Finance

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Britain's ruling Conservative Party says it plans to establish a sovereign wealth fund. It's a great idea -- albeit one that comes decades too late, with North Sea oil revenue diminishing and the cupboard of U.K. assets available for sale to seed the fund already almost bare.  

Here's what the party's manifesto, released on Thursday ahead of the June 8 election, has to say:

People have long talked about the need to create U.K. sovereign wealth funds. We will create a number of such funds, known as Future Britain funds, which will hold in trust the investments of the British people, backing British infrastructure and the British economy. We anticipate early funds being created out of revenues from shale gas extraction, dormant assets and the receipts of sale of some public assets.

And there's the rub. Those three asset categories are likely to provide thin gruel for the fund, at least for the foreseeable future.

Take dormant assets, defined in a government-commissioned report in March as those that "a firm is unable to reunite with a beneficial owner." The list includes "bank accounts, unclaimed proceeds from life insurance and pensions products, and non-cash assets such as dormant holdings in investment funds, shares and bonds."

The cut-off point for declaring such assets as dormant comes after 15 years of no customer-initiated contact. The report, though, reckons that there's no more than 2 billion pounds ($2.6 billion) of such orphan money available; an existing program to mop up unclaimed money has generated less than 1 billion pounds since 2011.

Moreover, the U.K. has few public assets left for sale. The privatization program championed by Margaret Thatcher saw more than 70 billion pounds raised from selling state-owned companies ranging from Rolls-Royce Motors in the 1970s, British Airways in the 1980s and British Rail in the 1990s.

Family Silver
Privatizations of U.K. national assets over 35 years yielded 71 billion pounds
Source: House of Commons Library research paper 14/61

Back in 1979, with revenue from North Sea oil starting to boom, the government dismissed the idea of investing the proceeds in a wealth fund. In a study published in September 2016, the Centre for Climate Change Economics and Policy argued that the taxes on that oil income were increasingly used by the government to fill the gap between expenditure and revenue, with oil and gas taxes climbing to provide more than 10 percent of tax receipts in the 1980s from 3.5 percent in 1979. The CCEP ran the numbers on what the result would have been of setting that money aside instead of spending it:

We have simulated a potential fund based on investing resource revenues. Specifically, had the U.K. established such a fund along the lines of the Norwegian example, starting in 1975, its value would amount to about 284 billion pounds in 2010.

U.K. revenue from oil and gas, though, has collapsed in recent years, and is forecast to languish at less than 1 billion pounds per year for the foreseeable future.

Dwindling Income
U.K. revenue from oil and gas
Source: Office for Budget Responsibility

Moreover, the prospect of tax revenue from shale gas filling the mooted sovereign wealth fund's coffers any time soon seems remote. In its 2015 Energy Outlook publication, BP Plc said it didn't expect "any shale production of any great significance in Europe and the U.K. by 2035."

The government only approved the first U.K. hydraulic fracturing wells in October, and that was by overruling the objections of the local council in Lancashire. The Bowland Basin region, where the U.K.'s shale gas is concentrated, could generate less than 600 million pounds per year in tax revenue by 2020, according to a June 2013 report by Deloitte.

The poster child for sovereign wealth funds remains Norway. Since it was established in 1998 to invest the country's oil and gas proceeds, it has delivered a 5.8 percent annual return (3.8 percent after costs), and grown by more than 20 times to its current value of about $940 billion. That equates to about $178,000 per citizen. Nice work, but the population of Norway is only 5.3 million, less than Scotland alone.

In Your Dreams
How big the U.K. fund would have to be to match Norway's on a per capita basis
Source; Bloomberg, Norges Bank

No matter who wins the forthcoming election, austerity remains the watchword as far as the U.K. economy is concerned. How different the outlook might have been if a sovereign wealth fund had been embraced decades ago.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net