The UK Infrastructure Bank is designed for the past –not the future
The world of public banks just got a little larger. But did it get better?
In this week’s Spring Budget, the UK chancellor set out further details on the design and governance of the nascent UK Infrastructure Bank (UKIB), which was first announced in November 2020.
The UKIB’s raison d’être will be to ‘partner with the private sector and local government to increase infrastructure investment to help tackle climate change and promote economic growth across the UK.’ It will also ‘boost productivity and growth across the UK and to help put the UK on a path to meeting its net zero target by 2050. … Decarbonising our infrastructure will be crucial to meeting the target of net zero emissions by 2050.’
At the UCL Institute for Innovation and Public Purpose, our work has shown how well designed public investment banks can be powerful agents of economic transformation. So how does the new UKIB stack up?
The opportunities
Let’s start with the positives. The new UKIB will be 100% publicly-owned, which will position the bank firmly within the public sphere. While this guarantees nothing in terms of public purpose, public ownership does open up a particular public realm of possibilities. The UKIB is also to be located not in London but in Leeds.
The Treasury acknowledges the need for supportive, low-cost financing for local authorities and municipalities. This is significant. In the policy design document, the Treasury understands that not all local authority projects need to be ‘revenue generating in themselves’, even if the UKIB must ensure that projects are ‘financially sound and that the authority has the ability to repay the loan.’ As of this summer, local authorities and municipalities can apply for loans ‘at a rate of gilts + 60 bps for high value and strategic projects of at least £5 million.’
Relatedly, the design of the UKIB explicitly and repeatedly underscores that the bank should be an institutional resource for expertise and support, particularly for local authorities. This, if managed properly, can lead to the building of the UKIB as a public knowledge bank and institutional repository of expertise able to support government authorities in the field of finance and development. This would be consistent with successful bank’s elsewhere. India’s National Bank for Agriculture and Rural Development (NABARD) bridges the local and national spheres of policy and planning, linking communities, local banks, governments, and even universities together.
Ideally, the UKIB would also include forums for listening and responding to local needs and concerns. It is established best practice that all major infrastructure and development projects should be subject to ‘Free, Prior and Informed Consent (FPIC)’.
Finally, it is promising that the Treasury has identified scope for public-public financial collaborations, singling out the Development Bank of Wales and the new Scottish National Investment Bank (SNIB) as potential partners. This could be extended to public pension funds as another form of public-public collaboration.
The pitfalls
Now let’s look at the negatives. There is nothing in the UKIB’s design that meaningfully locks its mandate to decarbonisation and the government’s net zero ambitions. The greenwashing of climate investments by banks, public and private, is already well-known, and must end if we are to have a chance of meeting our climate obligations.
What is needed is a gold standard green mandate, not a carbonizing charlatan. This means firm, up-front, and binding commitments to financial precautionary principles and ambitious ecological goals related to ‘clean energy, transport, digital, water and waste’ — the UKIB target areas for investment.
“There is nothing in the UKIB’s design that meaningfully locks its mandate to decarbonisation”
Even if the UKIB achieve a gold standard green mandate however, its promised financial firepower is anything but ambitious. Its proposed funding means that it has been designed as a bank of the meek, not the bold.
The Treasury has committed £22 billion to the bank to deliver on its climate and levelling up objectives (£12 billion of equity and additional debt plus £10 billion in guarantees). In proposed layouts of loans, this translates into a mere £1.5 billion annually in the coming years. In comparable jurisdictions, this is remarkably little.
The German KfW, founded in 1948, lends about £70 billion annually. Even the recently founded Canada Infrastructure Bank (CIB) was established with a bigger financial bang — some £20 billion in equity commitments (though it has had troubles rolling this out, largely because of its similar private investor leveraging strategy).
UK authorities hope to leverage UKIB resources with private capital, blending and underwriting private risks to crowd otherwise reticent financiers into infrastructure investments that they would not otherwise consider. In this way, the Treasury hopes that the UKIB can amplify the public’s £12 billion capital stake two and a half fold, generating some £40 billion in infrastructure investment.
This is a fraught public-private partnership strategy that often costs taxpayers more while delivering less. Here the Canada Infrastructure Bank should have served as a warning: higher financing costs and community resistance to the CIB courting the privatization of municipal water services saw the bank kicked out of Mapleton, Ontario by town authorities.
Putting the private interest before public purpose is also evident in the minority role it sets out for low-cost municipal funding: only £4 billion of the £12 billion allocated is for local authority lending. Again, the KFW offers important lessons for green transitions: it shows how long-term, low interest-rate loans can receive repayment bonuses linked to verified energy efficiency gains. It also provides initial repayment grace periods to support local authorities.
The UKIB depends too much on the promise of private finance rather than the reality of it. Conventional economic tropes like ‘de-risking’ private investments and overcoming ‘market failure’ are applied haphazardly, reflecting World Bank commitments to maximising private finance for development, which has been widely criticised for reflecting a Wall Street Consensus rather than public purpose.
This UKIB will be music to the ears of globally mobile private finance, which is desperate to stake out low-risk, high-return projects backed by public guarantees and money in a low-return global marketplace. There is a phrase for this that is not written used by the Treasury, but which underwrites the bulk of the UKIB strategy: the socialisation of risks and privatisation of profits.
Rethinking the UKIB to serve public purpose, people and planet
There is much that is promising in the UKIB, but this may well be overshadowed by its pitfalls. By all indications, this is a bank that is designed for private ambitions rather than catalysing public purpose. It is a bank anchored to past ‘market-failure’ approaches rather than a future where public banks, public purpose, and citizen engagement provide credible and innovative solutions to green and just transitions for people and planet.
But this is not yet set in stone. The UKIB will continue to take shape in the near future, with the final phase putting the bank ‘on a statutory footing’. This is good news: public banks are dynamic institutions, and UK civil society now has a chance to rethink the UKIB to serve the public purpose, people, and the planet.
