My way, not the highway
Jeroen Dijsselbloem was never going to have an easy time as the Dutch minister of finance, thanks to the country’s slowing economic growth and the need for cuts to bring deficit spending under the European Union’s 3% threshold. Now, however, he has made an enemy of the €1trn domestic pensions market after opting not to proceed with plans to inflation-proof any investments made in Dutch infrastructure.
A €145m pilot project to expand the N33 road near Groningen from single to dual carriageway – initiated by Dijsselbloem’s predecessor Jan Kees de Jager – while offering those providing the capital inflation-linked returns had been seen, according to APG CIO Angelien Kemna, as a signal the ministry had overcome its long-standing aversion of inflation-linking debt. Reacting to the decision not to roll out inflation-proofing across future projects, Kemna said: “We are very surprised the minister considers the pilot as a success, but turned down the inflation premium for reasons of principle, closing a source of long-term financing as a result.”
The chairman of civil service fund ABP, Henk Brouwer, noted that Dutch infrastructure would only be a viable investment for the €292bn fund if the conditions were right, while PGGM chief executive Else Bos stressed that inflation protection would be needed to “mobilise sufficient assets from the pensions sector” to meet the country’s infrastructure needs.
The absence of inflation-linked Dutch debt has long been a sore spot for the industry, Dennis van Ek, principal investment consultant at Mercer, says. “In the Netherlands, today, the opportunities for Dutch pension funds to invest in assets including a price inflation correction are limited.” He says the funds will have an ambition to meet inflation, although the pension framework makes increases in line with living costs discretionary based on funding. But he says that, under changes to the FTK coming into force from January 2015, indexation is set to become an even more important issue as a real contract with inflation-proofing takes effect.
“Already, pension funds are looking for euro-based investments with inflation linkage, realising this market may be relatively small compared with the overall need,” he added, noting that if Dutch infrastructure does lose the linkage, then its appeal could be lost.
“Obviously, the love has to come from two sides. The Dutch government should not be surprised if Dutch pension funds were to look for infrastructure investments elsewhere, with inflation linkage.”
PGGM, for one, has already been investing capital elsewhere, much to the joy of the struggling Irish government. Its joint venture with Royal BAM, which had already provided the remaining 15% of capital for the N33 project not put up by ABP, was earlier this year involved in a €282m public-private partnership to construct roads in Ireland. The €20m investment with PGGM BAM Infrastructure Cooperatie followed on from a €15m commitment to a PPP for school construction in the country.
Van Ek notes that investors will need to be prepared for mixed signals from finance departments, driven both by a desire for private capital but also by the need to keep costs down – with Spain going so far as to amend feed-in tariffs for renewable energy retroactively, cutting returns for investments. “These experiences notwithstanding,” he says, “given wider portfolio imperatives at play for many institutional investors in Europe, we expect the bulk of local investor interest to be focused on core assets in industries with proven regulatory regimes and in countries with relatively better economic and fiscal health.”
The Netherlands may not yet have the proven regulatory regime, but, despite its decision not to continue beyond the N33 project, both ABP and PGGM will see their commitments increase in line with inflation.