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Treasury Committee 

Oral evidence: Economic impact of coronavirus, HC 271

Wednesday 17 June 2020

Ordered by the House of Commons to be published on 17 June 2020.

Watch the meeting 

Members present: Mel Stride (Chair); Rushanara Ali; Mr Steve Baker; Harriett Baldwin; Anthony Browne; Felicity Buchan; Ms Angela Eagle; Mike Hill; Siobhan McDonagh; Alison Thewliss.

Questions 662 - 739


I: Dr Adam Marshall, Director General, British Chambers of Commerce; Jon Moulton, Chair, finnCap; Lord O'Neill of Gatley.


Examination of witnesses

Witnesses: Dr Adam Marshall, Jon Moulton and Lord O'Neill of Gatley.

Q662       Chair: Good afternoon and welcome to the latest session of the Treasury Committee, looking at the economic consequences of the coronavirus. We are very pleased this afternoon to be joined by three witnesses. I will ask each of them to introduce themselves very briefly for the public record.

Dr Marshall: Good afternoon. Thank you very much for inviting me to appear today. I am here representing 53 chambers of commerce across the United Kingdom, which in turn represent over 75,000 businesses with 6 million employees, as well as our network of over 60 British chambers and business groups around the world. Together we are looking at the consequences of this pandemic, from both a UK and a trade and global view. I am delighted to be with you today.

Jon Moulton: I am a private investor in about 100 companies. I am chairman of finnCap, the largest AIM broker, and chairman of the International Stock Exchange. I chair an early-stage pharmaceutical company in Cheshire and do a few other things.

Lord O’Neill of Gatley: I am Jim O’Neill. I am a Member of the House of Lords. I apologise for my tardy dress code. I had not quite focused on the fact that everybody else would be so smartly dressed. I guess I am here in my role as vice-chair of the northern powerhouse Partnership, perhaps, as well as chair of Chatham House. Thank you very much for inviting me.

Q663       Chair: There may be a Division of the House this afternoon while the Committee is sitting. We are hoping not, but, in the event that there is, I will adjourn the Committee, probably for the best part of half an hour, I am afraid. Jim, you have let us know that you need to go at 4.30 pm, and we totally understand that. It is just possible, if we have a Division, that we will need to run beyond 4.30 pm, but hopefully that will not occur.

I am going to ask all Committee members to direct their questions to the panel as a whole, if necessary, or to individuals on the panel, but to at every stage make it clear to whom they are addressing the question. If you do not have a question addressed to you and you really want to get in on that question, please raise your hand and I will endeavour to bring you in, although bear in mind that we very much welcome correspondence from all who appear before us. If there is anything subsequently that you want to raise with us, there is always the opportunity to write to the Committee afterwards as well.

With that, I am going to move on to my first question. I will direct it at all three witnesses, please, but I will start with Adam. It is about this issue of Government support by way of loans. Clearly we have a wide variety of different approaches, from the bounce-back loans through to CBILS. We have had the larger version of CBILS and we have the CCFF at the higher end of loan support. Adam, do you feel that these loans are, by and large, fit for purpose, or are there still issues around any of these particular loan approaches? Do you feel that the banks have been getting these out, particularly to your members, for example, quickly enough?

Dr Marshall: The sense that we get from business communities around the country is that some of these loan schemes—in particular, CBILS and CLBILS—had a bit of a slow and rocky start. Some of that will inevitably have been down to the fact that they were brand new and that both the financial institutions and Government were feeling their way through how to provide support to businesses facing cash flow difficulties. But there were a number of issues that arose in the early weeks, for example around the ability to contact one’s bank in order to get an application moving. Response times were rather difficult, and then a backlog appeared as well, particularly in CBILS, which left a number of businesses frustrated.

I am happy to report that that has improved somewhat after that initial spike of demand. We are seeing more businesses reporting smoother application processes for CBILS loans, with more of those businesses that are trying to use them getting a response and a decision within a reasonable period of time. That was not without the need to tweak some of the criteria of the schemes, and to make it easier for the application process to proceed quickly. One important change was with regard to the forward-look test, for example. That was altered and made things easier. There has been a need to continuously iterate the CBILS loans to ensure that cash gets out as those small and medium-sized businesses need it.

The experience on the bounce-back loan scheme has been significantly better. That is down to the fact that due diligence and credit processes are much more limited, given the scale of the Government guarantee. Cash has been getting out to the front line much more quickly from that particular scheme. Many businesses are reporting that they had a simple application process and they had the cash within 48 hours, as was expected. That has been positive.

There has been a difficulty with some businesses that have been customers of non-accredited lenders. They have felt they have been locked out of the bounce-back loan scheme because the accredited lenders were spending most of their time servicing their existing customer basis, because they had a huge number of applications from their existing customer base, rather than being able to take on applicants from outside their business itself. There have been some difficulties there, just in terms of servicing the huge volume of demand that has come through.

On CLBILS, there is a concern among the smaller number of companies that have used that particular route about clearing up questions around the debt stack and where the CLBILS debt ranks in comparison to other existing obligations. I know that has been a bit of a brake on getting cash through quickly to some. Again, that scheme is also hugely welcomed by us, because there were a lot of mid-size and mid-cap companies that felt that they could not get the scale of support that was required.

The overall message is that these are fundamentally helpful schemes for those companies that feel they are able to go out and borrow from the market, so they can see where the revenue is going to come from in order to pay back the debts they are incurring, but it is going to take continuous iteration and they are going to have to go on for some time to support businesses through the waves of cash difficulty ahead that they are likely to face.

Lord O’Neill of Gatley: To be candid, I do not have even a percentage of the experience that Adam can share about the realities on the ground. As a private investor, I certainly know of many of the difficulties in accessing some of these things.

This is the interjection I would offer, having participated in a House of Lords debate on the very initial support offered by the Chancellor, ahead of the big launch of the debt-based scheme. I am a huge fan of the furlough scheme, but I would not have approached the company support schemes through debt provision. It is easy for me to make that comment because of the speed with which the Treasury had to act, but in many ways it was taking from the books of the 2008 crisis and trying to apply things that were learnt through that. I would have had an approach that was more grant-based, tying it very closely to the furloughing for a two to three-month period.

As I suspect we may get into further, I would have considered forms of potential equity injection for those that really needed it for a longer period, rather than this very wide, scattergun debt approach. I cannot imagine how that many companies are going to be able to repay a lot of it.

Q664       Chair: We will come back to that aspect in a minute. Jon, did you have any comments specifically on the offering that the Government have gone out with?

Jon Moulton: Adam has given a very good account of what has gone on. I will add a couple of things. The tests about viability have been difficult. Companies that I have been involved with have found themselves being locked out for some fairly arbitrary accounting points in a prior year. That test has not worked very well. There is a requirement for the CLBILS, for example, that the loan will enable you to trade out of any short to medium-term difficulty resulting from coronavirus. That sounds perfectly reasonable until you try to work out how long and how deep it is going to be coming out the other end, which is completely impossible to guess.

The bounce-back scheme has been great and has worked very well for the companies involved. It has been fast and easy.

The future fund, which is the smallest of the schemes, is a very poor scheme. It provides funding for innovative early-stage companies. The effect of what has happening in the economy is that companies have lost revenues. Early-stage companies do not have revenues, or if they do they are very small. They are a small component of their funding. Fast-growing little companies were the least affected by the coronavirus, and they are operating in a world where there is a monstrous amount of private capital. The future fund seems to be, first, barely necessary and, secondly, just crowding out some £10 billion of dry powder, as they call itunspent private equity to invest in growing businesses in London.

That one scheme is quite badly flawed. The need is not there and the structure is not going to do much good. The others have done some good, but, as Jim says, the real problem is going to be getting them to repay.

Q665       Chair: On that future fund point, Jon, we would love to have more time now to explore it with you, but, if you have a moment, could you drop your thoughts to the Committee by way of a letter or something of that nature? That would be particularly interesting to us.

Jon Moulton: I am very happy to oblige.

Q666       Chair: Sticking with you for a minute, Jon, we know that clearly we are going to have a vast number of businesses saddled up with an awful lot of debt as we come through the crisis. The concern is that they are going to be focused on deleveraging and servicing that debt, rather than investing in growing their businesses and creating the jobs that we are going to be in such desperate need of.

Taking a view of, on the one hand, the quite large businesses that will have, perhaps under CCFF and the larger schemes, borrowed substantial amounts of money, and also then the smaller businesses, which may have borrowed much smaller amounts, what approaches could Government take to easing that debt burden in both those particular cases? Is it debt forgiveness? Is it some equity-debt arrangement? Is it something that looks a bit like the student loan arrangements? How do you think it works for the big ones, on the one hand, and the smaller ones, on the other?

Jon Moulton: A very large report from the Recapitalisation Group at TheCityUK is being produced. It is really a very difficult report to write. We have no idea of the magnitude of the difficulty here. If we assume that interest rates remain low, difficulties will be low. If interest rates creep up over the course of the next three or six years, you could have very, very much greater levels of default than the numbers in here. They have taken some very crude approximations to guess that we might have a £100 billion of dodgy-looking debt in a year’s time. It could be a lot worse than that in time.

You went through a list of techniques for sorting this out. One is that, if interest rates are low and you do not have principal payments, companies can hang on to debt forever. You do not really need to bring the thing to a crisis. You can have a lot more forbearance. You can have more risk transfer to the banks. You can transfer debt into equity in a variety of ways, such as preferred equity or ordinary equity. You can do things like the student-loan-type structure. A more creative idea is to make repayment of the loans as an additional layer of corporate tax, so companies basically pay it when they are making profits and can repay it. It is quite a complex idea but at least it is novel.

The scale of the problem is going to be enormous, unless we have a very good, strong economy and very, very low interest rates. It is clear that there will be a lot of rescheduling of debt if we are to clear it in time. There is every reason to be concerned about it.

Some of it is going to get recapitalised the hard way, known as corporate bankruptcy. That number is going to go up quite sharply in the course of the next year and may persist into the future, again depending on the strength of the economy and on future interest rates. It also depends on other things, but those are your two big variables.

Lord O’Neill of Gatley: One broader issue, because of the potential scale, as indicated by what Jon said, is about reviewing the whole framework for monetary and fiscal policy. As I have written about and been in the media about for the past six weeks, the whole idea of some kind of nominal GDP targeting should not be off the table as a way of trying to increase the probability of a V-shaped recovery, as opposed to just leaving it all to chance.

Secondly, as I suspect many people on the Committee are aware, I am a big believer in the concept of never letting a crisis go to waste. The whole idea of using patient capital through Government in some form of equity to achieve more strategic goals, particularly as they relate to our dreadfully low productivity performance, should be actively considered.

Dr Marshall: We agree that the scale of the challenge on recapitalisation is going to be very significant. From the demand side, you will have companies that are under-trading and unable to repay their debts, and you will have companies that are over-trading, run out of cash and find themselves in difficulty as well. We are concerned about both of those situations.

We have been supportive, as chambers of commerce, of some sort of contingent tax-liability-type structure for the smaller SMEs, particularly those that are in BBLS at the moment. We think that is easily understandable to those that have taken on that debt. We have to remember in all circumstances that the companies that have taken on some of this debt do not all have the highest levels of financial literacy. We need solutions that are easily understandable, so that they can then try to find a way to trade their way out and take advantage of those solutions.

Q667       Felicity Buchan: Thank you for taking the time. Let me address my first question to Jim. It seems to me that the Treasury is going to end up with a lot of bad debt on its books through the various schemes. That will have to be transferred to a vehicle like UKFI, which will have to manage that bad debt, whether that is through debt-to-equity swaps, bankruptcy or anything else. What are the implications of the state owning so many stakes, or indeed bond-type commitments, with so many businesses across the country?

Lord O’Neill of Gatley: To reaffirm what I said, it partly will depend on the broader framework for macroeconomic policy and the success or otherwise. If we get very fast nominal GDP recovery, the debt will not seem anything like as bothersome as it otherwise does.

On the specifics, I find myself being less bothered about it than I would have thought I might be in the past, because that is the reality we face. We cannot undo the past six months, hence the idea of never letting a crisis go to waste. Again, this might come up later, but we can think about and pursue routes of equity-backed capital in some kind of modern version of what came out of World War II, with the Government playing an active role in trying to create more sustainable and better productivity-enhancing businesses, which at some point will then be sold off to private investors, as with the whole end of nationalisation and privatisation that we saw in the 1970s and 1980s.

Q668       Felicity Buchan: Do you think that there are any risks of the state taking such an active role in determining where investments are going to be made?

Lord O’Neill of Gatley: You would have to create an arm’s-length investment body. Rather topically given the past 24 hours, DFID is a 100% shareholder of something called CDC, which invests overseas. The investments are undertaken by experienced professional people. Around the world there are equity-based entities where the Government are the 100% shareholder, Singapore’s Temasek being one that has some parallels, but the investments are made by experienced investors. The remit is given by the Government but the actual investing is done at arm’s length.

Q669       Felicity Buchan: Jon, you have alluded to the report by TheCityUK and the talk of potentially £100 billion of unsustainable corporate debt. How much appetite is there in the private equity sector? Specifically, how much appetite is there for SMEs, where a lot of this bad debt will lie?

Jon Moulton: The larger end of private equity is very well placed to deal with the larger problem. Thankfully, £100 billion is now the size of the largest private equity fund, just on its own. Can it deal with it? Yes, it can.

There is good appetite for fast-growing companies in the private equity world, and there is good appetite for stable companies with decent cash flows. The problem will be smaller, less stable, less exciting companies. They are difficult equity stories under any scenario. The UK has already done a great bunch of things, with EIS, VCTs and the like, to support small and medium-sized companies, but not really small ones; there is nothing there to do that.

If I might just pick up on Jim’s contentment with the idea of large-scale Government ownership of UK companies, I would not be content with that. The general experience is that widespread ownership of companies by Government entities does not end very well. We can see that in many of the things that have happened regionally and in the devolved jurisdictions. It is to be approached very cautiously. The main thing is to try to avoid ending up with a lot of half-dead or three-quarters-dead companies needing to be tended by the state.

Q670       Felicity Buchan: Looking at these SMEs that are in the less attractive industries, not necessarily fast-growing, what is your solution for them if the private market is not going to be interested and you do not like the state investment solution?

Jon Moulton: There is no brilliant solution. They will end up with difficult financial bases. If they have too much capital because they borrow too much now, and they have a low-return business, there is no easy answer. Somebody has to take the write-off sooner or later. You can defer it a long time, which may be very helpful. Deferring pain is something that is very critical at the moment and will be over the years ahead. We will not be able to allow Darwinian free markets to deal with the small companies, or else you will have enormous problems.

Q671       Felicity Buchan: Given the fact that some of these companies will just not be viable going forward, so there is going to be bad debt out there, are you concerned about the resilience of our financial sector, our banks, in that scenario?

Jon Moulton: Our banks have done remarkably well in this crisis. They have had some help with releasing their reserves. They entered it with a stronger financial base. The Government and the Bank have been really aggressive in supporting that. I am not particularly worried about banking capacity at the moment, which is a surprise to me; I thought they would have found a way to get into trouble, but they do not seem to have.

Q672       Felicity Buchan: Jim, do you want to come back to Jon’s point that state involvement in the private sector has historically not worked very well, given that is what you are proposing?

Lord O’Neill of Gatley: I do not really agree with the analogy, although it is factually true in the small specific instances we have chosen. As I remarked earlier, the UK, particularly in the past 20-odd years, has a dreadful performance on productivity. It depends on what criteria you are making such assessments. I am not aware, other than the 3i early-stages example, of our Government doing such a thing, other than in some very modest ways.

I assume Jon is implying Government-owned big businesses, as was the case across the board in the Second World War, which ended up being privatised. Deliberately providing longer-term equity for things that might be strategically important sectors for the UK economy of today and the future is something this country has not actively even considered pursuing in the past. That might be part of our problem.

Q673       Felicity Buchan: What are you, practically, thinking about? You are thinking of, for instance, a £20 billion to £25 billion fund, where we look to invest in strategic industries, through either equity or debt.

Lord O’Neill of Gatley: I would suggest that there are three possible alternatives; all three are quite attractive, at least in principle, to me. One relates specifically to the net zero climate emissions by 2030. Before this crisis hit, I cannot think of a human being I knew who would have thought there was the slightest chance of industries having the incentives to do that. In relation to the so-called Project Birch—I am not sure where that name comes from—for many of those kind of industries, this is an ideal chance to help gear them towards further appropriate financial investments, to help accelerate a move towards net zero climate goals.

The second one would be very specifically, on a regional basis, to support the so-called levelling-up agenda. I have talked publicly about this whole notion before. For example, a bit of research has been done by a few people to suggest that advanced manufacturing, alternative energies and life sciences are three things that the north of England has, in theory, the potential to be world class in, but there were not really the resources to do it. The Government have the chance, in this mess, to do that through such a vehicle.

The third one is the more conventional one that you touched on with your question, dealing with it on a national basis. The other two are really appealing, given the reality that the future of so much of business now depends on what Government do. It is not as if we are starting from a position where the Government are a passive player here. Given what this Government have stated as some of their priority objectives, this seems to me to be a sensible path to pursue.

Dr Marshall: I just have three points. The notions of breathing space and deferred payments are going to be extraordinarily important for a lot of the SMEs, as Jon mentioned previously. I note that at the moment some of the loan schemes have a six-year timeframe on them. That will need to be looked at again. 

On Jim’s point, mission-focused finance is going to be very important. It is very important that the Government have a clear vision of what that mission is. We have had lots of strategies over the years, and Jim and I have been party to many of them. We recreate them over and over again. If we could have some clarity and say, “There are two or three things that we are trying to achieve as a country and we will focus finance and any equity stake the Government might take on those missions, and we will stick with it for 20 years”, that might actually have the desired effect.

Finally, I agree with Jim on the importance of the geographic element of all of this. So much of the venture capital, private equity and so on has gone in destinations within 90 minutes of central London over the years. I know this Committee has been very seized of that fact over time. If we do have a chance to build new structures or new ways to help businesses grow, we have to pay attention to their geographic distribution and to making sure that growth can happen in other areas of the UK.

Q674       Ms Eagle: I wanted to pursue this idea of a strategic planning role for the Government to recapitalise, making the best of this job that has seen the Government have to prop up with loans, effectively, so much of the economy. I am very struck, Lord O’Neill, with your view that a crisis perhaps creates opportunities to steer towards somewhere better and low-carbon, with innovation in some way, and thinking about how that could be done.

After the war, we had the Industrial and Commercial Finance Corporation. You have talked about what goes on in Singapore. Which models do you think are most likely to work? Are there any other examples existing in the world that you think we should be looking at as a model to do this?

Lord O’Neill of Gatley: The two you refer to are certainly particularly pertinent ones. 3i came out of the corporation that you just mentioned. Broadly speaking, that is regarded as having been successful and ended up becoming one of the earliest active players in the subsequent private equity world. That is a very good parallel to think about.

From my experience around the world, where I have spent a lot of my career in this regard, Temasek has a lot of experience, not just in domestic investments but in international ones, in taking significant long-term equity stakes. There are a number of others, including in some Middle Eastern countries. Temasek has greater applicability because of the amount of investment that it does in Singapore.

Q675       Ms Eagle: Do you get the idea that Project Birch, as it is emerging, might be an embryonic version of that, or do you think that is really just to be a place of last resort for what the Treasury decides is strategically important?

Lord O’Neill of Gatley: My impression is no more detailed on this particular aspect than any other, but my impression is that Project Birch might be thought of as a bit more of a traditional bad bank, and not in the same context as the two things that I said earlier; it would be an addition.

Linked to your question, for a number of the businesses and industries that are discussed in the context of Project Birch, some kind of conditionality, whether it was debt or equity, linked to strategic goals should be a requirement.

Q676       Ms Eagle: Do you think that the British Government, after many generations of leaving most of this to the market, and indeed allowing foreign takeovers of strategically important British sectors, have the experience or expertise even to think in this way, let alone deliver it? Were this an approach that the Government wanted to take, how do you think that they could equip themselves practically with the capacity to deliver it?

Lord O’Neill of Gatley: That is a tough question.

Ms Eagle: That is what we are here for. We want some practical answers, if possible, to these really important issues about delivery.

Lord O’Neill of Gatley: Let me try to give you three parts of it very quickly. First of all, it strikes me that over the past 20 years many aspects of capitalism have not really succeeded for all in the way that they are supposed to.

That is partly related to the second point: that our productivity performance is exceptionally weak and got worse over the past decade. Why would you want to just carry on with the exact same framework that was there before, particularly when, as you touched on, the reality of this very unique crisis has put this Government in a position that they never would have thought they would face? They have an opportunity to shape and frame things very differently than they could have done before.

Thirdly, from my own experience of the extensive 17 months I had as a Treasury Minister, I know we have some pretty competent people in the Treasury who can think outside the box if they are given the guidance to do so. If we have the right focus and intention, I do not see why it would be beyond the bounds of capability, given that there are examples, in our own past and elsewhere in the world, of such things being pursued.

Q677       Ms Eagle: That is a really interesting answer, thank you. Jon Moulton, you are used to being in that area where the market provides the money for investment. Do you have any observations about whether the Government ought to be getting into this kind of thing and, if so, how the expertise that has been involved in the way that capitalism has worked so far in our country could be harnessed to something a bit more strategic in these extraordinary times?

Jon Moulton: My experience in this neck of the woods was being on the board of the somewhat benighted Regional Growth Fund of a few years ago. We had the thick end of £4 billion disbursed, with nearly half of it against the advice of the board; it really was dissipated away.

However, you might be surprised to know that I am actually a fan of doing some industrial strategy. As Jim says, it ain’t working the way it is; productivity is going nowhere. There are a stack of things that need to be done. Focus is really important. We talk about doing regional policy. When I was on that Regional Growth Fund, I was much taken by the discovery that there were about 50 life science hubs in the UK. Most of them were too small to ever have any chance of doing anything.

If we are to go regional, we have to go regional and concentrate. That is why London is so successfulbecause of the massive concentration. If you decide to do Manchester, Bradford Leeds and Liverpool, and given them all some of the same cake, you probably will not prosper. You need to make difficult decisions, and focus and concentrate, to make these little industries work and get them to grow. We need those growing industries really badly.

Q678       Ms Eagle: That is, again, a really interesting answer, because the idea that the Government should choose where these hubs ought to be, perhaps after they have had an analysis of where there are some points of excellence, has not featured at all in national economic discourse since probably before Mrs Thatcher. To hear it is very refreshing. Again, where would we get the expertise to decide to do that, so that we could make the best fist of it possible? Where would the people that could make that decision come from?

Jon Moulton: You need a few people of very high quality to make those difficult decisions. This is not about masses. It is about intelligence and careful analysis. If we decide to bet the UK extensively in nuclear fusion or advanced genetics, there are clearly areas in which people need a lot of knowledge to decide that is the right place to be putting the bets. You then have to be able to run those bets for quite a reasonable period. That is difficult because, of course, the politics is not easy.

Yes, there are people who are capable of doing this kind of thing, and relatively small amounts of money, carefully placed, could do a great deal of good. We have some of that visible in places like Innovate UK. We need something that is really focused and not with multiple objectives, which is what has tended to happen to the Government entities when they have strayed into this territory.

Q679       Ms Eagle: It needs to be focused and to not be diverted by the latest headline into adding something else in. How do you think that sort of focus could be achieved and baked into the structures?

Jon Moulton: I fear my idea of advocating a benevolent dictatorship will not go down well.

Ms Eagle: Not with this democrat, no.

Jon Moulton: But it would work if you could find one. I am afraid it comes down to political will. It simply has to be this: “We are doing this for the long term. Let us keep at it for the long term. Let us make sure this works. Let us not divide it in three and end up with three non-critical-mass units. Have one that is critical mass and make it prosper”. You see that in the successful economies. Singapore has it easy; it is small enough to be one hub. In the United States, you have a few places that really motor that economy.

Q680       Alison Thewliss: I want to ask a few questions around the concept of a bad bank, which has been suggested, and debt relief around the bounce-back loan scheme. Could I ask Lord O’Neill, first of all, whether a so-called bad bank, under which the state would take over distressed loans and assets from banks, would be a useful intervention in the current crisis?

Lord O’Neill of Gatley: I am not sure. As you can tell from my answers to previous questions, I am more focused on the non-bad-bank parts. I am trying to look for something better in the future. It is so tempting because that is what has happened before. Arguably some parts of the banking sector still have very much part of themselves as bad banks from 10, 11 or 12 years ago, so that playbook is something that we are comfortable with. Because of the scale and diversity of loans that have been taken on board here, it is a little trickier, to put it mildly.

In my own view, when I think about the purpose of a so-called bad bank, you would want to have a clear purpose as to why you were doing it. Is it to maintain employment? Is it to achieve net zero carbon emissions with those industries? Is it a combination? What is it? To provide ongoing support for the huge potential scale of entities that could be in such a bad bank potentially would just be a guarantee of having a very large amount of debt for a very long time. From what I have seen, it needs to be thought about more carefully.

Q681       Alison Thewliss: Jon Moulton, do you see any advantages—or disadvantages, given what you have said already—of a state-led bank versus private-sector-led recapitalisation of distressed businesses?

Jon Moulton: My preferred route, and probably the best all round, is private-sector-driven recapitalisation. It is inevitable that the Government are going to have to help because of the scale of it. It is also inevitable, whether Jim likes it or not, that we will have some form of bad bank, because there will be a lot of them, just statistically. There will be a lot of bad loans.

At the moment, the main priority of the economy should be job preservation. That is the number one thing at the moment. Much of the other stuff that we are talking about is quite secondary. We need to be protecting jobs, not regulations. For the very short term, that is the main game. In the long term, you definitely do not want to just be focused on job preservation. I hope that helps.

Q682       Alison Thewliss: That is useful, thank you. That gives a bit of a focus. If it is job preservation that you are aiming for, that could be a road to go down.

Adam Marshall, bounce-back loans could see arrears and defaults among hundreds of thousands of small firms, some of which might be otherwise viable. Is there any way for the Government to sort through these firms and sift what is and is not viable? Do the Government need to consider widespread debt relief for these bounce-bank loans, given they have underwritten them?

Dr Marshall: That is a great question. The scale of the challenge is absolutely enormous. It is very difficult to come up with a viability test that you could apply to hundreds of thousands of firms consistently and get it right every time. Some of these inevitably will fail at some point in time. Others still have viable business models and viable operations.

Up until now, with the application process for CBILS and, to a lesser extent, BBLS, the criteria has been whether the firm was viable before the pandemic and the subsequent lockdown. Given that a certain level of due diligence has already been done there, there may be some benefit in using that to assess the very many loans that have been granted under the schemes when we are considering what should happen next with them in the future.

We have to find some sort of way to give these businesses the financial headroom to rebuild their operations, grow and then be in a better position to repay their debts. Coming back to the earlier conversation, changing the term and the repayment profile of some of this debt may be part of the solution, and indeed looking at the contingent tax liability type of approach or a student loan type of approach, so that firms get a chance to rebuild their revenues.

I very much agree with Jon that maintaining jobs and maintaining economic activity, particularly in regions where that economic activity is not as dense as it might be in some parts of the country, is incredibly important; otherwise we will face structural problems and scarring that will last for a very long time.

Q683       Alison Thewliss: Do you see the potential for arrears to be more likely to be geographically-based or sector-based? Are particular areas or sectors more vulnerable?

Dr Marshall: It could be a mixture. When I hear from chamber members all across the UK, there are some sectoral themes that come through, particularly in hospitality, leisure and tourism. In any business that is in the aviation supply chain anywhere at the moment there are again some difficulties. Commercial property is one, perhaps in the short term but maybe not in the longer term; people are having some very immediate difficulties. You can see some sectoral commonalities right now, but that is what applies right now; I could not tell you what would apply at the moment that the Government were considering what to do with the loan book that already exists. You would have to re-evaluate that yet again.

We need to have specific sensitivity to geography. I know Jim and I very much agree on this point. What is considered a systemically or structurally important business in one part of the UK might not be in another part. The loss of 250 jobs in some county economies may be a huge blow and have a very big follow-on impact, whereas that, in a big, major metropolitan area, may have very little impact, so there has to be an eye to that too.

Q684       Alison Thewliss: That makes sense. In his evidence to us, Philip Hammond highlighted that financial services firms are being put in the very uncomfortable position of having to issue bounce-back loans to companies that they suspect might not be able to pay them back. Those banks will then have to go and chase those debts from their customers. Would it have been preferable if that was given directly from some kind of state-funded bank, rather than damaging the relationship between banks and businesses?

Dr Marshall: The simple fact of the matter is that we did not have the financial institutions at the scale and speed required to do it any differently than was done. I understand the issue and I work very closely, trying to mediate between the businesses, which are at the sharp end of all of this, and the financial institutions, which are very concerned about their relationship with their customers right now, understandably so. I can understand that a bank does not want to be put in the position of having to take recovery action against a lot of businesses when, at the end of the day, it knows it may need to go and claim the Government guarantee.

As we look down the road here, we are going to have to look at ways to defuse that tension. The form of Government intervention will be very important. What we really must not seeand this is crucial for the recoveryis a moment in time when confidence between businesses and banks gets to what it was in 2008 and 2009. That left an impact on our business communities in terms of their attitude towards risk, debt and growth, which has taken a long time to overcome. If this were to lead to something similar, I would suspect that economic growth would be significantly hindered for a long time to come.

Q685       Alison Thewliss: Very quickly, Jon and Jim, do you feel that this outbreak has really exposed a gap in the UK Government’s ability to invest quickly and directly in businesses?

Jon Moulton: The size of what has happened is so large that there was no way that the capacity could have existed.

Lord O’Neill of Gatley: I am not going to answer what you asked. What it has exposed is that we have a really bad productivity problem in the UK. I slightly hesitate to be in full agreement with the others about the scale of the priority of employment. Of course we need to get everybody back to work, but we need to think about how to be more thoughtful. I am thinking, as I am listening to this, about 12 years ago. It was widely expected in 2008 that there would be a massive unemployment problem for the foreseeable few years from that, and there was not. We ended up with the highest levels of some form of so-called employment the country has ever seen, but a spectacularly weak productivity performance. There is an opportunity here, through direct and different ways of provision of capital, but also through incentives for how business behaves and how laws over employment behave, to do something more fundamental about some of these very long-term challenges we have.

Q686       Siobhain McDonagh: I want to look at issues of conditionality. Should there be any? If the Government are giving out money, should they impose on businesses some sort of conditionality in order to receive those funds? Lord O’Neill, you have called for greater conditionality to be attached to any Government bailout of business. What conditionality do you have in mind, and why?

Lord O’Neill of Gatley: I have spoken already, a couple of times, about net zero carbon emissions. If we as a nation have a genuine desire to get to net zero by 2030, business is not going to have incentives to do what is needed to get there without a powerful role by the state. That is definitely one that should play a role.

The second links to how I answered the previous question. My suspicion, for a number of years, has been that we need to change the incentives and the interplay between investment spending, employment of labour and the whole set of rules and form of engagement. To give a specific example, there is the whole role of share buybacks. I have been a long-time supporter, certainly for the past few years, of the idea that we need to cut them out of being such a regular part of balance sheet management by companies. Certainly, any entity that is planning to get some strong Government support should be stopped from pursuing share buybacks.

Q687       Siobhain McDonagh: Dr Marshall, do you agree? Should there be conditionalities attached to any business bailout? For example, should seven-figure bonuses or extraordinary pay ratios be challenged before bailouts are awarded?

Dr Marshall: I would expect that there would be scrutiny and a degree of conditionality. That conditionality can be quite broad in certain respects. Jim mentioned the environmental factors that could be in there.

I also think about local impact and social value. My company is a company that is limited by guarantee. I am under a duty to reinvest any profit that I make as a chamber of commerce in my local business community. That does not mean that I think every company should be in a similar model. Of course, having profit and having disbursements are absolutely essential to the functioning of the economy, but measuring the social value that a business puts into a community after a bailout could be considered as well.

Q688       Siobhain McDonagh: This is for anybody who wants to answer it. It was reported last weekend that two of the largest beneficiaries of the Covid-19 emergency fund scheme did not pay a penny of corporation tax last year. Should companies that pay no corporation tax in the UK be able to access tax-funded assistance for their businesses? The two companies named were CNH, which owns Iveco, the lorry-maker, and BASF, the giant chemicals group.

Jon Moulton: I am probably not unique in not knowing the particular facts of the companies, but in general terms it is a good idea to support your taxpayers, not your non-taxpayers. I have no idea whether they have a special reason for not paying tax.

Lord O’Neill of Gatley: I concur.

Q689       Siobhain McDonagh: Everybody always has a reason. Once the Government have invested in businesses, how can they ensure that they are not subject to political interference? How, for example, does business feel about the prospect of the Government taking significant equity stakes in private businesses? That is to Adam Marshall.

Dr Marshall: A lot of businesses that are in need of substantial support would understand that conditionality, including the possibility of some form of equity stake, could be attached to that support. The rules of the game need to be clear so that businesses understand that, when they are asking for support, that may be one of the outcomes. That is very important.

Equally, to the first part of your point, it is crucial for businesses and the professional managers in them to manage those companies and to not have constant interference from a single shareholder in that management, because that would make it very difficult to execute a recovery strategy and, indeed, to grow the company again. You would expect a Government equity stake to be managed and that shareholder to act in a similar way to other shareholders in terms of corporate governance.

Q690       Siobhain McDonagh: Mr Moulton, under what circumstances should the Government be considering taking equity stakes in businesses, rather than relying on recapitalisation through the private sector? Is it the right approach to deal with large and strategic businesses in a separate way from other businesses?

Jon Moulton: On the whole, I must admit that I favour private-sector solutions. If there is one, it will mostly be the right answer. There are very small but important bits of the economy that you can say are of strategic importance. The case for having the Government involved is more significant there. There will be a lot of involuntary Government stakes coming out of this. That has to be a fact. If there is a large chunk of guaranteed debt that cannot be serviced, the best way forward may well be for the Government to be a 40% shareholder for a few years, until such time as the private market can take them out.

Q691       Anthony Browne: We have talked a lot about capital, equity and recapitalisation. I want to widen it out to other policies that you believe the Government should adopt. We are all in the V camp. We want a V-shaped recovery and a bounce-back as quickly as possible. We want to retain jobs and minimise unemployment. Given where we are, halfway through the lockdown, what should be done to make sure that we have an economic bounce-back as quickly as possible, preserving as many jobs as possible and restoring consumer confidence?

Dr Marshall: We think a supply-side reaction, a demand-side set of measures and some measures in terms of boosting resilience are needed. Let me take each of the three in turn.

On the supply side, there has been some element of regulatory forbearance that many businesses have had during the crisis. Things have been made easier. Companies can focus on their day-to-day operations rather than regulatory compliance. As long as that does not prejudice their security or health in any way, that should probably continue for the foreseeable future.

Similarly, on