3 Impact on Business
15. One way of measuring the impact of these
developments on the region is by the number of insolvencies in
the South West. These averaged 232 in each quarter in 2007, in
the first half of 2008 they averaged 231 per quarter, but in the
third quarter of 2008 they increased to 254 and in the fourth
quarter they reached 341. These figures should be treated with
caution, as the Regional Economic Profile states, "Businesses
fold all the time, however, and it's hard in the current environment
to get an objective picture of what is really happening to business
numbers."[22]
16. Another way of measuring the impact is to
look at the number of redundancies in the region. Jobcentre Plus
told us that, in the South West, they had seen a rise of 139%
in unemployment over the past 12 months, whereas the national
figure has gone up by 86%.[23]
The increase had not been uniform across the region.[24]
17. The major issues that businesses raised with
us were access to finance from banks, late payment by customers
and the withdrawal of trade credit insurance. Other issues that
were raised, and increased in relevance as cash-flow became more
restricted, were the lack of automatic small business rate relief
and empty property rate relief. We discuss these issues below.
Access to finance
18. We were told that the major issue facing
business concerned access to finance. Richard Bayly from the Government
Office told us
the thing that feeds back to us—but is only
anecdotal—is that the lending patterns have reverted to
the traditional model of lending against security, rather than
investing in a business track record, a business plan, or a profit
and loss accounts performance. That may explain some of the differences
of experience between different companies.[25]
19. One example given to us was the plight of
the construction industry, the credit crunch had led to a contraction
in mortgage lending and reduction in demand for property. Development
schemes had stalled and as a result the construction industry
was in difficulty. As a consequence any firm with 'construction'
in its name was having grave problems securing credit from the
banks.[26] Mr Rosser
from the CBI thought that there was an argument that the change
in lending practices was necessary, and overdue, but nevertheless,
this situation was hurting business and unlikely to change in
the medium term.[27]
20. The FSB told us that this change in lending
by the banks was the single largest problem for their members,
citing overdrafts being withdrawn or cut, and contracts being
lost because of loans being refused. They told us that "Good
businesses with reasonable order books have closed just through
lack of finance."[28]
The CBI agreed it was "a problem for smaller companies who
might have a weak balance sheet and poor security."[29]
21. The SWRDA established a Business Loan Fund
early in 2009 of up to £10 million. The Fund is aimed at
providing loans up to £250,000 for businesses with viable
business plans but unable to secure a loan from conventional banks.
This was welcomed by the FSB but they compared the total available
in the South West fund—£10 million—to the North
East which had a £143 million fund.[30]
22. The Government also introduced the Enterprise
Finance Guarantee Scheme (EFGS) in January 2009. This is a £1.3
billion scheme to support new loans, refinance existing loans
or convert an existing overdraft into a loan. Each loan can be
between £1,000 and £1 million and are aimed at any firm
with a turnover of up to £25 million. It remains available
up to 31 March 2010. The Fund is processed through participating
banks but 75% of the loan is guaranteed by the Government.[31]
23. We were told that there had been low take
up of the EFGS among small businesses. The FSB said 12% of their
members, who responded in their latest survey, had applied for
the EFGS but only 1.28% had been offered it.[32]
24. The CBI agreed that it was, "absolutely
paramount are fixing the capital markets, getting liquidity moving
and sorting out confidence in the banking system" and they
did not see this as an issue that could effectively be solved
on a regional level. [33]
As such this was an issue that had to be dealt with at a national
level, and the difficulties in the region had to be represented
to central Government via the Regional Minister. The CBI welcomed
the Regional Minister as an additional route whereby the same
message could be passed to Government nationally and regionally.
25. We welcome the Government's
Enterprise Finance Guarantee Fund but are concerned that the Fund
appears to be not widely known among small businesses. If the
Fund is designed to help small businesses then more must be done
to inform them of its existence. We are also concerned about the
low success rates of those that do apply for it. It is difficult
to assess the success of the Fund until more firms apply and we
recommend that the Regional Minister works with the SWRDA, Business
Link and the banks in the region to increase take up of the scheme
and to identify reasons why the success rate is so low.
Late payment
26. Another problem raised with us was the increasing
incidence of firms finding their customers were taking longer
to pay bills or unilaterally changing the payment terms to give
them more time before making a payment. This can be more problematic
for smaller business as they have less power to insist upon payment.
Businesses that are not paid on time find their ability to operate
restricted because it limits their scope to plan ahead, such as
buying materials or marketing.
27. In October 2008 the Department for Business,
Enterprise and Regulatory Reform announced that central Government
was aiming to pay businesses within 10 days, and urging the wider
public sector to do the same. In evidence to this Committee in
March, the then-Regional Minister said with regard to the Government
commitment to pay promptly,
We have made quite clear to public service, certainly
as far as the health service is concerned, that that [paying within
10 days] is the expectation, and if you would like to bring, not
necessarily in public, but privately, to my attention any primary
care trusts or acute trusts that are not stepping up to the mark,
then I would be happy to have a look at it; but I think our feedback
is that most, if not the overwhelming majority, are.[34]
28. South West Councils told us that in response
to the recession they were undertaking additional measures including
paying suppliers ahead of schedule. The FSB told us that there
were problems with some public sector organisations not paying
according to the Government's 10 day commitment.[35]
29. We welcome the Regional
Minister's and South West Councils' efforts to ensure prompt payment.
We note that throughout the public sector there is an intention
to pay promptly and in some cases ahead of schedule. However,
we are also aware of evidence that it is not necessarily happening
throughout the region. We recommend that the new Regional Minister
seeks to identify the reasons why payments are not being processed
within 10 days; that he repeats the commitment that the public
sector in the South West will pay within 10 days; and that he
continues to press it to honour this commitment.
Trade Credit Insurance
30. Trade credit insurance is cover against a
firm's clients defaulting or becoming insolvent. Confidence in
the ability of firms' to pay their bills has been harmed by problems
raising finance. As a result the three main providers of trade
credit insurance have reduced the level of insurance they have
been willing to provide. When a business cannot secure insurance
it may have no option but to ask for payment in advance. The Government
announced the Trade Credit Insurance top-up scheme in the Budget
and initially said it would apply from 1 May 2009. This enables
a business to purchase additional insurance from the Government,
although the purchase is administered by the private sector. This
extra insurance sits on top of the existing credit insurance policy
and follows the conditions of that underlying policy. The Government
subsequently announced that the scheme would be backdated to 1
October 2008. The top up does not apply in situations where insurance
had been completely withdrawn and it expires on 31 December 2009.
31. The CBI said the withdrawal of trade credit
insurance was a 'huge concern' in the South West, and it was restricting
companies' willingness and ability to trade with each other.[36]
They felt the Government's response had been slow and the solution
offered would not address the full extent of the problem.[37]
The operation of trade credit insurance is not helped by the restrictive
structure of the market place—something which is very evident
in the South West.
32. We recommend that the Regional
Minister and the Task Group to monitor the effectiveness of the
Trade Credit Insurance top-up and the number of insolvencies closely
and continue to make representations to central Government.
Tax
33. On 24 November 2008 Her Majesty's Revenue
and Customs (HMRC) introduced a dedicated business payment support
service, available over the telephone seven days a week, for businesses
aimed at assisting firms who might be struggling to pay their
tax or National Insurance contributions, and enabling them to
agree a payment plan that allows them to defer their payments.
The Committee heard positive feedback on this scheme from all
the business representatives that we spoke to.[38]
In particular, the FSB told us their members using this facility
have been "100% positive in the way their calls for assistance
have been treated".[39]
However, there were concerns that staff in the local tax office
were not providing the same support nor directing visitors on
to the support line, and that the facilities available through
the business payment support service were only available once.[40]
34. The Committee notes the
positive consensus about the work being done by Her Majesty's
Revenue and Customs to help businesses manage their tax payments
through the recession. However, we are concerned at the apparent
discrepancy of service to customers who use the business payment
support service and those who approach their local tax office.
We recommend that the Government investigate as to why there appears
to be this inconsistent service, and consider what lessons can
be learned from the implementation of the business payment support
service that might be usefully applied to other schemes.
35. The FSB have said that business rates are
the third largest cost to small firms, after salaries and rent,
and have been asking for automatic business rate relief for small
businesses and the removal of business rates for empty property.[41]
The FSB welcomed the increase in the threshold at which an empty
property becomes liable for business rates.[42]
The CBI also said that there was a lot of anger among their members
around the decision to put up business rates by 5% at a time of
negative inflation (according to the Retail Price Index),[43]
and that the refusal to reinstate empty property rate relief "will
effectively stop speculative property development in parts of
the UK that are not in the highest demand."[44]
36. The Regional Minister set up the South West
Regional Economic Task Group in November 2008 to understand the
impact of the downturn on the region, and to try to ensure the
Government responded appropriately (see para 118, Chapter 7).
We asked the Regional Minister for examples
of issues that had been raised with the Task Group. He said empty
property business rates had been raised by business organisations
with him and the Task Group.[45]
He said that some of the measures taken in the pre-Budget report
bore a strong resemblance to some of the issues that had been
lobbied for by the business organisations on the task groups.
He gave the example of delayed payment of bills by HMRC as an
issue where representations had been made on behalf of business
in the region.[46]
37. We recognise that where
there is an issue of pressing concern in the region that relates
to national policy, it is important that the Regional Minister
can raise matters in Whitehall on behalf of the region. We recommend
that the Regional Minister considers how he can more clearly demonstrate
that his influence, either alone or in coordination with the Regional
Economic Council, has brought about changes for the benefit of
the South West.
Public procurement
38. In the evidence session on 30 March the SWRDA
was asked about improving public procurement within the region
to help local businesses. Mr Studholme of the SWRDA replied
the south-west is trying to lead the way in Europe
on public procurement in food and drink. That is a slow and painstaking
process […] We need to understand how to get through state
aid regulations and all of that. You are talking about—this
is very important—a step change in certain organisations
in cutting through some of those regulations. The success is patchy.[47]
They did inform us of their involvement with the
South West Public Sector Food Procurement Project and its input
into a European programme looking at public procurement best practice.[48]
39. Mr Bayley, of the Government Office said,
[…] successes come not by starting at the procurement
end, but at the supply end, and working with partners to build
up the supply chain capacity and the ability to use the procurement
processes that are available strongly. Business Link is investing
in that now […] there is no reason why people cannot work
with the supply side to build up the capacity of businesses, particularly
smaller businesses who may be intimidated by the scale of some
of the contracts. We could work out how they can be made more
accessible for them.[49]
The Regional Minister pointed to a successful project
in the Cornish NHS that was being considered for introduction
nationally.[50]
40. South West Councils told us they were putting
in place local procurement strategies, that they already procure
60-70% of their goods and services locally and are exploring to
see if this could be increased.[51]
41. We welcome the work of the
regional agencies and South West Councils to encourage and increase
local procurement and support the efforts to make sure that best
practice is spread throughout the region. We recommend that regional
agencies and local authorities make further efforts to explain
their contract requirements and examine how to build up the capacity
of small business to be able to apply for contracts.
PREPARING FOR THE FUTURE
42. We did hear views that the impact upon business
of the economic downturn had possibly reached the low point. The
CBI told us that,
we are now starting to get fairly widespread messages
from companies—I need to phrase this very carefully—that
we are reaching, have reached or are approaching the bottom. Things
are not getting worse anywhere near as rapidly as they were, which
is different from saying that things are getting better. One hesitates
before offering false optimism, although we are clearly looking
for optimistic signs at the moment. Things are not deteriorating
to anywhere near the extent that they were.[52]
We also heard evidence about what the region was
doing in anticipation of when the upturn comes.
Innovation and enterprise
43. We received evidence from the University
of Plymouth about what they are doing to try and encourage innovative
ideas to grow into business. They told us of an event they hosted,
with over 140 attendees, to encourage partnerships between local
businesses and the University, and to funding they had received
from HEFCE and the Economic Challenge Innovation Fund (ECIF) to
develop the University's Enterprise Solutions package for business.
The university actively wanted to engage in local social enterprises
and businesses to make them more competitive during the recession.[53]
Green economy
44. The SWRDA Corporate Plan 2008-2011 said that
one of the areas their core strategy was focussed on was developing
a low carbon economy. When they announced their refreshed Corporate
Plan for 2009-10, as a result of the reduced budget and the recession,
they said
We aim to be a leading international region in the
development of low carbon solutions, particularly in energy, waste,
construction and transport. We are increasing our investment in
measures that support these aims and are planning to invest around
£70 million by 2012 in low carbon activities.[54]
45. We welcome the commissioning
of the report on green jobs that the Regional Minister presented
to the National Economic Council.[55]
46. The FSB had told us that the lack of capital
was the biggest reason why firms were ceasing to trade, and said
that when the upturn comes and firms needed to expand they would
not be able to exploit the situation. They said that some of the
firms that were struggling due to lack of capital included the
fitters of green energy equipment, and that these were the same
firms having difficulty winning contracts for energy efficiency
schemes such as Warm Front. [56]
47. We support the ideal of a sustainable low
carbon economy in the South West and we support the work that
SWRDA and the Task Group are doing to make this happen. However,
we also note the views of the TUC regarding a lack of urgency
and leadership in pursuit of the green recovery.[57]
48. We welcome the
SWRDA and the Task Group's
ambitions to bring about a sustainable low carbon economy in the
South West. However, we remain to be convinced of progress in
this direction. We expect to return to this subject in the near
future.
22 SWRDA, Regional Economic Profile, Recession
Special Issue 7, SW England, April 2009, p 16 Back
23
Q 114 Back
24
SWRDA, Regional Economic Profile, Recession Special
Issue 7, SW England, April 2009, p 17 Back
25
Q 62 Back
26
Q 87 Back
27
Ev 48 Back
28
Ev 45, para 5 Back
29
Ev 48, para 5 Back
30
Q 83 Back
31
www.berr.gov.uk Back
32
Ev 45, para 21 Back
33
Q 81 Back
34
Q 51 Back
35
Ev 45, para 13 Back
36
Q 85 and Ev 48, para 6 Back
37
Ev 48, para 7 Back
38
Q 61 Back
39
Q 85 Back
40
Q 85, Ev 45, para 17 Back
41
FSB press release, Businesses take action for automatic rate
relief, 6 February 2009 Back
42
Ev 45, para 23 Back
43
Q 85 Back
44
Ev 48, para 15 Back
45
Q 61 Back
46
Q 61 Back
47
Q 21 Back
48
Ev 66 Back
49
Q 50 Back
50
Q 50 Back
51
Ev 62 Back
52
Q 68 Back
53
Ev 41 Back
54
SWRDA budget decisions 2009-10, June 2009 Back
55
Q 55 Back
56
Ev 45, para 8 Back
57
Ev 43, Chapter 5 Back
| 
