House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Letter and memorandum submitted by English Regional Development Agencies

Thank you for your invitation to submit evidence to the Treasury Select Committee inquiry into Regional Productivity. This response is on behalf of the English RDAs. It is additional and separate to any submissions particular regions may submit to the Select Committee specific to their own regions.

Improving regional performance on productivity is clearly central to the Regional Economic Strategies that RDAs have led and is an issue to which we have individually and collectively devoted considerable attention. This has been reflected in significant inputs RDAs and their partner agencies in the regions have already submitted to Government in relation to productivity and related PSA targets. These include the Regional Emphasis Documents ("RED"s) which will be pertinent to the key issues within individual regions on productivity as well as other policy areas.

This response focuses on key messages and established areas of agreement between the English RDAs on productivity. It is therefore focused on submission of the attached key pieces of work undertaken by the English RDA network:

(a) The shared RDA position statement on the PSA 2 Target on Regional Economic Performance.

(b) The RDA paper on Institutional Barriers in the Regions prepared for the Cross Cutting Review of Devolution and Decentralisation.

We formally request that each of these three papers is considered by the Select Committee.

Please contact Yorkshire Forward (in the capacity of lead RDA for work with HM Treasury) if you have questions that arise in relation to this submission.

I wish you well with the Select Committee's Inquiry and trust that you will find this a constructive and positive contribution.

Martin Havenhand

Chief Executive, Yorkshire Forward

26 January 2004

Annex

1. The Regional Development Agencies welcome the entirety of the PSA Regional Economic Performance Target to:

"Make sustainable improvements in the economic performance of all English regions and over the long term reduce the persistent gap in growth rates between the regions, defining measures to improve performance and reporting progress against these measures by 2006".

2. The RDAs collectively form a major part of the policy delivery system through which the Treasury, DTI and ODPM will pursue this target. We acknowledge that the target represents a major challenge—due to disparities within as well as between regions and the need for integration across Government departments. We see the task of reducing disparities as fundamentally about levelling up, not down.

3. Regional Economic Strategies provide an agreed and shared vision, agenda and priorities for each region to move forward. These strategies, combined with the delivery mechanism provided by the RDAs and other agencies, put the regions in a strong position to effectively utilise resources to deliver progress in their areas. Single Pot flexibilities afforded to RDAs are highly positive and further devolution of powers and funding to the regions will be central to meeting the disparities target.

4. Much regional activity is rolled out from national decisions and programmes or applied towards attaining similar outcomes in each region. To address disparities, many issues will therefore need to be tackled at the national level.

5. We recognise the need to understand the causes of differentials—including the spatial implications of Government policies, and their impacts on regional disparities. Potential impacts need to be addressed at the policy formulation stage with the full engagement of the RDAs.

6. Fundamentally, achieving the target will require commitment across all Government departments and a determination to effect any necessary changes in policy. The RDAs do not seek a national policy approach that focuses on some regions to the exclusion of others. There will, however, inevitably be the need to exercise some form of positive discrimination in certain policy areas to help raise the performance of the lagging regions.

7. We look forward to working with Government to devise and operationalise processes for "region-proofing" policy and to identify tangible early actions, as well as longer-term strategic measures, to deliver the PSA Target.

8. We are not seeking more funding from the PSA2 process, the focus is on "smart money" and delivering greater impact by more effectively utilising existing resources. This means more empowerment and flexibility being devolved from Whitehall to the regions.

June 2003

CROSS CUTTING REVIEW OF DEVOLUTION AND DECENTRALISATION: RDA INPUT

The RDAs have in their first five years made their mark on the economic landscape of the English regions, creating and safeguarding thousands of jobs, training tens of thousands of people, supporting thousands of businesses, investing hundreds of millions of pounds in deprived communities and attracting tens of millions of pounds of private investment. This has been made possible by a progressive development of the Government's regional policy from the establishment of RDAs, through the achievement of the flexible single pot to the recent increase in RDA delegation levels. RDAs have been well supported by many Government Departments.

In November 2003, HM Treasury invited the RDAs to "work together to identify the top 10 institutional barriers that they believe are currently hindering effective co-ordination of policy decisions and service delivery in the regions". This is a very timely and welcome opportunity to take stock of the changes needed to achieve the economic transformation of the English regions envisaged in the Regional Economic Strategies. The key theme running through the following recommendations is to achieve clarity between the Government's role in producing the national policy framework and the role of the RDAs in managing effective regional and local delivery and acting as the Government's change agents.

THE TOP TEN INSTITUTIONAL BARRIERS IN THE REGIONS (IN NO PARTICULAR ORDER)

1. Lack of a Broad Based Regional Policy

Barrier: Engagement with regional policy varies across Government departments. Too many decisions are taken by some central departments without regard to their impact on the regions, and without input from regional stakeholders. Wider ownership and genuine understanding of the regional agenda across departments (re-enforced by targets frameworks) and a better linkage between regional and national policy would improve this picture.

Examples: Decisions relating to R & D expenditure and the National Transport Plan.

Solutions:

(i) Departments should produce a regional policy statement, as recommended by the NAO report "Success in the regions", demonstrating a clear link between national policy and Regional Economic Strategies.

(ii) Greater RDA and regional input into business planning at the national level, recognition of the Regional Economic Strategies as key policy documents, and greater regional input into the design of national programmes.

(iii) Production of Regional Emphasis Documents to influence the 2004 Spending Review and RDA involvement in the DTI business planning process represent good practice to build on.

2. Target framework—too detailed and insufficiently owned and co-ordinated

Barrier: At national level, the limited departmental ownership of regional targets (notably the PSA Target on Regional Economic Performance) reduces regional engagement. Within regions, target frameworks can lack coherence—measuring the performance of different agencies (eg LLSCs, BLs and RDAs) in different ways acts as a disincentive to collaboration, and there is often insufficient interface between national and regional level targets. For example, Regional Economic Strategies are not fully reflected within the PSA or RDA target frameworks—which can result in activity being funding rather than strategy led.

Example: The National Skills Strategy aims to ensure flexibility and discretion at the regional level. If regional partners are to respond together to make this a reality in the regions, then Government needs to ensure that the national targets set for the key agencies responsible (RDAs, LSC, Jobcentre plus and Connexions in particular) are actually complementary.

Solutions:

(i) The Regional Economic Performance PSA Target is a good start. All key spending Departments should sign up to this, particularly DFT, DFES, DEFRA, DWP and DOH and the revised approach to aligning PSA targets with T2, 3 and regional targets.

(ii) In line with NAO recommendations in "Success in the Regions", parent Government departments and their NDPBs should develop joint PSA targets as part of the Spending Review. Complementary national targets for delivery agents should underpin all relevant PSA targets.

(iii) All targets should be well defined, focus delivery on the right outcomes, and operate to an agreed time frame.

3. Accountability—confusion over responsibilities and proliferation of partnerships

Barrier: There is a crowded field of different agencies and partnerships involved in delivery, with insufficient clarity on specific accountabilities in Whitehall, and through Government Offices. Issues that transcend normal central department responsibilities tend to suffer either from neglect or confusion over lead responsibilities.

Examples: Responsibility for enterprise, innovation, child poverty and childcare provision.

Solutions:

(i) Simple lines of communication on cross-departmental issues are required with clearly defined lead responsibilities and delivery structures.

(ii) RDAs and GOs to review solutions.

(iii) The review of the targeting and tasking framework, and the review of PSAs in the spending review, should be used to simplify accountability on cross Departmental issues.

4. Lack of distinction between policy formulation and delivery

Barrier: Central Government should set the policy framework for regional and local players to deliver change, focusing on required outcomes. The development of policy centrally is often confused with the need to overly define and manage the mechanics of delivery. Many RDAs are working through sub-regional partnerships and Local Strategic Partnerships to integrate regional and local delivery.

RDAs clearly recognise Departmental responsibility for policy. They would like to be involved appropriately in policy formulation in order to advise on the link between policy and delivery. In many cases RDAs will take responsibility for delivery and determine the most appropriate regional/ local mechanism, wherever possible utilising existing resources.

Example: Recent business support and skills pilots and the Regional Skills Partnerships guidance show how policy development has become blurred with defining and managing delivery from the center. See case study.

Solutions:

(i) Involve RDAs, through the lead role mechanism, in policy formulation as advisers on delivery.

(ii) Improve accountability through a clear separation of roles between policy development and delivery, and allow those responsible for delivery at the regional and local level to determine how best to implement the required outcomes.

(iii) Existing delivery structures which fit regional circumstances such as Local Strategic Partnerships and sub-regional partnerships should be utilised. Opportunities for rationalising existing delivery structures should be taken, building on the Better Regulation Task Force report on Local delivery of National policy.

5. Excessive guidance and regulation

Barrier: Unnecessary guidance and regulation in the public and private sectors reduces the productivity of businesses and the ability of the public sector to operate business-friendly decision making structures. Central departments have a tendency to specify excessive detail; including on targets, mechanisms, appraisal and monitoring and reporting arrangements.

Examples: Constraints on RDAs include the enforced 50/50 split on capital: current expenditure which limits flexibility, limited borrowing powers, the role of the CPRG in "re-approving" regional projects and obstacles to establishing subsidiaries and overly specific corporate planning guidance.

Solutions:

(i) Implement the NAO's recommendations in "Success in the Regions" on streamlining funding mechanisms and reducing bureaucracy and the recommendations of the Better Regulation Task Force.

(ii) Specific RDA constraints need to be addressed, including greater flexibility to draw down funds as capital or current in order to meet regional priorities. Single VAT recovery for all RDAs rather than separate negotiations.

(iii) Existing approval requirements in the Financial Memorandum should be reviewed. SPAG should be used across different Departments eg Home Office and DEFRA post Haskins implementation.

(iv) Encourage RDAs and other agencies to highlight examples of unnecessary guidance and regulation rather than seeking ways of working round contstraints.

6. Too Many Initiatives—hampering effective delivery and confusing customers

Barrier: At any one time there are simply too many initiatives emerging for potential beneficiaries such as business customers and delivery bodies to digest sensibly, sometimes further complicated by non-coterminous boundaries and different planning cycles. Since many of these initiatives involve some degree of organisational change, for which there is a cost, the value for money for many is extremely limited. There is often a real lack of engagement with those expected to deliver and to benefit from the change that initiatives are intended to deliver.

Example: Lambert Review recommendations on better marketing opportunities and programmes to business (such as R&D tax credits and Knowledge Transfer Partnerships) and the Haskins review call for customer focus. The Business Support review has been successfully carried across Departments and aligns different policies and approaches within a Department.

Solutions:

(i) New initiatives developed in Departments should be linked to the RDA's own corporate planning and resource commitments. Departments should co-ordinate better to identify resource implications for delivery agents. If RDAs are involved early in the policy development process to advise on delivery mechanisms, then emerging requirements can be reflected in their corporate plans.

(ii) RDAs might advise on marketing opportunities to customers.

7. Multiplicity of Funding Streams

Barrier: Despite some welcome reductions, there are still too many funding streams, particularly for Areas Based Initiatives (ABIs), which delivery partners need to access. No processes exist to ensure that large capital developments in local areas—health, education, economic development, etc—are co-ordinated over a long term horizon, both at the planning and implementation phases. This is inefficient and time consuming with resources and effort diverted away from the implementation task. The interface between the single pot and EU Structural Funds is a source of some frustration and RDAs have made great efforts to overcome these barriers by integrating appraisal systems and tackling the "n+2" spending issue.

Examples:

(i) In Cumbria, the Rural Regeneration Company and its partners have had to negotiate a complex maze of some 70 funding streams, often incompatible, and develop separate monitoring and reporting procedures for each.

(ii) Objective 2 funds and single pot funding have different definitions for jobs created.

Solutions:

(i) RDAs with DTI and GOs to undertake a further rigorous review of funding streams in related areas with the presumption that they should be merged/abolished unless a positive case for their retention can be proven, and a presumption against the introduction of new, separate funding streams.

(ii) RDAs are pioneering joined up investment planning that could provide much more effective use of taxpayers' money and agencies should be directed to participate in this process.

(iii) A much stronger role is needed for RDAs in being able to integrate the commissioning, appraisal, development and monitoring of projects requiring EU and single pot funds. This supports the NAO's call for support from departments to maximise synergy between the activities of different public sector agencies in the regions.

8. Insufficient Empowerment and Flexibility

Barrier: Flexibility is the biggest advantage of the RDA's single pot. However, the rules governing how key agencies such as local authorities, universities and Local Learning and Skills Councils should spend their resources act as a disincentive to collaboration. There is not yet a clear and consistent rationale behind Government policy for placing responsibilities at different national, regional and local levels. Applying the principle of "constrained discretion" and the process of corporate planning would allow Ministers to "buy" outcomes from local agencies. Local Government in particular should be enabled to deliver key elements of Government policy. The devolved decision making review provides an excellent opportunity to further address the issue, as does the Haskins Review recommendation's about bringing delivery closer to the customer.

Solutions:

(i) Departments, led by HM Treasury, to work with RDAs to identify those agencies (eg Local Government, LLSCs, Universities) who could have greater flexibility to deliver Regional Economic Strategies following an assessment of their capacity and capabilities. For instance greater devolution of Learning and Skills Councils budgets and policy (not just management) and a single pot for Government Offices.

(ii) Applying the principle of "constrained discretion" and the process of corporate planning would allow Ministers to "buy" outcomes from local agencies.

(iii) NWDA to present to DTI and DFES Ministers an update on the skills and business support pilots.

9. Evidence Base—insufficiently developed and utilised

Barrier: There is still a poor evidence and factual basis underpinning much of policy development and resource allocation. Some parts of the public sector do not effectively monitor where and on what their resources are being spent and the benefits they deliver. The statistical basis, particularly at regional level, is starting to improve following the Allsopp review, but there remains a lack of reliable and timely regional economic data. Evaluation is too often considered too late in the policy development process. The effectiveness of different funding streams and interventions should be assessed, with sharing of subsequent learning and good practice to assist further delivery.

Example: the difficulty faced by the PSA team seeking to develop proposals for the reducing regional disparities PSA target.

Solution:

(i) Implementation of the NAO recommendations on performance monitoring and evaluation, and the Allsopp findings on better statistical information.

10. Failure to Follow-up and Implement Review Findings

Barrier: Government has a good record in scrutinising policies and initiatives. There has been less enthusiasm, however, for implementing the recommendations of those reviews over a longer period. This reflects a risk-averse culture in some parts of Whitehall that does not always rise to the challenge of adopting radical change to meet customer needs. Key messages emerging from regions in connection with RES revisions and submissions to Government, eg on the importance of transport investment, should be fully considered. A good test of this will be the Government's determination to implement the findings of the Haskins report.

Solutions:

(i) Departments to undertake an audit of recent review recommendations and progress in implementing their key findings.

(ii) Reviews should be required to produce very specific recommendations for action and departments should be required to respond within prescribed time periods, as with normal financial audits.

(iii) There should be openness to proposals for radical institutional changes.

RDA BRIEFING NOTE TO HM TREASURY ON THE 2004 BUDGET

INTRODUCTION

1. The English RDAs very much welcome the opportunity to input into the Budget development process again. We see this meeting as part of a constructive and on-going dialogue with the Treasury building on previous Budget submissions, submissions of regional priorities to the 2004 Spending Review process and helping to address the joint DTI/HMT/ODPM PSA target on regional economic growth.

2. In preparing this report for discussion with the Chancellor, as last year, we have:

— Not sought additional resources (for ourselves or others), rather focused on areas where monies can be better redeployed.

— Focused on highlighting areas where changing the culture of government or how government is organised (or managed through targets) could make a difference.

3. The Treasury's Pre-Budget Report 2003 states "Recognising the pivotal role that they have in promoting economic development, the RDAs have been asked to contribute to the development of Budget 2004 in five areas:

— barriers to business start-ups;

— provision of government services to small businesses;

— access to finance for small and medium sized firms;

— barriers to skills provision; and

— knowledge transfer between businesses and universities".

4. The attached briefing papers have been produced collectively by the English RDAs in response to a request from the Treasury for the contributions sought above. The report follows the structure of these five topics. There is a lot of ground covered in the paper. We have therefore flagged up overleaf some specific points we would wish to form the focus for discussion with the Chancellor and his officials on 21 January 2004.

RDA INPUT INTO 2004 BUDGET

Question		Suggested Discussion Points for meeting on 21 January 2004 between RDA Chairs and the Treasury
Enterprise	1.	There remains a need to simplify and reduce the administrative burden for small businesses. We welcome the proposals announced in the pre-Budget Report for a review of the regulatory and tax structures affecting small businesses, especially the VAT changes, and the ongoing review of taxation administration.
	2.	We also welcome the review of welfare benefits for new entrepreneurs and encourage the vigorous pursuit of this agenda. This could include piloting the "Offer in Compromise" US model of benefits and tax amnesties for firms moving into the regulated economy.
	3.	Encourage the European Union to develop a block State Aids exemption for measures to support the development of entrepreneurship.
	4.	Focus enterprise support more on disadvantaged areas, for instance by providing a higher rate of effective subsidy for use of business support services in the designated Enterprise Areas or agreed regional sub-sets of these.
Business Support	1.	Extend the Business Link Pilots to all regions to improve co-ordination of publicly funded business support services.
	2.	Regionalise the approach and services for business support for rural and land-based business in line with the recommendations of the Haskins report.
Funding Gaps	1.	Ensure a strong regional dimension to the proposed "pathfinder" round of Enterprise Capital Funds (funding up to £2 million be SME).
	2.	Consider increasing the incentives for Venture Capital Trusts to provide equity funds for smaller investments (under £100k).
	3.	We welcome review of Small Business Loan Guarantee Scheme proposed in the Pre-Budget Report. Emphasise the need for Banks who operate the scheme to adopt consistent approaches to lending.
	4.	Consider encourage regional co-ordination and brokering of business angel networks by fiscal incentives for Business Angels to join such networks.
	5.	Urge caution in the proposed development of NIC on SME dividend payments, any changes must not adversely affect the incentives to invest amongst serial entrepreneurs and professional investors.
Skills	1.	Continued commitment to "regional devolution" of skills planning and policy, but allowing each region to develop its own structures, building on what it has already developed.
	2.	Far greater devolvement to region of LSC budgets and policy (not just management).
	3.	Creation of greater regional flexibility in LSC, Jobcentre Plus and Connexions target framework
Innovation	1.	Need to provide certainty and permanence for HEIs for the third stream of HE funding (HEIF) to enable HEls to invest in core services.
	2.	Need to regionalise the allocation of HEIF to help the co-ordination with regional innovation and science strategies. RDAs should be involved in decision on allocations of funds within their regions.
	3.	Regional HEIF should explicitly support "regional shared services", but with the best model determined in each region.

1. What are the barriers facing business start-ups, and what are the most effective ways of fostering more start-ups in deprived communities?

1.1 A wide range of issues lies behind the low level of enterprise start-ups in the UK economy in disadvantaged areas. Underlying culture and attitudes towards enterprise are highly prominent in the mix, however the operating environment in which business are expected to emerge and the support which is offered to would be entrepreneurs are also important. We set these out in our submission to the Treasury for the 2003 Budget.[11] In addition to these point made last year we have identified the following additional factors:

Education system:

Legislative and regulation framework

Information

Advanced Start-Up Support

State Aid Rules

1.2 A set of additional factors comes into play with enterprises coming from or operating in deprived communities. These barriers and the solutions are clearest when one considers the target groups affected and the underlying causes of deprivation:

Youth

Ethnicity

Gender

Inner City

Rurality

Benefit Dependency

1.3 The recent City Growth Strategy pilots have come up with some quite innovative projects and approaches to tackling these issues.

POSSIBLE WAYS OF TACKLING THE ISSUES

1.4 A number of broad developments to improve enterprise support would be welcome to address the generic issues identified above:

— The coherence of start-up services should be pursued by reducing the large number of small scale public and private sector initiatives and providing a new coherent branded regional start-up offer. The RDAs have already input into the draft national start-up strategy developed by the SBS, which provides an important starting point to build upon.

— Better intelligence on the pattern of start-ups, what works and who to target is required. Nationally accepted standards of, and approaches to, enterprise support would be welcome. Better information is also required on the real extent of suggested barriers such as the burden of student loans.

— The UK government should encourage the European Union to develop a block State Aids exemption for measures to support the development of entrepreneurship (along the lines of the present ones for SMEs and research).

1.5 We welcome the various initiatives taken by the Government to support enterprise in disadvantaged areas. These have, in the main, been "place and property" based initiatives, rather than people based initiatives. To effectively address the low levels of enterprise in target deprived communities we must address the people issues.

1.6 We welcome the review of welfare benefits for new entrepreneurs promised in the Draft Action Plan for Small Businesses and encourage the vigorous pursuit of this agenda. Specific attention should be focussed on providing pension incentives, benefits repayments (activated at an agreed threshold of income or success), assistance with care to maintain important family stability and benefits tapers. Many businesses could potentially be drawn from the informal economy through adoption of the Offer In Compromise concept used in the US and proposed by the SBS. The scheme, which should not be presented as an amnesty for those wilfully avoiding their legal obligations, has proved very effective in securing new tax registrations in the US where the IRS now has a backlog of 90,000 offers.

1.7 A key issue is a lack of role models or informal sources of help/advice. A network of established entrepreneurs, acting as mentors from target communities, would establish a mechanism for harnessing the power of demonstration and provide an accessible source of hands on advice to would-be entrepreneurs. The New Entrepreneurship Scholarship initiative (funded by DfES) is an innovative scheme that should be expanded and promoted nationally through the Federation of Enterprise Agencies. This commitment should be expanded to consider how the national curriculum could encourage greater levels of enterprise in schools, colleges and universities.

1.8 The drive for better intelligence should also attempt to better understand the different patterns of enterprise outcomes in different communities to inform policymakers and service deliverers.

CONCLUSIONS FOR DISCUSSION WITH THE TREASURY

  1.9  The key points for discussion are:

KEY POINTS

1.  A review of the regulatory and tax structures affecting small businesses would be welcome to identify areas for simplification and reducing the administrative burden. We welcome the proposals announced in the pre-Budget Report in this regard, especially the VAT changes and the ongoing review of taxation administration.

2.  We welcome the review of welfare benefits for new entrepreneurs promised in the Draft Action Plan for Small Businesses Government and encourage the vigorous pursuit of this agenda. This could include piloting the "Offer in Compromise" US model of benefits and tax amnesties for firms moving into the regulated economy. In addition there is a need to ensure more consistency between different anus of government in its treatment of non-compliant firms.

3.  Encourage the European Union to develop a block State Aids exemption for measures to support the development of entrepreneurship.

4.  Focus enterprise support more on disadvantaged. areas, for instance by providing a higher rate of effective subsidy for use of; business support services in the designated Enterprise Areas or agreed regional sub-sets of these.

2.   What more can be done to improve, from the customer's perspective, the integrated provision of government services to small businesses at the local level?

Introduction and Key Issues

2.1 The business support market has many funders and suppliers each with their own priorities and chosen route to market which leads to proliferation of services of variable quality. This fragmented approach inevitably causes confusion and duplication resulting in a poorer offer to the customer. This is compounded by a multiplicity of brands and products operating in the market and lack of clarity between the functions of policy, strategy, delivery management and ultimate delivery. These problems occur in all areas but have been highlighted recently in rural areas in the Haskins Review.

2.2 Public agencies are frequently not the first port of call for most businesses. The annual London Business survey of SMEs' preference for external advice found 43% turn to accountants whilst 34% opt for banks, followed next by Trade Associations (9%) and Business Link (8%).

2.3 In essence the key factors to improve supply for clients are:

— Discussion continues on the balance between a single access point for services and sign-posting to expertise. Nevertheless, there is an acknowledged need to address confusion in the marketplace and improve knowledge of who does what, even among service providers.

— Better connectivity between public and private sector advice sources (especially banking and financial sectors) is required as is greater clarity on the allocation of responsibilities (within the public sector) for strategy and delivery.

— Public support services are often overly supply driven and designed with insufficient attention to customer needs. This also gives rise to a tendency to reinvent the wheel instead of focussing on what is already in place and learning lessons.

— The promotion of business support services is hampered by confusing branding (Business Link or SBS or DTI) which adds to the impression of proliferation among clients.

— Public sector support providers have consistently faced challenges recruiting individuals with credibility and respect in the business community who are able to operate in a public sector environment.

— These issues were captured in a wide-ranging review of business support provision in the South West in 2003, with key messages including: perceived complexity of support, poor awareness of public support, low credibility and a degree of duplication of provision artificially supported by public funding.

2.4 RDAs support the efforts by DTI to streamline provision and to promote all services behind the Business Link brand.

POSSIBLE WAYS OF TACKLING THE ISSUES

2.5 RDAs, working with others, are making progress in improving the situation and rationalising provision.[14] The recent work by DTI as part of the Innovation Review to streamline the number of innovation products to just 10 is also a welcome step in the right direction. However, more needs to be done. The issues highlighted above could be partly addressed through introduction of the following proposals:

— The move to Business Link as the main access point for Government funded services is sensible. DTI could increase the effectiveness of its supply side interventions by extending Business Link pilots to all regions, with the region defining the best approach to implementation.

— Stimulating RDAs and others to link the skills & business competitiveness agendas, building on the lessons of the pilots. All public sector funds used for business support should be brought within the responsibility of RDAs including LSC workforce development budgets and ERDF.

— Redeploy resources to offer a "no wrong door" approach to businesses, providing advice across areas of the spectrum.

— Rather than being a deliverer of services Business Links should consistently adopt a brokering role which sees them direct central government funds at signposting, quality control, improving access to private advice and encouraging additional private capacity. Business Links should assume responsibility for promoting all forms of support and all government departments/agencies with a responsibility for or contact with business such as Inland Revenue, Jobcentre Plus.

— Improved consultation between regions and the centre at a pre-policy development stage both in terms of initiatives and policy would ensure that regional priorities are aligned with national initiatives/policies in regional strategies. Implicit in this approach must be a recognition that each RDA may have differing needs and priorities and require different levels of resources to meet regional/national objectives. This principle should be extended to central government departments to join up the range of departmental responses.

— Any rationalisation of public services should consider how at the same time the private supply of business support can be encouraged.

CONCLUSIONS FOR DISCUSSION WITH THE TREASURY

  2.6  The key points for discussion are:

KEY POINTS

1.  Extend the Business Link Pilots to all regions to improve co-ordination of publicly funded business support services.

2.  Regionalise the approach and services for business support for rural and land-based business in line with the recommendations of the Haskins report.

3.  Jointly investigate greater scope for innovative approaches to supporting the market for good quality SME advice (eg voucher schemes). [This approach should be capable of being developed regionally so long as steps to regionalise the funding and approach to business support are taken.]

3. What experience is there of the funding gap for small and medium sized enterprises? Are firms fully aware of the financing options available to them?

What are the Funding Gaps?

3.1 The existence of some funding gaps—where market failures lead to a lack of finance for firms whose growth could contribute to improved productivity and economic performance—has been the experience of all RDAs and their partners. The main reason for the market failure is the cost of information for lenders on the potential value/risks of possible investments. It is not always a supply side issue, often lenders/investors point towards a lack of good quality businesses and business propositions or a lack of understanding of the various financing options. A recent consultation paper issued by HM Treasury and the SBS[15]acknowledged the existence of market imperfections faced by some SMEs in raising the finance they need to support early stages of growth. The paper identified one key gap being for risk capital (ie equity funding) to finance growth between £250,000 (upper end of most business angel investment and £1 million (lower end of most Venture Capital investments).

3.2 Overall the paper suggests that for most SMEs access to finance (especially bank finance) has generally been improving in the UK and has become a less significant barrier to business growth. The recent major increases in house prices and so personal equity may be a contributory factor here. However, recent research in London (the London Annual Business Survey) found that 25% of those firms unable to invest as much as they desired cited access to external finance as an issue—the most significant reason given after market conditions.

3.3 There is no complete consensus amongst RDAs and their partners as to what are the main funding gaps for SMEs. In part this reflects slight regional variations in experience especially of Venture Capital. Gaps clearly vary by the life-cycle stage of the firms, their size and sector. Not surprisingly, RDAs' greatest concerns are over gaps for actual or potential high growth businesses in early stages of development. To summarise the experience of RDAs, the key points are:

— First, for companies in the start-up stage with high growth potential, typically technology based companies, there are still significant difficulties in accessing finance up to £100k. This is a particular issue in terms of seed capital for very early stage commercialisation of intellectual property, in particular new technologies and creative industries.

— Second, all RDAs identify from research carried out for them and from their experience of dealing with SMEs looking to expand an equity funding gap for high growth/technology focused SMEs. The precise nature of this gap varies however—possibly as a result of the different degrees of activity of Venture Capital in different regions. However, the consensus is that it is in the range £250k/£500k up to £2 million. AWM note that there has been only one sub-£1 million private equity deal in the West Midlands in the last 12 months.

— Several RDAs have seen evidence that Venture Capital funding (for new or follow on investment) is increasingly difficult to achieve for deals below £2 million—this is consistent with the evidence identified by HM Treasury and the SBS. As SEEDA points out "the small number of Venture Capitalists who are prepared to look at smaller deals can afford to be very selective about the business that they do, businesses with "good" rather than "exceptional" potential are not being funded'. ONE report that Venture Capitalist interest in start-up finance has dropped. Many Venture Capitalists are focussing on existing investments as exit routes (eg IPOs) have largely disappeared since the end of the dotcom boom.

— It is worth noting that the experience of the East of England is that the real equity funding gap is rather lower: from £50k possibly up to £500k. They are concerned that public support for Venture Capital funding over £500k could be "subsiding the existing Venture Capital market". However, this region is one of the best served by Venture Capitalists.

3.4 The RDAs welcome the steps that have been already taken by government to help encourage more private investors to invest in Venture Capital funds (eg VCTs[16]) and to help directly bridge the equity-funding gap, (such as the support for Regional Venture Capital Funds, the Early Growth Fund and HEI focussed support such as the University Challenge Fund). We also welcome the `pathfinder' round of Enterprise Capital Funds (ECFs), subject to State Aids approval, announced in the pre-Budget Report[17]. However, we are keen to see a strong regional dimension to these ECFs.

3.5 RDAs are working with SBS and others to try and improve the supply of finance. Different RDAs are adopting different approaches, for instance AWM is developing a web-based "Local Business Exchange" to try and link retail investors with regional SMEs for whom the cost of finance via AIM or LBX is prohibitive as part of its wider Access to Finance Framework.

3.6 Many regions are supporting Business Angle networks[18] to try and pool Business Angel investment to help bridge the equity funding gap as individual Business Angle investment tend to be small. Yorkshire Forward notes "research and practical experience has shown that businesses are particularly equity averse in the region, whilst restrictions within the Enterprise Investment Scheme act as a deterrent to investors", they advocate improved flexibilities and incentives in the taxation system focused on Business Angels. Specialist funds have or are being launched for specific sectors.[19]

3.7 Retained profits are an important source of finance for growth in all firms, especially SMEs. RDAs support the need to close tax loopholes whereby some owner managers pay themselves and spouses dividends instead of salaries to avoid NIC. However, RDAs are concerned that current proposals to apply NIC to dividends paid by owner manager businesses could have an unintended adverse impact on the ability of SME owners to finance expansion (often in other businesses) via dividend payments.

AWARENESS AND USAGE OF FINANCING OPTIONS

3.8 The apparent problem with access to finance and gaps is not purely on the supply side. EMDA report that the "investment readiness" of many firms seeking funding is poor. In London, research on Objective 2 Access to Finance projects identified the poor degree of investment readiness of SMEs. Many regions are working with the SBS and Business Links to tackle these issues.[20] It is undoubtedly the case that many firms seeking to grow are unaware of the financing options available to them—with bank overdrafts seen as the norm. We welcome the Pre-Budget Report's commitment to work with RDAs on the findings of the "investment readiness" demonstration projects. We believe that this is an area where better information for companies and for intermediaries is vital.

3.9 There is also a big cultural issue around many SMEs aversion to equity finance. Two large scale pieces of research for SWRDA confirm this point. SWRDA also note that the Clearing Banks could do more to educate their SME customers on the benefits of equity finance rather than debt fiancé (for which their staff are incentivised to sell).

3.10 A number of RDAs have also received feedback from their partners on the adequacy and issues associated with existing government support aimed at aiding SME access to finance. There is a particular problem with the Small Firms Loan Guarantee scheme. SEEDA's experience is that companies are aware it is available but find it difficult to find banks that understand the scheme or indeed are willing to use it. They report there is a high degree of inconsistency between the banks in their approach to security requirements.

CONCLUSIONS FOR DISCUSSION WITH THE TREASURY

  3.11  The key points for discussion are:

KEY POINTS

1.  Ensure a-strong regional dimension to the proposed `pathfinder' round of Enterprise Capital Funds (funding up to £2 million per SME).

2.  Consider increasing the incentives for Venture Capital Trusts to provide equity funds for smaller investments (under £100k).

3.  Continue to support and extend improvements in information to SMEs and advice to intermediaries on financing products and how to become investment ready.

4.  Welcome review of "Small Business Loan Guarantee Scheme proposed in the Pre-Budget Report. Emphasise the need for Banks who operate the scheme to adopt consistent approaches to lending.

5.  Consider encourage regional co-ordination and brokering of business angel networks by fiscal incentives for Business Angels to join such networks.

6.  Urge caution in the proposed development of HIC on `SME dividend payments, any changes must not adversely affect the incentives to invest of serial entrepreneurs and professional investors.

4.   What are the barriers to joined-up working between local and regional agents providing skills in line with needs at the appropriate regional and local level?

Introduction and Key Issues

4.1 The English RDAs welcome the important steps that have been taken since the last Budget to encourage a more integrated and demand led approach to skills. We welcome the launch of the National Skills Strategy in 2003 and, in particular, the role now envisaged for Regional Skills Partnerships (RSPs). The Skills Strategy and the specification for Regional Skills Partnerships provide further impetus for aligning skills planning in the regions. RDAs are working closely with our partners in developing our RSPs. Wherever possible this builds upon the existing structures, particularly those developed through our FRESA processes and in some cases the Adult Skills Pilots.

4.2 The National Skills Strategy gives a clear indication that regional targets may often be more appropriate in the skills arena than departmental/national ones. However, it is less clear on the commitment from the departments concerned on how regional partnerships may apportion mainstream funding to deliver against regional targets. If this is not forthcoming the FRESA process and the developing RSPs will fail to make the step change in delivery called for in the Skills White Paper. Recent guidance issued to RDAs and other in developing RSPs explicitly acknowledges the tension between driving forward the skills agenda at a regional level and through national priorities.

4.3 There are at present three major blocks to successful progress for RSPs and in the implementation of FRESAs:

— National targets which differ for key agencies responsible for tackling the skills agendas (especially RDAs, the LSC, Jobcentre Plus and Connexions).

— A lack of flexibility of funding associated with the national targets for national bodies.

— Targeting and planning cycles mismatches.

4.4 National Targets and Flexibility of Funding. Our FRESAs have led to the identification of very specific priorities which need to be addressed to improve the skills and therefore the productivity of the workforce. Partners in the FRESAs, in Adult Skills Pilots and the new RSPs are responsible for significant mainstream funding from across government. However, these funds are almost entirely tied to national targets which do not necessarily match regional priorities. In each region, with partners, RDAs are now able to identify regional targets. But until we have the ability to apportion appropriate budgets to them, priority actions can only be funded from partners' flexible budgets. Specific examples of these problems include:

— The obvious example of Jobcentre Plus targets, which can provide a disincentive for skills development—they get 12 points for a job entry and 0 points for skills development (which will only impact on Jobcentre Plus retention points). This is something the National Employment Panel has been examining and will recommend changes, perhaps a shared PSA target for LSC & Jobcentre Plus addressing progression into training.

— National workforce development targets for NVQ Level II/III (and MA/AMA programmes) are restricted to age 25 and under. This has created a problem in EEDA's region which, as others, has an ageing workforce (average age over 35). Their priorities, identified via the FRESA process, are to focus on the existing (and older) workforce but local LSC partners are unable to commit mainstream funding to this priority.

— Young People. The EEDA region is experiencing high employment and low unemployment, as are parts of many other regions. They have good school results at GCSE but very high drop-out rates at 17 (1st year A-level). These young people go straight into low-value-added employment and are lost to either vocational or academic pathways. Connexions funding is tied to targets solely aimed at young people not in employment, education or training (NEET). This cohort is small in the EEDA region and much smaller than the numbers dropping out at 17. Again, Connexions partners are unable to properly address this regional priority from their funding streams due to their nationally driven target.

— The work of the National Employer Panel has also highlighted number of perverse incentives for government funding aimed at helping those out of work access employment. For instance Jobcentre Plus targets encourage a focus on aiding early entry into employment (which might be short-lived) for the unemployed, rather than training which might lead to longer term success in the jobs market.

4.5 Proposals for a slightly more regional approach in the LSC (with regional lead Executive Directors) may help address a few of these problems. However, the lack of consistent regional structures and protocols holds back co-operation. We acknowledge that there already exists a degree of local and regional flexibility in the LSC and Jobcentre Plus. However, the RDAs believe that for RSPs to really be able to deliver labour market responsive and a joined up approach to skills across agencies will require much greater regional and local flexibility to set targets to create the "space" for inter-agency co-operation. The work in the North West suggests that there are considerable benefits to a more integrated approach to business support and adult skills and that the Joint Pilot approach should be extended to other regions.

4.6 Targeting and Planning Mismatches. As mentioned above, there is a mismatch between national, regional and local targets and funding. National targets can also be revised too frequently to enable their impact to be properly measured. This problem is further complicated by a departmentally driven mismatch of planning/finance cycles. Regional partners often have to reflect local partners business plans (and vice versa) yet the timing of each partner's planning or financial cycle is unaligned at the Whitehall level. For example the RDAs' Corporate Plans require the inclusion of the LSCs learning targets for Level II/III. At the time when we were seeking this information, national LSC had not actually announced them. The financial planning years for the EU (Jan), UK Government (April), HE academic years (Oct) and FE academic years (Sept) are all different yet they are all focussed on the skills agenda.

Conclusions for Discussion with the Treasury

4.7 There is a clear consensus from the RDAs over what needs to be done to address these issues. We welcome the changes that have been introduced and the aspiration for a stronger regional dimension for skill planning and policy. However, these aspirations need to backed up by a change in balance between national and regional agenda, target and resource setting.

  4.8  The key points for discussion are:

KEY POINTS

1.  Continued commitment to "regional devolution" of skills planning and policy, but allowing each region to develop its own structures, building on what it has already developed.

2.  Far greater devolvement to regions of LSC budgets and policy (not just management).

3.  Creation of greater regional flexibility in LSC, Jobcentre Plus and Connexions target framework.

4.  Ensure RDAs are brought into national decisions as early as possible (eg Employer Training Pilots.)

5. How can the regions best support the effective transfer and adoption of knowledge between universities and business and between regions, and greater innovation within regions and localities?

Introduction and Key Issues

5.1 All RDAs recognise the importance of making best use of our knowledge resources in our regions. We welcome the recently published Lambert Review of Business-University Collaboration. In particular we are pleased that the Review highlighted the need for a strong regional dimension to developing better University-Business links. We urge the Government to consider very carefully the Review's recommendations. We raise five key issues.

5.2 First, the very clear experience of RDAs and one of the central thrusts of the Lambert Report is that for effective knowledge transfer proximity does matter, especially for SMEs. Much effective innovative activity occurs at the local and regional level, even when that activity is internationally oriented (eg MIT and the Boston area in the US). This regional concentration of successful innovation is a consequence of the geographically focussed nature of many of the processes that underlie innovation, particularly the critical stages of technology transfer and early commercial exploitation (spin-offs from Universities tend to be established in the vicinity of the parent University).

5.3 Effective innovation at the regional level is not only of vital importance for regional economic development, but is also of key importance to the achievement of national economic policy, particularly in respect of the commercial exploitation aspects of innovation. The Lambert Report stresses the danger of research funding being excessively concentrated on just a few HEIs in a few parts of the country.

5.4 Given the importance of proximity and the fact that national centres of science and technology excellence are not evenly distributed, this points to the need for immediate extra efforts to build up links between institutions in different parts of the country and between key institutions and technology transfer networks outside their region.

5.5 Second, at present decisions on allocation of research funding do not in general take account of the impact on regional economic performance. RDAs believe that there should be an explicit regional dimension and consideration in the distribution of research funding. We also believe that an explicit regional dimension of decisions on research and third stream funding can work to help more effective commercialisation and technology transfer activity (see below). Research funding can still support `scientific excellence', but could also be aligned to much greater effect where other regional monies are being spent, and therefore achieve greater impact. This issue is now being addressed with the establishment of the RDA-Research Council Steering Group.

5.6 However, we also believe it is vital not to compromise on the need to fund and support existing global research excellence in the UK. Any shifts in research capacity would have to be carefully thought through and managed.

5.7 There are some differences of emphasis in the view between groups of RDAs on the implications of these points and the relative importance of supporting existing global class research institutions versus a stronger spread of research resources across regions.

5.8 Third, the RDAs are strong supporters of the need for the third stream of HE funding and have made this point in a number of previous submissions. We aim to play our part as fully as possible, with our HE institutions, in the current HEIF 2 round. However, a major issue is the short termism of support for the third stream of HE funding. The use of successive bidding rounds does not provide a stable backcloth for Universities to develop their activities in this area, with the recent delays for bids for HEIF Round 2 sending out the wrong signal to Universities. Our Universities report that, in consequence, it is difficult to recruit and retain high quality business development staff.

5.9 Fourth, there is the need for more effective support for running commercialisation services within our Universities and for linking with local/regional SMEs. The Lambert Review highlighted the need for effective services in technology transfer requiring "regional shared services" using third stream funding supported by RDAs. This approach is already being adopted by some regions. For instance in North East a regional approach provides a useful possible framework for other regions[21]. In London the LDA report that intermediary structures that connect London's universities with business are underdeveloped. Many of London's world-class institutions are, understandably, externally focused and consequently have only limited interconnection with local business communities. Action is being taken to try and address this gap.[22]

5.10 Fifth, we are concerned over the difficulties of co-ordinating the resources available through HEIF to Universities to deliver third stream activities and integrating these with regionally (RDA) led support for technology transfer. At present each institution bids into a national pot with no requirement for alignment or co-ordination—this approach does little to encourage inter-HE collaboration (although all RDAs are working with HEIs to better co-ordinate activity[23]). The Universities themselves would like to move to much more certainty in funding with less focus on bidding. We support this view. However, the logic of developing a more regional approach to delivering services demands a move to regionalisation of HEIF with RDAs working with the regional HEIs and (where they exist) Science Councils to making best use of HEIF resources in the support of each RES. This might involve appropriate joint University/RDA longer term targets for HE/business collaboration to aid the development of longer term relationships.

5.11 In summary we support the thrust of the Lambert Review (and the House of Lords Science & Technology Sub-Committee (Report on Science and the RDAs) in recommending that there

should be an explicit regional dimension to University-Business relations and that there should be explicit regional mechanisms to deliver on this.

CONCLUSIONS FOR DISCUSSION WITH THE TREASURY

  5.12  The key points for discussion are:

KEY POINTS

1.  Need to provide certainty and permanence for HEIs for the third stream of HE funding (HEIF) to enable HEls to invest in core services.

2.  Need to regionalise the allocation of HEIF to help the co-ordination with regional innovation and science strategies. RDAs should be involved in decision on allocations of funds within their regions.

3.  Regional HEIF should explicitly support "regional shared services", but with the best model determined in each region.