The UK Infrastructure Bank is better than nothing, but exemplifies much that is wrong with UK economic policy
Limited funding, relationships with third parties, and questions about tax avoidance (among other things) undermine UKIB’s mission
The UK Infrastructure Bank (UKIB) was established in 2021 in order to augment public finance for green technology to address climate change, and local projects to support ‘levelling up’. I first wrote about UKIB in June. This post updates my analysis, drawing primarily upon reporting undertaken by Lucas Amin for openDemocracy on some of UKIB’s investment partners.
In my view, while the UK certainly needs an infrastructure bank, UKIB represents a missed opportunity — and indeed exemplifies many of the perennial shortcomings of UK economic policy.
1. Limited investment
UKIB has only £22 billion at its disposal: £5 billion from the Treasury, an ability to borrow a further £7 billion via the Debt Management Office, and an ability to issue £10 billion in loan guarantees (a maximum of £2.5 billion each year).
To put this into context, it is roughly the cost of a single nuclear power station, and substantially lower than Labour is promising to spend each year on green investments. It is around half of what Northern Powerhouse Rail would cost, and around a quarter of what HS2 will cost.
Moreover, UKIB’s financing model is undermined by short-termism and uncertainty. It is not yet clear whether its public funding will be renewed when required: UKIB is currently expected to recapitalise itself through profitable investments (it has an annual return target of 5%).
This is in contrast to other start-up infrastructure banks in similar countries, where it is understood that some very long-term investments might deliver a public good, without necessarily delivering a private profit swiftly or directly. Mariana Mazzucato and Laurie Macfarlane argue that infrastructure banks should be detached from conventional metrics, with their success evaluated ‘according to the degree to which they catalyse new socially useful activity that otherwise would not have happened’.
2. Phoney devolution
The establishment of UKIB promises to support levelling up, yet it does so by introducing another central government body that local policy-makers have to persuade to offer their areas adequate development finance.
Local and regional governments in the UK need the autonomy – and devolved resources — to shape their own future. At the very least, they need a place within UKIB’s governing structures.
3. Subservience to private finance
UKIB has has attracted controversy recently though due to its investment in two third-party investment funds. Firstly, UKIB will become the cornerstone investor in the Octopus Sustainable Infrastructure Fund (OSIF) — operated by the UK’s largest venture capital fund — at an initial cost of £100 million. Secondly, it will invest £250 million in NextEnergy Capital’s NextPower UK ESG Fund, focused on solar farms.
It is not at all clear why UKIB needs to piggyback upon private funds run by well-established investment managers. UKIB is supposed to be setting the direction for novel and transformative infrastructure investment, thereby ‘crowding in’ the private sector to projects serving a public good, but third-party investments risk replicating investment the private sector would have engaged in anyway.
We could see this as ‘crowding out’ rather than crowding in. But I think UKIB typifies a broader trend of ‘substitutive’ statism in this regard, whereby the state’s fiscal largesse is used predominantly to enhance private profitability. The business model of companies like OSIF and NextEnergy is already focused on highly subsidised sectors, and it seems incongruous they would be used as a ‘middle man’ for direct public investment in, for instance, solar farms (collecting fees and commission in the process).
4. Cronyism
UKIB’s largest local investment to date in England is in Tees Valley. Investment in infrastructure to support the offshore wind sector is welcome. But the association with both Tees Valley mayor Ben Houchen is notable, echoing the favouring of areas with Conservative MPs in the distribution of the Levelling Up Fund. Independence from political interference is essential in the design of public banks.
It is also worth noting that one of the founders of Octopus — and still its second largest shareholder — is a Conservative Party donor. According to Amin’s piece for openDemocracy, it is not apparent that Octopus were subject to a tendering process before the UKIB partnership was agreed.
5. Tax avoidance
The openDemocracy report reveals, above all, the links to tax avoidance among some of UKIB’s partners. NextEnergy Capital is incorporated in the very low tax jurisdiction Luxembourg, and a fund similar to the NextPower UK ESG Fund already managed by the company is incorporated in the tax haven Guernsey, despite investing in many UK-based assets. UKIB did not respond to openDemocracy when asked where the new fund will be incorporated.
Similarly, UKIB recently announced a £200 million loan to CityFibre to support broadband rollout across England and Scotland. One of CityFibre’s largest owners, Antin Infrastructure Partners, manages its stake through another Luxembourg-based company. And Goldman Sachs owns ‘a substantial stake’ in CityFibre through ‘a complex chain of ownership’ that stretches to the US tax enclave Delaware.
CityFibre earns most of its revenue from UK government contracts, but it did not respond to openDemocracy on its corporate structure or the tax jurisdictions of its shareholders (nor did Antin or Goldman Sachs).
UKIB has made an inauspicious start. Strongly associated with Rishi Sunak’s tenure as Chancellor, it remains to be seen whether Liz Truss’s likely victory in the Conservative Party leadership election will herald a change of direction.
Looking to the next general election, Labour’s Shadow Chancellor, Rachel Reeves, has criticised UKIB’s business model and tax arrangements, and proposed reforms to the bank’s focus and governance. We need an infrastructure bank that showcases a new approach to economic policy practice in the UK, rather than one which reflects some of its longstanding flaws.