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Delegated Legislation Committee Debates

Draft Financial Assistance for Industry (Increase of Limit) Order 2002

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Fourth Standing Committee on Delegated Legislation

Monday 21 January 2002

[Mr. Eric Illsley in the Chair]

Draft Financial Assistance for Industry (Increase of Limit) Order 2002

4.30 pm

The Minister for Employment and the Regions (Alan Johnson): I beg to move,

    That the Committee has considered the draft Financial Assistance For Industry (Increase of Limit) Order 2002.

As hon. Members will know, before the Government can incur expenditure, they must have the appropriate statutory power. Section 8 of the Industrial Development Act 1982 provides the legislative basis for many schemes that give financial assistance to industry, but the section is subject to a statutory limit.

The order, which will be made under section 8(5) of the 1982 Act, is required because the current statutory limit of £2.3 billion is likely to be reached towards the end of the financial year. Unless the limit is increased, that stated in the legislative basis for schemes set up under section 8 will be exceeded. The order will not alter the present use of the powers under section 8, but it will allow the Government and the devolved Administrations to continue to provide industry with financial assistance under existing schemes.

The assistance provided under section 8 has always been subject to a statutory limit. The Industry Act 1972 placed that limit at £150 million. That figure was raised many times until it was reset to £1.9 billion under the Industrial Development Act 1982. The 1982 Act allows the limit to be increased four times, by up to £200 million each time, by affirmative procedure with Treasury consent. This is the third time that the Government have sought parliamentary approval to increase the limit. The order will increase the limit to £2.5 billion.

Unlike section 7 of the 1982 Act, which allows us to offer financial assistance in assisted areas of the United Kingdom, section 8 has broad scope. It provides us with the wide discretion to provide financial assistance to industry, if it will benefit the UK economy or some part of it, if it is in the national interest, and if assistance cannot appropriately be provided in any other way. Ministers in Scotland and Wales have the power to use section 8 to fund their projects and schemes.

Section 8 can be, and has been, used in three ways. First, it has been used in national schemes that assist business, such as the small firms loan guarantee scheme, which is administered by the Small Business Service. That scheme offers guarantees on loans to small firms with viable business proposals that are unable to obtain conventional finance because they lack assets that they can offer as security against a

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loan. By providing a guarantee against default, the scheme encourages lenders to lend when they would not otherwise do so. We propose to use section 8 to support the Post Office's programme to restructure the urban post office network by funding compensation payments to sub-postmasters under the urban reinvention scheme.

Secondly, section 8 can be used for geographically targeted assistance, such as the enterprise grant scheme, which is a discretionary scheme for small and medium-sized enterprises in areas of special need. Part of the assistance offered under the Rover taskforce programme is related to section 8. The funding will enable Advantage West Midlands, a regional development agency, to work with business link operators to help businesses in the west midlands to modernise and diversify.

Thirdly, section 8 can be used for schemes that deal with the needs of particular sectors, such as the UK coal operating aid scheme, which aims to prevent the premature closure of viable mines due to short-term market problems and the iron and steel employees re-adaptation benefits scheme, which would enable the Government to make payments to redundant steelworkers. Section 8 is also used to provide the assistance that my right hon. Friend the Secretary of State for Culture, Media and Sport offers to the British Film Commission.

In addition to the small firms loan guarantee scheme, many of the newer schemes set up using section 8 are targeted at small businesses and were set up by the Small Business Service. The schemes include: a challenge fund to help resource community development finance institutions in England, which are organisations that lend to enterprises that banks consider too risky; the community development venture fund, which will make equity investments in growing businesses in disadvantaged communities that tend to be overlooked by established venture capital funds; regional venture capital funds, which are set up to provide small-scale equity to SMEs with growth potential; the business incubation fund, which will help to improve the chances of survival and growth of start-up and early-stage SMEs through increasing the availability and access to business incubation; and the United Kingdom high technology fund, which is to encourage institutions to invest in early-stage, high-technology businesses and to increase the amount of finance available for investment in technology-based businesses.

The National Assembly for Wales also uses section 8 to operate that country's regional innovation grants scheme and trade promotion schemes. The Assembly proposes to use the section for its new investment grant scheme. In total, 15 schemes, funds or programmes were, or will be, set up with section 8 as their legislative base. In addition, the general powers of section 8 permit assistance to be offered to individual businesses outside the framework of formal schemes. Most recently, my Department and the Scottish Executive made available a rescue package of up to £550,000 to maintain Atlantic Telecom's fixed wireless network for sufficient time to allow customers to switch to an

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alternative supplier and to prevent disruption to the activities and income of Atlantic's 2,000 business customers.

At the end of March 2001, the cumulative expenditure for all section 8 schemes since 1972 was almost £2.2 billion. For the present financial year, the forecast is that a further £179 million will be used. The present limit of £2.3 billion is therefore expected to be reached towards the end of March 2002.

The order will increase the limit to £2.5 billion and is expected to provide legislative cover to enable assistance under section 8 to continue for a further year. After that, the limit may be increased for a fourth and final time. Beyond that, further legislation will be needed. That could be primary legislation or an order under the Regulatory Reform Act 2001. The Government will introduce such legislation as and when it is needed.

As hon. Members may know, following my Department's review of its business support activities, resources will be refocused to ensure that all activities that we fund are effective, target customer needs and make a real contribution to the Department's central objective of driving up UK productivity and competitiveness. To develop the Department of Trade and Industry's new approach to business support, our existing support schemes, including those with section 8 as their legislative basis, are being examined. With that explanation, I hope that the Committee will approve the order.

4.39 pm

Mr. Philip Hammond (Runnymede and Weybridge): I congratulate the Minister on economising at least on civil service time by basing his speech almost entirely on that made in March 2000 by the Minister of State for Trade, who is now the Minister for Sport, when he introduced a statutory instrument on the subject. He in turn economised on civil service time by modelling the structure of his speech on that made by my former hon. Friend, Phillip Oppenheim, when he was an Under-Secretary at the Department. A production line of speeches is developing. I shall return to that point in a moment because of the slightly alarming fact that the production line seems to be accelerating quite dangerously.

When my hon. Friend the Member for South-West Hertfordshire (Mr. Page) spoke in the Committee of March 2000 that considered an increase in the limit, he noted the similarity between what the then Minister said and what was said in 1996 by the previous Administration. He confirmed the Opposition's broad support—I am happy to confirm that again—for ensuring that proper financial support is available to enable the United Kingdom's industry to be competitive and effective and, most importantly, that its competitive position is not undermined by state aid that is given elsewhere and cannot be matched in this country. Of course, in many cases, we must ensure that UK industry may take advantage of European Union funding, when it is available, and British government funding must be available to match such payments.

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Will the Minister tell the Committee whether his Department's review clarifies which, if any, of the 15 schemes that he mentioned will be axed in the streamlining process that has been announced? Although some of those schemes serve a proven and demonstrable purpose, I am more sceptical about some that are effectively state equity investment schemes. My limited experience—thinking back to the failed experiments of the 1970s—is that the state has never been a particularly good chooser of venture capital investments. The Minister might be able to tell us about the success record to date, the balance of the account of funds invested, the amount lost, and the current estimated value of equity investments.

Will the Minister explain something about the regional context? He mentioned that section 8 of the Industrial Development Act 1982 is used for industrial assistance that is given by the devolved Administrations? How does that relate to the overall budgetary process? Presumably, although those allocations would count against the £2.5 billion total limit under the Act, they also count against the block grant allocations to the devolved Administrations. The Minister's comments did not make the working of that clear.

My two principal questions for the Minister are driven by worries about ensuring that proper value for money is derived from the schemes. I do not think that he mentioned the estimated number of jobs that will be supported by outstanding grants and guarantees under section 8 of the 1982 Act. What is the current estimate of the number of jobs that are supported by such grants? Will he help less numerate members of the Committee by expressing that as pounds per job supported?

The Minister mentioned the UK coal operators assistance scheme. Will he tell the Committee how much of the past £200 million tranche has gone to the coal industry? How much of the next £200 million is predicted for that industry? I do not know whether I have interpreted the figures correctly, but the amount seems to be a significant percentage of the total amount that is authorised.

Will the Minister explain why the rate of spend under the section has spiralled out of control? In February 1996, the then Government wanted a £200 million increase to the limit on the grounds that the original limit of £1.9 billion in the 1982 Act was close to being exhausted. The debate in the Committee that considered that legislation made it clear that that default rate was one of the significant factors that influenced future expenditure projections. The Minister may be able to tell us about the default rate in relation to guarantees or failure to repay grants that are subject to repayment.

When the previous Administration sought that increase in 1996, the then Minister predicted that it was likely to last about two and half years. As it happened, that turned out to be a rather conservative estimate, as the Labour Administration did not come back to Parliament to ask for a further £200 million until

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March 2000. The then Minister said that it was expected that that increase would allow the Department

    ''to continue offering assistance for a further three to four years.''—[Official Report, Eighth Standing Committee on Delegated Legislation, 16 March 2000; c. 4.]

In January 2002, 22 months later, that pot of money, which was requested on the basis that it would last for a further three to four years, had been emptied. That certainly tells me that the Department's budgeting capability is not especially strong. It may also be a reflection of greater laxity in the way in which those assistance moneys are administered and controlled, or of the desperate state in which manufacturing industry has found itself under this Government's control.

Will the Minister therefore tell the Committee why the projection made by his colleague 22 months ago was so badly wrong? The Minister has told the Committee that some part of that funding will be used to support restructuring of the Post Office—to pay off sub-postmasters. Put brutally, the Minister is telling us that we are being asked to vote for a sum of money to close down—according to the prediction of one of the Sunday newspapers—approximately half of the post offices in the United Kingdom. That is of great concern to Opposition Members. Will the Minister put a quantum around that use of the funding? How much of the £200 million will be used to close down post offices?

What are the Minister's predictions for the future? A further £200 million tranche is available under the existing primary legislation. When does he expect to have to come back to Parliament to ask for that? There is an alarming rate of acceleration, and, looking at the trend, we can expect it to be soon. The first £200 million increase lasted for four years, and the second lasted for two years. On that rate of acceleration, we can expect the total amount available under the 1982 Act to have been exhausted in a further 18 months.

I was slightly alarmed to hear the Minister say that, once it has been wholly exhausted, the Government have the option of further primary legislation or using a statutory instrument under the Regulatory Reform Act 2001 to allow themselves unlimited scope for increasing the amounts under the 1982 Act. That would be an abuse of what Parliament intended when it enacted the 1982 legislation. I hope that the Minister will assure the Committee that he intends to present primary legislation to the House if the final limit of £2.7 billion envisaged in the 1982 Act needs to be exceeded.

On fraud and failure to enforce the repayment of loans, I notified the Minister's office of a case that concerned me. The Minister mentioned at the beginning of the sitting that the case relates to section 7, not section 8, of the 1982 Act. Technically, it is not about this section, but the principle is the same. How effective are we in ensuring that money that is handed out to industry with conditions attached remains within the Government's grasp if something goes wrong? I am talking not about a catastrophe that

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closes down the business, but fraud or an arrangement that puts the money beyond the reach of the United Kingdom authorities.

Will the Minister comment on the example of the Viasystems Group and its subsidiary, Viasystems Tyneside, which operated in the Tyneside area? The Government sank £17 million into it several years ago. The money was predicated upon continuous local employment of a minimum of 2,000 people. My understanding is that the company defaulted on its obligations under the aid, but the Government decided not to call in the funds. They hoped for an upturn that would underpin the business, thus retaining employment in the area. The Minister may correct me if that is wrong. In the meantime, the business was sold to a Cayman Islands entity and went into receivership in September 2001. Subsequently, the Department of Trade and Industry extended further assistance to the business in the form of support for a management buyout—again, to preserve employment on Tyneside. The sum of £17 million is repayable to the UK Government, but because of a manoeuvre that moved control of the original entity to the Cayman Islands, the Government cannot recover it. That significant sum is a substantial percentage of the £200 million that the Government are now requesting.

Will the Minister tell the Committee about his Department's arrangements to ensure that the assets and control of businesses that default, or are about to default, cannot be expatriated from the jurisdiction of the UK courts and the Department? I would be grateful if he would explain the measures that the Department can take to recover money if it is appropriate to do so.

Generally, we support the principles at stake, but we are concerned about the rate of spend. It may be accelerating for entirely positive reasons, but we would like reassurance that the increases are not the result of an accelerating rate of loss due to an inability to claw back money, such as in the example that I have just given.

4.53 pm


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