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National Wealth Fund to unlock green and growth investment

Author: ICAEW Insights

Published: 15 Jul 2024

Fund will bring together UK Infrastructure Bank and the British Business Bank to unlock billions of pounds of investment in the UK’s green and growth industries, government says.

The government has launched a £7.3bn National Wealth Fund (NWF) in a move that it says will attract billions of pounds of private sector investment for big infrastructure projects across the UK.

The intention is for the newly created NWF to become the main conduit for public investment in infrastructure and reduce the investment risk for private funding or institutional capital in the kinds of innovative assets that are going to be necessary to achieve net zero and generate international competitive advantage.

Government support includes £1.8bn of public funding to ports, £1.5bn for gigafactories (including for electric vehicles), £2.5bn to clean steel, £1bn for carbon capture and £500m to green hydrogen. Pledging to mobilise billions more in private investment, the target is to attract £3 of private cash for every £1 of public funding put in via the NWF, which, if successful, would take total investments to about £29bn.

Investments will be managed by the existing UK Infrastructure Bank (UKIB), headed by the former HSBC Chief Executive John Flint, with support from a revamped British Business Bank, headed up by CEO Louis Taylor. Both Flint and Taylor sit on the ICAEW Corporate Finance Faculty board.

Chancellor of the Exchequer Rachel Reeves says: “I have previously committed to establishing a National Wealth Fund. I am now going further by bringing together key institutions. We need to go further and faster if we are to fix the foundations of our economy to rebuild Britain and make every part of our country better off.”

David Petrie, ICAEW Head of Corporate Finance, says using state funds to support investment in areas such as the UK transition to net zero was a laudable aim that would help the UK’s international competitiveness. “Merging the demonstrably successful British Business Bank with the now fully ‘open for business’ UKIB to create an entity under a new name is not only good politics, it seems to make sound commercial sense at this stage.” 

The macroeconomic, geopolitical and technological risks associated with commercial or private sector investment in certain types of infrastructure, and also in innovative smaller businesses, mean that an element of government support makes it much easier to get them fully funded, Petrie says. 

Geopolitical instability and disruption to global trade patterns have made ports less attractive than they once were to infrastructure investors such as sovereign wealth funds and North American pension funds.

The major investment required for the UK automotive sector to transition to EV production and net zero is both costly and risky. “Additional government support should ensure that banks and pension funds invest further in the UK automotive industry, enabling technological innovation and preserving jobs in the sector and its complex supply chain,” Petrie says.

Commercial production and safe distribution and use of green hydrogen remain largely unproven, and massive investment in distribution infrastructure will be required for domestic use. “Support for investment in this sector provides an element of government-funded de-risking,” Petrie continues. 

On green steel, continued UK steel production is a complex issue that spans both environmental and political considerations, regardless of the enormous investment needed to change furnaces to work on electric power. 

Petrie says that question marks remained over the source of the substantial £7.3bn fund, with the Chancellor’s announcement raising more questions than answers. 

According to Labour’s manifesto, closing loopholes on a windfall tax on oil and gas giants will contribute to the NWF at an average rate of £1.5bn per annum, implying that this tax is set to continue until the end of this parliament. Quite how likely that is is not yet clear, nor how the areas identified for investment were selected or how the Fund will allocate capital.

“In its first week in office, the new government has already indicated that significant investment is required in both the NHS and HM Prison estates, as well as the UK’s water and sewerage infrastructure and our national electricity transmission grid,” Petrie says. 

“A key question for the Chancellor and for the NWF is: are these projects, such as investing in UK ports – many of which are already either partially or fully owned by very well-funded international sovereign wealth funds or North American pension funds – really this government’s top priority?”

Petrie emphasises the importance of excellent management and strong governance, including the selection and monitoring of projects to ensure good value for taxpayers’ money and to ensure that the funds aren't simply used to de-risk investments that the banks would have made anyway, or to allow infrastructure funds to simply trade assets between them.

The NWF was a key pledge in Labour’s manifesto and underlies a broader strategy to enhance the UK’s economic resilience and promote sustainable growth. By targeting green industries, the government aims to advance the nation’s progress towards net zero emissions while fostering economic opportunities.

The blueprint for the NWF was formulated with the help of a taskforce of business leaders including former Bank of England Governor Mark Carney, who now chairs Canadian infrastructure investment fund Brookfield, Aviva Chief Executive Amanda Blanc and Barclays Chief Executive CS Venkatakrishnan.

The UKIB has been investing in established and proven infrastructure assets since its founding three years ago. It is now poised to take on the much more challenging task of investing in larger scale, innovative infrastructure projects that genuinely require government support, Petrie says.

The British Business Bank, established following the Breedon Review in 2012 and launched at Chartered Accountants’ Hall, now has a 10-year record of successful support for small and medium-sized businesses, providing much-needed funding to thousands of businesses during the pandemic. Its policy of supporting the challenger banks has fundamentally transformed the SME lending landscape, with more than 50% of loans now coming from these new or smaller lenders.

For ICAEW members already working with the UKIB, this represents a change of emphasis and investment criteria. Petrie says the NWF would also build on measures introduced by the British Business Bank for SMEs, particularly those seeking to invest to improve their own sustainability credentials and also those whose main operating activities focus on helping the country achieve net zero. 

Petrie adds: “This is undoubtedly also going to lead to an increase in deal activity and advisory work for our members working in the global professional services firms and specialist infrastructure funds.”

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