Britain’s Domestic Development Finance Institutions Emerge from the Shadows

25th August 2023

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By Noah Law

In July, UK Export Finance heralded the announcement of a €781 million loan guarantee to support construction of a 286km high-speed electric railway in southern Turkey.

Two things were striking about the major outcry from the British (or at least Twitterish) public that followed the announcement:

One was that it reflected a weak understanding of what Britain’s state-owned export and development finance institutions actually do – how they function (in fact, for profit – £303m in UKEF’s case) and who benefits (namely, Britain, not just Turkey). This was not a free hand-out.

The second was the genuine grievance with the British state for not providing the means for projects of such a scale to be par for the course in our own country, where we lament the state of our rail infrastructure, our national grid, and soaring electricity costs and, yet, have been successfully financing such projects overseas for many years.

The UK Export Finance Institution and its overseas Development Finance Institution (DFI), British International Investment, were established in 1919 and 1948 respectively. The UK’s domestic development finance institutions have a similarly long history, with the nowadays privately-owned private equity fund 3i being established by the Bank of England to provide long-term capital to SMEs after the Second World War. The French Caisse des dépôts et consignations and Italian Cassa Depositi e Prestiti were established in the early nineteenth century. The German development bank KfW is accompanied by a host of regional Landesbanken chartered to pursue a public purpose. These institutions have been a fixture of these nations’ industrial and infrastructure development. Yet, the one constant of the UK’s domestic DFIs is, much like Britain’s industrial strategy, their impermanence.

The Green Investment Bank, founded in 2012 and deemed by most to be a success was privatised in a sale to Macquarie, just five years later.

In 2014, the British Business Bank was established, serving as a beefed-up version of various previous sources of government development capital. However, the bank has been accused of failing in its mission to provide genuine risk capital to support startups.

The UK Infrastructure Bank (UKIB) was formed in 2021 to address the infrastructure financing gap and compensate for the loss of European Investment Bank and Fund access. Last year it came under fire for having invested almost the entirety of its portfolio in funds of funds, including some well-established names such as Octopus, providing no financial additionality whatsoever. CEO John Flint has been outspoken in recent weeks about the challenges and, now, what he suggests is the progress of the UKIB.

That such progress is so recent is a sad indictment of not just Britain’s lack of industrial strategy in recent years, but also the country’s ability to finance it. However, green shoots are rising, and the UKIB is engaging in deals with earlier-stage, longer-term ventures requiring risk capital, investing £53.6 million of equity in Cornish Lithium, a project which will help support regional development in my home of Cornwall, one of the UK’s poorest regions, and secure Britain’s resource and energy independence.

Fortunately, the prospective Labour Government recognises this need for development finance institutions. However, I’d like to set three goals to keep it on track:

Commercial deals – A Labour Government can no longer allow the conflation of spending and investment to choke off much-needed revitalisation. But, to ensure this conflation doesn’t become reality, our publicly-owned institutions must remain commercially rigorous and responsible with public money, returning not just the capital but, also, a handsome return that makes the British taxpayer feel they have a stake in building a better Britain and are rewarded for it.

Building markets – If there’s been one development lesson from the rise of emerging markets, sclerotic austerity in parts of Europe and, now, the race to build economies which are robust to the risk of deglobalisation, it is that industries do not just make themselves. Most financial institutions are too preoccupied with the daily business of seeking returns from existing opportunities and often don’t have the scale, resources, cost of funding, or long-term mandate to enact the wholesale development of critical new projects and industries. Development banks’ competitive edge lies in this area.

Regional Development with, most challengingly of all, local participation – how institutions such as UKIB, but also GB Energy will enable greater participation from local people and, in the process, improve their social licence to operate is still in the works. However, what’s clear, when even blue-blooded private equity funds are talking about the merits of worker participation, is that our publicly-owned institutions need to do the same.

Balancing these sometimes-conflicting goals can be a challenge, but the best targets are not there to be met with ease. Not all DFIs are created equal but those most successful institutions have clarity of strategy and are bold in mission.  A future Labour Government already has many of the developmental tools it needs at its disposal to build a better Britain, but they will need more resources, consistency, and clarity of direction to be successful.

About Noah Law

Noah Law is a Cornish Labour Party activist and economic development financier, campaigning to become the Parliamentary Candidate for St Austell & Newquay. He holds a Bachelor’s degree from the University of Exeter’s Cornwall Campus, an MPhil in Economic and Social History from the University of Cambridge, and a Master’s in Business Administration from the University of Oxford. He is a CFA Charterholder and has previously worked for the development finance fund of Finland and as a corporate finance analyst in the City of London.