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Tees Valley Combined Authority has become the first authority to agree a £107 million 50-year loan 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- meter quay to serve the offshore wind industry.

This article discusses why UKIB loans offer a competitive option for project authorities who would otherwise struggle to find investment, and why there could be strength in such requests from one combined authority in particular. .

Which bank?

One of UKIB’s aims is to replicate some of the role traditionally played by the European Investment Bank (EIB) in the UK. The EIB has a lower cost of capital than traditional commercial banks and therefore can offer loans at more competitive prices. As a multilateral institution, the EIB is not bound by state aid rules which, with its AAA credit rating, allow it to undermine the commercial banking market. UKIB will have to abide by subsidy rules although its proposed offer of 60 basis points above gilts is considerably cheaper than the commercial market.

The UK government believes the UKIB can act in a more focused way than the EIB has done in the past and have a strategy more aligned with its policy objectives such as leveling up and net zero.

Support innovation

The government’s aim is for UKIB to take on the start-up risk of the project and restructure the projects with equity and debt that would otherwise not attract private investment. The £10m loan to South Bank will create a dock and provide opportunities for manufacturing, storing and mobilizing wind technology. GE Renewable Energy is proposing to build a multi-million pound wind turbine blade factory here and the dock will transport these blades to the Dogger Bank Wind Farm. South Bank Quay is part of the Teeswork site which covers around 4,500 acres of land, including the former SSI steelworks, large parts of which will need to be restored before they can be redeveloped.

The UKIB loan can kick-start some of the overall development to the point where it generates its own revenue stream, which in turn can then be used to sanitize other parts of the site. As the project moves out of the riskier early stages and begins to yield returns, it will open the door for the commercial sector to set up shop and provide the funding for other later developments that “pull in” investments.

An invitation to other authorities

The fact that UKIB has accepted its first loan is a sign to other authorities that it is open for business. It is no surprise that the South Bank project was the first to secure funding as it is in line with UKIB’s policy mission, including facilitating a project which would otherwise have struggled to secure a initial commercial funding, contributing to the UK’s Green Revolution and supporting new technologies and innovations. It also corresponds to the government’s upgrading program, and politically the site is located next to several “red wall” constituencies.

But identifying projects that tick the right boxes for UKIB is clearly part of the puzzle for other authorities looking to secure loans. This is not unlike the exercise companies have to go through to obtain loans from commercial banks requiring the preparation of a solid business case. The local government should start looking for the skills acquired in the commercial/investor banking sector to obtain this type of financing.

Pitcher for investment

Another factor that may have contributed to the success of this bid is the energetic, ambitious and media-savvy mayor, Ben Houchen, who leads the net zero program in the Tees Valley region.

It is not just renewable energy projects that could be considered for this type of lending, transport infrastructure which has historically been a hard sell to attract private sector investment is a critical part of the road to net zero. . If authorities are successful, whether for local bus services or other transport links, they may be able to launch projects with UKIB-backed funding. Going through the exercise of having to present a business case for investments is good both in terms of value for money and it reassures a central government that might otherwise be concerned about decision-making regarding local government investments .

The government has indicated that it wants to use the UKIB in a way that goes beyond just providing infrastructure, but also enabling innovation, green technology, upgrading and facilitating investment from the private sector. The UKIB loan will launch the start of an exciting new chapter for Teesside – hopefully it does the same in other parts of the UK.

Marc Casey is a specialist in banking and finance, and legal director at Womble Bond Dickinson

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