Investor view, by Adam Hain

“Regulatory risk does not deter investors – they are comfortable pricing this – but retroactive and political risk does”

A recent European Investment Bank study suggested that up to €500 billion a year is required to fund infrastructure projects until 2030. The characteristics of infrastructure – long-term, stable, often inflation-linked investments – have attracted significant capital in the wake of the financial  crisis and volatile equity markets. Pension funds, sovereign wealth funds, insurance companies and traditional infrastructure funds have invested significant capital into roads, utilities, ports and airports at an increasing  rate. The poor state of European governments’ balance sheets means this investment needs to continue.

Regulation governing returns in the regulated utilities sector has become increasingly tough for infrastructure investors. Investors in Gassled have seen their returns impacted following a surprise ruling by the Norwegian regulator. Renewable investors in Spain and Italy are also suffering from the effects of retrospective regulatory changes. Over recent months shareholders in the UK water and electricity distribution sectors have been hit by tougher than expected price reviews. Investors are likely to characterise these risks borne from independent regulators as regulatory risks.

Regulatory or political uncertainty usually leads to investors increasing the price of their capital and in some circumstances, shying away from the opportunities completely. However, the demand for regulated assets remains robust.

Pension funds, who are finding it increasingly difficult to find assets to match their liabilities, continue to invest in “core” infrastructure, such as the Thames Tideway Tunnel, Associated British Ports, Fortum’s Swedish distribution network, Madrid Gas and Eon’s Spanish distribution businesses. All these have the key investment requirements for infrastructure investors.

As core infrastructure assets continue to be acquired by long-term investors, the supply/demand imbalance will continue to drive valuations. Regulatory risk does not deter investors but retroactive and political risk does. If governments and regulators act in a transparent and consistent manner, they will continue to attract private capital to help fund large infrastructure spending.

Adam Hain, senior managing director, infrastructure and utilities, Macquarie Capital