A Hedge Fund with a Health Service

On Britain’s Industrial Strategy or the complete lack thereof

At the time of writing, it looks like the proposed takeover of Ultra Electronics by Cobham is likely to go ahead. If you’re at a loss as to what any of that means — or why it’s important — let’s break it down.

Ultra Electronics Holdings is a key defence contractor for the British government, mainly for their submarine-hunting equipment and the control systems for the Trident submarine fleet. Cobham represents what’s left of another former key defence contractor which was purchased by US private equity group Advent in 2020. This deal attracted a great deal of criticism from the defence establishment and from some of the firm’s biggest shareholders. As well as the evident national security implications inherent in selling a strategically important company to a foreign buyer, many — including the widow of the firm’s founder — were uncomfortable with the idea of ownership of yet another British industrial group moving abroad.

This discomfort proved to be well founded. Within 18 months of the purchase, Advent had sold around half of what it had bought.

And this story is nothing new. In recent years the government has intervened in around 16 takeover attempts of UK businesses by foreign buyers. And while over half of those interventions were related to issues surrounding national security, none of them were blocked.

In 2016, then-chancellor Philip Hammond allowed British technology giant ARM to be sold to Japanese consortium SoftBank on the basis of no detailed scrutiny. ARM is one of the most successful semiconductors and computer chip designers in the world. Chances are that your smartphone, car, TV, and laptop all contain at least one ARM chip. This is anything but a short-term trend. In 2015, Will Hutton declared that British business was in the middle of an ownership crisis — remarking that companies with a cumulative value of £440 billion had been sold to foreign buyers in the last ten years alone. A 2021 article in The Financial Times suggests the situation has only gotten worse, with more companies than ever being sold into foreign hands.

When it isn’t presiding over the sale of strategically important British companies abroad, the government is hard at work allowing them to close down.

This June, CF Industries announced it intends to permanently shutter its Ince factory in Cheshire. The firm’s two factories were temporarily closed last autumn in the face of skyrocketing gas prices, and Ince’s Teeside counterpart at Billingham was reopened only with the help of an emergency government support plan.

These two facilities are a key strategic component of Britain’s food supply. As well as fertiliser, they provide over 60% of Britain’s CO2 — a vital commodity with uses in everything from improving plant growth to meat packing, surgical applications, and animal slaughter.

The government’s response can best be described as “apathetic” — and worryingly so considering its recent interest in food resilience and fears expressed by multiple industry bodies.

The most serious bid to keep the Ince factory open recently collapsed after UK Nitrogen – a British-owned consortium lead by the former head of the Armed Forces – was denied its request for a £5-10 million loan by the Department for Business, Energy, and Industrial Strategy. The only official comment on the matter? “The government believes this is an issue for the market to solve.”

But the government’s lack of interest goes deeper. Since at least 2020, Britain has not actually had an industrial strategy (the Commons committee responsible has decided that such a thing is no longer necessary). Arguably Britain hasn’t possessed one for at least 30 years. Although current minister Kwasi Kwarteng might occasionally say the right things in this direction in committee meetings, it’s his department — BEIS — which consistently fails to deliver on this front.

Instead, the role of substantive government support and promotion of industry in Britain since the 1990s has taken the form of platitudes about “the City” and “Tech”, accompanied by an embarrassing degree of smugness over the (relative) success of our “creative industries.”

Behind the scenes, our economy’s over-reliance on the financial services sector drives up exchange rates, and swallows up most of our increasingly scarce high-quality human capital. The Town and Country Planning Act (1947) makes location investments difficult or impossible, and severely limits competition.

International treaties and punitive carbon taxation regimes incentivise offshoring of production. Mass migration of low-skilled workers makes low-value service and production more attractive — and drives up the value of artificially scarce land for housing, crowding out investment in anything else.

This leaves an economy weighted overwhelmingly towards financial services which are effectively parasitic on global growth, and low-end industries that can survive only with a constant supply of cheap labour. Manufacturing is progressively obliterated, along with countless other advanced industries which might make a good life possible for hundreds of thousands of households. Effectively Britain has become a hedge fund with a health service.

This state of affairs is usually explained away with just-so stories that are taken as gospel by the country’s vast self-deluding janissary classes. Until recently, EU state aid restrictions were a frequent scapegoat for non-intervention. In fact, this claim was raised specifically by the governmentBoris Johnson – and by journalists during the steel industry crisis in 2015.

However, the argument misunderstood the fundamental nature and purpose of these rules. Crucially, while EU state aid laws never blocked public investment in businesses — or even subsidied within specific parameters — it is very likely that the beliefs of British politicians and analysts about them did. A similar theme runs through the deployment of “international” and “climate” obligations — whether these are framed in legal or optical terms. The simple truth is that in most cases, politicians and officials do not understand the economic landscape sufficiently to make sound judgements about it.

Failure to intervene in crises isn’t enough in and of itself to prove this incompetence, even if it helps illustrates it. The underlying – and much more serious – problem is the government dropping the ball on investments and planning. 

Ed Conway, a reporter at Sky, has done a much more thorough job than anyone else could covering the case of the Humber refinery. Briefly put, the government’s suicidal “net zero” pledge is dependent on stockpiling a gigantic number of batteries. One of the most important commodities on which the supply chain of batteries depends is synthetic graphite. The precursor to synthetic graphite (petroleum coke) is produced to a very high standard in the Humber crude oil refinery at South Killingholme in Lincolnshire.

As Conway points out, if the government was serious about industrial strategy, it would seem like an obvious decision to encourage the production of synthetic graphite here at home. But we do not do this. Instead, we export petroleum coke to China and then buy synthetic graphite back as a foreign import. And as Conway also points out, it’s difficult to tell if this is down to simple ignorance or concern over optics (and the emissions-heavy processes required in production.)

Regardless of the reasons, however, the government has been slow to create a sector strategy, let alone provide any real support in developing an industry that could significantly strengthen Britain’s geopolitical position.

There are many factors which might explain this tendency to ignorance and avoidance. We could cite critical differences in political philosophy, or energies and commitments focused elsewhere. Perhaps even blaming inaction on red tape and external pressure to pursue Blob-approved policies, even if they are deeply unpopular and highly damaging.

But underlying all of these factors is the reality that most British politicians and administrators have no personal motives to develop British industry.

Politicians are obsessed with “optics”, which traps them in a binary of grand gestures or complete inaction. There’s no incentive to think strategically and imaginatively about industrial policy. They like “the City” and “tech” because they’re eye-catching, close to home, and future-focused. Synthetic graphite in Lincolnshire (and semiconductors in Newport) is not.

Over the past forty years, the permanent Civil Service, the courts, and their associates have come to view themselves less as the governors of a country, and more as the regional implementation task-forces of a grand internationalist vision. They direct the attentions of their political masters accordingly.

Where do they go once they’ve put in a shift implementing this vision? The late Sir Jeremy Haywood, formerly the Head of the Civil Service, went to banking giant Morgan Stanley. Others go on to lucrative sinecures in “consulting”. The world of deal-making, glad-handing, and feather-bedding. Not the world of innovation or production.

In this kind of environment, it’s only to be expected that very few people are paying attention to the fundamentals; you won’t make your post-civil service career nurturing and advocating for Britain’s synthetic graphite cluster. You will make it by brokering a deal to sell it out to the CCP or the Gulf states.

We can see this most clearly in the case of the Ince factory, and the now growing crisis over the availability and cost of energy triggered by the war in Ukraine. A crisis only made worse by the fact that we are now completely dependent on the French to build any new nuclear facilities, and have allowed energy companies (often foreign-owned) to close down our gas storage facilities.

Politicians were clueless when these decisions were made. Their incompetence will now have huge impacts on the living standards of ordinary people across the country.

There are individuals within the structure who are well aware of how fragile and vulnerable our country is to supply shocks. But they are often powerless to ensure the decisions which could change this. Senior civil servants are often reluctant to brief ministers on problems of this nature, and ministers are equally reluctant to invest time on any issue that isn’t immediately newsworthy or politically expedient. Our government suffers from the same issue as the CIA, if not every centralized bureaucracy: the closer you get to decision-makers, the worse the information becomes.

Like an increasing number problems caused by our current system of governance, no solution is possible short of regime change. This will not be possible without an acceptance of some harsh realities about our deteriorating strategic position. But it will also require a significant increase in imagination. 

There is some merit to the argument from non-interventionism for the sake of market discipline — why should the taxpayer bankroll an uneconomical fertiliser plant? But there are also many more options available to address this concern that we simply aren’t pursuing beyond the usual diet of tax gimmicks, grants, and deregulation.

Britain will not always be able to rely on others for our material comfort and safety. “Soft power” is unlikely to be of much use if we’re forced to start rationing energy in the winter. And even less likely to help if we are forced to start rationing food.

This article is part of an ongoing series of internal diagnoses of dysfunctional social organs in the U.K. Read more, here.

Lin Manuel Rwanda is a writer from the U.K.




  
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