This report from UK think tank Onward looks at how the creation of a BDB would address market failures in business and infrastructure investment.
The report finds that, despite London’s deep and mature financial markets, the UK suffers competitive weaknesses linked to investment in businesses and infrastructure, including: A wide infrastructure financing gap of £8 billion a year, equivalent to 0.4% of GDP and weak infrastructure stock equivalent to just 47% of GDP. This compares to 52% for Italy, 54% for France and 56% for the Netherlands. A large SME financing gap, equivalent to £22 billion in foregone funding for growth and jobs. Between 2015 and the end of 2018 gross flows of bank lending to SMEs fell as a share of total lending to private sector non-financial services firms from 28% to 21%. Meanwhile, bank lending to large businesses rose from 70% to 80%. These problems are much worse in Britain’s lagging regions: since 2007, infrastructure spending per capita, for example, has been over triple the rate in London as in the East Midlands and Yorkshire and the Humber. According to Bank of England data, 25% of all SME loans are lent in London versus just 2.8% in the North East and 3.5% in Wales. These issues have been exacerbated by the sale of the Green Investment Bank (GIB) and the departure from the European Investment Bank (EIB). The GIB catalysed £15 billion of green infrastructure spending by 2015. In the same year the EIB invested £5.6 billion in UK projects, equivalent to approximately a third of infrastructure spending under the remit of the National Infrastructure Commission.
The creation of a British Development Bank would address these market failures and provide financing at scale to level up the UK. The majority of British Development Bank’s funding would come from loans to the private sector. This would be similar to KfW, which receives 99% of new funding from capital markets. The British Development Bank, in consultation with the Treasury, would issue the bonds and deploy a combination of loans, guarantees and equity to finance infrastructure and SMEs. The new institution would be modelled on the successful German bank, KfW, which was established in the aftermath of the Second World War. Since 1991, almost one out of every ten euros invested in East Germany has come from KfW, helping to reduce the gap in disposable incomes between East and West Germany by over 50%. In the first half of 2020, KfW has tripled the level of domestic promotion to £63 billion to support the coronavirus response. The report argues that the equity shares in the BDB should be given to each of the devolved administrations of the United Kingdom, and Mayors, Local Enterprise Partnerships and Combined Authorities should have the power to scrutinise decision-making. The institution would have the power to raise regional development bonds, ring-fenced for development in specific regions. An additional benefit of establishing a national development bank would be to create a long term financing institution capable of taking decisions away from the political cycle. At present, infrastructure decisions are subject to political wrangling that can frustrate investment and create undue delay. An independent bank, overseen but not controlled by the Treasury, would create certainty and stability of funding, especially for controversial projects.Read Full Report