My Lords, I wish to talk of an enduring problem of the UK economy that is of increasing severity: our inability to pay our way in the world by means of our exports of goods and services. The consequence of this failure is our indebtedness to foreigners, which has resulted in their ownership of an ever-increasing proportion of our capital assets. It is essential that we should understand the causes and consequences of these circumstances. We need to dispel the complacency that has allowed us to reach this state of affairs, and to take action urgently to remedy it.
The UK has an unprecedented deficit in its trade with the rest of the world. The difference in the value of the goods and services that the UK buys from abroad and the value of the goods that it sells to the rest of the world has risen to its highest level as a share of gross domestic product since records began. Since the early 1970s our deficits have been of an increasing magnitude. The last recorded surplus was in 1984, when it was a modest 0.3% of GDP. At present our deficit is running at 6% of our GDP. The period from the end of the Second World War until the 1970s saw trade deficits that were modest by comparison with our recent deficits, yet these years were afflicted by intense anxieties over Britain’s balance of payments. It is remarkable that such anxieties have largely disappeared at a time when the problem has never been more acute.
The reason for the present lack of concern over our trade deficit is that we have found the means of temporarily averting a balance of payments crisis, but these expedients will be the cause of much economic distress in future. We have managed to achieve the necessary balance of payments by selling our assets to foreign owners. This cannot continue indefinitely since the supply of assets for sale is limited. It will eventually be exhausted and we will find ourselves in an acutely impoverished state.
Such sales of our assets are liable to be described, disingenuously and deceptively, as “direct inward foreign investment”. The present Government have declared that Britain is open for business and have congratulated themselves on their success in attracting foreign investment. The much-publicised trade missions of the Chancellor and the Prime Minister to China, India and elsewhere have succeeded not so much in promoting the sale of British goods abroad as in selling the ownership of our economic enterprises. There has been an extraordinary self-deception on the part of the Government in this connection, which, unfortunately, has succeeded in deceiving many others besides.
It is appropriate at this juncture to note that Britain’s financial sector has been greatly enriched by the business of selling our assets abroad. Each sale commands a sizeable commission. One is therefore likely to find great enthusiasm for so-called inward foreign investment among those who work in the City of London. Moreover, politicians who are allied to the financial interest are unlikely to cast doubt on a strategy that favours inward investment.
Each such inward investment to the UK implies an increment in the demand for the pound on foreign exchange markets. The aggregate effect of this demand has been to raise the value of the pound to a level that has made our manufactured goods too expensive to compete successfully in foreign markets. The result has been not only a reduction in our exports but a long-term decline in our manufacturing sector.
The manufacturing sector, which accounted for 25% of gross domestic product in 1979, now accounts for less than 10%. It now contributes less to our GDP than does our financial sector. The policies that have favoured the financial sector have been to the detriment of the industrial sector and they will eventually be to the detriment of us all. A state has now been reached where the value of UK-owned foreign assets is less than the value of UK assets that are in foreign ownership. The consequence is that there is now a net flow abroad of interest payments, dividends and profits. The net leakage is clearly to our disadvantage. It is associated not only with the outright foreign ownership of UK enterprise but also with the ownership of UK franchises.
Our transport network provides a good example of a UK industry dominated by foreign-owned franchises. Three-quarters of rail franchises in the UK are now owned by foreign state-owned or state-backed rail companies. Prominent among these are the German state-owned company, Deutsche Bahn, and the rail company Abellio, which is the international arm of Nederlandse Spoorwegen, the Dutch national rail company. Foreign, state-owned rail companies are using profits earned by operating franchises in the UK to keep fares down and to support investments in the rail services of their respective countries. Our passengers and our taxpayers are subsidising a system that hands increasing profits to foreign, state-owned train operators, instead of investing them in our railways, as would be the case if they were under UK public ownership.
This phenomenon is also evident throughout our national utilities. The energy companies provide a well-known example. The majority of UK customers, whether domestic consumers or businesses, are supplied by one of four foreign-owned companies: EDF, which is Electricité de France; E.ON and RWE, which are in German ownership; and Iberdrola, a Spanish company. There are substantial repatriations of profits and dividends from the UK companies to their owners abroad.
The recent announcement of deals that have been struck by the Government with EDF and with two Chinese national nuclear corporations to build a new generation of nuclear power stations has filled many commentators with alarm. To secure EDF as a builder, the Government have guaranteed a minimum price for electricity from the Hinkley C nuclear power station of £89.50 per megawatt hour for 35 years. This is approximately double the current rate for electricity on the wholesale market. The Government have also provided a guarantee of up to £17 billion that foreign lenders to this infrastructure project will be repaid in full and on time, irrespective of the performance of the project. It is, of course, the taxpayers and the consumers who will fund this largesse.
One is startled to discover how much of Britain’s infrastructure is now in foreign ownership. This includes our seaports, our airports, our power stations, our railways and buses, our water companies and much else besides. Large swathes of our manufacturing industry are also now in foreign ownership. This includes our car industry, our steel industry, our cement manufacturing industry, a large proportion of our food processing industry and so on. Britain’s aerospace industry has been celebrated by politicians as an exemplar of economic and technological success. However, a recent study by Norman Smith and Joseph Wright on mergers and acquisitions in the aerospace supply chain, Losing Control, published by Civitas in June this year, has shown that this industry too is passing into foreign ownership. Of the 155 companies still present in 2014, only a third had avoided takeovers or mergers between 1990 and 2014. Of 101 companies that experienced a change of ownership, over half passed into foreign hands. As the report wryly remarked, a great deal of effort and energy was devoted by managements to pursuing these transactions, generating large fees and commissions that have been paid to bankers, brokers, accountants and solicitors. The report also observes that foreign enterprises have been cherry-picking smaller British aerospace companies that have been in possession of valuable intellectual capital and technical expertise. Few of these companies have survived the takeover.
The truth is that many takeovers have been inimical to the prospects of our industries. Many have been intended, primarily, for the purpose of acquiring our intellectual capital and of limiting competition. This was clearly the case in the bid by the American pharmaceutical company Pfizer for AstraZeneca. The bid was also driven by prospects of cost saving and tax minimisation. It was facilitated, as many other takeovers of British firms have been, by our lax rules of corporate governance that put few impediments in the way of mergers and acquisitions.
The UK has a unique openness to foreign ownership. By contrast, virtually all other developed countries retain the power to block foreign takeovers that are deemed not to be in the national interest. The Committee on Foreign Investment in the United States sits in judgment on attempted takeovers that are thought to have implications for national security. In France, the Government, who do likewise, recently blocked the takeover of the engineering firm Alstom by America’s General Electric. Most recently, the French yogurt maker Danone was protected from an attempted takeover by the Swiss food group Nestlé. I can recall a headline in the financial pages of the Telegraph in 2011 on the occasion of the takeover of Cadbury by the American firm Kraft which declared, correctly, that the French would never have allowed it.
The availability of British assets to foreign takeover can be seen both as a product of an ideological predisposition and as the result of the influence of some powerful vested interests. The ideological predisposition has favoured the widespread privatisation of industries that were formerly in public ownership. The risible irony is that much of what has been privatised that was previously in public ownership has fallen into the hands of foreign nationalised industries or state-sponsored industries. We have seen that this has been the case throughout our transport network and in our electricity-generating industry. It is also true of our aerospace and defence industries. The Thales Group—or “Groupe Thales”, as it would be in French pronunciation—which has taken ownership of some of the leading UK defence contractors and of a fair proportion of our electronics industry, is a French state-backed company that is partly state-owned.
The City of London has a vested interest in trading financial assets of every description. Our financial sector is no longer devoted to the purpose of raising capital to finance industrial investment. Instead, its main activities are in financial arbitrage and trading. These activities have been stimulated by the remarkable growth of financial credit. As the neglected Kay Review of UK Equity Markets and Long-term Decision Making has testified, the preoccupation with stock market performance has penetrated deeply into the management of UK industry. Many managers have become more interested in pursuing mergers, acquisitions and corporate sales than in pursuing industrial developments. In other words, they have been affected by short-term financial considerations, including the consideration of their own salaries and of the value of their stock options.
Our rules of corporate governance amount to a system of self-regulation by the financial sector. They create few impediments to mergers and acquisitions or to financial trading and do nothing to protect the national interest. They contrast markedly with the rules that prevail in Germany, for example, where there are statutory anti-takeover provisions and where the public and politicians are strongly opposed to hostile takeover bids. German firms that are listed on their stock market are governed both by a management board and by a supervisory board, which must by law comprise a large contingent of the firm’s employees. The supervisory boards act as a restraint on financial activities that might be harmful to the company. It would be greatly to our advantage to adopt a continental model of corporate governance and to replace our unitary boards of directors by a two-tier system.
The difficulties and the failures of our industrial sector are to a great extent due to the power and the influence of our financial sector, whose activities are inimical to a long-term industrial strategy. As I have already emphasised, the sales of our assets to overseas buyers has raised the foreign exchange value of the pound, which has made our manufactured goods uncompetitive in world markets. Ideally, I should like to see the financial sector diminished and its activities restrained. This is unlikely to happen under the present Government. Even a future Government of a different colour should not be relied upon to act effectively against the financial interests.
However, there is an obvious recourse that could be relied upon to diminish the value of the pound. The central bank, or some other agency, should be charged with purchasing foreign assets when the value of the pound exceeds competitive levels. Such a collection of nationally owned foreign assets is commonly described as a sovereign wealth fund. The money that has been devoted to quantitative easing might have been used for this purpose. Many countries have established sovereign wealth funds for the purpose of limiting the exchange values of their currencies. A leading example is China, which has fostered an export boom based on the cheapness of its goods in its overseas markets.
The idea is not new. Under the gold standard that prevailed throughout the interwar years, gold was purchased by countries whenever it was favourable for them to do so, which was when their currencies were liable to be overvalued in foreign exchange markets. Gold is a sterile metal. By contrast, the assets held within a sovereign wealth fund will generate an income, which could redress the leakage of income that is flowing abroad in the form of profits, dividends and interest payments.