Subsidies for Rolls-Royce might seem a bit rich, but they are inevitable

Rolls-Royce, the engine-maker and defence firm that is spitting out so much cash it can shove £7bn to £9bn towards buying back shares over the next three years, would like UK taxpayers to find a few quid – reportedly up to £200m as a first slug – to help fund one its big bets. The company would “appreciate” financial support from the government to smooth work on a new engine, says its chief executive, Tufan Erginbilgiç.Outrageous? Well, corporate welfare for Rolls is obviously absurd in the abstract. If there is a definition of a company that can afford to pay for its own research and development, this is it. One might also say Rolls owes us a favour since it was the recipient of billions of pounds worth of loan guarantees from the UK’s export finance agency when the Covid wolf was at the corporate door in 2020.That show of state support enabled a wider refinancing that got Rolls through its financial crisis and ensured that the “burning platform”, as Erginbilgiç called it, was still intact when he arrived in 2023 to lead what has been the most astonishing improvement at a major UK company in years. The share price has risen from 90p to almost £13.52, up another 3% as Thursday’s full-year numbers came (yet again) with raised guidance on medium-term profits. Rolls is now the UK’s fifth most valuable listed company.Here’s the rub, though. Erginbilgiç made two points about state subsidies and both are correct. First, it’s just how life works in the aerospace business. Every country plays the support game, and overseas rivals get two or three times as much financial help, he said. Governments do it because of the knock-on gains in the manufacturing supply chain, which yield (he argued) economic returns that can be many multiples of the outlay. For Rolls’s fuel-efficient UltraFan development engine, he floated 40,000 jobs and a big boost to the balance of trade figures, since 80% of the product would be exported.Second, this is what the Labour government signed up for with its “modern” industrial strategy. UltraFan was specifically name-checked in last year’s documents as one of the advanced manufacturing technologies that the state-backed Aerospace Technology Institute should get behind. As Erginbilgiç argued, it would only be “natural” for the government to support the project in those circumstances, noting that the company will still be paying most of the bill itself.At which point, we get down to the gritty reality: Rolls isn’t asking for subsidies in a nice-to-have sense; the request comes with the implied menace that production will happen overseas if the cash is not forthcoming. Unfortunately, that threat is probably credible: Germany and the US, where Rolls is also big, would love the lion’s share of a programme that would mark Rolls’s re-entry into the narrow-body engine market (its business is now concentrated in the wide-body long-haul area).Thus there is an air of inevitability about UK subsidies for UltraFan. One can wish the government would apply more attention to addressing the sky-high cost of electricity for industry, which could make the UK more attractive for heavyweight users like Rolls, but state support for multibillion aerospace programmes is a fact of life. Let’s remember that taxpayers did very well out of their initial £250m support for the Airbus A320’s UK-built wings.The real imperative is to ensure the state gets something solid in return – in other words, pledges that are more tangible than loose estimates of future “gross value added”. The job is about ensuring intellectual property stays in the UK to provide leverage over the manufacturing base. Peter Kyle, the business secretary, should be as transparent as commercially possible on what he secures on production commitments.As for Rolls, the soaraway success story simply gets better. The “significant” new business opportunities extend well beyond narrow-body engines to small modular reactors in nuclear, power systems for AI datacentres and a presence on multiple Nato defence programmes. At least UK taxpayers, when we inevitably cough up on UltraFan, should be backing a winner.