UK companies are facing at least a £90bn ($67bn) cashflow gap this year due to the coronavirus pandemic and are at risk of collapse unless the government takes public stakes in firms, two think tanks have warned.
In a joint report, IPPR and Common Wealth called for £45bn of public investment in ownership stakes to support businesses and boost private investment.
Unlike a debt-based approach, public equity stakes can “better absorb losses, reduce debt levels and give private investors certainty around the long-term viability of a firm,” the report said.
George Dibb, the head of the IPPR centre for economic justice, explained that while for some “the idea of the state owning shares in companies sparks concerns about nationalisation, across the EU and around the world this is the norm.
“Now is the time for bold action which can help save viable companies from collapse in the short-term, and also complement an industrial strategy to set us on the right track for recovery in the long-term,” he added.
The £90bn cash gap figure is calculated using Bank of England data showing that businesses across the UK are facing a £180bn cash shortfall this year, and taking into account the fact that there is just £90bn in cash reserves.
This shortfall in cash would mean many firms, including major employers and industries, struggle to pay debts, salaries and other operating costs.
IPPR and Common Wealth warn that with a fifth of firms having seen their turnover drop by more than 50% as of November, firms facing dwindling cash reserves and a disrupted Christmas trading period, this cash gap could force many viable businesses to collapse.
The report argues that too much emphasis has been put on debt as a way of supporting businesses hit by the pandemic and these schemes won’t prevent firms collapsing.
It noted that public investment will fill an important funding gap left by private financial markets. “Despite the upfront cost, doing so would likely ultimately return net-benefits to taxpayers, with long-term returns on the investment,” it said.
The report calls on the government to give the new UK Infrastructure Bank, announced at the spending review, a broader mandate to provide finance and take equity not just in infrastructure projects, but across the economy to fuel a recovery.
The authors make clear that while the state would be taking ownership stakes in firms, it is vital that it remains at arms-length from business decision-making to avoid political influence at the whims of ministers.
The report also states that the initial investment should come with high level conditions. These should include commitments for investing in long-term growth, retaining jobs, staff training and upskilling, trade union representation, corporate governance, fair tax practices, and alignment with the net zero climate targets.
The government also must have a highly transparent approach for selecting firms to support.
Extremely indebted companies and ‘zombie firms’, those that are unable to cover debt servicing costs, should be avoided, with exceptions made for ‘strategic firms’ based on their regional and national employment significance, the report said.
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