FINANCIAL STRUGGLES
There are concerns that the European Investment Bank’s (EIB) recent decision to pull the plug on funding could put a dent in Hammond’s ambitions. Since 2012, the UK has more than doubled the volume of investment received from the EIB and last year it was the beneficiary of a record €7.7bn, representing 11.2% of its overall lending to EU countries. The UK was also one of the largest recipients of the EIB’s new special investment facility, the European Fund for Strategic Investments (EFSI) – a £360m investment in the smart meter roll-out by British Gas.
Other notable EIB-backed projects over the past three years include the extension of the M8 motorway between Edinburgh and Glasgow and a £70m loan to the Thames Tideway Tunnel, a super sewer which is one of the biggest projects in London.
The list also included £200m to improve Oxford University’s research and teaching, £400m for social housing in London and £150m to expand the Port of Liverpool.
Currently, there is almost €50bn (£45bn) of finance the EIB earmarked for British projects and while contractual arrangements will protect existing projects, new initiatives may increasingly struggle to obtain finance from the bank. This is because only EU members can be shareholders and green light funding to other countries within the eurozone. With a 16% stake, the UK is the joint largest shareholder with Germany, France and Italy, and if Prime Minister Theresa May pursues a clean break from the single market, the country could be treated like other non-EU advanced countries. For example, Norway and Switzerland received roughly a tenth of the scale of its lending relative to the size of their economies.
A MIXED PICTURE
These issues are highlighted in a recent note by ratings agency S&P which warns that private investment may be under threat and infrastructure companies could be hit by a reduction in capital investment from both domestic and foreign investors. This is not just down to the withdrawal of EIB funding, but also the uncertainty tied to possible lengthy re-negotiation periods over the terms of exit and replacement trade treaties with the UK’s partners.
Georg Inderst, an independent consultant who has written working papers for the EIB, is cautious that the UK’s attractiveness may wane, particularly to overseas investors who have historically put the UK as their number one infrastructure destination.
“For the short term, I expect life to go on as usual because the UK has not left yet and the money is still there as global infrastructure funds have a lot of dry powder. Over the longer term I am a bit more wary.”
This can be attributed to both possible economic turmoil as well as internal strife if Scotland calls for a second referendum to leave the UK over a hard Brexit. Moreover, the construction industry which relies heavily on overseas labour may suffer skills shortages if there are any restrictions to free movement within the EU.
Guy Hopgood, associate, private markets at bfinance, also paints a mixed picture. He notes that on the one hand, the increasingly aggressive pricing of the asset class could lead investors to search for opportunities in other markets. On the other, the ambiguity posed by Brexit could lead to weaker economic growth which would dampen the prospects for infrastructure performance.
“Perhaps a more fundamental concern for investors in UK infrastructure is the potential regulatory uncertainty that could arise from an increasingly protectionist world,” Hopgood adds. “This is a major reason for many potential new investors to hold back for longer.”
For now, the inflows are healthy. In fact, bfinance data shows that 2016 is set to be a record year for infrastructure fund raising, with over £50bn of capital due to be amassed before the end of the year. Although tiny in comparison with the need for infrastructure spending, the increase reflects the growing appetite from investors to participate in the asset class, according to Hopgood.
