Monthly Archives: September 2022

Back in 2018, the National Infrastructure Commission (NIC) recommended setting up a UK national infrastructure bank to replace the functions of the European Investment Bank (EIB) after Brexit. The bank launched in June 2021 and since then has been operating on an interim basis. With Government wanting to put it on a statutory footing, how will its investments benefit rural areas? Jessica Sellick investigates. 

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Why set up a National Infrastructure Bank? The National Infrastructure Commission (NIC) was established in 2015 and is an executive agency sponsored by HM Treasury. It is charged with providing Government with ‘impartial, expert advice on major long-term infrastructure challenges.’ Every 5-years the NIC is tasked with producing a National Infrastructure Assessment (NIA) which analyses the UK’s infrastructure needs including a strategic vision and recommendations for the next 30-years. The NIA published in 2018 contained a recommendation that ‘Government should maintain access to the European Investment Bank if possible. If access is lost, a new, operationally independent, UK infrastructure finance institution should be established by 2021. To enable this, Government should consult on a proposed design of the new institution by Spring 2019’ (page 118). 

This recommendation was picked up in March 2019, when HM Treasury and the Infrastructure and Ports Authority (IPA) launched a consultation on infrastructure financing in the UK. This explained the role the European Investment Bank (EIB) had played in financing long-term investments in UK infrastructure. The EIB was established in 1958 and is the lending arm of the European Union (EU). It is one of the largest multilateral financial institutions globally, having invested over a trillion euros since then.

With the UK leaving the EIB when it ceased membership of the EU, the consultation looked at how the UK would be ready to ensure infrastructure projects could continue to access the finance they need. The consultation asked respondents to assess the EIB’s roles both in addressing market failure, and in providing additionality – and the extent to which the private sector could fill the gap in infrastructure finance when the UK ceased membership of the EIB. 

In November 2020, HM Treasury published a summary of the consultation feedback. Respondents identified several benefits to the EIB’s presence in the UK, including competitive rates with flexible terms, and the capacity to step in during economic downturns by offering additional liquidity in the event of insufficient private sector appetite to finance infrastructure projects. The EIB’s independence from Governments was also identified as a key benefit. Respondents also noted the EIB’s support for new technologies and green investments, and its ability to act as a catalyst to bring in additional funding for higher risk projects. Some respondents suggested the private sector would be able to fill some of the lending gap left by the EIB, however, they further highlighted how the private sector would find it difficult to fill certain gaps such as new technologies, where a long-term UK replacement would be required. HM Treasury stated there was support for a ‘new, enduring body to deliver infrastructure finance support tools’ (page 10) and set out the Government’s commitment to establishing ‘a major new national infrastructure bank… [with a] high degree of operational independence [but within a mandate set by Government]’ (page 12). 

In Spending Review 2020, the then Chancellor Rishi Sunak announced ‘plans to create a new infrastructure bank to catalyse private investment in infrastructure projects across the UK’. The National Infrastructure Strategy (NIS) was published alongside the Spending Review and set out plans to level up the country, strengthen the Union and achieve net zero emissions by 2050. In the foreword, the then Prime Minister Boris Johnson indicated how the national infrastructure bank would be a co-investment with private sector partners, available to mayors and Local Authorities, with its HQ based in the North of England. The proposed bank was a means of marking the Government’s commitment to ‘end the stop-start pattern of investment that has been common in the UK in the past…Public investment is only part of the story. Private infrastructure investment will be crucial for the UK’s economic recovery from the pandemic…the Government will support private sector investment, including through a new infrastructure bank for the UK which will co-invest with the private sector’ (page 10). 

Within the NIS, the UK infrastructure bank was described as acting as a ‘cornerstone investor’ that would seek to release investment from pension funders and insurers – which the Government estimated could provide £150-£190 billion for infrastructure over 10-years. The NIS stated co-investors might include banks, institutional investors, sovereign wealth funds and global infrastructure investors. The Government also stated that while the new bank would replace ‘some of the activities’ of the EIB its investments would be ‘more targeted’ than those of the EIB, and ‘better aligned with the UK Government’s objectives.’ 

When and how was the UK National Investment Bank established? The Spring 2021 Budget contained information on establishing the UK Infrastructure Bank: 

• The Bank would be provided with £12 billion of equity and debt capital to deploy to finance Local Authority and private sector infrastructure projects across the UK. 
• The Bank would be able to issue up to £10 billion of guarantees. 
• The Bank would be able to offer a range of financing tools including debt, hybrid products, equity and guarantees to support private infrastructure projects. 
• The Bank would be able to offer loans to Local Authorities at a rate of gilts + 60 basis points for strategic infrastructure projects. 
• The Bank would establish an advisory function to help with the development and delivery of projects. 

Also in March 2021, HM Treasury published a policy design document setting out the Bank’s strategic objectives and operating principles. The Bank’s operating principles included how it should (i) generate a financial return while also contributing to the Government’s priorities such as climate policy and levelling up; (ii) prioritise investment where private sector finance is lacking and ‘crowd in’ private sector investment; and (iii) take a long-term approach to provide the market with confidence and clear direction. 

In June 2021, the Government published a further document setting out the principles underpinning the relationship between it and the Bank. This Framework document set out the governance and accountability arrangements and the parameters within which the Bank would be expected to operate. While the Bank would be expected to operate across a range of sectors, the Framework asked it to prioritise clean energy, transport, digital, water and waste. The document also confirmed that HM Treasury would be the sole shareholder of the Bank, and that the Chancellor of the Exchequer would have ministerial responsibility for it. 

On 17 June 2021, the Bank was launched in an interim form from its headquarters in Leeds. At the launch event, the then Chancellor Rishi Sunak described how the Bank will “accelerate our ambitions for tackling climate change and levelling up, while creating new opportunities across the UK as part of our Plan for Jobs…Through the Bank, we are investing billions of pounds in world class infrastructure that will support people, businesses and communities in every corner of the UK”.     

What has it delivered so far? Since launch, HM Treasury and the Bank have focused on setting up the Bank’s structures – with the interim Board, chief executive, chief operating officer and non-executive director being filled with permanent appointments between September 2021 and June 2022. 

In November 2021, HM Treasury and the Bank agreed a Financial Framework, providing more detail on HM Treasury’s requirements of, and expectations of, the Bank. These details: 

• Confirmed the Bank’s financial resources – its transaction delegations and limits. The Bank was given delegated authority up to £5 million with thresholds ranging from £125 million for equity deals to £500 million for Local Authority lending. 
• Contained details about managing public money – setting out the Bank’s responsibilities and the principles within which it should operate. 
• Required the Bank to develop sound financial and risk management structures and processes. 
• Specified an annual financial performance (return on equity) target of 2.5%-4% before tax by the end of a 5-year period. 

HM Treasury requested the Bank produce its first strategic plan within 12-months of launch. To do this, the Chancellor provided additional guidance to the Bank on the Government’s policy priorities for the Bank and its mandate. 

In January 2022, the Bank published a discussion paper on ‘private sector opportunities in priority sectors’. This document set out the Bank’s offer to the private sector and public sector, what distinguishes it from other lenders, and the progress it had made since its launch. The discussion paper informed the Bank’s Strategic Plan. This confirmed the Bank’s focus on ‘increasing infrastructure investment across the United Kingdom’ in pursuit of two strategic objectives’: 

• To help tackle climate change, particularly meeting the Government’s net zero emissions target by 2050. 
• To support regional and local economic growth through better connectedness, opportunities for new jobs and higher levels of productivity. 

The Strategic Plan contained four principles against it will assess investments: 

1. Investments must support the Bank’s objectives to drive regional and local economic growth or support tackling climate change. 
2. Be in infrastructure assets or networks, or in new infrastructure technology. This principle reaffirms the Bank’s commitment to operate across a range of sectors but to prioritise clean energy, transport, digital, water and waste. 
3. Be intended to deliver a positive financial return. 
4. Be expected to crowd in significant private capital over time. 

Private sector projects must meet all four of these investment principles, and Local Authority projects must meet the first three. The Strategic Plan further explained how the Bank is developing KPIs to measure the impact of its investments. Organisations representing business, finance, trade unions, academia and civil society have provided feedback on the development of KPIs – calling on the Bank to take a broad interpretation of return (i.e., not just financial but also social, climatic and environmental); to implement Do Not Harm Standards and ensure all investments contribute to a nature positive economy; and to recognise the links between KPIs and transparency. The Bank is in the process of developing an ESG policy and framework. 

In March 2022 the Government set out its ‘strategic steer’ to the Bank. It asked the Bank to prioritise the energy security sector in sharing its concerns about energy security and energy prices following recovery from COVID-19 and the war in Ukraine. This means investments in nuclear energy, retrofitting energy efficiency measures into homes and greenhouse gas removals have increased in prominence within the Bank’s investment scope. On regional and local growth, the strategic steer referenced prioritising projects that fit with the missions contained in the Levelling Up White Paper, in particular, improving employment and productivity, transport infrastructure and digital connectivity. The Government also highlighted the role the Bank would take over in running the UK Guarantees Scheme. 

Between its launch date and June 2022, the Bank made five deals amounting to some £311.5 million. They comprise: South Bank Quay (£107 million), Gigaclear (£100 million), NextEnergy (£44.5 million), A45 Sprint Bus Route (£10 million) and Fibrus (£50 million). All of these deals are loans, and many came from existing proposals being considered elsewhere in Government and/or from existing initiatives underway. By April 2022, the Bank had a project pipeline of some 44 potential deals with a total value of approximately £5 billion. As well as existing contacts, the pipeline is also the result of enquiries through the Bank’s website and market engagement with potential customers. 24 of these pipeline projects are seeking to help tackle climate change, 9 relate to regional and local economic growth, and 11 projects cover both of these priorities. 

Why put it on a statutory footing? The Bank was set up in June 2021 as a company under the Companies Act 2006 and wholly owned by HM Treasury. At the outset the Bank began by operating under existing legislation through the Infrastructure (Financial Assistance) Act 2012 and the United Kingdom Internal Market Act 2020. 

In May 2022, HM Treasury published the UK Infrastructure Bank Bill. The Bill seeks to provide a specific parliamentary mandate for the Bank, placing its objectives into legislation and creating statutory forms of transparency, accountability, and governance. It is also intended remove legal obstacles to the Bank’s capacity to lend directly to Local Authorities and the Northern Ireland Executive for infrastructure purposes, and to give the Treasury financial assistance powers specific to the Bank. The Bill further provides flexibility for future changes should the Government wish to adjust the scope and/or focus of the Bank’s mandate. John Glen, then Economic Secretary to the Treasury, described how the Bill “sets out the Bank’s long-term purposes as an enduring institution…helping tackle climate change and support levelling up.” 

The Bill consists of eleven clauses – these reference the Policy Design Document and Framework Document in setting out the objectives and activities of the Bank; the Government’s strategic steer in supporting the Bank to set strategic priorities and plans; Treasury arrangements for money to be paid out of the National Loans Fund; and the need for the Bank to publish its first review of its effectiveness and impact with 10-years. It also confirms the financial capacity with the £22 billion provided to the Bank comprising £5 billion as equity from the Treasury, £7 billion in debt that it can borrow from the Treasury, and £10 billion in guarantees that can be issued by the Bank as part of the UK Guarantee Scheme. The Bank can also borrow from private markets and grow through recycling and retaining return on investments. 

How will the Bank benefit rural areas? The Bank’s strategic plan contains five references to rural. These include:  

• How the UK is one of the most geographically unequal developed economies and opportunity is not spread equally across the country – with complex rural-urban disparities (page 41). 
• Fast, reliable, digital connectivity drives regional and local economic growth, particularly in rural communities as it helps businesses grow, innovate, and create jobs (page 54). 
• The Government has a goal of delivering 4G mobile coverage across 95% of the UK landmass by 2025. We do not see a role for the Bank because existing investment will be sufficient to reach this target, and the Shared Rural Network will support roll-out in the remaining harder-to-reach areas (page 55).

Back in December 2021, the Bank announced a £100 million investment in the internet provider Gigaclear. The Bank also facilitated £90 million of private sector investment from five other lenders: ABN Amro, ING, Lloyds Bank, Natwest and NIBC. The overall investment is for Gigaclear to deliver broadband to a further 250,000 properties in the south west, midlands and south east of England, with 90% of these in hard-to-reach rural properties currently underserved by the commercial market. In April 2022, the Bank provided a £50 million loan to Fibrus to support ‘full fibre broadband connections to approximately 220,000 properties in rural areas and market towns in Northern Ireland’. More recently, in August 2022, the Bank announced it was investing £100 million in the Digital Infrastructure Investment Fund (DIIF) to accelerate the digital roll out of ultrafast broadband to rural homes across the UK. 

There are circumstances where markets do not meet all of a rural population’s needs and must be supplemented either by the state or by civil society. In its strategic plan, the Bank indicates its focus on ‘where there is an undersupply of private sector financing…by reducing barriers to investment and market failures’ (page 71) and how it ‘will be judged over time on whether we have accelerated infrastructure investments, helped shape markets, addressed market failures’ (page 73). While financing to benefit rural residents and businesses through the Bank’s digital priority sector is welcome, other priority sectors within its portfolio (e.g., transport, energy, water) are also important to rural communities – how and when will these be picked up through investment opportunities? While the Bank acknowledges spatial disparities, how is (or will) it ensure that rural areas are taken into account in its decision making processes and investments?    

Unlike other financial facilities operated by or on behalf of HM Treasury (e.g., UK Debt Management Office), the Bank works on a single project basis. In a rural context, this means propositions could not necessarily group several projects up into one application or package thus discouraging potential customers from approaching the Bank. 

Where next? Successive Governments have sought to address market failures. Back in October 2012 the Government established the UK Green Investment Bank plc (GIB) – selling it off to Macquaries in August 2017 for £2.3 billion. According to a report published by the National Audit Office (NAO), while the GIB was set up with a clear rationale, mission and objectives to help the Government achieve its commitments on climate change; the Government lacked clear criteria or evidence to show that it had achieved its intended green impact. The sale of GIB was at the lower end of the expected valuation range and Macquarie has no legal obligation to ensure GIB will keep focusing on green objectives nor to keep the institution going in the long term. In relation to the UK Investment Bank, these findings suggest the need to set clear KPIs or metrics to measure the Bank’s impact; and the need to put the Bank on a legal standing to ensure it can fund, borrow, and reinvest in the longer-term. 

The NIC’s next major assessment of the UK’s long term infrastructure priorities is due to be published in 2023. In November 2021 the NIC published a baseline report surveying the state of national systems of digital, energy, flood resilience, water and wastewater, waste and transport.  For rural areas, the baseline report highlights instances of lower levels of productivity, variations in digital connectivity and the need to invest in rural fibre. The NIC will be framing its next assessment around three strategic themes: (i) reaching net zero; (ii) reducing environmental impacts and building resilience to climate change; and (iii) helping level up communities across the UK.

On 23 September the chancellor, Kwasi Kwarteng delivered his Growth Plan 2022 speech. In the speech he highlighted the need for an ambitious agenda which will look at the planning system, agricultural productivity, and digital infrastructure. He further described how ‘an essential foundation of this growth is infrastructure.’ The Government is now intending to bring forward new legislation to make it quicker to plan and build new roads, speed up the deployment of energy infrastructure like offshore wind farms and streamline environmental assessments and regulations. The Government is also in discussions with 38 Local Authority areas to establish investment zones in England.  

 The NIC recognised the need for a new financial institution for infrastructure investment. What will Growth Plan 2022, the Bank’s investments and the next NIC assessment all mean for rural communities? Watch this space… 

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Jessica is a researcher/project manager at Rose Regeneration and a senior research fellow at The National Centre for Rural Health and Care (NCRHC). She is currently supporting a Community Renewal Fund project; and evaluating employability schemes and a veterans programme. Jessica also sits on the board of a Housing Association that supports older people and a charity supporting Cambridgeshire’s rural communities. 

She can be contacted by email jessica.sellick@roseregeneration.co.uk. 

Website: http://roseregeneration.co.uk/https://www.ncrhc.org/ 

Blog: http://ruralwords.co.uk/ 

Twitter: @RoseRegen