Starmer faces challenge in convincing global investors

KEIR Starmer is set for a critical meeting with international investors this month, seeking their backing to drive economic growth and address concerns about national decline.

On October 14, Starmer will meet with executives from global banks, energy companies, and other major firms. He aims to leverage political uncertainties in countries like France, Germany, and the United States to position Britain as an attractive investment option.

However, significant challenges remain. Although Starmer's Labour Party won a strong victory in the recent elections, the near-collapse of Thames Water has shaken investor confidence.

Thames Water and other privatised utilities have come under fire for environmental issues, particularly the pollution of rivers. Current investors in Thames Water argue that regulatory restrictions have limited their ability to raise bills, which they say is necessary to finance improvements.

"We're talking to international investors, and they're very nervous about the UK," said Luke Hickmore, investment director at abrdn, one of Thames Water's creditors. "That's largely around the uncertainty on regulation."

Britain requires large-scale investments to modernise infrastructure, which is essential for Starmer's plan to double economic growth and increase tax revenues for public services. However, the country cannot compete with the significant subsidies available in the United States and the eurozone for the transition to net-zero emissions.

Chancellor Rachel Reeves, just days after the election, outlined proposals to address obstacles in planning and financing for infrastructure and housing projects. Despite this, specific details remain scarce, and the government has yet to appoint an investment minister.

"There is definitely a sense that they have identified some of the problems, but it's very early days and there are a lot of unanswered questions," said Raoul Ruparel, director of the Boston Consulting Group's Centre for Growth.

Investment rates remain low in the UK, with additional challenges from high labour and energy costs. Britain also has a long-standing under-investment problem, ranking 28th out of 31 countries in the Organisation for Economic Cooperation and Development for business investment as a percentage of national income in 2022, according to the Institute for Public Policy Research.

Despite these issues, officials point to recent successes, including a £10 billion investment by Blackstone in an AI data centre and an £8 billion investment by Amazon.

Investor concerns

Britain has lost its position as Europe’s top foreign direct investment destination, overtaken by France, although it still led in new projects in 2023, according to EY. A survey conducted in July by Alvarez & Marsal found Britain was the only major European economy rated negatively for infrastructure attractiveness, largely due to regulatory concerns.

"The government doesn't understand that clear, distinctive and predictable regulation is still an opportunity the UK hasn't seized," said a London-based consultant who asked to remain anonymous.

Luke Hickmore from abrdn noted the combination of higher interest rates, government change, and regulation had created a "perfect storm" for investors.

Starmer's government plans to introduce new laws to tighten oversight of water companies, including measures to curb executive pay, in response to public outrage over environmental issues.

Investors are also awaiting clarity on the new government's tax policies. Reeves will announce her first budget on October 30, with hints of higher taxes for the wealthy. Many businesses are delaying expansion plans until the budget is revealed.

Next spring’s spending review will detail the government's long-term investment plans for sectors such as power and transport, providing a framework for private sector investments.

Ruparel highlighted that investors are seeking a shift away from the government's focus on short-term budget rules toward a longer-term strategy. "Businesses appreciate the balance-sheet challenges, but they are looking for strategic guidance and clarity over where the government is going with its own investment plans," he said.

Reeves has hinted at such a shift in her upcoming budget, but some investors worry that tax increases, including on capital gains, could undermine efforts to boost investment.

"Those types of measures might be counterproductive to what they are trying to achieve," said Peter Arnold, EY's chief UK economist.

(With inputs from Reuters)