Britain's State Investment Funds Get £20bn More — and Need a Watchdog

By Daniel Okafor

The National Wealth Fund will receive another £15.4bn over the next five years, taking its total firepower to £43.2bn, under plans set out by Chancellor John Healey. The British Business Bank gets an extra £5bn, adding to its existing £30.6bn. Two state-funded investment bodies have become the load-bearing pillars of the government's growth strategy, and they now command more than £70bn of public money between them.

Expect the Treasury to trumpet "over 100,000 jobs across the country to be created" from the new capital. These institutions are known in Whitehall as PuFins — public financial institutions. They invest in private sector assets, directly or through third-party funds, and aim to earn a return that matches or beats the government's cost of borrowing. The label, and the arithmetic behind it, deserve closer inspection.

Why do these funds matter to the fiscal rules?

Rachel Reeves, the former chancellor, rewrote the fiscal rules in her first budget in 2024. The change allows the value of financial assets — the NWF and BBB's loans and company stakes — to be netted off against public debt. Healey's successors benefit from the same accounting treatment.

Supporters say the logic holds. As long as the PuFins' assets keep their value and cover the interest on extra government borrowing, the state can build critical projects sooner, and possibly more cheaply. Companies prosper, and the public purse gains.

Critics read it differently. The Centre for Policy Studies, a right-leaning thinktank, called the arrangement a "financial wheeze" in a report last week. It argued the structure disguises the true level of government borrowing and stores up trouble, as the Blair-era private finance initiative did. The thinktank wants the PuFins' wings clipped.

Healey, it is safe to assume, will ignore that advice. The funds sit squarely within his theory of growth: "crowding in" private investment and spreading capital across the regions.

Is this approach actually new?

Not really. Governments of all hues have used state-backed co-investment vehicles. George Osborne launched a Green Investment Bank. The NWF, despite its name, is not a Norway-style sovereign wealth fund. In part it replaces infrastructure lending the European Investment Bank once did in pre-Brexit Britain. The BBB focuses on "scale-up" capital for young, fast-growing companies — a financing gap that has drawn grumbles for decades.

Both institutions are useful. The question is overuse.

Where might the funds stray from their brief?

The core test is "additionality": PuFins should bring something extra, not substitute for private capital. They must crowd in, not crowd out. The line looks blurry in places.

The BBB put £25m into Kraken Technologies, the software firm spun out of Octopus Energy. Kraken was valued at £6.45bn — not a small firm — and £25m was a rounding error inside a wider $1bn fundraising. How did that serve the BBB's stated mission of "helping smaller businesses get the finance they need"?

The Centre for Policy Studies raises a similar point about the NWF's loan to Scottish Power, "an investment-grade company with an investment-grade Spanish parent", for electricity grid upgrades. Regulated utilities should stand on their own feet. The NWF's long-dated loans probably helped the financing, but were there no better targets?

To be fair, both fund websites carry case studies that fit government priorities without controversy. The BBB's follow-on £100m investment in Oxford Quantum Circuits, a quantum computing firm, was big and on-message.

Are the returns holding up?

So far, the promise of gilt-like returns is intact, or at least not disproved. The BBB cites a "3.9% five-year adjusted return", and says the figure would be higher counting only its commercial activities. The NWF is too young to judge: last year's return on equity was -2.6%, but a gilt-like number was only ever promised for 2030-31. The requirement to co-invest alongside hard-nosed private investors probably helps discipline.

The deeper problem is measurement. The NWF concedes in its impact framework: "Assessing additionality is not a precise science, but rather an exercise in judgment." Those judgments currently face only one check: the PuFins are answerable solely to their shareholder, the Treasury.

What should happen next?

An Office for Budget Responsibility-style body to scrutinise those judgments is starting to look essential. As Treasury allocations grow, the definition of "additional" risks being stretched.

The Institute for Fiscal Studies warned in its pre-budget assessment: "If the government follows the spirit of the guidelines, and aims to construct a portfolio of investments that align with government priorities and generate a profit, the cases where investment can occur through PuFins may turn out to be relatively limited."

That sounds like good advice, but capacity also matters. The Resolution Foundation argues that, even with the extra £5.8bn from Reeves, the NWF's resources have "barely kept pace with inflation". There is room for more. Yet policing the PuFins — and keeping them to their additionality brief — is equally important. There will be problems if they behave like gannets.