Examination of Witnesses (Question Numbers
40-59)
The Rt Hon Vince Cable MP,
Secretary of State for Business, Innovation and Skills, and The
Rt Hon David Willetts MP, Minister of State for Universities
and Science, Department of Business, Innovation and Skills
26 October 2010
Q40 Chair:
Could I come back to my previous question? Given the role of
LEPs in rebalancing the geographic economy, and given its role
in the wider strategic objective of rebalancing the private and
the public sector, and mopping up the unemployment that will arise
from the public sector, is it not odd that nowhere within the
process for setting up LEPs, which are key to achieving these
outcomes, do you appear to know whether there has been any funding,
either requested or allocated, in order to deliver this.
Vince Cable: Sorry,
I misunderstood your earlier question. No, we are not talking
about allocating Government money in order for these LEPs to get
off the ground. They will have to consider how they want to operate
and there are potentially several sources of funding open to them,
but there is no Government budget being rolled out in order to
launch these LEPs; it will operate in a rather different way from
the RDAs, which were Government institutions, funded by Government.
Q41 Chair:
So what you are saying is that there is actually no Government
support for the setting up of LEPs or the preparation of the application
for the regional growth funds, which are necessary for them to
actually achieve the objectives they are being set up for.
Vince Cable: Well,
they are quite different. The Regional Growth Fund is a central
Government body, and we have already indicated in the spending
review that it will be substantially funded from the outset. I
think we are talking about £1.3 billion—
Q42 Chair:
With respect, that is not the issue. We know that. The fact is
that if LEPs are to access money, in order to deliver on their
objectives of assisting and developing industry and the private
sector within their area, they are going to have to have resources
to do that. You cannot just make an application to the Regional
Growth Fund on the back of an envelope; it has to be prepared,
it has to be researched, and so on and so forth. It is quite
a skilful job. But it does appear that nowhere in your Department
or the DCLG is there money allocated to do that.
Vince Cable: That
is correct but I think you are underestimating the creativity
of these local groups coming up from the grass roots. They have
already, in several cases, submitted highly professional, well
thought-through proposals as to how they can operate simply by
pooling their own initiatives—local councils and local businesses—and
that is where we expect the drive to come from. Not from central
Government funding.
Q43 Chair:
If they are to continue to access this fund then they have to
develop permanent funding streams in order to do the preparatory
work to do so.
Vince Cable: They
will have to do that, yes.
Chair: Thank you. Rachel
Reeves.
Q44 Rachel Reeves:
Thank you, Chair. In Yorkshire, all the LEP bids have put in
that they want to set up a community interest company—Yorkshire
Enterprise Partnership—to do some of the administrative
and some of the crossregional work. But to be able to set
that up the Chief Executive of Leeds City Council said quite clearly
that they would need some funding from Government, because with
cuts in local council budgets of 27% there is just no way that
that could be funded by local authorities. You say that there
are several sources of finance available for LEPs. Could you outline
what those sources of finance might be?
Vince Cable: If
it is a partnership between local businesses and local authorities,
which is the process that we envisage, local authorities may wish
to support them directly. The Regional Growth Fund is another
source. If there are appropriate projects they will in due course
be able to go to the Green Investment Bank. There are various
European sources of funding which also have to be factored in.
So there are potentially—if these bodies are creative and
imaginative—different ways in which they can raise money
without resorting to central Government. I have said a couple
of times that we will be setting out, in a White Paper on subregional
growth, how we envisage this process getting under way. I understand
your wish to get clear answers at this stage, but we have to take
this step by step.
Q45 Rachel Reeves:
But it is very difficult, Secretary of State, for local enterprise
partnerships to put in proposals of how they're going to set up
and run, and very difficult for them to work out how they are
going to bid for regional growth fund, when they have no idea
what is expected of local enterprise partnerships and what finances
they might have to be able to set up and run. The Yorkshire bids
have been very clear that they need this community interest company,
Yorkshire Enterprise Partnership, to support them, and until today
I had not heard that that was not a viable option. But you are
saying that no funding would be available for such a panregional—
Vince Cable: No,
I am not giving you specific answers because the whole process
has not yet been mapped out in detail. I am not making commitments
of Government funding, for the reasons I have given you. We have
not even got to the first stage of deciding which of the LEP proposals
are viable, but that is very close, and there will be an announcement
made to Parliament very soon about that. The second step is to
sketch out how these new LEPs will operate. I fully appreciate
that as a local MP you want to know how your particular LEP proposal
will actually get launched as quickly as possible and actually
start doing things. We have to do things in an orderly way and,
as I said, the White Paper will help provide answers to some of
those questions.
Q46 Rachel Reeves:
I would suggest that a more orderly way would have been to publish
the White Paper before local enterprise partnerships had to put
in their bids.
Vince Cable: No,
I think what's happened, as a result of doing things the way we
have, is that we have produced some very creative approaches.
I think when the list of proposals is announced you will find
that some of them are very good and very creative, precisely because
we did not set boundaries within which these new concepts could
be launched.
Chair: Well, we will make
a judgment on that in due course. Can I just go on to the impact
of the CSR on specific functions of the Department, and bring
in Brian Binley for the first question?
Q47 Mr Binley:
Thank you, Mr Chairman. Secretary of State, one of the specific
functions of the Department is to deal with the Enterprise Finance
Guarantee Scheme, as you well know. Indeed in your submission
to our inquiry, it was stated that "the long-term market
failure in the provision of debt finance to credit-worthy SMEs"
is a real problem. I note from the report that by the beginning
of August, 11,245 businesses had been successful in getting a
loan from that fund, and the total amount loaned is just under
£1 billion. That is a very, very minute fraction of the
businesses that are crying out for working capital and simply
not getting it in other ways. What pressure have you put on the
Treasury to talk with the banks, to make sure that small and medium-sized
businesses do get the finance they need to finance growth—which
as you know is a very serious issue for small businesses—and
not returned until they have retained profit, which comes much
further down the line?
Vince Cable: I
think you have identified what is potentially the biggest constraint
on economic growth going forward, which is the availability of
credit on reasonable terms to successful small enterprises. There
will be scope within the capital budget that we have negotiated
to operate the Enterprise Finance Guarantee Scheme, possibly on
an enhanced basis. We will be giving a response very soon to
the Green Paper that we issued on business finance—you may
remember it from before the summer. We have now got the answers
to that. We will be saying how we will take forward the Enterprise
Finance Guarantee Scheme when we do that. In terms of the broader
approach of the banks, I meet heads of banks periodically, as
does the Chancellor. We meet them together. They are under no
doubt about the concerns of the Government about lending in that
sector. As you know, the underlying problem here is that banks
are required to set aside increased amounts of regulatory capital
because small-scale business activity is regarded as high risk,
relatively; the amount of capital they are required to hold is
significant, and this is an inhibiting factor on the supply of
credit. There is also a problem of lack of demand, but that is
not the only reason. We have a variety of ways in which we can
do this. You probably saw last week that the bankers themselves
came forward with improved proposals for dealing with their small
business customers, as well as a proposal for equity financing
on mid-cap companies. Things are beginning to move, but I would
not suggest for one moment that this problem has been solved.
Q48 Mr Binley:
Let me pursue that just a little further. I know this is not
your direct remit, but you are Secretary of State for Business
and this is vital to the whole growth agenda in the budget. Bank
lending to businesses in August of this year was less than it
was for the same period 12 months ago. That is a deep concern.
We have listened to what are very fine words—welcome very
fine words—and I pay tribute to the Prime Minister's speech
to the CBI of only two days ago. But we still have not got the
detail. What are you doing, as Secretary of State, to prise open
that detail from the Treasury. To get George by the neck and
say, "You have got to do something George".
Vince Cable: Well
you describe in rather graphic ways—
Mr Binley: I do indeed.
Vince Cable: —what
are currently very amicable conversations on that subject with
the Chancellor. Yes, we accept that there is an issue, a serious,
serious issue, with bank lending. The figures you describe are
quite right; the trend is down. There is a lot of analysis going
on as to why that is going down. Is it a problem of supply? Is
it banks being increasingly restrictive in the way they operate,
or is it lack of demand because businesses themselves have been
leveraging? There is an element of both. My own view, having
heard both sides of this argument many times, is that there are
many good companies that would borrow more from banks if they
were confident they could obtain credit on reasonable terms.
There is an issue on the bankers' side as well as on the demand
side. In terms of what you do about it, we have now got back
the conclusions of the consultation on the Green Paper. We have
a variety of measures that can be taken. Some of them, like the
Enterprise Finance Guarantee Scheme, are working with the grain
of the market and giving guarantees of various kinds. Others
may involve continuation of loan schemes—the scheme that
we have with the nationalised banks at the moment. We have not
yet come to a decision on what's the best combination of instruments.
As you quite rightly said, yesterday the Prime Minister spoke
very strongly on this subject at the CBI. So did I. We are dealing
regularly with the banks on this question.
It is just worth pointing out by way of anecdote
that some banks are expanding their small business lending portfolios
very substantially. Some of them are finding a way of doing it.
Perhaps I should not name names, but some have been more forward
than others, and there may be lessons in the way they operate.
Mr Binley: I am grateful
for that. I have been a bit naughty with those questions to you,
but I did want to make the point that this is absolutely urgent
and vital. I know you know that.
Vince Cable: This
is urgent and important, we fully understand.
Q49 Mr Binley:
And I am grateful for that. Let me go on to ask what you can
do within your Department. Can I ask how much additional funding
you hope to make available for the continuation of the Enterprise
Finance Guarantee Scheme and what is the new expected date for
applications?
Vince Cable: I
cannot give you the exact sum, but as I said in my earlier response
to you, we are confident that within the capital budget we have
agreed there will be scope for continuing and hopefully expanding
the Enterprise Finance Guarantee Scheme. We will be announcing
precise figures of that very, very soon.
Q50 Mr Binley:
I look forward to that. Can you give us any idea of what very
soon means, because in Government terms very soon can stretch
over a very long period?
Vince Cable: I
think we are talking about days, rather than months.
Mr Binley: I am grateful
for that. Thank you very much, Secretary of State.
Chair: I will bring in
Rachel Reeves in a moment. Beforehand though, there is a very
specific question from Luciana Berger.
Q51 Luciana Berger:
We saw in the CSR that from January the Government will offer
support for low carbon vehicles through an incentive scheme offering
up to £5,000 towards the cost of a new ultralow emission
vehicle. Can you tell us, please, what the budget will be for
this scheme and also what the definition of such a vehicle will
be?
Vince Cable: The
budget is operated by my colleague, the Secretary of State for
Transport. He will be able to tell you exactly how that scheme
will operate. It is a partnership arrangement; we have supported
the manufacturing side of this. You will remember from our last
meeting that I talked to you about the support that has been given
to Nissan to develop electric vehicles, and of course that is
complementary to the incentive scheme that Philip Hammond's Department
is operating. I am not avoiding your question, but I think if
you just ask him he will give you the details of how that scheme
operates.
Q52 Chair:
What commitment is there from the Department, apart from the funding
that we know is granted to Nissan?
Vince Cable: Well,
that is the main proposal.
Q53 Chair:
Yes, but is there any funding over and above that, that the Department
is involved in?
Vince Cable: There
will be continuing support, which will operate in a different
way in future. As I said, the Manufacturing Advisory Service
is one channel. While we are talking about basic technologies,
these new innovation centres will be another; that is rather upstream,
in terms of the R&D work. The Green Investment Bank is very
much conceived in terms of how we can promote lowcarbon
manufacturing, as well as other aspects of the lowcarbon
economy.
Q54 Chair:
Is there anything in the CSR that could prejudice the BIS funding
for this particular project?
Vince Cable: I
cannot think of anything negative, we are very positive about
this.
Chair: Right. Can I bring
in Rachel Reeves?
Q55 Rachel Reeves:
Thank you, Chair. I just want to come back to Brian's important
point about bank lending. The big four banks alone made profits
of £15 billion in the first half of this year, and it
looks like the bonus payouts this year are going to exceed, by
some margin, bonuses last year. Andy Haldane, Executive Director
for Markets at the Bank of England, made it very clear that banks
could lend substantially more and increase the capital they put
aside at the same time, if they were to pay out less in bonuses
and dividends. Do you subscribe to that analysis?
Vince Cable: I
think there is quite a bit of truth in that. Andrew Haldane has
written extremely well on the banking system. But there is not
a direct link, of course, between bonus payments and small business
lending; as you know, the bonus payments tend to be concentrated
in the investment banking arms of some of the leading banks and
the free-standing investment banking institutions. But there
is an indirect link, and I accept that, and I have said that myself
on many occasions.
Q56 Rachel Reeves:
I guess my point is that many of the banks are saying that they
have to put aside more capital and as a result there is not the
money to lend out to small businesses. What Andy Haldane was
arguing, and what I would subscribe to, is that they could do
both if they were willing to reduce their bonus pots and if they
were willing to pay out less in dividends.
Vince Cable: Well,
certainly that is the Government view, precisely along those lines.
It is a point we have repeatedly made to the banks, whether they
are publicly owned—
Chair: Could I refocus
this debate on actual CSR and support? I gave Mr Binley a little
licence.
Mr Binley: Very kind.
Chair: I have given you
a little licence Rachel, but can we actually focus on the specific
issue?
Q57 Rachel Reeves:
Yes, okay. On the money available for manufacturing, it says in
the comprehensive spending review that the Government will be
providing £200 million a year by 201415 to support
manufacturing. Would you be able to tell us how that is phased
in? Will there be any money, for example, next year, in that scheme?
Vince Cable: Yes,
there will. How we break that down precisely we will have to
report to you. I think there are three basic areas where money
will be spent in that general heading. The first is the Manufacturing
Advisory Service. The second is the growth hubs, which are being
developed by my colleague Mark Prisk, which are for growing companies,
giving them support. The third is the innovation centres, which
of course are not directly manufacturing activities but the technologies
that lie behind them, and we want to make that whole process much
more effective. But manufacturing companies will also be able
to tap into the Regional Growth Fund, if they have good applications.
Q58 Rachel Reeves:
So this £200 million, if it is for the Manufacturing
Advisory Service, is it more around advice than it is around grants
or loans for businesses with big business plans who cannot access
finance from banks, for example?
Vince Cable: Yes,
and I think I have said on many occasions that given the overall
position of the Government, and perhaps our own reluctance to
get too involved in "picking winners", we do not envisage
the Government being heavily involved in lending or making equity
investments in individual companies. But this can happen in particular
cases' the Green Investment Bank and the Regional Growth Fund
may well involve direct involvement, depending on the strength
of the application.
Q59 Rachel Reeves:
You say on the one hand that the Government will not be involved
in picking winners or supporting directly, but through the Green
Investment Bank, they might do that.
Vince Cable: But
it would be done on arm's length and very professional banking
principles. The system that we inherited, in which you may remember
there was extensive involvement, as we discussed at our last meeting,
where the Government were heavily involved in supporting particular
industries—for understandable reasons in the emergency we
had—was time limited and that has now come to an end.
Rachel Reeves: Yes. You
allowed them all to go through, apart from the loan to Sheffield
Forgemasters. I remember that well, Secretary of State.
Chair: Congratulations
Rachel, you slipped that one in. Right, can I turn to Nadhim
Zahawi?
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