Governments must not fiddle

If governments are serious about partnering with the private sector to finance new infrastructure, sound and sustainable regulation is a must, argues Philip Borel.

The numbers relating to new investment opportunities opening up in the infrastructure space keep getting bigger. For example: $26 trillion (that’s right: $26,000,000,000,000) is the investment required to meet the world’s energy demand in 2030, says Bill Macaulay, boss of energy-focused private equity specialist First Reserve Corporation.

Of the total, “only” $6 trillion will be needed for exploration, Macaulay believes; the other $20 trillion must be invested in energy-related infrastructure if the lights are to stay on. In other words, generating enough energy for everyone is the smaller of two massive challenges; by far the bigger problem is making sure oil, gas and electricity can get to where they are needed.   

Macaulay, who quoted these numbers at PEI Media’s Global Energy Forum in London this week, is doing his bit through First Reserve, which is now investing the $9 billion fund it closed in April. But in light of the requisite totals he is talking about, $9 billion is quite small even as far as drops in oceans are concerned.

Philip Borel

Ah, you might say: Macaulay’s forecast could be too pessimistic. But even those projecting a smaller capital short-fall over the coming decades agree that whatever the actual number, it will still be staggering. For governments conscious of this fact, co-opting the private sector into providing as much investment as possible now must be a priority.

One key tool countries and supra-national entities must use to aid the process of private sector mobilisation is regulation. Investment from private sources in regulated energy infrastructure sectors such as power grids will only be forthcoming if, first of all, the rules and regulations governing these sectors provide ample incentives to investors, without at the same time jeopardising the interests of the general public.  

Needless to say countries differ significantly in this regard. According to infrastructure investors operating in Europe for instance, the UK, France and Italy already have frameworks in place that are fundamentally fit for purpose. Other countries, notably Germany, still have further to go: “Germany is excellent at regulating vertically integrated multi-utilities; but now that German utilities are having to sell non-core assets such as grids, what Germany needs to do now is understand how to regulate the unbundled components of each sector in isolation,” Mathias Burghardt, head of infrastructure at AXA Private Equity, told the PEI Energy Forum today.

Government mustn't fiddle, therefore; if they do, their ability to attract capital from private institutions will suffer serious damage

Philip Borel

The other bit regulators must get right is to give investors reasonable confidence that the regulatory status quo at the time of making the investment will not suddenly be turned on its head later on. Moving goal posts can kill even the soundest of investment cases, and because investors in infrastructure are by definition committing capital for very long periods of time, assessing the long-term sustainability of the regulatory context is a vital part of their due diligence. Governments mustn’t fiddle, therefore; if they do, their ability to attract capital from private institutions will suffer serious damage.

At a time when the European Parliament is mulling onerous changes to the rules governing certain types of private investment fund, the issue of regulatory sustainability is of critical importance. Infrastructure investment professionals should take some comfort though: as long as governments’ capital expenditure requirements remain enormous, alignment of interest with the private sector has an excellent chance to endure. Just think $26 trillion.