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INFRASTRUCTURE
RISK MANAGEMENT

Assessing and managing dynamic exogenous risks

Edited by
Jeffrey Altman, Finadvice AG
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Published in June 2015 by

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Contents

Contents

Figures and tables x

About the editor xiii

Introduction from the editor 1

By Jeffrey Altman, Finadvice AG
Dynamic exogenous risks 2
Regulatory risk 2
Political risk 2
Social risk 3
Technological risk 4
Climatic and environmental risk 5
Economic risk 5
Catalysts of change 5
Implications of the new normal 6

Section I: Practical strategies for assessing and managing risks 7

Part 1: Political risk

1. Mitigating political risk in infrastructure investing:
A politician’s perspective 9
By Ian Pearson, Former UK Minister, HM Treasury
What political risk means to politicians 9
The changing politics of infrastructure 11
The UK model — some reflections 12
Government expectations and dealing with politicians and regulators —
some useful tips 14
Bringing it together — final thoughts 16

2. A methodological approach to political risk 17

By Richard G. Little, AICP
Introduction 17
Understanding political risk 17
Assessing political risk 18
Decision aid for management of political risk 19
Strategies for management of political risk 20
Conclusion 22

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Infrastructure Risk Management

Part 2: Regulatory risk

3. A new age of regulatory austerity? 23
By Regina Finn, Lucerna Partners
Introduction 23
It ain’t broke so 23
How regulators make decisions 24
How regulation is adapting to a changing environment 26
What change means for investors, fund managers and firms 29
Final thoughts 30

4. Proactive asset management during times

of regulatory uncertainty 33
By Jeffrey Altman, Finadvice AG
Introduction 33
The current landscape 33
What’s driving the shift? 36
Implications of the new normal 38
What a fund manager and its asset management team can do 38
What investors can do 39
What the industry can do 40
Conclusion 40

Part 3: Social and environmental risk

5. Social dynamite: The impact of consumer empowerment
on the infrastructure sector 41
By Thomas Putter, Ancora Finance Group and Jeffrey Altman, Finadvice AG
Introduction 41
Infrastructure industry and the consumer: A brief history 41
Catalysts of consumer empowerment 42
Case studies 43
Attributions of social backlash 45
Conclusion 46

6. Effective management of ESG risks in major

infrastructure projects 47
By Mark Hoff, Jaideep Das, Sarah Murfitt and Alec Martin, ERM
Introduction 47
Organisational culture 48
Effective stakeholder engagement 48
Characterising the nature of the project and key associated ESG issues 48
Why effective management of ESG matters and key challenges 49
Role of ESG in project delay and associated costs 50
Case study 1: Development of a coal-fired power plant in Germany 52
Case study 2: Road project in Turkey — Resettlement issues 53
Effectively managing ESG issues to maximise beneficial project outcomes 54
Conclusion 55

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Contents

7. Infrastructure management and sustainability:

The benefits of keeping the horse before the cart 57
By John Watt, Morgan Stanley Infrastructure
Introduction 57
Background 57
Infrastructure and sustainability 59
Case study 1: Chicago Parking Meters 59
Case study 2: Montreal Gateway Terminals 61
Case study 3: Madrileña Red de Gas 62
Case study 4: Medical Area Total Energy Plant 64
Case study 5: Eversholt Rail Group 65
Conclusion 65

Part 4: Technological risk

8. Technological innovation: Opportunities
and threats to infrastructure 67
By Jeffrey Altman, Finadvice AG
Reflecting on recent disruptive events 67
Innovation in the gas industry and its impact on the coal industry 68
Innovation in the electricity industry 70
Other sectors 72
Cybersecurity 73
Conclusion 73

9. Designing regulation around technological innovation:

Experiences from Hawai’i 75
By Hermina M. Morita, Former Chair of the Hawai’i Public Utilities Commission
Introduction 75
Hawai’i’s electric systems and energy landscape 76
Clean energy drivers 79
Navigating transformation: Understanding and accepting a new paradigm 86
Conclusion 88
Addendum: Hawai’i’s energy policy drivers and current results 88

Part 5: Assessing the implications of risk

10. Assessing the credit implications of regulatory
and political risk in infrastructure 97
By Michael Wilkins, Standard & Poor’s Ratings Services
Introduction 97
Analysing political and regulatory risk 97
Political focus on affordability 99
Affordability through tariff changes 100
Regulatory advantage 101
Public funding and credit support 101
Subsidies and renewables 102
Government antitrust action 105
Conclusion: Adapting to changes in global infrastructure markets 105

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11. Infrastructure asset management:

Assessing regulatory and political risk 107
By Julian M. Macey-Dare, Marsh Ltd and Stephen Kay, Marsh LLC
Introduction 107
Infrastructure’s dilemma 107
Altered landscape 108
Managing the risks 110
A project’s life cycle of political risks 111
Conclusion 113

Section II: Law and regulation:

Regional overviews and analysis 115
12. A legal perspective of regulatory and political risk
in infrastructure 117
By James Snape, Nabarro LLP
Introduction 117
Project-specific risks 118
Risks that impact on a sector or entire economy 120
Managing political and regulatory risk 121
Private sector mechanisms to manage political and regulatory risk 123
Conclusions 123

13. AIFMD and infrastructure asset management 125

By Tamasin Little, King & Wood Mallesons LLP
Introduction 125
Authorisation — What is an AIF? 125
Fundraising 127
Depositaries 128
Asset stripping and other provisions affecting EU portfolio companies 129
Securitisations 130
Investment and management process and operational obligations 131
European Long-Term Investment Funds 134
Conclusion 134

14. An introduction to energy and infrastructure regulation

in the European Union 137
By Silke Goldberg, Herbert Smith Freehills
Introduction and scope 137
Unbundling 138
Regulatory oversight 141
Cooperation between transmission system operators 142
European network codes 143
Development of energy infrastructure 143
New state aid guidelines 145
Outlook 146

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Contents

15. An overview of the US regulatory structure for infrastructure 147

By David Narefsky, John Schmidt and Joe Seliga, Mayer Brown LLP
Introduction 147
The federal role: Regulation, financial support, taxation 150
Federal taxation 152
Increasing use of public-private partnerships (PPPs) 152
Conclusion: The continuing politics of US infrastructure governance 158

16. UK-regulated infrastructure: Current landscape and challenges 159

By James Wardlaw, Campbell Lutyens
Introduction 159
Key challenges: the Government perspective 159
Key challenges: the consumer perspective 162
Key challenges: the investor perspective 162
The UK Regulators Network: Objectives 164
Conclusion 165
Appendix: Principles and Commitments for Economic Regulation 166

17. Opportunities and challenges for infrastructure

investment in Asia 171
By Susan Hilliard and John Sullivan, King & Wood Mallesons LLP
Introduction 171
Growth in demand for private investment… but challenges remain 171
Region not homogenous 172
Significant opportunities… but reform is needed 178

18. The investment opportunity in African infrastructure 179

By Cindy Valentine and Patrick Deasy, King & Wood Mallesons LLP
Introduction 179
Political stability 180
International planning and cooperation 180
Credible legislative and regulatory frameworks 181
Capacity 181
South Africa — Renewable Energy Independent Power Producer
Procurement Program 182
Nigeria — Roadmap for Power Sector Reform 183
Ports and related infrastructure 185
Uganda — Bujagali Hydroelectric Power Station 186
Investment landscape and investor activity 186
Conclusion 188

19. Infrastructure in Latin America 189

By Glenn Faass and Pablo Jaramillo, Norton Rose Fulbright
Introduction 189
Macroeconomic changes 190
Current financing trends 195
Key risk factors 197
Conclusion 199

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Section III: Case studies 201

20. A case study in regulatory risk

in the Spanish renewables sector 203
By Tom Murley, HgCapital
Prologue 203
Introduction 203
Collective action 204
International arbitration 207
Debt restructuring 208
Implications of response to regulatory changes 209
Lessons learned 211

21. Managing PV assets in Italy 213

By Gintare Sertvytyte, Pierluigi Sagarriga Visconti and
Max Lensvelt, Platina Partners
Introduction 213
The turbulent rise of the Italian PV market 213
Platina Partners’ response to the regulatory changes 215
Conclusion 220

22. Southern Star: Creating value at a US-regulated asset 221

By John Veech, Morgan Stanley Infrastructure
Introduction 221
Rate cases made simple 221
The Southern Star experience 222
The regulated US pipeline market 224
Planning for value creation 224
Adding to Capex 225
Managing relationships 226
Expansion projects 226
Conclusion 227

23. Opportunities and challenges in the Middle East

energy sector 229
By Wissam Anastas, Deutsche Alternative Asset Management Global
Introduction: A regional overview 229
The cases of Jordan and Egypt 232
Making the case for renewables 233
A pan-Arab common electricity market: Key benefits 235
Conclusion 236

24. Infrastructure investment in Africa:

Navigating the regulatory and political challenges 237
By Clarisa De Franco and Eddie Buckley, CDC Group plc
Introduction 237
Case study 1: Developing geothermal power in Kenya 239
Case study 2: Privatised power assets in Cameroon 240
Investing in Africa: Lessons learnt from an LP perspective 242
A strategy for future investments 243

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Contents

25. Newcastle International Airport: A case study in active management

in a UK public private partnership 245
By Boe Pahari and Hywel Rees, AMP Capital
Introduction 245
The airport 245
AMP’s approach to investment 246
Key value factors 247
Challenges to growth 249
Conclusion 251

26. Berlin’s Brandenburg Gate: How not to build an airport 253

By Peter Jumpertz, Theron Advisory Group
Introduction 253
Good idea, bad execution 253
Root causes of failure 255
Lessons learned from an infrastructure asset management perspective 257
Conclusion 260

27. Inexus: Managing an infrastructure business in a dynamic UK

regulatory environment 263
By Stephen Wright, eSPe Investment Partners LLP
Introduction 263
About Inexus 263
Doing the deal 263
Management 264
The building blocks of value 264
Delivering growth 265
Managing regulation 266
What an investor can do well 266
The end game 267
Conclusion 268

28. The commercialisation of Queensland Motorways in Australia 269

By Ross Israel, Leisel Moorhead and Trent Carmichael, QIC
Introduction 269
Asset background 269
QIC’s acquisition of QML 270
The strategy 271
Commercialisation 272
Developing a network platform 276
Equity sell-down 277
Conclusion 278

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Infrastructure Risk Management

Figures and tables

FIGURES
Figure 2.1: Decision aid for risk management 20
Figure 3.1: Recent changes in regulated return
in UK energy and water sectors 28
Figure 6.1: Comparison of the relative importance
of ESG issues in emerging and developed markets 49
Figure 6.2: ESG issue prioritisation matrix 54
Figure 7.1: Estimated impact of parking efficiency on ‘cruising’ 60
Figure 7.2: Estimate of CO2 reduction as a result of conversion
to natural gas — Residential 63
Figure 7.3: Estimate of CO2 reduction as a result of conversion
to natural gas — Commercial 63
Figure 9.1: Hawai’i electric systems: Four electric utilities, six separate grids 77
Figure 9.2: Fuel source for electricity production in 2013:
Hawai’i and US comparison 78
Figure 9.3: Net system load profile — island of O’ahu 80
Figure 9.4: Net load profile — island of Moloka’i 81
Figure 9.5: Renewable portfolio standard and energy efficiency
portfolio standard levels in Hawai’i, 2008 to 2014 89
Figure 9.6: Hawaiian electric companies distributed
solar PV installed capacity, 2005 to 2014 91
Figure 16.1: Planned capital expenditure in regulated infrastructure
sectors, 2015 to 2020 160
Figure 21.1: Solar capacity growth in Italy, 2008 to 2014 214
Figure 21.2: Decreasing Italian power prices, 2012-2014 216
Figure 21.3: Comparing hourly production from individual
inverters at a PV plant 219
Figure 22.1: Rate cases: Settlement overview 223
Figure 22.2: Southern Star: Additional capex 225
Figure 22.3: Southern Star — pipeline leakage below industry average 225
Figure 22.4: Southern Star projects — average LTM EBITDA multiples 227

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Contents

Figure 23.1: Indicative energy infrastructure projects and themes 230

Figure 23.2: MENA net electricity generation by fuel, 2010-2040 231
Figure 26.1: Brandenburg Gate Saga: Historical timeline
and projected completion date 254
Figure 28.1: Queensland Motorways group (QML) network
history pre-QIC ownership 270
Figure 28.2: Map of the SEQ motorway network 271
Figure 28.3: Strategic milestones for the DB Fund’s investment in QML 272
Figure 28.4: Indicative QML earnings uplift 276
Figure 28.5: Value uplift realised by the DB Fund through
its investment in QML 278

TABLES
Table 2.1: Assumed consequences of event categories 19
Table 6.1: Large-scale infrastructure projects and their challenges 51
Table 7.1: Diesel vs. electric reefer containers:
Estimated annual costs comparison 62
Table 9.1: Roadmap and work scope for Hawai’i’s energy transformation 84
Table 9.2: Distributed Generation (DG) versus Electric Utility 86
Table 10.1: Accounting for political risk: Four factors captured by S&P’s country
institutional and governance effectiveness score 98
Table 10.2: Factors affecting the creditworthiness
of renewable energy incentive schemes 104
Table 15.1: Owners and annual passenger numbers at major US airports 148
Table 15.2: List of state statutes authorising PPP structures 154
Table 21.1: Tariff reduction options offered to Italian PV plant holders 214
Table 22.1: Rate-making process 222
Table 23.1: Recent PV deals and projects in Jordan 235

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About the editor

Jeffrey Altman has over 20 years’ experience in infrastructure asset management,

investment management and transactions having worked within several utilities, an
infrastructure fund as well as advising institutional investors in Europe and North America.
He is currently a Senior Advisor to Finadvice (FAA Financial Advisory AG), one of Europe’s
largest boutique energy and infrastructure advisory practices.

Prior to joining Finadvice, Jeffrey was Director of Investment Management at First State
Investments’ European Diversified Infrastructure Fund and was a member of the holding
company board of Electricity North West, the electric distribution company for the north
west of England, including the city of Manchester. Before joining First State, Jeffrey
worked for almost ten years in the US and Europe with The Southern Company, one of the
largest US electric utilities, and its former subsidiary Mirant Corporation, a (then) global
independent power producer. During this time, he spent five years successfully privatising
and restructuring Bewag AG and GASAG AG (Berlin’s electric and gas utilities), before
Mirant sold its stake to Vattenfall for an after tax gain of $900 million. While in the US,
Jeffrey initiated, negotiated, structured and closed transactions that created over $120
million in net value for The Southern Company and developed several strategic plans,
including the recommendation not to enter into the California retail market.

Jeffrey is also editor of PEI’s Best Practice in Infrastructure Asset Management. In addition,
he is the co-author of the White Paper for the US utility industry titled, Development and
Integration of Renewable Energy: Lessons Learned From Germany and has authored
several articles as well. Jeffrey has an MBA from the University of Southern California and a
Bachelor of Science from the School of Foreign Service, Georgetown University.

About Finadvice AG
Finadvice AG is an M&A advisory firm specialising in the utility industry (electricity, gas and
water) and renewable industry in Continental Europe with offices in Germany, Switzerland,
Austria, Czech Republic, Poland and Romania. Since 1998, Finadvice has advised utility
companies, energy trading companies and renewable companies as well as institutional
and infrastructure and private equity investors investing in these sectors. Finadvice provides
a range of advisory services with respect to investment decisions, including valuations, due
diligence, regulation and economic calculations. Finadvice is 100 percent management-
owned and has been supporting many of its clients since the foundation of the company.
Collectively, Finadvice has worked on more than 250 projects worth over €45 billion since
its foundation, which includes over 150 renewable energy assets.

For further information, please see: www.finadvice.ch

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Introduction from the editor

A fundamental tenet of infrastructure investment is the notional symmetrical band whereby

investors have both downside protection as well as a prudent range for outperformance
before regulatory intervention is likely to occur. Yet this thesis has been tested in the last
20 years — and particularly in the last decade (2005 to 2015) — as the risk/return balance
has proven rather asymmetrical for many investors, driven by the frequency, intensity and
complexity of risks — regulatory, political, social, technological, climatic/environmental and
economic.

Profound changes in telecommunications, water, gas, electricity and renewables have

generated outsized returns for some investors, but significant value destruction for others.
Further, rapid changes have occurred to business models in various infrastructure sectors
— frequently over periods of eight years or less (shorter than the average hold period
for most infrastructure funds) — thus challenging the widely held perception that the
infrastructure industry is slow to evolve.

The confluence of these risks is at an all-time high. They are not one-off events, but
dynamic. Their influence is growing and will shape the industry for the foreseeable
future.

This dynamism coincides with a five-year global financial market environment of

interest rate declines and credit spread compression driven by central banking
policies. The combination of these two effects, added to widespread infrastructure
asset class re-allocations by institutional investors, is producing asset price inflation as
infrastructure funds seek to deploy these allocations. Indeed, many infrastructure asset
prices are now exceeding pre-2008 bubble levels with historical amounts of equity and
debt (much of which is being fixed over extended periods of time) pouring into the
market. In such an environment, it can be argued that the level of actual performance
risk inherent in these assets may become obscured by the ongoing high valuations.
One may therefore conclude that the confluence of increasing risks and falling returns
suggests that infrastructure investment may be reaching an inflection point. The
question that must be addressed therefore is: Are current infrastructure risk-adjusted
returns appropriate?

This book attempts to answer that question by drawing on the perspectives of leading
figures in the infrastructure sector, including former regulators in the UK and US, global
fund managers, a former UK treasury minister, global law firms, a global rating agency
and a global risk manager. Case studies are also included showcasing how investors
have addressed adverse and often capricious regulatory interventions that destroyed
value, and how other investors have utilised regulation to generate superior returns.

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Introduction

Dynamic Infrastructure risks fall broadly into two categories:

exogenous risks
1. Endogenous risks — such risks are inherent to the asset and are largely within the
control of the investor, management and employees. Examples include operating risks,
cost overruns and performance.
2. Exogenous risks — such risks are beyond the control of owners, management and
employees. Examples include regulation, GDP growth and other economic factors,
social movements, political influences and disruptive technology changes.

My first book, Best Practice in Infrastructure Asset Management: Creating and Maintaining
Value for All Stakeholders, published by PEI in December 2010, focused on endogenous
risks. Although it sought input on exogenous risk no one was willing, at that time, to write
on record about the impact of such risks on the sector.

Almost five years later, the infrastructure investment industry is now recognising and
openly discussing the importance and scale of such risks. This book therefore focuses on
assessing the six main exogenous risks (introduced below), the catalysts driving them and
their interrelationships.

Regulatory risk Among the exogenous risks, regulatory has received the most coverage in industry press.
Whether it be retroactive taxes implemented in Spain and Italy or the decision in Norway
(although a governmental decision) to reduce the tariff rate for Gassled’s transportation
contracts by up to 90 percent, these events foretell a new era of capricious regulatory
changes and, as some would argue, breaches of national and international law. While many
expected these actions to occur in emerging markets, they were considered unthinkable,
until recently, in the OECD West.

However, regulation is, by its very nature, imperfect and new regulatory regimes are
scheduled to occur in defined timeframes to reset regulation to achieve targeted
outcomes. When there are perceived market distortions, through regulators’ own guidance
or by market dynamics, regulators may or may not have the legal right to implement new
regulation or change existing regulation. It is here that many infrastructure investors place
their entire focus on regulatory risk; to ensure there is a history of a stable regulatory
regime as well as appropriate legal frameworks that can act as safeguards against, or at
least minimise the impact of, interventions.

Yet investors relying on this two dimensional view of regulatory risk may face a nasty
surprise. The two dimensions have become much more complex; with political, societal,
technological, economic and climatic risks becoming more prominent, investors are now
facing six dimensions of risk — a totally new universe.

Regulatory determination is no longer a process that considers the (then) long-standing

perception of an industry’s direction within a planned regulatory framework. Rather,
regulatory determinations now need to consider a number of dynamic factors that
collectively can (and have) radically change market structures and lead to new regulatory
frameworks, which can also include unforeseeable regulatory interventions.

Political risk Political risk manifests itself in two ways, geopolitical and national, and can have a
significant impact on the infrastructure sector. Examples of geopolitical risk include: Russia

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Introduction

repeatedly cutting off Ukraine’s gas supply, which has also impacted gas supply and
pipeline stability across Europe; and US/EU sanctions on Russia over Ukraine and the EU
anti-trust proceedings against Gazprom.

On a national (or as the case may be state/regional) level, governments may use their
authority to dismantle regulatory bodies, enact new regulation and correct perceived
market distortions, including windfall profit taxes or retroactive taxes. Where infrastructure
companies and investors have achieved what is perceived to be excessive profits, some
national and/or regional governments may seek to return these assets back into public
ownership through renationalisation or by simply not renewing concessions, allowing
them to receive the benefits of these large income streams.

However, it is social and technology risks that have driven both the largest value creation
and destruction in infrastructure investment. Moreover, given certain dynamic catalysts,
both these trends are likely to create the greatest risks and opportunities over the coming
decades.

Social risk Social movements have and will play an even greater role in the infrastructure sector.
Environmentalism and distrust of financial institutions, foreign investors, and offshore tax
havens are the major social drivers currently affecting infrastructure. Examples of social
unrest include Australian voter outrage against infrastructure privatisation, which led to
the State of Victoria cancelling the AUD6 billion East-West Link contract and the State of
Queensland withdrawing some AUD37 billion in privatisations.

Environmentalism is the strongest social movement to date and affects every infrastructure
sector through higher standards for air, land and water quality and waste management,
requiring hundreds of billions of investment in new and existing facilities. It has
unequivocally and dramatically changed industries across the globe and will continue
to shape sustainability within the infrastructure industry. For example, the massive social
protests that followed the Fukushima disaster led Germany to close a third of its nuclear
fleet immediately and to schedule the rest for closure by 2022 and Swiss voters to approve
a referendum to close all nuclear plants at the end of their current lives.

The global finance community has also been under enormous social scrutiny, which has
resulted in greater regulation of banks, private equity and infrastructure operators. The
infrastructureindustryisjustbeginningtoaddresssocietalperceptionsof privateinfrastructure
ownership by the formation of two industry groups: the Long-Term Infrastructure Investors
Association (LTIIA) and the Global Infrastructure Investor Association (GIIA).

Foreign investors have been the target of social movements whose emotions have
ranged from nationalistic fervour to outright xenophobia. Further, the broad ownership
base of foreign investors appears to empower politicians and regulators to ‘diversify the
pain’ by reducing the concentration of local investors (thus reducing blowback from the
local investment community) and therefore providing flexibility to implement retroactive
taxes and/or lower returns via new tariff regimes. This empowerment is bolstered by
revelations of the aggressive use of divergent and inefficient global tax regimes and
treaties by multinational corporations and investors to move profits from high to low
tax jurisdictions, leaving consumers and politicians with a strong taste of unfairness. As
noted by the current chair of Ofwat (the UK’s water regulator), the infrastructure sector

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Introduction

has adopted some of these techniques by establishing companies outside the tax
jurisdiction of their operating entities.

Technological risk Technological innovation is having the greatest impact on the infrastructure industry
and investment returns. Mobile telephony and fibre optic cables have made many
metal or copper wire networks redundant and, with respect to developing markets,
virtually non-existent. Another example is the impact of horizontal drilling and
hydraulic fracturing (fracking), which has been nothing short of game-changing. It has,
for example:

• Changed the global oil and gas supply outlook, helping to drive down prices.
• Led to an ongoing shift in US power generation from coal to gas, creating a global coal
glut and price collapse, which has all but bankrupted EU gas-fired power generation.
• Driven down the value of US liquefied natural gas (LNG) import infrastructure to the
point where it is being reconfigured for export.
• Driven a seismic shift in the geopolitical landscape for the US, Middle East and other
OPEC countries, and Russia, and ignited a market share war by Saudi Arabia.

Renewable energy is having a disruptive effect in the electricity sector, particularly in

Europe. However, it should be noted that it is the large amount of subsidies created by
governments and regulators that have been disruptive to the power markets, not the
technologies. Advances in energy storage technologies and lower cost renewables could
ultimately transform the electricity sector by solving the issue of renewable intermittency
and possibly move the industry more towards a distributed network. Water will likely be
the next industry to be impacted by technological innovation. Technologies are being
developed to improve, for example, leak detection, storage, purification and waste
processing. There is even distributed water purification, waste processing and storage
systems being introduced for developing markets whereby with time, production modules,
scale and scope, these units could ultimately appear in developed countries as a disruptive
innovation.

Technology is also being further advanced to provide critical data to consumers of utilities,
empowering them to efficiently manage, and potentially radically change, consumption
usage patterns and perhaps even procure services (depending on regulation), as key
information will be delivered on a real-time basis with the assistance of smart thermostats,
smart appliances, smart meters and software. Silicon Valley is attempting to play a major
role with regards to developing, processing and owning this information. Moreover, there
is the likelihood for Silicon Valley to use this data as a Trojan Horse to sell utility (power,
gas, etc.) and other related services to the homeowner. In the near term, the real battle will
be in the courts and with the regulators, with respect to who owns this data; information
companies will claim it is public domain and belongs to everyone, while consumer
protection groups and utilities will claim such information is private. The outcome of these
decisions will determine how the utility industry evolves.

Finally, the threat from cyber attacks poses enormous political, social and financial risks
to infrastructure owners. Those found to be negligent in maintaining their security will
likely be held accountable financially and even potentially criminally for their inactions.

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Introduction

Climatic and Climate and environmental issues have already greatly influenced the infrastructure industry
environmental risk and further sudden or prolonged climate change will present even more challenges in the
future. The Californian drought, in its fourth year in 2015, has just required a historical
state-wide water conservation plan. The implications of that plan for water and electric
utilities (both large water and power — and hydro power — users) remain unknown, as do
the long-term implications should the changes in weather patterns be permanent. This is
indeed one of the great known unknowns.

Economic risk Economic risk can be assessed on two levels: macroeconomic and microeconomic. From
a macroeconomic risk perspective, the recovery from the Global Financial Crisis has been
slow, GDP growth remains muted and consumers and governments overleveraged. OECD
and developing countries are expected to continue to struggle for some time to shore up
their fiscal deficits and minimise the impact of austerity and stagnant or falling median
incomes on their citizens. The large fiscal deficits of both federal and state governments
continue to be exacerbated by regional recessions and stagflation. Conversely, a spike in
inflation could have detrimental effects necessitating regulatory intervention.

From a microeconomic risk perspective, the aforementioned risks have in many cases
greatly affected the market economics of various infrastructure sectors. For example,
the European renewables sector, which received large subsidies from governments and
regulators, experienced rapid uptake by environmentally and cost-conscious consumers
and investors (enticed by cheap subsidies). This created overcapacity in the power markets
and drove down the wholesale price of power. The result was the planned closure of many
thermal plants, which were needed to support the intermittent production of renewables.
Regulators then introduced retroactive taxes in various countries and/or other measures to
correct real or perceived market distortions, which severely impacted renewable investors’
returns. Moreover, for those plants whose feed-in-tariffs have expired, as most renewable
plants (hydro, wind, solar) have variable costs of zero, these entities are bidding their
power at low prices which, combined with the over capacity in the markets, is now negating
the terminal value of many renewable funds’ recently installed projects. The net result of
these risks is that cost of capital has increased across the whole power sector, while overall
returns have gone down. This increase in the cost of energy is ultimately passed on to
consumers with the potential to create a cost of living issue. Consumers will then address
their concerns with politicians and regulators, who will likely initiate further asymmetry for
infrastructure investors. The thread of these expected changes again increases the cost
of capital. In countries with a history of retroactive changes, it has become difficult to find
investors.

Catalysts of Driving these dynamic changes is the increased alignment of regulators, consumers
change and politicians. Regulators have driven increased transparency and have encouraged
consumer engagement. This drive coincides with technological innovation and social
media, which enables consumers to achieve greater efficiencies in time, data management
and aggregation of supporters and funding — in short, greater empowerment. Consumers
have effectively utilised technology and social media to form special interest groups,
which have significant influence over decisions made by regulators and politicians
through the power of vote and/or the power of the purse (for example, financing special
interests groups and/or lobbying organisations to influence outcomes or funding election
campaigns of aligned politicians).

5
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Introduction

Regulators have demanded transparency of service and pricing performance,

environmental responsibility and other requirements on infrastructure businesses.
Further, increased access to information has enabled consumers to better understand
how businesses operate. Regulators have incorporated consumer engagement into their
overall model and decision-making with respect to existing/new rate cases, accidents/
incidents, and mergers or sales of companies. There are many instances where consumers
have responded vociferously, materially changing outcomes. Fracking in Europe is a good
example where the strategic requirement for cheaper gas and energy independence as
well as the upside of employment was overridden by the environmental concerns of the
populace.

As recent events have proven, the rule of the regulator and/or the rule of law can be
usurped by an incoming/existing government, in many cases driven by social movements,
which can perhaps be best described as consumer empowerment. This is likely to affect
the infrastructure industry permanently.

Implications of Whether the infrastructure industry is entering a paradigm shift or not, there now is a ‘new
the new normal normal’ for the foreseeable future, which can be summarised as follows:

• Greater volatile geopolitical situations impacting the supply of natural resources and/
or distribution of technologies.
• Greater political involvement as well as possible further interventions to correct
perceived market imperfections. There is probability for further moratoriums on
privatisations and for assets to reverse to state ownership.
• Prolonged period of regulatory austerity for infrastructure owners in order to represent
the interests of consumers during difficult macroeconomic times and/or technological
transformations.
• More frequent regulatory interventions, particularly in industries affected by
technological innovation.
• Greater empowerment of consumers requiring infrastructure investors to justify returns
and sustainability and to proactively engage with the communities in which they
operate and serve.
• Dynamic technological innovation is creating greater operational efficiencies, further
major changes in demand profiles, new business models and possible disruptive
changes to various infrastructure sectors.
• Infrastructure returns will ultimately be impacted by the frequency, intensity and
complexity of asymmetric risks. This will inevitably change fund structure models and
the way investors conduct business

In conclusion, as Dorothy in The Wizard of Oz stated: “Toto, I’ve a feeling we’re not in
Kansas anymore.”

I would like to express my deep gratitude to the authors who have shared their insights for
this book as well as Helen Lewer, senior managing editor of PEI Books, who collectively
have provided the path to “over the rainbow”.

Jeffrey Altman
Finadvice AG