Viscount Hanworth
That this House takes note of the sale of United Kingdom assets to foreign ownership and of the effects on such sales of the laws of corporate governance.
Viscount Hanworth (Lab)
My Lords, I wish to talk of an enduring problem of the UK economy that is of increasing severity: our inability to pay our way in the world by means of our exports of goods and services. The consequence of this failure is our indebtedness to foreigners, which has resulted in their ownership of an ever-increasing proportion of our capital assets. It is essential that we should understand the causes and consequences of these circumstances. We need to dispel the complacency that has allowed us to reach this state of affairs, and to take action urgently to remedy it.
The UK has an unprecedented deficit in its trade with the rest of the world. The difference in the value of the goods and services that the UK buys from abroad and the value of the goods that it sells to the rest of the world has risen to its highest level as a share of gross domestic product since records began. Since the early 1970s our deficits have been of an increasing magnitude. The last recorded surplus was in 1984, when it was a modest 0.3% of GDP. At present our deficit is running at 6% of our GDP. The period from the end of the Second World War until the 1970s saw trade deficits that were modest by comparison with our recent deficits, yet these years were afflicted by intense anxieties over Britain’s balance of payments. It is remarkable that such anxieties have largely disappeared at a time when the problem has never been more acute.
The reason for the present lack of concern over our trade deficit is that we have found the means of temporarily averting a balance of payments crisis, but these expedients will be the cause of much economic distress in future. We have managed to achieve the necessary balance of payments by selling our assets to foreign owners. This cannot continue indefinitely since the supply of assets for sale is limited. It will eventually be exhausted and we will find ourselves in an acutely impoverished state.
Such sales of our assets are liable to be described, disingenuously and deceptively, as “direct inward foreign investment”. The present Government have declared that Britain is open for business and have congratulated themselves on their success in attracting foreign investment. The much-publicised trade missions of the Chancellor and the Prime Minister to China, India and elsewhere have succeeded not so much in promoting the sale of British goods abroad as in selling the ownership of our economic enterprises. There has been an extraordinary self-deception on the part of the Government in this connection, which, unfortunately, has succeeded in deceiving many others besides.
It is appropriate at this juncture to note that Britain’s financial sector has been greatly enriched by the business of selling our assets abroad. Each sale commands a sizeable commission. One is therefore likely to find great enthusiasm for so-called inward foreign investment among those who work in the City of London. Moreover, politicians who are allied to the financial interest are unlikely to cast doubt on a strategy that favours inward investment.
Each such inward investment to the UK implies an increment in the demand for the pound on foreign exchange markets. The aggregate effect of this demand has been to raise the value of the pound to a level that has made our manufactured goods too expensive to compete successfully in foreign markets. The result has been not only a reduction in our exports but a long-term decline in our manufacturing sector.
The manufacturing sector, which accounted for 25% of gross domestic product in 1979, now accounts for less than 10%. It now contributes less to our GDP than does our financial sector. The policies that have favoured the financial sector have been to the detriment of the industrial sector and they will eventually be to the detriment of us all. A state has now been reached where the value of UK-owned foreign assets is less than the value of UK assets that are in foreign ownership. The consequence is that there is now a net flow abroad of interest payments, dividends and profits. The net leakage is clearly to our disadvantage. It is associated not only with the outright foreign ownership of UK enterprise but also with the ownership of UK franchises.
Our transport network provides a good example of a UK industry dominated by foreign-owned franchises. Three-quarters of rail franchises in the UK are now owned by foreign state-owned or state-backed rail companies. Prominent among these are the German state-owned company, Deutsche Bahn, and the rail company Abellio, which is the international arm of Nederlandse Spoorwegen, the Dutch national rail company. Foreign, state-owned rail companies are using profits earned by operating franchises in the UK to keep fares down and to support investments in the rail services of their respective countries. Our passengers and our taxpayers are subsidising a system that hands increasing profits to foreign, state-owned train operators, instead of investing them in our railways, as would be the case if they were under UK public ownership.
This phenomenon is also evident throughout our national utilities. The energy companies provide a well-known example. The majority of UK customers, whether domestic consumers or businesses, are supplied by one of four foreign-owned companies: EDF, which is Electricité de France; E.ON and RWE, which are in German ownership; and Iberdrola, a Spanish company. There are substantial repatriations of profits and dividends from the UK companies to their owners abroad.
The recent announcement of deals that have been struck by the Government with EDF and with two Chinese national nuclear corporations to build a new generation of nuclear power stations has filled many commentators with alarm. To secure EDF as a builder, the Government have guaranteed a minimum price for electricity from the Hinkley C nuclear power station of £89.50 per megawatt hour for 35 years. This is approximately double the current rate for electricity on the wholesale market. The Government have also provided a guarantee of up to £17 billion that foreign lenders to this infrastructure project will be repaid in full and on time, irrespective of the performance of the project. It is, of course, the taxpayers and the consumers who will fund this largesse.
One is startled to discover how much of Britain’s infrastructure is now in foreign ownership. This includes our seaports, our airports, our power stations, our railways and buses, our water companies and much else besides. Large swathes of our manufacturing industry are also now in foreign ownership. This includes our car industry, our steel industry, our cement manufacturing industry, a large proportion of our food processing industry and so on. Britain’s aerospace industry has been celebrated by politicians as an exemplar of economic and technological success. However, a recent study by Norman Smith and Joseph Wright on mergers and acquisitions in the aerospace supply chain, Losing Control, published by Civitas in June this year, has shown that this industry too is passing into foreign ownership. Of the 155 companies still present in 2014, only a third had avoided takeovers or mergers between 1990 and 2014. Of 101 companies that experienced a change of ownership, over half passed into foreign hands. As the report wryly remarked, a great deal of effort and energy was devoted by managements to pursuing these transactions, generating large fees and commissions that have been paid to bankers, brokers, accountants and solicitors. The report also observes that foreign enterprises have been cherry-picking smaller British aerospace companies that have been in possession of valuable intellectual capital and technical expertise. Few of these companies have survived the takeover.
The truth is that many takeovers have been inimical to the prospects of our industries. Many have been intended, primarily, for the purpose of acquiring our intellectual capital and of limiting competition. This was clearly the case in the bid by the American pharmaceutical company Pfizer for AstraZeneca. The bid was also driven by prospects of cost saving and tax minimisation. It was facilitated, as many other takeovers of British firms have been, by our lax rules of corporate governance that put few impediments in the way of mergers and acquisitions.
The UK has a unique openness to foreign ownership. By contrast, virtually all other developed countries retain the power to block foreign takeovers that are deemed not to be in the national interest. The Committee on Foreign Investment in the United States sits in judgment on attempted takeovers that are thought to have implications for national security. In France, the Government, who do likewise, recently blocked the takeover of the engineering firm Alstom by America’s General Electric. Most recently, the French yogurt maker Danone was protected from an attempted takeover by the Swiss food group Nestlé. I can recall a headline in the financial pages of the Telegraph in 2011 on the occasion of the takeover of Cadbury by the American firm Kraft which declared, correctly, that the French would never have allowed it.
The availability of British assets to foreign takeover can be seen both as a product of an ideological predisposition and as the result of the influence of some powerful vested interests. The ideological predisposition has favoured the widespread privatisation of industries that were formerly in public ownership. The risible irony is that much of what has been privatised that was previously in public ownership has fallen into the hands of foreign nationalised industries or state-sponsored industries. We have seen that this has been the case throughout our transport network and in our electricity-generating industry. It is also true of our aerospace and defence industries. The Thales Group—or “Groupe Thales”, as it would be in French pronunciation—which has taken ownership of some of the leading UK defence contractors and of a fair proportion of our electronics industry, is a French state-backed company that is partly state-owned.
The City of London has a vested interest in trading financial assets of every description. Our financial sector is no longer devoted to the purpose of raising capital to finance industrial investment. Instead, its main activities are in financial arbitrage and trading. These activities have been stimulated by the remarkable growth of financial credit. As the neglected Kay Review of UK Equity Markets and Long-term Decision Making has testified, the preoccupation with stock market performance has penetrated deeply into the management of UK industry. Many managers have become more interested in pursuing mergers, acquisitions and corporate sales than in pursuing industrial developments. In other words, they have been affected by short-term financial considerations, including the consideration of their own salaries and of the value of their stock options.
Our rules of corporate governance amount to a system of self-regulation by the financial sector. They create few impediments to mergers and acquisitions or to financial trading and do nothing to protect the national interest. They contrast markedly with the rules that prevail in Germany, for example, where there are statutory anti-takeover provisions and where the public and politicians are strongly opposed to hostile takeover bids. German firms that are listed on their stock market are governed both by a management board and by a supervisory board, which must by law comprise a large contingent of the firm’s employees. The supervisory boards act as a restraint on financial activities that might be harmful to the company. It would be greatly to our advantage to adopt a continental model of corporate governance and to replace our unitary boards of directors by a two-tier system.
The difficulties and the failures of our industrial sector are to a great extent due to the power and the influence of our financial sector, whose activities are inimical to a long-term industrial strategy. As I have already emphasised, the sales of our assets to overseas buyers has raised the foreign exchange value of the pound, which has made our manufactured goods uncompetitive in world markets. Ideally, I should like to see the financial sector diminished and its activities restrained. This is unlikely to happen under the present Government. Even a future Government of a different colour should not be relied upon to act effectively against the financial interests.
However, there is an obvious recourse that could be relied upon to diminish the value of the pound. The central bank, or some other agency, should be charged with purchasing foreign assets when the value of the pound exceeds competitive levels. Such a collection of nationally owned foreign assets is commonly described as a sovereign wealth fund. The money that has been devoted to quantitative easing might have been used for this purpose. Many countries have established sovereign wealth funds for the purpose of limiting the exchange values of their currencies. A leading example is China, which has fostered an export boom based on the cheapness of its goods in its overseas markets.
The idea is not new. Under the gold standard that prevailed throughout the interwar years, gold was purchased by countries whenever it was favourable for them to do so, which was when their currencies were liable to be overvalued in foreign exchange markets. Gold is a sterile metal. By contrast, the assets held within a sovereign wealth fund will generate an income, which could redress the leakage of income that is flowing abroad in the form of profits, dividends and interest payments.
Lord Desai (Lab)
My Lords, we are grateful to my noble friend Lord Hanworth for introducing this topic. I am afraid that I am not at all alarmed by the proposition that he has put before us. I will come to that in a minute but perhaps I may just recall an event many years ago when Peter Shore—later Lord Shore—was at the front of the battleground at the Department for Economic Affairs. He said, “What happened to the balance of payments crisis? Why aren’t we alarmed about whether our balance of payments is in surplus or in deficit? We used to battle month after month over what was going to happen, and the pound was always under threat”. I said, “We are now in a world of flexible exchange rates and we have free capital movements, so movements on the flow account are balanced by movements on the capital account, and therefore you can stop caring about the balance of payments”.
I still believe that that is the right attitude to take. For one thing, it cannot be said that this country is particularly impoverished. We are still in the G7 and, give or take a ranking here or there, we continue to be a rich country. Currently, we happen to be one of the fastest-growing economies among the G7 and our proportion of employment in terms of labour force participation is also one of the highest in Europe. Therefore, we have practically full employment. Of course, the recession was long and the recovery took some time but, compared with the eurozone economies and even to some extent the US economy, we are not doing too badly.
Obviously our manufacturing sector started shrinking more than 25 years ago as soon as the oil shock happened. The manufacturing industries of most European countries reduced in size—it happened in the United States and the UK and so on—but I do not think that is anything to be alarmed about. There is nothing sacrosanct about manufacturing as against anything else. We need to do the things at which we are more efficient than the rest of the world and, as long as we can find things at which we are more efficient, we should go on doing them.
There is a long-standing fallacy in this country—going back to Winston Churchill, if not before—that somehow industry is more important than finance. However, few people remember that the UK had a financial revolution a century or more before it had an industrial revolution. The industrial revolution came in in the second half of the 18th century, whereas our financial revolution came about in the late 17th and early 18th centuries. We were able to fight a number of wars, with France and other countries, because the City and our public finances afforded us better financial governance than there was in Europe. I do not think there is any particular virtue in saying that the City is bad and industry is good or that somehow, William Blake notwithstanding, we should have dark, satanic mills and not banks.
The important thing is that the most interesting innovations have happened in the financial sector rather than in the manufacturing sector, at least as far as the UK is concerned. My noble friend himself pointed out that the City has gone on to be a major player in mergers and acquisitions and in a number of intermediary arbitrage activities. That is the nice thing about the City—it moves from one specialisation to another depending on where the demand is.
One paradox is that, if we are in a trade deficit, why is the pound not collapsing? It is argued that the pound is overvalued, but one would like to see more proof of why the pound is believed to be overvalued—overvalued in respect of what? We have a trade deficit and we have financial flows to balance that deficit. The pound is free to float as it likes, and I think it should stay that way, without us getting into pegging it or anything like that. I do not think our exports are low because the pound is overvalued; our exports are probably low because the countries to which we sell are in depression. The whole eurozone is in a state of very low growth. Therefore, it is no wonder our markets are not as buoyant.
For some years now we have been trying to redirect our trade away from the eurozone and into the emerging economies. The visits of the Indian Prime Minister last week and before that the Chinese President are part of the UK’s effort to redirect our trade from the stagnant eurozone to the more dynamic emerging economies, and that is quite right.
My noble friend said it is shocking that various foreigners run our trains and our energy companies. That is fine. But I remember how our car industry came close to complete collapse in the 1970s. Who rescued the car industry? The Japanese. Who is the largest single employer of manufacturing workers? It is Tata Motors, which has rescued Jaguar Land Rover from shut-down. Right now, Jaguar Land Rover is a thriving business, thanks to management from Tata. Its management is a global team, because it also takes support from German, British and American firms.
This is a globalised world. There is no reason why we should settle for fortress Britain, in which only our capital will serve our industry. We have been through that, and we lost considerably playing that game. It was precisely because we lost—we were in a dreadful situation in the 1970s; that is all of the 1970s, during both the Conservative and Labour Governments—that we got out of it and decided that there are better ways of making a living than sticking to selling the family silver.
From the point of view of economics, I fail to see the problem here. There are problems as to whether or not we should have a different model of corporate governance, but that is independent of whether foreigners own our industries. All I will say about the continental model of corporate governance is that we are living under the scandal of Volkswagen. I would like to know why corporate governance on the continent failed so abysmally in the case of Volkswagen? We have not had any scandal like that.
There is also the problem of short-termism. Short-termism is not particular to British business; it applies to any business that has equity holders. Of course, some people are now saying that preferable to relying on public equity would be to go to private equity firms. If you are owned by private equity firms, you are free of stock market pressure, and some firms have gone that way. That may be a good recommendation if you want a long-term vision in our economy.
Without being complacent about it, I believe that the UK has always been a trading nation. It has always taken the view that one must not sentimentally stick to national ownership or particular restrictions. We should allow the best companies to provide our services regardless of whether they are British or foreign, just as British companies should be all over the world doing business, as they have done for the past 300 years. We should say, “Let the best people come and provide us with our services, and let the best companies from here provide services elsewhere”. That is as long as our living standards are high and rising and as long as we have an adequate amount of employment in the economy and can make sure that our productivity stays high. I know productivity problems are not particular to the UK; they are to be found all around the western world. A rising standard of living for our people is all that an economy should deliver, regardless of who owns what.
Baroness Falkner of Margravine (LD)
My Lords, I, too, thank the noble Viscount, Lord Hanworth, not just for bringing this important topic to us today but for having covered such a wide expanse in his opening speech. When I was a student at the London School of Economics—I should add hastily that I was a mature student, so the age difference between me and the noble Lord, Lord Desai, is not as great as it might appear when I say that—I used to pop in to listen to the noble Lord’s lectures. They were not part of my major—I was doing international relations—but as a Marxist, which is what he was known as at the time, he presented a clear world view that was entirely contemporary and understood what was happening in the world around us. I wish that he and I were still there, because those were much more interesting days than we find ourselves in today, where there is a much broader consensus in economic theory than there was 25 years ago. In that sense, the noble Viscount, Lord Hanworth, has made us think about things that in our discussions we almost take for granted and never seem to consider any more.
Let me add my few thoughts on this topic—I am not an expert by any means. The noble Lord, Lord Desai, is right to say, and the noble Viscount, Lord Hanworth, acknowledged it, that we live in a globalised world—we live in an interdependent, globalised world. The EU was quite insightful in the 1950s in seeing that four freedoms were vital to making the single market work, those being labour, goods, services and capital. The underlining issue in this debate is that of capital. I subscribe to the view that the productive use of capital is a common good that underpins all our modern economies. It is so desirable that when we see less developed parts of the world doing less well than they might do given their human capital and resources, it is a dearth of financial capital—investment in infrastructure and so on—that holds them back. Therefore, it is not entirely correct to say that national ownership matters, but rather that it depends on a case-by-case basis on what we are talking about.
For me, there is no reason why the ownership of a company should be an overarching issue, other than—I would add here advisedly—the interests of national security. I interpret national security as including, to some extent, economic security as well. The noble Viscount mentioned the Chinese investment in Hinkley Point, announced only a few weeks ago. That deal will allow for 33% of Hinkley Point to be owned by the Chinese. However, the agreement goes wider because, eventually, Chinese nuclear technology will be approved for use at Bradwell in Essex. In this area, foreign ownership matters because this is not just passive investment. If it were just passive investment and they decided to disinvest, they would sell their ownership in international markets and that would not be a cause for concern. However, there is a cause for concern because the United Kingdom will be the testing ground for Chinese nuclear technology and its regulatory approval in the West. That is a matter of concern. The Chinese have built their nuclear capability sector at breakneck speed. We do not know their sector well enough—there is little transparency in it—and we do not know that we can have complete faith in their safety standards because they are less than entirely transparent. I am not concerned about them coming in with EDF at Hinkley Point but I would be concerned about being the first country in the West to give regulatory approval when it comes to Bradwell in Essex.
On the broader question of ownership, I do not understand why United Kingdom ownership gives more back to a community or a country than foreign ownership. The noble Lord, Lord Desai, mentioned British Leyland versus Nissan, Tata and BMW. I will go further and mention British Airways and its ownership in the past few years of the International Airlines Group. British Airways is the third biggest carrier in Europe and the sixth biggest in the world, and, knowing how the international airline industry has seen consolidation, if it had not made that move I wonder where our national carrier would be. One has to look only at Lufthansa and the parlous state of Air France to know where it might be if it had not made that rather bold move. It is also important that British Airways’ International Airlines Group is registered on the London Stock Exchange. So it is not a lose-lose scenario.
In the City of London, this small island has arguably the world’s—the Americans might contest this—biggest financial sector. It has not come about by accident—as the noble Lord, Lord Desai, said, it has been 350 years in the making—because there are things that give the United Kingdom its special place in the financial services industry. These include the rule of law, the reputation of our judicial system, the English language, schools, the good quality of housing, overpriced though it may be, and also culture. It is the cosmopolitanism of London—with its foreign owners, foreign migrants such as myself and so on—that make the City such a success. When I speak to people in the City, I always say to them that the idea they have that they are masters of the universe is completely flawed. It is the enabling environment of London and the United Kingdom—particularly the rule of law—that makes it so attractive.
I have sympathy with the issue of hostile takeovers of our strategic industries. The noble Viscount, Lord Hanworth, is right to raise that. We have to think about what are our strategically important companies. I would say that they are more about intellectual capital, technology and some areas of national security, where I agree with the noble Viscount. When we live in such an interdependent world, it seems rather curious that we are harking back to an era where we, as Brits, would run things better than other people.
I want to push back against the idea that the financial services sector trading in arbitrage, which was selected for particular condemnation by the noble Viscount, Lord Hanworth, is entirely worthless. The extent of our regulation has clearly been insufficient, and I would remind him of who was in government when most of that disaster happened. But a humbling experience for us to reflect on is the daily diet of scandals that are still happening in our financial services industry. The Financial Times today has a story about Barclays and algorithmic trading. We have seen LIBOR, forex and all the other scandals. But again I would say to the noble Viscount that this is not just about United Kingdom financial services companies. Société Générale, Deutsche Bank and a whole lot of others are involved: foreign owners have been right in there with their fingers in the till while British companies may have been as well. I myself worry when our big flagship companies such as HSBC and others think that they might relocate abroad because there may be an environment which is more conducive than having their headquarters here. I am extremely glad that the Government are looking at what needs to be done to keep our flagship companies here.
I also want to touch on the decline of manufacturing, and I agree with the noble Lord, Lord Desai, who said a great deal of what could be said in this debate about how perhaps it is the strength of the pound that is the issue, or the fact that our technology is not good enough so that people do not want to buy our goods. I suggest that the problem we have in the UK is that of a very low savings rate. If you want more investment in the UK, you have to change the culture. We have such a low savings rate because we invest so much of our personal wealth in bricks and mortar, so we have a distorted economy. That is probably something that we need to change.
In conclusion, the world is changing and the future lies in technology, robotics, artificial intelligence, and innovations in healthcare, energy and so on. What we should do is not hark back to an era of golden ownership by UK plc, but invest more and more in education, which is the key; in innovation, which is the future; and, where possible, of course, in good ownership of our assets.
Lord Haskel (Lab)
My Lords, my noble friend is concerned about what is happening as the Government withdraw from investing in our essential services and infrastructure, leaving foreign investors and foreign Governments to take their place. What happens when our financial system leaves foreign investors free to acquire our companies? He is concerned about the effect on the balance of trade, on our exchange rate, the security of our strategic services and products, and the development of our own economy. I think he is right to be concerned. He is right because it has got out of balance. I say to my noble friend Lord Desai that it is affecting our economy.
As my noble friend said, our strategic infrastructure is foreign-owned. Ten of the regional water companies in England and Wales are foreign-owned, as are four of the six big energy companies, including much of our nuclear industry. As he told us, so are many British sea ports, airports and, in particular, railway franchises, along with many of our financial institutions, particularly the banks. Some of these strategic utilities are virtual monopolies, with our consumer interests protected only by regulators. Surely foreign ownership must make this a bit more difficult.
Brands are an important national asset. Many have a national identity. Yes, many of our best-known brands are also foreign-owned. In some ways this is fortunate, of course, particularly in the car industry, where most of our well-known brands have survived thanks to Tata Motors of India, and BMW and VW of Germany. Nielsen Research reported last year that of the 150 biggest grocery brands in the UK, only 44 are home owned. As my noble friend said, there was a time when we owned other people’s family silver. Net income from our foreign direct investments used to be 3% or 4% of our gross domestic product. It now looks as though the outflow from foreign-owned utilities and businesses is just about equal to the inflow.
Why is there so much foreign ownership here? The answer lies partly in the Government’s preoccupation with our deficit and the resulting inability to invest in our own strategic infrastructure. The Government of Britain can borrow for decades ahead at low or even negative interest rates to build our own infrastructure and invest in long-term energy projects on extremely favourable terms. But this has been sacrificed in favour of the Government’s economic policy, leaving the deficit to be carried by private sector debt and inward investment.
With a high proportion of publicly listed companies, it is easy to buy British companies. John Kay, in his report in 2012 and recent book, Other People’s Money, explains why—how most shareholders are short-term and ready to sell out at a profit; and how most share trading is high-frequency and automatic, or on the own account of the investment banks. They are all traders whose purpose is to drive their short-term expectations into the boardroom so that there are high returns for the shareholders—the culture that the noble Baroness, Lady Falkner, spoke about.
John Kay explains that our financial system tends not to reward management for investing. Management is rewarded for the high share price. There is a good example of this going on right now as we do our weekly shopping. Research has shown that a typical shopping basket in one of the big four supermarket chains can be undercut by up to 20% by the German retailers, Aldi and Lidl. Why? Because they are privately owned and can price more keenly.
Another current example is our aerospace industry—the kind of high-tech industry that the noble Baroness spoke about. It is a vital export business. A Civitas report, mentioned by my noble friend, tells us that the number of companies in this industry whose owners are based abroad has jumped from 14% to 41%. As its report points out, British expertise is being lost overseas and this is reducing the chance of British companies growing into world-class players. They are cherry picked before they have the chance to reach their full potential. Surely this must be damaging to our economy.
As an excellent economist, my noble friend Lord Desai, in the abstract, thinks that this does not matter. It is just the globalised market working. To people working in industry and business, it does because ownership explains why the performance and productivity of many foreign-owned companies in Britain are often much higher than the performance of many British-owned counterparts. Their longer-term strategies have brought a higher order of management skills, more thorough training and better pay for employees than many of their British equivalents. They have introduced know-how and technology that would not have been available to us otherwise. Without them there would have been no volume motor manufacturing industry here.
Then there is the question of ownership of our strategic services and infrastructure. Ownership does matter. The noble Baroness spoke of Hinkley Point. It matters so much that the Chinese participation in Hinkley Point is conditional on the Chinese state being the majority shareholder in subsequent nuclear power plants. Do the Government not recognise this when they see it? No, they are blinded by their perceived need for cash, even when there is a strategic argument for blocking a deal.
My noble friend mentioned the proposed takeover of AstraZeneca by Pfizer, mainly for tax advantage. It was stopped only because of the efforts of the Dutch and Swedish parts of AstraZeneca.
What is the answer? While welcoming foreign investment, how can we achieve a better balance and feel more secure? The real solution of restructuring the finance industry is, of course, too difficult because it will disturb too many vested interests—the influence of the financial industry’s money on politics is too well entrenched. Because the finance sector is much used as an instrument of economic policy its interests and opinions take precedence in economic decisions. This has to change. I do not agree with my noble friend Lord Desai. It has become too unbalanced, and equal regard must be given to the interests and opinions of other sectors—of business, of industry. This will help to encourage UK ownership of our strategic assets and their long-term development. Many regulatory agencies seek to pursue the public interest, but their work is limited by a too-prescriptive rulebook. This has to be reviewed, bearing in mind foreign ownership.
The answer also lies in more enlightened business governance. For 20 years, Tomorrow’s Company has promoted the principle of stewardship. These ideas are slowly becoming more accepted. By coincidence, I hosted Tomorrow’s Company’s annual reception here in the Cholmondeley Room yesterday. Several noble Lords were present. We heard how many of our more successful and more progressive businesses are adopting the stewardship form of leadership and governance. I put it to the Minister that if foreign investors were urged, perhaps by regulators, to adopt this form of governance, then we may not only benefit from their management performance, their technology and productivity; we would also feel more secure with the clear purpose, values and collaboration that stewardship brings, and the long-term attitude towards investment and risk. You never know: this culture may bring more British investors and, yes, a Labour Government back into the market.
Lord Monks (Lab)
My Lords, I add my thanks to my noble friend Lord Hanworth for initiating a debate on a very important subject. It deserves a more prominent slot than we have given it. It is a subject to which not enough attention and debate is given. With the different views already expressed, noble Lords have heard some things that are rather close to the heart of the way this country earns its living and whether it is on the right path.
I used to be one of those who did not really mind about foreign ownership. We did not need to bother about it too much. We owned a lot of assets abroad. We were doing quite well out of remittances from those. Companies that were overseas-owned were in many cases rather successful in the UK, providing a lot of employment. As my noble friend Lord Haskel just reminded us, they were in many ways leading on innovation, technology and productivity. The trends have now accelerated. I am much more worried about it than I ever was before. As my noble friend Lord Hanworth pointed out very well, the stark fact is that British companies are being sold off at a higher rate than we acquire assets elsewhere. Worse, there is little sign that the proceeds of this Great British sell-off are going into British business, to grow great new businesses that slot into the spaces that others have departed from. Therefore, this is an extremely important debate. The country has turned a blind eye to it and adopted a rather laissez-faire approach. In some ways that has suppressed creative thought on the issues. What do I mean by that?
It is interesting to note that last week and previously, this House has spent a considerable amount of time debating national sovereignty. Noble Lords, particularly on the other side of the House, have been “banging on”—to pinch a phrase from the Prime Minister—about that in the context of the EU Referendum Bill for a couple of weeks, and we will spend a lot more time on it in the next 12 months. However, they are talking about sovereignty only in the context of parliamentary sovereignty. They are not debating the business sovereignty that we are talking about today. They are not debating the fact that British businesses are increasingly foreign owned, including those occupying the commanding heights of utilities and key sectors. I am always interested to see whether any of the Europhobes or Eurosceptics say anything about this great sell-off when they go on about sovereignty. We obviously mean different things when we have this discussion.
I believe that EU membership enhances sovereignty, extends influence and boosts our reach on global developments such as trade and the environment. But these are all at risk if our economy becomes more and more anorexic. We have already lost a lot of ground. You cannot say that it is the EU’s fault or it is due to Europe’s sclerosis. It is our fault. Our system is out of step with those of many other countries. Some great and successful British companies—not the flops—have simply vanished into the entrails of foreign companies. However, the car industry has been transformed by foreign ownership, for which I am extremely grateful. By the way, sometimes even smaller companies, such as Pilkington and British Oxygen, have been acquired by foreign owners. I do not recall hearing any murmurs—not even a squeak—from the nationalists about what was going on when Pilkington was bought by the Japanese and British Oxygen by the Germans.
I stress that I am not an economic nationalist or a protectionist. I am grateful to the firms that have come in, particularly the car firms, and many others, for what they have done for the UK. Without that foreign ownership we would not have the industries we have. None the less, why is it that we rely on foreign ownership to control so many of our major industries? Why are there so few UK world-class multinationals, particularly manufacturing multinationals? I say to the noble Lord, Lord Desai, that from the privileged position of the south-east of England it is a lot easier to make the case he did than it would be in the north, where it is much more evident that the great companies have retreated or disappeared and foreign investment has not filled all the gaps, although it has filled some. Some great companies, such as Rolls-Royce and GKN, are obviously exceptions to this but they are not the rule. However, you can see how fragile the situation can become for a great company such as Rolls-Royce when a few things start to go wrong. It is not just Volkswagen that has ethical dilemmas and problems at the moment. We know that some of our companies have problems. The banks have been mentioned and Rolls-Royce is struggling a bit at present.
All the evidence is that, however benevolent foreign-owned companies are, however much they intend to be good corporate citizens, inevitably, the profits tend to fly overseas to where the strategic decisions are taken. Understandably, those who control the companies are biased in favour of their own country, city or region, just like we used to be. Now, we lack companies that can do that on any scale outside those in London and the south-east.
Why are we in this position? I tend to agree with the noble Viscount, Lord Hanworth—that a lot of it has to do with the powerful financial services sector, which seems to know a lot more about value extraction than value creation. It is primarily interested in promoting deals—takeovers, flotations, privatisations, restructurings and so on—to earn commissions and fat fees, and the volume of transactions is absolutely everything. The objectives of these deals should be encouraged to be more market share-boosting, rather than for short-term shareholder value extraction. This is deeply inconvenient to many in the City, but those people should reflect on the fact that many acquisitions actually result in a reduction of shareholder value.
Short-term shareholder value has become something of a curse. I note with interest that the boss of General Electric, who invented the term in the 1980s, has repented and recanted and said that it cannot be the sole goal of companies. The financial services world needs to get some new criteria to judge businesses by. I am a strong advocate of market share being one of the features. The pressure to deliver short-term returns provokes risky strategies, almost all linked to deals on acquisitions or restructurings rather than launching fresh major innovations and investments. Linking executive bonuses to short-term shareholder results just intensifies the pressures.
It is a very hard world for British companies, given this financial culture to grow, be successful and thrive. Some have stayed private and have managed to do so: Dyson and JCB are fine examples. Others trust in private equity. Well, good luck to them, I hope it works for them. Others have become and remain plcs, but in that sector you have to be very good to avoid being vulnerable to the prowlers and takeover merchants. Very often, those are people in the City trying to promote somebody to come in and take you over.
Some in government and business have recognised this problem. I pay tribute to Vincent Cable and Paul Polman of Unilever. But most shy away from an issue that is marked “too difficult”. Along with Civitas, I think we should be looking at American anti-takeover statutes and that little poison pill that can prevent a hostile takeover in certain states. We should be looking more at German cross-ownership. I know it used to be called a cartel and perhaps there is a degree of that; none the less, it means that great companies survive bad times. I will say this about Volkswagen: it will survive this very bad time. I was more worried that BP might not survive its very bad time in the Gulf of Mexico in the context of our financial markets. I am also interested in the French and Nordic multiple or weighted voting systems to discourage hostile takeovers. Like the noble Viscount, Lord Hanworth, I am rather a fan of two-tier board structures, with stakeholders involved in the supervisory board.
We are alone in extending the idea of a free market in goods and services—for many people, an act of faith since Cobden and Bright—to a free market in the ownership of companies. We are also alone in confusing foreign investment in new plant, such as by Nissan, with hostile takeovers, such as by Pfizer. We know that companies such as Pfizer are very likely to run down the British arm to reduce competition and costs and to extract—that word again—intellectual capital.
This is not an issue that is particularly easy to resolve. I have no simple solutions but, for a start, an anti-hostile takeover law could be extremely useful in trying to shift the cultures in the UK towards longer-term, more sustainable success. After all, that is the kind of company that Tata and the best companies coming into this country are—not short-termist but long-term players. We want more companies of our own like that, so that we are not completely dependent—to the extent that we could become dependent—on foreign ownership. There is nothing wrong with foreign ownership but it does need a sense of proportion.
Lord Judd (Lab)
My Lords, if I am allowed to say so, how good it is to have the experience, wisdom and common sense of the noble Lord, Lord Monks, at our disposal. I enjoyed every word of that speech and found myself relating to it very closely. I thank the noble Viscount, Lord Hanworth, for having introduced this debate today and shared with the House a great deal of the anxiety that is out there among thinking people in our society.
I have had a long association with LSE myself and have always found it enjoyable that we have in our family the noble Lord, Lord Desai. There is never a dull moment; one is never quite sure where he will be coming from intellectually and analytically. I hope he will not think I am pushing it too far if I recall here something he once said to me in a cheerful, exuberant way. He said, “Of course, I am the last Marxist at LSE”. I would say now that he was the first marketeer at LSE and it is very interesting how people make this transition. He is not alone and I suggest to him that it is something about absolutism. I of course come unashamedly from the nonconformist, Fabian tradition, which is all about search. Perhaps I may remind him that the motto of LSE is “Rerum cognoscere causas”—not “Here are all the answers” but “We are looking for what is causing a situation”.
I find it very interesting that there is no shortage of people wanting to come and make their business here or to invest here. But I ask myself, as indeed our noble friend Lord Monks was asking: what lessons have we learnt from how we came here? Some of the lessons do not perhaps lie in the immediate sphere of economics at all. They lie very much in the realm of education, as has been mentioned. There has been a total failure of creativity in Britain, apart from in the arts. In the arts, we lead the world—nobody rivals the United Kingdom in them. But somehow, in the realm of applied knowledge, there has been, as I say, a failure of creativity and the imagination. The failure is not in imagination or creativity but when something goes so far, there is no one who then seizes it and says, “Right, this is where we’re going with it”. We have to get that back.
It is about character building and the rest and, if I am, as an older man, allowed to say so, I am very fearful about that. We have got into a trap of taking a completely quantitative approach to education by measuring it all the time, as distinct from asking what it is inspiring and achieving. Originality is not being given enough attention. I am rather worried. I take my family—my children and grandchildren—very seriously. When I see our country basing itself on a future of energy largely generated by nuclear power, I say to myself, “Am I confident about this future?”.
I have nothing but respect for the Chinese. I first went to China in 1956, spent five weeks there and came back deeply impressed. That was before it had broken with Russia. I found myself—perhaps I eagerly sought to be there as a young man—on “In Town Tonight” and was probed about my reactions to China. I said, “It is not communism that worries me about China, it is the nationalism. That country is thinking long, and it is thinking about Chinese influence and predominance in the world”. My goodness, I think very often of the impressions I formed then.
It seems to me that, with all the uncertainties of the politics of the Far East and the Pacific, to have our steel industry to a very large extent dependent on the Far East is—I put it no stronger than this—a rather intriguing situation, and one about which I do not think one can sleep easily at night. I am sure they will make a great success of it in the short term, but who knows what will happen in the long term and where the power lies?
When I was a young MP, I used to see that in my constituency of Portsmouth, because we had been highly dependent on the Navy. Ministry of Defence employment was reducing and we needed another source of industry. Because there had been very high skills in the dockyard, all sorts of industry came along. I saw from practical experience, when times got tough, when the going got hard, which places that industry disappeared from most quickly. We were ancillary, something they had gone for and taken over. They were not rooted in the area.
We have to take that seriously in this situation as well. It is the same with the steel industry. Let me be candid with the House: I have a capitalist wing of my family. A branch of my family dealt in steel—it was not very big, but it was big in steel. Members of my family were terribly interested in developing new types of steel. They were engineers, and they used to travel around the world getting and discussing their orders. They sometimes got pretty sick of doing it, too. What was true about them was that they were part of Sheffield. They had been involved in libraries, wings of hospitals and education, not just to get an advertisement up but because they cared. It was a community.
The other major thing that I wanted to say in this debate—I thank my noble friend for having introduced it—is that what has gone wrong in Britain is that we have allowed ourselves to go down a certain road. I say in all seriousness to my good friend, my noble friend Lord Desai, that he should be careful in separating the economy from the people. I became a member of the party that I am in because I believed that the economy and the people were one and the same thing. We looked at the health of the economy in the long run and at the health and well-being of the people in the long run, and we had a commitment and attachment to the people, which was fundamental. I do not think we have that in the direction we have taken. When it comes to the situation in which British managers and workers on a railway being run outstandingly well want to bid because they are told that the line must be privatised but are told that they cannot because they are British—but goodness knows who from abroad is allowed to bid and come in—the situation has gone dangerously barmy, and it is time that we redressed the balance.
Lord Mendelsohn (Lab)
My Lords, I draw attention to my interests in the register. I also earn a living in the corporate finance industry. I start by thanking the noble Viscount, Lord Hanworth, for introducing this interesting debate and for his, as always, extremely thought-provoking contribution. It has been a great pleasure to listen to such a fantastic debate, and it reminds me—a relative newcomer—of the sheer quality present in this House. It also reminds me that I must make sure that I am not a disappointment to my mother when I respond to such high-quality contributions.
I should like to raise a series of issues that touch across the issue of ownership and its consequences and address a complex series of opportunities and challenges that come from the level of foreign ownership—matters that we should be very alive to. It is always difficult to come to a completely full conclusion on these matters. My noble friend Lord Monks raised the issue of potentially restricting hostile takeovers. Of course, one of the great corporate achievements in the United Kingdom was Vodafone’s takeover of Mannesmann, which was a hostile takeover. Many of the problems associated with foreign ownership of companies come from agreed takeovers, so it is very hard to find inherently the right instruments. Of course, we believe in open markets and trade and we understand the benefits of investment and know-how that can come in, and of new business processes and products. We also understand the profile of foreign investment, which is that it is principally about large companies—1% of companies, around 30% of value added. That is also why there is a central importance in our deliberations and in our work to improve the condition of the business environment for small businesses, where foreign ownership is not highly present.
It was a matter of some comment around the general election—I cite an article in the Wall Street Journal—that Britain was becoming very resistant to foreign deals. In fact, it said that barriers were rising, pointing to the climate over a few particular deals, and over the way in which the chief executive of Pfizer, in relation to the AstraZeneca deal, was forced to write to the Prime Minister with a “string of commitments”. It also identified that in March the Department of Energy and Climate Change,
“moved to block Russian oligarch Mikhail Fridman from owning stakes in 12 North Sea gas fields”,
through his investment vehicle. It then said that,
“the boldest move by the UK government against a foreign takeover came just weeks before”,
the general election, when a,
“UK official confirmed that the government had told BP that it would block any sale of the oil company to a foreign company”.
So the pattern is not absolutely clear.
It does come as some contrast to how the Government have positively encouraged the Chinese investment in Hinkley Point. These issues were ably raised by the noble Baroness, Lady Falkner, the noble Viscount, Lord Hanworth, and by my noble friends Lord Haskel and Lord Judd. There are considerable concerns about the design, the fact that we are going to be the pilot for it and the extraordinarily long-term deal at a very high price. It stands in great contrast to the concern over other matters that this one has gone through in the way and shape that it has.
This raises the central importance of regulation. Regulation is key to these things, and not just to how we deal with the utilities and the protection of service standards and security. It has a central role in how we ensure that these markets, takeovers and other things, and the condition of business itself, are dealt with properly. My noble friend Lord Desai mentioned VW and said that it was a failure of corporate governance. Actually, it was a failure of regulation. It was another example of why trust is an inadequate safety net for business practice. We have to make sure that markets are regulated properly and sensibly, and foreign ownership only increases that challenge.
The Government have a very good record with UK transparency laws. The register of people who exercise significant control, which was introduced by the Small Business, Enterprise and Employment Act, will be implemented this year and will be an important addition to how we manage foreign businesses on our shores.
The method of ownership matters. My noble friend Lord Haskel made a very important point about how it has affected our supermarket sector. It has affected other retailers. Zara has exactly the same condition. All shareholders are not the same. There are differences. Whether companies are private equity or listed, and whether a company has particular return on capital requirements, ownership matters. Perhaps the greatest illustration was during the course of the financial crisis when we saw the impact of deglobalisation—the return of capital and investments to national headquarters and a choking of investment into our country which had tremendous consequences and had to be managed with a great deal of skill.
My noble friend Lord Haskel made a very important point which I am very keen to re-emphasise. Foreign direct investment has huge benefits and is and always was key to our productivity strategy, but, given that foreign-owned company outflows broadly equate to FDI inflows, with all the consequences for trade deficits so ably illustrated by my noble friend Lord Hanworth, it cannot be a useful tool to assist the productivity challenge at this stage. We have to have a more sophisticated approach to foreign direct investment.
One of my great concerns is about how it has completely transformed some of our sectors and our contribution to the long-term sustainability and strategic capability in sectors. Of course, we have some which are uniquely attractive and a number of companies would wish to acquire them. To give some sense of perspective, I believe that at the moment there are no major British companies in IT hardware, electronic and electrical equipment, semiconductors, office accounting and computing equipment, radio, TV and telecommunications equipment, fine chemicals, automotive, computer software, except for standard software, and investment banking and international management consulting, and there are worrying issues for larger UK-quoted companies in aerospace and bioscience.
British-owned enterprises are in retail, leisure and general services and are insufficient in high knowledge and technology, with the strong exception of the Cambridge Science Park—I wish we spoke a lot more about that rather than about the somewhat overblown Tech City. The list of companies I have described has been described rather well as,
“the knowledge and technology-based sinews of the modern economy”.
We lose long-term capability and adaptability for the future if we do not have the right contribution there. It is tragic to see what happened to Logica when it was acquired. It was a fantastic company with huge ambitions and was sold short by the City. It is very important to see companies such as British Airways being prepared to go out to the wider markets.
Indeed, I fear that the consequences are very clear to see. Foreign ownership of patents in this country is 40%. The European average is 14%, in America it is 11% and in Japan it is 4%. We have huge capacity for our greatest inventions being applied in other places and that knowledge being extracted and headquartered in other areas. That is quite important for us to understand.
I share the concerns about the finance industry and some of the issues about short-termism and trading, as well as my broader concerns about the pensions industry. My noble friend Lord Haskel made the case for how corporate governance should be considered in the light of foreign ownership. Corporate governance is a central matter that we have to deal with. Foreign ownership is a greater challenge with regard to how companies are run, managed and held accountable.
In a study on wages, productivity and foreign ownership in UK manufacturing, the Centre for Research on Globalisation and Labour Markets at the University of Nottingham identified that in foreign-owned companies labour productivity was 10% higher, total factor productivity was 5% higher and the wage advantage was 5%. At the very top of the scale were US-owned companies, not Japanese, to whom we owe a very great debt for transforming our motor industry. So there is a huge challenge for boards of management, especially remuneration committees, and institutional shareholders, since some of these companies show greater strength because of their investment and training, not a short-term finance director-led approach to managing companies.
In many ways there is almost a tragic element here. Without foreign investment, would there be any significant British presence in major advanced industries, such as motor manufacturing and indeed in investment banking? When we talk about that great institution, the City, we should remember that there is, I think, only one investment bank that is British-owned any more. These are matters that we cannot take lightly, and we have to think about them and plan for them.
I make the point again that there are great advantages and contributions from foreign ownership. I do not take the view that the sky will fall in and that these things are without redemption, but I worry that there is a light travelling towards us and it may not be a bicycle. It is important that we address the known knowns and the consequences with a stronger industrial policy; that we address the unknown knowns with a greater study of foreign direct investment and ministerial willingness to be much more careful and forensic in their examination of it, rather than just pursuing an overall headline target figure; and that we address the unknown unknowns by ensuring that we pay greater attention to maximising our position and to considering our strategically important sectors.
I shall finish with some challenges to the Minister, to see whether he will agree with me that we need a more precise targeting of particular kinds of foreign direct investment and better regulatory intervention to help to maximise local multiplier effects, encourage positive technology spillovers, minimise the displacement of local businesses and encourage opportunities for small businesses, so that the Government are better informed about the corporate objectives, management style and track records of multinational corporations that wish to presence themselves in this country and can ensure that, given the problems that we have in the sectors that I would say are at risk, there is a strong government focus around science, engineering and technology, and protecting and building our IP.
The Earl of Courtown (Con)
My Lords, this has been a fascinating debate with incredibly varied speeches from many different areas opposite me; I am saddened only because some noble friends were unable to be here for this debate. It has been of great interest and some fascinating speeches have been made.
It is right that we continue to consider how best we can help UK companies to support growth in the UK and remain competitive, both within Europe and globally. I will set out today how the UK achieves this through a flexible framework of regulation that supports growth by attracting important overseas investment while ensuring that legitimate public interests are protected.
As the noble Lord, Lord Desai, said, the UK has always been a trading nation. Throughout history, trade has brought great prosperity to the United Kingdom. The UK is negotiating ambitious trade agreements with our established markets, such as the United States; emerging markets, such as Vietnam; and the world’s poorest markets, as a way of supporting their economic development. My noble friend Lord Maude, as the Government’s lead on trade policy, works hard to ensure that the European Commission is pursuing the right agenda—both the right negotiations and the UK interests within the negotiations. He particularly champions increased pace in EU trade negotiations. Completing all ongoing EU trade negotiations could add more than £20 billion to the economy each year. Every delay has a cost. Concluding trade negotiations allows our goods to enter markets at reduced or zero tariffs, reduces the requirements for multiple testing, protects UK firms’ intellectual property in markets, opens up procurement and services markets and protects our investments overseas.
I now turn to the benefits of the United Kingdom’s strong track record on inward investment. High-quality foreign investments are very important for the United Kingdom economy. Foreign-owned firms now account for nearly 40% of total output in the UK, as mentioned by noble Lords. Around a quarter of United Kingdom private sector employment is with foreign-owned firms. The United Kingdom is the number one destination for foreign direct investment in Europe. The total value of UK inward foreign direct investment stock reached a record £1 trillion as of the end of 2014, the highest in Europe and third in the world, behind only the USA and China.
Over the last five years, UK Trade & Investment recorded more than 8,000 successful inward investment projects in the United Kingdom, which have brought with them nearly 600,000 new and safeguarded jobs. In 2014-15 alone, UKTI recorded a total of just fewer than 2,000 inward investment projects, 12% more than in the previous year. These investment projects are estimated to have brought with them almost 108,000 new and safeguarded jobs over the last year.
Inward investment plays an important role in supporting growth across all parts of the United Kingdom, and last year saw strong investment and jobs growth in most regions. During 2014-15, England, excluding London, received the highest number of FDI projects, followed by London, Scotland, Wales and Northern Ireland. These results confirm that we have the right approach. International companies see the strength of the United Kingdom as a place to do business and, in many cases, the place to locate their international or European headquarters. However, we need to continue working hard to make the United Kingdom the best place in the world for starting and growing business and the Government are committed to creating the conditions necessary to grow the economy and allow business to expand, thrive and create lasting jobs in the United Kingdom.
Given the significant benefits of foreign investment and open markets to the United Kingdom economy, the United Kingdom’s corporate governance framework does not seek to constrain investment from overseas in UK companies. Nor does the framework seek to stop UK investors investing overseas. The UK has been a leading influence internationally in the development of company law and corporate governance over 150 years and the UK’s corporate law and governance framework continues to be recognised as world-leading. This legal and regulatory framework is ultimately about enabling business to succeed: it provides the certainty needed to facilitate trade and attract investment in the United Kingdom.
The UK takeover regime is subject to the EU takeover bids directive, which sets out common minimum standards across the EU for the conduct of takeover bids for companies whose shares are admitted to trading on a regulated market. There is some permitted variation in how the directive is implemented in different member states, reflecting the wide variety of corporate governance and shareholder models and, indeed, patterns of shareholding across different member states. These factors influence the landscape for mergers and acquisitions.
The European Commission published a review of the application of the directive by EU member states in June 2012. The review concluded that, generally, the regime created by the directive is working satisfactorily. Currently, there are no plans for significant changes to the directive itself. The European Commission review also included a study comparing the EU framework with a number of other major jurisdictions. It showed that takeover bid legislation in the other countries is based on principles similar to those in the EU directive.
The benefits to the UK economy of being open to inward investment are clear. It is therefore important that the United Kingdom creates an environment where investors can invest with confidence. A cornerstone of this is ensuring that mergers are, in the most part, assessed not by politicians but by an independent authority with access to high-quality evidence. In the main, consideration of mergers and takeovers in the UK is handled by the independent Competition and Markets Authority or the European Commission. They will look to see whether any competition concerns arise from a proposed or completed merger or takeover.
Member states’ systems are distinct and operate in different ways but the underpinning EU rules are the same. If a takeover or merger gives rise to legitimate matters of public interest other than competition, UK Ministers, like their European counterparts, have formal powers to intervene. The Government use these powers in exceptional cases to ensure that UK interests are protected; for example, where there may be national security issues. The grounds for using these powers are constrained by EU law to avoid damaging the transparency and predictability of the regime to the detriment of investor confidence and the economy as a whole.
As I have already set out, the UK’s approach to inward investment gives us a competitive advantage over other, more interventionist, regimes. However, there is more to do. We need to reduce regulatory burdens and empower our businesses to compete more effectively by accelerating the integration of the single market, especially in the services and digital sectors. We continue to focus on the importance of freeing businesses from the constraints of overly burdensome EU rules. We want regulation which achieves its objectives more efficiently and proportionately, without imposing unnecessary costs; in some cases this means exempting microenterprises or start-ups.
The noble Viscount, in his introductory speech, commented on the role of manufacturing in the UK economy. We must remember the contribution that manufacturing makes to the UK economy—now £171 billion—which is significant and increasing over the long term. We manufactured a greater volume of goods in 2014 than in any year since 2008, the start of the global downturn/recession.
The Government are also setting the economic conditions to enable business to invest in the technology and skills it needs to compete and to deliver productivity growth. The productivity plan sets out the Government’s approach to delivering productivity growth, and the approach to working with industry focuses on: supporting businesses to invest, grow and prosper in the UK; promoting the UK as a world leader in disruptive and emerging technologies; and making Britain the best place in the world to start up and grow a business. Driving innovation, rolling out further deregulation, promoting competition, boosting skills and strengthening exports will be central to meeting these objectives.
The noble Viscount also commented that other countries are able to intervene in mergers and takeovers that are not generally in their own national interests. Consideration of mergers and takeovers in the United Kingdom is handled by the independent Competition and Markets Authority or the European Commission, as I mentioned earlier. If a takeover or merger gives rise to legitimate matters of public interest other than competition, UK Ministers have the formal powers to intervene. It is not the case that other EU member states have greater powers to block mergers and takeovers on public interest grounds.
The noble Viscount and the noble Lord, Lord Monks, said that the Government should mandate that employee representatives should be on company boards—basically looking at a two-tier board system. As noble Lords will know, under the current law there is nothing to stop companies having employees on boards, and the Government do not believe that it would be appropriate to mandate this arrangement. It should be a matter for companies to decide. Under law, the unitary board system means that all directors, including those representing employers, have the same duties and responsibilities, and we do not see that there is a case for moving to two-tier boards. As the noble Lord, Lord Desai, mentioned, the current governance issue at Volkswagen illustrates that the two-tier system is no guarantee of good governance. The Government believe that effective engagement with employees is a vital part of good corporate governance.
Noble Lords went on to discuss the current account and the balance of payments. The recent weaknesses in the current account deficit have been driven by a fall in income earned by UK residents on their foreign direct investments abroad. Relative weaknesses in economic activity among the UK’s trading partners, especially in the euro area, have depressed returns on the UK’s foreign assets. The current account deficit narrowed in Q2 to minus 3.6% of gross domestic product from minus 5.2% in the previous quarter. This has been the smallest quarterly current account deficit over the last few years.
The noble Viscount also mentioned the Kay review. This found issues relating to short-termism in UK companies, including the tendency to pursue short-term takeovers, which undermine UK companies. Her Majesty’s Government’s response to the Kay review acknowledged that short-termism among equity investments has affected long-term investment by UK companies. We have made considerable progress not through regulation but by working with companies and investors to encourage engagement between them with a focus on long-term company strategy. Good progress has been made with, for example, the establishment of the Investor Forum, as recommended by Professor Kay, to promote such engagement. Building on this progress as part of the Government’s productivity plan, leading investors are now developing action plans for long-term investment.
The noble Lord, Lord Haskel, said that foreign investors should adopt a stewardship approach. I agree, but it is important to note that United Kingdom asset managers invest on behalf of savers from all over the world. Many of our asset management firms have led the way on adopting a long-term stewardship approach, responding to the challenge set out in the UK stewardship code, overseen by the Financial Reporting Council. They have also set up the Investor Forum in response to the Kay review, as I have already mentioned. The Government believe that these investors have an important role in ensuring that companies focus on long-term investment and not just short-term market value.
A number of noble Lords mentioned sovereign wealth funds. In the summer Budget 2015, the Chancellor announced that he would bring forward a proposal to establish a sovereign wealth fund from shale gas revenues to ensure that local communities share in the economic benefits of shale gas developments in their area. More details will be set out in the Autumn Statement.
The noble Viscount commented that the Government are focusing on foreign investment and congratulating themselves on their performance. Foreign-owned firms account for nearly 40% of total output in the United Kingdom. Over the last five years, foreign direct investment has created or safeguarded nearly 600,000 jobs in the United Kingdom.
There was also the comment that foreign-owned firms have higher productivity. This is an issue that everybody is aware of, the object being to improve the financial situation so that productivity can increase. Yes, foreign-owned firms do have better productivity, and that is one of the main benefits of foreign investment. Incoming knowledge, technologies and innovation can spill over to other companies and supply chains, contributing to overall UK productivity growth.
The noble Lord, Lord Haskel, said that growth has become unbalanced, with too much emphasis on the financial sector. The Government have a comprehensive plan to rebalance the economy and strengthen every part of the United Kingdom, and to create a northern powerhouse by bringing together the great cities and counties of the north of England. That is alongside plans to support other vital economies in the UK, such as the Midlands and the south-west.
According to the latest data, output per head grew faster in the north than in the south in 2013. The north-east, north-west, West Midlands and Wales all grew faster per head than London and the UK average. Her Majesty’s Government will go further by supporting the resurgence of strong city regions through devolution, enabling cities to work together to take responsibility for their own economic success.
The noble Lords, Lord Haskel and Lord Mendelsohn, also mentioned the Pfizer interest in AstraZeneca as being an example of corporate investment short-termism. I do not believe that this is the case. On the contrary, AstraZeneca’s directors resisted, arguing that it was not in the long-term interests of shareholders. The majority of investors accepted this view and, as a result, the bid was rejected by shareholders.
A flexible, open marketplace that supports and encourages investors, including foreign direct investment, helps to deliver a successful UK economy. The UK Government’s flexible framework of regulation, which supports growth by attracting important overseas investment while ensuring that legitimate public interests are protected, plays a key role in ensuring that we are a productive and growing nation.
Viscount Hanworth
My Lords, this has been an interesting debate in which we have heard a diversity of opinions. I wish to thank all speakers for their various contributions. I must also thank the Minister for his judicious summary. On Tuesday, he was kind enough to tell me of the nature of his brief, which informed him that there were no problems whatsoever with inward financial investment. In return, I promised not to take him to account for being so seriously misinformed.
The Earl of Courtown
My Lords, the noble Viscount has mentioned something that was said outside this Chamber. I feel that that is a little unfair.
Viscount Hanworth
I believe that the Minister also said the same thing in the Chamber. Be that as it may, I thank him for his response.
The Minister who bears responsibility for these matters at present is the noble Lord, Lord O’Neill. I trust that this debate will be brought to his attention.