A UK Sovereign Wealth Fund and a UK National Investment Bank Are Not Separate Issues

In previous posts I have set out the case for both a UK Sovereign Wealth Fund (SWF) and a UK National Investment Bank (NIB). In each instance I didn’t pay much attention to the question of implementation. Turning to that issue now I aim to show that the two are highly interdependent and would deliver most value if closely integrated.

A SWF needs to be professionally managed and a NIB needs assets with which to fund the investment it must undertake and stimulate. This in itself indicates the potential relationship between the two. There is no reason why they should not be created at the same time, and the NIB charged with managing the SWF and overseeing its growth. At the same time, the NIB’s activities in generating investment will create assets which become part of the SWF. Properly managed, the two entities could operate in a ‘virtuous circle’, each reinforcing the value and activity of the other.

I have argued elsewhere that the role of the modern state should be to act as a dynamic interface between the public and private sectors.

Close integration of a SWF and a NIB exemplifies how this could work in addressing a major politico/economic crisis such as the UK housing shortage. If all publicly owned social housing becomes an asset within the SWF and rental incomes accrue to the SWF, then the SWF’s balance sheet is strengthened accordingly. Bonds can then then be issued by NIB to raise money for building further homes. These, and rental income further increase the SWF’s asset base and the beginnings of a virtual circle is created. The actual way in which this is done becomes critically important: the NIB is in a position to invest in providers of new housing and to stimulate innovative solutions (such as pre-fabrication – this worked well in the emergency shortage situation created by WW2) to rapid removal of the shortage. Quality of build becomes important here. If the quality of new housing is sufficiently good to make new homes attractive to purchasers under right-to-buy, then the process can become supercharged. If right-to-buy can be activated if and only if buyers can obtain a mortgage in the commercial market, then the SWF/NIB will generate new funds. If these funds can only be used to build more housing, then the overall solution is accelerated. Consider this: if it costs £100,000 to build a home and that home can be sold to generate £200,000 in capital, then the funding for the ceation of two further homes is provided. The numbers (admittedly ‘back of an envelope’) are less important than the principle here: there is a potential snowball effect that accelerates the solution of a problem while rapidly enhancing the SWF’s asset base.

The workability and effectiveness of solutions and processes like this depend on the acceptance of a number of key principles, all of which offer strong clues as to how the all-important governance of the SWF/NIB needs to be set up.

  • Ideology needs to be taken completely out of the loop. The right-wing private = good, public = bad, is as unhelpful as the left-wing private = bad, public = good line of thinking.
  • The SWF/NIB governance needs to establish a pragmatic, solution-orientated approach to problems, based on a productive, enabling interface between the public and private sectors.
  • Symptom-orientated micro-economic ‘solutions’ need to be recognised and selectively eliminated as the illusions they represent. In relation to a problem such as the housing shortage, these might include rent controls, multiple home ownership controls, ‘affordability’ criteria, low occupancy controls, and so forth. This is not an argument for a free-for-all in the housing market, but rather a recognition that such measures do not address the core problem. Their role should be limited to transitional amelioration of social difficulties, diminishing over time as the core problem is solved.
  • Obstacles to progress need to be identified on economic grounds by the NIB, and subjected to rigorous, broad-based and long term cost-benefit analysis. Where this prescribes removal or diminution of obstacles, then political support should be uncontroversial and automatic. In the housing market, planning controls are an indicative instance.
  • The use of cost-benefit analyses needs to be embedded, but done in a particular way (see below). CBAs can be useful, for example, in assessing ‘green’ investments where a long-term, broad scope view is essential to gauging real value. In more general terms, these analyses represent an important countervailing influence to the short-termism that discourages investment in an increasingly financialised UK economy.
  • The SWF/NIB constitution and governance need to be inherently resistant to undue political influence. This can come from a number of directions. Right-wing free-market idealogues will seek to privatise part or all of the SWF’s assets. Left-wing politicians will seek to favour co-operative and similar activities in the name of ‘inclusivity’ – here, the aim should not be to rule out productive investment, but rather to protect from interest group capture.
  • The integrity of the SWF as a trading entity, and consequently its value, needs to be secured. It should not be constrained by the NIB’s mission to improve the level of investment in UK business. A global investment portfolio is an important strategic asset in offsetting any diminution of government revenue arising from issues within the UK economy.

Taken together, these principles can contribute to a cultural change in the nature of the UK economy’s approach to investment.

  • An adjustment of the banking sector towards long term, patient investment patterns. To compete effectively with the NIB/SWF, the private banking sector will need to change its approach.
  • A problem-solving mandate integrated with a different approach to CBA evaluation (taking in a much broader, long term estimation of benefits) will encourage ongoing flexibility in support of further investment.
  • A problem-solving mandate will encourage greater emphasis on investment that would not otherwise take place, and stimulate the involvement of a wider range of expertise in investment decision-making.
  • A generalised shift away from short term financialised decisions, and towards longer term decisions that support new business, employment, economic change and renewal.
  • One criticism of publicly funded investment programmes is that they ‘crowd out’ private investment. If there is a strong and credible commitment to long term, patient investment then the reverse is more likely to be the case. Investment responds to expectations – if an expectation of long term economic growth through public investment is created, then this will create further opportunity for private investment and a greater multiplier effect than that attributable to public investment alone.
  • The 2017 Labour manifesto’s commitment to the creation of a NIB mentioned a break up of the publicly owned RBS into a series of regional banks that would serve as the vehicles for NIB activity. Regionalisation of NIB activity could trigger some important cultural changes: decentralisation immediately creates new regionalised employment opportunities that strengthen local economies and make them more attractive to private investors; local expertise is encouraged and more readily deployed; critically important links with local univeristy R&D can more easily be forged; local training and re-training infrastructure can be co-ordinated into the investment process more easily; regionalised and localised investment ecosystems can be created.

Whenever ambitious schemes of this nature are put forward there are those who will object on grounds of practicality and so on. The best way of answering such objections is to point to actual examples of successful implementation. Germany’s KfW is the country’s third largest bank by balance sheet and combines support for new German business with a strong portfolio of foreign investments. Its existence and success have not inhibited the strength of the German private banking sector. The Norwegian SWF has achieved substantial scale, has a global investment portfolio, and makes a significant contribution to meeting government expenditure commitments. Plans for Scotland’s proposed National Investment Bank are informed by research that demonstrates how success depends on the way that such banks are set up.

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