Long-term Capital for Business

Stephen Kerr Excerpts

Tuesday 15th January 2019 Westminster Hall

[Stephen Kerr (Stirling) (Con)]

I beg to move,

That this House has considered provision of long-term capital for business.

It is a pleasure to serve under your chairmanship, Mr Walker, and it is truly a privilege once again to lead a debate in Westminster Hall. Long-term capital for business is critical to the future of our economic wellbeing. Business knows business best, and in many ways the industry panel patient capital review was the genesis of the debate. That review, published in October 2017, was written by experienced and successful business leaders, and I commend it to hon. Members.

I recognise that the debate is somewhat overshadowed by what is happening in the main Chamber and what will transpire later this evening. That said, I cannot think of a better time to hold a debate on this subject. These are critical days for the future of our country, and we will be making critical decisions. It is incumbent on us to put the long-term interests of our country at the heart of the decisions we make. Our country, its people and those who come after us will not thank us if we make decisions based solely on narrow, short-term or selfish interests.

What is true for our country in our current predicament is also true when it pertains to the fortunes of business. Although there are undoubtedly risks in making strategic decisions for the long term, there are greater perils in considering the tactical only here and now, in looking for immediate returns and being unprepared to consider the bigger picture in a way that a long-term view necessitates. I am afraid that one life lesson that we must sadly keep learning is connected to what is often described as the law of the harvest: we can reap only what we are prepared to sow in the first place. The harvest comes in due season, but we must be prepared to be patient. I want us to reflect on the pitfalls of short-termism, and the missed opportunities and failures of a lack of a long-term vision.

As every colleague who ever worked with me in my previous business career would attest to, I am no accountant. However, it is insightful that, in accountancy terminology, a long-term investment is defined as an investment that is to be held for more than a single year, which hardly seems long term to me.

We have quite rightly heard a great deal about the UK productivity gap. Productivity is defined by the Office for National Statistics as the output per worker, output per job and output per hour, and it is ordinarily calculated by dividing the annualised GDP per capita by the average annual hours worked per employee. Countries with a track record of rising productivity tend to benefit from higher rates of growth and low inflation. It is the golden fleece of national economics, if I may describe it as such.

Productivity in the UK over the past few years has not been our best feature, and we rank poorly compared with other developed economies. We are currently at No. 17 in the world rankings, with our average hourly productivity across the economy being £17.37, compared with the Germans, who produce £23.30 per hour, the Americans, who produce £25.74 per hour, and the Danes, who produce £28.87 per hour.

Imagine for a moment that we were as productive as the most productive of the developed economies. It would transform our fortunes. We could pay ourselves more, and as a result of paying more in taxation we could invest many billions more in our NHS and other public services. The increased profitability in the private sector would also yield increased dividends, which in turn would be good news for our pension funds.

[John Howell (Henley) (Con)]

Has my hon. Friend looked at how many countries have a means of producing long-term capital, and at what sort of competitive advantage our having one would give us as a result?

[Stephen Kerr]

I am grateful to my hon. Friend for that timely intervention. That is the very point I will come on to. Let us examine the critical reason for our lack of national productivity, again comparing investment in our economy with that of the world’s leading economies. A good indicator is the level of gross fixed capital formation as percentage of GDP, which is the value of the acquisitions of new or existing fixed assets in the economy less the disposal of fixed assets. It is just a single measure.

In 2017—the most up-to-date World Bank figures are for 2017—we invested 16.8p for every £1 of GDP. The Chinese invested 41.8p for every £1 of their wealth. We also lag significantly behind developed western economies. For every £1 of GDP, Italy invests 17.5p, Poland 18p, Germany 20.3p, Denmark 20.4p, Spain 20.5p, France 22.5p, Finland 22.6p, Canada 23p, and Belgium 23.3p. That is but one measurement of investment, but it says something about future business activity and also about our confidence in the future. It is my firm belief that much of our productivity gap in this country is due to that indicative investment gap. We are simply not investing enough, and I contend that that is because there is an insufficiency of quality patient capital in our economy.

It is a much-worn anecdote that, while we come up with great ideas, breakthrough technologies and transformative product concepts, all of that good stuff ends up being commercialised somewhere else by someone else. As a young Scot, my pride in being a Scot was spurred by the great stories of our inventors, scientists and engineers. I believe it is a valid contention—one I am prepared to stand by—that the modern world was largely designed by the Scots. The litany of great Scottish contributors include James Watt, Alexander Graham Bell, John Logie Baird, James Chalmers and John Dunlop. I am delighted to give way at this point to the hon. Member for Strangford (Jim Shannon).

[Jim Shannon (Strangford) (DUP)]

The world may have been designed by the Scots, but it was built by the Irish, especially the Ulstermen.

[Stephen Kerr]

A timely intervention, as ever, from the hon. Gentleman. These British Isles are a crucible for invention. The genius of the people of these islands, their creative free thinking and their imagining of the unimaginable has created whole new branches of sciences and technology and whole new categories of product. That native, creative, entrepreneurial spirit is alive and kicking.

Entrepreneurs are among us in abundance. The number of start-ups in this country is at an all-time high. Entrepreneurs are launching themselves and their ideas on to the high seas of enterprise in greater numbers than at any time in our past. Our universities and other research institutes are brimming with exceptional people having very bright ideas. Some of those ideas, if carefully nurtured through the commercialisation process, will not only continue to change the modern world for the better but will be the source of the wealth of this nation for generations to come. However, they must be nurtured, and that nurturing relies, in substantial part, on the availability of long-term patient capital.

All too often at present these small to medium-sized businesses fall prey to predators, who invest in them for the short term and then sell on without having made the necessary long-term commitment to bring the businesses to their full potential. I am not arguing against the importance of short-term investment or venture capitalism, but I argue that it is wrong to surrender our whole economy to that model of capital. Some 650,000 new companies were formed in Britain last year, but the number that scale up is relatively small. Some of those are lifestyle businesses that suit the people running them, but many business owners are driven by a sense of purpose—to build a growing, successful business—and they very often come up against the obstacle of the limited availability of patient capital.

[John Howell]

My hon. Friend is being very generous with his time. He may be about to come on to the digital industry. It is a major industry and such a fundamental part of our economy, and it needs investment, as I know from my own costs when I ran a company involved in that area.

[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.

[Several hon. Members rose—]

--- Later in debate ---

[Stephen Kerr]

It was perhaps a portent that throughout the Minister’s speech I could hear cheering. It was from outside, but it entered the Chamber, and I must confess that there were many points in the speech at which I would have joined in the cheering. I am greatly encouraged by what the Minister has said and by the positive and upbeat way in which he talked about the Government’s approach to the concept of spreading this change of culture in relation to long-term capital. I thank all Members for their thoughtful speeches, including those who would normally be political opponents and could not resist banging on, again, about independence. We will overlook that. I am grateful to the hon. Member for Strangford (Jim Shannon), who hits the right note when he talks about confidence in the future. I believe in our United Kingdom and in the genius of our people, and I believe that our future is bright and that we should have faith in it.

Question put and agreed to.

Resolved,

That this House has considered provision of long-term capital for business.