Would Labour’s plans for a British sovereign wealth fund work?
While we don’t know the details of a Labour manifesto yet, we do have one solid commitment from them: a sovereign wealth fund.
“The National Wealth Fund will be a crucial tool in our armoury towards bringing about growth,” shadow chancellor Rachel Reeves has said.
Senior City figures have been calling for the establishment of a fund for some time, with the most vocal proponents including Keith Skeoch, the former chief executive of Standard Life Aberdeen, and former Canada Lord Mayor Nicholas Lyons.
The exact size, source of funding, or targets of the sovereign wealth fund are unknown right now, but even when those details are worked out, analysts agree that delivering such a fund in the UK wouldn’t be without its challenges – not least as, elsewhere, they are predominantly backstopped with energy-driven profits.
The first problem everyone immediately sees is “we’re too late”, due to running out of cash generated from oil in the North Sea.
However, Lakshmi Narayana, chair of the Sovereign Wealth Fund Institute, explained to CityAM that while we might think of sovereign wealth funds as reliant on oil money, that isn’t always the case.
The oldest sovereign wealth fund in the world is the Kuwait Investment Authority, with it since being joined by a whole host of oil-rich nations, mainly monarchies in the Middle East.
The largest sovereign wealth fund is actually Norway’s. Valued at nearly $1.4 trillion (£1.1 trillion), it has a stake in a staggering 9,000 companies worldwide. Back in 2011 it bought half of Regent Street.
Labour seems to be targeting a sovereign development fund, which is distinct from other sovereign wealth funds: investing within the country itself for the purpose of boosting its economy.
India is a key example of this, that began its $5bn National Investment and Infrastructure Fund in 2015, and has invested in areas that push up the country’s development.
However, some sovereign funds are an example of both: Saudi Arabia’s Public Investment Fund sees more than 60 per cent of its activities invested within the country, but still maintains large investments in foreign assets, like Newcastle United.
Other countries that have set up sovereign wealth funds without money include Indonesia and the Philippines, the latter of which used a variety of income sources to kickstart its fund, including gambling taxes.
How would a sovereign wealth fund work in a democracy?
So how could Labour raise money? One option is making a global gilt issuance, which Narayana advocated for due to the UK’s credibility and worldwide use of the pound.
Charles Hall, head of research at Peel Hunt, has suggested the sale of Natwest’s shares by the government, worth around £7.4bn, could be used.
Others have called for taking around five per cent of pension contributions from the bigger pension funds that would go into a national welfare fund.
So, what are the challenges, beyond raising the money? Well, setting it up is a hurdle in itself.
“In any democratic country, it’s very tough to establish something like this,” warned Narayana.
He explained that due to various levels of government, regulatory compliance and bureacratic oversight, the whole process can lead to delays, or even derailment of the project.
“Every party would like to have an overseeing committee on it,” he added, complaining that each investment
However, it is definitely possible. Norway is of course an obvious example, but other democratic countries like Nigeria have set up sovereign wealth funds in recent years.
Meanwhile, the UK has “the best fund managers in the world”, argued Narayana, leaving the potential for strong returns from a well-functioning sovereign wealth fund. If one will be set up is yet to be seen.