It is bitterly ironic that, having identified political risk as the first of five key risks covered in our upcoming July/August ‘In Focus’ special, we have woken up on 24 June to what is almost certainly the defining political decision of this generation – Britain’s vote to leave the EU after 43 years of membership.
That this earthquake was unleashed by one of the world’s oldest democracies and one of its foremost economic powerhouses comprehensively rules out the idea that high-level political risk is the preserve of less developed countries. Brazil may have a suspended president going through impeachment proceedings, but the UK is about to embark on an unprecedented divorce that will see it disentangle itself from decades of rules and regulations. That will generate an unprecedented level of uncertainly for years to come – precisely the sentiment investors hate the most.
So what does this mean for infrastructure? Well, for UK infrastructure, it almost certainly means less investment. According to a pre-Brexit S&P survey of 51 infrastructure investors, 71 percent of respondents expected investment in the UK to be hit in the two years following the vote, with 47 percent believing it would be reduced for even longer.
The European Investment Bank (EIB), which has invested over €19 billion in UK infrastructure over the last eight years, will probably reduce its funding for UK projects, although not immediately. However, there is the larger question of the status of the bank’s current fourth-largest shareholder, since constitutionally EIB shareholders must belong to the EU. It is also unclear what will happen to the €972 million approved last year for UK projects as part of the €315 billion Juncker plan.
Energy prices, considering how dependent the UK is on power imports, will likely go up now that sterling is taking a beating (at press time, it had plunged 10 percent to 31-year lows). But that’s not all. As Tony Ward, Ernst & Young’s head of power & utilities, points out: “Whatever government emerges in the aftermath of the leave vote, it will need to clarify its policies with respect to climate change, renewable energy, technology preferences, state aid and many other matters of direct relevance to the utility industry, and to its investors.”
But of course the real concern is what a Brexit will do to the rest of the EU, and particularly to its fragile single currency, the euro. If Brexit turns out to be the spark that lights a fire under the eurozone and the wider European project, the repercussions could be nothing short of cataclysmic.
There is a small silver lining – infrastructure’s resiliency. “Infrastructure assets are resilient by nature. They’re unlikely to be seriously affected by Brexit, at least in the medium term,” Vincent Levita, co-founder, chief executive and chief investment officer at French fund manager InfraVia, told us in an emailed statement.
That sentiment is shared by many in the infrastructure community. In fact some listed infrastructure funds have traditionally seen their share price increase in times of crisis, although today and in the near-term, they will probably not experience anything other than a sharp plunge.
Regardless, it is the prolonged period of uncertainty that will now ensue and the skyrocketing political risk Brexit entails that is likely to cause lasting damage.
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