The UK Government has announced plans for a UK National Infrastructure Bank to support its pledges to "level-up" the UK, reach "net-zero carbon" by 2050 and meet the challenges of both Brexit and post-COVID-19 recovery. We look at the background and some of the key issues for the new bank.

Following weeks of speculation, Chancellor Rishi Sunak used the 2020 Spending Review to outline plans for creating a UK National Infrastructure Bank ("UKNIB")

This bank is a crucial component of Britain's first National Infrastructure Strategy ("NIS").

The NIS underpins four critical parts of the Government's updated agenda: catalysing manifesto pledges to "level-up" the nation, making a success of Brexit, reaching "net-zero carbon" by 2050, and aiding post-COVID recovery. The NIS is intended to harness £640bn of infrastructure investment over the course of the current parliament, as the Chancellor announced in March of this year.

The bank is expected to play a leadership role in this "infrastructure revolution", and will support investment in both the public and private sectors. The private sector currently contributes half of all infrastructure spending in the UK.

Acknowledging the "levelling-up" agenda, the bank will be based in the North of England. It will likely be an advance guard of the proposed new northern "economic campus" and part of broader attempts to relocate 22,000 civil servants out of London and the south-east by 2030.

The role of the EIB and Brexit

The UKNIB is envisaged to replace some activities of the European Investment Bank ("EIB") in the UK. The EIB model has been to use its AAA rating to support projects - by investing directly and guaranteeing it will cover certain risks and thus encouraging other financial institutions to invest. The EIB's ability to raise money at a cheaper rate than private and debt and equity providers (given it does not look for commercial returns) has also enabled it to enhance the affordability of the projects it has supported. Since its formation, the UK has received the fifth most EIB investment - in recent years, EIB has guaranteed €200m loans to northern SMEs, provided a loan for new rolling stock for Merseytravel and supported the most recent extension to Manchester's Metrolink light rail network.

However, the EIB's support for UK projects has declined in the years following the UK's referendum on EU membership. Given that over its entire history 91% of the EIB's investment has been directed to EU countries (with the other 9% primarily deployed in countries that were EU applicants/potential EU applicants), the scope for the EIB to continue to support UK projects appears to have diminished. Accordingly, calls have grown for a UK institution to replace the EIB as a source for investment / support of private investment in infrastructure deals. In July 2018, the National Infrastructure Commission recommended that a "new, operationally independent, UK infrastructure finance institution should be established by 2021".

With a significant proportion of the UK's infrastructure projects pipeline expected to be funded and delivered privately and the UK's existing sophisticated capital and financial markets seeking relatively sound investments (with pension funds tabbed to play an increasingly important role), supporting that investment pipeline is, understandably, important to the Government.

The UK National Infrastructure Bank

Until now, the UK has been the only G8 country without a dedicated institution for dealing with SME financing issues and initiatives. By contract, Germany, Japan and Canada also have publicly owned, operationally independent financing institutions for infrastructure.

The UKNIB is intended to be a world-class, expert institution operating within a mandate defined by the government whilst retaining a high degree of operational independence. Crucially, given the nature of infrastructure projects and investment, UKNIB will provide a degree of policy stability, and withstand the cycles of parliamentary politics.

Like the EIB, the UKNIB will be expected to act as a cornerstone investor on key projects, co-investing alongside private sector investors including banks, institutional investors, sovereign wealth funds, global infrastructure investors and perhaps most significantly, pension funds. It will be able to offer guarantees as well as debt, equity and hybrid products.

The Government has stated its intention that the UKNIB will collaborate with pension funds and the institutional investor market to explore further opportunities for institutional investment into UK infrastructure projects. The expectation is that pension funds and insurers would be able to invest between £150 billion and £190 billion in UK infrastructure over the next ten years[1]. The hope is that in this way the UKNIB will indirectly enable the Government to achieve its stated infrastructure objectives - including support for net zero infrastructure. When analysing the market ahead of the creation of the Green Investment Bank, the Government identified "ongoing market failure around innovation in the infrastructure sector; the risks associated with innovative technologies, techniques and financial products can be too high for the private sector without government support." [2] This market failure was (at least in part) due to the lack of availability of viable financing solutions for SMEs due to the perceived risk. The UKNIB may therefore prove particularly useful in enabling innovation in new infrastructure technologies, where private sector investors would typically be uncomfortable with the risk profile of specific projects or sponsors.

It remains to be seen to what extent those projects in asset classes currently deemed to be too high risk / immature to attract low cost capital (in particular "Net Zero" infrastructure schemes) can be supported by the UKNIB. This partly depends on the extent to which existing tools (such as the UK Guarantee Scheme) will be available to the UKNIB. Perhaps more significantly it depends on whether the Government's objectives (including Net Zero) will be supported by targeted funding and long-term incentives, to enable a pipeline of deliverable projects. It also remains to be seen what the UKNIB's strategy will be around secondary market activity (which could be a route for the UKNIB to improve its liquidity).

The UKNIB will be able to lend to local and mayoral authorities for key regional infrastructure projects, and act as an advisor to these authorities on developing and financing such projects. It is unclear how this aspect of UKNIB's remit will fit with the revised role of the UK Public Works Loan Board, since the Government identified new lending terms for PWLB loans in the 2020 Spending Review.

The Chancellor is expected to set out comprehensive details of the structure, operations, mandate and scale of the UKNIB at Budget 2021. Enabling legislation will follow shortly thereafter and is likely to be subject to considerable scrutiny. Until then, important questions remain about how the UKNIB will be structured and controlled, and how and when it will become involved in projects.

In light of their manifesto pledges and the pending loss of access to the EIB, the creation of the UKNIB is a logical step by the government. Key questions about its procedures and structures remain, but there is hope that the UKNIB can help catalyse infrastructure investment and innovation in the UK, at a time when measures to enable such investment are critical for so many reasons.

Footnotes:

[1] 'The Power of Pensions', Legal & General, June 2020
[2] HM Government (2011), Update on the design of the Green Investment Bank