Investment | G Pontin

Business Innovate – Autumn Statement: innovative steps that make difference

The 2014 Autumn Statement left little room for manoeuvre, the deficit is not as low as the government would like and the temptation for giveaways is significant. What can be said though is that whilst the deficit challenge remains, the focus on innovation and reform rather than grand gestures is a welcome relief.

I use to illustrate this point two particular measures announced in the Autumn Statement. The first is that of apprenticeships. The education system and tax system in reality does not encourage the knowledge and skills transfer that is possible between businesses and youngsters entering the labour market. Yet there has traditionally been a mix of mismatched and poor incentives to encourage limited business and individuals to undertake such schemes. This has now potentially changed.

The Autumn Statement announced that it was abolishing employer National Insurance contributions for apprentices aged under 25 on earnings up to the upper earnings limit. This in the grand scheme of spending is not a significant sum but the message and incentive is right. It encourages that transfer from education to work and helps to build a relationship between business and future potential employees and output. Such innovative thinking is long overdue with business craving practical skills to improve productivity.

The second measure that stands out is the reform of stamp duty. This tax has long created distortions in the housing market. It is well overdue for reform but the changes announced today should be part of a continued effort to reform the housing market to ensure that future generations are able to own their own home, which is of a reasonable quality, at an affordable rate. In this respect stamp duty is an issue because it creates artificial holes in pricing where buyers have to spend significantly more to reach the ‘next level’ of the ladder. It is no longer just the first time buyers that don’t have the capital but also the second movers. This is why such reform is so important and innovative. I would, however, also stress that this is only part of the solution. It is a demand side response where as in actual fact the UK suffers a supply side problem. This is why the measures to increase the degree of house building are welcomed but do not equate to anything near the 260,000 homes a year required to meet population growth.

So whilst the majority of this statement contains small changes there is some significant progress. It should, however, never be underestimated that the measures announced are actually the first steps to what are long needed reform.

Autumn Statement: Summary of other main points

TAX

Stamp Duty rates overhauled. Top rate now 12% on properties worth more than £1.5m effective from midnight Wednesday. There will be no duty on properties worth up to £125,000 then 2% rate on the portion up to £250,000 then 5% up to £925,000, then 10% up to £1.5m.

Higher rate income tax threshold to rise to £42,385 next year.

Income tax-free personal allowance to rise to £10,600 rather than the planned £10,500 next year, giving wage boost of £825 a year.

ISAs can be inherited tax free.

Fuel duty remains frozen.

People who die under 75 to be able to pass on annuities, tax free.

CORPORATE TAX

A so-called ‘Google Tax’ will introduce a levy of 25% on profits shifted abroad by multi-national firms. The Diverted Profits Tax aims to raise more than £1bn over five years.

Banks to pay almost £4bn more in tax over next five years, with profits which can be offset by losses for tax purposes to be limited to 50%.

Inflation-linked increase in business rates capped at 2% and discount for shops, pubs and cafes increased by 50% to £1,500.

SAVINGS

Limit on saving in New ISAs to rise to £15,240

DEVOLUTION & ‘NORTHERN POWERHOUSE’

Business rates for Wales to be devolved to Welsh Government.

Plans law to devolve corporation tax to Northern Ireland if the Northern Ireland executive shows it can manage the financial implications.

Investment of £250m in new advanced material science institute in Manchester with branches in Leeds, Sheffield and Liverpool. Tendering for new franchises for Northern Rail and Trans-Pennine Express to ensure modern trains.

EDUCATION

Government-backed student loans of up to £10,000 are to be made available for postgraduates.

TRAVEL

Air Passenger Duty for under-12s abolished from May 2015. Scrapped from 2016 for under-16s.

SAVINGS

A further £10bn of Whitehall efficiencies is planned while £5bn more is sought from crackdown on tax evasion and avoidance.

Public service pension reforms will be completed, saving £1.3bn annually.

SPENDING

NHS gets additional £2bn every year for frontline services. A £1.2bn investment in GP services will be paid for from foreign exchange fines.

Government spending £10bn less than forecast this year but warns the coming years will require “very substantial savings in public spending.”

PUBLIC FINANCES

Office for Budget Responsibility (OBR): Forecast 2014 GDP growth upgraded to 3% from 2.7%. 2015 forecast raised to 2.4%.

“Deficit is falling this year and every year.” Deficit now cut in half. OBR forecasts borrowing to fall from £97.5bn in 2013/14 to £91.3bn in 2014/15 (£5bn above annual target). Budget surplus of £23bn predicted for 2019/20.

Osborne says deficit reduction better than some predicted as welfare spending is lower and interest paid on national debt is considerably lower.

OBR predicts wage growth above inflation for the next five years.

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

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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 – 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 – 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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ACE – Barriers to Investment

ACE’s Barriers to Investment report explores a wide variety of aspects that act as barriers, or significantly change the risk profile of an investment project. These processes are important within the investment cycle and should be understood by all parties involved.

By facilitating wider debate on these issues it is hoped that the UK can open up new and existing avenues of funding to help address the infrastructure challenges we face moving forward.

Investment in infrastructure is currently considered as a key policy objective of most developed and developing nations. The goal is a simple one, given the financial crisis, reduced demand conditions and concerns regarding sovereign debt, capital spending is considered a method of facilitating economic growth.

However, these conditions have meant that financial markets are less willing to invest, and their risk profile is considerably lower (reducing their willingness to take risks). This is unfortunate given governments willingness to transfer both the financing and risk of delivering infrastructure projects into the private market.

This paper has identified three key areas where improvement is required to facilitate more activity within infrastructure investment.

The risk associated with the construction phase of infrastructure is not understood, and is considered of significant risk by investors. This phase of projects needs de-risking.

The public/private sector need to outline clearly what risk each party are prepared to accept and the return associated with such risk.

There needs to be a dialogue between government and industry to move the debate surrounding the barriers that are in place with a view to designing practical solutions.

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

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ACE – Introducing competition into the water market

This paper has been produced by ACE to explore the potential of regulatory and market reforms within the water sector.

In particular this paper looks to address the relatively low levels of consumer competition, supply competition, the inadequate levels of investment and the environment under which investment takes place.

To resolve some of these issues the paper makes the following recommendations for the government’s water white paper, suggetsing it should consider:

Introducing competition into the consumer and supplier markets by allowing private companies to run and compete in these areas;

Creating of an independent (ownership unbundled) network system operator(s);

Requiring non-discriminatory third party access to the network from network system operators;

Allowing price signals to guide investment;

Breaking the current investment cycle, allowing network investment to occur over longer periods according to detailed investment plans, whilst companies that own private water producing/treatment facilities invest on a rolling basis given market price signals and consumer needs;

Creating conditions that would allow new entrants to enter the market, and create competition between existing water suppliers. For example, companies outside of the water sector may wish to enter to provide bundled services (gas, electricity and water);

Putting in place regulatory conditions that create an easy switching environment, to encourage switching rates;

and having the water regulator oversee the operation of the market and ensure competition and standards are met, rather than directly setting investment and consumer pricing signals.

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

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ACE – Signals to invest

There has recently been an increased level of debate as to how the structure of the railways operates and the manner in which franchises are provided. Whilst this paper does not look at the franchise mechanism itself it does pose the question as to how we could further incentivise train operating companies (TOCs) to invest in the system on which they operate.

Most franchises in Great Britain are awarded by the Department for Transport (DfT), following an invitation to tender. Companies that tender do so according to a number of service criteria and targets that are outlined by the DfT to be achieved during day-to-day operation.

However, as with most regulated industries the franchise model is not without its flaws. Some companies perform well, others do not. There have been instances of fare increases significantly above the rate of inflation, with questionable service provision and improvements taking place. There is also anecdotal evidence that the confusing terms and conditions and negotiations within the franchise system making performance achievement hard to measure and value hard to judge.

Part of the reason for such occurrences is a reduced willingness to improve an infrastructure asset which the TOC does not own.

As we have seen from the government‟s recent announcements in the Comprehensive Spending Review, the level of subsidy provided to the companies that operate these franchises is due to fall, and fares rise. This will not please rail users unless service levels continue to improve and investment continues to take place to upgrade Britain‟s ageing rail network.

The questions once again arise: are franchise companies willing to invest in the network, are they able to invest in the network, and are they willing to make these investments given the current length of the franchise agreements and that they do not receive the full market return for the investment that takes place?

There is a willingness among TOCs to invest in physical assets. Virgin, for example, has bid for the design, build and operate contract for the new Tampa to Orlando high speed line in Florida. Train operators in the UK have invested in station refurbishment, while alternative models (such as “adopt-a-station”

schemes) have been applied to harness alternative resources and community efforts.

Other solutions have been proposed which include lengthening franchises to encourage franchise operators to take a long term view of investment, or privatising the system allowing all decisions to be made on a cost/profit basis with ownership of the asset under private hands. However, privatisation holds the potential for the formation of an uncompetitive monopoly and brings into question how the asset is treated in terms of its national efficiency, importance and strategic value.

Ways in which such investment issues could be alleviated include creating regulatory frameworks which incentivise investment (effectively subsidising the TOC) and extending the term of franchises to extend the period under which a return is made.

As well as the financial issues explored in this paper, there may be other obstacles to bringing private investment into the physical rail network. These include issues of planning law, compulsory purchase mechanisms and regulatory and procurement processes, all of which would impact private sector efforts to build new railway infrastructure. This paper only considers the financial mechanisms by which investments could be encouraged.

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

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