National Wealth Fund
The National Wealth Fund Taskforce published its report for the Labour Party on how the National Wealth Fund (NWF) should operate, including what products it could offer and its role in the wider public and private investment landscape. The taskforce includes Mark Carney, former Governor of the Bank of England, as well as CEOs from Barclays, NatWest Group and leading pension and investment funds. The report can be found here.
Ports are one of five industries earmarked by the government for investment from the NWF – with £1.8bn allocated – and this report makes recommendations about how that could be delivered. This includes the possibility of a ‘cap and floor’ revenue assurance mechanism for ports.
The goal of the National Wealth Fund is to mobilise private capital to drive the energy transition whilst creating green jobs and growth across the UK. The Climate Change Committee say that £50bn of private sector investment is needed every year from 2030 to 2050 to meet net zero ambitions.
The NWF taskforce’s foundational recommendation recognises that policy is as important as funding to achieving the government’s mission on net zero. Reassuringly, the taskforce say that public investment must be accompanied by a stable, aligned, and competitive policy environment. It says the fund should be accompanied by a wider industrial strategy to improve UK competitiveness and the report identifies some key areas for immediate reform, including the planning system, tackling the skills gap, and strengthening the UK carbon price (alongside other demand pull measures).
The NWF taskforce sees the NWF as a sovereign-backed ‘green catalytic fund’ rather than a sovereign wealth fund (which are usually focused on financial returns only). The NWF aims to improve UK competitiveness by meeting the needs of investors, government, and the five identified priority sectors (including ports). It says the fund must provide the right type of product and provide operational simplicity as well as working alongside other support mechanisms.
The taskforce says that the fund should pursue the best investment opportunities in terms of strategic significance, impact on emissions, and ability to crowd in private capital. As well as demonstrating higher risk appetite and accepting lower rates of return, the fund will be uniquely placed to manage risks such as supporting the development of new markets.
Tackling investment barriers
The taskforce says the NWF should be ‘additive’ and designed to address various sectoral risks by investing in nascent technologies or projects at the initial stages of market development. KPMG provided the taskforce with some common barriers to green investment across three broad themes:
- Investment Viability
- Demand Certainty
- Value Chain Readiness
Investment viability, includes high capital requirements, which the taskforce identifies as the biggest impact on the port sector. Investment return is also an issue for the sector, where it says input price volatility and long payback periods caused by tight margins is moving the risk-reward balance below those required for private investors. Delivery risk, including permitting delays, cost overruns and construction delays that create uncertainty, is also an issue for ports, the report says.
The taskforce say that the NWF could have a role tackling investment viability by providing debt financing for strategic assets (including “larger” ports) on a “no-regrets” basis where anticipatory investment is required. The NWF could also provide equity financing where there is a higher risk profile or a long-term investment horizon is required (and uses “smaller” ports as an illustrative example of this) and loan guarantees where counterparty creditworthiness is a barrier to accessing capital. Our initial view is that the type of products or support offered by the NWF should not depend on the size of the port but on the type of investment.
Demand certainty is the second broad theme of investment barriers, where current policy addressing this is short term and limited and held back by a lack of established creditworthy markets. The taskforce suggest the NWF could play a role in addressing demand certainty through loan/revenue/price guarantees where lenders require contracts to commit funding or by underwriting the risk itself. It could also provide equity/debt co-investments in downstream assets to stimulate offtake and reduce uncertainty.
Value chain readiness covers timing delays to enabling infrastructure and “dependencies between production and offtake assets”. The taskforce identifies a lack of robust domestic supply chains in an “increasingly tight global market”, insufficient skills, and a lack of established enabling infrastructure, which are all barriers to green investment. The report says there is a potential role for the NWF in providing debt and/or equity in supporting development of enabling infrastructure where a policy gap exists or debt financing to support investments where a significant supply chain gap exists.
Products and Approach
The taskforce says the NWF must be mandated to provide a broad range of products and financial instruments to suit different sectors, including equity (with higher levels of risk appetite), concessional debt guarantees, and price assurance products. It should however exclude pure grants from its remit as they do not deliver a return on investment and there is already strong grant-making provision in the UK public investment landscape. However, the NWF could help coordinate other grant giving organisations and activity. The BPA would support this as members have told us of the proliferation of funds open to ports, yet all have different criteria and aims.
The report states that the NWF should have an investment mandate rather than fixed funding allocations for different sectors. This approach will help the NWF be seen as credible by investors and support its efforts to mobilise capital, as it mirrors private investment funds and follows a similar approach to comparable funds in Canada and Australia. It should be noted that ports have already been allocated £1.8bn of the total £7.3bn available, and the BPA would oppose this being eroded; we see it as a floor not a ceiling. It also says that where there is a clear case, and it sits within broader objectives and mandates, investment through third-party funds should also be allowed.
In order to support the report’s core aim of a fund that is catalytic and additive, the taskforce says the NWF should offer:
- Equity, with the ability to invest in both projects and funds that pose higher levels of risk. The NWF could consider deploying non-control equity for greater speed to market in the immediate term.
- Concessional debt (providing loans below standard market rates) where this is required alongside other forms of capital that cannot be sought elsewhere.
- Guarantees and wider price assurance options, deployed in a coordinated manner.
The report details two types of price assurance options: (1) contracts for difference (CfD) where the market does not provide sufficient price signals to incentivise low carbon products, and a (2) Cap & Floor mechanism which can be used to de-risk investment where revenue uncertainty is a blocker to investment, especially when the timing of when offtake contracts impedes investment viability.
Contracts for Difference (CfD), which have been used successfully to support the deployment of wind power and are being developed for hydrogen, offer price certainty to producers. The taskforce says that the NWF could offer producers a per unit revenue top up to cover the cost base and required returns based on an agreed strike price. In return, projects will agree to profit share any offtake price achieved that is higher than the strike price with the NWF.
Cap and Floor Ports Scheme
The second price assurance scheme is a Cap and Floor mechanism. The taskforce highlight it as a potential mechanism to de-risk port investment where revenue uncertainty is a barrier, especially when the timing of when offtake contracts impedes investment viability.
The Cap and Floor (C&F) mechanism is currently used to support revenue stability for UK Interconnectors. The report says that a similar regime would allow ports to operate on a merchant basis, stacking revenues across a number of revenue streams. The overall revenue stack is then subject to a minimum and maximum level. If earnings fall below the ‘floor’ level, the NWF (either directly or through a counterparty such as the Low Carbon Contracts Company) would top up revenue to the floor level. This is set on the basis of discounted and annuitized CAPEX, OPEX and debt service costs over the lifetime of the contract. If revenues exceed the cap, the operator would return excess revenues to the NWF.
The cap level would be determined considering total OPEX, CAPEX, depreciation and equity expected rate of return. This in turn will be discounted and annuitized. A Soft Cap could be introduced whereby revenue would be shared between the asset and the NWF to incentivise investment.
The NWF say that this could make ports more attractive to investment and could operate at zero cost given ports’ established business model and strong expectation of demand.
