Infrastructure investors received some welcome news last week with the offer for the John Laing infra fund. I have to say on one level I was surprised by the announcement but another level unsurprised. The long-term investors behind this offer probably have a very different returns expectation from investing in PPP assets and were happy to maybe accept the probable 5 to 6% long-term return (levered up of course).
Unsurprisingly the share price of a number of funds in this space ticked up, especially HICL – which has featured regularly on these pages. I suspect we’ll see another month or two at least of positive price action.
But then the brutal reality of British politics will intrude. There are, I would wager, four facts on the ground investors in PPP assets must deal with.
- Private utilities and infrastructure assets are hugely unpopular. The whole industry has lost the battle for hearts and minds. Outrageous charges levied by PFI contracts for changing a lightbulb through to excessive sneaky price schemes for power supplies, taking in excessive executive compensation – they’ve all poisoned the well. If there is one good thing that could come out of this whole sorry saga, its that the utilities and infra operators desperately need to fight back and court public opinion again. Crucially they need to disentangle themselves from the free market, small state right-wing Conservative party. These extremists with their libertarian agenda have made life incredibly difficult for nay pragmatic politician who wants to argue for sensible private sector involvement. The industry lobby should start hitting ordinary social democrats, liberals and moderate Conservatives, making the case for private sector involvement in managing monopoly assets. Until they do, bashing utilities and PFI is a wonderful populist tool
- The Labour Party is doing an excellent job under Jeremy Corbyn and Unite of capitalizing on these populist fears. As readers will know, I despise the Hard Left leadership of the Labour Party but I admire the way that they are twisting the knife into the lamentable Tory government. A proper leftist populist manifesto that went even further than just nationalizing these assets over time, will get lots of votes.
- Even moderate Labour, liberal and Conservative MPs are beginning to question whether the returns on offer from some infra and utility assets is excessive. This prompts a more moderate reaction which is not nationalize but impose a windfall tax. If we can impose windfall taxes on oil and banks, why not PE PPP investors?
- The current Conservative government is a shambles. I actually think that the proposed Brexit MuddleThrough is the least worst of a whole series of bad options. I even admire the PM for at last putting her foot down. But its now obvious that getting any form of Brexit past this parliament is going to be a real stretch. My deep concern here is that the UK simply becomes ungovernable and we crash into another election (unlikely but not impossible) where the Conservative’s lose because a nationalist right-wing movement has sprung up to attack the government from its flanks. In sum, Corbyn is handed power unless the Centre somehow works out what to do to stop him.
As I have said before, the long-term premium for UK domiciled assets – a safe harbour jurisdiction with reliable laws and pragmatic governments – could evaporate overnight under Corbyn. Infrastructure assets could in effect be either seized or windfall taxed, and international investors could start dumping UK assets. Be warned. This is more likely than we all think.