Political risk is big no-no for institutions

In a reader poll on this website, almost 60% of voters cited political risk as the biggest risk factor for institutions investing in infrastructure.

As we have previously reported, some very large numbers have been quoted with respect to the infrastructure investment need around the world – most of them by politicians. For example, the UK’s National Infrastructure Plan came with a £375 billion (€457 billion; $624 billion) price tag.

The irony of this is that it’s the politicians themselves who are the biggest roadblock to the institutional investment that’s needed to help address the funding gap. That at least is the finding of a poll that has appeared on this website for the last couple of weeks which asked the question: “What is the biggest infrastructure risk for institutions?”

A resounding 57.69 percent of voters selected political risk. In a way, this should come as no surprise. After all, it was long perceived by investors that infrastructure represented a safe and steady, low-risk return. However, following the Crisis it has become apparent that agreements between governments and infrastructure investors can be rescinded in the face of budgetary pressures (witness the re-adjustments to renewable energy tariff regimes in many parts of Europe, for example).

It is arguably something of a surprise, however, that political risk received so many more votes than our other options – around three times the number for operational risk, which was selected by 19.23 percent.

The fact that operational risk was the second-most-popular choice tends to confirm trends identified at a recent event organised by rating agency Standard & Poor’s and the International Project Finance Association. It indicated that both operational risk and counterparty risk should be considered more threatening than construction risk – even though the latter has traditionally been cited as a bugbear by institutional investors.

The message seems to be getting through. Both operational risk and counterparty risk (7.69 percent) attracted more votes as risk factors than construction risk, which polled a lowly 3.85 percent. The only other risk factor cited was currency risk (7.69 percent).