MONEY Mr Villiers and the equity cult
NICHOLAS DAVENPORT
Apart from a correspondent who made a good point in the SPECTATOR of 6 June, to which I will reply, the most fervent upholder of the equity cult seems to be Mr Charles Villiers, an ex-merchant banker and now the managing director of the IRC. As soon as he sees an equity about to go under he rushes in to bolster it up with offers of loans, and as it is public money he offers he has the wherewithal to stave off quite a lot of bankruptcies. But is this what capitalism is about? Does it make the national economy any stronger?
The Government gave the IRC £150 million for the good cause of promoting 'in- dustrial efficiency and profitability'—two- thirds of it have already been spent—but it did not give it a book of rules or a guide for action; it left the IRC to work out its pro- gramme with the Minister in charge—first at the DEA and now at the Ministry of Technology. Whether Mr Wedgwood Benn is too busy electioneering with Mr Enoch Powell to pay any attention to Mr Villiers I do not know, but the lac has just announced that it is loaning £10 million to British Leyland on condition that it uses the money to buy only British-made machine tools instead of placing 30 per cent of its orders abroad. This is the first time that the IRC has introduced protectionism into its work- ing brief. It is not denying it; it is even saying that it will grant similar loan facilities at 8-1- per cent to any other firm which will place orders with the British machine tool com- panies. Sometimes a single act of pro- tectionism may be justified but this is a general, act and it should be debated publicly in Parliament and not introduced through the backdoor of the IRC by Mr Villiers.
Now the IRC has done some good work and some dubious work, as when it took sides in a private merger. It has tried to put the machine tool industry on its economic feet. It spent £3 million in helping Plessey form a group with Aimec and the machine tool division of Ferranti. It helped Marwin with £11 million and Herbert-Ingersoll with £2-} million. But it cannot yet be claimed that any industry in which the IRC has in- tervened has been made really prosperous and profitable. Look, for example, at the computer industry or at the shipbuilding in- dustry. Neither has yet got off the ground by way of profits. Recently the MC seems to have abandoned the idea of rationalisation and has concentrated on handing out public money to the needy private enterprise. For example, it has lent £20 million to Rolls- Royce, £84- million to Alfred Herbert and £6 million to Cammell Laird. It is not only Sir Keith Joseph who is becoming increasingly critical of its activities. The impression is growing that it is handing out money without knowing exactly where it is going.
Competition, not -protectionism or state coddling, is the orthodox and surely the pro- per way to bring British industry up to the international mark. This was emphasised by an Oxford economist, Mr I. M. D. Little, in a trenchant letter to the Times. The pro- tectionism of Mr Villiers, he said, would reduce exports as well as imports, for the costs of firms which use the products of the protected industries will be raised. Pro- tectionism always tends to reduce efficiency. France tried it out in the nineteen-fifties and had to devalue twice in 1957-58. And it is a dangerous game because it will encourage America to retaliate and extend the similar measures of protectionism which it has already been taking. British Leyland, which is in a pretty mess itself, should be ordering the best machine tools in the world for its particular job, and if the British machine tool companies cannot supply them they should be bought abroad. The capitalist system does not work unless the inefficient companies go to the wall and the efficient ones come to the top. If the IRC simply intends to prevent inefficient companies going to the wall the last state of British industry will be worse than the first.
One gets the impression that the !tic is obsessed, with the idea that bigness pays and that bigness will keep the smaller groups going when it is ordered to channel its orders in a protectionist way. Certainly there are in- dustries, like machine tools, which have too many small units, but just to amalgamate giants like GEC and AEI or British Motors and Leylands and hope that geniuses like Mr Arnold Weinstock and Lord Stokes will work miracles and hand out their orders to groups of companies which the IRC has selected for favour is only asking for more trouble. Bigness creates its own management problems and protectionism its own inefficiencies.
My simple thesis is that one cannot keep an equity cult going by featherbedding the inefficient or ailing company. I agree with our correspondent, Mr Cleave, that the successful equity is the only potential hedge against inflation, that is, the equity of a com- pany which can maintain its earnings in real terms by raising prices, which can offset ris- ing costs by increasing its productivity, which can meet the ever-rising cost of wages and yet retain sufficient of its earnings to enable it to grow without recourse to shareholders and a watering of share capital. But how many companies can meet this challenge? Precious few have been able to maintain the standard of living of their owners over a long period. Technologies change. the quality of management changes, the economic environment and climate change—a company's fortunes go up and down but never steadily upwards. Even a wonderful company like Rolls-Royce en- dowed with the highest technical efficiency in its trade has had to go to the lac for a loan to tide it over a difficult period. Even the most successful private enterprise in the country—Pilkington the glass makers—is suddenly hamstrung by labour troubles. The point I am making is that while the successful equity share is the only nmential hedge against inflation it is so few and far between that the cult of the equity becomes a load of nonsense Keynes used to say that the only sensible investment policy was to hold only one equity share and change it every day.
Far be it from me to end on a discordant note of controversy but I would ask the highly taxed individual investor to look at Gas 3 per cent 1990-95 which stands in the market at 421. It will be paid off at 100 free of capital gains tax in twenty-five years. It has a guaranteed growth of around 3.4 per cent a year and this is equivalent to a 4.8 per cent growth of an equity share subject to 30 per cent capital gains tax. In other words an equity share has to grow at 4.8 a year over twenty-five years to produce the same total return as Gas 3 per cent. There are not sufficient equity shares which can do that—even with the help of Mr Charles Villiers and the IRC—to maintain an equity cult. But that should not stop our looking for the one or two equities which over twenty- five years will quadruple in market price.
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