Ted Frith is chief operating officer of GLIL Infrastructure, an LGPS-backed £2.3bn fund
Build Back Better. I expect we will hear a lot more of that phrase as focus turns from epidemiology to the economy. Encouragingly, infrastructure appears to be at the forefront of government intervention with the launch of a new National Infrastructure Bank as central to Britain’s future.
It is not news that the government was moving to set up an institution that could help drive capital into the sector. Until the Budget, however, detail had been thin. The private sector has been, understandably, keen to learn more about how the National Infrastructure Bank would shape up in terms of funding the transformation of our nation’s infrastructure and economy. While there was only a brief mention of the bank in the recent budget, the new policy design paper offers significant further guidance.
The paper makes clear the National Infrastructure Bank’s objectives and far-reaching role in the market. We now know that it will not only back regional projects, but also other large complex projects that need significant investment to get off the ground. A determination to get new projects started is important. In recent years, there has been a transition in ownership of major infrastructure assets. As funds like ours invest in utilities, renewable energy, ports and logistics, and train rolling stock, the profile and nature of owner investors has changed.
Where once ownership structures were dominated by sovereign wealth funds and specialist private equity, now it is investors with long investment horizons are the most prevalent and taking an active role. While this has helped create a better alignment between investors and the infrastructure assets they support, it has also meant that there is a considerable amount of capital trying to find a home in a limited number of investment opportunities.
By using the government’s investment power to get projects going, the bank’s aim is to create more opportunities for pension funds to invest directly into infrastructure, which means more stable, long-term returns for millions of pensioners. This supports the government’s stated desire to involve pension fund capital in funding infrastructure, not least as it acknowledges positive impact on outcomes that arise from involving institutional investors. The expectation is that the government can then offload its risk to institutional investors and recycle the capital into new projects, creating a sustainable funding source for generations to come.
Yet, I was surprised by some of the negative reaction to the announcement. There are legitimate challenges for more detail and a greater focus on tackling climate change, however many have bemoaned the scale of the investment being made. I take an optimistic view.
This is a significant improvement on the £3bn of capital that was first allocated to the Green Investment Bank in 2012. Now we are talking £22bn of financial capacity – £12bn for lending and investment and a further £10bn of guarantees. This gives the bank immediate clout to get projects off the ground. It also acknowledges the need to use the capital efficiently and for the benefit of taxpayers.
Beyond the financial commitment, the most important development for me is the spirit in which the announcement is made. It reaffirmed the government’s commitment to work closely with pension funds, which the chancellor sees as a key ally in funding and achieving its ambitions.
The bank’s inception will help foster mutually beneficial collaboration between the public and private sector, meaning the capital associated with the new bank should not be seen in isolation. It means using public money smartly to develop infrastructure by leveraging private sector funds and tapping into the strong outcomes that can be delivered by private capital – a clear objective of the chancellor.
This is about creating a triangle of interdependent needs – those of local communities, the government and our nation of tax-payers and pension savers. No doubt, there is much more work to be done. For now, let’s embrace the opportunity to work together and to build back better.