Australia is a Nation of Idiots

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Just when you thought Australia’s energy picture couldn’t get any worse…it gets much worse.

In yesterday’s Australian, John Durie wrote a great article showing how Australia has pretty much sold off its energy infrastructure assets to foreign interests.

This follows the ACCC’s decision to approve the sale of gas pipeline infrastructure owner APA Group [ASX:APA] to CK Infrastructure (CKI), a group controlled by Hong Kong’s Li Ka-shing, the 23rd richest person in the world.

While the sale is still subject to a decision by the Foreign Investment Review Board (FIRB), Durie says that CKI, along with the 100% Chinese government owned State Grid, now control nearly all of Australia’s east coast energy distribution assets:

Subject to FIRB approval, CKI and the State Grid Group (including Singapore Power) now has a major ownership interest in all of Victoria’s electricity and distribution networks and all of its gas transmission pipelines and distribution networks.

In South Australia it will own all of its electricity transmission and distribution networks and in NSW all the gas transmission pipelines.

In Queensland it will own all the gas transmission pipelines other than purpose-built lines from the Bowen and Surat basins to Gladstone and the Moranbah to Townsville line.

The general consumer pipelines will be in CKI’s control.

The two groups own every single pipeline used in the north-south transport of gas (aside from Moomba to Adelaide) plus 50 per cent of SEA Gas which transports gas from Victoria to Adelaide.

FIRB willing, the CKI network will now include the following Victoria assets.

Murray Link interconnector, electricity distribution through Powercor, Citipower, United Energy and the Gasnet pipeline plus distribution through Multinet and the Australian Gas Network.

To me it is nothing short of a disgrace that ownership of such crucial energy infrastructure should be concentrated in the hands of two main players. The fact one is an investment arm of a communist nation just rubs salt into the wound.

And nothing in the consumer competition legislation could knock back the approval, even though it further concentrates ownership! Let’s hope the FIRB takes a different view.

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The impact of selling our assets

It may not prove to be a big deal right now. Or next year, or the year after, or even in 10 years’ time. After all, the impact of selling out of your strategic assets takes a long time to become apparent.

But here’s the deal, and it’s a deal that our kids and grandkids are not going to be happy with when they realise what we’ve done. (That’s if they manage to realise it. ‘Higher education’ these days doesn’t do much in the way of promote critical thinking, as much as indoctrinate.)

Remember our chronic current account deficit? It’s the result of something called a ‘primary income deficit’. This is a measure of the money (in net terms) that flows out of our economy each year as a result of repayments on debt or profits from assets owned by foreign interests.

Thanks to the sell-off of the east coast gas and electricity distribution network over the years, the profits flowing from these assets no longer stay in the country.

In the three months to 30 June, the primary income deficit was $16 billion, or $64 billion annualised. Adding the balance of trade to those figures gives you the current account. Our trade balance is currently in surplus. That gave us a current account deficit of $13.5 billion for the June quarter, or $54 billion annualised.

Roughly speaking, that means we need to attract $54 billion in foreign capital inflows per year to keep our dollar stable. That hasn’t been happening of late, which is one reason why our dollar is tanking.

The purpose of a flexible exchange rate is to smooth out these foreign exchange inflows in the least jarring manner possible. A falling dollar increases the purchasing power of foreign currencies, and helps attract the necessary capital.

An exchange rate is just a price. It is the price at which foreign investors think buying Aussie dollar denominated assets is a good deal. And this year, that ‘price’ has been falling consistently (see chart below).

MoneyMorning 12-09-18

Source: Optuma
[Click to open new window]

The bottom line is that when global growth is strong, foreign capital pours into Australia to take advantage of it. But when global growth slows, or China/Asia slows, that capital will promptly flee.

As a commodity based economy, it’s always been like this. But instead of wisely saving the proceeds from each successive commodity boom, our politicians have steered the economy into a deeper and deeper hole.

While selling off our productive assets, our regulations and tax policy incentivises debt accumulation and housing speculation.

It’s the dumbest thing ever. We hand over the productive assets in exchange for more and more debt to speculate on land prices. And then sit around in cafes discussing these land prices.

We believe land price equals wealth, but forget to see the debt that is backing it. If the debt doesn’t rest with you it rests with your kids, or your grandkids.

We have sold future generations out. We are a nation of idiots.


Greg Canavan,
Editor, Crisis & Opportunity

PS: Population growth is booming — find out how you can make the most of a massive global infrastructure rush in this free report. Get access now.

About Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need…