4 Specific BIS business support schemes |
77. The focus of the Department's strategy must
be to create the right environment for economic growth across
all sectors of the economy. As we note earlier in this Report,
we await the detail of how this will be achieved. However, the
Department has a number of on-going and proposed interventions
to assist industry which it either sponsors or administers. In
this section we consider the relative merits of a number of schemes
as an indicator of where the Department should concentrate its
efforts and interventions. We note that most of these schemes
were established under the previous administration.
Enterprise Finance Guarantee
78. The Enterprise Finance Guarantee (EFG) replaced
the Small Firms Loan Guarantee Scheme and was launched in conjunction
with a network of approved lenders in January 2009. It is a loan
guarantee scheme for lenders to enable them to:
Provide additional lending to viable SMEs. It addresses
the long term market failure in the provision of debt finance
to credit-worthy SMEs which lack collateral or track record, who
are unable to secure a normal commercial loan.
79. Under the scheme the Government provides
a guarantee of up to 75% of the requested loan value. In return
for this guarantee the Government charges a premium of "2%
per annum on the outstanding balance of the loan" which is
collected quarterly throughout the life of the loan. Lenders are
permitted to take an unsupported personal guarantee on an EFG
backed loan for up to the full value of the loan.
It is run by UK banks and administered by the Government.
80. A network of 46 approved lenders provides
access to the scheme. Despite the large number of approved lenders,
we were told that the "Big Six" banks handle 96% of
all EFG loans and Lloyds and RBS between them process around 70%
of all EFG applications. Peter Ibbeston suggested that part of
the reason for this was the cap on guarantees of 9.75% (now reduced
to 9.225%) of total lending guaranteed under the EFG per institution
which discouraged smaller, more specialised institutions using
81. Government figures suggest that, as of 27
October 2010, 12,460 SMEs had been offered loans to a value of
£1.27 billion, of which 10,734 had been drawn down. These
loans are worth £1.07 billion. It also stated that since
1 April 2010, of a potential £700 million which was available,
loans of a value of £221.8 million have been drawn upon by
2,388 separate loan packages.
82. In the 2010 Budget, the Government increased
the funds available through the scheme from £500 million
to £700 million.
The Comprehensive Spending Review also announced that the EFG
would be continued past 31 March 2011 and the Government's Green
Paper, Financing business growth: The Government response to
Financing a private sector recovery, confirmed that the scheme
would be extended until 2014-15 and would receive "over £2
billion" of funding over the four years.
SUCCESS OF THE SCHEME
83. The Scheme was a response to the difficulties
faced by SMEs during the recession and therefore it needed to
be delivered quickly to the market. In its written evidence RBS
set out the timetable of events:
Initial discussions on the design of the EFG were
held in early December 2008 and detailed scheme parameters were
provided to lenders in mid-December. The EFG was formally launched
on 14 January 2009 and implementation was achieved in challenging
timescales. From start to finish, the speed of the EFG launch
was significantly quicker than would usually be the case for a
When he gave evidence to the Committee, Mr Ibbetson
described this as "pretty impressive for any scheme that
Government and banks have launched".
He also believed that the Scheme has had the single greatest impact
of all Government measures.
84. However, while the speed of delivery was
acknowledged by our witnesses, it was also the cause of a number
of problems. Roger Bibby, from the Federation of Small Businesses,
believed that the initial problems were caused by miscommunication
on the reason for the Scheme at and after its initial launch.
Phil Orford, from the Forum of Private Business, agreed and said
that the initial advertising of the Scheme "frankly gave
the impression that it was a small business bailout: 'If you cannot
lend or borrow, go for the EFG.'"
Both Angela Knight of the BBA and Peter Ibbetson from RBS were
also of that view and argued that "in the early stages the
Scheme may have been misunderstood". Ms Knight went on to
state that "some of the [Government] statements around it
were not quite right".
85. Peter Ibbetson acknowledged that banks also
were at fault in the early stages of the Scheme. He believed that
they were guilty of not adequately communicating the Scheme to
their staff. Although he was confident that business managers
were aware of the Scheme he conceded that all staff should have
been appraised of the Scheme and its availability:
Of course, what people tended to do, which we failed
to recognise, was to walk into the branches and ask the receptionist
or the cashier, "What's all this about the Scheme?"
Phil Orford of the Forum of Private Business believed
that it was "not ready for market" at the time of its
launch, and that
the banks had not committed sufficiently to it. This view was
echoed by the FSB which argued that the attitude of the banks
was a significant barrier to the success of the Scheme until they
realised that they "had to get on with it".
86. Our representatives from business agreed
that the performance of the scheme had improved markedly. Phil
Orford said of the Scheme "mechanically, it works very well
now," while Roger Bibby told us that "the volume of
applications has certainly improved and the pace of decision making".
Matthew Fell believed that the Scheme was operating much more
successfully than it did at the outset "through word of mouth
and other measures" and that awareness of the scheme was
running at quite a high level.
87. A number of refinements have been made to
the Scheme. For example, the introduction of a 20-day target for
approval of loans. Emma Squire confirmed that the 20-day target
was a "binding target on accredited lenders" and that
broadly speaking, loans were being approved within that time frame.
She also told us that in addition to the target the Department
had agreed with banks a new principle "to give absolute clarity
to SME borrowers on when they can expect a decision".
88. Mark Prisk MP, the Minister for Business
and Enterprise, confirmed that the Government was now looking
at widening participation in the Scheme, specifically at the viability
of including Community Development Financial Institutions as lenders
as part of the EFG programme.
89. It is clear that the Enterprise
Finance Guarantee Scheme represents a positive intervention by
the Department and that in general it is now running efficiently.
We note that there were significant problems when it was launched
but accept that, to some extent, these were caused by the need
to bring the Scheme to market before it was fully ready. We welcome
the Government's commitment to the Scheme and the extension to
its lifespan but caution that it will continue to require close
monitoring to ensure that it continues to make a positive impact
The Automotive Assistance Programme
90. The Automotive Assistance Programme (AAP)
was announced in January 2009 to help tackle the significant problems
faced by the industry during the recession. The industry experienced
a 14% fall in automotive sector output in the year to February
2009, compared to a fall of 5.5% for the manufacturing sector
as a whole. Rules under the EU Temporary Framework for State Aid
prohibited the Programme from operating after 31 December 2010.
91. The Programme offered £2.3 billion of
loan guarantees to the UK automotive sector in order to:
- encourage "the development
of cutting-edge green technologies" and a "low carbon
future for the industry";
- advance R&D in UK vehicle manufacturing;
- create and sustain jobs in the sector.
92. As our predecessor Committee was told, to
be eligible for assistance under the scheme companies needed a
turnover of at least £25 million per annum and the proposed
investment needed to be at least £5 million. While theoretically
the Programme allowed the provision of loans and loan guarantees,
it was anticipated that all offers would be of loan guarantees
of not more than 75% of the value of the loan.
93. The Department told us that the AAP had provided
a £360 million loan guarantee to Ford Motor Company Ltd,
in support of a £450 million loan from the European Investment
Bank (EIB) to fund six projects in the UK worth a total of £1.5
billion. The projects included R&D and production investment
relating to new generation, environmentally friendlier, vehicle
and engine technologies.
94. In addition, the Department stated that an
additional three formal offers of support were made to General
Motors Europe, Jaguar Land Rover, and Tata Motors European Technical
Centre (TMETC). However, these were not taken up due to the applicants'
success in accessing financial support elsewhere.
95. Written evidence submitted to our inquiry
raised concerns about the operation of the AAP. While praising
the Programme as a signal that "the Government was serious
about supporting the automotive industry" and suggesting
the Government support for the development of low carbon technologies
was "crucial", the Society of Motor Manufacturers and
Traders (SMMT) complained that:
The application process and subsequent approval procedures
were lengthy, complicated and may have impacted negatively on
timely support needed.
In addition to the loan guarantee to Ford, Nissan
Motors UK received a direct grant to support the development of
electric vehicles at its Sunderland plant. While Nissan initially
applied for funding under the AAP, ultimately funding was provided
via the Grant for Business Investment scheme. While it welcomed
the introduction of the Programme, Nissan was "ultimately
disappointed that the programme failed to meet its original intentions",
and that in the end, the "loan guarantee offer was simply
not competitive enough" nor did it reflect business needs.
96. Nissan argued that the scheme would have
been more effective and provided greater stability to businesses
had loan guarantees been based on the life of the project instead
of a maximum two-year guarantee. It also criticised the costs
of the AAP under which additional fees charged by the Government
to cover the risk of default ultimately meant that lending under
the AAP was less competitive than normal commercial lending. It
concluded by stating that the AAP compared unfavourably to schemes
operated in other countries such as France which provided direct
government financing in the form of grants rather than loan guarantees.
97. The SMMT also noted that the design of the
AAP meant that there "was a significant gap" in support
for medium-sized companies who were too large to be eligible for
funding under the Enterprise Finance Guarantee scheme, but were
too small to benefit from the Automotive Assistance Programme.
The eligibility criteria and the investment threshold were both
subsequently changed but SMMT believed that these were late changes
and did not sufficiently address assistance for smaller automotive
98. Of the £2.3 billion available in loan
guarantees, Jane Whewell from the Department confirmed to us that
only £378 million had been committed
and that there were "no plans for automotive-specific schemes
in the future".
Under any assessment this figure represents a very poor return
for an intervention which could have levered in significant funds
for the automotive industry.
99. The AAP was not the only intervention targeted
at the automotive industry. The previous Government also introduced
a voluntary discount schemethe Car Scrappage Schemeunder
which motorists were given £2,000 or more towards a new vehicle
if they traded in a car or van over 10 years old for scrap. The
Department, under the previous administration, explained that
the aim of the scheme was to:
Provide a boost to demand and immediate support on
a short-term basis to the car industry and its supply chain in
the wake of falling sales. It would also get older vehicles off
the road and encourage consumers to invest in new, safer and potentially
more environmentally friendly models.
100. Data released by the Department in March
2010 provided the following information on the scheme:
- Scrappage contributed to approximately
one fifth (20%) of all new car registrations since the scheme
- Half (54%) of scrappage buyers surveyed had never
bought a new car before
- More than half (56%) of those surveyed said they
would not have bought any vehicle at this time if the scrappage
scheme had not been introduced
- Cars bought through scrappage had average CO2
emissions of 133g/km27% lower than the average CO2
of scrapped cars
- The average age of cars scrapped under the scheme
was just over 13 years90% of all cars scrapped in the scheme
were between 10 and 16 years old (SMMT)
- Government data estimates that there may have
been as many as 4,000 jobs supported by the scheme at manufacturers
and suppliers across UK.
101. In marked contrast to the AAP, the Car Scrappage
Scheme was considered to have been a highly successful intervention.
The SMMT described it as "far more influential than most
imagined, delivering a major increase in vehicle demand."
It also argued that the scheme "helped support the economy,
played a vital role in providing a much-needed boost to the UK
automotive industry, while retaining skills and jobs, in turn
making the industry better placed for the upturn".
Data collected by the SMMT showed that in the region of 392,500
new cars and some 7,300 new light commercial vehicles were registered
through the scheme.
102. The Automotive Assistance
Programme is a salutary example of how a well-intentioned intervention
failed to deliver for the sector it was supposed to support. By
contrast the Car Scrappage Scheme was widely seen as a success.
The contrasting fortunes of these two interventions should be
considered in detail by the Department so that any future interventions
in an industry or sector are well targeted, well run and deliver
meaningful benefits to the industry.
Strategic Investment Fund
103. The Strategic Investment Fund (SIF) was
established by the previous Administration in the 2009 Budget
as a two-year fund with a budget of around £1 billion. The
Department explained that the Fund was designed as:
A two-year, predominantly capital fund consisting
of around 45 projects and programmes [...] where strong opportunities
for growth and employment exist and Government action would make
a positive difference.
104. The rationale behind the Fund was to support
areas in which the United Kingdom's capabilities were able to
"attract high value jobs and processes for UK industries".
Primarily, the SIF was aimed at those industries or areas of the
supply chain where there were barriers to the commercialisation
of technology, where there is evidence that the United Kingdom
could have a comparative advantage and where the United Kingdom
was able to attract high value jobs and processes for UK industries.
It was targeted at composites, plastic electronics and industrial
biotechnology, where investment is aimed at use by SMEs, with
open access facilities, as well as larger firms. Examples of projects
supported by the SIF included:
- The construction of a large-scale
Industrial Biotechnology Demonstrator at Wilton, Teesside;
- An expansion of the Printable Electronics Centre
in County Durham to enable it to become a national centre of excellence
in plastic electronics;
- The development, in partnership with GlaxoSmithKline
and others, an innovation campus in Stevenage for new life sciences
companies involved in drug discovery and development; and
- A creation of a new International Space Innovation
Centre at Harwell as a centre of excellence to exploit data generated
105. The Department also listed a number of other
projects in receipt of SIF funding which were aimed at developing
the low-carbon sector, including collaborative R&D projects
in new generations of wind turbines and air engines, test facilities
in offshore wind and marine power, and low carbon vehicles, including
accelerated deployment of an electric vehicle charging infrastructure
in the United Kingdom. In addition, it supported science and research
"that the market exploits but won't always fund itself, such
as 'science clusters'facilities which provide access to
specialist equipment, services and knowledge-sharing in pre-commercialised
106. Our witnesses believed that it had a positive
impact, but that its design also contained some serious flaws.
Roger Bibby of the Federation of Small Businesses supported the
aims of the Fund but argued that its time-limited nature was not
helpful to business:
Development capital is a long-term issue; you cannot
just say it is on the supermarket gondola for 12 months and then
it is gone.
In his opinion, the "artificial" deadline
for applications was not in line with "creating the right
environment for small businesses and consistency of policy."
107. Philip Ruttnam, from the Department, believed
that the decision to limit the fund to two years was made in the
context of the previous administration's Spending Review and the
fact that "there were only two financial years in relation
to which the Government then felt it could make decisions".
He also told us that while the Fund was initially set up with
a budget of around £1 billion, that had been reduced during
the course of the scheme to a level of around £670 million.
He explained that £200 million had already been committed
and that the remaining £470 million would be allocated by
April 2011, when the scheme closed.
There were no plans for a second round of the SIF but Mr Rutnam
believed that the gap in funding would be filled by the £1.4
billion Regional Growth Fund.
108. The Minister acknowledged short-term initiatives
had their downsides but equally noted that:
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.
109. Mr Prisk went on to say that "what
industry looks for is initiatives that can last for a longer period,
rather than be sticking plasters"
and stated that the Department was trying to develop initiatives
in this area which ran over a longer time period. Both the Minister
and Mr Rutnam highlighted the Enterprise Finance Guarantee Scheme
and the Regional Growth Fund as examples of where the Department
had pushed for longer time frames for assistance.
110. The Department confirmed that it would not
reopen the Strategic Investment Fund but the Minister highlighted
a number of other avenues for investment, including the Enterprise
Capital Fund route and the UK Innovation Investment Fund. He asserted
that these funds would more than compensate for the ending of
the Strategic Investment Fund and that business would benefit
from the fact that they would "run on beyond the political
cycle, which is often what business and industry are looking for".
111. The Strategic Investment
Fund has proved to be a worthwhile intervention by the Government
and it is clear that all of its funds will have been allocated
by the time of its demise. That said, the limited timetable for
applications was seen as a significant drawback by business. We
welcome the fact that other avenues for funding are being developed
by the Department and that those avenues will have a longer lifespan.
We look forward to receiving an update on the Government's proposals
in its response to this Report.
Manufacturing Advisory Service
112. In addition to direct and indirect financial
support, the Department also provides technical assistance and
expertise to certain industrial sectors. Examples of such work
include the Manufacturing Advisory Service (MAS) which is currently
run by the Regional Development Agencies (RDAs) and has a budget
of around £15-20 million per annum.
113. The Department describes the Manufacturing
Advisory Service to business as:
designed to help you, the manufacturer, streamline
your processes, reduce waste, become more energy efficient and
generally improve your business. Regardless of the size of your
business our experienced and highly skilled practitioners can
help you. They all have 'hands-on' experience of both shop floor
working and management skills. They will work with you and your
workforce to ensure that your business is run in the best way
possible and our initial services are FREE and we also offer grants
if you decide you need more specific help. 
114. Philip Rutnam, Director General of the Business
Group in BIS explained that the role of MAS advisers was to help
individual companies to develop their business, with support for
"business plans and strategies and the way in which they
can turn those into action".
He asserted that the MAS received a very good response from business
as a "very practical, action-oriented approach that engages
with manufacturers" and declared that the Department was
"very committed to its future".
On 10 December 2010, Mark Prisk MP, the Minister for Business
and Enterprise announced that the Manufacturing Advisory Service
would receive £50 million over the next three years.
115. The Manufacturing Advisory Service was overseen
by the Department but run and delivered by the RDAs. The Engineering
and Machinery Alliance believed that its regional structure had
made the introduction of new schemes "very complicated and
time-consuming", and that it could take up to 18 months to
complete presentations to MAS consultants in every region.
116. The Government's decision to abolish the
Regional Development Agencies will change that delivery structure.
When he came before us the Minister explained that the Manufacturing
Advisory Service would be redeveloped as "a national service"
led by his Department and delivered locally through contracts.
The model for delivery was still under development but Mark Prisk
MP gave us an insight into his Department's thinking:
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 bodiesthe Engineering Employers Federation
or whoeverare also sighted on what it is and they can promote
it through their channels.
117. The Manufacturing Advisory
Service is a well-used and well-regarded avenue of advice for
business. While the Government is committed to its future, the
abolition of the RDAs through which the MAS was delivered has
left local delivery of the Service in a state of confusion. The
financial commitment to the Service is welcome but those resources
will be wasted unless there is a clear delivery strategy in place.
Furthermore, there is a danger that the Service could lose ability
to retain valuable expertise while that strategy is developed.
The Government, as a matter of urgency, needs to set out how the
MAS will be delivered at a local level and how it will retain
the necessary local knowledge for it to continue to be a success.
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