The Financial Times (FT) has commented that infrastructure investors have introduced a ‘blanket ban’ on further investment in UK infrastructure assets. According to the FT this is based on the UK’s ‘very negative’ and ‘hostile’ political and regulatory environment. The story cites pension and sovereign wealth funds that previously invested heavily in UK electricity, airports and water assets in recent years (and so have significant exposure to regulated utility networks) have confirmed they are now ‘highly unlikely’ to make further investments in the UK in the current regulatory climate.
Alongside tougher regulation from Ofwat and Ofgem investors also point to the ‘Corbyn factor’. Even if his much talked about nationalisation agenda has not yet materialised it has caused a reaction from government such as environment secretary Michael Gove’s criticism of the water sector. Furthermore, regulators are criticised by investors in the article for using ‘regulatory discretion….to fundamentally change the risk profile of the sector.’ No article would be complete without a nod to Brexit uncertainty, but perhaps the biggest surprise is that it is the current regulatory climate that is cited as giving rise to the reluctance of investment boards to commit more funds to these sectors than the political uncertainty.
Based on my discussions with investors I would certainly see the political uncertainty, including but not limited to the Brexit factor, as the primary driver for any current hiatus in investment in UK infrastructure assets and not regulatory issues. Perhaps the reluctance to take such investment opportunities to their investment boards is because the committees view the act of passing existing assets around with very little value being created as old hat!
The market view seems to be that it is the political angle that is holding back investors here – not the regulatory risk. The National Grid and UK water companies are still largely viewed as a neutral or buy rating because, by historic standards and versus their more expensive continental peers, they are viewed as comparatively good value for money. At the end of the day it comes down to basic economics – if the price is right there will be buyers and sellers for any class of asset.