Nick King is Head of Business Policy at the Centre for Policy Studies. He is a former Chief of Staff to Sajid Javid.
The news recently broke that the Government was drawing up plans for investment into ‘strategically important companies’ as part of its response to the Covid-19 pandemic. The proposed bailout plan, given the working title ‘Project Birch’ within Government, is reported as being considered for investments worth billions of pounds into companies within aviation, automotive, aerospace and steel, amongst other sectors.
To say this would be a novel approach for the Treasury would be an understatement. But this would hardly be the first break with orthodox Treasury thinking that we’ve seen in recent months – the millions of people currently being paid by the state via the furlough scheme provides an all too obvious example of that.
But the furlough scheme, and other Government interventions like the Future Fund, Bounce-Back Loans and Coronavirus Business Interruption Loans, all show the value of Government planning before such schemes get launched.
CBILs, for example, were necessarily launched quickly, but not designed on terms which were attractive enough for most small businesses and which failed to overcome the banks’ bureaucracy or reluctance to lend.
The other schemes mentioned – the Future Fund, the furlough scheme, and Bounce-Bank Loans, have been wildly popular – but one could argue that their popularity is testament to their generous terms. If one puts oneself in employers’ shoes then why would they not apply for loans on interest free terms or put their staff on furlough whilst they wait to see how long the lockdown continues?
The Treasury might respond, of course, that such moral hazard is a price worth paying to keep most businesses afloat and to keep staff retained, albeit furloughed. Only time will tell as to whether or not that is an accurate judgment, but there is surely an all too real risk that some of these companies and employees are simply in a holding pattern. It feels inevitable that many companies will fold and large numbers of employees will lose their jobs as we move out of lockdown.
That brings us back to Project Birch. In shaping this bailout fund, the Government must do everything possible to avoid moral hazard, to protect taxpayers and to ensure it’s not throwing good money after bad. Here then are some principles it would do well to abide by.
Firstly, it should only lend money once all other avenues have been exhausted. Companies including British Airways, Jaguar Land Rover and British Steel are thought to be candidates for funding from Project Birch and their owners are reported to be in discussions with Treasury about cash injections. Each of these companies has shareholders and existing lenders – these should be the first port of call for necessary investment with the Government only stepping as a last resort.
Secondly, where Government is convinced there is no prospect of any such support, it should only provide funding where it is confident of the long-term financial sustainability of the company or the sector, perhaps underpinned by transformation plans.
Steel, for example, has been written off by some as an outdated industry in the UK. But if Government can guarantee a pipeline of future sales activity, put against the increased infrastructure investment recently promised for example, the UK steel industry would be on a more secure footing.
If plans to promote and progress ecological ‘green steel’ are supported, the UK can even forge a competitive advantage for its domestic steel industry. So support through Project Birch should be contingent upon there being a line of sight to future financial sustainability.
Thirdly, as a logical extension of that, the Government should be prepared to let some companies go into liquidation, either where there is no confidence in its future viability or where they are publicly owned. If a listed company cannot raise funds in the equity markets, then it is likely it is better off going into liquidation. Any valuable assets would readily be secured by another organisation and economic recovery is likely to be all the quicker as a result.
Fourthly, where the Government is willing to step in, and whether it is providing debt or taking equity, it should only offer funding which prioritises the taxpayers’ investment. In the case of debt, it should insist its debt is senior to other creditors, insuring the taxpayer against future defaults, and where it takes equity is should insist on taking preferential shares.
A potential model to be followed exists in the form of debtor-in-possession financing, already used in the USA and Canada. Current investors and creditors won’t like this, but they have the option of injecting cash if they wish to. If they want to access taxpayers’ money, this should be the price they are willing to pay.
Finally, where Government does take equity stakes, which might be necessary in some cases given the likely working capital requirements, these must be run at arm’s-length from Government. Investment, divestment and operational decisions would need to be taken by investment professionals, even if they’re answerable to politicians. The day to day running must be entirely free of political interference.
There has been a relatively strong case for the UK to develop its own Sovereign Wealth Fund for some time, and it would be an irony of the current crisis if Project Birch finally led to its creation. But necessity is the mother of invention, as the phrase goes, and it feels like this bailout might be deemed necessary sooner rather than later.