REFUND

Britain is debating whether to launch a sovereign wealth fund to protect the UK economy

Out of the budget box.
Out of the budget box.
Image: Reuters/Toby Melville
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As the coronavirus pandemic batters the global economy, some government officials are getting creative. One idea from Britain is to start a sovereign wealth fund.

The suggestion comes from Jim O’Neill, the former chief economist at Goldman Sachs. The UK Treasury may also consider a form of last-resort financing—known as “Project Birch”—if a viable company’s collapse would “disproportionately harm the economy,” according to a spokesperson. (Think airlines or car makers.) Separately, the Business Growth Fund, which is backed by large UK lenders, is in talks to start a fund that would invest public and private money into UK businesses to help them grow again.

What all these proposals share is an acknowledgement that the government’s extraordinary support for the economy may not be enough to prevent long-term damage. Britain is far from alone here—governments around the globe have pledged some $9 trillion of spending and lending to prevent another Great Depression, and more measures are almost certainly just around the corner.

“We have a fast evolving and extremely serious economic outlook that is clearly not getting better by the day—it’s getting worse,” Stephen Welton, chief executive of Business Growth Fund, said in a phone call.

Pot of money

There’s no firm definition for a sovereign wealth fund, which is just one of the ideas being tossed around by officials. The general idea is that it’s an investment fund owned by the government. The pot of money can be used to cushion an economy during a recession, or to help a country that’s rich in commodities invest for the future by investing in other promising industries.

In Britain’s case, the funding could be used to support goals like reducing carbon emissions. The fund could also be designed to keep the UK’s most promising businesses local, and avoid having them acquired by US or other foreign companies out of a lack of other financing options.

The £25 billion ($32 billion) fund mooted by O’Neill would be much more modest than the best known ones, like Norway’s $1.1 trillion fund, built from the country’s oil wealth. The idea is to invest in British businesses outside of London, an effort that would parallel prime minister Boris Johnson’s pledge to “level up” the UK economy by investing in regions that have higher unemployment and fewer opportunities. O’Neill was also the architect of the Northern Powerhouse project, which was set up when George Osborne was chancellor of the exchequer to boost post-industrial cities like Manchester and Leeds. O’Neill worked for the Treasury under Osborne.

The wealth fund proposal comes after the UK government has already reached deep into its wallet to protect businesses and workers. More than £30 billion has been loaned to crisis-struck enterprises (including fashion company Chanel, owned by a wealthy French family, which tapped the Bank of England’s emergency program for short-term commercial paper borrowing).

The UK Treasury has also supported a million businesses in the UK that have furloughed more than 8 million jobs, paying up to 80% of those workers’ wages. The program will gradually be tapered down from August.

Despite the support, there are growing concerns about whether many of these companies will be able to afford the loans they’ve undertaken since the pandemic set in. In the coming months, smaller enterprises are likely to be coping with a weak economy as well as a heavier debt burden than they had before the crisis, Welton said.

He argues that an array of efforts, including the conversion of some government-backed borrowings to equity stakes, are likely to be needed to avoid widespread business failures. And while the amount of government aid is unprecedented outside of wartime, Welton warns that the economy will suffer as the scaffolding goes away.

“Without significant action, there is going to be a huge increase in unemployment as furloughed workers become redundant workers, and as businesses that have survived though the crisis unfortunately fail,” he said.

The bad bank

But government ownership of private companies is not a simple step, whether that’s through Project Birch (nobody seems to know why it’s called that), which is aimed big companies that are vital to the economy, or any other program. When it comes to small businesses, grants might be a better route than equity stakes, according to Jane Fuller, co-director at the Centre for the Study of Financial Innovation.

Governments have little experience guessing which companies are likely to survive, and taxpayer money may be better spent on infrastructure, on helping workers train for new skills, and by updating insolvency rules so that sound companies can get back to work after restructuring. So-called bad banks, which acquire large batches of risky loans and safely unwind them, have a history of preventing problem debts from spiraling into full-blown banking crises.

“The point is that governments—and their central bank agents—have form in dealing with property crashes and banking crises,” Fuller wrote. “Owning stakes in a myriad of small businesses is another matter.”

In the meantime, and despite the wide array of programs, there are still companies that have slipped through the holes in the net, said Stuart Veale, managing partner at Beringea, which manages venture capital trusts. Loss-making startups aren’t eligible for certain types of government loans, and some may be too risky for most investors to touch. Veale said he has spoken with the UK government about loosening the restrictions on venture capital trusts, which are mainly confined to investing in newer companies.

Along with the proposal for a sovereign wealth fund, it’s one of the many ideas officials are considering as time is running out to put yet another plan in place.

“There’s quite a large group of companies which are falling through the cracks,” Veale said. “There’s a large pool of companies that could really scale up and benefit for the UK economy, which are really struggling to access financing at the moment.”