Significant investment in UK infrastructure is needed to deliver much needed upgrades, stimulate social and economic growth in the economy and across the UK post-Covid-19, and to set in motion the wide-ranging changes needed to help tackle climate change such as investment in emerging technologies.
The newly formed UK Infrastructure Bank (UKIB) announced by Chancellor, Rishi Sunak, last Autumn will have a key role to play in catalysing the investment needed to help us “build back better, fairer and greener”.
HMT’s policy document issued in March 2021 set out some key principles around how UKIB will operate - Policy Design of the UK Infrastructure Bank.
Whilst the stimulus that UKIB could bring is to be welcomed, with new chair, Chris Grigg, taking up his appointment earlier this month and UKIB still set to launch imminently in an interim form this Spring, much remains unclear in terms of the Bank’s remit, priorities and interim capabilities. More guidance is expected later in the Spring.
I attended a Westminster Energy, Environment & Transport Forum policy conference earlier this week (sponsored by Burges Salmon) on priorities for the Bank, with speakers from across the industry.
Burges Salmon’s Stuart McMillan shared his views as part of the panel considering ‘priorities for Bank design and the potential scope of powers and responsibilities - options for finance and investment models, its role at a national and local level, and learning from examples of best practice’.
There is a lot to consider in terms of how the HMT’s policy document will be implemented, what UKIB’s role and priorities should be.
UKIB’s central policy objectives
UKIB has stated that it will pursue two central policy objectives through its interventions in the infrastructure market to:
- Help tackle climate change, particularly meeting our net zero emissions target by 2050; and
- Support regional and local economic growth through better connectivity, opportunities for new jobs and higher levels of productivity - “levelling up”.
Its primary focus will be on the economic infrastructure sectors covered in the National Infrastructure Strategy, including clean energy, transport, digital, water and waste.
It is thought that how successful UKIB can be in achieving these aims is likely to turn on:
- to what extent its mandate as a “commercial organisation” will fetter its ability to meet its social and environmental policy objectives and its appetite to risk and loss; and
- UKIB’s ability to “crowd in” private sector finance.
UKIB’s role as a commercial organisation
HTM’s policy document makes clear that UKIB will prioritise investment where there is an under-supply of private sector financing. I.e. UKIB’s role will be to champion and accelerate infrastructure projects that otherwise would not have been given the green light using traditional investment models. This will include projects that are deemed too risky for private investment to take on at this stage, such as those involving new and emerging technologies or smaller start-ups, both of which will have an important role to play in our ability to tackle climate change.
Inevitably, this must mean that it is likely that at least some projects that UKIB invests in will be loss-making (at least at first) and that some projects will fail. WEET panellists suggested that the Bank will have to accept this principle and take calculated risks in order to play the role that we need it to play in delivering major infrastructure and enable private finance to come in further down the track. Canada’s Infrastructure Bank for example operates upon these principles.
It remains to be seen however how UKIB can balance its appetite to risk and loss with its role as a commercial organisation. Will this hamstring UKIB’s ability to meet its social and environmental objectives on Net Zero and Levelling Up?
“Crowding in” private finance
The policy document is also clear that UKIB intends to work alongside the private sector to deliver the change and investment needed.
Whilst concerns have been raised by some industry players that UKIB could “crowd out” private finance, HTM’s policy document makes clear that UKIB’s ability to “crowding in” private finance will be crucial to its success.
To develop the major infrastructure that is needed and achieve key objectives on Net Zero and Levelling Up, we cannot rely upon public sector financing or UKIB lending alone.
In reality, UKIB’s initial budget of £22bn (£12bn of capital and £10bn of government guarantees) will only scratch the surface in delivering the pipeline infrastructure needed. For example, the Climate Change Committee has estimated that by 2050 the UK will need to spend an additional £50bn per annum across all sectors to meet its Net Zero targets - Sixth Carbon Budget. To achieve our Net Zero goals, we need to accelerate investment now.
Private sector investment into UK infrastructure will be needed. UKIB will have a key role to play in creating the environment to build confidence in what may be seen as riskier investments and structure projects in such a way as to attract the private finance needed (e.g. by aggregating smaller projects).
In the first instance, this will ultimately require taxpayers to underwrite the early-stage construction and financial risks.
As ever, the devil will be in the detail.
With the Treasury’s Net Zero Review expected imminently to “assess how the government can make the most of the economic opportunities and benefits of net zero and what a green economy could look like”, will we see UKIB clarifying its objectives over the next few months?
Fairness must be central to decarbonising, spreading success so that all groups or regions benefit. Recent updates to the Treasury’s decision-making bible, the Green Book, were a step in the right direction, referencing environmental metrics and regional inequality. But a bigger signal would be if the new UK Infrastructure Bank focused on job creation, carbon reduction and health, not just financial returns.