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Car firm bailouts could leave Government owning swathes of British industry

Jaguar cars - Ben Stansall/AFP
Jaguar cars - Ben Stansall/AFP

The Treasury could end up with control of sweeping stakes in British industry if a mooted rescue package for Jaguar Land Rover sets a precedent for a series of coronavirus bailouts of struggling firms.

JLR, the jewel in the crown of the UK’s automotive sector, is in talks for help which could include a loan of more than £1bn, with conditions to potentially turn it into a shareholding in the Tata-owned group.

It could be the first of several as the Treasury considers buying stakes in businesses which are of strategic importance but cannot access help under current schemes, under a new initiative dubbed Project Birch.

Along with the rest of the industry the company is suffering from a steep fall in sales as the lockdown closed showrooms and factories.

Car industry expert David Bailey at Aston University said help for the industry, including supply chain technologies such as battery factories, could see the UK emulate France and Germany where the state has significant stakes in the sector.

“Having it convertible into equity is a very good idea. It is what other Governments do – the French Government has an equity stake in Renault as well as Peugeot, there are regional Governments in Germany that have a stake in VW,” he said.

“So it is not unusual in the industry, although it is unusual in the UK – it would really raise a new form of industrial policy, but one which I think we are probably going to need.”

Late on Sunday, it emerged the Treasury had authorised plans to take stakes in strategically important companies on a “last resort” basis.

Prof Bailey wanted the Government to take a stake in JLR in the financial crisis, noting that it could have made a significant profit in the years since.

Andrew Bailey, the Governor of the Bank of England, said he and the Chancellor have held talks around taking equity stakes in struggling companies.

It could be particularly suitable for businesses which do not qualify for the loans currently on offer, often because they already have too much debt.

Last week Andrew Bailey, Governor of the Bank of England, said equity stakes could be appropriate for those companies which do not qualify for Government-backed loans.

“There will still be companies that don’t have access [to those schemes] and one principle reason for this is their condition before any of this happened,” he told the Treasury Select Committee. “They were over indebted before Covid ever came along. They do have to take responsibility for sorting that out, and the need for them is not debt, it is equity. The answer for that situation is not more debt.

“We are working, the Treasury is working, and the Chancellor and I are in close contact on this, on what are the options for equity. I hope that the first port of call is the market.”

On Sunday night, the Treasury told the Financial Times it would consider taking stakes in firms that had “exhausted all options” where failure “would disproportionately harm the economy”. This would be done on a “last resort” basis.

Bailey - Hannah Mckay/REUTERS
Bailey - Hannah Mckay/REUTERS

JLR is not eligible for help under existing schemes because they require big businesses to have an investment grade credit rating, which the car maker lacks. Much of the car industry has weak ratings due to its low margins.

Business groups and economists warned of practical difficulties and risks around the idea of equity stakes.

“Firms have their backs up against the wall right now, so it’s welcome to see the Treasury considering innovative ideas to boost the economy,” said Tej Parikh, chief economist at the Institute of Directors. “The debt that businesses have taken on during the pandemic will drag on investment in the months ahead, holding back our recovery.

“An equity-based approach, such as a sovereign wealth fund, could help deal with this problem, but it does raise its own challenges. Working out which businesses to fund won’t be easy, and many firms may balk at the idea of the Government holding sway over their decision-making.”

Prof Philip Booth at the Institute of Economic Affairs said: “By taking an equity stake, the government has the lowest level of security for the investment it makes. It might get back more than it invested, but if the company goes bust it will be paid back nothing.

“Secondly, if we put this in the context of the government’s debt, this is like somebody with a huge mortgage taking a punt into the equity market. If it simply makes loans, the government ends up with some assets because it is a prior creditor unless the companies go bust. The repayment of that lending should be used to repay the debt that has been incurred to lend the money in the first place.”

He added that it would lead to Government control of increasing chunks of the economy, as well as poor corporate governance as businesses end up being run by a mix of bureaucrats and politicians without clear rules and guidelines on how to operate. No large-scale equity package is expected imminently.

Business Briefing Newsletter REFERRAL (Article)
Business Briefing Newsletter REFERRAL (Article)

JLR said: “We are in regular discussion with government on a whole range of matters and the content of our private discussions remains confidential,” adding that the suggestion it requires up to £2bn of support “is inaccurate and speculative.”

A Government spokesperson said: “The Government is in regular contact with the car manufacturing sector to assist them through this crisis.