National Infrastructure Bank (2) – crowding in post-pandemic

As anticipated in our blog on 14 December 2020, the Treasury has provided further detail on the UK’s new national infrastructure bank (the “Bank”) following the Spring 2021 Budget.

The Leeds-based Bank has been given two core policy objectives:

1. To help tackle climate change and help the UK meet its net zero emissions target by 2050.
2. To “support regional and local economic growth”.

The Bank will have a total of £22bn to deliver these objectives in the form of £5bn of equity capital, up to £7bn in debt, and authority to issue up to £10bn of guarantees under the UK Guarantee Scheme. Of this, £4bn of the debt and equity capital will be allocated to local authority lending and from this summer the Bank will offer loans to local authorities for strategic projects of at least £5m at a rate of gilts + 60bps.

In deploying this capital, the Bank will focus on the infrastructure sectors covered by the National Infrastructure Strategy, which include clean energy, transport, digital, water and waste.

In our previous blog on the Bank, we:

• asked whether the Bank would crowd out or crowd in private infrastructure investors;
• considered the extent to which the Bank might fill or deviate from the role played by the EIB prior to the UK’s exit from the EU; and
• queried how much operational independence from the UK government the Bank would have.

The UK government’s stated hope is that the Bank will not crowd out private capital (as EIB has sometimes been challenged for doing by investing where there would otherwise be private finance readily available).

The Bank’s capital is intended to play a “pivotal role” in crowding in private sector investment in new green technologies and other investments with a social benefit. Offshore wind and the role of the EIB and Green Investment Bank in crowding in private capital is provided as a case study for how the Bank may be instrumental in driving investment in new green technologies. Looking forward, the UK government points to CCUS, sustainable fuels and heat efficiency as particular areas where the Bank could accelerate the delivery of new technologies alongside the private sector.

Among the tools available to the Bank to crowd in private finance, or at least avoid crowding it out, the government highlights the Bank providing mezzanine or first loss debt financing, taking equity alongside the private sector and investing early in an asset’s maturity or a project’s lifecycle where the risk may be too great for the private sector’s appetite.  At the same time, access to £10bn of UK Guarantee Scheme guarantees means that the Bank will have capacity to lend (or co-lend) a very significant amount of money to projects that fit within the Guarantee Scheme criteria of supporting otherwise bankable projects at market rates.

In terms of independence from central government, the Bank will operate under a strategic framework provided by the UK Treasury, but will, the government says, have day-to-day operational independence in making investment decisions.

While all will welcome further clarity in due course on the Bank’s independence and strategic framework for making investment decisions, those developing novel technologies in the clean energy sector can anticipate a major new and hopefully flexible source of funds to facilitate their projects.  In parts of the market where models for debt and equity investment are already well established, private infrastructure investors will take comfort from the UK government’s emphasis on making space for private capital investment in the UK’s significant pipeline of infrastructure projects; time will tell whether the new Bank does indeed apply its impressive capital resources to crowd in rather than crowd out private sector investment activity.

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