Fabian Society No. 5 18 An Investment Bank For The UK Fabian Tract 518 An Investment Bank For The UK Chapter I. Introduction 2. De-industrialisation: how far has it gone? 3 3. Why has it happened? 5 4. What needs to be done? 9 5. How can it be done? 11 6. What is done elsewhere? 17 7. An investment bank for the UK 22 Appendix:The major credit institutions 29 Dennis Turner is an economist in the City. He previously worked as a trade union research officer and with the National Economic Development Office. He writes in a personal capacity. Charles Williams spent the early years of his career in industry. moving to banking and subsequently spending nearly 20 years in the City. He was Chairman of the Price Commission 1977-9 and, as Lord Williams of Elvel, is Labour's Trade and Industry Spokesman in the House of Lords. This pamphlet like al l publications of the Fabian Society represents not the collective view of the Society but only the views of the individuals who prepared it. The responsibility of the Society is limited to approving the publications it issues at worthy for consideration within the labour movement. Photomontage: Peter Kennard March 1987 ISBN 0 7 16 3 05 I 8 6 ISN 0307 7523 ' ' ~'' Typeset by Contemporary Graphics Ltd. Tel 01 -253 3339 \' r\"~- Printed by Blackrose Press (TU) 0 I 25 I 304 3 ' ., C . ~· Published by the Fabian Society, 11 Dartmouth Street, London SWI H 9BN -·-" Fabian Tract 518 An Investment Bank For The UK Chapter I. Introduction 2. De-industrialisation: how far has it gone? 3 3. Why has it happened? 5 4. What needs to be done? 9 5. How can it be done? 11 6. What is done elsewhere? 17 7. An investment bank for the UK 22 Appendix:The major credit institutions 29 Dennis Turner is an economist in the City. He previously worked as a trade union research officer and with the National Economic Development Office. He writes in a personal capacity. Charles Williams spent the early years of his career in industry. moving to banking and subsequently spending nearly 20 years in the City. He was Chairman of the Price Commission 1977-9 and, as Lord Williams of Elvel, is Labour's Trade and Industry Spokesman in the House of Lords. This pamphlet like al l publications of the Fabian Society represents not the collective view of the Society but only the views of the individuals who prepared it. The responsibility of the Society is limited to approving the publications it issues at worthy for consideration within the labour movement. Photomontage: Peter Kennard March 1987 ISBN 0 7 16 3 05 I 8 6 ISN 0307 7523 ' ' ~'' Typeset by Contemporary Graphics Ltd. Tel 01 -253 3339 \' r\"~- Printed by Blackrose Press (TU) 0 I 25 I 304 3 ' ., C . ~· Published by the Fabian Society, 11 Dartmouth Street, London SWI H 9BN -·-" I. Introduction Few subjects have generated such intense debate in recent years as the deteriorating performance ofBritain's manufacturing industries, but there can be no disagreement that the UK's industrial record over the past 20-25 years compares unfavourably with that of its major competitors. Furthermore, both the importance of a competitive manufacturing sector and the need to reverse its relative decline are generally accepted across a wide spectrum of opinion. The Labour Party has identified itself as the 'Party of Production', and has the reversal of manufacturing's malaise at the core ofits economic strategy. Concerns about the diminished manufacturing base have also been voiced by groups as diverse as the House ofLords and the Church ofEngland, and by numerous economic analysts and former Conservative prime ministers. This broad measure ofagreement on the general desirability of regenerating manufacturing has not, however, led to a common view on the policies required to achieve it. In large measure, the differences in the proposed remedies reflect different diagnoses of the underlying problem. It has been argued, for example, that with the exploitation of North Sea oil and the emergence of the UK as a net oil exporter, a relative decline in the share ofmanufacturing in the UK gross domestic product and a deterioriation in the balance of trade in manufactured goods were inevitable. A surplus on oil, coupled with the traditional positive balance on invisibles, kept the exchange rate at a level which made it difficult for manufacturing to compete, especially in the hostile world trading conditions which followed the second oil price rise of 1979. On this diagnosis, the decline in the contribution ofNorth Sea oil to economic activity should lead to a positive response from manufacturing industry. An alternative view is that North Sea oil has been only one of many factors which influenced the course of events. Whilst a relative decline in manufacturing's share ofGDP could be explained by North Sea oil, it does not account for the absolute fall in manufacturing output. In 1986, output was still below the 1979 level which in turn was below the 1973 peak. None of 1973-9 decline can be attributed to the North Sea oil factor, and, on this analysis, the circumstances causing that decline are still present, the period (and policies) of 1979-86 simply continuing and aggravating the process. The rapid fall in oil prices in 1986 has added urgency to the debate. In 1986, the value of the UK's oil surplus was just about half that of 1985, and the balance of payments in 1987-8 will, it is widely predicted, be in deficit. The world trade benefits of the oil price fall should provide an opportunity for UK manufacturing industry, but the extent to which it is grasped will depend largely on our ability to compete more effectively in the faster growing markets and to recover a proportion ofthe home market lost to imports. --------------------------'Fabian tract SIB • I The ability to compete, of course, is partly a function of price, and those who stress the exchange rate as a cause of manufacturing's decline will expect an exchange rate adjustment consequent on the disappearance of the oil surplus to bring manufacturing trade back into !;>alance, or even surplus. Those who have argued that the problems are more deeply rooted point to the distribution of manufacturing capacity, sector by sector, and ask whether the UK will be any more able in the late 1980s to produce the goods demanded by the faster growing, high-income markets than was the case in the 1960s and 1970s. The Labour Party, like the House of Lords Select Committee on Overseas Trade, rightly rejects the 'inevitability' of manufacturing's decline as a consequence of the oil surplus and the 'automaticity' argument, which implies a comforting mechanism which re-establishes manufacturing as the oil surplus disappears, through the exchange rate effect. Rather than rely on market forces to bring about an adjustment, it believes a more active policy to stimulate manufacturing's ability to compete, even in favourable exchange rate conditions. This pamphlet is designed to re-examine the causes of the decline, to indicate an essential feature of any recovery programme, and to focus on one of a number of policy measures necessary for its achievement. 2 • Fab>an tract 518-------------------------- 2. De-industrialisation: how far has it gone? Throughout the post-war period, the production of manufactured goods in the UK has expanded at a slower rate than in almost all other advanced industrialised nations. In the decade prior to the first oil crisis, manufacturing production, measured at constant prices, grew at an average annual rate of 3.4 per cent in the UK, while the other seven major industrialised countries in the OECD area, with the exception of the US, managed increases averaging more than 5.5 per cent a year. The manufacturing sectors in the industrialised countries have all suffered to some degree from the effects of two worldwide economic recessions since 1973, but only the UK has experienced an absolute decline in production. Between 1973 and 1985, manufacturing output in the UK fell at an average rate of 0.5 per cent a year. As Table 2 shows, this compares with average annual growth rates ranging from 0.4 per cent in France to 3.1 per cent in Japan. The severity of the decline in manufacturing output in the most recent recession was greater in the UK than in any other of the major seven countries, most of which have also recovered more rapidly. In terms of the size ofits manufactur ing output, the UK currently ranks as the sixth largest in the OECD area, having been overtaken by Italy in the late 1970s. It now ranks on a par with Brazil, the largest producer among developing countries. The UK's share of the total manufactured output of mar ket economies is estimated to have fallen from 5.2 per cent in 1973 to 3.1 per cent in 1984. In spite of the modest revival enjoyed by the UK's manufacturing industries since 1981, total output in 1985 was still nearly 10 per cent below the peak achieved in 1973 and 5 per cent below the 1979 level. The sector has under gone a radical restructuring as it grappled with the effects of two recessions and a general intensification of international competition. Its weak performance has been largely responsible for the substantial rise in unemployment. Since the early 1970s, the number ofpeople employed in manufacturing has shrunk by more than two million, with a decline of three quarters ofa million in the space of 12 months to June 1981. When viewed in the context ofdeclining output, the trend towards increasing deficits in the UK's trade in manufactured goods since 1983 provides further evidence of structural weakness. In 1983, for the first time except in periods of war, the UK moved sharply into deficit on its trade in manufactured goods. The trade deficit in manufactures (ie goods classified under Sections 5-8 of the Standard International Trade Classificationl widened from £4.9 billion in 1983 to £5.8 billion in 1985, having been in surplus by more than £3 billion in 1980. There has been a marked increase in the proportion of the UK market accounted for by imported manufactures (currently running at 35 per cent), all but 10 per --------------------------Fabian tract 518 • 3 Table I Contributions to UK GDP, 1965-85 (%shares) 1965 1970 1975 1980 1985 Agriculture, forestry and fishing 3.3 2.9 2.7 2.1 1.8 Energy and water supply 5.6 4.9 5.4 I 0.3 I 1.3 Manufacturing 34.6 33.5 29.9 27.5 25.2 Construction 7.0 6.7 6.8 6.3 6. 1 Distribution 11 .7 8.9 12.9 12.6 13.2 Transport and communications 8.6 I 0.4 8.4 7.3 6.8 Banking and finance 6.8 8.0 10.8 11 .8 13.9 Public and miscellaneous services 22.4 24.6 23.1 22.0 21 .6 Total 100.0 1000 100.0 100.0 100.0 UK National Accounts, various issues Table 2 Trends in manufacturing output, 1973-85 1973 1975 1977 1979 1980 1981 1982 1983 1984 1985 United States 100 89 103 116 112 115 106 115 129 131 Canada 100 98 107 118 115 116 103 109 117 123 Japan West Germany 100 100 85 90 99 92 113 109 118 109 119 107 119 103 124 104 138 108 144 113 France 100 93 103 101 110 108 107 103 105 104 Italy United Kingdom 100 100 94 92 107 95 116 96 123 88 121 82 117 82 114 85 117 89 120 91 UN: Yearbook of Industrial Statistics and Monchly Bulletin OECD: Industrial Accivity cent of which come from other indu-' strialised countries. At the same time, the UK's position as a supplier of manufactures to other OECD countries has been eroded. These countries account for almost three-quarters of Britain's exports of manufactured goods. The position has been made worse by the particularly sharp decline of the UK's market share in some important high value-added sectors, notably motor vehicles, data-processing equipment, and telecommunications and audio equipment. What overall assessment can be made of what the loss ofcompetitivenesss has meant to the UK economy? Comparisons can be made with 1966, the peak year of manufacturing employment, when the UK had a surplus on trade in manufactures equivalent to 5.7 per cent of GNP. To have achieved a similar performance in 1985 would have added 10.8 per cent to manufacturing output. Even comparing 1985 with 1978, when the surplus was worth 3.4 per cent of GNP, manufacturing output would have been 6.6 per cent higher than the level actually recorded. 4 • Fabtan tract 518---------------------------- 3. Why has it happened? Perhaps the least plausible explanation of recent trends is that a drift from manufacturing to services is to be expected in advanced industrial countries. It overlooks two facts: that in the UK the drift has been more like an avalanche, and that, in many respects, manufacturing and services are interdependent rather than discrete sectors. This latter phenomenon is easiest to understand in a regional context. It is convenient in many ways to regard each region in the UK as a small, open economy, the growth of which depends crucially on the expansion of 'exports' relative to 'imports'. Trade in this instance refers to trade with other regions as well as other countries. Local economic development is not brought about by firms within a given trading area trading more and more with each other. Growth occurs by the expansion ofthose sectors which sell their products outside the area. There is, therefore, a distinction between industries which lead economic growth in an area by selling outside the territory, ie basic industries, and those which sell to the local market, ie dependent industries. Basic industries are the key to growth, whilst dependent industries' output and employment respond to the growth in basic industries. In the UK, agriculture, mining and manufacturing are largely basic activities, since the vast majority of the outputs are sold outside the regions in which they are produced. Areas of high growth in basic industries have tended to experience high growth in the service sectors. In general, therefore, it is the growth or decline of agriculture, mining and manufacturing which is the motor behind growth and decline in the local economy. There are some service activities which can be classified as basic: financial services, international ports and airports, tourism etc, are the obvious examples. In total, these are estimated to account for 2.5 million jobs, which means that only one in five service jobs are in basic sectors. This proportion has changed little through time, though the total number has increased in line with the growth of services as a whole. In this context, the decline of manufacturing is neither inevitable nor desirable. Of the basic industries, it is clearly the most important, but it is also the most footloose. Unlike agriculture and mining, manufacturing is not constrained by an immobility of the fundamental factor ofproduction. Much of manufacturing is now potentially profitable in a wide variety oflocations, both regional in the UK and international, and significant shifts in the location of production can and do occur. Trade in services cannot seriously be expected to expand at a sufficient rate to offset the decline in oil or fill the gap left by manufactured exports. Whilst the UK enjoys a substantial surplus on trade in services, much of which is related to visible trade, credits on services amount to only 39 per cent of the value of non-oil visible exports. In real terms, moreover, exports of services fell by 7.5 per cent between 1979 and 1982, and only in 1985 did they recover the 1979 level. This is reflected in the UK's diminishing share of world invisible receipts, which has declined from 12.4 per cent to 7.7 per cent since 1979. This analysis reinforces the conclusion made on many occasions ---------------------------Fabiantract 518 • 5 elsewhere that service activity is not sufficiently broadly based to offer the required trade and employment potential. The overall contribution ofservices to growth since 1981 masks the fact that it was concentrated largely in financial services and communications, whilst some other sectors declined. It is also debatable whether growth in banking and communications can be sustained at the previous rates for very much longer. It is, moreover, perfectly feasible to expect a degree of re-industrialisation as income rises. An obvious example from the recent past is motor cars. Until the mid-1950s, people used public transport, a service, but now higher living standards have encouraged private vehicle ownership, to the benefit of car manufacturers. Similarly, in the entertainment field where televisions, videos, hi-fis and home computers have superseded the music halls, cinemas and theatres. Higher incomes have also stimulated the demand for consumer durables such as washing machines, vacuum cleaners and freezers, which have reduced the service element in the domestic environment. Industrialised countries as a whole still retain enormous comparative advantages over the 'low-cost' producers of the Third World. There are opportunities in virtually all industries to retain some market share not onlythrough the development of new products and new production methods, but also through the exploitation of their one great advantage, proximity to the larger, high-income markets. Equally, there are many skill and innovation-intensive manufactured product areas in which industrialised countries will continue to dominate world markets. Within the OECD area, moreover, there will also be opportunities for intra-industry specialisation to exploit product differentiation and economies of scale. Poor performance in home markets is thus a symptom of industrial decay, not the underlying cause, and the decline in British industry has been so protracted and affects so many sectors, that it is naive to suggest that any one factor is principally responsible. Industrial decay A comparative analysis of trade patterns reveals where the UK is losing out. While we have withstood competition in the traditional industries rather better than many European countries, or the US, we have fared less well in higher value-added, more skill and innovation-intensive products. Since a disproportionate amount of limited investment in manufacturing in the UK has been directed towards cost ·cutting and labour saving in the more mature industries, there has been a failure to exploit new products and markets embodying new designs and technology. This has allowed others to exploit their proximity to our high- income market, and prevented us from exploiting our proximity to theirs. This general conclusion is not a new one. It has long been established that the UK's income elasticity of demand for exports is well above unity, whereas the rest of the world's income elasticity of demand from UK exports is well below unity. Thus, the UK has been unable to grow at more than half the rate of the rest of the western world without facing a balance of paymentsconstraint. The implication of the elasticities is that our manufacturingindustry produces goods not only that other nations do not want but also that the British consumer does not want in sufficient volume. The issue is more complex than one merely of price. The government's own measures of price competitiveness for exports, imports and relative labour costs have all moved in the UK's favour since 1980, yet the volume of manufactured imports has increased four times faster than exports. Over an even longer period, the Germans and French have not only been able to increase the volume of their manufactured exports 6 • Fabian tract 518-------------------------- at a faster rate than the UK, but also the unit price, indicating an ability to sell higher priced products. This is not to suggest that price is an irrelevant consideration in home and international markets, merely that it is not the only, or even the most significant one. The areas where the UK's European competitors have scored more highly come under the broad heading of 'non-price' factors. These embrace product design, reliability, distribution, marketing, delivery dates and after sales service, and while not independent of one another, or of price, together they constitute the customer's perception of the quality of the product. Design plays a key role in the whole range of non-price factors. Research and development is also of importance as is training. It is hard to assess quantitatively the importance of non-price factors in relative performance, but specific industry studies and surveys confirm that in world markets the price is negotiable but the quality is not. Academic research suggests that non-price factors account for something in the range of half to three-quarters or more of the balance of customer decisions. To compete effectively, Japanese companies have relied on technological innovations and an emphasis on quality differentials, because they realise price cutting can be taken only so far ifaverage costs are to be covered. This strategy probably explains the apparent pre-occupation of Japanese management with the product itselfrather than with financial management. The neglect of these supply side considerations has led to the UK importing relatively sophisticated up-market products and exporting basic down-market goods. A National Economic Development Council paper recently concluded that improvements in non-price competitiveness, and the consequent effects on UK Table 3 Industrial specialisation by country us Japan EEC UK Germany France Total High research intensity Aerospace Office equipment Electronics and appliances 1.1 1.7 1.8 0.8 1.4 0.4 2.1 1.0 0.7 0.2 1.0 0.6 0.7 0.2 0.9 1.5 0.5 0.2 1.2 1.2 1.7 0.3 1.2 Instrument engineering Speciality chemicals Pharmaceuticals 1.6 0.7 1.5 1.3 1.1 0.6 0.2 1.6 0.5 0.8 0.9 0.6 3.0 0.7 1.0 0.4 Motor vehicles 0.9 1.9 1.0 0.4 1.8 1.6 Medium research intensity Industrial equipment Other transport equipment Rubber 0.6 0.9 0.2 1.0 1.4 1.4 1.1 1.2 1.2 0.8 0.3 0.9 1.2 1.2 0.9 0.8 1.8 1.6 0.5 1.5 0.4 2.8 Building materials Metal manufacturing and goods 0.7 0.5 1.3 1.4 1.5 1.4 2.5 1.0 2.6 4.5 1.3 Low research intensity Textiles and clothing Paper and wood Publishing and printing Food 1.1 0.8 1.3 1. 1 1.1 0.8 2.5 0.8 1.1 0.8 0.9 0.7 0.4 0.6 1.0 2.0 1.7 1.0 0.4 1.6 0.2 0.4 0.2 1.5 0.5 0.5 0.7 0.7 Drink 1.0 0.3 1.4 4.3 Tobacco 1.0 1.5 4.7 0.3 0.3 Petroleum 1.1 0.4 0.9 0.8 0.2 0.9 Other manufacturing 0.6 0.4 1.2 1.6 2.6 Fabian tract 518 • 7 trade, are capable of generating a large increase in employment in the future. Certainly this route offered more potential than focusing entirely on international prices, and pointed the way for the UK being as productive as its competitors in internationally traded goods, while simultaneously returning to much higher employment m non- traded areas of activity. Sectoral issues At a micro-economic level, the nature of the manufacturing sector's problems can be put into sharper focus. Examining trends by sector helps to explain why the income elasticities are of the wrong magnitude in the UK. Table 3 is based on an analysis of the world's largest industrial companies, 806 in total. They have been categorised by country of the parent and by principal industrial activity. In addition, the industries have been placed in one of three groups, according to a measure of research intensity (ie the proportion of turnover devoted to research and development (R and DJ. In the highest category, upwards of2.8 per cent of sales is spent on Rand D, and in the lowest, less than 1.1 per cent. The High Research Intensity (HR!) industry group has been the fastest growing internationally over the last 20 years, and the return on capital for the major companies the highest. Moving down the research intensity scale, growth and profitability fall. The table illustrates which countries have a comparative advantage in which industries, calculated by dividing its share of the industry's sales by its overall share of all sales. A number in excess of 1.0 denotes a relative advan tage, and less than 1.0 a disadvantage. It can be seen that every country other than the UK has a comparative advantage in at least three of the HRI sectors. The UK, on the other hand, is most competitive in the LRI sectors, the slow growing, low value-added activities. Using this approach with more conventional Central Statistical Office output and trade data highlights the problem. Although the HRI sectors have been the fastest growing in the UK over the last 10-15 years, this growth has not kept pace with the rise in world demand. The UK's trade balance in these high value-added products has moved from a surplus in 1980 to a deficit in 1985, and import penetration has risen from 34 per cent to 46 per cent. In the LRI industries, on the other hand, exports as a proportion of imports has been unchanged since 1980 and import penetration is currentlyjust 21 per cent. This confirms the view that manufacturing investment in the UK since 1980 has gone into the traditional (LRI) industries and has been aimed at reducing costs as a way of improving competitiveness. In the key industries, there has been a steady erosion of market share, both domestic and international. The issues contributing to this poor performance are complex, and to rely on exchange rate adjustments to restore competitiveness will make only a modest contribution to an improvement. The problems are most acute in the HRI industries, those which are probably least price sensitive: the LRI products, which are more price sensitive, have not suffered to the same extent. 8 • Fabian tract 518-------------------------- 4. What needs to be done? Ifmanufacturing has declined for reasons of product failure (in the broadest sense) rather than price failure, the decline will not be reversed by policy measures acting on price alone. In other words, improving the macro-economic environment, and in particular enhancing price competitiveness by exchange rate adjustments, will at best offer only a partial answer. The key question is what can be done about product failure, and this question can only be answered if it is addressed at sectorallevel. A more intensive sectoral policyis the only way in which the UK can stake a claim in world markets for the HRI industries which are essential for success. Such a policy cannot be implemented without support from government. The competition is fierce, and markets are not won overnight. HRI industries, moreover, are dominated by large multinational companies which have developed their products and markets over a long period. It will be expensive for companies to invest in new technology which is essential; unattractive, unless there is a clear and continuing concept of manufacturing's role in a modern economy; confusing, ifthere are contradictory policies; and difficult for the unions to accept unless it offers the opportunity to improve total employment and real earnings. This is not an argument for an increase in government's role as a producer of tradeable goods; rather, it suggests that government has a pivotal part to play in creating the right climate for manufacturing to adjust and expand, and in improving the basic economic infrastructure to support corporate activities. Although the key actions will take place at the micro level, a sympathetic macro-economic policy is a pre-requisite for success. To undertake the necessarymodernisation, industry requires the incentive of a higher level of effective demand for domestic manufactured output. Private sector investment will not be forthcoming without the prospect of a period of sustained buoyant demand. This will require macro-economic policy initiatives (on government spending, taxation, interest rates and exchange rates) that encom:age sustainable growth but do not lead to balance of payments constraints or stoke up inflationary pressures. On its own, however, demand expansion will be insufficient. It should be complementary to the aims of an industrial policy which will attempt to change the way the economy operates and performs. Role of investment At the heart of the programme for manufacturing industry there must be measures to stimulate a major pro- gramme of investment in new capacity, to raise both the quality and quantity of capital stock. Recent past trends and international comparisons indicate the magnitude of the task. In comparisonwith the other major industrialised economies, the UK has traditionallyrecorded a relatively low ratio of gross investment to GDP. Since 1960, it has ___________________________Fabian tract 518 • 9 averaged Hl.4 per cent: the US is the only other country where the proportion has been below 20 per cent, while in Japan it has exceeded 30 per cent. Gross investment in manufacturing as a percentage of GDP in the mid1980s, moreover, has been at its lowest level since the late 1950s. Furthermor~, since 1981, capital consumption llas exceeded new investment in manufacturing, and there was therefore a reduction in the capital stock (even allowing for the distortions caused by leasing). In each year from 1981 to 1983, this exceeded £1.5 billion, and, although it has since declined, net disinvestment still exceeds £0.6 billion. The Bank of England has estimated that between 1979 and 1985, the net capital stock of manufacturing industry contracted by 2.75 per cent. During this same period, new investment in sectors such as banking and distribution outstripped capital consumption by £5 billion and £2 billion respectively. Improvements in performance are not just a matter oflevels of investment but also of its quality and direction. A core component of a successful innovative investment programme is R and D expenditure. As has been well documented elsewhere, this has been increasing at a slower rate in the UK than in any major industrialised country other than the US. In addition, a higher proportion of R and D expenditure in the UK is devoted to defence, and the spin-off to civilian commercial activities has been limited. The consequences are apparent from the UK's share of the key HRI sectors discussed above, and the declining competitiveness is as much a reflection of capital productivity (low capitaVoutput ratios) as the volume of capital expenditure. Investment, therefore, has a critical role to play in restoring international competitiveness in manufacturing. Previous governments have tried to increase the rate ofinvestment through a range of subsidies and tax incentives, with varying degrees of success. There has, however, been no concerted effort to improve both the quality and quantity of investment with the objective of raising performance. It is this combination that has eluded governments in the past. Total investment has at times been increased by government action, but incentives have just as frequentlybeen used for low quality investment (witness the boom in property in the early 1970s). The quality ofinvestment has at times been improved, notably by the industrial strategy of the mid1970s. To achieve the combination of the two requires both that the machinery of government, in other words the bureaucracy, be kept at a distance, at one remove, from the decision to finance any particular investment project and that the weight of government support be behind the general programme. The question now is whether this combination can be achieved with existinginstitutions, or whether a new institution (or an existing institution with an enhanced role) is necessary for the purpose. 10 • Fabian tract 518-------------------------- 5. How can it be done? The Wilson's Committee's investigation into the functioning ofthe UK's financial institutions concluded that there was no evidence of any general shortage of finance for industry at prevailing rates of interest and levels of demand, and with existing perceptions of the risks involved. It expressed the view that industry had not been held back by an inability to obtain external funds (Report ofthe Committee to Review the Functioning of Financial Institutions (Wilson Committee), Cmnd. 7937, 1980). In their submission to the Wilson Committee, the clearing banks justified their emphasis on short-term lending to industry in terms of the constraints placed on them, by the need to honour agreed lending facilities, and also by competitive forces which had eroded their market share of lending. In practice, the clearing banks believed that bank lending was used to finance fixed investment as well as working capital since a good deal of overdraft lending was in fact term lending with limits regularly revised. Their general view was that investment had not been held back by lack offinance nor had the total amount lent, or its allocation between sectors, contributed to the general economic decline. Underlying the specific points made by the banks was the assumption that the decision to raise funds to add to the capital stock of industry depended essentially on the borrower not on the lender. It was also related to the rate of return which the borrower could secure from the productive use of the assets. The problem for manufacturing industry in the banks' view, therefore, was that the real pre-tax rates of return on manufacturing were lower in the UK than elsewhere, and this had had a discouraging effect on the demand for capital for new investment. Pre-tax rates of return on manufacturing have improved since the publica tion of the Wilson Committee's report and are currently the highest for a decade yet investment has not responded. Some ofthe fundamental questions raised by Wilson are being asked of the banks once again, often by industry- in particular, the cost of capital and the extent ofbanks' willingness to lend long term have become important issues. Industrial banks in other countries provide facilities on more favourable terms than the clearers are able or willing to do in the UK. Cost of capital In the UK, nominal interest rates peaked in 1980-1, and are now not significantly higher than in many European countries. The problem, however, is that after adjusting for inflation, real interest rates are higher: currently, the UK is the only major industrialised country with real interest rates to the corporate sector above 10 per cent. This clearly adds to the real cost ofinvesting for UK companies and reduces the profit margin. Detailed analysis of the importance of the cost of capital in international competitiveness has been undertaken by two Americans, G. Hatsopoulas and S. Brooks. Their study concludes that over the past 25 years, American manufacturers have paid three times as --------------------------'Fabian tract 518 • 11 much for capital as the Japanese. The result is that investment per worker is twice as high in Japan than in the US, and much of America's loss of industrial competitiveness is attributed to the high cost of capital (G Hatsopoulos and S Brooks, The gap in the cost ofcapital: causes, effects and remedies. 1986). Two other Americans, D. Bernhelm and J . Shaven, have argued that domestic credit market conditions are the single most important determinant of capital costs, even in the face of global capital mobility m Bernhelm and J Shaven, Taxation and the cost of capital: an international comparison, 1986). The clear message from these two analyses is that the cost of capital is important and this problem should be attacked. The Wilson Committee concluded that there was no shortage of funds "at prevailing rates of interest", but it is apparent that the rate of interest needs closer attention. It is equally obvious that the clearing banks have obligations to shareholders which preclude them from subsidising loans to industry. Since the general level of interest rates are largely determined by macro-economic factors, moreover, new sources of lending to manufacturing at cheap rates must be sought. Long-term finance The length of loans is also an important factor. Comparisons have been made between the banks' willingness to lend for 20-25 years for mortgages but their reluctance to make similarly long-term advances to industry. A loan over 20 years rather than 5 has obvious cash flow advantages to the borrower, and can reduce the risk (the likelihood of default). The banks claim that more of their advances have been medium/long term, certainly since the publication of the Wilson Committee's report. Of the UK clearing banks' advances to UK non-personal customers in 1986, however, only 13 per cent were for a period of 5 years or more, whilst 50 per cent was on overdraft, and a further 21 per cent was for less than 12 months. Although the banks have responded to a limited extent to the Wilson Committee's recommendations (particularly in their attitude to small and medium sized firms), the failure of the corporate bond market to revive means that financing long-term investment, even for larger companies, remains difficult and perplexing. The overdraft remains the single most important instrument the banks offer industry, and its significance has grown during the 1980s. It is hardly the most appropriate method of financing long-term investment, nor is it intended to be. Despite these criticisms, little would be gained from redirecting the banking system, even ifit were possible. Not only would a different kind of bariker be required, but there would be a serious risk of damaging the international competitiveness of the banks. Between 1974 and 1985, when manufacturing production fell by an average of 0.8 per cent per year, the output ofthe banking and financial community rose at an average annual rate of 6.2 per cent. Medium and long-term projections show a slowing down in the rate of growth of the financial sector, but it is nevertheless expected to grow two or three times faster than manufacturing. In employment terms, this sector is significant, with over 2 million people in 1986 (almost half of whom are female), and expanding. This is equivalent to some 40 per cent of the manufacturing labour force, which is contracting. The financial services sector appears to be a good, as well as a large, employer, with average pay above that of most other industries. The same is true ofthe wider range of financial institutions. The overall net earnings of all UK financial institutions in 1985 was £7.6 billion which covered almost 75 per cent of the deficit on non-oil visible trade. Even more striking is the huge growth in credits attributable to banking activities. From £4.4 billion in 1975, these rose to £41.6 12 • Fabian tract 518-------------------------- billion ten years later, a rate ofincrease three and a half times faster than non-oil visible exports. The UK ranks amongst the world's leading exporters of financial services, a position any future government would be anxious to maintain. Redirecting the machinery of those institutions, if it means diverting their attention from international business, would be to put at risk an industry which is basic, and therefore likely to be self-defeating as a policy measure. Nevertheless, there is an increasing feeling that the gulf between industry and finance is widening. Several claims are made against financial institutions, particularly those forming what is known as the "City". It is said that UK banks have been too preoccupied with the financing of overseas trade and other international activities to ensure an adequate supply of investment finance for domestic industry; that by their preference for short-term rather than long-term lending they have forced lower gearing levels on companies than is the practice in other industrial countries; that they have overpriced or demanded unreasonable security for funds for small-scale or high-risk innovative ventures; that their traditional arms-length, passive role implies a lack ofinvolvement in or commitment to their industrial customers until problems arise, which is often too late; and, above all that they place a higher priority on short-term performance than long-term growth. There is much anecdotal and some statistical evidence to support these charges. The analysis of bank advances to UK residents, for instance, lends credence to the claim that banks' priorities lie in sectors othan than manufacturing. In 1975,25.3 per cent of outstanding bank loans and advances were to manufacturing, a proportion which had fallen to 20.1 per cent by 1983: since then, there has been a further decline, and in May 1986 the share was only 13.3 per cent. There has, I however, been a corresponding rise in the proportion of loans going to the personal sector, from 13.6 cent to 26.1 per cent between 1975 and 1986. Loans to other financial institutions have also increased in relative importance, while the proportions accounted for by construction and government and public utilities have fallen (the latter reflectingprivatisation). Market-based v bank-based systems The institutional environment in which banks in the UK and in the other major industrialised countries operate help put the supposed inadequacies of British financial institutions in context. It also adds further weight to the argument that redirection of existing institutions would be inappropriate and that the establishment of a new body is the most effective way to promote industrial investment. The critical distinction in organisational structures is between bank-based and market-based systems. Bank-based financial systems are those in which the banking sector plays a major role in the financing ofindustry, whilst the securities market is neither very active nor well developed. In contrast, market- based systems are those in which the securities markets are both highly active and provide a major source of finance for industrial companies, but where the banking sector plays a less dominant role. Bank-based systems are a feature of the industrial environment in Japan, West Germany and France, whilst the UK and US are the most obvious examples of market-based systems. In general, relations between banks and industry are closer in countries with bank-based systems. The effect different systems can have on the corporate customer was highlighted in an article by Will Hutton in The Listener (13 February 1986), contrasting the experiences of two major motor vehicle manufacturers, BL in the UK ----------------------------Fabian tract 518 • 13 and Toyo Kogyo in Japan, manufacturers of Mazda, when both ran into financial trouble in 1974. BL was then producing 1.2 million cars a year; Toyo Kogyo 750,000. The Japanese company was more in debt than BL, losing more money, had far greater unsold stocks and an obsolete product range. Yet today, BL (now Rover) produces fewer than a million cars, whilst Toyo Kogyo's annual production is three times higher. Critical to the subsequent histories of the companies were the attitudes shown by their principal bankers in 1974. In the UK, the banks refused to put more money into BL when the debt equalled the shareholders' equity. The government assumed responsibility for funding the company and a long-delayed recovery programme was put into effect, but on a much reduced base. In Japan, when Toyo Kogyo's debts exceeded equity by four to one, the main bank was instrumental in putting together a radical plan for restructuring the company, which included substantial new investment. The results are reflected in the current productionfigures of the two companies. This may be an extreme example. There is however ample evidence at the other end of the size scale to support the view that the banks' arms-length relationships with their corporate customers have not served either party very well. In 1981, the governmentintroduced the Small Business Loan Guarantee Scheme, the purpose of which was to provide potentially profitable (small) firms with access to funds for projects that did not attract financing from conventional sources. A review of the scheme, undertaken by a firm of chartered accountants on behalf of the Department ofTrade and Industry, was critical of the support banks were able to give companies in this context (Robson Rhode , A study of business financed under the Small Business Loan Guarantee Scheme, DTI, 1984J. Acknowledging that the banks offer the ingle mo t direct route for influenc ing and contacting (smallJ businesses, the report concluded that "many managers ... saw the administration oftheir branch, and the volume of transactions through their branch, as precluding giving small businesses special attention. (TJheir ideas of how to cope were often limited .. .". Equally critical was the conclusion that "only a minority of bank managers are suited to lend at the fringe of commercial prospects ...". The National Economic Development Council's Committee on Finance for Industry's report on 'Lending to Small Firms' also had some harsh criticisms to make of the financial literacy and judgemental skills of many branch managers (NEDC, Lending to small firms 1986, External capital for small firms 1986). In many respects, these criticisms are understandable, and from the bank's viewpoint defensible. As the corporate market is changing, so are the banks trying to restructure their own activities in response. Separating the high street retail business from the corporate customer is a fundamental issue which all the clearers are examining, but none has yet grasped. The role of the manager, the nature of the relationship with the corporate customer and the key products the banks have to offer will all be affected by how the restructuringis implemented. This is not to criticise the banks, but to argue that, in spite of their traditional links with UK industry and their comprehen ive geographical network of branches, they may not be the most appropriate institutions for spearheading the drive to improve industrial performance. The arms-length relationship which is an almost inevitable consequence of the market-based system has not encouraged traditional clearing bankers to understand industries or to evaluate a lendingproposition on anything but a 'goneconcern' ba is. The clearer ' high co t base precludes the development of proper relation hip management for all but the mo t profitable accounts, while I~ • Fab1an tract 518-------------------------- the spread down-market of multi-banking has made it harder for a bank to develop a special lead bank relationship with its larger corporate customers. It is, in addition, still largely the case that the bigger companies, usually with Head Offices in London or the South East, get the best service from the banks, yet these are often the least profitable accounts, and ones which do not need high-level account management. 'Short-termism' In the case of financial institutions other than the clearing banks, the criticism that is most fiercely advanced by industry relates to the time horizon. 'Short-termism' was a subject which provoked intense debate at the CBI's last National Conference in November 1986. The City had few supporters from industry, and it had to rely on representatives of the banking sector to defend its record. "An obsession among financiers with bottom-line results" was the charge most commonly levelled against financial institutions, and respected City commentators have identified a growing tension between industry and finance. In some ways, the timing of this changing climate is strange. In 1985, non-North Sea industrial and commercial companies' profitability increased for the fourth successive year, whilst the pre-tax rate of return, at 8 per cent, was the highest since 1973. In addition, the de-regulation of financial markets has intensified competitive pressures within the City, and supposedly given companies easier and cheaper access to funds. The point has already been made, however, that improved corporate performance has not resulted in a corresponding increase in investment in new assets, and part of the explanation for this has been attributed to the attitudes of the City, particularly the short-term view taken by the market- based institutions. Although investment in new assets has.stagnated,there has been a surge in expenditure on the transfer of ownership of existing assets. Merger activity has gathered pace during the 1980s, and in 1985, the value of takeovers by industrial and commercial companies was £7.1 billion, the highest figure for a decade and equivalent to 90 per cent of new investment in manufacturing. These mergers often reduce capacity, and are increasingly of the 'conglomerate' type owing more to financial sleight of hand than industrial logic. This has implications for any serious programm.e to increase and improve industrial investment and competition policy will have a role to play here. The financial system in general does not encourage organic growth by companies. On the contrary, it puts pressure on them to ward off predators by putting the short-term interests of shareholders (other large institutions) ahead of the longer-term development of the company. The threat of a takeover is a constraint to growth, since faster growth requires companies to retain a higher proportion of profits. The resulting lower dividend leads to a lower relative share price, thus increasing the likelihood of acquisition. If, on the other hand, growth is financed by external borrowings, it increases debt in relation to equity. In a period of high interest rates, high gearing ratios make for potential danger if profits fall. Conclusions The UK's financial system, whilst efficient and internationally competitive, is not able to respond to the needs of manufacturing industry. The historical development of British financial institutions has encouraged an arms-length relationship with all but the largest oftheir corporate customers, whilst there has been an increasing tendency in recent years to take a short-term view of lending opportunities. This has come at a critical time ---------------------------Fabian tract 518 • IS for manufacturing industry, when domestic and international pres<;ures have increased the need for a more sympathetic response to its problems. The need for a more integrated ap proach between industry and finance is highlighted if the practices common amongst the UK' principal industrial competitors are con idered. 16 8 Fabian tract 518 --------------------------- 6. What is done elsewhere? In the UK's market-based financial system, the three key sectors of government, industry and finance all appear to pursue their interests separately. There have been few peacetime attempts to develop a framework around which all three could coalesce, and no agreed objective of national interest. The arms-length relationship between industry and banks extends to industry and government and to banks and government. In this environment, government leadership is regarded as interference or intervention, and attempts to change behaviour or attitudes amount to little more than exhortation. In most other European countries, and (especially) in Japan, there is a greater integration of the various sectors of the economy. Government involvement in the running of the economy at the micro-economic level is more readily accepted, and as a consequence more effective. This involvement is usually termed 'industrial policy', at the core of which is the government's ability to promote, stimulate and regulate industrial development through the financial system. Itis the bank-based financial systems which are the most integrated. In some of these countries, the government takes the lead in defining the long-term objectives, whilst in others it adopts a lower profile, preferring to operate obliquely and indirectly. These countries have recorded faster rates of manufacturing growth than the UK over a long period, and it is believed increasingly that part of this success is attributable to the integrationalist approach that is adopted. In spite of the fact that the UK was the first to industrialise, and that its financial system has long been amongst the most sophisticated in the world, the two sectors have operated independently and developed separately. It was perhaps because the UK was the first to industrialise that this happened. Indu-1 stry was funded initially by private capital and subsequently by internal funds arising out of high profits. For their part, the banks developed their interests elsewhere since it was apparent that industry was able to grow without their help. From the outset, industrial development in the major European countries was more co-ordinated than in the UK. This involved closer links between the industrialists and the financiers, to the extent that new institutions were established to meet the needs ofindustry or special skills developed by the large commercial banks. Thus, industrial banking can be a service provided by a general bank as much as a specialised institution engaged exclusively in industrial banking. It is, however, the special credit institutions in continental Europe and Japan which have been a conspicuous feature of their systems. This is a 20th century phenomenon, born out of the general industrial banking which emerged in the last century. Whilst the role and organisation of each of these special credit institutions is determined by the unique financial and industrial structure in each country, there are features common to most of them: e there is formal state direction and/or financing; ---------------------------'Fabian tract 518 • 17 e the credit institutions have concentrated largely on providing longterm loan capital to companies, rather than equity finance; e re-developing existing enterprises is the focus of the activities, rather than promoting new businesses; e small and medium sized enterprises are as, if not more, important than the larger companies; and e the special credit institutions are more lending than deposit-taking bodies, raising much of their finance at long maturities. In some ways, the distinction between the industrial banking services provided by the general banks and the facilities offered by the special credit institutions is an arbitrary one. The demarcation is even more blurred in some countries where the special credit institutions work entirely through the banking system. Since much of what is being proposed for the UK, however, is based on the special credit institutions, the distinction is worth making. It should, nevertheless, be remembered that these bodies do not represent the sum of industrial banking expertise in any one country, but they can be regarded as the catalyst around which the relationships between industry, finance and government revolve. Structural characteristics A summary of the operations of the major credit institutions in the leading industrialised countries is given in the Appendix. The structure of each of these organi ations is determined largely by the peculiar financial and industrial environment in that country, and any similar body in the UK must be organised in a way which takes into account this country' in titutional framework. There is, therefore, no single foreign example which can be transplanted in the UK. The brief ummaries of the main characteri tics of these other long-term credit institutions, however, reveal the general factors which have contributed to their success. In terms of status, ownership and control, the credit institutions function most successfully where there is a close relationship with the state on policy issues but autonomy on operational matters. Since the state is, in most cases, a major provider of funds and sets the national economic objectives, a close relationship on policy matters is essential. Independence at the operational level is just as critical because the institution: e needs to be able to reject bad propositions and poor quality borrowers; e has to maintain its credibility with other financial institutions; e needs to minimise bureaucratic delays and political interference; and e has to ensure continuity when governments change. Although their precise legal status varies, the major credit institutions in Europe and Japan qualify under both criteria. The three Japanese banks are all in private hands, having once been government-owned, but they continue to enjoy a very do e relationship with the state. In Germany, the KfW is owned by the government, but its independence is undoubted. CN in France is privately owned and has its shares traded in the Stock Exchange, but enjoys special legal provisions and has a number of top posts filled by government appointment. Lending policy The central role of the credit institutions is to provide general support for industrial investment by lending funds of medium and long-term maturities at a cost which is generally below the prevailing market rate. In Japan, loans are, on average, for 5-7 years, from the KfW for 4-10 years and in 18 • Fab1an tract 518-------------------------- France, the CN lends from 10-15 years. Just as the financial institutions argue that it is inappropriate for them to borrow short and lend long, so industrial companies can claim it is unwise for them to borrow short in order to invest long-term. Since floating rate finance makes the calculation ofreturns on investment hazardous, the availability of long-term money at fixed rates is considered to be a necessary investment incentive. These are services the credit institutions are able to offer, together with the important interest rate subsidy. This should not be taken to mean that these banks lend to any applicant. An integral part of the institutions' operations is the closeness of the relationship they develop with the borrower. There is often active monitoring of company performance, to the extent of involvement in discussing management plans and exerting direct influence over corporate policy. Some ofthese loans are made against targets for specific objectives (eg exports) or after the submission of a plan detailing the company's future activities. Markets and products Most of the credit institutions have a specific remit to support sma!Vmedium sized enterprises (SMEs). In most countries it is felt that the larger enterprises have easier access to equity markets. In Germany, for example, 70 per cent of the KfW's domestic investment loans are to SMEs: other institutions, such as the lndustriekreditbank AG-Deutsche lndustriebank, are also involved in this sector. In France, the CN focusses on larger companies, but there are 15 Societies de Developpement (SDR) and the CEPME which compete fiercely for the small!medium firms. Itis estimated that CN has a 45 per cent share of long-term loans to industrial and commercial sectors, CEPME 35 per cent and the SDRs 18 per cent. The situation is similar in Japan, where there is a host of smaller banks specialising in SME financing. The emphasis of the credit institutions' activities is on providing long-term loans for investment. Few are interested in taking direct equity stakes in borrowing firms. Similarly, these institutions do not provide funds to rescue ailing companies, concentrating instead on investments which have long-term potential. In the major European countries, there are other publicly- funded institutions which are prepared to take a stake in a company or help it through short-term difficulties, in rather the same way as the National Enterprise Board tried to do in the UK during the 1970s. Advice is an important service offered by these institutions. They have developed industrial expertise in dealing with borrowers and in approving loans. Large research departments are a common feature which can advise not only on the economic environment in which companies operate, but also on the development of standard loan contracts and rules for security. The credit institutions' approach to lending is based on whether or not expected cash flows will be sufficient to cover interest and capital payments. British banks, on the other hand, tend to adopt the 'gone concern' or 'carcass' evaluation, which reg_uires no industrial expertise or understanding of the borrower's business: it is a decision reached at arms length, based on accounting valuations of a company's assets. The cash flow approach does not mean no security is taken. The collateral, however, is mainly a protection of the bank's position against the borrower or other creditors: the decision on whether or not to lend does not depend on the security. The cash flow approach is meant to encourage companies and projects with good future prospects and additional criteria are designed to encourage investments which meet national economic objectives. Equally important is the credit institutions' role as advisers to governments. Their close contact with compa ----------------------------1Fabian tract 518 • 19 nies and their understanding of industry and finance places them ill a unique position for advising on industrial policy issues. The Japanese banks and CN in France have been most closely involved in such discussions. It is hard to assess quantitatively the impact these banks have had on investment. Some indication can be obtained from a survey undertaken by Germany's KfW of its corporate customers in 1983. This revealed that only 20 per cent of respondents would have carried out the project in the same way had they not received favourable loan finance. Of the remainder, 70 per cent reported that they would have cut down their investment plans or postponed the project without KfW assistance, and 10 per cent claimed the project would not have been carried out at all. The three most commonly cited reasons for using the KfW were low interest rates, the length ofthe loan and the fact that the rate was fixed. The majority of respondents regarded the procedure for loans as straightforward, which encouraged them to apply, and it was also felt that lower interest rates were preferable to investment grants or allowances. UKgap There is no UK equivalent for the credit institutions that have been described here. The nearest approximation is Investors in Industry Group (3i), which acts as the holding company for the Industrial and Commercial Finance Corporation (ICFC), Finance Corporation for Industry (FCD, Finance for Shipping (FFS), and other subsidiaries involved in leasing, property and consultancy services. 3i owns substantially all the investments and other assets of the group, and carries on the group's investment activities in the UK. ICFC and FCI were formed in 1945 at the request of the Labour government, and in 1973 the holding company Finance for Industry was formed, which in 1983 was renamed Investors in Industry. It is owned by the Bank of England (15 per cent), Bank ofScotland (3 per cent), Barclays (18.8 per cent), Lloyds (13.7 per cent), Midland and Clydesdale Banks (18 per cent), Royal Bank of Scotland (7.6 per cent), National Westminster (23.7 per cent) and Waterloo Trustee Co. (0.1 per cent). The group operates under five divisions, ICFC, Head Office, Ventures, Shipping and Energy, and Property. Shareholders' funds in 1986 amounted to £277 million and total liabilities were £1,877 million on which a surplus (after tax and interest) of £29.7 million was earned. Gross investment in the year was £318 million. The group provides permanent and long-term investment capital, as well as advice, to businesses of all types. These facilities are provided through specialist groups, with particular skills in different market segments, either direct or through its network of 23 regional offices. 3i's long-term investments come in many different combinations of loans and shares, and it also provides hire purchase, leasing and guarantees. The present government's emphasis on and fiscal support for the establishment of new businesses and the accumulation of private capital has proved the stimulus for the growth of new venture capital and Business Expansion Scheme funds. On the surface, it appears that 3i fulfills a similar function to the European credit institutions. There are, however, critical differences in its operations which sets it apart from its European counterparts. In the first place, the ICFC was not welcomed by the British banks other than the Bank of England: it was imposed by government, and for many years did not enjoy a close relationship with its parents. In 1959, it was able to raise money on its own by means of quoted debenture and loan stock issues, since when it has become totally independent ofthe state and the banks. In raising funds, however, 3i receives no interest subsidy. None of its borrowings are guaranteed, either by the govern 20 • Fabian tra: the rise of the MSC £1.SO S07 ed. Lisanne Radice Winning women's votes £1 .SO S09 Neil Kinnock The future of socialism £1.00 S I 0 Denis Healey Beyond nuclear deterrence £1.00 S I I Alan Alexander Managing local socialism £1.SO S12 Denis MacShane French lessons for Labour £1.SO Sl3 Martin Smith The consumer case for socialism £1.SO Sl4 Giles Radice Equality and quality: a socialist plan for education £1.SO SIS John Mann & Phil Woolas Labour and youth: the missing generation £1.SO Sl6 ed . lan Forbes Market socialism: whose choicel £1.SO Sl7 John Carr New roads to equality: contract compliance for the UK? £I. 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Order by telephone: ring 01-222 8877 during office hours, quoting Access or Barclaycard number (also Mastercard and Eurocard). An Investment Bank For The UK Britain's manufacturing sector has been in decline for over 20 years. The authors of this pamphlet argue that this is neither inevitable nor desirable but requires a concerted national effort led by the government to ensure that UK industry is able to meet the challenges which face it. It is necessary for government to pursue long-term policies and essential to stimulate investment over a long period. But industry also needs a bank which is sympathetic to the longer-term perspectives required to sustain a period ofgrowth. The authors examine the investment institutions of other leading industrialised countries and show how they are able to provide general support for industrial investment. They argue that a similar organisation should be set up in the UK as an integral part of a Labour government's overall strategy for industrial recovery. A British Investment Bank would stimulate a major programme ofinvestment in new capacity to raise the quality and quantity ofcapital stock. Complementing the existing sources of finance, the Bank would be expected to consider sympathetically requests for loans to support a wide range of activities including: e projects/businesses in industrial sectors which are identified as high growth areas; e projects with significant regional importance and employment potential; e businesses with significant export or import substitution potential; e major infrastructure projects. A key instrument of the Bank would be low interest loans, the precise terms of which would be varied to suit individual firms' specific needs. These would include options for capital holidays or capitalisation of interest, loans convertible into equity share capital and other mechanisms for matching repayments to cash flows. Fabian Society The Fabian Society exists to further socialist education and research. Since 1884 it has enrolled thoughtful socialists who wish to discuss the essential questions of democratic socialism and relate them to practical plans for building socialism in a changing world. Beyond this the Society has no collective policy. Itis affiliated to the Labour Party. Anyone who is not ineligible for membership of the Labour Party is eligible for full membership; others may become associate members. For membership and publications details write to: John Willman, General Secretary, Fabian Society, 11 Dartmouth Street, London SWlH 9BN.