Golden shares and silver bullets

There’s no secret formula for aligning public and private interests in infrastructure projects. But some good ideas are currently being tested.

“We appreciate the concerns of customers and have listened to their feedback carefully.” Coming from profit-driven corporates, general declarations like this one sometimes have to be taken with a pinch of salt. But when the chief executive of Finnish power grid operator Caruna said it at the end of last month, he really meant it.

Having faced a severe backlash over his decision to jack up power prices by up to a third from March onwards, Ari Koponen went on to announce that rates would be lifted slowly over the next year, with no further increases until 2018.

Caruna is the new name given to the former domestic distribution business of Fortum, Finland’s largest utility. The unit was bought in 2013 by a consortium of Borealis Infrastructure and First State Investments for €2.55 billion. Market sources we spoke to found it curious that the company’s new shareholders failed to anticipate the public’s reaction, opening themselves to the suspicion, in the words of a trade union leader, that Caruna was “using its customers to cover its grid acquisitions costs”.

Borealis and First State did not respond to requests for comment at press time.

But what matters more than the rationale for the rate hike – for the purpose of this article at least – is the lack of recourse both the regulator and the government seemed to face when trying to get the company to back down. As far as we understand, Caruna was allowed to pretty much do what it intended to do.

We generally don’t support public interference in the management of private assets and that’s not really our point here. But having authorities looking powerless when it comes to addressing perceived private greed – or failing to adequately communicate when rate hikes are justified – won’t help make the case for future privatisations.

Full control, through state ownership or full-blown price regulation, does not always yield optimal results, as investors in Spanish solar or Norwegian gas can attest. But across various European markets, middle-ground solutions are being tried out.

Such is the case of the UK, where the government has launched a process to sell its entire stake in the Green Investment Bank (GIB). To ensure the lender keeps to its environmental mission, the state will hold a special “golden” share post-privatisation, giving it the right to veto any investment deemed contrary to its original principles.

The GIB seems serious about getting it right. The bank has secured support from three respected UK institutions to help it select the Nominations Committee, which will be tasked with appointing the three permanent trustees of the Special Shareholder. Golden shares have proven controversial in the past, because the looming threat of a government veto ended up constraining management’s ability to make sound business decisions. But this time may be different: public oversight is limited to assessing an investment’s green credentials, leaving less room for interference and uncertainty.

Limited state ownership is also an option being explored to better align interests in the realm of greenfield infrastructure. Salim Bensmail, who heads the PPP Unit at the French Treasury Department, told us last week that solutions including institutional PPPs, where the state owns a stake in the project company, were recently made possible in France through new legislation (the UK also allows this through the PF2 framework).

Such arrangements will confront public authorities with decisions they’re not always well equipped to make, such as negotiating IRR levels and setting a dividend policy. This could, in turn, smooth out their relationship with infrastructure owners beyond the greenfield space, especially when the provisions of a deal or project can’t be integrally covered via contracts ex-ante.

Having more skin in the game will come with its own problems, starting with potential conflicts of interests. But as Bensmail says, “this may be the price to pay for the political sustainability of private capital in public projects”.

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