Let’s just take the companies that actually have the word “British” in their name. British Airways is owned by IAG, a Spanish registered company. British Steel was bought by Jingye Group, the Chinese steelmaker, in 2020.
The biggest shareholder in BT, which used to be called British Telecom, is the French billionaire Patrick Drahi. British Land’s top three shareholders are Norway’s massive sovereign wealth fund, a Dutch pension scheme and a US fund manager.
Roll back the years and British Leyland, which incorporated most of the UK’s car making industry, was renamed the Rover Group in 1986 and then sold to Germany’s BMW.
Most of the other notable marques were snapped up by other foreign buyers: Jaguar Land Rover is now part of India’s Tata Group, Bentley Motors is part of Germany’s Volkswagen Group, Rolls-Royce is another of BMW’s stable, Aston Martin Lagonda is controlled by a consortium headed by the Canadian entrepreneur Lawrence Stroll (although the livery of his F1 team of the same name, a separate company, is British racing green).
British Gas’s parent company Centrica is headquartered in Windsor and listed on the FTSE 100. It is, therefore, still pretty British. (Scottish Power, however, is a subsidiary of the Spanish utility Iberdrola.)
But in common with the likes of British American Tobacco and BAE, which was formed by the merger of British Aerospace and Marconi Electronic Systems in 1999, it will have a large number of foreign fund managers and hedge funds on its shareholder register.
They will be investing in these companies on behalf of pension schemes, endowments and retail investors all around the world. In total, foreign investors now own roughly two-thirds of all listed shares in the UK, according to a study conducted last year by the investor relations consultancy firm Orient Capital.
Such a granular analysis of privately owned companies is trickier but it is clear large swathes of British infrastructure are also in foreign hands. Heathrow is owned by a consortium of Spanish, Qatari, Canadian, Singaporean and US investors (although the UK’s Universities Superannuation Scheme does have a 10pc stake).
Gatwick is majority owned by a French company and managed by an American outfit. Most of the UK’s rail franchises are run by foreign owners, including the German, French, Italian and Dutch states. A recent investigation by The Guardian found that at least 72pc of England’s water industry is held abroad (although some of the ownership structures are so opaque it could be an even larger percentage).
Fall into foreign hands
There has been a “for sale” sign over the UK for more than four decades now. Few Western countries have allowed so many strategic assets and blue-chip companies to fall into foreign hands. Two questions quickly follow from this: how did it happen and does it matter?
The UK has been one of the world’s leading advocates of free trade since William Gladstone repealed the restrictive Navigation Acts in the 19th century. This was admittedly something of a no-brainer when a quarter of the landmass on world maps was coloured pink, but the dislike of trade barriers survived the loss of Empire and it has long been considered a net positive that foreign investors are queuing up to buy a piece of the UK.
This is partially because the UK is also a leading advocate of cakeism - a doctrine that long predates Boris Johnson. As the old joke has it, Britons aspire to Scandinavian-style public services paid for with US levels of taxation.
One way to bridge the gap is through the public-private partnership model of infrastructure funding, which was pioneered by the Major and Blair governments and seen as a cost-effective alternative to public ownership that ensures borrowing can be kept off the Government’s balance sheet.
When allied with a light-touch regulatory environment, it attracted huge flows of foreign money. In the early years of the century it was not uncommon for the UK to attract a full fifth of all the foreign direct investment flowing into the EU’s 28 member states in any given year.
That money has been trumpeted by successive governments as a vote of confidence in the country. Sometimes a fall in the value in the pound will result in UK assets appearing cheap to those who account for their investments in another currency
But, on the whole, most investors are putting their money into the UK because they think it is a good place to make money.
Foreign investment also tends to come with fresh management styles and expertise, techniques and technology. This helps to ensure British businesses are competitive on the world stage. As long as a company is headquartered in the UK, employs plenty of Britons, makes its products or provides its services and pays its taxes here, the main benefits of the business operations will still accrue to this country. For the most part, it should be largely irrelevant who the owners are.
Loss of control
water leak - Chris J. Ratcliffe/Bloomberg
But foreign ownership can also result in a certain, sometimes quite indefinable, loss of control. International owners may not feel as compelled to keep their promises to the Government as British owners would. Soon after the US food giant Kraft swallowed Cadbury in 2010 it reneged on a pledge made during the bidding process to keep a factory open. Foreign investors may be less swayed by local activists and pressure groups and therefore arguably less accountable.
Much of the criticism of this state of affairs focuses less on foreign ownership and more on privatisation. The UK is one of very few countries in the world that has auctioned off its water industry partly because it is such a vital service and local providers operate quasi-monopolies. A common complaint is that investors milk these assets for dividends rather than investing in improvements - hence the leaks, hosepipe bans and dumping of sewage.
However, it is not entirely clear the water companies would fare much better under government ownership when there are so many other competing demands on the public purse at the moment. A better solution may lie in tightening up the regulation of such assets.
Things get even more fraught when issues of national security are at stake.
A report in 2017 warned that “ownership or control of critical businesses or infrastructure could provide opportunities to undertake espionage, sabotage or exert inappropriate leverage”.
The list of assets that are considered strategically vital and cannot be allowed to fall into hostile hands is constantly expanding. The National Security and Investment Act came into force in January, which the Government heralded as “the biggest shake-up of the UK’s national-security regime for 20 years”.
Most people would agree that a balance needs to be struck between holding a jumble sale for the UK’s family silver and becoming so protectionist that we start repelling foreign investors at the border. Where the balance lies is, of course, a matter of fierce debate and is also liable to shift over time. It has certainly done so in the past decade.
Globalism’s apotheosis
For the best illustration of this look no further than how quickly the UK government’s attitude to Chinese investment has changed. The golden age of Anglo-Sino relations lasted barely seven years. The epoch was ushered in by George Osborne at the Shanghai Stock Exchange in the autumn of 2015; it was pronounced dead by Rishi Sunak last month.
The symbolism of the location in which Osborne made his declaration was lost on precisely no one. This was all about trade. The then Chancellor claimed: “No economy in the world is as open to Chinese investment as the UK.” If you exclude North Korea, he was probably right. Osborne’s kow-towing to Beijing has not aged well. But it is worth remembering the context. Osborne was operating at what we can now judge as globalism’s apotheosis.
Many rich nations had concluded that greater engagement with China was a win-win-win. As the fast-growing economy opened up it offered the possibility of a previously untapped market for Western companies; as it grew richer, the savings of China’s burgeoning middle classes could become a vast new source of capital; and as China became more integrated in the global economy, it was assumed the country would become more politically liberal. Germany dubbed this policy Wandel durch Handel, “change through trade”, and applied it to Russia as well.
Xi Jinping London - Yui Mok - WPA Pool/Getty Images
It hasn’t worked out as hoped. There has been a backlash in the West to globalisation. While this had been building for a while, it is relatively easy to identify the turning point.
“The world looked a lot different after 2016,” says Jonno Evans, a former private secretary to two Prime Ministers in 10 Downing Street and former British diplomat in Washington DC.
“The election of Donald Trump and the Brexit referendum were at least in part a result of public attitudes to globalisation souring. China was seen by some to have benefited more than Western countries. Suddenly the inevitability of globalisation didn’t look quite so inevitable any more.”
Separately, China’s leader Xi Jinping has become more authoritarian, not less. The first pause for doubt was provided by Beijing’s crackdown on the Uyghur population in Xinjiang and pro-democracy demonstrators in Hong Kong.
“People started waking up to what China was doing and how powerful it had become,” says Evans. “The US especially has now made the judgment that China’s technological prowess had developed too far and is seeking to, in the words of economist Noah Smith, ‘kneecap China’s semiconductor industry’. And Washington is quite explicitly putting pressure on its allies to do the same.”
Then came the double whammy of the Covid pandemic and Russia’s invasion of Ukraine. Suddenly global supply chains started jamming up. For years, the Western world had only really considered where it could buy the stuff it needed most cheaply. Now it came to realise that this might mean it wouldn’t be able to buy stuff for love nor money when it was most needed. Economic interdependence provides huge benefits in the good times but can also create massive vulnerabilities when the going gets tough.
“Geopolitics is back in the boardroom,” says Evans, who now advises technology companies at Epsilon Advisory Partners. “For the past couple of decades companies didn’t need to worry about it but we have now entered a new era of Techpolitik."
He adds that they now need to consider not only sanctions, but data sovereignty, supply chain disruption, cyber attacks and standard setting.
“Politicians are looking to ensure that the technology our children and grandchildren use is underpinned by Western values,” says Evans.
“The US Office of Foreign Assets Control recently sanctioned a line of code. It’s possible that TikTok [which is owned by the Chinese tech giant ByteDance] will be banned in the US pretty soon. Then the UK will have a choice to make, as we did on 5G.”
Disentanglement
George Osborne david cameron - Dan Kitwood - Pool/Getty Images
Was the Cameron government naive or has the world just become a lot more worrisome in recent years? Probably a bit of both. Either way, the UK has been attempting to disentangle Chinese investment from crucial infrastructure.
Under a long-standing deal, CGN, which the US placed on an export blacklist back in 2019 after Washington accused it of stealing American know-how for military purposes, invested in Hinkley Point C power station in Somerset; then Sizewell C, which has just been given the green light; and is still technically due to be the lead investor at Bradwell-on-Sea in Essex where it is hoping to instal its own design of reactor.
The Chinese company still retains a stake in Hinkley Point and received formal approval for Bradwell from the UK’s nuclear regulator in February. But there is growing scepticism at Westminster that the Chinese will ever be able to build on the site.
“The Government has deliberately cast the net very wide [with the NSI Act] to make sure that it doesn’t miss anything,” says Neil Cuninghame, a partner at City law firm Ashurst, “The Government won’t actively single out China but I’m sure there’s a hierarchy where China is at or near the top of the list.”
In focusing on how the UK got into a situation where it sold off so many of its assets to foreign investors, most people fail to consider the other side of the equation: why British investors are selling up.
It’s not like they don’t have plenty of cash. UK pension schemes, insurance companies and retail investors own assets totalling something in the order of £5.6 trillion. This is the largest and deepest pool of capital in Europe. However, just 12pc of this money is invested in the UK stock market and less than 4pc trickles down below the FTSE 100 group of the biggest companies.
Defined benefit, or “final salary”, pension schemes reduced their allocation to UK equities from 48pc in 2000 to just 3pc last year, according to the Bank of England. Even more strikingly, less than a single per cent of the £4.6 trillion in pensions and insurance assets is invested in unlisted equities, according to New Financial. As William Wright, the head of the think tank says, it’s like The Rime of the Ancient Mariner: “Water, water, everywhere – nor any drop to drink.”
What’s so frustrating is that, with money so tight, the country badly needs investors like pension funds and insurers with long-term time horizons directing their patient capital at the real economy. And, theoretically at least, such assets would provide exactly the right kind of return profile to meet their liabilities.
Back ourselves
Last year, Boris Johnson and Rishi Sunak wrote an exasperated letter to UK-based institutional investors urging them to plough a greater proportion of their money into UK assets: “It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country.”
Earlier this year, local government pension schemes were told to set up plans to invest up to 5pc of their assets in domestic initiatives - a target so low that it mostly serves to highlight the extent of the issue. Even this prompted swift pushback from a number of schemes who pointed out the goal might clash with their fiduciary responsibilities.
The trouble is, UK investors are not investing as they do because they are unpatriotic or believe British assets are duds. Rather it is down to a number of deep-seated regulatory and structural issues.
Most defined benefit pension schemes are closed to new members and switching from equities to bonds as the majority of their members approach retirement. Onerous regulations make it too expensive for insurers to invest in illiquid assets like private equity and infrastructure. Most low-cost retail investment products are also unsuited to these kinds of investment.
In fairness, a good chunk of the regulatory tweaks that have been wrapped together and branded as the Edinburgh Reforms attempt to address this mismatch.
The cornerstone of this drive is Solvency II, a piece of arcane insurance regulation that most people would never have heard about were it not for the fact its reform is frequently touted as a potential Brexit dividend. Although the benefits are often overstated, it is true the existing EU rules don’t perfectly suit UK insurers. Without getting too lost in the weeds, the reforms should mean that insurers will be asked to hold less capital against long-dated investments.
The Association of British Insurers has calculated that this might free up around £100bn in what it calls “long-term productive finance”. Whether this money will actually find its way to investments in British assets of, say, future dividend payments remains to be seen.
‘Sliding doors moment’
Perhaps the best answer to the predicament the UK now finds itself in can be found at an intriguing “sliding doors” moment in recent British political history.
In his book “Two Hundred Years of Muddling Through: The Surprising Story of the British Economy”, the economist and author Duncan Weldon points out an apartment paradox. For all Margaret Thatcher’s reputation as a tax-cutting prime minister, the amount of revenue being collected by the Treasury during her time in charge hovered at around 40pc of GDP. How come? In a word: oil. Crude was discovered under the North Sea in the late 1960s but production didn’t really start cranking up until the late 1970s. The UK went from producing 1.5m barrels a day in 1979 to 2.7m in 1988.
During the 1980s, taxation on oil from the North Sea delivered an average of £18bn a year to the UK’s Treasury (when adjusted for inflation). “One in 12 pounds the British government received came straight from the North Sea,” writes Weldon.
north sea oil - CARINA JOHANSEN/NTB Scanpix/AFP
But whether the UK got the maximum bank for those bucks is open to debate. Weldon certainly doesn’t think so and a country on the other side of the North Sea provides the counter example.
He writes: “Norway used its oil bonanza to build a sovereign wealth fund that is now one of the world’s largest pools of assets; Britain used its take to cut corporation and personal tax.”
Actually, the Norwegian oil fund, which was set up with the express aim of ensuring the country’s petroleum revenues could be enjoyed by future generations, is now the biggest in the world, with $1.3 trillion in assets under management, a figure that has increased sixfold since the financial crisis in 2008. It seems to exploit its long-term nature to boost returns by investing in assets that aren’t available to other investors.
Its chief executive Nicholai Tangen recently said: “We can be more contrarian [and] do the opposite of other people, because when other people sell we can buy and vice versa. We can be even more long term in how we invest because we have a 30 to 100-year time frame.”
One of things his fund has been buying as others were selling was UK assets. As of the end of last year it had £71.6bn, 6.8pc of its assets, invested in Britain, with stakes in 370 companies and 214 properties, including London’s Regent Street (one of the green ones on the Monopoly board). It is, as previously mentioned, the biggest investor in British Land.
The UK may be becoming more wary of accepting China’s money but that doesn’t mean we have to eschew the country’s wisdom. The Chinese say that the best time to plant a tree was 40 years ago but the second best time is now. The same may well be true of establishing sovereign wealth funds.
