I don’t know if many politicians across the European Union (EU) still count themselves as fans of eighties rock group Queen. But even casual listeners would surely nod in assent at the immortal line “these are the days it never rains but it pours,” from Under Pressure.
With Spain’s banks threatening to implode and bring the rest of the country down with them, the EU, and the world economy at large, may be about to enter a very dangerous phase.
That, of course, puts politicians under unprecedented scrutiny, which will in turn be felt in all areas of business – including infrastructure investing.
To help guide investors, we present four different facets of political risk today.
Changing the rules of the game: This might once have been the sole province of developing or third-world countries. But these days, retroactive action is fair game, with developed governments across the world prepared to play.
Spain fired the warning shot a couple of years ago with its retroactive cuts to solar subsidies. Now Portugal, under the auspices of the EU and International Monetary Fund, is talking about cutting availability payments in its pre-crisis €5 billion roads programme by some 30 percent.
Going forward, expect governments of all stripes to review the sanctity of long-term contracts. And the more troubled they are, the more emboldened they are likely to be.
Pressuring domestic investors: It’s the feel-good story of the day: domestic investors buying domestic assets and, hopefully, creating domestic jobs.
Politicians love it, it goes down well with voters, and investors feel increasingly obliged to pay lip service to it. Here’s what Frank Naylor, of UK pension BT Pension Scheme, had to say after becoming Thames Water’s second-largest shareholder:
“The investment in Thames Water clearly demonstrates [BT’s] ongoing commitment to investing in domestic infrastructure”. George Osborne would surely oblige for the photo shoot.
But beware of the increased pressure for domestic deals. For every Thames Water, there will be a SAUR, the French water utility plagued by shareholder infighting, after stakeholders with different interests found themselves in a marriage of convenience to keep the company in French hands.
Electioneering: It’s true that for every long position there must be a short. But with politicians getting booted from office at record speeds, investors are finding themselves increasingly shorted by the electoral cycle.
With the people you shook hands with on a deal possibly not around for much longer than a single term, the mismatch between the short-term duration of the electoral cycle and the long-term horizon of infrastructure investors is becoming more glaring.
Forget about the 10-year stability that produced the UK PFI programme; rather scrutinise new programmes to see how comfortably they can withstand turbulent electoral cycles.
Because in times of crises, only one thing is certain: politicians will do whatever it takes to differentiate themselves from their predecessors.
Rebellious consumers: Scared of falling traffic across your roads? You should be. But keep an eye out also for rebellious consumers.
So far, there have only been ad-hoc manifestations of users in Greece and Spain unwilling to pay their tolls (Spanish developer Abertis recently estimated the free-loaders at one of its Catalan concessions at less than 1 percent of total users).
Still, if these protests ever attain the scale and organisation of something like the ‘Occupy’ movement, investors could be in for a major headache.
Add in the politically explosive potential of having, say, Greek toll road users not paying tolls on roads managed by German or French companies, and things could get very sticky.