The Infrastructure in the United Kingdom
Numerous infrastructure deals have come to the United Kingdom since the Brexit vote passed two years ago. This is despite the growing uncertainty and the regulatory and political risks. The uncertainty has caused many people to question how much the investors are willing to invest. Infrastructure assets as opposed to real estate assets appear to have more regulatory and government interference. The collapse of Carillion’s last year triggered questions regarding (PFI) private finance initiative contracts. Hundreds of infrastructure projects within the United Kingdom are supported by these contracts. The government has announced they will no longer engage in new PFI contracts.
The Opposition Labour Government
The opposition Labour government is planning to regain control of the existing projects. This political move may turn investors away from the United Kingdom. The public-private partnerships have delivered investments in private sector capital for £56bn for more than 700 infrastructure projects in the United Kingdom. S&P Global Ratings stated there are concerns other than the turn in the credit cycle and the slowing of the global economy. Investors in the infrastructure are concerned about the political risks impacting regulatory and contractual stability, sovereign credit quality and country risk. S&P believes the operational consequences will be significant for a no-deal Brexit including new license procedures, regulatory authorizations, new customs and border controls.
The transportation infrastructure assets may be affected by the operating environment, uncertainty and exposure to the EU-UK traffic. The assets are particularly sensitive to Brexit-related disruptions because passenger trade and travel in rail and aviation have a close link to economic growth, currency fluctuations and disposable incomes. Some of the European institutional investors have become concerned about the impact on investments in the United Kingdom infrastructure due to a disorderly Brexit.
The Reasons for Concern
There are two key reasons for concern. A disorderly Brexit may lead to sterling depreciating further and unhedged United Kingdom assets may decrease the value of the euro. A lot of European infrastructure investors will not hedge the exchange rate for United Kingdom assets. This has led to a limit of new investments from some of the European investors. The second concern is the United Kingdom infrastructure and economy being negatively impacted by a disorderly Brexit due to links to UK-Europe trade. This has resulted in limiting new investments and potentially limiting the exposure to raise new funds. The infrastructure assets usually have a stable and robust performance through the economic cycles due to their long term fundamentals and essential nature.
The Brexit Negotiations
The outcome of the Brexit negotiations may impact the economies of Europe and the United Kingdom. If trade is affected, this could trigger economic uncertainties and hurdles. This may result in experienced investors seeking investments with long term value. If the United Kingdom leaves the EU, they will no longer belong to the (EIB)
European Investment Bank. This means access to EIB funding will be lost. This possibility led a committee from the House of Lords to ask the government to consider establishing a UK infrastructure bank. According to a sub-committee from EU financial affairs, in excess of €118bn has been placed by the EIB in numerous sectors in the United Kingdom including housing, energy, water and transport.
The impact of a disorderly Brexit may negatively affect the economic activity of the United Kingdom such as airports or UK-Europe trade including seaports. The assets without a direct link to the economy include regulated utilities and water. If sterling depreciates, inflation may increase. Despite the speculation and fears of the media, airports in the United Kingdom have shown strong growth after the Brexit announcement. The most profitable and largest aviation market in Europe is still London. Numerous economists are expecting a slowdown. Throughout history, airports have been resilient against economic downturns. Travel is one of the last areas the people are willing to sacrifice.
The Growth of the United Kingdom Airport Sector
Although the political perspective is uncertainty, the European Union and European governments have acknowledged the importance of stable access across the aviation markets. The belief is the political environment will not affect the buoyancy of the sector. Many of the investors view infrastructure as a means of providing insulation from the cycle of business. Despite the potential consequences of Brexit, the investors see the benefits of allocation. Challenges are a part of uncertainty, but there are still opportunities among the changing market conditions. There are significant opportunities for investors with the experience, intellectual capital and insight to identify the investment opportunities in the United Kingdom. This may support the regeneration and evolution of the infrastructure while providing investors with value.
On March 29th, the United Kingdom will be leaving the EU. This is when the remote and immediate effects of Brexit regarding infrastructure investments will become clear. According to one investor, no deals will be signed on March 29th, just in case.