The new ‘National Wealth Fund’ is catnip for useful idiots

Bad name, worse investments

Can we sue Rachel Reeves for false advertising? The name of the Labour Government’s new investment vehicle, the ‘National Wealth Fund’, is presumably intended to conjure up images of sovereign wealth funds like those of Norway (GPF-G, $1.6tn AUM), the United Arab Emirates (ADIA, $993bn AUM), Saudi Arabia (PIF, $925bn AUM), and Singapore (GIC and Temasek, $660bn and $287bn AUM). The so-called ‘NWF’ is of course nothing of the sort: for better or for worse, although we once had the opportunity to create a genuine sovereign wealth fund, we took a different path, instead using the windfall from North Sea oil (which peaked in the mid ’80s) to assist in Margaret Thatcher’s quest to roll back the frontiers of the state through tax cuts. Instead, the money will come from borrowing.

Moreover — genuine ‘sovereign wealth fund’ or not — the amount of money available is unimpressive to say the least: Wikipedia’s rankings of ‘sovereign wealth funds’ by size places the ‘National Wealth Fund’, which has been given £7.3bn of funding, between such titans of the industry as the ‘Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo’ and the ‘New Mexico Severance Tax Permanent Fund’ (the latter doesn’t even have a Wikipedia page) — though, as we shall see, this lack of ambition and/or hard cash is not exactly a bad thing in the circumstances. The hope is that every £1 of government money will attract a further £3 of private money. If — with an emphasis on if — this happens, then total new investment from the scheme will be closer to £30bn, which is a rather more impressive figure.

Around £1.8bn of the £7.3bn available is currently expected to be spent on upgrading Britain’s ports, which seems reasonable enough (though we may wonder why a brand new investment vehicle was needed for this, and worry about whether Felixstowe, located next to a thoroughly unremarkable ‘Area of Natural Beauty’, will be permitted to expand as it should). More concerning is that all of the rest will be spent on various ‘green’ initiatives: £1.5bn for ‘gigafactories’, £2.5bn for ‘clean steel’, £1bn for ‘carbon capture’, and £500m for ‘green hydrogen’. (Notably absent is any money for nuclear energy, though this might be provided by the new ‘GB Energy’ instead.) These, we are told, will create the ‘jobs of the future’.

Aside from ports, all of the industries selected reek of ineffectual bandwagoning. In a previous article (‘Industrial policy? Get the basics right first’, Volume VII (April 2024)), I gave the following warnings:

Many countries have began aggressively promoting the so-called ‘green’ industries… Labour Party politicians seem eager to follow the United States into this trap (Green New Deal!), and, worse still, will be attempting to enter an already saturated and ultra-competitive market from a weak position.

…

‘Industrial policy’ will favour industries that have political muscle and non-economic justifications for state support. Even at best, investment will often be excessive and wasteful in ‘trendy’ and/or ‘prestige’ industries — nuclear energy, computers, and aerospace in the 1950s; semiconductors, artificial intelligence, and green energy in the 2020s. It would be best, if we are to have an ‘industrial policy’, to avoid allocating so much money to such industries, but the political incentives to do so may prove irresistible.

Yet again, the Left — borrowing from ‘Green New Deal’ rhetoric — has smuggled ‘green’ subsidies into an industrial policy scheme that, at least outwardly, seems to be focused on economic growth. Unlike many readers, I am in no way dogmatically opposed to industrial policy; nonetheless, the prospects here do not look good.

By far the least objectionable of the ‘green’ industries receiving money is ‘gigafactories’; that is to say (avoiding buzzwords) factories that produce batteries for electric vehicles. Nonetheless, before putting any more taxpayer money into this industry, we would be wise to think of the ruins of Britishvolt — a high-profile (and partially state-backed) venture which spent investor funds lavishly, yet never ended up producing any batteries before it went into administration. The failure of Britishvolt can perhaps be chalked up to incompetent management in a hyper-competitive industry (and, relatedly, the parasitism of certain professional services firms), rather than the idea of investing in batteries being in itself unsound. But Britain is hardly ahead of the curve in identifying ‘gigafactories’ as a potential ‘industry of the future’: there will be no first-mover advantage here. The lumbering British state has not identified anything particularly new, and the global competition — often state-subsidised — will hardly be slackening in the next few years. That is not to say that investing in ‘gigafactories’ is wrong simply because there is competition any more than investing in aerospace and computers in the ’50s was: the ‘winners’ in these industries have (eventually) been rewarded, even if years and years of losses needed to be absorbed. The problem was the sheer number of ‘losers’.

And here, Britain seems overwhelmingly likely to be one of these ‘losers’. For even if we do assume that ‘gigafactories’ are genuinely worthy of state subsidy, we would still be ignoring the elephant in the room: Britain’s more general lack of competitiveness in manufacturing, regardless of whether said manufacturing is claimed to be ‘green’ or ‘grey’. The ‘problem’ of high wages is, of course, unavoidable (at least assuming we don’t flood the country even more aggressively with immigrants). It will continue to be difficult to attract genuinely elite human capital into the industry given the existence of the City of London, which will always offer higher wages in more appealing locations than anything in manufacturing. But other factors, most notably our exorbitant land and energy costs, are not. Nor are the mountains of red tape that any ambitious firm that wants to do anything that impacts the physical world will inevitably face. Will the Labour Party do anything to remedy this? It seems unlikely.

So far, one full point on ports, and half a point for effort on ‘gigafactories’. Not too bad. Unfortunately, the rest of the projects receiving funding — certainly from the point of view of profit and loss (independent of government subsidies), and perhaps even from a narrow technological point of view — seem completely hopeless. Much like ‘gigafactories’, all of the other three are already effectively buzzwords. The worst person you know on LinkedIn already knows about them; the British Government is hardly a pioneer here, somehow spotting the ‘industries of the future’ before you, or the decentralised wisdom of the market, can. Which leads us to the following question: since they haven’t identified anything new, if these projects are so worthwhile, why can’t firms just turn to the private sector for funding? Britain is not a developing country: it has mature capital markets. These markets might sometimes be a little skittish and over-eager for immediate returns, true. Perhaps, in some cases, there is a role for government involvement to remedy this. But the more fundamental reason for why these projects require government funds is that they are not — and probably never will be — commercially viable.

The ‘carbon capture’ industry does not even pretend to be of any commercial value without government intervention to make ‘captured’ carbon valuable (which it isn’t in a free market), meaning little more needs be said about this highly speculative venture. More interesting is the decision to invest in ‘clean steel’. The troubles of the British steel industry, which has been in slow-motion collapse since at least the ’80s, are already well-documented by Rian Whitton. In short, British steel is fundamentally uncompetitive, and the British Government is faced with two real options: the first is to permit the final collapse of the remnants of British steel in Scunthorpe and Port Talbot; the second is to work out a route to long-term viability which involves both private and government action. Instead, in classic British fashion, the Government has equivocated, refusing to do what is necessary for the latter but bailing the industry out every time it is about to collapse, with foreign investors periodically shaking down the government for more funds.

There are many reasons for the uncompetitiveness of British steel, but by far the most important and, helpfully, the easiest to understand, is that energy prices are simply too high, with UK Steel estimating that electricity prices for steelmakers in Britain are fully 80% higher than for steelmakers in Germany. This is due to German subsidies and exemptions, bad British energy policy, and outright taxes on carbon.

‘Clean steel’ presumably refers to funding for existing plans to ‘decarbonise’ what remains of the British steel industry, which has a target of 95% reduced emissions by 2050 — a target which seems extraordinary from the outside. One method of achieving this is through moving away from oxygen furnaces and towards electric arc furnaces — i.e., away from creating new steel and towards recycling steel from scrap. Britain, as Whitton notes, is unusually lopsided towards the former, which is more ‘dirty’. Yet there are good reasons for this lopsidedness: although all energy prices in Britain are too high, this is even more true of electricity than of fossil fuels; and while the former relies heavily upon coal, the latter is disproportionately reliant on electricity. Will the British Government do anything to make electricity cheap enough to justify the use of electric arc furnaces? If it does not, no private company would ever invest in them — which, ominously, is perhaps why the Government has now decided to step in.

Once again, what is missing is any route to profitability, even in the long-term. It is exceptionally unlikely that ‘clean steel’ in Britain will ever be competitive with ‘dirty’ competition abroad. Methods could perhaps be found to prevent ‘dirty’ competition undercutting ‘clean’ steel in Britain itself, but it is unlikely that much could be done to secure any foreign market for the products. Ultimately, it seems inevitable that ordinary British people will be forced to pay more, whether through increased prices on products containing steel or through taxpayer subsidies.

Worse still, that the steel industry is being purposefully directed by the Government towards production that is almost inherently unprofitable will help reduce pressures, however small, on the industry to become less reliant upon subsidy and/or bailouts in the long-term and on the Government to create a more reasonable environment for manufacturing. Instead, it will be taken as a given that these activities, and the associated trade union jobs this creates, should continue to be subsidised by the taxpayer for the foreseeable future, no strings attached.

Finally — and perhaps predictably — the £500m that remains of the £7.3bn has managed to find its way into the ‘green hydrogen’ industry. Is ‘green hydrogen’ a scam? That would perhaps be too strong a word. But what is clear is that British politics is currently awash with money from this highly dodgy industry; indeed, so much so that it is now often difficult to find any well-informed criticism of it from mainstream think tanks. Much of this money, as Net Zero fanatics (with whom I am in rare agreement here) will often point out, ultimately comes from major oil producers.

So what’s wrong with ‘green hydrogen’? In brief, ‘green hydrogen’ is a proposed energy storage method to transport renewable energy over long distances. Hydrogen is produced through the electrolysis of water, which is exceptionally energy intensive; this process only becomes ‘green’ by virtue of the electricity that is used to produce it being ‘renewable’. The process of producing ‘green hydrogen’ will have to become far, far more efficient for hydrogen to be at all competitive with hydrocarbons. Yet the commercial difficulties don’t end with production: it’s also one of the least dense fuels available, meaning that storage and piping have to be significantly larger than for any hydrocarbons, which is expensive. It is extremely prone to leaking (thanks to the tiny size of hydrogen molecules), and is highly flammable (due to its simple chemical structure), further adding to the costs and risks. Many believe that in order to be practical for transport, it requires as-yet uninvented solid state storage techniques.

While I am not sufficiently technically informed to rule out the idea that the ‘green hydrogen’ industry may eventually develop into something useful, it is currently one Britain’s favourite haunts for subsidy junkies, and any spending on it seems very likely indeed to be wasteful.

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Media reaction to the National Wealth Fund has, in general, been positive, though (predictably) The Economist was critical. Interestingly, The Guardian did not appreciate the fund’s misleading name. Probably the most glowing responses came from the Financial Times. Many might think that this, as well as the various big names involved in the formulation of the policy — including former Bank of England governor Mark Carney and the Chief Executives of Aviva, NatWest, and Barclays — reflects the fact that this policy is well-formulated and fundamentally sensible. They would be wrong. As we have seen, there is nothing sensible about the majority of the ‘preliminary’ sectors chosen.

In part the positive response can be explained by the sheer strength of the ‘ESG’ Blob. Why exactly so many corporations acquiesce to such ridiculous policies is a question for another time. But what is clear is that the ‘ESG’ Blob is not only unusually well-funded; it is also unusually powerful because it gives the appearance of being ‘sensible’, mostly staffed by normal people in what appear to be normal professional jobs — quite unlike many other aspects of the Blob, which are quite transparently extremist. As such, nothing appears outwardly ‘off’ when the Financial Times decides to have an ‘ESG’ professor explain the new scheme to their readers.

But more generally, the positive response can also be explained in another way. After a decade or more of growth which has ranged between anaemic and nonexistent, political discourse has now decidedly shifted towards prioritising economic growth. Centrists of various shades will now invariably rejoice at the idea that something, somewhere, might now be happening. In some ways, this is to be applauded. Economic growth is, after all, as close to a panacea as you can get in politics: regardless of your political goals, almost all of them can be achieved more easily if there is more money to go around. And, not wrongly, Britain’s lack of ability and/or will to do things — to invest, to build, to take risks, and so on — is identified as one of the major issues facing this country.

But unfortunately, years of frustrations under a sclerotic, pensioner-coddling Tory government have meant that something has gone wrong in what otherwise seems to be a healthy ‘vibe shift’: nowadays, virtually every big project with big ambitions — and, usually, big government subsidies to boot — will find many cheerleaders on X and in the press, even when (on the face of it) the project seems ridiculous. Of course, it is true that building and investment in Britain (and indeed many other Western countries) has been far below what is required for many years now, especially given the strain that immigration has placed on our infrastructure. But that does not mean that all construction is always good, or that malinvestment somehow does not exist, or that every big new idea for a project is a sensible one. Just how widespread this notion is can be seen from the reaction to announcements of this or that Chinese infrastructure project being completed, usually at great expense: rarely is any doubt expressed about whether, say, a high-speed railway to nowhere is in fact the best use of scarce capital. That we need to in some sense ‘match’ China — a developing country with a hugely distorted economy — seems to be taken as a given by many non-economists.

This is even true among many people who should know better, and especially among younger people who should know better; the sort of people who are meant to be looking out for the ‘national interest’, not just trying to create local employment or positive headlines. Think of some of the ‘YIMBYs’ (especially those who are more on the Left), those people who like to yammer on about ‘progress’, the people aggressively opine that ‘it’s time to build!’, and nowadays, even certain self-described ‘neoliberals’.

This is an undeniably disparate crowd. Some are more attuned to markets than others. But what loosely ties them together is a tendency — sometimes weak, sometimes strong — towards building and investment and the ‘project’ in itself becoming fetishised, divorced from the actual reasons for us needing such things in the first place; that is to say, divorced from profitability, efficiency, and growth. In part this is simple delusion about the prospects of renewable energy and other projects striving for ‘progress’ (see above) — ‘surely the clever folks working on “green hydrogen” and “clean steel” will work something out?’ — but, in my view, it is also something more than that. Whether they know it or not, they have been psychically colonised by the Chesham and Amersham by-election, and have mentally become no more than the opposite side of the ‘Build Absolutely Nothing Anywhere Near Anything’ sour-faced Liberal Democrat-voting pensioner coin.

This will inevitably make them — and the Government — easy pickings for the delusional engineers, the subsidy junkies, and the foreign vultures. The National Wealth Fund suggests that they are all already circling.