Farewell nationalisation, hello UK PLC

The Labour party’s crushing defeat in the UK elections should unblock private capital sitting on the sidelines. But as Ofwat’s Monday ruling shows, some damage has already been done.

Well, that’s that then. After a humiliating and conclusive defeat in the UK’s general election, the Labour party’s much-feared nationalisation plans will finally slip into oblivion. Good riddance.

Ill-conceived and sketchily fleshed out, the whole exercise would’ve been a huge (and costly) waste of time. Worse, it would not have solved the problems affecting UK infrastructure, including some valid complaints about poor service provision. It would, however, have done irreparable damage to the country’s reputation and ability to attract private capital.

Rattled investors that tried to ensure fair-market compensation by stashing their assets offshore to capitalise on bilateral treaties in case of expropriation may now breathe a sigh of relief. Capital sitting on the sidelines can finally start looking at the UK market again without fear of finding itself stranded in a socialist dystopia.

Even Brexit, which, along with a potential Labour party win, was the other top investor concern – as Phillip Souta, head of UK public policy at Clifford Chance, told us around this time last year – is on the verge of being resolved. Friday, for better or worse, prime minister Boris Johnson’s Brexit deal with the European Union will be passed by Parliament, paving the way for the UK to exit the EU by the end of January.

With both major roadblocks on the verge of being removed, UK PLC is open for business again.

That’s good news because there is plenty to do. For a comprehensive assessment of the UK’s infrastructure needs, start with the National Infrastructure Commission’s National Infrastructure Assessment, published last July. If you want a shorter, more private capital-oriented view of where investors can put money to work, check out Macquarie’s UK infrastructure investment: the next 30 years, published, coincidentally or not, the day after the election.

That should tide you over until the new government comes around to publishing its national infrastructure strategy.

During the election campaign, the prime minister (who’s known to love a bridge or two) signalled that the Conservatives were ready to spend an extra £100 billion ($132 billion; €118 billion) on infrastructure over the next five years, with transport one of the highlights. Digital was another winner, with around £5 billion pledged to support broadband in places where it is not bankable. That’s alongside £4 billion for new flood defences and a £2 billion fund to fix potholes.

More importantly, the Conservatives also re-committed to achieving the UK’s net-zero carbon emissions target by 2050, enshrined in law earlier this year. That will be good for the environment and for private capital, given it will require hundreds of billions of pounds of investment.

Is it all good news and Christmas cheer, then? Not quite.

While the ghost of nationalisation has definitely left the building, you have only to look at Monday’s Ofwat ruling to see some of the lasting damage the haunting has left.

In January, Andrew Claerhout, co-head of infrastructure for private-equity firm Searchlight Capital Partners, posited that harsh changes to the regulatory regime could effectively offer nationalisation via the back door.

“Changing the regulation so that existing owners make a zero return on equity would effectively nationalise them. That would be the worst outcome,” Claerhout argued.

Allowed returns across regulated assets are not zero. They are, however, a rather low 2.96 percent in the water sector, following Ofwat’s latest determination. Ratings agency Moody’s said last week that the watchdog’s new regime could trigger the largest deterioration in credit quality since privatisation.

In the energy sector, regulator Ofgem settled on a 4.3 percent allowed return earlier this year. That’s higher but no more palatable, with the Energy Networks Association warning it would have “damaging impacts” on the energy system and the decarbonisation agenda.

Still, with the worst averted, we all, to borrow a line from the newly re-elected prime minister, deserve a break from regulatory wrangling and a permanent break from talking about nationalisation.

With that, and on this last weekly letter of the year (normal service to resume on 9 January), we’d like to wish you all a Merry Christmas and a Happy New Year.

Write to the author at bruno.a@peimedia.com

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