Compare this:

“However it was with the idea of a state planning agency that [Stuart] Holland (*) hoped to show the new possibilities open to a more just economy. He looked to the Italian example of the IRI (the Industrial Reconstruction Institute), set up by Mussolini and used by subsequent Italian governments to develop the economy. This had, of course, already been tried through the IRC (the Industrial Reorganization Corporation) set up as part of the National Plan [in Britain] in 1966, but the IRC had been too small to have much effect on the British economy. A revamped IRC in the form of a National Enterprise Board would, however, have a major effect in stimulating the private sector through an active policy of state intervention and direction.”
Source: Geoffrey Foote: The Labour Party’s Political Thought: A History (Palgrave, 1997) p.311.

(*) Stuart Holland: Labour MP for Lambeth, Vauxhall 1979-89, political assistant in Downing St to the PM 1967/8, and shadow Financial Secretary to the Treasury 1987-9

The main problem I see with a potential British Investment Bank is the amount of vested interest lobbying it would be subjected to. Every obsessed activist group would want the lending of the bank to reflect their prejudices. Remember what happened when UKFI took over the Treasury’s equity share in RBS. Green activists immediately started to say that RBS should not be lending to oil companies.

The old industrial UK left no longer exist in any great numbers. The days when everyone knew the names of the industrial union leaders are well gone. What has replaced them is a disparate group of herbal tea socialists, and no matter what sector of the economy we look at outside of green energy there will be some section of the contemporary left opposed to that sector. So who the hell is the investment bank going to lend to when there is some group of antis for everything? See if you can think of a sector of the modern economy where there is not a group of lefty antis opposed to that sector. There are none. The contemporary UK left are no longer radical or have a vision for anything, they are just the antis and a state-backed investment would come under intense pressure and lobbying from the antis.

The other type of lobbying it would come under is regional and marginal constituency lobbying. Don’t invest there come and invest in my constituency. Relax the commercial lending terms because this group are really worthy. I think we all know what happens when lending terms are lax. Moreover, there is a subtext to all this that there is free money all over the place that those idiots in the private sector just can’t see the commercial possibilities. The state-backed bank apparently is going to allow the flowering of these unexploited commercial opportunities. Call me cynical but don’t you think other people have looked at the numbers and concluded they do not add up, hence the need to turn to a SIB.

The lack of infrastructure investment is not a market failure, it is a failure of government. We have been underrinvesting in this country for over forty years at least. We do not need a SIB to invest in infrastructure we just need to increase capital investment budgets. Using a SIB and funding it probably by selling bonds to the pension funds is just a way to finance projects off-balance sheet. You know as well as I know that it can’t be cheaper than the government just increasing cap ex budgets.

The UK banks do have a property bias because they want collateral for loans. If SME do not have collateral what else can be done but charge them more for lending. I suppose they could always pledge their house as collateral. Oops the commercial good idea requiring lending is suddenly not that good an idea. Most of their complaints are about the price of lending rather than actual access to lending. They are a lot more risky than they themselves recognise. What would be more useful for SME is the development of a UK bond market for SME. That would give them access to huge pools of capital and bypass the banks. It is ridiculous that the UK with such an advanced financial sector does not have much of a bond market for firms of this size compared to somewhere like the U.S.

What happened with PFI is not much of a recommendation for the acumen of those running public sector institutions in leveraging private investment:

The 717 PFI contracts currently under way across the UK are funding new schools, hospitals and other public facilities with a total capital value of £54.7bn, but the overall ultimate cost will reach £301bn by the time they have been paid off over the coming decades.
http://www.guardian.co.uk/politics/2012/jul/05/pfi-cost-300bn?newsfeed=true

Oh I know: it will all be different next time. Try the Wikipedia entry for Crédit Lyonnais

“Crédit Lyonnais is a historic French bank. In the early 1990s it was the largest French bank, majority state-owned at that point. Crédit Lyonnais was the subject of poor management during that period which almost led to its bankruptcy in 1993.”

I can see why we might want to have more banks, but there doesn’t seem to be much about how we get them. Do we encourage a foreign bank or two to move here? Remember the problems Virgin has had in acquiring a full banking licence in order to take up the valuable bits of Northern Rock. How might a new mutual/co-operative bank be founded?

JC: “Do we encourage a foreign bank or two to move here?”

Reportedly, there are already more foreign banks with branches in London than in any of the other global financial centres – perhaps as many as c. 500 banks. It’s just that we mostly choose to bank with the big five highstreet banks and evidently want to avoid the hassle of shopping around and switching where we keep our bank accounts.

Try the OFT Review of barriers to entry, expansion and exit in retail banking (November 2010)
http://www.oft.gov.uk/news-and-updates/press/2010/114-10

I think a state bank could be a good idea, but I think enthusiasts should take a look at the history of state owned banks and job-creating investments in grand projects. I’m thinking Spain and Japan (the former being covered in grandiose white elephants, the latter being famously half-concreted over by the “construction state”) and to some extent Germany, whose state run banks also ran into trouble. How would we avoid those errors?

Luis: “How would we avoid those errors?”

That’s a good question. The trouble is that Richard W @2 is absolutely right.

A state bank would be subject to all sorts of political pressures, national, regional and local, to fund politically favoured projects. Whatever the much publicised failings of our banking system in lending to business, politically motivated funding has a bad track record.

The R&D costs of the supersonic Concord airliner were paid for by taxpayers and never recovered from commercial opperations – the plane was only bought by the national airlines of Britain and France. £3.4billion of taxpayers’ money was sunk into British-Leyland/the Rover Group until it was privatised in 1988. I lost track of how many hundreds of millions were put into developing the Selby Coalfield before that geological fault was discovered. In the 1990s, I witnessed the Welsh and Scottish Offices competing against each other to attract mobile foreign direct investment projects with taxpayer funded grants.

The HoC Public Accounts Committee recently reported that the projected passenger traffic for the Highspeed rail link from London to Folkestone for the Channel Tunnel had been grossly inflated. The economic case for the proposed H2S link from London to Birmingham and beyond is very wobbly – try this assessment in the Guardian:
http://www.guardian.co.uk/politics/reality-check-with-polly-curtis/2012/jan/10/high-speed-rail-is-it-worth-it