The new Chancellor, Rachel Reeves, has wasted no time in formally launching the National Wealth Fund (NWF), which was a key pledge in Labour’s manifesto. The fund will invest £7.3bn in ‘new industries of the future’. Essentially early-stage green technology businesses - investments in ‘green' steel; in hydrogen production from electrolysis of water; in carbon capture and storage.
The detail, which is yet to emerge, will be worked on in the coming weeks and months by the National Wealth Fund Taskforce, which includes Mark Carney, former governor of the Bank of England, as well as other high profile business leaders. The target is to attract private capital investment of £3 for every £1 of public funds invested, which if successful would generate an aggregate fund of around £29bn. So, can the Government expect a return on its investment?
The Treasury has not commented on how much it expects to recoup from its £7.3bn investment, but it is of interest that the UK Infrastructure Bank, set up by Rishi Sunak when he was Chancellor in 2021 to provide infrastructure finance to tackle climate change, targets a 1.5% to 4% return on investment.
The reality is that if the NWF turns any profit at all for investors (including the British taxpayer) it will have done well. Picking the winners, and rejecting the losers, is by no means guaranteed in such an evolving and often unpredictable sector. And let’s face it, the Government has a far from perfect track record of investing public sector funds in private sector businesses.
In its most recently reported figures, the British Business Bank, which is tasked with increasing the supply of finance available to British businesses by lending to companies or taking an ownership stake, suffered significant losses, as its investments were hit by a decline in tech company valuations. It would come as no great surprise if in a few years’ time, the NWF is reporting its own losses.
Yet this is only part of the story. Whilst the Government does not want to lose public funds, it must ensure that the businesses who most dearly need the funds on offer by the NWF are able to access them. If the UK has any chance of achieving net zero by 2050, the Government must back those businesses who are going to get us there.
The NWF will be controlled and invested by the UK Infrastructure Bank and the success or failure of the fund will be entirely in their hands. If the fund is too accessible, the losses will be significant and there could be more losers than winners. If the fund cannot be accessed easily enough, the entire purpose of the NWF will be undermined. It is a difficult balance to strike.
Speed of delivery is also key. In the press release which launched the NWF, it was repeatedly stated that there is ‘no time to waste’, that there was a need to act ‘immediately’ and that there was a need to ‘rapidly set detailed plans in motion’. The reality is that the UK is behind the curve when it comes to investing public funds in green technologies. Other countries have been funding such businesses through their respective sovereign wealth funds for years. However, these schemes are complex. They take time to implement and time to deliver.
The Government should be under no illusion that it has its work cut out if it is make the NWF a success. But it is certainly a step in the right direction.
James Walton is Partner in the Banking and Finance team at law firm Charles Russell Speechlys
