Good quality infrastructure is essential to deliver services across a range of sectors. Investment is vital to building and maintaining infrastructure; it is also essential where infrastructure needs change, for example to achieve the government’s commitment to achieving net zero carbon emissions by 2050. The government’s National Infrastructure Strategy highlights the importance of infrastructure to outcomes for consumers, the environment and disadvantaged areas of the country. The government wants private investors to continue playing a key role in financing infrastructure. However, the level of risk, particularly in relation to new technologies or early investment in projects, can deter potential private investors from otherwise attractive infrastructure projects.
In June 2021, HM Treasury launched the UK Infrastructure Bank (the Bank) to encourage private finance alongside public investment, to achieve two strategic objectives – helping to tackle climate change and supporting regional and local economic growth. The Bank is a publicly owned company, with HM Treasury as the sole shareholder. UK Government Investments acts as the shareholder representative, including as a member of the Bank’s Board. HM Treasury has provided for the Bank to invest up to £22 billion of public money over its first five years, through a combination of equity, loans and guarantees to support infrastructure projects. It has asked the Bank to prioritise five sectors: clean energy, transport, digital, water and waste.
This report covers the Bank’s set-up, including HM Treasury’s planning before launch. It examines the Bank’s progress in implementing HM Treasury’s vision for the Bank, in terms of establishing structures and processes to pursue its objectives. It also looks forward to the main challenges facing the Bank, and how the Bank is preparing for them. We did not evaluate the success of the Bank’s early investments as part of this study.
The government wanted to be ambitious in creating the UK Infrastructure Bank, both in the scale of its purpose and the intention that it should start making deals as quickly as possible. Moving at this speed meant some important planning steps were skipped, and many aspects of the Bank’s structure and processes were, deliberately, not in place at launch. This is an unusual approach, and HM Treasury took steps to ensure controls existed to protect taxpayers’ money. Officials at the Bank, with support from HM Treasury, took a pragmatic approach by progressing new investments at a pace in line with its available resources, while recruiting staff and establishing systems and controls: a trade-off for moving at speed to open the Bank.
The Bank, with HM Treasury support, has worked hard since launch to complete the Bank’s set-up. Some elements, particularly its advisory function, remain to be established and it will take time for the Bank to fully mature, so it is too early to say whether the Bank will be a success. The Bank will need to manage a range of operational and external challenges if it is to deliver government’s ambition for it. It will need to clearly demonstrate its achievements and that it is justifying the costs of establishing the Bank as a separate institution. Drawing together information on costs and impact will be essential in allowing the Bank to demonstrate value for money. Developing a clear view of where investment is most needed, and an impact framework that shows where the Bank’s interventions are most effective, will be vital to its future success.
]]>In 2019, the government set a target to achieve net zero greenhouse gas emissions by 2050. This will require changes across society, from the way people heat their homes to the way they travel.
Decarbonising electricity generation is fundamental to the government’s net zero strategy because many sectors of the economy, such as transport and heating in buildings, are likely to switch to using electricity instead of fossil fuels such as natural gas. In 2021, the government set an ambition that by 2035 all electricity should be generated using clean sources, subject to security of supply, while meeting an expected increase in electricity demand of up to 60%. This means phasing out polluting types of electricity generation, such as gas-fired power stations and replacing them with a new mix of zero and low-carbon generation, including wind, solar and nuclear power.
Switching to clean electricity generation has increasingly become part of the government’s plan to ensure there is an affordable and secure domestic energy supply in response to the disruption to international gas supplies that has followed Russia’s invasion of Ukraine. In April 2022, the government published the British Energy Security Strategy. This emphasised how accelerating progress towards a decarbonised power sector would, over time, enable a secure supply of electricity and affordable bills. The strategy set out increased government ambitions for transitioning to zero and low-carbon electricity generation during the 2020s, including increased ambitions for offshore wind and nuclear power.
In February 2023, the government established the Department for Energy Security & Net Zero (DESNZ), which has overall responsibility for ensuring the government achieves its power sector ambitions.
This report sets out the main challenges that DESNZ faces to decarbonise power. We have assessed the progress DESNZ has made since it set the ambition to decarbonise power by 2035 and examined how well it is set up to oversee future progress. We use offshore wind and nuclear power as examples of zero and low-carbon generation to illustrate some of our points.
We recognise that DESNZ has made less progress since 2021 with establishing its long-term delivery plan than it intended because it needed to shift focus to respond to short-term challenges on energy supply and the cost of consumer bills. This report is therefore an early assessment in which we set out potential risks DESNZ needs to manage and make recommendations aimed at supporting DESNZ as it develops its plan. In the future we will assess government’s progress with achieving power sector decarbonisation, how well it is managing the risks highlighted in this report, and the value for money of its interventions.
Decarbonising power is the backbone of the government’s plan to achieve net zero. Although power sector emissions have reduced significantly over the past three decades, DESNZ cannot be complacent about the challenges involved in decarbonising further while continuing to ensure a secure supply that meets the predicted electricity demand increases. This will require substantial investment in new capacity, alongside system-wide modernisation, and needs a joined-up approach to ensure changes happen in sequence and with coherence.
The longer DESNZ goes without a critical path bringing together different aspects of power decarbonisation, the higher the risk that it does not achieve its ambitions, or it does so at greater than necessary cost to taxpayers and consumers. While the recent energy crisis has understandably delayed DESNZ’s progress in establishing a longer-term delivery plan for decarbonising power by 2035 it has reinforced the importance of ensuring that plan is resilient to external shocks
]]>This briefing provides an overview of the Department’s sustainability and provides context for the actions it is taking to support environmental protection and sustainable development. The transport sector has a significant impact on the environment, making the activities of the Department vital in meeting environmental objectives.
The briefing is primarily focused on the environmental impact and activity of the Department, rather than economic or social sustainability.
It continues the NAO’s series of Departmental sustainability overviews prepared for the Environmental Audit Committee, which have previously covered the Department for Business, Innovation and Skills, the Home Office, and the NHS.
April 2016
]]>European regions and cities face a common set of renewal issues. Local economies have to adjust as manufacturing and older industries decline and more knowledge-based industries take their place. Across Europe particular regions, cities, districts or neighbourhoods and their communities are in danger of being left behind unless existing social, physical and environmental infrastructure is renewed and adjusted to new economic conditions.
Delivering ambitious regeneration in today’s European state and economy is complex. Creating sustainable communities and neighbourhoods requires integrated action across a range of different sectors – transport, housing, green space, health, leisure, employment and skills. For every successful regeneration programme there have been others that did not achieve sustainable change. So what is it that causes some programmes to be successful and others not?
The purpose of our publication was to illustrate from across a range of different European contexts how successful regeneration has been delivered. We have drawn out critical factors in each case study that helped to bring about success. In total there are seven factors, but not all are present in each of our case studies. Common to all our case studies was the need to develop a clear shared vision backed up with strong leadership.
We did not seek to evaluate each of the approaches to regeneration or identify any particular individual approach as an exemplar. Even the most successful of the programmes described in the pages of our report will have its critics. The very different constitutional and administrative contexts and problems to be solved in each of the cities and regions prevent simplistic read across.
But with the help of The Bartlett Faculty of the Built Environment we have identified how structured programme management can help to ensure the critical success factors are delivered – our framework for successful regeneration. The framework is set out at page 70 of the publication.
We hope this publication will provide useful motivating material for all those engaged in delivering ambitious regeneration.
]]>The report notes that, in difficult circumstances, a range of complex issues had to be addressed and that the Department handled the negotiations with LCR in a competent manner. It also sets out a number of lessons for future Public Private Partnerships, including:
Make sure that bidders for a PFI deal are not encouraged to be over-optimistic
Poor performance by Eurostar (UK) Limited (the UK arm of the international train service transferred to the private sector in 1996 as part of the PFI deal) weakened London & Continental Railways (Eurostar UK’s owner and contractor for the construction of the Link) to such an extent that its ability to fund construction of the Link was destroyed and the entire project came close to collapse. There have been recent examples (such as the Millennium Dome and the Royal Armouries Museum) of high profile projects whose business plans have depended on forecasts of usage that turned out to be highly optimistic. As bidders’ forecasts in 1996 for the fledgling Eurostar UK business were in line with previous estimates made by the Department and British Rail, the Department did not have them independently reviewed.
The private sector is paid for taking risk. Responsibility should therefore remain with the private sector should these risks actually occur. In the restructured deal, LCR’s shareholders retained an economic interest in the project while avoiding the full financial consequences of its near collapse. On the other hand, the taxpayer could be exposed to further financial risk of £360 million on current forecasts if Eurostar UK revenues are badly affected by poor passenger numbers. Departments should ensure that over-optimism in bidding for contracts will lead to losses if things go wrong.
The risk of running a relatively new international train service was bundled together with the risk that the private sector contractor would be unable to raise sufficient finance to build the Link. Significant public assets were transferred to the private sector more than a year before the planned completion of the external financing for the project. If a department proposes to depart from the normal practice in Public Private Partnerships of transferring assets only when all finance has been raised, then it needs to think through its approach to managing the increased risks involved.
Departments should ensure that the capital structure of a deal is consistent with the risks involved in the project. If the proportion of risk capital is too low, the project will not be financially robust in the face of lower than expected revenues. Moreover, having a relatively low investment at risk may provide insufficient incentive for the private sector shareholders to tackle business problems with determination. Either way, the impact of proceeding with too little risk capital is likely to be a call on the public sector for increased financial support, as happened in this case. It follows that a department should take a close interest in private sector proposals for the capital structure of Public Private Partnerships.
The Department calculated benefits of some £3,000 million from a public sector subsidy of £2,000 million. Reworking the calculation, adjusting some of the Department’s assumptions, the report shows that the economic case for the Link is debatable and that the justification for public sector support is heavily dependent on wider policy benefits. If regeneration and passenger benefits are not as high as expected, the Link is unlikely to be good value for the taxpayer on economic grounds. It is essential therefore that the Department should do what it can to ensure that such benefits are realised.
The Department retained the risk that future Eurostar UK revenues would be insufficient to service £430 million of debt taken on by LCR and attract further investment in the project. If the market is unwilling to provide sufficient debt capital secured on the project, that is a clear signal that the project risks go beyond normal commercial risks. Such guarantees transfer project risks to the department, which needs therefore to consider thoroughly how to manage those risks.
LCR could not have raised all the finance it needed without Government help. However, the use of bonds carrying a Government guarantee rather than a voted loan from the Department to fund the project, cost the taxpayer an additional £80 million. The use of such bonds reflected the unique circumstances of this deal and achieved the Government’s objectives for risk allocation and accounting treatment in this Public Private Partnership. Departments will need to consider this cost-benefit balance with great care if similar situations arise in the future.
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