Budget 2021: giving meaning to the UK Infrastructure Bank
With the publication of the “Policy Design” for the UK Infrastructure Bank (“UKIB“), the UK government has ‘delivered’ on its commitment to create a national infrastructure bank. We are looking at some of the key issues for the UKIB and what its role might be in implementing the government’s pledges to ‘level'” in the UK, will reach Net Zero Carbon by 2050 and meet the challenges of Brexit and COVID-19 recovery.
Leeds, don’t follow
As we saw in our previous article, “UK National Infrastructure Bank announces – a catalyst for UK infra?” plans for a national infrastructure bank were first outlined in the 2020 expenditure review. UKIB will be headquartered in Leeds but will 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-step process, with the foundation it needs to perform many of its functions ahead of the ‘third step. where it will be established by law. . At present, there is no timeline for the first loan or investment, but it looks like the UKIB will be able to do this at “Stages 1” and “2” before the legislation is passed. enabling.
The policy design is very clear on the role of the UKIB’s role in crowding-in investing and bridging the gap between the large body of private finance seeking to provide capital for projects UK Infra and the current risk profile (and therefore the expected rate of return) of projects identified by the government as key investment areas.
UKIB’s initial ‘mission statement’ focused on two policy objectives:
- support decarbonization (to achieve Net Zero by 2050) and
- support local and regional growth.
For Net zero, the policy design infers that the UKIB’s role will be akin to government action to address market failures. It specifically refers to carbon capture and storage, sustainable fuels and thermal efficiency as examples of the type of projects the UKIB will provide funding to and identifies some tools it will have at its disposal to “ convene ” a co- private sector investment. It also identifies (in very high level terms) a broader role for UKIB in supporting the policy and regulatory changes needed to enable the use of certain technologies that may play a role in decarbonization projects.
For local and regional growth UKIB should also support goals and policies, including:
- Infrastructure as an engine of growth and upgrading; and
- Building on the “Ten Point Plan for a Green Industrial Revolution”.
A replacement for the EIB after Brexit?
The general message is that the UKIB will replace the activity of the European Investment Bank (“EIB”) mainly in areas related to green technologies and Net Zero, but does not seek to participate in the infra UK market as a direct replacement. of the EIB.
The policy design recognizes the role previously played by the EIB in the UK, but does so in slightly critical terms (referring to studies which identified the EIB as ‘crowding out’ private investment and only supporting projects in the UK. well-funded domains). However, he recognizes the historic role of the EIB in enabling the growth of offshore wind in the UK.
Capitalization and capacity
UKIB will have the capacity to deploy up to £ 22 billion:
- Up to £ 2.5bn per year of guarantees (up to a maximum of £ 10bn). The policy statement states that this will mean that the UKIB will take responsibility for the functioning of the UK guarantee system;
- £ 5 billion from HM Treasury in the form of equity; and
- The ability to borrow up to £ 1.5 billion per year (up to a maximum of £ 7 billion) on a government credit facility or in private markets.
Public / private sector breakdown
The policy design also identifies that the UKIB will have a clear separation between public and private.
Its “public” arm will be focused on the public sector, with £ 4bn of the £ 12bn of equity and debt capital available to UKIB for lending to local communities. These loans will initially be made through the Public Works Loan Board (“PWLB”), and UKIB will not be able to make them on its own until it is created by law.
Loans to local authorities (for projects> £ 5million) will be made at rates as low as gilts + 60 basis points. What is not clear is to what extent UKIB should replace activities that are currently funded by prudential borrowing from local authorities, or to what extent the involvement of a local authority will be necessary for any project. or other investment to access UKIB funding.
The full mandate of the “ private ” branch of the UKIB is to be defined by the time it receives statutory foundation, but the design of the policy indicates that it will be strongly focused on Net Zero, with its initial mandate being to provide clean energy loans and investments. , transport, digital technology, water and waste, as well as loans to universities (for income-generating projects).
Role of the UKIB in the implementation of the Dasgupta recommendations
A potentially important point identified in the design of the policy is the indication that the government will consider the case for expanding the UKIB’s mandate to include other areas such as enhancing the UK’s natural capital. United. It could just be to refer to nature as one of the 10 points identified in government. Ten-point plan for a green industrial revolution for 250,000 jobs (November 2020), but it could also highlight some of the measures identified in Professor Sir Partha Dasgupta’s paper “The economics of biodiversity“and the potential for nature conservation and measures aimed at improving our natural environment to be part of the UKIB’s mandate.
While the policy design and accompanying announcements provide much-needed clarity on the intentions behind the establishment of the UKIB, it also identifies some of the areas where further reflection and development is underway to determine the structure and future role of UKIB.
What is certain is ambition – rather than an initiative to ‘fill’ the void left by the EIB after Brexit, the UK government has signaled its intention to exploit UKIB as a tool key in achieving goals that go beyond the mere achievement of Infrastructure. We will watch with interest its progress and the achievement of the stated goal of ensuring that private investment occurs at a rate that enables the UK government to meet its political goals.
You can find out more about the other changes that Budget 2021 has planned for the energy and infrastructure sectors by reading our article “Budget 2021: what does this mean for the energy and infrastructure sectors?“.