House of Commons - The impact of the current economic situation on the North West and the Government's response

The impact of the current economic situation on the North West and the Government's response - North West Regional Committee Contents

3 Impact of the downturn on business

68. The economic downturn has affected large parts of the economy of the North West. The CBI told us that firms in all sectors had reported steep declines in orders and many were de-stocking, cutting investment and reducing staff numbers.[67] The NWDA said that automotive, engineering, construction, retail and banking and insurance sectors had been affected the most.[68] The Chambers of Commerce said that the construction industry had been affected first, and the economic effects were then spilling over into manufacturing, finance, professional services and retail.[69] Business Link predicted that business failures would increase in both 2009 and 2010 with all sectors affected, but construction, manufacturing and business services expected to be hardest hit.[70]

69. On the other hand, we were also told that some parts of the North West economy were performing well, such as in the chemical, biotechnology, defence and creative and digital industries[71] and that there was a level of resilience in the regional economy due to its diversity and the performance of major employers such as BAE systems and the Co-operative Group.[72] The Chambers of Commerce told us in Manchester that "The businesses that seem to be doing better at present are those where the business owners have taken early preventative action to put steps in place to offset the worst effects of the downturn."[73]

70. The Regional Minister was optimistic about the North West's ability to come out of the recession. He told us that one of the strengths of the region's economy was its high exports, and so the recent fall in the value of the pound could give firms in the North West a competitive advantage. He also said that the fact that the North West had companies which had survived the last two recessions, and that the high proportion of the region's GVA[74] was based on manufacturing—rather than financial services—meant that the region was well placed to recover strongly from the downturn.[75]

MANUFACTURING

71. Manufacturing accounts for just under a quarter of the total GVA for the North West. We received several submissions, including from 4NW, the Engineering Employers Federation, Merseyside Chamber of Commerce, and the TUC, pointing out that manufacturing was struggling.[76] The CBI told us that "optimism levels for manufacturing output in 2009 are amongst some of the worst on record."[77] This appears to have resulted in job losses, for example 41.4% of all notified North West redundancies in March were in the manufacturing sector.[78] We also received evidence highlighting particular problems, including short time working, in automotive manufacturing,[79] and the effect this was having within the automotive supply chain.[80] The Liverpool City Region told us of risks to Jaguar Land Rover and Vauxhall on Merseyside, and expressed doubts about the extent to which the Government's scrappage scheme would support automotive manufacturing in the region because of the scheme's "restrictive eligibility criteria".[81]

72. Damian Waters of the CBI also called for more support for manufacturing.[82] He told us that while the NWDA had made funds and advice available through Business Link to help manufacturers (see para 71 below), he felt the sector was still not receiving sufficient attention[83] and he doubted whether the Joint Economic Commission (see para 138, Chapter 5 below) had done anything on the ground to help manufacturing. He used the automotive assistance programme as an example, referring to Lord Mandelson stating in January that there was £2 billion available, but claiming that none of it had been seen in the North West six months on.[84]

73. Steve Broomhead, Chief Executive of the NWDA, acknowledged that manufacturing was under pressure and that "the CBI was probably right to say that we have to give more emphasis to manufacturing."[85] He said the NWDA worked with manufacturers through the Manufacturing Institute, the Manufacturing Advisory Service and through cluster organisations that represented the aerospace and automotive sectors in the region and that the Agency had used its strong relationship with the Department for Business, Innovation and Skills (BIS) to lobby on behalf of regional automotive employers, such as Vauxhall. Mr Broomhead also mentioned that the NWDA had worked to support firms in the automotive supply chain and, in coordination, with Advantage West Midlands with regard to Jaguar Land Rover and the wider automotive supply chain.[86]

74. Manufacturing is a vital part of the North West economy and also supports a large service sector. We welcome the efforts made by NWDA and the Manufacturing Advisory Service to support manufacturers in the region. However, we believe more could be done by the NWDA and the Government to make sure that the manufacturing base in the region remain a diverse and important sector in the North West. We recommend that the NWDA and the JEC make manufacturing a priority over the next twelve months. We further recommend that the Regional Minister works with the Department of Business, Innovation and Skills to accelerate the delivery of the Automotive Assistance Programme in the region.

BUSINESS LINK AND BUSINESS SUPPORT

75. Business Link, operated by the NWDA, is the primary gateway for business support in the North West. It provides this by:

providing advice on securing finance through its Access to Finance team;
providing companies with free health checks, offering diagnosis and advice on how to survive and prepare for growth;
offering small loans to businesses, including new start ups; and
working with partners, such as the Institute of Manufacturing and the HMRC on what others can provide for business.[87]

76. The general view from witnesses, including Business Link itself,[88] was that Business Link used to have a poor reputation, but that it had improved since being restructured in April 2007 as part of the Business Support Simplification Programme.[89] A recent review of Business Link, commissioned by 4NW, found that it was responding well to changing demands.[90] The FSB said Business Link had responded quickly and effectively to the downturn and had put resources into supporting access to finance, helping some of their members through the 'finance minefield'.[91] The CBI said Business Link had "moved swiftly and decisively" especially with regard to the lack of liquidity available to private sector firms.[92] Vanda Murray, Chair of Business Link, told us:

In terms of all the evidence and measures, we are making real progress. Calls to the universal service are 60% up year on year; our intensive assists are achieving our targets; and our GVA targets are all being hit, so we are making real progress. More importantly, the service has responded very quickly to adapt to the needs of business, particularly over the past 12 months.[93]

77. Both the CBI and FSB told us that if one of their members asked for advice they would refer them to Business Link.[94] There was a caveat from Damian Waters of the CBI, who said that while the intention was for Business Link to be the One Stop Shop, sometimes there appeared to be confusion because of the variety of messages that were coming out from different sources.[95] Sometimes, he told the Committee, there was "a lot of noise". He wanted more effort from all of the agencies to focus their attention on pointing people in the direction of Business Link and to try to cut down on the "background rumble".[96] The Manchester Commission for the New Economy also told us it was unhelpful for the Government to introduce the "Real Help for Business" brand at the same time as promoting the "Solutions for Business" brand, and that "one undermines the other and can lead to some confusion".[97] The FSB's survey on Business Link that found 50% of businesses went to their bank for advice in the first place rather than to Business Link.[98] We also received evidence that Business Link did not have the same level of recognition throughout the region.[99]

78. Vanda Murray argued that while there was evidence that businesses approached their bank first, Business Link was working hard to make sure the banks understood what services Business Link could provide, so businesses unable to secure support from their bank were referred on to Business Link .[100] We discuss the relationship between businesses and their banks in more detail below under Access to Finance below).[101] We also received evidence that Business Link was working with local authorities to try and ensure a consistent delivery of business support.[102]

79. We welcome the work that the NWRDA and Business Link have done to restructure Business Link. This had clearly led to improved perceptions of Business Link and encouraged businesses to seek advice and support from the service. However, the NWDA and Business Link could still do more to promote Business Link as a first point of call for early advice or a business health check and we recommend that it continues to work with banks, local authorities and other partners to improve signposting to the valuable services it provides.

Access to finance

Role of the banks

80. The evidence we received from business organisations said that getting access to finance remained difficult and was not improving.[103] While some surveys indicated that businesses felt they had a good relationship with their bank, this did not necessarily equate to access to credit. Mr Chris Fletcher from the Chambers of Commerce, for example, told us:

we have done surveys on how businesses feel their relationships with banks have been over the last few months. In the first one, roughly 60% of respondees said that the relationship was the same. Whether that was good or bad, it has not worsened. In our most recent survey that figure has increased to 72%. The relationship [between businesses and banks] is fine, but some problems start to come out when trying to access finance and we have seen an increase in the cost of that finance over the last three months. The figures we are pulling together show that businesses which want to make an approach to banks for finance are seeing the cost go up.[104]

81. However, Steve Broomhead told us that while it had taken some time for the banks to come to terms with their new role in providing fair lending, they were "much more supportive of small businesses than they were three months ago."[105]

82. Mark Hughes, Executive Director of Economic Development at the NWDA told us the situation was improving, but admitted "we will never go back to what we had, and there will be businesses that were able to get finance 18 months ago but will not get finance in the future."[106] The NWDA's revised Corporate Plan 2009-2010 acknowledged that a failure to restore sufficient access to credit and confidence in the banks was one of the major current risks to the economy of the region.[107]

83. Business Link told us they were focusing on helping businesses meet banks' new higher lending requirements. Vanda Murray, Chair of Business Link North West, said,

Things are not going to go back to the levels they were at, and that will make it more difficult for companies to access finance. Their business plans have to be better, and we at Business Link have been working with many companies to try to make sure that their business plans are well prepared […] the more we can work with small businesses to help them in their interactions with banks, the better.[108]

84. We also received evidence that Business Link had started working with the banks in a positive way. The NWDA told us that Business Link had been holding events inviting business people and LloydsTSB and HBOS bank staff together so they could have one-to-one conversations and get practical assistance.[109] Mark Hughes said the feedback from these events probably provided NWDA with their highest level of customer satisfaction. He also pointed out that this had increased the level of understanding among bank staff of what services Business Link could provide, as 10% of the businesses referred to them now came via the banks.[110]

85. When asked what else could be done to improve the performance of the banks in this regard, Mark Hughes said that once the Government in Whitehall started talking to the banks on a national level, it had improved the willingness of the banks to engage at the regional level. He said that if a message could go from Lord Mandelson and the Chancellor to the banks on a national level in the interests of greater clarity, this would help with the delivery of the schemes [to increase lending] at regional level.[111] In addition, Liz Meek, Director of the Government Office for the Northwest told us that the Regional Minister would be meeting the banks in Liverpool on 20 July and that the aim of this meeting was "to get bank lending back up to the levels that it was at".[112]

86. We discuss the Government's response to reduced lending in the sections below.

87. We agree with the NWDA that the failure to restore sufficient access to credit and confidence in the banks remains a major risk to the regional economy. We recommend that the Government continues to apply pressure upon the banks at a regional and a national level with regard to increasing lending to businesses in the region. We also ask the Regional Minister to examine the cost of borrowing in the North West and report to us on how this compares with the pattern nationally.

88. We support the joint work being done between Business Link, LloydsTSB and HBOS to increase the dialogue between businesses and bank staff. However, it is vital that the Government urges all major banks to educate their staff about the services Business Link provides.

GOVERNMENT FINANCE SCHEMES

89. As a result of problems relating to cash flow the Government introduced various initiatives in the region as part of the Real Help for Business package, including:

the Enterprise Finance Guarantee Scheme (£1 billion of guarantees nationally);
the Working Capital Scheme (£10 billion of guarantees for banks); and
the Capital for Enterprise Scheme (£75 million fund to provide equity investment).[113]

90. At a regional level, the NWDA also announced measures to improve access to finance including:

a Venture Capital Loan Fund (£140 million);
support for high growth businesses (£10 million); and
a business support package (£35 million)[114]

91. However, we were told that several of these schemes, specifically designed to help businesses that are struggling to access finance in the short term, had been either delayed or implemented with undue haste, and that initiatives were announced without the mechanism or the trained staff in place at the point of delivery. As one witness put it, "The flash to bang time, as it has been described—from the announcement being made to actual implementation—is way too long." By contrast, he remarked, "the HMRC Business Support Service was implemented virtually overnight."[115]

ENTERPRISE FINANCE GUARANTEE SCHEME

92. The Government introduced the Enterprise Finance Guarantee Scheme (EFGS) in January 2009 to encourage lending to businesses that currently cannot easily access finance. The decision to lend remains with the bank but the Government guarantees 75% of the loan, so reducing the risk to the bank. Nationally, the scheme totals £1 billion of guarantees to support up to £1.3 billion of lending to small business and is available up to 31 March 2010.[116]

93. The FSB told us in written evidence that 22% of small businesses were unaware of the scheme and less than 40% of those that were aware of it thought it would encourage increased bank lending. They also reported that only one in four respondents said their bank was making it available. We asked business representatives in Manchester why they thought the EFGS was not working. Chris Fletcher, from the Chamber of Commerce, said he had anecdotal evidence that the banks did not properly understand what the Enterprise Finance Guarantee was about and that different business managers in the same bank would give different messages about the scheme. He said that this was partly because of "the urgency with which the Government got the scheme out, with very little follow through from the point of view of people on the front line, who were making the decisions to get that money out to businesses".[117]

94. Mark Hughes from the NWDA agreed. He said, "It started off with an announcement without everything on the ground being in place, so it started off in the wrong place, as it were."[118] He said that Business Link had had to coach bank staff through how the scheme worked, and they were now going through a process of identifying banks with a high take up of the EFGS and sharing their best practice among banks in other parts of the region.

95. It is difficult to measure the success of the Enterprise Finance Guarantee Scheme at present because of the low awareness among banks and businesses. This is a serious flaw in a scheme that was intended to increase the level of lending from the banks to businesses. We recommend that Business Link continue their work to increase take up of the scheme. This should include every opportunity to engage with bank staff who are involved in delivering the scheme. We further recommend that the Joint Economic Commission monitor the take up of this scheme and report this information to us on a quarterly basis.

VENTURE CAPITAL LOAN FUND

96. Some confusion also appeared to have arisen with another initiative aimed at providing equity and mezzanine funding to companies that were unable to secure commercial finance, the Venture Capital Loan Fund. This was a £140 million fund originally scheduled to start in April 2009. Private Sector Partners NW Limited told us that the delay may have caused companies to cease to trade.[119] The launch did not, in fact, take place until 29 June. Damian Waters for the CBI argued that Business Link and the NWDA had "their hands tied behind their back" because they could only operate at the same speed as central Government and stressed that in the period of delay by central Government businesses had been "going bust."[120]

97. Steve Broomhead told us the delay was due to HM Treasury considering whether the scheme could be implemented without compromising public borrowing requirements, and that in the interim, the NWDA was providing £20 million for venture capital through other schemes. Vanda Murray from Business Link stressed that there was still a need for the venture capital fund scheme itself:

It is very difficult for SMEs particularly to access venture capital funding. We have evidence of need. The Business Link brokers, particularly the access to finance team, have worked and identified many opportunities, so we have a pipeline. They have been getting their business plans business-ready. The transitional scheme that Mark was talking about will be used very quickly so, as he said, that will buy us time, but there is still a need for the scheme itself.[121]

Steve Broomhead said progress on the venture capital fund was something he planned to take up with the Regional Minister.[122]

98. There is a demonstrable need for venture capital funding in the North West. It is important to ensure that innovative small and medium sized enterprises survive the recession, and are well placed to expand when the opportunity arises. It also provides a vital potential source of funding for new-starters. We recommend that the Regional Minister works with HM Treasury to clarify the status of the Venture Capital Fund and accelerate a decision as to its final delivery, and that he reports back to this Committee on the response from HM Treasury.

Lessons learned

99. The CBI told us that it had some sympathy for the NWDA with regard to the wave of Government announcements and policies. The CBI's regional Director said, "Expectations are raised therefore for things to be delivered now but it then takes maybe months or maybe a couple of quarters of the year for that to filter down into action on the ground."[123] Holly Bonfield, from the FSB, agreed that was the case with the Enterprise Finance Guarantee fund.[124] Steve Broomhead from the NWDA conceded that there had probably been too many announcements by Government in the autumn of 2008 that had to be turned into things that could be understood on the ground and "the transitional loan scheme and the role of the banks got caught up in all of that."[125]

100. The North West Business Leadership Team told us in written evidence that they thought the current experience had provided important lessons for the future implementation of regional Government initiatives.[126] Mark Hughes said that the NWDA had had discussions with Government about how schemes might be delivered on the ground, but that it would have been beneficial if they could have taken place earlier. He added that such discussions were now happening because the Government was recognising the work that the NWDA had been doing over the last six months.[127] He mentioned that there was more positive engagement about what might come out of the new industry new jobs announcement.[128]

101. Business Link and the NWDA have valuable experience of the needs of business in the region, and the detail of how projects are delivered on the front line. The Government should have engaged more with the Northwest Regional Development Agency before announcing initiatives that the NWDA had to implement. We recommend that in future the NWDA is involved in discussions about new initiatives in the region from the start. The Government should also consider how it disseminates information in the region to other partners, including banks, and review what it can do to make sure the delivery of initiatives does not become confused.

LATE PAYMENT

102. The North West is one of the regions worst affected by the 'days beyond term' problem where companies hold onto cash as long as possible and pay their invoices beyond the stipulated time period. Figures show that companies in the property, finance, business services and transport sectors appear to be continuing to hang on to cash at the expense of smaller companies.[129] Firms were taking on average 60 days to pay an invoice, but for larger firms, employing over 1000+ employees, the average was 90 days.[130]

103. The NWDA agreed that small businesses (employing up to eleven people) had been most affected by the issue of late payment and stressed that it was these same small businesses where the greatest increase in insolvencies had taken place. It predicted that small business insolvencies would continue to increase into 2010.[131] The FSB agreed, saying late payment was viewed as the reason why 25% of small firms were becoming insolvent.[132] The Manchester Chamber of Commerce told us that this was the major problem for their members.[133] These views were also backed up by the Barclays Local Business annual Late Payments report, published 10 June, which said that an average small business was £2,858 out of pocket as a result of suppliers or customers failing to pay within 30 days.[134]

Public sector

104. The Government has committed to paying bills within 10 days.[135] The GONW told us this was one of the priorities of the JEC (see para 138, Chapter 5)[136] and claimed that 90% of the public sector in the region—central Government and its agencies, including the NHS—were paying on time, although local authorities were not performing so well.[137] The NWDA said they paid 98% of uncontested invoices within 10 working days.[138]

105. However, we were given a different picture of payment times in the public sector from our other witnesses. The FSB said that, in surveys of their members, 83% had reported payment from the public sector taking longer than 10 days[139] and the CBI said that 80% of councils were not hitting the 10 day target.[140] Steve Broomhead from the NWRDA said he was "disappointed" with local authorities and the NHS' payment times and suggested there was a need for some sort of audit showing performance on hitting payment obligations.[141]

Private sector

106. The problem is of course not limited to the public sector. The NWDA said that they had run campaigns to business on prompt payment saying that one of the best things that could be done to get cash moving through the financial system again was to pay bills on time. Steve Broomhead mentioned that he had recently written to Tesco's on this matter.[142] However, the NWDA admitted they could only encourage rather than enforce, and the problem remained the lack of confidence that the banks would provide support.[143] The GONW told us they were encouraging the private sector to sign up to a prompt payment code, but they acknowledged the response so far had been disappointing. We were told that the issue would be discussed at the next meeting of the JEC[144] and the Regional Minister added he thought that the role of the banks had to brought into this, and that there was a case for naming and shaming those companies that were not paying on time.[145]

107. We welcome the move by the JEC to make prompt payment an immediate priority. There are differing opinions as to performance of public sector in paying on the 10 day target and we agree with the NWDA that there should be an audit of public sector (central government, agencies and local government) performance in this regard. These results should be made public, the reasons why the 10 day target is not being met in some parts of the public sector should be identified and the JEC should work with the relevant partner organisations to improve the level of performance.

108. We are dismayed to find that larger firms are exploiting their strength at the expense of small businesses. The JEC should identify and make public the worst offenders among the private sector in the region, to borrow the Regional Ministers phrase, we should be 'shining a light' on those that do not pay on time. The Government should also take this message to the banks, regionally and nationally, that they have a major role to play in increasing the speed with which cash can move through supply chains and help reduce the need among business to withhold payment.

67 Ev 49 Back

68 Ev 75 Back

69 Q 1 Back

70 Ev 75 Back

71 Ev 75 Back

72 Ev 57 Back

73 Q 1 Back

74 Q 91 Gross Value Added (or GVA) is the value of goods and services produced by an area, sector or producer minus the cost of the raw materials and other inputs used to produce them. Back

75 Q 115 Back

76 Ev 83, Ev 43, Ev 55, Ev 68 Back

77 Ev 49 Back

78 Ev 75 Back