Foreign direct investment in UK could dry up post-Brexit

14 June 2018 Consultancy.uk

Globally foreign direct investment is set to continue to grow, with North America sitting at the top, while China has slid three spots to fifth overall. While a weakened pound continues to make the UK a target for bargain hunters in 2018, the country faces considerable hurdles from Brexit’s impact on its economic outlook, something which threatens the optimism of its investors in the future. 

In recent years, foreign investment has continued apace in the UK. The nation’s capital saw the largest number of retail brand arrivals in 2017, with London outpacing rivals such as Paris and Vienna. The city also continues to post strong results in its real estate scene, thanks in part to the deflated value of the pound, which has enabled record levels of foreign investment from China and Asia.

However, as Britain braces for Brexit, and the potential seismic realignment of Europe’s economy which this could well cause, foreign direct investment (FDI) could quickly cool. According to analysis from A.T. Kearney Britain still boasts the world’s fourth highest level of confidence among foreign direct investors, behind Germany, Canada and the US.

The report, based on data from 500 of the world’s largest companies and covering 29 distinct regions, found that the resurgent US took the number one spot in terms of FDI Confidence, a spot the country has held for the past three years running, on the back of its strong economic performance, while uncertainties around market access due to protectionist rhetoric has further boosted inward investment. Canada meanwhile climbed three spots on last year to number 2, reflecting strong positive sentiment about the future of growth in the country.

Optimism high for most developed markets

However, while the immediate future remains bright for the UK, the country also finds itself among the worst performers in terms of how the economic outlook has changed in the past year. Investors are 22% less optimistic now than at the same juncture in 2017, the worst percentage of any nation in A.T. Kearney’s analysis.

The nation’s balanced net change still sees a boost in positivity of 11%, however this change still sees the UK fourth least well regarded, just ahead of Mexico, Portugal and Brazil. Two of those nations face extreme uncertainty and political deadlock in the coming year, while just ahead of the UK is Spain – a country which at the time of the poll, was facing a constitutional crisis caused by government corruption. The UK’s association with this grouping of economies hardly breeds confidence, in this case, as the nation continues to shuffle ever closer to the tumultuous conclusion of Brexit negotiations in 2019.

Top destinations for FDI

In terms of where FDI is currently heading, total investment has generally declined over past three years. This has been most notable in the European Union, which has seen FDI fall from a high of $500 billion in 2016 to $370 billion a year later – undoubtedly relating to the fallout of the UK’s shock referendum result, which threatened to destabilise the Eurozone, as it prompted Eurosceptics in countries such as Italy to follow suit. Following a number of far-right electoral triumphs in EU nations, this has become a real possibility.

Changes to monetary policy, particularly in the US and Europe, may well have wide ranging global impacts in the future, too, with tariffs threatening to spark a trade war between the EU, China and the US at present. In terms of investment strategy, few are currently not planning to invest in developed and emerging markets (4% each), while those currently invested but seeking to divest in such markets stands at 15% and 16% respectively.

The status quo remains dominant in developed markets, with 42% of those currently invested seeking to maintain the levels of investment, followed by 37% for emerging markets. Meanwhile 29% of both developed market and emerging market strategy for investment sees those currently invested in the markets seeking new investment opportunities.

Reasons for investors to increase FDI

When it comes to investment, the majority are planning to up their targets – with 46% projecting moderate increases while 30% say that they will bring significant increases. The respondents note however that the availability of funds and the availability of targets will influence their decisions – with the latter in particular a concern as a good deal of investment will be for businesses and units that are being fished for by others, such as PE or other corporate interests.

Commenting on the results, Paul A. Laudicina, Partner at A.T. Kearney, said, “The world continues to change in fundamental ways. Amid such changes, however, we often miss what in retrospect seems clear. A few years ago we released our From Globalisation to Islandisation report, foreshadowing a more protectionist world. Many observers expressed scepticism about our conclusions, believing globalisation to be immutable, and irreversible as a phenomenon. Now, our FDI Confidence Index indicates that investors have accepted globalisation is being challenged, and are seeking practical ways to ensure continued access to key markets.”

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Brexit will have major impact on UK-EU electricity flows

22 April 2019 Consultancy.uk

Brexit could have a major impact on the consumer price of electricity in the UK, according to an analysis by Sia Partners. The total costs for UK society could swell to €600 million annually due to less efficient flows of electricity.

As the Brexit process has perpetually stalled, with no realistic end in sight now until Halloween, underprepared businesses have been handed a lifeline. The scramble to prepare for a No Deal scenario can now continue for another half-a-year, and one of the key factors which companies will need to consider when drawing up these plans is the cost of accessing utilities post-Brexit. In the digital age, virtually no business can survive without a ready supply of electricity – while the pay-cheques of staff will also need to inflate to accommodate future rises in bills.

With significant cross-border flows of electricity between continental Europe and the UK, Brexit is destined to have a major impact on individuals and companies in this manner, according to new analysis by consulting firm Sia Partners. These flows of electricity are governed by common European rules, but when the UK leaves EU, Britain’s electricity markets will no longer be integrated into Europe’s ‘Internal Energy Market’.

European model

Historically, electricity grids and markets were developed on a national level. However, years ago the EU set out to achieve integration in electricity grids, on the premise that coupling grids and markets can lead to significant benefits. By making electricity flows possible, price arbitrage can be faded out by allowing buyers to access cheaper prices offered beyond the country’s own borders, driving up competition and lowering average prices.

Brexit will have major impact on UK-EU electricity flows

An analysis of electricity flows between the UK and Ireland demonstrates this. Before Ireland was coupled to the UK, commercial electricity exchanges on the UK - Ireland border flowed 40% of the time against the natural direction, i.e. from the higher to the lower price market. After more effective cooperation and regulation was put into place ('After the I-SEM' went live), the picture changed drastically, with commercial flows now following the price differential 96% of the time. Quantifying this welfare benefit is not easy: according to one estimate by ACER, the economic added value of having market coupling with implicit capacity allocation on the GB-Ireland border (1GW) amounts to around €110 million annually.

Europe’s aim is to achieve interconnection of at least 10% of their installed electricity production capacity by 2020. As it stands, seventeen countries are on track to reach that target by 2020, or have already reached it.

On the UK side, the region currently has a total capacity of around 5GW connected with mainland Europe (France, the Netherlands, Ireland, Belgium), corresponding to roughly 5% of UK’s installed capacity. In comparison with other EU countries, this ratio is on the low end; however, the UK is playing catch-up and has 10 interconnections scheduled for commissioning in the next four years.

Brexit

It's clear that the UK’s withdrawal from the EU will have an impact on electricity markets co-operation. The question which remains is how large will the impact will be? To provide a forecast for this, analysts at Sia Partners ran a modelling exercise with two scenarios in mind. After leaving the European bloc, the UK will have to make agreements with European countries, similar to how Switzerland and Norway currently operate. Norway has a deal with a relatively high level of integration with the EU’s internal energy market, while Switzerland stands at the other end of the spectrum, with the country excluded from several market coupling initiatives (e.g. MRC, XBID) and from implicit capacity allocation with any other EU member state.

“If Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, then there will be a major loss of welfare.”
– Sia Partners

If the UK follows in the footsteps of Norway, then the consequences of Brexit could be muted. According to Sia Partners’ calculations, the economic loss would be minimised in the mid-term, with only operational challenges expected. For example, the implementation of pan-European projects, such as XBID, could run into delays in the UK. The EU currently has 7 of such interconnection projects scheduled for completion before 2022.

“In case a Norwegian style deal is struck, the UK will lose its decision power related to EU energy policy but it would allow keeping the benefits linked to the internal energy market not only for itself but also for Ireland and continental Europe,” the researchers state.

If, however, a Swiss deal is struck, then the projected costs could range between €500 million to €1 billion. An expected 60% of this loss will be borne by the UK, 16% by France, and 8% by Belgium, the isle of Ireland and the Netherlands. The researchers concluded that if Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, “then there will be a major loss of welfare.”