Long-term Capital for Business

Luke Graham Excerpts

Tuesday 15th January 2019 Westminster Hall

[Stephen Kerr]

Anyone would think that my hon. Friend and I were working in some form of symbiosis, because the very next thing I wanted to say was that the need for investment is never more pertinent than in the technology sector, in which large American corporations invest speculatively and then buy companies when they reach a sufficient level of development. One reason that so many British businesses go that way is that they reach a stage where their access to affordable long-term capital dries up. This is not just about start-ups but about how a business accesses capital to be able to invest in new assets or capabilities.

[Luke Graham (Ochil and South Perthshire) (Con)]

My hon. Friend makes a valid point about access to capital for companies going into their mid-stage development. He makes the point about size, but is it not also about geography? Many companies that are further away from the capital bases in London and Edinburgh, especially across Scotland and in northern England, do not get that same access to capital. It is incumbent on us to make sure that our companies can be connected with capital, so that they can grow in the way we should all want them to.

[Stephen Kerr]

I am grateful to my hon. Friend and constituency neighbour for that very valuable intervention. I will return to that idea shortly.

As I said, this is not just about start-ups; it is about how businesses access capital to be able to invest in new assets or capabilities. There is an abundance of evidence to suggest that our capital investment system is addicted to short-termism and is risk-averse. Risk is built into the capitalist system. Investment, by definition, includes a calculation of exposure to risk. The more risk-averse we become, the less inclined we are to invest in new ideas or ventures, because they might fail; the returns might not materialise. It is implicit in—I would argue essential to—the free enterprise economic system that there is acceptance of the inherent risk of failure. However, anecdotally, we have become less willing to accept that risk.

The banks obviously were badly burnt because of their recklessness in respect of risk. They then set about recapitalising their businesses, at the expense of small and medium-sized businesses. That led to some of the gross abuses and alleged criminality that is still the subject of ongoing inquiry. That is an outstanding injustice; it has still to be remedied. I do not want to spend too long on the past misdemeanours of the banks—we have had many debates on that subject in Westminster Hall and the main Chamber, and I am sure that we will have plenty more—but restoring confidence to the small and medium-sized businesses of this country necessitates that something be done about the scandals of the past decade. Banks will not take a long-term view, and if we entrust our productivity to them we will have no long-term economic future.

That said, I certainly do not want to be guilty of using this debate as a platform to spread doom and gloom—that is not in my nature—because there are very many good examples of private sector long-term investment. CityFibre is a good example. It is investing £10 million in Stirling. That will make fibre-to-the-premises ultrafast broadband available to every household and business in the city. Stirling will soon become one of the top digital cities in the United Kingdom—something that I am proud of. When we look at the bigger picture, we see that CityFibre is investing £2.5 billion across the UK. The investment will take many years to recoup, but the investors have faith in the product and are willing to be patient while the company makes the money back. Their planning horizon is measured in decades. Now, that is something akin to my definition of long-term investment.

Around the world, many countries, although they do not have this particular set of problems and although they have not cracked things entirely, have a different system of capital deployment. I would like to pause on the German example—I have used this before in Westminster Hall. I have already explained the successful indicators of productivity and capital investment in the German economy. KfW is the German national development bank. It came about as a result of the Marshall plan; it was set up for the purposes of post-war reconstruction. It supports infrastructure investment, lending some €47 billion, it acts as a lender to local authorities and, most importantly, it supports small and medium-sized enterprises. In 2017 it lent some €8.2 billion to small and medium-sized enterprises for start-ups and scale-ups. It lends money, provides equity funding and provides mezzanine financing to cover all aspects of capital investment. Some 90% of the bank’s funding is from the private sector, in the form of debt that is backed by bonds. It is owned in partnership between the federal Government and the individual states. It does not appear on the national balance sheet of the Federal Republic of Germany.

As the United Kingdom leaves the European Union, we will no longer have access to the European Investment Bank. That bank invested more than £2.5 billion in the UK in 2018. That was our money that was invested—it was gleaned from borrowing on the back of the British taxpayer—but we will need to find a way to replace that level of financing, because there will be a hole in the capital provision landscape. We need to look at the investment bank model in detail. It would fulfil the need for a patient capital investment vehicle, as outlined in the industry panel review. The case for a major intervention in this way is, in my opinion, justified. The lagging productivity in our economy is a major risk to our economic prosperity, and we need action now. This cannot wait any longer. It especially cannot wait until after we have resolved the issue of Brexit. Our thinking in this area is a vital part of our preparations for our economic wellbeing after we have left the European Union.

We have the British Business Bank, which has some of the functionality of a national investment bank, so there is tacit acceptance by Government of the problem that I have been attempting to describe. The big issue with the British Business Bank, as I understand it, is that it does not seem to have equal coverage across all parts of the United Kingdom.

[Luke Graham]

As my hon. Friend is talking about the British Business Bank, will he join me in welcoming the expansion of the bank announced in the Budget, which places people on the ground in Scotland? He and I have been asking for that since we came to this place.

[Stephen Kerr]

Yes. I am grateful for that very important point of information. It is important that the British Business Bank has representation in all parts of the United Kingdom, but currently it is still limited in its mission because of its limited scope of operation and it does not really behave like a bank, even though that word is in the title. Its model of supplying finance via existing investment funds means that its base of operations is quite limited and seems to favour, if you will forgive me, Mr Walker, the south-east. I am happy to be corrected, but the British Business Bank does not seem to have the kind of extensive operation on the ground that it needs in Scotland, even with the announcement in the Budget.

I would like to see the British Business Bank operating across the breadth of the United Kingdom, interacting with the economy on the basis of a clearly defined mission, including small and medium-sized businesses, operating at arm’s length from the UK Government, and raising its own capital rather than simply being a channel through which public funds are disbursed.

I am not being critical of the British Business Bank as it stands, because I am a fan, but I am advocating that it evolve into something more. That something more is what the industry panel patient capital review advocated—namely, an investment vehicle to support the scaling up of British businesses and capital-intensive start-ups. By investing in equity directly through such a vehicle, we can harness the wealth of our nation to deliver on the promise of the industrial strategy and to make our economy fit for the future.

The UK economy is dominated by the service sector, and there is nothing amiss about services, but we need to rebalance our economy and we need the availability of long-term capital in order to become the best country in the world in which to build a business. In the post-war era, too few British businesses have grown to become multibillion-pound global corporations.

There is more that we can do. We should look at other ways of releasing under-productive cash for equity funding. We need to take a healthier approach to our risk appetite as a country. Changing the culture is essential. We need to harness our savings and pensions. With some innovative mechanisms, we can unlock that money and put it to use in our economy. Using the tax system and the savings guarantee system in innovative ways, we could revolutionise the way companies get finance and the ultimate source of that finance. Helping people to acquire equity stakes through shareholder co-operatives, saving schemes and direct micro investment could all work towards a new culture of investment.

To that end, we need the Treasury to be as innovative as the entrepreneurs who fuel our economy. We need to see ideas being tried and tested and the apparatus of Government swinging behind the idea of long-term investment and rewarding those who make such investments. A starting point would be to increase the thresholds for the tax on dividends and seek to band it to allow smaller-scale investors to pay no tax whatsoever on dividends, especially if they can be incentivised to maintain their investment over a longer period.

The industry panel review on patient capital made a number of recommendations that need to be addressed. It identified the need to provide patient capital to help entrepreneurs to be successful; I have already mentioned its idea for a patient capital investment vehicle. It also proposes a licensed scheme to allow patient capital investment companies to be founded that would be venture capital funds licensed to raise money from the markets, guaranteed by Government. Although I agree with that recommendation, it needs to be a truly national venture, with specific guidance about the development of capital funds outside London and the south-east.

The review also proposes a change in the way taxation hits investors when they seek to invest in developing a company past its start-up phase. Ensuring that tax incentives for equity and venture capital funding are there when companies are seeking capital to expand, rather than simply during the start-up phase, will allow investment to flow more freely into medium-size companies.

I have a few straightforward asks of the Government. First, I would like to see a formal response to the industry panel review, alongside an action plan for the implementation of its recommendations. If I have missed it, I am happy to be corrected. Secondly, we need a full analysis of the possibility of a national investment bank or development bank, as I outlined earlier. Thirdly, we need a statement about the replacement vehicle for the investments made by the European Investment Bank, which we will no longer have access to.

Finally, I would like some reassurance from the Minister that the Treasury is ready to innovate to improve the availability and quality of long-term capital. We need to encourage a positive investment culture and we need a creative response from the Treasury to unlock and harness the wealth of this nation in the delivery of a modern industrial economy that is fit for the future.

My hope, in bringing this debate to Westminster Hall, was to focus the House on the substance of how we can improve the environment for entrepreneurial success and wealth creation. It is perfectly understandable that we have become distracted by the politics of Brexit. One day soon, I hope and pray, we will turn the page on Brexit, and this House will fully turn its attention to the vitally important agenda of ensuring the long-term productivity of our economy. It is timely, because it is about our future.

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[Luke Graham (Ochil and South Perthshire) (Con)]

It is a pleasure to serve under your chairmanship, Mr Walker. I will try to be even briefer than that, if possible. I want to make some quick points on, first, the regional nature and importance of capital spreading out around the United Kingdom, and, secondly, innovation. Finally, I will ask the Minister always to think about the British interest and not to let devolution become a barrier to investment across the United Kingdom.

My hon. Friend the Member for Stirling (Stephen Kerr) made some fantastic points about the importance of long-term patient capital across the United Kingdom. We always talk about the regions of England and Scotland as a whole, but it is the regions of Scotland, and beyond that, the counties and towns in Scotland, that we should consider.

My constituency is particularly rural, and my county of Clackmannanshire is post-industrial. We have been starved of investment for a very long time. It is important that both public and private investment is connected, and funnelled here as easily and simply as it is to many of the incubators in London, and around the universities of Edinburgh, Oxford and Cambridge. There are some great models out there—we just need to expand them to other parts of our countries.

Innovation is really important. We have a fantastic opportunity ahead of us to capitalise on the financial centres we have in Edinburgh, Belfast and London, and to look at innovative solutions, not only in company models or ways and types of financing, but in the infrastructure that can be used across the country. I have written about reintroducing regional stock exchanges as a way to try to raise more local capital. That was used a lot in the 19th century to help pay for some of the railways that now connect our country and it could be used again to help fund infrastructure, from broadband to additional road infrastructure and company infrastructure. Especially when trying to encourage more rural investment, it could help some of the communities raise funds locally as well.

It is important that the Government play a full part in creating a real ecosystem. They are not there to make every decision. It is not for our constituents and companies to live on the Government’s shilling. The Government should put their money into infrastructure, to ensure that they are developing the framework that enables private enterprise to flourish, and ensuring that any public investment is there to stimulate research and innovation, and to back the entrepreneurs who do so much for our country and individual communities. As I say, the Government can be more innovative. Brexit need not apply. They can look at things such as regional stock exchanges, rural enterprise zones and expanding the powers of the British Business Bank, as my hon. Friend said, to make it a true investment bank.

To reiterate my point and the frustration that I have felt since I have been in this place, sometimes—I know it does not come from my hon. Friend the Minister—it appears that the Treasury is not so much a British Treasury but an English Treasury, which becomes incredibly frustrating for people trying to fight for projects in Scottish constituencies. That holds for hon. Members in other parts of England and in Wales too, although Northern Irish Members seem to make quite a good job of it. I encourage the Minister to remember that we are still one country and that we need British investment decisions from British Ministers.

Even where areas are devolved, there is no law—we have checked in the Library—to stop Westminster investing in devolved areas. That artificial barrier has been set up through a cultural shift in the civil service, and it has not been helped by the current Administration in Edinburgh, but it does not need to be there.

In future, we as British parliamentarians should not see devolution as a barrier, but should work across every level of Government to make sure that investment comes from the centre and reaches our frontline communities, so when we increase the block grant to Scotland, as the Minister has, that money will go to our local council services, which it does not at the moment. That will also make sure that when we as individual MPs lobby for projects in our constituencies, the money will come to our constituencies directly from Westminster.

Infrastructure needs more, and our governmental frameworks need more. The Government have it within their power to create an ecosystem that takes all the innovation and energy of the United Kingdom and really increases the prosperity of all our constituents. I hope the Minister will outline some of his vision for that today.

[Drew Hendry (Inverness, Nairn, Badenoch and Strathspey) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Walker. I congratulate the hon. Member for Stirling (Stephen Kerr) on securing this important debate. I was not aware that he was unwell over Christmas, but I am delighted to see him in the pink of health.

It is a rare treat to be in a debate with two Tories and a Democratic Unionist party Member where I have to pick my differences in their speeches; they made many points that I agree with. In particular, the hon. Member for Stirling discussed productivity. It has long been an issue that I have talked about. It has been holding back business and people for far too long, and I agree with his sentiment. As a result of paying more in taxation, we can invest more in our services—that is the consequence of getting that kind of result in productivity.

I also agree about the lack of focus across the nations of the UK. It does feel like an English Treasury; we make that point regularly. It is also a fact that the south-east gains far more traction than any other part of the UK, including the regions of England, Northern Ireland and Wales. There was a lot to agree with in that regard as well.

It is particularly poignant to have this debate today, as the biggest threat to business access to finance comes from Brexit. Government Members, particularly those in favour of Brexit, would like that to be ignored in this debate, but I do not think it can be. Brexit is already reducing the number of customers, the size of workforces, and the level of confidence. Instead of building our economy, investors are voting with their wallets by pulling nearly £20.6 billion from UK equity funds since the vote in 2016, according to EPFR.

[Luke Graham]

The hon. Gentleman makes a point about Brexit being a threat. Does he agree with a developer in Alloa in my constituency that the biggest threat to raising finances is not Brexit but the threat of a second independence referendum?

[Drew Hendry]

It will come as no surprise to the hon. Gentleman that I do not agree with that. He has gone from making a sterling point about the English Treasury to saying that independence is somehow a threat. I do not think so; I think it is a marvellous opportunity. As he has raised the issue, I will say that it has been brought into sharp focus in this place over recent months.

As Marian Bell of Alpha Economics pointed out, businesses that were told to prepare for a no-deal Brexit have relocated their operations and those decisions may not be reversed, even in the event of the best possible economic outcome—even if that is remaining in the EU. As Brexit inches closer, the UK services sector has recorded the slowest sales growth in two years, according to the British Chambers of Commerce, whose survey of 6,000 British firms shows that labour shortages and price pressures persist.

Scotland is a world leader in patient long-term capital, but Brexit risks lenders following the example of a well-known hon. Member, the hon. Member for North East Somerset (Mr Rees-Mogg), in moving business to Dublin or the continent. We are being Mogged over Brexit.

In the face of austerity, we have to make different decisions to support business. The Scottish Government are introducing the Scottish national investment bank, which will provide patient long-term capital to support Scotland’s firms. In contrast, as we have heard, the UK Green Investment Bank, which was privatised by the Government, is now bereft of its UK focus.

The aim is for the Scottish national investment bank to invest in businesses and communities by 2020, subject to regulatory approval. It is backed by our commitment of at least £2 billion of investment in the first 10 years, which paves the way for a step change in innovative and inclusive growth.

We also welcome the plan for a Scottish stock exchange in the second quarter of 2019, with a focus firmly on social and environmental companies that are worth between £50 million and £100 million. The plan has now secured a partnership agreement with the major European stock market operator Euronext, meaning that the first Scottish stock exchange will operate since the closure of the trading floor in Glasgow in 1973.

That is all being done in the shadow of Brexit, which was a vehicle aroused solely to calm Tory infighting. As chaos reigns on the Conservative Benches, there is as much chance of success for business as for the economy of our people, who will ultimately pay the price in the long term.

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[Marion Fellows (Motherwell and Wishaw) (SNP)]

It is a pleasure to serve under your chairmanship yet again, Mr Walker. I congratulate the hon. Member for Stirling (Stephen Kerr) on securing this important, and sometimes quite consensual, debate. The hon. Gentleman spoke fully and passionately, and with a great deal of knowledge and expertise, about how we can best provide businesses across the UK with ongoing patient long-term funding. When I learned accountancy, however, long-term funding was generally for between seven and 10 years, and even longer, rather than just over a year—that is a blast from the past; it is many years since I did accountancy.

I was interested to hear the hon. Gentleman talk about productivity and refer to Denmark, which is a small, independent nation leading the charge on productivity. Long may Scotland follow. He also talked briefly about the reasons for national productivity being linked to levels of investment and how, especially in Scotland, companies have been innovative but they start to slow down and fail because they cannot get the correct long-term investment. That is a real ongoing issue.

My hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) talked about the Scottish national investment bank, which we hope to see become fully functional in the early 2020s. That will be a huge boost to small industries in Scotland.

The hon. Member for Stirling also talked about the lack of money that will now come from Europe, and he looked quite favourably on small German companies. For many years, this country has looked enviously at Germany and we need to take on board what it does to help businesses. He also called for tax incentives and talked about needing a full analysis of a national development bank to look at what it could do post Brexit.

The hon. Member for Strangford (Jim Shannon) gave us his usual full and frank views on where things are going in Northern Ireland. He talked about the cyber-security industry and how it is helping, and how the United Kingdom, of which he is a great proponent, should invest in itself post Brexit. He wants the Government to help with that. In fact, I think the Minister has a lot of explaining to do as to how he will move things forward.

The hon. Member for Ochil and South Perthshire (Luke Graham) said that devolution should not be a barrier to development, and I totally agree with that. On many occasions, colleagues of mine have stood in the main Chamber here and asked about city deals, whereas the Scottish Government have invested increasing amounts in various city deals without getting the same amount of money from the Treasury.

[Luke Graham]

I have been in negotiations about two city deals that impact on my constituency. Does the hon. Lady recognise that the obstacles do not just come from central Government for the devolved Administrations, but from the devolved Administrations for the central Government as well? So if there is to be a little bit of give, does she appreciate that it has to come from both sides of the argument?

[Marion Fellows]

I agree that in any negotiations there has to be give on both sides but the Scottish Government are giving more in a practical sense, and that is really what the people involved in the city deals on Tayside, in Stirling and in other areas of Scotland are really concerned about.

It is also very important that, when we talk about innovation and moving small businesses forward, we consider regional stock exchanges, which the hon. Gentleman mentioned. I was very interested that my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey talked about the Scottish stock exchange in Glasgow closing in 1973. The square that it was in has been renamed Nelson Mandela Square, but I remember it being Stock Exchange Square for many years.

We will all be very interested to hear how the Minister responds to this debate, because none of us in this place disagrees that there is a need for long-term and patient funding for businesses to thrive and grow, to increase prosperity for all our citizens, and to increase the economy in Scotland and the rest of the UK.