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Gareth Davies is the Conservative MP for Grantham and Stamford.

Much has rightly been said about the perilous economic situation facing our country as a result of this dreadful Coronavirus. But talk to people in our towns and cities across the regions and they will tell you the pandemic has merely amplified economic problems that were there already. For decades our regions have been hampered by systematic underinvestment in businesses, infrastructure and transport links that have held back opportunity for large parts of the electorate. Last December, those voters demanded change.

They are right to do so. The UK faces an infrastructure gap of £8 billion a year, according to McKinsey, and a lack of infrastructure investment is one of the reasons we suffer poor productivity relative to our global competitors. Productivity issues are even worse internally – regional disparities in investment have led to disparities in productivity with average gross value added per hour worked in the UK 35 per cent below that of London and the South East.

We need a long-term strategy to boost infrastructure investment, stimulate regional development and leverage much greater levels of private capital in the process. Today I have published a plan to restructure our investments to target the regions and help mobilise billions of new private savings and investment to reduce the burden on the Treasury and the taxpayer at a time of great challenge.

Together with the think tank Onward, I am proposing the creation of a new British Development Bank with a specific mandate to invest billions in the regions. The UK has never had such an independent institution despite the model being a tremendous success in other countries around the world.

Germany pioneered the use of development banks with their own organisation called KFW. After the Cold War it was critical for “levelling up” the previously occupied East Germany. Since 1991 one out of every ten euros invested in East Germany has come from KFW and the inequality gap between East and West reduced significantly – this is in contrast to the widening inequality between England’s North and South.

We have long needed to rethink how and what we build in this country. We all know the history of PFI schemes which failed to demonstrate value for money for the taxpayer. Now is our opportunity to put in place a dedicated institution of genuine finance experts to drive and mobilise funding.

Infrastructure helps an economy to grow. The investment and construction of new assets creates additional jobs and supports supply chains. The eventual infrastructure supports productivity by connecting people whether it is a new train line, better broadband or more energy. Infrastructure makes our country a more attractive place to live and do business, and by reducing transaction costs makes Britain a more competitive player in the global economy.

Therefore, our pervasively poor quality, low stock infrastructure is a serious issue if we are going to level up and boost economic growth.

However, I entirely sympathise with the dilemma our Treasury faces, infrastructure is the one thing we need to grow our way out of the crisis and truly level up and yet it becomes more and more difficult to pay for as every day passes. This is why we must mobilise private capital to supplement public spending.

A British Development Bank will do three critical things. First, it will provide long-term targeted financing by project, business or region to ensure that investment is ring-fenced to where it is most needed. Second, it will mobilise private savings and investments by a multiple of four, meaning that for every £1 of government spend, £4 of private capital spend will be unlocked. Thirdly, it will provide “counter-cyclical” investment so that in times of economic downturn when mainstream banks’ risk appetite dries up, required funding flows will be maintained.

This new institution would be modelled on Germany’s KFW. To do this, we would move the existing British Business Bank (BBB) and the Commonwealth Development Corporation (CDC) under the one umbrella organisation of the British Development Bank to bring about huge efficiencies, but critically, the combined assets of these two organisations (which is several billion pounds) would enable the Development Bank to issue its own targeted infrastructure bonds. The domestic work of BBB financing SMEs would be bolstered by an increase in assets, as would the reach of our overseas schemes under CDC.

Backed by the Treasury, a Development Bank could borrow at very low rates to fund and encourage infrastructure investment the private sector would not otherwise build. The bank could also issue “guarantees” or could buy shares in infrastructure projects, taking the risks of infrastructure construction the private sector is unwilling to take.

This Government has an opportunity to not only set out a long term plan for levelling up in the upcoming National Infrastructure Strategy, it has the chance to put in place a financial institution that will serve the needs of our regions for decades to come regardless of who holds the keys to Number 10.

31 comments for: Gareth Davies: A new British Development Bank could drive our national recovery

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