The curse of gimmickry

GOVERNMENT RONALD GRIERSON

Ronald Grierson resigned as chief executive of the IRC a fortnight ago. This critical appraisal of the Government's new policy to- wards industry is his first public statement since his resignation.

It could be that the political alarm about the Industrial Expansion Bill has been overdone and that the final measure will contain better safeguards against abuse than had at first been thought. If so, much of the credit will go to those who have so forcefully expressed their apprehensions. It must also in fairness be admitted that if the Bill becomes law the chances are that it will somehow do some good somewhere. But any benefit which could pos- sibly flow from it would even on the most optimistic assumptions be quite trifling com- pared with the tremendous release of energies which could be achieved by different measures: abolishing SET in its present form, creating real export incentives, lowering the level of taxation, especially on individual salary earners, fixing more realistic profit margins on government contracts—all or any of these would do more for the tone and morale of British industry than the selective inducements envisaged under the new Bill.

One of the claims which its advocates make for it is that individual industrialists have ex- pressed a welcome for the new proposals and that a substantial demand for such facilities is already known to exist. There is nothing sur- prising about this claim. It is a well-known fact that there are always takers for a public honey- pot; indeed the offer of substantial sums of money on soft terms is one which it would be foolish for industrialists to turn down out of hand. There could even be industrialists who for reasons of their own might welcome the Government as a shareholder.

What should concern us is not so rnuch the reaction of individual industrialists as the general appropriateness of this form of govern- ment-industry relationship both in the specific context of current economic problems and in the more general context of what constitutes proper use of Exchequer funds. The idea of a statutory instrument to enable government to meddle in the affairs of individual companies has always had a fairly strong appeal to left- wing theorists. However, the main impulse be- hind the new measure probably comes from another and more recently conceived economic doctrine: that the way out of industrial stagna- tion is not by general reflation but through 'selective intervention' in support of specific industries and chosen companies. This con- cept enables its authors to claim that the term 'intervention' has a less sinister connotation than its opponents allege; and that it is in fact no more than a form of 'support' for industry comparable to that available in other countries.

The comparison with other countries, as will be seen later, is dangerously misleading. But the doctrine itself is in any case unproven and it is hard to see how in pure cost-effectiveness, as a stimulant to growth, it can begin to com- pare with the other measures for which in- dustry has been pressing. Advocates of the Industrial Expansion Bill seem to-ibe unduly mesmerised by the few specific examples with which they have been concerned and one of the real tragedies of the proposed measure is that it elevates a temporary expedient to a major principle of economic administration. The area of government-industry relationship is too serious and too important to be dealt with in this manner.

The proposed measure also touches on another vital issue of public policy : how Ex- chequer funds should be used in support of industry and whether equity investment is in fact an appropriate vehicle for this. If we accept the Government's assurance, unconvinc- ing though it may be, that the new legislation will not be used for lame ducks, the cases likely to qualify for financial help from the Govern- ment are those where companies in the fore- front of technological progress require research and development (R & D) funds on a scale wilich their own shareholders could not justify; and certain other companies, especially in the heavy capital goods sector, where the main problem is lack of orders and where some artificial stimulus is required to maintain ex- pansion.

It is, of course, true that in other countries generous state assistance of one kind or another is available in support of industry. In the United States this assistance comes largely by Way of projects. Government places large orders, often of a highly experimental nature, with the companies concerned who thus earn for themselves the financial resources needed to carry on a major R & D effort. It is not often appreciated in this country what an im- portant effect this generous public ordering has not only on the scale of R & D in American companies, but even more on their ability to master complex production problems by being given the experience of mass manufacture at an early stage. The absence of a comparable stimulus constitutes a severe handicap for British industry and the Government is not wrong in claiming that it should be solved.

It is here that the question of how to use the taxpayer's money arises. The state could take the view, as in the United States, that pro- vision of public funds for selected industries (computers, ,aircraft, etc) is a justified charge to the public purse and yields such general benefits that no specific return on it need be expected. Such a view would be defensible. Conversely, it could be argued that if the state makes such contributions to industry, it would be fair to impose a repayment obligation to operate once the expected benefits in profit- ability had materialised. It is a matter for de- bate whether in such an event industry should be made to repay the whole of the sum con- tributed by the government, or only a part of that sum—or possibly the whole sum plus a premium. The answer to this lies in the realm of social cost considerations and depends, as in the case of other public services, on whether it is deemed right for the cost to fall on the direct beneficiary or on the community at large.

If the view is taken that the state should obtain a return, and possibly a profit-sharing one, from the contributions it makes to in- dustry, the question of how this should be ex- pressed becomes an important one. When

pressed about the right to own equities, which is said to form part of the new legislation, Whitehall's reaction is that this is only perm. sive and may not. in fact happen very often; but the Bill's advocates profess to see no reason why equities should be excluded from the range of securities the state may hold.

In support of this view they claim that the City frequently invests in special situations by way of equity. It is important to analyse this argument. In the first place, there is no possible basis for comparing the kind of financial facility expected from government—whether it is an R & D contribution or a concealed sub- sidy—with any possible finance to be obtained from the private sector. The money which the City raises for industry by way of equity or debenture issues is for its permanent or work- ing capital needs and the fact that a small part of it may be used for R & D, as it might also be used for rent, advertising or anything else, is completely beside the point. The kind of money for which industry turns to the govern- ment cannot by definition be supplied from private sources and the mechanism used for providing it cannot therefore be compared.

If it is felt on grounds of public policy that these contributions should not be made by the state a fonds perdu but that reimbursement (with or without a premium) should be im- posed on industry out of profits above a certain level, this can easily be catered for by income stock or notes with limited convertibility (and without voting rights or board representation) of the kind negotiated by the Industrial Re- organisation Corporation when Elliott-Auto- mation was merged into English Electric.

One is thus left with the uneasy sensation that one of the prime motives behind the desire to take equity investment is a certain financial showmanship which has recently become mani- fest in Whitehall. There have always been those who eagerly wanted the state to share in what they regarded as the 'super-profits' of in- dustry; to their numbers have now been added certain others who feel that it would redound to the credit of a Labour administration to pull off one or two spectacular financial coups.

It is highly questionable whether such an approach is really in the public interest. The prudent financial view has always been that equities are a gamble and that, especially in risky situations—which by definition are those most likely to be proposed—the safe course is to be a creditor and if at all possible a secured one; and that if one has to be an unsecured creditor, the lack of security should be com- pensated by some form of free profit-sharing. It is difficult to see why in the case of public money this sound financial principle should be stood on its head.

It must now be taken for granted that the Industrial Expansion Bill will shortly in one form or another appear on the statute book. Perhaps its political implications will be less sinister than is generally feared. But to those with practical knowledge of industry's prob- lems it remains hard to believe that this form of swimming against the economic tide—even when dressed up under the elegant title of `micro-economics'—can be a practical substi- tute for the sounder measures needed to restore confidence in the economic management of our affairs. It is also sad to reflect that at a time when the problem of industry-government re- lationship deserves the most careful study, some of the best brains in Whitehall have their already overloaded timetables burdened with this form of gimmickry.