Britain’s state investment institutions can’t compete with Europe’s

There has been much talk recently of Burnham’s options for increasing the firepower of state investment institutions. Whether national-level public finance institutions (PuFIns) like the National Wealth Fund (NWF), or local-level ones such as the proposed regional public development corporations (PDCs), state institutions with real firepower have a much greater role to play in a country whose infrastructure is crying out for investment.

There are a few ideas on the table. Resolution Foundation has suggested £9bn increased firepower for the UK’s green policy bank, the NWF. This would certainly be a good place to start. It would edge us back towards the volumes of public finance for investment that used to be channelled to us via the European Investment Bank before Brexit. But when you look over to our continental neighbours –such as France and Germany, this volume pales in comparison. Matching the roughly 1% of GDP a year that the German and French state-owned development banks — KfW and Bpifrance — each invest would mean the NWF investing around £21bn annually by 2028 – 29. This is nearly four times its current annual cap.

On a regional level, infrastructure expert Thomas Aubrey has suggested that rescuing the government’s new towns programme would mean reviving something similar to the old PDC model. Owned by mayoral authorities, PDCs could borrow against specific revenue streams in the way Britain’s postwar new towns and infrastructure once did, rather than routing everything through gilts and general taxation. Public corporation debt in the Netherlands, used to funds assets worth nearly 80% of GDP, and underpins a self-funding, regional delivery model that has historically delivered around six housing completions per 1,000 people, nearly double the UK’s long-run rate of roughly 3.5.

Why do European state investment institutions seem so much more ambitious than ours?

The fiscal rule on government debt that EU countries must target is general gross government debt (GGGD), which is narrower than our public sector net financial liabilities (PSNFL) measure in that it excludes public corporation debt. That narrower target buys them more investment, as well as more control over essential infrastructure, than we allow ourselves.

Public corporation liabilities are excluded from GGGD because they sit outside the ​“general government” boundary. The UK’s 2024 shift to PSNFL nets public corporation debt against income-generating assets rather than excluding it outright, which has opened some space to invest, but only recently, and only where a financial public corporation is doing the investing.

A non-financial public corporation like Network Rail or the BBC gets no such credit. And even for financial public corporations, investments that generate income from tolls, tickets and tariffs do not count as financial assets, so even this kind of revenue-generating investment counts negatively against PSNFL. Equally, a PDC which invests in land would not have any of that land’s future value offset against PSNFL, as land is classified as a non-financial asset.

On top of this, most EU public corporations, financial or not, are allowed to borrow themselves whereas most of ours cannot — and even the ones that are allowed often choose not to (such as the NWF). Meanwhile, EU rules also exclude public corporation debt regardless of whether the state holds a controlling stake, whereas in the UK a ​“controlling” equity stake, as judged by the Office for National Statistics (ONS), tips the investment back onto PSNFL.

Classification also matters. Currently, the NWF is classified by the ONS as a central government organisation. If the UK were to adopt GGGD, it would not be excluded. Independence from the Treasury in borrowing decisions could give reason for the ONS to classify it differently along the lines of NWF’s European counterparts.

The UK’s 2024 shift in the debt rule from public sector net debt (PSND) to public sector net financial liabilities (PSNFL) did help to render some public investment ​“fiscally neutral” that previously was not, opening up space to invest. But more needs to change if we want state institutions that can truly deliver an agenda of taking back public control through public ownership and majority equity stakes, can borrow against revenue-generating assets and be truly independent from the Treasury, and if we want to empower regional authorities to lead the way in local-level investment.

What lessons can we take from Europe?

Last year, in our report Firing up the fund and when giving evidence tothe Treasury select committee, we recommended that the NWF should raise its own finance on capital markets. Critics say this is a bad idea as it will come with a premium attached making it more expensive than gilt issuance (as it will be seen as slightly more risky, even with a sovereign guarantee). But that argument only looks at the direct cost and misses the bigger opportunity of empowering the NWF to boost its own firepower in a way that is independent from the Treasury’s fears over gilt issuance.

Other countries show there is investor appetite for public corporation debt for large scale institutions. Germany’s KfW has over €400bn in debt outstanding, funded through international capital markets. It issues tens of billions more every year, and has done so for decades, without denting Bunds’ status as Europe’s deepest, most liquid, lowest-yielding sovereign market. It is true that demand in the UK gilt market is structurally weak, with a patient capital increasingly substituted by volatile hedge funds as defined benefit pension schemes wind down. But that does not mean markets will be unable to absorb public corporation debt. It is a different kind of asset to gilts with a different returns profile. A bond tied to a specific corporation and project pipeline gives investors something more concrete to price than gilts.

Demand is certainly there for a regional PDC-type approach. Earlier this year investors managing nearly £2tn wrote to the chancellor, urging a consultation on excluding self-funding public corporation debt from the public sector balance sheet.

Where should the investment go?

To highlight just two examples, energy is a big opportunity for national-scale projects while PDCs offer solutions for social housing as part of new town and wider urban development programmes.

On energy, PSNFL is part of what would limit the national-scale investment institutions to minority stakes rather than considering a controlling position in our infrastructure. For example, grid lines about to go to tender and at the £70bn scale needed by 2030, this is exactly the kind of asset a public corporation could own outright. But because a ​“controlling” equity stake would tip the investment back onto PSNFL, we are confined to minority stakes instead, leaving the residual claim, price-setting power and day-to-day control with the private owner.

Municipal bonds and regional public corporation debt can fund new town and large urban extension-style development with a high proportion of social and affordable homes. A PDC borrows to buy land cheaply, sells part for private housebuilding, and uses the proceeds to repay the debt and fund the council homes it keeps, coordinated with transport and amenities. This is far from PFI 2.0 as local government borrows on terms that retain oversight and avoid extractive practices.

What else needs to happen?

Whilst some of the investment we need can be achieved under current fiscal rules, aligning with the widely adopted GGGD measure as our fiscal rule could help us maximise the opportunities our EU neighbours are capturing. But we should be careful. The argument is not to expand self-financing public corporations only because it could exploit a loophole in the fiscal rules. This is not some ruse to hide government spending and borrow unsustainably. Regardless of our fiscal situation, we should have been doing more of this for years to build out revenue-generating assets where appropriate and ensuring public value is delivered, as we have done in the past. Not doing so in more recent decades has meant forgoing a source of public wealth that our neighbours have quietly built up for decades, and that we instead actively liquidated and sold off via privatisation. It has also meant the state has lost its investment capabilities and must learn to deliver large, complex projects again. We should be serious about rebuilding this capability now.

But the EU is not perfect, and its fiscal rules still constrain what it could achieve through public investment. Much of the investment we most urgently need, including adaptation, resilience and nature protection, are not tied to a revenue stream but pay off through economy-wide gains that show up in stronger tax revenues over time. Shifting public corporation debt off-balance sheet won’t resolve this. A move towards a more holistic assessment of fiscal sustainability would truly unleash the public investment we need.

Making the best of PuFIns and PDCs means fixing the outdated accounting rules that treat their investment as risk rather than opportunity and allowing borrowing directly from capital markets. But to deliver infrastructure in a way that captures public value, we need meaningful degrees of public ownership and oversight retained throughout, with residual profits captured and recycled. Even then, we will never close the investment gap without a new approach to the fiscal framework that does not block the spending that generates returns in a less direct way.

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