The case for a British Investment Bank

The UK is the only member of the G8 not to have a dedicated institution dealing with SME financing.

For some time the calls have increased for the creation of some type of government-backed financing institution to support the UK economy.  This is based not only on the needs created by the perfect storm we have been experiencing since 2008 but also the value which a permanent institution could have for UK plc throughout the economic cycle, and in addressing issues which existed before the credit crunch.  In particular there are two areas where getting investment moving is vital:  the financing of small and medium-sized enterprises (SME) and ensuring we have fit-for-purpose infrastructure.  They are both fundamental for the creation of a growing economy in which business enterprise can flourish.

The non-availability of finance to smaller businesses is long-standing, having been identified in 1931 by the Macmillan Report.  Market failures exist in relation to the provision of both debt and equity.  In many cases this stems from an asymmetry of information between the finance provider and the business.  Financiers find it difficult to distinguish between high and low risk businesses without incurring significant costs which are judged too high in relation to the level of finance being provided, thus reducing profit margins.  The way Banks avoid this is only to finance businesses with a strong track record and/or the provision of collateral (the classic mortgaging of the family home to finance the business).  There are also credit-scoring systems which mean atypical, innovative businesses, which may be economically viable, are unduly penalised because they do not fit the mould.  The regulatory environment is stacked against SMEs as well with banks required to hold more capital when lending to SMEs, resulting in more expensive finance and/or less finance.  Added to that is the lack of competition in the mainstream SME lending market and the trend towards short-termism in lending, with facilities often repayable on demand.

Faced with such systemic deep-seated problems it is surprising, to say the least, that the UK is the only member of the G8 not to have a dedicated institution dealing with SME financing issues.  So there are international examples from which we can learn, notably the activities of KfW in Germany, the Small Business Administration (SBA) in the US and the Business Development Bank of Canada.  Indeed the SBA provided early-stage finance to success stories such as Apple.  There is also past UK experience, in the original activities of the Industrial and Commercial Finance Corporation (ICFC), created immediately after the Second World War to address the funding gap identified by the Macmillan Report.  Its modus operandi was to employ technical specialists, familiar with local business, operating through a regional network.  That original business model was watered down as external investors put pressure on increasing returns more quickly.  The strengths and weaknesses of the ICFC experience need to be borne in mind when considering how to structure any government intervention. 

In the area of infrastructure investment the coalition government's National Infrastructure Plan identifies the huge investment required in infrastructure over the next decade (some £250bn).  We have a nascent model in the area of the green economy, the Green Investment Bank.  Its activities are currently constrained by its inability to borrow until at least 2015 and then only if public sector net debt is falling as a percentage of GDP.  There are likely to be synergies between its current activities and those in the wider area of potential interventions in infrastructure investment and SME finance.  The Green Investment Bank's role is to crowd-in private finance where it can and to demonstrate financeability by being a frontier investor.  It will act in a commercial manner and is not in the business of financing lost causes.  Finance for infrastructure investment is constrained, in part by the retreat of commercial banks from the sector and the demise of credit-enhanced bonds but also as a result of regulatory changes, which make long-term investing in infrastructure more expensive (similar to the SME problem).  The EU has initiatives to attempt to address these issues but their resources are finite and have to cover the entire EU.  Given our investment needs, intervention is also required by government here in the UK.

There are therefore a series of necessary interventions in the areas of SME finance, and infrastructure finance which, based on past and present experience, here and internationally, point towards the creation of a British Investment Bank operating on a commercial basis independent from government. It would also have a public policy mission thus creating a dual-bottom line business strategy.  Given that split and the broad range of interested parties affected by it activities, there is merit in establishing an overarching Advisory Council which would not have executive authority but which would ensure that the board held to its dual strategy.  Members of the Advisory Council could include, among others, representatives of key government departments, trades unions and business.

Funding for the Bank could come from a range of sources, including channelling funds from National Savings and Investments.  Something similar is done to fund comparable institutions in France and Italy.  That would create an effective depositor base for the Bank and give it a platform to develop further products to fund its activities - for example Green ISAs, which could fund interventions by the Green Investment Bank.

If we fail to learn from and embrace the experience of other countries we will, as Ed Miliband said in his speech on 9 July, be condemning businesses to operate with one arm tied behind their backs.

Nicholas Tott is the author of a report for Labour's policy review on "The Case for a British Investment Bank".

The facade of the headquarters of the Bank of England. Photograph: Getty Images.

Nicholas Tott is a consultant for Herbert Smith and the author of a report for Labour's policy review on "The Case for a British Investment Bank".

Photo: Getty Images
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Sadiq Khan is the radical Mayor that Londoners need

I've lived and worked in this city all my life. Sadiq is the mayor we need, says Andy Slaughter MP.

I have lived and worked in London all my life and for the past 20 years, as council leader or MP, represented one of its most politically fought over and eclectic parts, Hammersmith & Fulham.

I do not exaggerate in saying much of what makes London communities work is on the line in next year’s Mayoral election.

My constituents, already facing five more years of a Tory Government, need a champion in City Hall.

The current mayor has not proven capable, siding with vested interests over the needs of Londoners.

Whether it is destroying the 100 year-old Shepherds Bush Market or demolishing 750 good quality council houses in West Kensington to make way for high-rise luxury flats, Boris Johnson used his planning and regeneration powers against the wishes of residents and small businesses alike.

Boris was keen to take control of the London NHS but silent in speaking out against hospital service closures at Charing Cross, Ealing or Lewisham.

Another Tory Mayor, however presented, will be no different.

We must win to prevent the hollowing out and social cleansing of London, but we must win for positive reasons too.

That’s why we need a Mayor with a radical and bold agenda for a progressive city. For me, that person is Sadiq Khan.

The son of a bus driver and immigrant parents who moved to London for the opportunities many take for granted, he is a Londoner born and bred.

His family gave the young Sadiq the platform on which he built a career as a leading human rights lawyer, campaigning Member of Parliament and now a frontrunner for the Mayoralty.

That track record of standing up for the rule of law, universal human rights and access to justice is why so many leading figures from the legal world are today supporting Sadiq’s campaign.

Writing yesterday, in a letter to the Solicitors Journal, Michael Mansfield QC, Imran Khan and Matthew Ryder - part of the legal team who secured justice for the Lawrence family - add their support, stating that Sadiq as Mayor would “represent the very best of modern, tolerant and diverse London".

Shadow Attorney General Willy Bach and Shadow Solicitor General Karl Turner, former Director of Public Prosecutions Sir Keir Starmer, former Shadow Attorney General Emily Thornberry MP and leading human rights lawyers Baroness Helena Kennedy and Ben Emerson, are all supporting Sadiq.

What unites Sadiq’s supporters is a desire to see London governed by a dynamic and modern Mayor, suited to represent this vibrant and diverse city.  That person has to be Sadiq Khan. He can be the champion that Londoners need.