Conclusions and recommendations
Strategy for growth
1. The
branding of the Department as the "Department for Growth"
has sent out a positive message that it will focus its efforts
on creating the right environment in which business can flourish
but it will need to put significantly more flesh on the bones
of this strategy if its actions are to match the rhetoric. The
lack of a detailed strategy for sectoral support is a good example
of where there remains a worrying gap between the Department's
ambition for growth and clearly defined policies to achieve that
goal. The Department may be pointing in the right direction but
the recent disappointing growth figures demonstrate that a positive
message is not enough. What is needed now is the delivery of tangible
policies for business. (Paragraph 24)
2. We remain unclear
about how the Department proposes to assess its performance in
delivering sustained economic growth. Merely looking at the success
or otherwise of the economy will not give an objective view on
the Department's record. This should be of concern to the Department
because economic success could mask failures in Departmental policy
while economic hardship could mask excellent strategies or interventions.
We therefore recommend that the Government, in its response to
this Report, set out in detail how it will monitor its strategy
and set out the criteria under which that strategy will be assessed.
Furthermore, we believe that the Department's performance management
system must concentrate on outcomes and not processes if it is
to be of any relevance to the economy. (Paragraph 27)
Bank lending rates
3. The
Green Paper on banking policy contains many welcome initiatives
but the key challenge is to address bank lending. All that the
Department does will be of little consequence if business does
not get access to sufficient levels of working capital. (Paragraph
37)
4. Working capital
is the life-blood of business. If it is not available then the
economic recovery will wither on the vine. We believe that the
Government has had sufficient time to debate with banks the need
to provide sufficient finance and come to an agreement on appropriate
levels of bank lending. We expect the Government to deliver on
its claim that it "will not stand by and let the businesses
of tomorrow fail on the basis that they can't attract investment".
The agreement between the Government and the banks to increase
levels of bank lending represents a step in the right direction.
The only reliable assessment of the banks' delivery on commitment,
however, will be the level of take-up of that additional finance.
We are aware that the terms and conditions currently applied to
loans can be onerous and far too often drive businesses to use
inappropriate forms of alternative finance. Furthermore, the cost
of that finance can also hinder access. If either of these factors
are not addressed the agreement reached by the Government will
have been of little, if any, benefit to small and medium-sized
businesses. (Paragraph 58)
5. The data on lending
rates which the banks will provide to the Department and the Bank
of England should go some way to demonstrating whether or not
the banks have delivered on their commitment to increase lending.
We note the banks' undertaking to provide lending data to the
Government and the Bank of England. All of this data will need
to be made public so that it can be examined by us and the wider
business community. We will expect it to be published as soon
as practicable after it has been received. We also recommend that
the Department include in its assessment of that data, any survey
information received from business organisations on the costs
of that finance and the level of loan applications which are turned
down before formal applications are made. (Paragraph 59)
Small Business Economic Forum
6. It
is clear that all sides value the opportunity for dialogue offered
by a forum which brings together banks, business and Government
to both discuss the needs of business and to improve the relationship
between banks and business. The widening of the remit of the new
Small Business Economic Forum has the potential to deliver that.
But the Forum should not be seen as an alternative to direct action
to address shortfalls in lending. Quarterly meetings, while welcome,
will not deliver on this in time. (Paragraph 67)
7. We note the view
of the banks that they would prefer to be full time participants
rather than invitees when finance is discussed. This is a positive
approach and we recommend that Government and business take a
flexible approach to membership of the Forum and consider extending
full membership to the banks. (Paragraph 68)
Relations at the local level
8. At
present, the relationship between banks and businesses can be
characterised as distant and lacking in trust. As a result, banks
have become far too risk-averse with decision-making based on
formulas rather than local knowledge. The banking sector's proposals
for banking mentors to assist businesses has the potential to
develop a two-way process of understanding. Key to their success
will be a change in bank culture with banks at the local level
making lending decisions based on the merits of individual applications
and not merely acting as an intermediary between businesses and
banks central offices. If they are to achieve this, banks need
to develop a new approach to risk management with process which
are sufficiently sophisticated to balance local decision-making
with the need for strategic risk assessment. (Paragraph 72)
Specific interventions
9. The
Business Growth Fund has the potential to deliver significant
investment to British industry. We believe that Government should
be represented on the board of the Fund, but whether this is through
a Government Minister or an official is open to question. However,
we strongly believe that Government representation in whatever
form it takes should have, at its heart, the promotion of businesses
and business need. We recommend that Government representation
on the board of the Business Growth Fund be founded in the Department
of Business, Innovation and Skills. Relinquishing that role to
HM Treasury will not give business the appropriate levels of expertise
and support they require. (Paragraph 76)
10. 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 for business. (Paragraph 89)
11. 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. (Paragraph
102)
12. 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.
(Paragraph 111)
13. 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.
(Paragraph 117)
Creative industries
14. 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.
(Paragraph 123)
15. 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. (Paragraph 128)
Environmental sector
16. 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. (Paragraph 132)
17. 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. (Paragraph 134)
Engineering and machinery sector
18. 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. (Paragraph 140)
19. 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. (Paragraph
141)
Conclusion
20. Our
report provides an initial assessment of the Department's support
for industry. The Government has proposed a number of interventions
which have the potential help promote economic growth, but they
do not add up to a comprehensive growth strategy. (Paragraph 142)
21. The crucial issue
of rates of lending by banks remains unresolved; and all the good
that the Department hopes to achieve in its industrial policies
will suffer without a vibrant business community which has adequate
access for working capital. That, more than any Government initiative,
will drive the recovery. The Government has been talking a tough
game since it came into power and while bank lending rates are
a complicated issue to manage, it is time for Government to deliver.
(Paragraph 143)
22. It is also clear
that different sectors of the economy have different requirements
when it comes to Government support. In order to build capability
across all sectors of the economy the Department will need to
develop a strong awareness of the needs of individual sectors
and have the flexibility to react to them. While the Government's
growth strategy appears to move in this direction, our evidence
from three sectors has shown that much work needs to be done.
It has also reinforced the central theme of this Report, that
finance remains the critical issue to address, whether by direct
intervention or by creating the right environment for investors.
(Paragraph 144)
23. As we state at
the start of our Report, this is an initial assessment of the
Government's position. We intend to monitor closely the Government's
efforts in this area and will return to it at regular intervals.
(Paragraph 145)
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