Steve Gummer and Shyann Sheehey issue a call on the government to make use of their options to address various barriers to investment and innovation in the manufacturing sector.
There are several subsidy mechanisms available to the UK Government, as outlined below, that are designed to address various barriers to investment and innovation in the manufacturing sector. These are able to provide both direct or indirect support to enhance competitiveness and drive technological processes and should be means the UK Government is considering soon.
Green Bonds and Climate Bonds
Green bonds can be issued by governments and development banks to raise funds specifically for environmentally sustainable projects, for example renewable energy manufacturing. The bonds will provide desirable returns to investors whilst also simultaneously providing low-cost capital to manufacturers.
An example of the use of such a bond in practice can be seen by the European Investment Bank who have utilised these for over 15 years, with the Climate Awareness Bond being first issued in 2007 as the world’s first green bond. In 2022 the total issuance of green, social and sustainability bonds by this institution stood at roughly 2.2 trillion euros with the issuance of the Climate and Sustainability bonds approaching the 60-billion-euro mark at the same time.
Tax Increment Financing
Tax Increment Financing (‘TIF’) gives municipalities the use of future increases in property taxes to fund current improvements such as infrastructure enhancements that benefit manufacturing facilities. These are used to create an environment for private manufacturing without the need to directly tap into current tax revenues.
The idea of Tax Increment Financing has been used in the United States for over 60 years and are usually provided to projects which aim to address economic blight, but TIF’s have also been introduced here to assist specific projects such as public transportation developments.
R&D Tax Credits
R&D Tax Credits allow companies which invest in research and development to claim significant tax relief, thereby reducing the cost of innovation whilst encouraging private firms to develop new manufacturing technologies.
The UK has employed a R&D Tax Credit Scheme since 2000 with the aims of encouraging scientific and technological innovation. The Scheme provides various incentives to users such as enhanced tax relief and cash credits and is available to businesses of all sizes who partake in the innovation.
Public-Private Innovation Funds
In these funds the government partners with private investors to create a fund which invests in the manufacturing sector, specifically in startups and innovative companies. Funding is provided by way of equity investment and will support the commercialisation of new technologies.
In Germany, High-Tech Gründerfonds are a public-private partnership which fund investors across various sized industries through providing financing for start-up projects in industrial and digital technology, life sciences and chemical sectors with over 700 companies funded already.
Accelerated Depreciation and Capital Allowances
Here companies are provided the opportunity to immediately deduct the full cost of eligible capital investments (such as new equipment or machinery) which in turn reduces the initial cost burden and encourages manufacturers to invest in the modernisation of their facilities.
Australia has a similar scheme called the ‘Instant Asset Write Off’ which allows eligible businesses to make claims to write-off deductions for the costs of their assets (including both new and second-hand assets so long as they fall under the relevant threshold).
Direct Equity Investments and Venture Capital
Direct equity investment alongside partnerships with private investors is provided to manufacturing sectors to give growth capital for innovative companies.
The Singapore’s Economic Development Board (EDB) is a government agency (acting under the Ministry of Trade and Industry) which is directly responsible for strategies that enhance Singapore’s standing as a global centre for business, talent and innovation. It undertakes various means of investment promotion and industry development within the internally tradeable and manufacturing sectors.
Export Credit Agencies (ECAs) and Insurance
ECAs are able to provide insurance and financing solutions to support certain domestic manufacturers in exporting their products, this then mitigates the risks associated with international trade and helps companies expand their global reach.
In Japan the ‘Nippon Export and Investment Insurance (NEXI) provides such support as the official export credit agency of the country. NEXI acts with the purpose of covering business risks which arise in foreign transactions that are not already covered by commercial insurance whilst still considering the environmental and social impacts of the projects.
Cluster Development Programmes
These programmes allow government support to be provided for the formation of industry clusters and innovation networks by providing funding for collaborative projects, shared infrastructure and joint marketing efforts. They are able to enhance competitiveness and foster innovation within specific manufacturing sectors.
Denmark has implemented the ‘Cluster and Network Program’ which funds roughly 13 national clusters such as business industries, public actors, knowledge institutes and companies. The organisation of the programme aims to facilitate cooperation between actors in the ecosystem whilst handling administrative and strategic work for the parties.
Government Procurement and Advanced Market Commitments (AMCs)
Under an AMC, the government would commit to purchasing a set quantity of products from domestic manufacturers, which would in turn provide a guaranteed market and encourage private investment in production capacity.
The UK has previously committed over US$485 million to pilot AMC for a pneumococcal vaccine and acted as a donor commitment to subsidise the future purchase of a vaccine which had not yet become available.
Patent Box Regimes
A patent box regime is a reduced corporate tax rate on income which is derived from patented products and innovations. This reduction aims to incentivise companies to invest in R&D and the manufacturing of new technologies domestically.
The Netherlands have introduced a ‘Innovation Box’ that provides a special tariff box on corporate tax returns by allowing companies to pay less corporate income tax on the profits of innovative activities. Specifically lower tax rates will be applied to intangible assets including research and development costs and patents or other intellectual property rights.
Technology Transfer and Licensing Programmes
Government-funded research institutions or universities can licence their technology to private companies at favourable terms which then facilitates the commercialisation of innovative manufacturing technologies.
The Technology Transfer Companies (TTCs) are used within the UK with the Queen Mary Innovation working alongside academics for example, to help build innovations into successful social ventures or businesses or alternatively to licence them to allow companies to take such technology forward.
Industrial Symbiosis Programmes
In Industrial Symbiosis Programmes the government is able to facilitate networks in which industries cooperate with each other’s by-products and waste materials as resources. These programmes are able to create cost savings and environmental benefits, thereby encouraging sustainable manufacturing practices.
This has been implemented in Denmark by Kalundborg Symbiosis which is a partnership between 17 public and private companies who developed the first industrial symbiosis that adopts a circular approach to production. In essence it allows the residual flow in one company to become resourced in another, thereby benefiting both the environment and the economy.
Skills Development and Training Subsidies
Here the Government would be providing funding for workforce training and development programmes which are specifically tailored to the needs in the manufacturing sector.
Singapore has implemented the SkillsFuture Initiative which is a national programme which works to support individuals to continue learning and enhance the role of enterprises in developing their workforces.
Regulatory Sandboxes
The use of a regulatory sandbox allows companies to test their newest products and technologies in a controlled environment with more relaxed regulations in the hopes of accelerating innovation and commercialisation. These are primarily used in the fintech sector but the principles of these can be adapted and applied to the manufacturing sector.
The UK has already implemented this approach with the Financial Conduct Authorities Sandbox which provides firms the ability to test new products live in the market with real consumers. It accepts applications from firms seeking to trial new products or services and also from technology companies who wish to meet their obligations in a more efficient manner.
Carbon Pricing and Trading Schemes
By reinvesting carbon pricing and trading schemes into green manufacturing projects, the UK government could not only support innovation but also align current manufacturing practices with environmental goals.
This is a practice which can already be seen through the European Unions’ Emissions Trading System (EU ETS) as the world’s first major carbon market. The EU ETS has developed a ‘cap and trade’ system that aims to reduce emissions and implements a ‘polluter pays’ principle in their auctioning rounds.
Steve Gummer is a Partner and Shyann Sheehy is a Paralegal at Sharpe Pritchard LLP.
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