Pipe dreams

The words used by a well-known asset class professional in conversation with Infrastructure Investor were blurted out – and colourful. Not so explicit that they would shock most well-adjusted adults, but also not the kind of language you’d expect to hear on, for example, a playground.

They came in response to the breaking news that investors in Norwegian gas pipeline Gassled had lost their case in an Oslo court, which was brought on the grounds that Norway’s Ministry of Petroleum and Energy (MPE) had not acted legally in 2013 when it reduced Gassled’s tariffs by up to 90 percent – with a devastating effect on the value of investments that had been made in the asset.

“They didn’t expect this,” said our industry pro. “They were pretty positive they had a case.”

Indeed, some quick research added weight to his view that the investors felt they had been the victims of completely unpredictable wrong-doing at the hands of the MPE. One of the investors in Gassled, at the time when the decision to take legal action was announced in January 2014, told the Financial Times: “It [the tariff cut] came completely out of the blue. No one saw this coming.”

However, there is a market view that the investor group – which included Allianz Capital Partners, Canada Pension Plan Investment Board, the Abu Dhabi Investment Authority, UBS Infrastructure Fund and CDC Infrastructure – would have been well advised to have observed rather more closely that age-old warning sign that hangs over every kind of transaction: caveat emptor.

Had that been front of mind, perhaps more detailed and persistent questions might have been asked about whether expected double-digit returns were entirely realistic, given that the asset appeared to be very much of the safe and steady variety rather than a racy, value-add opportunity. It appears that the Norwegian government may have shared the view that such a predictable asset didn’t warrant outsized returns and was only too keen to depress the profits being made up to that point.

In our discussions with the market, questions are also raised about why there was not sufficient protection written into the deal against the eventuality that came to pass? Does that imply slack negotiation, or perhaps that – although there was a risk present – the investors did not take seriously the idea that the risk would be real?

Were they perhaps a little too keen to get money out of the door in the face of fast-declining returns in other asset classes? And another question, given that there had been some notable turnover in personnel in at least one of these investor groups: did the individuals on the front line of the deal have sufficient experience and business savvy?

Of course, hindsight is a wonderful thing. On the government side of the Gassled transaction, there may not have been total transparency. If the investors were guilty of a certain naivety, it could perhaps be argued that they were not guided towards a more grounded view. Equally, this would presumably be where the wise counsel of advisers is required. It’s easy to reach the conclusion that no participant in this transaction comes out of it particularly well.

In the end, it appears that the investors – which still incidentally have a right of appeal – may end up making the bond-like return that they thought they would be easily surpassing. Therein lies considerable disappointment, and also a certain irony.