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Why we must embrace foreign ownership in energy

There is some resistence in the UK to foreign ownership of energy infrastructure, but it’s vital for the growth of the economy.

On 29 October 2013 David Cameron delivered a speech at the Islamic Economic Forum in London in which he reaffirmed the government’s stance towards foreign ownership in UK infrastructure.

Mr Cameron’s central premise was that if the UK is to remain economically competitive in a globalised world, it should remain what it is and always has been: open to foreign investors.

“Behaviour of all corporations in the UK market should, and will become, more effectively regulated”

The speech was timely given the government’s recent announcement that it would welcome Chinese state investment in UK nuclear new-build.

Many considered this as a coup, but the speech drew substantial criticisms over the desirability of foreign ownership in UK infrastructure.

Opposition to openness

Detractors from the ‘openness’ approach towards infrastructure investment often point to the leakage of profits and tax revenues abroad; the weaker sense of social responsibility borne by foreign corporations to UK inhabitants; the threat to the competiveness of the UK’s manufacturing and construction industries; and, rather narrow-mindedly, to a misplaced sense of patriotism.

Each of these arguments is oversimplified and can be readily defeated by considering the UK’s circumstances in a globalised economy.

Infrastructure-related capital outflows and inflows assessed together generally deliver a net benefit to the UK; tax breaks are largely responsible for the UK’s ongoing competitiveness.

Behaviour of all corporations in the UK market should, and will, become more effectively regulated. For example, Ofgem will soon launch a full competition review into the UK electricity market.

Finally, FDI actually strengthens our industrial base through supply chain growth, job creation and demand for research and development. This is already being seen in the UK’s world-leading offshore wind sector.

Unprecedented competition for resources

More importantly, however, and what detractors fail to grasp, is that the current level of global competition for infrastructure-related resources is unprecedented – and growing.

“Historically the UK has prospered and managed to avoid the worst of some recessions because of its long track record in attracting significant FDI”

Either through necessity or in an attempt to remain competitive, developed economies are moving to either upgrade or replace their existing infrastructure. Closure of polluting coal plants in the UK is a prime example of this.

This move just happens to coincide with the largest and most rapid example of industrialisation in history: that of the BRIC economies.

The result is a global race to secure not only the capital but also the access to the contractors, equipment manufacturers and raw materials that are a prerequisite to infrastructure development.

We are witnessing this in the energy sector as utilities such as E.ON and RWE focus on the German market at the UK’s expense.

UK attracts foreign direct investment

The UK has a head start in this race. Historically the UK has prospered and managed to avoid the worst of some recessions because of its long track record in attracting significant FDI.

It has achieved this largely through education, favourable regulation and tax breaks, and a politically stable environment. According to the Financial Times FDI Report 2013, the UK remains the leading European destination for FDI, ahead of Germany, France and Spain.

Despite this, the UK faces significant internal challenges. In 2011/12 the World Economic Forum ranked the overall quality of the UK’s infrastructure 28th out of 142 countries.

“We must join the global competition for the capital of North American pension funds, Chinese state-owned enterprises and Middle Eastern sovereign wealth funds”

Inaction now would risk jeopardising the UK’s ability to generate future growth. The government has recognised this – its National Infrastructure Plan 2011 set out the UK’s investment requirements across the water, waste, transport, energy and digital infrastructure sectors.

However, to 2015 and beyond UK infrastructure will require £250bn of combined public and private sector funding. Of this, government-commissioned projects currently account for only £40bn.

Private sector must step up

Additional public funding is constrained by fiscal austerity. Responsibility for filling the infrastructure gap must therefore fall to the private sector.

Sufficient allocation of private institutional funds for infrastructure simply does not exist in the UK. Instead, we must join the global competition for the capital of North American pension funds, Chinese state-owned enterprises and Middle Eastern sovereign wealth funds.

Rather than stopping FDI, we need more of it.

Our local businesses face their own challenges on capital and debt constraints, and the overseas investor market is the only way to deliver the infrastructure changes required to push UK plc business forward and secure socially acceptable infrastructure development.

If the government wants to deliver against its ambitious infrastructure plans, not only is it logical to look abroad; given the global competition for capital, it is essential that it does everything within its control to continue to promote foreign investment in UK infrastructure.

Neil Upton is co-head of and Thomas Coles is an associate in the energy and infrastructure group at King & Wood Mallesons SJ Berwis.

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