EXAMINATION
OF WITNESSES
(QUESTIONS 460-479)
FSB
4 NOVEMBER 2008
Q460 MR
WRIGHT: Did you also ask your
members what their view is of the short to medium term? Is it
what the CBI has said: that it will be dragging all the way through
2009 and on to 2010?
MR
CAVE: I think
that we did. I must admit that we did not ask that directly but
we did look at the response that our members are making to these
problems that they face. From this survey, nearly a third of businesses
are considering shutting down. That was a survey done of 5,000
businesses. If you look across the whole of the small—
Q461 CHAIRMAN:
Could you just repeat that statistic? A third of all businesses
you surveyed were contemplating... ?
MR
CAVE: Yes, would
consider it.
Q462 MR
WRIGHT: In what circumstances?
You say they would consider it, but in what circumstances? If
it drags on any longer?
MR
CAVE: Yes.
Q463 MR
WRIGHT: What is the sort of timescale
for that?
MR
CAVE: The timescale
we have given them is "How has it been over the last two
months? How have you found access to finance? How have you found
payment terms? How have you found the trade?"—and that
has been the response looking forward. We have not specified that
time. Also, a fifth of small businesses have already cut jobs
in the last two months; 14% have said that they have cut hours;
and a further 34% have said that they would consider cutting the
hours that their staff are working.
CHAIRMAN: Could
I ask you to clarify the question you were asked to get the answer
that a third of your membership are thinking of shutting up shop?
That is quite remarkable to me.
Q464 MR
HOYLE: It is a phenomenal statistic
that has been thrown at us.
MR
CAVE: This has
been given to the Committee clerk.
CHAIRMAN: We
will come back to it later. We have a copy of that already, have
we?
Q465 MR
WRIGHT: Clearly the financing
is one of the key factors to this. If there were to be some movement
from the banks and also if late payments were reduced, that would
reduce the opportunities for these businesses and they would have
to close then.
MR
CAVE: That is
right. The results that we are getting coming in at the moment
are being backed up by a huge number of anecdotal comments that
we are getting. We have a number of letters that have been sent
to our members by banks and some of them make absolutely incredible
reading; when you hear what the banks are saying at national level,
the kind of letters—and I am happy to read extracts to you
if you wish—that our members are getting on the ground.
What we do feel, though, is that it does not have to be this way.
There are practical solutions that could be taken now, but they
have to be taken now. The Prime Minister has said that we need
actions in days; and, while the Federation welcomes the announcement
last week of the EIB money being available, from the sources we
have within the Treasury this will not be available for four to
five months.
Q466 MR
WRIGHT: For example, I have an
estate agent who has said that he has extreme difficulties, because
of the sudden downturn in the housing market, with maintaining
his chain of offices because they are just not selling properties.
He is also finding difficulty in getting the bank to agree to
overdraft facilities and other facilities, to ensure that he can
keep in business.
MR
CAVE: That is
right. One of the best examples we have here is that a customer
of NatWest received a letter recently saying that they would be
doubling interest rates on her overdraft facility on the existing
loan and, for doing that, they will also introduce a facility
fee of 2.5%, which actually increased her costs to £100K
a year. She has no bad debts, she has banked with NatWest for
many years and has a very profitable business; but we are hearing
this kind of thing all the time.
Q467 MR
WRIGHT: So really it is about
retrospective decisions that are now being taken on previous debts,
rather than looking to the future and if they were to say, "If
you have an overdraft from this point on, it is going to cost
you more; there will be a facility cost", and everything
else.
MR
CAVE: I would
be cautious about what we say about debts here, because these
are very healthy businesses that use finance to oil the cogs—
Q468 MR
WRIGHT: Cash flow.
MR
CAVE: Yes, for
cash flow. I think it is worth drawing attention to the fact that
SMEs have £54.5 billion on deposit with banks, compared to
£44 billion in borrowing; so in actual fact the small business
community is financing the banking sector at the moment.
Q469 MR
WRIGHT: It was mentioned earlier
with the CBI that the small businesses look more to public sector
projects: the Keynesian-type policy, which is "Let's bring
forward these public sector capital projects. We will spend our
way out of this particular dilemma". Would that have a positive
effect on small businesses in terms of being able to fit with
some of these projects?
MR
CAVE: At the
moment it would not, because the way in which public procurement
contracts are structured it makes it very difficult for a small
business to get a contract. The total value of public procurement
in the UK at the moment is £150 billion, but small businesses
have only 16% of that public procurement. I hear what you are
saying, in terms of the Chancellor saying that we should put money
in and direct it to small businesses. We welcome that, but there
are some very straightforward measures that need to be adopted
that will allow small businesses to engage with that and to get
their hands on that money.
MR HOYLE:
I think this is a bit simplistic, is it not, just to rule out
what Tony Wright has said? Procurement can have a difference.
Opening up contracts and bringing them forward. The fact is, if
it is a large-scale contract—just suppose it is building
a new hospital—the local economy benefits from that, through
employment, through supplies, through everybody who can feed into
that. If we bring contracts forward, it can help the business.
It is a way of trying to get out of the recession. We all know
that. What I am more interested to know is what are the barriers
that stop small businesses ensuring that they get on that tender
list and that they can get part of that?
CHAIRMAN: This
is a series of questions I was expecting to ask later in some
detail but we may as well take it now, because it is important
for the small business sector.
MR HOYLE:
The Government has also said that people should be paid within
ten days. It is fine for the Government to say that. If they do
that, I welcome it. Do you feel that, with local government, where
I had evidence yesterday that they are taking 90 days to pay bills,
that is a problem?
Q470 CHAIRMAN:
Mr Hoyle's enthusiasm is firing at a series of difficult and important
questions; so let us take the first one about getting on the tender
list, getting access to public sector procurement first. What
is your answer to that question?
MR
CAVE: First
of all, can I clarify that I think public procurement is a way
forward, but there is a huge problem in getting on that tender
list. At the moment, small businesses, if they want to get on
the tender list and want to find a possible contract and a route
in, have to pay to get onto the website that will give them access
to that. I think that the first thing we should do, therefore,
is to scrap the fee for that, for supply2.gov. The other thing
is the actual pre-qualification questionnaire that you have to
fill out before you can even get onto the list. There is no one,
single form. Every form is different. We have examples, particularly
in Leicestershire, where the form runs to over 100 pages. If you
are a small business, you are not going to fill out 100 pages.
That is just for the possibility of getting one contract. What
if you then want to start all over again? What we are calling
for, therefore, is a single pre-qualification questionnaire, to
facilitate that.
Q471 CHAIRMAN:
That would be a national questionnaire that local authorities
and all other local procurers would be obliged to recognise?
MR
CAVE: Correct.
It could be a very straightforward questionnaire that has additions.
We would also like to see the ten-day payment terms, which you
have mentioned, enforced at local government level. You are right:
it is extremely patchy. We have anecdotal evidence—as clearly
you have—that that is not happening in the South East. While
the Government has said that government departments will pay within
ten days, they have merely requested that local authorities pay
within ten and 20 days; so we would like to see that extended.
In summary, there are a range of simplification measures that
should and could be adopted very quickly, to ensure that public
procurement contracts are simplified to a point that small businesses
feel able to engage with them.
Q472 CHAIRMAN:
Can I finish off the questions about procurement in this area?
I just want to clarify your answer to Mr Hoyle's question. Just
as a matter of fact, when a big hospital is built in an area,
to what extent do the local contractors in that area benefit from
sub-contracts? To what extent would a big organisation like a
hospital use its traditional partners and not benefit the small
local businesses? I do not know the answer to that question. Is
there a general answer you can give or is it too difficult?
MR
CAVE: The general
answer is that local authorities seem predisposed to go to large
companies to negotiate a contract. This is why we would like to
see 30% of public procurement contracts ring-fenced for small
businesses, as you have in the United States.
Q473 CHAIRMAN:
I want to ask about the US experience. Is there stuff we can learn
from the States, particularly in the research area? We are talking
about building a high value-added economy. We are not just talking
about survival; we are talking about how small businesses contribute
to the future of a recovered UK economy. We were very struck by
what the States does in the small business innovation research
programme. There is a similar sort of programme here but it does
not seem to be as effective or far-reaching. Do you have a view
on the procurement of research specifically?
MR
CAVE: I will
be perfectly honest with you. The Federation's work in the area
of innovation and R&D has been limited until quite recently,
because that has rather reflected our members' view that they
do not innovate and they do not engage in R&D—which
is actually not true. They do, on a very informal basis, and I
think that is illustrative. In the United States you see quite
the opposite to the way that it is conducted in the European Union,
where they focus large sums of money on very sharp-end R&D.
What we have seen in the United States is that they focus a lot
of funding through public procurement on the low-level innovation:
the kind of innovation that is just taking a product to the next
level and helping a business owner to understand that they can
actually do that and that what they are doing can be innovation.
I agree that there should be much more focus on the large number
of businesses that do not feel that they are innovating, rather
than those at the sharp end who would probably innovate anyway.
They would probably go and find a university to co-operate with.
Q474 MR
BINLEY: I would like to ask you
a bit about procurement, to clear this up. First of all, if you
have a big project, small business does not get there until almost
the very end of the process. You are talking about, in building
a hospital, four or five years. It does not help the problem you
have just raised, which is about survival at the moment, and you
have made that point. The second point I want clarification on
is this business of local authorities. More and more local authorities
are getting involved in partnership-working. That is cutting out
small businesses because they are bringing in direct labour. I
can name one that has done that in Northamptonshire—Carillion—and
I think done it in a way that is unacceptable. That is the truth
of the matter at local level with local government, is it not?
MR
CAVE: Yes.
Q475 MR
BINLEY: Happening more and more.
MR
CAVE: It is
happening more and more. The converse side to that is there are
patches where local authorities have exceptionally good public
procurement records. We have done a lot of research in Essex,
for example, and the percentage of small businesses involved in
public procurement in some parts of Essex is up to 70%, which
is brilliant. What we would like to see is an average of 30% across
the country. There is a lot that local authorities can do to engage
with the Small Business Friendly Concordat which was launched
recently, but I think that only 125 local authorities have taken
it up. We should be promoting that, therefore.
Q476 MR
BINLEY: I want to talk more about
the relationship between small businesses and banks, because I
think that there are lots of myths and misunderstandings going
round. The first is the difference between a profitable company
that has a one-off hit through a bad debt, or an elongated age
debt process, or other one-off hits, and that company which clearly
is seen not to be profitable, will not survive and where we are
talking about a period of survival. Do you think that is well
understood—that difference at the level we are talking about,
i.e. banks?
MR
CAVE: I do not
think that it is understood well enough, but also it is possibly
not even a consideration at the moment. It is clearly not understood,
because we have so many bits of anecdotal evidence from companies
that are more than happy to demonstrate to us that they are successful;
they are waiting for money to come in, which will come in, but
then there is the issue of late payments. So, yes, there is that.
There are also the behavioural inconsistencies that we see at
branch level within banks. The meeting we are having next week
with the banks will be very interesting, because what we are being
told at national level is simply not the experience that our members
are finding within branches.
Q477 MR
BINLEY: Can I relate that to what
has happened with the banks over 30 years? That they have very
much lost that local involvement with business; decisions are
being shoved up the line; and you do not have the people at local
level that you had 25 or 30 years ago, who can understand local
business and could intervene in a much more realistic manner than
is happening at the moment?
MR
CAVE: Yes, totally.
The models that branch managers are having to work to when they
have a small business come to them are being changed all the time,
and they are changed centrally. An indication of this is a letter
that we had from Barclays to a member. The letter says, "I
know that having cash to support and grow your business is vital.
Like many of our customers, you have an overdraft facility with
us to help you manage your cash flow. From 8 October 2008 the
interest rate margin on your overdraft will be changing from 6.8%
to 10.8% above the Bank base rate". That is not something
that, if a branch manager had a real understanding of this business,
would write to their customer.
Q478 MR
BINLEY: Can I just follow up on
this issue, particularly on personal guarantees? All of the information
I am getting is that more and more banks are shoving more and
more businesses into personal guarantees, and that is where you
are getting people saying, "Is this worth it?" Is that
fair as well?
MR
CAVE: Yes.
Q479 MR
BINLEY: We have talked about government
proposals and the additional proposals that you would like to
see. My impression is that it is very much a scattergun effect
and we need to bring it together and to make it more focused,
particularly for the SME sector. How would you do that?
MR
CAVE: First
and foremost, we need to get finance to businesses. We are not
looking to businesses that do not have a long-term future and
to be carried through a recession. We are talking about healthy
businesses. We have been told last week that there was money available
from the European Investment Bank, yet we are still living on
the goodwill of banks in taking up this EIB money and distributing
it through their networks, when there is actually no need for
that. We are facing a situation where we are losing 40 businesses
a day. We need to stop that going to the early 1990s, of having
1,000 businesses a week. The EIB money could be directed through
other channels. It is perfectly acceptable for the Government
to look at the EIB money that has been ring-fenced for small businesses,
to buy that money itself and to distribute that through the RDA
network for example. Last week, the Federation of Small Businesses
put forward a Small Business Survival Fund, which looked at taking
the Small Firms Loan Guarantee Scheme and rewriting the criteria
for it, but using the banks to channel EIB money through that
particular scheme. We have now discovered that—and the RDAs
are all FSA-registered—there is a precedent for regional
local authorities and local authorities in other countries to
serve as a conduit for delivering this money; so there is no reason
why the Government could not act today, get that money moving
and use the RDAs to get through to the small businesses.
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