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".

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Is defeat in Stoke the beginning of the end for Paul Nuttall?

The Ukip leader was his party's unity candidate. But after his defeat in Stoke, the old divisions are beginning to show again

In a speech to Ukip’s spring conference in Bolton on February 17, the party’s once and probably future leader Nigel Farage laid down the gauntlet for his successor, Paul Nuttall. Stoke’s by-election was “fundamental” to the future of the party – and Nuttall had to win.
 
One week on, Nuttall has failed that test miserably and thrown the fundamental questions hanging over Ukip’s future into harsh relief. 

For all his bullish talk of supplanting Labour in its industrial heartlands, the Ukip leader only managed to increase the party’s vote share by 2.2 percentage points on 2015. This paltry increase came despite Stoke’s 70 per cent Brexit majority, and a media narrative that was, until the revelations around Nuttall and Hillsborough, talking the party’s chances up.
 
So what now for Nuttall? There is, for the time being, little chance of him resigning – and, in truth, few inside Ukip expected him to win. Nuttall was relying on two well-rehearsed lines as get-out-of-jail free cards very early on in the campaign. 

The first was that the seat was a lowly 72 on Ukip’s target list. The second was that he had been leader of party whose image had been tarnished by infighting both figurative and literal for all of 12 weeks – the real work of his project had yet to begin. 

The chances of that project ever succeeding were modest at the very best. After yesterday’s defeat, it looks even more unlikely. Nuttall had originally stated his intention to run in the likely by-election in Leigh, Greater Manchester, when Andy Burnham wins the Greater Manchester metro mayoralty as is expected in May (Wigan, the borough of which Leigh is part, voted 64 per cent for Brexit).

If he goes ahead and stands – which he may well do – he will have to overturn a Labour majority of over 14,000. That, even before the unedifying row over the veracity of his Hillsborough recollections, was always going to be a big challenge. If he goes for it and loses, his leadership – predicated as it is on his supposed ability to win votes in the north - will be dead in the water. 

Nuttall is not entirely to blame, but he is a big part of Ukip’s problem. I visited Stoke the day before The Guardian published its initial report on Nuttall’s Hillsborough claims, and even then Nuttall’s campaign manager admitted that he was unlikely to convince the “hard core” of Conservative voters to back him. 

There are manifold reasons for this, but chief among them is that Nuttall, despite his newfound love of tweed, is no Nigel Farage. Not only does he lack his name recognition and box office appeal, but the sad truth is that the Tory voters Ukip need to attract are much less likely to vote for a party led by a Scouser whose platform consists of reassuring working-class voters their NHS and benefits are safe.
 
It is Farage and his allies – most notably the party’s main donor Arron Banks – who hold the most power over Nuttall’s future. Banks, who Nuttall publicly disowned as a non-member after he said he was “sick to death” of people “milking” the Hillsborough disaster, said on the eve of the Stoke poll that Ukip had to “remain radical” if it wanted to keep receiving his money. Farage himself has said the party’s campaign ought to have been “clearer” on immigration. 

Senior party figures are already briefing against Nuttall and his team in the Telegraph, whose proprietors are chummy with the beer-swilling Farage-Banks axis. They deride him for his efforts to turn Ukip into “NiceKip” or “Nukip” in order to appeal to more women voters, and for the heavy-handedness of his pitch to Labour voters (“There were times when I wondered whether I’ve got a purple rosette or a red one on”, one told the paper). 

It is Nuttall’s policy advisers - the anti-Farage awkward squad of Suzanne Evans, MEP Patrick O’Flynn (who famously branded Farage "snarling, thin-skinned and aggressive") and former leadership candidate Lisa Duffy – come in for the harshest criticism. Herein lies the leader's almost impossible task. Despite having pitched to members as a unity candidate, the two sides’ visions for Ukip are irreconcilable – one urges him to emulate Trump (who Nuttall says he would not have voted for), and the other urges a more moderate tack. 

Endorsing his leader on Question Time last night, Ukip’s sole MP Douglas Carswell blamed the legacy of the party’s Tea Party-inspired 2015 general election campaign, which saw Farage complain about foreigners with HIV using the NHS in ITV’s leaders debate, for the party’s poor performance in Stoke. Others, such as MEP Bill Etheridge, say precisely the opposite – that Nuttall must be more like Farage. 

Neither side has yet called for Nuttall’s head. He insists he is “not going anywhere”. With his febrile party no stranger to abortive coup and counter-coup, he is unlikely to be the one who has the final say.