Gazelles, Exports, and Infrastructure: A View from the UK

Infrastructure 11 Mar 2015

gazelleA new paper from the Confederation of British Industry looks at three policy issues that ought to concern investors in the United Kingdom, including FDI: the private placement market; the trade balance; and infrastructure opportunities.

The paper, “Financing Our Future Economy,” begins with the presumption that the country needs three things: to unlock the potential of its “high-growth medium-sized businesses;” (which the paper also calls its “gazelle” firms; to break into new export markets; and to meet its infrastructure needs.

Under the first heading: the UK’s economy has been moving away from traditional debt toward bank loans and alternative non-bank sorts of financing. The 60% growth in the flow of private external equity between 2011 and 2013 fits this pattern.

Serving the Gazelles

To complete this transition toward a “new normal” that will serve the gazelles, the country needs to kick-start its private placement market. For example, the UK Listing Authority “should be given clearer objectives for competitiveness and growth” and the British Business Bank should offer one-stop shopping, helping the gazelles exercise their financing options, inclusive of equity.

Under the second heading, improving the export numbers, the report outlines the problem thus:

  • The UK last ran a trade surplus in 1998;
  • It appears likely to run short of the Chancellor’s goal of ?1 trillion exports by 2020;
  • The country’s share of exports globally was just 3.3% in 2013: it had been 6.1% in 1980.

Trade finance has had some difficulties of its own in recent years. The CBI cites one survey indicating that 69% of trade finance providers “cited anti-money laundering and know your customer requirements as a highly significant impediment to trade finance.”

Forty-one percent referenced Basel III’s requirements as a highly significant impediment. More than three quarters of respondents said Basel had increased their costs.

To grease the rails of trade finance, the CBI suggests three actions: it should push within Europe for a pro-growth understanding of the European Market Infrastructure Regulation (EMIR); it should broaden the good work that UK Expert Finance has been doing; and it should re-examine its anti-money laundering requirements.

The U.K. isn’t the only sovereign in the world within with AML rules have become a matter of controversy. In the shock following the 9/11 attacks such rules were generally accepted, quietly even by those with some reason to grumble. But before long, scholars began to wonder whether the relationship between AML rules and any actual disruption of criminal finance – terrorist or otherwise — was just so much wishful thinking.

Inducing Infrastructure Investment

Finally, we come to infrastructure. Here, too, CBI begins by stating the problem.

[It refers here to the ranking specifically devoted to “quality of overall infrastructure,” – in the ranking that takes into account all of the WEF’s metrics, the UK is much higher: ninth.]
  • Capital spending as a percentage of gross domestic product remains below France, the U.S., or Canada;
  • 99% of the respondents to a CBI survey on infrastructure issues said that quality and cost of infrastructure were either significant or very significant to their investment decisions.

Here, too, the CBI proposes a couple of actions. First, the government has to work to improve the project pipeline. It could do this by establishing an independent body “to determine future infrastructure investment needs and how they should be met,” and by focusing government financing on areas where the “risks are too large or complex to be tacked solely by the private sector.” Failure to maintain such a focus ends up crowding out private investors in areas where their money could be of use.

The other action step is the implementation of “Solvency II.” This is an EU directive approved by a vote of the European Parliament in March 2014, dealing specifically with the insurance industry.

The CBI wants insurers to feel confident investing in infrastructure, and it believes implementation of Solvency II will help with that. Related to this: it wants project managements/issuers to understand the asset eligibility requirements that insurers face, such as Spens clause requirements.



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