The outcome of a hung parliament following the UK’s snap election could cast a long shadow over the near to medium term outlook for infrastructure investors, industry players warn.
While Prime Minister Theresa May has received authority from the Queen to lead a minority government supported by Northern Ireland’s Democratic Unionist Party, her own position, the makeup of her government and the future of Brexit talks remain uncertain after the Prime Minister’s decision to call an early election left no party with an outright majority.
“In addition to the broader implications for the country, a hung parliament could be the worst possible result for the infrastructure industry,” declared Robert Meakin, partner at law firm Clyde & Co. “With the economy already struggling with the uncertainty of Brexit, the last thing we need is further confusion and delay in the government's investment strategy.”
Meakin’s comments were echoed by Richard Laudy, global head of infrastructure at Pinsent Masons, who described the poll as a “bad result” for the UK infrastructure market.
“The UK desperately needs to attract investors if it is to improve its ailing infrastructure yet the political uncertainty in which we now find ourselves is precisely what puts off investors and will make our infrastructure problems more difficult to solve,” he said. “It is imperative for the future of Britain's infrastructure that the government faces up to the challenges around funding and skills and does not allow infrastructure to slip further down its list of priorities as it seeks to grapple with its own position.”
Some observers were more specific. A weak Conservative-led government, resulting from an alliance with a smaller party like Northern Ireland’s Democratic Union Party, would want to have “signature projects that they can point to,” David Lea, a senior analyst at Control Risk, told Infrastructure Investor. “But I’m not sure they’ll want any of them to be huge areas of spending. So Crossrail, the Thames Tideway Tunnel and all these major disruptive projects, they might fall away.”
A coalition involving Labour – now or after another general election, if it happens – would be more promising for the UK’s project pipeline, he observed. “The performance of the Labour Party suggests that there’s probably a bit of demand out there for some ‘priming of the pump’, to borrow a phrase that put Donald Trump in trouble a few weeks ago.”
In the eventuality of a Labour-led government, most of the spending would likely be funded through the public purse, implying a much more limited bump in activity for private players. Prior to the vote, it did not escape investors that the party’s manifesto was calling for the renationalisation of rail and energy companies.
Others were indeed more optimistic about what the current deadlock means for infrastructure. A fund manager with a significant UK presence argued a hung parliament was “not remotely near” the worst outcome for the sector. “Maybe a softer Brexit from a coalition or other form of tie-up is better for the industry,” he said.
“Also, the infrastructure industry is much bigger than the UK. The reality is that the Conservatives will somehow form a new government and life will continue as before, with the possible exception of the pace and direction of Brexit negotiations.”
This sentiment was shared by Dominic Church, managing director at Westminster Advisers. “While a hung parliament is challenging, and unexpected, the numbers have stacked up to give Theresa May a working majority. It’s likely there will be significant pressure from within her own party to change her policy approach to be more pro-market, which could have an impact on levels of infrastructure investment,” he told Infrastructure Investor.
With 10 days until Brexit negotiations with the European Union begin, May faces a demanding task as she seeks to recompose a government that lost its Housing Minister, Cabinet Minister and Treasury Minister after seats swung to opposition parties. There has also been speculation Chancellor Philip Hammond may be shifted from his position, with German insurer Allianz saying the doubts will hurt the British market.
“Political uncertainty will weigh heavily on sterling, consumer confidence and investment,” said chief economist Michel Heise.