Overseas Investment in UK energy Infrastructure

Overseas Investment in UK energy Infrastructure

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I’m writing this on the day that Sir Howard Davies’s Airport Commission Group has recommended a 3rd runway at Heathrow. As expected, this is far from a foregone conclusion with the lawyers and politicians set to scrap this out well into the next decade. Let me put those political considerations aside for a minute and look at the economics which propose benefits to the project which are staggering. Whether a runway is added ultimately at Heathrow, Gatwick or even the Thames Estuary let’s assume that the economic benefits for the various schemes are comparable. Sir Howard concludes that Heathrow could add £150bn to GDP over 60 years with 70,000 jobs created. This should ensure somewhere in the South East, eventually, an additional runway will be built. It’s safe to say that £150bn is a considerable return for the UK economy beyond the construction costs. This is an economic no-brainer and it made me think about some objections I’ve heard recently to foreign ownership of key UK infrastructure.

Does it matter who owns and invests in our essential infrastructure? It’s a seemingly emotive question for essential energy assets as it is for airports. I’ll look at energy infrastructure next but let me give you a bit of background on UK Airports. Heathrow is ultimately owned (through BAA) by Ferrovial the Spanish infrastructure group. Gatwick is owned by Global Infrastructure Partners the multinational PE firm headquartered in New York. The third largest UK Airport, Manchester, is owned by a consortium including the Australian Infrastructure fund IFM. Manchester is benefiting from £1bn investment over the next 10 years in its terminal facilities in addition to the £800m ongoing project with Beijing Construction Engineering to enhance the airports hotels, business parks and warehousing facilities. Once again the investment has a multiplier effect on regional and national GDP, in this case creating 16,000 new jobs in the North West of England.

I think I’ve made my point here in that investment in our largest airports have and will create huge gains for the economy. At the same time ownership of and investment in these assets is becoming almost entirely globalised. There is an almost identical trend in the UK energy infrastructure market. I believe that as with airports we have nothing to fear from this trend but in fact should be accelerating the growth in foreign ownership and investment through increasingly attractive government policy.

Over 40% of UK energy and utilities firms now have foreign ownership. The biggest players are Pennsylvania Power and Light (WPD), CKI Holdings (Wales & West Utilities, UKPN, Northumbrian Water and Northern Gas Networks), Berkshire Hathaway (Northern Powergrid) and Ibderola (Scottish Power). The scale of foreign ownership is truly remarkable and this is not including foreign share ownership in UK listed businesses such as SSE plc. This trend is on the up. Before the election David Cameron clearly stated that more of the UKs infrastructure should be open to overseas investment and ownership. Why should this be encouraged and why is it a good thing for the UK energy sector?

First of all it needs to be said that investment in Energy and Utilities infrastructure offer benefits not only through the multiplied effect of the investment through the economy but also across businesses and individuals through improved services and prices. When looking at foreign ownership the Competition and Markets Authority believes “Foreign investment can strengthen competition & help drive down costs”. Further reducing the barriers to foreign ownership and investment can only improve the broader gains we reap from our utilities. The foreign investors are driven by profit but also efficiency, service provision and investment. Three things that were often lacked by nationalised or UK owned utilities. The key thing to look at here for the consumer is how they are regulated not their ownership. Strong regulation provides a safety net to the consumer and an incentive for efficient strong leadership.

Is foreign capital and ownership also a force for good in creating efficient strong leadership within our utilities? Undoubtedly it helps redefine (breakdown) old corporate structures. The redefining of energy and water leadership started with privatisation and has undoubtedly shifted a gear with overseas ownership. Many of the leadership teams of the old nationalised industries were built on a dubious policy of promotion through time served. There was also an equal issue with the most talented, skilled and driven leaders of the day having talent, drive and skill in the wrong places. Not necessarily their fault but the result of a post-war mix of skewed incentives in nationalised industries.

Back to the modern era. The incentives all shifted with privatisation. Transparency led to greater accountability. Not only the consumer but the shareholders and the government (through regulators) demand and expect more. In turn, more was expected of leaders. Leaders now needed to lead change and deliver highly visible results. I believe that foreign ownership provides a more powerful opportunity for strong efficient leadership and change. Like it or not, few could imagine the highly successful UK car industry without the leadership provided by Germany, Japan or U.S.A. Globalisation is giving that needed boost to leadership functions in the energy and water infrastructure sectors too. The foreign investors lack the cultural bias that can prevent the hiring of the best talent, independent of nationality or even sector. It’s visible in many of the industry’s foreign owned firms and really has helped drive global best practice and management efficiency. We even see examples of knowledge and best practice then being re-exported within these groups with our executives moving overseas.

Is there an argument that UK based investors would best serve the industry? It’s an emotive issue largely based around a feeling that UK energy security is undermined by foreign investors working to their own political and financial objectives. It’s a feeling that is largely misplaced due to the legal protection that regulators give to consumers and their powers over the firms prices (and ultimately to influence their business plans). Also because of the regulators powers it takes a particular type of investor to invest in UK assets. They need a long-term view, possibly over several decades where they can reap steady returns. This long-term capital investment provides exactly the stability these utilities need. Without foreign capital the costs of investing and therefore our costs as business owners and consumers would increase.

So what can we expect in the next decade? Most significantly the UK energy infrastructure sector will increasingly be targeted by Chinese investment. The UK currently receives twice as much from China as the next largest EU recipient. The money is flowing into infrastructure, nuclear energy, wind power and PV generation. By 2025 inward investment by China alone could have reached in excess of £40bn. Let’s keep this positive environment for inward investment in infrastructure over the next decade. It’s an opportunity we can’t waste to get ahead of our competitors in leadership development, public service provision and jobs growth.