 2018, with operations scheduled to begin in 2026. Once completed, the WSA will accommodate around 5 million passengers per year and its capacity will likely increase gradually to 10 million passengers in the following five years. That compares with passenger volumes of 43 million at the incumbent Sydney Airport in 2017.
“Australian airports generate most of their revenue by levying passenger charges on airlines for the number of passengers that use the airport,” Moody’s explained.
“Airports’ credit profiles are therefore driven by their ability to attract stable passenger volumes. The Commonwealth government has accepted the risk associated with negotiating service agreements with airlines to generate revenue for the WSA and the execution risks associated with the WSA’s greenfield nature and long development lead time.
“Once the ramp-up risk of such assets has declined, we believe the governments will seek to privatise these government-funded assets through asset recycling initiatives and use the proceeds to fund additional capital investments.”
The NSW government’s privatisation of a 51 per cent stake in the multiphase Westconnex toll road in Sydney is an example of such a capital recycling initiative.
The state has announced that it intends to use the proceeds from privatisation to fund its share of remaining construction expenses to complete Westconnex after privatisation.
“We believe that assets such as the WSA and Westconnex will have strong market positions. We therefore expect regulators will focus on mitigating the risk of the new, post-privatisation owners exercising pricing power associated with the assets’ strong market positions to the detriment of consumers,” Moody’s said.
“Regulators will likely mitigate this risk through measures such as preventing incumbent operators with other strongly positioned assets from controlling these new assets, exercising tariff-approval rights, or both.”