The chancellor’s pet PuFins have an important role – but they need more scrutiny

An Office for Budget Responsibility for public financial institutions like the National Wealth Fund and the British Business Bank is starting to look essential

Two winners in the budget are known already. They are the National Wealth Fund (NWF) and the British Business Bank (BBB), state-funded investment bodies that have rapidly become central to the government’s growth strategy.

Former chancellor Rachel Reeves handed extra slugs of capital to both and now John Healey is going further. The NWF will get another £15.4bn over the next half decade, on top of its existing £27.8bn, and there’ll be another £5bn for the BBB, which already has £30.6bn.

Expect a fanfare about “over 100,000 jobs across the country to be created” via the extra capital for these so-called PuFins. The term means public financial institutions that invest in private sector assets, either directly or through third-party funds, with the aim of making a profit for the taxpayer – or, at least, earning a return that matches or beats the government’s cost of borrowing.

Cue, also, another round of debate about whether Healey is engaged in fancy financial footwork to get around the constraints of his fiscal rules. Reeves re-wrote those rules in her first budget in 2024 to allow the value of financial assets – such the NWF and BBB’s loans and stakes in companies – to be netted off against the public debt.

To fans, the principle makes excellent sense. As long as the PuFins’ assets maintain their value and cover the interest on the government’s extra borrowing (a critical condition), it’s a way to boost investment. More critical projects can be built sooner, and possibly more cheaply; more companies may prosper to the eventual benefit of the public purse.

Critics, such as the right-leaning Centre for Policy Studies (CPS) in a report last week, see a “financial wheeze” that disguises the true level of government borrowing and stores up trouble, as the Blair-era private finance initiative did. The CPS called for the wings of the PuFins to be clipped.

Healey, it is safe to assume, will ignore the CPS’s advice. The NWF and BBB fall squarely within his theory for growth – the idea of “crowding in” private investment and spreading money around the regions.

In Healey’s support, one can say state-backed co-investment vehicles are not new. Governments of all hues have used them. George Osborne even launched a Green Investment Bank. And the NWF, despite its misleading name (it’s not a Norway-style wealth fund), to some degree merely replaces infrastructure lending that might have been done by the European Investment Bank in pre-Brexit days. As for the BBB, its focus on “scale-up” capital for young, fast-growing companies is designed to address a gap that has been a source of grumbles for decades. Both institutions are definitely useful.

There are still questions, however, about potential overuse. Are the NWF and BBB sticking in all cases to their core role of “additionality”, the idea that PuFins should bring something extra to the party? They are not meant to be substitutes for private capital. They must crowd in rather than crowd out.

The line can appear blurry at times. This column has questioned the £25m that BBB invested in Kraken Technologies, the software firm being spun out of Octopus Energy. How was that a case of “helping smaller businesses get the finance they need”? Kraken was valued at a thumping £6.45bn, so wasn’t a small firm; and £25m was a rounding error within a wider $1bn fundraising.

Similarly, the CPS surely has a point when it wonders why the NWF lent to Scottish Power, “an investment-grade company with an investment-grade Spanish parent” on projects to upgrade to the electricity grid. The NWF’s ability to make long-dated loans probably helped the financing, but regulated utilities are supposed to be big enough to stand on their own feet. Weren’t there better targets for the NWF’s loans?

To be fair, the websites of both the NWF and BBB are stuffed with case studies that fit the government’s priorities uncontroversially. For example, the latter’s follow-on £100m investment in Oxford Quantum Circuits, a quantum computing firm, was big and on-message.

And, so far at least, the promise of gilt-like returns is intact, or not disproved. The BBB cites a “3.9% five-year adjusted return” but says the number would be higher if one was counting only its commercial activities. In the case of NWF, it’s too soon to tell: last year’s return on equity was minus 2.6% but a gilt-like number was only ever promised in 2030-31. The requirement to co-invest with hard-nosed private investors is probably helpful.

But there’s still the issue of being additional. “Assessing additionality is not a precise science, but rather an exercise in judgment,” concedes the NWF in its impact framework. An Office for Budget Responsibility-style body to scrutinise those judgments is starting to look essential. As the allocations from the Treasury increase, there is a risk that the definition of “additional” gets stretched. At the moment, the NWF and BBB are only ultimately answerable to their sole shareholder, the Treasury.

The Institute for Fiscal Studies, in its pre-budget assessment, commented: “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. For the time being, there’s a fair argument there is room for more. Resolution Foundation argues that, notwithstanding the extra £5.8bn from Reeves, the NWF’s capacity has “barely kept pace with inflation”. But policing the PuFins, and ensuring they stick to their “additionality” brief, is surely equally important. There will be problems if they behave like gannets.