Brexit vote will halt infrastructure investment for two years

A vote for Brexit in the forthcoming EU referendum would halt investment for infrastructure for two years or more after the vote, say a majority of infrastructure investors active in the UK market according to a new survey carried out by S&P Global Ratings.

In a report, Post-Brexit, Long-Term Funding Is UK Infrastructure Investors’ Biggest Concern, S&P are clear that a no vote would be bad for UK infrastructure investment. “It is said that perception is reality, and based on what investors are telling us, the reality is that a Brexit scenario could put long-term funding for UK infrastructure at risk," said S&P Global Ratings managing director and head of infrastructure research, Michael Wilkins.

According to the survey, in the short term, infrastructure investors are most worried about currency volatility. About one-half of respondents cite concerns about macroeconomic turbulence and political instability. That is of course if Brexit happens at all. Less than half of the respondents believe the UK is likely or very likely to leave the EU but reflecting the current feeling of many in the business community, it is the uncertainty about the decision that is giving rise to risks for both domestic and foreign investors.

The survey garnered opinions in the latter half of April from 51 investors in the UK and abroad, representing mostly infrastructure funds, investment management companies, insurance companies, hedge funds, pension funds, and sovereign wealth funds.  

S&P believe that the worries about political instability and macroeconomic turbulence are unlikely to directly impinge on investment, but rather postpone decisions to make investments, as investors delay any decisions until the UK-EU relationship is renegotiated or until the economy settles down. 

The results of the survey come hard on the heels of claims by Prime Minister David Cameron this week that a Brexit vote would mean that the UK will lose billions of pounds in infrastructure funding if it leaves EU. An exit from the EU would terminate Britain’s membership of the European Investment Bank (EIB), an organisation which has invested more than £16 billion in UK projects over the past three years.

Last week, the EIB announced funding of £280 million for the expansion of facilities at University College London and this week it confirmed a £700 million injection of finance for the Thames Tideway Tunnel. Speaking this week, David Cameron said that leaving the EU would have a “devastating impact on future infrastructure investment” as a result of the UK’s expulsion from the European Investment Bank.

“Vital projects across every region of the UK have been financed by the EIB,” said Cameron. “These make a huge difference locally, nationally, and sometimes globally – from the purchase of 65 new Super Express Trains for the East Coast Main Line; to investment in development of emission control technologies in Hertfordshire; to extension of the M8 motorway between Edinburgh and Glasgow; to the expansion of Oxford University’s research and teaching facilities.

“Not only would leaving the EU see us wave goodbye to this crucial funding – but, with a smaller economy hit by new trading barriers and job losses, it’s unlikely we’d be able to find that money from alternative sources. Infrastructure affects the competitiveness of every business and the prosperity of every family in the country – but a leave vote on 23 June risks putting the brakes on the infrastructure investment we need and shifting our economy into reverse.”

The EIB operates outside of the EU budget and is financially autonomous. The UK is its joint-largest shareholder and is a significant beneficiary. The bank offers long-term investment loans to EU member states on favourable terms and its mission is to support economic growth across Europe.

Since 2012, the UK has more than doubled the volume of investment it receives from the EIB and in 2015 EIB lending in the UK totalled a record €7.77 billion, representing 11.2% of its overall lending to EU countries. In 2015, the UK was also one or the largest beneficiaries of the EIB’s new special investment facility, the European Fund for Strategic Investments (EFSI), and received the largest single EFSI-backed loan, a £360 million investment in the smart meter roll-out by British Gas.

Both the S&P survey results and the PM’s claims about the EIB further highlight the dangers for the infrastructure sector of a vote for Brexit and are sure to harden opinion amongst those in the industry that want to see the UK remain in the EU.

With just over a month to go until the EU referendum, expect more claim and counter claim as the campaign hots up.