State Capital and Private Enterprise

The Case of the UK National Enterprise Board

Daniel C. Kramer

• Publisher: Routledge
• Year: 2019
• Edition: 1
• eBook ISBN:
  9780429509230
• Topic: Negocios y empresa
• Subtopic: Negocios en general

To what extent can governments supplement private venture capitalists and stimulate the economy by providing money to new entrepreneurs as well as existing enterprises? The UK's National Enterprise Board (NEB) attempted to do just this, and whilst it gained most publicity through its efforts to bail out ailing giants such as British Leyland and Rolls Royce Aerospace, much of its attention was actually directed to smaller ventures. Originally published in 1988 Professor Kramer reports that the NEB's record of success was surprisingly good, and that many flourishing undertakings would not be in business today had it not been for the NEB's efforts. The author goes further, and after discussing the political and economic issues involved in according public aid to private enterprises on a case by case basis, he argues that not only should the UK revive its NEB, but that other countries, notably the United States, could benefit by establishing their own versions of it. Indeed, throughout, the author's perspective as an outsider makes him peculiarly alive to the relevance of the UK example to a whole range of international cases.

As the first scholarly, full-length study of the NEB, this book will be of value to those interested in the relationships between venture capitalists generally and the enterprises in which they take equity. It will also interest those studying the relationship between holding companies and their subsidiaries.

1

Introduction: The Rise and Fall of the NEB

Selective Assistance in the UK

I shall in this book describe a controversial British experiment with directing public subsidies to specific companies, the National Enterprise Board (henceforth ‘NEB’ or ‘Board’). The heyday of the Board was 1976 through 1980, though it still exists as a legal entity. The NEB, as will be seen in more detail shortly, was charged with ‘bailing out’ several major firms that were experiencing economic troubles and with giving assistance to other undertakings for purposes such as increasing jobs and exports and reducing dependence on imports. Its helping hand more often than not involved the taking of equity in the assisted concern, though it made loans as well. A fair amount has been written about the NEB’s problems with the larger firms, especially Rolls Royce Aerospace and British Leyland. I shall, therefore, devote relatively little space to the links between the Board and these ‘giants’ – though no respectable discussion of the agency can ignore these relationships – and concentrate upon its successes, failures, agonies and triumphs in acting as angel to less sizeable ventures.

Through depicting its relationship with enterprises of modest size, I shall show that it would make sense for the UK to revive its NEB and for the US to create one. As I shall demonstrate, its profit and loss record was not as poor as it appears on the surface to have been; and was achieved in the teeth of obstacles that its counterparts in the private sector did not have to brave. A couple of its major failures could easily have been avoided. Some flourishing undertakings making fine products would not be in business without its efforts. And it improved the management practices of some of the companies with which it dealt. There are, of course, those from both the right and the left of the political spectrum who argue that public aid accorded to private firms on a case-by-case basis will almost inevitably be harmful or useless. Their contentions are not insubstantial and will be analysed toward the end of this volume.

Before turning to the ins and outs of the NEB, a bit of background is necessary. Government steps to aid business can be general, designed to aid all industries; intermediate, intended to assist all firms in a particular sector (e.g., steel, computers); or selective, designed to support given companies.¹ (The aid awarded by the NEB was really ‘selective’ assistance, even though firms of all sorts could apply for the funding, since the agency had broad, almost legislative-like discretion to determine whom to bolster.) The United Kingdom (and West Germany) have been described as unlike France in that they favour general over specific aids.² Thus Britain has made considerable use of accelerated depreciation and investment allowances, techniques that are ‘general’ aids to industry because they are available on a non-discretionary basis to all firms that wish to make new investment.³

Nevertheless, even before the creation of the NEB, the UK did accord considerable help to specific companies or to specific sectors of the economy. Thus the Conservative Administration of Prime Minister Harold Macmillan enacted a 1959 Cotton Industry Act that gave bounties to the cotton spinning industry to destroy old, unused spindles and looms and replace them with modern equipment.⁴ Between 1945 and the end of March 1974 Conservative and Labour governments together contributed £340 million in launching aid for aircraft and £406 million in such subsidies for aeroplane engines. Of the £340 million, £233 million was accorded to build (in conjunction with France) the supersonic Concorde airliner and, of the £406 million, £178 million went to develop the Concorde’s Olympus 593 engine.⁵ (Launching aid involves assistance for the costs of design, development, tools of production, and the ‘extra’ manufacturing costs incurred while workers are learning their new jobs.⁶) Shipbuilding in the UK, as in other western countries, has been in trouble for many years. However, most shipbuilding firms are located in ‘depressed’ areas of the country, e.g., Northern Ireland and Scotland; and form a bulwark of the economy of these regions. Ergo, even before the British industry was nationalised in 1977 under the name of British Shipbuilders, it had received significant chunks of state funding. For example, between 1970 and 1975 the government gave it a total of £69 million, almost 15% of its total revenue.⁷

The Conservative Government under Prime Minister Edward Heath passed the Industry Act of 1972. Under Section 7 of the Act the Department of Trade and Industry (DTI) may offer assistance to firms locating or expanding in regions suffering from severe unemployment. (We shall henceforth call the DTI the Department of Industry (DOI), as it bore this name for most of the period this book covers.) Under Section 8 the Department may assist projects anywhere in the country that promise to benefit the economy and promote the national interest. Section 7 produced £203 million and Section 8 £151.6 million for British industry between 1972/73 and 1977/78. In 1984 alone £189 million went to particular enterprises under these clauses. Recipients of their generosity have included major shipbuilding firms, Ford and Chrysler Motor Corporations, and British Leyland.⁸

The direct institutional antecedent of the NEB was the Industrial Reorganisation Corporation (IRC), set up by the Labour Government in 1966 and abolished by Heath’s Tory Administration. The purpose of the IRC was to promote (by, e.g., encouraging mergers of small firms) the reorganisation or development of any industry in order to increase industrial efficiency and profitability. To facilitate a merger it could grant a subsidy to cover the costs. For example, in 1968–69 it supported with a loan of £25 million a marriage between Britain’s two largest ‘native’ automobile makers, British Motor Holdings (Austin-Morris-MG and Jaguar) and Leyland Motors (Leyland and Standard). In 1970 it lent the offspring (British Leyland, later a NEB problem child) £10 million to help it buy tools.⁹ And to complete this partial list of UK projects of selective assistance to industry, mention must be made of the birth of the country’s main UK-owned computer firm, International Computers Limited (ICL). This arose in 1968 as a result of a government-sponsored blending of various UK computer manufacturers. The state took a 10% shareholding in the new company and over the course of the next several years gave it about £50 million assistance for research and development. As we shall see, the paths of ICL and the NEB were to cross.¹⁰

The Birth of the NEB

Labour was out of power between June 1970 and February 1974. In opposition, its left wing was more dominant than during the Harold Wilson Prime Ministerial years of 1964–70. And in a UK suffering from economic stagnation and inequality, the idea of a state holding company patterned after Italy’s Industrial Reconstruction Institute (IRI) seemed attractive to some on that flank of the Party.¹¹ Even as far back as 1969 the Party’s National Executive Committee statement for the 1969 Conference raised the NEB idea; as did the Party’s Programme of 1972.¹² In 1975 there appeared a book entitled The Socialist Challenge¹³ by the economist (and currently Labour MP for Vauxhall) Stuart Holland. Holland argued that the ‘British private sector is now dominated by giant companies who are the leaders in such fields as investment, jobs, pricing and trade’.¹⁴ Were a state holding company to take over about 20 to 25 of the nation’s top manufacturing enterprises, the following advantages, among others, would be gleaned. (Holland was a keen though not totally uncritical observer of the IRI experience.)

(1) The state-owned giant company in a particular sector of the economy could pioneer ‘a new product or technique on a major scale’,¹⁵ thus forcing its privately-owned competitors to imitate it.

(2) The information that the sizable publicly-owned firms would convey to the state about costs and profits would enable it to more precisely identify whether privately-owned multinationals were evading UK taxation.¹⁶

(3) Where a privately-owned multinational was charging excessively high prices, its state-holding-company competitor could compel it to reduce these by lowering its own.¹⁷

(4) A state holding company controlling about 25 of the country’s hundred largest manufacturing companies would be strong enough to absorb any subsidiary in the country abandoned by a private multinational. The very possibility of this would deter a large multinational from blackmailing the UK government by threatening to close the doors of one of its UK subsidiaries.¹⁸

Holland had close ties to left wing members of the Labour Party’s National Executive Committee such as Anthony Wedgwood Benn, Ian Mikardo and Eric Heffer. Though his book was not published until 1975, he had been expounding the theories expressed therein to these individuals since the late 1960s.¹⁹ In April 1973 a Labour Party study group issued a Green Paper based on his ideas and calling for a National Enterprise Board that would take an interest in about 20 to 25 of the UK’s top hundred manufacturers. These future NEB subsidiaries would account for one-third of the turnover, half the employment and two-fifths of the profit of these leading enterprises. The purposes of the Board would include the stimulation of investment, the reduction of inflation, and the improvement of the balance of payments situation.²⁰ These views were incorporated into the National Executive Committee’s Programme for Britain of June 1973. This document contained other proposals unpopular with British industry such as legislation enabling the government to obtain certain information from private companies and to enter into ‘planning agreements’ with private firms covering prices, profits and investment programmes.²¹ Party Leader Wilson praised these suggestions except for the recommendation about an NEB takeover of the 25 leading firms, a scheme that he thought would lose him votes among the middle classes.²² Wilson, supported even by left wingers Benn and Michael Foot in his opposition to the 25 undertakings project, convinced the Party Conference to accept his position on this matter.²³

In February 1974 a plurality (not majority) Labour Government was formed with Wilson as Prime Minister. Wilson’s first Secretary of State for Industry was Benn, who was then and is currently a bête noire of the British press and industry. In August 1974 Benn issued a White Paper entitled The Regeneration of British Industry, which was more moderate than some on the left of the Party had hoped for. It talked about the need for a closer and better relationship between government and industry working together to increase national prosperity. Though the document proposed the establishment of a National Enterprise Board ‘to provide the means for direct public initiatives in particular key sections of industry’, no mention was made of a Board takeover of 25 leading firms. The Paper made it clear that no concern would be forced to enter into a planning agreement and that the NEB could not buy sha...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Dedication
• Contents
• Foreword
• 1 Introduction: The rise and fall of the NEB
• 2 The NEB’s profit-and-loss record
• 3 Obstacles faced by NEB not confronting private venture capitalists
• 4 The Board wraps itself in a cloud of mystery: additional Parliamentary tribulations of a public venture capitalist
• 5 The NEB and the Department of Industry
• 6 Firms aided by the NEB as venture capitalist: case studies
• 7 Highlights of the case studies
• 8 Inmos
• 9 The Insac debacle
• 10 The Nexos disaster
• 11 Alfred Herbert
• 12 Fairey and Ferranti
• 13 Rolls Royce
• 14 British Leyland
• 15 The NEB and the Ministry of Defence
• 16 Is an NEB now needed in the United Kingdom?
• 17 Does the US need an NEB?
• 18 Government subsidies to specific firms: an evaluation of the conservative critique
• 19 Government subsidies to specific firms: an evaluation of the radical critique
• 20 The NEB: an example of co-operation
• Bibliography
• Index