House of Commons - Government Assistance to Industry - Business, Innovation and Skills Committee

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

5 Three case studies

Introduction

118. During the course of our inquiry, we tested Government support for industry with three different industrial sectors; the creative industries, manufacturing and engineering industries and the environmental industry. The experience of the three sectors demonstrated a diverse range of needs and experiences of interaction with Government. We set out our findings, in broad terms below.

The creative industries

ENTERPRISE FINANCE GUARANTEE SCHEME AND THE CREATIVE INDUSTRIES

119. Earlier in our Report we considered the success of the Enterprise Finance Guarantee Scheme. While we concluded that, in general, the EFG was working effectively, our witnesses from the creative industries continue to encounter great difficulties in accessing the Scheme. When we took evidence from UK Music, Feargal Sharkey, the Chief Executive of UK Music, highlighted the fact that access to finance remained a particular problem for his sector. He told us that this was a long-standing problem and cited a 2001 Report from the Department for Culture Media and Sport (DCMS) as evidence of this. The Report Banking on a Hit concluded that:

Difficulties in raising finance are affecting the ability of the music industry to grow and prosper. Particularly worrying is the evidence [...] of a growing trend in recent years of a lack of confidence within the industry in accessing external finance.[173]

120. Mr Sharkey went on to say that "in the intervening nine years not an awful lot that is productive has happened"[174] and highlighted the fact that the DCMS reviewed its 2001 Report in 2006 and identified exactly the same issue as a continuing problem.[175]

121. A key element of this was access to the Enterprise Finance Guarantee Scheme. Brian Message, Director of UK Music, told us that data received from a survey of the Music Managers Forum in January 2009 indicated that access to finance was, "by some margin" the biggest issue facing its members, and that a lack of access to EFG was specifically highlighted. Mr Message told us that when his members applied for EFG funding it was turned down because "music is too risky a sector".[176] He described to us the common response from the banks:

Look guys, this is not for us. Yes, you can demonstrate that there is a track record; yes, you can demonstrate that your business can be run by a sufficiently capably management team; yes, your business plan is fine, but this just is too risky for us.[177]

122. Mr Sharkey confirmed that UK Music had undergone detailed research into EFG-funding and found only one example of where an application had been successful "out of a £5 billion a year industry".[178] He believed that the Government needed to work with both the industry and the banks to develop a set of standards and a set of appraisals and that it should report on a quarterly basis, on the flow of funding going into the industry. Of equal importance was guidance on the valuing of Intellectual Property which he argued was a significant problem in valuing companies in his sector.[179]

123. The Enterprise Finance Guarantee Scheme should be available to all sectors of the economy. It is therefore unacceptable that the creative industries sector—which generates around £4 billion a year in the United Kingdom and is one of the six sectors designated by the Government as growth sectors— is effectively being excluded from this avenue of funding. We recommend that the Government, as a matter of urgency, ensure that the criteria for receiving EFG funding is sufficiently flexible to accommodate the creative industries. We expect the Government, in its Response to this Report, to set out clearly how it will achieve this aim.

RELATIONS WITH GOVERNMENT

124. The creative industries are a significant contributor to the UK economy with the UK music industry worth around £4 billion in 2009,[180] and the independent television sector contributing £4.3 billion per year to the UK economy.[181]Mr Sharkey told us that, as a sector, the creative industries provided in the region of 6.2% of GVA to the nation's economy, and created about 1.1 million to 1.2 million jobs.[182]

125. Despite the importance of the sector, we found that Government engagement with it was patchy and the day-to-day relationship with Government was described as "somewhat delicate" and not delivering what it potentially could.[183] As an example of this Mr Sharkey stated that while the Strategy for Growth had highlighted the importance of the creative industry, the Government had failed to inform anyone in the sector that announcement was going to be made.[184]

126. The Department is trying to address this and recently announced the establishment a ministerial ad hoc committee to help develop and nurture the sector. While this was welcomed, Mr Sharkey believed that a Cabinet-level committee would be preferable and would reflect the diversity of responsibilities across Whitehall. He told us that there were:

Seven Secretaries of State whose portfolios all overlap with the creative industries. That is before we moved on to the then 27 external agencies, bodies and non-departmental Government bodies, and we were not sure that they were all communicating with each other in the most productive way possible.[185]

127. Mr Sharkey also argued for a formal creative industries council along the lines of industrial councils for the aerospace, automotive and marine industries:

Quite clearly, any attempt whatsoever that would help develop that relationship to be more constructive, more pragmatic and more positive, for both the industry and BIS in delivering on all of our objectives, we would welcome with open arms. I can guarantee you right now this industry's total and enthusiastic support and co-operation.[186]

128. The creative industries sector is a significant wealth creator in the United Kingdom. It is therefore surprising that Government engagement with the sector appears to be somewhat haphazard. While we welcome the creation of an ad hoc ministerial committee to cover the sector we believe that a more structured approach would be more beneficial. Industrial Councils have been established for the automotive, aerospace and marine sectors and we recommend that the Department consider establishing a similar council for the creative industries.

Environmental industries

RELATIONS WITH GOVERNMENT

129. The environmental sector is relatively new but despite being a younger industry than the two other sectors we considered, it has grown quickly into a sizable sector. Danny Stevens explained that the sector:

Is currently worth £111 billion, as of last year, and that is approximately a 5% or 6% share of a global market that is worth £3.2 trillion across the world.[187]

130. Dr Gordon Edge, the Director of Policy at RenewableUK, told us that there was good engagement between the sector and Government and believed that the Department was "starting to really help us forge an industry going forward".[188] As an example of that positive engagement, he cited excellent outcomes from the Comprehensive Spending Review which protected grants and loans to port infrastructure for offshore wind manufacturing.[189] Dr Edge believed that much of this good work was due to the existence of the low-carbon business team in the Department and expressed his hope that team would be retained so that it could develop that support. That said, he described the Department's activities as "a little subterranean" and encouraged it to be "more open and forthright about coming to us and saying 'this is what we can do for you'".[190]

131. However, while Danny Stevens agreed that relations between industry and Government were good he stated that one of his "biggest concerns" was that under the current administration both the Department for Business, Innovation and Skills and HM Treasury had a tendency to leave environmental policy and climate change policy to other Departments. He considered that to be "a huge mistake" and argued that the Department had:

An absolutely critical role to play in supporting environmental businesses, not only the industry that we represent, but also in terms of communicating with wider industry. Climate change and environmental policy in business policy; it has to be business policy and it has to be economic policy. In order to co-ordinate that, I think BIS has [...] an absolutely critical role.[191]

132. While there was broad support for the Government's engagement with the environmental sector we heard concerns that the Department had a tendency to leave environmental and climate change policy to the Department for Energy and Climate Change. Overall policy direction in those areas reside in that Department, but the strategic importance of the sector to the economy requires an active Department for Business, Innovation and Skills. The Department has to take the lead in delivering the right environment for the sector to thrive and ensure that all other parts of Whitehall formulate policy in that context.

FINANCE AND REGULATION

133. Unlike the other sectors, the development of a detailed policy and regulatory framework for the industry was considered to be a higher priority than direct interventions which addressed finance. Dr Gordon Edge, from RenewablesUK, stressed that "the policy framework for the delivery of our technologies" was their number one priority in relation to Government support.[192] Danny Stevens, Policy Director at the Environmental Industries Commission, also highlighted the importance of the policy and regulatory framework. He argued that the industry "lives and dies by the policy and regulatory framework".[193] He stated that while governments had acknowledged the existence of market failure in the environmental industry, targeted government intervention in regulatory terms had yet to be delivered.[194] He asserted that the absence of such an explicit regulatory framework had resulted in UK losing ground to the United States, China, Germany and Denmark over recent years. [195] The swift implementation of such a framework would, he believed, allow the industry to grow domestically which would facilitate "huge export opportunities that the industry has for the UK".[196]

134. The environmental sector is a good example of a sector which can be significantly assisted by Government, not through direct financial interventions, but by a clear policy and regulatory framework. The industry believes that if such a framework was introduced it would provide the right environment to attract sufficient private sector investment. If the United Kingdom is not to fall further behind its international competitors in this sector, it must deliver on this framework as a matter of urgency.

Manufacturing and engineering sector

135. In a similar vein to our witnesses from the environmental sector, our witnesses from EEF, the manufacturers' organisation and Engineering and Machinery Alliance (EAMA) also gave a positive report of their relationship with the Department. Lee Hopley from EEF told us that the Manufacturing and Materials Unit in BIS was "a small but important part of the Department".[197] He said that his members had a good relationship with the unit and it had "good connections in terms of their sector knowledge".[198] Martin Walder from the Engineering and Machinery Alliance gave a similar view and described his relationship with the unit as "solid".[199] Both the EEF and the EAMA were complimentary about the level of awareness in the Department of their industries.[200]

136. Of greatest concern to them was access to credit for their members. Lee Hopley argued that while the Department "does not have a large fiscal lever to pull" he noted that it had introduced a number of positive interventions.[201] However, he expressed his concern that the banking sector did not have a sufficient understanding of his sector and in particular the needs of small businesses in the supply chain.[202] Martin Walder highlighted the fact that businesses which employed between 10 and 20 people were either unable or unwilling to put up the necessary levels of equity to gain further credit despite being in "traditional engineering areas and supply chains that have been going for 20 to 30 years".[203] We also had a lengthy debate with our witnesses on support for manufacturers who exported. That evidence will contribute to our inquiry into Trade and Exports, the findings of which will be published later in the year.

137. Lee Hopley believed that where the Government could make a useful intervention was in helping to provide a "stable and predictable business environment".[204] This was not restricted to those areas of BIS concerned with banking but covered "skills, access to finance, export support and regulatory barriers".[205] Regulatory barriers were highlighted as a particular concern for SMEs wanting to grow as "they suddenly come up against the tangle of regulation".[206]

138. In addition, Mr Martin Walder argued that a number of his members "certainly have come up against the brick wall of the EFG" when a lot of their business was in exports and that this was another area which the Government needed to address. He believed that other European Countries had established programmes within EFG schemes which had not been replicated in the United Kingdom:

One of the areas that we see that does limit the SMEs' exporting is when we are competing with other European countries, say for business overseas, and the companies can't get bonds. Quite often you get a deposit plus 30%, say, of the system that is being ordered, whereas many of the other countries like Germany, France or Italy would provide a bond to the client for their deposit. That is not very easily attainable. If you want a bank guarantee in the UK, that quite often comes off your facility. On the whole issue of bonds for exporting, I think we are at quite a disadvantage in the UK, particularly when you look at SMEs.[207]

139. Lee Hopley also noted that during the recession, other European economies were able to take advantage of what he described as "a window of opportunity" provided by the European Commission to offer state assistance to exporters. However, he believed that the window may now have closed.[208]

140. The engineering and machinery sector is a well-established sector which appears to have good relations with and support from Government. However, access to finance, which we cover in an earlier section of this Report, remains a priority concern.

141. There also remains a perception in business that financial support for exporters remains inadequate in comparison to their European competitors. In particular, that European Governments have used schemes similar to the UK's Enterprise Finance Guarantee Scheme to support exporters in a way that the UK has failed to do. The Government needs to be alive to the strategies of our European partners in this area and ensure that it is not missing a valuable opportunity to support growth in UK exports. We will address Government support for exports in more detail in our inquiry into Trade and Exports.

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