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British Steel's collapse highlights the complexities of state intervention

The government's response to the troubles of British Steel is a reminder of how difficult it is to get state intervention right.

The government's response to the troubles of British Steel shows how state intervention is back in vogue – and is a reminder of how difficult it is to get right, writes Giles Wilkes.

The news about British Steel in Scunthorpe swings from hope to worry. At one point the venerable steel maker was to be rescued from collapse by Chinese industrial conglomerate Jingye; the next day the commercial viability of its plan was being questioned. At time of writing, the prospects for the rescue can only be described as uncertain.  

We should not be suprised by the twists and turns to the saga. Almost 15 years ago, in another election year, in a part of England full of potential swing constituencies, a massive industrial concern, over a century old, was similarly at risk of going bust – with the loss of 5,000 jobs. The business secretary and prime minster were hitting the phones, begging overseas investors to put in the money to keep it going.  Just like today, the selling management was facing accusations that it had profited from the failure of a business. European rules were examined for their flexibility to see what kind of a government loan was allowed, thereby inducing a life-saving investment from China.  

 The collapse of MG Rover in Birmingham back in 2005 was the industrial story of the year, but one which played out against a very different political context. In the end, the feverish behind-the-scenes activity came to naught. MG Rover went bust, at a time when successful intervention was a rarity and one which tended to be met with disapproval from conventional wisdom. Indeed, in 2005 The Economist blamed the government’s poorly-planned intervention a few years earlier for pitching MG Rover into the wrong hands and allowing the four directors known as the “Phoenix Four” to profit from failure. Six years later, these four were disqualified from acting as company directors. 

Industrial Strategy has enjoyed a renaissance under successive governments

What is to be learned from the passage of 15 years? Above all, there has been a profound change in the political attitude towards intervention. Industrial Strategy was not a phrase ministers liked to bandy around under Tony Blair and Gordon Brown. You might say that the mishandling of MG Rover showed why politicians were nervous. A failed rescue produces the worst of all worlds, politically and economically, with brickbats hurled from either side.   

 Nevertheless, looking back it is still remarkable how the collapse of such a big employer played little part in a relatively close general election. Possibly there was less focus, before the financial crisis, on the difficulty of sustaining regions hit by an industrial shock: the UK economy was in its 13th year of growth and the then-government still sustained a strong reputation for economic competence. In retrospect that lack of focus was a mistake. Those years of growth hid profound weaknesses in the structure of the economy. Sustained growth at a national level was not enough to spread prosperity across the country. Many communities were still struggling to recover from the steady loss of manufacturing jobs that began under Margaret Thatcher or even before.

This was, in part, why industrial strategy enjoyed a renaissance, first under the Coalition and then Theresa May, with a particular focus on rebalancing the economy to lagging regions. There was also a much greater appreciation for how difficult it is to rebuild an area that has been hit by the collapse of a single large employer. When the cost and difficulty of restoring a region after such a shock is taken into account, it can often emerge that preventing the collapse provides much better value for money for the taxpayer. As a result, the rescue of the British Steel plant in Scunthorpe was the number one priority for Greg Clark, the business secretary during the dying days of the May administration – even during the turmoil around Brexit.   

There is no guarantee of success when the state intervenes in private sector companies

But what is really striking is the similarity between the two stories, and above all how they remind us of something somewhat banal and yet vitally important. State intervention to help a private-sector company is difficult and uncertain of success. As we set out in our recent report about bailing out business for a No Deal Brexit, government support for business is a minefield of dilemmas. A government cannot be generous and unconditional in its approach, or it risks handing out windfalls to the private sector. It cannot place a confident bet on a future commercial recovery, because markets are far too unpredictable for such confidence. Who knows what the price of steel will be in one year’s time – or, for that matter, the market for sheep meat, the tariff regime for automobiles, or the regulatory arrangements for pharmaceuticals? 

Yet industrial crises do not proceed at a leisurely pace. A company can produce a confident annual report one month, and be begging for leniency from its bankers the next. Decisions have to be made quickly. In most cases, companies should be allowed to go bust: the failure is the market’s way of saying that there are better ways to deploy their assets, and removing the risk of failure simply encourages imprudent or risky behaviour. The UK's strong labour market helps displaced workers into new jobs reasonably well, and there is the risk that intervention often merely postpones the inevitable if it cannot change the fundamental situation of the company. This comes at the expense of other, better-run businesses that keep going without the help of the state.  

The attempts to rescue a single failing company have taken up a great deal of government time and energy

The very size of British Steel tipped the government in favour of its support earlier this year. There might also have been concerns about whether the government itself might be blamed – because of too high energy prices, for example, or for not prioritising steel as significant to the defence industry. Hopefully its rescue will see it put onto a sustainable footing, for the sake of its workers, large supply chain and the local area. We should also hope that multiple situations like this one do not occur at once; a single industrial crisis took a great deal of the energy and time of the business department to handle. Much has changed in 15 years, but a growing appetite for industrial intervention has not made it any easier to do.  

Publisher
Institute for Government

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