The irony behind Norway’s misguided ‘no’ to infra

After burning foreign investors in its Gassled gas network with a 90% tariff cut, the government has decided it does not want the same fate to befall its $895bn SWF.

Well that’s funny: Norway, after nonchalantly slapping foreign investors in its gas transportation network with post-investment tariff cuts of 90 percent in 2013, has deemed political and regulatory risk in infrastructure too high to allow its $895 billion sovereign wealth fund (SWF) to invest in the asset class. We don’t know where irony ranks in the list of Norwegian cultural traits, but judging by this decision alone, we’d say it ranks pretty high.

“In our view, a number of important factors indicate that investments in unlisted infrastructure should not be permitted. Such investments are exposed to high regulatory or political risk. Conflicts with the authorities of other countries regarding the regulation of transport, energy supply and other important goods will generally be difficult to handle,” stated finance minister Siv Jensen.

Translation: Norway doesn’t want its SWF money exposed to the kind of brutal cuts it was all too happy to impose on other investors, including on fellow SWF the Abu Dhabi Investment Authority.

Also, following a first round Oslo court defeat for the Gassled investors that are trying to get legal redress after the damage caused by the tariff cuts – which came into effect this year – Jensen’s assertion that these conflicts “will generally be difficult to handle” comes across a bit euphemistically. Again, if what’s happening in Norway is anything to go by, governments will change their minds and their legal systems will not challenge those decisions.

We wholeheartedly agree with the Norwegian government that political and regulatory risks are a big factor in infrastructure investment (we called regulatory risk ‘Public risk number one’ in a recent feature). But if the Norwegian government is using its own behaviour as a model for assessing those risks, we’d like to tell it that most governments don’t normally do what Norway did to the Gassled investors.

Most governments don’t spend time attracting over $5 billion of long-term institutional money based on certain assumptions only to then reduce a key component of those assumptions almost totally a mere two years after the deal. So in that sense, Norway’s behaviour towards the Gassled investors was an exception, not the rule.

Of course, it isn’t great to have the world’s biggest SWF reject infrastructure as an asset class. But for those fearful this might signal some sort of wider shift in SWF attitudes towards infrastructure, we’d caution some restraint.

As AMP global head of infrastructure Boe Pahari pointed out in a recent article published in our Annual Review, SWFs have doubled their capital to $6.31 trillion since 2008 and over 60 percent of them held infrastructure investments in 2014. In fact, infrastructure is the most common type of alternative investment among SWFs.

If we subtract Norway’s SWF from the equation that means there are SWFs with $3.2 trillion of assets invested in infrastructure as of 2014. Which is another way of saying that the Norwegian government’s decision seems to swim against the stream of current SWF thinking on infrastructure.

Regarding Oslo’s contention that it is not certain whether infrastructure improves risk diversification or raises expected returns, we’d respectfully disagree and would again point out that diversification is precisely one of the asset class traits that is attracting so many of the world’s SWFs. Funnily enough, Norway’s decision comes just as we prepare to put Wendy Norris, head of infrastructure and timberland for Australian SWF Future Fund, on the cover of our May edition. You will find Norris has quite a different view of the asset class.

With that in mind, we’d urge the Norwegian government to reconsider its decision. While we fully agree that political and regulatory risks are a significant component of infrastructure investment, we’d like to reassure it that its own treatment of investors is not the norm. We’d also urge it to consult with those SWFs managing $3.2 trillion that are already invested in the asset class to find out more about their experience. It’s never too late to correct a mistake.