The British Labour party has enshrined the proposal for a National Wealth Fund (NWF) in its manifesto, in the hopes of catalysing private investment into strategic sectors, funded by a time-limited windfall tax on oil and gas firms and “responsible” borrowing. 

The party’s manifesto, published on June 14, confirmed the party’s ambition to capitalise the NWF with £7.3bn over the course of the next parliament and catalyse £3 of private investment for every £1 of public investment. 

In other words, it will pursue a 25/75 scheme in investment projects for the upgrade of ports and the development of supply chains across the UK, where the fund contribution will amount to a total of £1.8bn; the development of new gigafactories (£1.5bn) and the steel industry (£2.5bn); the acceleration of the deployment of carbon capture (£1bn) and green hydrogen (£500m). 

Overall, it aims to create 650,000 new jobs. 

“It appears that the Labour party is seeking to create a catalyst fund in which the sovereign fund co-invests with a private partner,” says Daniel Brett, head of research and data at research firm Global SWF. “In renewables, which is Labour’s main target, sovereign wealth funds (SWFs) will often co-invest with an operator."

“As such, a 25% stake is not unusual. Whether it is realistic depends [not only] on how much capital the fund is seeded with and its ambitions, but also whether the regulatory framework is conducive to investment.” 

The NWF is part of a set of policies making up the party’s Green Prosperity Plan. The fund itself will need an annual capital injection of 1.5bn, while the whole plan’s annual funding needs are estimated at £4.7bn. 

“The Green Prosperity Plan will be funded in part by a time-limited windfall tax on the oil and gas giants making record profits, with the rest of the funding coming from responsible borrowing to invest within Labour’s fiscal rules — catalytic investment that will leverage higher private investment and boost economic growth,” the manifesto reads. 

The party estimates it can generate £1.2bn per year from the windfall tax, and source the remaining £3.5bn via new borrowing. 

The manifesto pledges follow the establishment in March of a task-force led by Rhian-Mari Thomas, the CEO of the Green Finance Institute, and featuring major institutional investors to advise on the delivery of the NWF. 

More on sovreign wealth funds: 

• Sovereign investors are the new conduits of FDI
• Spain readying €2bn co-investment SWF to lure FDI
• Opinion | Sovereign wealth funds and foreign investors still need each other

The idea of a British SWF investing in strategic industries is not new per se, but funding uncertainties have hampered any such plan so far, as the country faces tight public finances. 

Under the leadership of then prime minister Theresa May, the Conservative party’s 2017 manifesto pledged to make SWFs “a central part of our long-term plan for Britain” and to “create a number of such funds”. Back then, Ms May proposed to capitalise her proposed SWF via revenues from shale gas extraction, dormant assets and the receipts of sale of some public assets. However, those plans never really came to fruition. 

“The failure to launch any sovereign investment vehicles since 2017 demonstrates the fiscal and political obstacles to launching a British SWF,” Global SWF noted on June 6. The new Conservative manifesto seems to have given up the idea of a SWF. 

Direct investment has played a major role in the campaigning ahead of July’s national election, as parties concoct their recipe to prop up the country’s flagging capital formation levels, particularly in infrastructure and strategic sectors. However, the financial cover of these plans is under increased scrutiny following the fallout from former prime minister Liz Truss’s mini-budget in 2022, which promised generous tax cuts without providing much detail on their cover. 

“Looking ahead, the government faces pressing service delivery and investment needs which, in staff’s view, will be difficult to accommodate within the official medium-term spending plans,” the IMF Article IV review of the UK economy noted in May. 

Hence ideas of a strategic catalyst fund able to crowd in private investment into strategic sectors, and therefore limit the need for public resources, have gained momentum in recent years. 

“Strategic investment funds multiply the impact of their capital by catalysing investment, often in the form of equity, from a variety of third-party investors,” concludes Victoria Barbary, the director of strategy and communications at the London-based International Forum of Sovereign Wealth Funds. “Strategic investment funds with strong governance, management and investment credentials can serve as credible local partners to third-party capital to reduce risk, enhance governance, and integrate local market knowledge with external expertise to enhance the quality of investment decision-making."

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