Brexit: the implications for Energy & Infrastructure investment in the United Kingdom
One impact of Brexit might be that the withdrawal of EIB, EFSI and other EU funds could create opportunities for some investors to plug the gap on those projects that would have been funded from those sources so long as the wider investment climate remains buoyant. Conversely the stabilising and facilitating effects of such funds is likely to be missed in future periods of crisis unless effective replacement sources of investment are put in place by the UK government. UK infrastructure has in the past greatly benefitted from attracting expertise and competitive financing from companies and institutions from all around the world. In 2015, the last full year for the Brexit referendum, the European Investment Bank (EIB) made investments totalling €7.8bn in the UK, with energy projects accounting for 24% of this figure, and transport and water making up 22% and 21% respectively. In addition, in areas of the UK where the GDP is less than 75% of the EU average, they received significant funding for infrastructure improvements from the European Regional Development Fund. For example, the Cornwall and Isles of Scilly Growth Programme, running from 2014-2020, is worth €100m per year to the region.
Since the referendum decision to leave the EU the EIB has decided that it will no longer accept the jurisdiction of English courts when entering into documentation relating to EU investments and will only accept English law governing its contracts in exceptional cases. This is a significant departure from the period running up to the Brexit referendum where a significant proportion of its documentation, even when there was no nexus with the United Kingdom, was governed by English law and disputes were submitted to English courts. Similarly on the funding side the EIB in practice, notwithstanding what its published policies might say, no longer participates in new funding in the UK although it has, we understand, participated in some refinancings of existing transactions. In an environment where credit is in plentiful supply it can be argued that the EIB's retreat from the UK lending market has had no appreciable impact.
A growing problem for the last few years in the international energy and infrastructure markets has been an insufficient supply of projects that investors deem to be “investible”. The majority of European focused investors have traditionally concentrated their attention on a list of “Old EU” countries which typically included the UK, Benelux, the Nordics, Germany and France and more recently Spain and Italy again. 2018 was a very good year for fundraising for both debt and equity infrastructure funds and the market expects 2019 to be, if anything, better. Increasingly the UK is now being left off the list. This is in part because of the uncertainty created by the chaotic Brexit process but it also masks a more fundamental shift in the market’s perception of the UK as a reliable place to invest in energy and infrastructure assets.
The UK government, independently of policies related to Brexit, has been moving away from using private ownership and finance as a tool for infrastructure development and new private sector investment in the U.K.'s infrastructure has dropped off significantly with rumours of some assets being put up for sale and failing to find buyers and other assets that are put up for sale, for example Gatwick airport, achieving prices lower than the vendors might otherwise have anticipated. This cooling or lack of interest in both the primary and secondary infrastructure markets in the UK at a time of unprecedented international investment appetite is partly due to Brexit related uncertainty but arguably more to do with a less positive regulatory and political climate which even under the Coalition and current Conservative governments has been cooling towards private sector involvement in the energy and infrastructure markets and has adopted some of the rhetoric of the critics of utility privatisations accusing the utility companies of exploiting their customers . The utility markets in the UK have significantly underperformed their international benchmarks and the market has been waking up to the prospect that if the shadow Chancellor's announcements become reality and the current Labour opposition get into power, the political climate will be outright hostile. It is a stated Labour party policy priority to seek to nationalise utility and PPP interests and the shadow Chancellor's stated intention that Parliament should determine levels of compensation for investors based upon their perceived record of custodianship of the nationalised assets as opposed to common accepted valuation methods or contractually agreed terms.
What is clear is that Brexit is spelling a period of significant uncertainty for energy and infrastructure investment in the UK economy. Investors and financial markets generally do not like uncertainty and therefore the investment climate has been and will continue, at least in in the short to medium term, to be impaired. This is likely to lead to the debt needed for infrastructure investment becoming more expensive. Because infrastructure investments are, by their nature, long term, an uncertain economic climate could lead to some investments being postponed or even abandoned. One of the most prominent planned investments in the UK’s economy, which has already been running behind schedule, is the development of Hinckley Point nuclear power station by EdF and Chinese investors. The possibility of EdF emulating Toshiba and Hitachi and withdrawing from their nuclear project would seem to be more likely in a post Brexit world given the very significant investment this project would indirectly require from the French tax payer.
One of the promised advantages of a Brexit promoted by its supporters is that the UK will be free to strike bilateral deals with other countries and, by doing so, will fare better than it would have done as part of an EU bloc. Undoubtedly the freedom to tailor international treaties and trade agreements to suit the UK’s needs, without having to compromise with EU partner interests which may not be aligned with those of the UK, has the potential to bring benefits to the UK economy. However, whether the UK is able to place itself on the priority list of those countries with whom the UK is most likely to want to enter into treaties and trade agreements will have to be seen.
The argument run at the time of the referendum by the Remain supporters that many international businesses from outside the EU who have their EU headquarters in the UK will either leave the UK or similar businesses will not pick the UK for their European headquarters in future is increasingly becoming a reality with financial institutions scrambling to ensure they do not lose their passporting rights and manufacturers, such as Nissan and Dyson, choosing to manufacture their products elsewhere. However, as far as energy and infrastructure investing in the UK is concerned, it is probably just as much the hostile policies and the threat of future nationalisation policies outlined above that are impacting the reduction in interest than the prospect of Brexit and withdrawal of EU institutional funding itself.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.