UKIB: The ant bank?
By World Infrastructure Journal-
The creation of the UK Infrastructure Bank (UKIB) is a huge step towards dealing with the climate crisis and place-based inequalities. Creating a source of funding that is somewhat sheltered from the boom and bust cycle of the private market, that will be more willing to make investments with uncertain returns, is hugely important for a country that needs to begin the process of rebuilding its infrastructure. The only issue is that the UKIB is simply too small.
On the 17th of June, the UK launched its first infrastructure bank in Leeds. Designed to help channel money into big projects and address the climate crisis in every region and nation of the UK, Chancellor Rishi Sunak said it will not only assist the UK’s plans to ‘level up’ post-COVID-19, but will also help to bridge the north-south divide. According to the Chancellor, the UKIB will “accelerate our ambitions for tackling climate change while creating new opportunities across the UK,” by largely focusing on providing funding to clean energy. The bank’s creation will also further cement Leeds’s status as a financial hub. Sir Roger Marsh, Chair of Leeds City Region Enterprise Partnership, said putting the institution in Leeds would be “a real catalyst for change and a major driver of our post-pandemic recovery. ”
However, despite all the positivity, there is reason to doubt that the UKIB will deliver on its promises. The Chancellor has claimed that “through the bank, we are investing billions of pounds in world-class infrastructure that will support people, businesses and communities in every corner of the UK." However, the Office for Budget Responsibility said it had “not adjusted our economy forecast” for the bank’s creation due to its small size and expected limited impact. Currently, the bank will receive an initial £12 billion of capital and £10 billion of government guarantees and hopes that private investors can provide an additional £40 billion. While this may seem like a large amount, it is worthwhile to point out that the earnings before interest and taxes (EBIT) of the BPI Groupe S.A. (France’s largest public investment bank) were around £872 billion in 2018. While there is a commitment to a spend £100 billion on capital expenditure, there is no date set for when that money needs to be spent – and already large firms, such as Network Rail, have been told they will receive no additional funding from the UKIB.
The importance of the UKIB’s creation cannot be understated. Since the 2007-2009 Global Financial Crisis, there has been a clear need in the UK for a national investment bank that could at least partially insulate the public sector from the volatility of the market. Moreover, as the UK has found itself in greater and greater need of investment in infrastructure (not only to repair and restore existing elements, but to also make the necessary steps in order to hit the Net-Zero 2050 targets), the inefficiency of private investment has only become more and more clear.
Private investment tends to be rather poor at providing adequate finance at sufficient maturity and a reasonable cost to small firms. This means that, beyond perpetuating a cycle where the largest firms win contracts mostly because they are large, neglected regions of the UK have even less chance at securing investment. Moreover, private investment also tends to shy away from areas of uncertainty, such as new technologies and new sectors. If the UK is to sufficiently transform its economy and infrastructure to deliver on both its promise to ‘level up’ and to ‘green the economy,’ there will be a significant need for innovation and creativity. This means that unless private investors in the UK begin defying conventional wisdom, a national investment bank could come in handy.
Other middle-income countries have realised this. Canada, Japan, India, China, South Korea, France, and Germany all have well developed national investment banks that have supported entrepreneurship, technological innovation, and efforts to increase energy efficiency. While the UK joins their ranks with the creation of the UKIB, until it has the financial power of the BPI Groupe S.A. (France) or KfW (Germany) it will not be able to secure the same sort of returns.
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