Brexit: the implications for Projects and project financings
In 2015, 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. There are also several UK projects in the pipeline due to be funded or guaranteed by the European Fund for Strategic Investments (EFSI), which aims to mobilise at least €315bn of additional investment in the EU over the next three years (also known as the "Juncker Plan"). The £1bn roll-out of more than seven million smart meters in the UK is the largest project so far to be backed by the EFSI, with the EIB providing £360m alongside six major international commercial banks.
In addition, areas of the UK where the GDP is less than 75% of the EU average, have 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.
It is unclear how UK’s Brexit will affect projects that have received or, more importantly, expect to receive funding or guarantees from EU institutions. At the least it is very probable that the UK will have to find replacement funding for much if not all of the new project and infrastructure finance originating from the EU institutions. Whether the UK’s pre-Brexit forecast net contribution to the EU budget at £11.1bn for 2016 and funds which would have been contributed in following years will be re-deployed to plug that gap or perhaps fund a national infrastructure investment bank to support projects in a way that resembles the EIB support remains to be seen.
A growing problem for the last few years in the international energy and infrastructure markets has been insufficient supply of projects that investors deem to be “good” which are being brought to market in European countries which the majority of those investors wish to invest in (this list of countries has typically included the UK, Benelux, the Nordics, Germany and France). The withdrawal of EIB, EFSI and other EU funds may create opportunities for some investors to plug the gap on those projects so long as the wider investment climate remains buoyant but conversely the stabilising and facilitating effects of such funds is likely to be missed in future periods of crisis.
UK infrastructure has in the past greatly benefitted from attracting expertise and competitive financing from companies and institutions from all around the world.
What is clear is that Brexit will spell a period of significant uncertainty for the UK economy (and probably other EU economies). Investors and financial markets generally do not like uncertainty and therefore the investment climate will, in the short to medium term, be impaired, which 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 a withdrawal by EdF from the 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 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 partners 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 now have to be seen.
Another argument run by the Remain supporters was 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. This argument is often countered by Brexit supporters by the observation that the UK is still the world’s fifth largest economy and once Brexit has been put in place the UK will have the freedom to preserve its attractiveness as an investment destination and thus overcome this problem. The truth of this prediction will now have to be tested.
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