UK government plans for a national infrastructure bank, unveiled earlier this month, have been welcomed by investors. But there are questions yet to be answered, and doubts persist as to whether the idea fleshed out by Chancellor of the Exchequer Rishi Sunak and the UK Treasury will provide the stimulus needed.
“We already knew that the government is committed to infrastructure investment, but the private sector needed to see more detail on how the national infrastructure bank would shape up in terms of supporting the economy and our communities,” says Ted Frith, COO of GLIL Infrastructure, a fund that invests on behalf of UK local authority pension schemes.
Although Sunak’s budget announcement in the House of Commons only mentioned the bank briefly, Frith said the policy design paper now published offers substantial guidance. “It has also reaffirmed the government’s commitment to work closely with pension funds, which the Chancellor sees as an important ally in funding and achieving its programme to ‘build back better’,” he says.
According to the document, the UK Infrastructure Bank (UKIB) will be a long-lasting institution with a high degree of operational independence, and two core objectives: help tackle climate change by meeting the UK’s 2050 net-zero emissions targets; support regional and local economic growth “through better connectedness, opportunities for new jobs and higher levels of productivity”.
Launching in the spring, the bank is to have financial capacity of £22bn (€25.6bn), comprising £12bn in capital and £10bn in government guarantees. The Treasury has said £4bn of the bank’s capital should be earmarked for local-authority lending and the other £8bn allocated to private-sector projects. The bank is to draw capital from the Treasury and be able to borrow from private markets, and will also grow through recycling and retaining returns on investments.
Frith says Sunak’s announcement clarified the UKIB’s objectives and role in the market. “It will both back some regional projects, but also the large complex projects that need significant investment to get off the ground – an efficient use of its capital,” he says. “This will also help create more opportunities for pension funds to invest directly into infrastructure, which means more stable, long-term returns for millions of pensioners.”
Darryl Murphy, managing director of infrastructure at Aviva Investors, says that, even though the industry would welcome the positive tone of Sunak’s announcement and the details about how the UKIB would work in practice, what mattered now was meaningful engagement on how the bank could unblock latent private capital to meet the government’s infrastructure aims.
Several questions have yet to be answered. Will the bank replace or supplement existing tools – for example, how the finance function in the Infrastructure and Projects Authority fits into the UKIB.
Aviva Investors has also consistently told the government that the main area of market failure within infrastructure was in early-stage development of new technologies or business models. “The policy document does not provide direct comfort early-stage equity capital that is explicitly designed to be recycled is within its remit,” Murphy says. But he hopes there will be assurances soon.
The UKIB is being positioned as a public-sector bank, Murphy says, not an infrastructure fund. This implies the government sees a greater gap in debt than equity – but this is “not a feature readily observed in the UK market today”, he adds.
Investors are concerned about the lack of infrastructure investment opportunities, according to Murphy, especially for insurance companies subject to Solvency II requirements. Unless there are “significant changes” to so-called matching-adjustment requirements for insurers, “a large volume of potential capital well aligned to the long-term nature of net zero-related infrastructure will not be available,” he says. Whether the UKIB can help mobilise this capital is a critical question, Murphy says.
And there are currently few examples of commercially-viable new UK infrastructure assets that could attract private-sector capital, he adds. “Assets only struggle to raise capital for clear reasons associated with the underlying commercial risk, although this position may change over time as the UK accelerates new technologies and policies to support the pathway to net zero.”
The UKIB will need to work carefully through each sub-sector to understand the precise financing challenges and determine its risk appetite for new technologies or commercial models, he says. “There are many examples of the challenges ahead: The appetite for long-term, subsidy-free renewable projects, early-stage technologies in the waste-to-sustainable-aviation-fuel sector, early-stage projects relating to the hydrogen economy and the development of small modular nuclear reactors.”
Tony Dalwood, CEO of alternative asset management firm Gresham House, says that, overall, the announcement was positive. “It’s positive for us and it’s positive for UK society as a whole to crowd in private capital,” he says. “It has happened in the past, and anything that accelerates investment into areas that the private market needs to be stimulated is a positive thing.”
Gresham House is already involved in a number of areas the bank is planning to support, Dalwood says. “Now it’s about getting their capital to work in the other areas of its aspirations. They will need to work with private capital providers like Gresham House, and the implementation is critical, he says.
“That means involving the people at the centre of this, having timetables to work to and being clear on the mandates. They will have to plug into private capital networks.”
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