Australia’s political uncertainty eats away at investor appetite

A survey of 33 global investors is a ‘canary in the mine shaft’ for investor confidence in the Australian infrastructure market.

Global investors are increasingly concerned about Australia’s uncertain political and regulatory environment and the risk of increased market interventions, a new survey has found.

The 2018 Australian Infrastructure Investment Report, compiled and published by Infrastructure Partnerships Australia and Perpetual Corporate Trust, found that the country had fallen from first to third as the preferred global destination for investment.

The fourth annual survey quizzed 33 unidentified global investors who, combined, currently own or manage infrastructure assets totalling more than A$380 billion ($269 billion; €235 billion).

The survey found that 83 percent of investors agreed that Australia’s political and regulatory uncertainty limited their ability to invest, and that 87 percent said the energy market in particular was “full of uncertainty” – a 15 percent year-on-year increase and the highest since the survey began four years ago.

Despite this, 90 percent of investors said they were “highly likely” to invest in Australia in the next two to three years – a 20 percentage point jump from 2017.

Speaking to Infrastructure Investor, Infrastructure Partnerships Australia CEO Adrian Dwyer said Australia still remained a “destination of choice” for investors, but the survey highlighted some areas of concern, particularly around regulatory uncertainty and reputation damage.

“Reputations are hard won and easily lost,” he said. “There are alarm bells with this and it’s best to take heed of them.”

Changing energy policy ‘denting confidence’
Dwyer said that broader concerns around high-level political upheaval over energy policy was denting confidence. This is alongside recent reviews into the guidelines for calculating the rate of return and the regulatory tax approach for electricity networks, and the abolition of the Limited Merits Review Regime in 2017.

“There are lots of things happening in this space, all of which can partially undermine certainty, and collectively can have a big impact,” Dwyer said.

“In a practical sense, eight out of 10 respondents said that [a lack of] policy and regulatory certainty in Australia was limiting their appetite for investment. These are real people, with real money, making real decisions, saying that this is undermining our degree of certainty in the sector.

“That doesn’t mean money’s not going to turn up to bid for things, but it does mean the risk pricing will be different.”

Vicki Riggio, general manager, managed funds services at Perpetual Corporate Trust, agreed: “Frequent changes to Australia’s national energy policy, market intervention and political risks are dampening investor interest for infrastructure assets in the energy space.

“This is despite investor appetite for all infrastructure assets increasing across the board and points to the need for greater stability to ensure we don’t fall behind in investing to improve this sector.”

Competition also a challenge

In addition to political risk, 58 percent of survey respondents identified competition for assets as a challenge for the Australian market – up from 42 percent last year – and 42 percent said that a lack of opportunities would be a challenge, up from 31 percent in the same period.

The preference for unregulated assets also rose, with 40 percent of investors citing them as the preferred regulatory model for investments – up from 17 percent in 2017. The preference for regulated assets fell from 65 percent to 43 percent.

One anonymous investor told the survey: “The reality is that regulated assets are now more subject to critical nuance, interference and influence, and there are risks embedded in that, which the financial investor can do very little about once the tide of opinion turns against them.”

On Australia’s standing relative to other countries and regions, half the survey participants said that Australia’s political stability was either ‘below average’ or ‘one of the worst’ – a 25 percentage point increase from 2017. Overall, investors indicated growing preferences for Europe and North America, with preference for Australia declining by 13 percentage points.

“We’re presenting this to government by saying this is mostly good news, but there’s a canary in the mine shaft for you,” Dwyer said.

“[Investors are] saying there are areas of Australia that we’re more concerned about than we’ve ever been before. When you’ve got that group of people saying they’re concerned, that’s when governments need to sit up and take notice, and consider what they, regulators and others can do to ensure those investors have certainty.”