A New UK Infrastructure Bank

The UK government has outlined the mandate and design of a new U.K. Infrastructure Bank ahead of its launch later in spring 2021. Following the U.K.’s departure from the EU, the new institution shall follow the EIB’s approach to develop a commercial market for green technology through low-cost lending activities as well as to facilitate infrastructure adaptation and to create resilient and sustainable markets in the fight on climate change.

The bank is an essential element of the government’s broader infrastructure strategy. While the UK relies much on the private sector in financing, building and operating infrastructure, the government issued the setup to cushion anticipated shocks in the private infrastructure finance market.

Strong Private Sector Involvement 

While further financial details shall be set out in the framework document to be published later in 2021, the bank will be equipped by HM Treasury with a financial capacity of £22 billion, consisting of £12 billion of equity and debt capital and the ability to issue £10 billion of guarantees. The Bank will be able to borrow (from capital markets) up to £1.5 billion a year up to the £7 billion total borrowing limit and to allocate £4 billion to local authority lending while providing annual guarantees amounting to £2.5 billion.

The bank will operate on a set of core principles that are linked to the twin objectives of facilitating sustainable growth while generating positive financial return to maintain financial sustainability. These core objectives are (1) building up partnerships between private and public sector stakeholders, (2) prioritizing investment that provide additionality in as much as it develops underdeveloped sectors, reducing barriers to further investment and crowd in private capital, (3) safeguarding operational independence to decide on investment envelopes, (4) creating investment direction and confidence in the market as well as (5) operating with highest flexibility to address disruption and market evolution.

Highly Flexible Financing Instruments

To effectively implement its mandate, the bank can draw from a range of financial instruments including senior debt to bridge short levels of market liquidity, hybrid products in which the bank can issue various forms of credit enhancement to improve the efficiency of a project’s capital structure, equity / loans to address construction risks and make direct / co-investments; and (first-loss) guarantees in the event this instrument under the UK Guarantees Scheme provides to be more efficient than the instruments above. 

For further information: https://www.gov.uk/government/publications/policy-design-of-the-uk-infrastructure-bank