UK Government Proposes £22B Infrastructure Bank
This week, as part of the annual budget message, the government of United Kingdom Prime Minister Boris Johnson proposed to create a national Infrastructure Bank, to be located in Leeds (not London) and to be capitalized with £12 billion in capital from Her Majesty’s Treasury.
The full plan answers the “why now” argument – because Brexit has ended the eligibility of projects in the UK for funding out of the European Union Infrastructure Bank (EIB). The plan says “Where the EIB provided support in well- financed areas, the government anticipates that the private sector will step in without public sector support. An assessment from Vivid Economics for the NIC1 showed that a portion of EIB activity crowded out private investment. Respondents to the Infrastructure Finance Review echoed this point. However, the EIB played a role in helping some new green technologies, such as offshore wind, to develop a commercial market through its low-cost lending. The threat of climate change and our targets for net zero make the need to support new greener technologies all the more pressing. The UK Infrastructure Bank can play a pivotal role here, crowding in private sector investment in important areas and helping to kick start new sectors. It is also a government priority to ensure that the shift to a green economy happens in a way that distributes investment across the whole country.”
The plan calls for the UKIB to be capitalized up front with £5 billion in cash from the Treasury, plus an an additional £7 billion in borrowing rights from the government’s Debt Management Office (which can also be used to borrow in private markets if that winds up being cheaper than borrowing from DMO). Of that £12 billion of equity and debt capital, 25 percent (£4 billion) will be loaned to local government authorities (at the base “gilt” rate plus 60 basis points) for their projects, which “do not need to be revenue generating in themselves but the Bank will seek evidence that the project is financially sound and that the authority has the ability to repay the loan.”
The other £8 billion will be invested in private-sector projects, the initial focus of which will be “the economic infrastructure sectors covered in the National Infrastructure Strategy: clean energy, transport, digital, water and waste.”
In addition to that £12 billion in equity and debt capital, the Bank will also be able to guarantee up to £10 billion in loans (no more than £2.5 billion per year for four years), with special access through the UK Guarantees Scheme.
The investment strategy to be followed by the Bank is spelled out in the full plan:
To maximise its impact the Bank will focus on intervening where its ‘additionality’ to the market is greatest. The Bank will invest to make projects happen that would not have happened otherwise or to bring projects forward to meet net zero or regional and local growth objectives. The bank will limit its exposure to investments that could already be fulfilled by the private sector.
By providing financing tools and support earlier in an asset’s maturity or the lifecycle of a project, the Bank can help to bridge gaps in the private market and to de-risk the project for other investors, therefore crowding in further capital via cornerstone investments. Through the development of new infrastructure markets and assets, the Bank can help to grow the overall UK market which will create new opportunities and returns for private investors.
The plan promises operational independence from the rest of government, but says that the full details will have to wait until a “framework document” is released later this spring.
The pound sterling is currently trading at 1.40 dollars per pound. But the UK is smaller than the US, so we have two different comparisons of how this level of I-Bank investment would scale up to the US – relative percentage of GDP, and relative percentage of total government spending. No matter how you scale it up, the UKIB is the equivalent of the US putting a little north of $200 billion in infrastructure investment out in the economy through this vehicle.