If there’s one positive outcome from the financial crisis that started in 2008 it’s that it has shown definitively that infrastructure is not immune to trends in the wider economy, some of which can threaten the long-term sustainability of public-private partnership (PPP) contracts. This has opened investors' eyes to some of the hitherto ignored risks of infrastructure investing.
Shortly after the crisis burst, investors made the unpleasant discovery that economic infrastructure – like ports and toll roads – correlated much more closely than expected with the economy and GDP growth. They reacted to this by fleeing these investments and seeking shelter in PPP contracts backed by availability payments.
Now, as the crisis enters what is perhaps its most dangerous phase, investors are about to make another, potentially more unpleasant discovery: that troubled Eurozone countries may be increasingly unable to honour their contractually agreed commitments, turning supposedly ‘safer’ PPP contracts into ticking time bombs.
The first worrying tick-tocks are coming from Spain’s highly indebted regions. Thanks to ratings agency Moody’s, it has emerged that Castilla-La Mancha, an autonomous community in central Spain, has failed to pay its agreed contribution for a shadow toll road concession for the past nine months. You can read more about that project here.
And Castilla-La Mancha is not the only region in Spain where this is happening; Catalonia is said to have also fallen behind on some of the payments for its shadow toll roads and other availability-based concessions. And in places like the Balearic Islands, the situation is said to be particularly dire…
The bottom-line: infrastructure is again showing, like it did in 2008-2009, that it correlates significantly with trends in the wider economy. This is important because it counters the perception that certain sectors in infrastructure and specific contractual structures are, for the most part, risk free. They aren’t.
Fund managers like our November 2011 keynote interviewees – Andrew Charlesworth and David Marshall of the John Laing Infrastructure Fund (JLIF) – are attracting investors by focusing on conservative PPP assets with no demand risk. Theoretically, these assets are safer – until the governments underpinning them get into trouble that is. JLIF argue that they hedge against this by investing in fiscally sound governments.
But so many ‘unthinkables’ have materialised over the last two years that one has to doubt the ‘soundness’ of almost everything nowadays. And when you think that the UK, one of JLIF’s primary markets, actually has higher deficits and net public debt than Spain…
In a recent interview, Henk Huizing, PGGM’s head of infrastructure, neatly outlined why he would prefer to invest in a real toll road in Spain instead of an availability-based one:
“We know that some PPPs in Spain are paid by the regions and that these regions have very high debt positions. We can say that we already know what the impact of the crisis is on real toll roads – a decrease in traffic of roughly 15 percent. But while we know this impact, we can’t predict what will happen if one of these regions gets into trouble.”
Sadly, some investors might soon find out.