In the end she said yes. Six weeks after postponing a decision on what had been considered a done deal, UK Prime Minister Theresa May last Thursday gave the green light to the £18 billion ($23 billion; €20.9 billion) Hinkley Point nuclear power project. That came as a serious relief for French utility EDF and Chinese group CGN, the plant's builders and equity investors. For Paris and Beijing, it was also a welcome sign that the UK remains open for business after Brexit.
But there's a catch: May wants the UK government to own a 'golden share' in Hinkley Point and future nuclear projects – of which, given the country’s looming power generation shortfall, there could be some. That would provide Westminster with a voice in the boardroom, as well as the means to block asset sales it deems contrary to the national interest. Conveniently, these special rights are also cheap: in 2012, then-UK Defence Secretary Philip Hammond threatened to block a €35 billion merger between defence giant BAE Systems and Europe’s EADS by using the government’s £1 golden share.
With de-facto control over the fate of mega-projects, the government may be inclined to set more of them in motion. But golden shares have downsides. They often lower the price at which an asset can be sold, because the possibility of government interference, especially regarding exit strategies, dampens investors’ appetite. Should the use of golden shares be generalised, large-scale infrastructure projects, for which sizeable investments are needed upfront, could thus struggle to find traction. Had it not been for the vastly generous price guarantees that come with it, EDF may have been more critical of the idea.
The precedent set by Hinkley Point is thus not entirely reassuring. Other signals are even more worrying, though. Two weeks ago, the UK’s National Infrastructure Commission, a body tasked with making sure the country addresses its long-term infrastructure needs, suffered a blow less than a year after its creation, after it was omitted from a bill designed to establish it on a statutory basis. The U-turn took the industry by surprise: “It is deeply ironic that legislation which would have put infrastructure planning at arms-length from politics has been frustrated by political turmoil,” Richard Threlfall, KPMG’s head of UK infrastructure, commented then.
May has said she is in favour of greater spending on infrastructure, notably via Treasury project bonds. But Hammond – now at the helm of the finance ministry – sounds more hawkish than her. Two weeks ago, he argued against a major infrastructure investment surge, on the basis that large projects would take too long to deliver. Instead, he noted that the Treasury may fund “modest, rapidly deliverable investments”, calling to mind President Obama's 'shovel-ready' infrastructure stimulus post-financial crisis. How many projects qualify as such will only become clearer after he delivers his budget in November, but his lukewarm statements are hardly providing the vision infrastructure investors need.
Market players are calling on the government to seize on low borrowing costs to help fund projects, notably through the extended use of guarantees. One of them is the British Chamber of Commerce, which recently downgraded its 2017 and 2018 economic growth forecasts to 1 and 1.8 percent respectively. Rather than bucking this trend, infrastructure, via the construction sector, was the hardest hit in the first full month following the EU referendum, according to Barbour ABI, the consultancy that supplies figures to the UK’s Office for National Statistics.
For infrastructure to become a growth engine rather than a victim of Brexit, May needs to say more than definitely maybe.
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