Examination of Witnesses (Questions 80
- 92)
WEDNESDAY 2 MAY 2001
MR DAVID
IRWIN, MR
PETER WALLER
AND MS
HA¤F
MERRIFIELD
Chairman
80. You have assumed responsibility for the
operation of the Small Firms Loan Guarantee Scheme; you have taken
it over. Was the implication that it could be done better? If
it could be, are you beginning to move towards that now?
(Mr Irwin) I guess we were given it because Government
wanted to bring altogether under one roof all of its business
support activities, so it would be slightly strange if the Small
Firms Loan Guarantee Scheme were left out and done somewhere else.
As I said a moment ago, I think it is important that we aim for
a complete spectrum of debt finance at every stage of the development
of a business. Almost certainly there are ways in which we could
improve the way that the Small Firms Loan Guarantee Scheme works.
We are currently looking at some of those with the banks as well.
I think it fulfils an important part of the total spectrum. Last
year we guaranteed something like £220 million worth of loans.
(Ms Merrifield) £240 million.
(Mr Irwin) Without actually looking at the figures,
I think we helped about 4,000 individual loans. The long-term
loss rate runs at about 18 per cent which actually, I think, is
not bad.
81. Do you think the turnover threshold is too
high?
(Mr Irwin) I guess it depends whom I talk to. Some
people say it is too high. Some people say it is too low. Some
people say, "Why should it be lower if you're less than two
years old?" We are currently looking at whether we should
stick with the current turnover level. There are some good arguments
for why £100,000 is too low for businesses who are less than
two years old. I happen to think that is a good argument for why
£250,000 is too high for businesses that are more than two
years old, but equally some businesses I talk to are just beginning
to reach that. So I suspect it is one of those areas where you
are probably sticking a pin in the drawing board.
82. I get the impression, from what you are
talking about in relation to SMART money and perhaps introducing
an element of recycling which would give you more resource to
make available to people, that you are working, in a number of
respects, along the lines of the SBA?
(Mr Irwin) Yes.
83. We have had several exchanges with them
and have been exposed to them both here and in the US. What would
concern us is that after all of the effort of people like yourself
rolling out the new organisation, we see at the end of the day
that you are just the DTI up in Sheffield. Perhaps you would not
wish to criticise the DTI in that way. We probably would, because
we think that you have got a tremendous opportunity here to break
new ground. Is that the way you see it as well.
(Mr Irwin) No, I do not.
84. You do not have to associate yourself with
the criticism of the DTI, but the other part.
(Mr Irwin) Firstly, a significant number of our staff
are based in London, and the regional offices and regional teams
are in other regions as well. So no, we are not the DTI in Sheffield.
Whilst I guess the DTI is, if you like, our parent department,
we are an investment agency, so I actually think we have a major
role which is not a DTI role, it is a small business role.
Mr Butterfill: Is not the threshold a little
arbitrary, though, because you can have some firms with—
Chairman: I think we are back on the Small Firms
Loan Guarantee Fund.
Mr Butterfill
85. Yes, on the 1½ million. You get some
firms with a high level of turnover but very small margins. You
get other firms with a lower level of turnover but very high margins,
and they may actually be the firms that you need to encourage.
Does there not need to be a more sophisticated way of looking
at it, apart from a threshold?
(Mr Irwin) The problem with all of these schemes is
that you could always have more flexibility just to bring in a
business who would really benefit from it and who just misses.
My personal experience of working with businesses has been that
any entrepreneur who has a good proposition and a determination
to succeed is very good at raising the cash. I used to use every
possible means to help a client to raise the money that they needed,
depending on what was available, sometimes depending on the time
of year, because a grant scheme had finished because it was December,
to find equity from wherever it was, designed to help the business
to do what the business wanted to do. In some ways part of the
challenge is to ensure that every adviser—I am not saying
they cannot at the moment—can actually help clients in that
sort of way to use the mechanisms that do exist to help clients
to do that which they want to do.
Mr Baldry
86. I want to follow on from both of those.
To what extent are you invited to make budget representations
either to the DTI or direct to the Chancellor on proposals that
might help small businesses? I am just picking up from the Small
Firms Loan Guarantee Scheme. My experience is that actually it
is quite difficult for business to raise money up to about £5
million. Over £5 million they are given money, but up to
£5 million it is actually quite challenging. People who could
give you money up to £5 million are often high net-worth
individuals, business angels. If one were more generous on the
tax relief for business angels, one might attract more venture
capital into the market than happens at the moment. I wondered
to what extent you make budget representations.
(Mr Irwin) We make representations through the collective
DTI process, but I also put forward my own budget representations
last time, with a number of proposals that I hoped would be accepted.
We shall continue to make our own budget representations. The
other part of your question—maybe it was not meant to be
a question—was in relation to raising finance. I think you
are right. The threshold actually depends whereabouts in the country
you are, so the further north you are, the further west you are,
the lower the threshold becomes. There is still a gap. That is
why we have already looked at the High Tech Venture Fund where
we have provided £20 million a year, £106 million has
come from the private sector, and in turn we are investing that
with a number of funds, so we are actually getting some very good
leverage for our limited contribution. We are also desperately
trying to launch regional venture capital funds as soon as the
EU will give us state aid clearance. We are optimistic that those
will enable the creation of funds whereby it will not go as high
as £5 million, but it will fill the gap up to about £500,000.
The fund managers recognise the gap is of that sort of order.
Then I am very keen that we should go on from there to provide,
if you like, early-stage funds which fill the gap between 100K
and 25K where there continues to be a gap which is only partially
met by angels. It is not always met by angels, firstly because,
again, the distribution of angels is patchy. It is pretty good
down here, but the further north you go the less good it is, until
you get up to Scotland where it is better. Also, some businesses
actually do not want that sort of relationship. So the distribution
of capital is very patchy there, and the early-stage funds we
hope will fill the rest of the gap.
Mr Chope
87. Following on from that, can I ask you what
your role has been in discussions about the changes to the Loan
Guarantee Scheme for foot and mouth business victims? I wondered
if you could let us know whether you have been taking any initiative
on all that and saying, "Well, it's not just a question of
being able to borrow more money, it's the fact that these businesses
have not actually got any income to pay their existing debts,
and they certainly don't want to borrow more money with interest
on it." I wondered whether you have been involved in articulating
the argument for interest-free loans to businesses that are hit
by this awful crisis?
(Mr Irwin) Firstly, the specific proposals for changes
to the Small Firms Loan Guarantee Scheme were negotiated by my
finance team, together with the banks, remarkably quickly, so
that we can give people a longer repayment term, we can give them
a capital repayment holiday. We have also broadened the scope
of businesses who could benefit from having a Small Firms Loan
Guarantee Scheme loan through the guaranteed mechanism, though
I agree with you that the last thing you want to do with a business
that has lost all its customers is saddle them with extra debt.
The current position is that we do not have the ability to subsidise
the interest on those loans.
88. No, I did not have that objective. All I
am asking you directly is whether you have been lobbying to have
the ability to do that, faced with this crisis, on behalf of small
businesses.
(Mr Irwin) It is one of the suggestions that we have
been putting forward.
89. You have been putting forward that suggestion?
(Mr Irwin) Yes.
Chairman
90. I have two questions to finish up with now.
We were in Glasgow University last week. We were talking to them
about the Proof of Concept Funding Scheme which is administered
by the DTI. One of the problems that they raised was that money
was provided in order that universities that have been successful
in their bidding could fund the next stage from research to the
point, you might say, a step below angels or that side of VC participation,
and that they felt that this scheme needed some fine tuning. Do
you get involved in the kind of to and fro on the debate about
that, in the sense that it is operated by the DTI, but in some
ways it ought to be funded by the Small Business Service, but
it is something they have kept a hold of, you might say? If you
were to be confronted with a scheme which some people say perhaps
is not working quite as well as it ought to, which is not within
your domain at the moment, how would you address that as an issue?
Would you say to the DTI, "Get your act together", or
to the machinery of government people, "We could do it better.
Leave it to us"?
(Mr Irwin) I am not actively going out looking for
schemes that I am not responsible for, but certainly where an
organisation might come to us and say that there is a scheme and
it could be done better, then I am feeding that back into other
parts of the DTI. The Proof of Concept Scheme is part of the Science
Enterprise Challenge Scheme, is it?
91. That is right, yes. It seems that different
academic institutions have had different fund management arrangements
on this, and the Glasgow Strathclyde one was not very happy. It
certainly perhaps was not as happy as the Imperial one has been,
but again one is talking about academia, and they can be just
as precious or as rigorous as anyone else (and I choose my words
carefully here). Certainly they had quite an impressive story
to tell, but this was one of the areas about which they expressed
concern. One last point is that we have been rather critical of
the DTI in the way in which (a) it sets targets, and (b) it never
seems to have any information sufficient to be able to measure
effectively whether or not you have reached it within a reasonable
timespan. Given that you have just started, that you have a goal
that by 2005 the UK can become the best place to start and grow
a business—the fingerprints of consultants are written all
over government publications—part of your responsibility
is to monitor the achievement of this goal. How do you do that?
Do you use the Government's criteria? Do you use international
benchmarks? How do you seek to measure this?
(Mr Irwin) You mean whether we have achieved that
vision specifically, rather than all of our performance?
92. Yes. The Business Creation Loan—just
take that as a simple, straightforward one.
(Mr Irwin) Firstly, there are a number of areas where
we are setting specific targets, and we have been taking some
time planning our strategy, doing our business plans. We hope
to be in a position to share that with you very, very shortly.
We are trying to set some broad areas where we should be specifically
setting targets. We are also conscious that we ought to be doing
a lot more to measure activity, even if we do not think it appropriate
to our targets. That is one of the areas where we are trying to
create a database to help us. In some of the areas—for example,
changes in attitude—we will be using third-party research.
You may be familiar with the Global Entrepreneurship Monitor,
for example, which does comparisons, and we partly fund its study
in the UK, but we will be using that sort of data because it gives
good, broad comparisons. We have a small research team and they
are currently charged with deciding exactly how we should determine
whether we achieve my vision. What is interesting is if you saw
the delightfully named "Not Just Peanuts" report published
recently by Andersens, where they have compared seven countries
in the EU with the US and I think Japan, but certainly seven countries
of the EU and the US, and have gone out and talked to a lot of
businesses across the spectrum who think they have already got
the best start that a business can achieve, so we have only got
half a vision to achieve. We do want to work with that sort of
organisation, to ensure that it is not just us who are saying
we have done it, but that actually we can demonstrate that it
is an independent view.
Chairman: I think there are one or two points
on which you are going to send us information. I have to say that
some of my colleagues have left, because we had anticipated this
session finishing somewhat earlier than it has done, but we are
very grateful to you for coming, and it has been very helpful.
I think a lot of the thinking of the Committee is very much along
the same lines as your own. As we are in the shadow of a general
election, we have to say that probably a successor Committee will
want to see you before too long. We do not subject arm's-length
agencies to meetings of this length every three or four months,
we tend to do it maybe once a year or so, but we are very grateful
for the time you have taken today and for the fulsome nature of
your responses. I hope that as many of us as possible will be
able to see you in the future. Thank you very much for coming.
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