Launch of the UK Infrastructure Bank

The UK Infrastructure Bank‘s two objectives are:

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

The UK Infrastructure Bank has an initial capital of £12 billion and will be able to issue up to £10 billion government guarantees, and will be able to finance infrastructure projects using a range of financing tools including debt, equity and guarantees. The bank’s ultimate capacity will be £22 billion, provided by the Treasury, and will consist of:

• £5 billion of equity from the Treasury, which can be drawn down in tranches of up to £1.5 billion in any year for the first 5 years;
• £7 billion of debt which can be borrowed from the Debt Management Office or private markets (depending on the best value for money), with an annual borrowing limit of £1.5 billion subject to an overall borrowing limit of £7 billion; and
• £10 billion of guarantees (with the UK Infrastructure Bank taking over the management of the UK Guarantee Scheme), with up to £2.5 billion in guarantees being able to be issued in any year, subject to an overall limit of £10 billion.

The Treasury is the sole shareholder of ‘UK Infrastructure Bank Ltd’ and has entered into a Keep Well Agreement with the UK Infrastructure Bank to ensure that the bank has sufficient funds to meet its payment obligations. However, the bank will be expected to generate a positive financial return over time to relieve the tax payer burden, and will work towards achieving a double bottom line.

The UK Infrastructure Bank will have autonomy in its investment decisions, subject to meeting certain conditions agreed with the Treasury. However, the Infrastructure bank will only have scope to invest in projects where the investment will:

• Help support the UK Infrastructure Bank’s objectives to drive regional and economic growth or tackling climate change;
• Be in infrastructure assets, infrastructure networks or infrastructure technology;
• Be intended to deliver a positive financial return; and
• Be expected to crowd-in significant private capital over time.

There will be prioritisation of sectors where there is an undersupply of private sector financing with the hope of crowding in private capital. Where the objectives of regional economic growth and tackling climate change conflict, the UK Infrastructure Bank will be required to have regard to both objectives, in relation to its policies and specific investments, and where an investment is primarily to support economic growth it will ensure that it does not do significant harm against its climate objective. The UK Infrastructure Bank will not consider lending to support projects involving fossil fuels save for very limited exceptions, such as improving efficiency, health and safety and environmental standards, carbon capture and decommissioning existing fossil fuel assets. The bank will not provide financial assistance to bail out businesses in financial difficulty.

The UK Infrastructure Bank is based in Leeds and it’s Chair, Chris Grigg has said:

Comment

It will be interesting to see how these funds are disbursed in practice. There is some expectation that funding will be provided in partnership with private money as part of the plan is to leverage private investment into otherwise potentially uneconomic projects. We expect a more commercial approach to these partnerships than that operated under the Coronavirus Business Interruption Loan Scheme (CBILS) which may mean that the benefit is not so much in the pricing as the availability of funding.

Unlike the pandemic support schemes, the UK Infrastructure Bank will be investing/lending directly rather than via the banking network. This may mean that it will introduce competition in this sector for projects that have the potential of good returns, as the bank’s objectives include a requirement that it be profitable – but will this differential result in an arbitrage of pricing against investment quantum and the stringent application of the sustainability criteria applied by different lenders. The Loan Market Association (LMA) has already outlined an overarching view of sustainable lending for the private sector – will there be any clashes of principle?

If you need any legal advice on lending and the UK Infrastructure Bank, please do contact our Banking & Finance department or Infrastructure group.