Brexit, Industrial Strategy and Productivity

What next now that we are committed to Brexit? Well first we need an “industrial strategy” to help us develop a new place in the world and possibly to pay for the up to £60 billion that might be demanded by the EU (as settlement for outstanding commitments if you believe that – yes divorce can be expensive). Now it just so happens that the Government has just published a Green Paper entitled “Building our Industrial Strategy” on that topic which is worth reviewing.

If you don’t think revolution is in the air, or would prefer it was not, it’s worth quoting from the Prime Minister’s foreword to the document: “Last summer’s referendum was not simply a vote to leave the European Union, it was an instruction to the Government to change the way our country works – and the people for whom it works – forever.”

Another comment in her foreword is on the need to tackle low productivity in the UK and she says: “This is vital because if we want to increase our overall prosperity, if we want more people to share in that prosperity, if we want higher real wages, and if we want more opportunities for young people to get on – we have to raise our productivity.”

That is undoubtedly true. Productivity in the UK has been a problem for many years as the Paper explains. It improved up until the financial crisis in 2008, but then fell behind our competitors in France, Germany and the UK (they produce as much in four days as UK workers do in five). There are also bigger disparities across the UK than in other countries, with London being 72% higher than the UK average. Note: this probably reflects the very high “added value” achievable in financial services in London and over reliance on that distorts the UK economy in many ways.

Now Governments, particularly socialist ones, tend to talk at length about improving the economy by improving productivity, backing new technology, backing selected winners, developing sectors where we have obvious strengths, improving capital investment, developing a more educated workforce and suchlike. This makes for good political speeches but in practice does not often result in much change. Or worse, a lot of money is wasted on backing losers, or subsidising industries in decline.

So let’s just pick out what might be new in the Green Paper. The Government proposes ten “pillars” for the strategy – investing in R&D, developing skills, upgrading infrastructure, supporting start-ups and early stage businesses, and several others with somewhat woolly definitions.

The Government is to invest an extra £4.7 billion in R&D funding. How this will be spent has not yet been determined but a whole list of possible “hot” sectors are given that might be supported by the new “Industrial Strategy Challenge Fund”.

There will be effort expended to develop improved technical education and improvement in STEM skills where the UK has long been behind other countries (we basically have too many people studying for useless or easy degrees, and not enough focus on less glamorous technical skills – best not to comment perhaps that the Prime Minister has a degree in Geography; she may have realised her mistake as she promptly joined the Bank of England before going into politics). The creation of a new system of technical education is promised.

There will also be a commitment to improve our transport infrastructure – rated second lowest among G7 countries. That includes, roads and railways, energy production, housing and even our digital infrastructure. The failure of long term planning in these areas is surely obvious to everyone. The road network is a particularly good example of under investment and obstructive planning processes resulting in some of the worst traffic congestion in the developed world. This certainly damages productivity.

The low level of investment in infrastructure, and in plant and machinery, is a long established aspect of the UK economy which the Government wishes to change.

To promote the growth of long term investment the Government has launched a new Patient Capital Review, led by the Treasury. It will be looking at the problems of obtaining and providing development capital for growing innovative firms. And it will consider the role of “market practice and market norms” in facilitating investment. It even suggests that dual class share structures such as those of Google, Facebook and LinkedIn where founders can retain dominant voting control might assist in the development of winning businesses, even though UK stock market investors generally dislike them.

One can anticipate a big fight over this idea as surely this is not the cause of those companies success. Indeed if you look at Apple, where in its early days Steve Jobs was dominant he made so many mistakes that he was removed and replaced by a businessman. Only later did he return and make a success of the company in a conventional share structure. The dominance of Henry Ford over Ford Motor Company and his reluctance to change meant that he subsequently lost out to General Motors where a more normal corporate share structure was present. The beauty of a conventional structure is that when the CEO is going awry, they can be changed. A dual share structure can block change. The Government’s analysis here is surely simplistic and they have spent too much time talking to entrepreneurs rather than students of business history.

Anyway it seems we are soon going to get a discussion paper from the Financial Conduct Authority that will review the structure of the UK’s listed markets. So that’s one more consultation to add to the current pile – we seem to be snowed under with them at present. But it sounds like we will definitely need to respond to that one. And you can of course respond to the Industrial Strategy Green Paper as it poses some questions to which they would like answers.

For those who invest in smaller companies, the Minister for Small Business will take on the role of “Scale-Up Champion” and there will be a review into entrepreneurship led by the “Chief Entrepreneurial Adviser to the Department for Business, Energy and Industrial Strategy (BEIS).

Comment: The responses to the Green Paper by businesses and the media was unenthusiastic (“politely lukewarm” as the FT called it). They have no doubt seen it all before, with no obvious benefits arising. Unfortunately asking civil servants, or politicians, to develop sensible business development strategies does not work simply because they have no relevant experience or understanding. There are not many people with MBA degrees for example in the Treasury or BEIS I would guess, and even fewer with real business experience. In simple terms asking them to pick technology or market sectors to back is not realistic, and they will waste a lot of money backing projects and people that fail.

The existing approach of providing tax relief to those who back smaller companies (via EIS and VCTs for example), and risk their own money, has worked. Providing direct stimulation does not. Exiting the EU will enable us to escape from the limitations of EU rules in this area concerning tax relief. But providing a good educational framework can help and that should surely be one of the key roles for Government to play. Fixing the infrastructure is also where Government can assist.

If you wish to make your own comments, the Government’s Green Paper is present here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/586626/building-our-industrial-strategy-green-paper.pdf

Note that I hope to write an article for the next ShareSoc newsletter than will explain the conundrum of poor UK productivity. There are a lot of misconceptions about what can and what cannot improve productivity.

Roger Lawson