UK’s Project Birch revives age-old problem of ‘picking winners’

State aid policy must stand on its own merits and not be muddled up with Covid-19

The writer, a former FT editor, is head of industrial policy at Policy Exchange

Does anyone remember Alfred Herbert? Back in the 1970s, this company was Britain’s largest machine tool maker and regarded by the then Labour government as strategically important.

Thus, when the company ran into a financial crisis, the government intervened and pushed it into the arms of the National Enterprise Board, the agency that had been created to rescue temporarily sick companies of this sort. However, like other “lame ducks” that passed into the NEB’s control, the patient did not recover. In the early 1980s, under a Conservative government that was not much interested in national champions, Alfred Herbert, like the NEB itself, vanished from view.

No one is suggesting that Project Birch, the name which the Treasury has given to this government’s bailout plan to save strategically important companies, will bear any resemblance to the National Enterprise Board.

It is a response to the Covid-19 crisis. The idea is that viable companies which are at risk of going under because their markets have collapsed — through no fault of their own — should be able to stay afloat by drawing on the support schemes the government has set in train. In the first instance, Project Birch is more likely to be about making loans (with the taxpayer being first in the queue if the company goes bust). Only in extreme cases might the government consider as a last resort taking an equity stake. Any such stake would also be held for the shortest possible period.

There is, nevertheless, a potential problem, which harks back to the “picking winners” era of the 1960s and 1970s. How does the government decide which companies are strategically important, and which are not? Will the decision be based on employment, or exports, or the importance of the company to a particular region?

One hopes that the criteria for intervention of this sort — if it ever becomes necessary — will be tightly drawn, limiting the scope for discretion on the part of politicians and civil servants.

There is also the well-known “exit” problem. Having acquired a significant equity stake, the government may find it hard to sell out later. Could some large industrial companies come to be regarded as too important to fail?

A few British companies are already in that category, as was shown in 1971 when Edward Heath’s Conservative government effectivelynationalised Rolls-Royce, the aero-engine manufacturer. Rolls-Royce had got into trouble through management mistakes. It had negotiated, on excessively onerous terms, a contract to sell its RB211 engine to Lockheed in the US. As development costs escalated, the company ran out of cash and was forced into receivership.

Rolls-Royce was seen as a national asset that should not be allowed to go under or to be acquired by one of its American rivals. As it turned out, the design of the RB211 was sound and it was the basis for a successful range of engines which eventually, in 1987, allowed the government of Margaret Thatcher to privatise the company.

When taking over Rolls-Royce, however, Heath made no promise as to when the company might be returned to the private sector. In that and other respects, his deal was very different from the one just negotiated by the German government with Lufthansa, the national airline. This arrangement, some aspects of which have been challenged by the EU competition authorities, would give the state a 20 per cent stake in return for a rescue package worth a total of €9bn.

The plan is for the government to sell its shares before the end of 2023. There is also a provision in the deal that the state shareholding can be increased to 25 per cent plus one share (a blocking minority in German law) if that is needed to ward off a hostile takeover.

This takeover clause is of particular interest to Peter Altmaier, Germany’s economic affairs and energy minister, who was arguing, long before the current crisis, that some German companies should be designated national champions and that the government should, therefore, be allowed to take shares in them to prevent foreign takeovers.

The Lufthansa agreement could be seen as being in line with this approach. But senior members of Germany’s ruling party are insisting that the state must be an entirely passive and temporary shareholder, and in no way involved in management.

The implication of that view is that Covid-19 policy should not be allowed to morph into industrial policy. It is also a principle that the UK government should take on board with Project Birch.

If Boris Johnson’s government wants to use state aid as an instrument of industrial strategy or to make it harder for strategically important companies to be taken over, such policies should be justified on their own merits. They should not be muddled up with the response to Covid-19.