The Chancellor of the Exchequer used his 2021/22 Budget announcement to provide details on the new UK Infrastructure Bank (UKIB), timetabled to begin operating in an interim form in Spring 2021. It will have captured the attention of many UK infrastructure professionals keen to understand what would replace the European Investment Bank (EIB) financing after Brexit. Until now, discussions around the topic have understandably been more about “what it won’t do” than “what it will do”, let alone “how” it will do it.
In summary, the UKIB will provide financing support to infrastructure projects across the UK, to help meet government objectives on climate change and regional economic growth (the “levelling up” agenda). Those two overarching goals were widely anticipated given their prevalence in recent public announcements. To deliver on this objective, UKIB will:
- be able to deploy £12 billion of equity and debt capital, and be able to issue up to £10 billion of guarantees (currently administered by the Government’s guarantee scheme);
- offer a range of financing tools, including debt, hybrid products, equity and guarantees, to support private infrastructure projects;
- from the summer 2021, offer loans to local authorities at a rate of gilts + 60 basis points for strategic infrastructure projects; and
- establish an advisory function to help with the development and delivery of projects.
Some conclusions jump out from the initial announcement.
A strong point is the various ways in which the UKIB will be able to deploy its capital across the capital structure and including some guarantees. This should ensure that it is not limited to lending beside the commercial funding markets: instead, it will seek to act as a catalyst for, or even a precursor to, private sector capital. Going over the initial remit of the Green Investment Bank (“GIB”), this sounds eerily familiar though.
However, it is important that its assumption of responsibility for the Government’s guarantee scheme does not turn it into an extension of the Government. Ensuring its independence will be paramount to its ability to raise capital. International development institutions typically have a shared ownership structure: this allows their investment decision-making to remain independent from changing political forces. It is unclear how UKIB will achieve this with a single shareholder, despite the stated ambition to “ultimately operate as a separate institutional unit at arm’s length and with a high degree of operational independence”. The publication of the Bank’s investment principles, promised for later in the spring, should shed further light.
The initial £22bn is a drop in the ocean of the funding needed for the climate objectives alone, let alone the “levelling up” agenda. To put it into context, the total senior debt raised in November 2020 by Dogger Bank A & B (two offshore wind farms -admittedly rather large ones both located well out to sea), added up to £6bn[1], or 27% of UKIB’s initial “firepower”. A further relevant comparison is the GIB’s initial capitalisation of £18bn in 2011 (through £3bn of Government capital allocation leveraged up to five to six times through debt facilities).
The advisory role may prove helpful in supporting local authorities in structuring their projects in a way that guarantees the highest level of acceptability to markets. Subject to that team’s terms of engagement and experience, it may be a good incentive for local authorities to fully use their financial advisor. The advisory team would, however, need to be fully independent in order to protect the quality of the advice it provides. It will also need to explain how its mission differs from the Infrastructure & Projects Authority, the Treasury’s centre of expertise for infrastructure and major projects.
For the infrastructure market participants, it confirms public officials’ early messaging about the UKIB that it would not “crowd out” the private sector. Indeed, its mission is one of additionality: to “crowd in” private investments. The GIB’s focus on green investments (not dissimilar to UKIB’s) was also meant to support the development of technologies then perceived as too risky. The success of offshore wind in the UK is testimony to this approach.
The GIB was however created at a time when market liquidity was perceived as constrained forever. Bank debt was regularly being dismissed as an ill-fitted source of long-term funding and those critics said new credit enhancement tools were needed. However, in practice, there has been no shortage of liquidity: since the great financial crisis the infrastructure asset class has grown in leaps, managing to secure increased capital allocations within ever vaster pools of liquidity. This has helped drive down the cost of established technologies as well as reduce the time required for technologies to look “mature” enough to finance privately: witness the speed at which hydrogen projects are being developed even before the regulation is fully established.
Since GIB was created, another fundamental change happened: the UK left the EU in January 2021, with the direct consequence of preventing the EIB from financing UK projects such as those that UKIB is now proposing to finance. As in many other areas, the UK needs to replicate what was available through the European institutions and architecture.
Technology will keep advancing and continue to offer new investment challenges that private sector capital may be reluctant to back initially. The Government is betting not only that using public money will be the right solution to these situations, but also that UKIB’s investment decisions will be “smarter” than those of venture capitalists or private equity investors.
[1] Source: Inframation
