Long-term Capital for Business

Around the world, many countries, although they do not have this particular set of problems and although they have not cracked things entirely, have a different system of capital deployment. I would like to pause on the German example—I have used this before in Westminster Hall. I have already explained the successful indicators of productivity and capital investment in the German economy. KfW is the German national development bank. It came about as a result of the Marshall plan; it was set up for the purposes of post-war reconstruction. It supports infrastructure investment, lending some €47 billion, it acts as a lender to local authorities and, most importantly, it supports small and medium-sized enterprises. In 2017 it lent some €8.2 billion to small and medium-sized enterprises for start-ups and scale-ups. It lends money, provides equity funding and provides mezzanine financing to cover all aspects of capital investment. Some 90% of the bank’s funding is from the private sector, in the form of debt that is backed by bonds. It is owned in partnership between the federal Government and the individual states. It does not appear on the national balance sheet of the Federal Republic of Germany.

As the United Kingdom leaves the European Union, we will no longer have access to the European Investment Bank. That bank invested more than £2.5 billion in the UK in 2018. That was our money that was invested—it was gleaned from borrowing on the back of the British taxpayer—but we will need to find a way to replace that level of financing, because there will be a hole in the capital provision landscape. We need to look at the investment bank model in detail. It would fulfil the need for a patient capital investment vehicle, as outlined in the industry panel review. The case for a major intervention in this way is, in my opinion, justified. The lagging productivity in our economy is a major risk to our economic prosperity, and we need action now. This cannot wait any longer. It especially cannot wait until after we have resolved the issue of Brexit. Our thinking in this area is a vital part of our preparations for our economic wellbeing after we have left the European Union.

We have the British Business Bank, which has some of the functionality of a national investment bank, so there is tacit acceptance by Government of the problem that I have been attempting to describe. The big issue with the British Business Bank, as I understand it, is that it does not seem to have equal coverage across all parts of the United Kingdom.

There is more that we can do. We should look at other ways of releasing under-productive cash for equity funding. We need to take a healthier approach to our risk appetite as a country. Changing the culture is essential. We need to harness our savings and pensions. With some innovative mechanisms, we can unlock that money and put it to use in our economy. Using the tax system and the savings guarantee system in innovative ways, we could revolutionise the way companies get finance and the ultimate source of that finance. Helping people to acquire equity stakes through shareholder co-operatives, saving schemes and direct micro investment could all work towards a new culture of investment.

To that end, we need the Treasury to be as innovative as the entrepreneurs who fuel our economy. We need to see ideas being tried and tested and the apparatus of Government swinging behind the idea of long-term investment and rewarding those who make such investments. A starting point would be to increase the thresholds for the tax on dividends and seek to band it to allow smaller-scale investors to pay no tax whatsoever on dividends, especially if they can be incentivised to maintain their investment over a longer period.

The industry panel review on patient capital made a number of recommendations that need to be addressed. It identified the need to provide patient capital to help entrepreneurs to be successful; I have already mentioned its idea for a patient capital investment vehicle. It also proposes a licensed scheme to allow patient capital investment companies to be founded that would be venture capital funds licensed to raise money from the markets, guaranteed by Government. Although I agree with that recommendation, it needs to be a truly national venture, with specific guidance about the development of capital funds outside London and the south-east.

The review also proposes a change in the way taxation hits investors when they seek to invest in developing a company past its start-up phase. Ensuring that tax incentives for equity and venture capital funding are there when companies are seeking capital to expand, rather than simply during the start-up phase, will allow investment to flow more freely into medium-size companies.

I have a few straightforward asks of the Government. First, I would like to see a formal response to the industry panel review, alongside an action plan for the implementation of its recommendations. If I have missed it, I am happy to be corrected. Secondly, we need a full analysis of the possibility of a national investment bank or development bank, as I outlined earlier. Thirdly, we need a statement about the replacement vehicle for the investments made by the European Investment Bank, which we will no longer have access to.

Finally, I would like some reassurance from the Minister that the Treasury is ready to innovate to improve the availability and quality of long-term capital. We need to encourage a positive investment culture and we need a creative response from the Treasury to unlock and harness the wealth of this nation in the delivery of a modern industrial economy that is fit for the future.

My hope, in bringing this debate to Westminster Hall, was to focus the House on the substance of how we can improve the environment for entrepreneurial success and wealth creation. It is perfectly understandable that we have become distracted by the politics of Brexit. One day soon, I hope and pray, we will turn the page on Brexit, and this House will fully turn its attention to the vitally important agenda of ensuring the long-term productivity of our economy. It is timely, because it is about our future.

That investment is due to the concerted effort to find space in the market and to provide all that is needed. We have businesses that seek to make the most of that, but are prevented from doing so by the lack of affordable capital investment. I believe Government must invest in the long game and make provision. We all know the phrase, “speculate to accumulate”—how real and true that is.

Mr Walker, I am no man’s fool, as you and other hon. Members know. I well understand that funding capital should ideally come through the private sector, but to build in a post-Brexit age, it is imperative that we put our money where our mouths are and invest in ourselves, in order to establish and encourage international confidence in the United Kingdom outside Europe.

I support the panel’s suggestions for addressing those issues, such as the creation of the patient capital investment vehicle, to enable the aggregation and deployment of both retail and institutional capital for investment in UK scale-up businesses and capital-intensive research and development-based businesses. We have to invest, so that those sectors do better. The vehicle would invest £1 billion annually, primarily in UK venture capital funds and other investors in high-growth businesses, and catalyse an additional £2 billion of private investment by providing up to only 30% of the equity capital. Perhaps that is a bit technical. None the less, it explains how the system works.

The vehicle would be a new entity, independent of the UK Government, but with a Government-defined mandate, including some Government investment to signal strategic intent to build this. I ask the Minister, what are the Government’s intentions on that? If they can help—I think if they can, they will—it will be a step in the right direction. We will all benefit across the United Kingdom of Great Britain and Northern Ireland. In order to attract institutional capital, investments in the PCIV might receive favourable capital treatment, similar to the Prudential Regulation Authority’s treatment of bank investments in the Business Growth Fund—the BGF. The phrase “go big or go home” seems to be in operation here, but the gains are as necessary as oxygen. The message is clear: this nation believes in its worth and ability, and this nation backs itself as a global leader.

I use the phrase again: we must speculate to accumulate. Businesses are ready and waiting. We have proved in Belfast and Northern Ireland that if we plan ahead and fill the skills pool, investment, jobs and a boost to the economy will most certainly follow. I believe in this wonderful United Kingdom of Great Britain and Northern Ireland. We are better together. That is a fact. I ask the Minister, do the Government believe that, too? If they do, show it and sow it, so we can all reap the harvest.