Third party investments cast doubt on the UK Infrastructure Bank’s approach to climate action and levelling up
The establishment of a public infrastructure bank is long overdue, but UKIB has work to do to fulfil its promise
The establishment of the UK Infrastructure Bank (UKIB) was emblematic of a new approach to intervention heralded by Boris Johnson upon becoming Prime Minister (albeit set in train by the May government). It is due to publish its full strategy in the next few weeks, but its early decisions paint a worrying picture.
UKIB has £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).
Profit and loss
But it is not yet clear whether this funding will be renewed when required: it appears UKIB is expected to recapitalise itself through profitable investments (it has an annual return target of 5%) – 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 delivering a private profit in a direct sense.
£22 billion is a drop in the ocean, but the point of the UKIB is to ‘crowd in’ private investment. Its twin priorities are investment in green technology to address climate change, and local projects to support ‘levelling up’.
The scheme 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 – 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 too premature to say that these are poor investments by UKIB. But the type of investment practice they represent is questionable. Run by already-successful investment managers, there is a danger of replicating investment the private sector would have engaged in anyway (‘crowding out’ rather than crowding in).
Furthermore, UKIB’s investment, and any returns it attracts, will be subject to fees, and there does not appear to be a guarantee that all capital will be invested in the UK.
Labour’s Shadow Chancellor, Rachel Reeves, has raised this issue in Parliament. And even Lord Aamer Sarfraz, former Conservative Party Treasurer, told the Financial Times that:
“We need UKIB to do the difficult direct deals, not outsource their responsibilities to third party fund managers as once you invest in a fund you have very little influence over it… The point of [UKIB] is to address a market gap in infrastructure investing and it’s not at all clear that it is doing that.”
How can we explain these decisions by UKIB? I suspect, in part, it is simply what tends to happen in organisations like this, despite public ownership. UKIB is run by City bankers and property developers, operating within their comfort zone. The British Business Bank, set up by the coalition government, is another case in point.
It probably relates also to UKIB’s dependence on meeting its profit targets. Specialist infrastructure funds, even when operating at the technological cutting edge, tend to deliver stable returns, because they specialise in debt financing for projects that will generate predictable revenue streams.
Local authority
We can expect a significant portion of UKIB’s loan book to consist of local government bodies. Local, combined and/or mayoral authorities can pitch to UKIB for financing for projects which will support levelling up.
Local government in the UK is starved of funding, so beggars obviously cannot be choosers. But it is not at all clear that introducing another ‘middle man’ that local policy-makers have to persuade in order to obtain adequate development finance is appropriate.
UKIB may, in time, become a welcome contributor to the levelling up crusade. But this arrangement could also be seen as another example of the infantilisation of local government in the UK.
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 (the face of the Conservative Party’s success in the so-called ‘red wall’) and the Teeswork Freeport (championed by the Chancellor, Rishi Sunak) is notable. It follows the blatant and outrageous 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 will be important for UKIB to adopt clear criteria for local investments. In recommending a ‘universal basic infrastructure’ framework in 2017, the Industrial Strategy Commission (which I served on with Kate Barker, Diane Coyle, Richard Jones and Andy Westwood) argued that there were general infrastructural requirements across all local areas, which should be prioritised over ‘big ticket’ projects.
It is also essential that local leaders are represented in the governance of UKIB (ditto trade unions, and science and engineering expertise). The organisation will work best as a platform for partnership between national and local government.
Expecting UKIB to deliver a profit each year will drive conservatism in its investment strategy. Instead UKIB should adopt (and pioneer) a more holistic understanding of value-for-money. Marianna Mazzucato and Laurie Macfarlane argue that the success of investments should be evaluated ‘according to the degree to which they catalyse new socially useful activity that otherwise would not have happened’.
In the most basic sense, if UKIB gets anywhere close to achieving its mandate on climate change and levelling up, then irrespective of what the balance sheet looks like, it is going to be helping the UK alleviate the enormous costs of climate catastrophe, and the fiscal impact of deprivation in poorer regions.
Funding a massive programme of retrofitting, for instance – combining the environmental and local objectives – would be a useful start. The New Economics Foundation recently called for an additional investment of £11.7 billion over the current parliamentary term for home insulation and low-carbon heating solutions.