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Infrastructure blog

Future Finance – paying for infrastructure after Brexit

10 June 2019

ICE has responded to the Treasury and IPA Infrastructure Finance Review, which looks at a potential domestic replacement for the European Investment Bank after Brexit and the role of private finance.

Future Finance – paying for infrastructure after Brexit
Image credit: EIB

With record levels of planned investment in the nation’s infrastructure – projected to be worth at least £60bn a year for the next decade – taking steps to keep the flow of finance open are more and more pressing.

That investment is desperately needed.

New transport links around the country will unlock growth and productivity, while improving commuter experiences.

A growing population alters the demand profile for energy generation and climate change means that much more of this must come from renewable sources.

More extreme weather events will require greater water resilience, more robust flood defences and sustainable drainage systems.

Financing future need

While the need is clear, as set out in ICE’s National Needs Assessment, how we find the resources to meet it is not. This is why ICE published State of the Nation 2018: Infrastructure Investment last year looking at interventions which can be made to encourage the long-term funding and financing of infrastructure.

One of our core recommendations for that report was for the government to explore the feasibility of establishing a UK financial institution as contingency against a loss of access to the European Investment Bank (EIB).

The EIB is a major inward investor of capital, with over €100bn invested in projects in the UK since 1973. The bank has supported offshore wind and the development of landmarks like Cardiff Bay and Canary Wharf. It also has a mandate to support regional growth and invest in less developed areas.

Through hundreds of projects around the country, the EIB has been a valued partner in the UK’s development over recent decades.

With Brexit, however, that partnership is in jeopardy. The UK is a shareholder of the EIB by virtue of membership of the EU, but this looks set to end whenever the UK does leave.

It's, therefore, timely that the Treasury has decided to review the need for a replacement to the EIB if the UK does lose access.

A UK financial institution

Maintaining access must be preferred, but if that's not possible, ICE has made the case that a replacement UK financial institution is necessary.

Any new domestic institution should seek to replicate the many benefits the EIB already provides. These include:

  • Vital investment during periods of economic turmoil ‘Anchoring’ or ‘crowding in’ investment from the private sector by providing additional expertise and confidence;
  • Supporting innovative projects and developing new sectors; and
  • Maintaining expertise and directing investment to less developed regions.

ICE has suggested using the UK Guarantees Scheme to leverage private capital and de-risk a UK financial institution which would avoid impacting on public sector net debt.

The successful impact of the EIB

There's a strong case that without lending from the EIB (and the Green Investment Bank) for offshore wind in its infancy the sector would have struggled to receive enough financing from the private sector to progress.

As a result of this initial support, this technology is now competitive with coal and gas on cost. Additional renewable capacity has enabled the UK to experience its longest period of coal-free power since the 1880s.

Where the private sector is hesitant and where social benefit can realistically occur from action, there will continue to be a need for an institution in the UK to provide the functionality that the EIB currently does.

Long-term planning for long-term benefit

It's promising that infrastructure remains high on the government’s agenda. The response to the National Infrastructure Assessment, in the form of the National Infrastructure Strategy, is due later this year and should outline a plan for the long-term needs of businesses and the public alike.

Keeping the flow of public and private investment going is key to delivering major projects. This is vital to provide boosts to capacity which projects like High Speed Two and Hornsea Project One, the world’s largest planned offshore wind farm, will deliver.

These projects will still be connecting people, in person and through powering digital technology, in decades, if not centuries, to come; benefiting multiple generations and driving economic development.

Meeting this end goal requires that the UK remains a competitive destination for international and domestic capital.

Finding a solution to policy challenges like Brexit, providing alternatives routes to market for private investors and stabilising policy mechanisms, which help to bring about a long-term vision, are the necessary building blocks to retain confidence.

If the EIB becomes unavailable, it's necessary that a UK alternative, which builds on the positive legacy of the past and looks to the future, is forged. The UK will need its own investment bank.

View the full paper

  • Policy, at ICE