Regulation isn't all bad

Lawmakers can open doors for infrastructure investors as well as close them, writes Andy Thomson.

In researching our cover story on regulation for the October 2010 issue of Infrastructure Investor, we discovered that regulatory risk was not the whole story of regulation. It was also a story of innovation and deregulation.

The regulatory risk aspects were generally bad news. It’s hard, for example, to find any room for optimism in Brussels’ proposed Alternative Investment Fund Management Directive. The ill effects of the Directive have been well documented elsewhere, notably in our sister publication Private Equity International. Suffice to say, if it goes through in anything like its present form, it will make life for infrastructure fund managers in future more complex and more expensive (and less logical).

Brussels may be the source of further agitation if EUROSTAT, the European Commission’s statistics arm, gets its way. It wants to see public-private partnerships (PPPs) recorded on governments’ balance sheets (unlike at present) unless they give up control of various contractual variables such as the ability to set tariffs.  Making the state’s PPP liabilities transparent in this way would likely result in breaches of fiscal rules in countries that have enthusiastically embraced PPP programmes – and a resulting decimation of these programmes going forward.

But regulators have brought good news to infrastructure investors’ doors too. For example, the EU's 2007 energy directive aimed to deregulate the continent's electricity and gas sectors. Its gradual (in some cases, very gradual) adoption has resulted in the unbundling of assets and a boost to infrastructure funds’ deal pipelines. The recent sale of Vattenfall’s German electricity grid to Industry Funds Management is just one example.

Our exclusive news today that the French government is prepared to consider extending the country’s debt guarantee to PPP projects is also a plus for investors. It’s arguably no surprise that, in order to ensure the credibility of a measure that was a core element of President Sarkozy’s post-Crisis economic stimulus plan, qualifying projects would be given extra time to reach financial close. For the investors involved in these projects it is a welcome sign of pragmatism from the authorities.   

We also discovered some academic work being conducted behind the scenes that may bring future benefits. For example, Oxford University economist Dieter Helm has produced a paper in which he argues for broadening the application of the regulated asset base (RAB) regime from utilities to PPPs. Tightening governments’ commitment to the assets by guaranteeing (and capping) shareholder returns would, he reasons, bring down PPPs’ high cost of capital. That too would be a cause for celebration.    

For more on infrastructure investors’ ambivalent relationship with regulators, make sure you obtain a copy of the October 2010 edition of Infrastructure Investor.