Examination of Witnesses (Question Numbers
1-19)
DEPARTMENT FOR
BUSINESS, INNOVATION
AND SKILLS
AND CAPITAL
FOR ENTERPRISE
LIMITED
13 JANUARY 2010
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts where today we are considering
the Comptroller and Auditor General's Report The Department
for Business, Innovation and Skills: Venture capital support to
small businesses. We welcome back to our Committee Simon Fraser,
the Department's Permanent Secretary. We also welcome Rory Earley,
Chief Executive of Capital for Enterprise Limited. We were hoping
to have this hearing last week but we were informed by the Permanent
Secretary's Private Office that they did not want to come last
week because it might have spoiled their Christmas, which we found
surprising because it meant we lost a day for a hearing. But there
we are. Happy New Year anyway. May I now refer you to paragraph
16 of the C&AG's Report, which you will be familiar with?
There it says that you accept that the programme cannot currently
demonstrate value for money. If we also look at paragraph 3.16
we will see that it took you from 2000 to 2008 to have an interim
evaluation. Why has it taken so long for the Department to measure
what we are getting out of these funds?
Mr Fraser: First of all, I do
indeed agree with the findings and recommendations of the Report
which are useful for the Department in evaluating these schemes.
I do also agree with the conclusion that you alluded to that we
cannot currently demonstrate the full value for money of these
schemes. I am happy to talk further about that and explain that
further in our discussions. In your point about why it has taken
so long to launch interim evaluations, the fact is that schemes
of this sort are fairly long-term operations. Characteristically
you can only begin to evaluate the returns from these schemes
after a period of about eight years and they come to maturity
after a period of 10 to 12 years. Both these schemes were only
started in 2000 and are now at the point at which we have been
able to begin to do intermediate evaluation of the first sets
of schemes and indeed we have done that.
Q2 Chairman: The interim evaluation,
which it took eight years to come out with, was actually published
on 10 December, exactly the same day that the NAO Report was published.
It rather leads me to suspect that you only got on with this when
the NAO were breathing down your back.
Mr Fraser: May I ask Ms Squire
to comment on the timing of that precisely?
Ms Squire: It was always our intention
to produce interim evaluation reports for Regional Venture Capital
Funds and the Early Growth Funds around year six or seven. The
reason we wait so long is because, while the fund might be six
years' old, the number of investments that it makes will be made
gradually over the first few years. At year six, whilst the oldest
investments might be six years' old, the newest were only a few
months' old. NESTA and BVCA, in their report last year, confirmed
that year six or seven was about right for an interim evaluation.
Q3 Chairman: I can understand that
it might take some time to evaluate these funds. What I cannot
understand is why, when you set them up, you did not set specific
economic objectives. If we look at paragraph 2.3 in the Comptroller
and Auditor General's Report we see there "The Department
has not, however, translated these aims into clear, prioritised
objectives". If you did not set out the objectives then,
are you now able to tell the Committee what you were trying to
achieve?
Mr Fraser: The Report makes a
number of valid observations about ways in which these schemes
might have been better set up in their early stages, which reflects
the fact that they were fairly innovative schemes. Certainly in
relation to setting clear objectives, setting clear means for
evaluating performance, as well as other things like transparency,
there have been lessons learned and we have been able to improve
the scheme. Certainly on the new schemes we are putting in place—and
Mr Earley will be able to comment in more detail than I on this,
if you wish—we have introduced very clear objectives, both
in terms of financial performance, much clearer evaluation mechanisms,
also in terms of the economic impact of these funds which was
of course an important objective for them and we have improved
the transparency. A number of lessons have been learned and this
Report very usefully brings them together in a way which helps
the Department improve its performance.
Q4 Chairman: Are we going to lose
money as a result of investing in these funds?
Mr Fraser: It is too early for
us to be able to make a full judgment on the performance of the
funds, for a number of reasons. First of all, as I said at the
start, it is too early to be able to evaluate the performance;
it takes time. There is a J-curve in the report which shows the
sort of normal return period on funds of this sort. Second, on
this question of value for money
Q5 Chairman: You loosely mentioned
a J-curve. I think you are referring to figure 10. What figure
10 actually shows on page 25 is that these funds, which had no
clear objective when they were set up, are actually performing
poorly compared with their European counterparts.
Mr Fraser: Actually I was not
referring to figure 10.
Q6 Chairman: Which J-curve were you
referring to then?
Mr Fraser: Figure nine, which
is a more general indication of the normal profile of returns.
Q7 Chairman: Can you also see figure
10?
Mr Fraser: I can see figure 10
which is giving some comparison with other funds. Would you like
me to comment on figure 10?
Q8 Chairman: Yes.
Mr Fraser: On comparisons it is
quite difficult because a number of comparisons are drawn in the
Report, for example with commercial funds. This was the point
I was going to make that we have to bear in mind that we were
specifically addressing an equity gap with these funds, that is
an area in which normal commercial funds were reluctant to invest,
the reason being that these are relatively high risk areas.
Q9 Chairman: What are these? Are
they an investment fund or just a grant to business? Which is
it?
Mr Fraser: These are very clearly
capital growth funds. May I ask Mr Earley to comment in more detail
on the nature of the precise investment? They are certainly not
grants to business.
Q10 Chairman: All right, they are
not grants to business then. If they are not grants to business
and they are investments, why was a rate of return not set at
the beginning? If you are a bank and you wish to invest in a business,
you plan from the start. At least you have some idea what you
hope your rate of return should be. There is a real suspicion
here that this is in fact a slush fund to help business, it is
a grant to business and it could well fall foul of EU state aid
rules because they are not run as proper investments with a proper
rate of return and a proper objective laid down at the beginning.
Mr Earley: It is true that there
was no financial return objective set for the Regional Venture
Capital Funds programme at the outset. However, each of the individual
funds was set a target rate of return before or below which the
investment fund manager could not share in the profits of the
fund. Each individual fund was set a target rate of return which,
for the Regional Venture Capital Funds, meant the return of all,
both the Government's money and the private investors' money,
plus a 10% return on the private investors' money. So there was
a target for each individual fund. They are managed in a way which
very clearly cannot be slush funds; the managers are incentivised
and very carefully tasked.
Q11 Chairman: Let us now deal with
fund managers; you mentioned them so let us deal with them. They
are in the private sector and there are 28 fund managers, are
there not? Is that right?
Mr Earley: There are 28 funds;
some fund managers manage more than one fund.
Q12 Chairman: How many are there?
Mr Earley: I do not have that
figure off the top of my head.
Q13 Chairman: They are in the private
sector so they obviously manage other funds. I am told they get
from the taxpayer between £50,000 and £90,000 for running
the funds. Is that right?
Mr Earley: The salary levels,
as surveyed by the NAO, are in that range and at the bottom of
the range ... ... ..
Q14 Chairman: Why do you think it
appropriate that 36% of the money invested goes to these fund
managers? Thirty-six per cent of taxpayers' money designed to
help struggling small businesses actually goes to wealthy fund
managers.
Mr Earley: The Report points out
that the fees paid for these funds are not out of line with the
fees paid elsewhere.
Q15 Chairman: Do you think it appropriate
that 36% of the money which is supposed to go to struggling businesses
actually ends up in the pockets of your fund managers?
Mr Earley: The way the funds are
structured, the money is not—
Q16 Chairman: I did not ask you about
the way, I asked you whether you thought it was appropriate.
Mr Earley: You will be asking
for a personal opinion there. I think this is a very hands-on
activity which requires professional, expert people. It is not
cheap and the Report recognises that.
Q17 Chairman: Would you please look
at paragraph 2.10? You will see there that a very large proportion
of these investments are made in London and the South East. Why
do you think that is? Is it because about 50% of your fund managers
actually live in London and the South East that a very large proportion
of taxpayers' money is going to fund managers who live in London
and the South East as opposed to helping businesses in the North
West, North East, East Midlands or the West Midlands?
Mr Earley: May I point out that
figure six shows there is not actually a great correlation between
where the fund managers are based and where the investments are
made? Our analysis shows that the investments across all these
programmes map very well onto the map of regional GVA, so each
region gets a very good share.
Q18 Chairman: It says here in this
Report that Mr Fraser has signed up to "The distribution
of investments under the national programmes has been concentrated
in London and the South East".
Mr Earley: And regional GVA is
concentrated in London and the South East.
Q19 Chairman: Yes, it has been concentrated
there because 50% of the fund managers live in London and the
South East.
Mr Earley: I do not think that
is borne out by our analysis of the distribution.
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