UK launches ‘flagship’ industrial strategy into the headwinds of Brexit uncertainty

The UK government has published a wide-ranging, long-term plan to embrace new technologies, develop the industrial sectors of the future and address the country’s productivity woes.

In a white paper, ‘Industrial Strategy: building a Britain fit for the future’, the government describes its aim of making the UK the world’s most innovative nation by 2030.

In support of this, it committed to investing a further £725 million over the next three years in the Industrial Strategy Challenge Fund (ISCF), with £170 million to transform the construction sector and up to £210 million for the development of precision medicine.

The £725 million is in addition to £1 billion for a first wave of ISCF projects, which included investing £246 million in next generation battery technology and £86 million in robotics.

The strategy was reinforced by a pledge to increase the UK’s – lamentably low – investment in R&D of 1.7 per cent currently, to reach the OECD average of 2.4 per cent of GDP by 2027. This could mean around £80 billion of additional investment over the next decade.

More immediately, public spending on R&D will increase from £9.5 billion in 2016/17 to £12.5 billion in 2021/22. The government made clear it wants more of this to be spent on commercialisation activities, saying, “Within R&D, the D for development needs a particular boost.” 

The white paper also confirmed there will be a series of tailored deals with individual sectors, plotting a way forward for their future development. The first of these deals, with construction, life sciences, automotive and artificial intelligence sectors, will use public money to pull in investment from the private sector. Deals with other sectors will follow.

The government insisted the sector deals are not about picking winners and subsidising them, but shaping the business environment as a whole. However, the strategy certainly represents a more overt attempt to directly plan and steer the economy than has been attempted since the late 1970s.

“The modern nation state is the most powerful means we have of pooling risks,” the strategy says. “We are willing to take these risks, which means accepting not all will work out successfully.”

Backing up the sector deals, the government is forming a £2.5 billion patient capital fund, which will run like a venture capital fund, with private sector managers to handle investments and conduct due diligence. The fund will be directed at providing long term capital that UK start-ups need to scale.

“The long and patient process of getting new technology to market is difficult,” the strategy observes. As a result, with a few exceptions, innovative companies in the UK “do not grow to be substantial, big or strong,” because investors, “prefer selling businesses to growing them.”

It is hoped that the scale of the patient capital fund and its private sector management will de-risk investment in start-ups and encourage UK pension funds, currently sitting on £3 trillion, to invest in the fund.

The government also said it will fill the €1 billion - €2 billion gap that will emerge after the UK leaves the EU and no longer has access to the European Innovation Fund.

The strategy identifies four grand challenges that will receive particular attention:

• artificial intelligence and the data revolution
• clean growth
• ageing society
• future of mobility, including plans for vehicle infrastructure and £1.7 billion for intracity transport

The industrial strategy has been in the mill for the past 18 months and builds on more than 2,000 responses to a green paper consultation earlier in 2017.