Tees Valley Combined Authority has become the first authority to agree a 50-year loan of £107m with the recently launched UK Infrastructure Bank (UKIB) to fund its South Bank Quay project, which aims to transform part of a former steelworks into a 450-metre quay to service the offshore wind sector.
This article explains why loans from the UKIB offer a competitive option for projects authorities would otherwise struggle to find investment for, and why there might be strength in applications of this kind from a combined authority specifically.
Which bank?
One of the purposes of the UKIB is to replicate part of the role traditionally adopted by the European Investment Bank (EIB) in the UK. The EIB has a lower cost of capital than traditional commercial banks and as a result can offer more competitively priced loans. As a multilateral institution the EIB doesn't need to abide by state aid rules which, along with its AAA credit rating, allows it to undercut the commercial bank market. The UKIB will have to meet subsidy rules although its proposed offering of 60 basis points above Gilts is considerably cheaper than the commercial market.
The UK Government believes that the UKIB can act in a more targeted way than the EIB has historically operated and have a strategy more aligned with its policy aims such as levelling up and net zero.
Supporting innovation
The Government's aim is for the UKIB is to assume project start-up risk and restructure projects with equity and debt which might not otherwise attract private investment. The £10m loan at South Bank will create a quay and provide opportunities for the manufacturing, storage and mobilisation of wind technology. GE Renewable Energy proposes to build a multimillion-pound wind turbine blade factory here and the quay will enable those blades to be transported to the Dogger Bank wind farm. The South Bank quay forms part of the Teeswork site which covers approximately 4,500 acres of land including the former SSI steelworks, large portions of which will require remediation before they can be redeveloped.
The UKIB loan can kickstart a portion of the overall development to the point where it’s generating its own income stream, which in turn can then be used to remediate other parts of the site. As the project moves out of the riskier early stages and starts to produce returns, it will open the door for the commercial sector to move in and provide the funding for other subsequent developments "crowding-in" investment.
An invite to other authorities
The fact that the UKIB has agreed its first loan is a sign to other authorities that its open for business. It’s not surprising that the South Bank project was the first to obtain funding as it is in line with the UKIB's policy remit including the facilitation of a project that might have otherwise struggled to obtain initial commercial funding, contributing to the UK's green revolution, and supporting new technology and innovation. It also fits the government's levelling up agenda and politically the site is located next to several "Red Wall" constituencies.
But identifying projects that tick the right boxes for the UKIB is clearly part of the puzzle for other authorities looking to secure loans. This is not unlike the exercise businesses go through to seek loans from commercial banks requiring the preparation of a robust business case. Local government must start to look for the skills acquired in the commercial banking/investor sector to secure this sort of finance.
Pitching for investment
Another factor which may have contributed to the success of this bid is the energetic, ambitious, and media-savvy mayor Ben Houchen who is driving the net zero agenda in the Tees Valley area.
It’s not just renewable energy projects that could be considered for these sorts of loans, transport infrastructure which has always been a hard sell in terms of attracting private sector investment is an essential part of the road to net zero. If authorities get their pitch right – whether it's for local bus services or other transport links, they might be able to kick-off projects with the UKIB backed funding. Going through the exercise of having to put forward a commercial case for investments is good both in value for money terms and that it provides reassurance to a central government which might otherwise be concerned about decision-making around local government investment.
The Government has indicated that it wishes to utilise the UKIB in a way that goes beyond just delivering infrastructure but also enables innovation, green technology, levelling up and leads to the facilitation of private sector investment. The UKIB loan will kick-off the beginning of an exciting new chapter for Teesside – let’s hope it does the same thing in other parts of the UK.
Mark Casey is a specialist in banking and finance, and is legal director at Womble Bond Dickinson
