This piece builds on a strong body of work on the advantages of a development bank for economic growth and structural transformation to a greener, fairer and more dynamic economy. The United Kingdom is an outlier amongst developed and emerging economies, especially the most successful ones, in not having a national development bank.
Labour’s Shadow Chancellor John McDonnell, seeing the economic advantages of a development bank, has proposed the establishment of a National Investment Bank (NIB) in the UK.
The proposal involves the NIB coordinating with other key economic institutions to support sustainable growth. Along with Labour’s proposed National Transformation Fund, the NIB would be one of the driving forces behind expanding and transforming the UK’s infrastructure to make it consistent with our environmental objectives.
Additionally, funding small and medium enterprises (SMEs) for investment in innovation, including digitisation, and training for transformation to a sustainable economy is key. An NIB will support such transformations to increase jobs, productivity and sustainable economic activity.
The NIB would play an important role rebalancing regional economic development through Regional Development Banks and through partner entities that can support SME lending, as well as through regional infrastructure projects.
The mandate of the proposed NIB would be:
- Addressing the long-term funding gap for SMEs across the country, emphasising innovation and sustainability;
- Addressing the long-term funding gap for infrastructure investment across the country, including both physical and social infrastructure, with emphasis on decarbonisation.
Although there are many examples of well-functioning development banks throughout Europe and around the world, the UK has idiosyncracies that must be overcome to ensure credit is directed where needed. Compared to many Western countries, the banking sector in the United Kingdom has focussed much of its lending to property and related activities. This has left the UK weak in its support of business, especially SMEs.
An NIB, with a focus on innovation and sustainability, is needed to support SMEs, improve efficiency and productivity, and create well-paid jobs, in the context of the need for climate change mitigation.
Building the required networks to reach SMEs throughout the country, especially in the most deprived regions, is a big task. Our new paper ‘Taking a National Investment Bank Forward‘ looks at a variety of ways to address this with combinations of direct lending by Regional Development Banks and indirect lending by public and private sector banks, including:
- The establishment of a Post Bank, to support local communities and SMEs (proposed by Christine Berry and Laurie Macfarlane)
- Commercial banks (this time with conditions imposed on their lending behaviour)
- Local Enterprise Partnerships (for lending, training and support)
- Royal Bank of Scotland (possible use depending on the level of public ownership and costs of transformation)
Our new paper reiterates what the Shadow Chancellor has proposed: a coordinated approach that will be clear as to the direction of where financing should be channelled – productive investment – to meet the various global and societal challenges.
National development banks are also about upskilling. We propose that Regional Development Banks work alongside local entities such as private sector Catapult centres and accelerators, and public sector Local Enterprise Partnerships (“LEPS”). The success of LEPs has been very patchy. Consistent underfunding has not helped them meet their stated aims. These entities, when better financed, can work alongside the NIB.
The NIB’s infrastructure project financing will support the decarbonisation of the economy. It will coordinate its efforts with other key institutions so that the financial system funds necessary innovations for tackling environmental breakdown, as well as the development of infrastructure – especially where regional or sectoral gaps exist, like in public transport, grids for green energy, etc.
We will need the right skills for a national development bank – to cover both project finance for infrastructure and retail/corporate banking for SMEs. The NIB will need expertise and skills across banking, engineering, climate and environmental sciences, project management, law and technology. There will be emphasis on real engineering, rather than on financial engineering.
The right governance structures are important for the success of the NIB. It is important that stakeholders from all relevant sectors are included on the Board (including trade unions) while ensuring appropriate skills and accountabilities.
Like other national development banks, the NIB will tap long-term debt markets, including for green bonds, to finance sustainable infrastructure and efficient, creditworthy SMEs. The fact that the capital will be provided by government, but funding by private capital markets, will allow valuable leverage, which will in turn allow the NIB to make a significant impact on the structural transformation of the UK economy towards one supporting innovation and investment for increased equality and tackling environmental breakdown.
The aim would be to have an NIB of a significant scale, to reach after 10 years, a total of at least £250 billion of additional loans and equity.