The definition of insanity
Trying the same policy again and again, while expecting different results
This weekend, The Sunday Times ran an interview with Peter Kyle, the current Secretary of State for Business and Trade. Kyle announced that the government would take “aggressive” stakes in fast-growing private companies.
Kyle’s argument ran as follows: there is a lot of talent in British companies, they struggle to scale domestically, this is partly due to a lack of capital and to regulatory obstacles, if the government provides the capital, it would then be incentivised to remove the structural barriers, thus solving both problems at once.
At a surface level, this might sound appealing. It bundles together a (partly accurate) diagnosis with a clever-sounding mechanism that makes the state’s incentives self-correcting.
In reality, this sounds like a continuation of a set of policies that haven’t worked. It bolts together a distinctly wooly theory of change with a wrong-headed view of government’s relationship with enterprise.
Memeing yourself
The incentive question is the most interesting and damning part of Kyle’s pitch. The argument seems to be that high-growth businesses face structural barriers to growth, but if the government is a shareholder in these companies, then it will be incentivised to help them succeed. Kyle cites the example of self-driving car company Wayve. After the British Business Bank invested $33 million in the company’s $1.2 billion Series D round, his department has been lobbying Transport for London on Wayve’s behalf. As the government owns a small stake, “we share the ambition of Wayve — we take on some of the challenges in getting this stuff through the system”.
For a start, this says something fairly dismal about the government’s outlook on business.
The government receives around £100 billion a year in corporation tax receipts. Companies employ people who pay income tax and when successful entrepreneurs and investors exit, they pay capital gains tax. Kyle is essentially conceding that economic growth (officially “the number one mission of the government”) isn’t a sufficient motivator.
There are two possible explanations – both of which likely contain some truth.
The first is that, if this government doesn’t have its hands on part of your business, it isn’t all that invested in your success. This would tally with the Labour Party’s baleful slide back into its comfort zone that Tony Blair warned about in his recent intervention.
The other is that this is an admission of low state capacity. A government confident in its ability to create favourable conditions for business doesn’t need equity to motivate it to fix regulatory bottlenecks. When a functioning state believes that a technology, such as autonomous vehicles, is economically significant but held back by artificial policy barriers, it ... fixes it. That way, the entire sector benefits, rather than just the entrant government happens to have a small equity stake in.
Kyle argues that entrepreneurs are held back by “a stop-start system where it takes everyone from top to bottom for something to happen. But it only takes one person to say no, or for them to leave something in their in-tray, for everything to grind to a halt.”
He is completely right, but what he’s describing is a state that lacks the capacity to act on diffuse incentives and that needs to bribe itself with its own balance sheet to act.
Broken levers
The reason for this lack of capacity also points to why ‘take bigger equity stakes’ is unlikely to do much by itself.
If the British government had a track record of French-style dirigisme, where it backed national champions aggressively and was prepared to sideline national regulators and ... creatively interpret international treaties, this might theoretically make some sense. While I don’t view the French government’s relationship with business as something we should emulate, it is geared up for this kind of intervention through decades of experience. As a result, the country also has an administrative elite and political culture that tolerates it across electoral cycles.
This is not the case in Britain. The British state has so eroded its capacity to act by outsourcing power to the courts, independent regulators, and international agreements that it struggles to act decisively even when it wants to. Regulators with statutory duties around fair competition can’t favour one firm over another, while pathologically risk-averse ministers and civil servants aren’t about to go to war over subsidy control. By contrast, France has a track record of aggressively litigating state aid cases, swallowing any penalties, and Bpifrance’s balance sheet is roughly 15 times larger than the British Business Bank’s.
Kyle’s comments betray this lack of capacity. He refers to his department making phone calls on behalf of Wayve. This is because, increasingly, most government departments only have the ability to lobby other arms of the state. Peter Kyle has no power over the road network. Even his colleague, the Secretary of State for Transport would struggle legally to compel local authorities to allow autonomous vehicles to operate on their roads. So phone calls it is.
Even then, there’s no reason to believe that the Department for Business and Trade will be a particularly effective lobbyist. That the British Business Bank has a financial stake in Wayve doesn’t actually matter to any of the individual decision-makers. TfL is not going to move faster, because in ten years time, a part of the system that it has little connection to might realise significant gains on part of its investment portfolio. You can’t fix a system that doesn’t respond to diffuse incentives by introducing another layer of diffuse incentives.
In practice, I suspect the government will continue to gradually worsen the operating conditions for most fast-growth businesses, while weaving an ever-more byzantine web of special strategic designations, side-deals, and carve-outs for companies that ministers happen to favour. Not only is this an intrinsically unscalable approach to economic growth, it’s abysmal for business dynamism.
It wouldn’t surprise me if we see some backpedalling and for the government to insist that it isn’t trying to pick winners and that by helping individual companies, other entrants will benefit. But then the supposed value-add of this intervention would diminish sharply.
State advocacy in a commercial context in part derives its value from scarcity. For example, Sovereign AI’s pitch that it offers the companies it backs “the unique powers of the British state” only means anything if the powers are not extended to everyone. What’s on offer is a queue-jump, and a universal queue-jump is just the queue.
Let’s do the time warp again
Putting aside the mechanics of this specific intervention, I remain constantly frustrated by the lack of intellectual curiosity across government when it comes to venture and fast-growth businesses.
The government looks at British businesses either flaming out at growth stage or moving overseas and consistently lands on ‘lack of capital’ as the explanation – something that Kyle also references in this interview.
This is despite successive governments pumping billions of pounds into UK venture and increasingly taking stakes in companies directly. For more than two decades, the government has been using progressively escalating sums of taxpayers’ money to close the ‘funding gap’. Yet the ‘funding gap’ remains as unclosed as ever, while lobbyists and a group of fund managers continue to push for yet more money.
In practice, the case has never struck me as very persuasive. After all, even without the British Business Bank’s $33 million, Wayve has managed two $1 billion plus fundraises. I’ve spoken to fund managers focused on growth-stage companies who say that, far from facing a capital shortage, they struggle to find enough good British opportunities to invest in.
My theory has always been that “British venture capital” just isn’t a very attractive product. British VC funds have underperformed their American peers since 2007, in much the same way other British asset classes have. This is exactly what you’d expect in a country with two decades of stagnant productivity growth!
The median fund the British Business Bank has staked through its flagship Enterprise Capital Fund scheme, which has been running since 2006, has returned 15 pence for every pound invested, while the scheme’s pooled returns sit at a formidable 62 pence on the pound.
Of course, you could argue that the government’s past track record isn’t a fair yardstick. This time, Kyle isn’t investing in “British venture capital”, but in companies with a track record of winning, like Wayve or Octopus. But if they’re already winning, what ‘market failure’ is this correcting? What meaningful seat at the table is the British state gaining by taking single digit stakes in already successful companies?
Brother, can you spare me a job?
The real tell in this whole interview was Kyle’s comments on the Labour leadership election:
Asked whether Sir Keir Starmer, Andy Burnham or Wes Streeting would deliver the best business environment, Kyle responded, “A Labour government,” before adding: “With me in it.”
Kyle was historically identified with the right of the Labour Party. I doubt that, in his heart of hearts, he really believes that what British business needs right now is 1970s corporatism. Instead, he sees the writing on the wall for this government and knows its successor will lean towards greater interventionism and more tax and spend, bond markets be damned.
We can only hope that this isn’t the start of a competitive arms race to see who in the current Cabinet can spend the most of other people’s money before their tenure is up.
Disclaimer: these views are my views and my views alone. They are not the views of my employer, any French dirigistes litigating state aid cases, or anyone else. I’m not an expert in anything, I get things wrong, and change my mind. Don’t say you weren’t warned.