Picking Winners – and State Aids

by ukcivilservant

This is a response to a request from David Higham and other fomer colleagues for my views on the current debate about Dominic Cummings’ reported wish to be able to offer generous ‘state aid’ (i.e. subsidies) to chosen high tech (and potentially high growth) companies.

Background:  I led the Business Department’s industry/education team in the late 1980s and a number of industry ‘sponsorship’ teams in the mid 1980s and then again from 1992 to 1998, including working closely with Michael Heseltine during his time as President of the Board of Trade.

Sponsorship teams focus on specific industries or groups of industries, and undertake a number of activities. Officials are expected to get to know key figures across the industry and so gain a thorough understanding of its strengths, weaknesses, challenges, opportunities and needs. Its interests can then be communicated to all relevant government departments.

Most industries do not need any sort of hard intervention either by way of regulatory favours or subsidies. Indeed, it was obvious to most outside observers that many industries’ fundamental problems were self inflicted through weak management and chronic underinvestment exacerbated by over-strong and/or short-sighted unions. Any government intervention was likely to make things worse, not better.

But some interventions were well justified, During the periods mentioned above, I can think of four types of subsidy that represented good to exceptional value for money.

  • First, in the 1980s, we heavily subsidised the provision of the first computers in schools.  There were two suppliers, Acorn (who built the BBC-B microcomputer) and Research Machines (RM) who built higher spec and more expensive machines.  The scheme was a huge success.  It not only excited huge numbers of teachers and pupils but Acorn went on to develop RISC PCs, and one of its subsidiaries became ARM Holdings whose processors can be found in most mobile phones.  RM now employs around 1,700 people providing educational IT, although it ceased manufacturing during the 2008 financial crisis.
  • We subsidised inward investment, most obviously by vehicle manufacturers.  But we never invested more than 25% of total cost.  Our support was most often directed at ‘saving jobs’ or ensuring that we got jobs as a result of investment that would otherwise go to other countries.  But we sometimes supported R&D, including most recently into battery technology and autonomous (‘driverless’) vehicles – though we subsidised Jaguar’s investment in autonomous vehicles as long ago as 1989.  I remember experiencing it on a French motorway.
    • Note, though, that it can be difficult to know how to respond to other countries’ bids to win investment in new vehicle plants, for instance. Serious bidding wars usually end with a seriously expensive winner’s curse. Luckily, the UK has been able also to point to the benefits of excellent macroeconomic and regulatory policies – at least until Brexit – and so spend less than might otherwise have been necessary.
  • We rescued (i.e. saved jobs in) Leyland Daf’s UK operations following its 1993 receivership including by funding 25% of an otherwise private sector investment in Leyland Daf Vans (LDV) in the West Midlands.. Three of the four rescued subsidiaries are still trading successfully.  LDV continued to employ significant numbers but closed during the 2008 recession.
  • Finally, and probably least successfully, we ran schemes which funded typically 25% of smaller firms’ investments in research, development and new products.  Many of these were bound to lead nowhere but even a low hit rate followed by exceptional growth would have justified the expenditure.

And here is a bad example:

  • There was a fierce battle, in the UK in the 70s/80s, between big bad IBM with their closed propriety systems, and ICL, keen on open systems and a proud successor to the earlier giants of British computing including English Electric Leo Marconi. I inherited the sponsorship team and initially continued to pour as much money as possible into ICL technology, and to arm twist the public sector to continue to buy its mainframes. But I eventually realised that the company was uncompetitive to the extent that well over 90% of its sales were to the public sector. In other words, any business that had a choice bought IBM. I understand that colleagues subsequently did their best to continue to support the company, and it eventually had to be rescued from collapse in order to keep vital systems running, such as those in DVLA. ICL was eventually bought by Fujitsu.

Lessons, Conclusions, Comments

All the above expenditure was approved under the current state aid regime, though it sometimes took a few weeks or months to persuade the European Commission of the merits of our case.  It helped hugely that were not one of the member states who spent the most on state aid, nor one of those who came forward with the least deserving applications.

Equally, though, we probably could have pushed the state aid boundaries further than we did.  Other countries ‘ administrations seem to have more supportive lawyers and economists.  Also, countries such as France and Germany have well-funded public sector investment banks which pre-date the state aid regime.  I understand that our attempts to set up similar institutions have been thwarted by state aid considerations, much to the annoyance of both ministers and officials.

Two of our successful investments were brought down by the 2008 financial crisis, which underlines the importance of having appropriate macro-economic and regulatory backgrounds, including competition policy, without which state aid will inevitably be wasted.

Despite my experience, I have no faith in ministers’ or officials’ ability to ‘pick winners’ even when our decisions had to be approved by external advisory boards.   (See Note below) I was accordingly a great fan of the requirement that 75% of program cost had to be funded by the private sector.

Note, for instance, that my ‘best’ investment was almost certainly computers in schools.   However – if we had been forced to support only one of the two companies  – we might have gone for RM’s higher end machines which would certainly have met with the approval of a previous generation’s Dominic Cummings.  But it was the initially lower tech Acorn computer that eventually led to world-beating technology.

Equally, my worst investment (though I inherited the policy) was support for ICL. Unfortunately that company was then seen as the UK’s answer to an American giant. It is a cautionary tale for those now seeking to build British high-tech companies to rival the American and Chinese giants.

(And I am anyway not aware that Silicon Valley benefitted from government finance. Weak regulation and a vibrant venture capital industry were much more important.)

More generally, I have absolutely no faith in ministers’ ability to withstand pressure to spend unwisely for political and constituency reasons.  ‘Saving jobs’ and ‘attracting inward investment’ can make sense, as I have explained above.   But such powers need to be tightly controlled (such as via the state aids regime) if they are not to degenerate into hugely wasteful expenditure in uncompetitive companies and/or international auctions which end up in governments paying far too much per job gained.

Equally, I have little faith in minister’s ability to focus support narrowly enough.  As Giles Wilkes points out, no-one is ever against:

  • Investment
  • Innovation
  • R&D
  • Entrepreneurship
  • ‘Hubs’, ‘Catalysts’ and ‘Accelerators’
  • Exports, and
  • How Germany Does Things

And I would add small firms to that list. 

The underlying problem is that ministers find it very difficult to refuse to extend the borders of even the best, highly targeted schemes.  Surely, they will argue, butchers and restaurants can be innovative too.  And how can we justify excluding firms that employ less than 500 people, or 50, or 5 …?

The result can too easily be cash sprayed at a large number of targets in the hope that some of it will generate rapid returns.  But it is far from clear to me why the government is likely to be any better at this than venture capitalists and other investors.  

In short, therefore, I would generally advise against adopting any policies which go beyond those currently allowed by the current state aids rules.  

Martin Stanley

Editor – Understanding Government


Mandy Mayer, who has considerable experience of supporting SMEs from within government, has sent me these interesting comments:

  • There is a marked difference between entrepreneurs and small firms. The former usually cannot be bothered with government schemes because they are moving too fast and don’t want to be tied up in bureaucracy for the sake of relatively small amounts of money.
  • Those SMEs that did get involved with the schemes did indeed often find they got bogged down and had their timescales distorted.
  • Innovation is very hard to define and differs in its nature form sector to sector. In a service-based economy such as ours it can be about intangibles which are hard to identify and, just as importantly, measure.
  • I’ll never forget the venture capitalist I met in California who said that US VCs were an inch wide and a mile deep whereas he viewed UK ones as a mile wide and an inch deep.
  • I would count the most successful experience of supporting innovation was through the telecommunications liberalisation regime and then the subsequent opening up of 3G.
  • Looking to support innovation in the future, I would like to see more focus on helping to create markets.


  1. Prominent examples of foolish government-inspired investments include:
  • The Rootes Hillman Imp factory in Linwood, many miles from main suppliers and where the local workforce had no relevant experience.
  • The aluminium smelter at Invergordon next to a nuclear power plant that was never built.
  • It is beginning to look as though the 2020 (Brexit driven) $500 million investment in the OneWeb mass constellation satellite system (ordered by Ministers against the advice of officials) might also have been a very expensive mistake.

2. My colleague Michael Coolican wrote this in his book No Tradesmen and No Women.

‘[Many ministers are very clever but they] tend to be ‘big picture’ people who simply can’t deal with detail. If such qualities are mixed with a fair amount of dogmatism, a large dose of self-confidence, special advisers with inadequate experience, and a civil service unable to make good the deficiencies, then the way is prepared for the sort of poor government that has been much in evidence during the past fifty or so years …

Harold Lever saw at first hand how such factors affected the ability of the Wilson government to achieve anything despite the undoubted talents of its members … ‘These governments … overestimated their ability to shape and manage the complex drivers of a modern economy. They assumed they understood all the reasons for its shortcomings and so, unsurprisingly, were all too ready to lay hands on superficial remedies for overcoming them.

3. Exposure to private sector practices could often be translated into lessons for government itself. Some private sector practices were appallingly bad – so we learned what not to do. But some companies taught us a huge amount about how highly controlled manufacturing environments, for instance, could be combined with recognition that ideas and challenges can start at the bottom and flow upwards if encouraged by a positive atmosphere, a sense of purpose and an emphasis on team-working.