Regular readers of these pages will be familiar with the common refrain by now. Inflation worries? No problem for investors in defensive infrastructure assets, benefitting from stable, long-term cash flows, and the ability to pass through increased costs to customers, especially if you’re investing in core infrastructure.
Indeed, when we recently interviewed Angela Miller-May, chief investment officer of the Illinois Municipal Retirement Fund, she told us: “We’re attracted to strategies that have the ability to pass on inflation or price increases to end users of infrastructure assets.”
That’s the typical argument for investment in any of the plethora of core infrastructure funds today, particularly those looking to invest in regulated energy and water assets, as well as some transportation assets.
For a fund manager, being able to pass through inflation-linked contracts to end users is about at least maintaining or increasing profits. For the faceless end user, it is yet another blow in a growing list of economic hardships. An increase in returns against a family choosing when to run the water taps, if you like. For sensitivities’ sake, the sales pitch could at least be toned down – for regulators and politicians, it’s food for thought.
There are signs that some are becoming aware to this sentiment. Last month, Portugal’s then minister of infrastructure, Pedro Nuno Santos, announced that, despite the country’s 9.6 percent inflation rate, toll road fees would increase by 4.9 percent.
“It was clear to us that an increase of 9.5-10.5 percent was intolerable, and we tried to find a balanced solution that would allow for a smaller increase,” he stated. The solution would see the state (ie the taxpayer) cover concessionaires for another 2.8 percent of the fees, while the remainder would be borne by concessionaires.
“In this way, we have found a solution that shares responsibilities between users, the state and concessionaires and that allows an increase in tolls of less than half of what the concessionaires had requested to increase,” Nuno Santos said, revealingly.
Elsewhere, in Chile, after a record year of profits for toll road concessionaires populated by Spain’s Abertis and a joint venture between the Blackstone-owned Atlantia and the Canada Pension Plan Investment Board, Chile’s minister of public works, Juan Carlos García, felt similar action had to be taken in the run-up to the new year.
The minister announced toll road concessions would increase by 6.7 percent in January 2023 and a further 6.7 percent in July, in what he announced as a “progressive” negotiation with concessionaires. Those aghast at a 13.4 percent increase being described as “progressive” would be mindful to know that inflation in the Chilean transport sector stood at 22.1 percent in November.
“Operation costs such as oil and supplies have risen, and this is reflected in long-term contracts, and they have to be updated over time. The important thing is that we take measures, but that from an economic point of view it does not end up impacting people’s pockets in other aspects,” said Garcia.
These two happy endings shouldn’t obscure the larger issue: that inflation-linked contracts could become infrastructure managers’ next regulatory hurdle, rather than the defensive panacea they are sold as.
After all, when inflation spikes, regulatory resets are always just around the corner.