Those familiar with the UK infrastructure and energy sectors will be aware be aware that a Government-owned bank, established to fund projects in these sectors, has been talked about for some years, partially as a response to Brexit and the withdrawal of the European Investment Bank from the UK market, and also following the Government’s sale to Macquarie of a previous government-backed bank, the Green Investment Bank, in 2017.
Established in June 2021 (but discussed by Ministers long before this date), the UK Infrastructure Bank (“UKIB”), is now firmly in existence. It recently published its first annual report and accounts, has made a number of significant senior recruitment hires and has financed a number of material projects including several in the digital / broadband sector.
UKIB’s stated role is to offer a range of financing support to projects in specific sectors. Backed with £22bn of financial capacity from the UK Treasury, UKIB will fund the private sector and the public sector (particularly targeting local authorities and mayoral authorities looking to support high-value and complex economic infrastructure projects), with a range of products available including loans, credit enhancements, guarantees and equity investment. There is also an emerging advisory service for local authorities.
UKIB will apply four ‘investment principles’ to any proposed private sector financing. In each case, the proposed investment:
- must help to support the Bank’s objectives ‘to drive regional and local economic growth or support tackling climate change’;
- must be in infrastructure assets or networks, or in new infrastructure technologies. The Bank will operate across a range of sectors, but will prioritise clean energy (including nuclear), transport, digital, water and waste;
- should be intended to deliver a positive financial return;
- is expected to ‘crowd in’ significant private capital over time.
A further objective, ‘to support the UK’s energy resilience and security’ following the Russian invasion of Ukraine appears to have fallen away, but we expect will still apply informally.
Crowding in or Crowding out?
Some market commentators have queried the need for UKIB, given that there is no apparent shortage of equity and debt capital available to fund projects in the UK (in contrast to 2009/10 following the Global Financial Crisis), and this is thought to remain the case even as the country enters more challenging economic times. UKIB’s early position was summarized as being able to fund novel or challenging projects /sectors / technologies which commercial lenders may be wary of, or to act as a cornerstone investor. This has now developed into the principle of ‘additionality’ with the Bank considering whether there is ‘an undersupply of private sector capital and where its participation will reduce barriers to investment’. Guidance on ‘additionality’ has recently been published, but some in the market may continue to hold a view that the Bank’s participation risks ‘crowding out’ investors.
To date, the UKIB has funded c.10 projects (there may be more, with details not yet published), the first being a loan of £107m in October 2021 to a public sector body to part fund the construction of offshore wind industry port facilities in Teeside. Significant investments were seen in 2022 particularly in the digital (fiber / broadband) sector. Q3 saw a particularly noteworthy deal, being its support for the £2.4bn NeuConnect UK: Germany interconnector project. It has also announced support for programs of investment in EV charging infra and low carbon heat networks. Particularly novel is the Bank’s stated support for ‘natural capital markets’, aimed at projects which may assist with tacking climate change and which could take in projects involving woodland / peatland and rewilding. The Bank is known to be in discussions with a number of other projects and potential borrowers, across sectors, with 2023 being potentially busy.
The Bank now regards itself as not just ‘open for business’ but as ‘a permanent and important UK financial institution’. Headquartered in Leeds not London, it has ambitions for a large workforce and is recruiting locally. Sponsors and developers of projects in the Bank’s chosen sectors will want to consider UKIB within their financial structuring. This will apply whether they are UK-based, or non-UK investors looking to fund UK-based projects. It will also be interesting to follow the extent to which UKIB adopts similar features and ‘lessons learned’ from other similar institutions around the globe such as the Canada Infrastructure Bank and the Asian Infrastructure Investment Bank.