Theresa May’s new government has an unprecedented opportunity to reshape the UK economy and it should not be wasted. Now is the time for Government to review its role in helping to finance productivity enhancing capital investments.
Lost confidence due to Brexit uncertainty and persistently weak productivity growth, the ultimate driver of long-run economic growth, are major concerns and new supply side investments and reforms are urgently required. While the amount of financing available is returning to pre-crisis levels, the length of loans and the cost of capital have not. Financing is available for too short a period of time and is too expensive, which results in many potentially profitable and productive investment opportunities failing to go ahead.
Given the massive difference between long-term UK government borrowing costs and those available to private investors, it would make sense to pass on some of this difference in capital costs and length of loans to those making productivity enhancing investments in social, physical, technological, and human capital.
An approach could be based on existing instruments created since 2010, namely the UK Guarantees Scheme for Infrastructure (the Scheme) and the UK Green Investment Bank (the GIB). Both of these policy instruments were created to help unlock financing for infrastructure, but both are severely constrained - largely because of the need to comply with EU State Aid rules.
State development banks in other European countries, such as KfW (originally Kreditanstalt für Wiederaufbau) in Germany, have block exemptions from these requirements as they were established prior to the EU existing and were folded into EU treaties and directives.
Now that we are committed to Brexit, the Scheme and GIB should be similarly unshackled so they can provide concessional finance. Providing low cost finance to sectors (as opposed to specific companies or ‘national champions’) through fair and competitive tendering processes can boost growth, without unfairly and counter-productively ‘picking winners’.
Such a reform would allow lower cost capital to be invested in assets able to improve long-run productivity. Concessional finance can be disbursed through tenders, or by allocating funds to banks or asset managers operating in selected sectors. This would be an important public policy tool able to accelerate investment in key areas. It could also improve the UK government balance sheet: interest would be charged on finance provided and these rates would be above the government’s own cost of capital, but below market rates.
Priorities for financing could include energy efficiency or capital improvement loans for households and small businesses – dramatically improving the attractiveness of borrowing to invest for those groups. Projects eligible for Contracts-for-Difference (CfDs) - which underpin power generation investments - could also receive the option of low cost loans, which also have the benefit of reducing their overall cost. Other priorities could be energy intensive industries – providing low cost finance for new technologies that improve the resource efficiency of industrial processes – and the deployment of a new national electric vehicle charging network. An offer of low cost capital could unlock the construction of an ambitious new UK electric vehicle charging network that would be privately owned and operated on a commercial basis.
Investments that are more resilient (for example, those future-proofed against flooding) and supportive of multiple government objectives (such as pollution and biodiversity) should be prioritised. HM Treasury and the new Department for Business, Energy and Industrial Strategy (BEIS) should determine these win-win opportunities together with the independent Committee on Climate Change and Natural Capital Committee. The creation of BEIS is a significant opportunity for a joined up approach to supporting investment.
The government can enable important productivity enhancing investments, while minimising the direct role of the state, the impact on the public finances, and the risks of ‘picking winners’. A majority Conservative Government can deliver this and get the appropriate balance between positive intervention and counter-productive market distortion.
Ben Caldecott is an Associate Fellow of Bright Blue and author of Green and responsible conservatism: embedding sustainability and long-termism within the UK economy
This article first appeared on BusinessGreen.