Guest Blog: Infrastructure Sensitivities and SWFs

Rajiv Sharma

Many thanks to Ashby for the opportunity to contribute to this blog. I thought I would add to the discussion about SWF’s and infrastructure investing including the debate over whether to invest directly or through fund managers.

As Ashby mentions, while it does seem obvious for SWF’s to invest directly and make the most of their strategic advantage, there are a number of factors that might prohibit them from doing so. I would like to elaborate on one of these factors with a couple of examples.

When entering into an infrastructure investment transaction, an investor must realise that there is significant reputation risk if anything goes wrong. This is especially important for infrastructure investments because of the wide reaching political, social, economic and environmental implications. The risks and threat to reputation are very real for infrastructure investments, which has affected sovereign wealth funds when approaching the field.

For example, the international gateway airport to NZ, Auckland International Airport was subjected to two significant, and as it turned out highly publicised, takeover attempts firstly by the sovereign backed institution Dubai Aerospace Enterprise (DAE) and secondly by CPP Investment Board.

The DAE bid failed to get very far in the bid process despite being the better financial offering for shareholders. In fact, the bid was unanimously backed by Auckland Airport’s board, which was impressed by the potential upside in value that DAE could bring to aeronautical activities of the airport, bringing in tourists from the Middle East, India and China. Following the announcement of the bid by DAE, media interest grew, sparking significant public outcry over foreign ownership of one of the country’s strategic infrastructure assets. At the time, the primary shareholder in the DAE airports division (which no longer exists) was the Government of Dubai. This was compounded by government officials expressing publically xenophobic comments about the proposed foreign ownership. While DAE was acutely aware of wanting to succeed in its takeover intentions, being a sovereign backed fund, it only wanted to succeed if its proposal was supported by the public and government officials. Due to the negative political and public attention that seemed to cloud over the takeover proceedings, the company was forced to pull out of their merger proposal before shareholders had had a chance to vote on it.

As for the CPP Investment Board bid, it failed at the last hurdle due to a veto by the relevant government minister. This has had repercussions for foreign investment into NZ.

The Auckland International Airport case highlights the strong emotional and nationalistic appeal associated with infrastructure assets, and the need for investors to take into account the wider stakeholder interests. It could be argued that DAE did not sufficiently consult local body councils and central government officials with both parties, failing to understand the drivers behind each other leading to negative, unwarranted speculation.

In such examples, it would clearly be more appropriate for a fund manager to approach the takeover bid as they would be a lot less sensitive to public outcry and especially in a foreign takeover situation would spark a much less nationalistic reaction to their motives. An experienced infrastructure fund manager that could draw upon a number of different investors, undeterred by xenophobic comments, would arguably get a lot further in a bid process with a greater chance of achieving a successful outcome.

Another asset that has been observed to be too sensitive to public outcry was the Chicago Parking meter privatisation in 2008. I recently heard one particular SWF official complain that, despite the relatively successful financial performance of the investment, they would not want to invest directly into the asset because of the public outcry over the privatisation process, rate increases and malfunctioning meters causing excessive tickets to be issued. By investing discretely through a fund manager, the SWF is not directly exposed to any associated controversies that might come up, with the fund manager holding more responsibility for the investment.

So it seems as though the reputation risk of infrastructure investments is a genuine consideration for SWFs and affects how they approach investing into infrastructure assets. The sensitivity of SWF’s to stakeholder outcry can affect the success achieved by investing into infrastructure assets, which is likely to encourage certain funds to favour the indirect fund manager route.

Mr. Rajiv Sharma is a doctoral candidate in economic geography at the University of Oxford.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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