Fans of Monty Python will be familiar with the scene in the film The Life of Brian, which culminates in the line, “But apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the freshwater system, and public health ... what have the Romans ever done for us?” Investors are always suspicious of public sector funders and the potential to crowd out and not crowd in, along with distorting the market for investment. But as was the case with the Romans, the UK Infrastructure Bank (UKIB) has already achieved perhaps more than it has been credited for and we welcome the opportunity to work in tandem to deliver the investment required to reach net zero.
Infrastructure investment over the next 25 years will undoubtedly be shaped by the themes of decarbonisation and the transition towards net zero. This is going to require huge levels of investment from both the public and private sector. But, for now, demand for net-zero assets is materially greater than the supply of suitable investments.
Much of the investment required to achieve net zero will be into new or emerging technologies, which present two major challenges to investors: technology and delivery risk, and longer-term revenue and market risk. As a result, investors are looking for the ability of industrial sponsors to bring forward these technologies and investment opportunities to the market, alongside government policy incentives or capital which can support the development of nascent industries and absorb some of the initial risk associated with them.
Currently there are few examples of commercially viable new assets that are unable to attract private sector capital. Assets only struggle to raise capital when there are clear reasons associated with the underlying commercial risk, although this position may change over time as the UK accelerates new technologies and policies to support the pathway to net zero.
There are many examples of the challenges which lie ahead; the appetite for long-term subsidy-free renewable projects, early-stage technologies in the waste-to-sustainable-aviation-fuel sector, early-stage projects relating to the hydrogen economy and the development of small modular nuclear reactors.
To bridge the gap between the desirable and what is deliverable, there is a clear role for a public sector provider of capital which can sit comfortably in the nexus between government policy and investability.
The UK Infrastructure Bank (UKIB) was set up in 2021 with exactly this mandate and a long-term enduring strategy.
The stated objective to crowd-in private capital for such projects will not be straightforward and requires carefully designed financial structuring. There is no “one-size-fits-all” approach. Sectors will need their own mix of policy intervention and UKIB will need to be ready to play a different role across each.
In the context of concern amongst investors about the lack of suitable investment opportunities, which is especially acute for institutional investors subject to Solvency II requirements, it will be critical to understand whether and how UKIB can help to mobilise this capital.
Despite early scepticism, UKIB has shown how it can help bridge the gaps – not least through the use of a wide range of financial instruments.
It offers not just senior debt, but credit guarantees, credit enhancement structures, subordinated instruments, and convertibles. It is also pleasing to see it providing early-stage equity to new technologies and/or business models. Examples include its investment into Cornish Lithium and Rock Road, where UKIB invested alongside Rock Rail and Aviva Capital Partners, to develop a leasing platform for zero-emission buses. These are examples of UKIB deploying capital to develop new businesses and technology, which can be recycled when the assets crowd-in further capital from private investors seeking a lower risk/return.
It is noticeable that UKIB is building relationships and mechanisms to support positive market engagement. Such an approach is warmly welcomed by the industry.
Only by providing an effective, open and transparent conduit to the financing and investment market will UKIB be able to deliver on its stated objectives to work alongside the private sector and unleash the billions of capital waiting to be deployed. Deals completed so far suggests it is an institution more than willing and capable of playing this role.
We would encourage engagement between the Government, industry, UKIB and the wider financial market to be more structured and feed into an overarching delivery plan that creates a clear roadmap towards achieving the targets towards net zero.
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