By Jonathan Barrett and Anshuman Daga
SYDNEY (Reuters) - An Australian state government will restart the sale process for a major energy grid after the federal government angered China on Friday by ruling out the preferred Chinese bidders on security grounds.
Australia's Treasurer Scott Morrison, who must approve major foreign investments, formally blocked the A$10 billion ($7.6 billion) sale of Ausgrid on Friday to preferred bidders State Grid Corp of China [STGRD.UL] and Hong Kong's Cheung Kong Infrastructure Holdings (HK:1038).
The disqualification of the Chinese firms prompted the state of New South Wales (NSW) to re-start the tender process for the grid's majority stake.
"The NSW Government will now move immediately to relaunch the transaction process for the partial lease of Ausgrid and notes the strong market interest for this valuable asset," NSW Premier Mike Baird said in a statement on Friday.
The decision to block the sale - Morrison made a preliminary decision to block last week before confirming the stance officially on Friday - has caused a rift with China, Australia's biggest trade partner, just eight months after their A$100 billion free trade agreement took effect.
China's commerce ministry said in a statement on its website on Friday that the decision showed uncertainty in Australia's investment environment and would seriously hurt the willingness of Chinese companies to invest in the country.
The Ausgrid delay is the latest of a series of set backs for planned privatisations across the country, including the shelving of energy asset sales in Queensland and the Fremantle Port in Western Australia; both of which were disrupted by a lack of support in their state parliaments.
Proceeds from the sale of Australian state-owned assets are designed to be plowed back into the economy through job-creating infrastructure projects, including public transport networks.
AUSTRALIAN BIDS FAVOURED
The re-run of the Ausgrid tender opens the way for a local bidder, with Australia's pension funds likely to play a role as a partner in any fresh offers.
One investment manager at a major Australian superannuation fund told Reuters that the bar on foreign bidders meant his fund would now look more closely at the asset, although he said it would take a long time to be in a position to bid.
"Typically around the world the Chinese have been the highest payers," said the investment manager, who declined to be named.
"As investors, we've been reluctant to get involved. This might open the door but it's very early."
Morrison said on Friday that the proposed structure of the Ausgrid bids would be contrary to the national interest. He has previously cited "national security issues" without elaborating.
Foreign bidders will likely need to restructure their deals and bring in local partners to succeed in Australia, said Matthew Fitzgerald, an Australian-based corporate partner at law firm Herbert Smith Freehills.
"One example would be that rather than have a majority Chinese consortium buying the asset, you might have three or four different investors, some of whom are Australian, some of whom are Chinese," Fitzgerald said.
($1 = 1.3141 Australian dollars)