Government Assistance to Industry - Business, Innovation and Skills Committee Contents

Examination of Witnesses (Question Numbers 294-351)

Mark Prisk MP, Philip Rutnam and Emma Squire

7 December 2010

Q294   Chair: The Minister made an early start at the breakfast meeting that I attended. Thank you for your attendance. Could you just introduce yourselves for voice levels and so on?

Mark Prisk: Yes, certainly. I am Mark Prisk and I am the Minister with responsibility for business and enterprise.

Emma Squire: Emma Squire, head of the SME Finance team at BIS.

Philip Rutnam: Philip Rutnam. I am Director General for Business and Skills in BIS.

Q295   Chair: Thanks very much. I will kick off. Minister, what do you think are the main challenges for BIS, firstly over the next 12 months, and also over the lifetime of the Parliament? Where do you think you will be focusing your efforts?

Mark Prisk: I think the key priority for the Department is to continue to enable sustainable and sustained growth. Clearly, it's early days for the Government. We are just six months into office and there are mixed data in terms of the global economy and what impact that will have in terms of the UK. I think for us, the principal framework that shapes our approach to assisting industry and business rests around a credible plan for macroeconomic stability and financial stability; a programme of reform to inject new dynamism into the markets here and indeed to enable us to export abroad; a relentless focus on the Government's own activities and how we can best enable growth; and then to ensure that there is strong growth, but opportunities are fairly distributed right across the county. In that context, the growth reviews that the Chancellor and the Secretary of State for Business jointly announced last week are a very good example of the approach we want to take as a Department. I think this goes back to what I consider our principal role to be. It is a pivotal function, which is that our role as a Department should be as a voice for business in Government and across Whitehall, whilst also being the voice of Government and the key contact point of Government for business. It is that pivotal role that I think is very important.

Q296   Chair: One of the difficulties, as I see it, that your Department has is that it may be very focused itself, but obviously the decisions made by other Government Departments impact on BIS's ability to deliver. Are you satisfied that other Departments are signed up, if you like, to the BIS growth agenda?

Mark Prisk: Very encouraged, I have to say, that all colleagues that I have worked with across Government have demonstrated their recognition that not only do we need to tackle the public sector deficit, but that we must also grow the private sector economy. In many ways, the two things go hand in hand.

I think a good example of that would be the decision by the Treasury to press ahead with a Patent Box, which is immensely helpful to those businesses for which intellectual property and the development of IP are crucial. We saw just last week GlaxoSmithKline set out their own response that suggests they now intend to invest a further £500 million in their business alone as a direct response to that, but they are not the only ones, Mr Bailey.

I have been encouraged by the way, when I have been dealing with the vexed question of regulation, that ministerial colleagues understand the need to tackle the problems around wanting to put in place the Government's coalition agreement manifesto, as it were, whilst recognising that in doing so you have to respect the burden that may place, intentionally or otherwise, on small and medium-sized businesses.

I suppose that is really why we have come forward with the idea of growth reviews, because we feel very strongly—this has been endorsed by the Chancellor and by his Cabinet colleagues—that we need to look at the whole impact of Whitehall, in terms the business community and in terms of the economy. The point about the reviews is not simply to see what this Department is doing, but also to look carefully at what is happening by sector and then to look at what different Departments are doing that may impact on those sectors or on business as a whole. We will be setting out very shortly the first of those six reviews, by sector, and how we are going to engage with other Departments.

I have to say that, whilst I recognise that colleagues will have their own priorities as Departments—the Home Office with law and order or whatever—nevertheless, they have been very positive about trying to square the circle of delivering a set of agenda items from the coalition agreement whilst also respecting the need to grow the economy. Inevitably, sometimes, there will be a tension between those two aims.

Q297   Chair: After the Government has been in for four or five years, how would you judge whether you have been successful or not?

Mark Prisk: I am always a cautious person in this context. In the past, I have watched colleagues of all political persuasions make big statements. My own inclination would be to say that I would like to feel that if in four or five years' time we can look back and say that through this Parliament we had sustained and sustainable growth that was recognised across our key sectors where the UK has strong advantages; that we saw the ability to start and grow a business, especially a small business, actually made easier; and that we found ourselves exporting more, both in value and volume, those would be good symptoms of what I would hope would be a positive agenda by the Government.

Q298   Chair: This Government has been described as less interventionist than its predecessor. Do you think this is an accurate assessment? If so, how do you think you are less interventionist?

Mark Prisk: The way I would describe it is to say that we want to make sure we set the right long-term economic conditions for business and industry so that businesses that very often have a longer time frame than we in politics have the confidence to plan and invest over the next four or five years and beyond. So our view would be not to try to tinker and meddle in different aspects of those things that shape decisions by business.

The Chancellor, for example, has himself said that he wants to simplify the tax system. We equally have said that our view would be to try to focus on supporting technological capabilities and skills, rather than trying, as has happened in the recession, to bail out individual companies. In other words, we feel strongly that Government has a role. We do not believe it is a free for all; we do believe in free enterprise. But Government can be an effective partner, and that will mean making sure that we invest, as we are planning, in things like infrastructure and skills, maintaining the cash in real terms, the science budget—those things that help business as a whole, or key technological capabilities, rather than giving pots of money to individual businesses as has happened perhaps in the past.

Q299   Chair: All Governments give some sort of help to industry, and at the meeting that we both attended earlier, one of the points that was raised was a request by the Government effectively to do a stock take of what other countries did in support of, in this particular context, the motor industry, but you could project this for manufacturing in general. Does the Department do this, and if so, how do we compare with other countries?

Mark Prisk: That is a huge range of different activities, sectors and policies. What we try to do is make sure that, first, we are measuring the effectiveness of UK programmes and then look at how competitive the sectors are in this country by comparison to other nations. We have a preference as a Government not to move down the subsidy route, but prefer to try to create the right incentives in the market through a simplified tax system—by reducing corporation tax, for example. So we do look at our competitive position and one of the things that I have raised with the different sector groupings that we have in the Department is, how does UK plc compare with, for example, our French, German, Italian or American competitors? What are we doing well? What can we do better? That applies, as far as I am concerned, to Government as well as to the industry as a whole.

Q300   Nadhim Zahawi: Minister, thank you for coming. Just following on from that question and taking it a step lower—that is, to the European Union—what assessments have you made of how the European Union countries interpret the EU state aid rules and are we as effective as they are, albeit I take on board your instinct not to be state interventionists?

Mark Prisk: The state aid rules are there to help tackle evident market failure and try to make sure that you get a sensible balance between the natural public interest in a key technological capability—for example, the automotive sector—and making sure you do not distort competition. There is, you're right to say, perhaps a different outlook in the UK, perhaps a more Anglo-Saxon view of the world, which is that we take the view that the state aid rules are there to encourage free trade, not to encourage protectionism, and that we want to make sure that they operate clearly and above aboard.

So, we have, as a country, been meticulous in making sure that we follow these rules carefully. I do not have a problem with that. The key is to look at some of the evidence. I see anecdotal remarks that somehow other countries are getting away with things that we do not. I have not seen any evidence of that. I have read about it and I have had different businesses say that and I have asked for that evidence, but I have not seen that evidence.

What I would say is that I think it is important in this area to recognise that we must be careful in ensuring the Commission is able to do its job. The UK, as I recall, has had just six orders against us since state aid rules began. I may be wrong in that, and my colleagues here may be able to correct me, whereas, just last year, for example, Italy faced 15 referral orders. I want to make sure that we have a clear set of rules and I want them properly enforced so that we are indeed able to promote free trade, rather than necessarily start getting into a marketplace where we're jostling for subsidies. Repayable launch aid is a good example in the aerospace industry that there will always be a case for legitimate support for industries where there is market failure, but so far the evidence shows me that the state aid rules are not disadvantaging the UK.

Nadhim Zahawi: There is obviously a perception gap that you point to. What do you think are the causes of that, because the evidence does not show it, yet in the court of public opinion, or in the court of business opinion, there is that perception gap. Why do you think that develops and what can your Department do about that?

Mark Prisk: Perhaps it is appropriate this morning to refer to it. We tend to look at the world as if we are playing cricket. I will just pause there to make that point, and obviously we are playing it better than certain other nations in the last couple of days. I think you have to recognise that the UK is probably one of the strongest voices in promoting free trade. It is a different outlook. Therefore, I think that is a good position to be in.

What I have always said to business is, "Show me the evidence", and I have yet to see concerted evidence from the business community that we are at a disadvantage. So if I find that, by all means we would want to pursue the issue, but I suspect that, quite naturally, what happens is that, in the discussion among businesses, people will say, "I gather such and such", and, "Oh, did you, really?", and, in that discussion, the danger is that that can become an assumption that there is systemic failure by other countries. I have not seen that evidence.

Q301   Margot James: At a previous session we were advised that the Enterprise Finance Guarantee scheme could not be applied to companies that exported because of state aid rules, and I believe your Department is looking at this from the point of view of finding a way of having an Enterprise Finance Guarantee scheme or similar that could apply to exporters, for obvious reasons—it would benefit our economy. Are you really suggesting that no other EU country provides that sort of support for companies that export? I would find that very hard to believe.

Mark Prisk: What we have established with the legal advice we have had is that the de minimis rules of the EU state aid regime would make it difficult for us to take the Enterprise Finance Guarantee as it exists and apply it in that context, but that is why we are now making a conscious effort to work with the banks and with business to look at alternative schemes. I do not know if my colleagues want to say where we are getting with those discussions. So although that particular route with the particular set of criteria may not be an avenue that we can pursue, that does not stop me wanting to try to deal with that problem, because it is a persistent problem.

A note of caution in this area: the last Government did try to go down this path with trade credit insurance and it came quite badly unstuck. I am sure its intentions were entirely appropriate, but nevertheless the scheme did not work, so we need to be very careful about that. I do not know if Miss Squire wants to comment on that?

Emma Squire: I would just say that the state aid rules are very clear that aid cannot be used to support trade or exporting, so we are working with the banks to design a scheme similar to the Enterprise Finance Guarantee that is not aid, and we hope to be able to announce details alongside a trade White Paper next year.

Q302   Chair: Can I just follow up on this, because you are right about the scheme that was introduced. One of the problems was that it was not available for exporters. There is, I believe, a considerable body of evidence to show that during the recession there was a relaxation of rules and that other EU export credit agencies were able to provide assistance that does not seem to have been available for British exporting companies. Now, one of our next inquiries is going to be on trade and investment, and we will go into this no doubt in much greater detail, but I would like your comments on that. It may give us some flavour in advance of that inquiry.

Mark Prisk: You are quite right, Mr Bailey, to say that there was, I think, a temporary framework during the recession period where there was a loosening in the way in which the application of the EU rules operated during the recession. Now, our view is that once you have a system that, over a period, is able to bail out failing companies, you have got a problem in terms of whether people are just propping up business unreasonably. So we were pleased to understand that, although the temporary framework is to be extended to the end of December next year, the Commission has agreed to the idea that the rules need to be tightened back again to the original framework, so that bailing out failing companies is not possible. I do not know whether there is any further update on that. That is my understanding of the position at the moment.

Q303   Chair: But I do not think it was for bailing out companies; it is for assisting successful companies.

Mark Prisk: Yes, let me rephrase that. The loosening of the framework allowed some businesses to be able to seek that support when perhaps they were failing and the worry was that, if we went on as we came into recovery, there might be a temptation for other Governments to pursue that road, which would not be helpful. So the temporary framework is now going to be tightened back to the original purpose of state aid.

Q304   Chair: But that did not seem to apply in Germany and France.

Mark Prisk: Again, I do not have evidence to that, but I would be very interested if the Committee does have it. I would be happy to look at that.

Chair: We will pursue this in greater depth when we do our further inquiry.

Q305   Nadhim Zahawi: Minister, the Department says that supporting those sectors where Britain has a comparative advantage is one of its aims. What does that really mean in practice?

Mark Prisk: Right. What that means in practice is making sure that we create the right macroeconomic and financial environment; that is why we are reforming the tax system. It is why we, as a Department, are working on issues around access to finance. In terms of freeing up markets where we have strengths, the point of the growth reviews is to look at the barriers that Departments may be contributing to that are holding businesses back. The Patent Box, which I mentioned earlier, is a very good example.

We, as a Department, are looking particularly closely at how we better commercialise the development of new ideas and that is why the new Technology and Innovation Centres, which the Department is seeking to invest in, will be crucial to that process. Very often, what businesses say to us, particularly the micro­business, is that they develop a strong idea or product or service, but their ability then to commercialise that is restrained. That is why we feel that the combination of looking at venture capital, strengthening access to credit more broadly and the development of Technology and Innovation Centres, where the focus is on how you commercialise good ideas into viable products, is a good way of progressing that.

More broadly, I think issues around reducing the burden of regulation is a very important process because we need to make sure that well­intentioned legislation is not unintentionally holding back business, and then there are other avenues that I think are important.

We were talking this morning, Mr Bailey, about the question of the motor industry and the increasingly rapid growth in low-emission vehicles. I think an approach that was, to be fair, started under the last Government and that we have endorsed, which is the Office for Low Emission Vehicles, which brings together ourselves, the Department for Transport and the Department of Energy and Climate Change to look at how we encourage the new technologies in low-carbon vehicles, is a really good way of dealing with this. It is dealing with both demand issues, by the Plug-In Grant with the Car Grant, but also supply issues and infrastructure issues in terms of the Plugged-in Places Programme. It is getting that balance right, which we were talking about earlier in the All-Party Parliamentary Group.

Q306   Nadhim Zahawi: So let me just push you a bit further on that. What are the sectors that you think Britain has a comparative advantage in that are worth supporting?

Mark Prisk: Well, some sectors and some technological areas of capability. Green technology is one area where we are well regarded. I went to China recently and it was very clear there that they regard our capability in design, and architectural design particularly; ICT; construction; and consultancy, all around low carbon and reducing carbon emissions, as being one of the UK's great strengths. So that is an area where we need to do a lot more and that is why, for example, I have encouraged the completion of the Low Carbon Report from the Innovation and Growth Team on the construction side. They have now given those recommendations to us. It is a very substantial report and what I want to do now is look at not just what are the issues within the industry, but how I help the industry go and sell their expertise, because there is a big market out there.

Low-carbon goods and environmental services in that field are worth £3 trillion globally. That is expected to rise in this Parliament to £4.3 trillion globally, and in the UK alone it is worth £112 billion. It is a market that is growing. Now, that of course cuts across different sectors. We are looking, through the growth reviews, to focus on six areas initially. These are our first areas. One is obviously to deal with advanced manufacturing, and then construction, retail, looking at the digital and creative industries, looking at professional and business services and—I am just going to have to double check my note to make sure that I get the sixth one correct—health and life sciences. You can see that I struggle beyond counting to five.

I think the other thing is that we are trying to focus our energies in the growth reviews on evidence, so trade data and looking at where we are succeeding in overseas markets. Those are the ways in which we were trying to develop this. It is complex in the sense that you are dealing with domestic capabilities, the skills agenda, the import opportunities and foreign direct investment, which very often is then able to assist that process. So, it is making sure that you have those four things I started with—around macroeconomic stability, dynamic markets, reforming how Government works and making sure we are supporting the way in which industry can access credit for example.

Q307   Nadhim Zahawi: That is wonderful and fantastic. A lot of the areas that we are focusing on are new growth areas and therefore if you take them in terms of the size of our economy they are still micro in size. Do we have a comparative advantage in financial services in the UK?

Mark Prisk: Yes, I think we do. I think if you talk to anyone in the industry, their recognition of the role of the City—obviously, financial services is quite broad; it is not just banking, it is insurance and other fields as well—is that it is still an important comparative advantage. Yes, absolutely.

Q308   Nadhim Zahawi: And does it worry you that it has not made the six sectors and also does it worry you that there is research—I think from Policy Exchange yesterday—that something like one quarter of financial service institutions in the broader sense are thinking of relocating out of London?

Mark Prisk: Yes, I have seen that survey. I think I would say two things to you. First, the professional and business services growth review will enviably impinge on a number of the financial services because clearly accountancy and the related management consultant groups are very much part of that. I would also suspect that the City feels that the Treasury, the Bank of England and the FSA have looked—perhaps they might argue—closely enough at the role, the remit, the scope and so on. Therefore, the need to focus on some of those other sectors in the short term, in terms of growth reviews, is probably the right balance of priorities, but the key here is not denigrate the role of financial services. It is to make sure that we have a range of sectors the economy is based on, rather than what I think we have suffered from in the past, which has been an over­reliance on a small number of sectors in a part of England. We need to change that.

Q309   Nadhim Zahawi: We have heard that one of the big problems facing businesses is that HMRC is now requesting money that had been previously deferred under the Time to Pay scheme and those firms need to use that capital to invest. Are you aware of this problem?

Mark Prisk: I have heard anecdotal evidence about that. We understand from Revenue and Customs, having inquired, that the position they have has not changed. What they have argued is that it may be that those businesses are finding it more difficult in a recovery period to demonstrate their viability, because obviously the market conditions have changed, but clearly if there is any systemic evidence, I would be very keen to have a look at it, as I am sure would the Chancellor.

Q310   Nadhim Zahawi: I think it is something that BIS would want to wean businesses off, or mitigate, because it is an interest­free loan, if that is how it has been—

Mark Prisk: In the longer term, it is not the way to develop your business, but quite clearly there was a perfectly sensible reason to recognise that cash is king in a recession.

Q311   Paul Blomfield: Can I just go back for a second, Minister, to sectoral priorities? We have heard two views in our discussions: on the one hand, we should be focusing on those sectors where we already enjoy a comparative advantage, but, on the other, that we should be looking to those sectors where we have the potential to gain advantage. What would your view be on that issue?

Mark Prisk: The approach I have taken from taking on this office has been to strengthen the sectoral understanding and relationship across the work of the Department, because the first thing you need to do is make sure there is an effective relationship, which means that we understand what is going on in that marketplace of that sector and that we have good ties with them. The next step, in my view, is to start being reasonably demanding of that industry about making sure that, where it has weaknesses, it addresses them and we address them. A good example is the Automotive Council. This is something that came out of the Innovation and Growth team. It is chaired partly by someone from industry, Richard Parry­Jones, and partly by the Secretary of State and he and I have worked with that Council. What we have tried to do is not have a nice discussion and then all go away and meet again in a quarter's time, but instead to say to them, "Right, what are the key issues?" Together, they have identified supply chain issues and also the question of the emerging technologies. We have then set up working groups and I made it clear that I then want to see outcomes from those. That puts some pressure on me to perform as well.

So to answer your question, I am going to be demanding of all business sectors. Clearly some will succeed better than others. It is wiser for me not to try to ignore some and focus only on others. I think what I am trying to make sure is that we are effective in what we do as a Department and that when people are developing their role in a sector or looking to invest from abroad into the UK, they see a Government that is engaged—not trying to tinker and meddle in individual businesses, but is an effective partner that stands alongside them.

This is also important when we come to overseas markets. As we move towards trying to grow—for example with China, trying to double our trade with them over the next five years—what we need to do is make sure we understand how that marketplace works. There, for example, the Government-to-Government relationship is, if you like, the starting point before the business-to-business relationships can get much further.

Therefore, we have taken a very proactive approach: visits by individual Ministers, the visit by the Prime Minister and Chancellor a month or so ago. It is all about building that relationship so that business then feels able to step in. This is where memorandums of understanding and so on come into play.

My view is that we have tried to strengthen our sectoral understanding, make sure there is an agenda for the industry as leading, that we are being demanding of them and that we are involving all the sectors. Some will progress further and faster and that will be when we have to look at our resources. We need to look at those areas where I can get the best value out of every pound of taxpayers' money that I am provided with. What I do not want to do is find that we have ignored an area and that there were opportunities there. This is going to be a rebalanced economy. We do need to be aware of all the sectors. Sorry, that was a long answer, but I wanted to cover the waterfront.

Q312   Paul Blomfield: No, it is a useful answer. If I could just follow up on that last point in terms of being aware of sectors where we might make progress. I am interested in the role, as you see it, of the Department in strategic planning and in identifying those sectors and the sort of support that they need.

Mark Prisk: Yes, I think what we are trying to do is work with the industry to identify the key things that are barriers to growth. You will find in a lot of the skilled engineering areas at the moment that there is beginning to be a problem. We might think of it being welcome in the sense that they are now beginning to grow at a point where they are thinking about whether there will be sufficient skilled engineers. Given where we have come from, in terms of recession, this is possibly a better problem to have. I am not saying it's a good problem, but that direction is better.

I think it would be useful if we reflected, therefore, on the barriers to growth, and that is why we have focused on the skills issue, why we are looking at specific technologies and also why were looking at working across Departments on things like deregulation, but there are emerging technologies. Plastic electronics is one that I am still getting my head around, but I do not know whether Mr Rutnam or Miss Squire want to comment on that.

Philip Rutnam: Perhaps I could add a little to the Minister's answer. We try to take a very active approach looking at emerging technologies. Of course, we also have the science base in the Department, and there is a very strong and useful linkage there—for example, there is work being done under the Foresight programme at the moment, looking at emerging technologies on a 20-year time horizon. We find that as some of those get to a certain stage of maturity, they become very relevant for the sectoral approach that the Minister's outlined.

The Minister mentioned plastic electronics. That is an area where the Department has been putting quite a bit of effort into understanding and making sure we get the right sort of conditions for supporting growth in the UK over several years. It is an area where the intellectual property was developed in the UK. We have in­depth expertise here and we really should be seeing world-leading businesses coming out of that IP base.

Another example I would cite is composites, which are a bit further along in terms of commercialisation, but really still at a relatively early stage in their potential for transforming very large parts of manufacturing and the supply chain. We try to take a very active approach, thinking ahead to new technologies and new sectors, many of which will not fit within the existing classifications and categories that we have got.

Mark Prisk: Composites is a good example there in that it, as a technology, started principally in the aerospace sector, but the automotive sector is now beginning to think around this because in the use of lighter materials—the ability to drive down its carbon emissions—that is an important aspect of how it might do that. This is one of the areas where the benefit of having the ability to be working across the different sectors in order to add two and two together and come up with five is a very important role. It is a facilitating role that I think is something that we as a Department and I as a Minister want to focus on.

Q313   Paul Blomfield: A final question on sectoral support. You have mentioned the model of the Automotive Industry Council. What benefits could be gained by applying that model more widely across other sectors?

Mark Prisk: What I have tried to do is allow the sectors or the groupings to develop a forum that works best for them. The Automotive Council is drawing together very often some very major businesses—multinationals—with some smaller businesses and long supply chains. If you take professional and business services, this is a slightly different animal. The grouping we have for that is different because the marketplace is very different. You have a range of different sectors they work in—everyone from architecture and surveying through to accountancy—and the structure of the markets is different in that the businesses are very often limited liability partnerships. There is a greater balance in the market between small, medium-sized and larger players, and although there are common issues, like professional standards, very often there are other aspects there.

What we try to do is make sure there is a group, a forum. It might be the Automotive Council or the Professional and Business Services Group. We are with retail now, looking at establishing the roundtable approach so that we can get the interaction with them. I have tried to make sure that it is a forum that works best for that marketplace—for that industry—rather than lifting up the Automotive Council, dropping it down and saying, "This is how it should be done." What I have not done, however, is be willing to compromise on the basis that I wanted to have outcomes.

I have said to the industry, "We can meet, but let us meet with specific outcomes. I want to know in a year's time, when I look back and we have met two or three times over the year, that we have progressed on the problems and the things holding you back, otherwise we have all got better things to do, to be perfectly blunt." So they like that; that is the way business works. Yes, the model is good, but we need to allow, and we are allowing, those forums to develop in a way that best suits the shape and the structure of each marketplace.

Q314   Nadhim Zahawi: Just on that point, Minister, you have the growth sector panels, and obviously the councils and other forums. How does that interact, if at all, with the Prime Minister's business panel?

Mark Prisk: Okay. The Business Council, which the Prime Minister runs, is really a group to enable him to pick up on the big-picture issues. The groups we have just been talking about are drilling down, focusing on the sectors, looking at the nitty-gritty. I think that is quite a good balance.

Q315   Nadhim Zahawi: What is the link to your Department, or is there one?

Mark Prisk: Oh yes. The Secretary of State is party to all those, and that is the best way of forming that link.

Q316   Nadhim Zahawi: You described very eloquently the reason for the Automotive Council, and this morning's breakfast was a perfect example of why it's working so well and why it is such a good idea. Feargal Sharkey of UK Music last week said that the creative industry would very much welcome a similar Council, and they have similar characteristics in the sense you have got some very big companies—some giants—and then a long tail of SMEs and micro­businesses. If they request a similar Council, would you be minded to help them to set that up?

Mark Prisk: My colleague, Mr Vaizey, is the Minister with specific responsibility for digital and creative industries, and I know he has very good contacts with the industry. As you have noticed, one of the first growth reviews will be for the digital and creative industries, so we are certainly open to looking at how we can develop forums in that context. I confess I am old enough to remember some of Feargal Sharkey's excellent music, but I am in danger of getting to sound like a High Court judge, so I will not press that too far, but I understand there are challenges in that field, not least around things like access to finance.

Q317   Chair: May I ask about industrial councils? The model seems to be working fairly well, certainly on the basis of the meeting we were both at this morning. Was the model, if you like, devised by industry, devised by the Department or what?

Mark Prisk: It is a good question. I am only six months into the job, so some of these predate that and I am not in a position to judge. My officials might be able to comment in more detail as to the history. What I would say to you is that the key in this is not necessarily the structure; it is the quality of the relationship. I have always taken the view that one of my roles is to spend as much time as I reasonably can engaged with business and industry at all levels, because it is only in that way that we in politics can best understand the world we are trying to encourage.

I did run a business myself, but that was over 10 years ago, so I am a bit out of date. One of the things that I have consciously done is make sure that I spend more time with business so I am spending, over my first seven or eight months, five working days with small and medium-sized businesses. As to the model for industrial councils, I think they have evolved. That is fine, but I would say to you that the key is the quality of the relationship between the key industry players and the Ministers involved, and that, frankly, is about us spending sufficient time to get to know those people.

It did help me—let us be quite clear about this—to have been in the shadow role for three or fours years before coming into government, because that allowed me to get those relationships established, and I think that continuity is important. I do feel some sympathy for those Ministers from the previous Government who perhaps had only a short time—three, four or six months or so—in office. It is very difficult to develop that relationship, so the relationship is often as important as the structure.

Chair: Do your officials have anything to add?

Philip Rutnam: Specifically on the case of the Automotive Council, it was a mutual agreement that this would be a good thing to do. I think it stemmed from an earlier exercise in the Innovation and Growth Team that we had around the automotive sector, which again was very much a partnership between Government and the sector to look at things that we could do together to improve conditions for the sector's success. As the Minister has indicated, there are a variety of tools that we use, such as Innovation and Growth Teams, industry councils, leaders' forums and other types of partnership. It really is, as the Minister said, down to the quality of the relationship, which is extremely important to us.

Q318   Simon Kirby: Picking up the Minister on the UK music industry, we were told by your Department that for eligibility for a council, one of the key points was that the industry needed a coherent picture of what it wanted to achieve. You have spoken today about outcomes as well. Is that reasonable for the music industry, given the inherent nature of the creative process?

Mark Prisk: To make a forum between Government and business work and be sustained, there has to be a centre to that industry's view. If they cannot agree among themselves, it makes it very difficult for the Government to engage effectively, because you get a range of competing, conflicting opinions, which makes it very difficult for the Government to work with them to deliver sensible outcomes.

I suppose the starting point is whether that industry is sufficiently coherent. It does not have to agree on everything. Certainly there will have been a degree of caution around the automotive industry, for example. Certainly, in looking at the Defence Industry Council, there was a little caution among some of the major players because they are competing for similar contracts, so why would they share information? It is quite a challenge to get the businesses to open up a little and be a little more candid with us so that we can understand the broad view. The key is, does the industry have a coherent view of where it wants to go? If that is the case, at that stage there should be an opportunity for looking at how you could formalise the relationship. I am sure that is something that my colleague Mr Vaizey would want to pursue and I know he has good contacts with the sector.

Q319   Margot James: Moving on to issues around credit and bank lending, the Forum of Private Business told us that lending to small businesses was down on this time last year. Several of the banks that we have spoken to have contested that view. What do you feel can be ascribed to lack of demand for credit and how much do you feel should be ascribed to the lack of availability of credit on the part of the banks? How do you unpick this particular issue at your Department?

Mark Prisk: There is conflicting information and opinion on this. Our evidence, which we collect from the principal lenders, shows that for the smallest of those businesses—those with a turnover of less than £1 million—two thirds of loan applications are approved and that figure rises to 80% for business with a turnover between £1 million and £25 million, but of course, if you are in the third of the micro­businesses that does not get a loan, that is not a lot of comfort. Inevitably, what has happened is that the number of lenders in the market has reduced substantially. The pressure on those lenders to get their own books in order is considerable, so I think there is a mismatch between the outlook of the banks and the small businesses. Equally, I think the Forum of Private Business figures looked at net lending—in other words, what was the appetite to borrow and what was the appetite to pay back?—and there has, perhaps not surprisingly after recent events running into the recession and the credit crunch, been a greater determination by small and medium-sized businesses to want to pay back money they owe. That is perfectly rational behaviour. That has tended to lead to a depression of the total—the net lending figures—so there is some element of truth in what the banks are saying and there is some element of truth in what small business is saying. I am trying to give you my analysis of it, before I come to where we go.

Our view has been that there is a mismatch and that we wanted to press the banks about this to make sure there was clearer information, clearer commitments and action both in terms of the lending and the information they provide. We pressed them over the summer on coming to office, and in October, the British Bankers Association published their taskforce recommendations. Seventeen separate changes were proposed—a new lending code with an appeals process; the application, I think quite sensibly, of offering business mentors in this field to help smaller business look at the range of debt and equity funding available; discussions around trade finance, which we touched on before and which we are working on with them; and also their business growth fund of, over a 10-year period, £1.5 billion. In my book, the issue is enforceability. They have put these proposals forward. They have merit. Let us make them work.

First, we have agreed that the banks and the small business organisations, including the Forum, meet on a monthly basis to go through the data. They report back to the Small Business Economic Forum, which I chair and which brings small businesses and Government together with the banking community, and also to stress that where there is unreasonable behaviour by the banks—whether it is in terms of their willingness to lend, or indeed the terms and conditions that underpin that—we will act on that where we find evidence of unreasonable behaviour. What that really means is making sure that we press the banks.

There is one other point here that I think is more concerning for the banks, which is the word "trust". I think I pick up from a wide range of small and, in particular, high-growth businesses that their willingness routinely to go to the banking community, as they might have three or four years ago, has broken down; that they are looking elsewhere; that they have got to the point where they do not see the high street bank as their first port of call. The good news about that is that our small business communities tended to be over­reliant on debt finance, unlike other countries where there is a better balance between debt and equity, and potentially if that means a shift in that, that could be better for the long-term, more stable funding of SMEs.

The tricky part about it will of course in the short term be, how do banks respond to that? Because if there is a fundamental loss in trust, I think that is a real problem for them as businesses on the high street. That is something that they are sensitive to and I think they will want to come back on, but we need to work with them to get this right, which is why I have made it clear that we are not going to ignore evidence of any unreasonable behaviour.

Q320   Margot James: Thank you for the very comprehensive answer. You have answered my next question.

Mark Prisk: My apologies.

Margot James: Not at all. It was about how to tackle the trust gap from companies that do not feel they can even approach the banks, out of fear of being restructured or for whatever reason, for loans. You touched on the issue of small businesses looking to alternative sources of finance. Equity is one source. What about these other groups? I was going to ask this question later, but I will ask it now: what is your Department doing to encourage alternative sources of finance like the Community Development Lending Partnerships?

Mark Prisk: The CDFIs are very important. That is why, in looking at the Enterprise Finance Guarantee, we are not just looking to extend the value that is available, but also the number of lenders that can participate—in particular, whether we can get the Community Development Financial Institutions as lenders as part of the EFG programme.

One of the benefits, I think, of those institutions is that they are rooted in a locality and have a better understanding of what the prospects are for the small micro­businesses. The danger is we veer slightly into a rose-tinted view of Mr Mainwaring and the bank manager. It was not perfect, but there is a problem for the banks in terms of their business model in that, in consolidating their high street presence and in focusing on a more systematic approach, they have lost that value-judgment capability on the ground of knowing a business well enough such that when they come through the door and ask for a loan, they do not only know about the business; they know the business's customers and they are therefore able to make a good value judgment as a local bank manager. They have lost a lot of that and many of them would accept that that breakdown is a problem.

The CDFIs are more community based and that is where—I think for the micro­businesses; not the £20,000, £30,000, £40,000 loans, but the small ones—they have a benefit. There is another aspect to this, and I might ask Miss Squire to comment on it. It is about helping small businesses understand the options available to them. I can think of several small businesses for which the options in their mind would be, "Stick it on the credit card," or, "Borrow it off the back of the value of the house," and anything else is slightly hazy. I understand that. Most people go into business not to become a financial expert, but because they have got a great idea and they want to sell it. All the financial side is something they have to learn on the job, but this is where I think financial readiness is an important issue. I do not know whether Miss Squire wants to touch on that topic.

Emma Squire: I will happily pick up on financial readiness and CDFIs. On financial readiness, one of the best ways SMEs can maximise their chance of accessing finance is if they have a sound business plan and good credit management procedures in place, and we are working with the private sector to support initiatives that will help SMEs to get their own management information in order so that when they walk into a bank, they look like a credible borrower that will be able to meet their repayment schedule and to support them in that.

Only last Friday, the Secretary of State attended the launch of the Doing Business Together initiative, which is one such initiative to support SMEs in this way, and it brings together accounting firms, trade credit providers, banks, the small business representative bodies and a number of other partners to make advice and information available to SMEs and support them so that they can walk into a bank and be successful when they apply for finance.

Just quickly on CDFIs, doing those micro­loans is very expensive and resource-intensive, so the Department has two main objectives. One is to support capacity building in the sector, and we are doing that through encouraging private initiatives. There have been a number of initiatives recently where banks are working with CDFIs to provide secondments of expert credit appraisers to pass on near misses, which are businesses that have applied for finance and been turned down by the bank, but that might be suitable for CDFI lending, together with all the credit assessment information to short-circuit some of the due diligence that the CDFIs have to do. So that is on capacity building.

We are also working with the sector through a programme called Change Matters to improve their monitoring information so that they can go and show their books to potential private sources of funding and have income streams that they can lend on to micro­businesses. In terms of ongoing sources of funding for the sector, we are working with the Office for Civil Society on the design of the Big Society Bank to see whether that might provide wholesale finance for CDFIs.

The European Union announced a new micro­finance facility, Progress, last year and we are working to make sure that UK CDFIs make use of that and can access money through it. We are also aware of a potential bid to the Regional Growth Fund from the CDFI sector and we will work with them on that to maximise their chances of successfully getting through the competitive process to win money from the Regional Growth Fund.

Mark Prisk: It is quite a comprehensive range of approaches. I think CDFIs do fill, particularly for the micro­business market, a very important gap that has emerged.

Q321   Margot James: Can you give us a clear understanding of which areas of banking policy reside with BIS versus the Treasury, and in which areas do you share responsibility?

Mark Prisk: We work very well together, I have to say, both on a ministerial and official level. We are focused on the access to finance from businesses' point of view and the financial regulation aspects are clearly led by the Treasury. That is the broad divide.

Q322   Chair: I would like to raise a couple of issues. There seems to be a perception, particularly within manufacturing SMEs, that the banks are not interested in them and do not understand them. Do you think there is merit in the idea of, effectively, the banks finding some way of potentially embedding bank officials within a particular manufacturing sector, and if so, do you think there is any role that BIS could play in promoting it?

Mark Prisk: I have certainly come across concerns among people in manufacturing—certainly in the summer, but less so this autumn—that if you were in manufacturing, the perception was that somehow this was not something the banks were willing to lend to, but I have not seen evidence of it. I specifically encourage the trade bodies to try and see if we can get any evidence of that, because I think if there is discrimination in that context by sector, that is quite wrong. Clearly, a bank needs to make a judgment on the viability of an individual business—that is one issue—but simply to label an entire sector as something that the banking sector is not willing to lend to at all would be wrong.

Q323   Chair: But this is happening, both in the motor manufacturing sector and supply chain and in construction. There is overwhelming evidence from SMEs in those sectors that they have just been dismissed because of the sector they are in.

Mark Prisk: Those are certainly the views expressed and I understand that. I am certainly talking in the Midlands and elsewhere; I have had that commentary to us. We pressed the banks on it. We are looking at the evidence to see if we can find any that shows systemic discrimination on the basis of a sector and we will continue to do so.

You mentioned, Mr Bailey, the idea of embedding banks into manufacturing or into particular businesses. It is a new thought from my own point of view, I have to say, but of course what it drives at is breaking down the knowledge and understanding of the nature of manufacturing, which is a very good point. It is certainly something that I would want to have some further thought about. It is something that I have considered as to whether we use the Department better to draw together the banking sector and key industrial sectors to try to see if we can reduce the perception of risk, because this is what it will be about in the banking mind, which is the perception that somehow certain sectors are riskier and that therefore they are not prepared to lend. Whilst clearly we cannot force people to lend to businesses that are not viable, I think there is an argument for looking at how we could better facilitate that, so I think the principle behind what you are suggesting is very interesting.

Chair: I have to say it was a new thought as far as I was concerned, and it arose partly from the discussions that we had with representatives of SMEs at the Birmingham Chamber of Commerce meeting last week. I think it merits further investigation.

Mark Prisk: Interesting.

Q324   Nadhim Zahawi: Just very quickly, just on that particular point and your point about tackling, or looking at, the trust issue with banks. When we had the bankers here—Peter Ibbetson from RBS and his equivalent from Lloyds Banking Group, and Angela Knight—one of the points that I raised with them is this trust gap, or perception gap, because they were bemoaning the fact that, as they pointed out, the statistics are that two thirds of applications have been approved, up to 80% over the £1 million mark and so on. The bit that needs focusing on is the communication, which you quite rightly outlined. What is the viability quotient? What does it mean to be a viable business? Their own businesses were not viable two years ago—if it had not been for the taxpayer and if you had taken a snapshot—so they need to be a bit more transparent about what they mean by that. Secondly, if they are going to regain credibility, they ought to be more transparent with Government and with particular sectors as to what they think of that sector. On the manufacturing sector, for example, we had the managing director of Toyota here at another meeting, who was making a plea for one of his suppliers. Brilliant supplier, helping them build one of their new models, cannot get access to finance to try and expand their business. So I think we got Mr Ibbetson to get close to admitting that, first, they look slightly negatively on certain sectors—they need to make that clearer to your Department—and, secondly, that they are being a bit more careful and meticulous and taking a bit longer when they are looking at viability of loans and so on. I think there is room for the Department to tackle those things to help them regain that trust.

Mark Prisk: Yes, I take your point on that and I suppose in a way my view is that encouraging competition will help focus minds. In a market where there is fundamentally a choice for most people between four players, the balance between customer and supplier is somewhat limited, he said politely. So getting that competition right is what the Independent Banking Commission will want to deal with in the longer term, but in the shorter term, initiatives—particularly for the micro­players like CDFIs—are an important way forward on that. It may be that my officials want to add something further on this.

I would also say to you that supply chain finance is something where industry itself is taking some good initiatives. I am certainly aware of that in the retail sector and I am also aware of it in industry more broadly, and it makes a lot of sense, because the point is that the major provider, major manufacturer or the retailer is well placed to understand the character of the business they are working with and that there is a good opportunity to strengthen the supply chain beyond the issue of just the supply chain finance.

This is an avenue that we are talking to industry about to try and encourage them. To be honest, it is one of those areas where we almost just need to encourage people to sit in a room and move it forward, rather than the Government weighing in and throwing money around, even if we had any. That is one of the areas where I am trying to facilitate. I do not know whether Miss Squire wants to add anything to this.

Emma Squire: Yes, the Small Business Economic Forum brings together the banks and the business rep bodies and has proved really successful at helping to build some of that trust and improve transparency.

The Minister mentioned the 17 new commitments from the banks. Many of those are about trust and transparency and were really driven by BIS. So, a new survey where the methodology is agreed by the business representative bodies; that is carried out independently really to understand availability, demand and so on for lending; a commitment from the banks to publish more transparent data on lending, including sectoral and regional lending data; the lending principles, lending codes and appeals processes. But you are certainly right that banks can do more to demystify how they assess risk and how they price loans. BIS encouraged and worked with the BBA to publish a pamphlet on how the price of loans is arrived at and they can do more to disseminate that and to make it meaningful for SME customers—put it in plain English and so on. All that was very much front-of-mind when we were working with the BBA on their 17 commitments, and a large part of those is based around trying to improve transparency and trust.

Chair: I know Simon Kirby wanted to ask you about transparency. Are you satisfied that it has been covered, Simon?

Q325   Simon Kirby: I just think it is worth saying that clearly you have had some success in pressing the banks for more clarity of information, but I think there is this specific area around decision making. I was struck, when UK Music came to speak to us, by the similarities between their industry and the manufacturing industry—that there was a mystique attached specifically to the decision making that the banks carried out. I wonder if, having had some success with your pressing, you should press more in this specific area.

Mark Prisk: I intend to be very persistent because I think this is not going to be solved overnight, and in fact, as the economy starts to move into this more sustained period of growth, the danger is that this is just the moment where there is a squeeze on the ability of businesses to grow when they need to access further credit. Therefore, we need to be even more vigilant about that. I think it is very important that we are all aware of how they are meant to perform and what they are meant to do, which partly leads me to a question in the back of my own mind, Mr Bailey.

I am not sure whether Members have seen the lending code that banks are proposing and the appeals process. I do not know whether that came in your evidence because I have had several Members say to me, what is the code? I get constituency businesses raising the question, "This happened, they performed in this way," and I am getting the impression from talking to colleagues—

Q326   Chair: Yes, I want to cover this particular area. Since we have moved into it, can I start with the Business Task Force? Angela Knight of the BBA mentioned what might happen if things, shall we say, did not improve. First they must be judged, but, having judged the Business Task Force and perhaps theoretically found it wanting, what particular sanctions can BIS apply?

Mark Prisk: What we said first of all is that when it comes to bank lending, they have a monthly monitoring and the evidence comes to the quarterly meeting of the Small Business Economic Forum. In my dealing with the cases of bank behaviour, that is the key forum that we want to hold them to account on. That is really dealing with cases as they come forward, looking at sectors, looking at lending terms, looking at terms and conditions and so on. That is step A.

Step B is then working with the remainder of their 17 commitments around the code and its enforcement, around the growth fund and the £1.5 billion promise. That is over a 10-year period. We want to make sure the £150 million a year is forthcoming. We are pressing them on that. We are pressing them on some of the other points they have raised around the application of business mentors. In other words, what we have got from them is—I have the 17 items here—the agenda that we shall remorselessly persue, month in month out. We are working with them on many of these issues already, but it is to make sure that, as we progress over the next six to 12 months, these are not only principles, but they are put into practice. That is the challenge. We have, if you like, an agenda sheet. Now we have to make sure they deliver it.

Q327   Chair: This issue of communication and understanding, including the appeals process, as you put it, does seem very much an issue in terms of SMEs and accessing finance. There seems to be a very low level of awareness. On the one hand, we see banks like RBS saying they are making up to £50 billion available to business over the next 12 months; on the other, we have SMEs who are saying they can't access finance under any circumstances. I believe it has been characterised as the dialogue of the deaf and, from my perspective, it seems very difficult to reconcile these two conflicting viewpoints. Do you think there is a role for BIS in trying to improve the educational process between banks and businesses?

Mark Prisk: Yes, I do. I think it is making this relationship work. Where there is available provision of finance and those people who need finance in business, we need to encourage this to work properly. At the moment, we have a dysfunctional market in that we have just four principal providers and that clearly needs to improve. That is what the Banking Commission is focused on. It is why we are focusing on CDFIs. It is also why we have encouraged the banks to progress with their lending agreements. The Royal Bank of Scotland and the Lloyds Banking Group are on track at this point. We are monitoring that very carefully so the £94 billion that the two organisations have committed to is something we are tracking very carefully and we will continue to do so.

I think also it is about making sure that businesses know the lending code to which the banks have now ascribed. I am a great believer—this may be an area where I want to work more with Members of the House—in making sure that we all know what the lending code is and what the appeals process is, so when we get a constituency business coming to us, we can see immediately the behaviour of that bank and go back to the Chief Executive, as individual Members of Parliament on our constituent's behalf, to impress upon them the importance of them behaving appropriately.

Government has a role in that. I would venture to suggest that so do constituency Members of Parliament, because certainly in campaigns I run as a constituency Member of Parliament where the Chief Executive of an organisation gets 150 letters in his private office, he wakes up to the issue. If he just gets one letter from a Minister saying that he has had correspondence, it does not have quite the same impact, no matter how significant the office bearer, so I think this is an area where we need to make sure there is greater transparency on the banks' behalf and we need to make sure that the information is out there so that the businesses can use it.

Q328   Chair: I think the issue was highlighted with the Enterprise Finance Guarantee scheme because when it was first introduced, there was considerable evidence that the front-line operators of that scheme did not even know about it and that businesses were turned away without being aware of the facilities available. That, by and large, has, I understand, been addressed and has changed, but it does seem to demonstrate that there is a gap between the conception of a policy and the resources being made available at one level and the implementation and distribution of those funds at the contact level—the engagement level—with business.

Mark Prisk: I would certainly agree with that, Mr Bailey, and I think it has to be put in the context of the understandable enthusiasm of the Ministers concerned in January 2009 to want to announce something, which was quite detailed and which inevitably took some months to implement. That is why, for example, we have done our best not to tinker with the Enterprise Finance Guarantee scheme in government, because the moment you do that it takes another three months for everybody down the chain to get the new rules and train the people handling it, whereas the person watching the evening news will see that the Government has announced something and they will go into their local branch the following morning. So you are quite right—we have to be very careful around that. What we have done is extend the value of the EFG without tinkering with most of the rules, so that we can reach more businesses. It looks as though in the coming year we could reach up to another 6,000 businesses, which will be very encouraging.

Q329   Chair: In terms of the engagement of businesses with banking, I know there is this idealised, old-fashioned perception of the Captain Mainwaring approach with the local bank manager who knew the ins and outs of every local business and could make commercial judgments based on that, which I am sure was never the case, but there is an issue, and I know a number of businesses have commented on the tick-box mentality and computer-based allocation of banking finance. Does your Department feel that it has a role in training bank staff and banks into developing a new model that would be a satisfactory bridge between those two extremes?

Mark Prisk: I do not think we have a role in training the bank staff. What is crucial is that the Chancellor and the Business Secretary together impress upon the chief executives that the business model they have is not working in ensuring that lending is made in the way that businesses seek—their customers seek. It is also why we have set up the Banking Commission so that we can see start to look at how we might ensure there is a bringing forward of competitors to those banks. I think that is probably the right approach to it—in other words, getting those businesses to get the right business models so they can better service their customers.

Chair: Yes, I accept that it would not be BIS's role to do the training per se, but it could bring influence to bear on, as you say, the business model designed to rectify this.

Q330   Margot James: On a similar theme, but looking ahead, if the growth prospects for our economy and business in general do materialise, as we all expect them to, where will we be in six months' time, with business perhaps having greater confidence and more need for capital as they come out of the recession? The simple question is, are you confident the capital will be there?

Mark Prisk: We are working to try to make sure that it will be. I am always cautious of speculating because one never quite knows what is around the corner. What we have tried to focus on is, as you rightly say, the provision of capital—the equity side of the equation—so alongside the Enterprise Finance Guarantee, which is obviously guaranteeing debt finance loans, on equity there are a number of steps that we have tried to take. At the smallest level, the business-angel end of the equation, we are looking at how we can reform the regulatory framework because business angels fall into that category of financial intermediaries, and there are rules and regulations around that. That is where, together with our Treasury colleagues, we are looking at whether we need to reform the regime, both in how EIS works—the Enterprise Investment Scheme—and making sure the rules around financial intermediaries work, so that we have a genuine nationwide network of business angels there, able to invest and also give that invaluable business savvy that comes with a business angel. It is not just the money, I often feel; it is that business experience that the person brings when they invest in a business.

Then we come to the question of venture capital, and you are quite right in saying that there are certain points where growing businesses need support. The range of high-growth businesses that we are trying to support is focused around the operation that Capital for Enterprise Ltd runs. These are the pots of money that are there to lever in private sector funds for the high-growth businesses. There are nine running at the moment. They started under the previous Government. We think they have merit, not least because they unlock additional funds, so looking over the next four years we are looking to an investment of £200 million that should unlock £300 million and they are focused on those high-growth businesses, where we are talking about businesses with a turnover—I think I am right in saying—of £2 million to £25 million. I never quite remember the criteria for the ECFs.

Emma Squire: For ECFs it is an equity investment of up to £2 million or up to 10% of the funds, so up to £3 million in investment.

Mark Prisk: So that side I think is important as well. Obviously the banks have proposed their own growth fund—this is the £1.5 billion over the next 10 years. Again we are talking with them about how that works and what the criteria are. They are focused on the businesses with a £2 million to £10 million turnover, which is the classic equity gap that people talk about, so you have angels down here, you have the Business Growth Fund and the ECF funds that are really focused on helping to achieve sufficient growth capital. That is the sort of package I mean. There are a couple of other elements as well. I do not know whether Miss Squire wants to touch on those.

Emma Squire: Yes, just on the availability of bank lending during the recovery, Adair Turner has said that the new regulations that will be placed on the financial services sector to support stability—capital requirements, regulatory requirements—will make it more expensive for banks to lend and was concerned that that may have an impact on more expensive borrowers or SMEs. We are obviously in regular dialogue with the banks to understand whether there is a risk to the availability of lending during the recovery and they assure us that there is not, but also new financial regulations will be phased in to make sure that there is no problem during the transition.

Mark Prisk: I think it is worth saying as well that underpinning that is making sure that the banks have healthy balance sheets, and indeed there has been some encouraging progress, which is obviously in some contrast to other countries' banks, that we are beginning to make sure that they have that stability so that they will have the ability to lend, and indeed invest, as we move into the growth period.

Q331   Simon Kirby: If we can turn to the Automotive Assistance Programme, £378 million has been allocated out of the budget of £2.3 billion. Can it be counted a success?

Mark Prisk: It is a programme that is not quite complete. I think it closes on the 31st of this month so it is difficult to judge in that sense. It is one of those programmes that was there during the recession to make sure that businesses that were in difficulties because of the state of the car market but nevertheless wanted to make longer-term investments were able to do so. In a sense, the fact that some companies went elsewhere was almost encouraging from the sector's point of view because it meant that they did not need to come to this Government package. They could get funding in the market—in other words, they were regarded as viable. In a funny way, fewer businesses needing to rely on it suggested that fewer business were struggling to get funding in the normal market—in other words, they were regarded as viable.

For example, the investment that you mentioned with Ford, which I signed in July, is an important investment. It unlocks £1.5 billion of private funding and is a good deal. In that sense, it has been very good for those businesses that it has been able to help. It is one of the difficult things in government: the moment you put out a programme that's there to tackle a market failure, if businesses find that they do not need it, it's because the market failure was not quite as bad as we feared. It is one of those contradictory things where one assumes that more people taking it up means the more successful it is, but that is not the case in every instance.

Q332   Simon Kirby: Okay. Would you do it differently if you did it again?

Mark Prisk: It depends on the circumstances. I would not be doing it now because it was done deliberately by the previous Government to tackle the perceived problems in the car industry in what was a very sharp recession. I understand that and it is not something that we opposed in opposition, and therefore I am not wanting to criticise it now. I think there is an argument for loan guarantees where there are clear market failures, and for Ford, I think there was a good argument for them. In the circumstances they were in, this was a sensible deal by the taxpayer. I think it is important to bear in mind that, as a Government, we will get back income from Ford in the form of guarantee fees, so this was something there to provide that stepping stone through a difficult financial period for a business that wants to invest over the next decade.

Q333   Simon Kirby: You mentioned the scheme comes to an end at the end of the month and that there are no specific plans to replace it. In view of the fact that car registrations for the month of November fell by 11.5%, is that wise?

Mark Prisk: There are two things here. One is car sales and the other is car production. Talking to many of the businesses—take Jaguar Land Rover, for example—the last six months certainly have been very encouraging for them. Production has improved for many of them—not all, but for many. Sales are weaker than we would perhaps like them to be, but we have to remember, for example, that if you look at things like the vehicle scrappage scheme that was put in place during the recession, a very significant proportion—I think in excess of three quarters of the vehicles purchased under that scheme—were mostly assembled abroad. There were UK components to that and what we are trying to do at the moment is understand what that did for UK production and jobs, but nevertheless, when you intervene in these markets, you have got to be clear who gets the benefit, and the nature of the automotive sector as it is structured meant that that scrappage scheme was very good for a number of international businesses. That is why I had some caution around it as an individual. I was on the record as saying that: I wanted to make sure I was helping British jobs rather than putting out a subsidy that in the end would help workers in Frankfurt or elsewhere.

Chair: I have to say that if you spoke to almost any automotive supply manufacturer, they would say the car scrappage scheme was a significant part of their survival.

Q334   Paul Blomfield: We have been told, Minister, that the £470 million remaining in the Strategic Investment Fund will be spent by next April. Is this still the case and have you an idea of how many projects that will fund?

Mark Prisk: It will end in April. That is the intention. I understand there are 45 projects in hand. It was designed, of course, to overcome barriers to commercialisation. The financial commitments at the moment—my officials can probably help me—are that we are, I think, committed to £432 million.

Philip Rutnam: We are forecasting that we will spend the budget for the Strategic Investment Fund in 2010­11, yes, so to budget, or at very small variance from it, but essentially to budget. Can I clarify one point? I think that the correct figure for 2010­11 is a bit less than £470 million. I think it is £420 million or £430 million. Perhaps we can confirm that with the Committee afterwards.

Mark Prisk: That is the figure in my mind.

Q335   Paul Blomfield: In the discussions we have had around the Strategic Investment Fund, one voice from business said that problems around development capital are more long term and that it is not helpful to have short-term funds available, which is effectively being guillotined next April. Would there have been, in your view, some advantage in having something tapering off over, say, a three to five-year period?

Mark Prisk: I think having short term initiatives always has downsides. In a recession, a Government will feel that it needs to act promptly and it can't necessarily guarantee that the actions appropriate in a recession are appropriate when we're into recovery. I can see that you cannot have a continuous open-ended situation.

Obviously we have inherited a situation where the resources that we have are sharply reduced because of the need to tackle the public sector deficit. I think being able to have an open-ended commitment would be very challenging indeed. I agree with you, though, that what industry looks for is initiatives that can last for a longer period, rather than be sticking plasters. Therefore, this is why we are trying to make sure that where we make moves in terms of things like the Enterprise Finance Guarantee, we are able to do so in the longer term. That is why we have said, "Instead of running this for one or two years, we can extend it and run it right the way through to the end of the Parliament." I do not know if Mr Rutnam wants to add anything.

Philip Rutnam: I will add a little. The decision about the Strategic Investment Fund that it should be a fund for two years was of course a decision of the previous Government and it has been an interesting challenge making sure that we can fit the projects within that two-year time frame, but one that I think we are very pleased about as we feel we have largely achieved it so far. In developing the Regional Growth Fund, which is a further initiative that also involves a defined amount of money over a particular time frame, we have, even within the constraints of the Spending Review that has just been concluded, managed to get a longer period of three years. That may not sound like a big difference, but I can tell you from the point of view of making sure these projects fit within the time frame, it is a very welcome extension.

Q336   Paul Blomfield: Just on that point, do you see the sort of support that the Department can provide as limited to the Regional Growth Fund? We had in some of the evidence that we received the case made that we should be looking towards a continuation of the Strategic Investment Fund, perhaps along the model of the French FSI, as a friendly investor contributing strategic support on an ongoing basis and levering in private sector funding alongside Government investment. What would be your view on that?

Mark Prisk: I think our preference is to go down the road of loan guarantees and venture capital funds, where we are indeed able to lever in additional funding. That is why we have gone down the Enterprise Capital Fund route, where we want to focus on the small businesses, and it is why also we are looking at the UK Innovation Investment Fund, which is a longer-term programme. It is a fund of funds that has a value in total of £325 million, of which UK plc, or the UK Government, is putting in something like £150 million—in other words, nearly half. It is able to lever in additional funds. That, I think, is an important aspect. The joy of those is they, as investments, run on beyond the political cycle, which is often what business and industry are looking for.

Q337   Mr Ward: Can I just ask some questions about MAS, please? We were told back in October by the Secretary of State that he saw MAS was one of the three significant areas of support being offered to business and enterprise—Philip at a previous meeting was very complimentary about MAS. We received a letter from the Regional Director of Yorkshire and Humber MAS, who notifies me that it's supported in excess of 1,000 business in the last year, but the letter goes on to say that "at a local level in this region, we have been instructed by our funders Yorkshire Forward to effectively close down MAS. My understanding from Yorkshire Forward is that this instruction results from directions from BIS, whereas BIS indicates that funding discretion lies with Yorkshire Forward. Whatever the fact of the matter, in practice we are now unable to give further support to the region's manufacturers, leaving manufacturers in Yorkshire and Humber disadvantaged relative to other regions". I think there was about £23 million of funding through RDAs last year, 2009­2010, so the question is, are we in a position where we can give a definitive statement on the funding of MAS?

Mark Prisk: Yes, let me start by saying that MAS will continue under this Government, but as we wind down the RDAs and the regional approach that has been taken in recent years, we want to revert to the original model, which was that MAS was run essentially as a service across England and then delivered through contracts. We are looking at that model at the moment. So in terms of its future, it is secure. We are going to run it slightly differently, because obviously the RDAs will cease to exist from April 2012, and what I would say to you is that, in terms of the transition—Mr Rutnam may want to add something to this—the view we have always taken is that we have tried to allow the RDAs to wind down their operations in the way they think best and most appropriate. We have quite consciously tried to give them a bit of leeway in that context. It sounds as though, in that context, Yorkshire Forward has chosen to focus on this particular area and that is why we are moving quite quickly to try to make sure that we can bring forward a national programme. We have tried not to instruct, line by line, the individual spending items per RDA because, in the interim, we recognise that those people on the ground will be better placed to judge what is their short-term priority. I do not know whether Mr Rutnam wants to follow that up.

Philip Rutnam: Perhaps I could add a little. I am not sure of the date of the letter that you have there.

Mr Ward: 26 October.

Philip Rutnam: There was a particular issue in relation to the continuity of the MAS service in Yorkshire. I think that we have now resolved that. I believe that the service is going to be continuing to operate in Yorkshire, as in the other regions of England. We had various exchanges with Yorkshire Forward that have taken place since 26 October. Again, if it would be helpful, I am sure we could confirm the current position to the Committee.

Q338   Mr Ward: Given that it will continue, albeit in a different form, is there now an agreed budget for it?

Mark Prisk: Not quite. We are nearly there. We got the CSR spending envelope just over a month ago. We are completing our review, not just of MAS, but of all the other elements in the solutions for the business portfolio, and we should be able to set those out very shortly.

Q339   Mr Ward: How will MAS be promoted under the new arrangements? There were some indications—I certainly heard from local businesses—of a lack of understanding in manufacturing businesses about the role of MAS. How will the Government promote the services of MAS?

Mark Prisk: We want to develop MAS as it was originally, which was a national service led by the Business Department. Clearly, local delivery is important, so we need to make sure of the delivery partners we work with, and also we want to make sure that we work better with LEPs, as new players in a sense, so they are well placed to understand the MAS offer, and that the trade bodies—the Engineering Employers Federation or whoever—are also sighted on what it is and they can promote it through their channels. I do not know whether Mr Rutnam wants to add anything.

Philip Rutnam: Absolutely, all those routes. We are working on quite a detailed plan for how to take forward MAS in the world after the RDAs. Making sure that there is appropriate promotion and awareness of MAS is going to be absolutely integral to that project. I cannot go into all the details now because, to be honest, the plan is still being worked on, but rest assured, we are going to be looking at using trade bodies, but also any other outlet that we have that will reach small and medium-sized manufacturers to get the message across that MAS may well be something that can help them enhance their performance. Over the years, I think this Department and its predecessors have got quite a lot of experience of how to reach firms, so it is a very important part of the project.

Q340   Mr Ward: On the manufacturing sector as a whole, we have seen over a 10-year period in Bradford quite a dramatic fall—by 25%—in businesses and over a third in employment in the manufacturing industry. One thing that came out of the visit to the West Midlands was this long-standing issue of the image of the manufacturing sector. Now, is there a specific strategy that the Government will be following and has MAS a role to play in that strategy of the perception and the image of manufacturing industry?

Mark Prisk: I am very glad you have mentioned this because I think it is a very important issue. It is a vexed issue in that if it was easy, someone would have done it very many years before. So again, I come to this with a degree of caution, but I think, first, that one of our ambitions will be how we can make sure that more people come into industry and manufacturing and see that as a valued, skilled and valuable career. That is about changing some of the long-held perceptions about industry.

We are looking at a number of ideas that go beyond the programme known as Manufacturing Insight, which has been partly supported by Government and partly supported by the Engineering Employers Federation. They have done some good things, but I am not sure that all manufacturing and engineering has been wholly engaged with it. I looked at the excellent work of Engineering UK and we asked them to come to No. 11 Downing Street to launch their annual review, because there are some great initiatives going on out there, but I want to see how we can lever those up, to strengthen it.

So there are some elements to this that matter. One is showing people that, for example, the typical skilled engineer will not only be more skilled, but will earn more than the average person in banking. That is not necessarily something that is known or understood. People would assume that if you go into banking you are going to earn a lot more—not true. One of the things is to show to people different characteristics of manufacturing industry that change how they think about it. I think that is a very important aspect, not least, rather than berating people for not going into industry, showing them what they are missing.

I am a great believer in saying to people, "You do not really want to miss out on this opportunity where you get better skills, you have good long-term prospects and by the way you get better pay." I think that it is far more likely, working with industry, for the Government to be able to persuade more young people to take on science, technology, engineering and mathematic courses, than saying, "You ought to go into industry because…", not least because I think adults telling teenagers to do something is a guarantee they are going to do precisely the opposite, certainly in my experience. So that is step one, which is changing how people perceive the career of going into industry. I want to work with the existing initiatives because there is some good stuff out there, Engineering UK being a good example of that—the Big Bang Fair and so on.

The second thing is to start genuinely and regularly to showcase what we make in this country. If the Committee would like to come tomorrow to the reception of BIS, you will find that we are showcasing a number of things we make in this country, from the automotive sector right the way through to the aerospace sector, and each month we are now opening up the Department to showcase what we make in this country. I want to roll that out.

I am getting slightly ahead of where we are in policy, but let me tell you what my ambitions are so that you can see this as a Committee, because you have raised a very important issue. Showcasing what we make in this country is something that we need to be much more proactive about and the industry is keen to do this. That includes the possibility of opening up more of our industrial centres and our factories to show people what a modern factory looks like.

An awful lot of our constituents, who are not as involved with industry, may have the perception that some elements of the media have, which is 1970s, smoke-stacked factories from yesteryear. Those are largely gone and most industry centres, factories and production centres that I go to are very modern with very modern processes and so on. Showcasing what we make, opening up industry to show people how it is changed and showing they can have good careers that are well paid and valued is a crucial part of this. As we set out our agenda in the advanced manufacturing growth review, one of the key elements will be, how can we take a more positive approach in promoting what manufacturing really means today? Sorry, Mr Ward, that is a very long answer, but I think it is important.

Q341   Chair: Could I intervene at that point? Earlier, you mentioned something about a reception by the Department. Did I hear that correctly?

Mark Prisk: In the BIS reception, if you come to BIS, you will find part of a composite wing and an explanation of the work that Ford are doing in their low-carbon engines. Indeed, you will find one of their eco­engines sitting in the reception for people to see. What we are trying to do is put things we make in this country literally in the window for people to see, and what is great is we have many people from business and Whitehall coming through that reception, and in my book, surely to goodness that is one of the best places to start to showcase what we make.

Q342   Chair: I now understand. It is not a specific event; it is ongoing. I was slightly puzzled that nobody on the Committee, including the Clerk, seemed to know of it.

Mark Prisk: No, it is not a particular event but—I am going to make myself unpopular with my officials—you have encouraged me to think, Mr Bailey, that maybe when we get to next month or the month after's launch of this, I ought to make sure that all members of the Committee are aware of it.

Chair: Right. We have already spoken about the Enterprise Finance Guarantee scheme at some length, but Simon Kirby has a specific question.

Simon Kirby: I will ask some very short questions if I may.

Mark Prisk: I will try to give some short answers.

Q343   Simon Kirby: Two banks, 70%—why is that and what can BIS do to change that statistic?

Mark Prisk: I think it is focused on a small number of banks. What I would say to you is that we are talking to all the banks to make sure that the take-up of EFG is as we would expect it to be. I would say to you that the numbers are quite encouraging. Of 16,000 applications that are eligible, 12,800 have been approved, so that is about 80%. That is quite encouraging, but you are right. We do want to try to make sure that all the banks are able to do this, which is one of the reasons why we are extending EFG to specialist lenders and to the CDFIs, which I mentioned earlier to Ms James.

Q344   Simon Kirby: How are you getting on with your newly introduced 20-day processing target?

Mark Prisk: I do not know whether my officials are able to give you an up-to-date answer on that. This was one of the classic issues that came up, which is, how long does it take? That is why we set the 20 days. My understanding is that it is going quite well, but I do not know whether Miss Squire has more up-to-date information.

Emma Squire: Yes, that is right. Broadly speaking, loans are being approved within the 20-day target. It is a binding target on accredited lenders under the scheme. The EFG process adds around two days to the time taken to approve the loan. As I told the Committee last time we were here, we want to encourage all SME lending, not just EFG lending, to be done in a timely way and that has now been written into the lending principles that the BBA signed up to as part of their taskforce commitments, because EFGs are only a small proportion of overall SME lending and it takes only a small amount of additional time on top of the banks' own process. In addition to the EFG target, we now have this new principle to which the banks have signed up to give absolute clarity to SME borrowers on when they can expect a decision.

Q345   Simon Kirby: Just so I am clear on it, the 20-day target is an absolute? It is not something that banks need aim for; it is something that they absolutely have to achieve?

Emma Squire: Yes. It is the target as set out in the Budget that we monitor the banks on.

Q346   Simon Kirby: Okay. My final question: there was a lot of miscommunication in the earlier days of the EFG and it is administered by Capital for Enterprise. Are you happy with the performance of that body?

Mark Prisk: Yes, I am. I think at the start there was a problem, both in the gap between bold announcements from Ministers and the ability to put the scheme into practice—it is certainly a lesson that I take away, albeit obviously it occurred under the previous Government. I am perfectly happy with the operation of CfEL. I meet with them regularly and we are encouraged by the work that they are doing, both in terms of this and in the management of other schemes. But you are right: at the start, there were a couple of schemes where there were some question marks over one of the ECF pots. We are monitoring that very carefully and we are encouraged that they have got it right.

Q347   Paul Blomfield: Minister, I represent a city, Sheffield, that was built on the sort of manufacturing industry that you so graphically described a moment ago, which is now at the cutting edge of advanced manufacturing, but which also has a thriving creative industries sector, and in our discussions we have had powerful evidence put to us about the contribution in export earnings from the creative industries sector, yet the point has been made to us on the enormous difficulty that that sector has had in accessing EFG support. In fact, we were told that there has been only one recipient in the creative industries sector of EFG loan. How do you think your Department could improve on that record?

Mark Prisk: Miss Squire may have better information on the sectoral breakdown, but as I said with manufacturing, if a sector believes that it is being discriminated as a sector by the banks, I want to see the evidence, and armed with that evidence I will want to go back to the banks. It would be very helpful if they are able to provide that. There is a broader issue here as well, though, which is that EFG should be important because the point about EFG is that it is there to help in those areas where businesses do not have the security that you might otherwise expect, so I would be keen to look at that more carefully. I do not know whether Miss Squire has more detail on the breakdown of the numbers.

Emma Squire: As of 2 December, 670 creative industry businesses had been offered an EFG-backed loan, worth £76 million, so that is the figure to date.

Q348   Paul Blomfield: The point was made by one part of the creative industries and it might have been more significantly focused on their area, which was UK Music. I do not know whether you have specific information there, but one can see the difficulties for the banks in assessing risk and, as you say, Minister, that is why EFG support was so useful for that sector, but perhaps we need to share the evidence that we have received to take that discussion forward.

Mark Prisk: That would be very helpful.

Emma Squire: If I could just add, we are doing a piece of work at the moment with the Department for Culture, Media and Sport to understand whether the creative industry sector, or parts of it, faces particular and unique problems in accessing finance. That will feed into the growth review and will conclude by Budget, because we really do want to understand whether there are particular problems for certain sectors compared to others.

Paul Blomfield: I think we ought to share the information we have had.

Chair: I was going to say, I think the evidence presented to us would make it absolutely crystal clear that there are enormous problems and enormous potential in rectifying those problems.

Q349   Paul Blomfield: Specifically on the issue that they have raised with us, they understand the difficulties that banks have in evaluating intellectual property within their sector and I would be interested to know what practical steps you feel the Department could take to help resolve that problem.

Mark Prisk: It is a difficulty because it requires that specialist expertise. I think that the opportunity to expand the business angel movement and strengthen the VC market is important, because although banks clearly need to make sure they have a good sectoral understanding of the businesses they are investing in, I also think that you often find with business angels and venture capitals a genuine focus on a sector. They understand the value of intellectual property.

Clearly, the music industry has taken a battering in the switch towards downloads and what that has meant around the question of copyright and so on. That may well have meant that investors will look at it as being a market in flux, and therefore possibly one where the rewards are not so strong. I think this is one of those areas where we feel that if we can strengthen the business angel market, those investors who, particularly appropriately for the creative industry, may be on the smaller side, but who know that marketplace, are well placed to support it. Certainly in a city like Sheffield where you have, as you say, a strong creative bent and potential, this is one of those things where we feel that getting that side of it right broadens the choice.

Q350   Chair: That virtually concludes our questioning. I would, however, like to come back to a question I raised earlier, which was on the ability of the BIS Department to prevail upon other Government Departments to frame their departmental priorities in a way that would underpin your ability to deliver growth. A huge area is higher education, but we are going to deal with this separately and I will not go down that road. One other area where I have found very vocal concern from manufacturing SMEs is the policy on capital investment allowances, which every SME I have come across believes are an essential tool for enabling them to invest further and potentially export our way out of recession, but Treasury policy is going in the opposite direction. Obviously that is Treasury policy. What is your understanding of the opinion of the manufacturing sector and what are you doing to press the Treasury to mitigate that policy?

Mark Prisk: The reform of corporation tax is something that business and industry have welcomed, because it is going to simplify and therefore allow us to reduce the headline rate. That is going to help the corporate tax revenues in terms of the individual corporations. Clearly, making sure that capital allowances and the annual investment allowance in particular, which is what we are really talking about, still enable business to invest is important. What the Treasury has set out, and what the Chancellor has made clear, is that even after we have reformed corporation tax, including some of the changes to the AIA, 95% of eligible businesses will still be able to secure their AIA as they have in the past.

If you take the total benefit—in other words, reforming corporation tax, the changes to the AIA, the reduction in the headline corporation tax rate—the balance sees an improvement, I think, of £250 million by the end of this programme, so by the end of 2014-15. I respect that there may be individual businesses that may find that, because of the balance they have between their capital investments and their other taxes, there may be some pinch points, but the overall picture is that 95% of businesses, including industry, would not be affected by changes overall, and in fact overall, the net revenue remaining with companies would be £250 million higher. I understand their concerns and we talked with the CBI on that, but that is the balance of the picture as the Treasury has set out.

Q351   Chair: I think the response to that is yes. That may be the balance. The problem is the benefits of the balance are spread over too wide a sector. Strategically, there is better value for money in the pursuit of the investment allowances than the corporation tax route and I have come across that overwhelmingly from manufacturing.

Mark Prisk: What I would say to you—it comes back to the broader point you prefaced this with—is that bringing manufacturing forward as one of the first areas for growth review will allow us to tease out these kinds of issue. It is one of those areas that, by bringing in all the Departments involved that affect a particular sector—in this case, advanced manufacturing—the Chancellor and the Business Secretary want to look at in the run-up to the Budget. How do other Departments affect advanced manufacturing?

It is the same case if we look at the Department for Transport's programme, where clearly its proposal for looking at how it will progress with rail, with road, with investments and so on is just as important. The point about the growth reviews is that they allow us to look at the impact of Government across Whitehall, whether it is ourselves, the Treasury, Transport or whoever. I think that is going to be quite a welcome step.

Chair: I welcome that. I suspect this issue will run and run. I thank you very much for your attendance today. If my two colleagues could wait, I have a very brief item that I need to discuss with them privately. Thanks very much.

Mark Prisk: Thank you very much indeed.

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Prepared 18 February 2011