Economic | G Pontin

Category Archives: Economic

Publications on economic topics

Business Innovate – Budget 2014 – Innovation, before big announcements

Whilst the 2014 Budget was unlikely to be one of significant spending given the fiscal constraints that continue to challenge government, it did provide a backdrop of significant innovation in several policy areas which has not been seen for a number of years.

The most significant of these innovations was in the area of pensions and savings. The UK has for a long time struggled to encourage individuals to think of their long term needs, with policies built up over a number of years being bolted on to an ever more complex system.

The 2014 Budget looks to be taking some significant shifts in these areas. On pensions the Chancellor announced that from April 2015, the government will change the tax rules to allow people to access their defined contribution pension savings as they wish from the point of retirement. If a significant number of individuals choose such action this would be a significant step away from the current system of having to purchase an annuity and could lead to some interesting market innovations in terms of providing incomes for retirement.

Another area of innovation surrounded encouraging saving, with the launch of the New ISA (NISA). This NISA will not only see its limit raised to £15,000 but will also allow individuals to transfer the amount they invest in cash and shares, removing the set restriction for each area. Another possibly more important innovation is that ISA eligibility will be extended to peer-to-peer loans, and all restrictions around the maturity dates of securities held within ISAs will be removed. Again this could provide a number of new investment opportunities that provide better rates and direct savings into small businesses through platforms in the peer to peer lending market.

As well as encouraging individuals to save the Budget 2014 announced the doubling of the annual investment allowance (AIA) to £500,000 from April 2014 until the end of 2015. This will be a significant benefit to businesses wishing to invest and will mean that the scheme will cover 4.9 million firms (99.8% of businesses), providing 100% up-front relief on their qualifying investment in plant and machinery.

Further to this the government also announced it will raise the rate of the R&D tax credit payable to loss making small and medium sized companies from 11% to 14.5% from April 2014, providing valuable support as the economy continues to improve.

Looking forward, there is another interesting announcement for small business in the budget that the British Business Bank will issue a request for proposals to implement an innovative wholesale guarantees programme alongside the Budget. Such a scheme could provide significant support for businesses and provide targeted assistance in the future, and so Business Innovate looks forward to engaging with government on this further in the future.

Whilst supporting small business is welcome, opening up opportunities is important as it allows companies to support themselves. The Budget announced an overhaul of UK Export Finance’s (UKEF) direct lending programme, doubling it to £3 billion and cutting interest rates to the lowest permitted levels. This scheme will mean that UK business will have access to one of the most competitive support schemes available for wining contracts in new markets, helping them to improve and expand overseas.

Go to: http://businessinnovate.co.uk/

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ACE – Funding roads – Reducing inefficiency and securing investment in roads for future generations

This report takes a macroeconomic approach to explore the potential inefficiency and loss of economic productivity as a result of the current condition of the road network.

This report considers a number of inefficiencies as part of this loss, with a total annual inefficiency of £12.2bn across England’s entire road network.

One of the concerns emphasised in this report is that this annual inefficiency adds up quickly over time, and given recent Government estimates that the number of hours each household will spend in traffic by 2040 will rise to 70 hours, with inefficiency on a path to reaching £27bn annually.

The government should be aiming to reduce inefficiency in the network, not mitigate a rise. As such this paper suggests two models which move the government and policy making towards stable investment mechanisms to ensure that the road network receives the maintenance and investment it requires.

These models are underpinned by the principle of a long term asset management approach to both the local and strategic network and they consider the risks that the private and public sector are able to bear under each scenario.

Company website:
http://www.acenet.co.uk/

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ACE – Revolutionising housing – Restoring the value of land: a new model for housing development

This paper is the second in ACE’s housing paper series and explores in detail the challenging conditions within the UK housing market.

Following the discovery of a £185bn housing gap and the disconnect between supply and demand in the housing market. This paper suggests an innovative model that attempts to address these challenges within the housing sector.

It proposes a Land Optimised Value Extraction (LOVE) model which is based around certainty and optimising the value which can be extracted from land by using principles such as a clear strategic direction, regulatory certainty and encouraging market competition.

This model therefore attempts to shift the emphasis and process of planning and development. This aims to reduce the burden throughout the system, reducing costs for parties involved, whilst also balancing the need for strategic housing development, commercial competition and local engagement.

Company website:
http://www.acenet.co.uk/

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ACE – The housing gap – The growing human cost of not building enough homes

This paper is the first in ACE’s housing paper series and explores in detail the conditions within the UK housing market.

It finds that there is a serious housing gap (where the number of households formed outstrips houses built) looming in the UK. The paper argues that unless the growing disconnect between supply and demand is tackled through major house building, the housing gap may prove potentially irrevocable. Such a failure to tackle this housing gap would have serious social and economic consequences for the UK.

The analysis in this report reveals that by 2021 the UK will have developed a housing gap of £185bn, the equivalent to 886,000 households, requiring housing to be built on the scale of a city twice the size of Birmingham. This additional gap on top of the already tight conditions in the housing market will if unchanged lead to a future where millions of people in the UK will be unable to afford to own a home.

This analysis highlights an urgent need for the housing gap to receive greater priority from government and all political parties, as well as the need for a new housing model to allow such increased house building to occur.

Company website:
http://www.acenet.co.uk/

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ACE – State Investment Bank

This paper is the final paper in ACE’s infrastructure investment series and explores in more detail the rational and practicalities of establishing a State Investment Bank.

Key areas explored in the paper:

A State Investment Bank could play an important role in long term economic policy
A State Investment Bank would help to stimulate housing supply
Given the importance of SME finance, it should remain separated from the task of investing in infrastructure.
State aid approval is required for a State Investment Bank
A State Investment Bank is not a one stop shop to fix for endemic investment problems
A State Investment Bank needs to make profit and invest returns.
Building a skills base for a State Investment Bank is vital
The change in financial regulatory landscape needs to be factored into a State Investment Banks design
The scale of capitalisation for a State Investment Bank is important
The banking levy could provide a significant degree of the capital for a State Investment Bank
A State Investment Bank requires a solid plan as to its capitalisation proces
Could the government scale down Royal Bank of Scotland (RBS) into a State Invsestment Bank?
A clear roadmap would be needed to scale up the GIB to a full State Investment Bank.

Company website:
http://www.acenet.co.uk/

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ACE – Green Investment Bank

This paper is the fifth in ACE’s infrastructure investment series and explores in more detail the current market conditions, challenges and rationale behind the Green Investment Bank. It concludes that whilst the Green Investment Bank is a step in the right direction, there are some issues which if left unchecked, could undermine confidence in its ability to facilitate green investment.

Key findings

The Green Investment Bank is a step in the right direction, but finance conditions continue to raise concerns about scale and speed of implementation
The GIB needs to improve transparency and information sharing for investment to take place
Perceptions surrounding the GIB and the subsidisation of green projects needs to evolve if investor confidence is to be gained
The current plan for granting the Green Investment Bank’s borrowing powers should be reinforced further
The GIB should continue to expand and identify other areas where it could facilitate investment

Company website:
http://www.acenet.co.uk/

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ACE – Pensions and infrastructure

This paper is the fourth in ACE’s infrastructure investment series and explores in more detail the current conditions within the market, and the implications they have on pension funds’ investment potential into infrastructure.

Key findings include:

The scale of the global pensions fund market holds great potential for investment
Government role is important given the challenge ahead
There is mutual benefit in pension fund investment into infrastructure
Infrastructure could help to improve pension funds’ funding status
The UK’s pension fund market is fragmented and so restricts the scale of investment required by infrastructure; opening this up could generate £6bn of investment
Culture and regulations within the UK need to change if significant investment is to take place
Tailoring products and investment to pension funds needs is essential
Expectations of returns and risk need to be realised by all parties
Pension funds are not the answer to all the UK’s investment requirements

Company website:
http://www.acenet.co.uk/

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ACE – Procurement in PPFM

This paper is the third in ACE’s infrastructure investment series and explores in more detail improvement that could be made to the procurement within Public and Private Finance Models (PPFM).

Issues explored in this paper include the concept of flexibility, transparency and the use of a centralised resource to improve procurement efficiency and reactiveness, resulting in better overall value for money for the taxpayer.

The paper explores and has recommendations in the following areas:

There needs to be clear guidance on model suitability
Centralised efficiency and skills retention are important
The two broad procurement phases, provide limited information or confidence to the market
Implementing a Procurement Efficiency Mechanism (PEM)
There needs to be improved accountability
Procurement issues expand beyond that of Public Private Finance Models
Design and exploratory work can save time and money
Flexibility is required for government to gain better efficiency and value for money
Provide a baseline, creating a fixed operational performance will provide certainty
Dynamic operational performance, providing capacity and efficiency beyond the baseline

Company website:
http://www.acenet.co.uk/

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ACE – Public Private Finance Model: moving forward

This paper is the second in ACE’s infrastructure investment series and explores in more detail the rationale, performance and market conditions that surround Public and Private Finance Models (PPFM).

This paper explores a number of flexible models that should help to improve public and private sector performance. Whilst, encouraging the level of private finance required to improve the UK’s aging infrastructure. Importantly, improving the models through which private finance is encouraged into infrastructure investment is key to providing savings for the taxpayer.

The PFI model is in need of review by government following the financial crisis. A number of factors have changed, such as the higher cost and lower availability of capital. This has in turn called into question value for money, the relative cost of the public sector undertaking the project and attracting further investment into primary (greenfield/new build) projects.
However, the National Audit Office (NAO)3 has previously found that there are some positives that can be taken forward from the PFI miodel. For example:“Sixty nine per cent of PFI projects reported delivering to the contracted timetable in 2008.”“Ninety four per cent of projects responding to our 2008 survey were reported to have been delivered on, or less than five per cent over, price”
There needs to be greater flexibility built within models to allow a more efficient application to a wider set of scenarios. The PFI model has shown that there is an interest from the private sector. Areas such as construction risk can be improved, the financial crisis and the subsequent shift in attitudes away from higher risk projects have highlighted the need for the model to be improved.
This paper outlines five Public Private Finance Models (PPFM) that aim to improve the prospects of private financing, its performance and value for money going forward.

Company website:
http://www.acenet.co.uk/

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ACE – Performance of PFI: 1996 – 2010: lessons learned

This paper is the first of a new series of infrastructure financing papers from ACE. It looks at 15 years of Private Finance Initiative experience in the UK. The paper establishes the lessons learnt, both positive and negative, that must inform new thinking on project financing if the public and private sectors, and most importantly the taxpayer, is to get the best possible value for money earnings and policy.

Key findings:

Reviewing the PFI model
PFI’s lack of public trust demonstrates that there needs to be a clear and transparent link between capital liabilities, operational liabilities and the expected rates of return for private companies within financing public projects.
Within the review of the PFI procurement model Government must look to retain the benefits that a successfully procured PFI project can deliver as it develops new financing models.
The focus of the debate must be to develop a successful public-private model moving forward, ensuring efficient investment in the UK’s long term economic growth.
The effect of the recession and financial crisis:
The financial crisis and recession have had a significant effect on the financial sector. Lending has been constrained, confidence between banks, consumers and business has been shaken.
There have been significant changes in the cost of capital; the cost of government borrowing; the difference between the two; the private sector’s ability to raise funds; and attitudes to risk. These factors call into question the assumptions within the PFI model, resulting in a weaker less sustainable case for its usage.
New issuance in a range of primary debt markets, global issuance of leveraged loans and issuance of high-yield corporate debt have all undergone a challenging year in 2011. This means it has been harder for companies to raise funding.
The financial crisis has changed attitudes to risk, with companies moving towards cash rich positions, paying off debt and re-enforcing balance sheets. This has fed through into the PFI model, with fewer companies able to take on the risks, and raise the finances required to make projects successful.
A continuing aversion to risk will impact on the long term growth and investment potential of projects in the UK from the private sector. however, it is important to recognise that attitudes to risk are also aligned with the pricing of finance. For example, the recent decision of RWE and EON to abandon their UK nuclear build programme shows how difficult it is to raise finance given
uncertainty with regards to risks, earnings and policy.

Company website:
http://www.acenet.co.uk/

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