The UK government has unveiled details for a new UK Infrastructure Bank (UKIB) to jump-start investment in infrastructure. It sounds like a good idea but risks being little more than a token gesture.
Keen to support its levelling up and net-zero initiatives, the government wants to catalyse construction across a range of sectors to create jobs and economic activity post-Covid.
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Despite an initial budget of £12bn, UKIB is not the fiscal stimulus tool it may appear. The government has made clear it wants roughly half of the UK’s future infrastructure to be privately financed, and expects its £12bn investment to facilitate £40bn in infrastructure development. Crowding in private investment by making businesses and projects more attractive is the explicit aim of this bank.
While almost all of the country’s energy projects have been financed by the private sector in recent years, the government has provided just under 80 per cent of the funding for transport projects. The government doesn’t want to spend more money on infrastructure. It wants to build more while spending less (at least up front).
The problem is, there is little evidence that state infrastructure banks do crowd in investment. UKIB is most similar to the Canada Infrastructure Bank, which has overseen a decline in new infrastructure projects since it was introduced in 2017.
The problem with state banks
Soon after the Brexit referendum, it became clear how big a hole would be left by the European Investment Bank which suddenly became a lot less interested in the UK. The EIB had supported emerging technologies and innovative businesses with cheap finance, and assisted the rapid development of renewable energy projects in the UK.
UKIB will not be a like-for-like replacement though. Its £12bn budget will be less than the EIB invested in the UK in 2015 and 2016 alone, and state aid rules should prohibit it from providing cheap loans in the same way.
Many commercial investors are glad to see the back of the EIB, which often crowded them out of attractive deals.
UKIB risks doing the same at a time when the market is already flooded with capital. Infrastructure funds have spent the last few years investing in wind farms and selling data centres to each other to keep busy.
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The need to replace PFI
Investment in new infrastructure, aside from renewables, has dried up in recent years because of the death of the private finance initiative (PFI). The PFI funding model provided investors with certainty of return and made them a lot of money. The government has promised to never use PFI again however because of widespread criticism that profits were too high and risk transference to the private sector a mirage.
The irony is, an almost identical funding mechanism has been used to finance the UK’s offshore wind farms without attracting any public criticism.
Contracts for Difference (CfD) work in a very similar way to PFI. Both put construction and operation risk into the private sector in exchange for a fixed price per unit of power produced/service provided. The main difference is the ultimate payer of CfDs is the electricity consumer and for PFIs its the taxpayer. Since those people in reality are the same, it’s a pretty subtle distinction.
Exactly the same banks, law firms and investors that made out like bandits building hospitals and schools under PFI are now making a killing in offshore wind. The government is extending its use of CfDs to other renewable technologies and is likely to adopt a similar funding model, with a new name, for other types of major infrastructure projects. That will have a much bigger impact on UK infrastructure investment than the UKIB, and the government knows it.
A good use of taxpayer money?
The UKIB could provide some value. It could help incubate various emerging technologies and sectors, such as fuel cells, hydrogen production, and EV charging infrastructure. It could also provide loans and guarantees for pathfinder projects to help establish new markets.
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But can this new bank be disciplined enough to only stick to providing risk capital for small enterprises, and not have its head turned by big shiny headline-grabbing projects?
The Green Investment Bank was the UK’s last attempt at a state bank. The government made a healthy profit when it sold GIB to Macquarie for £2.3bn in 2017 but it is not clear how additive it was to the renewable energy market.
It sold for so much money because it was mostly invested in commercial projects that would have attracted private capital anyway.
This new bank is apparently intended to be a long-term project, with no plan to privatise. That frees it to be uncommercial and potentially lose money backing businesses that ultimately fail. That is exactly what it should be doing, but it will inevitably attract heavy criticism if it develops a habit of picking losers.
The UKIB risks either tinkering around the edges or getting in other investors’ way. Either way, it is no magic bullet to revive a dormant infrastructure market.