BBI may demote NZ over Vector

Steven Boulton

International investor Babcock & Brown Infrastructure, owner of the country's second-largest electricity distributor, Powerco, warns that regulatory uncertainty has knocked New Zealand to the bottom of its list of investment destinations.

BBI chief executive Steve Boulton said the Commerce Commission's August clampdown on electricity lines company Vector had undermined international investor confidence.

BBI, which bought Powerco for nearly $680 million in 2004, rated the 14 regulatory jurisdictions in which it invests against principles of predictability, accountability, transparency and whether the regime was forward looking and gave a competitive commercial return.

"When we bought into Powerco any reasonable person could not have predicted the position the Commerce Commission is now taking," he said.

Around $400 million has been wiped from Vector's sharemarket value since the competition watchdog declared it was delivering power cheaply to Auckland residential users at the expense of others, particularly in Wellington.

Its shares closed on Friday at $2.25.

Investors were surprised especially since the move came just two days after the Government issued a directive - to which the commission was required to "have regard" - that infrastructure companies should have the confidence to invest, that they were entitled to commercially realistic rates of return and that they should have no fear of investment.

This directive - which also reiterated the commission's role in ensuring infrastructure companies were held accountable for their investments and consumers were not disadvantaged - gave Vector's shares a big lift.

Vector said the action came "out of the blue" and has since put on hold or is reviewing some $630 million of investment, while other electricity companies are following suit. It is also considering legal remedies.

Boulton said BBI had been encouraged by the policy statement, believing it lifted incentives for further investment. He agreed the commission's move on Vector was inconsistent with that statement.

"We consider that this inconsistency and the non-conformance with key regulatory principles ... will lead to a gradual diminishing of capital investment, adverse long-term outcomes for New Zealand consumers and for economic growth as a whole," Boulton said.

The commission's view that 7.35 per cent was adequate return on capital invested in networks was inconsistent with overseas experience and not sufficient to encourage investment in New Zealand's infrastructure.

"[7.35 per cent] is only approximately 140 basis points above the 10-year Government bond rate. In other jurisdictions in which BBI invests, the spread is in a range of 300bp to 400bp above the risk-free rate in the relevant jurisdiction.

"Sources of capital are finite. An investor chooses where to invest based on an assessment of returns available weighed against the risks involved. In the current regulatory environment in New Zealand, BBI considers that New Zealand ranks at the lower end of jurisdictions conducive to infrastructure investment."

Boulton said the commission was not giving companies full credit for every dollar they invested in their networks. As a result, asset values against which returns are measured were artificially low, further depressing allowable returns.

"No rational investor would proceed with asset replacement if the asset is valued at less than actual cost," Boulton said.

The Government should allow the commission's decisions to be subject to a review of substance, he said.

"The Commerce Commission decisions have no adequate checks and balances to ensure that its discretion is exercised fairly, rationally and appropriately, in conformance with sound regulatory principles and practice."


Babcock And Brown Infrastructure

* Part of Australian investment bank Babcock & Brown.

* A specialist infrastructure entity which provides investors access to a diversified portfolio of quality infrastructure assets.

* Assets in energy distribution and transmission, transport infrastructure and power generation.

* Market value A$2.4 billion.