Conversation with Antonio Hernández, KPMG Spain Head of International and Energy Strategy, responsible for Brexit

September 2019

To deal with the uncertainty brought on by Brexit, the Economy, Innovation and Employment Department of Madrid City Council has developed a self-diagnostic tool to help companies assess potential risks and identify their most exposed business areas. In this context, we talked with Antonio Hernández, International Strategy Partner responsible for Brexit at KPMG Spain and who has been part of the team involved in the development of the tool.

M.I.A.: What is your opinion about Madrid’s international standing Madrid? Where would you place it?

A.H.: First of all, it is important to take into account the attractiveness of Spain as a destination for global investment, being as it is one of the main investment destinations worldwide, as well as in terms of ease of doing business.

Since 2014, Spain has received annual foreign direct investment flows above €20 billion , reaching a historical maximum of €49 billion in 2018.  Madrid attracted 85% of these flows.

In accumulated terms (stock), Spain ranks as the 13th world destination, and Madrid represents 68% of direct foreign investment in company HQ and 29% of the employment generated.

The structural reforms carried out in recent years (financial system, labor market, fiscal consolidation, tax system, competitiveness reforms, etc.) have contributed to strengthening the competitiveness of the business climate in our country. To this we must add the correction of the main macroeconomic imbalances (public deficit, current account balance and unemployment) and the improvement of the economic scenario in Spain, which has become the country with the highest growth within the great European economies with five consecutive years of growth above 2%. Institutions such as the European Commission or the IMF have recently revised upward the growth forecasts for the Spanish economy in 2019 and by 2020 the estimates point to a GDP growth of 1.9% (compared to the estimated 1.6% for the EU ).

As I said, within Spain, the Madrid region has traditionally been at the forefront as a recipient of foreign direct investment.

This is undoubtedly due to the strong dynamism of the Madrid economy, the main economic engine of Spain, with economic growth that has traditionally exceeded, not only the national average, but also the EU’s. In 2018, the growth of Madrid’s GDP stood at 3.7%, more than one percentage point above Spain’s as a whole (2.6%).

But not only have the strong dynamism and scale of Madrid’s economy  served to lure foreign investors. Factors such as a lower taxation on income and wealth, the concentration of businesses and the presence of supervisors and regulators, the high qualification and specialization of the available labor, its greater competitiveness in terms of labor costs and real estate rentals, its transport and communications infrastructure, as well as its magnificent connectivity with Latin America and Africa, and of course, its quality of life and cultural offer, mean that Madrid continues to be an attractive destination for investors, competing with other European cities such as Paris , Frankfurt, Amsterdam or Dublin.

M.I.A.: What is Madrid lacking for it to become a true global center, beyond positioning and image? Could you identify 3 areas in which Madrid could stand out?

A.H.: Despite the undeniable advantages that Madrid offers as a destination for foreign investors and the efforts at the institutional level to improve the competitiveness of the Spanish economy, there is still room for improvement in areas like strengthening market unity, the streamlining of procedures, digitalization of companies, innovation, education and entrepreneurship, as well as in the tax and labor spheres. We are aware that progress is being made in this regard.

In the last Business Climate Barometer in Spain published by Invest in Spain in 2018, investors pointed out issues such as the costs of some services (electricity, telephone, etc.), red tape, or knowledge of languages among the workforce, as elements to be improved.

One of the areas of improvement in Madrid, highlighted by several real estate consultants, is the efficiency and flexibility in the supply of real estate, which they consider inferior to that of other European capitals, on average- In this sense, it is necessary to improve the quality standards of real estate in the market.

As for the three areas in which Madrid has room to stand out, and, without ruling out other areas, I would first mention financial services, taking into account the concentration of the Spanish sector in the capital, the proximity of regulators, availability of a skilled workforce and an ecosystem of service companies for the first level sector, and the connecting role that Madrid has traditionally played between Europe and Latin America alongside London.

Precisely related to the link with Latin America, I would also highlight a certain advantage in regard to international arbitration, with a jurisprudence that is increasingly favorable in our country and an Arbitration Law inspired, almost entirely, in the United Nations guidelines in matters of international arbitration (UNCITRAL Model Law), which facilitates and streamlines procedures.

Finally, investors in technological projects can find interesting advantages in Madrid, such as the ecosystem of large companies and startups from various sectors that have been forming in recent years, an important specialization in large financing rounds and the availability of highly specialized professionals in technology at highly competitive costs.

M.I.A.: Madrid before Brexit: What are the risks and the opportunities? Is the city prepared? How can a negative impact be minimized? What can still be done?

A.H.: Financial services and related professional services (legal, consulting, tax, etc.) currently represent 12% of the GDP of the United Kingdom, which gives an idea of the magnitude of the City’s financial sector. Moreover, it is also used to working under British law, with all that this implies in terms of codes of conduct, standardization of contracts and judicial pronouncements.

In this way, it is difficult for such a financial ecosystem to move entirely to another European destination. However, several relocations have already taken place and more are no longer ruled out in the coming months due to a potential loss of the financial “passport” (whereby any entity established in an EU country can freely provide its services in the rest without establishing itself). 

Therefore, a sufficient adaptation of the legal systems to the usual standards of the City will be a relevant location factor.

Some Spanish institutions were proactive from the start, like the CNMV, which launched a direct authorization procedure for companies based in the United Kingdom, with standardized forms in English and a single interlocutor.

However, it is not an easy task to anticipate measures in an environment as uncertain as the current one with the Brexit negotiations, and there are still many investors who are still waiting to see if they activate their contingency plans, relocating their activity in the United Kingdom to other places in Europe. The high cost that this implies and the great uncertainty justify the delay.

In this sense, Madrid has to bet on attracting as much business as possible, highlighting its attractions and continuing to improve its business climate and regulatory environment; issues that I discussed earlier.

The provision of quality office space is becoming increasingly important. In this sense, I am convinced that the recently approved real estate developments and the improvements that are being carried out will contribute very positively to attract investment to Madrid.