BRIDGING THE GAP IN INFRASTRUCTURE INVESTMENTS BY CO-INVESTING

Kim Wikström, professor & Jonas Spohr, Dr.

Are you charged by steadily increasing electricity transfer prices by foreign owned companies? In the future, international asset managers may be involved in collecting fees also for a wide range of other essential infrastructure services. The crusade of foreign investors to pick up monopoly-like assets in Finland did not stop with acquisitions of our biggest electricity distributors, Caruna and Elenia. Many municipalities are currently selling vital assets in energy- and district heating companies to finance their constrained budgets. In just 2019, several deals of this kind were made. Riihimäen Kaukolämpö sold out 49 % to a foreign investor and equally Kajaani and Sotkamo sold 34% of their energy company, Loiste.

From the decision makers’, municipalities’ or state controlled companies’ perspective, the decision to sell an asset may be the correct one. Still it may create a conflict with the interests and benefits for our society. Maximizing their own benefit, can be costly for the society and leave many unused options on the table for Finland. How to change this narrow view of various actors and open up the door for increased and better collaboration is the challenge. Overcoming this challenge will increase the long-term value created by our society and secure that our citizens also capture the fruits of their work.

Selling assets and greenfield investments to international investors may give a moment of relief for the distressed seller. Nevertheless, as the investors generally have a relatively short time frame to maximize the value of the asset, it will come at a cost. The investors’ incentive structures lead to a focus on efficiency on the cost of long-term value creation and on increasing the top line earned by the service. The strategies building on efficiency and price increases have generally worked very well from the investors’ standpoint, often providing double-digit yearly investment returns at low risk levels. In some cases, local institutional investors have been let in to share some of the returns, mainly to increase the political correctness of the deals and secure that they do not fall apart due to objections from the public. The question thus is, why do we let foreign investors extract returns from the society and at the same time give up considerable influence on how we develop our country in the future?

We should not give up our future options to create and capture value in infrastructure

The problems in letting important infrastructure assets fall into foreign hands is widely recognized. Due to various kinds of lock-ins it is difficult to stop this development. We should take actions to develop better structures that enable local investors to invest in assets whose value, in the end, is extracted from our current and future tax-payers. In our opinion, one interesting solution is new structures that enable co-investments with domestic investors taking the lead. In the 1990s, pension funds in Australia and Canada set up organizations specialized in investing directly in infrastructure assets and this has proven to be successful. In 2019, Sweden set up an institution of this kind as three of their pension funds founded the co-investment company Polhem Infra. Polhem aims to be an investor securing that citizens can benefit from good and sustainable infrastructure which is developed for long-term value creation, especially in Sweden.

Taking on the challenge

Together with the Finnish government, institutional investors and industry, we have started the discussion of putting our country’s interest first when it comes to infrastructure. Despite the good will and intentions of all parties involved, our study shows that it is quite hard to step outside the mandate of one’s institution. Understandably, in interviews conducted and in meetings with several important decision makers present, people usually saw things from their employers’ standpoint. The municipalities need to keep their budgets; the pension funds need the returns and the state and its authorities have a long history of doing things in certain ways which are hard to change or abandon. More work is needed to improve the relationships between the institutions involved and build confidence as well as the knowledge needed for co-investing. The government is a key player in initiating the process securing that our infrastructure, and the future development of it, stays in domestic control. There is urgency in taking on this task. We firmly believe that with efficient models of collaboration it surely can be done.

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