In the world of start-up business, they call it the ‘Valley of Death’.
“With all nascent technologies there is a valley of death, which is where you reach a point where you have to take a jump and if you make it over you are fine. A lot of that comes down to access to capital,” says Dr Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit.
This is a particular challenge for green technology companies. Unlike most start-up firms, they don’t just have impatient investors breathing down their neck. The rest of us have a stake in their success, given that the testbed technologies these companies are working on offer potential routes to eliminate the potentially catastrophic rise in global greenhouse gas emissions.
Bridging this valley looks set to be one of the key roles of the National Infrastructure Bank (NIB), which goes live this spring in Leeds, chancellor of the exchequer Rishi Sunak revealed in this month’s Budget.
If the NIB has a familiar ring, it’s because it shares a lot of the hallmarks of the Green Investment Bank (GIB). Set up by the then coalition government in 2013, the GIB was controversially sold off to Australian investment bank Macquarie after the Conservatives regained sole power at the 2015 general election.
The National Infrastructure Commission (NIC) set the ball rolling in 2018 when it called for the establishment of a NIB.
So, what should the role of the new bank be and what lessons can be learnt from the history of its short-lived predecessor?
Building the foundations
The government will supply the new institution with £12 billion worth of initial capital, which ministers hope will draw in a total of £40 billion worth of investment.
Some critics, including the Labour opposition, have branded the scale of the government’s commitment to the GIB as inadequate.
They include Tom Burke, founder and chair of environmental consultancy E3G, which contributed to the establishment by then business secretary of state Sir Vince Cable of the GIB.
“The government can commit £27 billion to roads we don’t need and only £12 billion to a national infrastructure bank that could make an enormous difference to levelling up and net zero by lowering the price of capital in the right ways,” he says, adding that an assessment of the UK’s infrastructure funding needs points to a leveraged total closer to £150 billion.
Nick Molho, executive director of the Aldersgate Group of investors, agrees that the level of capital committed by the government is on the low side, compared to its nearest equivalent, the German KfW bank.
“It has a much higher magnitude of firepower compared to what we are setting up.”
NIC chief executive James Heath isn’t worried about the scale of the government’s commitment.
He says: “The bank is clearly not there to fill all the capital requirements for the transition to net zero. It can make an important contribution but it’s designed to leverage private capital for market failures and deliver additionality.”
This last point addresses a criticism of the GIB that it invested in projects, which would have found backing otherwise, crowding out other sources of capital.
Marshall says: “It’s not about the money, it’s how targeted it is: the GIB often spent money on things it didn’t really need to.”
Richard Howard, head of research at Aurora Energy, points out that many private investors have an appetite for low-carbon infrastructure these days.
“Private sector funders are now funding large amounts of clean infrastructure anyway.
“The government has to be careful not to crowd out what would have happened anyway in the private sector, which wouldn’t be particularly helpful.
“If the NIB goes around funding things lots of others would have otherwise you wonder what the point is.”
Utilities can tap a large amount of the private capital that is available in the City of London, says Heath: “We have one of the strongest and most liquid markets in the world.
“It has to be doing something different – further detail will be important.”
Reaching the parts other banks can’t
Part of the problem with the GIB was that it wasn’t allowed to offer subsidised finance because of EU state aid rules, says Howard: “They didn’t do cut price loans for projects on more preferential terms than other banks would do.
“At the same time, they had to demonstrate additionality in some way, which meant doing things that other banks wouldn’t have done. This left them in a slightly tricky place where they could do things just behind the market or the same. As a result, they ended up doing an awful lot of offshore wind.”
The trick for the new bank will be identifying precisely where it should be targeting its resources.
Molho says: “Ultimately it is essential that it (the NIB) has very clear mandate, which needs to be very closely linked to meeting net zero and not contributing to investment that will get in the way.”
Michael Watson, partner at solicitors Pinsent Masons, says the scale of investment required to meet net zero is so huge that it is still needed despite the liquidity of the market.
“It’s big enough to make a good start,” he says, adding that the NIB can help to plug the gap left by the withdrawal of the European Investment Bank (EIB), which also played an important role in getting the UK’s offshore wind industry off the ground.
The new bank should have a more focused remit on infrastructure than the EIB, which also invested in social projects like housing and schools, he says.
Lawrence Slade, chief executive of the Global Infrastructure Investor Association, believes that the government has got the balance right.
“They have used the NIB to crowd in public finance and resisted the temptation to crowd out private investment.”
The most useful role that the NIB may play is to help finance companies caught in the ‘valley of death’ for emerging technologies, where the market is not well equipped to deliver the investment that will enable the transition from start-up status, says Howard: “The NIB’s distinct role could be pulling through project at that stage, which otherwise wouldn’t go anywhere because people see them as risky.
“There is quite a large gap in the middle where there is potentially a role.”
The new bank’s state backed status means that it should be able to offer cheaper rates than those on offer elsewhere in the market, says Marshall: “If the bank can lend at an attractive rate, which it should be able to do, they should be able to undercut existing banks.
“The targeted co-investment of a public backed financial institution could make a huge difference in same way GIB did in previous decade with offshore wind.”
Examples of areas ripe for this kind of support include floating offshore wind, hydrogen, CCS and electric heavy good vehicles, he says.
There is a rationale for the bank to perform a similar role in areas like direct air capture and hydrogen where upfront costs are high and uncertainties surrounding new technologies, says Heath: “Those areas feel strategically important for the transition to net zero but clearly the bank will have to take a view about the quality of investment proposals coming forward.”
The bank could also help to develop markets for technologies that are proven but yet to be commercialised, Howard adds: “There are some areas where the technology is mature but the market structures are complicated and we are not getting enough private investment into them, and the intervention of a bank with public backing could make a difference.”
The new bank could also make a difference in industrial and building decarbonisation, says Marshall: “It seems like most sensible way to address that market failure.”
The NIB could play a role as a co-investor, helping to de-risks project for more cautious investors like insurance companies, says Watson: “It will take a risk on part of the financial structure to encourage other financiers.”
The bank could also create a centre of expertise for other would-be investors in the emerging green economy, says Burke: “The real value is creating expertise that can better price the cost of capital for consumers, a bunch of people experienced in making judgements and therefore able to lower the cost of capital for things conventionally thought riskier.”
The knowledge the bank gleans from the financial rockface could be useful for policy makers and regulators too, Molho says: “A bank putting money into projects is ideally placed to provide empirical evidence when government is making policy and regulatory interventions.”
The new bank will certainly have its work cut out but it is to be hoped that it has a longer shelf life than its predecessor.