Fraud accounts for 40% of all crime across the UK, and the Cabinet Office estimates that fraud and error cost the public purse up to £51.8 billion every year.
Around £26.8 billion of this loss is attributable to fraud and error in the tax and benefits system, but for many areas of public spending outside the tax and benefits system there is no formal measurement and the Cabinet Office estimates that undetected fraud and error could cost the taxpayer up to £25 billion a year – before any losses to Covid19 schemes are taken into account.
The Department for Business (BEIS) estimates the Bounce Back Loan Scheme alone, just one of the many schemes that UK government put in place to respond to Covid, could cost the taxpayer £27 billion in fraud or credit losses, with the 100% taxpayer guarantee leaving the Department reliant on banks who it admits lack incentives given it is not their money on the line.
MPs on the cross-party public accounts committee concluded that government schemes were drawn up “on the hoof”, weeks after the first case of coronavirus was detected in the UK. The delay risked leaving sectors of the UK economy behind. The parliamentary committee expressed its concern at the lack of prior thinking on the types of schemes that may be required to respond to the pandemic and the robustness to guard against misuse and mitigation of unintended consequences.
The UK Government eventually mounted one of the most aggressive economic responses to the Covid-19 pandemic in the world. But, in giving evidence to the committee, Sir Tom Scholar, the permanent secretary in the Treasury said “We developed our economic response in the weeks leading up to the budget … We didn’t have these schemes ready and designed to go. We have been designing them as we have gone along.”
This included the coronavirus business interruption loan scheme (CBILS), the coronavirus large business interruption loan scheme (CLBILS), the bounceback scheme, the business-led innovation initiative run by Innovate UK (previously investigated by The Future Shapers) and the Future Fund.
Saving our next generation stars and future unicorns.
The economic strategy was of necessity rushed and reactive, initially a one-size-fits-all response that left (and continues to this day) to leave whole sectors of the economy behind. One sector that was initially not targeted was the high growth potential of start-ups as these would typically miss out due to having limited profits, higher debts but significant future growth and market potential which gets factored into unicorn level valuations at over $1billion. These firms typically also have a diverse range of investors ranging from high-net-worth individuals, venture capitalists and private equity funds. The UK has historically been seen to have a strength in these sectors and communities of stakeholders. In responding to the initial gap in the schemes the UK government designed The Future Fund.
This attempted to address the immediate funding challenge that the UK’s innovative, equity-backed companies faced due to COVID-19. The scheme, alongside other Government support schemes, aimed to support companies facing financing difficulties due to the Coronavirus outbreak. The Future Fund scheme was delivered by the British Business Bank.
The Future Fund offered convertible loans to UK-based companies ranging from £125,000 to £5 million, subject to at least equal matched funding from private investors. The idea behind the scheme was that it should be investor led, meaning that a lead investor applies on behalf of themselves and may provide information about other investors making up the investment round, in connection to a company.
The principle of matched funding was seen as a means to lower the risk for government. However, an oversight on behalf of the designers who were operating at speed looks to have been allowing applicants to crowd fund the pledges for investment and for the UK government match funding commit to be used as a lead investor in an applicant’s share placement. When you have a significant number of retail investors, furloughed and sitting at home looking for something to do, one outcome may well be an overcommitment to dubious business propositions.
For a fund that was designed to protect the UK’s next generation industry stars, the requirements were fairly light touch with limited commitments to revenue or headcount. The attractiveness of a share of over one billion pound that was set aside led to high levels of interest with thousands of applications. Also as one might expect for a programme that was designed to operate at speed the eligibility criteria turned into a box ticking exercise on behalf of the accessors, to such an extent that the rationale for a government using public funds to take an equity stake seems decoupled from common sense and ran contrary to existing government policy in other departments.
The Future Fund is now closed to new applicants, the complete list of recipients and co-investors is yet to be announced to the public. The latest figures released by British Business Bank (on February 25th) confirmed that 1,140 companies have been approved for £1.12b of convertible loans since launch—the average value received being £982k—matched by at least the same amount from third-party investors. The Future Fund published data showing that the scheme completed £1.14bn of convertible loan agreements. Data showed that 1,190 companies had their applications completed to access £1.14bn (£1136.7m) worth of Convertible Loan Agreements funded by the Future Fund since the scheme was launched in May 2020. There have been 1,851 applications (64% success ratio) in total since the scheme was launched and the scheme closed to new applications on 31 January 2021.
This final release of data shows where companies are based across the UK and the composition of the senior management teams by gender and ethnicity. The British Business Bank has also self-reported a number of its investments from this scheme on investment platforms, on Companies house or through all manner of publications and news publishers.
Having been provided insight that “the Future Fund applicants may not be as they seem and that one needed to look at the beneficiaries” The Future Shapers filed a Freedom of Information request to BEIS to obtain the names of all the 1190 companies that received a government investment.
The response which came back from BEIS was contradictory to wider evidence. The department took the view that under Sections 22 and 43(2) they would withhold the information. This is despite The British Business Bank using the likes of Crunchbase to showcase investments as displayed below:
The justification from a BEIS spokesperson was “It is important that companies are able to share commercially sensitive information with Government in the confidence that that information will not then enter the public domain and damage their wider commercial interests and opportunities. Disclosure of the requested information in this case would be likely to damage the commercial interests of the companies concerned, since others including their competitors could draw inferences about the financial situation and commercial prospects of these companies, based on them having received co-investment from the Future Fund in the form of a convertible loan.”
This is despite the UK British Bank publishing this information on other third-party investment sites and the recipients publishing all manner of press releases and investment statements.
Due to the importance of funding to the innovation sector and the next generation start-ups that are pushing the boundaries with next generation technologies The Future Shapers have investigated the press releases, crowdfunding and investment platforms. Shining a light on to some of the startling funding decisions made by the Future Fund, that have included taking a stake in sex orgy platform to supporting a crypto backed mortgage platform.
Killing Kittens secured £340,000 on the Seedrs crowdfunding platform. Half of that came from the U.K. government’s Future Fund scheme. Killing Kittens, which is known for hosting sex parties for the world’s elite in cities around the world, has also built a social media platform. The prospect of the government owning a slice of an organiser of upmarket sex parties is one of the more surprising side-effects of the covid-19 pandemic.
As one might expect this scenario generated criticism from MP’s for giving state support to this type of firm, with Labour MP Sarah Champion asking the government to “take steps to stop payments”.
Kemi Badenoch, Exchequer Secretary to the Treasury of the United Kingdom, responded by saying “ Regarding the Future Fund, it is an investor-led scheme with clear and published eligibility criteria. The scheme is being delivered by the British Business Bank and the Government is unable to comment on individual applications.” despite the British Business Bank eligibility criteria stating the following:
Clearly, the evidence would point to the UK Government not taking into account concerns around the proper use of public finances. Whether through design, application or a combination of both this is another example of a scheme that has left itself and its applicants open to abuse. If the scenario was that this case represented an isolated once off, the ramifications may be manageable. However, evidence from The Future Shapers investigation is that Killing Kittens is one of potentially hundreds of applications where the receipts value proposition is of very tenuous benefit to the UK and in some cases is directly counter to current and future government policy.
The Future Shapers are always in support of innovation and progressive change but we believe that the delivery institutions (government or otherwise) need to be held to account for their performance as at the end of the day we all end up paying.
The Future Shapers will continue to follow this story and will make an honest attempt to update it with relevant information when it becomes available.