Fear of the unknown (weekly)(2)

The unpredictability surrounding today’s vote on Scottish independence is troubling for infrastructure investors.

If you’ve been watching the rolling news coverage in the run-up to today’s yes/no vote on independence for Scotland, one phrase will by now have become very familiar: “Too close to call”.

It wasn’t always that way. Polls recorded on the whatscotlandthinks.org website show that, back in May last year, one was showing support for a “no” vote at 65 percent, while that for a “yes” vote was 26 percent. This month, most polls are still showing the “no” vote in the lead (albeit by what is now a narrow margin), while a couple of them have the “yes” option in the lead.

What is clear is that no one can take the outcome for granted. This observation alone is enough to trigger some queasiness in the stomachs of infrastructure investors, with their natural aversion to risk and volatility. In the event that the residents of Scotland wake up tomorrow in a country transitioning to independence (the “yes” campaign has mooted 24 March 2016 as official “independence day”), there would be numerous reasons for continuing nervousness.

With reference to the financial services industry as a whole, attention has been drawn by the “naysayers” to the role of the Bank of England as a backstop for institutions in trouble – and the issue of whether Scottish companies would still benefit from this backstop in the event of independence.

In the case of infrastructure projects specifically, there is also a ‘backstop’ in the form of the UK Guarantees Scheme, which effectively throws the weight of the UK government’s balance sheet behind nationally-important projects that would otherwise struggle to obtain the necessary financing. It is not clear whether the scheme could still apply to projects in an independent Scotland.

Another issue that has become even more of a talking point is that of currency, with Scotland’s First Minister, Alex Salmond, being repeatedly pressed by opponents on the issue of what the plan B is in the event that Scotland is not allowed to continue using pound sterling.

Again, this will not go down well with infrastructure investors. Even once the situation becomes clear – with Scotland, for example, becoming part of a sterling currency union – there would be uncertainty about whether the country could cope as well with economic challenges as it could as part of the UK. This would be something to ponder in the context of infrastructure projects exposed to economic risk.

Then there’s the issue of implications arising from Scotland being outside the European Union (EU). The competing “yes” and “no” camps have sharply diverging views when it comes to the likelihood of swift Scottish admission to the EU – but, for however long outsider status were to prevail, access would be denied to EU infrastructure financing initiatives such as the 2020 Project Bond Initiative.

Set against the above concerns, Salmond has made clear his intention to prioritise infrastructure in an independent Scotland and the country has already demonstrated its long-recognised ability to innovate through the Scottish Futures Trust, which created its own version of the UK’s Private Finance Initiative in the form of the Non-Profit Distributing (NPD) model. With its profit-capping element, the introduction of the NPD represented a compelling response to those who felt the private sector was guilty of making windfall profits through PFI at the expense of the public side.

There have also been strong indications that Scotland would be keen to continue cooperating with its southerly neighbour on mutually beneficial cross-border infrastructure projects – including, potentially, an eventual high-speed rail link (though it has to be said that plenty of controversy surrounds this).

To reverse back to what is the key, bottom-line issue for infrastructure investors: uncertainty is never desirable. This means that a “yes” vote would likely result in investor wariness with regard to Scottish infrastructure – at least until the implications of such a vote become clearer.