The government has handed £895bn to speculators but can only find £12bn for infrastructure development.

With the exception of Russia, the UK is facing the worst economic prospects amongst G20 countries. The real value of the state pension and social security benefits has been cut. Wages are lagging inflation and price of energy, food and other essentials is rocketing.

The legacy of Brexit looms large in self-inflicted economic woes. There are shortages of goods/services and labour; long queues at ports and airports, and additional bureaucracy is increasing costs and hitting exports and jobs.

Building high quality infrastructure is essential to rejuvenate the economy, but the post-Brexit UK has failed to create institutions to deliver it. After years of dithering, the government has been forced to reinvent the EU structures that it abandoned and form the UK Infrastructure Bank. Even this shows no ambition.

The UK boasts a large capital market but lacks appetite for new risks and in the absence of state guarantees it has failed to invest sufficiently in floating offshore wind, marine and tidal energy, electric vehicle charging, battery storage technology, broadband rollout, carbon storage, flood controls and much more. In short, markets have failed and the state must accept responsibility.

The European Union recognised market failure at the outset and created the European Investment Bank to finance long-term infrastructure projects. Since the 1960s, it has provided over one trillion euros for projects which can’t easily be financed from other sources. After Brexit the UK needed to create its own infrastructure bank.

A number of EU member states have also accelerated their infrastructure development though national infrastructure banks. In Germany, the state-owned Kreditanstalt für Wiederaufbau (KfW) has performed this function since 1948 and has assets of over €554.7bn.

This German model was advocated by Liberal Democrats during their coalition with the Conservative party and in 2012, the UK government formed the Green Investment Bank. However, in 2017, after the 2016 Brexit referendum, the Conservative government privatised it and assumed that markets would somehow finance long-term infrastructure projects.

The Labour Party was not persuaded by reliance upon markets, and its 2017 and 2019 election manifestos promised to create a national investment bank to rebuild Britain’s industries, revive manufacturing, finance new technologies, provide clean energy, regional investment and a ‘new deal’. It was earmarked to spend £500bn over a ten year period.

Labour did not win the 2017 and 2019 general elections. Markets have not provided the necessary finance for infrastructure and belatedly the government has been forced to reinvent the wheel by the creation of the UK Infrastructure Bank (UKIB).

The UKIB is a pale shadow of Labour’s vision. It has been operational since June 2021, but bizarrely the Bill to create it is going through parliament now. The Bank will have £5bn of equity from the Treasury and another £7bn in loans from the Treasury. It can secure another £10bn in government guarantees. In addition, the government hopes that UKIB would be able to borrow £18bn from capital markets.

There is no explanation for this convoluted capital structure. The hard cash of £5bn or even £12bn isn’t even enough to fill potholes in the roads, far less launch an economic renaissance.

It is worth recalling that since 2010, the government has handed £695bn of quantitative easing (another £200bn was handed in 2009) to speculators. In comparison, the amount allocated for infrastructure development is puny.

There is no indication of how much UKIB will spend each year and how the worthiness of projects will be judged. There is no indication of how the investment proposals will be ranked if UKIB is forced to ration finance.

Ministers claim that UKIB is independent but that is hard to believe, especially as the government is its sole shareholder. The Chancellor is to appoint the chair of the board, the Bank’s CEO and its non-executive directors. Altogether, the Bank will be under the control of the Treasury and could easily become a political puppet.

Its operational independence seems to be constrained. The Bill states that the “Treasury may give a specific or general direction to the Bank about how it is to deliver its objectives”. The Treasury’s “direction” will constrain UKIB’s independence. Directors may succumb to Ministerial pressures and favour projects that enhance the ruling party’s election prospects rather than what is needed for the benefit of the people.

The operations of a government-owned bank need to be reviewed by parliament, but the government is not keen on that. The Bill offers the possibility of a statutory review by shareholders i.e. the Treasury after ten years and thereafter once every seven years. This is inadequate and also neuters parliamentary scrutiny and possibilities of assessing the performance and abuse of UKIB for political purposes.

The UK economy is drifting. It desperately needs investment in infrastructure to create jobs and improve quality of life and business prospects. The government’s misguided faith in markets has obstructed infrastructure investment. The muddled plan for UKIB shows no ambition. The government has handed £895bn to speculators but can only find £12bn for infrastructure development. The formation of UKIB is part of the gesture politics and will make little qualitative difference to the economy.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

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