Need of An Infrastructure Bank for the UK And Role of Private Investors 

Summary

• The UK treasury plans to create a new public infrastructure bank to finance capital projects

• In May 2020, John Armitt, chair of NIC called for the creation of infrastructure bank as an alternative to EIB.

• Investors fear that the private sector will be left out if the government creates a public infrastructure bank.

The UK Treasury announced that it is planning to establish a new infrastructure bank to fund capital projects across Britain, as the government looks to revive the economy from the onslaught of Coronavirus-led slowdown.

The government feels the need to devise ways on how a new state-owned lending institution could build the country’s inept infrastructure. To be established outside London, the £100 billion bank would substitute for the role played earlier by the European Investment Bank (EIB) or at least a part of the role. It is worthy of mentioning here that, the UK will no more be a member of the EIB with the Brexit transition period ending later 31 December 2020.

The chancellor of the Exchequer, Rishi Sunak could reveal the details in his upcoming autumn fiscal announcement, though no concrete plans are in place as of yet. The government’s seriousness could be understood from its focus on infrastructure as it plans to bring in the much-awaited National Infrastructure Strategy paper with details of expenditure of over £100 billion and divulge his long-term investment plans. The government is looking at developing the Midlands and the North and has indicated on borrowing an extra £100 billion for capital spending.

On the other hand, to promote exports and support the SMEs, Alok Sharma, business secretary has on individual basis recommended setting up a national development bank, though the treasury seems to be keen on forming a bigger lender to meet all infrastructure credit needs. On 24 July 2020, the UK PM, the chancellor along with other ministers including transport secretary, held a meeting to discuss infrastructure spending.

Need for a new infrastructure bank

Infrastructure system formed the central theme in the UK PM’s speech on 30 June 2020, which showed a positive way ahead to fight the economic slowdown due to the Coronavirus pandemic. Building on the infrastructure is important beyond the short-term outlook. The bank would specifically hold importance to renew major city projects, flood resilience schemes, augment regional broadband connectivity and support renewable energy projects.

An infrastructure finance review consultation which started in In 2019 and would conclude this autumn, the UK treasury had highlighted that German, Japanese and Canadian government owned operationally independent financing entities for infrastructure projects.

Earlier in May 2020, John Armitt, chair of the government’s National Infrastructure Commission (NIC) proposed a new infrastructure bank with an asset base of about £20 billion. He emphasised on the bank’s need for providing long-term assurance to the industry but did not deny the importance of private investors to build the sector. Armitt’s letter to the chancellor highlighted the benefits of clearer policies for R&D and pilot projects will excite private investors to look positively at the segment.

UK’s negotiation so far with the EIB

Even after leaving the EU, Britain’s Brexit negotiators yearned for continuing EIB’s funding. The UK will no longer remain an EIB member, and its 16.11% subscribed capital in the lender will end. The UK’s share includes €3.5 billion paid-in-share besides €35.7 billion of callable capital. The bank will repay the €3.5 billion amount over 12 annual instalments.

The callable money that disappears on the Brexit day is replaced by the UK’s liability on callable capital. Though the UK will be responsible for the EIB’s pre-Brexit operations, it will be decreased as the EIB’s pre-Brexit exposure declines. Though, during the financial settlement, there were no points raised regarding EIB’s future role in the UK.

Presently, the EIB lends outside the EU in accordance with its foreign policy that allows investment into pre-accession nations with the probability of joining it. The bank is also committed to help EU's poor southern and eastern neighbours.

Werner Hoyer, EIB president while regretting on Brexit, had expressed happiness on the constructive engagement of the UK during withdrawal negotiations. The EIB assured the UK on the existing finance contracts for projects and investments in the country.

Since 1973, the bank has made a total investment of over €118 billion to the UK for over 1000 projects. Reportedly, EIB has lent about €8 billion per year for Britain’s Crossrail, new school buildings and social housing, among others. The energy sector was the largest gainer, with 30% of the total EIB funding; the second-largest amount was dedicated to sewage and waste disposal. Other areas to receive considerable investment included transport and telecom, education, and health.

Private investors worry over creating a national infrastructure bank

It has been seen that over the last 10 years, private investors have retained their enthusiasm to pump money in existing infrastructure that generated an exciting rate of return. However, their reluctance has been quite evident in developing new projects subject to delays, over budget and unclear rate of return.

Raising their concern to the government regarding forming a new public infrastructure bank, leading investors expressed their worries that the private sector will be left out. They requested to retain private player’s participation in the planned finance lending entity. In a traditional approach, national lenders use public money to complete their targets and, in the process, weaken the private investors on the rate front. On the same time, some experts believe that private investor’s risk is curtailed if the government steps in to invest a bit. Given the avenues to borrow at lower rates, the government can finance the projects economically.

Many experts have advised that the government-owned bank with its lower borrowing rates should bring in the efficiencies of the private sector to deliver larger benefits. Some have even opined that UK’s infrastructure investment market could be substantially impacted by losing out on the funding from EIB. It also remains to be seen if the discussion of building a state-owned infrastructure bank will explore strategies to deal with actual market failure including provisions for early-stage development money.

Conclusion

The United Kingdom has been greatly helped by the European Investment Bank, which has been supporting UK infrastructure investment since long, now once the transition period is over, and the UK is not having access to the EIB funds, the nations’ infrastructure would require major concentration and having a specific infrastructure would undoubtedly be of big help, as the government needs to achieve its goals of building better, greener and faster. The government must modify its institutional framework in the National Infrastructure Strategy due later in 2020. Experts see value in disassociating the finance function of the Infrastructure and Projects Authority into an independent unit powered with tools to finance infrastructure projects.