The National Wealth Fund: Explained

What is the National Wealth Fund?

On 9th July, the new government announced the establishment of a new National Wealth Fund (NWF), fulfilling a manifesto promise to make transformative investments across every part of the country. The NWF will be given £7.3 billion in new funding, and bring together two existing public financial institutions under one umbrella: the UK Infrastructure Bank (UKIB) and British Business Bank (BBB).

Whilst the UKIB and BBB have the word ‘bank’ in their names, they don’t work quite the same as commercial banks. Rather than creating new money when they give loans, they lend out and invest money that the government has given them. Banks like this are often called ‘policy banks’, because they act as pots of money to lend and make investments in ways that support government policy goals. For the UKIB, those goals have been to tackle climate change and boost economic growth through infrastructure investment, and for the BBB to increase loans available to small and medium sized businesses (SMEs). Whether the NWF will replicate this kind of structure exactly remains to be seen.

What the National Wealth Fund isn’t

Despite having a similar name, the NWF is not a sovereign wealth fund. Those are funded by revenues from state-owned industries, and often exist in countries with vast natural resources, like oil. They also usually invest solely to maximise profit, for example Norway’s Sovereign Wealth Fund which invests across the world. In contrast, the National Wealth Fund is better thought of as a public bank, intended to support Labour’s decarbonisation goals, and the money will supposedly come from Labour “clos[ing] the loopholes in the windfall tax on oil and gas companies”. 

What’s it going to be used for, and how will it work?

The government says the NWF will “help create thousands of jobs in the clean energy industries of the future to boost our energy independence and tackle climate change.” The money has been divided into pots to help the most energy intensive sectors to decarbonise: £1.8 billion to ports, £1.5 billion for gigafactories including for electric vehicles, £2.5 billion to clean steel, £1 billion for carbon capture and £500 million to green hydrogen. 

Crucially, Labour say that for every £1 of public investment, the fund will attract £3 of investment from private companies. So the government’s hope is that from their initial £7.3 billion in public money, a further £20 billion of private investment will be brought in. 

The logic behind this is that many green technologies are still early in their development, and so represent a risky investment for private companies. By the National Wealth Fund, ie. the government, investing first, it makes the projects a safer bet for investors. The idea is that this encourages, or in economic terms ‘crowds in’, private investment.

Another purpose of the NWF is to try and make investing simpler, so that there is one point of entry for accessing finance from public institutions. It's also hoped that the fund will generate a return for the taxpayer - but this isn’t guaranteed.

As several commentators have noted, focusing solely on ‘crowding-in’ money from private investors can be a risky strategy. By ‘de-risk’-ing private investment, the money ends up being used to subsidise the profits of the future for private investors (like pension funds, insurance companies and asset managers). In the long-run, that’s often a bad deal for the public, similar to the Private Finance Initiative (PFI) scandals, and raises big questions about who owns and profits from the green industries of the future.

Why is it important?

The NWF hasn’t attracted much media attention yet, but since scrapping their pledge for £28 billion a year for the green transition, the National Wealth Fund is one of the last ways Labour intends to achieve their climate goals. Although, the Climate Change Committee estimates we need £50 billion of investment per year to fund the green transition, so the NWF’s £7.3 billion (over 5 years) will barely touch the sides. 

However, since many details about the design of the NWF are yet to be announced - there is still scope to make the NWF more ambitious and ensure that it really delivers in the public interest.

How is it different from what exists in the UK already?

The short answer is: from what we know at the minute, not very. 

The current proposals sound very similar to how the UKIB works, investing in infrastructure to drive growth and progress towards net zero. It could however differentiate itself from what the UKIB and BBB had been able to do previously if it was given more financing powers. If the National Wealth Fund was able to raise its own funds - by creating its own debt through issuing bonds - its capacity for delivering transformative investment would far exceed what the UKIB and BBB have been able to do so far, and would turn the fund into something more like the impressive infrastructure banks that are common in other countries.    

Do other countries have anything similar?

Yes, many countries including France, Australia, and the Netherlands have similar funds or national public development banks. Crucially however, most of them have greater financing powers, more funding, or both. 

Germany has a particularly well established and effective public development bank called the KfW. KfW is significantly larger than the NWF, with total assets at £580 billion. For the NWF to be the same size relative to UK GDP, it would have to grow to over £460 billion. The KfW is able to reach this size because it can raise financing from private investors by issuing bonds which are backed by the government, meaning that it can borrow cheaply, as investors (like pension funds) know that the bonds are safe. KfW has played an important role in driving Germany’s green transition - the Bank has an explicit mandate to do so, and imposes conditions on companies it lends to to ensure that their behaviour supports these goals. 

Who’s been involved in shaping the NWF so far?

Before entering government, Labour set up a taskforce to advise on the design of the fund. But the vast majority of members are from the financial industry, with no trade unions or representatives from wider civil society. Perhaps unsurprisingly, most of the taskforce’s recommendations were around how the fund can create incentives for private investors, rather than on how the fund could deliver a genuine green and just transition that prioritises the public good. But the most effective public development banks - like Germany’s KfW - have governance structures that include a strong role for trade unions, civil society and municipal governments. 

What are the key decisions yet to be made?

Key decisions in the following three areas could hugely impact what shape it takes, and what it can deliver.

1. The funds mandate and objectives

We know the government’s headlines on how the fund is intended to deliver jobs, growth, boosts to clean energy supply and reduction in carbon emissions. But what exact goal(s) will be prioritised: returns on investment for private companies? Long-term benefits for the UK people and the environment? And, how will progress be measured: in financial returns? The number and quality of jobs created? The quantity of emissions reduced? These are all still yet to be determined.

2. Who will the fund be governed by and for?

The taskforce advising on the fund has been almost exclusively made up of representatives from the private finance sector - will this be replicated in its governance structure? Or will trade unions, civil society or representatives of the general public be given a say?

3. Will the fund be given powers to deliver investment at the scale we need? 

Whether the NWF is given the powers to raise its own funds will determine the scale of investment it can deliver. Another key question is: how will it be counted in government statistics? The new government has chosen to strictly abide by (highly criticised) ‘fiscal rules’ that limit the level of Public Sector Net Debt (PSND) over a five-year period. If NWF borrowing is included in PSND calculations, the scale of its operations will be drastically reduced compared to its potential if allowed to be excluded from PSND. Excluding these bonds from these measures would follow the norms of comparative funds in other countries, and allow the NWF to engage in the kind of long-term investment the country is crying out for. 

What’s the final takeaway?

The worst case scenario is that the NWF becomes a sink for public money, built solely to generate maximum profit for private companies, without public benefit or meaningful climate action. 

But Labour also has a huge opportunity with the NWF to create a long lasting legacy - a transformative public institution, that has a clear objective for driving the green transition and providing social value. We’ll be pushing the government to do everything it can to realise this significant potential when Parliament returns in a few weeks time - so watch this space! 

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