A tango is a passionate dance for two, leading to procreation. A quango is an unelected body of people who tell everyone else what to do and/or spend our money. Past form indicates no aptitude for business, still less revitalising it. Yet Whitehall plans leaving it to quangos to boost the economy.
Key to recovery is our SMEs and start-ups. Large companies can take care of themselves although both large and small would be helped by low taxes, tax incentives and cutting regulation – easier post-Brexit. Two main initiatives have been indicated: increasing public sector funding of R&D from 0.55 percent of GDP to at least 0.75 percent and a new “London Transition Board”.
The government’s funding of R&D, i.e. potential economic drivers, is through “UK Research and Innovation” (UKRI), a quango formed to supervise ten others in 2018. In 2018/19 UKRI distributed £6.4bn of our money on research and innovation through ten subsidiary quangos, £403M on staff and £484M on other overheads. Seven of the quangos are academic but the one most relevant to business (GDP) is Innovate UK. The process for applying for business grants is dauntingly complex and, being “state aid”, governed by Brussels for another four years after the end of this year if transition is completed then. There are also 12 competitions to encourage particular sectors and a maze of other “funding opportunities”. The nub of it, if one perseveres that far, is that each application is scored, arbitrary box by irrelevant box, by three assessors and the highest scores get the money. There should be only one test of a new SME; is it going to grow into a success? Experts may be able to spot reasons why it will fail but almost certainly not why it will prosper. Dragons’ Den provides a much better model: 15 minutes with the entrepreneur(s) will give more insight than any amount of boxes and paper.
Box ticking seems very reasonable, at least to the Whitehall mind, but it is not how the free market works. In the first of two personal experiences, we submitted a neuroscience research application to the relevant quango. Two years later, it was refused on the grounds that the research was cutting edge (why was that a negative?) and would almost certainly fail. By then we had achieved funding from elsewhere and a successful outcome.
The second example is Baileys Irish Cream, now world brand leader in its category. The CEO of our Irish company knew the Irish Treasury Minister who was desperately seeking increased exports. Over a glass or two, he agreed that the export profits on an agricultural product would be free of tax for ten years if we could create a new one. Baileys was conceived and judged by all and sundry, i.e. consumer research and the board of the parent company, to be a no hoper. We had learnt by then that these were encouraging signals and success soon followed. Baileys would not have survived the Innovate UK assessment process.
UKRI is not business oriented even when dealing with businesses. Dragons’ Den do not judge innovation until it has had some evidence of commercial success however small. They want to understand if and how the start-up will make money. “Return on investment” is mentioned just seven times in the 144 page UKRI 2019 Annual Report but only to do with pensions and financial technicalities on leases. To a business person, investment and innovation are simply means to future profits – clearly an alien concept to UKRI. There seems to be no tracking of the outcomes of grants made. How many made money and survived? How many failed? It would be interesting to know how the subsequent performance of successful applicants compared with those who were rejected but persevered nonetheless. My money is on the latter. UKRI sees itself as Father Christmas handing out presents to the children who write the nicest Dear Santa letters.
Nor do the accounts distinguish grants given to purely academic from private sector commercial applicants, apart from noting that awards went to 2,647 SMEs in 2018/9 (p.137). The vast preponderance of UKRI “performance indicators” report support for academia and measures relevant to that such as the number of PhDs and journal articles. Of course some academics claim that building the country’s knowledge base subtly leads to greater wealth but UKRI makes no effort to justify that. Within business, cash flow arises essentially from marketing, i.e. from the user/consumer. In my 20 years at London Business School, not a single marketing PhD student came from a British university.
It is tempting to suggest that the best contribution that UKRI could make to reviving the economy would be to close itself down. That will not happen but the private sector grant money could be divided between the 38 Local Enterprise Partnerships (LEPs, see below) and public sector funded by the universities that, in essence, it supports.
The other major quango-led boost to the economy is the London Transition Board (LTB). This follows the London Economic Action Partnership (LEAP) which was set up in 2017 and “spent £44m of public money in 2017-18, aiming to ‘identify strategic actions to support and lead economic growth and job creation in the capital’. By end 2018/19, £445M had been committed but it is difficult to distinguish economy-boosting expenditure from social improvement. The range of items supported and quango relationships is mind-boggling.
The LTB provides another, same-again, layer to that and will also operate in parallel with the London Recovery Board which “will plan and oversee the capital’s wider economic and social long-term recovery, developing a strategy and plan of action to reshape London to be fairer, more equal, greener and more resilient than it was before the crisis.” Enough already!
One of the reasons governments foist these quangos on the economy is the lack of business experience in the Cabinet. The last two Cabinet ministers with substantial business experience were Geoffrey Robinson, outed for lending money to Peter Mandelson in 1998, and Michael Heseltine who fell out with Margaret Thatcher in 1986.
Whilst this blog does dismiss quangos as a useful way for government to stimulate the private sector, there are other valid means beyond tax incentives and de-regulation, namely infrastructure. The big banks could be arm-twisted to being more responsible and responsible to SMEs. As discussed in a previous blog, helping small business investors (angels) interact with new and small businesses has to be positive and so are tech hubs. From early days in Italy to Silicon Valley, bringing expertise geographically together can spark surprising growth.
Start-ups and SMEs are small and therefore local. In addition to the value of the grants, they carry a huge cost burden for those preparing applications and the quangos dealing with them. Each LEP could use the money it receives from UKRI and elsewhere to negatively tax funding by business angels, i.e. their investments topped up by 20 – 30% up to a maximum. LEPs are themselves quangos but their involvement would be limited to acting as conduits and central government could direct the funds to the LEPs most in need and who make the best use of the funding. The angel receiving top-ups would be required to report by each SME after five years. There are lessons here for revitalising the north. So, infrastructure yes, quangos no.