Report: UK infra bank could be modelled on KfW

The UK government is said to be planning the creation of a state-backed investment bank targeting infrastructure projects with cheaper capital and small businesses. Germany’s KfW could serve as the model for the bank, which could be announced in this year’s budget.

UK business secretary Peter Mandelson is considering creating a state-run investment bank modelled on Germany’s KfW group, the Telegraph newspaper reports today.

The news is the latest in a series of reports that seem to indicate the government is seriously considering the creation of a state-backed entity to help finance infrastructure projects, a vehicle that could be unveiled in this year’s state budget. But the Telegraph suggests the state-run bank could have a wider remit than previously envisaged, similar to that enjoyed by Germany’s KfW group.

As such, it would not only provide capital for major infrastructure projects but would also lend to small businesses at cheaper rates than commercial banks.

The KfW group was founded in the aftermath of the Second World War to help reconstruct Germany. Initially, it used funds from the Marshall Plan to help fund projects but its federal guarantee allowed it to borrow at very low costs and, in turn, provide competitive loans. It is now Germany’s sixth-largest bank with close to €400 billion of assets at the end of 2008.

The government is currently drafting a list of priority infrastructure projects the UK will need in the next five to 50 years, which is set to be revealed in the upcoming 2010 budget.

It is also discussing solutions on how to attract pension fund capital to help fund the £434 billion (€497 billion; $700 billion) of infrastructure the UK is said to need over the next decade. This could see the government take on some of the construction risk for these projects to boost their credit ratings to investment grade.

According to government estimates, the lion’s share of investments will be spent in the energy sector (£264 billion), followed by the transport (£120 billion), water (£45 billion) and communications (£5 billion) sectors.