When to intervene

BY THEIR nature, governments intervene in everything all the time, from the tax on a packet of cigarettes to the appropriate sentence for mugging an old age pensioner. For the last decade and a bit, however, Britain has had a government that does not believe in intervening in industry.

Throughout the 1980s the battle-cry of Thatcherism drowned out all opposition: you cannot buck the market. Michael Heseltine may have promised the manufacturing classes a better deal but if the fate of the coal industry is anything to go by he has little inclination to go against the trend.

This is a pity, not just for Mr Heseltine's credibility but also for the country's wealth-creating sector, destined as it surely is to remain trapped in a sterile debate between two extremes: naked intervention on the one hand, market forces on the other.

Although it is fashionable these days to condemn intervention as a recipe for distortion, waste and bureaucratic inertia, it is just as easy to demonstrate that markets do not always know best.

If they did, then how was it that the purest of them all, the stock market, contrived to fritter away pounds 400m developing a computerised share settlement system that patently would not work? Equally, if market forces had known best in 1971 the Heath government would not have rescued the aero-engine maker, Rolls-Royce. But is anyone seriously suggesting that it was wrong to intervene?

The fact is that governments of all hues have been intervening in industry for years, from Macmillan's decision in the 1950s to erect the Ravenscraig steelworks in Motherwell to the Thatcher government's repeated intervention in the aviation industry in preparation for British Airways' privatisation.

Today Mr Heseltine might contest it vehemently, but the fact is that his predecessors intervened in the affairs of the coal industry - and in the most disastrous fashion - when the decision was taken to privatise electricity.

In their zeal to get rid of the electricity generation industry, ministers created the duopoly of National Power and PowerGen.

Rightly fearing that this double- headed monster would dominate the market, the regional distribution companies decided to invest in their own independent gas-fired stations. Having invested, they naturally awarded these stations long-term contracts.

Taken together with the 20 per cent share of the electricity market already guaranteed to the heavily subsidised nuclear industry, the squeeze on coal was complete. The rest, as they say, is history, or soon will be for at least 18 pits.

Mr Heseltine now says that he cannot force the electricity generators to buy more British coal than they want to, and that the industry must contract. With 400 years of coal reserves left underground but only 50 years of proven gas reserves in the North Sea, common sense says that Britain's long-term energy policy should not be determined by the short-term dictates of the electricity market.

Coal demonstrates that it is possible to make the case for intervention in a given industry. It is also possible, though admittedly more difficult, to do likewise for a given company. Of course, the economically correct will throw up their hands in horror and say that this way lies distortion of the market and ultimate ruin. Bale out one lame duck and you will have to bale out a hundred.

Let us return, then, to the example of Rolls-Royce. Had the company not been rescued through nationalisation after over-extending itself on the original RB211 programme, where would we be today?

Well, Britain would almost certainly not possess an aero-engine industry - unlike the Americans, the French, the Germans, the Italians and even the Spanish. From a narrow perspective that would mean 100,000 fewer jobs today and another pounds 2.5bn on the balance of payments deficit.

But in a wider context, Britain would be absent from a strategic, high-technology industry. Without an aero-engine capacity, either military or civil, what would our airframe capability be? Would Britain still have been a party to collaborative European defence programmes such as the Tornado and the Eurofighter 2000?

And what of Britain's presence in those industries, ranging from automotive to domestic appliances, that have benefited in some way through technological spin-offs from aerospace? The answers can never be known for sure but it is possible to make some educated guesses.

In recent weeks Mr Heseltine has been under pressure to rescue the Anglo-Dutch truck and van maker, Leyland DAF, from receivership (another questionable example, incidentally, of a free-market solution that ended sourly). He decided, correctly, against intervening, but for the wrong reasons. The right argument against intervention was that Britain has a more than adequate truck and van manufacturing capacity.

The justification Mr Heseltine chose to cite was one of precedent. If he had intervened on behalf of Leyland DAF, where would he have drawn the line? The answer is straightforward: wherever he chose to, since that is his job.

There is nothing inherently wrong with intervention or 'picking winners'. The trick is to select the right ones.

Hamish McRae is on holiday.