This article was first published in the Financial Times.
As UK priorities move towards boosting foreign direct investment (FDI) into the UK, Rupert Pleasant, CEO of Guernsey Finance, looks at how jurisdictions such as Guernsey can bolster investment back into the UK.
As its external connections and position in the global economy undergoes change, foreign direct investment (FDI) is becoming ever more vital for the UK economy. But it is facing stiff competition to attract that investment from the likes of countries including the US, France, Ireland and Singapore.
On average, a £1 million FDI project into Great Britain leads to a net increase in national levels of gross value added (GVA) of around £98,000, and a net increase in employment of around 2.9 jobs.
With an increase in FDI comes substantial economic benefits, yet since its peak in 2016, there have been successive annual falls in the value of investment into the UK. The latest statistics show that the value of FDI into the UK in 2021 was worth -£51.7 billion, down from £34.8 billion in 2020.
The value of outward FDI flows (investments made by UK companies in companies abroad) was £61.7 billion, compared to -£74.8 billion in 2020.
So, how can the UK increase its levels of inward investment in the face of tough competition?
Well, investment flows from Guernsey, an international finance centre and crown dependency and key member of the British family, are bucking this trend by reinforcing global investment into the UK.
In a recently published report by one of Europe’s largest economic research houses, Frontier Economics, researchers found that Guernsey-based funds currently channel £57 billion of investment from around the world and into the UK economy.
This is important partly because of what that funding is used for - infrastructure projects, financing business through private equity, and property investments. But this is also important in terms of the wider context for the UK's inward investment, because funding through Guernsey has been growing at about 14% per year since 2020.
The findings also highlight that UK fund managers are generating more than £2 billion of fees from Guernsey-based funds annually, generating additional tax revenue for the UK, and providing £7 billion of investment returns for UK investors.
In the report, one UK law firm said: “Guernsey funds are an economic enabler.
“They aggregate and channel money into the UK. Foreign money wants to come into the UK via a neutral, stable jurisdiction.”
So, could a jurisdiction like Guernsey add to the UK’s value proposition to attract inward investment?
Well, the relationship between the island and the UK, with deep linkages built up over generations due to geographical, historical and cultural ties, as well as overlaps in legal and regulatory frameworks, certainly increases the competitiveness of the UK as a finance hub.
The island’s financial services industry has played a significant role in increasing the international competitiveness of UK financial services providers, improving risk-adjusted returns, diversifying portfolios, getting UK clients greater access to the significant expertise that international finance centres like Guernsey have, and offering access into global markets.
Because of that unique relationship to the UK, Guernsey channels investment that other international finance centres wouldn’t be able to do. The report demonstrates that a significant proportion, namely £13 billion, of the £57 billion of investment into the UK would be unable to be recouped in the long term if these funds were domiciled in other jurisdictions.
Guernsey’s long-established fund industry also encourages investment into sustainable UK infrastructure through regimes such as the Guernsey Green Fund, the world’s first regulated green investment fund product. Investments through this regime align with UK policy objectives such as the development of a resilient, low cost, low carbon power sector. Specifically, the British Energy Security Strategy has set out a target for the UK to deliver a five-fold increase in the deployment of solar by 2035.
For example, the NextEnergy Solar Fund (NESF) was awarded the Guernsey Green Fund designation in February 2020. NESF invests primarily in solar power plants across the UK and in all four nations (approximately 85% of its asset base). As of September 2023, NESF owned 92 UK operating solar assets which collectively accounted for 830 MW of solar assets, which could power roughly 660,000 homes each year.
Initiatives like the Guernsey Green Fund align seamlessly with UK policy goals, particularly in levelling up and advancing an economically efficient and environmentally friendly power sector.
NESF UK investment locations
NextEnergy Solar Fund investments across the UK.
Guernsey also offers up an ecosystem of expertise with service providers offering niche services that often leads to higher cost savings for businesses than they could access from alternative services.
It makes sense for the UK to tap into the expertise and dynamism of the island, bolstering foreign investment and the generation of UK-based fees, along with the associated tax revenues.
Crown dependencies like Guernsey continue to add value to the UK and remain strategically important as stable conduits to international capital. It represents a mutually beneficial collaboration and a symbiotic relationship; the success of one is the success of the other.
