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GAI 1

Memorandum submitted by BIS (UKTI and ECGD)

Contents

1. Executive Summary 2

2. Future Government Policy to Support Industry 4

3. Banking Support and Government Policy 7

3.1 SME Access to Finance Schemes 8

4. Government Programmes and Assistance to Industry 11

4.1 Automotive Assistance Programme 11

4.2 Strategic Investment Fund 12

4.3 Working Capital Guarantee Scheme 13

4.4 Business Support Programmes 14

4.5 Science and Research Working with Industry 15

5. Steps to Encourage Exports and Inward Investment 16

5.1 UK Trade & Investment 16

5.2 Export Credits Guarantee Department 20

Annex A: ECGD Business FY 2000 – 2010 26

Annex B: Exporters who have benefited from ECGD support: FY 2000-10 27

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1. Executive Summary

This paper sets out the joint response from BIS, UK Trade and Investment and the Export Credits Guarantee Department to the Business, Innovation and Skills Committee inquiry into Government Assistance to Industry. It outlines future Government policy to support industry through delivering sustainable growth; banking support; Government programmes and assistance to industry; and steps to encourage exports and inward investment through UKTI and ECGD support. Delivering sustainable growth

BIS is the department for growth and is committed to fostering long-term sustainable growth which plays a crucial part in cutting the fiscal deficit. In July this year we launched a new growth strategy, setting out our agenda to address the UK’s long term challenges, with Government playing a crucial role as an enabler of balanced and sustainable growth.

‘A Strategy for Sustainable Growth’ is based on the three key strands of: promoting the efficient operation of markets to support growth; smarter public and private investment in the economy, including creating a highly-skilled workforce; and encouraging entrepreneurialism and individual engagement in the economy to support growth. Section 2 of this evidence sets out BIS’s approach to delivering sustainable growth and how this will be developed through a cross government Growth White Paper, to be published later in the autumn. Banking support and Government policy

Ensuring access to appropriate finance is also essential to facilitate business growth. In July, BIS and HMT launched the Green Paper, ‘Financing a Private Sector Recovery’. This shows that ensuring the financial system delivers for business is central to our growth ambitions and that Government intends to work with business and the financial community to ensure that access to finance is not a barrier for companies looking to invest.

The Government already has a range of measures to help ensure that the supply of finance, and the banking sector, supports the economic recovery. An Independent Commission on Banking has been set up to consider the structure of the UK banking sector and look at structural and non-structural measures to reform the banking system and promote competition, reporting in September 2011. There are also frequent meetings with a range of stakeholders across industry, including roundtables with the banks and regular engagement with the Bank of England, Financial Services Authority, Office of Fair Trading and British Banker’s Association.

Additionally, BIS has a range of SME access to finance schemes, recognising that ensuring the flow of credit to viable SMEs is vital to support growth. A number of measures to help small businesses access credit have been announced, as well as the continuation of some existing policies. The Enterprise Finance Guarantee (EFG) facility has been increased; the 2nd year of legally binding lending commitments with Lloyds Banking Group and the Royal Bank of Scotland have begun; a Growth Capital Fund and a new Enterprise Capital Fund have been announced; and a ‘Big Society Bank’ will be established using funds from dormant bank accounts. Section 3 of this paper provides further details of these schemes, a range of other current Government interventions and the latest BIS SME lending data.

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Government programmes and assistance to industry

Government provides a range of programmes and assistance to industry. These include the Automotive Assistance Programme (AAP), aimed at automotive companies hit by the recession and facing difficulties in financing new investment; and the Strategic Investment Fund (SIF), which has targeted resources to areas where strong opportunities for growth and employment exist and where Government action would make a positive difference (such as the construction of a large-scale industrial Biotechnology demonstrator, development of an innovation campus, and collaborative R&D projects in new generations of wind turbines and air engines). In addition, assistance has been provided through the Working Capital Guarantee Scheme (WCS), which was designed in the midst of the financial crisis as part of a comprehensive approach to stabilising the banking system and maintaining lending to business; and Business Support Programmes (offered under the ‘Solutions for Business’ banner) which deliver a range of help for businesses, covering the whole life cycle from start-up to development and growth.

Government funding of science and research also provides support to industry, with the UK Research Base contributing to economic growth through creating new businesses, stimulating improvement to existing businesses and providing highly skilled people to the job market.

Section 4 of this evidence outlines the objectives, rationale, outcomes and effectiveness, and future of these programmes. Steps to encourage exports and inward investment

The Government appreciates the key role that exports and investment will play in driving growth over the next few years. As outlined in section 5 of this evidence, actions are being taken to encourage exports and inward investment, recognising that they provide significant benefits to the UK economy through boosting productivity, innovation, R&D, and generating increased profit, sales and jobs.

UK Trade & Investment (UKTI) helps UK-based companies to develop their capacity to trade and to maximise their international success. UKTI also helps bring high quality inward investment to the UK’s economy, providing support and advice to investors at all stages of their business decision-making. The focus of UKTI’s support; the range and effectiveness of trade and inward investment services it offers; the overseas and UK networks it has established; and relationships with the Regional Development Agencies and Devolved Administrations, are detailed in section 5.1, along with an overview of UKTI’s effectiveness and efficiency.

The Export Credits Guarantee Department (ECGD) provides assistance to industry in two main ways: first, by supporting loans to overseas buyers to purchase goods and services from UK exporters, and, second, through providing insurance directly to exporters and investors overseas against the risks of not being paid. ECGD principally supports exporters of capital goods and services and has a small customer base, although hundreds of companies, including SMEs, indirectly benefit from that support through the supply chains of these exporters.

The recent economic downturn has seen an increase in demand for ECGD support. ECGD’s response included introducing its first new product for many years. Its levels of new business have risen materially (more than 50%) over the last year; this looks set to continue. Although the business supported by ECGD represents less than 1% of UK exports, ECGD remains an important source of support for certain industrial sectors, such as civil aerospace and process engineering for the oil and gas sectors.

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2. Future Government Policy to Support Industry

Delivering Sustainable Growth

UK economic growth in recent years has been driven by the accumulation of unsustainable private sector debt and rising public sector debt. The Government has taken decisive action to reduce the fiscal deficit and has put this at the centre of its agenda. The OECD and the Governor of the Bank of England also agree that we need early action on the deficit. However, the growth prospects of the UK economy will be undermined if we do not have a credible deficit reduction plan, but equally, deficit reduction over the medium term requires significant and sustained growth. BIS is the department for growth and is committed to fostering long-term sustainable growth, the flip side of spending reduction.

The Government recognises that a new growth agenda is needed to address the UK’s long term challenges, with Government playing a role as an enabler of balanced and sustainable growth. In the long-term we need to build a sustainable economy, that is greener, more enterprising, more technologically advanced, more balanced across the regions and grounded in diverse sources of sectoral strength. As outlined in ‘A Strategy for Sustainable Growth’, BIS plays a crucial role in supporting businesses and individuals through the changes needed to return the economy to this sustainable growth. It is about creating an environment that enables businesses to invest with confidence and the conditions for businesses to start out, invest, grow and be profitable. We recognise that we must find efficiencies and reduce our levels of spending, but also that supporting growth-related activity is essential.

‘A Strategy for Sustainable Growth’ is based on three key strands: • Promoting the efficient operation of markets to support growth; • Smarter public and private investment in the economy, including creating a highly-skilled

workforce; and • Encouraging entrepreneurialism and individual engagement in the economy to support

growth. Promoting the efficient operation of markets to support growth

Government plays a critical role in maintaining a stable framework within which businesses can set up and grow. BIS will support industry by creating the best market frameworks through appropriate regulation and ensuring that the regulatory framework is fit for the challenges of the future. Well functioning, competitive markets are essential and we need to provide the necessary certainty for firms to conduct their business with confidence by ensuring our legal and institutional frameworks are fair, efficient and transparent.

BIS has taken the lead across Whitehall in driving the agenda to achieving a level of regulation that promotes competition and stability without impinging on businesses ability to effectively operate. Recently introduced measures such as the Reducing Regulation Committee, a ‘One In One Out’ rule and actions to ensure regulations are regularly reviewed through requiring ‘sunset clauses’ are a critical part of this agenda to support industry and growth. We are also conducting a fundamental review of all legacy regulations left by the previous administration.

It is also key that Britain isn’t left behind following the rapid emergence of the large developing economies which have radically reshaped global patterns of production and commerce. Removing barriers to trade globally is a cornerstone of the growth strategy and essential part of the rebalancing agenda. There is a key role for government in driving down, and keeping down, barriers to trade and in helping British businesses to take advantage of opportunities to trade. BIS will continue to work closely with the Foreign and Commonwealth

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Office and UK Trade and Investment to support this agenda – to strengthen the UK’s relations with the fastest growing areas of the world; to press to reduce trade barriers and to support British businesses to ensure they are able to access the support and advice they need to seize overseas opportunities; and to attract foreign investment in to the UK. BIS is currently working with other key government departments to develop a Trade White Paper, setting out the Government’s strategy for growth through free, fair and open markets, including trade agreements, promoting trade facilitation and cutting global red tape. Investment in our productive capacity to drive growth

Investment in the UK’s productive capacity is critical to driving growth. Sustainable growth must be driven by the private sector. Government can play a role in encouraging investment by minimising uncertainties and correcting sources of market failure, both in capital markets and in areas where there would otherwise be under-investment as the benefits are not fully recognised by business and individuals. Investing in capital, infrastructure, higher education, science and innovation are all crucial to creating growth and being economically competitive but it is neither optimal nor affordable to rely on government expenditure alone. Public investment is complementary to private investment and we must target any spend in areas that have the greatest impact and also consider where there is the possibility to leverage in greater levels of private investment. Securing improvements in productive capacity may be delivered by providing direct support to industry and industrial projects, through grants, loans or loan guarantees. Where this happens, Government support should be clearly additional (i.e. the project would not be brought forward by the market alone), and aimed at locking-in wider economic, technological and social benefits.

Significant infrastructure investment – such as in better transport links, ICT, green energy, water and waste - will be needed to maintain our competitiveness as we move to a greener economy. Given the need to reduce public spending, we must look at how greater private sector investment can be facilitated. Infrastructure UK and the publication of the National Infrastructure Plan are key elements of this approach as are changes government intends to make to the planning regime.

Investment in higher education and skills is also integral to supporting the economy and driving sustainable growth. As in all areas, however, reducing the fiscal deficit must mean that public money is used more effectively. Actions already taken include the newly refocused Apprenticeship programme and further work this year to provide incentives to encourage provision and take-up of training in priority areas, including a growth and innovation fund. A consultation document outlining the Government’s future strategy for skills, ‘Skills for Sustainable Growth’ was published in the summer and following responses the full strategy will be published after the Spending Review in October. Lord Browne’s Independent Review of Higher Education funding and student finance will also report in the autumn.

Additionally, investment in science, research and innovation are essential for the UK economy and long-term growth. BIS will continue to fund the most excellent research and will continue to support collaboration between universities and businesses; the commercialisation of new technologies; and the building of relationships between institutions and businesses which foster the exchange of new knowledge. Innovation policy will focus on realising the benefits of better links between universities, enterprise, skills and access to finance and we are also looking at the facilitative role government can play in developing a network of innovation infrastructure.

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Encouraging Entrepreneurialism

The final strand of BIS’ strategy to deliver sustainable growth is based on restoring a spirit of entrepreneurialism in the economy and providing the opportunities, or removing the constraints, that limit the ability of businesses and individuals to reach their full potential. Elements of achieving this include making it as easy as possible to start and run a business; encouraging individuals to take more business opportunities; growing enterprise awareness and skills; and supporting existing businesses in growing to their potential by encouraging them to develop their internal capabilities.

It will be important for government to work both with business and with individuals to achieve these aims. The forthcoming White paper on sub national growth will develop proposals for local enterprise partnerships and set out the Government’s approach to improving incentives for local economic development. Government also needs to work more collaboratively, both through working in partnership with business but also encouraging businesses to work better together to identify and address barriers to growth. Rather than supporting individual businesses, there is a role for BIS in understanding the impact government has in delivering horizontal policies and where the challenges are faced by certain sectors and industries. Manufacturing or low carbon industries are good examples of where this approach is needed to ensure UK businesses are best positioned.

Government also needs to work more closely with individuals; ensuring they have access to quality information to drive informed choices about their skills needs and work prospects; and enabling those at the lower end of the labour market to access the skills and training needed to enter and progress in work. There is also the need to work with employers to help them make full use of their workforce and ensure more satisfying and better quality jobs; to provide advice to help them make more informed choices on skills; and work to ensure skills are better aligned with employers’ priorities and the benefits can be better captured. Developing the Growth Strategy

Government’s agenda to achieve sustainable economic growth will be built upon in the cross government Growth White Paper, to be published later in the autumn. The White Paper will analyse the current economic conditions and set out what further we can do to remove barriers and enable strong and sustainable growth by improving our productivity and increasing levels of employment. Rebalancing the Economy

The Government is committed to rebalancing the economy and is undertaking significant reform to unleash the economic potential of localities. A key element of this involves the creation of local economic partnerships. In addition, the Government will create a £1bn regional growth fund which will have two main objectives: • To encourage private sector enterprise by providing support for projects with significant

potential for economic growth and create additional sustainable private sector employment; and

• To support in particular those areas and communities that are currently dependent on the public sector make the transition to sustainable private sector led growth and prosperity

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3. Banking Support and Government Policy

The growth strategy outlined in the previous section recognises that access to appropriate finance is important to facilitate business growth and that a key challenge is to ensure that the supply of finance in general, and the banking sector in particular, supports the economic recovery rather than constrains it.

The recently launched Green Paper, ‘Financing a Private Sector Recovery’, shows that ensuring the financial system delivers for business is central to our growth ambitions and government intends to work with business and the financial community to ensure that access to finance is not a barrier for companies looking to invest.

‘Financing a Private Sector Recovery’, sets out the range of finance options for different sized businesses, explores where the market is failing to provide and if there is a role for government intervention. Although government already plays a key role in supporting access to finance, risks remain to the supply of finance as the economy recovers and demand increases. Ensuring sufficient finance is available to businesses as confidence recovers is of central importance.

Through the consultation document, BIS and HM Treasury are seeking views on whether there are further actions needed from industry, financial institutions or Government and what form this should take. Potential risks surround the future price and availability of finance but where problems are identified, industry and market-led solutions are generally preferred. However, the Government recognises the need for stable financial conditions for business and if needed stands ready to act to prevent downside risks to the economic recovery materialising. While government has already set out a number of criteria which any intervention must meet, responses to the consultation will also be used to inform any future intervention and will be used to understand how business and the government can better work together to produce a diverse, competitive and sustainable financial environment.

The deadline for responses to the Green Paper was 20 September, enabling them to be used in informing the spending review. Following this, the Government will publish a summary of responses, giving feedback on how the consultation process influenced government policy.

The Green Paper also announced a task force led by the British Bankers Association, which will identify, analyse and review ways the banking system can, over the next three years, help viable UK businesses of all size access appropriate finance and other support. Independent Commission on Banking

The Government has also announced the set up of an Independent Commission on Banking, which will consider the structure of the UK banking sector and look at structural and non-structural measures to reform the banking system and promote competition. The Commission will produce a final report by the end of September 2011, formulating policy recommendations with a view to: • Reducing systemic risk in the banking sector, exploring the risk posed by banks of

different size, scale and function; • Mitigating moral hazard in the banking system; • Reducing both the likelihood and impact of firm failure; and • Promoting competition in both retail and investment banking with a view to ensuring that

the needs of banks’ customers and clients are efficiently served, and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail.

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Government Engagement with Industry and Banks

Government has frequent meetings with a range of stakeholders across industry, on a collective and bilateral basis. These include recent roundtables with the banks, as well as regular engagement with organisations such as the Bank of England, Financial Services Authority, Office of Fair Trading and British Banker’s Association.

Effective engagement is key to improving communication between banks and businesses. Following on from the Previous Small Business Finance Forum, a Small Business Economic Forum will be chaired by the Minister for Small Business. Membership will be similar to that of the SBFF, although individual entrepreneurs will be invited and banks will only attend when relevant items are on the agenda.

3.1 SME Access to Finance Schemes

Ensuring the flow of credit to viable SMEs is essential for supporting growth and is a core priority. Government is not only committed to increasing the flow of lending to SMEs, but also to improving the standards and behaviour that businesses can expect from banks.

In that respect, Government has announced a number of measures that will help small businesses access credit, as well as the continuation of existing policies: • An increase in the Enterprise Finance Guarantee (EFG) of £200 million to support £700

million of additional lending until 31 March 2011. In addition, a processing target of 20 working days was introduced for each of the main lenders from 1 August 2010.

• Year 2 of the legally binding lending commitments with Lloyds Banking Group and the Royal Bank of Scotland began on 1 March 2010. LBG committed to lend £44bn to businesses, including £11bn to SMEs and £33bn to mid and large corporates. The Royal Bank of Scotland committed to lend £50bn to businesses, including £30bn to SMEs and £20bn to mid and large corporates.

• A Growth Capital Fund to address a gap in the market for growth capital for SMEs. • A new Enterprise Capital Fund to provide early stage risk capital to innovative small

business with high-growth potential. • Use of funds from dormant bank accounts to establish a ‘Big Society Bank’ that will

provide new finance for neighbourhood groups, charities, social enterprises and other non-government bodies, and creation of a Green Investment Bank.

Enterprise Finance Guarantee Scheme (EFG)

The Enterprise Finance Guarantee is a loan guarantee scheme for lenders to enable them to provide additional lending to viable SMEs. It addresses the long term market failure in the provision of debt finance to credit-worthy SMEs which lack collateral or track record, who are unable to secure a normal commercial loan.

Following an announcement in the June Emergency Budget, the facility was increased from £500m to £700m for this financial year, facilitating additional bank lending to viable SMEs.

A network of 46 approved lenders is providing access across the whole of the UK, and since becoming operational in January 2009, as of 4 August 2010 the scheme has achieved the following: • 14,175 eligible EFG applications with a value of over £1.58 billion have been recorded. • 11,245 businesses have been offered loans totalling £1.15 billion. • 9,600 businesses have drawn down loans with a value of £960.7 million.

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Enterprise Capital Fund (ECF)

A new £37.5 million Enterprise Capital Fund to provide early stage risk capital to innovative small businesses with high growth potential was announced in the Emergency Budget. Government will commit up to £25m, with the remainder coming from the private sector. ECFs are used to establish funds targeting investments of up to £2m to provide venture capital on commercial terms for innovative SMEs with high growth potential in the “equity gap” that have the potential to provide a good commercial return. Previous ECFs have secured total investor commitment in the ECF programme to £238.6m of which BIS commitment represents £156.2m and private investors the remaining £82.4m. As at 31 March 2010, 70 portfolio companies have received a total investment of £72.6m. Growth Capital Fund

The Budget also confirmed the creation of a Growth Capital Fund, to provide funding of between £2m and £10m for small and medium-sized businesses (SMEs) with strong growth potential, to address the funding gap identified by the Rowlands Review of Growth Capital published in November 2009. Current Government Interventions • Microfinance – Community Development Finance Institutions (CDFIs) undertake

enterprise lending in disadvantaged communities or groups who are unable to access finance from mainstream banks. They are supported by Community Investment Tax Relief (CITR) and Regional Development Agencies (RDAs). BIS is also supporting work developing the capacity of the sector at a national level though the CDFA (CDFI’s trade association).

• European Investment Bank (EIB) SME Facility – In 2008, £1bn of EIB funding was negotiated by UK banks for SME on-lending, against an overall UK share of £4bn of EIB lending between 2008 and 2011. EIB makes credit lines available to lenders with good credit rating at close to sovereign debt rates, enabling them to on-lend to SMEs at a competitive rate. Of that £1bn, around £700m of SME applications for funding have already been agreed by UK banks.

• Aspire – A £25 million co-investment fund (with up to £12.5 million of public funds) aimed at high growth businesses seeking equity of £100k and £2 million. The fund acted as a beacon to encourage female entrepreneurs to seek appropriate risk capital finance; to demonstrate that attractive and viable investment opportunities existed; and to provide improved investment readiness support. As at 30 June 2010 a total of £1.9m had been invested.

• Capital for Enterprise Fund (CfEF) – set up as an overall response to the acute difficulties SMEs were facing accessing finance and sustaining their businesses during the financial crisis and recession, CfEF was a £75m time limited scheme from January 2009 to March 2010, when it ceased making new investments. It provided equity or quasi equity investments of up £2 million, targeted at SMEs that had exhausted their normal borrowing capacity. So far 30 businesses have received investment totalling £41.6m, and twelve businesses have accepted the terms of the funding offered with a total value of £17.6m. We believe there is demand remaining for this type of intervention which provides investment flexibly through debt, equity or mezzanine finance. Part of this demand is met through EFG, and work is continuing on the development of a Growth Capital Fund, as confirmed in the June Budget.

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BIS SME Lending Data

Data supplied to BIS from the main lenders to SMEs at May 2010 indicate that: • Demand for credit remains subdued - the number of applications per working day was

4.5% down on a year ago and almost a fifth below the level in May 2008; • Approval rates continue to edge upwards - currently at around 69% for loans and 75% for

overdrafts for businesses with turnover of under £1m. • The value of loan draw-downs was the lowest since data is available at £1.8bn - under

half the value of the peak in early 2008. • Repayments were £200m greater than draw-downs, continuing the high levels of

repayments seen over the past 18 months. • Stock of lending was £118bn at end of May, down £2.8bn on peak reached in March 2009 • The subdued outlook from these figures reflects the fact that there is relatively little new

lending as demand for finance for new investment is subdued and companies continue to de-leverage.

• Little is known for certain about the extent of debt aversion or discouraged demand. A distinction should be made between “pure” discouraged demand (where SMEs believe applications will be rejected and therefore do not apply for a loan) and secondary discouraged demand (where SMEs believe they would be accepted but that the price or other conditions would be unacceptable).

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4. Government Programmes and Assistance to Industry

Government provides a range of programmes and assistance to industry. Details of a selection of these are given below, including those specifically highlighted in the announcement of this inquiry.

4.1 Automotive Assistance Programme Objective The Automotive Assistance Programme (AAP) was announced in January 2009 by the previous Government. It was aimed at automotive companies hit by the recession and facing difficulties in financing new investment to ensure continued investment in: • Development of cutting-edge green technologies that can contribute to CO2 reduction, and

a low carbon future for the industry; • Advancement of research and development (R&D) in UK vehicle manufacturing; and • Creating and sustaining jobs. Rationale The automotive industry is a pivotal part of the UK manufacturing sector. Whilst the manufacturing sector as a whole was down 5.5% in the year to February 2009 compared to the previous year, automotive sector output was down 14% on the same basis. In response, the then Government introduced a range of measures to support the automotive sector through the recession – including the Automotive Assistance Programme. Outcome AAP has provided a £360 million loan guarantee to Ford Motor Company Ltd, in support of their £450 million loan from the European Investment Bank (EIB) to fund six projects in the UK worth a total of £1.5 billion to support R&D and production investment related to new generation, environmentally friendlier vehicle and engine technologies. In addition, three formal offers of support were made under AAP to General Motors Europe, Jaguar Land Rover, and Tata Motors European Technical Centre (TMETC). These were not taken up due to the applicants’ success in accessing financial support elsewhere. Other companies, who expressed an interest in the scheme and discussed it with officials, have found that the willingness of Government to engage has allowed them to find support or external investment without a government guarantee – either through their bank, or with support from their parent company or key Original Equipment Manufacturer (OEM). The details of such companies are commercially confidential. Future AAP was introduced by the previous Government on an exceptional basis during a period of acute stress for the industry and in a very particular set of economic and financial circumstances. As was proper, we have reviewed outstanding automotive decisions made by the previous Government and are winding up AAP appropriately, but the acute crisis is over and the AAP is no longer accepting new applications. The Government is considering those cases left in the AAP “pipeline” on their merits. Rules under the EU Temporary Framework for State Aid prohibit the current scheme from operating after 31 December 2010.

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4.2 Strategic Investment Fund Objective The Strategic Investment Fund (SIF) is a two-year, predominantly capital fund consisting of around 45 projects and programmes. Following rigorous prioritisation and appraisal processes the SIF has targeted resources to areas where strong opportunities for growth and employment exist and Government action would make a positive difference. SIF intervention is aimed at those industries or areas of the supply chain where there are barriers to the commercialization of technology and where there is evidence that the UK could have a comparative advantage. It is geographically diverse to ensure widespread benefits across the UK economy. Rationale With manufacturing supply-chains increasingly global in nature, SIF supports areas in which UK capabilities are able to attract high value jobs and processes for UK industries. SIF helps firms exploit new ‘platform technologies’ that are relevant to multiple sectors and long supply chains. Key areas include composites, plastic electronics and industrial biotechnology, where investment is aimed at use by SMEs, with open access facilities, as well as larger firms. Outcome Below are some examples of where SIF funding is being deployed: • The construction of a large-scale Industrial Biotechnology demonstrator at Wilton,

Teesside (£12m of funding) which will enable companies (including SMEs) to scale up and develop bio-based processes to commercialise new products. Forecasts indicate that in 2025, the market for these chemicals could be worth up to £360bn worldwide.

• The Printable Electronics Centre in County Durham is being expanded (£12m funding) to become a national centre of excellence in plastic electronics, a technology that could underpin growth across in a range of sectors. The Centre will offer capability in ultra-efficient lighting and photovoltaic manufacturing, contributing to the low carbon agenda.

• An innovation campus in Stevenage (£12m funding) is being developed in partnership with, among others, GlaxoSmithKLine. It will provide incubation facilities for new life sciences companies involved in drug discovery and development, and was flagged in the Dyson report as an example of best practice in industry and research base collaboration.

• SIF funding is also directed at developing the low-carbon sector where demand is under-stated in the market as commercial solutions are related to long-term environmental needs. This includes collaborative R&D projects in new generations of wind turbines and air engines, test facilities in offshore wind and marine power, and low carbon vehicles, including accelerated deployment of an electric vehicle charging infrastructure in the UK.

• SIF supports science and research that the market exploits but wont always fund itself, such as “science clusters” - facilities which provide access to specialist equipment, services and knowledge-sharing in pre-commercialised science.

• A new International Space Innovation Centre (ISIC) at Harwell (£12m funding) will establish a centre of excellence to exploit data generated by satellites, use space data to understand climate change, and enhance the security of space systems and services.

Future SIF is a time-limited fund; all spend needs to be completed by April 2011. Most SIF funding forms part of larger projects whose effectiveness can only be evaluated longer-term. We will conduct an initial evaluation of the main SIF projects in 2012, with a final evaluation conducted in 2015.

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4.3 Working Capital Guarantee Scheme Objective The Working Capital Guarantee Scheme (WCS) was announced in January 2009 as part of the package of measures to help manage the impact of the recession on businesses in the UK. Its purpose was to enable banks at the time of the credit crunch to provide new lending to businesses operating in the UK. It was designed to help stabilise the financial system by providing banks with the capital required to meet business lending requirements, working in conjunction with other Government initiatives such as the Asset Protection Scheme to help companies through the difficult economic climate. Rationale Prior to the credit crisis, UK financial markets were able to provide the majority of business with the finance required. During the credit crunch bank lending was constrained by inadequate levels of bank capital. It was feared this would impact on corporate lending leading to rising insolvency rates. Under the Working Capital Guarantee Scheme, Government provided banks with guarantees covering 50% of the loan value on portfolios of working capital loans with less than 12 months to maturity. This guarantee in turn released regulatory capital for the banks. Participating banks were required (through Lending Agreements) to increase lending on normal commercial terms to SME and Mid Corporate UK businesses. Like the Asset Protection Scheme, but unlike the Enterprise Finance Guarantee Scheme, companies themselves did not apply for the guarantees under the Working Capital Scheme. Outcome Royal Bank of Scotland and Lloyds Banking Group obtained WCS guarantees totalling £2.2bn out of the £10bn guarantee offered to all UK banks. The RBS and Lloyds portfolios contained £4.4bn of short term commercial loans. The scheme was designed in the midst of the crisis as part of a comprehensive approach to stabilising the banking system and maintaining lending to business. The Working Capital Guarantee Scheme is operating within its expected parameters. The quality of the loans and the expected probability of default are carefully monitored through management information provided by banks. Maximum exposure to BIS on any single default is £25m. To date there have been no defaults and no claims have been made. The Scheme is designed to break-even, so that no final costs fall to the Government. Like all insurance schemes, the insurance premiums are calculated on assessments of the likely future risks. As of 7th September 2010, premiums received by BIS amounted to £11.8m. Future In November 2009 it was announced that new guarantees would not be available under the Working Capital Guarantee Scheme, as similar Government support was now available through the broader Asset Protection Scheme. Existing guarantees will remain in place until 31st March 2011.

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4.4 Business Support Programmes The table below summarises the support from government to help businesses succeed, provided under the ‘Solutions for Business’ branding in England. These products deliver a range of help for businesses, covering the whole life cycle from start-up to development and growth. The portfolio is flexible, with new business support products made available when the need exists.

Product and Area Target Type of Support Start Up

Enterprise Coaching Groups unlikely to be involved in enterprise Mentoring

Intensive Start Up Support Under-represented start-ups

Advice and small grants

Business Mentoring (pilot) SMEs Mentoring Starting a Business Start-ups Advice and guidance

Starting a High Growth Business High-growth potential start-ups

Advice, guidance, mentoring

Access to Finance

Enterprise Finance Guarantee SMEs up to £25m turnover Loan Guarantee

Finance for Business SMEs Finance Fund Small Loans for Business Start-ups / SMEs Loan (up to £50,000) Skills Train to Gain All Sectors / Sizes Funding for training Business Growth Business Collaboration Networks Specialist intermediaries Intermediary Funding

Business Premises Commercial property developers Intermediary Funding

Coaching for High Growth SMEs Coaching Manufacturing Advisory Service Manufacturing SMEs Specialist Advice Grant for Business Investment Disadvantaged Areas Financial Grant Innovation Advice and Guidance SMEs Specialist Advice Designing Demand SMEs Specialist Advice Understanding Finance for Business SMEs Specialist Advice Selling to the Public Sector (pilot) SMEs Advice and Training Transformational ICT (pilot) SMEs ICT Advice Innovation Specialist Facilities and Environments Specialist intermediaries Intermediary Funding Collaborative Research and Development All Sectors / Sizes Grant Funding

Grant for Research and Development Start-ups / SMEs plus all Low Carbon sector Grant Funding

Innovation Vouchers (pilot) SMEs Funding for R&D Support

Knowledge Transfer Partnerships All Sectors / Sizes Financial Support for Specialist Placement

Networking for Innovation Specialist intermediaries Intermediary Funding

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Product and Area Target Type of Support Environment and Efficiency Improving Your Resource Efficiency All Sectors / Sizes Specialist Advice Low Carbon Energy Demonstration Low Carbon Sector Grant Funding Rural Development Programme for England: Business Support Rural SMEs Training and Grants

International Trade

Accessing International Markets All Sectors / Sizes Specialist Advice and Financial Support

Developing Your International Trade Potential All Sectors / Sizes Advice, Training and

Funding

Export Credit Insurance All Sectors / Sizes Insurance / Loan Guarantee

Maximising Foreign Direct Investment Overseas Companies Inward investment support

Train to Gain

Train to Gain is the main mechanism through which Government provides skills and training support for businesses, and is open to employers of all sizes and sectors in England. It aims to develop the skills of employees as a route to improving overall business performance. Free, expert support is available to help employers to make an assessment of their skills needs and identify and access appropriate training solutions. Eligibility for funding or subsidies is identified to enhance the employers own investment in skills, reflecting the shared responsibility for training.

In 2008/09 over 817,000 Train to Gain programmes were started, resulting in over 540,000 achievements. 4.5 Science and Research Working with Industry

Science and Research lie at the heart of many of those areas the UK will need for growth and to rebalance the economy. The UK Research Base contributes to economic growth through creating new businesses, stimulating improvement to existing businesses and providing highly skilled people to the job market. The strength of the research base helped attract 250 R&D investments in Britain in 2007-08 and a further 200 during 2008-09. Research Councils provide funding to universities and other eligible organisations, rather than funding for business, but through collaborative grants and other activities, they currently work with around 3,000 companies. The Engineering and Physical Sciences Research Council, for example, already spend over 40% of their budget in collaboration with business (£340m per annum). Universities work directly with many more firms. BIS is working with Research Councils to drive up the economic impact of their research further, and universities will be further encouraged to work with businesses with the development of the “Research Excellence Framework”, which will assess the quality of research in UK universities.

The Higher Education Innovation Fund (HEIF) is the primary Government incentive to encourage universities to interact with business. It is allocated to English universities to enable them to build capacity and capability to work with business and other external organisations. HEIF funding strengthens technology transfer offices, provides proof of concept funding to help commercialise intellectual property outputs, and supports business development functions. BIS is working with HEFCE to focus HEIF on further increasing university-business interactions.

5. Steps to Encourage Exports and Inward Investment

The Government is clear that exports and investment will be the key drivers of growth in the next few years, providing significant benefits to the UK economy through boosting productivity, innovation, R&D, and generating increased profit, sales and jobs. 5.1 UK Trade & Investment

UK Trade & Investment (UKTI) is the government organisation that helps UK-based companies succeed in the global economy, tailoring its services to the needs of individual businesses to help them maximise their international success. UKTI also helps bring high quality inward investment to the UK’s economy, providing support and advice to investors at all stages of their business decision-making.

Current economic challenges mean that UK businesses must be flexible, innovative and able to seek out opportunities throughout the world. UKTI services help to position UK companies as the global trading partners of choice, promoting and building the UK’s reputation, and working to attract high-value investment to the UK, with support focused on: • strengthening the social networks (contacts, knowledge, advice, etc) that underpin

international trade and investment flows, helping individual businesses to gain access to key contact networks by acting as a trusted intermediary;

• building and strengthening the capability of innovative and high growth businesses to maximise their chances of succeeding in international markets;

• providing access to information and advice the private sector alone would not or could not provide, both to inward investors and to potential UK exporters;

• building UK reputation as a backdrop for potential investors/overseas buyers; and • facilitating co-operation among businesses, enabling them to work together to overcome

barriers and develop international trade and investment opportunities. Trade Services

UKTI trade services help companies from all sectors who can lead sustainable UK growth. Helping these companies to gain access to new business overseas enables them to generate additional revenues and to maximise the returns on their investment in R&D and innovation, thereby increasing resources available for them to invest in growth and innovation. Many customers also improve their products and services by gaining exposure to new contacts and new ideas.

UKTI offers a range of support services to UK companies, providing individually tailored packages of practical assistance to help them develop the capacity needed to trade internationally, including: • Access to a local International Trade Advisor to help develop a plan of action; • Specialist help with tackling cultural and language issues; • Advice on how to go about market research; and • Ongoing support to help businesses continue to develop their export potential and enter

new and more sophisticated markets.

Once the initial research has been done, UKTI can assist new and experienced exporters with information, contacts, practical assistance, advice, mentoring and ongoing help before they go overseas and while they are there, including:

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• Tailored information and advice about the market (normally a chargeable service), which can include identification of relevant business contacts, and facilitation of introductions, for example through arranging meetings or networking opportunities on the client's behalf;

• Alerts to the latest business opportunities through its website. • Support to participate in trade fairs overseas; • Opportunities to participate in sector-based trade missions and seminars; • Access to major buyers, governments and supply chains in overseas markets; • Advice on forming international joint ventures and partnerships; • Exploratory visits to new markets; • Access to marketing toolkits and support on marketing overseas.

Independent evaluations of the effectiveness of trade services carried out for UKTI consistently find strong firm-level impacts and high benefit:cost ratios, demonstrating a very cost effective means of enabling UK exporters to exploit overseas markets and facilitating stronger growth. UKTI helped 23,600 UK businesses in 2009/10, with the latest independent surveys showing that: • British companies attributed an additional £5bn to their bottom line profits as a result of

working with UKTI, up from £3.6bn the previous year, representing £19 benefit for each £1 spent on UKTI trade services, up from £16:£1 the previous year.

• The £5bn additional profit reported by UKTI clients represents over £35bn additional UK exports generated as a direct result of the support UKTI provided.

• 41% of UK companies reported new or safeguarded jobs as a result of using UKTI trade services, with 23% reporting the former.

• 67% of UKTI customers reported significant business benefit from upgrading their approach to overseas markets, gaining access to contacts and information not otherwise accessible, and overcoming legal or regulatory difficulties or cultural differences affecting access to opportunities overseas.

• 39% of UKTI clients expect substantial growth over the next 5 years compared with 23% of other UK exporters. Some 87% of UKTI trade clients expect at least moderate growth, as compared with 78% non-user exporters. UKTI users are also more likely to have grown substantially over the previous 5 years.

• On average, UKTI trade support generates an additional £65k of R&D per trade client. This reflects the important role trade support plays in increasing UK innovation capability and R&D;

• Some 53% of all businesses assisted through UKTI trade services, to the end FY 2009/10, improved their business performance as a direct result of UKTI support.

• UKTI helped 23,600 UK businesses during 2009/10, up from 20,700 the previous year. Combined with the increasing average impact, this reflects a real rise in productivity.

• 60% of UKTI users, and 40% of non-user exporters expect to be selling to a larger number of markets within 3 years. 66% of UKTI trade clients, and only 43% of non-user exporters, expect to increase the export proportion of their turnover over this period.

• Users are much more likely to be in high growth markets (61% vs. 44%), and also to be giving these markets more attention in response to the downturn (33% vs. 23%);

• UKTI users are more likely to plan to increase exports in response to the Sterling depreciation (47% vs. 37%), and more likely to have benefited from the depreciation overall (33% vs. 25%);

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Inward Investment Services

High quality inward investment creates jobs and stimulates productivity growth in other firms, via competition effects and knowledge spillovers. UKTI is the national lead for delivering foreign direct investment, providing a free, bespoke and confidential service to potential inward investors on a range of issues, dependent on the company/project nature and requirements, and the stage of development. UKTI Account management teams are constantly working with some 2000 investment projects that are in the pipeline for the UK at any one time. Investment services include: • Segmentation and bespoke proposition development – to ensure a tight focus on the

needs of high value investors in making global location decisions. • Outstanding access to Government and other networks relevant to the success of

investment projects and ensured by client relationship management of the 200 most strategically important investors led at a senior level in UKTI, BIS or another directly relevant Government Department.

• Targeted marketing to cover subjects such as the UK business environment, sectoral and sub-sectoral information, and bespoke sales information, all the way to key information needed to reach the final decision to invest in the UK.

• A systematic investor development programme to ensure UKTI remains a high value-adding partner for those investors growing their business in and from the UK. Foreign-headquartered companies that have a UK presence can also avail themselves of the full range of UKTI export services.

UKTI’s investment network helps Government to develop a better understanding of investor concerns and ensure that investment drivers are considered in all areas of policy development. UKTI regularly raise with Whitehall Departments issues such as planning, transport infrastructure, migration, and skills availability.

Evidence shows that help from UKTI can have significant influence on investor decisions, resulting in a more than seven fold increase in High Value Foreign Direct Investment (FDI) over the past 4 years, helping to maintain the UK as a top location in Europe for inward investment, and globally second only to the USA. In 2009/10, UKTI played a role in securing 759 investment projects into the UK - almost half the total UK figure of 1,619 and a 26.5% increase on the previous year. These projects have helped create some 47,000 jobs (more than 32,000 new jobs created and some 14,000 jobs safeguarded), a 61% increase on 2008/09.

Over 70% of inward investors report some significant influence from working with UKTI, most often through enabling the inward investor to overcome barriers to accessing information and contacts. Within this, 49% said UKTI had influenced their decision to locate in the UK. Some 57% report significant business benefits as a result of UKTI help enabling them to overcome such barriers. Overseas and UK Networks

UKTI works across both BIS and the FCO, with some 1,300 people delivering services in 162 locations in 96 overseas markets, covering in excess of 98% of global Gross Domestic Product (GDP). This overseas presence is bolstered by the formation of a new UKTI-FCO Commercial Task Force that will drive a central commercial imperative into all aspects of FCO activity to support the whole of government to deliver for UK business.

In the UK, UKTI works with businesses in a variety of ways, including engaging private sector organisations to deploy local networks of specialist trade advisers who are able to offer help to exporters and potential exporters across England. UKTI also has sector-based

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teams working closely with key industry partners nationally to direct the UK's export efforts in a number of important sectors.

UKTI also works closely with external partners, engaging with Chambers of Commerce, Universities, banks and the business representative organisations such as the CBI and IoD. Nationally, UKTI sector teams work closely with a wide variety of trade associations, major UK corporate businesses and key people from the sectors with global business experience. Regional Development Agencies and Devolved Administrations

UKTI's local networks are currently organised regionally along the same geographic lines as the RDAs. While UKTI delivers trade development support as part of a UK strategy, our teams in the English regions have always maintained a close dialogue with RDAs, ensuring trade development work is aligned with the economic development work of the RDAs and giving UKTI visibility of the broader economic strategies being pursued by the RDAs. UKTI expects to maintain these close working relationships locally once the new Local Enterprise Partnerships are created. UKTI is already working with BIS and the RDAs to establish the most effective and efficient way of continuing to provide essential support at a sub-national and local level for foreign direct investors. Detailed structures, functionality and costings of a new delivery model will be developed, with the aim of implementing the new arrangements from 1 April 2011.

At the BIS Select Committee session of 20 July, the point was raised that a disproportionate number of UKTI involved projects went to London and the South East compared with the regions in the North (North West & East and Yorkshire & Humberside). Historically, London has taken around 40% of all involved investment projects. However, many of these would be an initial footprint, creating a small number of jobs; expansion to other regions would often follow.

The Devolved Administrations (DAs) have fully devolved powers for all trade and investment activities. As well as delivering their own suite of services to local businesses, the DAs have access to the majority of UKTI services, including the resources available from the commercial teams in overseas Posts. UKTI maintains good working links with all three DAs and co-ordinates UK wide activities through the International Business Development Forum, on which the DAs play an active role. UKTI Effectiveness and Efficiency

UKTI is assisting more businesses than ever at a diminishing cost to the taxpayer. Over the last three years, UKTI has cut the average cost of assisting business by 25% from around £14k to around £10.5k now. Over this same period, the quality of our work and the satisfaction of our trade customers have remained steady, and the number of businesses who have recorded improved performance as a result of working with UKTI has increased. Taken together this is a strong demonstration that UKTI is becoming more efficient and effective while maintaining the standard of service to our trade customers.

UKTI supports overseas companies looking to invest or expand their operations in the UK, through managing relationships and working closely with key clients. Consequently, efficiency and productivity are not measured in exactly the same way as trade services. We undertake an extensive analysis of the effectiveness of our Inward Investment network, providing a rigorous assessment of performance that allows us to optimise our use of resources. The average cost of UKTI’s support to each inward investment project has greatly reduced over the last three years, dropping by 27% from around £147K to £107K. This is set against a backdrop of continuing delivery of high value inward investment wins, which further demonstrates UKTI's efficiency and effectiveness.

5.2 Export Credits Guarantee Department Introduction

ECGD is the UK export credit agency (ECA). ECGD supports UK exports and investments made overseas by issuing insurance contracts to exporters and investors and guarantees to banks that make loans to overseas borrowers. ECGD does not lend directly.

Most industrialised nations have an ECA that supports exports by providing government-backed guarantees, insurance and sometimes loans. The status of ECAs varies: in some countries private companies write business for the government account (France, Germany), while in others they are public bodies (the Canadian ECA is a Crown corporation). ECGD is, uniquely, a government department.

Regulatory framework

ECGD’s operations are bound by:

(i) statute (the Export and Investment Guarantees Act 1991, as amended by the Industry and Exports (Financial Support) Act 2009) and its standing consent from HM Treasury; (ii) government policy that ECGD should:

a. complement, not compete with, the private market; b. price to risk and to comply with its financial objectives; c. operate at no net cost to the taxpayer; d. seek to achieve a level playing field internationally among government-

backed ECAs; and e. take account of the Government’s wider policies in the exercise of its

primary purpose of supporting UK exports and overseas investments; (iii) international agreements that emanate from the WTO (the Agreement on Subsidies and Countervailing Measures), the OECD (principally the Arrangement on Officially Supported Export Credits), and the EU (the Short Term Communication).

As a public body, ECGD must also comply with the Freedom of Information Act and the Environmental Information Regulations. Exporters, banks, buyers, project sponsors and overseas governments who seek ECGD support must be aware that information provided to ECGD may be disclosable publicly in accordance with the terms of freedom of information legislation, even where that party may consider it to be sensitive or commercially confidential.

Although ECGD enters into private law contracts with exporters and banks, as a public body ECGD’s decision-making must comply with its public law obligations and, accordingly, can be challenged through Judicial Review.

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BUSINESS OPERATIONS

Operating model

Unlike a private sector insurer or bank, ECGD does not seek to create demand but to respond to it (see also customer base and market awareness below). ECGD must be satisfied that the transactions it supports are acceptable in terms of: • Credit risk – transactions are assessed in order that ECGD can be satisfied they meet its

minimum risk standards, which are set with the aim that ECGD will meet its financial objectives. ECGD charges premiums that reflect the risk and to recover its operating costs;

• Environmental and social impacts – transactions must meet international standards as required by the OECD Revised Council Recommendation on Common Approaches on the Environment and Officially Supported Export Credits;

• Bribery and corruption – ECGD takes precautions that no corruption is involved in the transaction as far as ECGD can reasonably ascertain, in compliance with the OECD Council Recommendation on Bribery and Officially Export Credits; and

• Sustainable lending - where the export is to an IDA-only1 country or to a country subject to the non-concessional borrowing policy of the IMF, ECGD must satisfy itself that the provision of export credits reflect sustainable lending practices (that it supports a borrowing country’s economic and social progress without endangering its financial future and long-term development prospects), while at the same time preserving the country’s debt sustainability. This is in accordance with the OECD Principles and Guidelines to Promote Sustainable Lending Practices in the Provision of Official Export Credits to Low-Income Countries.

These requirements may constrain ECGD’s ability to be flexible in the provision of its support for exports.

Business domain

Since 1991, following the privatisation of ECGD’s Insurance Services Group which was responsible for providing trade credit insurance for exports such as raw materials, consumer durables, components or light manufactures, sold on short terms of credit (usually up to 180 days), ECGD’s role has been principally to support exports of capital and semi-capital goods and services, normally, but not exclusively, sold with medium/long-term credit (2-15 years). Such exports include commercial aircraft, construction projects, defence, and hydrocarbon and telecommunications-related equipment and services.

In common with most other ECAs, ECGD is able to support ‘foreign content’ included in an exporter’s contract, usually in situations where certain goods cannot be sourced domestically, the buyer requires certain goods to be sourced from other countries, or UK prices are too expensive. ECGD requires a minimum of 20% UK content.

Volumes of exports supported

Over the past decade there was a gradual decline in the amount of exports supported by ECGD (see Annex A), largely as a result of the changes in the pattern of capital goods manufactured in the UK, and the benign risk conditions that prevailed over most of this period causing support to be provided by private markets and not from ECGD.

1 IDA-only: countries that are only eligible for concessional loans from the IDA, International Development Association of the World Bank group

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The economic downturn in 2008-09, however, led to a material increase in demand for ECGD support, largely due to the scarcity and increased cost of credit internationally and to a deterioration in the global risk environment. As well as receiving more applications for support in emerging markets, ECGD has also been requested to provide support for exports to developed markets which previously had not required such support because insurance and finance could be readily obtained from private markets.

In 2009-10, ECGD supported £2.21 billion of new business (up from £1.46 billion in 2008-09), due primarily to an increase in Airbus transactions. ECGD expects to see a further material increase in the amount of exports it supports by the end of this financial year (March 2011), possibly by over 50% by comparison with the previous financial year. The increase in demand has been across a number of sectors, led principally by civil aerospace and the oil, gas and civil construction sectors.

ECGD’s total exposure to credit risk is just under £16.5 billion (July 2010).

A consequence of the downward trend in business over the last decade was a reduction in ECGD’s premium income, part of which finances the cost of its operations. ECGD accordingly took steps to increase its operational efficiency and effectiveness and to cut its cost base, including reducing staff numbers from an average of 366 in 2003-04 to 207 in 2009-10. Despite the recent increase in demand, ECGD expects, without negatively impacting on its ability to support exporters, to reduce its staff numbers further over the lifetime of this Parliament in compliance with government policy to reduce the costs of the public sector.

Customer base and market awareness

ECGD mainly supports a core of large exporters, particularly Airbus and Rolls-Royce. It does provide support to SMEs under the Sovereign Star Trade Finance facility, which is a financing programme aimed primarily at supporting SME export contracts. The exporters supported since April 2000, including SMEs, are detailed at Annex B. Many hundreds of other companies, however, have benefited from ECGD support indirectly through supply chains. Since the onset of the economic downturn, ECGD has received inquiries and applications for support from a wider range of exporters than in previous years.

Within the resources available to it and consistent with not competing with the private sector, ECGD actively promotes its products to the exporting community, both directly and through trade bodies and banks, with the aim that exporters should be aware of them and, where appropriate, take advantage of them. Over the last two years, ECGD has particularly sought to make contact with UK renewable energy companies so that they are aware of how ECGD may assist them to expand their export efforts. ECGD also promotes its products overseas, particularly to project sponsors engaging in substantial investment programmes with the aim that their procurement decisions should take into account the availability of ECGD-backed finance in order to assist UK exporters pursuing business.

Collaboration with UKTI

Although much of UKTI’s business is not directly related to ECGD, the two organisations collaborate, both domestically and overseas, to exploit opportunities for UK exporters. This has been especially close in the oil and gas sectors.

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OTHER ISSUES

Trade credit and short-term credit insurance

Before ECGD privatised its Insurance Services Group operations, it was effectively a monopoly provider of short-term trade credit insurance. Following the sale of the business to NCM (now Atradius) in 1991, other private credit insurers, including Coface and Euler Hermes, entered the UK credit insurance market. This brought more competition, leading to greater choice, more products and lower premiums for UK exporters than previously available from ECGD.

The economic downturn in 2008 and 2009 saw a global reduction in the availability of private trade credit insurance, principally because of the deterioration in the risk environment that led to a sharp increase in claims and related underwriting losses for insurers. As a result, UK exporters experienced sudden withdrawals and/or reductions of insurance limits on their buyers and an increase in premiums which hampered their ability to fulfil export orders. Moreover, some exporters faced constraints on obtaining finance from banks that had relied on the existence of short-term trade credit insurance as a form of risk mitigation for their lending.

In the face of the problems that existed in the short-term trade credit insurance market, the European Commission issued a temporary waiver of its Short Term Communication in 2009. This Communication bans governments of Member States from providing short-term (below two years credit) support for commercial and political risks involving trade within the European Union and exports to certain ‘rich’ OECD markets (including Australia, Canada, Japan and USA), these being the dominant destinations for UK exports. Of the total £227.5 billion UK exports of goods to all destinations in 20092, around 75% of goods exports went to this group of markets. Total exports of goods to the EU were £124.3 billion (54.7% of the total) and total exports to Australia, Canada, Japan and the USA were £43.8 billion (19.3%). The waiver allowed EU governments to seek approval from the Commission for interventions that addressed this shortfall in short-term credit risk capacity, subject to meeting certain tests that demonstrated market failure. A number of Member States (but not the UK) obtained such approval. The waiver is due to expire at the end of 2010; the Commission is expected to engage with Member States on exit arrangements. The Communication is also due to expire at the end of 2010 and the Commission is considering the basis of its renewal.

More recently, the trade credit insurers have advised the Government that new capacity has been entering the reinsurance market for trade-related risks, so that they have been able to reinstate cover that had been withdrawn or reduced subject, as previously, to the acceptability of risks on individual markets and buyers. Although there are reports that problems still persist for some exporters, there are currently no plans for ECGD to intervene, whether on a direct basis (which would be very difficult as it does not have the staff, products or systems to provide such support without substantial investment) or indirectly through private trade credit insurers by way of reinsurance.

2 Source: ONS Pink Book 2010.

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Letter of Credit Guarantee Scheme

Following a Public Consultation, ECGD launched a Letter of Credit Guarantee Scheme (LCGS) in October 2009. This provides support for exporters who export on short terms of credit to countries not covered by the EU Short Term Communication with the benefit of payment security under letters of credit. Under the scheme ECGD provides partial guarantees to banks against the non-payment of letters of credit opened by foreign banks on behalf of buyers which they confirm, thereby providing a secure means of payment for exporters. This product was designed to provide additional risk capacity to UK banks who confirm letters of credit for UK exporters in response to capacity constraints in the trade finance market.

Six UK-based banks are participating in the scheme, which covers more than 300 overseas banks in more than 30 countries. So far, the LCGS has supported five UK export transactions involving confirmed letters of credit totalling just under £3 million. The scheme is due to close on 31 March 2011.

Possible bond support scheme

ECGD provides insurance for exporters against the unfair calling of performance and related bonds issued on their behalf by UK banks and in favour of overseas buyers. Exporter organisations have pressed ECGD to provide support for the raising of such bonds, where banks are unwilling to do so. There appears to be some evidence that some exporters are facing constraints in obtaining such bonds from banks and that there may be insufficient bank lending capacity to support very large value bonds involving creditworthy mid-sized companies. ECGD is exploring whether and on what terms it might provide assistance. A decision is expected later this year.

Fixed Rate Export Finance

Under its Fixed Rate Export Finance (FREF) scheme, ECGD provides interest make-up support to banks which fund export credit loans to buyers at internationally agreed fixed rates of interest. The future of the FREF scheme is under review, given that it is now little used and there are market alternatives. This review has included a public consultation launched in January 2008 with an interim response from the Government and with successive extensions to the scheme until 31 March 2011 (unless exhaustion of its remaining budget requires earlier closure). A decision is expected later this year.

Public Consultation on Business Principles

In 2000, ECGD adopted certain Business Principles to guide the way in which it conducted its business. Earlier this year, following a public consultation, these principles were substantially revised, largely because the international agreements (see above), which govern the activities of ECAs, had been adopted since 2000. Moreover, the Government decided that ECGD should no longer operate policies which separately and additionally went beyond those international agreements in order that UK exporters should not be put at a competitive disadvantage.

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Sovereign debt and debt forgiveness

Debt is owed to ECGD where it has supported business with overseas governments and subsequently claims have been paid. The UK is committed to providing 100% debt relief to countries qualifying for the World Bank/IMF HIPC3 Initiative. For this group, ECGD has already written off about £1.5 billion of debt. The remaining £750 million owed to ECGD by HIPC-qualifying countries is expected to be written off as countries comply with the terms of the Initiative. In the meantime, these countries are not required to make interest payments on their debts. This means that resources that would otherwise have been spent on debt service to ECGD can be directed at poverty reduction.

New claims

Despite the economic downturn in 2008 and 2009, to date ECGD has continued to face a low level of new authorised claims over the last five years: none in 2005-06 or 2006-07; two new claims totalling £4.6 million in 2007-08; one new claim for £4.1 million in 2008-09; and one new claim for £0.5 million in 2009-10.

Developments over 2008-09

Given the importance to Airbus of export credit support from France, Germany and the UK, ECGD continued to work with its French and German counterparts to align their working practices more closely to improve their service. During 2008-09, ECGD was able to take forward its co-operation arrangements on this business, involving the provision of a form of re-insurance support in most cases. Under these arrangements, one of the three ECAs fronts the transactions with the buyer; the other two provide support to the lead ECA. Airbus has welcomed the efficiency benefits from these measures.

In the economic downturn of 2008 and 2009, there were concerns about the availability of sufficient funding from bank markets for guaranteed export credits. In the event no ECGD-supported export failed to be put in place due to insufficiency of bank funding. ECGD has further agreed to support for funding from capital markets to supplement finance available to exporters; the first such issue took place in June 2010.

As a result of the economic downturn and an increase in enquiries from exporters, ECGD adopted in November 2009 a more open policy towards medium-term business in rich markets4, which it had hitherto left to the private sector.

CONCLUSION

ECGD support for industry is concentrated on those companies that export, and particularly those which export capital goods and services. Despite its very low proportion of total UK exports, ECGD support is of key importance to several leading sectors. ECGD is responding to higher levels of new business in response to the needs of exporters where the risks to the taxpayer are acceptable.

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3 Heavily Indebted Poor Country 4 A “rich market”, also known as a “category zero” market, is a high income OECD or non-OECD country as defined by the World Bank for the purposes of the OECD Arrangement.

ANNEX A ECGD BUSINESS: FY 2000 – 2010 Financial Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Projected Value of business supported

£5,662m £3,298m £3,532m £2,991m £1,995m £2,230m £1,798m £1,830m £1,460m £2,206m £3,283m

Value of business supported by Sector:

Aerospace 22% 22% 15% 23% 32% 47% 29% 30% 73% 90% 55% Civil 30% 47% 35% 38% 30% 30% 29% 13% 26% 9% 42% Defence 48% 31% 50% 39% 38% 23% 42% 57% 1% 1% 3% Number of Guarantees/Policies issued in FY

250 190 150 155 113 151 91 96 136 198 163

of which were issued to SMEs:

3 2 7 3 2 4 0 2 3 1 2

Notes: • A small number of insurance policies/guarantees issued have not been disclosed for reasons of commercial confidentiality. • SMEs refers to enterprises with fewer than 250 staff and turnover of less than €50 million and which do not have a parent that falls outside of this

criteria. SME at time of underwriting may have been taken over later by a larger company.

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ANNEX B EXPORTERS WHO HAVE BENEFITED FROM ECGD SUPPORT: FY 2000-10 Exporter Sector Aedas Architects Ltd Architectural services Aeromatic-Fielder Ltd Manufacturer of pharmaceutical processing equipment Airbus S.A.S Aircraft manufacturer Air Products plc Manufacturer of industrial gases and speciality chemicals Alderley Systems Ltd Manufacturer of metering systems and processing equipment

to oil and gas industry Alstom Power UK Ltd Supplier of power generation equipment and technology Alvis plc Manufacturer of armoured vehicles Angloco Ltd * Manufacturer of fire fighting and rescue vehicles and

equipment BAE Systems Defence contractor Balcke Marley UK Ltd Manufacturer of cooling towers Balfour Beatty Rail Projects Ltd Rail engineering, equipment and supplier of rail infrastructure

services Battenfield Gloucester Europe Ltd Manufacturer of plastic products Bombardier Incorporated Aircraft manufacturer BP Exploration (Caspian Sea) Limited Oil and gas contractor Brackett Green Ltd Manufacturer of water filtration, treatment and desalination

equipment Capital Valves Ltd * Supplier of valves to the oil, gas, petrochemical, power and

industrial gases industries Carillion Construction (West Indies) Ltd Construction services Caterpillar (UK) Ltd Manufacturer of construction and mining equipment CB&I John Brown Limited Oil and gas contractor Cementation Skanska Building, civil engineering and infrastructure services Chinook Sciences Ltd Provider of technology and equipment to the metal, industrial

gases and environmental industries Cleveland Potash Ltd Producer and supplier of potash fertilizers for agriculture and

industry uses Corus UK Ltd Manufacturer of steel products and services CRI Catalyst Company UK Ltd Provider of catalyst technology to the refining and

petrochemical industry Crown Agents Services Ltd International development consultancy services Demag Delaval Industrial Turbomachinery Ltd Manufacturer of gas turbine engines Dennis Specialist Vehicles Ltd Vehicle manufacturer Diamond Offshore Drilling (UK) Ltd Drilling services contractor Doncasters Middle East Ltd Manufacturer of turbines and turbine generator sets Dunlop Oil & Marine Limited Manufacturer and supplier of hoses for the oil, gas,

petrochemical and dredging industries Europa Crown Ltd * Supplier of processing and edible oil refining equipment European Marine Contractors Ltd Pipeline and piping installation contractor Fairbank Brearley Ltd Manufacturer of spring making machinery and rapid heat gas

furnaces Faun Municipal Vehicles Ltd * Vehicle manufacturer Fernau Avionics Ltd * Supplier of ground based navigation aids for military, naval

and civil aviation needs Findel Education Ltd Supplier of educational products to schools, nurseries and

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learning environments Fira International Ltd * Consultancy service and testing of the furniture supply chain Fitzpatrick Contractors Ltd Civil engineering, building and property development

Flakt Woods Ltd Supplier of energy-efficient air solutions Fluor Limited Engineering, procurement construction, maintenance and

project management services The Football Association Premier League Ltd Football broadcaster Foster Wheeler (GB) Ltd Engineering and construction contractor and power

equipment supplier Gall Thomson Environmental plc * Supplier of marine breakaway couplings to oil and gas

industries Gateway (Textiles) Ltd Manufacturer of machinery for the bedding trade GEA Process Engineering Ltd Supplier of engineering services and complete process plants

and equipment within the pharmaceutical and chemical industries

Gentec Energy Plc * Engineering, procurement and construction contractor in the gas and diesel power generation industry

Greys Exports Ltd * Supplier of explosive ordnance disposal equipment Guralp Systems Ltd * Manufacturer of seismic instrumentation systems Hawker Beechcraft Inc Aircraft manufacturer Howden Power Ltd Manufacturer of regenerative air heaters and associated

equipment Hydroflow Europe Ltd * Manufacturer of industrial filtration equipment and supplier of

services Invsat Ltd * Supplier of integrated telecommunication services to the oil

and gas industry John Gordon Ltd * Manufacturer of coffee plantation machinery Johnson Matthey Plc Manufacturer of chemical products and precious metals and

supplier of catalysts and related technologies Lagan International Ltd Civil engineering and construction contractor Leafield Logistics & Technical Services Ltd * Supplier of equipment and logistics services to defence and

commercial organisations Kellogg Brown & Root Ltd Engineering and construction services Kelton Engineering Ltd * Engineering consultancy on oil and gas flow measurement

and specialist software Kier International Ltd Building and civil engineering services Koch Chemical Technology Group Ltd Manufacturer of process and pollution-control equipment and

provider of other process technologies and related specialty services to refinery and chemical plants

Mabey & Johnson Ltd Manufacturer of bridges MAN B&W Diesel Limited Manufacturer of diesel engines MAN Ltd Supplier of mechanical, piping and electrical engineering

equipment Marlborough Communications Ltd * Producer and supplier of radio and telecommunications

systems Martin-Baker Aircraft Company Ltd Manufacturer of ejection seats and related survival equipmentMBDA UK Ltd Defence contractor Motherwell Bridge Engineering Ltd Engineering services Motorola Ltd Telecommunications manufacturer

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MRB Schumag Ltd Designer and supplier of equipment to the copper tube industry

M W Kellogg Ltd Engineering, procurement and construction services within the process plant industries

Northey Technologies Ltd * Manufacturer of rotary compression and vacuum pumps NSG Exports Ltd * Purchaser and supplier of equipment and services Odebrecht Oil and Gas Services Limited Oil and gas exploration and production contractor Pipeline Tube and Casing Ltd * Supplier of tubular products and accessories P W Ltd Civil engineering and mining contractor Reviss Services (UK) Ltd * Manufacturer and supplier of sealed radiation sources,

radioisotope technologies and services Rolls-Royce Plc Manufacturer of aero-engines and power generation systems Rolls Wood Group (Repair and Overhaul) Ltd Gas turbine repair and overhaul specialist Saipem UK Limited Engineering and operational services for offshore oilfield

design and installation Salzgitter Mannesmann (UK) Ltd Supplier of steel-related products Saywell International Ltd * Supplier of aircraft spares and components Sedgewall Communications Group Ltd * Manufacturer of communications equipment Sembcorp Simon-Carves Ltd Engineering services Shell Research Limited Oil research and development Siemens VAI Metals Technologies Ltd Engineering and construction of ironmaking and steelmaking

plants Sir William Halcrow & Partners Ltd Engineering consultancy SLP Engineering Limited Engineering services SMS Mevac UK Ltd Supplier of vacuum degassing and secondary steel making

plant and equipment Snamprogetti Ltd Engineering design and consultancy services Surrey Satellite Technology Ltd Manufacturer and supplier of small satellites and related

services Telspec Europe Limited Manufacturer of telecommunications equipment Thales ATM Ltd Manufacturer of navigation and aeronautical equipment Traffic Safety Systems Ltd Manufacturer of traffic safety systems VAI Industries (UK) Ltd Manufacturer of steelworks plant and equipment Vikoma International Ltd * Manufacturer of oil spill containment and recovery equipment Voith Paper Ltd Paper manufacturer Volvo Bus Exports (UK) Ltd Vehicle manufacturer VT Shipbuilding International Ltd Defence contractor VWS Westgarth Ltd Designer and constructor of water treatment and desalination

plants and supplier/operator of sulphate reduction membrane systems

Wellstream Ltd Manufacturer and supplier of flexible pipe systems and solutions to the offshore oil and gas industry

York International Ltd Manufacturer of air conditioning, refrigeration and heating equipment

* SME

GAI 2

Memorandum submitted by Unite the union

This evidence is submitted by Unite the union. Unite is the UK’s largest trade union with over 1.5 million members across the private and public sectors. The union’s members work in a range of industries including manufacturing, financial services, print, media, construction, transport, local government, education, health and not for profit sectors. Executive Summary

a) Government must recognise and reflect the need for a balanced economy where industry is a major contributor to the wealth of the country

b) Government has a clear responsibility to create a climate which encourages investment and risk taking across industry including research and development and innovation

c) Unite welcomes the steps taken in the last few years by DBIS to provide more direct support to industry (Section 2)

d) Unite believes that the delivery of such assistance should be supported by the banking sector and where this is not happening government should intervene (section 3)

e) As part of any government industrial policy, a national strategic investment bank should be established to ensure those industries of strategic importance to the economy are adequately supported (Section 4)

f) Unite welcomes the government’s proposal to create a Green Investment Bank as a part of its assistance to industry (Paras 4.3 – 4.5)

g) Unite is calling for streamlining of processes for accessing government assistance but is not convinced that the breaking up of regional development agencies will deliver more effective or efficient systems of assistance (Paras 7.1 – 7.3)

h) Unite recognises that recent improvements to the Export Credit Guarantee Department support but believes that more could be done to promote and support exports from UK based manufacturers (Paras 6.3 – 6.8)

i) Whilst the work of the UKTI contributes to UK business abroad, the evidence suggests that this work needs to be more focussed and inclusive of the business community (Paras 6.1 – 6.2)

j) The current R&D Tax credit system should be improved and made more flexible (Section 5)

k) The role of the Department of Business innovation and skills should embrace all stakeholders. Whilst there is room for sectoral work across industry Unite argues that the absence of a tripartite forum to address the medium to long term strategic industrial policy weakens the knowledge available to the Department and the government. (Para 7.7)

1. Introduction

1.1. Unite has made a number of submissions to this committee and others on the subject of government support for industry. Our views are predicated on the belief that part of government’s role is to provide and support the economic climate necessary for industry to prosper. Economic history both

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in the past and more recently has clearly demonstrated that national economies cannot survive on services alone and that economic growth and wealth requires the production of goods as well as services.

1.2. It is essential therefore that governments and their departments play a role in

developing economic and fiscal policies which encourage investment and risk taking in the business community. This enquiry is clearly looking at the other side of the coin, that of direct intervention in delivering appropriate assistance to companies to enable them to take advantage of a positive economic climate or sustain viable industries through periods of economic downturn.

1.3. Unite does not argue for propping up lame duck companies. But Unite does

believe that in the current global climate where companies are struggling to survive due to economic conditions not of their making, government assistance can and should provide the impetus to enhance their sustainability as part of a strategic industrial policy.

1.4. Our comments below point to how this has been done well in the past and

also looks to the future to consider the shape of future assistance learning from the mistakes of the past.

2. Recent government financial support programmes

2.1. Probably one of the most successful and innovative support programmes in the last 2 years was the car scrappage scheme. Unite was one of the bodies who called for this as the UK and European motor industry slumped as a result of the global recession and was delighted that government agreed to its introduction in May 2008 and an extension in September 2009. The success of this scheme, which included a shared responsibility from manufacturers and government, delivered increased sales of domestic vehicles and small vans through to May of 2010. As well as benefitting consumers it provided an environmental boost by reducing the average carbon emissions from vehicles and, of course, enabled the workforces of those companies affected to return to full time working following periods of shut down and short time working.

2.2. The automotive assistance programme did provide guarantees for major

companies within the automotive sector. It appeared to be a mechanism which was slow to respond and equally slow to deliver but no doubt the employers will be in a better position to comment upon that. It was designed correctly to provide support to an important manufacturing industry in the UK to address the investment needs of the industry at a time when innovation and environmental considerations are essential to its long term sustainability. But it has done little to support directly the SMEs which support the main automotive manufacturers.

2.3. The signals from Government give serious cause for concern as the

Secretary of State rules out further financial aid and effectively leaves the Automotive and other strategic industries to fend for themselves when it comes to investment. The collapse of car sales in June following the demise of the scrappage scheme and the suggestion that promised subsidies for new electric cars may be cut, will not be replaced quick enough by a government “creating” the right economic environment for business.

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'We've moved on from the era of subsidies. We just have to be realistic about what's affordable.'1

2.4. Dr Vince Cable also said that the UK manufacturing base was no longer in

an emergency and therefore direct Government support would be withdrawn. Unite would argue that manufacturing output figures from June2 indicated only a small increase and presented at best a fragile recovery in the context of global problems which industry is currently facing particularly in the Euro Zone. Continuing support at this time is essential.

2.5. On the wider front of the Strategic Investment Fund introduced by the last

government, provided a vehicle where potentially sustainable projects were likely to fail due to the unwillingness of the market to invest. The investments made from the fund were allocated through the Technology Strategy Board, the Regional Development Agencies and Scotland, Wales and Northern Ireland in order to identify suitable investments. Projects included advanced technologies and innovative facilities addressing low carbon and export potential. Unite believes such a fund is an essential element of a government’s strategic approach to industry. This view is shared by Sir John Rose, CEO Rolls Royce, who has called for3 an industrial strategy that involves government support for technology-based enterprises

2.6. The Working Capital Guarantee Scheme and other similar schemes were

aimed specifically at small and medium sized enterprises. The intention was to provide guarantees to enable banks which at the time were reluctant to lend following the crisis of 2008. Recent figures announced at the beginning of August would appear to illustrate that major banks were returning to profit and that such guarantees may no longer be necessary. However the evidence of the guarantees themselves was that this did not pump prime bank lending as intended and that stronger intervention in the banking industry is necessary to ensure that the industry fulfils its obligations to the economy at large and not simply its own shareholders.

3. Government and industry relationship with the banks

3.1. Unite takes the view shared by many economists that the global financial crisis was brought about by the irresponsible actions of investment banks across the globe. The consequences of those actions have been most severely felt by the populations of different countries across the globe and the current remedies being instigated by the UK and other governments are, in our view, likely to hit hardest at those least able to afford it.

3.2. One of the opportunities that the crises of the last 2-3 years has produced in

the UK is the part nationalisation of two of the countries largest financial institutions. The government share in the Lloyds Banking Group and RBS provides a different relationship to that prior to the financial collapse in 2008. Unite does not believe that the government has taken sufficient advantage of its potential influence in the strategy of these banks regarding business lending.

1 Vince Cable SoS for Business 30th June 2010 International Automotive Summit 2 ONS Production index for June 2010 3 Financial Times 1st August 2010

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3.3. The failure of the banks to provide access to businesses to loans and investment funding has slowed down the recovery and risks thousands of jobs being caught in a double dip recession through the impact of public spending cuts and a fiscal policy aimed at the most vulnerable in society.

3.4. Unite has called for the banks to be persuaded, by whatever means are at

the disposal of the government, to improve the accessibility of investment funds. The government in the Treasury paper, “Financing a private sector recovery”, acknowledges that access to appropriate finance will be key to ensuring that businesses are able to survive and expand. This is not only about new finance but also re-financing existing loans and whilst major corporate entities may have access to alternative finance, small and medium sized enterprises are far more vulnerable. It is inconceivable that a government which is reliant upon the private sector to secure an economic recovery fails to maximise the opportunities to businesses to access funds needed. SMEs make up 99% of all UK manufacturing businesses4 and account for over 50% of the manufacturing population.

3.5. Recent profit figures from the major banks suggest that in part the growth in

profit is due to the increasing differential between the cost of bank borrowing and the level of interest charged to borrowers. This higher cost of borrowing for business has meant that SMEs in particular have found it increasingly difficult to obtain finance at a viable level. An independent survey conducted on behalf of the Institute of Chartered Accountants by Ipsos MORI in 20095 found that SME businesses are finding it harder to access capital, but opinions vary as to the severity – from ‘fairly difficult’ all the way through to bank lending having ‘come to a standstill’. The report found that relationships had deteriorated between businesses and banks. This was largely believed to be the fault of the banks being less supportive and existing direct relationships weakening, for example as branch managers’ decisions on funding are countermanded by head office. Banks are now treating new clients cautiously, and are becoming more stringent with existing clients.

3.6. Research6 has confirmed that complaints to the Financial Ombudsman about

the lack of availability of bank loans to small businesses have risen by nearly 120% over the past year. At the same time UK banks are reporting bumper increases in the first half year‘s profits for 2010.

3.7. Unite believes that responsibility lies in part with government to repair the

damage done and improve these relationships. The direct influence that government currently has in two of the largest UK banks provides a direct opportunity which, to date, government has declined to exercise.

4. A national strategic investment bank

4.1. Neither the previous government nor the present Coalition has so far been prepared to commit the funds necessary to provide a source of funding which

4http://www.statistics.gov.uk/downloads/theme_commerce/PA1003_2009/UK_Business_2009.pdf September 2009 5 SME ACCESS TO FINANCE RESEARCH REPORT July 2009 Research conducted by: Ipsos MORI 6 Financial Times 8th August 2010

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would guarantee that viable businesses could access investment funds crucial to the strategic economic needs of the country.

4.2. Unite has consistently called for National Investment Bank funded to a level

of £13 billion which would enable the government to pump prime strategic manufacturing industries which meeting the demands of government. The case of Sheffield Forgemasters was a clear example of how government funds should have been used. The circumstances of this case have been well documented and Unite regrets that the current government were not prepared to honour the commitments made by the last government prior to the election. However the case serves to make the point that government, through selective intervention, can play a major part in assisting sustainable companies to expand and develop centres of UK excellence in a global market.

4.3. Unite supported the TUC proposal in its submission to the March 2010

budget which argued for a green investment bank. The TUC called for a new strategic investment fund, borrowing from the French model where an independent public sector body takes long-term minority stakes in strategic companies, with a view to supporting their development into world class players, building the British economy, reducing our balance of payments deficit and providing high skill, high value jobs.

4.4. Some companies need to make investments that a risk-averse banking

sector will not support. If those investments are in sectors such as green technology, where the outcomes are not proven, it may be understandable that regular banks will not take such a risk. In such obvious cases of market failure, rival economies have industrial investment structures supported by government. This means that entrepreneurs with good ideas in strategic sectors with high start up costs take those ideas abroad – and other governments reap the economic benefits. The TUC demand for a Green Investment Bank to support the growth of a world class green sector would support the UK manufacturing base and help to protect our environment, both at the same time. The previous government responded positively to this proposal in the March 2010 budget and announced the intention to establish a Green Investment Bank operating on a commercial basis and involving both public and private sector capital. The Government undertook to invest up to £1 billion from the sale of mature government-owned infrastructure-related assets and would seek to match this with at least £1 billion of private sector investment

4.5. The proposal from the Coalition government in its emergency budget in June

2010 was to put forward detailed proposals on the creation of a Green Investment Bank to help the UK meet the low-carbon investment challenge but not until after the comprehensive spending review in October. Whilst such a proposal is welcome, the delay in detailed consideration leaves Unite with fears that this will amount to too little too late.

4.6. Having studied the government‘s more recent publications, “A strategy for

sustainable growth” (DBIS July 2010) and the consultation on “Financing a private sector recovery”, Unite is not convinced that the necessary government support for manufacturing will be forthcoming and that the UK will return to the wholesale reliance on the private sector and market to deliver the support for economic growth needed by manufacturing now.

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5. R&D tax credits

5.1. The R&D tax credit was a key part of the last government’s strategy to boost business R&D. Following extensive consultation with business, it was introduced in 2000 for SMEs and extended to large companies in 2002. The tax credits are designed to reduce the real cost of companies’ investment in R&D and raise the firm’s private return towards the higher rate of return to the economy as a whole.

5.2. The UK’s investment in R&D has, since the late 1980s, been low compared

with other major developed countries. The last government set a goal to raise overall levels of R&D in the economy from the current level of 1.9 per cent to 2.5 per cent of Gross Domestic Product (GDP), by 2014. Raising UK business R&D should be a government priority; the target will only be met if private sector investment in R&D matches growth in Government investment.

5.3. The business community has overall been very supportive of the R&D Tax

Credit facility with a CBI survey in 2008 reporting that 60% of companies surveyed said that their UK research and development activities would have been adversely affected if the tax credit had not been available. However Unite’s own experience has been less positive due to the uncompetitive nature of the UK scheme. As an example when Ericsson decided to close its site at Ansty in Coventry last year part of the decision was affected by the alternative tax credit system offered by the Canadian government which had the effect of reducing the notional hourly costs at the firm’s Montreal site.

5.4. Unite believes that the UK system could be improved not only in quantity but

also qualitatively by the scheme being applied in a more flexible manner. 6. UKTI and the Export Credit Guarantee Department (ECGD)

6.1. To limit wasteful duplication and achieve national coordination, there should be a dedicated office at UK Trade and Investment (UKTI) to work with LEPs and devolved administrations to lead and coordinate efforts to attract foreign investment. UKTI should work with LEPs to map out all UK activity designed to attract foreign investment and should take an active role for all major inward FDI opportunities to prevent ‘bidding wars’ between them.

6.2. The UKTI must convert its knowledge of different markets and its wide-

ranging influence into concrete export opportunities for business.

6.3. The ECGD only provides a small but significant level of support to UK exports, principally by way of guarantees and insurance. By sector over 72% of support goes to Airbus, 26% to civil air transport (Rolls Royce etc), and the remainder to other aerospace and defence. Not only is the ECGD in competition with the private sector but with other Export Credit Agencies (ECAs) which are often more generously supported by their governments.

6.4. The ECGD's annual report is laid before Parliament and it attracts

considerable interest from MPs, Select Committees, and NGOs, because as an agency of government involved in assessing credit risk management, it is also responsible to Ministers for implementing government policy in a number of areas such as business principles, sustainable development, anti-bribery and corruption, supply chain standards, environmental audits and reporting, sustainable development in government, freedom of information. In

6

an OECD report a few years back ECGD scored well amongst international comparators in terms of its operation and commitments to social and environmental issues. By comparison the same report identified that where export credit assistance was provided by the private sector the same considerations often did not apply. This distinguishes the ECGD from alternative private sector sources of credit insurance.

6.5. The ECGD has benefited to some degree from the effects of the financial

crisis through the erosion of private sector finance. At the same time the risk of defaults has grown. The ECGD remains over dependent on civil aerospace despite various attempts that have and continue to be made to attract business from SMEs. Despite this the ECGD interventions continue to grow both in the current year and 2009/10.

6.6. Given the current economic situation and with debt finance thin on the

ground, it falls upon the ECGD to provide a significant role in the market.

6.7. Evidence that Unite has obtained also suggests that the ECGD would benefit from a more flexible approach to requests. In 2009 a company in the North East Cleveland Potash found itself with surplus stocks of potash due to the recession and were contemplating redundancies. Fortunately the company identified a market opportunity in Brazil with companies known to them and with whom business had previously been done and whose credit ratings were good. Due to the banking crisis insurance for the cargo in transit was difficult to obtain and the assistance of the ECGD was sought. This was rejected because it was not a capital project and therefore outwith their rules. It was only after much lobbying by the company and Unite that the Secretary of State intervened and ordered the department to re-examine the case concerned and check their credit ratings. This resulted ultimately in the insurance being provided and clearly provided security for a significant number of the 1,000 workers employed by the company in the North East.

6.8. Other EU Governments have already boosted state-backed credit

guarantees to industry and Unite recommends that the ECGD be enabled to provide direct funding and bond support, and argues for the reactivation of the ECGD’s dormant reinsurance facility.

7. Conclusions

7.1. Future proposals and impact on effective government assistance In the Emergency Budget of June 2010, the Coalition government set out a clear ambition to radically overhaul the nature of business support in England. The reforms included the abolition of the Regional Development Agencies (RDA) structure with a view to improving the accountability and effectiveness of business support. However, Unite believes it will be a huge challenge to carry out such wide-ranging, root-and-branch reform in a way that provides both value for taxpayers’ money and meaningful support for business. Unite acknowledges that the performance of RDAs has not always been consistent but believes that the wholesale restructuring of the support structure for manufacturing in the regions is ill timed and unlikely to provide the solutions to the perceived problems.

7.2. However, given the government’s apparent determination to proceed with this programme the transition from RDAs to Local Enterprise Partnerships must be well-planned, and follow in phase with fiscal consolidation and

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7.3. The budget for the RDAs this year was £1.5billion. Any reduction in this

budget and the abolition of a number of the national bodies set up to support manufacturing businesses will undermine the government’s overall economic approach of creating a strategy for sustainable growth.

7.4. The comparison of interventionist support from the UK government with

support from a number of immediate EU competitors remains unfavourable despite the initiatives taken by the last government during the last 3 years. In the announcements made to date, Unite does not see those comparisons improving. Unite does not believe in government being responsible for supporting what has colloquially been referred to as ‘lame ducks’ of industry, however where the market fails to provide adequate support, the economic responsibility to ensure that sustainable manufacturing industry survives rests with the government. This, Unite believes, would best be achieved by a single industrial investment bank funded, in part by the taxpayer and part through private funds, if necessary drawn from the banks which the government has a major share in.

7.5. Whilst manufacturing has seen a small increase in performance over the first

half of 2010, there remain serious reservations about the immediate future. It would, in the view of Unite, be a serious miscalculation on the part of government to start removing the support mechanisms introduced over the last 2/3 years under the auspices of the Department of Business Innovation and Skills. Whilst more could be done and improvements to access to the various funds being examined by the Business Select Committee in this enquiry introduced, the existing funds should be seen as the start not the end of a structured programme of government assistance to manufacturing.

7.6. It is clear that economic growth on a European and global basis is likely to be

slower than first forecast at the end of last year and UK manufacturing growth is crucial to the overall recovery of the UK economy. The DBIS has already accepted this in its Strategy for Sustainable Growth7 published in July this year. However, over reliance on the markets and private finance in the initial stages is likely to restrain growth and Unite believes that direct government assistance, both financial and fiscal, is essential to meet the business needs of the sector. This view, unsurprisingly, is not supported by the Treasury, which in its publication in the same month, argues for a preferred option of a market-led solution. This conflict within government requires to be resolved if UK manufacturing is to benefit from government led strategies to restore manufacturing as the growth engine of the economy.

7.7. Unite would further propose that a tripartite body of government, employers

and trade unions be established through the DBIS to monitor and review both the efficiency and effectiveness of government funding schemes on an

7 Department for Business Innovation & Skills – A strategy for Sustainable Growth –July 2010

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ongoing basis. Such a body should continue to provide expert advice to the government on strategic industrial policy for the future.

2 September 2010

GAI 3 Memoranda submitted by the Royal Aeronautical Society

Executive Summary

Aerospace remains one of the few world class, export orientated manufacturing sectors left in the UK. There is considerable and growing competition from overseas aerospace industries, usually well supported by their national governments. There is a long and successful legacy of UK government-industry partnership in supporting most aspects of the industry either through funding for technology acquisition and product development as well as backing for exports. These mechanisms are all under pressure from the prospect of reduced public expenditure. Fortunately, barriers to entry in aerospace are high, which provides British companies some respite. But given the level of government support elsewhere, this will not last, and capability lost to the UK will not easily be recovered, if it at all.

Introduction

1. The Royal Aeronautical Society (RAeS) is the world’s only professional body dedicated to the entire aerospace community. Established in 1866, the Society has 17,000 members in over 100 countries (including 3,500 classified as young members), and is a leader and provider of foresight within the aerospace community. The work of the Society is supported by a number of specialist groups.

 

Government support for the UK aerospace industry

2. The present technological and commercial standing of the UK aerospace industry has been built on a wide and deep relationship between industry and government. This has many dimensions both direct and indirect, nationally and regionally:

3. Through the Ministry of Defence, the government is a major customer for UK industry, which has helped to sustain demand and consequently capacity throughout the industrial supply chain and across most sectors, including space. The MoD is also an important source of technology acquisition through project-related R&D as well as its dedicated programme of fundamental research and technology demonstration. An important current example of the latter is the MoD-industry work on unmanned aerospace systems.

4. Government investment in civil aerospace through the Repayable Launch Investment (RPLI) scheme, where public money is advanced to cover a proportion of launch costs usually to be repaid from a levy on sales and subsequent royalties throughout the life of the aircraft or engine. RPLI dates from 1960 and in its present format since 1973. RPLI has helped to maintain a world class capability in large aircraft wing design and manufacturing and large commercial aero-engines. Investment in Airbus and Rolls-Royce projects has indirectly afforded support for the wider UK-based supply chain. 5. Support for technology acquisition, largely for civil aerospace, but often with applications for defence purposes. Most of the current investment is channelled through the Technology Strategy Board and has had a considerable impact on several key aspects of aerospace development, notably in supporting research into composite materials. The UK space sector receives support through funding from the British National Space Agency (formerly the British National Space Centre), largely in the form of subscriptions to the European Space Agency. Following the report

  1

of the Space Innovation and Growth Team, additional funding has been provided for national space research. 6. The UK aerospace industry has benefited from government programmes designed to improve manufacturing processes and supply chain relationships. Aerospace also depends heavily on public investment in Higher Education, academic research and the promotion of STEM subjects throughout the British educational system. 7. The aerospace industry has received support, primarily for infrastructure development and some research activity through the Regional Development Agencies and their equivalents in the Devolved governments. This has been especially useful in seeding new activities such as the Unmanned Aerial Systems facilities at Aberporth in Wales, as well as helping smaller aerospace companies. Significantly, infrastructure improvements in relation to the Airbus A380 have not contravened the WTO subsidy code. 8. Government support for UK aerospace exports has been facilitated by the Defence Export Sales Organisation (now subsumed into BIS) and the ECGD. The former has had a direct impact on both the UK’s ability to sell defence equipment abroad and to maximise the value of offsets on imports to UK industry. The latter has helped to sustain a range of UK civil aerospace products, and has played an especially important role during the recent down turn in civil aviation in financing export sales. 9. The cumulative effect of this support has helped to sustain a globally competitive aerospace sector with an enviable breadth and depth. In particular, the UK has benefitted considerably from the positive environment created by the totality of government support which has encouraged inward investment in the UK from European and US defence and aerospace companies, as well as ensuring continued investment in the UK by UK-owned aerospace transnational enterprises.

Key issues for the future

10. Reduced expenditure on defence procurement will necessarily have an impact on demand for UK aerospace products. In the light of current economic circumstances, if regrettable, cuts in production are understandable. However, the government should be aware of the potential damage this will do to a wide range of companies throughout the UK supply chain. More damaging for long term sustainability would be any additional cut in resources devoted to technology acquisition. The level of MoD spending in this field has been falling in real and in absolute terms for many years. The temptation would be to cut this aspect of defence spending to save reductions in operational areas and to protect current equipment programmes. This would be short sighted and risk loss of bedrock technological capability, and the source of future support for UK operational sovereignty as well as future wealth creation. A similar concern applies to the future level of support afforded to technology acquisition through the TSB. 11. The Defence Industrial Strategy (DIS) was also particularly important to the aerospace industry. It provided a guide to industrial investment and was an explicit recognition of the importance of maintaining an on shore industrial capability in support of UK armed forces. The DIS recognised the need to maintain on shore capabilities in high technology areas. Many of these have important civilian applications, as well as underpinning future developments in vital areas such as unmanned vehicles and complex weapons. These include the UK’s world-class rotary wing capability, communication satellites and other space based equipment, propulsion systems and a wide range of high technology equipment and other imbedded technology. 12. The DIS also recognised that as the number of new military projects and equipment procurements decreases, industry needed to maintain its financial base. This has been achieved by industry changing from equipment suppliers to service providers and taking more risk for support of existing platforms. This matches the MoD's desire to reduce the number of personnel involved

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in non-front line activities and stop 'man-marking' industry equivalents. 13. Although the WTO ruling did not explicitly declare RPLI illegal under its subsidy code, and the WTO ruling is subject to appeal, the long term future of RPLI is uncertain. Technically, the ruling does not apply to RPLI granted to aero-engines, or other aircraft projects such as the C-Series of Bombardier airliners. However, there may therefore be a need to consider adjustments to the scheme or to seek alternatives to the current procedure. To date, the UK government has received a substantial return on its investment in civil aerospace, as well as ensuring the continuation of a very-high value industry in the UK, the like of which several other countries are seeking to emulate. The French government is already exploring alternatives to its form of RPLI, which was already open to a wider range of aerospace companies than the more stringent British mechanism. Without continuing support from the UK government, much of the next generation of Airbus and Rolls-Royce development and manufacturing could move offshore, and foreign companies will have less incentive to invest in the UK.

Lack of Level Playing Field for Space Exports

14. Britain is an important supplier of space systems to the world market. The size of the UK space sector is about £6 billion per annum and it is heavily export-oriented and growing at about 10% per annum. France and Germany, among others, compete with the UK for this market and have arrangements with many countries to which they export space systems for the exports to be VAT exempt, typically on a reciprocal basis. The UK is slower to set these arrangements in place, and UK industry loses out on export opportunities as a result. Some of our space agreements with other countries, such as the Memorandum of Understanding (MoU) signed with Russia in July, lack any reference to tax. Such MoUs are a useful first step, but need to be replaced as soon as possible with more substantive agreements.

15. Recently, a number of major commercial contracts have been secured by foreign companies in high-value export markets thanks to the availability of overseas government-backed finance. France and the USA have been particularly active and their companies have won major contracts as a consequence. The UK lags in this area, and this has become more of an issue now that there is a significant difference between central bank rates and commercial rates following the recent financial crisis.

Final Words

16. Aerospace remains one of the few world class, export orientated manufacturing sectors left in this country. Given the known returns both directly and indirectly to the UK economy, this is not support for an ailing industry. Fortunately, barriers to entry are high, which provides British companies some respite. But given the level of government support elsewhere, this will not last, and capability lost to the UK will not easily be recovered, it at all.   

 

7 September 2010 

GAI 4

Memorandum submitted by Britchem Products UK Ltd 1. Background

BritChem Products UK Ltd is a chemical blending and packaging business located in Oldbury West Midlands UK. The company was established in 2005 and began trading in 2006. In the year ending 31st March 2010 the company reported sale of £1.7 million and an operating profit of £107k. Some of the key aspects of the company are summarised below:-

• The company EXPORTS 100% of the products that it produces.  

• The company exports to the West African market where it has 95 customers (distributors/wholesalers).  

• In 2007 the company won the Black Country ACBF awards for best Business Start up and International trade.  

•  The business is owned 50/50 by Mr Paul Udenze and Mr Charles Nwachukwu who both bring to the business a large degree of experience in both the manufacturing and service sectors.  

2. Access to Finance

2.1 The company has constantly struggled to secure access to finance to support its growth from the outset. In part this is because the company was a small, early stage venture (and in our experience bank’s do not like to lend money to early stage, unproven enterprises) and in part because the business was established with the intent of selling goods to the West African market and this market is considered by many to be more risky than others (this is despite the fact that official statistics indicate that the Nigerian market is the 32nd largest export market for the UK) Source UKTI 13th January 2010.

2.2 The company was established with the assistance (in terms of help, guidance, grants and loans) of

Business Link, the Manufacturing Advisory Service and the local Community Development Finance Institution (Black Country Reinvestment Society and Aston Reinvestment Trust) and loans from LloydsTSB under the Small Firms Loan Guarantee Scheme (SFLG). As one of the founders/owners of the company I would like to stress that without the assistance and finance provided by these organisations it is doubtful that the company would have got off the ground.

2.3 The majority of the finance that has been raised to secure the company’s growth to date has been capital invested by the owner/founders (£125k) and loan capital invested by our family and friends (£75k).

3 Enterprise Finance Guarantee Scheme

3.1 During the early stages of 2010 we made an application for a loan (in support of the growth working capital requirements of the company) under the Enterprise Finance Guarantee Scheme (EFGS). The loan was required to help the company to grow, create jobs in the UK and helped the company to expand the export markets to which it exports.

3.2 Loan applications were made to Royal Bank of Scotland Plc and HSBC Plc under the Enterprise Finance Guarantee Scheme (EFGS). The loan applications were made with the support of a local West Midlands firm of corporate finance specialists (Blue Sky Corporate Finance Ltd) and their assistance was partially funded by a grant from Business Link.

3.3 The EFGS loan application was declined on the basis that the principle activity of the company is to EXPORT and one of the rules of the EFGS scheme is that a loan under this scheme cannot be used where the principle purpose for which the loan is being sought is to support the activity of EXPORT. It is my understanding that no such rule exists where the primary use of the loan is to support the activity of IMPORTING.

3.4 Our corporate finance advisors have checked the legitimacy of the reason given by the banks for declining the loan application with EFGS experts at Advantage West Midlands (AWM), Capital for

Enterprise Ltd (CFeL) and at the Department for Business, Innovation and Skills (BIS). In all cases the EFGS experts have confirmed the existence of the rule preventing a loan being granted to Britchem Products UK Ltd under the EFGS scheme. There does not appear to be any consensus on the rationale for this rule but so far two theories have emerged from the discussions with CFeL and BIS:-

• One theory is that the rule was established at a European level under the principles of “State Aid” to prevent the EFGS loan from distorting trade between European Countries (i.e. a loan being made to a company in one European Country to create jobs that would displace jobs in another European Country). If this is indeed the rationale for the rule then it would appear to ignore the fact that the EFGS loan scheme is only available to SME’s and it is surely difficult to imagine that an SME can materially distort the markets within the EEC. More importantly the loan that is being sought in the case of Britchem (see above) is intended for the support of export activity outside of Europe.

• The other theory is that a loan under the EFGS scheme is not needed for the support of

export activity because other Government backed initiatives (most obviously the support provided under the Export Credit Guarantee Scheme) are better suited to this purpose. If true; then this rationale is based upon a limited interpretation of the support provided under export credit guarantees (explained below). Suffice to say that all of the experts from the worlds of corporate finance and banking that have looked at the Britchem business agree that an EFGS loan would be ideal (if it were permitted under the rule of the scheme) and that export credit guarantees are not suited to the working capital requirements of this business.

4 Export Credit Guarantees

4.1 Export Credit Guarantees (ECG) underwrite all or some of the value of the sale (debt) being made to an export market and where this support is available then it may be possible to use the value of this underwritten debt to secure working capital finance secured against the value of this security in the UK.

4.2 The principle underpinning ECG’s is that the export company has a single order from a single customer in the export market. The organisation providing the ECG can then assess the trading record and credit worthiness of the export customer concerned and can offer/price the insurance according to their view of the risk concerned. This model only works if the exporter knows precisely which of its customers is going to buy the goods that it is exporting and in most cases only if the exporter has a firm purchase order from the customer(s) concerned.

4.3 Britchem (and we suspect many other companies) does not work in this way. Britchem ships goods to stock in its target market. At the stage that the goods are loaded onto the ship Britchem will not know for certain which of its 95 (and growing) customers in its target market are going to take delivery of the inventory concerned. When the goods exported arrive in West Africa the container is split down, allocated and shipped to its customers on an as required basis.

4.4 In summary the ECG model does not work for a company that is ‘shipping to stock’ in an export market and because of this fact the Government intervention into the ECG market is of no benefit to exporters like Britchem.

5 Conclusion and Recommendation

5.1 There appears to be a consensus that small to medium sized enterprises will lead the UK economy out of the recession and also that export will play an important part of this process. Britchem is a small but fast growing and viable export based business in desperate need of additional working capital to finance its growth.

5.2 One of the obvious Government backed schemes that could assist our company is the EFGS loan scheme and it would appear that one or more of the banks that operate this scheme would gladly consider extending the company credit under the scheme save for the fact that this would not be permitted under the rules of that scheme.

5.3 The irony of this rule is that we are surrounded by companies here in the West Midlands that are little

more than warehouses for good being imported from China (and other markets) on their way to retail outlets. I can only presume that these companies are therefore supporting the creation of wealth and jobs in the markets from which they import. In the event that any one of these companies are SME’s and they need working capital finance to grow (and import more) then a loan under the UK Government backed EFGS scheme would be freely available to them.

5.4 It follows that our recommendation is simple and straightforward – that the rules of the EFGS scheme (or whatever scheme replaces this) are changed to ensure that EXPORTS are not only permitted but also encouraged.

14 September 2010

GAI 05 Memorandum submitted by UK Music

About UK Music UK Music is the umbrella organisation which represents the collective interests of the UK’s commercial music industry - from artists, musicians, record producers, songwriters and composers, to record labels, music managers, music publishers, and collecting societies. UK Music consists of: the Association of Independent Music representing 850 small and medium sized independent music companies; the British Academy of Songwriters, Composers and Authors with over 2,200 songwriter and composer members; the BPI representing over 440 record company members; the Music Managers Forum representing 425 managers throughout the music industry; the Music Producers Guild representing and promoting the interests of all those involved in the production of recorded music – including producers, engineers, mixers, re-mixers, programmers and mastering engineers; the Music Publishers Association, with more than 250 major and independent music publishers representing close to 4,000 catalogues; the Musicians Union representing 32,000 musicians; PPL representing 42,000 performer members and 5,000 record company members; and PRS for Music representing 70,000 songwriters and composers and music publishers. Government-backed loan guarantees and the UK’s music sector Executive Summary: UK Music welcomes the BIS Select Committee inquiry into Government Assistance to Industry. The evidence we submit demonstrates that the obstacles that music sector SMEs face in accessing finance amount to a market failure, and that Government assistance designed to stimulate the flow of finance to SMEs is still not reaching our sector. “Difficulties in raising finance are affecting the ability of the music business to grow and prosper. Particularly worrying is the evidence……of a growing trend in recent years, of a lack of confidence in accessing external finance.”

• So said “Banking on a Hit,” published by the Department for Culture, Media and

Sport in 2001. Words which resonate just as loudly today as they did almost ten years ago.

• In the intervening years it would appear that the inability of music industry SMEs

to access finance has now become an established and increasingly entrenched obstacle and one which has intensified over recent months as the global financial markets have attempted to re-stabilise.

• For many music industry SMEs, access to finance might now be described as a systemic and worsening problem, the consequences of which will not only be detrimental to the music industry overall but to the UK’s economy more broadly.

Economic context

1. The UK’s music industry is a valuable cultural and economic national asset. The UK music industry was worth around £4 billion in 2009.1

2. The invisible earnings and additional value created by music is potentially

immense. Music has driven the growth of digital services like high speed broadband and digital devices like iPods. Music also feeds a host of business that work directly with music such as film, television, games, advertising and fashion, which quite simply, would not be what they are without music.

3. Likewise, music inescapably, intrinsically and advantageously impacts upon the

tourism, leisure and hospitality sectors. An ever increasing number of people both within the UK and abroad are choosing to spend their holiday money within the UK attending music events and festivals. Live music in the nation’s vast array of music venues and festivals each year attract visitors from all over the UK, Europe and the rest of the world.

4. The O2 arena in London, for instance, since opening has already attracted 12

million visitors and is now the largest ticketed entertainment venue in the whole world. The Cavern Club is at the centre of Liverpool’s tourist trade and draws in half a million visitors each year. Glastonbury festival annually accounts for approximately £73 million in spending, £36 million of which is spent directly within the local economy.

5. In absolute terms the UK is the third largest music market in the world while in

relative terms, we are the largest. Per capita we purchase and consume more music than any other country in the world while the UK ranks second only to North America in the league of nations who are net global exporters.

6. Latest industry figures show that the UK music industry bucked the global

downward trend in 2009 with a return to growth.2 Added to this background is the prospect that the digital marketplace opens up further growth with the development of new music services, wider markets, and faster distribution.

7. As the industry continues to realise the potential value of music in the digital

marketplace and live music continues to expand outwards from London, the ability to access finance becomes even more crucial. The innovators and entrepreneurs from our sector need to be able to finance their ambitions of tomorrow.

Music and access to finance: a structural problem

8. In this section we provide our analysis as to why our sector’s difficulties in accessing finance is a structural problem and not a transitional one.

9. The music industry is characterised by a very small number of large corporate

organisations, and a very large number of small organisations. This remarkably diverse mix of company structures sustains a vast array of talent.

1 PRS for Music, Adding Up The UK Music Industry, August 2010 2 Adding up the UK music industry for 2009, Will Page and Chris Carey, PRS for Music, Economic Insight issue 20, 4th August 2010.

10. The signature of many of these companies is the long-term development of their relationships with their artists, to support, to nurture, to sustain an artist’s career and therefore the company prospects over a long periods of time. What these SMEs achieve is to create steady employment and the continued production of IP assets and creative goods. Sustainability is key. The thousands of small yet steady musical enterprises for whom rapid growth is not an immediate priority form the backbone of the UK’s music industry.

11. In reality the majority of record companies working within our sector would

employ less than 10 people. By way of example a recent survey of the 850 companies who make up the membership of the Association of Independent Music showed that the average employee headcount was two people per company.

12. Size has a strong bearing on the ability of a firm to access to finance. The

Association of Chartered Certified Accountants says that, “the financing of small businesses is manifestly different from that of large businesses…there have been persistent concerns that the finance markets do not always fully meet the needs of small firms who can find it harder than large firms to acquire finance that is accessible, appropriate and affordable.”3

13. If only because of their large numbers of small firms, the creative industries may

therefore experience greater difficulties in accessing funds.

14. To compound matters, small music firms face additional challenges to those SMEs in more traditional sectors because of the intangible quality of their assets.

15. While many other small enterprises may trade on intangible assets, such as

graphic design or consultancy services, the value of a cultural good can only be approximated in hindsight, that is, after the music has already been created, recorded, released and promoted. The Work Foundation report into the economic performance of the UK’s creative industries refers to this underlying problem of market uncertainty as the ‘nobody knows anything’ scenario’.4 Other sectors trading in intangible assets would be less exposed to the vagaries of personal taste as those trading in cultural goods, and so are able to tabulate and valuate their assets more predictably.

16. The CBI recently published a blueprint for the creative industries in which it

acknowledged that “the unpredictability of consumer reactions can make it difficult to gauge the success of a product before its launch. This can affect access to finance for creative businesses.”5

17. There are further knock-on effects. The loan applicant’s track record is an

important criteria that bankers use in making lending decisions. It is likely that many small firms and entrepreneurs in the music business will have ‘misses’ for every hit. In more traditional industries, such a chequered track record might reasonably serve as a warning against further investment. In the music industry, such a record is the norm and is a less reliable an indicator of risk.

3 Improving access to finance for small firms, Association of Chartered Certified Accountants, Policy Briefing Paper, March 2006. 4 Staying ahead: ibid. 5 Creating Growth: a blueprint for the creative industries, CBI July 2010

18. One way that banks can mitigate their exposure to uncertainty and risk is by demanding security against assets. However, for many creative businesses, the firm’s assets are intangible, tied up as they are in copyrights. Their value can be difficult to gauge at any one point in time, as the value of copyrights can fluctuate. While the income from a few back catalogues have maintained a consistent value over many years, most are less constant. Indeed, the value of a copyright in a piece of music can suddenly rocket in value, for example, if a piece of music is used in a popular film, television series or commercial.

19. These characteristics of our sector – the ‘no one knows’ factor of a cultural

good, an inconsistent producer track record, difficulty in valuing IP assets and offering security – all conspire against our sector over and above those experienced by other SMEs in terms of obtaining finance from banks. This is partly because the standard criteria used by banks to assess loan applications cannot usefully gauge whether a proposition represents a reasonable level of risk in our sector. The error will therefore almost always be on the side of caution.

20. While the music industry has reported difficulties in accessing finance for many

years, the problem appears to have become even more exasperated of late. Several reasons account for this. First is the global downturn.

21. Industries with large numbers of small firms tend to suffer particularly severely

in cyclical downturns according to a number of studies.6 In a letter dated 11 August, the Governor of the Bank of England observed “many businesses have had difficulty accessing bank credit…these appear to have been most testing for small and medium sized firms for which bank lending is a particularly important source of finance.”7

22. The CBI also conclude that “the recent credit crisis has added to the already

difficult task of securing traditional sources of funding, reducing further the finance options available for the [creative] sector.”8

23. Certainly our own research and experience confirms that the difficulties that

small music firms report in accessing finance have intensified during the global downturn.

24. Secondly, the music industry is in the midst of significant structural change.

One result of this change is that the internal investment model that sustained the music industry in the past is no longer a viable option.

25. To put this in context: historically, there has been an internal investment model

within the music industry. Entrepreneurial individuals have started bands, management companies, publishing companies and record labels with personal money or personal borrowing; and been prepared to reinvest profits into their businesses.

6 For example, see the conclusions of a survey conducted by IPSOS MORI on behalf of the Institute of Chartered Accountants in July 2009: “The respondents’ overall view is that SMEs clearly have difficulty obtaining financing, but opinions vary as to whether it is merely fairly difficult to almost impossible.” P. 7 See also A Framework for Creative Industries Development in South Hampshire, December 2009 which found: “Across all business sectors access to finance has become a significant concern over the past year.” 7 Letter from Mervyn King to Feargal Sharkey dated 11 August 2010. 8 Creating Growth: a blueprint for the creative industries, CBI, July 2010

26. Music businesses have also invested in each other, with established companies

using their knowledge of the key indicators of success in the music industry to invest in artists or in other small firms. This has provided both equity and debt finance, as well as management support. For example, small record companies have used advances against future income from their distribution companies or collection societies to provide working capital, and have entered into joint ventures or other equity deals with major labels and large independents in order to grow.

27. Record companies used profits from the record sales of their most popular acts

to reinvest in new talent, so the cycle continues. For composers and songwriters, the situation was similar.

28. However, liquidity for an internal financing model has all but disappeared.

Record sales are down nearly 30% from 2004 levels. Sales of digital music and online music services have grown but the revenues generated from digital sales have not made up the shortfall. The live music sector has also grown, but revenues generated from live concerts and festivals do not get reinvested in nurturing a new raft of talent. Concert promoters and organisers do not “sign” new talent or give out advances, as that is not their function. The result is less revenue to go around for investment in new talent.

29. Today, record companies and music publishers are still the primary investors in

new music. But they are not able to invest in as many new musicians, and the pressure to back those hopefuls who are most likely to generate a return is considerable.

30. This raises questions about how those that might be termed “experimental” or

cutting edge can get the opportunities they need. It also raises questions about how those who are just starting out can get the nurturing they need, as well as ongoing support for those who are able to sustain steady careers.

31. Stepping up into the frame are thousands of small record labels, publishers,

band managers, promoters and agents. These small enterprises do not have the ability to negotiate with the major music retailers (such as Tesco) and broadcasters, and so are more likely to pursue alternative approaches to marketing and distribution in order to promote their roster. While there is much innovation, the ability of these entrepreneurs to finance their initiatives is a serious stumbling block.

32. Obtaining finance is particularly difficult when sums of finance required are too

low to be of interest to venture capitalists, but deemed too risky to be of interest to high street banks. Music enterprises seeking relatively small amounts of finance, either to ease short-term cash flow issues, or to finance a venture, are finding themselves unable to get the finance they need. This appears to be the case generally, even for those who have demonstrated great entrepreneurial flair in the past, who have a good credit history, and a solid business plan with credible revenue projections.

33. This combination – historical difficulties in accessing finance, exacerbated by

more recent developments – is leaving many in the music sector unable to access finance. The current situation is unsustainable.

Government-backed assistance in the form of the EFG

34. The Enterprise Finance Guarantee seemed the perfect finance vehicle to address the difficulties of the music industry in accessing finance. In announcing the money at the start of the scheme in 2008, the European Investment Bank said it would be designed for SMEs throughout Europe to “help them weather the global financial storm.” The new loans were to be channelled through existing commercial banks, with the aim of being “simpler, more flexible and more transparent, making it possible to reach a greater number of European SMEs.”9 As the creative industries account for 2.8% of the GDP of Europe, this sector anticipated sharing in this lifeline.

35. In January of 2009 the UK Government announced that the funding would be

made available via the new EFGS. Upon initial inspection the EFGS would appear to have been the answer to the historical funding issues within the industry yet this has not provided to be the case. Government also specified that the scheme should be open to artists and songwriters.

36. UK Music investigated the extent to which music enterprises were able to

access loans under the Enterprise Finance Guarantee through a survey of our members. We learned that many companies had applied for a loan under the EFG but were turned down. Only one business was offered a loan under the EFG (and only on the condition that the applicant’s primary residence was provided as security against the loan).

37. The difficulties experienced by our sector with respect to the EFG have been

recognised recently by the CBI. CBI President Helen Alexander 10said: "Music, films and books are not seen as safe bets – and so don’t attract investment from banks keen to reduce their exposure to risk. The Government’s Enterprise Finance Guarantee Scheme is meant to help alleviate this, but evidence on the ground from CBI members suggests this isn’t the case... "

CASE STUDY: EFG AND ATC MANAGEMENT The EFGS is proving inaccessible to applicants from the music sector. ATC Management have run a test case with ‘the Rifles’, applying to every high street bank for a loan for working capital to allow them to record and tour their new album. The EFGS is specifically for viable plans from small businesses without sufficient access to capital to secure their loans. The criteria explicitly include songwriters and artists, and should be the idea vehicle for debt financing in music – but in practise there are no banks willing to back our businesses. The Rifles, artists managed by ATC Management (management company of well known artists Radiohead and Kate Nash) have applied for an EFG-backed loan of £200,000 to cash flow their second tour and album. Their proposal is based on a track record of a successful first album and a national tour of venues of 1000-2000 capacity.

9 http://www.eib.org/projects/topics/sme/index.htm 10 CBI Press Release 9th March 2010, “Helen Alexander sets out CBI priorities for creative industries”

Their applications have been presented by ATC director Brian Message. Brian is a chartered accountant and chairman of the trade body for artist managers the Music Managers Forum. He has successfully applied for the Small Firms Loan Guarantee scheme for music businesses in the past. Another business which Brian owns a stake in has obtained an EFG-backed loan. This was not, however, a creative company. When the EFGS was opened to own-account artists, Brian decided to apply as a test case, hoping that this would be of benefit to managers of other artists with viable businesses who require debt finance to cashflow their businesses. Over the last 8 months, Brian has applied on 8 occasions to a number of the high street banks for funding for the Rifles business including HSBC, Lloyds, RBS and Barclays. All have been refused an EFG-backed loan for different reasons. The banks “would offer an EFG-backed loan for a domino’s pizza franchise”, or “would take a charge over the property of the directors of the management company”, but will not lend to a viable small business in the music industry without security. Even an offer of a deposit of £50,000 (25% of the loan amount) thereby providing the bank with an 100% security when added to the EFG was rejected. T There is frustration in the music sector that the EFGS is effectively closed off to music companies. The lack of data to inform the effectiveness of Government assistance

38. There is no lack of evidence of the difficulties in accessing finance from the demand side.11 What is lacking is statistical evidence from the supply side. However useful and illuminating case studies from our sector are, we need information from lenders, not just borrowers.

39. UK Music sought to obtain data from across a range of lenders in order to

aggregate lending statistics, so that comparisons could be made and the results analysed. For instance, we wished to see how many loan applications or overdraft requests have been made by music businesses, how many were granted, the total value of finance made available to music businesses over a given period, and the rate of default. We wished to compare these statistics for music businesses versus statistics for SMEs as a whole.

40. UK Music approached the largest high street banks (Barclays, Lloyds,

Santander, HSBC, NatWest) to enquire whether they keep statistics about their lending on a sector basis. However, these banks were not able to disclose whether or not they keep such statistics.

11 For example, see “Access to finance for the cultural and creative industries in the South East of England,” commissioned by the South East England Development Agency in December 2009. See also “Creating Growth: A blueprint for the creative industries” published by the CBI in July 2010. And see “Entrepreneurial Reactions to Uncertainty in the Creative Industries” a research paper by Dr Anna Dempster at the Department of Management at Birkbeck College in May 2008. The DCMS commissioned studies into music and access to finance in 2001 (“Banking on a Hit”) and again in 2006 (“SME Music Businesses: Business Growth and Access to Finance Report”). Both only surveyed borrowers or potential borrowers, rather than attempting to make an analysis by looking at lending patterns.

41. UK Music maintains that such data is essential in order to establish whether

lending patterns have changed over time, and assess whether music businesses or other IP based firms experience difficulties over and above other sectors.

Conclusions

42. Government have a duty to ensure that all business sectors of the economy are able to access appropriate sources of finance. This is a basic requirement for any functioning economy.

43. Difficulties in accessing finance have plagued our industry for the best part of a

decade. This is primarily due to the specific characteristics of our industry that lead banks to judge lending to our sector as too risky.

44. The difficulties faced by the music sector in accessing finance have intensified

in recent years. The economic downturn has resulted in banks tightening up their lending criteria further, and structural changes within the music industry have resulted in the disappearance of an internal financing model.

45. The UK’s music sector is a cultural and economic asset with a global reputation.

The potential for growth is strong as the digital economy continues to develop. Music also has a significant role to play in driving tourism as live music continues to grow.

46. The music industry will be unable to meet its ambitions for growth unless it is

able to access appropriate sources of finance. Government assistance to industry, through loan guarantees such as the Enterprise Finance Guarantee, has so far failed to reach our sector.

47. Data that could help Government target its assistance to industry better and

assess its effectiveness, such as aggregated lending statistics by sector, is patchy or nonexistent.

48. The Government’s review into sources of finance, led by the Treasury, presents

an opportunity for Government to correct this serious market failure. 15 September 2010

GAI 6 Memorandum submitted by the British Chambers of Commerce 

Introduction  

1. The British Chambers of Commerce (BCC) welcomes the opportunity to respond to the Business, Innovation and Skills Committee’s inquiry into Government Assistance to Industry. We would also welcome the opportunity to give oral evidence on this issue, if that would be helpful.  

2. The BCC is an influential network of fifty‐five Accredited Chambers across the UK. No other business organisation has the geographic spread or multi‐size, multi‐sector membership that characterises the Chamber Network. Every Chamber sits at the heart of its local business community, providing representation, services, information and guidance to member businesses and the wider local business community.   

3. In summary, our position is the following: 

• The government has an important role to play in addressing market failures and provision where the private sector is not meeting clear needs; 

• Specific schemes such as the Enterprise Finance Guarantee (EFG) have been useful, but there needs to be better understanding of the scheme from both banks and businesses; 

• The Small Business Finance Forum has been an important forum for dialogue between business, the financial service industry and Government. Its replacement, the Small Business Economic Forum, must pick up the Small Business Finance Forum’s good work; 

• The services provided by UK Trade and Investment (UKTI) are vital for encouraging British exporters and offer levels of support comparable to other major trading nations; 

• The lack of intervention into the export trade finance and export trade credit insurance markets, which have caused serious problems for British exporters during the past two years, has stood in stark contrast to other European countries. This has placed British exporters at a competitive disadvantage; and, 

• Inward investment has been a success story during the past decade, but the government must ensure that efforts are not duplicated by competing regional and national bodies.  

 

 

The role of the Department of Business, Innovation and Skills in supporting industry 

1  

4. We believe that the state has an important role to play in assisting industry where there are clear market failures. The Department of Business, Innovation and Skills (BIS) is a natural home for all of this activity, and for the sake of simplicity and ease of both engagement and access, all business related activities of government should be co‐ordinated, disseminated and managed from BIS and its related agencies.  

 

The Enterprise Finance Guarantee (EFG) 

5. The EFG has helped underpin a large number of loans to businesses throughout the course of the recession. Improving it is dependent on ensuring that advisers in banks are fully aware of which situation the product is suitable for, and exactly how it operates. The problems seen with EFG in its early days were symptomatic of wider knowledge gaps of the frontline in the banks – a by‐product of over‐centralised decision‐making procedures that have become common in recent years.  

6. Equally, there needs to be an understanding on behalf of the business community that this is not “free money”. There is clearly still a breakdown in communication in some areas around the need for personal guarantees, as best articulated by one of our members in recent representations: 

“We are aware of other local banks who have decided not to use the EFG Scheme due to the difficulties involved with it and in particular, there is a situation of "smoke and mirrors" whereby clients think that there is a 75% guarantee and cannot understand why they are being asked for personal guarantees and in particular, for more than 25%. [One high street bank] seems to be asking for a 25% personal guarantee while other high street banks are looking for 100% personal guarantees. 

“Banks are also unclear in their advice as to the application of this and we feel that they have a duty to spell out the exact position….to the client as to their potential liability under the scheme”. 

7. Given the figures on EFG lending, and the amount of money that has been allocated to it, it would seem that the scheme is meeting the current level of demand. There has been no overwhelming evidence to suggest that certain sectors require greater access to state backed schemes, or are losing out because of a lack of one.  However, there is a strong belief that an extension or a successor scheme will be required beyond 2011.    

The Small Business Finance Forum 

8. We believe the Small Business Finance Forum was an effective vehicle for dialogue and the resolution of difficulties between SMEs and the banks. The Forum’s discussions had also broadened to include the provision of alternative forms of finance (e.g. invoice discounting, factoring, trade credit insurance, etc) that are of critical importance to the economic recovery. Ultimately, the dialogue between senior bank representatives and business representatives was constructive and led to important relationships being formed between 

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banks and business. The BCC was able to bring specific cases to the attention of senior bank executives, and to arrive at a satisfactory conclusion for all parties.   

9. Its replacement, the Small Business Economic Forum, must pick up the Small Business Finance Forum’s good work.   

Access to Finance Green Paper    10. Overall, the evidence base included in the ‘Financing a Private Sector Recovery’ Green Paper 

is an accurate and objective reflection of the business financing environment. It includes a detailed evaluation of nearly all areas of the access to finance debate, with the possible exception of a detailed analysis of the bank/SME relationship, which the BCC has argued repeatedly requires attention from both parties as well as regulators. It is a good starting point for the next stage in the access to finance policy debate, and should form the basis of the work of BIS going forward. We attach our response to the Green Paper with this response. 

 

UKTI and trade promotion 

11. All sources agree that exporting more of what we manufacture in the UK is one of the keys to a successful, sustainable and balanced economic recovery. As the global demand in world trade improves, British manufacturing companies must become more adept in selling their goods and services abroad – not just into the established markets of Europe and the developing world, but into high‐growth developing markets who have only witnessed a fraction of the economic problems experienced by the developed word.  

12. Governments across the world provide trade promotion services for their exporters. The British trade body, UKTI, performs many vital functions for British companies that wish to engage in international trade, such as organising trade delegations into different markets, funding tradeshow access and creating British pavilions, providing market research, and running schemes to help SMEs export for the first time.  

13. State‐backed trade promotion and export support are therefore vital to the UK’s present and future exporters. We believe that the current budget of £350 million for UK Trade and Investment is a small price to pay for the contribution that UKTI services make to the growth of private sector companies. We believe that UKTI services cannot be significantly cut and still provide services to businesses that are comparable with those in our principle competitor countries.   

14. However, there are a number of things that the organisation could do differently. For example, currently UKTI operates under a quantitative, target driven culture, where the number of companies assisted and value of revenue generated to UKTI takes precedence over the outcomes of help offered to both new and existing exporting companies. BCC therefore believes that UKTI’s targets should be changed to monitor the value of results 

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associated with help given, such as growth in export sales and employment generated, rather than purely on the number of companies assisted, as this distorts the true value of the organisation.    

15. We are currently undertaking a report on manufacturing for export, which we will be happy to share with the Committee when published. While many exporting manufacturers that we have spoken to have used UKTI and see it as a vital service, they often had mixed views about its effectiveness and efficiency. While some found it useful, especially for its investigative work in new markets, the majority felt that it could be further rationalised with a more joined‐up service offered, and that its quality of service could be variable. The number of different Government organisations that attempt to help exporters also added to confusion. Our quantitative survey showed that 32.7% of businesses responded saying that they felt that better export support from the Government would be one of their top three policy changes to help manufacturers, along with continued low interest rates and better access to growth capital.  

16. UKTI now charges for many of the services that it once offered free of charge. A number of companies commented negatively on this, and also said that they felt UK staff were very keen to sell them charged‐for services whenever they came into contact with them.  Despite these charges, such as for the Overseas Market Introduction Service (OMIS), companies often reported receiving variable quality work. One interviewee from an SME technology company commented that a bad OMIS can set a small business’s growth back considerably.  Companies such as these often only a have a small marketing budget that dictates a gradual approach to new market entry; a bad OMIS and in‐market service from UKTI therefore has the potential to damage growth strategies based on exporting for a considerable time.   

17. We understand the need to recoup some costs from businesses, both because of the current state of the public finances, and to act as a gate‐keeper to make sure companies genuinely have a commitment to exporting. However, fees should at a level that encourages and supports new SME exporters without strong cash‐flows. Furthermore, UKTI must ensure that the focus on raising funds through collecting fees for services does not detract from qualitative help for exporters.  

18. Despite these problems, businesses have often commented that UKTI services can be effective. The UKTI organised British presence at international trade shows was considered a particular success. Such events were often made especially effective by the attendance of a Government minister. BCC welcomes the delayed appointment of Stephen Green as Minister for Trade and Investment, and hope that he will play a critical role leading trade delegations and helping to open new markets for sometimes risk‐averse UK exporters.  

19. Export trade finance plays a vital role in underpinning exports and helping mitigate the substantial risks of international trade. However, access to these sources of finance has been severely curtailed during the recession, while businesses from other major trading nations have access to much greater sources of trade finance support – especially for trade with developing markets.  

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 20. The BCC believes that unless the Government intervenes to support SMEs’ access to sources 

of trade finance, British businesses will not benefit from the predicted rise in global trade flows over the coming year. There has been a market failure in the trade finance industry, especially around short‐term export trade credit insurance. The Government must therefore intervene to rectify this by providing a publicly‐backed scheme. Without such action, it is unlikely that British businesses will benefit from the likely rise in demand for consumer goods to ‘BRIC countries’ and other emerging markets. This is reflected by the Business, Innovation and Skills Select Committee itself who “strongly recommend[ed] that the Government reassess its decision not to use the opportunity presented by the [European] Commission’s decision to re‐enter the short‐term trade credit market until the financial situation improves”.1  While banks and insurers maintain that there is some evidence to suggest that the problems of the past year are easing, the Government needs to establish support in this area to ensure that British businesses can access short‐term financing for non‐capital goods during any subsequent economic downturns, or periods of uncertainly, which have the potential to disrupt finance flows.   

21. Currently the Government believes that the export credit insurance market is rectifying itself, but our members have not found any greater liquidity within the market and are still being hamstrung by insurance being withdrawn from credit lines both to, and from their companies. Furthermore, the Government must ensure that British exporters are able to access trade finance for high‐growth developing markets in the same manner that all other comparable trading nations provide for their exporters.  

22. The BCC believes that the Government should consider creating a state‐backed export trade credit insurance scheme run through a private company, who would share the risk and the profits. Both France and Germany have successfully applied this model.   

23. The application of such a model would mean that exporters would not be dependent on the private market for exporting into emerging markets, or during periods of recession or economic uncertainty. While in times of economic growth developed markets in the EU, North American and Australasia would not be allowed to be covered by such a scheme under EU State Aid rules, the European Commission relaxed the rules which govern this during the economic crisis. EU countries that already had such schemes were able to take full and immediate advantage by widening the scope of their cover. The British Government was unable to help its’ exporters in such a way, but should have a scheme ready to help exporters both in the short‐term and when the market fails again.  

24. While greater support is critical, so is the need to ensure a level playing field. The Government needs to remain vigilant to ensure that other countries are not extending support to their exporters that would infringe upon State Aid rules.  

                                                            1 http://www.publications.parliament.uk/pa/cm200910/cmselect/cmbis/266/26610.htm 

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25. The BCC recently held an SME trade finance roundtable with businesses, banks, insurers and government officials to thrash out the problems faced by SMEs when accessing export trade finance and insurance. We recommend that this forum be placed on an official footing and held at regular intervals to ensure that the Government is receiving a full evidence‐base of what is happening in the trade finance market. We attach the notes of the roundtable with this response. 

Inward investment  

26. Central government clearly has an important role to play in attracting inward investment into the UK; indeed, this has been a particular success of the UK during the past decade, partially down to government action in this area co‐ordinated through UKTI and the Regional Development Agencies (RDAs). However, despite these successes, there are a number of issues that the Government should take into account around duplication of effort among the different regions and nations of the UK. During the past few years RDAs have sometimes competed against each other to win investment for their regions. The UK brand abroad is watered down by separate representation from all three devolved nations and nine English regions. Separate efforts from Scotland, Wales, Northern Ireland and the English RDAs only serve to confuse potential investors who are likely to be unaware of the constitutional particulars of the UK.  

27. Now that RDAs are being wound down, and the functions of Local Economic Partnerships (LEPs) are being determined, there is a discussion about how these functions should be delivered. Many Chambers in the North and Midlands (including the North East, North‐West and Yorkshire and the Humber) believe that there is a continued need to retain control over some of the strategic economic functions presently exercised by RDAs, notably around inward investment and place‐marketing. When establishing these functions, central government must ensure that provision is made to reduce externally visible competition between different organisations.   

Also attached:  1. BCC response to Access to Finance Green Paper 

    2. Notes of BCC‐HM Treasury SME Trade Finance Roundtable 

 

6 October 2010 

GAI 7

Memorandum submitted by Nissan

Nissan welcomes the opportunity to respond to the Business, Innovation and Skills Select Committee inquiry into Government Assistance to Industry. Nissan is a highly successful global automotive manufacturer with a significant presence in the UK. We are at the cutting edge of low carbon technologies and will be introducing the LEAF electric vehicle to the UK next year. Nissan has a strong presence in the UK having established our Sunderland manufacturing plant in 1984. We also have our R&D European headquarters based in Cranfield in Bedfordshire as well as our European Design Centre in Paddington and our Sales and Marketing centre in Maple Cross. In total we employ 6000 people in the UK and many more through our supply chain network. Nissan’s successful Qashqai product was designed in Paddington, developed in Cranfield and built in Sunderland. Over the past year Qashqai volumes reached over 250,0001 and since start of production we expect total Qashqai volumes to reach 877,198 by the end of this financial year2. In our view, its huge popularity should be considered as a great British successes story. Automotive Assistance Programme The Automotive Assistance Programme (AAP) was intended to enable new investment in order for the UK car industry to emerge from the economic crisis. Nissan welcomed this approach but was ultimately disappointed that the programme failed to meet its original intentions. In our experience the loan guarantee offer was simply not competitive enough nor did it properly reflect Nissan’s business needs at that time. This is explained in more detail in the following paragraphs Uncompetitive Rather than offering competitive direct government financing of the industry as seen in other countries, the UK Government opted to provide the industry under the AAP a loan guarantee covering 75% up to 90% of the total financing. The loan guarantee provided under the programme was meant to provide security to

1 251,440 total production volumes September 2009 – 2010 2 Qashqai start of production December 2006

creditors to allow automotive companies to borrow in an otherwise frozen credit market. Initially, in the midst of the crisis, this seemed a reasonable offer. However, as the worst of the crisis passed, and banks and financial institution received the first wave of support to begin lending, it became progressively easier for automotive industry to secure credit on its own. So when the industry was actually ready to use the loan guarantee facility, companies could already secure credit themselves on the open market. The use of the loan guarantee came with a cost. To invoke the guarantee, the AAP charged an additional fee or interest rate to cover the cost and risk of the company to default. Under the scheme, Nissan would then still be liable to the Government in case of a default. The level of the fee was determined by the rate charged by high street banks, some of which had just been taken into public ownership. This reflected the full default risk of the company on top of what would be required to secure credit under the backing of Government. Only after intense negotiation and demonstration to Government that Nissan’s risk was at a level below what was charged in the open market was a reassessment made on the guarantee fee (and only in conjunction with a loan only covering 50% of Nissan’s borrowing needs). In effect, securing credit for Nissan under the AAP brought no preferential access to credit, no increased security for the lender, nor competitive borrowing rates. It only brought additional cost. In our view, under this scheme, the fee for the guarantee should have been zero which would have put the AAP more in line with direct financing offered by other governments at the time. As a result the additional charges added further cost to an already uncompetitive offering. Reflecting the Needs of Business The AAP was largely inflexible as it would only offer a subsidised rate for the guarantee for a maximum of two years. In Nissan’s view it would have been much more effective if the scheme had provided loan guarantee based on the life of the project giving business far greater stability and certainty. Furthermore, we believe that the AAP scheme could have been broader in scope. The scheme should have considered green projects that considered infrastructure and R&D technology. The scheme could have also expanded on the EIB criteria to provide guarantees for both R&D and manufacturing that had green qualifications. Ultimately, Nissan was able to secure finance in the open market and with support of the global Nissan business. We were able to do this at lower costs and with greater flexibility to suit our business needs. The Effectiveness of BIS Nissan has an established relationship with BIS via the Automotive Unit. Nissan views the Automotive Unit a vital component within Government that is able to

join up the complex areas of the industry. The Automotive Unit provides a vital link between business and the successful Automotive Council which has also enabled better dialogue between industry and Government. Grant for Business Investment (GBI) Nissan is a successful and profitable global company which does not need support from governments to build its cars. The Sunderland plant is one of the most productive car plants in Europe and exports around 80% of its annual volume to over 45 world markets. Nissan competes internally within the Renault-Nissan Alliance for new manufacturing projects. Sunderland competes with other plants as widespread as Mexico, Japan and Spain. Production sites based in lower cost countries are maintaining their competitiveness with lower labour costs. Higher cost countries, including Spain and Portugal, are also receiving strong support from their governments to keep their vehicle manufacturing industry inside their borders. The Sunderland plant has a proven track record for high productivity and quality. However, external factors also play a significant role in attracting new business to the plant. This is why Nissan views the Grant for Business Investment (GBI) as a vital factor in bringing new investment and highly-skilled jobs into North East England. Nissan has received support via GBI for the production of the Nissan LEAF zero-emission electric vehicle and the advance lithium-ion battery plant at Sunderland. The total investment for these projects is expected to reach £350m of which £310m will be invested in the North East and is therefore eligible for GBI support. The UK Government’s GBI offer represents £20.7m or 6.7% of expected eligible investment. In return the UK will become a leader on low carbon manufacturing and will be only the second country (along with the US) outside of Japan to build the Nissan LEAF, the world’s first mass-produced zero-emission passenger car. Wide reaching benefits to the UK economy Spin-off businesses and low carbon skills development projects have developed in the North East as a response to the Nissan LEAF and battery plant being built in Sunderland. Nissan estimates that over 1000 jobs will be safeguarded and a further 600 will be created in the supply chain as a result of the investment made by the UK in bringing the LEAF and battery plant to Sunderland. Such investment within the UK regions via GBI will be more crucial than ever if the UK is serious about rebalancing the economy. Relatively modest investment through GBI has the capacity to attract inward investment which in turn create jobs in high skilled manufacturing and attract further inward investment into the economy. In short it can be the catalyst to create in a virtuous circle of investment into the UK. Foreign governments are competing to maintain their manufacturing bases that have a capacity to export their way out of challenging economic times. The UK

has a clear choice of whether it chooses to fight for new business, new jobs, and rebalance the economy or allow the opportunity of this business to go elsewhere. As the UK arm of Nissan, we hope that the Coalition Government seizes this opportunity with both hands. Nissan Motor Manufacturing (UK) Limited September 2010

Facts about Nissan in the UK:

• Nissan’s Sunderland Plant started production in 1986 • Total investment in plant to date: 2.7 billion GBP • Total volume since start of production: 5.7 million units • Total 2009 volume: 338,150 units • Current workforce: 4,900 • UK’s largest car producer and exporter for the past 12 years • Produced a third of all cars built in the UK in 2009 • Juke, Note, Qashqai and Qashqai+2 are all produced at Sunderland Plant • The UK is Nissan’s biggest market in Europe • Over 80 per cent of production is exported to 45 markets worldwide • Sunderland Plant won a Queen's Award for Export, the fourth received

since the plant opened in 1986 • Advanced lithium-ion battery plant under construction at Sunderland, will

have a production capacity of 60,000 units a year and will start manufacturing batteries in 2012 for both Nissan and its Alliance partner Renault.

• Nissan’s LEAF Electric Vehicle will be manufactured at Sunderland Plant from early 2013 with an initial annual production capacity of around 50,000 units

• LEAF together with Sunderland battery plant production represents more than a 420 million GBP investment in zero emission mobility, supported by a 20.7 million GBP Grant for Business Investment (GBI) from the UK Government and a proposed finance package from the European Investment Bank of up to 220 million euros (180 million GBP).

• Nissan’s European Design Centre is located in Paddington, London and employs around 50 people

• Nissan’s European Technical Centre is based in Cranfield, Bedfordshire and employs around 750 people

1 October 2010

GAI 08

Memorandum submitted by The Scotch Whisky Association 1. Introduction 1.1 The Scotch Whisky Association (SWA) is the industry’s representative body, with a remit

to protect and promote Scotch Whisky worldwide. Its 56 member companies – Scotch Whisky distillers, blenders and bottlers – account for over 90% of the industry.

1.2 Scotch Whisky is Scotland’s leading single product export and the UK’s largest FMCG

export. Annual shipments in excess of £3.1bn in customs value represent over 20% of total Scottish manufactured exports and almost a quarter of total UK food & drink exports. The industry is worth £4bn a year to the economy, supporting 35,000 jobs.

1.3 The SWA works closely with the Department of Business, Innovation & Skills (BIS) and UK

Trade & Investment (UKTI). The Committee’s inquiry is therefore a welcome opportunity to review Government assistance. Our comments are focused on the reserved issue of international trade, specifically BIS and UKTI assistance to industry on export matters.

2. Scotch Whisky International Priorities 2.1 The Scotch Whisky industry is export-oriented, with nine out of every ten bottles sold

overseas. International growth, and optimism about future export potential, has supported in excess of £600m in new capital investment over the last two years.

2.2 The industry’s international trade priorities include improved and fair access to Brazil,

China, Colombia, India, Mexico, the Russian Federation, South Korea, Thailand, and Turkey. Equally, appropriate outcomes to negotiations within the WTO and EU free trade agreement framework, as well as on EU regulatory and accession issues, are important.

2.3 Scotch Whisky’s export potential is negatively impacted by tariff and non-tariff barriers

to trade. An SWA analysis (2010) identified around 660 separate barriers to the trade in Scotch Whisky in 186 markets. Issues include high import tariffs (e.g. 150% in India) and discriminatory taxes (e.g. in Colombia), as well as restrictive certification, labelling and licensing rules. Inadequate IPR protection can also undermine potential growth, whilst up to 15% can be added to the cost of a bottle of whisky by customs procedures. In each instance, export opportunities in a premium sector are lost.

3. UK Government Policy & Support 3.1 Efforts to improve the export environment, and to promote fair market access, are of

the highest priority to the industry. The SWA and its member companies are proactive in seeking to remove trade barriers, as well as supporting trade liberalisation that promotes Scotch Whisky.

3.2 UK Government assistance on trade issues is therefore vital. We work closely with BIS,

UKTI, DEFRA, and the British Embassy network. The support received over many years has proved invaluable and is generally of high quality. Working together, the industry and government can point to numerous trade barriers that have been removed, supporting the competitiveness of the sector and its supply chain.

3.3 The SWA enjoys a strong relationship with BIS on both trade policy and market access

issues. There is a regular and constructive dialogue on finding practical solutions to these issues. Progress is annually reviewed and efforts made to agree joint strategy. We have also welcomed the opportunity to participate in BIS trade policy seminars and forums. Only by maintaining and developing an open dialogue with business will the Government ensure that its ‘commercial diplomacy’ delivers measurable results for the UK economy.

3.4 BIS’ representation on the European Commission’s Market Access Advisory Committee

(MAAC), which considers external trade issues, has also been beneficial. The MAAC is an important mechanism for resolving market access problems confronting Scotch Whisky. More generally, ensuring the UK trade voice is heard within the EU is vital given the important role of the European Commission and the EU’s overseas delegations on trade issues.

3.5 The support received on EU internal market issues has been equally valuable, for

example in relation to complex dossiers regarding product labelling and prescribed quantities. Assistance on EU accession candidate issues has been welcome.

4. Looking to the Future 4.1 The industry has welcomed the Coalition Government’s engagement on trade issues and

the stress it appears to be putting on supporting UK exporters. The Prime Minister’s remarks at the FCO Leadership Conference (6 July 2010) and the UKTI business summit (14 July 2010), for example, highlighted the need to tackle trade barriers and open markets to British business. We agree that such an approach should be at the heart of foreign policy and that it has a vital role to play in supporting economic recovery.

4.2 We are encouraged that the BIS ‘Strategy for Sustainable Growth’, as well as its draft

‘Structural Reform Plan’, identify a need to develop exports. In this context, traditional manufacturing businesses, such as alcoholic drinks, should receive just as much support as new manufacturing sectors. There are major opportunities for accelerated growth in Scotch Whisky exports to both traditionally important and new emerging markets.

4.3 Plans to develop a Trade White Paper by the end of 2010, setting out a strategy for

growth through free and fair open markets, are timely. Key export sectors, such as Scotch Whisky, should have the opportunity to contribute to the development of the White Paper at an early stage.

4.4 The SWA supports the priority that is being accorded to completing the WTO Doha Round

and ongoing free trade agreement negotiations between the EU and major developing trading partners such as Korea, India, ASEAN and Mercosur. Trade liberalisation can enhance UK exports, whilst also supporting international development goals. The UK must provide leadership within the EU, countering protectionist tendencies within certain other EU Member States.

4.5 We look to BIS to ensure that the business perspective is understood clearly in other

Government departments. A good example has been the development of a holistic UK approach to alcohol, health and trade during discussions at the World Health Organisation.

4.6 In assisting UK business to develop its exports, domestic measures can be just as

important as overseas action. UK legislation can have negative, unintended consequences for exports. Fair and responsible taxation of alcohol in the UK, for example, would send out a clear signal to export markets, setting an important precedent. This autumn’s

review of alcohol taxation in the UK is an opportunity to update a system that is no longer fit for purpose. BIS, UKTI and DEFRA should be bringing their perspectives to that review, recognising that it would help to promote the end of tax discrimination against Scotch Whisky in overseas markets.

4.7 The impact of the day to day problems of getting goods to nearly 200 world markets

should not be underestimated. Route to market and trade facilitation issues should continue to be addressed. The SWA therefore welcomes the Government’s continuing assistance, both bilaterally and through the EU’s market access strategy, towards resolving market access problems in key export markets.

5. Responsibility for International Trade issues 5.1 Trade policy, market access, trade defence and EU internal market work should be

driven forward by BIS and FCO, helping to deliver on the Government’s commitment to promote exports and ensuring a co-ordinated Governmental approach.

5.2 The SWA also welcomes the work of UKTI. We have received excellent support from UKTI

staff in overseas posts in relation to export promotion activities and events. That work is rightly financed through the charging structure of the Overseas Market Introduction Service (OMIS).

5.3 Our experience has been, however, that there can be reluctance in commercial posts to

commit resources to industry-level trade policy issues, which are not chargeable under OMIS. Consistency across the UKTI network is important. In this context, we welcomed the Committee’s report ‘Exporting out of Recession’ (January 2010), which touched on some of the issues regarding OMIS. The SWA has also received welcome assurance from UKTI that trade policy work should not be chargeable under OMIS.

6. Conclusion 6.1 The Association receives valuable support from the UK Government – including BIS, the

FCO and UKTI - on international trade issues. On both trade policy and market access, there is positive engagement and a willingness to work with the industry to secure improved trading conditions.

6.2 We welcome the new Government’s desire to emphasise the importance of international

trade within its foreign policy agenda. To ensure that approach is as effective as possible, trade policy work should be led by BIS and FCO, co-ordinating closely with colleagues in other departments as appropriate.

23 September 2010

GAI 09

Memorandum submitted by The West Midlands Regional Finance Forum We welcome the opportunity of submitting this evidence as the availability of appropriate finance is a key requirement for a healthy and flourishing economy at the local, regional and national levels. There is a wealth of evidence that there has long been a lack of appropriate finance to certain businesses at various stages of their development. This has been particularly the case for SMEs in their early stages, but also extends to more mature SMEs in certain circumstances. Government at the national and regional level has sought to address those issues through a variety of instruments, in particular the Enterprise Finance Guarantee scheme (and its predecessor the Small Firms Loan Guarantee scheme), a range of public sector backed venture capital and loan funds, Community Development Finance Institutions, fiscal incentives, support for business angel and high net worth investment activity and, on the demand side, investment readiness support to businesses seeking finance. These schemes have had varying degrees of success, but all have enabled businesses to access finance that would otherwise have been unavailable to them.

That underlying situation has been dramatically worsened by the recent recession which has led to a considerable retrenchment on the part of the financing community and a high degree of caution on the part of businesses. If not satisfactorily addressed, that combination will conspire to reduce the pace of the private sector led recovery that is our and Government’s objective.

This evidence is based on a combination of research commissioned on the advice of the Regional Finance Forum, the personal experience of the members of the Regional Finance Forum (see Annex1) in addressing the financing needs of businesses, particularly SMEs, over many years, and regular review of the impact of interventions put in place in the West Midlands during the period since 2002. The response is therefore supported by a wealth of practical experience in the business finance field.

Annex 1: MEMBERSHIP OF THE REGIONAL FINANCE FORUM MEMBERSHIP OF THE REGIONAL FINANCE FORUM

Norman Price Company Director/Business Angel

Ederyn Williams Director - Warwick Ventures

David Totney Director - Santander Invoice Finance

Nigel Mills Strategic Director - RBS Invoice Finance

Andy Youngman Area Director - Lloyds TSB Commercial

Rob Bailey Managing Director - NatWest and RBS Business and Commercial Banking for the Midlands

Paul Heaven Director- Blue Sky Corporate Finance Ltd

Mark Embley Vice President - Barclays Wealth

Rob Hill Finance Director –Metallisation Ltd and President of Wolverhampton branch of ICAEW

Stuart Gray Director - RSM Tenon Corporate Finance Limited

Jonathan Hall Director, Howard Denton International/Chief Executive, HDI Capital Partners LLP

John Kelly Regional Managing Partner – Begbies Traynor Group Plc

Chris Brown Director – Straight Business Solutions

Jane Lewis Corporate/Commercial Solicitor – Waldrons Solicitors

Sally Arkley Director – Women’s Business Development Agency

Steve Walker Chief Executive of Aston Reinvestment Trust and Co chair of Birmingham and Solihull Social Economy Consortium

David Rowe Chief Executive - University of Warwick Science Park

Paul Kalinauckas Chief Executive - Black Country Reinvestment Society Ltd and Chair of the Fair Finance Consortium Ltd

Tony Sealey Managing Director – Canefield Limited and member of the National Access to Finance Expert Group.

Mike Cherry Policy Chairman, Federation of Small Businesses; Director- W.H. Mason and Son Ltd

Roger Trotman Business Voice West Midlands Council Member

Kevin Foster Deputy Leader of Coventry City Council and Cabinet Member for Finance

Sue Lewis Partner - Eversheds LLP

Bob Cox Business Consultant and Board member of the Advantage Transition Bridge Fund Ltd; former executive with Barclays Bank.

Observer

Graeme Chaplin Agent (West Midlands and Oxfordshire) – Bank of England

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EVIDENCE FROM THE WEST MIDLANDS REGIONAL FINANCE FORUM TO THE BUSINESS, INNOVATION AND SKILLS COMMITTEE’S SECOND INQUIRY OF THE NEW

PARLIAMENT INTO GOVERNMENT ASSISTANCE TO INDUSTRY

Executive Summary

a) The Banking Sector Environment Bank relationships with customers have suffered considerably over the last 2 years and much work is required to repair them. Banks need to understand far more the needs of their SME customers and be more transparent in their charging structures and reasons for offering particular forms of finance. SMEs need to be better informed as to what types of finance are appropriate in what circumstances and to be prepared to explain to their banks why they prefer finance in one form rather than another. The current rigid prescribed mechanisms of large banks, including credit scoring, whilst reducing their costs and need for local skills, inevitably mean they miss some deserving investments and there is a need and opportunity for banks to be encouraged to adopt a more co-ordinated approach with other funders and business advisor/brokers to enable SMEs to be offered an appropriate funding package b) Need to address the divergence between the banks’ reported view of “demand” and

the well publicised experience of many SMEs Definitive research needs to be carried out to resolve the question of whether banks are denying SMEs the credit facilities they need to grow and develop. Whilst the recently announced Experian review commissioned by the banks may address this issue in part, our expectation is that it will only consider rejections which occur at a formal credit committee level. It will fail to address those enquiries for borrowing which are rejected in a less formal manner before being put to credit committee or the number of businesses which are discouraged from approaching banks because of their expectation of rejection in the current climate. c) Enterprise Finance Guarantee (EFG) scheme The EFG is a vital tool to allow lending by banks to businesses with insufficient track record or security. It bridges the short term gap between the financial objectives of the banks and the economic objectives of the community. Such a scheme has been a key part of the UK and other financial landscapes for over 25 years. However it does not achieve maximum benefit because the manner in which it is operated generally focuses solely on security, with the result that requests for finance from start ups or for finance based on growth forecasts rather than historical performance are frequently unsuccessful. In addition there is inconsistency in the manner in which the scheme is operated within and between banks, particularly with regard to security and personal guarantees which is inbuilt on the Government guidance. The approach to requiring personal guarantees when many of the benefits fall to the community, strikes many SME directors as unfair and leads to a number of offers made being turned down because of overly onerous terms. This matter should be addressed in any further iteration of the scheme and suggestions relating to this are made within the body of this response.

i. Use of intermediaries (such as Community Development Finance Institutions - CDFIs) Banks should support and make more use of intermediaries such as CDFIs

ii. Mezzanine Finance Bank participation could also extend to new instruments such as mezzanine funds with higher interest rates and equity kickers. We consider that the level at which such a product is required

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start as low as £50,000. It is also possible that the lower level requirements of mezzanine type funding could be met by the banks using an adapted form of Enterprise Finance Guarantee.

iii. Supply Chain Financing We believe this can be of use in certain circumstances and could be far more widely used by public and large private companies. d) The role of invoice discounting and credit insurance The disruption in business finances and subsequent company confidence that resulted from the withdrawal/reduction of credit insurance cover on sectors and individual customers and the consequent impact on the availability of invoice discounting and factoring facilities needs to be addressed by Government, businesses, asset backed lenders and credit insurers to ensure that lessons can be learned and trust in this important form of finance rebuilt. e) Export finance Many SMEs are concerned at the lack of readily accessible export finance instruments. This is exacerbated by a perception that bank staff dealing with SMEs frequently lack the knowledge and expertise to be able to assist in this area. To achieve an export led recovery urgent action is required in this area to enable SMEs to take full advantage of the opportunities which exist. f) HMRC We believe that the approach of HMRC to tax deferments was one of the most important actions of the previous government in supporting SMEs. Clearly, the deferred tax needs to be repaid but the manner in which this is done is crucial. g) Debt capital markets BIS should commission research to ascertain what circumstances have given rise to debt markets in the USA being more open to smaller businesses seeking smaller sums of money and how this form of finance can become more widely available in the UK. h) Promoting greater competition Government needs to ensure that necessary tightening in the regulatory environment doesn’t have the impact of favouring the largest players with the strongest balance sheets. In the USA government uses the banking licence procedure to encourage greater banking activity by existing institutions, particularly in disadvantaged areas. When SMEs need finance it is not possible at that point to change banks. This why codes of practice are needed and policed.

i. Research and Development There are certain categories of activity (particularly R&D) where the nature of the activity is of such uncertain outcome that external finance may not be available. In such circumstances there is a requirement for other financing products, such as the Grant for R&D and R&D Tax Credit.

ii. Capital investment There is also a need to encourage investment in new assets to improve the competitiveness of businesses, particularly those based in areas where productivity and historical levels of investment is below the national average. This can be stimulated by fiscal measures and financing products such as the Grant for Business Investment.

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DETAILED EVIDENCE a) Overview of the Banking Sector Environment There is little doubt that the perceived attitudes and actions of the banks in the early stages of the credit crunch dramatically undermined the relationship between banks and their customers. More recent behaviours and the introduction of Customer Charters are going some way to restoring these relationships, but there is still much to be done. This is important for small businesses, (particularly those which do not have sufficient high growth potential to attract venture capital or business angel support), as these are dependent to a large degree on bank finance. It is therefore particularly important for the small business sector of the market that relationships between banks and their small business customers can be restored and improved. There is a perception that banks do not really understand the nature of smaller businesses and hence look on them as “small large businesses”. There is insufficient effort to understand the needs of smaller businesses and also a desire to “sell” the banks’ preferred products with insufficient consideration as to whether they are the best ways of supporting the business customer. This is particularly the case with products such as invoice discounting, where the small business perception is that something is being thrust upon them when they would prefer to have a simple overdraft facility. Therefore banks need to make far more effort to understand the needs of their business customers, to act fairly with them, and to explain fully why particular products may be appropriate and particular charging structures are required. Bank managers need to explain why products such as invoice discounting are so attractive to them, but also to recognise that the circumstances of particular businesses may render other solutions more appropriate. There is also concern that arrangement fees and renewal fees have risen sharply and lending spreads have increased, particularly for small businesses. These factors discourage small businesses from seeking finance to grow and develop. Banks therefore need to ensure that they adopt fair charging structures and explain them well to customers. They also need to avoid the impression that they sometimes abuse a position of power, particularly in charging excessively when a business is experiencing trading difficulties, thereby restricting their ability to secure finance elsewhere. SMEs, for their part, need to recognise that we have moved from a time when credit was cheap to one where it is more expensive and less readily available. In assessing any offers of finance they need to focus on the benefits they will generate from taking up offers of finance, rather than purely on the perceived cost of the finance being offered. Equally businesses, with their advisers, need to assess with a more open mind whether different types of finance may be appropriate in particular circumstances. If they feel their bankers are offering an inappropriate form of finance they should be prepared to argue their case and see if a more satisfactory position can be negotiated. Government should ensure that its responses and comments on the banking situation are fair and reasonable – at the height of the credit crunch, for instance, it was inappropriate to draw attention to the disparity between base rate and the amounts charged to customers, as very few banks (if any) had a cost of capital anywhere near base rate. No small business would be expected to conduct its affairs at a gross loss and banks shouldn’t be asked to do so either. That said, it is a fair point that if banks retained more of their profits and paid lower bonuses they would be able to strengthen their balance sheets more quickly. As regards actions to improve the financial readiness of businesses there needs to be better communication between finance providers, businesses and their advisors. Other areas in which improvements could be made include:

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• Standardisation of documentation required to support applications for finance (e.g. standardised business plan formats and financial forecast requirements;

• Clear, like for like, cost comparisons between different forms of finance where these are being discussed with customers (e.g. between invoice discounting and a comparable overdraft facility).

• Banks can work with Businesses and their support providers to make investments applications better rather than just acting as a go/no-go operation.

b) Experience of recent years in banks’ provision of finance to SMEs A common perception is that it was easy for SMEs to obtain credit in the run up to the finance crisis. However, for some time, probably over 10 years, there has been a growing reluctance for banks to assess SMEs on an individual basis. They reverted to credit scoring and a preference for security over any form of cash-flow based lending. This reduced their assessment costs and eventually their capabilities at branch level. As a result SMEs have not had the over generous lending that has been available to mortgages, private credit cards, or to larger companies, including those financed by private equity. c) The divergence between the banks’ reported view of “demand” and the well

publicised experience of many SMEs There is considerable evidence that there has been a further net reduction in lending to SMEs in recent months. Much of this is attributed to businesses deferring investment decisions until the economic outlook is clearer and strengthening their balance sheets where they are able. This results in a reduction in demand. However, many businesses, particularly SMEs, are reported as having been unable to obtain the facilities they need to take their businesses forward. A recent IoD survey in the West Midlands reported that only one third of businesses seeking finance had successfully obtained the amount they were seeking. In addition SMEs report the imposition of high arrangement fees, higher interest margins and harsher security requirements, particularly for personal guarantees, even where the Enterprise Finance Guarantee is in place. These factors make SMEs reluctant to approach their banks for finance or to accept the onerous terms on which finance is offered. Even more worryingly they reduce their appetite to ‘bother to grow’. Unless these issues are addressed, future growth may be held back by an inability to obtain finance on acceptable terms. In part this requires a change in the mindset of SMEs to recognise that credit in the past has been available too cheaply; but even if they do this, it will not mean that their appetite for using credit to grow their businesses will necessarily return. However, banks too need to review their practices and ensure that they are dealing in an open, realistic and fair manner with their customers. Beyond that if they are not prepared to take a longer term economic view, rather than a short term financial one; there will still be a gap in SME finance. Definitive research needs to be carried out to resolve the question of whether banks are denying SMEs the credit facilities they need to grow and develop. Whilst the recently announced Experian review commissioned by the banks may address this issue in part, our expectation is that it will only consider rejections which occur at a formal credit committee level. It will fail to address those enquiries for borrowing which are rejected in a less formal manner before being put to credit committee or the number of businesses which are discouraged from approaching banks because of their expectation of rejection in the current climate. d) The impact of invoice discounting and factoring on the market for SME finance The Government’s Green Paper on Financing a Private Sector Recovery (the ‘Green Paper’) suggests at Paragraph 3.30 that “There do not currently appear to be constraints on these markets”, “these markets” being taken to include Asset based finance such as invoice discounting and stock financing. The experience of many businesses during the recession has

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been that the availability of invoice discounting facilities changed dramatically overnight, with credit limits being slashed and some customer limits being reduced to zero. The position was exacerbated (and, in many cases, caused) by credit insurers cutting levels of cover on certain customers and removing cover altogether in some sectors, such as retail, construction and automotive. This led to many businesses suffering financial distress as their financing facilities were cut dramatically. A high proportion of the customers of the Advantage Transition Bridge Fund (the region’s Transition Loan Fund which made loans of between £50,000 and £250,000 to viable businesses which could not secure mainstream funding between November 2008 and 2009) had experienced these problems and had therefore had to seek finance from other sources. The impact of this experience is that many SMEs are now highly sceptical of invoice discounting as a source of finance as its shortcomings have been so dramatically highlighted. Reduced turnover leads to lower facilities, but in difficult economic times that mathematical impact can be compounded by a reduction or removal of credit limits. Whilst we believe that invoice discounting will be a valuable source of finance as businesses recover and turnover increases, banks and other providers of this sort of finance will need to address the concerns of SMEs in this respect and explain why they consider such forms of finance more appropriate than the loan and overdraft finance which SMEs have typically used. In addition to the issues discussed above, many SMEs have found invoice discounting unavailable to them as regards export customers, and the availability of stock financing in the SME sector is much lower than the throwaway line in the Green Paper suggests. Indeed our experience is that stock financing is largely unavailable to SMEs. Some large companies, including in the public sector, refuse to let SME suppliers use invoice discounting; it appears on a whim/prejudice! In our view there is a clear need to research the role of credit insurers and invoice discounting generally and, in particular, in difficult economic times when conditions in these areas can change overnight. e) The apparent divergence of view between the manner in which Government believes

the Enterprise Finance Guarantee is being operated and the reality on the ground The Green Paper states in paragraphs 3.8 and 4.15 that the Small Firms Loan Guarantee Scheme and the Enterprise Finance Guarantee Scheme were intended to address situations where the lender found it difficult to assess the credit worthiness of a particular proposition because of a lack of track record or security. Our experience is that banks use the EFG almost exclusively to address issues of security rather than track record, and that this reluctance to use the Scheme in the absence of a track record also extends to a reluctance to use it where forecasts are based on growth rather than a continuation of the status quo. This issue needs to be addressed if businesses forecasting growth are to be adequately financed as the economy recovers. In terms of what options the Government might consider to support increased lending to business our view is that the objective of Government actions to support increased lending to businesses is to increase the availability of finance to businesses which would not otherwise be available. It is not merely to see a significant take up of the particular initiative implemented, particularly if this leads to increasing take up of the scheme by banks for lending which they should be doing in any case (e.g. by extending coverage of the scheme to some mid-sized businesses…which may have a lower credit risk than SMEs”). In assessing options for further Government actions there needs to be a focus on what currently makes it unattractive for banks to lend to businesses, particularly SMEs. In our view the factors which make lending to SMEs unattractive in certain circumstances are: • The risk of default; • The relatively low levels of income which banks can achieve from smaller business

customers relative to the higher risk of lending.

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The risk of default is addressed to some degree by the EFG, but the 25% exposure is still significant in the context of the relatively low levels of income achieved from lending to smaller businesses, particularly when allied to the 9.75% cap on claims. This leads banks to excessive caution in assessing small business lending propositions which exacerbates the cost: benefit ratio. Accordingly we would suggest that the level of guarantee is raised to 90% for smaller businesses and start ups. This was a position allowed by the EU under state aid at the time of the credit problems but was not taken up when the EFG was introduced as a replacement for the SFLG. A further incentive to lend to smaller businesses could be provided through the fiscal system, for instance by applying a lower level of Corporation Tax to profits on business carried out with smaller customers or, if transaction taxes are introduced, they should be alleviated for SME lending. An alternative could be for SMEs to be allowed higher levels of tax relief on interest charges and other costs related to raising finance, thus allowing banks to charge what they regard as the commercial rate whilst bringing the net cost suffered by the SME down to more acceptable levels.

As regards the detail of the EFG, firstly, we must emphasise that the existence of a government backed loan guarantee scheme is an absolutely fundamental need for SMEs, no matter what its exact faults. It has been in existence since 1981 at a rate of over £250m per year and has arguably not kept pace with inflation recently and is prevalent in some form or other in most of our international competitors. To deny its importance and legitimacy, as some free market economists have sought to do, is to fly in the face of all the evidence of its benefits. The justification for the EFG and its structure is not purely a question of financial cost but of economic value. It is generally used only when traditional lending is not available and therefore by definition is short term incremental investment in the business with additional economic benefits for the nation. The general criticism that the default rate is higher than normal lending is spurious. If that was not the case then our banks would truly be seen as totally incompetent, which is clearly not the case. It is the bridge between financial and economic benefit for our current complex state systems.

Detailed areas in which we would like to see the EFG improved are: • Enforce the use of the scheme for circumstances where there is insufficient track record

(including with regard to prospective growth), rather than the current situation in which banks largely use the scheme to meet shortcomings in security; this will probably require an increase in the banks’ assessment capability at a local level;

• Greater clarity and guidance about the extent to which personal guarantees and other security should be sought. There is a perception amongst SMEs that the banks seek a “no risk” situation in which the Government covers 75% of the risk and the balance is covered by personal guarantees, frequently for 100% of the borrowing (and never less than 25%). This strikes SME directors as unfair and an inappropriate position only for them, and fundamentally a repudiation of the Companies Act position which separates personal assets from those of the business. This position is a government responsibility and they cannot hide behind the banks;

• Greater clarity of the extent to which EFG can be used for a business with a significant level of export activity (as opposed to specifically for export finance);

• Relaxation of the overall 9.75% cap on claims which banks can make in respect of their EFG lending which was never present in the SFLG which this EFG replaced.

We would not like to see the cost to the borrower increased, particularly whilst there is a perception that excessive personal guarantees are being sought by some banks. There is already a perception that EFG money is relatively expensive and we know that perceived high rates can act as a disincentive to businesses accepting offers of finance. We would not suggest

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any attempt to increase the cost to the borrower until such time as the impact on defaults of the bank being allowed (under EFG) to take personal guarantees can be assessed. As regards the effectiveness of the EFG in addressing the financing needs of businesses, we have calculated that EFG has accounted for approximately 2% of SME lending since its implementation. Given the claims of SMEs that banks are not lending to them, this seems a relatively small proportion of total SME lending. We believe that this is a result of two factors, firstly the banks’ focus on EFG as a means of covering a lack of security (rather than track record or other risk characteristics) and secondly the perceived unfairness of some of the conditions imposed by the banks (e.g. excessive arrangement fees, excessive pursuit of personal guarantees, etc). As indicated above, we suggest these issues should be addressed by Government reinforcing positive guidelines to banks as regards the manner in which the scheme should be operated. f) Securitisation The lessons of the credit crunch indicate that a key issue in making securitisation more attractive to investors is to increase the transparency of what assets are actually being securitised and to ensure that credit ratings given to securitised vehicles are robust and well founded. This implies that the chain between the investor and the underlying assets being securitised should have few links and that the underlying assets should be identifiable and verifiable. Securitisation of sound assets as a route to raise growth finance can accelerate growth (as the Northern Rock experience demonstrates): however, Northern Rock also demonstrates the difficulties that arise if the securitisation is of assets which are worth less and of greater risk than investors originally appreciate. i) Supply Chain Financing We believe this can be of use in certain circumstances. We know of its use by one local authority and believe that it could be far more widely used by public and large private companies. It is a mechanism of introducing more secure assets into the whole financial system. It is possible, that large and secure purchasers could act as guarantors for goods and invoices from their suppliers which would be particularly helpful to SMEs and help them to grow and provide more competitive supply to both the public and the private sector. It might be possible for this to be done on a combined national or regional basis through some major banks. Santander is a leader in this field following some of its successful Spanish experience. However, Supply Chain Financing may suffer from some of the same issues as Invoice Discounting, particularly where certain sectors go out of favour (as is still the case with much of the automotive sector). j) Use of intermediaries (such as Community Development Finance Institutions) A fundamentally different way for banks to get involved in lending to SMEs is by using/supporting intermediaries. Already this has happened in the support of CDFIs where banking finance can be protected to a degree by the use of public grants (sometimes part financed through ERDF). The CDFIs can take a more portfolio based approach to lending whilst still providing sufficient security for the banks to have an appetite to lend to them. During the credit crunch lending by CDFIs in the region doubled and ongoing demand indicates that viable business propositions are not being funded from mainstream sources. k) Mezzanine Finance Bank participation could also extend to new instruments such as mezzanine funds with higher interest rates and equity kickers (such as were adopted by the original ICFC). We have had some indication of an appetite for such bank participation in our attempt to introduce a

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mezzanine fund in the West Midlands. Our expectation is that the proposed Growth Capital Fund will effectively provide a mezzanine product, although we consider that the level at which such a product is required starts well below £2 million. In fact we would suggest that it could start as low as £50,000. This is borne out by research carried out at the Regional Finance Forum’s request by West Midlands Enterprise Consultants. This report concluded that the: “findings demonstrated an area of market failure due to the lack of provision of unsecured loans of between £50,000 and £1 million and adequate business support alongside the finance”. We have some doubts as to whether the mezzanine gap really extends as high as £10 million: if it does so then we would regard that as a function of the current economic circumstances rather than a consistent, long term issue. It is possible that the lower level requirements of mezzanine type funding could be met by the banks using an adapted form of Enterprise Finance Guarantee. However, for that to happen there would need to be a significant change in the way the banks applied the scheme to put greater emphasis on the extent to which the scheme could be used to support lending to businesses with insufficient track record, or a growth forecast which the bank found hard to validate. The original ICFC was supported by the clearing banks and the Bank of England and was very successful for them and the economy in the mezzanine space. However, in the absence of such an approach, some form of publicly backed mezzanine provision is required from £50,000 upwards. l) International Trade It is particularly important that trade finance for UK exporters is readily available if we are to experience an export led recovery. However, recent evidence suggests that trade finance for export activity is a difficult area for SMEs in particular: • Credit insurance is available on an at best patchy basis; • Invoice discounting of export debt is often difficult to achieve at a suitable level; • Government support with such as EFG has been refused by banks as against government

guidelines; • More exotic destinations which are helped by ECGD for larger companies and contracts are

not available for SMEs; • Banks and invoice discounters have during the recent credit problems often adopted a

sectoral exclusion approach even on existing contracts. International banks should be well placed to address this issue, with their broad international coverage. We understand that some banks such as RBS/Nat West have adopted their own portfolio approach to some exporting, excluding the need for third party insurance. We believe that international banks with no UK presence, particularly in the fast developing markets, may be encouraged to support this activity. In addition, banks may be able to put in place improved documentary credit arrangements which make export finance more readily available. Our perception is that banks’ own staff have limited exposure to export finance arrangements and that standards and processes within and between banks vary significantly. A further frustration is the restrictive attitude many banks exhibit to the prohibition on using EFG for export credit activity. Our reading of the EFG rules is that as long as EFG is not used explicitly as an export credit line, EFG can be used to support investment (including in working capital) by a business a significant part of whose activity is in export markets. The application of this rule therefore needs clarification. m) HMRC The HMRC Business Payment Support Service/Time to Pay scheme has been a valuable lifeline to many businesses during the recession. However, there have been issues with it which

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should be addressed. In the first instance the scheme seems to have been offered too readily, with the result that a number of businesses availed themselves of the scheme when in practice they did not need it. Conversely, as time went by it became progressively more difficult to access the scheme, particularly if initial repayment forecasts were not achieved. Whilst recognising that the main job of HMRC is not to assess credit risks, it is important that propositions are considered on a case by case basis and handled appropriately. In some instances a determination to put businesses into administration may have acted to the detriment of both HMRC and the business concerned. How this now unwinds is a key concern and maybe an opportunity for fresh private sector involvement. A proposal has been made that the banks should take over the debts (subject to them being indemnified, maybe using the EFGS). This would bring them back into the SME market and replace Government debt with bank debt. There have also been suggestions about them being developed into a series of Bonds sold on the market which could create a new credit instrument as suggested earlier. n) Debt capital markets Our perception is that larger businesses can access debt capital markets appropriately but the Green Paper implies that debt markets in the United States of America are more open to smaller businesses seeking smaller sums of money. We would therefore suggest that BIS commission research to ascertain what circumstances have given rise to this situation and how this form of finance can become more widely available in the UK. In the past there has been discussion with intermediary institutions about the provision of grouped bonds which are then available to individual SMEs. This could be good way of introducing new capital into the market place and again is worth a trial. Later we talk about the possibility of using the outstanding HMRC loans as a start to new debt capital markets. o) Promoting greater competition Greater competition will appear when business demand for finance and business prospects improves. This has been demonstrated in successive banking cycles and is borne out by the recent trends in the impact of lending from overseas sources to UK businesses. At the moment overseas providers have largely withdrawn from the market to sort out their balance sheets and stabilise themselves. A limited amount of splitting up of UK banks will help re-introduce competition (e.g. the divestment of certain activities by RBS and Lloyds Banking Group). Government needs to be cautious, however, that Government backed initiatives aimed at stimulating competition do not, in fact, crowd out the private sector. Government also needs to ensure that necessary tightening in the regulatory environment doesn’t have the impact of favouring the largest players with the strongest balance sheets. Such an approach would clearly reduce, rather than increase, competition. Visits to the USA have demonstrated there that the government uses the banking licence procedure to encourage greater banking activity by existing institutions, particularly in disadvantaged areas. Generally the concept of competition between banks is flawed for SMEs who need finance. It is not possible at that point to change banks and therefore any company is totally dependent on the arbitrary power of their bank. This is a major reason why codes of practice are needed and policed.

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The current modest level of return from mainstream investments also gives rise to an opportunity to encourage Business Angels to enter the debt finance market as well as the equity market. We are aware of Funding Circle (see www.fundingcircle.com) which seeks to mobilise investors to lend to businesses seeking up to £50,000, although this will not provide access to finance for start ups or those with less than 2 years trading history. We are also aware of other new organisations looking to encourage lending by Business Angels at a higher level, one of which is a West Midlands based VC/angel organisation. This activity could be encouraged further, if the scope of the Enterprise Investment Scheme was extended to enable lending instruments to benefit from reliefs as well as equity investment. Also, the higher the quality the propositions, helped by intensive investment readiness programmes, the greater will be the competition to supply finance. p) Future Risks Our principal concerns are that banks’ appetite to lend to businesses will recover more slowly than businesses’ requirements for additional resources to support growth, that businesses will perceive the cost at and terms on which they are offered growth finance to be such they would prefer to lower their growth aspirations and turn down the finance offered and that with more demanding capital requirements there is a danger that the cost of finance will increase and availability of finance will reduce further. Part of these concerns relates to transitional issues brought about by the financial crisis, However, it is likely that the ongoing landscape of business finance will reflect a generally more prudent attitude to lending and with a higher risk premium factored in. It should also be recognised that the finance supply from the private sector for SMEs has been inadequate for at least the last 30 years and needs public interventions. It is not just a feature of the recent credit issues. It is a fundamental structural issue in that, at least in the short term, the economic benefits for the nation are not coincident with the financial returns desired by the banks and other lenders, which consequently prefer to invest in other areas. Instruments which can help address these concerns are: • Continuation of improvements in the way the Enterprise Finance Guarantee scheme works; • Ensuring a suitable array of public sector backed venture capital and loan funds; • Making it more attractive for Business Angels and mainstream finance to invest using

different instruments (e.g. loan and mezzanine funds ); • Thoughtful and comprehensive, positive tax incentives for investors; • Increased financial awareness amongst businesses, particularly smaller ones; • Ensure availability of skilled brokers and market places by public support. q) Other issues i. Research and Development

There are certain categories of activity (particularly R&D) where the nature of the activity is of such uncertain outcome that external finance may not be available. In such circumstances there is a requirement for other financing products, such as the Grant for R&D and R&D Tax Credit. ii. Capital investment There is also a need to encourage investment in new assets to improve the competitiveness of businesses, particularly those based in areas where productivity and historical levels of investment is below the national average. This can be stimulated by fiscal measures and financing products such as the Grant for Business Investment. WEST MIDLANDS REGIONAL FINANCE FORUM - SPETEMBER 2010

  

GAI 10  

Memorandum submitted by The Heating and Hotwater Industry Council  

1. Introduction  The Heating and Hotwater Industry Council (HHIC) welcomes the opportunity to submit evidence to the Business, Innovation and Skills Select Committee inquiry on Government assistance to industry.    HHIC understands the Committee will be reviewing key three themes as part of their inquiry process. Our  submission,  addresses  the  first of  these  themes,  the  role of Government  in providing  grants through  industry  focused  programmes. HHIC  and  our membership  have  unique  experience  here, through the Boiler Scrappage Scheme, which was introduced in January 2010. The 50 million scheme was established to support the UK boiler and heating industry as well as to generate carbon savings by encouraging home owners to replace inefficient central heating boilers.  The  scheme  proved  to  be  highly  successful  and  stimulated  rapid  take  up  by  homeowners.  Both consumers and the heating and hotwater industry benefited directly from the Government scheme and our submission outlines the valuable role this scheme played to the Committee.   

2. HHIC  The Heating and Hotwater Industry Council (HHIC)   is the representative body for the UK domestic heating and hot water industry, worth £3‐4 billion. 93‐95% of heating and hot water solutions in the UK are covered by HHIC’s membership, and members are committed to supporting and promoting the sustained growth of a low carbon economy.  

As  an  independent,  expert  knowledge‐base  for  UK  domestic  heating  and  hot  water,  HHIC  can support Government  in  the  development  of  effective,  long‐term  energy  efficiency  policy  for  the benefit of the consumer, UK manufacturing and UK carbon reduction targets.   

3. The UK boiler and central heating industry  The heating  industry makes a major contribution to the UK economy.    In 2009 over 1.5 million gas and oil  central heating boilers were  sold and  installed  in  the UK. About 80% of  these boilers are manufactured  in  the UK  and  account  for  about  10,000 manufacturing  jobs.  In  addition  new  and replacement boiler  installations  require other  components  such as  controls and pumps.  Including installation  then  the  total  number  of  jobs  involved  in  this  sector  is  over  120,000.    Total  annual turnover is some £4 billion.  

4. Improving the efficiency of boilers in UK homes  Since 2005  the UK has  the most demanding minimum energy efficiency  installation  standards  for domestic boilers  in  Europe. Building Regulations  in  England  and Wales were  revised  in 2005  and required  that  in  most  cases  condensing  boilers  would  become  the  minimum  installation requirement.  Similar  provisions  were  subsequently  made  within  Scottish  and  Northern  Ireland 

  

Building Regulations. As a result over 99% of boilers installed in the UK marker are the most energy efficient condensing boilers with efficiencies of about 90%.    There  are  some 22 million  central heating boilers  installed  in UK homes. At  the end of 2009  the number of boilers in each of the efficiency bands A to G was as follows.   

Total A B C D E F G 2009 21,920 5,701     1,671     65     5,136     3,090     2,053     4,205     (Thousands of boilers)  Whilst Building Regulations across the UK require that when a boiler is replaced then in most cases a condensing  boiler must  be  used,  there  are  no  requirements  or  incentives  for  home  owners  to replace  existing working  boilers.  The  table  shows  that  there were  still  some  4.5 million  Band G boilers in use in UK homes at the end of 2009. Whilst these boilers are inefficient (many well below 60%) there tend to be extremely robust and can be easily and inexpensively repaired when they go wrong. As a result very long service lives (well over 30 years) are common.  As a result home owners have proven reluctant to replace old boilers despite the well publicised benefits of improved energy efficiencies  and  reduced  fuel  bills  resulting  from  the  installation  of  condensing  boilers. Market modelling forecasts had shown that there would still be over 1 million Band G boilers  in use  in UK homes  in  2020.  Industry  had  provided  evidence  of  this  and  had  lobbied  for  an  incentive  to encourage home owners to replace old inefficient boilers.   

5. Boiler Scrappage Scheme  In the December 2009 Pre Budget Report, the Government announced the intention to introduce a £50 million boiler scrappage scheme known as the  ‘Green Boiler  Incentive’. This would provide an incentive of £400  to help up  to 125,000 households  to  scrap  their old boilers and upgrade  to  the latest high efficiency models. The Government’s objectives were to:  

• Help  sustain work  for  installers and UK based boiler manufacturers  through  the economic recovery 

• Reduce a household’s energy bill by between £200 and £235 a year • Reduce carbon emissions by a total of 140,000 tonnes of CO2 per year  

  Following this announcement  Industry was invited to work closely with DECC to advise on a scheme which  would  be  easy  for  householders  to  access,  would  be  available  for  all  products  and appropriately qualified  installers  and would have  low  administration  costs. The  resultant  voucher scheme was launched on 5 January 2010 and was administered by the Energy Saving Trust  The scheme was a major success. There was an immediate high demand from householders for the vouchers and by 26 March all 125,000 vouchers had been issued and the scheme was closed. Home owners were given three months from issue of the voucher for the new boiler to be installed and for the voucher to be redeemed. Within a few weeks of 26 March the Energy Saving Trust reported that virtually  all  of  the  vouchers  that  had  been  issued  had  been  redeemed.  Checks  had  also  been included  in  the  scheme  to  prevent  fraudulent  applications  for  vouchers  and  to  ensure  that  only eligible boilers  i.e.   working Band G boilers, would qualify  for  support. Monitoring by  the Energy Saving Trust has demonstrated very high level of compliance.  

  

Boiler sales statistics collected by HHIC also confirmed the very high demand for boilers during the period that the boiler scrappage scheme was in operation. During the first quarter of 2010 gas boiler sales were more  than  11%  higher  than  the  same  period  in  2009  resulting  in  increased  business across the supply chain including manufacturers, distributors and installers.  The  scheme  received  near  universal  praise  in  delivering  its  main  industry,  consumer  and environmental objectives.  It also fully met the other requirements of ease of access, opportunities for all industry players to participate and simple and low cost administration.   

6. Conclusion  A number of lessons can be learnt from the Boiler Scrappage Scheme that HHIC hope the Committee will  take  into account  in  their review of Government assistance programmes. The  two key  lessons are:  

• A simple and  readily accessible consumer scheme can provide highly effective support  for industry and can deliver real benefits to consumers 

 • A small but appropriately designed and targeted incentive can have a strong influence over 

consumer behaviour. In this case a simple £400 voucher encouraged homeowners to spend typically a further £2000 ‐3000 to replace an old inefficient boiler with a new efficient model 

 28 September 2010 

GAI 11

Memorandum submitted by the City of London Corporation Submitted by the Office of the City Remembrancer

Introduction 1. This memorandum is submitted on behalf of the City Corporation in the context of its

role in promoting and reinforcing the competitiveness of the UK-based international financial services sector. The City Corporation has extensive engagement with the Foreign and Commonwealth Office and UK Trade and Investment, as part of this promotional work, both to support UK based financial and professional services firms to develop business in overseas markets, and to attract enhanced levels of inward investment into the Square Mile, London and the UK as a whole.

2. The City Corporation is not in a position to respond fully to all the questions posed in

the Committee’s Call for Evidence but the following paragraphs reflect the City Corporation’s views on trade promotion, inward investment and SME financing which are all of particular interest to the City’s activities.

Trade Promotion 3. Lord Mayor currently spends approximately 90 days a year overseas promoting the

markets and services of the UK based financial community. The focus of these visits has evolved and a substantial business delegation drawn from financial and business services companies now usually accompanies the mayoral party. The planning of the Lord Mayor’s visits now involves UK-based financial service firms, institutions and trade associations at an early stage in order to understand which countries are important for them, and how a visit by the Lord Mayor could help. The results are analysed jointly with UKTI, and then FCO diplomatic posts are invited to bid for visits according to the priorities that have come out of the consultation exercise. Bids are assessed by a City of London Corporation committee, which includes members from UKTI and FCO amongst others. Selection of successful bids is made on the basis of the potential value to the financial and related business services industry.

4. Each visit programme is delivered in market by UKTI staff based in the Embassy and

Consulate network, with the aim to increase the profile of the UK based financial services industry in overseas markets (predominately high growth markets), promoting business development opportunities for UK based firms and influence senior interlocutors to increase market access for UK based firms.

5. As well as including the key emerging economies such as Russia, India and China

which are visited annually, considerable effort is made to incorporate within the programme visits to less high profile countries which are visited less often by UK Ministers. For example, this year the Lord Mayor will be visiting Columbia and Mexico and last year, Kazakhstan and Azerbaijan were included in the programme. Feedback from posts in such countries suggests that there is disproportionate benefits derived from these visits and they are highly valued.

6. Although it is difficult to measure the immediate impact of these visits in terms of business developed and contracts awarded, their strategic benefit is demonstrated by a continued interest from participating companies to be involved in the visits programme and by feedback from Posts.

7. Effective and well-resourced UKTI teams are essential to the successful delivery of

the visits. To this end, the City of London runs an annual ‘Industry briefing course’ for overseas based representatives from UKTI, who have a role in promoting the industry within their geographic remit. The week long intensive course arms UKTI staff with a core understanding of the UK based financial and professional services industry and its role in support of the broader economy, with a view to increasing the effectiveness of its promotion.

Inward Investment 8. In addition to the trade promotion work undertaken in tandem with UKTI, the City

further supports the delivery of inward investment services to assist foreign firms from the financial and related business services sector set up or expand in London and the UK. This includes working with firms that have been identified as targets by UKTI staff based in the overseas Embassy and Consulate network which, in turn, are usually referred to the City from the UKTI inward investment team based in London. The City then provides prospective investors with a range of services including market intelligence (research reports) detailing the UK based financial and professional services industry and facilitates introductions to relevant contacts in the sector. London’s foreign direct investment agency, Think London, is also a key partner in this work.

9. The UK’s Embassy and Consulate network provides a valuable and high profile point

of contact for overseas firms looking to invest in the UK and posts form an essential tool in facilitating access to firms to discuss and encourage their inward investment plans. UKTI is well placed within central government to work with other departments on issues that affect inward investment into the UK and this can be extremely valuable. However, this is not always fully exploited and coordination between departments is not always as clear as it perhaps could be.

SME finance 10. The presence of small and medium sized enterprises (SMEs) in and around the City

forms an valuable part of the attractiveness of the Square Mile as they provide essential support services (such as hospitality, cleaning, management consultancy and advertising) to City firms and contribute to the area’s economic prosperity through the creation of large numbers of jobs. However, London currently faces significant challenges in maintaining the productivity and sustainability of SMEs. Boroughs on the City fringe have high SME start-up rates, but they also suffer from some of the highest failure rates. The change in emphasis of Government support to SMEs towards those with high growth potential should not be at the expense of start up SMEs. Finance plays a key role in the creation of SMEs, alongside other support. The City therefore believes that the encouragement of bank lending for SMEs remains important.

11. In order to address these challenges and support a thriving SME community, the City of London Corporation recently commissioned research to assess the contribution made by the City (UK financial services) in meeting the equity finance needs of small and medium-size enterprises (SMEs) in the UK 1 . It has also initiated a business support programme to facilitate the development and growth of small businesses in the City fringe through the provision of premises, finance and guidance.

12. Together with workspace, the availability of finance is essential to the growth of

SMEs. Unfortunately many struggle to access external finance from mainstream banks, particularly if they lack an established track record or assets against which to secure a loan. As a result, publicly backed finance plays a critical role in promoting the development of SMEs particularly within deprived communities where banks may be more reluctant to lend. Accordingly, since 1999, the City of London Corporation has invested £8.7 million in the following SME loan funds:

• Barings English Growth Fund managed by Nova and providing capital for small

businesses with growth potential. • London Regional Venture Capital Fund a £50 million venture capital fund for

Greater London, supported by the Department for Business, Innovation and Skills (DBIS). The Fund provides equity finance to high growth, innovative businesses requiring sums below £500,000. Co-investors include DBIS, the European Investment Fund, Barclays Bank, Royal Bank of Scotland and a number of local authority pension funds.

• The Chandos Fund, dealing with expansion capital for high growth businesses, management buy-outs and buy-ins, pre IPO funding, partial sales, and release of equity.

13. One of the biggest obstacles to SMEs in supplying City businesses is cash flow. Many

large businesses do not pay promptly, so credit is often critical for SMEs’ cash flow to enable them to take on contracts with City businesses. City fringe SMEs report that, although the payment terms of the majority of City based companies are within 30 days of invoice, frequently payment is not made until 45 or even 60 days after supply. This places considerable pressure on SMEs especially if they have to source supplies/staff to deliver the contract prior to payment being made. Banks' unwillingness to advance credit or extend overdraft facilities can add to problem.

14. Anecdotal evidence suggests the current supply of credit to SMEs, despite

Government encouragement, remains inadequate. Current lending criteria, based predominantly on the size and amount of 'security' directors of SMEs can offer, rather than on the strength of the proposition do not work in favour of London SMEs, which tend to be service-oriented. To improve SMEs' access to unsecured loans, the Enterprise Finance Guarantee (EFG) banks could promote it more effectively and actively. For the most part it is currently unprofitable for banks to issue loans through the EFG scheme.

15. Access to micro-finance (loans under £10,000) also remains difficult. Many SMEs or

credit worthy entrepreneurs previously used personal loans prior to lending criteria

1 “The City’s Role in Providing for the Public Equity Financing Needs of UK SMEs”, URS Corporation, published by the City of London Corporation, March 2010.

tightening in 2008 but as lending criteria have tightened, SMEs have been starved of start up and growth funds. An easily accessed Government-secured micro-credit scheme could help to alleviate this issue.

16. A further tool that could assist SMEs would be if local enterprise agencies and banks

worked more effectively together to improve the quality of the applications and business plans that SME’s submit when asking for credit. If all applications were automatically referred to an agency for support then the quality of application would improve and the decline rate fall.

Business Incubation 17. The City of London is also a founding partner in a new-concept business incubator

model with a team of entrepreneurs – the first incubator premises will open in Smithfield in the Autumn. It is hoped that this, financially sustainable model with a unique range of services provided by a diverse support community including investor mentors will be capable of being replicated elsewhere in the country. It is envisaged that the City of London Innovation and Incubation Centre (to be known as the City of London Innovation Warehouse), could support significant new business growth in the capital and potentially be a model for other parts of the UK and abroad.

18. The Warehouse will provide high-growth start-ups with incubation workspace,

support to access financing, networking and training opportunities, and professional business advice delivered by experienced mentors.

4 October 2010

GAI 12 Memorandum submitted by The Cleaning and Support Services Association 

Executive Summary 

 

The CSSA is delighted to have the opportunity to make its submission into the Parliamentary Inquiry on Government Assistance to  Industry. The CSSA reviewed the policy goals of the paper entitled A Strategy  for Sustainable Growth as well as providing  its opinion on how  the  relationship between businesses and the Department of Business, Innovations and Skills could be  improved. At the CSSA we feel that at times BIS has been too often only an advocate of the Government, when  it should also do more  to be  the advocate of businesses  to Government. We  feel  that BIS should make  the case  for  businesses  within  Government,  even  if  that  means  challenging  other  Government departments.  

The CSSA also urges  that  the Government  implements  the  recommendations of  the  joint BIS and Trade  Association  Forum  initiative  called  ‘Voices Of  British  Businesses’ which  called  for  a  formal liaison between Government  and  trade  associations, where  interested parties  can meet  regularly and work against agreed agendas. We also feel that this recommendation must go beyond BIS and be  implemented with other Government Departments. A positive example already exists between the CSSA and the Health and Safety Executive.  

Government policy as set out in the ‘A Strategy for Sustainable Growth’ paper lists various forms of assistance  to  be  provided  to  specific  industries. We were  disappointed  to  find  that  the  Cleaning Industry was not one of those  industries earmarked for support. The provision of cleaning ensures that the businesses and other facility users can operate in a clean and safe environment. The recent economic  crisis has prompted many  clients  to  compel  cleaners  to  cut back on  their  services. This presents an unacceptable risk  towards public health and safety. The  industry has also been at  the forefront  of  developing  sustainability  as  well  as  enabling  sustainability  to  be  realised  in  other sectors. The  industry also provides a  route of employment  to  those  individuals where  the  formal education system has failed them; and as a consequence are long term unemployed. In light of these contributions we would like to see the Government give the industry its due recognition by providing assistance to grow.  

The CSSA has also provided its commentary and critique on various Government policies designed to bolster British businesses.  While we welcome many of these policies some of them pose issues that need  to  be  clarified.  The  fact  that  these  policy  proposals  need  further  clarification  further underscores  the  need  for  BIS  and  other  Government  departments  to  develop  more  formal relationships between themselves and British businesses that would enable both parties to develop a more effective collaboration that would ensure mutually shared objectives are achieved.  

 

 

 

 

 

Introduction 

The  Cleaning  and  Support  Services  Association  (CSSA)  is  the  national  trade  association  that represents  the  contract  cleaning  industry.  Our  organisation’s  members  encompass  70%  of  the industry’s turnover. The CSSA  is pleased to have the opportunity to air  its opinions on the  issue of Government support for businesses. We feel that  in the current economic climate businesses now more  than  ever  need  an  effective  partnership  with  Government  to  help  realise  our  mutual objectives. To that end the CSSA has examined the policy proposals as laid out in the ‘A Strategy For Sustainable  Growth’  paper  and  has  also  provided  its  own  commentary  on  the  role  of  the Department of Business, Skills and Innovations (BIS). Contained below is the CSSA position on some of the policy areas with comments, questions and critiques as well as our suggestions on how the relationship between BIS and  trade associations could be  redressed  to  the mutual benefit of both Government and Business.  

Strategic Investment fund and sustainability  

In general the CSSA  is concerned that  in the Strategic  Investment Fund  interim report some of the assistance programs were targeted to benefit specific sectors while others are to be applied across various  sectors. We  are disappointed  that  the  cleaning  sector has not been  regarded  as  a  sector worthy of receiving special assistance. The Cleaning  Industry  is worth an estimated £10 billion and employs  450  000  individuals.  It  contributes  health  and wellbeing  of  the  nation  by  ensuring  that businesses and other facility users can operate in a clean and safe environment. The industry is also at the forefront of developing sustainability and being an enabler of sustainability for other sectors. The Cleaning Industry is also unique in that it is one of the few industries that provides an avenue for individuals with  little  or  no  qualifications  and  enables  the  long  term  unemployed  to  lessen  their reliance on benefits by providing  training and qualifications  that  can be used  to develop a career over  the  long  term. We  feel  that  there  is  a  lack of  appreciation of  the  contribution  the  industry makes to the UK economy. For instance there are special assistance programs to develop wind and tidal  technologies  in  order  to  develop  sources  of  low  carbon  energy.  While  this  is  a  positive endeavour to undertake in the fight against climate change we believe the Government should not overlook the Cleaning Industry and its endeavours to reduce carbon emissions.  

For a considerable  time  the  industry has made strides  towards daytime cleaning because  it would preclude the requirement for electricity to be consumed during the evening hours. In order to make daytime cleaning work cleaning machines would need to be battery operated, in order to eliminate the use of power chords that could present a safety hazard to building users. The batteries powering the machines would be charged by a closed circuit generator that could receive its energy from solar panels.  This would  represent  an  effective  carbon  neutral  solution  that we  feel  the  government should consider investing in.  

In  ‘A Strategy  for Sustainable Growth’  the Government underlines  its commitment  to ensure  that highly skilled migrants are allowed to settle and work in the UK. We feel that the Government must understand that historically the industry has had a heavy reliance on foreign labour. Therefore if the Government  is  to undertake action  that would potentially  shut off  the  labour  supply  for  cleaning companies  then we would  like  to  know what  steps  the  Government would  take  to  ensure  the availability of staff.  

The role and remit of the Department of Business Skills and Innovations 

The  CSSA  feels  that  BIS  has  too  often  been  an  advocate  of  the Government  towards  businesses when it should also be the advocate of businesses towards Government, even if it means challenging any policy precepts  laid out by other government departments. We are concerned that the recent comments made by the Secretary of State for BIS at the recent Liberal Democrat conference were unhelpful  towards  the  business  community.    The  CSSA  believes  the  way  forward  would  be  to develop  better  liaisons  with  BIS  and  for  the  establishment  of  dedicated  staff  postings  for  each sector/industry  as  they  would  be  better  equipped  to  respond  to  any  enquiries  and  problems businesses  in certain sectors face and to provide dedicated policy support that businesses need. In November 2009 the ‘Voices Of British Businesses’ report was published. It was a joint collaboration between the Trade Association Forum and BIS, which explored ideas of how Government and Trade Associations  could  achieve  a  better  working  relationship.  The  report  contained  a  series  of recommendations on how trade associations and BIS could develop a more effective collaboration in order  to achieve mutual  interests. Chief among  those  recommendations was  to establish a  formal liaison between BIS and various  trade associations. The CSSA would  like  to stress  that  this  type of relationship  should  be  extended  across  other  departments.  Already  such  a  relationship  exists between  the Health and Safety Executive and  the CSSA and we  feel  that  it  is essential  that more departments  follow  this  example  as  our  members  activities  straddle  across  various  areas  of Government.   To  that effect we have  included as part of our written evidence an excerpt of  the recommendations sections of the report for the committee to examine (Appendix 3).    

The Train to Gain Scheme 

The CSSA  is concerned about the proposed cuts to the Train to Gain Scheme. As training and skills fall  within  the  remit  of  BIS,  we  feel  compelled  to  raise  this  issue  in  this  enquiry.  The  CSSA  is concerned that substantial cuts will make  it difficult for businesses to provide effective training for its personnel which  in turn prevent businesses from providing a quality service.  It should be noted that the Cleaning Industry plays a pivotal role in not only providing an avenue of employment for the long term unemployed but also imparting training and skills to those individuals that they can use in the  long  term  to  seek  advancement.  The  CSSA  believes  that  the  Government  needs  consider likelihood  that  such  cuts  could  frustrate  these aspirations.  In addition  to  the proposed  cuts Asset Skills has highlighted  some aspects of  the apprenticeship  schemes  that employers  in  the Facilities Management  sector  have  indicated  that  need  addressing.  An  excerpt  containing  a  list  of  issues raised by Asset Skills has been included as part of our written evidence (Appendix 1 & 2).  

 

 

 

 

 

 

Appendix 1 – an excerpt of a letter between Asset Skills and John Hayes MP, Minister of State for BIS   

Listed below are some of the main issues that Asset Skills’ research has identified as being of concern to employers in its footprint (business services including facilities management (FM) and cleaning, housing, property and parking): 

1. Funding needs to reflect better the demographics of the workforce to enable employers to make a step change in raising aspiration and skills.  Current funding is focused on the 16–18 age range, understandable given the large numbers not in employment or training.  The rigid application of this rule however means that sectors such as cleaning, that require staff to operate machinery, miss out, as they are, by law, restricted to employing those aged over 18.  In addition, the nature of facilities management requires employees to have a level of work experience that requires some years to achieve.  

2. The inclusion of Functional Skills in the framework for level 2 apprenticeships is at a significantly higher level than previous key skills qualifications and beyond the reach of many in sectors such as cleaning and catering.  A number of large employers have indicated to us that this will make apprenticeships difficult to deliver and as a result there will be a negative impact on achievement rates.  

3. The lack of flexibility in the apprenticeship framework (known as the ‘Specification of Apprenticeships Standards, England/Wales’) around the level of guided learning and ‘off station’ hours provides a disincentive as it assumes that electricians or others in highly technical roles, have similar working practices to those in more elementary occupations.  This is not the case and the current situation discriminates against the latter group while increases bureaucracy and the cost of delivery.  

4. The reduction in funding announced for large employers (above 1,000 staff) favours organisations with a large number of staff in a fixed location.  In facilities management the opposite scenario is more often the case as they provide support services to companies across the UK delivered by small teams in a wide range of locations.  The outcome is often that the numbers employed by individual FM companies in any one area are insufficient to make it economically viable for a provider to create and deliver the programme.  See case study 1 in Appendix 2.  The Asset Skills Virtual Academy for Business Services is working collaboratively on behalf of a group of facilities management employers to address the issue by bundling candidates from different employers and brokering the learning to selected providers.  This will help to 

mitigate some of the difficulties caused by small numbers of staff in remote locations but will still not create equality of opportunity between different groups of employers.  

5. Employers understand that all pre‐assessment activity, including candidate diagnostic work, may no longer be offset against the funding for the programme.  These activities are often very time‐consuming yet essential to ensure the candidate has the potential to achieve the qualification and that the selected programme is right for the candidate. 

Appendix 2 – an excerpt of a letter between Asset Skills and John Hayes MP, Minister of State for BIS   

Case study 1 A facilities management company provides services to a national organisation with 250 branches across England.  The contract requires the company to provide two employees to each branch and, inevitably, many of the locations are remote in terms of access to training providers.  The cost of delivering an NVQ or apprenticeship in these circumstances is significantly increased due to the expense and time of travel for either the provider or the employee, and the lack of opportunity to gain the economies of scale that can be achieved by employers with large numbers in a fixed location such as a supermarket.  Time off for learning becomes a greater issue when half of the team on any one site is involved, particularly when sickness or other logistical issues are taken into account.  Case study 2 This case study illustrates the commitment of employers in the facilities management and business services sector to employ and train apprentices.  It also illustrates the challenges of trying to attract candidates to an apprenticeship programme where the industry has a mature age profile and the nature of many jobs restricts recruitment of young people.  Despite the difficulties, the employers involved and Asset Skills remain committed to the project and efforts to recruit continue.  Jarvis Training Management is the training arm of a major business services employer that has gone into administration.  Jarvis Training Management is, however, a profitable organisation that continues to trade and earlier this year it approached Asset Skills for support with a project to deliver Apprenticeships in Cleaning and Support Services at Level 2 in collaboration with other sector employers. The aim of the programme was to deliver large numbers of apprentices aged 16‐18 years, in groups of 50, to raise the profile of the new apprenticeship and attract young entrants to a sector that traditionally has a mature workforce. The project received support from the north west regional NES.  The provider, through Asset Skills, invited other employers from the business services sector to take up places on the programme. Responses from employers were positive with eight national companies indicating they would offer places.  Jarvis would also take up a number of places within each group. The model of delivery included a 28 week training programme, with Jarvis covering employment and training costs for 16 hours per week. Participating employers would offer apprentices a post equivalent to a minimum of 16 hours per week but with the option of the host employer paying for additional hours if the post allowed. 

Employers would cover all equipment and supervision costs. Pay rates for candidates were set in line with apprenticeship guidelines and Jarvis also made provision for a completion bonus for each candidate. Employers agreed to offer completing candidates a permanent position on site contract terms on successful completion of the apprenticeship.  Recruitment of candidates began in April and vacancies were posted with local Connexions services and the National Apprenticeship Service. Vacancy locations are national including London, Birmingham, Oldham, Sheffield, Liverpool and Sunderland. Sites are a mixture of private and public sector contracts. Some locations have specific recruitment requirements, such as a need for security clearance and others, particularly some hospital sites looking for people aged 18 and above because of requirements for all posts to operate cleaning equipment. All the potential employers are high quality service providers with the ability to offer permanent positions with good quality benefits and opportunities for career progression. However, to date, the recruitment activity to this project has proved largely unsuccessful and only four candidates have been successfully recruited to the programme.    Neither Connexions nor the National Apprenticeship Service have been able to attract candidates to these apprenticeships despite the prospect that these roles offer genuine job security and career opportunities.  Connexions has cited significant challenges in marketing a cleaning apprenticeship to young people. The employers are disappointed in the response but aware that cleaning as a sector does not have an attractive image. 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 3 ‐ Excerpt of the Voices Of British Industry Report  RECOMMENDATIONS   Engagement and Consultation  To  formalise  an  arrangement  of  regular  two‐way  engagement  and  consultation  between Government  bodies  and  Trade  Associations  about  policy  issues,  to  bring  about  continuous improvement  in  building  better  working  relationships  and  improving  policy  development, implementation and wider ownership  (among businesses) of policy outcomes and mechanisms. To underpin  this,  both  parties  to  develop  an  annual  agenda  that  incorporates  effective  stakeholder engagement  and  communication  through  a  series  of  regular  joint meetings, working  groups  and conferences  that  are  regularly  reviewed  to  ensure  that  practices,  outcomes,  engagement,  and dialogue about emerging issues are well‐targeted and focused.   Understanding and Leadership  Government  bodies  and  Trade  Associations  to  forge  an  effective  partnership,  using  imaginative approaches and tools to bridge mutual gaps in understanding (e.g. poor understanding of sectors by Government  bodies;  poor  understanding  of  how  Government  works),  with  Trade  Associations leading  on  sector  thinking,  standard  setting,  building  proactive  policies  (alongside  their  reactive work), and developing a long‐term strategic outlook that incorporates practical solutions and greater transparency. Government bodies  and  Trade Associations  should  jointly  lead  the development of sector  and/or  issue‐based  road maps  (including  shared  visions)  for  the  future,  including delivery. Government bodies  to develop  strategy  involving  sourcing  suitably qualified  staff, broader use of secondments and fact‐finding visits to businesses.   Networking  Government bodies and Trade Associations should work closely together to sponsor the creation of additional  'networks',  'forums',  'alliances'  or  'federations' which  provide  a  focus  for  collaborative work with Government bodies on policy and delivery, and influence EU legislation (particularly that focused on only one sector). Trade Associations  in  the same sector  to work  together  to provide a consolidated  industry view, develop skills, and policy development and delivery, while Government bodies should maintain good  liaison with  international Trade Associations which represent sectors active in the UK, to complement contact between UK Trade Associations and their EU counterparts to help ensure better outcomes for UK plc.   Joint Projects  Government  should  as  needed maintain working‐level  contacts with  European  and  international associations, with a view to identifying synergies and opportunities for closer working, and to better understanding  policy  positions  adopted  by  other  countries  or  groups  of  countries,  while acknowledging  too  that  in some sectors  there may be cross‐currents between national and multi‐national priorities. 

23 September 2010 

GAI 13

Memorandum submitted by the Black Country Reinvestment Society

The Black Country Reinvestment Society (BCRS) was established in 2002 as an Industrial and Provident Society, initially to provide CDFI-style finance to social enterprises and SMEs in the Black Country. Geographically the Black Country comprises the local authority areas of Dudley, Sandwell, Walsall and Wolverhampton. BCRS has also recently expanded to cover Staffordshire. By most social and economic indicators, the Black Country ranks as one of the more impoverished in the country. Furthermore, the structure of the private sector in the area is predominantly composed of SMEs, often very small, especially in the component manufacturing sector. BCRS currently provides small business loans ranging from £10,000 to £50,000, and continued to provide such facilities through the recent credit crunch - a period when the main high street banks severely tightened their lending criteria or actually exited this segment of the market. As a result, more businesses turned to BCRS for access to finance and in 2009, our last reporting year, we lent £1,368,000, our total loan book exceeded £2 million and cumulatively since our establishment we have issued over £5 million of loans. While we have moved from a social enterprise emphasis toward a more SME focussed strategy, both in response to demand and to broaden and diversify our portfolio, we continue to offer the full range of CDFI products. The success of our strategy is founded on our ability to combine private-sector sourced funding, including that from high net worth individuals, with that drawn from the public sector, both grants and funding, as well as from the co-operative and benevolent sectors. Through leveraging on these funds, we have been able to increase the economic impact on that funding. Furthermore, the public sector funding has been crucial to provide funds to establish provisions, to cover the real risks of lending into this market segment, as well as to attract other fund providers. Current public funding streams are in place to 2011. Since 2002, we have built up an effective business and credit infrastructure, to enable both the monitoring of the performance and crucially, the risk of our loan portfolio and to provide confidence to funders. As a result of operating at the riskier end of the market, we have sharpened our analytic capabilities, ability to identify potential and innovative commercially-viable borrowers and thus reduce our provisioning requirements. The withdrawal of the commercial banking sector from this market has enabled us to service this unmet demand and scale up accordingly

The role of the Department of Business, Innovation and Skills in supporting industry

Given the range and scale of initiatives being pursued by the Coalition Government, the new role and scope of the BIS Department is only now emerging. The replacement of regional-level delivery by more locally-based systems, principally but not exclusively the Local Enterprise Partnerships (LEPs) will take time to be established, however it does appear to allow for a more local initiative driven process. How the Department accommodates these re-invigorated local demands for economic development and

business support will be critical. Evidence from other market economies suggest that consistency of delivery over the medium-term is a significant factor in determining success, as it allows the wider economy to develop business strategies that can accommodate and respond to policy.

The effectiveness of existing Government assistance programmes

The recent data for the EFG is that there is a marked reluctance on the part of either the banks or the potential SME customers, or both, to use the facility. It would seem more appropriate to allow such financing vehicles as EFG to be deployed by institutions that can and are willing to operate at this end of the market. This would require a restructuring of the current EFG product to meet the demands of the SMEs sector, the institutional capacity of potential lenders and crucially the desired policy objective of the Coalition Government

The relationship between the Government, industry and the banks, and the role and performance of the Small Business Banking Forum

Based on anecdotal evidence, we would suggest that apparent liquidity hoarding by banks is proving to be a major constraint in restoring proper functioning credit markets. While it is understandable that the impacted banks seek to replenish depleted capital resources, this has not helped restore access to finance for corporates, particularly SMEs. Furthermore, given the huge losses sustained, it is also an understandable reaction by banks to adopt credit and lending strategies that are extremely cautious, with tight conditionalities and narrower risk margins, both for existing facilities and future loans. This obviously, imposes a burden on the SME sector. Nevertheless, the massive losses that the main banks incurred were not as a result of widespread economic or commercial failure, at least initially, in the real domestic economy, but the result of severe risk and appraisal failures by banks of their positions taken in other sectors and internationally. From our perspective, to finance a private sector recovery, there are two separate, though intertwined, issues that need to be addressed. The first issue is the solvency and operations of the banks and the wider financial sector. The second, though not unassociated, issue is how to establish credit markets that can effectively supply finance to the real domestic economy, and given our focus, to the SME sector. From our perspective, the SME sector is, if anything, grossly under-banked with a dearth of effective facilities that could foster expansion. The larger universal and high street banks have historically been reluctant to service a sector that is seen as more volatile despite greater dynamism, more complex although offering greater returns, and requiring relationship-driven, more simple plain vanilla lending products than more exotic, mathematically-satisfying transaction-driven facilities. In other comparable economies, particularly where the private-sector is seen as the principal wealth creator, banks play a still significant but less dominant role in providing capital resources to fund business growth. This opportunity provided by the Coalition Government offers the possibility of re-emphasising the strengths of the British financial sector, and complementing these by expanding and intensifying the role of non-bank financial institutions that can provide credit and capital products, facilities and services that have been traditionally shunned by universal banks. CDFI-type structures offer some potential, but the real void in the market is between CDFI-level loans, that are more

normally available up £10,000 and corporate bank products, for which it is generally difficult to find availability below £1,000,000. BCRS currently lends up to £50,000 but for a variety of reasons, both regulatory and capital capacity, has not yet been able to offer amounts that would be credible to the larger SMEs. Realistically, our current estimated potential deal pipeline is considerable, roughly double our current loan portfolio, which we take as indicative of the strength of the demand for working capital and finance, in the Black Country, that is not being met by the high street banks.

The performance and role of UKTI and the Export Credit Guarantee Department

Although our operation is largely domestically focussed, we increasingly deal with SMEs that are attempting to take advantage of the renewed international competitiveness of the British economy. Unfortunately, the size and scope of facilities that ECGD offer tends to be beyond the capacity of the SMEs that BCRS deals with. However, this ignores the innovativeness of the sector and the potential that properly structured (commercially-viable) financial products could offer to capture this dynamism and enhance export potential. The regional UKTI has been proactive in responding to the SME sector, but their initiatives could be deepened if the right mix of financial support could be put in place and structured realistically to meet the requirements of SMEs.

Steps to encourage inward investment into the UK

It is beyond our remit to comment on the overall framework for attracting inward investment into the UK. However, one of the key advantages, indeed critical comparative advantages of Britain is the vibrancy of our SME sector, which provides the economic hinterland that enables foreign direct investment to flourish. In the Black Country, the SME sector largely comprises component manufacturers who supply key products and design to major industrial corporations both regionally and globally. These products are unlikely to dominate the headlines, but are critical, and include: radiators and kinetic transmission for Formula 1cars; brake-pads for heavy haulage; bespoke saddles for national Olympic squads; stadia convertors to enhance multi-purpose functionality and high specification paint processes for the London Eye. Thus whiles the national framework, tax incentives and currency performance are important, BCRS would like to suggest that the structure, flexibility and capabilities of the local economy is influential in attracting inward investors. It is therefore vital to sustain Britain’s attractiveness, that the SME sector has access to adequate financial resources.

Government policy as set out in A Strategy for Sustainable Growth and the Green Paper on Business Finance

The Coalition Government’s new strategy has undoubtedly made available fresh opportunities, and the attempt to stimulate greater local ownership of economic development and business support could prove successful. Nevertheless, the structure of the delivery framework will have a significant impact of the success, particular given the current financial and fiscal constraints. The role occupied by the regional development authorities should not be understated, and it is difficult to envisage, unless the resource issue is adequately addressed, how LEPs will be able to facilitate this role.

Enhancing the role of private and mutual financial (both bank and non-bank) institutions, and their capacity to prudentially leverage on financial and fiscal flows, could have a considerable role to play in successfully achieving the Coalition Government’s objectives for business support and economic growth.

23 September 2010

GAI 14 Memorandum submitted by The Berkeley Group Holdings

PLC Executive Summary The Berkeley Group Holdings plc is a leading urban regenerator and residential property developer operating mainly in London and the South East of England. The Company has an unrivalled understanding of the land development market and has become an expert in creating sustainable, attractive and high quality mixed use communities in towns and cities. The Berkeley Group develops sites ranging in size from around 10 residential units to long term regeneration projects delivering 4,000 residential units over 20 years or more. In 2009/2010, the company sold over 2,200 units and 45,000 square feet of commercial space on nineteen mixed use developments. Group turnover for this period was in excess of £615 million. Berkeley has always embraced the sustainable development agenda. It has produced an annual sustainability report for the past 9 years and in 2008 became the first housebuilder to make pubic a Climate Change Policy. The principles of sustainability are embedded in Berkeley’s business practices at both a strategic and project level. In recognition of this, the Group was granted a Queen’s Award for Enterprise in the Sustainable Development category in 2008. Berkeley welcomes the opportunity to provide evidence to the inquiry into Government Assistance to Industry. In providing this evidence to the Committee, Berkeley has consulted with experts from each of its operating divisions; Berkeley Homes, St George and St James. Berkeley’s response to the Select Committee has identified three specific Topics raised by the Committee. Berkeley believes it worthwhile that the Committee gains an industry view on the issues which affect Berkeley and the housebuilding industry. These are:

1. The effectiveness of Government assistance programmes:

o Recognition of developer costs associated with the provision of affordable homes in the planning system.

o Withdrawal of Kickstart housing programme and grants for affordable housing.

2. The role of Government in encouraging the supply of credit to small

and medium sized enterprises:

o Supply of mortgage finance. o Inward investment from overseas buyers and investors.

3. Government policy as set out in “A Strategy for Sustainable Growth”:

o Greener, sustainable development. o Planning.

The current economic conditions and future public sector spending constraints highlight the requirement for targeted, sustainable and creative proposals. I hope that the suggestions which follow will assist the Committee and facilitate the creation of a portfolio of ideas for consideration. In addition to this written evidence, I would be happy to provide oral evidence to the Committee summarising the Group’s thoughts. Please contact me should you wish to discuss this further. R C PERRINS Managing Director

1. Effectiveness of existing Government assistance programmes

Over the past 3 years, the Government has invested a combined £607million into the Kickstart programme which was targeted at supporting the development of high quality mixed tenure housing developments on sites that would otherwise be stalled. This has succeeded in increasing activity in the market for newbuild homes with the building of over 16,000 new homes including over 8,000 affordable homes which would not otherwise have been put into construction. There are no longer any programmes targeted specifically at housebuilders. The second issue is that in the current fiscal environment there is likely to be a reduced level of grant funding available to registered social landlords for them to acquire affordable homes from developers. The delivery of affordable housing will fall almost entirely to the developer. The current panning policies do not take account of this financial burden. While reduced levels of funding are understandable given the current economic climate, there is no recognition for these costs in the planning system (or elsewhere). The inevitable outcome is that certain planned developments have become unviable due to the high levels of subsidy required. These projects provide regeneration, employment (during and after construction) as well as places for people to live in. The knock-on effect of these developments not proceeding could be enormous to an economy beginning to make a sustained recovery from recession. We are proposing a joined-up approach which would offer the local authority more flexibility to recognise the developer funded costs associated with the provision of affordable housing. This will be incorporated as part of the pre-planning process. That is:

• Identification, agreement upon and assessment of costs to take place prior to planning application

• Any new costs funded by the developer to be reflected in the planning process:

o Offset against Section 106 obligations o Private rental properties in lieu of affordable o Reduced levels of affordable homes o Flexibility to provide affordable units offsite which

is more cost efficient

2 The role of Government in encouraging the supply of credit to small and medium-sized enterprises

We have slightly expanded this aspect of the inquiry to include the supply of mortgage finance (credit to the end user) and the continued promotion of inward investment from overseas buyers.

Supply of Mortgage Finance The current situation with regard to mortgage availability is quite serious:

• According to the Council of Mortgage Lenders’ announcement this week, mortgage lending in the UK is at a 10 year low

• There are currently 1.4 million households who aspire to owning property but are unable to do so because of house prices and mortgage availability (per Housing Minister, Grant Shapps)

• The average age of independent first-time buyers (i.e. those who do not receive help from family members) is 37 (per Housing Minister, Grant Shapps)

• It is the availability of mortgage finance rather than affordability which remains the issue:

Banks approval criteria increasing Loan-to-value rates are falling, meaning higher deposits

are needed from buyers Many mortgages have a policy of drawdown within 6

months of the date of approval – this does not match the average build programme of 12-18 months meaning either developers have to build speculatively and attain sales in final 6 months of a build programme, or purchasers agree to purchase properties with no certainty that a mortgage will be available to them when they close on their home

There is an urgent requirement for government intervention to ensure that creditworthy borrowers are offered fairly priced and appropriate mortgages. We would like to see increased levels of mortgage lending from the banks, in particular for new build properties in order that the first time buyer market be re-invigorated. The Berkeley Group proposes the following incentives:

• The introduction of early stage financing would eliminate the 6 months drawdown requirement by allowing homes to be purchased through stage payments. Reduced banking regulation would be required to achieve this

• The establishment of government backed/secured mortgages for qualifying purchasers should be considered. This would overcome LTV issues as the government would act as a guarantor

• Tax incentives to stimulate the market (reduced council tax, mortgage interest relief scheme etc.)

Inward investment from overseas buyers The UK (and London in particular) has always been a world-class destination. As a result of this, there will always be international investors who purchase properties in the UK. Conservative estimates would value this inward investment in excess of £2 billion per annum. As this investment is discretionary, any draconian changes to Stamp Duty & Capital Gains Tax could have a major impact on the attractiveness of the UK for inward investment.

3. Government policy as set out in A Strategy for Sustainable Growth

From our review of the paper, we have identified two areas upon which we would like to comment, these are:

(A) Greener, sustainable development (B) Planning

(A) Greener, Sustainable Development As a previous winner of the Queen’s Award for Enterprise in the Sustainable Development category, the Berkeley Group has a deeply-ingrained passion and commitment to sustainability. In 2009/2010, the Berkeley Group saw the certification of the first homes to Level 3 of the Code for Sustainable Homes. Indeed, since 2008, when the Berkeley Group became the first housebuilder to commit to Level 3 of the Code, over 17,000 homes have now been submitted for planning that will meet this level. This is a significant achievement and an industry leading position. Berkeley has always embraced change head-on resulting in an adaptable, energetic and entrepreneurial organisation. The Group is constantly advancing its sustainability agenda and work practices to ensure that our developments offer:

• Safe and secure places to live and work • Access to a range of services and amenities • Spaces which enable interaction between people • Good environmental quality and efficiency • Opportunity to access facilities to enhance health and well-being • A sense of identity

Berkeley supports the Government in its policies and targets for sustainability. However, we believe that there should be a better match between targets and (sometimes ill-conceived) regulation. As the industry is much better placed to design the solutions to meet the Government targets, therefore it should be left to the industry to do so. It is our belief that there is often little scope for objectivity and, in some cases, sustainability targets which would normally be controlled by building regulations are impacting upon planning decisions. If we consider, for example, the introduction of onsite power and heat generation; the objective is to reduce carbon emissions and planning would only be consented provided that a combined heat and power (CHP) plant is installed. In some cases, this CHP plant may not be required due to the overall energy efficiency of the building and the minimal requirement for heating. The counterproductive result of such a situation means that some buildings are overheated (due to efficient heat retention and district heating

being distributed throughout the building). This results in additional expense / carbon being consumed through air conditioning installation and use. In this case, the local authority achieved its result (of a CHP plant) but did not take into account all the relevant details. Increased objectivity In considering the above example, The Berkeley Group would suggest that an objective based approach be introduced whereby the stated objective is outlined to the developer (e.g. reduced carbon heating systems). The developer then must design a build solution which marries the requirements of the local authority to the needs of the developer (compliance with build regulations etc.). Such a system could permit a local authority to focus on the enforcement of regulatory changes and the achievement of same easier. Range of incentives to stimulate market for sustainable products: The worldwide market for sustainable development products and practices is growing constantly. Britain needs to become a producer of these products, not merely a consumer. This new industry could create employment and promote inward investment and exports. In recognition of this, we are proposing that a series of incentives be offered to stimulate the growth of this industry. Among these schemes are:

• Qualifying products to receive zero VAT rating – the effect of this would be to promote procurement of UK manufactured products

• Recognition of and flexibility on how the construction industry can recover the cost of sustainable development - further tax incentives for qualifying research and development into sustainable construction procedures and products should be made available

• Stricter rules and penalties - as there are currently few penalties for non-compliance and few incentives for compliance - how can one expect change? The enforcement policies should be mindful of creating a target-based rather than regulation-based environment.

Continued investment in public transport A key element of any effective, low-carbon community is the transport system which services it. Transport is a keystone to community; investment in transport and infrastructure can be used as a catalyst for further economic growth. The Berkeley Group recognises the requirement for continued investment in infrastructure and is supportive of the following projects:

• Crossrail • London Underground upgrade • High speed rail line between London & Glasgow • Heathrow extension

(B) Planning

An efficient, effective and user-friendly planning structure is vital to the economic recovery. The Berkeley Group submits circa 70 planning applications per year. We wish to bring the following observations to the attention of the Committee: Section 106 Reform Another specific area which often delays development (and in which more innovation is required) relates to Section 106 agreements. Sustainability involves much more that a simple number. We believe we should recognise that the greatest benefits to the community of significant regeneration schemes do not lie in the Section 106 contributions paid by developers but in the physical regeneration itself. This can include the opening up of new areas to the public such as canal walks, new parks etc. We would suggest that local authorities be encouraged to look at the overall benefit which a new development brings to a community (jobs, open spaces, regeneration) before determining any Section 106 contributions. Open Source Planning The current uncertainty surrounding the potential introduction of the Open Source Planning legislation should be cleared up for the benefit of the industry. The Berkeley Group recognises the need for reforms to the current planning structures and would welcome the opportunity to offer its views on Open Source Planning. We believe the key areas to be addressed are:

• Removal of bureaucracy • Creation of a consistent, efficient planning structures • Clear and precise guidelines to local, regional and national

authorities and stakeholders • Government policy on social housing to be finalised and

communicated • Schedule of changes and timelines for delivery

23 September 2010

GAI 15 Memorandum submitted by the TUC

Executive Summary • The role of BIS within the economic landscape must be to champion the creation of high skill,

high value, sustainable industries.

• Government must ensure that its dialogue with industry, through bodies such as Innovation and Growth Teams, includes dialogue with trade unions.

• There is a strong case for horizontal government support, in policy areas that affect all growing industries, such as skills training, and vertical support where specific industries are particularly valuable to growing our economy in the future.

• The TUC supported the Strategic Investment Fund, introduced by the previous Government as part of ‘New Industry, New Jobs’, as well as support programmes that were a specific response to the economic downturn, such as the Automotive Assistance Programme and the Working Capital Guarantee Scheme.

• The TUC calls for a new Strategic Investment Fund, with a budget of £5bn, modelled on the French Fonds Strategique D’Investissiment.

• The TUC looks forward to forthcoming proposals for a green investment bank.

• The TUC recognises the value of a body such as UK Trade and Investment. The positive role of trade unions should be among the reasons promoted by UKTI for investing in the UK.

1.1 Introduction 1.1 The TUC is the voice of Britain at work. Representing more than six million workers in 58 unions, our overall objectives are to raise the quality of working life and promote equality for all. With one worker in every four belonging to a TUC affiliated union, we seek to be a high profile organisation that campaigns successfully for trade union values, assists trade unions to increase membership and effectiveness, and promotes train union solidarity.

2.1 The role of BIS within the economic landscape 2.1 The TUC believes the most important priority facing the Coalition Government is to entrench economic growth. The engine of growth will be the creation and success of viable and sustainable industries. With a clearer understanding of the value, but also the limits, of the financial services sector, there is renewed interest in the role that wider industries, including high value manufacturing, can play.

2.2 The TUC believes the UK must create industries that provide wealth for UK plc and jobs for its workforce, millions of whom are or could become trade union members. But it is clear that the UK cannot succeed in all industries and sectors. Most obviously, some industries are based on low skills and low value, which means that a major source of their competitiveness is low labour costs. The UK clearly could not compete with the wage levels paid in many developing countries, even if we wished to do so. Instead, we must compete on the basis of high skills and high value. Moreover, demand will increasingly shift towards sustainable products. Countries have been set challenging targets to reduce CO2 emissions, in treaties such as the Kyoto protocol, and consumers, ever more environmentally conscious, increasingly wish to buy less polluting products. This does not mean that people will stop

driving cars or flying on occasion; it does mean that they will wish to driver cleaner cars and fly on cleaner aircraft. The TUC believes, therefore, that the UK should focus on the creation of high-skill, high-value, sustainable industries.

2.3 In the TUC’s view, the role of BIS within the economic landscape must be to champion the creation of such industries. These are the surest way to entrench and sustain economic growth in the years to come. It is through this prism that we make this submission to the Select Committee.

3.1 ‘A Strategy for Sustainable Growth’ 3.1 To this end, the TUC welcomes the statement by the Business Secretary, Vince Cable, in ‘A Strategy for Sustainable Growth’, that “Setting out the path to balanced and sustainable growth is at the heart of what BIS is here to do”.1

3.2 The section of this paper entitled ‘Investment in our capacity to drive growth’ is important. This describes how public investment can tackle sources of market failure and states: “Common examples are when the public sector supports infrastructure, higher education, science and innovation – all of which are of crucial importance for our growth potential.”2

3.3 ‘A Strategy for Sustainable Growth’ identifies an important challenge when it describes the UK’s need for as much as £40 - £50bn per annum of investment in key infrastructure such as better transport links, information communication technologies, green energy, water and waste, while at the same time managing down public spending. The TUC believes meeting this challenge while cutting public spending may be impossible.

3.4 A similar problem exists regarding a skilled workforce. Companies can and should make a contribution to the upskilling of their workforces, but there is also a major role for government, not least in developing the skills of so-called ‘NEETs’, i.e. those not in employment, education or training. Impending public spending cuts must not impact on the role of government in investing in the skills of our workforce or aspiring-workforce.

3.5 The TUC supports the arguments put forward in favour of scientific excellence. We fully support the recognition, advanced by the new Science Minister, David Willetts, that both applied and blue-sky research have important roles to play. We are, of course, very concerned about reports, such as that in ‘The Guardian’ on 26th August 2010, which suggest that science could take a 25 per cent funding cut later this year. If that happens, a major science facility may have to be mothballed, which could have a knock-on effect in terms of young people studying science in schools and universities.3 We hope this concern is addressed in the outcome of the Comprehensive Spending Review in October.

Encouraging Entrepreneurism

3.6 One important section of ‘A Strategy for Sustainable Growth’ is contained in the following passage, from the section entitled ‘Encouraging Entrepreneurialism’:

1 ‘A Strategy for Sustainable Growth’, Department for Business, Innovation and

Skills, p. 2

2 ‘A Strategy for Sustainable Growth’, Department for Business, Innovation and

Skills, p. 8

3 ‘UK Scientists on Collision Course over UK Research Cuts’, The Guardian, 26th

August 2010.

“The Automotive Council, the Space Leadership Council, and the Low Carbon Construction Innovation Growth Team represent the type of relationship government needs to have with industry – a relationship based on partnership to identify the main barriers and identify remedies that work with the grain of the market.

“There is a role for government, not only in supporting this interaction, but also in making sure we have the right policy framework in place through developing and delivering horizontal policies with a clear sense of their vertical impacts. We need to understand where and how horizontal policy has differential impact on different sectors so that we can minimise deadweight and focus our activities where the economic gains are likely to be greatest. This means understanding whether growth will be driven through increased productivity or through significant levels or employment.”4

3.7 This is an important statement for two reasons. First, when it describes “the type of relationship government needs to have with industry”, industry must be taken to mean trade unions as well as employers. Following the discontinuation of the Ministerial Advisory Group on Manufacturing, on which trade unions were represented, the Coalition Government must consider how it carries out a dialogue with trade unions about industrial matters. Trade union members are represented on the Automotive Council, the Aerospace Council and the Marine Industries Leadership Council. Consideration must be given to dialogue with trade unions in other industries, where they represent the interests of thousands of members.

3.8 Second, with regard to how industries are supported by government, the TUC believes there is a place for both horizontal and vertical support. Clearly, ensuring a sufficient supply of skilled workers is a key issue facing industry and skill support is a clear example of a horizontal policy that the government must pursue. However, some sectors are particularly important and growing those sectors must be a government priority. To do this, vertical support is necessary.

3.9 The previous government belated committed itself to the concept of active industrial policy, most notably through the policy paper, ‘New Industry, New Jobs’. The TUC had been calling for such an interventionist strategy for many years previously.

3.10 A useful list of industries on which to focus can be found in ‘The Race to the Top’, Lord Sainsbury’s review of the government’s science and innovation policies, published in October 2007. This document was valuable in that it was one of the first to highlight the high-skill, high-value, innovative sectors that are particularly important to UK plc. Among those sectors, the Sainsbury review spoke of “new industries in areas as diverse as aerospace, pharmaceuticals, biotechnology, regenerative medicine, telemedicine, nanotechnology, the space industry, intelligent transport systems, new sources of energy, creative industries, computer games, the instrumentation sector, business and financial services, computer services and education.”5

4.1 ‘Financing a Private Sector Recovery’ 4.1 Published jointly by HM Treasury and the Department of Business, Innovation and Skills, ‘Financing a Private Sector Recovery’ considers some of the main challenges facing businesses of various sizes in accessing financial support since the economic downturn.

4 ‘A Strategy for Sustainable Growth’, Department for Business, Innovation and

Skills, p. 14

5 ‘The Race to the Top: A Review of Government’s Science and Innovation Policies’,

Lord Sainsbury of Turville, October 2007.

4.2 According to this paper, SMEs have generally found access to finance more difficult, as they rely particularly on bank lending and many have no significant credit history or track record. To address this, the Government has announced an extension of £200 million to the Enterprise Finance Guarantee Scheme this year, enabling additional lending of £700m for around 7,000 SMEs to March next year. June’s Budget also announced the creation of a Growth Capital Fund, to help established SMEs to grow.

4.3 Larger companies, defined as having a turnover of over £500m per annum, of which there are only around 760 registered in the UK but which account for around a fifth of private sector employment, have had much more limited problems accessing finance, not least because they have access to debt capital markets through private placements, commercial paper or corporate bonds, as well as bank lending.

4.4 The TUC supports plans for a Growth Capital Fund. We believe that the UK faces a challenge growing smaller into medium sized firms. Indeed, we have some concern that the UK excessively indulges a ‘small is beautiful’ philosophy.

4.5 ‘Financing a Private Sector Recovery’ does not rule out government intervention to improve access to finance, but sets out a number of criteria that must be met for any proposal for government intervention, including that any such intervention should:

• Reflect a realistic expectation that it will successfully address a clearly identified market failure;

• Represent value for money for the taxpayer, and be affordable within the Spending Review envelope set out at the June Budget;

• Be timely and time-limited, with appropriate sunset clauses and a clear exit strategy;

• Be compliant with state aid rules;

• Not crowd out private provision or market solutions; and

• Avoid introducing distortions elsewhere in the economy.6

4.6 The TUC believes it is useful to consider this section of ‘Financing a Private Sector Recovery’ alongside another statement from paragraph 4.19 of the same paper: “In his report ‘Ingenious Britain – Making the UK the leading high-tech exporter in Europe’, Sir James Dyson recognised that it was important that bank lending flowed to innovative companies”.

4.7 The TUC believes that our proposal for a new Strategic Investment Bank, based on the French model, which is described in greater detail below, meets all of these criteria, as well as being able to target the innovative companies that were correctly identified by Sir James Dyson.7

Financial Transaction Tax

4.8 Elsewhere, in paragraph 4.8 of ‘Financing a Private Sector Recovery’, the Government seeks views on what actions could be taken to underline banks’ commitment to supporting economic recovery. Whilst it is probably outside the scope of this inquiry, the single most important way that banks can help to support the recovery would be through the introduction of a Financial Transactions Tax, which would have a very limited effect on banks’ profitability, but would make a major

6 ‘Financing a Private Sector Recovery, HM Treasury/BIS, Cm 7923, July 2010, p. 27

7 ‘Financing a Private Sector Recovery, HM Treasury/BIS, Cm 7923, July 2010, p. 30

contribution to cutting the deficit, allowing some current spending to continue and thereby putting less pressure on the economy through spending cuts that, the TUC fears, are larger than can be handled without threatening the economic recovery.

4.9 Finally, the TUC supports proposals set out in paragraph 4.37 of ‘Financing a Private Sector Recovery’ to support start-ups and established businesses in disadvantaged communities. We look forward to contributing to more detailed consultations on this when the White Paper on sub-national growth is published. We are also on record as supporting the establishment of a Green Investment Bank, as described in paragraph 4.47 of ‘Financing a Private Sector Recovery’ and we describe our ideas on this in more detail below.

5.1 Existing government assistance programmes 5.1 The terms of reference of this inquiry highlighted three programmes under which loans and grants have been provided to industry. Those were: the Strategic Investment Fund; the Automotive Assistance Programme; and the Working Capital Guarantee Scheme.

5.2 There is, in fact, an important distinction to be made between the Strategic Investment Fund and the other two programmes. The Strategic Investment Fund, with an initial budget of £750m (to which a further £200m was later added) was set up to support the active industrial strategy contained within New Industry, New Jobs (NINJ). The Strategic Investment Fund was not, in a direct sense, a response to the economic crisis. By contrast, both the Automotive Assistance Programme and the Working Capital Guarantee Scheme were aimed specifically at the automotive industry and SMEs in particular as they grappled with problems brought by the recession.

Strategic Investment Fund

5.3 The TUC supported the establishment of the Strategic Investment Fund in Budget 2009. What is distinctive about this programme is that it was targeted, largely, at high skill, high value sectors. It was, therefore, a good example of vertical policy in action.

5.4 In media terms, whilst there has been little discussion of the role of otherwise of the Strategic Investment Fund, there has been much commentary on the cancellation of some of the previous Labour Government’s loans and loan guarantees by the Coalition Government, some of which were to be funded by the Strategic Investment Fund. Most controversially, this has included the cancellation of the loan to Sheffield Forgemasters. The TUC is on record as arguing that the government is moving too far, too fast with its deficit reduction programme. More generally, we believe there is a role for government in supporting an investment fund for strategic industries. In our view, therefore, the cancellation of the loan to Sheffield Forgemasters was regrettable.

Automotive Assistance Programme and Working Capital Guarantee Scheme

5.5 The Automotive Assistance Programme and the Working Capital Guarantee Scheme were specific initiatives in response to the economic downturn. The TUC supports the principle of such schemes. We are aware of reports, including a previous report from the BIS Select Committee with regard to the AAP, highlighting delays in the release of money. That is regrettable at times when businesses need support urgently, but it is a different argument to whether such a programme is a good idea in principle. Of course, schemes set up at a time of economic recession and designed to help companies through that recession should not continue after economic recovery has taken place. Other, permanent structures are required at such times.

6.1

7.1

8.1 A new model of investment support 8.1 In March 2010, the TUC called for a new investment fund for strategic industries, with a £5 billion budget.8 This £5bn could come either from direct state funding, private investment, grants from bodies such as the European Investment Bank, or a combination of the three. The aim of this new fund would be to provide the kind of long term investment that many UK companies have struggled to attract.

8.2 The TUC proposal was modelled on the French Fonds Strategique D'Investissement (FSI), set up in January 2009 with a budget of 20 billion euros. The FSI has two shareholders - the Government and the Caisse des Depots, a long-term investment body. It invests in companies of all sizes for approximately 8-10 years. FSI funds are managed through a board of seven people, four from Government and three from the private sector. A governance body, comprised of 20 people from unions, MPs and business associations, is asked to advise on investment strategies.

8.3 In its first year the FSI invested 800 million euros directly into 21 companies and a further 600 million euros were invested through funds. Crucially, the FSI associates itself with entrepreneurial risk, rather than simply offering subsidies. All of the companies invested in are currently profitable.

8.4 In France, the FSI takes a seat on the board of companies in which it invests, thereby having a say in its investment strategies. It is always a ‘friendly’ investor and when it eventually leaves the company, it does so in a way the does not disrupt the operation of the company. However, through the FSI, the French Government can champion the industries of the future. It can invest in those sectors where France can remain or can become a major player in the global economy. In this way, France’s industrial interests are protected.

Green Investment Bank

8.5 The TUC welcomes proposals for the establishment of a Green Investment Bank. We have long advocated the setting up of such an investment bank, specifically to support low carbon industries. We have raised questions concerning the potential client group of the GIB, which must be able to respond to a wide range of investment requests, from major national power projects to regional and local green initiatives. We have also asked what investments would qualify as “green”? A key test, in our view, would be projects that support the carbon budget objectives of the Committee on Climate Change.

8.6 In terms of funding, one potential source of income could be the National Employment Savings Trust (NEST), the new low cost pension scheme, effective from 2010. Another is to hypothecate revenues from the EU Emissions Trading Scheme to the Treasury, estimated at £2 billion from 2013-14.

8.7 The creation of a green investment bank is, in the TUC’s view, one of the most important policy commitments of the Coalition Government. It is vital that stakeholders are consulted on the creation of this bank and also that they are represented in governance structures of the bank when it is operating.

8 http://www.tuc.org.uk/extras/strategicinvestmentfund.pdf

9.1 The Role of UKTI 9.1 Finally, the TUC recognises the value of a body such as UK Trade and Investment (UKTI) in supporting exporters and encouraging inward investment.

9.2 The TUC commented on the role of UKTI in an earlier submission to a Trade and Industry Select Committee inquiry into the Future of UK Manufacturing in 2007.9 At that time, we highlighted the UK’s impressive record of winning inward investment. We noted in our evidence that the UK has a good record of inward investors working well with trade unions. For example, when world-class Japanese inward investor companies such as Toyota and Nissan came to the UK, they chose to recognise a union, in spite of being under no obligation to do so, and have never sought to derecognise that union. We understand that positive industrial relations exist at these companies.

9.3 The TUC notes a page on the UKTI website that lists top reasons to invest in the UK10. These include: the easiest place to set up and run a business; access to the world’s largest market; a strong science base; a flexible workforce; most attractive destination for inward investment; transport; and Olympic opportunities.

9.4 Whilst these are excellent reasons, we would wish to highlight the positive role of trade unions among the reasons to invest in the UK.

10.1 Conclusions 10.1 It is clear that the UK and, indeed, the world economy face a formidable challenge as we emerge from recession and move towards recovery. The TUC believes that future UK economic success will be built on developing high skill, high value, sustainable industries for the future. In our view, there is a strong case for a new strategic investment fund based on France’s Fonds Strategique D’Investissiment, where government takes minority stakes in key strategic companies, allowing the development of industrial sectors in which the UK is or could become competitive in the age of globalisation. We also look forward to government proposals for a Green Investment Bank, as described in the Coalition Agreement and reiterated in ‘Financing a Private Sector Recovery’.

Trade unions are a major stakeholder in industry. Following the discontinuation of the Ministerial Advisory Group on Manufacturing, government must give consideration to the way in which it conducts a dialogue with trade unions about economic and industrial matters in the months and years to come.

23 September 2010

9 http://www.publications.parliament.uk/pa/cm200607/cmselect/cmtrdind/161/161.pdf

10 http://www.ukti.gov.uk/investintheuk/whytheuk/topreasonstoinvest.html

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GAI 16 Memorandum submitted by SMMT

About SMMT and contact 1. The Society of Motor Manufacturers and Traders (SMMT) is the leading trade association for the UK motor industry, providing expert advice and information to its members as well as to external organisations. It represents companies throughout the automotive sector ranging from vehicle manufacturers, component and material suppliers to power train providers and design engineers. The motor industry is a crucial sector of the UK economy, generating a manufacturing turnover of £51 billion, contributing over 10% of the UK’s total exports and supporting around 800,000 jobs.

2. SMMT welcomes the opportunity to respond to this inquiry and should further information be needed on any of the comments included in this written evidence please don’t hesitate to contact Jonathan Hawkings, Senior Policy Officer, SMMT on 020 7344 9217 or jhawkings@smmt.co.uk. Introduction 3. In May 2009, SMMT responded to a previous Business, Innovation and Skills select committee inquiry on the previous government’s assistance package for the automotive industry. The inquiry was held in the middle of the financial and economic downturn. As the economy recovers and industry is on the road to growth, it is vital that government assistance and support to businesses is sustained. 4. In November 2008, SMMT wrote to the then chancellor and business secretary to outline an automotive industry support package to reinforce consumer confidence and support the UK’s manufacturing base. Particular emphasis was given to access to finance and practical business support measures government could implement to mitigate the impact of the economic crisis. A previous letter to the chancellor, outlining SMMT’s submission ahead of the Pre-Budget Report in 2008 called for the introduction of a scrappage incentive scheme to stimulate the new car market and support business confidence. 5. The impact of the recession on the UK automotive industry has been severe. The new vehicle market over the course of the recession was badly hit, with the effects of downward market trends still being felt today. Following 12 successive monthly rises in new car registrations, the July 2010 market fell 13.2%. The 2010 new car market is expected to total 2.018 million units, 1.2% above the 2009 market. The availability of finance, consumer confidence and sustaining demand post-scrappage, is key to performance in the second half of 2010. 6. The new van market is slowly recovering, with registrations just 0.1% up for the rolling year in July. Whilst the forecast for 2011 is more positive, the prospects for the rest of the year are gloomy and SMMT expects a near record low for trucks. Fragile consumer and business confidence make the outlook for the next 18 months challenging. The bus market continues to be depressed. Public spending cuts may further weaken demand, leaving the outlook for big buses depressed. The very long lead times between sale and registration across the bus and coach sector mean that it hit the recession late and so will be slow to recover. 7. There is steady improvement for UK automotive production across the UK car, commercial vehicles and engine sectors against a weak 2009. Car production rose by

2 

 

28.6% in June and was up 55% over the year-to-date, with commercial vehicles up 24.9% year-on-year. Scrappage Incentive Scheme 8. The most prominent and publically visible form of government assistance to the UK automotive industry was the Scrappage Incentive Scheme (SIS), which was introduced on 18 May 2009. This gave a £2,000 incentive to anyone scrapping a ten or more year old car or van and buying a new one. The scheme was unlike others introduced across Europe in that in the UK the automotive sector contributed half of the incentive. The scheme was far more influential than most imagined, delivering a major increase in vehicle demand. It has also helped reduce CO2 emissions. 9. SMMT data, collected from scheme participants from the start of the scheme to July 2010, shows that some 392,500 new cars and some 7,300 new light commercial vehicles were registered through the scheme. The SIS helped support the economy, played a vital role in providing a much-needed boost to the UK automotive industry, while retaining skills and jobs, in turn making the industry better placed for the upturn. Vehicles built or using an engine produced in the UK accounted for around a fifth of UK SIS sales. UK vehicle and engine production figures began to grow in November 2009 and into 2010 have recovered sharply, due in part to the success of the UK and other member state schemes across the European Union. 10. Whilst not a primary objective of the SIS, the scheme did help ensure a significant fall in average new car CO2 emissions. New cars through the scheme emitted on average 132.3g/km of CO2, almost 10% below the overall new car market average and 27% below the emissions of the old vehicle being replaced. Based on average mileage calculations, the replacement of old with new cars will reduce CO2 emissions by some ½ million tonnes per year. Improved Euro standard engine ratings will also mean modern cars have 50% lower harmful emissions of nitrogen oxide and particulate emissions. Automotive Assistance Programme 11. In the previous submission to the select committee in September 2009, SMMT noted that it was too early to present a full assessment of the Automotive Assistance Programme (AAP). Since then, the Automotive Assistance Programme has overseen a number of decisions and outputs in terms of loans and loan guarantees to vehicle manufacturers in the UK. 12. SMMT welcomes the recent confirmation and signing off of the loan guarantee for Ford to invest in the development of more fuel efficient engines. Separately from the AAP, SMMT also welcomes government’s confirmation of a grant made to Nissan, supporting Nissan’s development of batteries and electric vehicles in Sunderland. The investment by Ford and Nissan are strident examples of the UK automotive industry taking a lead in low carbon manufacturing. 13. Government had made further decisions regarding projects under the AAP. A number of offers for assistance were made to vehicle manufacturers that were not taken up. While SMMT welcomes that companies were able to secure financing through private channels, concerns remain that the application process and subsequent approval procedures were lengthy, complicated and may have impacted negatively on timely support needed. 14. SMMT views the projects which have received support under the Automotive Assistance Programme as value for money. The existence of the scheme signalled that government was serious about supporting the automotive industry as a future focused and key sector of the economy. Stipulating that projects under the scheme were to be linked to the low carbon agenda signifies the important role that the UK automotive

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industry is playing in rebalancing the economy and driving low carbon growth. Government support is crucial in providing a sound industrial base in the UK for the industry to take advantage of the opportunities low carbon manufacturing presents. A positive government approach to the industry has helped secure key investment decisions in the UK by global automotive companies. 15. The change of government and resulting implications has meant that the Department for Business, Innovation and Skills is no longer accepting new applications under the scheme. SMMT understands that projects under consideration remain in the ‘pipeline’. Government has communicated that it considers the scheme to be no longer appropriate as the economy enters a new phase, and that new initiatives such as the Green Investment Bank and a consolidation of various schemes could provide a strategic form of assistance to companies from all sectors. Government should clarify its position on the Automotive Assistance Programme and seek to process any outstanding applications in a timely manner. 16. The EU’s temporary framework for state aid expires at the end of 2010 and SMMT expects the programme to finish at that point. Once the scheme is closed, government should undertake a comprehensive review of the effectiveness of the programme to ensure that future government policy and assistance to the sector can be as effective as possible. Access to credit and finance 17. As mentioned above, a major issue that has faced the industry and one which continues to persist is availability of credit and access to finance. While there has been some easing of bank lending to the automotive sector, automotive companies remain exposed to a negative assessment of the sector from financial services providers. Where perceptions of the automotive sector are negative within the banking community, government should facilitate dialogue to promote the future prospects of industry. 18. Under the previous government, a number of schemes were instituted to provide loan guarantees for SMEs and financial support in other areas. The Enterprise Finance Guarantee (EFG) scheme was intended to provide loan guarantees to small companies. SMMT members’ experience with this scheme suggested that the scheme would only operate with willing bank support. Due to the hesitancy of many banks towards the automotive sector, the scheme’s impact was reduced. SMMT members also felt there was a significant gap in support for medium sized companies who were not eligible for the EFG scheme, i.e. too large, and too small to benefit from the Automotive Assistance Programme. The previous government recognised this discrepancy and altered the AAP’s eligibility criteria, however this was a late change and no announcement from government on providing assistance to smaller automotive companies has been forthcoming. Other support 19. A trade credit insurance top-up scheme was introduced but did little to benefit the UK automotive sector. Specific targeted support was needed at a much earlier stage following the onset of the financial crisis reflecting the early withdrawal of such products to the automotive sector. In addition, the top up cover was only available for UK businesses – the vast majority of automotive products are exported to the EU and our members’ needs required the scheme to cover export credit insurance. 20. Time to pay was a welcome scheme for small businesses throughout the automotive sector. Flexibility to deal with short-term cash flow problems caused by a drying up of credit gave temporary relief to many companies. Skills and training support

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21. SMMT had called on the previous government to institute support for short time working. ProAct, the scheme initiated in Wales by the Welsh Assembly government was a model that had been implemented in other European countries such as Germany and France to retain highly-skilled employees within the automotive sector. While such a scheme was not implemented wider than in Wales, support for training and skills development was welcomed by industry. The Train to Gain programme and subsequent increases in the scheme’s budget was a positive step in enabling automotive companies to provide training courses to employees during downtime. Increasing the level of training within the sector and closing the skills gap is a top priority for SMMT. 22. Further targeted support for training in the sector will ensure the UK remains a key player in the competitive global automotive industry. Spending to support training and skills should be focused on priority areas that will drive business growth and productivity, such as increasing support for apprenticeships and applied learning. Investment in STEM (science, technology, engineering and maths) subjects is key in opening up employment opportunities at every level within the sector. Linking skills to low carbon jobs is essential if the UK is to play a leading role in the low carbon economy. SMMT looks forward to government’s response to its consultation on the future direction of skills policy and skills for sustainable growth. Rebalancing the UK Economy 23. SMMT welcomes the coalition government’s white paper outlining a ‘Strategy for Sustainable Growth’. SMMT is particularly encouraged by government’s approach to rebalance the economy, with focus on the UK’s sectoral strengths and low carbon growth. Through the development of this strategy, SMMT calls on government to implement this approach by supporting practical policies across government departments that will leverage sustainable growth in the UK automotive sector. 24. The coalition government has a responsibility to ensure that economic recovery and the prospects of growth are sustained through continued support for UK industry. For the automotive sector, low carbon technologies, R&D and investment in skills and training will be key to future success. Government should support industry’s aspirations to make the UK a leading location for R&D investment and collaboration. 25. SMMT recently published a report1 carried out by the Centre for Economic and Business Research which concludes that government support is vital for R&D investment, where the UK lags behind international competitors, and says that improving access to finance and credit is crucial for the UK to achieve sustained economic recovery. Government has a clearly defined role ahead of the forthcoming Comprehensive Spending Review to prioritise its spending and financial commitments. SMMT and its members believe that government assistance that is strategically targeted will not only benefit automotive and raise the prospects for future growth in the sector, but will also have a positive impact on the wider economy, supporting employment and creating new business opportunities. 26. SMMT agrees with government’s assessment for the need to support R&D and innovation. This is particularly crucial for the automotive sector. At €20 billion the automotive sector is Europe’s largest investor in R&D, driving industry forward and helping deliver more sustainable forms of motoring. Targeting support for high-value R&D through the Technology Strategy Board is a priority for SMMT members. SMMT awaits government’s response to Sir James Dyson’s report ‘Ingenious Britain - Making

 1 CEBR report, ‘Challenges for the Coalition Government – Encouraging private investment in R&D and ensuring there is a sufficient flow of credit to consumers and businesses’, http://www.smmt.co.uk/downloads/CEBRreportAugust2010.pdf  

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the UK the leading hi-tech exporter in Europe’ to demonstrate tangible policies that will support the crucial R&D base in the UK. Maintenance of the principle of R&D tax credits – an essential driver for investment and technology development, is crucial for the automotive industry. Retention of such credits and ensuring that companies of all sizes are able to benefit is a key call from SMMT. 27. SMMT looks forward to the publication of the National Infrastructure Plan in the autumn where the future of transport infrastructure, particularly in light of commitment to increase the level of low and ultra-low carbon vehicles, should be a priority for government. 28. A focus on skills as outlined in the white paper is essential in ensuring the UK is well placed in a competitive global economy, ready to take advantage of the opportunities that a rebalanced economy will bring, particularly within productive sectors. The commitment to increase support for apprenticeships and refocusing learning around technical level skills is particularly welcome. 29. Government singles out the Automotive Council as a positive example of government and industry collaboration in improving growth prospects. SMMT welcomes the coalition government’s commitment to the Council. A high-level focus on the automotive sector from government, working closely with companies and organisations across the industry, will ensure that the most is made of opportunities for the sector to lead in low carbon and sustainable growth. Government’s Manufacturing Framework due to be published in the autumn will be a key focus for SMMT. A horizontal policy approach looking at areas such as access to finance, skills, international trade, and the perception of the sector will provide a firm basis for future collaboration between industry and government on a wider manufacturing agenda. 30. Government proposals to establish a Green Investment Bank will be studied closely by SMMT members. The principle of enabling businesses simpler access to finance and credit to support low carbon investment is welcomed by SMMT. Government should also consult with industry to ascertain how current funding and financing facilities are being utilised to ensure that more effective structures are put in place and those structures that are proving effective support are maintained. As highlighted above, this is of particular importance when looking at the provision of support for R&D, where competitions through the Technology Strategy Board play a critical role in bringing together global companies, academia and SMEs to work on projects that have are of significant added-value to industry. Regional support and structures 31. Throughout the recession, regional support played a significant role for automotive companies across the UK. Regional Development Agencies (RDAs) offered support such as transition and bridging loans, finance for small capital projects, R&D support, and initiatives to encourage business collaboration. This support was highly valued by industry and experience with regional bodies was generally positive, due to particular regional knowledge of the economic and business landscape. Looking forward, where RDAs are to be replaced with Local Enterprise Partnerships (LEPs), it is imperative that business support and the benefits of a strategic understanding of major industry are not lost. Where recovery is still needed to be sustained, it is important that support at a local or regional level is not lost in the transition to new partnership mechanisms. SMMT has highlighted these concerns in its written evidence to the Committee’s inquiry on this subject. European assistance and international comparisons 32. A coordinated European Economic Recovery Plan was instituted at EU level, which was a wider response to the effects of the global downturn in Europe. Particular

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initiatives were launched through the recovery plan, including the Green Cars Initiative, as well as the increased support available through the European Investment Bank’s European Clean Transport Facility. The Green Cars Initiative provided support through public-private partnership bids for low carbon projects. The European Clean Transport Facility aimed to provide credit for investments targeting R&D projects in the areas of emissions reduction and energy efficiency. In particular regions of the EU, structural funds were allocated when particular companies experienced extreme financial difficulties, SMMT notes that this support can be of benefit when allocated in a manner that does not distort competitiveness. 33. The Committee should also consider assistance given to industry in other European member states and globally. Many member states instituted scrappage incentive schemes, and as highlighted above, a coordinated approach lifted Europe-wide registrations and production. The role of the Department for Business, Innovation and Skills 34. SMMT has an established working relationship with the Department for Business, Innovation and Skills. SMMT views the Department’s central role during the recession as a focal point for business support and industry assistance as key in formulating policy that has assisted businesses across sectors, with a particular focus on the needs of the UK automotive industry. 35. During the recession, SMMT forged closer links to the Department and was consulted on many policy decisions in relation to automotive assistance and business support. SMMT met with the Secretary of State on a number of occasions to discuss the impact of the recession on the sector. SMMT also engaged in frequent dialogue with civil servants within the Automotive Unit, Automotive Assistance Programme Unit and the Automotive Scrappage Scheme Team. Officials from the Department visited SMMT committee meetings to inform members of support schemes available. 36. Collaboration with the Automotive Scrappage Scheme Team ensured that SMMT and its members were involved in policy formation from an early stage through to implementation and delivery. SMMT met with officials from the Automotive Assistance Programme Unit to discuss uptake of the scheme and issues related to accessing the scheme. UKTI, the promotion of inward investment and supporting exports 37. SMMT has a close working relationship with UKTI and is a key delivery arm for the UKTI Automotive Sector Group as an Accredited Trade Organisation (ATO), providing contract delivery, project management and matched funding for inward and outward trade missions, overseas seminars, trade shows and exhibitions. SMMT supports UKTI activities that support SMEs, and develop market opportunities, particularly though the Overseas Market Introduction Service (OMIS), Export Market Research Study (EMRS), and Tradeshow Access Program (TAP). 38. Inward investment decisions by global automotive companies are crucial to the future of the automotive industry in the UK. Government policy that promotes a positive business environment within the UK is a key aspect of attracting such investment. The New Automotive Innovation and Growth Team report, published in May 2009, called on government to improve the UK investment offer2. Government assistance and programmes that are tailored to promote low carbon growth within the sector, such as consumer incentives for ultra-low carbon cars and the electric vehicle infrastructure programme, help boost the UK in the eyes of international investors.

 2 NAGIT Report, p. 42, http://www.bis.gov.uk/files/file51139.pdf

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39. Government has said that an export-led recovery is central to economic growth. Support in the area of export promotion is vital for the UK automotive industry. The value of UK automotive exports is £26.6 billion, just under 11% of total UK exports. UKTI is best placed to assist companies from all economic sectors to take advantage of international market opportunities. 23 September 2010

GAI 17 Memorandum submitted by EEF

About EEF

EEF is the representative voice of manufacturing, engineering and technology-based businesses with a membership of 6,000 companies employing around 800,000 people. A large part of its representational work focuses on the issues that make a difference to the productivity and competitiveness of UK manufacturing, including investment, innovation and tax issues.

Introduction

We welcome the opportunity to respond to this enquiry on government assistance to industry. This review is timely given the pressures on the public finance, the need to prioritise scarce resources and challenge of building better balanced economy.

• The focus of the government’s economic policies should be a recovery that builds the foundations of better-balanced and more sustainable growth over the long-term. In practice this means increasing the contributions to growth from trade and investment.

• Decisions on government assistance to industry in future will largely be

determined through the spending review process. It will also be informed by the government’s forthcoming strategies on growth, manufacturing and sub-national government. While the role of the Department for Business, Innovation and Skills (BIS) will be important in supporting growth, the white papers and spending review announcement must ensure co-ordination of ambition across all government departments and agencies.

• Improving the flow of credit to businesses will be an important component of a

private sector recovery, but there is no simple solution – even if the government has a large fiscal lever to pull. The government’s response must focus on facilitating better relations between banks and industry, improving competition and modifying existing schemes.

• UKTI also provides important support for exporters, with evidence from EEF

members showing that its services have made a tangible difference to export performance. The spending review and any restructuring must support and enhance the work of UKTI.

• In addition, supporting skills development, reducing regulation and a

competitive and predictable tax system are also vital in creating a business environment that gives industry confidence to invest.

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Growth policies and assistance to industry must support economic rebalancing 1. Growth over the last decade has been dominated by debt-financed consumer and

government spending. The rise in consumer, government, and particularly financial company debt over the last ten years is not sustainable. As the financial crisis and resulting recession showed, inappropriate pricing of risk and unrealistic expectations of asset price increases have had very negative consequences for growth. Higher funding costs for banks, deleveraging by households, the government, and the corporate sector, as well as adjustments in behaviour and attitudes to risk mean debt is not able to continue to drive growth.

2. There is a broad consensus, including from the government, that the UK’s

economy will need to ‘rebalance’ to new sources of growth in the future. If government economic policy is to support this rebalancing process it should focus on how to increase the share of growth accounted for by investment and net trade.

3. A greater emphasis on investment and net exports is a sustainable model for

growth. Expanding markets in the emerging world offer a key source of growth through net exports well into the medium term as developed economies’ consumption grows more slowly. Increasing business investment is the key to expanding the productive potential of the real economy to meet this growing demand.

4. The financial services sector is, nevertheless, a vital part of the UK economy and

will continue to be so in future years. But the resilience of the UK to future economic uncertainties will be improved by developing complementary strengths in other sectors. Export-led growth in particular will need more than just the UK’s traditional strengths to drive strong growth.

5. In this respect, industry, and manufacturing in particular can play a significant role

in delivering better-balanced economic growth. The sector accounts for around half of UK exports and has been driving a recovery in trade since the beginning of the year. A weaker exchange rate combined with manufacturers’ focus to extend their reach into global markets over much of the past decade provides a good foundation for export-led growth in future.

6. The government’s focus on better-balanced growth also comes at a time of

unprecedented fiscal consolidation. This provides an additional challenge as government seeks to reduce public expenditure over this parliament in a way that supports a strong private sector recovery.

HM Government’s Strategy for Sustainable Growth identifies these priorities 7. The government’s paper in July, A Strategy for Sustainable Growth, was positive

in that it covered the breadth of issues the government needs to focus on to ensure coordination of policy. The paper identified the priorities which can underpin private sector growth in future. While the outcome of a number of government policy reviews will not be evident for some months, manufacturers will welcome the attention to issues that could present barriers to improving the longer-term competitiveness of the UK economy.

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8. In particular decisions to tackle issues such as reducing regulation, improving access to finance and reviewing the approach to support skills development early in the parliament could potentially lay the foundations for sustainable growth. In addition, the paper also recognises that government needs to think and act differently – particularly in the areas of public procurement and engaging with partners to bring down barriers to trade growth. For example, companies that count the government as a customer will want to see government deliver on its commitment to communicating and sticking to infrastructure and investment priorities, which will enable UK companies to plan for and respond to procurement opportunities.

9. In addition the growth strategy acknowledges that the range of horizontal policies

to support growth can have differential impacts on different parts of the economy. The forthcoming Manufacturing Framework must put this recognition into practice, by setting how the range of government activity – from tax policy and access to finance to skills and innovation policy will impact on manufacturing and its ability to invest and grow in the UK.

10. While BIS is a key player in the process of supporting private sector growth and

rebalancing the economy, other government departments and agencies also exert a considerable influence. As government continues to flesh out its policy agenda in the months ahead with White Papers on growth, sub-national government and manufacturing, it must present a unifying theme to which all parts of government will work towards.

Policies to support growth and rebalancing and the role of the Department for Business 11. As indicated above EEF supports the broad policy priorities set out so far by the

coalition. However, the reviews and consultations that have been published to this date are only a first step in providing industry with the stable and predictable business environment that will provide companies with the confidence to invest and grow in the UK. The government should also prioritise action in the following areas:

Access to Finance

– The government’s Green Paper on access to finance provided a good overview

of general lending conditions and the problems facing some parts of the economy in accessing external finance. However, in our response to the consultation we highlighted a number of other areas, which we believed were not sufficiently addressed in the Green Paper. Our main concern is the change in assessment, management and pricing of risk by the banks. While banks may be taking a more cautious approach to lending decisions given uncertainty around the strength of the recovery, a shift in the management of risk is manifesting itself not just in terms of higher interest rates on borrowing, but also in the additional costs and conditions attached to a loan. We recognise that the government does not have a large fiscal lever to pull to improve lending conditions in the economy. We do not therefore see a simple solution to increasing the flow of finance to businesses seeking to expand and grow. There is however smaller scale action the government can take that we consider would improve lending conditions – especially for SMEs.

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Relations between banks and the private sector have deteriorated post-financial crisis and effort is needed on both sides to improve the situation. It is not evident that the use of lending targets has or will lead to improvements in accessing finance. However, government can help facilitate greater transparency around lending policies and costs. Competition is a major issue in financial services. We recognise there are processes underway looking at the overall structure of the banking sector and also barriers to entry, expansion, and exit in retail banking. However, there is also scope to increase non-price competition among banks and also greater competition with alternatives to bank lending. There are a range of government schemes already in place to improve access to finance. The effectiveness of some of these schemes would be more effective if small adjustments were made to their operation. For example:

grouping the government-backed equity funds together would provide a more complete picture for SMEs of what is available from government;

bringing greater non-financial business expertise into government-backed equity funds to actually make a difference in the way investment decisions are being made;

encouraging international investors to co-invest in its equity funds; and conducting analysis of and publishing the conditions being attached by

banks and other lenders to EFG applications.

– The Small Business Finance Forum was an effective exchange forum between small businesses and banks. There are no comparable forums that represent both sides of the lending arrangement and we consider the SBFF was conducive to constructive dialogue.

UKTI and support for exports – The government is committed to a review of the functions and structure of UK

Trade and Investment. This is in part necessitated by the abolition of the Regional Development Agencies, which were responsible for some trade and investment functions. However, this should also be viewed as an opportunity to consider the most cost-effective deployment of resources and where the strategies of different parts of UKTI have delivered the greatest benefits.

– In the past, we and the Business, Innovation and Skills Select Committee1 have questioned the regional delivery of elements of UKTI’s strategy. This has led to a degree of competition and duplication across the Regional Development Agency network. Moving to national sector strategies, the approach taken to promote advanced engineering for example, rather than a regional approach could therefore offer a more efficient and effective deployment of resources.

– A survey of EEF members published earlier this year2 showed that the range of services and support available from UKTI has made a tangible difference to manufacturers’ export performance. We found that around half of companies had accessed some form of export support service from UKTI in the previous two years. The most used service, by 42% of UK-based manufacturers, was the

1 BIS Committee report, Exporting out of recession, Jan 2010 2 EEF (2010) Rethinking Growth: Building blocks of an export-led recovery

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support UKTI provides via International Trade Advisors, with involvement in sector-specific seminars overseas and meeting key contacts visiting Britain on inward missions both accessed by 38% of companies.

– Overall, the majority of companies reported real benefits, including gaining access to information, customers and contacts and increased confidence to enter a new market. In addition around one in six increased total export sales as a result of UKTI support.

– UKTI’s strategic priorities are meeting the needs of exporters, the outcome of the Spending Review must ensure that they can stick with them. Turning the funding tap off again in the forthcoming Spending Review would risk disadvantaging UK companies in an environment where global opportunities and global competition will go hand in hand.

Other assistance to industry 12. While the Committee is particularly interested in BIS’s role in growing exports and

improving access to finance, the Department funds and manages a broad range of other areas of support and assistance to industry. These will also be important in delivering sustainable economic growth, including on innovation, practical support to improve productivity through the Manufacturing Advisory Service (MAS) and providing a framework for low-carbon business opportunities.

13. Inevitably spending on these programmes will be subject to review as part of the

Department’s spending settlement. And decisions on whether these programmes should continue should be judged on the extent to which they can support better balanced economic growth.

14. On innovation, for example, a forthcoming report from EEF will show that UK

manufacturers have increased their focus on a broader range of innovations as part of their strategy to increase penetration in export markets. Success here will require companies to commercialise innovations quickly and overcome hurdles by collaborating up and down the supply chain and with Higher Education Institutions. Government can have a role in catalysing private sector investment, but limited resources must now be focused on developing and commercialising innovative ideas in the UK. In addition future reforms to the R&D tax credit should also reflect these aims by covering a wider range of development costs.

Lessons from the recession and the previous government 15. The planned cuts to public spending will bring a different approach to industry

compared to what manufacturing has seen in recent years. The recent major synchronised global financial crisis and decline in worldwide demand created a situation where extraordinary policy interventions were warranted. In these circumstances, industrial policies that provided direct support to firms likely helped preserve and build UK economic strength that the recession may otherwise have destroyed. In the case of the interventions to support lending through the Enterprise Finance Guarantee Scheme, the previous government acted quickly in an attempt to get credit flowing to the private sector. Other initiatives such as the car scrappage scheme provided the automotive sector and its supply chain with a much-needed boost to demand.

16. In addition, a new strategy for industry – New Industry, New Jobs – set out the

sectors of the economy where the UK had, or could develop, a competitive

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advantage. It also put the spotlight on the contribution manufacturing makes to the UK economy. The Strategic Investment Fund provided an important source of investment to companies developing leading-edge technologies and helping to ensure their development and production continued in the UK. However, the decisions behind individual investments from the fund were not always transparent or clearly communicated. And the consequence of this was that some of the decisions were reversed by the new coalition government.

17. The need for a Strategic Investment Fund perhaps highlighted some of the

broader weaknesses in the business environment – where companies were left unable to secure, for example, finance from the private sector to support growth plans and access new markets. Getting these aspects of the business environment right in future should reduce the need for such interventions.

18. Government support for industry over this parliament can build on the work done

by the Department for Business in identifying the sectors, technologies and markets where UK companies can successful build a competitive advantage. If the forthcoming Manufacturing Framework is to fully recognise that government interventions have differential impacts on different parts of the economy, policy needs to be driven by a clear sense of direction on where the UK can excel. This will form the basis of a more stable policy environment, which can allow businesses to plan long-term investments in the UK.

19. Finally, with the recovery like to be an uneven one – both here and across the

global economy – decisions on government spending must be sufficiently flexible and able to respond should the upturn begin to lose momentum.

29 September 2010

GAI 18

Memorandum submitted by the Forum of Private Business

Introduction This is a collection of research undertaken by the Forum of Private business to be presented to the inquiry on ‘Government Assistance to Industry’. We represent 20,000 small businesses throughout the UK. We have decided to concentrate on the key areas which affect our members. The evidence that we are presenting relates to the following points;

• the role of the government in encouraging the supply of credit to small and medium-sized enterprises,

• the relationship between government, industry and the banks, • the role and performance of the Small Business Banking Forum, • steps to encourage inward investment into the UK • government policy as set out in the green paper on business finance

The supply of credit; the role of banks, government and industry During the recession At the start of the Credit Crunch we set up an Economic Downturn Panel to report on economic conditions and their effects on small businesses. During the recession our members felt that the previous Government did not do enough to support their businesses. As the table below shows, business owners felt government support for small businesses was deteriorating. Table 1.1

(Economic Downturn Panel, September 2009) During this period bank charges increased, as table 1.2 shows.

2

Table 1.2 changes to banking fees

(Economic Downturn Panel, September 2009) Businesses did not have a great deal of confidence in the role of banks in stimulating growth. This was reflected in the fact that only 5% of the SMEs believed improved bank support would be a factor which would help their businesses to grow. In total, 40% of those looking for credit (almost a quarter of the sample) in 2009 were unsuccessful in accessing one or more types of finance. Access, in terms of traditional commercial finance from banks (loans and finance), was particularly low, with 52% being refused for business loans and 38% being refused an extension or additional overdraft facility. The most recent research on this subject, the latest BIS SME Business Barometer(2), puts the success rates for all types of finance at 42%, overall the comparative figure from the Economic Downturn Panel research is 40%. Figure 1 highlights the policies, as of 2009, that businesses believed would be important in helping their business grow. Figure 1

(Referendum 186) This highlights that businesses were optimistic that many of the 2009 measures would help their business and the wider economy. During the recovery

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Since the economy has begun to recover, members feel that that the banks continue to be risk adverse and are not providing enough credit to allow business to make the most of the improved conditions. We set up an panel of over 350 member small businesses in January 2010 called ‘Economy Watch’ in order to measure the recovery. In comparison with the Economic Downturn Panel, there is relatively little movement in terms of the cost and access to finance, with 92% of businesses encountering no change in the cost of finance and 80% not seeing any change in access to finance. In March 2010 our Economy Watch panel found that business needed around 18% of additional funding from banks or other external forces in order to meet their plans for 2010. However, the evidence suggests that businesses were not receiving this extra funding (see table 2). Businesses were looking to invest, but were relying on their own cash reserves rather than external finance. Table 2- Access to finance

(May 2010 Economy Watch panel) In comparison with the Economic Downturn Panel there is relatively little movement in terms of the cost and access to finance, with 92% of businesses encountering no change in the cost of finance and 80% not seeing any change in access to finance. Case study 1 One small business, which manufactures and supplies electrical industrial equipment, was not receiving the support it needed to meet a large contract. The business owner said “We have an order of some $56m supported by a letter of credit for $25million already in place and no support whatsoever from the UK Government Support network or banks... if, as a small business, we do not get the support against finances already secured than the worst cases will be that yet another business will have no choice but to fold with the loss of some 40 jobs rather than creating the 40 or so jobs we envisaged, coupled with other similar local companies who would be heavily involved with us in achieving this contract and if we fail we would impact on them as well.” One key concern for business was the lack of information about available government schemes. 31% of respondents to our quarterly survey, Referendum 189, would like to know more about how to influence their credit score and a slightly larger proportion are concerned about the increasing onus on businesses to illustrate that they are creditworthy in the current lending climate. At least 18% are unsure of the easy availability of each type of advice and guidance for their business. In most cases this is because the owner or manager has not had time to look or does not know where to look. Comments from business owners indicate that some are reluctant to use Business Link to signpost them to the correct provider due to previous bad experiences. When listing the reasons why support is not easily available, some of our members said; “There is support out there but confusion exists over quality and delivery” and “It’s hard to find where and when to get it; nobody seems to know if support is available”. This information must be made more available in order that SMEs can make informed decisions. The chart below shows that banks dominate when it comes to lending. Figure 2 Comparison between probable providers of finance in 2010

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60%

7%6% 5%

16%

3%1% 2%

0%

10%

20%

30%

40%

50%

60%

70%

Banks Governmentgrants

Supply chain(suppliers orcustomers)

Venture capitalists Companydirectors, friends

and family

Credit cards Building societies No reply/othersources

(Finance and Credit Management report) The lack of any real alternative to finance from banks (whether it be traditional forms of bank lending or alternative forms of finance such as invoice discounting) is a major concern for our members, as any growth finance will need to come from the same companies that cut or refused credit, increased banking charges and who are blamed for encouraging the culture of overreliance on debt finance in the past. Many businesses are now chastened from the experience of the last few years and many of our members are reliant on the greater usage of internal profits as a growth strategy, if they expect to grow at all. For this reason there is a real chance that any recovery will be a jobless one, as around two thirds of jobs created between 1997 and 2008 were in SMEs. Tougher regulation on banks would be popular amongst our members; however more important longer term are steps to improve communication between banks and business owners, especially through greater transparency. We are concerned that tougher regulations would invariably lead to increased cost of or reduced access to finance at a time when our members are in greater need of reasonable access to affordable finance. A stable business environment has become an increasing priority for business owners, probably due to the instability of the European economy and fears of a double dip recession. In addition, there needs to be an improvement in public sector organisations when it comes to late payment. Businesses said these groups delayed payment in March to the end of the financial year, which was a concern.

Enterprise Finance Guarantee scheme In our response to the green paper on finance, we outlined that there are some problems with the Enterprise Finance Guarantee Scheme (EFG). Our research has found that businesses had struggled to access EFG funding. Case study 2 One Bradford-based business owner, who runs a photography and videography service, has tried so far unsuccessfully to gain EFG funding. He said that the funding which was available was unclear; “I have tried approaching Lloyds TSB for an enterprise finance scheme loan, waited 5 months for a reply....and still no reply affirmative, or negative, just no reply. One consultant whispered the name Enterprise Finance Scheme at HSBC, as if, shhhh! we are not supposed to tell you we can take part in this scheme the government is funding. Why is this failing? Why are the bankers failing me, and others?” The Enterprise Finance Guarantee scheme had initial teething problems due to poor communication and a very short timeframe in rolling it out to the nation’s businesses. There are however two main issues outstanding, one is that there is still no information about how many businesses asked for the scheme but were discouraged from accessing it and the other is simply the cost of the scheme.

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At some stage the EFG needs to be scaled back to levels closer to the Small Firms Loan Guarantee scheme; in the meantime we would like to see the scheme assessed annually and greater flexibility in how businesses can access the scheme. Ultimately we would like to see the private sector take on much of this itself, perhaps operating a two-tier system where the second tier was more intensive support for the business but at a greater cost – part of the vitriol aimed at bank charges was that our members felt that they were having to pay for the mistakes that the banks themselves had made and were getting nothing in return. We feel that the Government could make some of its schemes such as EFG more flexible in the short term, but in the longer term it should look to roll them back as the economy improves. We feel that the financial industry could benefit from more intensive support but at a slightly higher cost. Extending the scheme to allow the EFG to support growth finance through leasing or similar could be one such option.

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Government policy as set out in the green paper on business finance Historically, businesses need more finance during a recovery than during the recession itself, therefore this green paper is important as it raises issues that we have been concerned about for some time. So far in 2010 there has been no increase in the availability of finance for smaller firms, despite the economy coming out of recession; in fact the reverse has been the case. Some issues do need to be addressed as a priority; in particular there should be clearer definition of what should be expected from banks. In the last two years a number of our members have accused a number of the banks of dragging their heels. We would like the new Bank of England regulator to set specific timelines for decisions to be made on lending, written feedback on a loan rejection and the time for an internal escalation within the bank to be made, rather than the current wording of the Lending Code which uses phrases such as ‘appropriate’ or ‘reasonable’. Generally, greater transparency is required to restore trust in the banking industry as businesses have seen bank charges increase, have had greater demands put on them to provide collateral for lending, and have also seen hidden clauses activated on products and little change to the cost of lending, despite the historical reduction in the Bank of England’s base rate. Along with a more stable taxation and regulatory environment, this should allow our members to plan more effectively for the future. We would also like to see greater discretion locally, with bank managers able to take into account other evidence from businesses such as recent orders etc to help them access finance. In other countries such as Germany the response to the crisis has been a much closer relationship between banks and their customers, with the manager telling their clients when not to borrow as well as when to consider more complex financial products such as equity lending. Due to the historical sales orientation of relationship managers in this country this would take some time to implement and a better option would be to incorporate local independent expertise such as accountants or financial planners. Shared training schemes whereby banks, accountants and business owners have the option of understanding the basics of how banks assess risk would also be helpful to improve communication at a more local level. Steps to encourage inward investment into the UK Recent research by the Forum indicated that businesses involved in international trade were more likely to cite external finance as an issue than businesses whose trade was only in the UK. In total, 25% of importers and a similar proportion of exporters saw access to finance as an issue for their business compared to just 15% who traded solely in the UK. Cash flow problems also disproportionately affected those involved in international trade as payment terms in other countries differ significantly from the UK. Our research indicated that businesses of all sizes would like to see: • Better protection for importers and exporters from international credit ratings agencies.

Businesses complain that it is difficult to assess credit internationally and the information available to them is not always recent enough to allow them to make an informed decision.

• A greater range of financial products from financial institutions that support international trade such as a greater range of choice on international merchant services, web-based foreign exchange products or products to effectively reduce the risk of international trading.

• More effective advice and guidance on selling or buying abroad through the retail banking system.

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Trade finance was less of an issue as the current system is workable, however there is a feeling that for our manufacturing members who are looking to compete with firms in key rivals in Germany, France and Holland that these countries do more to support their businesses overseas than the UK does. More help from embassies was seen as important from our recent research and there are indications that this is starting to happen. Performance of the small business banking forum We were a member of this forum which was established by the previous Government when small businesses began to experience significant problems in accessing finance. We found the forum useful for raising these issues at ministerial level and from the point of view of speaking directly to the banks at one regular forum. The small business banking forum had several achievements and outcomes, one of which was the British Bankers Association’s (BBA’s) updated Statement of Principles. The updated statement lays down in black and white what small businesses can expect from the banks and what they are expected to do in return. Although, as stated above, we would like the new Bank of England regulator to set specific timelines for decisions to be made on lending, our members found this document useful in preparing for their negotiations with the banks. Another outcome of the forum was that some of the banks published their own customer charters, aimed at clarifying the relationships the banks have with their small business customers. Obviously the problems small firms have experienced in accessing finance are complex and not easily solved, however the forum was one way of facilitating a sharing of information which benefitted both the banks and small businesses. The Government played its role in bringing these two groups together and now that it is no longer involved in this group, we hope that the momentum continues and that the group continues to discuss emerging issues, facilitated by the BBA. Recommendations • We feel that the Government could make some of its schemes such as EFG more flexible

in the short term. • Information regarding government support must be made more available to enable SMEs

to make more informed decisions. • Clearer definition of what should be expected from banks is needed. We would like the

new Bank of England regulator to set specific timelines for decisions to be made on lending, written feedback on loan rejection and the time for an internal escalation within the bank to be made transparent.

• Generally greater transparency is needed to restore trust in the banking industry. • We would like to see greater discretion locally, with bank managers able to take into

account other evidence from businesses such as recent orders etc to help them access finance.

• We hope that the momentum generated by the Small Business Banking Forum continues and that the group continues to discuss emerging issues, facilitated by the BBA.

The Forum hopes that the evidence collected on the previous governments’ role in stimulating finance to business has been useful to the committee. We hope that the new government takes this evidence on board and uses it to improve government and bank support to SMEs. 29 September 2010 Sources 1. Parry T and Skaljak G, Finance and Credit Management http://www.fpb.org/images/PDFs/research/FPB-Graydon%20research%20report%20-%20Finance%20and%20credit%20management.pdf. FPB/Graydon, January 2010 2. Parry T, Referendum189 Preparing for Growth http://www.fpb.org/page/104/Referendum.htm, FPB, November 2009

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3. Economy watch report May 2010 http://www.fpb.org/images/PDFs/surveys/Economy%20watch%20May%20Report.pdf. FPB, May 2010. 4. Economic Downturn Panel September 2009 http://www.fpb.org/images/PDFs/research/FPB%20Economic%20Downturn%20Panel%20Report%20-September.pdf. FPB, September 2009.

About the Forum of Private Business The Forum of Private Business is a proactive, not-for-profit organisation, providing comprehensive support, protection and reassurance to small businesses. The organisation aims to deliver an exceptional service to its members, adding value through the provision of practical, tailored solutions that promote business success, and by being their voice in government.

 Tim Bradshaw Head of Enterprise & Innovation

DL: +44 (0) 207-395-8250 E: tim.bradshaw@cbi.org.uk  

   

CBI Centre Point 103 New Oxford Street London WC1A 1DUT: +44 (0)20 7379 7400 F: +44 (0)20 7240 1578 W: www.cbi.org.ukDirector-General: Richard Lambert President: Helen Alexander CBE

Registered No: RC000139 (England and Wales) Registered Office: CBI Centre Point 103 New Oxford Street London WC1A 1DU

GAI 19 Memorandum submitted by the CBI 

Summary 

Government assistance to industry is critical, even in a period of constrained public finances. It helps to underpin business growth and investment, innovation, entrepreneurial activity and exports. If well targeted, it can create a significant return on investment for the economy. 

The government should: 

•  Provide certainty for small businesses by extending the enterprise finance guarantee, committing to its review and ensuring it meets the needs of IP‐intensive businesses 

•  Examine options for addressing the investment capital needs of medium sized SMEs where there is greater demand for external finance 

•  Improve the EIS and VCTs to catalyse new investment with entrepreneurs 

•  Continue with the ‘time to pay’ scheme to allow viable businesses flexibility with working capital 

•  Focus intensive face to face support on businesses with high growth potential 

•  Provide enhanced support to maximize export potential – helping business gain presence in non‐traditional markets and tapping new opportunities (eg in health, low‐carbon, middle class consumables and IP‐intensive products and services) 

•  Focus on securing additional high‐value inward investment, working closely to establish in‐depth relationships with the highest value FDI prospects 

•  Review the governance and application of the rules that ECGD operates under to ensure greater flexibility and responsiveness to future financial shocks  

•  Overhaul the marketing and product range of ECGD, starting with a study to understand the potential demand for further government‐backed export finance. 

With all assistance, the government should ensure it meets the real needs of business, no matter what sector they are in. Assistance needs to be effective – addressing market failures without crowding out market solutions or creating distortions. 

Introduction 

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1.  The CBI is the UK’s leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world. 

2.  We welcome the opportunity to comment on the BIS discussion document on government assistance to industry. Government support for industry and measures to increase the flow of credit in the economy were vital during the downturn, but it is clear greater focus and targeting will be needed going forward. Our comments in this submission build upon views expressed in the CBI’s submission to the spending review and the wider need to reduce government expenditure.  

3.  The composition of public spending cuts will have a crucial effect on growth in the years ahead. Managed in the right way, government spending will still be able to support a recovery in the private sector and, in turn, underpin the improvement in tax receipts which is already underway. 

4.  Government assistance to industry should target economic growth and rebalancing in the economy — helping the UK move on from a period largely driven by domestic demand and public sector growth to an economy that is more export and investment oriented. We need to grow all areas of high value added activity including the hugely successful creative sector, which is the biggest in Europe. We need to encourage the transition to a low carbon economy and build upon the UK's capacity to benefit from, as well as respond to, the opportunities and threats of globalisation. Support that creates an environment conducive to entrepreneurship, with access to appropriate sources of finance for enterprise, is fundamental to achieving sustainable growth. 

5.  However, the main focus of intensive face to face business support should be restricted to those companies with high growth potential. Recent research by NESTA showed that just 6% of businesses with the highest growth rates generated half of the new jobs in the UK from 2002 to 2008. These businesses need a variety of support for growth to be realised and made sustainable, including: access to growth finance; support for business strategy development; skills and capability building to manage growth and the new challenges it brings; export advice and market access support; support for innovation, which may include R&D, design, demonstration, business model adaptation, and investment in advanced machinery, IT and other systems.  

6.  Any government intervention must also satisfy a number of parameters. Measures should: 

•  address a specific market failure 

•  be effective, eg in terms of creating a critical mass of support to have real impact 

•  provide value for money, and be consistent with fiscal consolidation 

•  be temporary in nature if addressing transitional problems  

•  not crowd out private provision or market solutions 

•  not create countervailing distortions elsewhere in the economy. 

Support SMEs into the recovery by addressing long‐standing structural finance issues  

7.  Given the damage caused to the capacity of the financial system during the recession, support must be maintained for measures that facilitate an efficient supply of appropriate finance to small and medium sized enterprises (SMEs). SMEs currently employ around 13.7 million people in the UK and create jobs at a rate of 2.1% a year, even during the crisis. But in order to continue to grow and deliver real benefits to the 

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economy, these companies will require access to an efficient, varied and diverse funding ecosystem including low cost bank lending to effectively meet the needs of growth.  

8.  This is a matter of stimulating demand as much as it is of encouraging supply – building the capacity for SMEs to understand alternative sources of finance and make themselves attractive as recipients of both bank and non‐bank finance. While the demand for and supply of finance are currently weak, the challenge is to ensure the supply of finance supports, rather than constrains, the recovery as the economy picks up and demand increases. 

9.  We therefore welcome the government’s ‘core priority’ to ensure credit flow to SMEs to support growth. Fresh thinking is required about alternative forms of finance for small firms, including from non‐bank sources. We have a history of ‘funding gaps’ for small companies at various stages of their growth cycles and the challenge is to keep on top of these as they develop – keeping the environment for business growth vibrant in the UK. Government can and should play a number of key roles here: 

•  Create the right regulatory, tax and fiscal environment to attract investors (including banks, other businesses, venture capital and business angels) 

•  Help to establish financing mechanisms – for example, providing initial capital that can have a multiplier effect, bringing in additional commercial funds 

•  Bring together smaller public funds to create critical mass (as has happened through Capital for Enterprise), reducing administrative costs and allowing for some higher risk investments to be supported – in particular where the focus is on innovation investment and export growth 

•  Provide loan guarantees to share some of the risk of commercial lenders offering loans to SMEs for working capital and growth finance 

•  Addressing demand side issues by encouraging SMEs to become investor ready. 

Enterprise finance Guarantee 

10.  The Enterprise Finance Guarantee (EFG) has so far been effective in encouraging lending at the margins of the risk profile for banks, especially during the worst months of the recession. Since its inception in January 2009, through to September 2010, over 11,673 loan offers have been made with support of the EFG – and over £998.8m of funding has been drawn on by SMEs. As these are loan guarantees the only real cost to government has been in scheme administration – but even this is significantly offset by the 2% premium payable by users to BIS on their outstanding loan balance. Although the peak of demand has probably now passed, there is still a need for this type of public‐backed risk sharing to release finance for SMEs. Government should make a temporary extension to the EFG to help SMEs in the post‐recession period and commit to a review of EFG to determine if such a scheme is needed for the long‐term. 

11.  In continuing with the EFG, the government should take into consideration the unique funding challenges facing IP‐based industries, for example content‐based creative industries. These businesses often hold few tangible assets, instead trading in cultural goods and intangible assets. This can present a challenge from a security perspective when sourcing finance. The criteria used for making lending decisions should be revised to ensure credit assessments take into account the characteristics of IP‐based industries. 

12.  Current EFG limits are also too restrictive in terms of the size of company eligible – only stimulating lending to smaller SMEs and failing to address pressure points in medium‐sized SMEs. These companies, with turnovers from £25 million to £500 million per year, typically rely more on bank finance than smaller 

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firms. BIS survey data suggests 40% of mid‐sized companies sought bank finance last year whereas SMEs below £25m turnover are generally net depositors with banks.   

13.  The current EFG upper lending limit of £1 million is not flexible enough to deal with the needs of mid‐sized SMEs that have viable business models and market opportunities for expansion, but may still be marginal in terms of banking risk. The demand from such businesses may also be more for growth and investment capital than for working capital. The government should examine options for addressing the investment capital needs of medium sized SMEs where there is greater demand for external finance. 

Enterprise investment Scheme and Venture Capital Trusts  

14.  Government schemes, such as the Enterprise Investment Scheme and Venture Capital Trusts are vital in incentivising SME equity investments. This is because small firms are inherently risky ventures; investors tend to prefer larger deals involving larger businesses where the transaction costs are a smaller proportion of the investment made. For example, many SMEs will have only limited performance measurement data or measurable track record. This may make investors more risk averse and can result in higher levels of return being required or lower levels of investment being committed. Tax incentives to encourage SME equity investments are not only welcome, but are essential in creating a vibrant investment landscape in the UK. 

15.  Venture Capital Trusts (VCTs) have raised £3.6 billion over the last 15 years , Enterprise Investment Schemes (EIS) have been equally important for smaller companies, with £7billion of investment made through the scheme since launch. This figure includes significant additionality –research indicating that 52% and 87% of the funding provided through the EIS and VCT schemes respectively would not have been invested in small, unquoted companies in the absence of the schemes. 

16.  VCTs and EIS also provide an efficient government intervention. As the below table shows, EIS supports fund raising at a funds to cost ratio of 4, and VCTs at a cost ratio of 2.3, both higher than the ratio offered by government co‐investment schemes such as UK Innovation Investment Fund. 

ENTERPRISE INVESTMENT SCHEME  2004/05 to 2007/08 

EIS cost to exchequer  £670m EIS funds raised  £2,676m EIS ratio of funds raised to cost  4    VENTURE CAPITAL TRUSTS  2004/05 to 2008/09 

VCT cost to exchequer  £855m VCT funds raised  £1,950m VCT ratio of funds raised to cost  2.3 

Funds raised and cost to Exchequer of specified tax reliefs (Source: HMRC)  

Government support for SME Equity investments is needed more than ever  

17.  Recent research by NESTA indicates that venture capital fund raising in 2009 was at its lowest level in the UK for a decade. The number of venture capital funds active in the UK halved over the year, to just 11 (fund total of £574m) – down from a peak of 106 funds active in 2000 (managing £3.3 billion). Involvement of public funds (now engaged in 40% of deals) appears to be increasingly important. 

 

 

 

 

 

 

(Source: NESTA) 

18.  Ultimately, private investors will return to venture capital and business angel activity as confidence in business growth returns after the recession. The government can help to facilitate this return by providing a more favourable tax environment for individual business investors. The Enterprise Investment Scheme (EIS), for example, provides 20% income tax relief and relief from capital gains tax on investments up to £500,000 per year in small firms. This should be extended to investments in medium‐sized businesses (>50 employees), with the limit increased to £1m. The rate of relief should also be increased over time back to 2006 levels (40% relief) as public finances allow. Since 2006, when the income tax relief for investments into VCTs was reduced from 40% to 30%, the amount raised has fallen from £790m to £219m in 2007/08 . 

Time to pay  

19.  The government should also continue with its ‘time to pay’ scheme run by HMRC. This provides a valuable working capital buffer for viable businesses needing a small amount of extra time to meet tax liabilities – for example, when income from a contract is out of phase with deadlines to pay business tax. Strict criteria should be applied to access this facility to reduce the likelihood of default and minimise costs associated with delayed payments. 

Business Link  

20.  The Business Link service has annual running costs in the order of £300m. This can be cut significantly while still providing valuable advice and guidance to business – specifically, by focusing intensive face to face support on businesses with high growth potential. 

21.   More general advice and guidance for small businesses and start‐ups should be delivered primarily via the internet, with basic online resources created nationally and delivered nationally. It needs to be developed more as an interactive tool rather than just a set of information pages, allowing businesses to tap the collective knowledge base and derive solutions fit for their own business needs. An example of best practice in turning knowledge into tools for businesses to use are the so called Lambert model contracts for business‐university collaboration, now hosted on the Intellectual Property Office website.  

22.  This web‐based approach could be supported by integrated telephone support via a national helpline, providing general diagnostic help and sign‐posting users to additional resources (for example those that might be available through local business mentoring schemes, or via university or sector networks or other commercial offerings). 

23.  The overall costs can be reduced by setting the bar higher in terms of business access to this more extensive assistance. For example, placing a premium on businesses seeking to export or where significant new demand for a business’s products and services can be established. Support should then be provided as a coherent package to meet the business’s needs over a period of time so they do not have to apply again 

5

6

and again for each individual element. This intensive support should be more hands on, typically managed face to face with an experienced business advisor.   

24.  Within the existing package of business support solutions funded and/or delivered by the RDAs, the following are particularly valuable in terms of creating economic return and should be prioritised for continuation, again, focused on high‐growth businesses: 

•  Knowledge Transfer Partnerships – linking new graduates, supported by their university, to work in business on real business problems for periods of between 10 weeks to 3 years 

•  Manufacturing Advisory Service – specific hands‐on help including technical support of manufacturers 

•  Innovation vouchers – supporting ‘first contact’ between SMEs and universities. This scheme should move to management at the national level, delivered through approved brokerage hubs in universities (such as Aston University in the West Midlands) to reduce costs and improve effectiveness 

•  Designing Demand – hands on design support delivered by approved design experts to a format developed by the Design Council. 

UKTI  

25.  Export growth and international investment (both inward and outward)is likely to support the re‐balancing of the UK economy and will  make a major contribution to tackling deficit reduction. Government can play a central role in helping businesses to achieve this growth – providing information, contacts, and financial/risk backing (eg export credit guarantees and repayable launch investment) and, in particular, supporting businesses breaking into new markets and facilitating market access. Other examples of barriers the government can help remove include: cumbersome import or documentation procedures at customs, inadequate or poorly‐enforced IP legislation, and protectionism in public procurement systems. 

26.  It is important the government fully recognise the critical role that the UK's trade and investment performance can play as a driver of economic recovery. We support the new government’s focus on improving the UK’s global business profile: UKTI needs to work with business and government departments to collectively tailor the UK Plc offering in order to compete effectively in the global economy. 

27.  In a period of financial constraint UKTI activities must focus on targeted support for business by translating market knowledge and political influence into concrete opportunities for business. For example, targeting exporters in innovative and high growth companies. 

28.  The need to develop the UK’s presence in high growth and emerging markets   in terms of exports and investment is growing . For example, the UK’s traditional export partners are the EU and US – accounting for 66% of exports of goods and services in 2009. Exports to these countries declined significantly during the recession, whereas exports to countries such as China, and Brazil continued to grow albeit from a low base. UKTI should target resources appropriately to help manufacturers and other industries, including the creative sector, to access these markets. UKTI should also increase efforts to help businesses gain presence in other non‐traditional markets with significant growth potential.  

29.  Similarly, the government should focus effort on the potential for growth in certain types of product and service export where the UK could build increased presence. For example, known trends in terms of global health, income and adaptation to climate change provide the basis of demand for new products and services that UK businesses could tap into with targeted export support: 

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30.  Four themes with potential for growth that could form the focus of effort are health, low carbon, IP‐intensive activity and middle class consumables. The UK should also seek to build on its existing strengths in export, investment and joint ventures in areas such as: pharmaceuticals, energy production and infrastructure development projects, automotive and aerospace industries; high‐tech manufacturing, professional and financial services and the creative industries.  The CBI believes there is significant business to be won on international projects if innovative strategies are used. 

31.  The CBI would support targeted project ‐winning campaigns to showcase UK capability, backed up by diplomatic and ECGD support. Working via consortia in high growth markets would enable the UK to bid more effectively for international strategic projects and draw UK SME capability into the supply chain. With the abolition of RDAs it will be important for UKTI to maintain and develop its sectoral knowledge and capability. At the moment there is a lack of clarity on the sub‐national architecture and therefore the danger of a hiatus at this crucial stage of the UK’s economic recovery. 

UKTI must also focus on winning more inward investment  

32.  The UK economy also benefits substantially from inward investment but benefits depend crucially on project type. R&D investments and green field investment by firms seeking to use UK as springboard for exploiting technology or innovative products or services are more likely to bring benefits than technology seeking investment or mergers and acquisitions.   

33.  UKTI will need to identify and establish in‐depth relationships with the highest value FDI prospects. Some may already be in the UK and have significant potential to expand their operations while others will be from the highly developed and the rapidly expanding economies. BRIC countries currently account for less than 6 per cent of all global FDI, their increasing economic power makes it important to establish the UK’s credentials as a prime destination for added‐value investment. 

ECGD 

34.  Export Credit Agencies (ECAs) support the financing of a country’s exports where commercial credit insurers have restricted appetites.  In the UK, the Export Credit Guarantee Department (ECGD) performs this role. ECGD is set up to complement the private market by providing assistance to exporters and investors, principally in the form of insurance and guarantees to banks. Essentially, it provides: 

•  Insurance for UK exporters against non‐payment by overseas buyers; 

•  Guarantees for bank loans to facilitate the provision of medium and long term (2 years +) finance to overseas buyers of goods and services; and 

•  Political risk insurance for UK companies making investments in overseas markets. 

35.  A review of ECGD’s performance in recent years suggests that the value of support to business had been in steady decline until the financial crisis, but then bounced back as commercial offerings were withdrawn. The other notable feature of ECGD is the heavy concentration of its business on aerospace and related sectors. 

36.  World trade needs reliable, adequate and cost effective sources of financing, both long term and short term –and many exporting firms rely on international trade finance to maintain the working capital cycle and provide cash flow to fulfill order books. The financial crisis reduced availability, and increased the price of international trade finance.  Since 2009, there has been some stabilisation of the market, but uncertainties remain.  Private sector finance in higher risk markets is still limited and expensive. 

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37.  The UK also suffers by comparison to other Export Credit Agencies due to a relatively limited number of services offered: 

 

Short‐term

 

insurance 

Med

ium/lon

g

‐term export 

cred

it 

sche

mes 

Fixed rate 

financing

 

(CIRR) 

Foreign 

exchange risk 

cover 

Direct 

lend

ing 

Investmen

t 

insurance 

Bond

 sup

port 

sche

me/ 

issuance 

Unfair calling

 

insurance 

Letter of 

cred

it 

guarantee 

sche

me 

Working

 

capital facility 

Score 

UK  X  YES  YES  X  X YES X YES YES  X  5

Australia  X  YES YES X  YES YES YES YES YES YES 8

Canada  YES YES YES YES YES YES YES YES YES YES 10

China  YES YES X  X  X YES YES ? YES YES 6

France  YES YES YES YES x YES YES YES YES YES 9

Germany  YES YES YES x  YES YES YES YES YES x  8

USA  YES YES YES YES YES YES YES YES YES YES 10

(Source: BEXA ECA benchmarking study, April 2010) 

38.  To ensure the flow of available and affordable trade credit finance to help facilitate an export‐led recovery and withstand any future shocks to the financial system we recommend: 

1. A review of the governance and application of the rules that ECGD operates under to ensure greater flexibility and responsiveness to future financial shocks. ECGD operates under a myriad of rules and regulations set out by the OECD and state aid rules under the EU.  Notwithstanding this, other competitor nations were able to put in place short‐term additional export trade credit support during the financial crisis when the UK was either not able or willing to.  This situation needs to be addressed so that UK exporters are not put at a competitive disadvantage in the future. 

2.  An overhaul of the marketing and product range of ECGD, starting with a study to understand the potential demand for further government‐backed export finance. This should include: 

•  A detailed study of whether the export potential for SME and mid‐cap firms is being held back by lack of available or affordable trade credit finance; and what form of export financing would help meet their needs. 

•  Depending on the outcome of this study, an overhaul of the ECGD product range to ensure it is more accessible and better suited to the financing needs of SME and mid‐cap exporters. 

•  Significantly improved marketing of the current, and potentially expanded, ECGD product range to ensure greater awareness of the facilities to help diversify ECGD’s customer base beyond its core aerospace markets. 

 

 

24 September 2010 

GAI 20

Memorandum submitted by the Black Country Chamber of Commerce

Black Country Chamber of Commerce is the voice of business across Dudley, Sandwell, Walsall and Wolverhampton, an area which collectively employs almost half a million people, seventeen per cent of which are in the manufacturing sector. With over 1,500 members and a strong manufacturing base, Black Country Chamber is well-placed to represent the needs of employers in this industrial heartland. Black Country Chamber of Commerce is keen to see Government assistance that will genuinely support productivity and business growth. Bank Lending The irresponsible lending policies of the past have significantly de-stabilised the market and businesses, particularly SMEs, are continuing to suffer. Businesses perceive that the banking sector is preventing companies from harnessing what vulnerable economic recovery there is due to the cost and restrictions of lending. Banks are restricting lending in sectors considered to be high risk, such as construction and automotive. The cost of lending, and increased demands for security, remains prohibitive for many businesses. Traditional risk assessment methods need to be reviewed as many companies will be posting poor results for the period affected by the recession which will affect their credit rating years after any improvement has been achieved. Local businesses have been helped by the recent HMRC support scheme and flexibility on payments, but problems in the main have been caused by cash flow, which have been created by credit finance being withdrawn at little or no notice. Anecdotally, we have evidence of lending being agreed at the local level, but then being withdrawn when the decision is looked at nationally. Although it is the case that demand for credit has fallen slightly due to the lack of overall demand in the global economy, the general lack of liquidity in the economy will hold back the recovery. Black Country Chamber would support measures to place lending decisions with bank managers at the local level, rather than by panels operating at the national level. SMEs in particular have suffered with the demise of the traditional bank manager and ‘relationship banking’ where their business is understood and lending decisions are made accordingly. In the longer term this would also foster more responsible lending by banks locally as it would increase the accountability of managers. Trade Credit Insurance Almost all trade requires some form of credit or insurance and trade finance is essential to supporting UK exports. Despite being relatively routine, trade finance has become susceptible to liquidity squeezes. Many manufacturers have internal financial systems that are based on invoice discounting, which can be essential for the cash flow, particularly for

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SMEs. However credit insurance is required in order to utilise invoice discounting for exports. With the vast majority of SMEs using sales invoice finance, the failure of the Credit Insurance providers to give continuity of cover has had a serious impact on working capital levels in companies using their debtor book as security for this type of loan. Not only have credit insurance providers become particularly risk averse, but every customer is also checked, increasing the likelihood of insurers reducing or withdrawing cover altogether if they perceive any financial risk. This can be the case where a business is exporting to an untested market, or politically sensitive region of the world. This is also the case for certain industry sectors, particularly automotive. Cover is assessed on historical trading performance and figures have been distorted by the recession. Therefore businesses may be refused cover on grounds of poor performance even where there is significant potential in the industry in the future. Firms continue to struggle with the lack of ability to use invoice discounting and have in some cases been unable to ship major orders. Larger firms may be able to self-insure, but this problem impacts on them indirectly as firms across the supply chain are affected by serious cash flow problems. The lack of credit insurance has undoubtedly contributed to the premature closure of some healthy businesses. A more robust system is required if working capital facilities are not to be eroded further. The introduction of a publicly-backed credit insurance scheme run through a private company would be welcome, and action from the Government to prevent credit insurance policy terms being varied during the lifetime of the policy is required urgently. The trade credit insurance (TCI) top-up scheme allowed a business to purchase top-up cover from its existing credit insurance provider, who administered the scheme on behalf of the Government. However as the minimum amount of top up cover was £20,000, many SMEs with a lower turnover were unable to benefit from the scheme. As the TCI scheme also only applied where cover had been reduced, rather than removed altogether, a substantial proportion of the businesses affected by lack of credit could not apply. Some form of reinsurance scheme as suggested by the ECGD would also be useful, both domestically and for export. Businesses have also expressed concerns about increases in premiums, for example, the 2% top up rate for the domestic scheme combined with insurance premium tax at 5%, proved to be prohibitive for some firms. ECGD It is problematic that the Exports Credits Guarantee Department (ECGD) scheme does not cover developed markets because special dispensation would be required from the European Commission. Given the severity of the lack of insurance cover, the UK is being put at a disadvantage and therefore this scheme should cover developed as well as developing markets. Some businesses have criticised the lack of assistance through ECGD and the fact that when they had sought help, they were simply referred to the website, or to Business Link. Government support for exporters must be less generic and flexible enough to take advantage of the opportunities provided by changing global economic circumstances.

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UKTI The Government must support exporters as a way of bolstering the UK economy and the channels for inward investment to the UK must be more structured, as is the case with our European counterparts. Black Country Chamber would strongly advocate the strengthening of UKTI within the context of a national strategy based on local delivery and welcome the Government’s proposals along these lines (although the finer detail must be determined quickly). Many local businesses have received substantial help from UKTI. However, there are still companies that are not aware of available support and who have funded their own international visits and materials to market their company overseas. For those firms that meet the eligibility criteria, the support appears to have been effective. However, there are numbers of businesses who have requested funds for foreign visits, but have not received anything due to ineligibility. Therefore relaxing the eligibility criteria for export assistance would make sense. Businesses require ongoing financial support to continue to export/return to markets, as well as support for first-time exporters. There is a perception that active exporters are penalised. This is also the case for non-SMEs and UK registered foreign-owned companies who receive little Government-funded support. UKTI offers substantial support and therefore reductions in the UKTI budget would be concerning, particularly given that exhibitions have seen the largest reduction in funding over recent years, yet this is one area that has been highlighted to help businesses access new markets. Like many government programmes the perennial problem of outputs being structured by so many schemes is a considerable barrier when the output target is reached. We would prefer to see a UKTI budget allocated to each area for them to deliver the assistance that firms actually need, rather than having to disappoint clients once the allocation is reached. Black Country Chamber recommends that the Government supports the redistribution of resources by UKTI to facilitate access opportunities according to where local businesses may have a competitive advantage. Greater flexibility in market research support would also be beneficial, for example, less focus on achieving OMIS targets and a greater emphasis on the specific business need. Support for new product development and bringing new products to market, linked to UKTI support to access overseas markets would be welcomed. The Automotive Assistance Programme (AAP) The AAP provided up to £2.3bn of support through the provision of loan guarantees to the UK automotive sector both manufacturing and importantly, across the supply chain. Within the Black Country the AAP has been a significant success. The eligibility criteria were appropriate and lending decisions were made quickly and effectively. The only negative comment to make is that it was a time limited scheme and that there is not more funding available. Enterprise Finance Guarantee Scheme (EFG)

Businesses are also facing difficulties with the EFG Scheme. Accessibility remains a concern, where banks do not offer, or do not promote lending through the EFG scheme. Where banks are offering finance through guarantee schemes, their main concern is making

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their money back and businesses increasingly have to prove that their assets have been used to secure the loan. It is unacceptable that small business owners have to put their business and personal assets up as a guarantee to access finance. Loan guarantee schemes are only viable if they do not create numerous hoops for businesses to go through to access funds. Black Country Chamber strongly recommends that the Government improves ease of access to loans and that Government and the banking sector work closely with the business community to increase awareness and promote the schemes available. Enterprise In terms of supporting enterprise and business development activity, on-going, face to face support at the local level is most effective for growth and job creation. Therefore there is considerable concern over the delivery of enterprise support nationally through a centralised website and the significant reductions in funding for this type of activity on the ground. Financial support for enterprise should be targeted specifically towards the creation of high-growth businesses with the potential to employ substantial numbers. There is also a need to change the mind-set that starting a business is merely something to do after redundancy or unemployment and to this end we believe that responsibility for enterprise must remain with BIS. In areas where there is a high dependency on public sector, as that sector inevitably shrinks it will increase the number of people out of work. There are significant opportunities for those higher skilled individuals to become self-employed, but as they are likely to have spent many years in large corporations they may have insufficient operational level experience in establishing and running a business. This would therefore increase the demand for localised face-to-face support and mentoring at a time when it is likely to be withdrawn or significantly re-shaped by national policy. Given the cuts in public funding, Black Country Chamber would advocate the development of a loan, rather than grant culture, as well as more effective use of match funding to ensure public money provides the most widespread coverage. Chambers of Commerce have a unique role to play in engaging directly with businesses at grass roots level. We would strongly encourage Government to continue to work closely with local Chambers of Commerce to help develop appropriate business support and the right environment for businesses to prosper. 24 September 2010

GAI 21

Memorandum submitted by AMEC plc 1. EXECUTIVE SUMMARY

UK Trade & Investment fulfils a leadership role for the whole of the United Kingdom to promote UK business and expertise overseas, raise awareness among UK businesses and provide services to enable UK businesses to compete effectively. Successful exporting businesses are a vital part of the UK economy. In addition, UKTI promotes the UK as a destination for inward investment. Devolved powers to Scotland, Wales, Northern Ireland and the English regions has led to fragmentation of the holistic UK approach and there is a need for a more coordinated approach to the delivery of support for exporters. UKTI are best able to achieve this.

2. AMEC

AMEC is a UK listed FTSE 100 company, providing high-value consultancy, engineering and project management services to the world's natural resources, nuclear, clean energy, water and environmental sectors. In 1999 the business was over 90% UK generated, by pursuing a focussed strategy since then our international business has grown and approximately 70% of our sales are now overseas. AMEC has worked closely with UKTI over many years. The relationship has been a great help to the company as it internationalised enhancing AMEC’s ability to network, at senior level, with governments and customers and through the UK Embassies and High Commissions. Senior managers have been seconded to work with UKTI on short and long term assignments completing market reports and undertaking Export Promoter work for specific geographies or industrial sectors. UKTI have supported AMEC in pursuing major overseas contracts, with ensuing benefit to the wider UK supply chain. .

3. UKTI

UKTI has a leadership role in relation to the whole of the UK to encourage businesses to develop the capability to export, the benefits of this is that it develops internationally competitive businesses, contributes to the balance of trade, and creates additional jobs in the UK. AMEC has helped with advice for UKTI professionals in the UK and overseas posts, in their support of other UK businesses.

4. Enabling businesses to compete internationally

UKTI’s role extends across every aspect of international trade and can bring substantial resources to maximise opportunities for UK businesses. This includes representation about fair access and recognition of technical, business & ethical standards. This includes a very significant role in supporting companies like AMEC when bidding for major contracts. UKTI is the largest organisation supporting UK businesses to access overseas markets. Through partners they have programmes to assist businesses to become fit for exporting,

1

initiatives which have been very successful in expanding the number of businesses taking export markets seriously. These activities are of strategic importance to UK businesses and UKTI is the only organisation that has the capability to provide this support, to businesses of all sizes

5. Advisory Boards

The Advisory Boards assist overseas posts and UK staff in identifying markets of strategic potential for specific industries. In addition, they provide detailed experience of the markets by accessing people with direct experience. AMEC has participated in UKTI Advisory Boards for Oil & Gas, Power and the Energy Excellence Board by providing senior management to support the work of UKTI in specific industrial sectors. These Boards allow knowledgeable individuals from specific sectors to provide information and advice to UKTI professionals in formulating the best ways of assisting SMEs across the wider supply chain.

6. Promotion of Overseas Opportunities

The leadership role is particularly important for ensuring that UK businesses are not overlooking markets, detailed studies of specific sectors have raised awareness of opportunities and helped businesses overcome difficulties in markets of high potential. The network of posts overseas and offices in the UK collect and distribute information on overseas markets and specific opportunities. Using partner organisations UKTI hold numerous seminars and other events, these events help stimulate interest in particular markets, and allow businesses with a common interest to learn from each other.

7. Promotion of UK Capability

The promotion of UK capability is a vital part of the service and includes the provision of information to key individuals in overseas markets. The offices abroad are staffed by individuals with a very detailed understanding of the local market and the opportunities. They support UK businesses by providing key contacts in potential customers, detailed opportunities and specific industry information. Overseas posts play a very important role by developing and maintaining relationships with key industry individuals. The creation of the “UK Energy Excellence” website allowed overseas customers access the full range of skills and experience of the UK supply chain and enabled the UK supply chain to market itself under the single brand of UK Energy. SMEs receive some support at major Conferences and Exhibitions through the development of UK sections which concentrates their promotion into a single brand and increases the impact of the UK presence. I have personally presented at two major events in the North East of England and Aberdeen to over 200 SME’s on business opportunities.

8. Inward Trade Missions

Inward missions give overseas customers, regulators, and other influencers the opportunity to learn first hand about UK businesses and for UK businesses to meet potential customers. This can be a very powerful tool in developing the knowledge and confidence of customers to understand the strength and depth of the UK’s offering. AMEC has participated in many Inward Missions to the UK and provided briefings for missions ranging from inter-parliamentary groups and visiting political and ministerial groups, academics, and National Oil Company personnel and other business delegations.

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3

9. Outward Trade Missions With partner organisations, UKTI arranges numerous visits to overseas markets providing first hand experience for UK businesses to make direct contact with potential customers. In many cases the visits coincide with an event of specific interest for example a trade conference or exhibition. These events provide a focal point for the mission and allow businesses to gain knowledge of the range of services already in market. For example, the mission to OTC in Houston allows businesses to learn more about the Offshore Oil & Gas Industry in a single week than would be possible in any other way. It is invaluable for businesses hoping to start exporting that they see the scale of the opportunity, and the competition. Similar impact is gained through participation at other major events such as the World Petroleum Congress, World Gas Conference and the World Energy Congress AMEC has made personnel available from its local offices to support visiting Trade Missions, often providing briefings for participants as well as opportunities to meet Supply Chain Managers, including in markets as diverse as Canada, Australia and Kazakhstan.

10. Other Comments

While I am a strong believer in the leadership role of UKTI there are without doubt areas of duplication and confusion, particularly in relation to RDAs. The role of contractors to UKTI in relation to events and trade missions is an area where things do not seem as well co-ordinated as they could be. Examples include: Multiple outward trade missions to the same location often calling on the same customers and/or individuals, diluting the overall impact and placing additional burdens on hosts (and no doubt confusing them in the process). Many of our competitor nations (e.g. Germany, France, USA and Norway) organise a country wide presence at trade shows where large numbers of businesses of all sizes can exhibit thus achieving a greater impact. While it is important to recognise the expertise held in different organisations and the invaluable relationships that exist between trade groups, regional economic bodies, and the like, most businesses would prefer a simplified way to access support for exporters. Some creative tension encourages innovation and improvement however a single access point has much to commend it.

11. Conclusions

UKTI provides very important support for SMEs new to exporting or to a specific overseas market and they rely on the high quality advice and information from capable professionals at home and in the overseas market. The leadership role cannot be overstated and the influence that comes from a coordinated UK wide organisation provides a great deal of support for our businesses, A single access point which brings together all of the services for exports would greatly simplify things for SMEs and anyone new to exporting, at least where government funding is being used to provide the service. UKTI has focused on key objectives and delivered their strategic plan and I have no hesitation in commending their work to the Committee.

24 September 2010

GAI 22  

Memorandum submitted by the FLA  1. The Finance and Leasing Association represents the UK’s providers of asset and motor finance, 

which includes hire purchase, leasing and other asset‐backed business loans. Our members are banks,  independent  asset  finance  companies,  or  captive  finance  companies  owned  by equipment  manufacturers.  We  are  pleased  to  contribute  to  the  inquiry  into  Government Assistance to Industry.  

Asset and motor finance  2. The asset finance industry plays a major role in supporting UK business investment. In 2009, our 

members  funded around £20 billion of  investment  in new business assets, down from normal levels of  just under £30 billion. They  currently have £66 billion  in outstanding business  loans with around 750,000 UK businesses. Asset finance  is typically used to fund at  least 25% of the UK’s fixed capital investment (excluding real property and own‐account software) and it makes up the majority of externally‐funded business investment. Around one in three small businesses that have any external borrowing use asset finance.   

3. Finance sold  in motor dealerships  is the most popular method of buying a car. Over half of all new cars are bought on finance provided by FLA members. FLA members provided £16.5 billion in 2009 to businesses and consumers for the purchase of cars. Of this, 45% was provided by the finance  subsidiaries  of  car manufacturers  (“captives”)  and  the  rest  from  bank  and  non‐bank finance companies.  

 4. The  finance provided by our members  supports  industry  in  two ways.  It helps businesses  to 

invest  in new equipment and  it helps manufacturers,  including those  in the motor  industry, to sell their output. Our members have continued to provide very substantial support to industry during  the  recession.  However, more  could  be  done  to  help  industry  via  asset  and motor finance if certain changes were made to how government assistance is provided. 

 Providing Government assistance through asset and motor finance  5. Although asset  finance  is often available  to businesses unable  to obtain a  conventional bank 

loan, a sizeable minority of UK businesses face difficulties replacing old equipment or investing in new equipment. Earlier this year an Open University Business School survey supported by the FLA found that around 1 in 6 businesses across the UK, and 1 in 4 businesses in the North East, reported problems caused by having unsuitable equipment.  

6. The Government’s existing policy tool for helping businesses finding it difficult to borrow funds is the Enterprise Finance Guarantee (EFG). But the EFG does not include asset finance.  Plugging 

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this fundamental hole in the EFG, or any successor scheme, would immediately help companies currently unable to invest in new business equipment.  

 7. For motor finance, a guarantee scheme to support the sale of securities backed by consumer or 

business motor loans could increase the flow of funds to support new car sales.  8. It  should be possible  to  set up arrangements  that would offer good value  for money  for  the 

taxpayer and provide substantial extra assistance to industry. Although state aid rules can be a constraint, we believe solutions can be found.  

 Conclusions  9. An effective but under‐utilised way for the Government to assist  industry  is by supporting the 

provision  of  alternatives  to  traditional  bank  loans. We  would  be  pleased  to  provide more information or to discuss our suggestions. 

  24 September 2010   

GAI 23

Memorandum submitted by Pact

Introduction

1) Pact is the trade association that represents the commercial interests of the independent production sector. The highly competitive sector produces and distributes half of all new UK television programmes,1 as well as much of the UK’s most popular, innovative and acclaimed content in digital media and feature film.

2) The independent television sector contributes £4.3 billion per year to the UK economy (GVA),2 and employs 20,950 people – more than the television divisions of the BBC, ITV, Channel 4 and Five combined.3 The sector has helped increase exports of UK television content by 39% since 2003,4 and uses much of the resulting revenues to invest £200m per year in the development and production UK content.

1 Ofcom, Communications Market Report, 2008 2 The Economic Impact of the BBC 2009, Deloitte for the BBC 3 Employment Census 2006, Skillset 4 Annual export figures, TRP for Pact/UKTI

The role of UKTI and Government in promoting inward investment and exports

1) In terms of global exports, the UK television production sector has been one of this country’s success stories over recent years, and is in some aspects a world leader. We have, in the context of this review, three suggested factors the Committee should consider in order to maintain and build on this growth:

• Ensuring the UK remains highly competitive as a global exporter of content rights, with a range of companies exploiting UK content around the world;

• Developing a coordinated, national strategy for assisting UK companies

to reach global markets; and

• Protecting against IP theft. The UK’s success in global TV exports

2) The UK is the second biggest exporter of television content in the world (after

the far bigger US industry), and the world leader in certain types of television export, such as remake rights (known as format rights).5

3) Total exports of UK television content have risen by 39% since 2003,6 helped by a resurgent independent production sector that, thanks to the Codes of Practice set out in the 2003 Communications, was able to own – and therefore exploit – a share of the rights to the programmes it created.

4) In some growth areas, independent programmes (as opposed to programmes

made in-house by broadcasters) account for as much as 81% of all UK export sales by volume. Leading independents now generate up to half of total profits from making programmes directly for the US television networks. The figure overleaf shows the growth in total UK television exports – i.e. programmes made in-house by broadcasters and by independents – since the 2003 Communications Act.

5 Rights of Passage, report by TRP for UKTI/Pact 6 Annual export figures, TRP for UKTI/Pact

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0

100

200

300

400

500

600

700

800

900

2003 2007

Growth in total UK TV exports

£m

Source: Annual TV export figures, TRP for UKTI/Pact Key growth areas for UK TV exports since 2003:7 • Formats up 95% • Sales to US up 20% • DVD up 50%

Encouraging a range of companies to exploit UK content around the world

5) In enabling independents to own and exploit rights globally through the

Communications Act, Parliament has in our view played an important role in underpinning the growth of UK television exports since 2003. We therefore ask Government, in its development of a new Communications Act for 2012, to ensure that there continues to be a healthy and competitive market for the exploitation of UK television content, with a range of players, including independent producers and broadcasters, competing to sell their programmes around the world.

6) Ensuring in this way that there is a competitive market will be all the more important in taking advantage of different opportunities for exploiting content that are emerging in the digital era. It should also be noted that independents are using the revenues generated from exploiting rights to reinvest in the production of UK content. The independent sector now invests up to £200m per year in the creation of UK television content – more than some of the UK’s

7 Rights of Passage and Annual TV export stats, TRP for Pact and UKTI, adjusted data

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major broadcasters.8 Unless independent companies can exploit their rights, they cannot raise this investment.

A coordinated strategy for reaching global markets

7) While we see Parliament’s intervention through the Communications Act 2003

as having been a notable success, government assistance in terms of direct funding support has in our view been less successful historically. Under the current system, disparate national and regional development agencies use different criteria for making grants to support exports, and even compete against each other. Although a level of flexibility is important, the current approach in our view wastes resources and creates a postcode lottery for funding that disadvantages certain companies purely on where they are based. For example, only two English regions currently provide funding for companies to attend the leading global trade fair for television content, MIP TV, disadvantaging producers in other regions in terms of reaching global markets.

8) We would therefore support a genuinely coordinated national strategy for assisting the production sector in growing exports, overseen by UK Trade & Investment or another suitable body.

Protecting against IP theft

9) Additionally, we broadly welcome Government and Parliament’s recent steps

towards addressing IP theft through the Digital Economy Act. In 2008, the UK audio and audiovisual creative industries lost an estimated £1.2 billion in revenues due to physical and digital piracy.9 It remains crucial for the continued success of UK television exports that rights holders, if they choose, are able to generate revenues from the content they create, in order to enable them to raise investment to create the content in the first place.

24 September 2010

8 Pact annual census 2010, O&O Associates for Pact 9 Building A Digital Economy: The Importance of saving Jobs in the EU’s creative industries, TERA Consultants for the International Chamber of Commerce, March 2010, page 32

GAI 24

Memorandum submitted by Semta (the Sector Skills Council for Science, Engineering and Manufacturing Technologies)

Summary

• Government assistance to industry is best managed through a sector-led approach, as demonstrated by Semta’s Compact in England, and our work in Wales. We have provided a service to employers, funded by the government, and effective in boosting employer engagement with training.

• Many of our companies, particularly small firms, are reporting difficulties accessing finance, and any government assistance to ease this would be welcome.

Industry owned and led, Semta aims to increase the impact of skilled people throughout the science, engineering and manufacturing technologies sectors. We work with employers to determine their current and future skills needs and to provide short and long term skills solutions, whether that be training and skills development, or campaigning with government and other organisations to change things for the better. Through our labour market intelligence and insights from employers across our sectors, we identify change needed in education and skills policy and practice, and engage with key industry partners and partners in the education and training sector, to help increase productivity at all levels in the workforce.

The sectors we represent are: Aerospace; Automotive; Bioscience; Electrical; Electronics; Maintenance; Marine; Mathematics; Mechanical; Metals and Engineered Metal Products.

Semta is part of the UK-wide network of employer-led Sector Skills Councils

A sector-led approach to government assistance

Semta has strong evidence of the value of taking a sector approach in the provision of government assistance, particularly in the light of the priorities highlighted in A Strategy for Sustainable Growth. For the government to realise its aim of achieving ‘the greatest returns in building an internationally competitive skills base’, and providing access to IAG to improve leadership and skills for small firms, companies will require something different to the standard support ‘offer’.

For science and engineering companies, Semta is able to offer a sector-specific approach to information, advice and guidance. This guidance takes the company through an analysis of the drivers on their business and industry, their current skill levels, and the training they will need to prepare for the future. Semta

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then facilitates the relationships between the company and the local training providers, as well as other agencies such as the Manufacturing Advisory Service and JobCentre Plus.

With this ‘One Call’ service (linked to the Semta Compact in England), Semta has been able to increase employer training activity significantly. Because the activity is linked to the company’s business plan, and because Semta advisers are expert in dealing with science and engineering companies, the advice they give is more likely to be taken up by the employer. A sector-based approach means that the advice is credible with the company, and more likely to lead to training which is of direct benefit to the firm. For example, training in Business-Improvement Techniques has increased substantially. This was a need identified by Semta’s Sector Skills Agreements across the engineering ‘footprint’, and the Compact activity has brought many companies and individuals to study and adopt ‘B-IT’ principles.

We believe that this approach demonstrates the value of sector-specific guidance, and also highlights the potential for this kind of activity to bring A Strategy for Sustainable Growth to fruition. We know that the government is serious about its aim to understand how policy has a differential impact on different sectors, to minimise deadweight and focus where economic gains will be highest. Semta’s approach provides a model for this activity, giving employers the opportunity to consider the future needs of their company and sector, and then articulate a strong demand signal to the system.

In Wales, all employer funding is channelled through the Sector Skills Councils network to ensure a sector approach. Semta has been involved in Welsh business support initiatives (ProAct and Pathway to Apprenticeships) which have been led by the needs on the sector. This has meant the success of the initiatives as a whole were linked to sector growth and reflected the requirements of key industries such as engineering.

Making credit available

While Semta is not directly involved in the finance and credit aspects of businesses in our sector, our employer engagement and Compact activity has encountered companies facing difficulties due to the lack of credit currently available, especially for small firms. It is hard for a company to consider investing in skills for the future when they cannot obtain credit to fund growth and innovation. For the government to make A Strategy for Sustainable Growth a success, action to free up credit, and mechanisms for credit-worthy firms to access appropriate support, is essential.

24 September 2010

GAI 25

Memorandum submitted by The Manufacturing Technologies Association

1. The Manufacturing Technologies Association is the UK’s Trade Association for

companies in the manufacturing technology sector - the core of engineering based manufacturing.

2. Our members design, create and supply the major machinery, technology and

equipment essential to enable the manufacture of everything from everyday items such as mobile phones, computers and family cars through to high-tech precision items like F1 racing cars, planes and space shuttles.

3. We welcome the establishment of the Committee’s Inquiry into Government support

for industry. The severity of the recession which began in 2008 necessitated a range of interventions and support mechanisms of a scope and depth that would have been unimaginable even months before. It is therefore timely to review these and learn lessons from them.

Executive Summary 4. In general Government support for industry over the last two years has been

welcome. However there have been significant shortcomings in addressing some of the issues caused by market failures in the Financial Service sector.

5. Capital Allowances are a key part of the investment mix. The myriad changes that

their regime has been subjected to over the last decade have not helped business to plan and the paring back of the rates claimable has impaired British manufacturing investment levels and hence productivity improvement.

6. The Enterprise Finance Guarantee has been a successful scheme, which has

prevented many companies from collapse; but it has not made a substantial contribution to rebalancing the financial playing field. It remains an expensive option of last resort. It also provides no support for exporting companies as export finance is excluded from its remit

7. Specific Sector interventions have been welcome; not just in those sectors but in the

supply chains with which they have a symbiotic relationship.

8. UKTI activity is valued by our sector and by industry in general but it is hampered by a lack of resources.

9. ECGD has been allowed to wither to a point at which it is almost invisible. The

market has not filled the gap and British Business is at a substantial competitive disadvantage as a consequence.

10. While the levels of availability and affordability of credit have recovered from their

mid-crisis nadir there remains a very strong belief in industry that the Financial Services sector understates the levels of demand for credit in the industrial economy and is reluctant to advance credit to manufacturing; certainly not on the scale seen in some of Britain’s competitors.

1

The Provision of Loans and Grants 11. The provision of loans and grants to industry has a long and chequered history.

There is a well founded tendency within industry to be suspicious of Government intervention in the market and Government’s track record has been far from unblemished. However the circumstances, speed and severity of the recession of 2008/09 were such that Government intervention was quickly deemed necessary in the financial services sector. This was welcome, few wished to see the entire edifice of financial service provision collapse. Many other industries experienced significant difficulties as a result of the recession. It should be noted that by and large it was individual firms that took responsibility for saving themselves. This often entailed painful cuts in jobs and activity.

12. However in a few key industries, notably the automotive sector, Government did elect

to intervene and provide support. This support was welcomed, not just by companies whose products readily placed them within the industries concerned, but by the whole supply chain. This was well recognised at the time. For instance the MTA, among others, wrote to the then Secretary of State, Lord Mandelson in September 2009 requesting an extension to the Car Scrappage scheme because we could see the benefits that it was beginning bring to our members within the automotive supply chain.

Financial Support for Manufacturing 13. Investing in new technology is the best way for manufacturers to grow their

businesses. The speed of technological change and the process of globalisation which pushes low technology processes overseas has made that more true than ever before. Yet British manufacturers are disadvantaged by a Capital Allowance regime which is significantly less generous than those of most of their competitors. As technology advances ever more quickly, machinery becomes obsolete ever faster. The current rates and allowances do not recognise this. In addition the constant chopping and changing of the rules over the last few years has made it much harder for companies to plan ahead with the degree of confidence necessary to engender investment.

14. The Enterprise Finance Guarantee has been a limited success. A feature of this

recession has been the lower than expected level of bankruptcies that have occurred to date. EFIG has surely played a role in that. However the scheme has not performed the role that was ascribed to it at its outset which was as a source of finance for companies in a wide range of difficult circumstances. Because of the cost of the finance, typically more expensive than that available elsewhere and the need for personal guarantees to be expended before it is applied, it has functioned as a lifeboat.

15. The Government has been sympathetic to manufacturers, with the rhetoric of the

present Secretary of State seemingly upping the ante further, but hitherto the actions of Governments of all political stripes have not matched their stated intentions to re-balance the economy.

16. An example of this was the almost overnight disappearance of the trade credit

insurance market at the outset of the recession. Once Government was persuaded, after some six months, that there was a problem action was taken in the 2009 Budget. However because the scheme was not backdated it was of virtually no use to anyone. While what appeared to be an oversight was eventually corrected a facility that many companies had found very useful has still not returned.

2

The Supply of Credit to SMEs 17. The Banking sector has returned to business as usual faster than seemed likely at

the onset of the recession. Regrettably, the rest of the economy has not been able to do so with quite the same alacrity. There is something of a dialogue of the deaf going on between a banking sector that insists that the only reason that rates of lending are low is the paucity of demand and a manufacturing sector which consistently reports a pattern of banks unwilling to lend in support of projects and companies which make good economic sense.

18. This is compounded by a mismatch of data. The financial services sector of course

collates significant, real time data on lending activity. There is no reason to suspect that this data is unreliable, indeed if it is the data used for management within institutions it would not be in anyone’s interest for it to be so. However the picture is persistently at variance with the anecdotal, but consistent, impression formed by Trade Associations such as the MTA, that there is an underreporting of refusals of credit. This is probably due to the invisibility of applications which never get beyond the level of a discussion between lender and customer. We would suggest that there is a role for one of the structures in the new financial services regulatory architecture to take an interest in this problem.

The work of UKTI 19. We are concerned at the reductions in UKTI’s budget for exhibition support and the

over emphasis on inward investment (which, while welcome, sees profits go overseas) rather than on export support which can help British companies identify new opportunities and markets for exports. We believe this will inevitably put us at a competitive disadvantage. We would like to see a level playing field with our competitor nations, many of whom invest far more in trade promotion.

20. UKTI support concentrates on fledgling exporters with very little available to

experienced exporters. Our competitor nations support ALL exporters, and in fact seem to promote the more experienced companies such that the fledglings can sit side by side with them and profit from the reflected customer contacts.

21. Ambassadorial support at exhibitions is prevalent among our competitor nations,

endorsing the quality of their national engineering prowess and exporting achievement. UK has an excellent network of embassies which could be better used to promote British industrial interests.

22. Synergies and savings can be achieved by UKTI through working with Trade

Associations; however there is scope for a considerable increase here with isolated good practice needing to be applied more evenly. The MTA runs its own exhibition, MACH, on a bi-annual basis. This exhibition, which attracts substantial foreign interest is a key shop window for British manufacturing technology. In 2010 MACH hosted a successful inward mission organised in conjunction with UKTI

23. Many SMEs believe that export support that does exist is not well configured to

support them. This is especially true of 2nd and 3rd tier companies in complex supply chains. Companies of this size will often initially follow a major company into a market as part of their supply chain. Where help could be given is to exploit subsequent, secondary, opportunities in the new market.

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24. UKTI, not unreasonably, looks to exploit new and developing markets, there are huge opportunities in countries such as the BRICs. However this approach can tend to overlook the export opportunities that exist on our doorstep in Europe. For many SMEs, perhaps with little experience of exporting, Europe is a natural first step.

25. In summary, engineering based manufacturing needs three areas of support from

Government to increase both its domestic market and also to promote an increased positive balance of payments through stronger exports; a helpful and competitive tax regime for investment in equipment, training, and research and development, support for the sector with the competitive provision of business and export finance and credit insurance, and finally the use of language that supports the sector both at home and abroad (through our excellent network of embassies), promoting the UK as a nation at the forefront of technology and advanced engineering. Perception is a great persuader for foreign buyers.

24 September 2010

The Engineering & Machinery Alliance, 62 Bayswater Road, London W2 3PS

Tel: 020 7298 6450 Email: eama@mta.org.uk W: www.eama.info

Company number: 5974924; Company limited by guarantee

1

GAI 26

Memorandum submitted by the Engineering and Machinery Alliance Background to the Alliance 1. The Engineering and Machinery Alliance (EAMA) represents the following trade associations:

• Agricultural Engineers Association • British Automation and Robot Association • British Paper Machinery Suppliers Association • British Plastics Federation • British Turned Part Manufacturers Association • Confederation of British Metalforming • Gauge and Toolmakers Association • Manufacturing Technologies Association • Printing, Papermaking and Converting Suppliers Association • Processing and Packaging Machinery Association • UK Industrial Vision Association

2. They represent 1,600 firms in the mechanical engineering sector with sales of £8 billion. • Based on the Office of National Statistics (ONS) new criteria for the sector they represent

a third of the UK’s mechanical engineering output. • Using HM Customs’ data, sector exports account for about 70% of sector sales. • And again according to ONS comparisons, mechanical engineering is one of only two

manufacturing sectors to regularly contribute a positive trade balance to the UK economy -- over £3 billion in 2008.

3. Typically our companies supply ‘enabling technologies’ to other sectors (e.g. automotive, aerospace, medical, power and food industries) in the form of machinery or packages combining services and products.

4. This is the preserve of small and medium sized niche or specialist companies (SMEs). Important, large companies are also involved, as are many innovative entrepreneurial SMEs, all pushing the boundaries of factory performance, extending the envelope of the physically feasible to new levels in terms of speed, precision and migration into novel technologies and materials.

Summary 5. There is a danger that in assessing the effectiveness of Government policy we might mistake the

shape and size of the policy need with what the most immediate and accessible support activities provide.

6. The facts are that the UK has not suffered the white collar recession that all feared in 2008/09. 7. But manufacturing has been hit again, this time while actually helping to save the banks, paying

more for services and still providing banks with a source of good business. After all it is in the nature of manufacturing to be capital intensive.

8. BIS policies and support have been instrumental in any success achieved, even if quite a few manufacturers feel they have been in an unequal battle with the banks.

9. But there may now be a real danger of a double dip. Investment action take now can help to stave off that threat and in doing so help prepare the UK for the future.

10. Based on what our EU competitors have been doing for the last ten years, the prize could be a substantial addition to UK manufacturing GVA that would then flow through the economy into other sectors.

11. This will not be achieved through BIS support schemes alone. But it will not be achieved without BIS acting in its crucial role as a champion for industry across Government, particularly with HM Treasury, and with stakeholders across the country.

The role of BIS in supporting industry 12. Basically, UK (industrial) competitiveness is what should matter to BIS. The Department’s remit

may be determined by Government policy, but ultimately it’s the UK’s place in the world economy that sets the challenges and the opportunities that support can open up, because:

• The UK is deeply dependent on trade. The World Trade Organisation says 58% of UK GDP is trade dependent (compared with Japan 26%, USA 29%, France 55% and Germany 87%)

• UK domestic demand represents a fairly small market, so manufacturing typically has to export to benefit from the economies of scale to warrant further innovation and investment

• Industry faces constant competition both in the UK and overseas.

13. BIS’s core tasks supporting industry therefore include: • Representing industry at Cabinet level and across Whitehall where business is directly

involved (e.g. on competitiveness, exporting, investment), where it contributes to the efficient workings of Government, (e.g. on the collection of PAYE) and where it plays a key role in delivering on economic, environmental, education and health matters as well as generating the nation’s wealth

• Stopping other departments promoting policy positions that unwittingly undermine UK interests (so that the investment, jobs, taxes and GDP do actually remain in and therefore benefit the UK)

• UK representation on EU industrial matters • Trade negotiations and export promotion. • The ability to put over a strong vision for the role and scope of the Department and the

wealth creating section of the economy (namely business in general and manufacturing in particular) helps inject confidence and vigour into this important area of Government policy.

14. This means that the more successful BIS ministers from an industry perspective tend to be visible and involved, visiting plants and talking up the sector and its achievements and discussing future plans. Labour’s last Business Secretary was a particularly successful exponent of generating publicity for industrial initiatives round the country.

Effectiveness of existing Government assistance Impact of previous policies 15. The Manufacturing Advisory Service (MAS), the Enterprise Finance Guarantee, R&D Tax Credits

and UKTI’s support for exhibitors overseas all have their place. The question that arises is ‘do they go far enough?’ In a financially unconstrained world the answer would be ‘no’. And manufacturers would argue that even in these difficult times of financial constraint, the answer is still no.

Manufacturing Advisory Service 16. MAS has undoubtedly been helpful in implementing ‘lean’ manufacturing concepts, but its

regional structure made introducing new national schemes very complicated and time-consuming, especially for organisations themselves run on lean lines.

17. For example, it took us 18 months to complete a series of presentations to MAS consultants in every region.

RDAs and supply chains 18. The RDA focus created other problems too. Their limited regional remit has unnecessarily

complicated industry initiatives such as the Manufacturing Resource Centre (www.manufacturingresourcecentre.co.uk) where OEMs and supply chain firms work together to strengthen sector supply chain competitiveness which nearly always extends beyond one region. OEMs like JCB and Boeing report the same difficulties in their own right. We need a simpler framework.

Enterprise Finance Guarantee 19. The Enterprise Finance Guarantee is a well designed scheme. As of April 2010 it had helped

nearly 10,000 firms through the recession. But it is also the refuge of last resort. A company is only eligible if all personal guarantees are used up in the loan process. So it’s not going to stimulate investment. Nor will it help firms take advantage of opportunities as they arise.

20. One of the reasons why the EFG works in this way is because of the way the ‘sliding scale’ is applied to the 75% Government-backed guarantee to make sure that the banks don’t provide loans to ‘failing’ companies. If it turns out to that a bank’s portfolio of loans includes some that turn sour, that bank will find its 75% guarantee from public funds reduced so that the bank takes some of the knock for its poor analysis and decision-making. As a result banks ask firms for a

2

personal guarantee that ‘occasionally’ extends beyond the 25% that is not covered by Government.

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Research and Development 21. According to the Government’s latest R&D Scorecard (March 2010) the UK’s top 1000 R&D

companies invested an extra 9.2% in 2008 compared with a 7% increase amongst the world’s top 1000 corporate R&D investors.

22. Just 100 companies accounted for 81% of the £27 billion spent in the UK on R&D. The three leading UK sectors were pharmaceuticals, aerospace and banking (£12.9 billion).

23. Many UK mechanical engineering SMEs supply ‘one-off’ products tailored to resolve problems in a unique manner. The sale may even be dependent on the firm coming up with a novel solution, which itself has to be tested.

24. To grow its manufacturing base, the UK needs to improve its ability to test and commercialise innovation, not only from the larger companies but also for SMEs. Policy and support should:

• Make it easier (less expensive) for SMEs to take part in leading innovation-focused organisations such as the Technology Strategy Board (TSB) and the Manufacturing Technologies Centre.

• Extend TSB funded projects to cover the pre-production phase so that a proportion of the customers’ costs associated with testing and evaluating prototypes or demonstrators supplied by SMEs can be covered (e.g. agricultural machinery for a low carbon future).

The performance and role of UKTI and the Export Credit Guarantee Department Exporting – finding and developing new customers 25. Budgetary pressure on UKTI has reduced its capability just as global competition is increasing

and the UK is more dependent on trade (see 12 above). 26. There’s plenty of good work going on at UKTI and elsewhere to help exporters, but unfortunately

companies often say that the paring back makes the UK presence look smaller, less professional and therefore less competitive when compared to the likes of Germany, France and Italy.

27. These and other countries also want to increase their exports as world trade picks up. They are not relying on a weak currency to underpin their efforts. Their governments are investing heavily in support at trade shows and on missions. Their ambassadors attend the shows and extol the strengths of the countries’ manufacturing capabilities. In short they sell themselves very well.

28. For example, the Obama administration’s National Export Initiative (NEI) aims to double US exports in five years. According to the Commerce Department the main effort will:

• Educate US companies about opportunities overseas • Connect companies directly with new customers • Improve access to credit for SMEs that want to export • Create an Export Cabinet, reporting directly to the president. • Increase the Ex-Im Bank’s budget for SMEs by 50% to $6 billion.

The UK experience 29. There is a view that the UK lags both in its promotion of the UK brand and in the range of

different services to involve companies of different sizes in exporting across the world as a positive benefit to the economy as a whole. Work is progressing, but:

• The UK needs a national agency that champions UK exports and exporters. To match the best in the world this agency should be totally separate from inward investment activities and staff.

• The regime should be simpler, run with a national focus, not subservient to regional priorities.

• Companies should be supported for their commitment and professionalism to exporting, not for their exporting ‘virginity’.

• The Export Credit Guarantee Department’s cover needs to be remodelled to be competitive across a far wider range of business.

Trade Credit Insurance 30. UK exporters, particularly SMEs need a far more flexible system of cover, particularly if they are

to penetrate new, dynamic markets as well as the traditional ones. Following Treasury pressure, ECGD’s offer has been so scaled back as to be ineffective for most of our members needs. Indeed for many SMEs the Trade Credit Insurance Top Up scheme stopped at the frontier and so excluded exports.

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Bank guarantees for customer deposits paid on orders placed with UK companies 31. In mechanical engineering it is standard practice for a customer to pay a 30% deposit to confirm

their order. It happens all over Europe and in the USA. In return for the deposit, the customer expects to receive a guarantee, normally from a bank, that they will receive the machine they have ordered or their money back.

32. Whereas French, German and US banks provide the guarantee for a small charge, UK banks also charge and also often deduct the deposit from the company’s facility with the bank, so that the manufacturer is no better off for having received the deposit. There’s no benefit to company cash flow.

33. Apparently such difficulties do not arise in other countries, because they run a ‘Bond Support Scheme’ with government backing, so that any orders where the deposit may be too big to be handled by the usual channels, can be covered competitively.

Following Treasury pressure UKTI is charging SMEs unreasonably for certain services 34. Trade associations supporting exporters do the same sort of thing as UKTI but get charged for

the privilege if they use in-country services provided by staff who are paid out of the public purse. The quality and cost of services are not consistent across posts. Some have completely priced themselves out of the market and seek to exploit exporters because of HMT pressure.

35. The real need is to help SME manufacturers to make and maintain contacts with prospects. Trade association export offices 36. Several trade associations have their own offices overseas to support their members’ export

activities. These offices are sector specialists and could be harnessed as part of the professional UK export network.

Enterprise Finance Guarantee 37. Currently this scheme excludes exporters. However, the Business Committee observed in its

recent inquiry that other Member States such as Holland were able to negotiate a way round the EU restrictions while the UK preferred to leave their exporters without cover and therefore uncompetitive.

The relationship between Government, industry and the banks UK manufacturing investment performance 38. If we step back for a moment and compare UK performance with some of our near neighbours we

can get a glimpse of what the UK could achieve with a more robust and consistent framework encouraging manufacturing investment.

39. According to the Office of National Statistics, UK manufacturing investment declined 40% while gross value added (GVA) increased by 5.3% and numbers employed in the sector fell by nearly over 30% in the ten years 1998 to 2007.

Table 1 UK manufacturing performance 1998-2007

Year GVA basic prices £ billions

Average numbers employed (millions)

Net investment £ billions

No of companies

1998 150 4.4 20.4 169,376 1999 150 4.3 18.1 170,196 2000 149 4.1 17.0 167,289 2001 145 4.0 16.3 164,718 2002 144 3.8 13.2 162,212 2003 142 3.5 12.7 157,894 2004 149 3.4 11.7 154,967 2005 147 3.3 11.3 153,262 2006 152 3.2 11.4 151,365 2007 158 3.1 12.0 149,101

Annual Business Inquiry June 2009 40. Using the EU’s AMECO ECFIN database we can compare French, German and Spanish

performance on a similar basis.1

1 Unfortunately UK data on this database is only available up to 2005, hence the need to use data sets from two different sources. Although it’s not ideal this approach does provide useful indicators as we observe changes in performance within the data sets.

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41. Thus, over the same 1998 to 2007 period, French, German and Spanish manufacturers grew

their manufacturing GVA in ‘constant’ 2000 Euros by three to five times the UK rate and in doing so kept their manufacturing employment levels significantly higher than the UK.

42. As a result France, Germany and Spain have all benefitted from an additional 15-25% rise in national wealth which has flowed through their economies, creating extra demand for other sectors as well as of course making an extra contribution to Government coffers.

Table 2 Manufacturing gross value added comparison constant 2000 Euros 1998 to 2007 1998 2007 % change 1998 - 2007

Country

Sector € billion

Nos employed millions

Per employee

€ ‘000

Sector € billion

Nos employed

million

Per employee

€ ‘000

Sector GVA

Nos employed

GVA per employee

Germany 395 7.7 52.3 494 6.7 72.8 25 -13 39

Spain 98.5 2.6 36.1 115.1 2.9 39.8 17 +12 10

France 188 3.7 51.3 216.8 3.2 66.7 15 -14 30 Sources: AMECO ECFIN Productivity versus value added 43. For historic reasons, and as a comparatively open economy, UK policy mainly focused on

productivity and competitiveness. GVA has only come into focus more recently. 44. And the policy had some success. Government initiatives such as the Manufacturing Advisory

Service pushing lean manufacturing techniques have vastly improved UK productivity growth and at over 50% (GVA per employee) outperformed increases in France, Germany and Spain (10-39%) over the period in question.

45. But basically this improvement has been achieved by paring back and cutting employment numbers, whereas Spain actually increased manufacturing employment and France and Germany reduced their proportions (13-14%) by under half the UK drop (-30%) and invested for the future.

Table 3 UK GVA and investment performance 1998-2007 per employee and per company

Year GVA per employee £000

Investment per company £000

Investment per employee £000

Ratio £GVA to £investment

1998 34 120.4 4.6 7.35 2007 51 80.5 3.9 13.17

Change % +50 -33 -15% +79 Source: workings based on Table 1 46. The nub of the issue here therefore is the tax framework and what BIS can do to ensure that this

recognises and rewards the type of long term investment that characterises manufacturing. Taxation, capital allowances and investment 47. Manufacturers working on improving their performance know that improvement usually means

having to do something that they have never done before. Often that means investing in new skills, new procedures and new equipment and of course risk.

48. In the UK, businesses’ Corporation Tax liability is assessed before they write down any machinery unless there is a special allowance for the type of investment they make. Other countries treat this depreciation differently.

49. The UK’s capital allowances have varied quite considerably over the last 13 years making investment planning more complex and in essence encouraging a short-term approach. (For a description of the myriad of changes in UK capital allowances please see HMRC website http://www.hmrc.gov.uk/manuals/camanual/CA10040.htm#IDAVKIKI )

50. In an interesting paper Tax Reform – A manifesto for a balanced economy EEF shows UK manufacturers using the 20% capital allowance will take 30 years to fully depreciate their investment against tax on the reducing balance basis that applies in the UK. This 30 year tax depreciation period for manufacturing machinery in the UK compares with radically shorter periods in competitor countries e.g. USA 3-10 years; France 10-20 years, Germany 10-16 years. Note: if the capital allowance is reduced to 12½%, the tax related write down extends out to 53 years.

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Conclusions 51. Bounded on the one hand by a relatively unfavourable and oft-changing investment tax regime

and on the other by banks that require entrepreneurs to put their own homes up as security, SME manufacturers in particular have preferred in part to manage improvement through their ability to change the size and configuration of their workforce, training for specific workshop needs or, where that’s not been possible, by taking on foreign workers.

52. Meanwhile the challenge to increase the UK’s productive capacity grows. 53. The typical replacement cycle for modern manufacturing machinery has now shrunk to five to

eight years. But the UK tax system is still working as if it were on 30 years. 54. UK factories are underinvested compared with the high value adding producers in Europe, USA

and Japan. 55. Increasingly they face a threat from newly industrialising countries such as India and China. 56. In the current economic environment the step change in approach requires Government

leadership to ensure awareness and a coherent pan-Whitehall longer term manufacturing investment friendly policy framework. The battle for lean manufacturing must continue but now it must be yoked to strategies for manufacturing growth and expansion, as well as competitive survival.

57. In line with the benefits that will flow from such an improvement, this step change will need to involve all manufacturing stakeholders from finance and customers to future employees and local government, all of whom will find their own challenges in the new technologies involved.

SME manufacturers and the banks 58. Our experience is that SME owners/MDs are often experts or ‘technicians’ in the products and

processes they use. They may not be experts in finance. For that they rely on third parties (e.g. accountants) whom they may see only three or four times a year (having to pay for the privilege) and that these advisers/consultants may not know the business that well.

59. If the bank that the firm has been with for many years turns a request down or imposes somewhat stiffer charges, the SME tends to take it for granted that since this is the bank that knows the business best, this is the best offer that’s going to be available and that other banks will only offer tougher conditions.

60. A local or mutual provider or bank may overcome this, but so might ‘nudges’ through business groups and trade associations highlighting the more competitive deals achieved by peer businesses.

Banking Sector Environment 61. EAMA members believe that banks have forgotten how to do business with manufacturers.

Manufacturers are good sources of business for banks because they typically have longer term requirements across a wide variety of services (e.g. deposits, overdraft, transmission and investment).

62. In the past OEMs used to show their (SME) suppliers what they needed to do to develop a successful relationship with them. If the banks’ approach is one of relationship building (rather than management) then they should offer guidance in a similar vein.

Personal guarantees 63. UK banks have a strong preference for personal guarantees (see also under Question 15 EFG

below). Their view is that statistically they get a much better outcome on loans where the main protagonist has put up some personal guarantees as collateral. This is a fact of life for most SME owners. But of course putting your family’s home on the line may simply be too much for many, particularly in uncertain times and so goes to undermine confidence and increase wariness and caution, particularly when the banks can so easily change your arrangements overnight as they did on 2008/09.

Addressing Future Risks 64. The banks hold the whip hand when it comes to their dealings with SMEs. 65. From the SMEs point of view, in 2008/09 the banks imposed new, arbitrary, one-sided

conditions. Finance dried up over night. The risk of that happening again is very real to SMEs. They want a sustainable banking relationship, but are doubtful whether it’s achievable.

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UK – EU comparisons on access to finance and associated costs 66. Eurobarometer’s Access to Finance Report (published in September 2009) covers many

industries (60%), such as manufacturing, construction, distributive trades and logistics, as well as services (40%) with a particular focus on SMEs (92% of all responses).

67. The report indicates that banks play a more central role as supportive business partners in Germany, France and Italy (countries all with a similar or higher level of dependence on trade) than they do in the UK, where firms use a greater variety of sources placing perhaps a greater demand on cash flow.

68. To summarise this study shows: • UK suppliers may have had more pressure on their cash flow than their competitors in

France Germany and Italy. Standard payment terms are much shorter for example in Germany.

• Banks are much more closely involved with their business clients, with bank loans far more prevalent in the other three countries than in the UK.

• French and German companies are more likely to be benefiting from financing terms that have been maintained at pre-crisis levels. Terms for UK and Italian firms are much more likely to have got tougher.

• One of the key changes for UK companies was the cut in the amount they could borrow. German, French and Italian firms were not hit to the same degree.

• Loans in Germany, France and Italy are more likely to go on fixed investment, where the plant can be used to pay off the loan. UK companies are more likely to spend it on running the business, with more than two in ten using it for R&D and training.

Investment 69. Companies supplying into innovative or high value added markets have to keep investing to

innovate and upgrade performance in plant and skills. If they don’t they fail. And where they fail they threaten the supply chain that depends on them all the way up to the original equipment manufacturer (OEM).

70. So banks must be encouraged to step up as partners to facilitate investment not just with the OEMs but with these crucial supply chain link SMEs. Without that investment UK firms and the supply chains that depend on them will be lagging competitors who are installing the latest equipment now.

Technology 71. Looking forward, manufacturing faces a period of considerable change, including rapid

technological innovation in production processes and associated machinery. 72. Technology life cycles are shortening. Machines that have a fully functional life of 25 years may

only be fully competitive for a much shorter period, so technological advance is actually eroding machinery’s residual value. As a result:

• Leasing is becoming more important. • Ownership is not such an issue. • Business models are changing/need to change.

73. It’s important to understand how banks are going to go about this changing model when Government policy will provide less favourable terms for manufacturing investment (i.e. withdrawal of investment allowances) -- what criteria will the banks use in the assessment platform on which sound judgment will be made.

74. If the UK is to promote high-tech industry and exports then it’s crucial that the financing framework is able to tackle these changes on an internationally competitive basis.

75. A recent four-country EAMA automation survey found that the other countries (Germany, Spain and Sweden) all offered a wider menu of financial support for example.

24 September 2010

GAI 27 Memorandum submitted by Lloyds Banking Group

Lloyds Banking Group welcomes this opportunity to present written evidence to the Business, Innovation and Skills Select Committee. We are a retail and commercial bank, committed to providing primarily loan finance to businesses through the economic cycle. As detailed below, our total lending is substantially greater than amounts covered by government assistance. Our comments are focused on those specific areas around government assistance where we have direct experience as a provider of finance. The provision of loans and grants under programmes such as the Automotive Assistance Programme, the Strategic Investment Fund and the Working Capital Guarantee Scheme (WCGS)

• There is a long history of Government backed assistance for loans and grants especially to small businesses both directly and often aimed at specific sectors or purposes and through banks as partners in distribution with the Small Firms Loan Guarantee Scheme and more recently the Enterprise Finance Guarantee. The financial crisis led to several new interventions and LBG were the biggest participant in the WCGS and this contributed to capital management to support continued growth in lending to businesses. This was a helpful and appropriate initiative at the time it was launched and helped to give confidence to the market in relation to the capacity and willingness of banks to lend to businesses. The scheme is analogous to asset based securitisations and, while there is some growth in this market on an entirely commercial basis (LBG have recently completed a securitisation of a high quality SME lending portfolio), it may still be useful to consider how the development of this market can be supported to help banks continue to access capital and liquidity on terms that can support competitive pricing. This is a subject that is being considered by the banking industry Taskforce with which LBG is involved and formal recommendations are due imminently.

The role of UKTI and the Export Credit Guarantee Department (ECGD) in promoting inward investment and exports

• LBG is a strong advocate of the need to promote the opportunities for business in international markets and this is of particular significance at the current time given the relative growth rates in other parts of the World. LBG has worked closely with UKTI in raising awareness of opportunities amongst SMEs in export markets and support for international trade generally. This has included running over 100 events in 2009 and more than this in 2010 around the country for SMEs jointly with UKTI. ECGD can also play an important role in underpinning trade with certain countries. LBG is in dialogue with them to review means by which the framework of support and education can be enhanced including for bonds and working capital.

The role of the Government in encouraging the supply of credit to small and medium-sized enterprises

• LBG is a keen supporter of businesses including SMEs, having helped over 100,000 start ups in 2009 and 60,000 in the first half of 2010. The Group delivered net business lending of £5.7bn in 2009, of which £2bn was to SMEs while overall net UK business lending actually decreased by £48billion, (Source BOE). In the first half of 2010, we

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committed £23.7bn of gross lending to businesses (of which £5.7bn was for SMEs) and again achieved net positive lending growth to SMEs. The approval rate of applications for finance from SMEs remains at around 80%, the vast majority of which is provided on normal commercial terms without taxpayer liability.

• One of the key measures adopted to support SME lending since January 2009, has been Enterprise Finance Guarantee (EFG). LBG is one of the most active participants and account for 30% of loan offers made since its launch to the value of over £250m. The scheme provides an important contribution to helping viable businesses with insufficient assets to support their borrowing needs where security is required albeit that this constitutes only 2% of LBG’s total SME lending.

• In common with previous recessions, the demand for finance has been subdued and we have seen a fall of more than 20% in SME loan applications while voluntary additional repayments have increased. Another indicator of this fall in demand is the continued low utilisation rate of SME overdrafts which stands at around 60%. LBG recognises that a key driver of recovery will be the confidence of businesses to invest. We have been working to rebuild that confidence and ensure that businesses are aware that we are open for business. LBG have committed through our SME charter to support all viable requests for finance from our customers; not to increase the price of existing lending unless there has been a significant increase in risk; and to encourage enterprise by, for instance, running 200 seminars a year up to 2012. The Government, business organisations and commentators have an important role to play in contributing to that confidence.

• LBG were strongly supportive of the Small Business Finance Forum as a useful interaction between business representatives, industry and other key stakeholders to shape policy addressing and remedying SME concerns; including improving access to finance and customer confidence. The Forum also worked well to ensure that the Government and Bank of England were kept up to date on these key issues and trends for policy and economic management purposes as well as providing a focus on enhancing the relationship between SMEs and the banks.

• Alongside traditional bank lending, other sources of finance including asset based lending, supplier finance and equity are all also important. LBG believes that more can be done to encourage access to and use of these forms of finance and whether through development of our own offers or partnership with and reference to other suppliers, we are working hard to ensure that SMEs have the right mix of finance. LBG supports the British Business Angels Association. 8 October 2010

GAI 28

Memorandum submitted by the RBS Group Executive Summary

• RBS Group, including NatWest is pleased to respond to this inquiry into Government Assistance to Industry. As the UK's leading bank for Small and Medium Sized Enterprises (SMEs) we have played an active role in both helping to design and implement Government initiatives. We have also introduced a number of our own schemes to support SMEs.

• Government support schemes such as the Enterprise Finance Guarantee (EFG)

have enabled us to support many more businesses throughout the recession than would otherwise have been the case. We are currently the leading lender under the scheme. The Government has also facilitated finance from the European Investment Bank (EIB) and has supported the development of SME Customer Charters, which have all had a positive effect on our offering to UK SMEs.

• Over recent years we have enjoyed a good relationship with the Department for

Business, Innovation and Skills and believe that there should be an opportunity for a regular and formal ongoing dialogue with banks and business groups to ensure that we build on progress already made. We would suggest the Small Business Finance Forum is reconstituted as a forum for debate between Government, business groups and lenders.

Government Assistance Programmes 1. We have worked closely with Government on a number of its initiatives designed to support industry. These include the Enterprise Finance Guarantee; The Working Capital Guarantee Scheme; The Capital for Enterprise Fund and the ECGD Letter of Credit Guarantee Scheme. We also had discussions on other schemes. 2. Some schemes have been more successful at meeting their objectives than others. The principal Government scheme which has had the single greatest impact is the Enterprise Finance Guarantee Scheme (EFG) .The EFG was introduced in January 2009 and replaced the previous Small Firms Loan Guarantee scheme (SFLGS). 3. Initial discussions on the design of the EFG were held in early December 2008 and detailed scheme parameters were provided to lenders in mid-December. The EFG was formally launched on 14 January 2009 and implementation was achieved in challenging timescales. From start to finish, the speed of the EFG launch was significantly quicker than would usually be the case for a new product.

4. The EFG has enabled us to extend working capital through term loans and the consolidation of overdrafts while also supporting lending for business growth and development in cases where a sound proposition may otherwise be declined due to a lack of security. 5. We have worked hard to ensure that like its predecessor, the EFG is widely accessible to our Small & Medium sized business customers and that our Relationship Managers are able to identify opportunities where EFG can improve the availability of working capital or support lending for business growth. 6. The Royal Bank of Scotland Group, which includes NatWest is the largest supporter of the Enterprise Finance Guarantee (EFG) Scheme and Ulster Bank remains the leading provider of the EFG in Northern Ireland. In total the scheme has generated over £1,201.3m of loan offers, of which £1,010.5m have been drawn. To date, RBS, including NatWest has offered £454.7m, of which £414.4m have drawn. Therefore we have a market share of all drawn loans of 41%. Of the 2010/2011 tranche, we have offered £94.2m which accounts for 41% of all phase 2 EFG loans across all lenders. 7. We have worked with the Government to modify and extend the scheme further to cover overdrafts and Invoice Finance. This has ensured that more companies are able to access the Guarantee Scheme. We believe that the EFG scheme’s success was partly because it was based on the previous Small Firms Loan Guarantee scheme (SFLGS) which meant there was already a familiarity and understanding with the fundamental terms and conditions of the scheme. We believe that there is now has a broad understanding of the scheme amongst businesses and banks and it should be retained both as a concept and a brand. 8. We believe the EFG should be flexible to reflect the changing needs of businesses and the support they require. There is room for consideration of further scheme changes to expand the current EFG proposition and increase its flexibility, although some of these may be complicated by EU state aid rules. For example, increasing the loan size to ensure that larger SMEs have access to EFG loans to finance their growth. Futhermore, the EFG could be modified to offer tailored propositions for different sectors with different costs and guarantee rates. The Government may also wish to consider whether the existence of the overall scheme cap is acting as a deterrent to smaller lenders participating in the scheme. European Investment Bank 9. In the Pre Budget Report 2008, HM Treasury announced that following proposals by the Government, the European Investment Bank had increased by 50 per cent the total amount of lending available to small firms, and it has significantly simplified its approach to increase the attractiveness of its lending. The Government welcomed the commitment of UK lenders to approach the EIB to access these funds. 10. In January 2009 it was announced that RBS/NatWest had received a £250m tranche of EIB funds, which we subsequently lent on to customers at a discount of 60 basis points. We have subsequently agreed an additional £300 million from the European Investment Bank (EIB) to support businesses in the UK with discounted loans. Furthermore, in November last year, RBS was one of three UK-based banks selected to

participate in another EIB scheme designed to deliver cost-effective loans to onshore windfarm projects in the UK. Lending Agreements 11. In the Budget in March 2010 it was announced that RBS had agreed to make £50 billion in gross new facilities available to businesses for the 12 month period from March 2010. We have the capital and we are ready and willing to lend. During Q2 2010, the Group extended £12.7 billion of gross new facilities to UK businesses. This was 22% higher than the previous quarter and a 27% rise from Q2 2009. While this represents an improved performance, overall activity levels remain somewhat subdued, with many businesses continuing to reduce their existing borrowings. Gross new facilities extended to businesses in the four months March-June 2010 totalled £17.1 billion, of which £9.9 billion was to SMEs, so at this early stage, the Group is on plan to achieve its £50 billion gross business lending target for the March 2010 to February 2011 period. SME Customer Charter 12. Working with the Government, we introduced a Customer Charter for SMEs. The RBS SME Customer Charter (see: http://www.rbs.co.uk/business/sme-support-charter.ashx) represents an enduring commitment to our SME customers, and one that will evolve over time as we continue to consult with all our stakeholders, and principally the organisations that represent business, with which we are already working closely. Our Charter gave us an opportunity to set out the core business principles that we commit to in order to ensure that we are supportive, fair and transparent as we help businesses grow. 13. Our charter included an extension of our committed overdraft and price promise for SMEs. This pledge means that overdrafts will remain in place for the entire term of the agreement unless there is a breach of the terms and conditions of the overdraft - so businesses know their access to working capital is secure. Our overdraft price promise: commits us not to increase the margin on overdrafts on renewal unless there has been a material change in the risks associated with the business. Since its launch over 300,000 companies have benefited from this pledge representing 9 out of 10 customers. At the same time, subject to some limited exceptions and a £150 de minimis, we committed not to charge arrangement fees on loans or overdraft facilities of more than 1.5% per annum to give SMEs greater certainty on costs. 14. Our Charter also offered customers the right to challenge our lending decision. Our Business Hotline (telephone number 0800 092 3087) gives customers an additional route to experienced bankers if businesses disagree with our original lending decision or need access to finance after being rejected by another bank. A team of experts are on hand to look again at declines – even if they have been from a competitor. Since launch our Hotline has made almost £6 million available to UK businesses and has established over 150 new banking relationships. 15. As part of the Charter, subject to some limited conditions, we also pledged to provide 2 years free banking for start-up businesses and extensive support to businesses facing short term financial difficulties through our specialist teams whose focus will be returning businesses to good health.

Export Initiatives including UKTI and ECGD 16. RBS believes that a competitive and vibrant export market is very important in helping to drive the economic recovery. We have been pleased to be the sole sponsor of the UK Trade and Investments “Doing Business in Asia” events across the UK, looking to promote UK exports to Asia’s high growth markets. As well as informing the audiences of the options available to them, our Global Trade Finance Division have been conducting export clinics, answering the needs of businesses who are new to exporting or want to increase their global reach. 17. We have had discussions with Government about supporting international exports and have worked with them on products including the Letter of Credit Guarantee Scheme. Unfortunately, we have not seen significant take up of this scheme. We also launched an exporter package earlier this year to promote exporting among our customers and we will continue to build knowledge among businesses of opportunities to obtain finance for both pre-export and international trade finance. 18. We have been in dialogue with the ECGD concerning support for pre-shipment finance. Typically, guarantees/bonds will be provided by the exporter’s bank but necessitates the exporter depositing the comparable amount with the bank. This, in turn, can significantly impact upon the company’s working capital and act to deter export activity. This is especially the case for smaller enterprises. We believe that consideration should potentially be given to the government providing some form of guarantee to the company. In doing so, this could close a product gap that currently exists between ECGD and the service offerings of the credit export agencies of many other countries and would also increase the profile of ECGD’s support services to SMEs. 19. We are also participating in the BBA Taskforce, which will make recommendations in relation to the treatment of trade finance and the use of existing schemes to improve support for SME exporters. Small Business Finance Forum 20. The Committee is interested in the relationship between the Government, industry and the banks, and the role and performance of the Small Business Finance Forum. RBSG were members of the Small Business Finance Forum. This was the only forum where the banks, the trade bodies and the Government regularly met together, discussed the key issues in a confidential environment, defined solutions and set timelines for their delivery. It gave the opportunity for all parties to understand each others positions. There was often a lively debate, and the output was very practical. The Finance Forum meant that communications between banks, Government and SMEs has been more proactive than in previous recession. 24 September 2010

GAI 29 Memorandum submitted by Furness Enterprise Ltd

1. Furness Enterprise

1.1 This evidence is submitted by Furness Enterprise which was set up as a public/private sector partnership (in effect a Local Enterprise Partnership) in 1991 to help the largely self-contained Barrow in Furness Travel to Work Area, adjust to the consequence of massive job losses from the local nuclear submarine naval shipyard and job losses from other major local employers. Our views are based on extensive experience of working in partnership with the private sector and government to help businesses access “money and markets” in innovative ways.

2. Executive Summary

2.1 Government assistance programmes work most effectively when they are targeted to realise local opportunities. We have found that what matters is a clear, common understanding of the way in which the local economy works that, distinct roles for the different partnerships are clearly agreed, but with enough shared membership and communication to ensure coherence and effective delivery.

2.2 There is now a well understood need to rebalance the UK economy away from its reliance on financial services and to reduce our structural balance of payments’ deficit. We welcome this shift of emphasis towards wealth creating manufacturing and local economies that retain high levels of manufacturing.

2.3 The role of the Department of Business, Innovation and Skills in supporting industry is changing as outlined in the July 2010 Government policy statement, “A Strategy for Sustainable Growth” and the “Green Paper on Business Finance”. The key objective is to promote private sector enterprise and jobs.

2.4 We believe that the Government through BIS should operate economic/enterprise policy in such a way as to distinguish between affluent self sustaining private sector job generating areas e.g. London and the South East and deprived areas with potentially good access to jobs created elsewhere e.g. Greater Manchester and job poor deprived areas remote from ‘engines of growth’ e.g. Barrow in Furness.

2.5 We are concerned that BIS may abandon the whole principle of direct assistance to businesses if the statement in “A Strategy for Sustainable Growth” that.... “where we intervene we must do so to support businesses in general rather than individual businesses.”.......is implemented. We would like BIS to clarify whether this amounts to a Government policy to abandon Assisted Area discretionary Grants for Business Investment.

2.6 Policy statements in “A Strategy for Sustainable Growth” raise issues of whether policy should attempt to enhance firms’ capabilities and/or whether the major role of Government is to provide relevant infrastructure at the more aggregate level.

2.7 We believe that “first and foremost it is at the firm level that capabilities and technology are advanced and therefore policy needs to relate to the specific needs of the firm if it is to be most effective”(2) “Horizontal Aid” allowed for by the European Commission as part of a policy “to support businesses in general rather than individual businesses.”......would be insufficient on its own to be able to assist with the growth of existing firms, attraction of inward investment and reinvestment. Horizontal Aid is available equally to prosperous regions and companies will tend to locate there first.

Research Project on DTI Industrial Support Policies: An analysis of current DTI industry support patterns (dti April 2001)” which BIS refers to in its 26 August 2010 “Measurement of Drivers of Business Success and Failure”

2.8 Government should continue with the current economic policy approach that distinguishes between deprived and affluent areas. The provision of loans and grants under programmes such as Assisted Areas is preferred for improving the chances of success for northern local economies over rather than relying instead on a more generic, favourable business environment approach.

2.9 Continuation of Assisted Area status until 2013 is absolutely critical to the future economic prosperity of areas like Furness if they are to be able to continue to benefit from growth orientated companies of all sizes,New start up businesses, growing indigenous firms or inward investors. We would add that:

• Assisted Area GBI support has, and is, being used very effectively to create private sector jobs. • There is clear evidence that Assisted Area GBI works as a private sector stimulus. • GBI should not be taken away. • If GBI is taken away, the UK will have an undifferentiated area based policy which will benefit

prosperous areas and city regions at the expense of peripheral areas which often have significant industries capable of benefitting from GBI, thereby creating private sector jobs.

2.10 The current freeze on its use in England is holding up development and jobs by the private sector. Evidence given to the House of Commons BIS Select Committee on 7 September stated that:

“There are some unintended consequences of these decisions. I will give you two: businesses were looking forward to receiving GBI grants for business but we are unable to do that”

3. Overview of Regional Policy

3.1 Ministers have confirmed that “All Solutions for Business (SfB) products are currently being reviewed, including the Grant for Business Investment (GBI)”(3).

3.2 UK and EU policy is to “promote economic development of certain disadvantaged areas within the EU”.... “by supporting investment and job creation” and to “promote expansion and diversification of the economic activities of enterprises located in less favoured regions in particular, by encouraging firms to set up new establishments there”.

3.3 EU National Regional Aid Guidelines state that – “regional aid can only play an effective role if it is used sparingly and proportionately and is concentrated on the most disadvantaged regions”, where “regional aid forms part of a well defined regional policy” which “produces a real incentive effort to undertake investments which would not otherwise be made in the Assisted Areas”). We urge government to retain Assisted area status and GBi grants because it is fits in with this principle.

3.4 UK Regional policy aims to reduce economic and social disparities between regions. These disparities are usually defined in terms of unemployment rate and income per capita and are aggravated by structural changes which can have social as well as economic consequences (Armstrong and Taylor, 1993). In such cases regional policy can help prevent large scale labour migration from peripheral to core city region areas(5). The UK's policy traditionally involved "taking work to the workers" to obviate the need for the "workers to move to the work". Contemporary regional policy has been, and is, targeted at specifically designated Assisted Areas through discretionary policies such as Grants for Business Investment and the previous Regional Selective Assistance (RSA). EU policies also aim to reduce/remove disparities between regions/countries.

The UK was amongst the first European countries to adopt an official regional policy with the 1934 Special Areas Act (Alden and Boland, 1996), and 60 years on, there is still a UK regional policy aiming to address issues of uneven regional incomes and growth.

3.5 Research conducted for BIS predecessors DTI concluded:

• “The conclusion from the 10 SFIE case studies is that the large scale investment that these grants support is something that makes an appreciable difference to the individual businesses concerned. In many cases, whilst the grant did not on its own tempt the firms into making these decisions, it acted to increase the size of the investment and to emphasize the growth element of the business decision”(7).

• “There is a high level of full additionality associated with the Scheme”.

• “Increasing the size of investment is important in areas such as Furness and West Cumbria”.

• “Our overall conclusion is that both the RSA and SFIE Schemes are delivering benefits to the UK economy through net additional employment, higher value added and a set of wider benefits that demonstrate linkage into other regional priorities such as regeneration, skill enhancement, supplier networks and broader environmental agenda

3.6 Evidence from the local area shows that Assisted Area discretionary grant aid has been, and continues to be, a significant source of sustainable private sector jobs growth in businesses of all sizes, including fast growth new start firms, through organic growth and through inward investment or reinvestment. Assisted Area GBI is cost effective.

3.7 Between 2007 and 2009, NWDA offered £21.8m of GBI grants to help 113 firms create/protect 3,274 jobs in NW England at a cost per job of £6,611 (2008-9)(6).

3.8 GBI continues to be an important source of finance for businesses particularly as banks remain reluctant to lend. The grants also help persuade firms to consider more peripheral areas as opposed to “engines of growth” such as the cities of Liverpool and Manchester.

3.9 In Barrow in Furness TTWA between August 1993 and August 1998, Assisted Area status enabled 49 firms in Furness to invest £64.94m and create and safeguard 1,821 jobs for £5.19m of grant aid. The scheme helped support 6.4% of all employees in employment.

3.10 After 2000 and up to 2006, a time when Furness and West Cumbria was further disadvantaged by only being eligible for a reduced grant rate under State Aid Rules, Regional Selective Assistance (RSA) and Selective Finance for Investment (SFI) created or safeguarded 2,717 jobs in 37 businesses at a cost of £10.04m whilst levering in £85.4m of private sector investment.

Figure One: Five case studies illustrate the effectiveness of Assisted Area incentives

Kimberly-Clark, Barrow (USA) A £1.6m SFI grant in 2005 enabled local management to secure HQ approval to a £15m investment as part of the Group’s global competitiveness strategy safeguarding 149 jobs. The development resulted in the Barrow site footprint being reconfigured, so it is then regarded as a strategic investment location in Europe rather than one designated for streamlining or closure. Since completion of the GBI project the site has attracted a further £16m of investment, with potential for more.

PartyLite Manufacturing, Barrow(USA) PartyLite are part of Blyth Inc. of USA. A £0.995m RSA grant enabled the largest overseas inward investment into Cumbria for 20 years to go ahead at Sandscale Park, Barrow in 1997 instead of in Holland or Eire. The new plant manufactures candles with 80% of output destined for mainland Europe. The site now employs 150 people. Further expansion is being contemplated.

Robert McBride, Barrow(UK) RSA has secured a significant reinvestment project for the UK instead of it going to France. A £0.6m RSA has enabled the company to secure a £9m investment from the parent company which created 25 new jobs and protected 150. ‘Project 2000’ increased capacity of the plant. The company subsequently undertook further investment. Liberata A £0.8m SFI grant in 2005 enabled Furness to attract a national Centre of Excellence in council tax and benefits processing, aimed at creating 200 jobs over 3 years. At the time it had 155 staff. It now employs 364 people. The development would otherwise have located in a large city in southern or central England.

Diamould Limited This company secured a small RSA grant when it started in 1999, a further offer was secured in 2002. SFI was offered in 2005. The company has grown to employ 107 people and is a market leader in subsea connectors. Schlumberger acquired the business in 2005, the recent SFI resulted in their commitment to sustain the business in Barrow, there is potential to grow it from the current 34,000ft² of premises.

3.8 We are also concerned that across the UK, inconsistent application of discretionary grant policy is disadvantaging peripheral English Assisted Areas such as West Cumbria and Furness. Scotland is still benefitting!

Figure Two - Scottish Areas Still Benefit from Assisted Area grants

“MORE than £2 million of grant support has been secured by two firms in moves that will safeguard or create almost 300 jobs, Scotsman 8th Sept 2010 First Minister Alex Salmond revealed the support for the Ayrshire economy as the Scottish cabinet met in Kilmarnock yesterday morning”. Commenting on the two awards, he said: "This investment shows Scotland has a high-quality manufacturing base and is testament to the talent and skills of the Ayrshire workforce." (Source: The Scotsman, September 2010)

3.9 All other EU countries are still offering grants so England’s Assisted Areas are competitively disadvantaged. Wider implications mean English deprived areas are disadvantaged in seeking to attract investment if EU supported Assisted Area grants are frozen as now.

3.10 The Grants for Business Investment (GBI) scheme which provides financial support to businesses to create or protect jobs is effectively suspended following the decision to scrap RDAs. The decision to curtail RDA funding led to NWDA suspending any new offers for GBI,as the nWDA chief Executive said on 7 September “There are some unintended consequences of these decisions. I will give you two: businesses were looking forward to receiving GBI grants for business but we are unable to do that”. Here In Furness two planned inward investment projects were adversely affected by that decision.

3.11 If the Government wishes to save money as part of the CSR it could continue to fund GBI in Tier 1 and Tier 2 Assisted Areas, eliminating Tier 3 support. It should also require the new Regional Growth Fund to be top sliced so GBI can still be offered. See below.

4 Proposed Regional Growth Fund

4.1 The proposed Regional Growth Fund,will amount to much smaller resources than the total funding currently deployed on regeneration through the RDAs. It obviously offers some potential resource, but it is going to be critical that the Regional Growth Fund is focused on encouraging private sector enterprise and sustainable private sector employment, particularly in those areas and communities currently dependent on the public sector.

4.2 We understand that a key aim of the Fund is to help the areas and communities that are likely to be hardest hit by public sector job cuts and we would add it should include areas highly reliant on public sector contracts or at risk from loss of them. In areas like Furness and West Cumbria this will matter most because it is an area where the private sector is currently weakest.

4.3 BIS officials will need to address whether the Regional Growth Fund will take over responsibility for GBI, and for other forms of financial aid to companies (eg: gap funding) that is permitted under EU State Aid Rules and was previously disbursed by RDAs and was designed to help the Assisted Areas.The committee may wish to seek the Department’s views on this.

4.4 It is unclear how GBi could be integrated into Regional Growth Fund and the process might be made to work at the sub-regional scale of the proposed LEPs, bearing in mind the cyclical nature of major private sector investment projects and the fact that expertise resident in RDAs and regional industrial development boards to administer the scheme may disipate. The Committee may wish to ask BIS how they will address this challenge, perhaps inviting them to clarify whether pooling some grant-giving activities between neighbouring LEPs will occur.

25 September 2010

Appendix A

Barrow in Furness was designated as an Assisted Area in 1993,renewed in 2000 and in 2007.

Ekosogen North West Index of Economic Resilience Report 1997-2007, which identified major improvements in Barrow between 1997-2007 in Enterprise, the Labour Market and Economic Dynamism

It is the 29th most deprived local authority in England with high concentrations of worklessness, particularly Incapacity Benefit claimants.

Experian’s 9 September resilience study for BBC Regions shows the town to be one of the bottom 7 district council areas.

As the area is remote from the ‘engines of growth’ in the North West, tackling worklessness has depended very much on seeking to work locally with the private sector to create jobs and diversify the economy.

Barrow is an integral part of “Britain’s Energy Coast” which is a programme designed to exploit the wide range of energy opportunities in the area from nuclear to wind.

We also have a significant reliance on public sector jobs and public sector contracts with the shipyard in Barrow employing 5,041 people out of a workforce of 36,000. Energy intensive manufacturing industries and a cluster of companies involved in energy efficient LED or solid state lighting offer growth opportunities.

Assisted Area status and hence the ability to attract investment and job creation using financial incentives, has meant that significant private job creation has been achieved and these results have been confirmed in the.

The results from Furness Enterprise demonstrate that a local public/private sector partnership with resources can work effectively with the private sector to create jobs even in a deprived area.

Between 1992 and the end of 2009, the local enterprise partnership helped companies create 9,416 jobs and to safeguard a further 3,399.5 jobs.

Organic growth of local firms accounted for 2,955 new and 1,100.5 safeguarded jobs.

New start businesses provided 1,887.5 jobs

Inward investment and reinvestment 4,583.5 new jobs and 2,299 safeguarded jobs(1).

“Government assistance” to industry has had a significant role to play in the delivery of this.

1

GAI 30

Memorandum submitted by the Federation of Master Builders

Introduction We are writing in response to the House of Commons Business, Innovation and Skills Committee announcement and call for evidence of 21st July 2010 on the launch of its second inquiry of the new Parliament, Government Assistance to Industry. The Federation of Master Builders (FMB) is the largest employers’ body for small and medium sized firms in the construction industry, and with 11,000 members is the recognised voice of small and medium sized builders. FMB is committed to promoting excellent standards in craftsmanship and assisting builders to improve levels of building performance and customer service. Within its membership, the FMB has around 4180 firms which engage in house building, either as their primary function, or as part for the suite of building services they provide. The remainder of this submission is divided into sections as follows;

Executive Summary and Recommendations.

Construction and the Recession.

Survey Responses: Changes in Access to Credit and their Impact on Construction SMEs.

The Effectiveness of Government Policy in Assisting Businesses During the Credit Crisis.

Executive Summary and Recommendations

1. As the UK construction industry contributes 8.5% of UK GDP and every £1 spent on construction results in £2.84 of additional economic output, construction is essential to the recovery of the UK economy.

2. A formal survey of FMB members suggests that credit has become more difficult to access and more expensive, resulting in reduced activity by firms, restrictions on clients’ ability to commission work, and reduced levels of employment of full time workers and apprentices.

3. An informal survey of FMB members suggests that banks are increasing the costs of lending in a variety of ways in addition to refusing access to credit as the construction sector is seen as too much of a risk.

4. The informal survey results reinforce the consensus view that lack of available mortgage finance is the single most important factor constraining house building.

5. We call on the Government to take immediate action to end the bank policy of penalising businesses operating in construction on the basis of the sector they operate in, through denial of credit facilities or excessive increases in its cost.

6. We call on the Government to take immediate action to address the gap between latent demand for housing and access to the finance required to stimulate its production.

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Construction and the Recession

7. The UK construction industry contributes 8.5% of UK GDP directly, around £124bn per annum, and this rises to 10% when the overall value chain is taken into account.

8. When value chain jobs such as construction products and the professional services such as architects and engineers are added to those directly classified as construction, the industry employs around three million peopled in a multitude of roles representing 8% of UK employment.

9. Construction is a SME dominated industry with 99% of firms employing fewer than 60 people and 93% fewer than 14.

10. Every £1 spent on construction output generates a total of £2.84 in total economic activity, and provides financial returns to the treasury in tax income and benefit savings of around £0.56. As such it is the most effective focus for government investment. Investment in construction has three other key advantages:

i. The industry’s low import requirements mean that a very high proportion of any investment remains in the UK economy;

ii. It is labour intensive creating jobs for all skill levels but especially those lower skilled workers who are most vulnerable in times of recession;

iii. Construction is not only immediate economic production. It is also investment rather than consumption, and as such provides significant long term economic and social benefits to the country by adding to its capital stock.

11. According to the data from the Office for National Statistics, there were 159,000 jobs lost in the construction industry between Q3 2008 and Q2 2010: A number roughly equal to the regular personnel of the British Army and the RAF combined, and comparable with the population of Oxford.

12. The latest FMB survey showed that construction workloads continued to decline in the third quarter of the year, an 11th consecutive quarterly fall.

Survey Responses: Changes in Access to Credit and their Impact on Construction SMEs

13. In September 2010, the FMB conducted two surveys of its membership on their experiences with banks, the impact of changes in policy, and their awareness and use of government assistance programmes. The first was a formal independent survey conducted for the FMB by Experian as an additional question set in the quarterly State of Trade Survey that it runs on the FMB’s behalf. This received 374 responses from a sample size of 2000 construction SMEs and is statistically robust. As such its results can reasonably be assumed as representative of construction SMEs’ experiences in the wider industry.

14. The second was an informal on-line survey of FMB members looking for answers to more specific questions, and for case studies of experiences. This received 255 responses from 7922 members invited to participate. The survey is statistically robust and included 94 written comments.

3

Formal Survey

Access

15. Access to credit facilities has become more difficult for many construction SMEs: When asked “in the past 2 years has your firm found it harder to access credit facilities” more than a quarter of respondents, 36%, said yes. If this is reflected across the industry, credit may have become more difficult to access for around 70,000 private SME contractors.

Cost

16. Access to credit facilities has become more expensive for nearly half of construction SMEs responding: When asked “in the past 2 years has your firm found it more expensive to access credit facilities” nearly half of respondents, 48.4%, said yes.

Impact

17. Restricted access to finance has resulted in lower activity in over a quarter of firms responding. If this figure of 27.2% of firms were reflected in the wider construction industry, this would suggest that credit issues had resulted in lower activity levels for nearly 53,000 private contractors.

18. Restriction of access to credit is also hampering the commissioning of work by clients, with over 61% of firms responding saying that it had reduced their clients’ commissioning of projects.

19. Credit issues are also having an impact on employment practices of FMB members. Over 15% of respondents said that the firm’s access to credit had resulted in their having to decrease overall employment, and nearly 25% said that the same issue had caused them to decrease their employment of apprentices. This suggests that credit issues not only have implications for employment, but also for training and skills in the industry as if the survey trend is reflected in the wider FMB membership then around 2700 firms may have reduced the number of apprenticeship places that they provide, and that many more places may have been lost.

Informal Survey

Access

20. Members were given a number of options for how their access to credit had changed since the beginning of the credit crisis, and asked to select all options that applied.

21. 36% of respondents experienced no problems with credit as their business either did not require credit facilities, or because the bank had not changed its lending policy towards them.

22. The remaining 64% who had experienced problems selected 2.6 options each on average, indicating that firms were experiencing multiple adverse changes to their access to credit.

23. The overall picture implied by those indicating that they had experience problems was that, while banks were not commonly removing all access to credit, they were increasing its cost in a variety of ways for both new and existing services, and frequently turning down requests for new credit facilities as well. Refusal of new credit facilities was the single most commonly selected option, and over half of all selections related to increased costs for existing or new credit facilities and loans.

4

Cost

24. Members produced numerous examples of how costs for them were increased. One member stated “Interest rates have increased for a development loan from 1.75% over BOE to 4.5% over BOE rate. Facility will only be extended for 6 months at a time and a fee of at least £7,500 has been charged at each renewal!!!” Another stated “we have two loans which we took out at an agreed rate of 2% over base. When these came up for renewal the rate was increased to 4.1% over base, on renewal again this year this has been increased to 4.65% over base. We have never defaulted on any monies borrowed during our 25+ years of trading.”

Lending policy

25. Responses and comments seem to support the proposition that banks consider construction to be risky and that policy decisions have been taken to reduce their exposure to the sector on principle, rather than on a case by case basis. When asked if they had been refused credit by a bank which had previously considered the firm creditworthy explicitly because of the sector the business operates in, 38.6% of respondents indicated that this was the case.

26. This is supported by a considerable number of comments to the effect that banks consider the sector to be risky and wish to limit their exposure to it. One member stated “Banks have specifically said to us that they will not entertain any business plan that involves property. Our overdraft has been reduced by over 90%. We have been notified of overdraft termination in December this year.” Another said “I asked my bank manager “if I had a project worth £1million and had £900k would he loan me the £100k” the answer was no as the HSBC have a no loan to developers policy.” The policy does not seem to be restricted to HSBC. One respondent stated “We have been quoted from the Manager of RBS that they have a policy of not funding any new development and they are trying to reduce their exposure from 2.5bn to 1.0bn in the next 18 months.”

27. This policy also seems to make no exceptions for long standing customers. A member stated “we have been trading with the same bank since 1924. They take no account of our previous trading records. Because we are in house building we are deemed a risk.”

28. Not all comments on bank policy have been negative with several members writing in stating that they have a good relationship with their bank, and that the bank/manager had been both helpful and supportive.

Impact

29. Responses suggest that limiting firms’ ability to raise funds is hampering a significant number of construction SMEs. When asked “Has the business lost business opportunities or had to abandon plans for growth or investment because it was unable to raise the necessary funds from the banks”, nearly 57% said yes. If this were to be reflected across all private SME contractors in the industry, this would suggest that around 97,000 firms in the construction industry were feeling the effects.

30. Withdrawal of funding for existing projects seems to be an issue for a considerable number of firms. When asked “Has the business lost business because a bank has withdrawn funding from a client for a project which is already underway?” nearly a quarter said yes.

31. Refusal of funding to clients seems to be suppressing demand for work which would otherwise go ahead. When asked “Has the business lost business because a bank has refused funding to a client for a project which they would have otherwise commissioned?” 46% said yes.

5

32. Access to credit is particularly important for firms who are experiencing problems with late paying customers, and anecdotal evidence suggests that refusal has resulted in firms going out of business. Over 55% of firms responding to the survey said that the length of time that their business typically had to wait for payment had increase since the beginning of the down turn, and a further 30% said that they were aware of firms in their area which had requested a bridging loan as a result of a defaulting customer, been denied, and been wound up as a result. Small firms are particularly vulnerable to this kind of threat as it may only take one default on one large value contract to instigate a cash flow crisis.

33. It is widely acknowledged that credit availability issues are having a serious impact on housing supply, and this reflected in responses to the survey. 67% of those building homes stated that lack of mortgage finance was preventing potential clients from buying homes from them, and 79% stated that the lack of mortgage finance was causing the business to slow the rate at which it builds homes.

The Effectiveness of Government Policy in Assisting Businesses During the Credit Crisis.

Mortgage Lending and Housing Supply Policy

34. The availability of mortgage finance is the key restriction on housing production, and as such the key to assisting business in this area is to ease restrictions on the credit available to drive the housing market.

35. The main problem is that significant rises in the size of the deposits required mean that

aspiring home owners are unable to access the levels of finance required to purchase a home. If a lender will only lend 85% of a property’s value whereas previously they would lend 125%, the potential borrower is transferred from a position where little or no saving is required to one where they will need to provide 15% of the property’s value as well as stamp duty and professional fees. If the average house price is now £224,064 (BBC May 2010 covering January to March 2010) then the borrower will need to provide a £33,609.60 deposit and this alone will often prove an insurmountable problem.

36. The banking crisis has led to changes in the price and availability of mortgage finance to

first time buyers who in July this year slipped to just 34% of the housing market: their lowest proportion since the beginning of the credit crisis in August 2007. The Council for Mortgage Lenders (CML) has reduced its forecast for total lending for the year by £10bn to £140bn. This compares to a total of £362bn in 2007 and £345bn in 2006.

37. Gross mortgage lending declined to an estimated £11.4bn in August, down 14% from £13.3bn in July and six per cent from £12.1bn in August 2009, according to the most recent data from the CML. This is the lowest August total since 2000 (£11.1bn) and the CML expects lending volumes to remain below last year's level in the coming months as activity was buoyed by the upcoming end of the stamp duty holiday in the last few months of 2009.

38. The UK currently faces an extremely serious housing shortage. In August 2009 the

Government’s own housing adviser the National Housing and Planning Advice Unit (NHPAU) stated that at least 237,800 new homes are needed every year between now and 2031. As a result of the financial crisis the UK built just 123,000 new homes in 2009/10 and annual completions are not set to rise to anything close to the necessary levels in the near future.

39. There is no magical cure all policy and a wide range of measures will be needed to tackle the issue, many of which will have to be delivered by departments other than that for Business, Innovation, and Skills.

6

40. The extent to which Government demands that banks increase lending have been successful is certainly open to question given the significant reduction in mortgage lending. However, it could be argued that Government policy in this area is unclear and possibly contradictory as demands to lend more could be seen to conflict with other messages such as those from Lord Turner relating to potentially “unpopular” credit controls as part of proposed financial regulation overhaul. This issue of clarity is one which merits further consideration but what is clear is that restrictions on credit at their current levels are having a serious impact on the construction of desperately needed housing, and must be significantly relaxed.

41. A study by MoneyFacts has concluded that, although the rate at which banks borrow money is falling, this is not being passed on in full to those seeking a fixed term mortgage as banks are increasing margins in order to repair their balance sheets. It further reports that that three years ago the margin on a three year fixed term mortgage deal stood at 0.41%, but that this figure now stands at 3.57%.

42. The Government must take urgent action to ensure that banks pass on savings to home owners and first time buyers, and to address the size of deposits required by first time buyers.

43. The government must also undertake significant reforms of stamp duty including its move to a graduated tax, the adjustment of thresholds so that family housing is not caught by a measure that should only tax genuinely luxury homes, and the introduction of a permanent exclusion from stamp duty for all first time buyers.

Business lending and Assistance Schemes

44. Awareness of Government schemes to assist industry appears limited in the construction SME sector. According to the formal survey of FMB members, 19.5% of respondents were aware of the Small Firms Loans Guarantee and 11% of its successor the Enterprise Finance Guarantee. A further 12% were aware of the Capital for Enterprise Fund, just under 11% had awareness of the Working Capital Guarantee Scheme and just over 9% were aware of the strategic investment fund. Of those who had heard of any of the schemes, 3% said that they had directly benefitted from any of them, the remaining 97% saying that they had not.

24 September 2010

GAI 31

Memorandum submitted by the Institute of Directors

1.1 Thank you for giving the Institute of Directors (IoD) the opportunity to respond to the new inquiry on Government Assistance to Industry, which was announced on 21 July 2010. This paper presents our response to your call for evidence. Issues surrounding business support and access to finance are of considerable interest to the business community in general and to the IoD in particular. We are therefore pleased to participate in the consultation and present our response for your consideration.

About the IoD 1.2 Founded by Royal Charter in 1903, the IoD is an independent, non-party political organisation

of 40,000 individual members. Its aim is to serve, support, represent and set standards for directors to enable them to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. The membership is drawn from right across the business spectrum. 84% of FTSE 100 companies have IoD members on their boards, but the majority of members, some 70%, comprise directors of small and medium-sized enterprises, ranging from long-established businesses to start-up companies.

General Comments 1.3 The IoD has responded to this inquiry primarily with member data collected on the state

of small business finance in the UK and our view on potential reforms to the provision of broad-based business support. While we have been unable to share similar data on the challenges and activities around export support, if invited to give oral evidence to the BIS Select Committee we remain hopeful we may be in a position to share member research due to be commissioned within the next few weeks.

State of Bank Lending (2009) 1.4 IoD research (approximately 1,000 respondents) conducted in November/December 2009

found that a quarter of directors said that they had tried to access finance from the institutions that they banked with in 2009/10. Of this quarter, 57% of directors said that their application for finance had been rejected by their bank.

1.5 In February 2010, when these results were publicised the IoD became aware that (in state

supported banks) the stock of loans to businesses (year-on-year) had fallen by some 8.1%. 1.6 The same IoD data also found that 1 in 5 businesses that wanted additional capital in 2009/10,

didn’t investigate bank loans or overdrafts because they believed they would be declined, saddled with disproportionately high costs or required to comply with requests for additional security.

1.7 Further data showed that the type of finance being accessed by businesses had also changed

over the past few years. IoD data from 2001 showed that 45% of IoD members were financing their businesses through bank loans and 40% through overdrafts. Today, only 28% are doing so via bank loans, 36% through overdrafts with a further 20% financing their business to some degree through credit cards.

1.8 During the same period (09/10) the IoD noted some significant issues with access, publicity and

availability of the Enterprise Finance Guarantee. In fact, we noted that “Government support in the form of the Enterprise Finance Guarantee is not getting through. Despite Government assurances that businesses found to be ineligible for commercial credit would be offered access to the taxpayer-backed fund, 83% of those declined bank finance were not even offered information on the Government’s Enterprise Finance Guarantee.”

1.9 While in many cases the Enterprise Finance Guarantee would have proven to be appropriate

for the business concerned, the fact that 83% of our members were not knowingly evaluated against its applicability to their situation following a decline was concerning.

State of Bank Lending (January - June 2010) 2.1 IoD research (approximately 900 respondents) conducted in June 2010 found that 39% of

IoD members’ firms applied for finance with a bank (applications include requests for renewals/extensions/new requests for overdrafts and loans) in the time period 1 January 2010 – June 2010.

2.2 This compared with an application rate of 25% in the previous survey (see above), which

covered the longer time period, 1 January 2009 to December 2009. 2.3 Of the 39% of IoD members’ firms which applied for finance in the time period 1 January 2010

– June 2010, 33% had an application for finance declined by a bank 2.4 This compares with a decline rate of 57% in the previous survey which covered the longer time

period, 1 January 2009 to December 2009. 2.5 37% of IoD members stated that in the period 1 January 2010 – June 2010 they had noticed an

increase in the amount of security being requested against any lending that their organisation sought.

2.6 This follows 29% of IoD members in our previous survey having noticed an increase in the

period 1 January 2009 to December 2009. No respondents in the latest survey noticed a decrease in the amount of security being requested.

Business Support 2.7 The IoD believes that the Government should look to remove the current cohort of paid

Business Link advisers and replace them with a larger network of accredited director/volunteers, who are willing to assist individuals in the creation, growth and realisation of their business aspirations.

2.8 The model is innovative, but not untried. It should deliver greater numbers of advisers

(than the present 1,500), higher intensity of advice and eventually a more respected brand amongst business owners. The proposal that the IoD is suggesting sees the removal of paid employees and their replacement with willing volunteers. It replaces national government interventions with government and business partnerships. It replaces bureaucracy with citizen activism and does so at lower cost.

2.9 The Institute of Directors have been out to visit the Business Support offerings available in the

Regions and were struck by the straightforward nature of requests and questions that were coming into the call centres. On the basis of what we saw, there was a clear and evident case for cost savings and efficiencies that could be delivered by rolling together the regional back-office resources and delivering a national phone and web-based service.

2.10 However, the necessary corollary of this change is that the face-to-face element of Business

Link advice would have to be looked at. The IoD’s impression of the advice offered was that it was of mixed quality, but that where delivered well it was received positively. The most significant drawback to the benefit of face-to-face advice was its scarcity. Business Link Advisers often visited the same businesses only once or twice a year, meaning that often the input was so light touch as to be unproductive.

2.11 In an environment where cost constraint will reduce the resource allocated to a face-to-face

business support programme that is already lacking in intensity it becomes essential to not only tweak the framework, but to fundamentally review it.

2.12 One example of a framework for business mentoring (as proposed) would be that the largest business representative organisations in the UK came together and shared their membership details with a single secretariat that agreed to contact individuals about their interest in advising business. Having drawn together the list of willing advisers, the organisations could then accredit the standards of advice (paid for by government funding) and ensure relevant waivers are signed that ensure the advisers do not cross-sell etc. Such a secretariat would be able to administer requests, link up individuals with advisers etc and deliver the service.

2.13 It is the IoD’s view that if such a model were delivered; the Government would need to fund this

national mentoring service (Volunteer Director Network). The service could be administered by a single external contractor as a national contract, but in order to fund it partially through ERDF funding, the role could be administered regionally.

2.14 The service would need government finance in order to begin immediately and to have full

national coverage: The scheme will be considerably less costly than the Business Link service, but the IoD believes that such a proposition would only require an annual outlay of £1-2 million.

2.15 The required finance would fund:

• Advertising of the availability of the service to potential mentees • Strategic recruitment of potential mentors • Funding for the brokering/matchmaking service between mentees and mentors • Underpinning costs for indemnity insurance, frameworks for required mentor/mentee

behaviour to avoid conflicts of interest and cross-selling etc 2.16 Such a service could be set up with or without accredited training for mentors, but the costs

outlined above are based upon such a training programme being in existence. 2.17 The interest amongst the business community is certainly there. In a survey of IoD members

conducted in August 2010, over 40% of directors who responded said they would be interested in becoming a mentor.

2.16 The above outline is not the only way the service could be delivered, but the model share some

broad characteristics with the SCORE (http://www.score.org/index.html) programme in the United States of America (see below).

SCORE is the Service Corps of Retired Executives

The Service Corps of Retired Executives (SCORE) is a national non-profit organization that counsels business owners and aspiring entrepreneurs. There are 389 SCORE chapters throughout the United States offering counselling services to small businesses in all areas at no charge to the client. There is no membership requirement to receive SCORE counselling—a phone call to make an appointment with a local SCORE chapter is sufficient to put the small business owner in touch with this valuable organization.

History SCORE was founded in 1964 specifically to provide business counselling to entrepreneurs. A national non-profit organization, SCORE is funded primarily by the U.S. Small Business Administration (founded in 1953). The group is made up of more than 10,000 active and retired business executives familiar with all areas of business management. This group donates its services, conducting one-to-one counselling as well as team counselling and training sessions. SCORE provides assistance to an estimated 300,000 plus would-be entrepreneurs and business owners annually. According to the SCORE Web site, the organization has helped 7.2 million small businesses since its founding.

Mission and Programs

According to SCORE, volunteers "serve as 'Counsellors to America's Small Business.'" The volunteer members of the organization are "dedicated to entrepreneur education and the formation, growth and success of small business nationwide."

SCORE counsellors provide general business advice on all aspects of business formation and management. This service is provided free of charge and in confidential fashion. Counsellors may assist in anything from investigating market potential for a product or service to providing guidance on cash flow management. They may provide insight into how to start or operate a business, how to buy a business or franchise, or how to sell a business. Volunteers also review business plans, often offering suggestions before the plans are submitted to a bank for financing consideration (in one survey of SCORE offices in 14 states, 27 percent of respondents indicated they delayed or cancelled plans to start their own business after talking with a SCORE counsellor, usually because the meetings illuminated shortcomings in training or strategy). Finally, individual SCORE offices offer free and confidential counselling and business advice via electronic mail on the Internet. According to the organization, these e-mail counselling sessions are its fastest growing service (SCORE offices conducted 75,000 such sessions in 2000).

SCORE also holds workshops throughout the country. Workshops and seminars on specialized areas of business training such as writing business plans, inventory control, advertising, financing and international trade are available at reduced cost (usually a nominal fee of $100 or so, to cover cost of facilities and materials). For more information on this and other SCORE services, the organization maintains a Web site (www.score.org) detailing its offerings.

SCORE Volunteers SCORE volunteers are usually between the ages of 60 and 70, but there is no age limit for a volunteer. Retired executives interested in joining SCORE fill out a formal application and usually supply a resume for consideration by their local chapter. There is a 90 day probation period during which performance is monitored. To insure quality, SCORE counsellors are matched to cases according to the type of business or client seeking advice and the counsellor’s area of specialty. SCORE is not an employment service, however. Members may give advice, but may not accept positions with client companies, nor may they direct a business owner to individuals or firms which may provide employees. SCORE's main function is to provide free advice to small businesses.

24 September 2010

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GAI 32

Memorandum submitted by the British Bankers’ Association Introduction

1. The British Bankers’ Association welcomes the opportunity to give evidence to the inquiry by the Treasury Committee into the Government’s proposals for changing the framework for UK financial regulation. We represent 220 banks from 60 countries and have 40 associate firms within our membership.

2. Banks continue to provide credit to viable businesses across the UK economy and are

committed to lending more to support the economic recovery. In order to safeguard and return depositors’ money, lending decisions must be responsible and debt must be priced appropriately. The BBA has recently produced a factsheet to explain how banks set the price of loans to small businesses1.

3. UK banks are lending £500m of new credit a month to small businesses (£27m of new loans

each day). The core business of banking is to make a return for customers by lending their money to sound borrowers with the long-term potential to repay.

4. Bank of England data shows that approximately 85 per cent of lending that is applied for by

SMEs is approved2. Banks offer hotlines for business customers who are unhappy with a lending decision – this gives the bank a chance to review an application.

5. The vast majority of SMEs are paying substantially less to borrow money, in absolute terms,

than two years ago, as a result of reductions in the Bank of England Base Rate and other reference rates such as LIBOR.

6. Ultimately, the price of lending is determined by the cost of making funds available and the

risk associated with any lending discussion. A separate paper on pricing is annexed for your information. Lending is one of the key areas for competition as firms choose where to place their business or switch banks: those banks that overprice will lose business, while those that underprice will not be able to sustain their operations.

7. BBA statistics - based on figures provided by the main high street banks - demonstrate that

companies are - perfectly rationally - paying down their loans and not borrowing more than is necessary. This behaviour is entirely in keeping with the fragile nature of the economic recovery and business anxiety about the forthcoming spending review and its potential impact on business activity.

8. High-street banks provide the bulk of lending to UK businesses. Their current lending stands

at a total of £720bn to all UK businesses. This is despite being required to keep back more cash and capital and having to plug the lending gap left as many overseas and specialist lenders stopped operating in the UK.

1 The BBA’s factsheet - Small Business Lending - How Banks Set The Price For Loans To Small Businesses - is available online at http://www.bba.org.uk/download/4051. 2 http://www.bankofengland.co.uk/publications/other/monetary/TrendsMarch10.pdf.

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9. Banks intend to keep playing their full part in financing growth in UK by lending to business and

offering other source of finance, such as asset-based finance and equity, and we work with others to inform the corporate sector about the appropriate options available. We are also hoping to further this agenda through the outcomes of the SME Taskforce (see below).

Working with Government

10. We recognise that there is not one single solution, nor a single stakeholder that can deliver holistic assistance to industry, especially in a difficult economic environment. We have been working closely with Government and business groups in a dedicated ‘task force’ over the summer to consider assistance to industry from a wider perspective than the committee’s terms of reference and will be happy to share our findings once our final report is published in the Autumn.

11. The BIS/HMT Green Paper – ‘Financing a private sector recovery’ – acknowledged the

establishment of a Taskforce by the BBA and its members to look at a number of key issues, including business finance and SMEs. The Taskforce will examine the barriers - real and perceived - that stop businesses accessing the finance they want and will make constructive suggestions about how the issues can be tackled head on.

12. The Taskforce will assess the positive role that banks will play in financing a private sector

recovery, and to determine to what extent the opposing forces of supply and demand are influencing the flow of finance between banks and businesses.

13. The Taskforce has divided the work up into four workstreams, including business finance

and official business support programmes, and SME issues. Each workstream includes observers the Department for Business, Innovation and Skills, as well as HM Treasury.

Working with Business and Business Groups

14. Banks have taken many recent initiatives to work together with SME customers, acting with Government and business groups. Some of these include:

• Individual members and BBA have taken part in many forums of businesses, their

representative bodies, and the Government. For example, the BBA has held a series of roundtable events with SME representative bodies such as the CBI.

• Banks and BBA have enhanced the information and advice available to small businesses.

We have published factsheets on the factors determining the pricing of business loans. • On Budget day 2010, banks have published six commitments to their SME credit

customers. These will now be made part of the Lending Code and will therefore be monitored and enforced by the Lending Standards Board in the near future.

• The BBA is also playing an active part in educating businesses on the importance of

proper financial management and presentation. Access to and use of financial information can help businesses enhance their access to funds, their credit ratings and terms. A programme of work to recommend good practice and potential campaigns has been taken up in a “Doing Business Together” group, involving the BBA, other parts of the credit industry, business groups including the CBI, the Forum of Private Business and accountancy bodies.

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The Role of the Department of Business, Innovation and Skills in supporting industry

15. Given the current uncertain outlook of businesses, we think it is particularly important at the present time to give the private sector certainty about future tax and regulation. This includes financial and non-financial businesses. Banks need certainty about the regulatory demands so that they can make sure they are still able to lend to businesses. Firms need certainty to be confident enough into future growth.

The Effectiveness of existing Government assistance programmes

16. We will address these issues in our Taskforce report. Both the main schemes are useful and effective but the restriction of EIS funding to ordinary shares does lead to a real issue for angel investors who find themselves substantially disadvantaged when venture capital companies subsequently invest through other classes such as preference shares and subordinated loan stock. While there might need to be some controls introduced in order to manage tax avoidance, such as sector eligibility, broader eligibility of different investment vehicles would be helpful.

The Relationship between the Government, industry and the banks, and the role and performance of the Small Business Banking (sic) Forum

17. We understand that BIS intends to establish a forum for business groups only, inviting banks where the agenda suggests that participation would be helpful. For our part, we would certainly intend to continue the round table discussions held between industry and business groups, which would arguably supersede the need for any government-led fora.

The Performance and role of UKTI and ECGD

18. We welcome the higher profile exercised by and given to UKTI and ECGD. The UK needs both organisations to be more accessible, dynamic and innovative so that the re-balancing of the British economy towards export and high-end production can be supported. UKTI is in contact with the BBA and its members, and its delegations have been supported in many ways by our members operating overseas. We look forward to building up this relationship.

19. Figures provided to BIS by the British Exporters Association (BExA) suggest that the ECGD

still has some way to go before it can match the percentages of exports insured by its European peers. Our members believe that that there is potential for expanding ECGD’s range of services.

20. The BBA’s members advise that most of their clients trade uninsured and recognise that the

merits of insurance should be brought to the attention of clients, including by way of a partnership with ECGD.

21. With regard to the point below, making ECGD better known, accessible and attractive to

exporters, many trans-national manufacturers may be encouraged to site in the UK. Steps to Encourage Inward Investment into the UK

22. As suggested in our response to the Green Paper regarding Business Angels within the UK, awareness of the opportunities to invest in smaller private companies could be better promoted

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as a component of inward investment. Tax incentives are critical to the attractions of what can be high-risk and time-consuming activity but with significant value added to a growing company. Those incentives need to be constructed carefully so as not to distort the allocation of investment or the relationship between investor classes and early stage or later rounds. Investor readiness is a major issue.

Government policy as set out in A Strategy for Sustainable Growth and the Green Paper on Business Finance

23. See also our full response attached. In summary (and acknowledging some duplication in the points raised above), we welcome the Green Paper’s wider focus on the various financing options available to the UK corporate sector. Overall, we believe that the document provides a balanced account of the challenges for business finance in the current economic recovery period.

24. We also welcome the recognition in the Green Paper that conditions have improved and that

the majority of businesses can raise the finance they need. Our members are fully aware of the banks’ responsibility and indeed self-interest in ensuring that credits flows to viable businesses.

25. We agree that demand for credit from SMEs has cooled. Our statistics on SME lending show

that subdued volumes of new lending are offset by loan repayments from businesses seeking to reduce financing costs and reliance on borrowing by operating out of cashflow.

26. On the issue of the re-introduction of regional stock exchanges, we are sceptical that they

would be an effective way to foster local growth. At worst, their re-introduction could fragment and dilute the market which for smaller quoted companies is already illiquid.

27. Awareness of the opportunities to invest in smaller private companies could be better

promoted. Tax incentives are critical then to the attractions of what can be high-risk and time-consuming activity but with significant value added to a growing company.

28. Investment readiness encompasses a variety of characteristics including willingness to share

equity; appropriate standards of governance and the quality of presentation. No single answer exists and pilots undertaken with government support have shown that different approaches are effective with different businesses.

29. We strongly advocate measures to make sure that liquidity is available in the wholesale

financial markets to make sure that banks can refinance themselves. We will provide more detailed suggestions in our Taskforce report.

30. Banks offer a variety of finance solutions, including debt, invoice finance, asset finance, trade

finance and sometimes equity. Often businesses are unaware of non-debt products, and invoice finance is not a popular choice in some quarters. It is important that businesses learn more about the available options, including their advantages and disadvantages.

31. Our members’ experience with mid-sized businesses (especially between £10m and £100m

turnover) suggests that often businessmen are reluctant about letting further investors take stakes in their businesses, as they want to maintain full control over their companies. Further education about the opportunities to grow in this sector would be an advantage.

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British Bankers’ Association 24 September 2010 ANNEXES

1. The SME Lending Commitments 2. Pricing Paper - Small Business Lending - How Banks Set The Price For Loans To Small

Businesses 3. BIS/ HMT Green Paper response - Financing a private sector recovery