Infrastructure investors seek additional protection from regulatory and political risks

(by Verity Mitchell)

Rising inflation and interest rates are the biggest challenge for the European infrastructure lending market’s ongoing growth, new research from Nordic Trustee and Ocorian shows.

The study found that 31% of infrastructure and private credit fund managers, investment bankers working in private credit, and infrastructure providers have concerns about inflation and high interest rates increasing hurdle rates of investment. Just 6% point to potential cost overruns on projects as a major challenge for infrastructure lenders.

However, when asked to rank risks to infrastructure projects across Europe, the survey pointed to regulatory and political risks, along with market risks (such as demand for lending and pricing volatility), as the biggest risks. Geopolitical risks, project-specific risks, and the potential for the project to fail to meet expectations ranked lower, but still ahead of financial risks such as leverage and repayment.

The concern about regulatory and political risks has led fund managers, investment bankers and infrastructure firms to look for legal protections, the use of insurance and hedging, as well as government guarantees or backing. The research found investors increasingly favour lower-risk brownfield sites which offer more stability over greenfield projects.

This has implications for the Government seeking to facilitate the Major Water Infrastructure Programme. Some of the 30 large-scale water infrastructure projects set out at PR24 will be greenfield projects. RAPID and Ofwat’s Major Projects team are likely to have to provide both higher hurdle rates of return and extra structural protections to attract project finance.