Build Back Better: long-termism and invest in hydrogen
18 August 2020: John Horgan, former Deputy CEO for EMIA of global engineering firm AECOM, tells us what policy recommendations he would make based on his experience as a businessman and engineer.
For any new policy to be successful, it must be informed by those who understand its real-world implications. While the Build Back Better campaign is overflowing with noble aspirations, it’s arguably hazy when it comes to the ‘how’.
Horgan’s career has taken him from running a firm of consulting engineers with a staff of two, to managing the Europe, Middle East and India arm of a $20bn business. He has been responsible for almost 20,000 employees and a budget of $2bn, and he has worked in most countries in the world. He is now the Non-Executive Chair of a small-fire engineering business and the Executive Chairman of a multi-academy trust.
The barriers to building back better
“I haven’t read of any country anywhere that appears to have changed any of its main policies because of the COVID crisis,” Horgan says. “I’m sure that the authors of this initiative are right: this is the right time to do it – but how to do it is much more difficult.”
He highlights that the solutions which would improve the quality of the environment we live in would require a lot of investment and would increase the cost of most things in the short-term. This would inevitably have an impact on bottom lines.
Horgan concedes that there are now corporate funds in the City that are beginning to engender a sense of responsibility into some of the organisations they fund. “Having said that, my experience says everybody does green and socially responsible things when they can afford to – but, a bit like marketing, as soon as business turns down everybody wants to turn them off in order to get back to profitability,” he says.
So, we need to regulate? “Yes, but who’s going to elect a government that’s going to increase taxation, and put in more regulation and inspection?” Horgan asks. “I don’t think anyone goes into a voting booth and thinks ‘what I’m doing now will be really good in 30 years’ time’, but those are the kind of timescales we need to be operating in, in order to make the changes required.”
“What we’re trying to do through Build Back Better is really difficult,” he says. “We need to invest in education. There will always be rogues, but there would be a greater sense of corporate responsibility if people were better educated, because there would be better scrutiny.”
The other key to building back better, according to Horgan, is for the Government to enlist specialists to advise on the next steps. With his expertise lying in business and engineering, he offers us one recommendation for each.
Take action to promote long-termism
Here’s the nub of Horgan’s thinking around business: “Unless we reward long-term investment and punish speculation, our public companies will remain fair game to hedge-funds, hostile foreign investors and greedy activist shareholders.”
When Horgan was working in big British and American corporations, a huge problem they faced was that, whenever they wanted to raise capital on the markets, if the markets couldn’t see a short-term gain, the activist shareholders would move in and stop them from doing it.
“Many of the very large corporations have been created by mergers and acquisitions, and in my experience none of them can invest sufficiently to provide proper integrated IT systems, largely because their investors would baulk at the cost,” he says. “A properly configured IT system may cost billions, and if you go to the markets and say, ‘We’re going to put a really good IT system into this business’, the market panics because they can’t see a short-term profit in it.”
Indeed, Deloitte’s Chief Economist Ian Stewart recently stated that one possible cause of the UK’s reduction in productivity growth since 2009 is “short-termism in the corporate sector” and “weak investment”.
Horgan says people in his grandparents’ generation bought shares in things they understood. “My grandparents in Liverpool bought shares in Marks & Spencer and in Cammell Laird, the local shipbuilding business,” he says. “And they were long-term investments: they bought the shares and put them to one side for years and years. That kind of investment has gone away.”
“Hedge funds are all about trying to make money very quickly, and instantaneous return on investment is making it very difficult for businesses to build long-term,” says Horgan. “So there’s far less organic growth in business than there should be: if people want to grow, they tend to buy other businesses.” The danger of this, he says, is that economic growth only happens when businesses grow, not when they acquire.
Some countries are better at promoting long-term investment than Britain and the US. According to Horgan, most British-quoted businesses live from half-year to half-year, or maybe year-end to year-end, and most American businesses live from quarter-to-quarter. “Whereas when I’ve been on investment rounds trying to raise capital in Europe, the further you move towards Germany and Switzerland, the more long-term they think,” he says. “They would be much more interested in the customer relationship management factors in an investment than I think the City of London has been.”
So, what does he suggest? “To adjust the tax system so that long-term investors get real benefits out of being long-term investors.”
Horgan says that when capital gains tax was originally introduced, it was tapered – so the longer you invested in something, the better the tax relief was. "If we were to taper capital gains tax over 10 years, and couple that with a penalty for very short-term dealings, we might be able to get industry the investment it needs,” he says.
Hydrogen – the future for energy?
“The UK harnesses a good amount of wind power – the previous government invested well in this,” Horgan says. “And as the country with the second-highest tidal range in the world it has the potential to capture a huge amount of wave power – but it has very few wave generators”. But with either source the greatest difficulty lies in storing and converting the energy.
“Batteries require unethical mining,” Horgan explains. “Fossil fuels are finite and pollute the atmosphere, and nuclear power has astronomical costs when it comes to safely disposing of the waste.”
This civil engineer believes the answer lies in hydrogen. “There’s no adverse output with hydrogen,” he explains. “It’s cheap to store, and easy to convert. The shift in recent years has been towards electricity, but hydrogen would need less change in infrastructure. You wouldn’t need to electrify the train lines for instance, as trains can run directly off hydrogen.”
Horgan says people are beginning to move towards hydrogen as a solution, but stresses that this country could take a world lead and sell our hydrogen technology to other countries. He also highlights that we’d be creating a new industry by doing it, which would create lots of jobs.
Whether a Government-led initiative or a private sector one, Horgan says that the Government needs to buy into it. “We all know the oil industry has suppressed technology in order to be sure that people go on buying oil. There were reports written in the 1960s talking about the fact carbon dioxide in the atmosphere was going to become a problem as economies grew, and the oil companies suppressed this information. The vested interests are so strong that we would need Government to take a strong position or the right courses won’t be taken.”
He concludes: “I think [economist] Marina Mazzucato is absolutely right: all the great strides we’ve made in the last couple of centuries have been made when government worked with industry, not when either of them was working on its own. Things like computers would never have happened if government hadn’t worked with industry to solve the Enigma problem or go to the Moon.”
Horgan’s insights are supported by another of Stewart’s assertions, that “for an economy which ranks highly on measures of attractiveness to business, the UK does relatively poorly on infrastructure provision and vocational education.”
Stewart continues: “Underfunding plays a major role in both, and only the government has the heft to make a major difference in these areas. Regardless of the progress of the virus, better infrastructure and vocational training would lay the foundation for a stronger, more productive recovery.”
Coming together to prompt change
Horgan is quick to point out that the above is just a snippet of one person’s opinion on two solutions. “Imagine what could be achieved if groups of specialists with experience and expertise came together to really think through solutions and explore implications,” he says. “They could ensure that considered, long-term decisions are made – decisions that are truly for the good of the people – and could somewhat protect the country from short-termism.”