UK ranks sixth most attractive nation for infrastructure investment
The UK is the world’s sixth most attractive nation for infrastructure investment, according to the CMS Infrastructure Index: Accelerating transformation report.
Produced by international law firm CMS in conjunction with GIIA and Capital Economics, the CMS Infrastructure Index ranks 50 jurisdictions according to their infrastructure investment attractiveness based on six key criteria: economic status, sustainability and innovation, tax environment, political stability, ease of doing business, and private participation.
The UK came in second place (after the Netherlands) for sustainability and innovation and was ranked fourth for ease of doing business. The country’s strong ranking in sustainability and innovation can be in part attributed to the UK government’s National Infrastructure Strategy announced in November 2020. The strategy sets out plans to transform the quality of the UK’s infrastructure in order to “level up the country, strengthen the Union and achieve net zero emissions by 2050.”
Additionally, the National Infrastructure Bank aimed at funding private sector projects that tackle climate change and support regional and local economic growth, was launched in March 2021 with an initial capital of GBP12 billion. This level of capital is unlikely to support as many projects as the European Investment Bank pre-Brexit thereby potentially allowing private investors to have a greater role.
Renewables is also another area of investment opportunity when the fourth Contracts for Difference allocation round opens in December 2021, aiming to award up to 12GW of new capacity (more than double that of the previous round). While the government has scaled back its pledge to roll out full fibre broadband to the whole of the UK, other developments are more encouraging for telecoms investors. These include telecoms regulator Ofcom relaxing price controls on fibre for Openreach, BT’s broadband network, which is also used by other service providers, and also introducing measures to stop Openreach restricting investment by other providers through its commercial practices. Both BT and its competitors now have ambitious plans to expand their networks.
“An anticipated slew of further strategies, reviews and policy papers for areas including rail, energy, electric vehicle charging, hydrogen and decarbonisation will shape the future direction of the infrastructure sector and the legislative and regulatory environment. While the sector still lacks full visibility on the way forward, we believe that there are huge opportunities for private investors as the UK government drives forward its Net Zero commitments and to support the recovery from the pandemic,” says Paul Smith, Co-Head of Infrastructure & Projects at CMS.
“The CMS Infrastructure Index paints a very positive picture. Singapore tops the leader board, bolstered by the unveiling of its Green Plan 2030 which aims to advance sustainable development and reduce the country’s carbon footprint. There are big spending plans in every region we reviewed as governments seek to close infrastructure gaps, recover from the pandemic and stimulate their economies. On the whole, infrastructure markets remain buoyant and show no sign of slowing down,” says Kristy Duane, Co-Head of Infrastructure and Projects at CMS.
Covid-19 has undoubtedly had an impact on the infrastructure sector which in recent years has also faced the turbulence of the US and UK elections, Brexit, leadership changes at the European Commission and Parliament, and the ongoing fight to stop climate change. Despite this challenging backdrop, government stimulus packages heavily focused on infrastructure spending are being committed in many nations to aid recovery from the pandemic, presenting opportunities for investors.
“From China and Indonesia, to the UK, the US and Europe, many governments have announced plans to invest in all types of infrastructure including transport, fibre, water and renewable energy, while other nations are focusing on opening up their markets to foreign investment or launching new funding models. All these point to opportunities for private investors to help nations recover from the pandemic and fill their infrastructure gaps,” comments Dr. Nicolai Ritter, Co-Head of Infrastructure and Projects at CMS.
The pandemic has highlighted the importance of reliable digital connectivity, making fast broadband an essential utility alongside power and water in nearly all nations. Significant digital infrastructure investment is needed to meet this demand for high speed and reliable connectivity. Many nations are improving their fibre-to-the-premises infrastructure and continue to roll out 5G networks. Satellite networks are being developed to provide low-cost Internet to remote locations while specialist digital infrastructure funds and Big Tech are emerging as important drivers of digital projects.
“The telecoms sector is very much in the spotlight – the pandemic has amplified the need for spending on digital infrastructure and a balanced range of digital technologies,” says Chris Watson, Global Head of Technology, Media and Communications at CMS. “Cloud services continue to grow strongly and, during 2020 and 2021, have been used as much for collaboration as for storing content. From data centres to subsea cables, satellite internet and Smart Cities, the global acceleration of digitalisation offers many infrastructure investment opportunities.”
ESG (environmental, social and governance) considerations in infrastructure investment are today no longer the exception but the rule. Net Zero commitments and disclosures are increasingly mandatory requirements while investment strategies are being shaped by stakeholders voicing their concerns through shareholder activism and litigation.
Many nations in the CMS Infrastructure Index are adapting their infrastructure to be climate resilient and to respond to the impact that climate change has already had on the world. Massive amounts of infrastructure spending will be needed to mitigate such impact, including on flood defences, cooling systems and resilient agribusiness.
The report also showed that green finance is expected to become a key area of opportunity for investors as it is likely to play an increasing role in financing many infrastructure projects.
Munir Hassan, Head of Energy & Climate Change at CMS, says: “Singapore’s plans to issue green bonds worth SGD 19bn (USD 14bn) are part of the government’s ambition to make it a leading centre for green finance. The Bank of England recently announced that it will no longer buy bonds issued by highly polluting companies, while the European Central Bank and Sweden’s Riksbank have pledged to buy more green bonds as part of their asset purchase programmes. These are some examples indicating that green finance is really taking hold and that Net Zero pledges and ESG priorities are driving investment decisions across all asset classes.”
While foreign direct investment (FDI) controls are not new, political concerns about hostile nations, the impact of globalisation and the focus on critical supply chains due to Covid-19 have led to a tightening of regulations and a greater scrutiny of deals in many jurisdictions featured in the report.
The likes of the UK, France and Australia have either introduced laws for the first time or reduced the thresholds for voting rights or transaction values. In the US, the remit of the Committee on Foreign Investment in the United States (CFIUS) continues to expand.
“It is too early to tell what impact such regulations will have on capital flows in developed markets but on current transaction levels, it appears to be limited. Nevertheless, navigating these controls, as well as other regulatory and merger control approvals, is becoming increasingly complex for many transactions. It is vital that infrastructure investors are fully aware of the broad scope of the controls when considering their investment plans,” comments Caroline Hobson, Co-Head of Competition at CMS.
Increased FDI controls are, however, not universal. Prior to the pandemic, protectionism appeared to be declining in the Middle East, CEE and Asia Pacific where the need for foreign capital is greater. The UAE previously required 51% ownership by local shareholders, but now permits, in some industries, 100% foreign ownership on the ground in Dubai. Countries in Asia Pacific welcomed new initiatives funded by China, Japan and Korea, while the CEE region has seen significant investment from China, with almost all countries in the region part of its Belt and Road Initiative.