How will Labour's Fair Pay Agreements affect Entrepreneurs?

In all the excitement of Liz Truss resigning and the starting pistol being fired for yet another race to become Prime Minister, many people have overlooked a speech by Keir Starmer in which he set out some substantive policies. Speaking to the Trades Union Congress on 20th October, Starmer committed to a series of labour market reforms. These include banning zero-hour contracts, extending parental leave, strengthening entitlements for flexible working, creating stronger protections for pregnant women, creating a single “worker” status for all but the most obviously self-employed, getting rid of one-sided flexibility, creating statutory sick pay for all, repealing 2016 restrictions on unions, and enforcing mandatory reporting on ethnicity pay gaps.

It’s a long list, and many of the ideas will be unsurprising. They’re the sort of things that Labour leaders often promise. But Starmer also committed to a new and radical idea, to create sector-specific “Fair Pay Agreements” (FPAs). As Starmer explains, FPAs would entail unions and industry representatives getting round the table to negotiate industry-specific minimum wages and minimum worker entitlements, which would then be applied to the rest of the sector – regardless of whether the sector’s other workers were represented by those unions at the negotiating table, and regardless of whether the sector’s other employers were represented by the industry bodies that took part.

The implications of such a policy, as you can imagine, are profound. If applied across all industries, they would empower both unions and industry bodies to set the terms for all workers and firms in an industry. If it passes, we might expect the membership of industry bodies to grow, in order for businesses to get any say in the matter. But unions may well dwindle because workers would gain regardless of whether they are actually members. This may or may not be what Labour intends, but many on the left have long dreamed of the UK becoming more like other European countries, where such agreements are common. Labour is also following New Zealand’s Labour party, which is currently shepherding the same reforms through Parliament.

We don’t yet have all the details from Labour, but New Zealand’s plans for FPAs give us some indication of what to expect. FPA agreements, when made, would become secondary legislation, so that breaches of the agreement would mean breaking the law rather than just a contract. The FPAs would also last for 3-5 years, after which they can be renegotiated. Unions are able to initiate FPA negotiations when they gain the support of either 1,000 employees or 10% of the workforce in a given sector – whichever is lower. And when an agreement cannot be reached, the government can step in to command one. Interestingly, unions would not be allowed to strike to achieve an FPA, but could take industrial action if employers fail to keep to the agreements.

Just as in New Zealand, Labour’s first target for FPAs is the social care sector, in which half a million workers are paid less than £10 an hour. But where it may get more troublesome is in how it gets applied beyond that. The plan for New Zealand is for FPAs to cover either occupations or industries, with overlaps defaulting to whichever provides the best coverage. But if the proposals are taken beyond social care, we can probably expect a lot of legal disputes down the line as to how industries or sectors are defined. 

And Labour should take into account how larger firms may use the process to hurt their smaller, newer competitors. It is not uncommon for small start ups, without much money now, to offer their employees equity or a particularly flexible or dynamic work culture to offset lower wages today. It’s already challenging enough for entrepreneurs to come up against large incumbent firms, but if those large firms have a seat at the table and their competitors (or potential competitors) do not, there’s a very big risk that larger firms able to swallow much higher labour costs may use FPAs to bury the firms that are less able to do so. This anticompetitive process – of big businesses pushing for higher and more costly regulations to benefit themselves – may ultimately benefit big businesses and hurt workers’ bargaining position in the long run. So Labour should pay close attention to how it designs FPAs in order to prevent it, or find ways to offset it. Otherwise, an economy dominated by big business will not lead to the dynamism, growth, and rising opportunities for employment that Labour envisions.

The Cost of R&D Tax Credit Delays

All is not well in the world of business. Forget the headlines about a new Chancellor, or even the U-turns on Corporation Tax. One of the biggest problems for many of the most innovative UK startups has been a dramatic increase in delays receiving their R&D tax credit payments.

Since July 2020, HMRC has been looking a lot more closely into the merits of R&D spending claims. Although their aims are laudable – to fight fraud and save taxpayer money – civil servants have been spending a lot more time checking the applications of all businesses, both bad and good. The approval windows have increased from 28 up to 40 days, which is already a major problem. But it’s actually even worse than that, as even when approvals are given, HMRC has been painfully slow at actually issuing the tax credit payments.

This has created major cashflow problems for startups, sometimes even forcing layoffs. After a company’s financial year has been completed, it can submit an application to HMRC for a R&D tax credits. These then typically took 28 days to process, with the payment made within just a few weeks. From spending on R&D to receiving the tax credit payments can thus take over a year.

But even the smallest delays can be critical for startups, because many of them take out loans using the expected credit as their security, in order to help their cash flow. As such, both HMRC’s own processing delays, along with post-processing delays in receiving payments from HMRC – some reportedly delayed for up to five months – create a very real cost to businesses in terms of the interest payments they must continue to pay for their loans. And in cases where HMRC decides not to pay out the full amount being claimed – often with minimal warning or communication – it can be game over for a startup.

What is the cost of these delays to startups? We can estimate this with a quick back-of-the-envelope calculation by taking the typical interest rate offered on R&D tax credit loans, and treating this as a proportion of about 80% of the total amount awarded in R&D tax credit payments each year – roughly the amount that most R&D tax credit loan providers seem to be willing to give. Not all startups will actually take out the loans of course, but the market interest rate tells us the opportunity cost faced by all startups who partake in the scheme. Just because they don’t always actually take out the loan, doesn’t mean they don’t also suffer costs from the same lack of cash flow.

For 2020-21, HMRC paid out £6.6bn in R&D tax relief support, so we are looking at a total market for R&D tax credit loans of about £5.28bn (80% of that figure). The loans themselves often vary in duration, but typically charge a loan facility fee of about 2.5-3% followed by an interest rate of 1.25% per month. Given this monthly interest rate, and generously assuming that total delays have averaged only an extra two months, the total cost to UK startups and small businesses is in the order of £132m – and probably higher, especially if they have been forced by delays to take out new loans to tide them over, incurring more rounds of loan facility fees.

Is Musk a modern Medici?

Elon Musk is a divisive figure. Simply mention his name on Twitter, and you’ll summon both his haters and his fans. But the controversy he excites signifies the start of a very positive trend – a trend that in the seventeenth century helped sustain the Industrial Revolution, and which in the late nineteenth century gave us much of the infrastructure for science and knowledge-creation that we still use today.

To put Musk into perspective, we should bear in mind that the vast majority of the wealthiest people throughout history have largely been content to just make their money, hoarding it for their own families or spending it on themselves. Most new fortunes were traditionally sunk into country estates, expensive private schools, and perhaps on gaining a few aristocratic titles. Many of the richest people today continue to do something similar, largely retreating from public life once their millions or billions have been made.

As Nadia Asparouhova notes, “the default state of a suddenly wealthy person is to quietly buy the boat or the vineyard in Napa, raise a family, and avoid confronting the power they've been given.” Even the now-famous industrialists of the Gilded Age, like Carnegie or Rockefeller, had to deliberately campaign to persuade their fellow fortune-makers to become philanthropists like them, endowing libraries, universities, and museums. Paying a few million to charity or into a named foundation may now be par for the course for the wealthy with no idea how to spend it, but it was not always thus. Philanthropy had to be normalised first, by those with the imagination and inclination to do so.

Indeed, it was from very similar initiatives amongst a handful of the wealthy that we got much of the technological progress of the sixteenth and seventeenth centuries. The Medici were far from the first oligarchs to seize both riches and power, but they certainly stood out both then and today as being among the most devoted to spending their wealth on the arts, encouraging others with similar power and wealth to do the same. 

One of the things that once differentiated Britain from the rest of Europe was the much greater early willingness of the nobility, gentry and wealthier merchants to spend their wealth on encouraging inventors. Eventually, when many inventors soon found themselves with fortunes of their own, they tended to refrain from simply becoming mere landed gentry, instead encouraging the next generation of inventors as well. Britain may not have been the only country to have inventors, but it is where innovation most dramatically accelerated in the seventeenth and eighteenth centuries – partly thanks to the philanthropic habits of their major success stories. James Watt made his fortune from steam engines, but he also later supported an innovative pneumatic medical institute to combat tuberculosis – not just financially, but by designing some of its equipment. Watt thereby nurtured the careers of the next generation of innovators, including Thomas Beddoes and Humphry Davy.

Given Elon Musk’s major investments in developing new technologies – Tom Chivers convincingly argues that for all his flaws, he’s been a major force for good in combating climate change – he has almost certainly already nurtured the career of a future Humphry Davy or two. 

Philanthropy doesn’t have to be purely charitable, after all. Indeed, investing in risky ventures – even if the returns might be large – is something that a lot of technology-made rich people seem peculiarly willing to do. We would be much worse off if they cared only about preserving their wealth, as it would be much wiser for them to invest in something much more boring (but less world-changing) things like land, bonds, or listed shares.

Of course, many dislike Musk not because of anything he actually does, but because he has become a billionaire in the first place. They are concerned that our economic system can produce any such person at all, able to wield extraordinary influence on a whim (though personally I find it encouraging that so many of the wealthiest people in the world today are entrepreneurs and inventors, rather than just landed aristocrats and magnates’ heirs). 

So long as billionaires exist, however – and I don’t think that will change anytime soon – it’s a good thing that Musk and his ilk wish to take some responsibility for their power, and devote their funds to the public good, and even that they wish to be in public life at all. The default alternative, as Asparouhova warns, would be much worse: “The failure mode of today's ascendant wealth class would be a backslide into aristocracy, perpetuating the bloat and disquiet of generational wealth”. 

Innovators vs. The Virus

From the moment the pandemic started to spread, people with an inventive turn of mind have been applying themselves to the problem of identifying, preventing, and treating the novel coronavirus. Here are just a few of their efforts and the challenges they face.

Testing

Seegene, a South Korean company, began work on creating a test for the virus before it had even spread beyond China. It used artificial intelligence to rapidly identify the chemicals needed for the test – a thought-saving invention that allowed them to complete the process in just a matter of days, rather than the usual months. The test was ready and approved by the authorities within a matter of weeks. And due to South Korea’s widespread use of robots, the tests themselves can be undertaken extremely rapidly. Robotic arms test 94 patient samples at once, returning results in only 4 hours – significantly faster and less prone to error than doing so by hand. As a result, the country has conducted over a quarter of a million tests for the virus – almost five times as many as the UK, despite having similarly sized populations. South Korea continues to test as many people as possible, while the UK has apparently scaled back its testing of mild cases, presumably due to a lack of testing capacity. In the US, due to a severe lack of testing kits, some biologists in San Francisco have organised a volunteer effort to manufacture them.

Preventing

Teams of scientists all over the world are currently testing potential vaccines for the virus, at least one of which will hopefully bear results. The Kaiser Permanente Washington Health Research Institute, in Seattle, has just begun a 6-week trial of a prospective vaccine, mRNA-1273, in healthy adult volunteers. It has shown promising results in animals, but the human test will be the clincher. This is not just a matter of determining its effectiveness and safety, but about working out the most effective dosage – those brave volunteers, for example, are testing doses of 25, 100, and 250 micrograms. Likewise, scientists at Russia’s Vector Institute have begun vaccine tests in animals, and researchers at China’s Academy of Military Sciences are beginning human trials too. Israel’s Institute for Biological Research is also about to begin its own trials.

Even if the trials are successful, however, getting vaccines to the world’s population will take a lot more ingenuity. Successful ones will need to be produced at great scale, and with great care. 

Treating

Despite the extraordinary rapidity with which vaccines have been able to get from the lab into human patients - largely thanks to advances in artificial intelligence and genome sequencing - having one that works and is available to everyone who needs it will take a matter of months.

In the meantime, the sheer number of cases worldwide has given us the opportunity to learn more about how to treat the virus. Initial reports have suggested that a few already-existing antiviral drugs may be effective against it. Yet these experiments still need to be replicated and confirmed. One of the top candidates is remdesivir, which was apparently successful when used to treat the US’s first patient. The drug now needs to be properly compared with placebos, though fortunately its general safety for humans is already well-established. It had already been tested as a candidate for treating ebola and MERS. Remdesivir is now the subject of a few randomised controlled trials, some of which should be reporting soon, and the manufacturer is already ramping up production just in case.

Chinese officials have also reported success using favipiravir, after trialling it in hundreds of patients, though Japanese trials (it is a Japanese-made drug) so far suggest it only works in milder cases and there are concerns there about potentially serious side-effects. Physicians in various countries have also reported success with drugs like Kaletra (a combination of lopinavir and ritonavir), typically used to treat HIV, as well as chloroquine, which has been used to treat malaria for decades (as well as a variant, hydroxochloroquine). As with remdesivir, however, we’re still waiting for their efficacy to be fully confirmed in randomised controlled trials.

Should none of these candidates prove effective, there are also a host of other organisations developing drugs from scratch. We can expect many of them to be tested in humans over the coming months, particularly as the authorities have become far more willing than usual to approve such tests.

Apart from the chemicals, the treatment of coronavirus has physical challenges. There is a widespread concern that many countries lack sufficient respirators to provide oxygen to those patients who have severe cases of the disease. There are so few ventilators in the UK, for example, that we would have to “flatten the curve” to impossibly low levels unless there is a dramatic increase in ventilator capacity. In Italy, this has already become a severe issue, though some inventors have stepped in to fill gaps in the supply chain. When a hospital in Brescia desperately needed new valves for its machines, and the manufacturer was unable to supply replacements, they turned to a number of local 3D-printing companies to manufacture the part - despite the fact that the manufacturer apparently refused to share blueprints and threatened the 3D-printing companies with legal action for patent infringement. Similarly, some people have begun sharing open-source designs for ventilator parts on Facebook.

There are, however, legitimate concerns about the safety standards for manufacturing ventilators. Even small mistakes can be life-threatening, and defective ventilators may in some cases be worse than no ventilator at all. To resolve this, the UK government has successfully persuaded large manufacturers to switch production to ventilators, and has a screening process in place to ensure that the new ventilators and their components are provided by manufacturers with sufficient experience of compiling to existing safety regulations.

Similarly, although there have been severe shortages of hand sanitiser due to stockpiling, some entrepreneurs have begun to step into the gap. A few Scottish whisky distilleries and London gin-makers have shifted production into manufacturing the stuff, though the government may need to look at whether alcohol duties should be altered to enable them to carry this on without incurring major losses. Perfume makers in France, too, have shifted to making the gels.

For those people treating the virus at home, there has also been some research into what works best, though without the rigour of proper randomised controlled trials - at least not yet. There have been rumours that ibuprofen and similar non-steroidal anti-inflammatory drugs have worsened the disease in some patients, and while many of these rumours seem to be unfounded, some health authorities have recommended that paracetamol be used as a preferred painkiller just in case (while urging people not to stop taking ibuprofen if they were already doing so under doctor’s orders). A team at the Spiez Laboratory in Switzerland has also reported that taking echinacea extract might have been somewhat preventative of similar diseases like SARS and MERS, raising hope that it might have the same effect for the coronavirus. But such work has been announced so recently that it has not yet even been peer-reviewed.

Dealing

Although governments are beginning to assemble bailout packages for the most severely affected businesses, like restaurants and cafés, some inventors are helping people direct money to their favourite places, to help them through the difficult next few months. Crowdfunder.co.uk, for example, with support from Enterprise Nation, have allowed the use of their platform for supporting affected UK businesses entirely for free. Likewise, in San Francisco, married couple Kaitlyn Trigger and Mike Krieger spent a weekend setting up SaveOurFaves, a platform for restaurants to be able to sell gift cards, getting some up-front cash to enable them to reopen when the crisis is over. Similar initiatives seem to be popping up all over the world.

When it comes to supporting the vulnerable, too, a number of apps have been developed seemingly overnight, to link up healthy people with those who may need deliveries of essential supplies while they are self-isolating. We at the Entrepreneurs Network, for example, have partnered with a scheme covering London, called Dare to Care Packages.

As for shortages of items like toilet paper, apparently due to stockpiling, I’ve yet to see much in the way of innovative solutions. In the meantime, however, do not use kitchen roll or wet wipes as direct substitutes, as flushing them down the toilet will utterly wreck the country’s sewage system.

As social-distancing measures ramp up and schools and other childcare providers close, companies like Bubble in the UK are supporting hospital staff and other key workers to find vetted babysitters while they go to work (though the government should probably look at adapting its tax-free childcare policy to such solutions, as the system is not yet set up to account for digital platforms).

Next time

The pandemic has brought attention to a number of others organisations that may help us deal with future cases. Nextstrain, for example, uses open genomic data to aid our understanding of this outbreaks and other ones, tracking coronaviruses, flus, and other strains as they evolve.

Even when the worst of this particular crisis is over, the world’s businesses and governments must step up their support for research into general vaccines and treatments for future pandemic-capable strains. This has been a devastating, deadly wake-up call. It must never happen again.