It seems paradoxical that, at a time when infrastructure investors perceive regulatory and political risk to be arguably more prevalent than ever before, there is growing evidence that investors’ reliance on government support is increasing. Why would the abused seek the help of the abuser?
The 'finger burning' in the wake of the Global Financial Crisis (GFC) was widespread. To take the European example, what looked initially like a problem primarily for those with exposure to the Southern economies in the end became pan-European in nature.
The early focus on renewable energy tariff reductions in BBB+ rated Spain and Italy soon switched to the pressure on utilities and criticism of the Private Finance Initiative (PFI) model in AA+ rated UK and even to a notorious gas transit tariff cut in triple-A Norway. Eventually, the concept of a ‘safe haven’ – an apparently sane notion, even in the immediate aftermath of the GFC – took on a darkly humorous aspect.
At a press briefing organised by Fitch Ratings earlier this week, those present were invited to contemplate an array of factors that combined to make life difficult for investors. These included: regulators back-tracking on tariff regimes viewed with hindsight as having been too generous; governments having to confront large deficits; the impact of austerity measures on consumers; and the private sector finding itself the unwitting victim of domestic politics.
The unsurprising end result has been an increasing risk aversion on the part of investors. This has manifested itself in a number of ways, including: rejection of traffic and demand risk in favour of availability-based public-private partnerships (PPPs); a shift to asset-based revenue streams; and insulation sought from the volatility of energy/commodity markets.
Another by-product, alluded to in the opening paragraph, has been the increasing role of government in infrastructure transactions. This can take several forms, including greater risk assumption in PPPs as well as the provision of financing and guarantees to underpin transactions that – in the current environment – may not otherwise happen.
The irony of all this is that, following the GFC, politicians queued up to recite the mantra about infrastructure investment being an essential driver of economic recovery. It hardly helped investors trying to live up to this billing that agreements signed in good faith were reneged upon as soon as the going got tough.
Economic recoveries, in many European countries as well as outside the region, remain fragile. But as the outlook slowly improves, governments may wish to reflect on the past cycle and consider whether their response to adversity could have been a little less knee-jerk.
The necessary interdependence of the public and private sectors when it comes to infrastructure investment is axiomatic, and neither side will stand to gain when the relationship becomes unbalanced. When governments end up taking on too much risk, it’s only because there’s no one else around willing to take it.