As the Budget reveals more details on the UK Infrastructure Bank, ICE analyses its offering and how it stacks up to previous financial institutions.
Set to be headquartered in Leeds with a nationwide remit, the UK Infrastructure Bank (UKIB) will be supported by £12 billion of initial capital and £10 billion in government guarantees over the next five years in support of levelling-up and achieving net zero.
ICE has advocated for a bank of this nature to be created since 2017, with our most recent State of the Nation report calling for it to have an explicit sustainability mandate, so the Bank’s creation and confirmation of its remit is welcome news to the infrastructure community.
Breaking down the bank’s offering
Five billion pounds of the Bank’s capital will be provided as equity from the Treasury, while it will be able to borrow up to £7 billion from private markets and government credit facilities.
The private sector will have access to the full range of the Bank’s products, including direct lending, hybrid loans, equity investments (including co-investments) and guarantees.
Some £4 billion is set aside for local government lending, which will only be in the form of loans for strategic projects of at least £5 million. However, the rate on these loans compares favourably to most existing offerings, which may prove attractive for local and mayoral authorities.
The Treasury has also confirmed that the UKIB will be able work with the devolved administrations and the likes of the Scottish National Investment Bank.
How does it compare to previous banks?
One of the UKIB’s predecessors – the Green Investment Bank, launched by the coalition government in 2012 – was stymied by its inability to borrow from private markets. It’s therefore encouraging that the UKIB will be able to borrow, as well as recycle and retain its return on investments.
The Green Investment Bank was later sold to the private sector, but it’s clear the government has no intention of doing so with the UKIB, stating that it “will remain as part of the public sector… permanently”.
There are also questions about how the UKIB measures up against the European Investment Bank (EIB). As ICE set out in a response to the Infrastructure Finance Review, the EIB was a major inward investor of capital, providing key financing in developing success stories such as the UK’s offshore wind market, alongside supporting regional growth in less developed parts of the country.
While funding from the EIB dried up in the aftermath of the 2016 referendum, it averaged approximately £5 billion of financing to UK projects every year before that.
The UKIB’s £12 billion in capital over the next five years does look small in comparison. The Office for Budget Responsibility expects expects that the UKIB will invest around £1.5 billion per year, after accounting for lending to local authorities that would have otherwise taken place through the Public Works Loans Board.
However, the government anticipates that the private sector will step into already well-financed areas, with the UKIB able to primarily support newer technologies and crowd in finance on projects that have a risk profile incompatible with the private market.
More than just a lender
From analysing the UKIB’s policy design, it’s clear that it will replicate the many benefits the EIB provided. This includes the role of crowding in private sector investment, directing investment to less developed regions, and providing advice and expertise on projects.
This latter point is important as it means the UKIB does more than simply be a source of finance.
Confirmation from the Treasury that the UKIB will develop a specific advisory service for local authorities and other project promoters is welcome, as this can address capacity gaps and help ensure infrastructure projects address strategic objectives.
What happens next?
While the initial funding may not be as extensive as previous offerings, it’s important that the Bank uses its capital in a strategic way that prioritises the delivery of outcomes from early on in its establishment.
Keeping the flow of public and private investment going is vital to deliver on the strategic objectives outlined in the National Infrastructure Strategy.
The Bank looks to be on solid foundations to enable this, with the government planning to publish a set of investment principles later this year to help the Bank assess whether a project is in scope. The UKIB itself will build a framework for assessing projects and making independent decisions on what it invests in.
ICE looks forward to working with the Treasury and the UKIB in developing these, and ensuring the bank adds the value needed to the infrastructure financing landscape.