On July 9th Britain’s new chancellor, Rachel Reeves, confirmed plans to set up a £7.3bn ($9.4bn) National Wealth Fund (NWF). The details, including its personnel, risk tolerance and degree of independence, are yet to be ironed out. But in its outlines, the plan brings to mind the old cliché about the Holy Roman Empire—that it was none of those three things.
Despite its name, the NWF is not intended to be a sovereign-wealth fund, an open-ended pot of government-run investments along the lines of Singapore’s GIC or Australia’s Future Fund. Instead, Ms Reeves wants the NWF to be a development-bank-cum-investment-concierge. Focused narrowly on a handful of favoured green industries like steel, hydrogen and batteries, it will aim to “crowd in” three times as much private capital by biting off the riskiest chunk of projects. That vision makes it closer in spirit to the UK Infrastructure Bank (UKIB), a Boris Johnson-era green lending venture.
Britain has a long lineage of state-backed efforts to pull cash into voguish industries. Some are still running, like UKIB or the British Business Bank, a lender to startups that dates back to the Conservative-Liberal Democrat coalition of 2010-15. (Ms Reeves intends to eventually pull both under the NWF umbrella.) Others are now defunct. The UK Green Investment Bank, another coalition-era lender, lost favour and was sold off in 2017 to Macquarie Group, an Australian investment conglomerate. Further back, the NWF has some similarities to the 1970s National Enterprise Board, a vehicle that propped up Britain’s ailing manufacturing sector during Harold Wilson’s premiership. The chances of the NWF substantially greening and expanding the British economy do not seem much greater than those of its predecessors.
Labour is right to note that Britain has a serious problem with under-investment. But access to finance is not the main bottleneck. Only 5% of the manufacturers surveyed by the Confederation of British Industry, a lobby group, said that trouble raising money is holding them back from investing. Half pointed to uncertainty about demand and a third to worries about inadequate returns (see chart).
Thoughtfully structured investment (for instance a “cap and floor” mechanism, in which the NWF would stabilise revenue by topping it up below a certain band in return for payouts above that band) could allay some of those issues. But in most cases, they are best mitigated by a growing and stable economy.Besides, “we have a very well-developed financial system with lots of risk finance,” says Neil Lee of the London School of Economics. “If people aren’t investing, it’s probably not because there aren’t enough clever bankers in London.”
More plausible culprits for low investment are Britain’s blocker-friendly planning system, its recent reputation for chaotic governance and a lack of expertise on managing big projects, especially in local government. Since taking charge, Labour has said it will offer more policy stability and launched an initial salvo of pro-development regulatory changes. These are much more likely to alter Britain’s growth prospects for the better.
Another worry is the NWF’s narrow scope. Emphasising green manufacturing lines up neatly with the Labour Party’s ideological proclivities. (Ed Miliband, the energy secretary, plans to launch a related venture, GB Energy, that focuses on renewable-power generation.) Less clear is whether that focus matches what the British economy needs to grow. Services, which make up 80% of output and more than half of exports, are largely absent from the NWF’s mandate. The single largest slug of NWF financing will be directed towards steel, an industry where Britain’s high energy costs and stringent environmental standards make competitiveness a challenge.
But the most serious question is more fundamental: should the British state be selectively doling out capital on generous terms at all? Governments across the rich world have gone on a green splurge over the past few years; a report on the NWF prepared for Labour by a task-force of finance-sector bigwigs points out that very similar bodies are already operating in Canada and Australia. Boosters say Britain could be left behind. They also emphasise that new green technologies are inherently risky. In theory, having the NWF shave off a portion of the downside risk (in return for appropriate upside) could entice larger, more cautious pools of capital like pension funds to invest alongside.
But Britain’s fraught history with industrial subsidies, especially in the post-war years, is not promising. And using the NWF to barge in on a global subsidies race would be an expensive error. The NWF and associated ventures are dwarfed by the trillion-dollar scale of American green spending, for example, though they are closer in size to Canadian and Australian efforts. Probably the strongest argument for state involvement is also the most dispiriting. A history of planning vetoes and costly U-turns on totemic projects like HS2, a rail line, has left many foreign investors leery of Britain; a government co-investor with taxpayer cash on the line might provide some reassurance of its commitment to specific policies and projects.
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