Global Summit: Engagement key to managing political risk

Populist sentiment may be putting pressure on politicians to tighten regulation, but improving communication between the public and private sectors – and changing the tone on both sides – is key to managing political risk.

Stricter regulation is certainly one manifestation of increased political risk, but according to Neil King, managing director, infrastructure, at the Canada Pension Plan Investment Board, the driver behind regulators’ increased focus is a view from politicians and governments that consumers are not always getting the best deal.

“We are seeing the public sector becoming more involved in how these businesses are run, which after all do provide essential services to large parts of the population,” King said, addressing attendees at Infrastructure Investor’s Global Summit in Berlin on Tuesday.

Thierry Deau, founding partner and chief executive of Meridiam, agreed that political risk is peaking as a result of populist sentiment as well as the fact that “we’ve had nearly 10 years of crisis across the world. Of course, it’s putting pressure on politicians to respond to social needs,” he said.

And the way to respond to that is through engagement and communication. “This is actually where you can build balanced partnerships to be able to sort of sustain this engagement and being able to manage political risk,” Deau said.

“I do believe that 50 percent of what we call political risk is usually a cock-up rather than an intention because a number of public sector procurement agencies or regulators can be somehow not well-equipped. So, it’s not always intentional,” Deau remarked.

“As long-term investors in infrastructure, this is one area where we’re going to have to engage and be much clearer about what we’re looking to do,” he said.

However, it seems that there isn’t enough communication to begin with and when there is, it is more often controversial rather than collaborative, according to Eugene Zhuchenko, executive director of the Long-term Infrastructure Investors Association.

“There are not enough forums in my opinion where a group of people from the private sector and a group of people from the public sector sit together and talk in a partner-like way about how we can solve problems together. There’s too much of a zero-sum game and that doesn’t help to manage political risk, it doesn’t help to improve political stability,” Zhuchenko said.

“I think the problems that we have today, particularly in the context of Brexit or the Trump rhetoric, if I can call it that, suggests that foreign ownership, particularly, is going to come under scrutiny,” Boe Pahari, AMP Capital’s managing partner & global head of infrastructure equity, commented.

“But, the short-term pursuits of governments are ultimately overwhelmed by longer-term interests,” he said. “In the US, for instance, you’re talking about the need for $14 trillion in infrastructure investment by 2040. Now, no matter what the rhetoric is, to be able to mobilize those sorts of resources you will have to attract foreign capital and private capital. In the end, that sort of momentum is inevitable,” Pahari said.

Still engagement is key for investors. As CPPIB’s King noted, “If we don’t engage more, we’re going to face a more and more difficult climate.”