10 July 2024

Why the National Wealth Fund won’t pay off


The first thing to know about the Government’s new National Wealth Fund is that it’s not, in fact, a national wealth fund. It’s absolutely nothing at all like the Norwegian store of that country’s oil and gas money, for example. The defining feature of that system is that it doesn’t invest in Norway – indeed it is barred by law from doing so.

Norway’s sort of national wealth fund solves the problem of being a large natural resource exporter. So many foreigners send so much money in that the exchange rate rises and kills off domestic industry. This is known as the Dutch Disease after the effects of natural gas exports from Holland decades back. Our problem in the UK is not that we’ve got too much foreign money coming in, so such a fund wouldn’t be the correct solution. And indeed, it’s not that kind of wealth fund.

It has however been named as if it is for the obvious political reason that many look to Norway’s trillion-Euro fund and think it would be nice to have one of those. But this is going to be an entirely different beast.

So, what actually is it? In short, it’s a vehicle for government picking winners again. Or as actually happens, government picking losers. Mission-oriented industrial policy with strict conditionality has become more popular among the spending classes, thanks in part to the work of Mariana Mazzucato. Spending other people’s money is why people go into politics after all, so it hasn’t taken much urging. But this is all that it is. It’s government borrowing money, then deciding which investments it is going to be spent upon. 

Yes, yes, there’s much about how to ‘unlock billions of pounds of investment in the UK’s world-leading green and growth industries’, but that’s hardly comforting. Because the only way that will happen – can even happen – is if government, the fund, is the holder of the risk equity. Making them the first people to lose their money if the project doesn’t work.

If there are wondrous projects in Britain which will make investors a fortune, then great: investors will invest and make their fortune. There is no need for either urging or participation by government. But we are being told that there is a need for participation by government – so, what is it, that need? It can only be to de-risk the project. That is, to stand there willing to take the first slug of losses from overruns, bad plans or even outright failures. That’s the only possible reason for government involvement at all.

To repeat, such a fund only works even in concept if it is down to government – or more precisely, down to us and our wallets – to take that first and riskiest tranche of the equity. We lose first.

Of course, there are funds that do just that and turn a profit for their investors. So the next question becomes: what will be invested in? We are being told green steel, gigafactories and ports. Umm, well now.

With ports, the major limitation is planning permission. That dread legacy of the Town and Country Planning Act 1947 and its successors. We can make it possible to build ports, or expand them, by dealing with that rather than bearing more risk. The one big new modern port the country has – that’s successful, at least – is at Felixstowe, and was built up by Trinity College, Cambridge. What allowed it to happen was its exclusion from national planning of ports under the National Docks Labour Scheme. Absence of government seems to be a successful manner of dealing with the ports problem. 

As for green steel, well, we’ve two blast furnaces that the operators want to close down: Port Talbot and Scunthorpe. The owners are asking for £500 million each (about) in order to replace them with electric arc furnaces. Green steel – say, direct reduction using hydrogen – is possible as an alternative. But it’s more expensive, and doesn’t solve any particular problem in a scrap steel exporting country like the UK.

Green steel is probably better thought of as a sop to still-powerful unions. It is most unlikely to be profitable, given that hugely cheaper scrap steel reprocessing already requires subsidy.

Finally, there is the case for gigafactories. We’ve had one of these – British Volt – go bust in recent months. Gigafactories seem rather more like a fashionable nod to being at the cutting edge of technology than a reasoned idea.

Which brings us to the other problem with this new initiative. In order for it to create wealth – possibly a decent reason for a national wealth fund – it must actually turn a profit. That is, wealth must be created by what they spend – sorry, invest – the cash upon. The initial list of what they intend to splash out on suggests that’s not going to happen. Rather than investing in good ideas, it’s the subsidy necessary to get bad ones funded.

Which is the real point here. This isn’t a wealth fund, it’s a spending fund: dedicated to projects that the Government thinks it would be nice to spend your and my money upon. Sure, governments get to do that. But there’s no reason at all we should believe them when they dress up the same old, same old, in new language.

The rhetoric is industrial planning through a wealth fund. The reality is going to be that our bureaucratic class will no more pick winners this time than when last they tried, blindfold, to pin the tail on the donkey. For the usual and obvious reason that it’s blindfolded bureaucrats picking losers.

Not much wealth in that, you know?

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Tim Worstall is a Senior Fellow at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.