Rishi Sunak, the image-aware chancellor, sees the dangers of the government owning businesses. As he said last month, it provides scope for stories about the taxpayer being on the hook for businesses that might be embarrassing, or flops.
As James Hurley and Charlie Parker reported in The Times on Monday, it is more than just a risk, it has become a reality thanks to the Future Fund.
Launched last May, the fund was intended to help small, fast-growing businesses survive the pandemic by matching private investment with government funding.
It has been hugely popular. Before closing to new applications at the end of January, the fund approved about £1.2 billion of taxpayer-funded convertible loans to more than 1,200 companies.
It is inevitable that many businesses will not make it through the crisis, leading to losses for taxpayers. They will come from the £75 billion lent to 1.6 million businesses in government-backed loans, as well as from the Future Fund.
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The problem is that in the case of the fund, information about which start-ups, and their private investors, have benefited is very limited.
Many recipients of the government guaranteed loans are not known. The volume is largely made up of Bounce Back loans, worth on average about £35,000, a sum seen as too small to disclose under state aid rules.
But the larger loans will be disclosed in time under Brussels’ state aid rules. Banks are notifying customers who have borrowed more than €100,000 (£86,000) at the moment about the likely disclosure. The Bank of England has also published the names of the large companies which have used its Covid Corporate Financing Facility.
That is not the case with the Future Fund. Its loans of up to £5 million, which can be repaid or converted into equity, were deemed to be commercial and so fall outside of state aid.
Recipients do come into the public domain if they have used an equity crowdfunding website to secure matched funding from the public, or because Companies House filings show loans converting into equity stakes, with disclosure coming months after the event.
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But in other circumstances, the information remains confidential.
The thinking last year was that secrecy would help investors and be in line with the venture capital world. News of fundraisings can be commercially sensitive, for example heralding expansion or the launch of a new product.
When the Future Fund was announced a year ago this month, it was extremely hard for the Treasury to tell how hard it was going to be for businesses large and small. Sunak rightly wanted to help start-ups as a vibrant part of the economy, and a lesson from the financial crisis was that private investors sat on their hands, starving businesses of cash when they most needed it.
But by allowing confidentiality the chancellor has created a messy situation likely to come back to bite the government if businesses do fail.
This is a weakness when many aspects of the scheme were strong. One was that the government did not want to pick winners; so as long as investors approached the British Business Bank overseeing the fund with businesses that met the criteria such as being based in the UK, they could receive funds. That was a neat structure given that the loans will convert into equity stakes — more than 50 have so far.
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Michael Buckworth, managing director of Buckworths, a law firm that has had clients using the fund, said: “I do think taxpayers have a right to know which companies the Future Fund has invested in. The government and individual companies should be comfortable and open about the fact. There is credit to the government, which moved very quickly and put money into a huge range of businesses”.
Created in a scramble to help save the economy, the Future Fund’s terms are now worth revising, as taxpayers have a right to know what they’ve paid for, good or bad.
Katherine Griffiths is Banking Editor of The Times
