Effective policy banks can be catalysts for sustainable investment and growth

As many countries grapple with the challenges of delivering net zero and fostering sustainable economic growth, the role of policy banks has never been more important. Policy banks are financial institutions established by governments to promote public policy objectives.

So, how do they work? Typically, policy banks supply innovative financial solutions to address market failures and deliver advisory services to local governments. In this way, policy banks drive sustainable economic development and spearhead major structural transformations toward dynamic, innovative, and net zero economies.

Additionality is key to the success of policy banks

It is generally agreed that a policy bank’s interventions should provide contributions beyond what the market offers (known as “additionality”) and should not displace (or “crowd-out”) private sector investment. Rather, they should “crowd-in” or attract private investors.

In practice, this means that effective policy banks can contribute to the projects that they finance in several ways by:

• Providing the necessary financing required for the project to go ahead, which might not be available from private sources alone.
• Improving project economics through, for example, the cost of their financing or by offering financing on more suitable terms. This includes offering a longer length of time before a financial contract expires or spreading loan payments out over time.
• Attracting private sector finance (crowding-in) on commercial terms based on the involvement of (or capital provided by) the policy bank. For example, the signalling effect of a policy bank can provide comfort to other investors (e.g., by de-risking potential perceived regulatory or policy uncertainty) along with the view that policy banks take a long-term strategic commitment to their investments.
• Improving project quality. For example, providing the advice and technical contributions that lead to improved operational performance, better outcomes and impacts, and/or stronger environmental, social, and corporate governance aspects.

An effective policy bank in action: The UK National Wealth Fund

In October 2024, the UK Infrastructure Bank became the National Wealth Fund (NWF)—established to help to drive growth and the transition to net zero across the UK.

Since its original founding in 2021 and previous iteration as the UK Infrastructure Bank, it has partnered with the private sector and local government to initiate investment deals that achieve public policy objectives. Under its new name and backed by an overall financial capacity of £27.8 billion and expanded mandate, it will continue to boost economic growth across the UK and unlock private investment for vital sectors.

To be effective, the investments made by the NWF must demonstrate additionality and encourage crowding-in. In this context, ICF was commissioned by the NWF to analyse and review their early progress in this area, looking at the period from October 2023 to March 2024.

Given that the NWF, in its current form, is still in its infancy, ICF measured where the policy bank currently is on its journey towards delivering its intended impact. ICF focused on how the NWF’s interventions uniquely address market failures and catalyse private sector investment, focusing on two sectors—digital and energy storage.

The key findings are:

• Additionality is already evident. The NWF has demonstrated additionality in the sector deals examined (digital and energy storage), in addition to its direct equity investments. In these instances, the NWF either filled a financing gap, which unlocked financing from other sources, or the traditional financing options were less suitable.
• The NWF is playing a complementary role in markets. NWF takes due care to avoid crowding-out other lenders or investors. It is a price taker on deals and avoids situations where it is competing with commercial lenders and investors on price. Across the projects that ICF reviewed, there is no evidence of the NWF offering lower prices to projects than commercial markets.
• The NWF is already mobilising private finance. NWF has unlocked significant private capital through its projects, by being additional and enabling projects to go ahead. There is evidence of direct, project-level, crowding-in of private finance across several projects.

Policy banks are a critical enabler of growth

With this review, ICF has set a new benchmark for assessing institutional additionality for policy banks. The findings underscore the pivotal role that policy banks can play in driving sustainable local and regional economic growth. The role of these bodies will grow in importance as countries attempt to progress towards net zero and prioritise local and regional economic growth.

Collaboration is the key to success. For policy banks to be effective, both government and the private sector must work together to address the complex challenges of achieving public policy objectives. This includes catalysing private sector investment at an even greater scale along with providing policy banks with broader mandates and additional funding. Given time, and the right support, policy banks are a critical enabler of growth and an accelerator in providing finance to businesses.