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As talk of massively ramping up defence spending to achieve security in Europe reaches fever pitch, the need to maintain essential infrastructure and plug infrastructure deficits has moved center stage alongside it. Not just military infrastructure but traditional areas like energy, utilities and transportation as well as newer areas like electric vehicles and data centres.
As governments across Europe urgently reassess their infrastructure needs and the scale of public and private capital required to fund them, I got to thinking about how much control governments in Europe really have over their infrastructure, much of which has been privatized, beyond what has often been deemed to be weak and poorly executed regulatory controls.
And what position are they in if they want to change the status quo around current ownership, now that asserting control of national resources and infrastructure in the face of grim global geopolitics becomes more compelling in the quest to ensure that economic benefits flow internally?
It's no secret that a relatively small number of multinationals, mammoth infrastructure and private equity funds, sovereign wealth funds, institutional investors, and other out-and-out financial investors own a lot of infrastructure. The extent to which infrastructure has become a financial play for private owners is striking, particularly since the go-go alternative investments segment emerged several years ago.
The extent to which infrastructure has become a financial play for private owners is striking, particularly since the go-go alternative investments segment emerged several years ago
Foreign investors reaping benefits
This is a global phenomenon for sure, but I’ve looked at it through a UK lens as a suite of random infrastructure-related stories in recent weeks has shone a light on the shape of UK infrastructure at this uncertain time. The background context here is the UK has sold off pretty much all of its infrastructure in recent decades: ports, airports and railways; gas, electricity, water and telecoms, and others.
But while international investors – including other governments through their sovereign wealth funds – have ploughed tens of billions of pounds into UK infrastructure over decades, UK-domiciled investors are conspicuous by their absence as material owners. If governments can do little to prevent foreign investors prioritizing dividend exports over investing back into the businesses to create high-performing infrastructure, you have to wonder what power they really have over the fate of their own operating infrastructures.
The other urgent question, of course, is why UK infrastructure is so attractive to foreign companies, governments and investors but so shunned by domestic players. Is this part of the same phenomenon that has seen UK domestic investors shun UK equities? How little UK investors are represented in major UK infrastructure ownership came to the fore in the wake of three unconnected stories.
Why is UK infrastructure so attractive to foreign companies, governments and investors but so shunned by domestic players?
First, the recent fire that caused the complete shutdown of Heathrow Airport, through which 70% of all UK cargo by value passes.
Second, BlackRock and Terminal Investment Ltd’s heavily politicized deal to buy CK Hutchison’s ports business for US$22.8 billion. The principal focus has been the Panama Canal ports, but the sale also comprises dozens of ports in 24 countries, including the UK’s largest container port at Felixstowe as well as Harwich International and London Thamesport.
Third, the complex circumstances surrounding Thames Water, one of the largest water companies in Europe whose £19 billion-plus ( US$24.5 billion ) debt pile has had it teetering on the edge of the abyss for some time. The company is currently negotiating an expensive £3 billion 9.75% bailout loan from a consortium of international hedge funds and institutional investors to keep it afloat while it seeks equity injections. KKR has been selected as a preferred bidder. CK Infrastructure Holdings, another arm of Li Ka-Shing’s sprawling Hutchison empire, is also reported to be readying a bid.
Heathrow and Thames Water’s shareholder lists make it crystal clear what has concerned people in the UK at a time of great uncertainty:
Heathrow Airport: French private investment firm Ardian ( 22.61% ), Qatar Investment Authority ( 20% ), Saudi Arabia’s Public Investment Fund ( 15.01% ), Singapore’s GIC ( 11.2% ), China Investment Corp ( 10% ), Spanish infrastructure company Ferrovial ( 5.25% ), Caisse de Dépôt et Placement du Québec ( 2.65% ), UK pension scheme the Universities Superannuation Scheme ( 2.1% )
Thames Water: Ontario Municipal Employees Retirement System ( 31.78% ), The Universities Superannuation Scheme ( 19.71% ), Abu Dhabi Investment Authority ( 9.9% ), British Columbia Investment Management Corp ( 8.71% ), US asset manager Federated Hermes ( 8.70% ), China Investment Corp ( 8.69% ), Queensland Investment Corp ( 5.35% ), Canada's Fiera Capital Corp ( 5% ), PFZW, the Dutch pension fund for healthcare and welfare ( 2.17% ).
It’s the same across the UK large airports footprint, where no UK investor is listed among material owners:
When it comes to major German airports, by comparison, the ownership structure is still arrestingly public through a combination of Federal, State and city/town ownership. In France, airport ownership is a little more mixed between public and private owners but the arm of government is still very visible.
Home bias?
So should domestic infrastructure, with its vital operating assets critical to a country’s economic well-being and performance, be domestically owned or at least actively controlled by domestic interests, particularly at a time of dramatic geopolitical change? And would that make any difference?
Should domestic infrastructure be domestically owned or at least actively controlled by domestic interests, particularly at a time of dramatic geopolitical change?
This brings to the fore the concept of home bias and how that operates – or whether it operates at all – within the bubble of profit-seeking enterprise. It’s certainly the case that some UK infrastructure is in deplorable shape thanks to woeful under-funding at the same time as big executive bonuses are paid out while profits are exported, forcing millions to endure the consequences. But would UK majority owners behave any differently?
Governments do have options to effect change, such as re-nationalizing or expropriating privatized assets or imposing windfall taxes. But these are pretty extreme measures. Expropriation can be achieved under international law, but it’s a serious step for any government to take as it will act as a deterrent to other investors, regardless of whether compensation was paid out. Room for manoeuvre can also be limited by protections in bilateral or multilateral agreements and/or investment treaties, while windfall taxes are deeply unpopular among those captured by them and are likely to have deterrent effects.
As ever, it’s a fine balancing act between protecting a country’s assets for the good of the economy and the people who live in it, against the interest of investors – wherever they are – and their right to extract profits from their risk capital investments. As the world shifts inexorably into some new form of geopolitical arrangements, who owns the assets will move up the agenda.
