Almost everyone agrees that ever-increasing sums of private money will make their way into infrastructure in the future. “It’s inevitable,” chuckles your archetypal infrastructure investor, a big Cheshire Cat grin spreading across his face at the certainty that cash-strapped governments are in no position to fund their infrastructure needs.
Most investors will also readily point out that they are well acquainted with the regulatory, financial and political risks associated with infrastructure investment. Few, however, will lose much sleep over the social reaction to increased private financing and ownership of infrastructure assets, especially in the developed world. That, however, could be a grave mistake:
“There’s been a dramatic change in the political and social appreciation of infrastructure. The public takes infrastructure for granted, especially in the Western world. We [infrastructure investors] are now part of a mechanism that will force these assets to be paid for. This is social dynamite. And we’d better be very careful about how we explain this,” Thomas Putter, former chief executive of Allianz Capital Partners, told a roomful of attendees at a recent conference organised by insurer Marsh.
Putter – who served as master of ceremonies at Infrastructure Investor Europe 2011 – has once again captured the zeitgeist. In fact, he’s outed a dangerous Black Swan: the widely ignored idea that rich Western countries – whose citizens can theoretically afford to pay for infrastructure – might actually prove very resistant to paying for it because they’ve always had their infrastructure for ‘free’.
That’s not the only Black Swan looming on the horizon. The other is that rich Western governments, with which investors entered into countless infrastructure contracts because they were seen as secure sovereigns, might fail to pay back a full return on investments. After all, who ever thought Greece would be unable to service its debts in full a few short years ago?
In this sense, privately financed infrastructure is not just ‘social dynamite’; it’s also ‘political kerosene’. Just take a look at the UK and the political attack on the Project Finance Initiative (PFI) to claw back some money from the country’s 500 existing PFI projects.
With large swaths of the media gleefully disseminating misinformation, the majority of the UK public are probably already sold on the idea that PFI is nothing more than a subprime-grade scam that allows the private sector to charge three times the cost of these assets over a 30-year period, endangering the sustainability of their schools and hospitals.
Presently, investors are being stoic about the abuse, believing that governments won’t go beyond clawing back money by cutting back on soft facility management services. And they’re probably right. But if things take a turn for the worse, it’s anyone’s guess how far governments, backed by angry public opinion, will go.
In short, the more visible private procurement of infrastructure becomes – with its associated increase in cost – the more explosive these issues will be. Ignore the burning fuse at your own risk.