On 25 November the Chancellor, Rishi Sunak, announced the establishment of a new national infrastructure bank as part of the government’s spending review. Although details remain sparse, documents suggest that the bank will be headquartered in the north of England, operate UK-wide and have “a high degree of operational independence”.
Creating another bank may seem like an odd priority for a British chancellor. After all, the UK’s banking sector is already among the largest in the world. But while the UK’s high-street banks channel billions of pounds into the economy each year, most of this ends up in property and financial markets. Precious little finances the real, productive part of the economy – and as a result the rate of investment in the UK is lower than in almost any other advanced economy.
Today the UK faces major social and environmental challenges, from Covid-19 and tackling climate change to reducing inequalities and adjusting to demographic changes. Overcoming these challenges will necessitate investing in new industrial and technological landscapes. But who will finance this transformation? Well-designed public investment banks are one increasingly popular solution.
Unlike private high-street banks, public investment banks don’t take deposits from households and don’t face pressure to deliver short-term profits. As a result, they are able to provide the kind of long-term, patient finance that the UK desperately lacks, and can focus on promoting social and environmental objectives.
As a member of the EU, the UK had access to the European Investment Bank (EIB), which historically invested €165bn in the UK economy. But with Brexit cutting off the UK’s access to the EIB, the Chancellor’s announcement is welcome – if long overdue.
Not all public investment banks are successful however. Understanding what works and what does not is vital if the new bank is to succeed. At the UCL Institute for Innovation and Public Purpose, we have assisted the Scottish government in the design and implementation of the new Scottish National Investment Bank, which launched on 23 November. Our work has examined how the design of public investment banks influences their role and effectiveness; a number of key lessons stand out.
Firstly, mandate is crucial. Whereas some public investment banks have a narrow remit to fix “market failures” or to support specific sectors, many of the more successful ones have broader mandates that enable them to support a wider range of economic objectives. There is a notable contrast between banks that are “mission-driven”, with investment activities directed towards solving grand challenges such as climate change, and those that are focused on directionless economic objectives such as growth or competitiveness. While the former can catalyse structural change, the latter tends to reinforce business-as-usual, and often ends up providing handouts to failing industries rather than applying pressure on those same industries to transform.
[See also: Stephen Bush on how Rishi Sunak's spending review is a return to the rhetoric of austerity]
According to government documents, the new bank will primarily focus on “supporting private infrastructure projects”. This is misguided. What the UK needs is not brick-and-mortar, “shovel-ready projects” but investments that can put the economy on a more sustainable and inclusive path. While public investment banks are often criticised by free-marketeers for “picking winners”, a better approach is to focus on picking directions and using this to then “pick the willing” – lending to those actors that are willing to invest in addressing challenges that are aligned with government policy, such as a green transition. In reality, these actors can be found in the public, private and third sectors, and the UK’s investment needs to extend far beyond physical infrastructure; social infrastructure and business investment are just as important.
Effective governance is also key. Many of the problems commonly associated with public banks, such as financial mismanagement and capture by vested interests, are a consequence of poor governance. Crucially, governance arrangements should be different to those of private banks, encompassing a diverse range of stakeholders, expertise and perspectives. Independence is vital, too: management teams need to be able to make long-term decisions free of day-to-day political interference.
Successful public investment banks also tend to draw on a wider range of expertise and capacities, including engineering and scientific knowledge as well as financial know-how, than private financial institutions. This means that investment decisions can be informed by a wider set of criteria than market signals alone, and social and environmental factors can be taken into account more effectively.
Given the UK’s relative inexperience in public banking, it is critical that the new bank rapidly develops the capacity to invest in the economy directly, rather than following the prevailing trend in government of relying on expensive private sector consultants and intermediaries. Decades of outsourcing need to be reversed so the civil service is more capable in its role as “investor of first resort”.
The bank must also be endowed with formidable financing powers. Thanks to their exemption from the imperative of short-term profit-making, public investment banks are able to leverage relatively small amounts of public capital into a significant source of strategic and long-term finance. However, previous attempts in the UK to establish such institutions, such as the British Business Bank and the now-privatised Green Investment Bank, have failed to achieve this.
This is because, despite their names, these institutions were never technically banks, as they weren’t allowed to borrow and incur liabilities on their own account. They were more akin to funds that were allocated fixed budgets by the government, from which they could lend to investors, often working with private sector intermediaries. Without the ability to borrow, the British Business Bank and Green Investment Bank were never granted the financial firepower that most public investment banks across Europe benefit from.
Finally, the bank should adopt monitoring frameworks that are designed to capture the dynamic benefits that bold, catalytic investments can generate. Rather than assessing the performance of the bank’s investments using conventional metrics such as impact on employment or financial returns, the success of investments should be evaluated, among other things, according to the degree to which they catalyse new socially useful activity that otherwise would not have happened. The bank should also benefit from recent thinking inside the Treasury on how to make sure the “Green Book” moves beyond narrow cost-benefit analysis in allocating government funding.
If correctly structured and governed, public investment banks can be powerful catalysts for structural transformation. By deciding to establish one, the UK has taken an important first step towards realising this potential and acknowledging that the “invisible hand” of the market cannot be relied on to tackle the 21st century’s gravest challenges. But details matter, and the Chancellor must now decide whether he wants to create a powerful institution capable of transforming the UK’s economic landscape, or another over-hyped “bank" that will soon be forgotten.
Mariana Mazzucato is a professor in the economics of innovation and public value at University College London (UCL) and the founding director of the UCL Institute for Innovation and Public Purpose
Laurie Macfarlane is a policy fellow at the UCL Institute for Innovation and Public Purpose and economics editor at OpenDemocracy
[See also: Helen Thompson on how the UK's economic problems began long before the pandemic]