Speaking at the recent ACI Airports Economic Symposium, GIIA Director of Corporate Affairs, Jon Phillips, shared thoughts on the future of regulation …
GIIA represents around 80 of the leading investors and advisers in infrastructure from around world. Our members include many of the large public pension funds, fund managers, insurance companies, sovereign wealth funds and corporate investors.
Between them, our members have around $1 trillion US dollars of infrastructure assets under management across 66 countries. These assets include transport, energy, water, and telecoms. In the UK and mainland Europe our members have over 1,000 individual assets, and this includes more than 40 European airports.
Importantly, these investors are also sitting on an estimated $200 billion dollars of ‘dry powder’ – ready to be deployed where markets and sectors combine to create the most attractive environment for infrastructure investment. Importantly for this conversation they are making decisions on a daily basis about the relative attractiveness of one country or region over another and between different infrastructure sectors.
GIIA exists to promote improved understanding and dialogue between governments, regulators and the private sector to create that right environment for investment. Although the context is different across the many specific markets, one theme is fairly constant: Everyone wants new and better infrastructure, but no one wants to pay for it. Hence the circular debate around taxpayer funded or user funded models.
In our view, the private sector is better placed to bring innovation, efficiency, project delivery disciplines and sustained investment – and when this is done well it provides better value for the user over the long term. But given the nature of some infrastructure, the normal dynamics of market competition don’t always exist and so economic regulation can have an important role to play to ensure that consumer’s interests are properly considered.
In our dialogue with policy makers around the world we emphasize the critical importance of effective regulation as a lever to deliver the outcomes that governments and society want. Last year we published a report on the Future of Regulation based upon our members’ experiences across a range of infrastructure sectors. The key observation from our report is around the changing mindset of regulators. Over recent years we believe regulators have become overly focused on their role in policing rather than enabling the success of the sectors they are a part of.
Probably in response to the global financial crisis and the rise of populist politics, we have seen an increasing focus on short term affordability for consumers. Without clear policy and strategic direction from Governments, there is a risk that regulators are left to interpret their statutory duties in line with the changeable political mood.
This has contributed in our view to a focus on short term bill reductions at the expense of investment to achieve long-term policy objectives such as climate resilience and carbon reduction targets. Investors in infrastructure think long term, their capital is tied up in 10, 20, even 30 year horizons. We need to see the economic regulatory model adapt to these priorities and time frames.
A second observation is around the depth and complexity of regulation. In the pursuit of squeezing operators harder and harder on their returns, there has been a tendency for regulators to get drawn deeper and deeper into the weeds of how operating companies are run, including interference with their financial structures and even executive compensation. The holy grail of ‘light touch’ regulation is becoming a distant memory as regulators search for further efficiency savings in operating costs that in most well run private business are simply no longer there. This also creates hundreds of pages of data and regulatory reporting, which is time consuming and costly for all involved that increasingly ends in appeals that add more cost and delay.
A third point is that Infrastructure owners and operators today are faced with unprecedented challenges and a reassessment of their risk profile.
Infrastructure traditionally attracts long term patient capital for its stable, lower risk, predictable returns. Yet, most privately owned infrastructure has relied on balance sheet strength, refinancing and shareholder support to ride the Covid storm rather than government bail outs in the face of the most extraordinary and unpredicted hit on their assets.
Regulators, who are quick to jump in with revenue caps when times are good, are mysteriously less responsive when the bottom has fallen out of the market, with the suggestion that this is all part of the downside risk the private sector should have factored in.
If ever there was a sector that deserved a helping hand from the regulators it is aviation, not least because there are few sectors that can help to get economies moving again if given the right support. But before Covid hit, aviation faced other enormous challenges: Climate resilience, the exponential rate of change in technology and probably most importantly Net Zero to name but three.
In light of these challenges, Regulators and policy makers need to work with investors and operators to enable the future investment and ultimately success of the sectors they are responsible for whilst continuing to ensure consumer interest are properly considered. We need regulatory regimes that secure the future investment needed and which spread the cost over multiple generations of consumers.
And finally, a plea to our friends in the Commission regarding the review of the EU Airports Directive. There is more than enough regulation in place today. We don’t need more. We need the Commission and Member States to focus on how to support the sector getting back on its feet and addressing these longer term policy objectives.
In conclusion, we think the regulatory pendulum has swung too far away from investors and some adjustment in thinking is needed to strike a fairer balance.
It’s time to reset economic regulation to enable the delivery of sustainable infrastructure for future generations and to align around the shared goals of quality, capacity, sustainability and affordability.
This means each party playing its role effectively:
- Governments setting clear and stable policy
- light touch regulation that enables investment through a fair pricing regime
- investors committing to responsible asset stewardship and long term investment and
- consumers paying a fair price today for a quality experience whilst contributing to the sustainability of tomorrow’s infrastructure.