Stricter regulation is certainly one manifestation of increased political risk, but according to Neil King, managing director, infrastructure, at the Canada Pension Plan Investment Board, the driver behind regulators’ increased focus is a view from politicians and governments that consumers are not always getting the best deal.
“We are seeing the public sector becoming more involved in how these businesses are run, which after all do provide essential services to large parts of the population,” King said, addressing attendees at our Global Summit, in Berlin.
Thierry Déau, founding partner and chief executive of Meridiam, agreed that political risk is peaking as a result of populist sentiment as well as the fact that “we’ve had nearly 10 years of crisis across the world. Of course, it’s putting pressure on politicians to respond to social needs”.
And the way to respond to that is through engagement and communication. “This is actually where you can build balanced partnerships to be able to sort of sustain this engagement and be able to manage political risk,” Déau said.
“I do believe that 50 percent of what we call political risk is usually a cock-up rather than an intention because a number of public sector procurement agencies or regulators can be somehow not well-equipped. So, it’s not always intentional,” Déau, remarked.
“As long-term investors in infrastructure, this is one area where we’re going to have to engage and be much clearer about what we’re looking to do,” he said.
Boe Pahari, AMP Capital’s managing partner and global head of infrastructure equity, commented: “I think the problems that we have today, particularly in the context of Brexit or the Trump rhetoric, if I can call it that, suggest that foreign ownership, particularly, is going to come under scrutiny.”
He added: “But, the short-term pursuits of governments are ultimately overwhelmed by longer-term interests. In the US, for instance, you’re talking about the need for $14 trillion in infrastructure investment by 2040. Now, no matter what the rhetoric is, to be able to mobilise those sorts of resources, you will have to attract foreign capital and private capital. In the end, that sort of momentum is inevitable.”
Still, engagement is key for investors. As CPPIB’s King noted: “If we don’t engage more, we’re going to face a more and more difficult climate.”
Attendees at our Global Summit certainly appreciated the heightened importance of communicating the benefits of private ownership.
As our conference chairman, the excellent Thomas Putter, chairman and chief executive of Ancora Finance Group, put it:
“Historically, industry has always talked to government and made the case regarding balance sheet and investment benefits [of private ownership] – we never addressed the benefit to the consumer. When something goes wrong, like with Carillion [going bankrupt], that’s when the man on the street gets really angry. In today’s populist world, that’s a dangerous thing.”
Still, that increased engagement will, admittedly, not be easy. Firstly, because it will force industry to move out of its comfort zone and, secondly, because it has to overcome increasingly entrenched popular perceptions of general financial services villainy.
The hardest part will come when the inevitable tension between financial gain and consumer loss plays out. Case in point: how investors, in some cases, might actually benefit from situations – such as higher inflation – that put pressure on ordinary citizens’ wallets.
But engage the industry must, and there are good reasons to do so. The two most important are the overwhelming benefits that private ownership and management bring to the vast majority of assets and consumers; and also, as Putter highlighted, because there is a much higher level of accountability in the private versus the public sector.
– Bruno Alves