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Not for want of trying

Author: John Moulton

Published: 10 Mar 2023

John Moulton on encouraging investment . The UK government must try harder when it comes to encouraging ‘good’ investment.
There has been much made of the UK having a lower rate of capital investment than many nations. We run at about two thirds of comparative countries in the G7 group of nations (Canada, Italy, France, Germany, USA and Japan). This is generally viewed as a bad thing. 

Our politicians have been messing around with tax incentives for investment for a long time. No regime seems to last long. Budgets since the Second World War have changed the system, either with the intention of increasing investment or increasing revenue – or less nobly, tackling abuse. The obvious benefits of a stable system – allowing planning, reducing uncertainty, less compliance effort – seem wasted on governments. 

We have had numerous government schemes in private equity. In the 1981 budget, the Business Start-Up Scheme was established to provide tax relief for private investors who would contribute not only capital to small firms, but also their ‘direct personal business experience’ to help companies. For individual investors looking to invest in small companies under five years old, they could claim up to £10,000 income tax relief per year. This scheme was singularly ineffective. Investors had to group together to make sensible-sized investments, and make investments quickly if they were to comply with tax deadlines. The largest such fund was Electra Risk Capital, which invested £8m in 32 companies, reportedly losing some 75% of its money.  

Since then, we have had a huge number of government schemes designed variously to encourage small firms, regional investment, sectoral investment, long-term capital and to correct some of the errors – and abuse – of prior schemes. We currently have the Enterprise Investment Scheme, Venture Capital Trusts, the Seed Enterprise Investment Scheme, R&D tax credits, innovation funding, patient capital, green initiatives, ‘levelling up’ and Enterprise Capital Funds (ECFs). None have been the desired silver bullet. No one scheme ever will be. 

I sat on the £3.2bn Regional Growth Fund board, giving out grants to businesses between 2011 and 2016. Ministers regularly disregarded our advice for what were obviously political and constituency reasons. There was supposed to be an annual review as to the success or otherwise of the grant recipients – one was done before the first half of the grants had been disbursed, unsurprisingly showing little. To my surprise the next review appeared in May 2022. It actually shows only £2.8bn got disbursed and that there was some evidence of increased employment in recipients, but not much else. 

Most of these numerous government schemes are never really properly evaluated and only the gross failures are very apparent. The Regional Development Agencies mostly failed spectacularly and both Welsh and Scottish development agencies are among those with public failures. 

Waste not, want not 

The problem is not a lack of good intentions. It’s a recurrent theme of setting up schemes with a primary objective of disbursing the money quickly – and sadly that’s the easy bit. If public money goes into hopeless deals, that is a waste. It will be an economic negative if good people and assets are used in hopeless enterprises. The clearest winners of these incentives have been tax professionals and fund managers. 

As most readers know, it’s hard enough finding good opportunities. Add in restrictive terms such as that the deal has to be in a narrow geography, and/or be tied to a narrow industrial sector and/or help diversity and/or be able to make money this year, and you can see how public funds often end up in mediocre, or worse, investments. We are told that ECFs, for example, have generated a lot of well-paid jobs – not necessarily a great objective. Obviously, it might be that the easy availability of public cash enables generosity in pay – or did in these instances. 

We need old-fashioned return on investment. The best investments for the economy are those made into businesses that will generate growth, not just expenditure. The private sector does fairly well at spotting such opportunities, and missing the black holes; the public sector mostly doesn’t. 

There is a public sector industry that says its job is to fill the ‘equity gap’ or address ‘market failures’. In reality, money soon finds the profitable areas. A hole is not a gap. Mostly we should be very sceptical of public funding of businesses. We don’t just need investment. We need good investment.