Retrospective legislation: two words designed to send shivers down the spines of infrastructure investors following the post-Global Financial Crisis solar photovoltaic debacle in Spain (among, it should be conceded, a number of other examples). What investors thought they were contractually agreeing to – and indeed WERE contractually agreeing to – turned out to have been something different entirely…if any of that makes sense (which it doesn’t).
There are some tentative signs that Spain – which began taking action to overturn previously agreed tariffs in late 2008 – has, seven years later, just started to win back the confidence of the international investment community (though in other sectors rather than renewable energy). But even so, that’s a long time to be effectively removed from the list of sensible investment locations.
So why would any other nation even think about following suit today? And, more to the point, why would the world’s leading infrastructure market think about it? Those questions are being directed, with increasing frequency and urgency, at Daniel Andrews, Premier of the Australian state of Victoria. And here’s why:
In last November’s state elections, the incumbent Liberal/National Party was swept out of power by the Andrews-led Labor Party. Andrews quickly made clear his opposition to the proposed A$5.3 billion (€3.8 billion; $4.1 billion) East-West Link, an 18-kilometre toll road that would connect Melbourne’s western suburbs to the Eastern Freeway. Supporters have viewed the project as an essential element in helping to relieve severe congestion in the city.
The prior administration had signed a contract with the East West Connect consortium (including the likes of Lend Lease, Capella Capital and QIC) in September 2014 and construction was scheduled to begin by the end of last year. The future of the project has now been thrown into doubt but, more ominous still, is the prospect of the state government attempting to wriggle out of the contractually agreed terms of compensation in the event of the project being cancelled.
Media reports indicate that the government may be prepared to shell out for the costs thus far incurred by the consortium. What it appears far more reluctant to do is to meet the full terms of compensation outlined in the contract (a figure of up to A$1.2 billion has been cited). And, to this end, Andrews has flatly refused to rule out bringing in new legislation to avoid any such payout.
In a letter to Andrews, the head of the legal chapter of the International Tunneling Association, Andrew Dix, claimed any such retrospective legislation would result in “extremely damaging and long-term financial cost and international confidence consequences for Victoria and Australia”.
Unlike in certain European countries, this particular case involves just one project and one state – at least, thus far it does. But the recent Queensland election resulted in some A$37 billion of potential infrastructure deals being taken off the table, and there are fears that something of a similar scale may happen in New South Wales where elections are due on 28 March.
For the time being, Australia continues to expect a ‘wave’ of infrastructure privatisation and can bathe in its status as the world’s most attractive infrastructure destination. In our “Hot markets” feature on p.xx, in which we evaluate the most attractive infrastructure markets globally, you will find that Australia once again holds onto the title of the hottest market for the second year in a row.
However, a ‘triple whammy’ in three leading states would raise the serious prospect of a turning of the tide. Australia needs to be careful that it does not allow its hard-earned reputation as an infrastructure investment destination of choice to drift out to the far horizons.