Chapter 17 - Investing in Infrastructures: What Financial Markets Want

Abstract

The chapter aims at answering a simple question: What is it that makes investors want to put their money in new (existing) infrastructures? The question is simple but the answer needs to be more articulated. To this end the chapter gives first a historical perspective of listed utilities in Europe to see what lessons can be learnt, which mistakes have been made, and why investors think the way they think. The institutional investors’ market is then framed in terms of size and internal organization so as to gauge their appetite for risk as well as the limits and benefits for regulators and countries wanting to attract them. The four key conditions that any regulatory regime should have are set out in order to release the maximum benefits to consumers and the lowest burden to tax payers. Based on the European experience, conclusions for the Middle East and North African (MENA) countries are drawn. In essence, given the need for strong investments in the region, it is suggested that long-term contracts should be employed as opposed to regulated asset-based (RAB) tariffs that seem to better suit the more mature markets (for infrastructures). However, transparency and consistency of regulation should always be achieved as a prerequisite to minimizing investors’ required rate of return and hence the cost for society as a whole.