THE CITY
The EIL miscarriage
Nicholas Davenport
If the EIL baby turns out to be stillborn its parents will surely breathe a sigh of deep relief. The reluctant couplers are the life and pension companies and mutual societies, the investment trusts, the unit trusts and the FFI (Finance for Industry) — an incompatible lot who would not normally be contemplating any sort of marriage or liaison. The directors of the life and pension funds have fiduciary obligations to their policy holders and members while those of the unit trusts are bound by strict rules of the Board of Trade. Neither could activate the purposes of EIL (Equity Investment Limited) without a breach of its articles. The only reason why they were all pushed together into unholy matrimony was because they all live in the City, because the City has been falsely accused of starving industry of capital and because the midwives gleefully presiding over this illicit union — none other than the Governor of the Bank and his industrial adviser, Sir Henry Benson — were anxious to improve the public image of the City. But they are going the wrong way about it. The right way is not to bow down to a false accusation but to expose the lie.
The reason why industrial investment has fallen, and is still falling, is not because the City has refused to provide the capital but: (i) because demand fell sharply with the onslaught of a deep world recession; (ii) because with the return of a Labour government in 1974 there followed a rise of 30 per cent or more in wages, a consequential jump in price inflation and a drop in profit margins — remember always that investment is mainly financed out of company profits; (iii) because the trade unions are not interested in productivity gains from new investment, insisting always on overmanning to conserve jobs; and (iv) because money rates for borrowers rose higher than profit rates on new investment. It is true that the life and pension funds stopped buying industrial equity shares towards the end of 1974, but that was because their directors really believed that the new Labour government was intent on destroying the whole private enterprise system. This was not an unreasonable assumption if the extreme socialism of the Labour Party's election manifesto was taken to be the forerunner of the Marxist Clause 4 — the socialisation of all the means of production, distribution and exchange to which it is committed — but when Mr Healey in his 1974 autumn budget demonstrated that he wanted private enterprise not only to continue but to be profitable, the cautious fund managers changed their minds and came massively into the equity share market, buying, at one time before the end of 1975, at the rate of nearly £50 million a week. Hence the market boom.
What gives the lie to the false accusers of the City is that the amount of new money raised by the issue of marketable securities (excluding government borrowing) in 1975 was the highest ever recorded. The total was £1,993 million against £584 million in the previous year. I quote the figures of the Midland Bank which keeps an accurate record of City activity. Company issues accounted for about 80 per cent of the 1975 total and of these £1,406 million was raised by way of 168 rights issues. The financial group (insurance, etc) took one-third, capital goods companies 16 per cent and consumer companies (durable goods and non-durable) 32 per cent. I repeat that most industrial investment is financed out of retained profits, and suffers badly when profits fall steeply, but the 1975 record of new issues proves that the City did its utmost to stimulate new investment.
Perhaps Mr Jack Jones, the most distinguished of the City's false accusers, is not familiar with the City machinery. If a company has shares quoted on the Stock Exchange its brokers can easily arrange a rights issue if its record is good and the market is active. If a company has no market quotation it can go to its bankers or its merchant bank or the FFI to arrange a bridging loan until a quotation can be arranged. (The FFI has recently had capital pumped into it for this purpose by the life and pension funds and can issue variable interest loans.) If the company is too small it can go to the ICFC, a subsidiary of the FFI, which is specially equipped to take up equity shares in the smaller size of companies. Yet the sponsors of EIL profess to see a gap in this City machinery. They even believe that fifty to a hundred applications for equity capital might be put up to them in a year. But they do not precisely define what the gap is. They speak of "difficulties" but the impression they leave is that the difficulties occur when the capitalseekers have been unable to convince the capital-providers of the soundness of their proposition. Of course, there will always be speculative enterprises which can only be financed by private backers, but if the sponsors of EIL want their directors to have a different lending policy from the conventional one in the City it means that it must be less strict; in other words, that it will allow investment in equity shares which are second-rate or third-rate. That is really not permissible for life and pension funds or for unit trust funds.
What is staggering is that the promoters of EIL propose that the authorised capital should be as high as £500 million of which £50 million would be called up immediately. With the Government already handing out millions to lame ducks it would be pathetic to see this new private institution hand out milliohs to fowl who may never fly or swim. The judging of risks is an expertise which the established financial institutions in the City have acquired after years of experience. They should not be asked to lower their standards.
Mr Harold Lever, the Chancellor of the Duchy Of Lancaster, who knows more about the City than any other minister of the Crown, said this to the National Association of Pension Funds on November 4: "The institutional investor has a paramount duty towards his policy holders and members, the little men who have entrusted him with their savings. He cannot and should not try to do the industria list's job for him by formulating proposals for industrial investment. His job is to assess whether the industrialist's proposal is suffi ciently sound to justify the loan of money belonging to those for whom he acts. He has a duty to refuse such a loan if it is designed only to support the speculative plans of an unsuccessful entrepreneur. And in discharging his duty he is helping to avoid the misallocation of the country's resources." And he added: "I have yet to meet a well-managed British firm with a soundly based project whia has been unable to find finance at the going rate." One big pension fund has already left the Association in protest against its support of
EIL. The City editor of the Daily Mail, Patrick
Sergeant, who seems to be able to collect more indiscretions from top people than I can, reported a fund manager as saying about EIL: "It is no part of my business to invest in a trust devoted to buying shares nobody else wants. I might find EIL using my money to buy bad shares I have just sold from the portfolios I • manage." And another: "The scheme was put together in last year's panic about left-wing criticism of the City. It simply doesn't hold water." The panic was caused by Mr Benn's threat, when Industry Secretary, to conscript City money for investment. As Mr Lever told the pension funds in the speech I have quoted: "A forced investment is invariably a bad investment."
I hope the EIL sponsors will now drop their baby and leave it to Mr Healey to give the financial nursing which will induce ■ industrialists, now worried by over-capacity, to advance their investment spending ahead o
the next boom. It is expected that he will give generous tax incentives — like writing off new
investment against advanced corporation tax — to encourage investment within a specified time limit. Let the midwives of EIL stop trading in politics and leave investment boosting to the astute politician we have at the Treasury.
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