Time for Companies to Start Spending Their Surplus Cash ; Diane Coyle Asks If Britain's Miserly Attitude to Industrial Investment Is about to Change Companies Cling to High Target Rates of Return the CBI's Surveys Suggest a Strong Pick-Up Is Due
Coyle, Diane, The Independent (London, England)
Investment spending by Britain's manufacturing firms has fallen by nearly a third since the recovery began and has only recently begun to grow. The share of business investment in total national output has been declining since 1989.
This will be the year, according to most economic forecasters, when investment finally rebounds. It had better, if the forecasters are to avoid another blot on their tarnished reputations. Many see investment as the driving force behind economic growth of 3-3.5 per cent this year.
The Treasury, for example, predicts business investment will grow 10.75 per cent after a 2 per cent rise last year. It puts total growth in fixed investment, including housing and government investment, at 5.75 per cent, up from 3.75 per cent. Many priv a te economists have made similar predictions. Yet it is hard to avoid the suspicion that part of the reason for forecasting an investment boom this year is its absence so far.
A variety of explanations have been put forward, the most prominent being the notion that companies have clung to high target rates of return for investment projects rather than reducing them in acclamation of the new era of low and stable inflation. Surveys carried out last year by both the Bank of England and the Confederation of British Industry supported this theory.
Both surveys found that large numbers of firms target rates of return of more than 20 per cent or require excessively short payback periods for planned investments. The CBI remarked: "Some companies are clearly not convinced that the current low inflation rates will continue."
Some firms have made the adjustment, but these have mainly been big and financially sophisticated companies - such as Hanson, which announced last summer that lower inflation and interest rates had made it appropriate to lengthen the payback period. Others have been slow to follow.
Christopher Taylor, finance director of the engineering group Smiths Industries, argues that there are good institutional reasons for sticking to strict investment criteria. "Many companies would use a high target rate of return to force local managementto put forward a good strong case," he said. "In many of our projects there is a high level of risk which we often tackle with a high discount rate."
However, Mr Taylor does believe that a majority of British firms set hurdles that are too high, which makes them overlook projects that would be steady earners and take on high-risk projects instead.
A second reason for weak investment in the recovery has been the slow process of rebuilding company balance sheets after the borrowing binge of the late 1980s. In 1993 companies repaid pounds 11.3bn in bank loans, and are likely to have repaid pounds 2-3bn more in 1
994. Rights issues since 1991 have totalled nearly pounds 30bn.
This financial restructuring left British businesses with a financial surplus of pounds 4.8bn in the second quarter of 1994, the biggest on record, and a remarkable recovery from 1990's pounds 23bn deficit.
Many economists argue that the corporate sector must now have enough cash to start spending it.
John Marsland, UK economist at UBS, said: "Companies' financial surplus in 1994 is unprecedented in the post-war period. …