The drawbacks of emergency business funding
The UK government’s emergency business funding is very unlikely to be efficient, good value for money – or fraud free, says columnist Jon Moulton
In my previous column (Corporate Financier, October), I wrote that it would soon become clear that some dishonest people would have taken new opportunities from global misfortune. Some already had, of course.
A friend of mine owns a self-storage business, and much of his new trade this year has been with small retailers who have been moving inventories into self-storage, before taking advantage of a company voluntary arrangement to sort out property costs. Oddly, crooks seem to have spotted opportunities to exploit emergency funding schemes a lot quicker than the UK government. But then, those in power rarely worry about the economic outturn of their actions – let alone fraud seepage.
Back in 2010, there was the £2.8bn Regional Growth Fund, chaired by Lord Heseltine. I sat on the fund’s advisory board, which oversaw which projects were worth backing. This board included business people, economists and trade unionists. In my opinion, we didn’t do a bad job of weeding out the useless projects that we saw. A few were obviously fraudulent – one was led by someone who had an international arrest warrant outstanding. This information had been missed by the civil servants, so the proposal was still put in front of the board. We actually failed to get enough fundable stuff to recommend to use up all the available money.
But this didn’t stop the politicians. They allocated 40% of the fund to projects where they were advised (by us) not to do so. There was negligible due diligence. Of course, some of these were in parliamentary constituencies that had particular political significance during the coalition government of 2010-2015. This was doubtless coincidental.
Embarrassingly, some of these initiatives were not recommended because they were illegal under the EU’s state aid rules. The politicians announced public investment in these projects without spotting this minor issue. Did the Regional Growth Fund work? Three years after it started, after the publication of an annual review (and with lots of the grant money still not then disbursed), it simply ceased. No one had a clue whether it was worthwhile.
And now...
We are currently seeing truly massive government funding – £50bn-plus – of UK industry. Beyond doubt, the virus did so much damage that state financial support was needed. But the speed of the response has not been matched by the intellect applied to that response. The job of controlling the flow of these vast sums fell to the government-owned British Business Bank.
To the great credit of its board, the bank’s chief executive, Keith Morgan (who, like me, is a member of the Corporate Finance Faculty’s board), wrote to the government in May, warning that the then proposed £38bn Bounce Back Loan Scheme had numerous issues including fraud, bad debt, the absence of good systems and value for money. The government’s response? Get on with it. The bank’s reservation was published some five months after it was written. Hardly the ‘open government’ we’ve been promised – but possibly very ‘open’ for crooks.
The British Business Bank also wrote to the UK government about the £250m Future Fund – a scheme for venture capital-backed companies – making similar points. It was quite robust in saying that the costs of the new programme would be greater than the economic benefits for the public. That was clearly the case – and even before anyone considered the seepage of any of the funds. The impact of the virus has mostly been to reduce revenues. Early-stage businesses frequently have little, or even negative, cash, so revenues are not really exposed to the impact of the virus as much as they would be in more mature companies. The cash needs of new ventures had little, if anything, to do with the pandemic. And their shareholders are currently holding unprecedented amounts of dry powder. They could easily reinvest in their own portfolios without state support. So, there was no liquidity need of any scale and there are undoubtedly much better places to spend government money – or even perhaps not spend it.
As I’ve previously argued, the Future Fund is unnecessarily complicated – and very gameable. It’s a catchy name for a bad idea that will absorb both useful intelligence and money.
About the author
Jon Moulton is a CF and a Fellow of the Institute for Turnaround Professionals. Jon has long experience of turnarounds, having invested in them for 30 years and with considerable success. Jon is currently Chairman of FinnCap, the major AIM broker, The International Stock Exchange and Anti-Microbial Research Limited. He also chairs the Better Capital funds and Greensphere, an alternative energy infrastructure fund. He regularly writes, broadcasts and speaks on corporate finance and financial matters. Jon is also a Director of the think tank The Centre for Policy Studies and an Honorary Fellow of University College London.
About the article
This originates from the Corporate Financier November 2020 edition, exclusively for Corporate Finance Faculty & Faculties Online members. You can access our award winning magazine in its originally designed form, and our extensive archive brought to you by the ICAEW Corporate Finance Faculty.
