The idea of a National investment Board or National Enterprise Board (NEB) has been around in the labour movement for decades. Towards the end of the sixties the left in the Labour Party conceived of the NEB as taking a controlling stake in about 25 of the top hundred manufacturing companies … the NEB became in fact a kind of merchant bank, but with a higher proportion of ‘lame ducks’ under its wing.
Sam Aaronovitch, The Road from Thatcherism: The alternative economic strategy (Lawrence & Wishart, 1981)
John McDonnell, Labour’s shadow chancellor, wants to create a state-owned investment bank. Should such an institution ever stride forward into the spotlight, it may find the stage a little crowded.
Already strutting its stuff is the British Business Bank, founded in 2013 with £1.25 billion of public funding and a mission to ‘increase the supply of finance available to smaller businesses where markets don’t work well’.
Then there is the Green Investment Bank, also 100 per cent state-owned, and backing, as the name suggests, the creation of environmentally-friendly infrastructure.
And who’s that over there? Why, it’s the Department for Business, Energy and Industrial Strategy (BEIS), which operates a number of venture capital funds set up to ‘stimulate private investment into early stage small and medium sized enterprise (SME) businesses’.
It is tempting to ask whether there will be much left for Mr McDonnell’s new bank to do. True, with a notional capitalisation of £250 billion, the proposed National Investment Bank will dwarf the existing entities. But the rationale behind both the existing schemes and Labour’s bank is oddly similar.
As we saw, the British Investment Bank is there to help small and medium-sized businesses ‘where markets don’t work well’, a polite version of Mr McDonnell’s remark on 26 September that ‘It’s a disgrace that our small businesses can’t get the finance they need to grow. Our financial system is letting them down badly.’
The difference between schemes run by a Conservative government and institutions proposed by Labour in opposition is that the former are forever stressing that their lending is ‘on a commercial basis’. Indeed, ‘being commercially-minded’ is one of the ‘values’ of the British Business Bank, while BEIS, as we saw, is very keen to emphasise that bringing in private investment is a top priority.
Matters become more confused with the Green Investment Bank, however. It says ‘legally binding environmental targets … require an investment of £330 billion in the UK’s green economy by 2020. To date we are seeing investment in the UK’s green economy at less than half the required rate.’
It goes on: ‘We invest on terms equivalent to others in the market – we do not offer low-cost finance or grants.’ Yes, but the rationale for this investment is that there are simply too few ‘others in the market’, thus the Green Investment Bank is needed to plug the gap.
While the Tories make a song and dance about how hard-nosed and commercial are their taxpayer-funded investments, Labour scarcely bothers. According to Mr McDonnell, the investment bank ‘will supply the long-term, patient finance needed to sustain a new, more productive economy’.
Furthermore: ‘It will be backed up by a network of regional development banks, with a clear public mandate to supply finance to regional and local economies.’
For the uninitiated ‘patient finance’ translates as no return on capital for a long time, perhaps ever. But at least this is intellectually robust within its own terms: Mr McDonnell and his colleagues do not believe British banks and other institutions do a good job of supporting business and industry – preferring to bankroll property speculation, asset-stripping and trading in ‘derivatives’ – thus the state needs to step in.
By contrast, the Conservatives justify such intervention on the basis that there has been a market failure, and then insist that lending terms are based on those prevailing in the very same market that has supposedly failed.
So let’s grant that Labour’s Treasury and general economics team is at least consistent in terms of the financial rationale for their National Investment Bank. Indeed, let us assume that this fine institution is duly established after a Labour victory, endowed with a quarter of a trillion pounds and told to get out there and make long-term investments in productive enterprises.
Would Labour ministers, and the rest of us, be able to take it easy for a decade or two as this patient capital fertilised British industry, passing judgment only when the fruits, or lack of them, finally become clear?
History suggests not. Setting up the NIB (as it would probably be known) would indeed indicate that the McDonnell argument – that private finance is wholly inadequate for industry’s needs – had been won. But that is merely the first such argument. Beyond it lie the equally big questions surrounding what sort of investments should be made and to what purpose.
Should the NIB act as a casualty department for ailing but strategically important companies? Or by contrast should it take public stakes in successful businesses, both to help them expand further and to give ordinary working people a stake in such firms?
Is it there to bankroll risky start-ups that could become the next Microsoft or Google? Or to fund ‘real economy’ businesses with export potential?
How is its stewardship as a shareholder to be exercised – in the same way as any private investment fund or actively pushing such issues as workers on the board and curbs on executive pay?
Above all, would the NIB be looking to ‘exit’ successful investments, in the manner of a private venture capitalist, by selling its stake, or would NIB investments remain in the public sector indefinitely?
We know these questions would arise because we have been here before, with an institution just one initial away from the NIB, the NEB, or National Enterprise Board.
The idea for an NEB arose out of Labour’s policy re-think in opposition from 1970 to 1974. Right from the start, its remit was confused.
At the 1973 party conference, Harold Wilson declared, ‘I must once again emphasise that the role of the National Enterprise Board is not just confined to the duties of a public holding and management agency… It will act also as a means to a further substantial expansion of public ownership through its power to take a controlling interest in profitable manufacturing industries.’
This did not happen. In 1975, the NEB was landed with insolvent vehicle giant British Leyland, which gobbled up £450 million of the NEB’s initial capital of £700 million. Forgotten today but a big deal at the time was another casualty rushed to the NEB’s operating theatre, Alfred Herbert, the machine-tool maker, once one of the world’s largest.
Little, beyond Jaguar and the Mini, survives of BL. Nothing is left of Alfred Herbert. True, the NEB picked up Rolls-Royce and successfully funded its RB-211 535 aero-engine. But the NEB inherited RR from the Heath Government, which had nationalised the insolvent group in 1971. This was not a case of boldly taking a stake in a private sector success story.
In 1978, the NEB bankrolled what was not then called a high-tech start-up, INMOS, maker of a ‘super-chip’. Well-regarded, even revolutionary, INMOS surely was what the NEB was for?
Yes, and no. INMOS never made a profit and was sold in 1989 to French-Italian group SGS-Thomson. Similarly, the NEB’s backing for Sir Clive Sinclair, as he became, produced somewhat mixed results.
One clear success, however, came with Ferranti:
[T]he NEB has done well with another highly criticised investment, that in Ferranti in 1974-75. At that time neither the City nor any private investor could have been easily persuaded to see Ferranti through its formidable problems, and the NEB’s intervention was greeted with criticism and gloomy prognoses – here was the NEB taking over another lame duck: it was widely said that I would never see its £15 million back. Ferranti, characterised by superb technical leadership, was in financial and management difficulties in 1975. The Government, ultimately through the NEB … [put in] £8 million plus a loan of £6 million. By 1977-78 its deficit had given way to a profit of £9.1 million and Ferranti has proved robust enough to seek a fresh listing in the market – netting the NEB £10 million on this once hazardous venture.
Harold Wilson, Final Term: The Labour Government 1974–1976 (Weidenfeld & Nicolson and Michael Joseph, 1979)
That Wilson took such pleasure in recounting the success of Ferranti indicates how far the NEB had strayed from the original notion of ‘[A] state holding company … with power to extend public ownership into profit-making sectors of the economy’, as Tony Benn put it in Arguments for Socialism (Jonathan Cape, 1979).
In short, few of the NEB’s investments were profitable, and when Ferranti proved to be so it was promptly floated on the stock exchange.
The lesson for John McDonnell, and for anyone thinking along the same lines, is that the rationale for a state investment vehicle needs to be clear from the start, not made up on the hoof once it is open for business. In the early 1970s, the original NEB blueprint reflected a desire to get the public sector involved in some existing success stories, rather than the apparently perennial loss-makers such as British Rail and the coal industry.
Is this a desirable course, or should NEB-type bodies be funding tomorrow’s companies rather than buying shares in those of today? One course or other is defensible, but veering between the two is not.
The same is true of ‘lame ducks’. There is a case for an agency designed to rescue troubled companies, saving jobs and capacity, but not for such a body to behave as if its real task lies elsewhere.
Finally, are the public-sector stakes designed to be permanent or to be returned to private ownership at an opportune moment?
McDonnell suggested his bank will be focused on infrastructure investment. Well fine, but how will roads, for example, generate a return in the absence of toll booths?
Details, details. All very boring, no doubt. But they would need to be nailed down before the NIB greets its first customer. We have seen what happens otherwise – the NEB name disappeared in 1981 and its remaining assets were privatised ten years later.