Bill Jamieson: Pitfalls of state equity and minders in the boardroom

Should we welcome a new Scottish Government agency to take shareholdings in small to medium-sized companies? Were the mega loans shelled out to giant overseas global conglomerates an appropriate use of Bank of England money? And can we be sure that £16.2 billion advanced to companies under the Covid Corporate Financing Facility (CCFF) will be paid back on time and in full?

Holyrood has had to sink £40m into Prestwick Airport. Picture: Robert Perry/Getty

Such are the searching questions as we begin to emerge from the coronavirus plague and lockdown. Updated modelling by the Scottish government Chief Economist Gary Gillespie suggests that economic output may not recover to pre-crisis levels until the start of 2023.

He warns that unemployment is rising from its pre-Covid-19 lows and could increase to more than 10 per cent this year, despite containment by the Job Retention Scheme. And many thousands of SMEs are tottering on the brink, fearful that continuing lockdown and social isolation measures will force them out of business.

It is against this backcloth that veteran Scots banker Benny Higgins, former chief executive of Tesco Bank and now chairman of the Scottish Government’s economic recovery panel, has talked of setting up a new agency to help firms in financial distress.

He told BBC Scotland of plans being sent to the Scottish cabinet this week for the agency to take numerous private company stakes as part of the rescue phase for firms in distress. It portends a new role for ministers as investors in Scotland’s companies – not just the big, strategically important ones, but also equity stakes in a wide range of small companies.

“It won’t just be high-level themes,” he said. There will be specific “interventions” – a new government agency to take control of the new and wide-ranging share portfolio. At arm’s length? Not necessarily: “The important bit is that the assets are managed by people who know what they’re doing.” But who might they be?

Welcome though this may be for struggling firms, it will be seen as a troubling development for many. Would business really want the Scottish Government as a shareholder as well as rule-maker, regulator and tax setter?

What might be the criteria for state equity support? Agreement to submit to government preferences for future investment? Long compliance protocols on social and unemployment issues such as age, ethnic and gender balance? Restrictions on dividends and bonus payments? And a Holyrood director on boards to monitor business decisions?

For firms that cherish their independence and flexibility of action and movement, the thought of having a Benny Minder in the boardroom or a “state guardian” enforcing conformity with the political whims of Holyrood chills them to the bone.

Precedent is cited – but not all of it is reassuring. The UK Financial Investments arm of the Treasury holds the 62 per cent stake in Royal Bank of Scotland. And the Scottish Government already owns Scottish Water, Cal-Mac ferries and Highlands and Islands Airports, a stake in troubled Scottish manufacturer Burntisland Fabrication (BiFab) and wholly owns Prestwick Airport.

The Prestwick example in particular provides little by way of reassurance for taxpayers. The Scottish Government put the airport up for sale last year after being bought in 2013 when Nicola Sturgeon was Cabinet Secretary for Infrastructure and Investment. It has remained chronically in deficit, with Holyrood having to put some £40 million into the loss-making business. The Scottish Liberal Democrats said the purchase had been a “disaster” and had “lost taxpayer’s money hand over fist”.

Picking winners is problematic enough. Fighting intense political pressure to rescue outright losers is even more fraught with difficulty.

Yet Higgins sees small businesses being of strategic importance, and says part ownership of them should be brought into the recommended new agency. But which SME businesses out of a universe of some 334,000 in Scotland would qualify? What would be the criteria? And how would firms respond if a rival in their sector is favoured with Scottish Government equity cash and they are not?

Meanwhile, critical questions loom over the massive loans granted by the Bank of England to UK and overseas companies. Last week the Bank revealed it has now paid out £16.18bn to 47 companies through its CCFF facility, offering loans at a low interest rate with a one-year maturity.

Ministers wanted to ensure that money loaned through the BoE facility was used by UK companies to help them survive the pandemic and targeted the programme at companies making a “material contribution” to the UK . But how can this apply to companies such as Burberry, Chanel and Tottenham Hotspur football club, majority owned by Bahamas billionaire Joe Lewis, which got £175m?

About half of the BoE programme money has been lent to foreign companies through their British operations, including groups such as Telefónica, in Spain, which is paying a dividend this year, and Baker Hughes, of the US, which announced a payment last month – before the announcement of recent dividend and bonus restrictions.

Ryanair and easyJet each received £600m in bailout loans. BA and Wizz borrowed £300m each. All four airlines have announced plans to shed up to 20,000 workers.

Global car makers have also used the Bank’s facility: Nissan has borrowed £600m, Toyota has access to £365m and Honda has borrowed £75m. Rolls-Royce, which has announced plans for 3,000 redundancies, borrowed £300m. Honda plans to close its Swindon plant next year. CNH, an industry group headquartered in the UK and the Netherlands and controlled by the Italian Agnelli family, has also used the programme.

The Bank’s programme is hailed as playing “a key role in supporting the British economy”. But some argue that several of these loans are hard to justify and that the Bank – and ultimately the taxpayer – is being taken for a ride.

All this is on top of the cost of the UK Treasury’s measures to tackle the economic consequence of coronavirus. With furlough extended to October, the total is up from £123bn to £132.5bn.

Better and probably cheaper, says Chancellor Rishi Sunak, to spend now to prop up distressed, but fundamentally sound, companies than to see them collapse and have to rebuild the economy and employment from the debris. But what a gamble.