With the publication of the 'Policy Design' for the UK Infrastructure Bank ("UKIB"), the UK Government has put "flesh on the bones" of its commitment to establish a national infrastructure bank. We look at some of the key issues for UKIB, and what its role might be in delivering government pledges to "level-up" the UK, reach Net Zero carbon by 2050 and meet the challenges of Brexit and COVID-19 recovery.
Leeds, not follows
As we covered in our previously article, 'UK National Infrastructure Bank announce – a catalyst for UK infra?' plans for a national infrastructure bank were first outlined in the 2020 spending review. UKIB will be headquartered in Leeds but have a UK-wide mandate. It is expected to start operations in spring 2021 in an 'interim' form, as the first part of a 3 stage process, with footing it needs to fulfil many of its functions not coming until 'stage 3' when it will be established by statute. At present, there is no timescale for when it will make its first loan or investment, but the indication is that UKIB will be able to do this at 'stage 1' and 'stage 2' before enabling legislation is passed.
The Policy Design is very clear about the role of UKIB's role in 'crowding-in' investment and addressing the gap between the significant body of private finance looking to provide capital for UK Infra projects and the current risk profile (and therefore the rate of return expected) of projects identified by the Government as key areas for investment.
The initial "mission statement" of UKIB is focussed on two policy objectives:
- supporting decarbonisation(to meet Net Zero by 2050) and
- supporting local and regional growth.
For Net Zero, the Policy Design infers that UKIB's role will be akin to government action to address market failure. It expressly refers to carbon capture and storage, sustainable fuels and heat efficiency as examples of the type of projects UKIB will provide funding to, and identifies certain tools it will have at its disposal to 'convene' private sector co-investment. It also identifies (in very high level terms) a broader role for UKIB in supporting the policy and regulatory changes needed to enable use of certain technologies that may have a role in decarbonisation projects.
For local and regional growth UKIB is also expected to support objectives and policies including:
- Infrastructure as a driver for growth and levelling up; and
- Building on the "Ten Point Plan for a Green Industrial Revolution".
A replacement for the EIB after Brexit?
The overall message is that UKIB will replace European Investment Bank ("EIB") activity principally in areas relating to green tech and Net Zero, but is not looking to participate in the UK infra market as a direct replacement for the EIB.
The Policy Design acknowledges the role previously played by the EIB in the UK, but does so in slightly critical terms (referring to studies that identified the EIB as "crowding out" private investment, and only supporting projects in well financed areas). However it does acknowledge the historic role of the EIB in enabling the growth of UK offshore wind.
Capitalisation and capacity
UKIB will have the capacity to deploy up to £22 billion:
- Up to £2.5 billion a year of guarantees (up to a maximum of £10 billion). The Policy Statement indicates this will mean UKIB takes on responsibility for the operation of the UK Guarantee Scheme;
- £5 Billion coming from HM Treasury as equity; and
- The ability to borrow up to £1.5 billion a year (up to a maximum of £7 Billion) from either government credit facility or private markets.
Public / Private Sector split
The Policy Design also identifies that UKIB will have a clear Public / Private split.
Its 'Public' Arm will be focussed on the public sector, with £4 billion of the £12 billion of equity and debt capital available to UKIB earmarked for local authority lending. These loans will initially be made through the Public Works Loan Board ("PWLB"), and UKIB will only be able to make them in its own right when it has been established by statute.
Loans to Local Authorities (for projects >£5 million) will be made at rates as low as gilts+60bps. What is not clear is the extent to which UKIB is expected to displace activities that are currently funded through local authority prudential borrowing, or the extent to which involvement of a local authority will be needed for any project or the other investment to access UKIB funding.
The full remit for UKIB's 'Private' arm is to be defined at the time it is given statutory footing, but the Policy Design indicates it will be heavily focussed on Net Zero, with its initial mandate being to offer loans and investments focussed on clean energy, transport, digital, water and waste, as well as lending to Universities (for revenue generating projects).
UKIB's role in fulfilling the Dasgupta recommendations
One potentially significant point identified in the Policy Design is the indication that the government will review the case for broadening UKIB's mandate to include other areas such as improving the UK's natural capital. This could just be to reference nature as one of the 10 points identified in the government' Ten Point Plan for a Green Industrial Revolution for 250,000 jobs (November 2020), but it might also point to certain of the measures identified in Professor Sir Partha Dasgupta's "The Economics of Biodiversity" and the potential for nature conservation and measures focussed on enhancing our natural environment to form part of UKIB's mandate.
Although the Policy Design and the accompanying announcements provide much needed clarity about the intentions behind the establishment of UKIB, it also identifies some of the areas where further thinking and development is taking place to determine UKIB's structure and future role.
What is certain is the ambition – rather than an initiative to 'plug' the gap left by the EIB post-Brexit the UK Government has signalled its intention to harness UKIB as a key tool in the delivery of objectives that go beyond the mere delivery of infrastructure. We will watch with interest to see its progress and whether it achieves the stated aim – getting private investment to happen at a pace that allows the UK Government to meet its policy objectives.
You can find out more about what other changes the Budget 2021 has set out for the energy and infrastructure sectors by reading our article 'Budget 2021: what does it mean for the energy and infrastructure sectors?'.