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Norges backs limiting infra to energy, communications and transport

The manager of Norway’s NOK7.5trn (€826bn) oil fund has written to the country’s finance ministry suggesting how it could reduce risk in its hypothetical investment in infrastructure, as government decision makers once more ponder allowing the sovereign wealth fund to add the asset class to its portfolio.

Norges Bank, the Nordic country’s central bank, and its asset management unit Norges Bank Investment Management (NBIM) – which exists to run the Government Pension Fund Global (GPFG) – said it believed large institutional investors already making private investments in infrastructure managed risk partly by putting limits on what they were prepared to invest in.

NBIM chief executive Yngve Slyngstad and central bank governor Øystein Olsen said in the letter: “Little information is publicly available on how these investors manage the risk unlisted infrastructure investments entail. 

“Our impression is that this risk is normally managed through a combination of concrete investment restrictions, thorough due diligence ahead of investments, and continuous follow-up.”

Outlining a set of investment restrictions the fund could adopt, they said: “The risk in unlisted infrastructure investments can be restricted by investing in assets in the energy, communications and transport sectors in developed markets in Europe and North America. 

“Collaboration with partners can be made a requirement, and limits can be set for the fund’s ownership stake.”

The central bank also responded to the ministry’s request for it to assess whether unlisted infrastructure investments could be adapted to the new benchmark index for the GPFG – which invests Norway’s oil revenue – which is to consist only of listed equities and bonds, with real estate investments included in the limit for tracking error.

Olsen and Slyngstad said the bank thought unlisted infrastructure should be subject to the same kind of regulation as the fund’s unlisted property investments.

“This means unlisted infrastructure investments will not form part of the benchmark index but will be included in the limit for tracking error,” they said in the letter. 

This type of framework would let NBIM manage market and currency risk in the fund at an overall level, they said.

If the fund is allowed to invest in infrastructure, the men said the bank would approach investment decisions and build up expertise here gradually – in the same way it had for its first forays into unlisted property.

“Infrastructure investments will be small in number but high in value,” they said, adding that, though cost intensive and needing different follow up to listed investments, unlisted infrastructure could be handled by far fewer staff than could unlisted real estate investment.

Lastly, Norges Bank told the ministry it would be just as transparent with its unlisted infrastructure investment, as it was with bonds, equities and real estate.

“The bank will provide the same detailed information on the fund’s investments in unlisted infrastructure as on the fund’s other investments,” Olsen and Slyngstad wrote.

In the 2015 white paper on the management of the GFPG, published in April 2016, the Norwegian government decided that the fund should not be allowed at that point to include unlisted infrastructure in its investment mix, despite NBIM’s recommendation.

It is now reconsidering the matter as part of its work on the 2016 report on the fund and has requested input from various parties to support this work, including this latest letter from the fund’s management and a report from McKinsey released earlier this month.

 

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