Monday, July 11, 2016

Politicians strive to reassure infrastructure investors following Brexit vote

[note: Originally published on The Fifth Estate, on 5.7.16.]

 The outlook for investment in housing, infrastructure and green energy projects in the UK remains uncertain following the referendum decision to leave the European Union, but politicians are now seeking to reassure industry and investors.

Over double the number of industry professionals (60 per cent vs 28 per cent) believe that Brexit will have a negative rather than positive long-term effect on the UK construction industry, with 12 per cent unsure, in an ongoing online poll among those in the UK building industry.

But looking closer, the picture becomes different for different sub-sectors and projects, with infrastructure projects, housing projects and green energy projects each facing differing challenges following the vote.

Infrastructure

The UK has plans for several big infrastructure projects, not least HS2 – a new high-speed rail link from London to the north – and Hinkley C nuclear power station, plus a number of offshore wind farms, Crossrail 2, numerous housing projects and the so-called “northern powerhouse” – a plan to rebalance the economy of Britain by investing in the North of England.

If any projects are to fall by the wayside they are likely to be HS2 and the expansion of Heathrow airport, both of which require substantial amounts of public money. Hinkley is also in serious doubt, but for quite a few additional reasons, not least the precarious nature of energy company EDF’s status and uncertainty about the technology chosen for the reactor.

Also at risk are smaller regeneration infrastructure projects (often road improvements) in England worth in total about £5.3 billion (AU$9.3b), according to the Local Government Association.

In Wales, which, unlike Scotland, London, Northern Ireland and Gibraltar, did vote Leave, the future of the £500 million (AU$882m) annual grant Wales receives from the EU is in doubt.

Welsh government’s first minister Carwyn Jones, calling Leave campaigners “clueless”, says major projects are “in difficulty” because of the Brexit vote, and there are “hundreds of vital EU-funded projects right across Wales whose future is now in the balance”. Funding had been allocated to improve main roads and build the South Wales Metro rail link, a project with a £2 billion (AU$3.5b) price tag that would have received £150 million (AU$265m) from the EU.

House building

Housebuilders suffered a big drop in share prices – an average of 18 per cent – following the referendum result, but there has been some recovery since then. Tony Williams, an analyst at Building Value, says he still expects a slowdown in building, but the underlying momentum will still be strong because of the chronic under-supply of homes in the UK. The devaluation of the pound could actually attract foreign buyers to buy bargain property, particularly in London.

As to how sustainable these homes of the future will be, UK Green Building Council policy adviser Richard Twinn pointed to the fact there is nothing in UK legislation saying it has to meet a sustainability target, except for a requirement in the Housing and Planning Act for the secretary of state to “undertake a review” of energy efficiency measures, with no actual action required by UK law.

The UK’s chief energy efficiency policy is derived from the EU’s Energy Performance of Buildings Directive, which requires all new buildings to be nearly zero-energy buildings from 2021, and may now be scrapped.

Other environmental protections at risk that derive from important European Directives protect birds and natural habitats. Developers have often found these a hindrance, but any attempt to roll back such protection will prompt vociferous opposition from environmentalists.

Green energy

The UK green energy sector last year had a market value of £16b (AU$28b) and employed around 117,000 people, according to the Renewable Energy Association. So far, no projects have been cancelled, and the sector is cautiously optimistic.

Marianne Wiinholt, chief financial officer for Denmark’s Dong Energy, which is building some of the UK’s largest offshore wind farms, says the UK’s energy policy is based on the need to replace old coal-fired power stations. She says any subsidies the UK government disburses to assist the construction of offshore wind farms are enshrined in private contracts “and will thus not be affected by the outcome of the EU vote”.

Many turbine blades for North Sea wind farms are made in Hull, on the north-east coast of England. These factories are not currently under threat, at least in the short term, says factory owner Siemens. Most of these big companies have hedging plans in place to cosset them from currency fluctuations.

Terri Wills, chief executive of the World Green Building Council, says that because the economic and environmental case for tackling climate change has in many ways already been won amongst policymakers, Brexit will make little difference.

“There is a sense that the green agenda is good for business, good for retaining amazing staff, good for us being strong corporate citizens looking to the long term and good for making sure corporations are resilient. So there is a business case for this. I think the market just wants to see that the government recognises that.”

The government has gone some way towards providing this recognition by last week adopting the 2050 emissions reduction target recommended by the Committee on Climate Change and agreeing with its damning report on its own progress, showing that it continues to be committed to the UK’s Climate Change Act and remain a leader on climate action.

Confidence building

Politicians have, in the last few days, been taking other steps to rebuild confidence in British investment plans.

Government infrastructure commissioner Sadie Morgan attempted to calm fears by saying she has “every confidence” projects will go ahead – because infrastructure spending is critical to lifting the country out of the Brexit crisis.

“As far as the [National Infrastructure Commission] is concerned, it’s business as usual,” she told a House of Commons reception for the construction industry.

“If anything is going to get us out of this hole it’s infrastructure.”

MP Conor McGinn, chair of the All Party Parliamentary Group on Construction and Urban Development, told those at the gathering that the country was entering “really challenging and unprecedented times” so it was crucial for the government to “work in partnership” with construction firms to overcome the challenges.

Chancellor George Osborne on Monday set out a five-point plan that includes a proposal to set the level of corporation tax at under 15 per cent – the lowest of any major economy – to stimulate investment including in the north of England. The decision to leave the EU potentially threatens the UK’s relationship with China, which Osborne had been at pains to build in order to attract inward investment. Osborne has said he will reassure China and other countries that Britain is still open for business.

He will be encouraged by a bounce back in the value of the top British shares index on Monday, led by mining stocks, and with the blue-chip FTSE 100 index at its highest level since August 2015, following a slump after the referendum result. The Sterling’s weakness since then has, reports investing.com, provided a cushion to the FTSE 100, “since many of the index’s international companies can benefit from a weaker pound which would help exports”.

Finally, one of the contenders for the leader of the Conservative Party, Stephen Crabb, has proposed a £100bn “Growing Britain Fund”. This would use government borrowing to fund infrastructure investment and invest in projects such as flood defences, a national fibre-optic broadband network, Crossrail 2, social housing, school buildings and new prisons.

European reaction

Further afield, the inward looking referendum result has jolted confidence around the world in the values formerly associated with not only Britain but the whole of the EU: pluralism, non-discrimination, tolerance, justice, solidarity, equality and a commitment to sustainable development and poverty eradication globally.

EU leaders who gathered in Brussels for a crisis summit last week were almost unanimous in their opinions about how the EU needs to change as a result. There can no longer be ‘business as usual”, they said. “Europe needs change.”

“Nothing would be worse than the status quo.”

But there has been no sign yet of these feelings being translated into action. The first post-Brexit vote decision made in Brussels was to bow to corporate lobbying and extend the licence of the controversial toxic herbicide glyphosate for another 18 months. This “shows the executive is failing to learn the clear lesson that the EU needs to finally start listening to its citizens again,” said Bart Staes, a Belgian Green MEP.

This was a view even felt by the Commission itself, and is a result of the complex, often remote and unaccountable way in which decisions can be made at the European level.

Until this changes, the public in many other member countries will continue to demand their own referendum, like Britain’s, putting the European project, which has brought peace, stability and prosperity to the continent for the last 50 years, under threat.

All in all, it seems that investors are going to have to live with uncertainty for some time to come.

David Thorpe is the author of:
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