The State of Britain

Airlines, rail, film, airports, ships, legal firms, energy supply and banking – no sector seems off limits to state intervention

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Few would argue that where there is market failure then an intervention by the state can be justified, however, many would argue that the interventions of the 1970s were largely horror shows which dragged down the state itself, everything else lies in the middle.

First Carillion and Thomas Cook were batted away, then even British Steel (for now at least) did not receive largesse from the state, but since then a number of industries have seen interventions.

Early in the month ministers intervened in the airline sector, confirming that Flybe will receive state support because of its regional connectivity role. The rescue deal details are unclear, but appear to offer deferral on the firm’s Air Passenger Duty (APD) and a short-term loan. Connect Airways – the consortium that includes Virgin Atlantic, Cyrus Capital and Stobart Group – which owns Flybe, will also inject another £30m into the business.

On rail, the government’s nationalisation of Northern Rail has thrown the South Western Railway and Transpennine franchises into sharper focus. The service offered by Northern Rail appeared beyond the pale, but interventionists beware, more than a year after Transport for Wales took over the Welsh rail franchise, overcrowding and poor punctuality continue, with the firm admitting improvements have been slower than they would have liked. Transport for Wales is a not-for-profit company owned by the Welsh Government, which is no doubt glad the contract is managed at ‘arms length’ by its appointed board.

Still with Wales, but now on airports, a Welsh Government spokesman has said state owned Cardiff Airport adds c£250m GVA to the Welsh economy and sustains around 2,400 aviation related jobs.

Last year a new tax payer loan was announced bringing the total amount of cash the airport can borrow from the Welsh Government to £59.4m. Most of the original loan of £38.2 has already been drawn down according to officials, which suggests the new £21.2m blurs the line between investment and working capital. 

Its latest accounts show the airport made a pre-tax loss of £18.5m in 2018/19 and barely recorded a positive EBITDA figure. Welsh ministers paid another £52m in 2013 to buy the airport. At c£80m of public money already deployed to keep the airport operating, and with a further £21m now at risk, the economic case looks increasingly thin.

Also on airports, but this time in Scotland, additional loans of £33m to keep Prestwick Airport afloat are now worthless the Auditor General for Scotland has said. Last month Holyrood Transport Secretary, Michael Matheson, said he had accepted a recommendation from the airport’s operators to appoint a preferred bidder but was not able yet to disclose the identity of the purchaser involved.

From ships, to fabrication, to steel, Scottish taxpayers have had to recently write off nearly £140m in loans and guarantees largely to private companies according to Auditor General Caroline Gardner. They include a £45m loan to the Ferguson shipyard on the Clyde, a £21m guarantee repayment fee from Liberty Steel and a taxpayer loan of £37m to the BiFab fabrication company, which is now valued at £2m.

On banking, the Scottish government has committed £2bn of taxpayers’ money to fund the Scottish National Investment Bank over the next decade after MSPs passed the necessary legislation. Whether there is sufficient market failure to warrant state intervention in business finance on this scale remains a moot point.

In the semiconductor trade, Diodes Incorporated, which took over Texas Instrument’s Greenock site last year, is set to receive a £14m taxpayer inducement from Scottish Enterprise. The funds form part of a £47m investment in upgrading the site and training the 300-strong workforce. The company has also received funding from Inverclyde Council to assist with the development of the site.

In the film business, the Tynwald’s enquiry into the island’s foray into the industry has found the Isle of Man government gambled £60m of taxpayers’ money via the island’s Media Development Fund between 2007 and 2016; £32m has so far been returned from the investments.

On the legal sector, a law company set up by Northamptonshire, Central Bedfordshire and Cambridgeshire county councils has recorded a £1.2m loss. The firm, LGSS Law, is owned by the three councils and offers public sector legal services. It is understood that sizeable overdrafts offered by Northamptonshire and Cambridgeshire County Councils have been largely drawn down

A new energy supplier for London, backed by City Hall, has been launched. London Power is not a London Assembly owned business, however, although the exact details of the deal between the Mayor and Octopus Energy are not known.

Highlighting the problems which can occur when the state gets involved in energy businesses, Bristol City Council owned Bristol Energy lost c£10m last year. Bristol Energy was set up in 2016 to provide ethically sourced, low-cost power and return a profit for Bristol taxpayers; instead the venture has so far soaked up £37m of public funds. Nottingham council owned Robin Hood Energy has likewise required taxpayer bailouts.

Interventions’ with public money are a risky business.

The awfulness of the pre-1997 ‘golden age’ of British Rail has been all too quickly forgotten but the state must retain the right to intervene where the imperfect system which replaced BR fails.  On the other hand, whilst connectivity (Flybe) and inducements to win internationally mobile projects (Diodes Incorporated) might on the face of it warrant state intervention, forays into film, airports, ships, fabrication yards and the steel industry begin to ring alarm bells.

And then there was HS2.

National stats

UK GDP increased by 0.1% in the three months to November although there was a contraction of 0.3% in the month itself. Over the quarter, construction performed well and was up by 1.1% but production fell by 0.6%, with manufacturing down by 0.8%; services grew by 0.1%. Annual growth was 1.1%.

GDP rose by 0.1% in both the euro area and the EU28 during the fourth quarter of 2019, according to Eurostat. Annually GDP rose by 1% in the euro area and by 1.4% in the EU28.

Key European economies remain sluggish; over the quarter Germany has grown by 0.1% but France contracted by 0.1%, with Italy shrinking by 0.3%. Annually Germany grew by 0.5%, France by 0.8% but Italy was at a standstill.

The UK labour market was largely unchanged, with the level of employment increasing by 359,000 to a record high of 32.9m and the level of unemployment decreasing by 64,000 to 1.31m or 3.8%. Average earnings grew by 3.2% in the year to November or by 1.6% after inflation.

The euro area unemployment rate was 7.4% in December 2019, with the EU28 rate at 6.2%. The lowest unemployment rate in December 2019 was 2% in the Czech Republic and the highest was 16.6% in Greece.

The UK inflation rate was 1.4% in December 2019, down from 1.5% in November. Key downward contributions came from accommodation services and clothing with the biggest risers housing, water, electricity, gas and other fuels.

Euro area annual inflation was 1.3% in December, up from 1% in November. European Union annual inflation was 1.6% in December 2019, up from 1.3% in November. A year earlier, the Euro rate was 1.5%.

Public sector borrowing in December was £4.8bn, £200m less than in December 2018.

Debt at the end of December 2019 was £1,819bn, 80.8% of GDP, a decrease of 0.9% on December 2018.