The following remarks were given as a keynote address by Commissioner Julia Prescot at a Westminster Energy, Environment & Transport Forum policy conference which took place today (19 May 2021), exploring priorities for the UK infrastructure bank.
Thank you for inviting me to speak at your event this morning and it’s good to be here. It’s particularly good to be talking about the UK Infrastructure Bank in the present tense, or at least the present progressive tense!
I think it is only right to begin by paying due credit to HM Treasury and the wider government for the work they have undertaken over the last six months – in particular – to turn the commitment in November’s National Infrastructure Strategy into a reality that we are very close to seeing in the flesh.
As I’m sure most in this audience will be aware, in 2018 the Commission recommended the creation of an operationally independent, UK infrastructure finance institution, in part to replace the UK’s access to the European Investment Bank.
In developing this recommendation, we looked at public banks in other countries as well as the Green Investment Bank (before its privatisation), to understand the role played in supporting infrastructure investment and to identify lessons.
This analysis showed that independent financing institutions offer three things:
- Mitigation of some risks involved in infrastructure investment, encouraging private investment;
- Provision of policy stability in the context of short-term political cycles;
- Development of expertise and credibility, building the understanding and capabilities of both private investors and local government.
Reflecting on those benefits, the Commission’s recommendation proposed three key functions for a UK infrastructure finance institution:
- Provision of finance to economic infrastructure projects in cases of market and coordination failures;
- Catalysing innovation such as in new low carbon technologies;
- And a centre of excellence on infrastructure project development, procurement and delivery.
The policy design document for the bank reflects the key principles we had been advocating for – operational independence, a clear mandate, including sound banking (investing in a risk-robust portfolio with a reasonable return) and additionality (crowding in private sector investment – not out), and having a wider economic and social impact.
The Commission believes an effective and independent Bank is key to delivering the infrastructure investment needed both for the recovery of the UK economy and long-term growth potential. It will help bring forward sound projects at scale, act as an anchor investor in new technologies and projects – like hydrogen and carbon capture and storage – and promote confidence for private investors.
I would also like to add my perspective as an investor. I very much welcome the creation of the Bank. For many years, I have worked closely with the European Investment Bank in the UK and elsewhere and can see the substantial benefits of having a nationally supported infrastructure bank.
I believe that such banks should not be seen as replacing the private sector – and this is an area for debate we may return to later – but I think the real value is in the Bank being additional, and being key participants in getting infrastructure delivered and getting projects done.
Investors, on the whole, do not see infrastructure banks as entities that will come in and ‘crowd’ us out, but rather entities that we can work with to complete financings, particularly in high risk and complex areas. Working as partners, they can offer confidence to financiers that a project is properly structured and robust and can have a ‘levering-in’ effect.
Not all projects will require this, but as we move into complex areas of new technology this factor will become increasingly important. Looking back, I think we can see this was a particular role that was carried out by the Green Investment Bank prior to privatisation.
Investors are looking at UK infrastructure, but there is a continuing concern voiced about the potential for ‘investable’ large scale projects. Part of this relates to robust regulatory structures, but there are also roles that the Bank can take on that will enhance ‘investability’ – for example, de-leveraging riskier projects or adding to the available liquidity from the private markets. In addition, acting as a catalyst in the aggregation of smaller projects or supporting early stage development capital, as I will refer to later, will be other key roles in attracting in private sector engagement.
After all, we have to remember that the private sector is expected to be the source of over half of new infrastructure spend and in some areas that private sector financing will need assistance to engage.
So, how will the Bank work in practice, particularly locally?
Supporting regional growth and recovery
Infrastructure projects alone cannot shore up an economy the size of the UK’s, and they cannot be expected to ‘level up’ our economic geography by themselves. They play an important part alongside other measures. And better infrastructure is a necessary condition to support local growth.
For example, many large towns and cities face significant challenges from traffic congestion, this has an impact on their economic development and the quality of life for inhabitants.
The Commission has long championed the need for the most congested cities outside London needing significant investment (the Commission has suggested in the order of £30bn to 2040 for major transport upgrades) to have access to longer-term funding commitments.
In addition to devolved funding from government, locally raised finance will need to be part of the mix, but the Bank can also play a role. It’s partly for this reason that the Commission welcomes the inclusion of lending to local authorities in the Bank’s remit.
In addition to provision of financing, our recommendation highlighted the role such an institution could play in providing technical and financial expertise supporting the in-house capacity of local authorities. There’s a lot of experience in local authorities. But complex projects tend to require specific expertise, and having access to such skills will make delivery more effective.
The Bank policy’s design document includes an aim of bringing together local actors for collaborative projects and aggregating projects together where appropriate. This will enable the development of projects of significant scale.
This project aggregation can be complex, but also very effective in attracting investment – a number of private investors look for a certain volume of investment prior to engaging. Their cost base and return requirements do not allow for smaller diverse projects – thus having an entity that will act as the fulcrum for smaller developments will be a great step forward.
Supporting local economies will require collaborative engagement between the Bank and local actors such as Metro mayors and city leaders who will play a critical role.
I am sure the panel on Regional Inequalities later this morning will bring all this out in more detail.
And of course, it’s not just about levelling up for the North of England, as important as that is. In areas such as the South West, interventions may take a different shape, in part due to the relative lack of really large cities. And maximising the potential of economic hubs such as the Oxford, Milton Keynes and Cambridge Growth Arc, one of the fastest growing and most productive areas of the country, will also be important to enabling recovery of the wider UK economy.
Different solutions will be needed in different places. At government’s request, the Commission is currently undertaking a study looking at how to maximise the benefits of infrastructure investment in towns and suburban areas in England and support regeneration and levelling up. The focus will be on how transport and digital infrastructure can make a difference in different types of place, and the study will also consider the potential implications of the pandemic on infrastructure for towns.
Low carbon transition
The other area set out in the initial policy priorities for the Bank is its key role in helping to tackle climate change. I know you are exploring this later in another panel discussion, but let me offer a few opening thoughts on that.
The arrival of the Bank can’t come a moment too soon in order to help accelerate investment in new and emerging technologies that we need now to assist with decarbonising our economy. Helping de-risk some investments to make them more attractive; helping shorten the odds on some of the strategic bets we’ll need to place to hit net zero by 2050 is critical.
I would also like to highlight the role that the Bank could play in assisting with the provision of the most hard to secure and potentially expensive financing – that involved in early stage project development for the new and emerging technologies. Developing ideas can be very expensive. One of the things the Bank can do is ‘sit alongside’ such developers. Clearly the Bank’s underlying principles of sound banking and additionality would need to be applied to any such engagement but the catalytic impact on new projects could potentially be huge.
The need for investment in home heating networks provides a good example. Heating the UK’s homes accounts for around 20 per cent of the country’s greenhouse gas emissions and that must change if we are to meet the net zero target. There is no one technology that can address this challenge, and large-scale trials of hydrogen, from its production to its use in homes, are testing whether hydrogen is a realistic alternative to gas boilers.
The Commission is not sure the current trajectory of experiments – with a town size trial not happening until 2030 – is ambitious enough. But setting that aside, until a decision on future heat infrastructure is reached, improving the energy efficiency of the UK’s building stock is a key priority.
These are areas where a new Bank with a bright green brief can help move things forward.
The Commission is currently undertaking a study looking at greenhouse gas removal technologies that can be deployed to remove carbon from the atmosphere. If the revised climate change targets to which government have committed in response to the CCC’s 6th Carbon Budget are to be met, these removal technologies will have a critical role to play in achieving that ambition. And in turn, the Bank can help develop and expand them more quickly than would otherwise be the case.
So, there are plenty of areas of opportunity where the Bank can potentially make a real difference.
With the appointment of Chris Grigg as the Bank’s inaugural Chair, and the appointment of a Chief Executive presumably due to follow soon as one of Chris’ first actions, let’s hope the stars are beginning to align.
For the Commission’s part, we will be keen to work with the Bank on the many areas of shared interest. And as an investor, personally I will be watching with great interest.