The UK needs more than an Infrastructure Bank. A National Investment Bank with the right tools could drive economic transformation – otherwise, we risk missing a golden opportunity, argues Adam Peggs
2020 has seen an economic crisis of vast proportions engulfing the world, with the United Kingdom among the hardest hit of the advanced capitalist economies. By the end of the year GDP will likely have taken a hit of around 11.3%, while unemployment could rise to 7.5% or above next year, the worst joblessness crisis since the Thatcher government.
Living standards for those on lower incomes are plunging (from levels that were already very low). A survey from the Child Poverty Action Group found 43% of families were “finding it very difficult” due to the pandemic and the accompanying economic crisis, while two-thirds of those on benefits have fallen into debt in recent months. The British Medical Journal has warned of a “nutritional crisis”, while food insecurity has quadrupled and a deepening homelessness crisis is also impending.
It is fair to say the United Kingdom is undergoing the worst social, economic and health crisis for generations.
In this context, it is clear that there is a need for state-led investment to reflate the economy and tackle the economic crisis head-on. This follows from widely accepted economic principles, broadly accepted inside and outside of both socialist and Keynesian circles. Pre-existing levels of poverty, insecurity and economic inequality, alongside an enormous appetite not to ‘go back to normal’, highlight the pressing need for constructing a new economy.
In this light, it looks like a positive move that the government has announced the creation of a UK Infrastructure Bank to be located in the North of England, in an apparent echo of John McDonnell’s proposals as Shadow Chancellor, for a National Investment Bank and to move various economic institutions out of London. There is a clear need for a new industrial policy – one that can address the country’s deep regional inequalities, the crisis of living standards and the scourge of low-quality work. And on the surface, this looks like part of that solution, channelling finance into projects that directly create good-quality jobs and counter regional imbalances.
The details of the UK Infrastructure Bank, in terms of its size, scope and remit, are yet to be unveiled. This piece is an exploration of how such a bank should be structured and how it should operate, informed by some of the work on National Investment Banks produced in recent years by John McDonnell’s Shadow Treasury team and various left-of-centre economists, academics and think tanks. While there is virtually zero chance of a Conservative government adopting such an approach, it is still worth examining how a National Investment Bank could be configured – underlining its potential as an institution. This could be of use to left-wing campaigners and the wider labour movement, informing future discussions and highlighting potential pressure points to hold the government to account.
More so than a dedicated Infrastructure Bank, the United Kingdom would benefit from a National Investment Bank. Such a bank has been backed by much of the Labour Party, including both the current and previous Shadow Chancellor, the TUC, the SNP (who are establishing one for Scotland, due to launch in December), and various think tanks, including Civitas, the Institute for Public Policy Research, Common Wealth and Localis.
A National Investment Bank is a state-owned bank which can borrow money to fund its activities in a way comparable to the Treasury. National Investment Banks engage in lending to businesses and other large organisations. Typically, they lend by using existing private banks as intermediaries (rather than directly) and lend to fund Small and Medium-sized businesses (though this can include larger companies) and infrastructure projects.
As such, National Investment Banks can play a pivotal role in job creation – even more so during an economic downturn. Unlike many European countries, the United Kingdom did not establish a National Investment Bank after the Second World War. Instead, the country established the Industrial and Commercial Finance Corporation, which possessed some similar characteristics. A UK Infrastructure Bank would likely operate in similar ways to a National Investment Bank, albeit with its activities presumably limited to funding infrastructure projects.
While the government has made a vast volume of loans available to businesses hit by the impacts of the pandemic, through CBILS and the Bounce Back Loan Scheme, this approach is unlikely to be sustainable. In a time of radical economic uncertainty, many businesses are averse to taking on debt. More direct forms of support are clearly necessary for protecting and creating jobs.
In light of this, there are two obvious solutions. One is direct government spending to create new jobs, for instance by funding a Green New Deal, a large-scale programme of house-building and rebuilding our infrastructure – this is vital. The second is by having a National Investment Bank take equity stakes in businesses which need support. This would also help address the problems of perceived lack of value for money in state funds being handed to businesses and of bailouts being given unconditionally to large companies. This approach has similarities to that proposed by Mariana Mazzucato and Laurie Macfarlane in their work on a ‘mission-oriented’ National Investment Bank, in which they recommend retaining equity stakes in innovative companies. Likewise, this model of public investment in equity echoes the approaches of National Investment Banks in Finland and Brazil.
More orthodox versions of this argument envision these public stakes being re-privatised when the economy returns to growth, ensuring that taxpayers receive a return for the original investment. Instead, these stakes could be used to reform business practices – for instance improving pay and conditions and committing to wider social and environmental goals, handing stakes to the workforce or retaining them as partially state-owned enterprises. The latter option, implemented as democratic public ownership, could have considerable advantages.
A National Investment Bank would be a key tool in moving toward a green economy, a process in which the United Kingdom is seriously behind. This task could (and should) be a key part of the bank’s official mandate. As a report found last summer, at present the country’s banking system has a structural bias towards lending to property and the financial sector, while green economic activities are significantly underserved.
A National Investment Bank, as the report argues, would have a major opportunity to remedy this situation. By funding new green infrastructure projects and investing in energy efficiency, among other activities, the bank could facilitate the decarbonisation of the economy that is so urgently needed.
This approach is in line with real-world examples of National Investment Banks. In 2012, development finance institutions such as National Investment Banks accounted for 34% of total green finance making them ‘the single largest type of player’.
It is worth adding, that other public banks, such as a Postal Bank or a reconfigured RBS (now NatWest Group) held in public hands, could also make a key contribution to the task of decarbonisation. In spring 2019, John McDonnell committed to opposing a further sell-off of RBS – keeping the bank in public hands for the long term. More recently, although campaigners both in and outside the Labour Party have mobilised around public ownership as part of the Green New Deal, the future of RBS has received little attention.
A long-running rationale for a National Investment Bank is the need for regional rebalancing. The United Kingdom has the highest levels of regional inequality of any of the higher-income countries and in recent years the need for a shift to a more regionally balanced economy has risen up the agenda. The City of London has largely concentrated investment in London and the South-East, leaving much of the rest of the country behind in terms of job creation and wages.
While a National Investment Bank would certainly not be a silver bullet in this regard, such a bank could play a major role in countering regional inequality. By putting regional balance at the heart of its approach to investment, a National Investment Bank could take large steps to address this. A bank with a series of devolved Regional Investment Banks, like that proposed in the last two Labour manifestos, would be particularly well-placed to do this. Germany’s KfW, as well as a range of other public banks internationally, show how a potential National Investment Bank in Britain could be at the centre of efforts to drive down regional imbalances.
Crucial to the role of a National Investment Bank, would be the funding of public infrastructure. It is this purpose that is likely to be the exclusive role of a UK Infrastructure Bank under the current government. Given the severe, chronic underfunding of infrastructure in the United Kingdom, it would make sense for this to be a priority of any National Investment Bank. The country’s infrastructure spending is well below the OECD average, with underfunding among the key causes of regional inequities.
The final area in which a National Investment Bank could play a crucial role in reshaping the economy is when it comes to company ownership. A National Investment Bank, and for that matter other public banks, could play a vital role in supporting the establishment of socially owned enterprises, be they co-ops, municipal-owned or nationalised. As Christine Berry and Laurie Macfarlane have argued in their report presented to McDonnell’s Shadow Treasury team last year, a National Investment Bank could support the creation of new co-operatives, help co-operatives to expand and provide support to firms shifting to co-operative ownership. In a similar mould, a report from Common Wealth published in October provides similar calls for a National Investment Bank to provide long-term funding for co-operatives.
These same approaches could be applied to building up public enterprise. A potential obstacle to this approach is the problem of EU State Aid Rules, which the country may still be bound to as part of the government’s final Brexit deal. These rules could potentially block this investment strategy as a form of ‘vertical’ industrial policy giving preference to socially owned enterprises. Kitty Stewart’s work at LSE suggests that this claim stacks up, while Andy Tarrant and Andrea Biondi’s examination of State Aid Rules appears to leave this more of an open question.
In terms of its structures, such a bank should have a strong, binding mandate. This mandate might include acting in the public interest, prioritising social needs and promoting environmental sustainability, regional equity and the creation of high-quality, secure jobs.
Perhaps even more importantly, its structures ought to be thoroughly democratic, unlike the United Kingdom’s historic nationalised industries. This will enable it to genuinely promote democratic accountability in the economy, avoid the pitfalls of bureaucracy associated with past nationalised industries and better fulfil a public interest mandate. Among other features, this might involve representation for bank staff, the labour movement and the wider community, high levels of transparency and practices designed to foster democratic engagement with the bank’s work.
This should all extend beyond just having a democratically accountable board, with democratic practices embedded across the bank’s structures. Frank Vanaerschot’s work in Democratising Nationalized Banks offers some useful insights here, based on the campaigning to democratise the Belgian bank Belfius (which was taken into public hands after the financial crisis). And likewise, Thomas Marois’ work on public banks has also highlighted relevant lessons from Costa Rica’s Banco Popular, which resembles a hybrid between public bank and cooperative and has been dubbed “perhaps the most democratic bank in the world”.
However, there are likely to be impediments for a National Investment Bank with transformational potential. Some critics have pointed out, quite rightly, that such a bank could run up against the limits of EU State Aid Rules – depending on the details of the UK’s future relationship with the EU. This would not prevent the creation of a National Investment Bank but could hinder the bank’s ability to structurally change the economy by supporting democratic ownership. Looking for ways to circumvent or protest these rules would be an important challenge, necessary for helping to maximise the bank’s chances to reorient the economy.
The details of the proposed UK Infrastructure Bank are yet to come, though its announcement suggests a more limited role than that of most National Investment Banks. However, in the years to come, an Infrastructure Bank could be recast as a National Investment Bank. Such a bank should be democratised, given a strong mandate for green investment, regional balancing and social purpose and given a remit which includes fostering alternative, democratic models of ownership. A National Investment Bank could then play a critical role in structural economic change.
Adam Peggs is a writer and activist based in Hackney, London.
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