Britain needs a state investment bank

November 14, 2012 1:49 pm

Nick Tott was right when he said in a report for the Labour Party earlier this year that there is a strong case for a British Investment Bank (BIB). Its remit should be to tackle two long-standing problems faced by the British economy: a tendency to invest less in infrastructure than comparable countries and a shortage of financing, particularly long-term financing, for small and medium-sized businesses.

There should be no doubt that these problems are real ones. Measures of international competitiveness, such as those compiled by the World Economic Forum, consistently show the UK’s infrastructure is one of its weak points. And the difficulties small businesses face when trying to get finance was highlighted as long ago as the 1930s (in the Macmillan Report). Their persistence also suggests that new ideas are needed to solve them. A BIB would represent one such new approach.

Vince Cable is setting up a ‘British Business Bank’, but this is only a down-payment towards a real British Investment Bank. It will have a one-off capital injection of £1 billion, which might at the most lead to an additional lending of £10 billion to small and medium-sized businesses. This is small beer in an economy of £1.5 trillion.  Given the fiscal constraints imposed by the Chancellor, the Business Secretary probably feels he has done well to get even £1 billion of funding. But this represents a missed opportunity. In an IPPR report published earlier this year, my former colleague David Nash and I argue that a state bank should be much more ambitious in scope.

We suggested the Bank should have an initial capital injection of £40 billion, spread over four years. (£10 billion a year is a little less than the amount the Coalition has cut public capital expenditure by in the current spending round.) If, like the Nordic Investment Bank and the European Investment Bank, the BIB was allowed to raise £2.50 on the financial markets – largely by issuing bonds – for every £1 of capital, it would have a balance sheet of £140 billion after four years.

This should be enough to make a difference to the UK economy. £140 billion is around 9% of UK GDP – and roughly one-third the size of the European Investment Bank’s balance sheet. Depending on the demand for funds, more might be needed eventually, but this would represent a good start.

The BIB should be 100% state-owned. It would be profit-making – though not necessarily profit-maximising – but it would not pay a dividend. Profits would be ploughed back into the Bank to allow it to further increase its lending.

The governance structure of the BIB should establish a clear dividing line between the role of government and the activities of bankers. Government ministers would approve the annual accounts, assess the performance of the BIB against its broad objectives of increasing lending for infrastructure projects and to SMEs and discuss any changes to its high-level mandate. It might also choose to require that a proportion of lending is directed, for example, to further the UK’s move to a low-carbon economy. Banking decisions – which projects to lend to and which not – would be the preserve of bankers.

The BIB would need to secure EU state aid approval. While this would not be easy, those who argue there is no point in even developing the idea of a BIB because it would be shot down by Brussels are wrong. The state aid rules are not written in stone. They are designed to prevent governments giving companies in their countries an unfair advantage, not to be a barrier to growth – or to an institution that would support growth.

Some have argued the case for a British Investment Bank to help the economy escape its current weak state; they misunderstand the role a BIB could play in the UK. The need for such an institution will not go away, even in the unlikely event of a vigorous economic recovery; it is required to tackle long-standing problems. Labour needs to be thinking now about how to promote growth in the medium-term through structural change in the economy. A fully-fledged British Investment Bank should be part of its package.

Tony Dolphin is Chief Economist at IPPR

This piece forms part of Jon Cruddas’s Guest Edit of LabourList

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