PROMOTING GROWTH AND REPORT SHARED PROSPERITY IN THE UK INVESTING FOR THE FUTURE WHY WE NEED A BRITISH INVESTMENT BANK Tony Dolphin and David Nash September 2012 © IPPR 2012 Institute for Public Policy Research ABOUT THE AUTHORS Tony Dolphin is senior economist and associate director for economic policy at IPPR. David Nash is a policy advisor at the Federation of Small Businesses and was until recently a research fellow at IPPR, in which capacity he co-authored this report. ACKNOWLEDGMENTS The authors wish to thank Nicola Smith, Duncan Weldon, Gerald Holtham, David Claydon and members of the advisory panel for IPPR’s work on Promoting Growth and Shared Prosperity in the UK for their comments on an earlier draft of this paper. We are also grateful to Gudrun Gumb of KfW, Ingrid Holmes of E3G, Daniel Ottolenghi of the EIB, Jaime Gornszteijn of BNDES’ London office and other colleagues who provided invaluable information and advice during the research phase of the project. However, responsibility for the final version lies solely with the authors. We are also grateful to Reuben Balfour, a former IPPR intern, for research support. Work on this project was funded by the TUC and we are grateful for their support. ABOUT IPPR ABOUT PROMOTING IPPR, the Institute for Public Policy Research, is the GROWTH AND SHARED UK’s leading progressive thinktank. We produce PROSPERITY IN THE UK rigorous research and innovative policy ideas for a fair, democratic and sustainable world. This major programme of work aims to identify the We are open and independent in how we work, and public policies that will promote the sustainable and with offices in London and the North of England, IPPR balanced economic growth needed to return the UK spans a full range of local and national policy debates. to full employment as soon as possible; create the Our international partnerships extend IPPR’s influence foundations required for the UK to prosper over the and reputation across the world. medium-term in a competitive global economy; and ensure that the benefits of future prosperity are more IPPR equally shared. 4th Floor 14 Buckingham Street For more information, see: London WC2N 6DF http://www.ippr.org/research-projects/44/7144/ T: +44 (0)20 7470 6100 promoting-growth-and-shared-prosperity-in-the-uk E: [email protected] www.ippr.org Registered charity no. 800065 This paper was first published in September 2012. © 2012 The contents and opinions expressed in this paper are those of the author(s) only. SMART IDEAS for CHANGE Contents Executive summary ......................................................................................................2 Introduction ..................................................................................................................3 1. Why we need a British Investment Bank ..................................................................5 A potential solution to many problems? .......................................................................5 The need for more infrastructure spending ..................................................................6 The need for increased lending to small and medium-sized enterprises ........................8 Government support for infrastructure spending and lending to SMEs ..........................9 Infrastructure and small business lending: odd partners? ...........................................11 2. Lessons we can learn from other national investment banks ................................12 The Kreditanstalt für Wiederaufbau (KfW) ..................................................................12 The Brazilian Development Bank (BNDES) .................................................................13 The US Small Business Administration (SBA) .............................................................14 Other public investment banks .................................................................................15 3. What a British Investment Bank might look like ....................................................17 Ownership and commercial status ............................................................................17 Remit .......................................................................................................................17 Securing EU state aid approval .................................................................................20 Governance .............................................................................................................21 Capitalising the BIB ..................................................................................................22 Leverage – raising funds in the capital markets ..........................................................25 BIB products and services ........................................................................................26 Accounting for the BIB in the public finances .............................................................28 Conclusion .................................................................................................................30 Appendix 1: Kreditanstalt für Wiederaufbau (KfW) ....................................................31 Appendix 2: Brazilian Development Bank (BNDES) ...................................................38 Appendix 3: US Small Business Administration (SBA) ...............................................45 References .................................................................................................................52 1 IPPR | Investing for the future: Why we need a British Investment Bank EXECUTIVE SUMMARY This paper seeks to develop the arguments for a British Investment Bank (BIB) and – by learning from the structure and operations of overseas national banks – to set out in greater detail than in previous papers what a BIB might look like and how it would go about fulfilling its remit. The idea of a BIB has been around for a number of years, but has come to prominence in the last five as the economy continues to struggle to emerge from recession. However, we do not see a BIB as a tool for boosting the economy in recessions. Instead, its aim should be to tackle two longstanding problems faced by the UK economy: first, a tendency to invest less in infrastructure (as a share of GDP) than comparable economies; and second, a shortage of financing, particularly long-term financing, for small and medium-sized businesses. There are a number of other countries that have national investment banks, but importing wholesale the model of any one of them is unlikely to be the best approach. Instead, lessons should be learned from overseas national banks about the key questions that a UK government would have to address before it could set up a British Investment Bank. Among these are: • Ownership The BIB should be 100 per cent state-owned. • Remit The BIB should be set up to increase lending for infrastructure and to SMEs. • EU state approval Securing EU state aid approval would require the government to demonstrate that the BIB’s lending would be additional. • Governance There must be a clear dividing line between the role of the government and the activities of the bankers. • Capitalisation The government should inject an initial £40 billion of capital over four years, funded by additional borrowing. • Leverage The BIB should be allowed to immediately raise funds on capital markets by issuing bonds up to a leverage ratio of 2.5:1, meaning it could have a balance sheet of over £140 billion within four years. • Activities The BIB would achieve its remit through a variety of forms of lending; and it would also develop an advisory role. • Accounting The activities of the BIB should not count towards the fiscal target of the government. 2 IPPR | Investing for the future: Why we need a British Investment Bank INTRODUCTION Interest in the idea of a British Investment Bank has increased significantly in recent years, particularly since the financial crisis and recession of 2008/09. There is a growing recognition that the balance of economic growth in the UK in the run-up to the crisis was wrong: involving overreliance on personal debt and the finance and housing-related sectors. The balance of future growth, it is hoped, will be tilted more towards exports and investment. But there are serious doubts about whether this outcome can be achieved by market forces alone. The UK has a long history of investing less, relative to national income, than comparable countries. Without institutional change, the desired shift to export and investment-led growth is unlikely to take place. Given the existence of national investment banks in other countries with higher investment ratios than the UK (for example the KfW in Germany), one obvious solution would appear to be a British Investment Bank. Such a bank would also be charged with taking investment decisions on the basis of long-term considerations, so enabling it to develop into an effective counterweight to the increased short-termism of other banks. The last Labour government – and the business secretary Lord Mandelson in particular – showed some interest in the idea of a national investment bank for supporting the transition to a low-carbon economy, but its conversion came too late in its life to take the idea forward. The new business secretary, Vince Cable, has argued the case for a National Infrastructure Bank in the past,1 and the Liberal Democrat manifesto for the last general election promised to establish such an institution,2 but it was not part of the Coalition