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UK infra investment needs more credibility, not more capital

By Jasper Cox, Jon Hay, Lewis McLellan, Owen Sanderson
27 Nov 2020

There is every reason to be sceptical of the UK’s plan for a national infrastructure bank. Infrastructure is hard to finance because governments are unreliable. Combining hard assets expected to pay back over 30 years with democratic governments that change course every few makes private investors reluctant to treat long-term infra projects as a pure matter of credit risk.

Moreover, public sector banks are complex beasts; difficult to create. Institutions such as Germany’s KfW are magnificent specimens but they have been nurtured over decades and have a special place in the national system.

Finding the right governance model for an organisation that will wield taxpayers’ money so influentially is tricky, and the UK’s track record is poor. Its administrative culture is fast-moving, prioritises “value for money” — though often fails to achieve it — and is easily influenced by political fads.

The UK invented the Private Finance Initiative in the 1990s, exported it worldwide, and later ditched it. In 2012 it set up the Green Investment Bank but sold it five years later to Macquarie, judging that it had achieved its aim of proving green energy was bankable.

The government already has myriad ways to lure private sector cash into infra: privatised infrastructure — such as the UK water companies — with heavy regulation; public-private partnerships, like the much maligned PFI schemes; guarantees; soft loans; credit enhancement and many more.

But the important characteristic all of these share is that they derisk infrastructure — governments are protecting the private sector from governments in the future.

What is not needed, in most of the developed world, is more lending to the sector by volume. Capital markets are drowning in excess cash everywhere. Creditworthy companies are absurdly overbanked, and credible investment opportunities are limited.

In the UK, this is particularly true. Creditor-friendly laws and open markets have allowed plenty of investment capital into UK infra. The railways might be creaking but the UK has the largest offshore wind capacity in the world, much of it funded privately.

Into the fray, therefore, steps the UK’s new infrastructure bank, unveiled on Wednesday — yet another source of already abundant capital. What is needed instead is stability in tolls, tariffs and regulatory regimes. That counts for much more than a couple of basis points off a project loan, and it must be the focus for a government that really wants to commit to new infrastructure.

If the new infra bank doesn't derisk projects, but simply becomes another competitor crowding out private markets, it will add little, and distract from a much more important task — ensuring that government credibility can give the private sector the confidence to invest.

For the new bank to work, the UK must change its mindset — above all, it must learn to think long term.

The next few decades will bring an unprecedented industrial revolution. Carbon emissions must fall to zero. If the UK can give the new bank time and space to take root and grow, it could become a valuable and creative player. As a centre of expertise in project finance, infrastructure and green technology, it could influence policy, spot bottlenecks, raise standards and handle risks the private sector does not dare tackle.

Yes, private markets are overflowing with capital. But it is not organised, little of it has a public welfare at heart, and none of it has a vision of what the whole country needs.

The UK government is not used to being the adult in the room, but with its new infra bank, it should try.

By Jasper Cox, Jon Hay, Lewis McLellan, Owen Sanderson
27 Nov 2020