Spain was the country which ushered in a new era of regulatory uncertainty for the infrastructure asset class when it made retroactive changes to the tariff regime applied to its solar photovoltaic (PV) industry in the wake of the Global Financial Crisis.
However, according to research from law firm Linklaters, Spain epitomises the improving perception of previously unfavoured regulatory regimes while those once considered stable are now becoming less attractive.
“Across North Western Europe there have been a number of instances of regulatory change in recent years which, in time, have the potential to erode some of the hard-earned investor confidence which these countries have built up over many years,” Ian Andrews, infrastructure partner at Linklaters, said in a statement.
He added: “Conversely, we are seeing improvements in the regulatory arrangements in countries that previously may have been regarded as offering a less stable environment.”
Linklaters highlights the example of Spanish electricity distribution, where the regulatory rating has increased by 7.5 percent, and Spanish gas distribution, which has increased by 5 percent. This has resulted from changes made by the Spanish government to the regulatory arrangements aimed at providing greater clarity about future revenues by setting out formulaically how the revenues will be determined.
“Governments have a significant role to play in building investor confidence through the type of regulation they apply to infrastructure assets so as to secure investor capital,” notes Andrews.
This is significant not least because, according to the same research, global institutional investors have some $1 trillion of funds at their disposal for potential investment in European infrastructure over the next 10 years.
Traditionally, the available capital has consistently handed the lion’s share of available capital to certain countries such as the UK, which accounted for as much as 39 percent of Europe’s M&A activity in 2014.
But Linklaters’ study suggests that limited available assets, changing economic regulation and new government incentives are “set to alter traditional investment flows”, with the flow shifting from North to South.
Regulatory risk analysis from Compass Lexecon and FTI Consulting, which was used by Linklaters for its study – entitled “Routes to Return – Navigating European infrastructure regulation” – showed that electricity networks in the UK have seen a 10 percent fall in their regulatory rating due to the latest network price controls, which are being challenged by the Competition & Markets Authority.
However, the UK’s Offshore Transmission Owners (OFTO) regulatory regime is hailed as “highly successful” and likely to be replicated elsewhere.