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Infrastructure Insights: The road to building back better – private sector priorities for the UK Infrastructure Bank2 February 2022

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In light of the recent publication by the UK Infrastructure Bank of the discussion paper “Potential Private Sector Opportunities in Priority Sectors” (the “January paper”), Partner Ryan Ayrton and Senior Associate Gavin Jackson have produced this short article for parties both interested, and already actively involved, in the UK infrastructure investment sphere.

UK Infrastructure Bank – what’s the goal?

As part of the UK government’s “build back better” response to the Covid-19 pandemic, the UK Infrastructure Bank (“UKIB”) was launched in June 2021 as a government-owned policy bank.

"...the range of tools at the UKIB’s disposal appears to be fairly broad..."

Perhaps unsurprisingly in a post-Paris Agreement (and post-Brexit) world, at its core the UKIB’s investment activity will be guided by two strategic objectives:

  • to help tackle climate change, particularly meeting the government’s net zero emissions target by 2050; and
  • to support regional and local economic growth through better connectivity, opportunities for new jobs and higher levels of productivity.¹

The Story So Far

The UKIB started life with a financing capacity of £22bn, comprising of:

  • £8bn earmarked specifically for private sector investment;
  • £4bn for local authorities; and
  • £10bn to be provided by way of government guarantee.

Its stated intention is to operate across a range of sectors, prioritising the clean energy, transport, digital, waste and water sectors, strategically positioning the UKIB to occupy the role vacated by the European Investment Bank (EIB) in the UK post-Brexit.

It is notable that the January paper does not exclude the possibility of investment in other sectors, flagging HMT’s expectation that the UKIB will unlock more than £40bn of overall investment.

Interestingly, and encouragingly for the market, the range of tools at the UKIB’s disposal appears to be fairly broad, including loans, mezzanine debt, guarantees and equity investment. The January paper makes it clear that, for the right deal, the UKIB is willing to accept higher levels of risk than commercial market participants ordinarily would, and confirms “we do not have a preferred investment type”.

Within the sphere of private sector investment, the UKIB has expressed a willingness to prioritise projects where there is an “undersupply of private sector financing”, or where private sector financing fails to reflect the full social benefits of a project.

UKIB’s Five Key Sectors

1. Clean energy

Potential private sector funding gaps and opportunities identified in the January paper include:

  • emerging net zero technologies (e.g. greenhouse gas reduction, hydrogen and, in the right circumstances, carbon capture, usage and storage (“CCUS”));
  • built environment energy efficiency technologies; and
  • new nuclear under the RAB model.

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"...public sector support to plug a perceived funding gap for UK digital infrastructure..."

Mature clean technologies with strong access to finance present a weaker case for investment, except where such investment would:

  • support the transition to subsidy-free business models²;  and
  • build the UKIB’s capability and expertise to ensure it can support technological development.

The UKIB will still monitor the sector for any emerging financing capacity gaps in mature clean technologies.

2. Transport

The January paper emphasises the value proposition presented by the transport sector, identifying opportunities for alignment with the UKIB’s net zero and local and regional growth objectives.

Areas earmarked for potential involvement include:

  • UK port infrastructure which supports the clean energy sector³;
  • EV charging infrastructure to unlock further private finance; and
  • gigafactories and their supply chains.
3. Digital

The UK government’s £5bn Project Gigabit initiative underlines the perceived need for public sector support to plug a perceived funding gap for UK digital infrastructure, which private funding alone may not be able to fill.⁴

The UKIB expects to prioritise emerging delivery and business models, including supporting 5G rollout and technologies which have not yet been deployed at scale in the UK.⁵

4. Water

The case for UKIB investment in the water sector in the immediate short term is presented as a less compelling option.

Unlike RAB model-supported new nuclear projects, the RAB model-supported water sector is judged to have sufficiently strong private financing support.

However, the UKIB does not pull the plug on the water sector – it proposes what is best characterised as a “wait and see” approach, which includes tracking the impact of Ofwat’s Direct Procurement for Customers model and the developments of other models and future project proposals (including those which are being developed by DEFRA).⁶

"...true to its word, the scope of projects has been broad, from fibre broadband rollout, to port infrastructure, to subsidy-free solar."

5. Waste

The Energy from Waste sector’s shift towards net zero is earmarked by UKIB as a viable target for support, either through development of new projects, or retrofitting existing plants which have a “clear and deliverable plan” on CCUS and/or substantial heat offtake.

The January paper presents a positive message for those interested in (among others):

  • advanced conversion technologies;
  • sequestration opportunities; and
  • anaerobic digestion.

On The Horizon – What’s Next?

Next on the agenda for the UKIB is the publishing of its first Strategic Plan, scheduled for June 2022. The Strategic Plan will flesh out the KPIs which the UKIB intends to hold itself accountable against and will also deliver the outcome of the UK government’s review into whether UKIB should broaden its primary initial focus, to include improving the UK’s natural capital (in addition to climate change mitigation and resilience).

The January paper is quick to emphasise it is not a formal consultation document, nor is it intended to be a first draft investment strategy. However, it does welcome stakeholder views (particularly prior to 25 February 2022) as part of a wider engagement exercise which the UKIB will undertake in the weeks following publication of the January paper, as it builds towards the release of the Strategic Plan.

The UKIB has already made significant investments in the private sector and, true to its word, the scope of projects has been broad, from fibre broadband rollout, to port infrastructure, to subsidy-free solar. The scale of financing capacity at its disposal, the flexibility of financial products and structures on offer and its willingness to engage with stakeholders, all suggest there will be plenty more to come.

[1] For more information, please see the UKIB’s March 2021 Policy Design document.
[2] For example, UKIB’s £250m matched funding commitment to the NextPower UK ESG fund, which is dedicated to subsidy free UK solar.
[3] For example, UKIB’s £107m investment in a 450m quay designed to service the offshore wind sector, as part of the Teesworks Freeport Project.
[4] See HMG’s March 2021 press release for more information on Project Gigabit.
[5] For example, UKIB’s £100m co-investment, along with commercial banks, in Gigaclear’s high-capacity broadband rollout.
[6] See Ofwat’s catalogue of key resources on the subject.

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