Memorandum from the West Midlands Business
Council (WM 28)
EXECUTIVE SUMMARY
The West Midlands region is suffering disproportionately
from the recession as compared to other regions of the United
Kingdom. As a consequence, the need for a joined up approach to
economic policy is sorely needed but aspects of national policy
are holding back on effective delivery.
In particular, we propose that Department for
Business, Enterprise and Regulatory Reform (now the Department
for Business, Innovation and Skills) processes are speeded up
to ensure the continuation of a regional bridge funding scheme
for SMEs and the continuation of a gap funding scheme for the
construction sector.
We also propose that national actions need to
complement regional actions in terms of introducing wage subsidies
for strategic sectors and underwriting credit insurance for strategic
sectors.
INTRODUCTION
1.1 The West Midlands Business Council brings
together over 20 mainly business representative organisations
from across the West Midlands region. Via our member organisations,
we are able to speak for approximately 200,000 businesses
across the region.
1.2 Further information regarding the West
Midlands Business Council can be found under Annex A.[52]
1.3 This submission focuses on the issues
the Committee has requested evidence for further to its call for
evidence of 19 March. This submission will respond to each
subject heading as identified by the Committee in detail and,
in addition, will identify how national policy considerations
have a bearing on actions taken at a regional level.
EFFECT OF
THE ECONOMIC
SITUATION ON
BUSINESSES IN
THE REGION
2.1 According to statistics from a number
of sources, it is virtually beyond dispute that the West Midlands
region has been one of the worst hit regions in the United Kingdom
by this recession.
2.2 As analysis from the Purchasing Managers
Index (PMI) has demonstrated, 50% of the regional economy is in
the following areas:
2.3 These are three of the sectors that
have been particularly damaged by the recession and the credit
crunch when national indicators are also taken into consideration.
2.4 The EEF Engineering Outlook of
December 2008 in its analysis of the state of engineering
across the country, stated:
Job losses were particularly marked in the
Midlands as the East and West Midlands balances fell to -24% and
-29%. Employers in the West Midlands were particularly pessimistic
about the next three months as 58% of firms expected to reduce
their workforce compared with only 7% planning to recruit new
workers.
2.5 The recession has also directly impacted
upon the ceramics sector and the economy of north Staffordshire.
There have been changes in ownership such as Waterford-Wedgewood,
Spode/Royal Worcester, Hudson & Middleton and Jesse Shirley,
a supplier to Wedgwood. Short time working has been introduced
in the ceramics sector such as at Steelite International plc.
2.6 The British Ceramic Confederation (BCC)
has reported that the number of people employed in the brick industry
is at an historic low. At the start of 2009, 90% of brick factories
were temporarily closed or on short time working. The BCC anticipate
that brick sales in 2009 will be only 60% of those in 2008.
Support services to the ceramics sector have also been adversely
affected by the downturn as exemplified by the kiln maker, Drayton
Beaumont ceasing trading in February.
2.7 In terms of the property and construction
sector there has also been a steep decline in activity. This was
demonstrated again in February 2009, when the Royal Institution
of Chartered Surveyors (RICS) produced their own survey data that
showed that the decline in construction in the West Midlands region
reflected the national decline.
2.8 They found that total workloads have
slipped to a new low driven principally by weakness in the private
sector. New enquiries about starting projects are also continuing
to slide particularly in the housing, commercial and industrial
sectors. Ominously, there has also been some deterioration in
the response from RICS members regarding new enquiries in the
infrastructure sector. Significantly, expectations on future workloads
and profits margins are now under heavy pressure.
2.9 In the last downturn in the early 1990s,
construction output fell, peak to trough, by roughly 15%. Given
the current macro backdrop and the increasing problems surrounding
the PFI programme, it would not be unreasonable to expect a broadly
similar decline this time around.
2.10 The national decline in retail sales
has been mirrored in the West Midlands region. The fact that Cannock
shopping centre, for instance, has very recently gone into receivership
may relate more to the investment company linked to the shopping
centre than retail flows in Cannock itself. Nonetheless, this
indicates the strains that the retail sector is facing.
2.11 In addition, the rural economy has
also taken a knock from the recession. Poor infrastructure needs,
such as poor broadband connections in a number of areas in the
region, have exacerbated the problems that rural businesses are
facing due to the recession.
2.12 Fortunately, the food and drink sector
and agriculture are less badly affected than others, though many
pubs and restaurants have suffered a loss of turnover. The dairy
sector is under pressure in part because of large stocks of cheese;
the price paid to farmers for their milk has dropped significantly
in recent months.
2.13 Rural areas have a significant manufacturing
sector, which is suffering in the same way as manufacturing elsewhere.
Currently, tourism is shielded by the weakness of sterling, though
there are fears that if the pound strengthens against the euro
the number of foreign tourists will dwindle; unless by then there
has been a domestic recovery the sector will be badly affected.
2.14 The West Midlands Minority Ethnic Business
Forum have stated that minority enterprise is still predominately
a disadvantaged business community with low levels of capitalisation
and low value, marginal enterprises. BME firms can be located
in areas with a low spending base in often disadvantaged communities.
Minority ethnic businesses, because of this context, may be disproportionately
affected.
2.15 This is snapshot of the problems the
business community is facing and we would be willing to provide
the Committee with more detailed information, if requested.
ROLE OF
ADVANTAGE WEST
MIDLANDS AND
BUSINESS LINKS
IN ASSISTING
BUSINESSES
3.1 Two specific steps were taken by Advantage
West Midlands that were focused specifically with this recession
in mind.
3.2 The first was the establishment of the
Advantage Transition Fund. This specifically aims to help businesses
whose normal bridge funding has been affected because of the changes
in the banks' behaviour caused by the credit crunch. This has
proved to be a critical policy vehicle in addressing the immediate
crisis and the West Midlands region was the first region of the
UK to launch such a scheme in November 2008.
3.3 The Advantage Transition Fund builds
on the lessons learnt from the collapse of MG Rover and the Government
commissioned Taskforce that was established at that time as a
direct consequence.
3.4 Until normal bank lending resumes to
small and medium sized enterprises (SMEs), this scheme will be
needed. We are aware that processes within the Department for
Business, Enterprise and Regulatory Reform (BERR) have not enabled
the regular re-capitalisation of the scheme from funds provided
by the European Investment Bank as is required. We would propose
to the Committee that it recommends that BERR review their procedures
so that effective and adequate re-capitalisation can take place.
3.5 In addition, we are disappointed at
the stance of the Government in not allowing an extension of time
for European funds allocated to the West Midlands region to be
expended. In a letter to the West Midlands Business Council in
April 2009 from the Government Office for the West Midlands,
we were informed of the following:
As you are aware the West Midlands has benefited
from substantial resources from the European Regional Development
Fund (ERDF) and the European Social Fund (ESF) under the Objective
2 and Objective 3 Programmes 2000-2006. The final date
for eligible expenditure was 31 December 2008. In late November
the Commission offered Member States the opportunity to continue
spending ERDF and ESF resources for a further six months because
of the economic downturn. Let me make it clear that no new money
was offered, nor did the Commission allow any additional flexibilities
in terms of the Programmes' financial profiles. This was simply
an extension to the final date for eligible expenditure, thus
allowing projects to continue spending their grant where they
had slipped, or to spend more grant where they could deliver additional
activity.
Ministers decided in January in respect of
the English programmes that they would not take advantage of the
Commission's offer. It had come very late in the day, at a time
when projects were compiling their final claims and winding down
and when Government Offices and central Departments were well
advanced in implementing programme closure. It would have been
difficult, though not impossible, to turn things around at that
late stage. However it is not simply a question of projects spending
more money—additional expenditure would have been subject
to Article 4 monitoring and Article 10 inspections and
it would have been difficult and expensive for Government Offices
to find the resources to carry out that unplanned extra work.
Also due to the lack of financial flexibility
offered by the Commission, it is doubtful whether any of the English
programmes, including our own, could have spent very much more
grant. Projects would have had little time to secure additional
match funding at a time when there are limited opportunities to
secure match and pressures to secure funding for the 2007-13 spending
round.
3.6 We do not agree with the Government's
analysis for this, as there was at least one ready vehicle which
could be used effectively for European funds to help the region
overcome the recession—and that is the Advantage Transition
Fund.
3.7 In addition, there are also Community
Development Finance Initiatives (CDFIs), such as the Black Country
Re-investment Society, that provide a vital revenue source for
hard pressed SMEs. Their re-capitalisation is also a useful contribution
to mitigating the impact of the recession.
3.8 There is also another scheme these funds
could be used for and which has been initiated by Advantage West
Midlands in response to the economic downturn. The Regional Development
Agency launched a £48 million gap funding scheme so
that major construction work on key projects could continue despite
the downturn.
3.9 This has provided a significant contribution
to stopping the region from declining further with additional
job losses. The continuation of the scheme with the continuing
slump in construction is critical for the state of the wider regional
economy.
RESPONSE OF
BANKS AND
OTHER FINANCIAL
INSTITUTIONS TO
STIMULATE BANK
LENDING
4.1 Concerns regarding the behaviour of
the banks have continued to be expressed by businesses.
4.2 For instance, the Institute of Chartered
Accountants in England and Wales (ICAEW) reporting that one firm
borrowing £3 million had an arrangement fee of £1,500.
This arrangement fee has recently increased to £30,000. Another
business seeking £15 million in borrowing now has a
£2.5 million arrangement fee renewable in six months
time.
4.3 The ICAEW have also reported receiving
reports from exporters who are facing greater difficulties in
gaining indemnity insurance, with one example of a business with
export interests to Portugal failing to get cover. This insurance
firm also was reluctant to provide insurance for exports to the
United States. The ICAEW also reported that it was now difficult
for construction firms to gain indemnity insurance.
4.4 One West Midlands chartered accountant
made the following observation regarding the behaviour of the
banks:
The banks are taking longer and longer to
make any decisions. In the old days, I used to have confidence
and know what they needed. Now, you discuss it with them and they
come back to me and want to change the whole ballpark and the
game again, which is extremely frustrating
4.5 The Federation of Small Businesses also
reported problems with HBOS and Lloyds TSB. In particular this
related to exit penalty charges with one charge raised from £12,000 to
£35,000.
4.6 While inevitably much of the data relating
to access to finance from the banks is anecdotal as commercial
confidentiality is required to avoid a collapse in market confidence
in some firms, the popularity of the Advantage Transition Fund,
mentioned earlier in this submission, is a clear indication that
these problems are continuing.
4.7 We are concerned that despite the statements
from the banks and Government that normal bank lending will be
on track, normal bank lending from all high street banks has not
resumed and this is a drag on regaining confidence in the regional
economy.
ROLE OF
THE WEST
MIDLANDS TASK
FORCE
5.1 The concept of a task force in dealing
with urgent situations is warmly welcomed by business. It proved
to be successful in the context of the collapse of MG Rover and
the establishment of the MG Rover Taskforce.
5.2 One of the key advantages of the MG
Rover Taskforce was that business was fully represented on the
Task Force. This gave the wider business community confidence
in the work it was undertaking. Therefore, we are disappointed
that, this time around, business is not represented on the Taskforce.
5.3 We appreciate the counter argument to
this is that business is represented on the Council of Regional
Economic Advisers which is part of the chain of Government consultative
forums on the recession. The Council of Regional Economic Advisers
is a positive development that is welcomed by business. But to
exclude business from a taskforce that is dealing with the practicalities
of a downturn that is affecting business is, we believe, unfortunate.
5.4 In respect of the day to day operations
of the Taskforce, our experience of it was when we presented our
detailed proposals to it to assist the construction sector. Further
to this presentation, the West Midlands Business Council has received
a letter from the Minister for the West Midlands that states that
a construction action plan will be developed for the region. This
is a positive development from the Minister and we look forward
to the publication of the action plan.
ROLE OF
OTHER GOVERNMENT
AGENCIES AND
OF PARTNERSHIPS
6.1 The uncertainty surrounding the details
of the package of measures to assist the automotive sector has
affected market confidence in this strategically important sector.
It was only in April 2009, several months after the initial announcement,
that the details were made known. Even then, we understand that
final details are still to be addressed.
6.2 This uncertainty at this difficult time
is undermining business confidence. In addition, there are at
least two measures business is calling for where only direct Government
action can assist.
6.3 The first of these is that some underwriting
of the credit insurance market is needed. Credit insurance is
critical for ensuring an export led growth strategy to moving
out of the recession. In addition, credit insurance is also important
for the retail sector as goods sold in shops are first, usually,
underwritten by credit insurance before the goods are sold to
customers. Therefore, normal business activity can not resume
without a normal credit insurance market being in operation.
6.4 Secondly, in previous downturns, short
time working assistance or wage subsidies were introduced. This
prevented mass redundancies from taking place. It also saved the
Government money as it is cheaper to pay wage subsidies than to
pay benefits to unemployed people and their families. It also
means that consumer spending can be kept going at a certain level
to help the economy overcome the recession.
6.5 Germany, the Netherlands and Wales have
focused short time working assistance for strategic business sectors
and this has helped their economies. At the time of writing, it
was expected that a form of short time working assistance for
strategic sectors will be introduced in Japan. We consider short
time working assistance is also required for strategic sectors
in the West Midlands region.
6.6 While we are aware of a comprehensive
report from the West Midlands Local Government Association (WMLGA)
detailing the many initiatives local authorities are undertaking
across the region to address the impact of the downturn, we receive
regular reports from business and business representative organisations
of different levels of business engagement by councils across
the region.
6.7 We would propose to the Committee that
best practice for how councils could work with business could
be distributed to local authorities by the Government Office for
the West Midlands. We make this proposal as engagement with the
local business community is essential if some form of local fiscal
stimulus can exist to help the local economy weather the recession.
6.8 The work of the Learning and Skills
Councils (LSCs) is important to address the skills issues arising
out of the recession. As business representative organisations
have rightly stated, a skilled workforce is critical for a business
to reach new markets and overcome the recession. The work of the
LSCs is being hampered by the fact that they are due to be abolished
by April 2010 with their responsibilities being split three
ways—between two new Government quangos and local authorities.
6.9 Whatever the rights and wrongs of these
changes, this is the worst possible time for these changes to
take place when all the focus should be on helping people stay
in work and get people back into work. We would urge the Committee
to recommend that these changes are put on hold until the worst
of the impacts of the recession is over, at the very least.
6.10 In terms of the performance of Jobcentre
Plus, business—on the whole—has yet to fully embrace
the services that are provided and there is still a reliance on
private recruitment agencies. We have encouraged Jobcentre Plus
to work with housing associations as housing associations train
their tenants in some areas so synergies can exist here. We have
so far been unsuccessful in this call.
CONCLUSION
7.1 Positive steps have been taken in the
region—such as the Advantage Transition Fund and the gap
funding scheme for the construction sector. Their continuing popularity
is a strong indication of the necessity for these schemes to continue
while we are still in the midst of the downturn where normal business
activity is not taking place.
7.2 Full engagement with the business community
at the regional and local level is necessary to help local communities
and the West Midlands region overcome the economic crisis. There
is a strong need for such engagement to take place across the
region to help families overcome the recession.
Annex A
WEST MIDLANDS BUSINESS COUNCIL
The West Midlands Business Council (WMBC) is
a UK First—the first time independent business representative
organisations have chosen to come together to speak with one voice
on the key regional business issues. No other region of the UK
has such an organisation;
WMBC is an umbrella organisation for the whole
West Midlands region—covering Herefordshire, Shropshire,
Staffordshire, Warwickshire, & Worcestershire together with
Birmingham/Coventry/Wolverhampton and the West Midlands conurbation.
The member organisations of WMBC are:
British Ceramic Confederation
Business in the Community
Chartered Institute of Building
Civil Engineering Contractors Association
Co-operatives West Midlands
Country Land and Business Association
Engineering Employers' Federation
Federation of Small Businesses
Institute of Chartered Accountants in England
and Wales
Institution of Civil Engineers
Midland Association of Restaurants, Caterers
and Entertainment
National Federation of Retail Newsagents
National Housing Federation
Royal Institution of Chartered Surveyors
Stratford upon Avon Town Management Partnership
West Midlands Chambers of Commerce
West Midlands Developers Alliance
West Midlands Higher Education Association
West Midlands Minority Ethnic Business Association
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