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Brexit & UK infrastructure: what next?

Prime Minister David Cameron has resigned and home secretary Theresa May is the United Kingdom’s new leader. With several twists and turns over the past few weeks, Brexit has already had a dramatic impact on British politics. We focus on what it might mean for UK infrastructure.

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The consistent message from Government is that the UK is still open for business and infrastructure projects ‘in the bucket’ should continue as before. In terms of Brexit, the future hinges on Theresa May’s road map to negotiate the country’s exit from the European Union (EU). Global markets reacted to the ‘Leave’ vote with shock but began to stabilize after Cameron said it would be up to the new Prime Minister to trigger Article 50 formalizing the UK’s intention to leave the EU. This allows companies time to study the impacts of Brexit and prepare for the changes that might impact their businesses. Critically, it also gives politicians and civil servants more time to develop their thinking.

Funding

Public finances were tight before Brexit and remain so – if not more. The downgrade of the UK sovereign ratings could affect the gilt rates and has already impacted local authority and university projects. This could be extended to housing associations. Longer-term, the UK economy is still a safe bet and there may be a flight to infrastructure investments as volatility in other sectors increases. However, with limited opportunities to invest, supply is unlikely to outstrip the demand providing a brake to increasing pricing. The extent to which European Investment Bank (EIB) funding will be available going forward is unclear. From 2011 to 2015 the EIB invested more than €29 billion in the British economy, and the bank has indicated that it is currently proceeding with ‘business as usual’. EIB does lend to projects in the European Economic Area (EEA), but not at the same level as within the EU. If the EIB were to decrease its lending into the UK market, there are more expensive commercial options available to fill that gap but you would see a direct impact on pricing. The UK has become accustomed to low interest rates and any increase will have an impact on the affordability of future projects.

Procurement

In terms of procurement and environmental standards, UK public bodies will no longer be subject to EU rules, and may have greater flexibility. However, countries with access to the EEA single market typically follow EU procurement rules and use the Official Journal of the European Union (OJEU). In any event, the UK Government favors an open playing field which includes non-public providers and thus regulated procurements and competitions are likely to continue to be implemented to show that decisions are fair and in the public’s interest.

People and skills

Free movement and the future status of EU nationals living in the UK are two of the core issues of Brexit uncertainty.International businesses benefit massively by the mobility of labor and being able to attract talent from across the world – not just Europe. Infrastructure businesses are no different. Ten percent of construction workers are reported as being born outside of the UK. Whether you run a hospital and need access to doctors or a building site and need access to a technically skilled labor force, the reality is that immigration has served to fill the gap for many UK businesses. The uncertainty will be felt immediately as potential employees and employers weigh options and may choose to migrate to more stable economic environments.

Transport

We have already seen the decision on Heathrow’s third runway pushed back and calls for the HS2 bill to also be put on hold following publication of a post-Brexit National Audit Office report critical of the project’s costs and timelines.

Utilities

Brexit will have limited or no impact on inward-focused regulated utilities assuming current regulatory frameworks remain in place. However, some EU regulations directly affect these sectors – such as the European Water Framework Directive – and are key areas to watch post-Brexit. There is an expectation of a rise in consumer price index (CPI) in the short term, and any increase in inflation will have a positive impact on the cashflows of regulated utilities.

Power

There is a cautious sense that fundamentals of UK energy markets haven’t changed but national policy remains a challenge. There is uncertainty whether the new Government will keep EU targets on low carbon impacting renewables and nuclear power development. In the meantime, we may see a push for new gas capacity and interconnectors. As with transport, more will depend on the new Government’s energy priorities than EU negotiations.

Social infrastructure

Housing remains the biggest issue for the new London Mayor Sadiq Khan. Concerns around GDP growth have already hit house builders in the UK, the new Government will need to priorities this sector to prevent it from spiraling into further disarray during EU negotiations.

Healthcare was a major campaign point for the ‘Leave’ camp who wanted to divert some of the money the UK sent to Europe into the National Health Service (NHS). This will be for the new PM to consider how the funds which otherwise would have gone to the EU, will be re-channeled. Restrictions on free movement may also have an impact on education infrastructure. Fewer foreign students would help ease capacity constraints in primary and secondary schools, but it is generally bad news for universities where non-UK students pay higher tuition and have been an attractive revenue resource.

Devolution

Local authorities are taking greater economic risk and devolution seems more likely now than ever before. This was demonstrated by the regional split of the referendum and it is hard to see how any new political appointment will not put the rebalancing of the UK as priority. The critical question locally to ask is: “What does the appetite for devolution look like in the context of uncertainly and shrinking GDP?”

Conclusion

Things are moving fast, George Osborne has abandoned his target to restore Government finances to a surplus by 2020, and pledged to reduce the rate of corporation tax to below 15 percent – the lowest of any major economy. With an acceptance of running reduced surpluses year-on-year, there will be more latitude to stimulate the economy through carefully targeted higher public spending and lower taxation. This together with the actions of the Bank of England are all targeted at trying to reduce any dip in GDP.

Maintaining the impetus on new infrastructure projects is also likely to be important. However, there may be greater financial scrutiny and need for assurance to ensure projects stay on budget and schedule during their pre-construction and construction phases. There is a strong desire amongst public and private sector businesses alike to reduce the total cost of ownership of their infrastructure assets.

Infrastructure will always be heavily driven by Government policy and regulatory actions. Although Brexit negotiations will be the new Prime Minister’s highest priority – stabilizing the economy and investing in infrastructure should also be on the agenda, the extent to which will only become apparent after the leadership campaign plays out.

This article is a commentary on the current state of Brexit and its implications on the UK's infrastructure market and broader economy. This content will be updated according to new developments.

This article is also part of the Foresight series; a collection of easy to read, short insights into trends and issues facing the infrastructure industry. Read other recent Foresight articles here.

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