Too much reliance on foreign investment says think tank

Denise Chevin
24 May 2016

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Infrastructure investment

Foreign investment in housing, transport and energy may fill the funding gap now, but could be more costly and risky over the longer term says Smith Institute, as EY report reveal a record number of projects backed by oversees investors. 

Over-reliance on foreign investment could make the UK’s cities less resilient and more vulnerable to global market fluctuations says a report from the Smith Institute, an independent think tank, and the Regional Studies Association. 

Professor Mike Raco, editor of the report, Britain for sale? Perspectives on the costs and benefits of foreign ownership, acknowledges the presence of overseas investors in London and the regions has financial benefits but argues that greater dependence on international investors (many state backed Sovereign Wealth Funds) is not risk free. He also expresses concerns over the way foreign-owned infrastructure projects in city-regions will be regulated and governed in the future.  

According to Professor Raco, if a global recession leads to higher costs, “there would be growing pressure from investors for stronger guarantees from taxpayers. Any failure in the delivery of projects could have serious knock-on effects. In such circumstances, more state support would certainly be required to make projects viable”.

Paul Hackett, director of the Smith Institute said: “

We need a more open and honest debate about the pros and cons of relying on overseas investors”.

The report argues: 

•Foreign ownership of strategic assets is a consequence of the government’s privatisation and austerity policies, but selling off Britain is far from straight forward.  The story of the water industry highlights the complex corporate structures some water companies use to reduce their tax bill. Overseas investment in the UK can be highly profitable for foreign firms. 

•The government’s approach to economic development is only likely to accelerate the process of foreign ownership, with implications for national and regional governance. Yet despite this emphasis on foreign investment as part of the devolution agenda, there is little scrutiny of the long term implications for local government and combined authorities – will it create winners and losers between places looking to attract investment, what would happen if the money was pulled out, how does it affect local democracy, decision making, sovereignty and control and who pays if the financial assumptions prove overly optimistic?

•Foreign investment is also having other spatial consequences, not least in housing in London.  More and more new housing in London is owned by overseas investors. There is a compelling case for regulating this investment, perhaps via a Property Speculation Tax.

The report comes as the consultant EY publish its annual Foreign Direct Investment survey which shows the UK brought in a record 1,065 FDI projects, creating over 42,000 jobs last year, the most in any year since 1997.

This 20% growth in projects achieved in a European market that grew 14% means the UK increased its market share from 19.9% to 20.9%, confirming it as Europe’s clear FDI leader

But, notes EY, “There are worrying signs for the future”. Investors are much less optimistic about the UK’s future attractiveness than they were 12 months ago. When asked how likely they were to invest in the UK next year, 23% responded positively, compared to 27% last year. When asked how the UK’s FDI attractiveness will change in the next three years, only 36% say they expect it to improve, in comparison to 54% last year – the lowest score since 2004

The UK’s ranking as Europe’s most attractive FDI location has also declined relative to Germany, with the UK now 2% further behind.