Government Assistance to Industry

Memorandum submitted by the City of London Corporation

Submitted by the Office of the City Remembrancer

Introduction

1. This memorandum is submitted on behalf of the City Corporation in the context of its role in promoting and reinforcing the competitiveness of the UK-based international financial services sector. The City Corporation has extensive engagement with the Foreign and Commonwealth Office and UK Trade and Investment, as part of this promotional work, both to support UK based financial and professional services firms to develop business in overseas markets, and to attract enhanced levels of inward investment into the Square Mile, London and the UK as a whole.

2. The City Corporation is not in a position to respond fully to all the questions posed in the Committee’s Call for Evidence but the following paragraphs reflect the City Corporation’s views on trade promotion, inward investment and SME financing which are all of particular interest to the City’s activities.

Trade Promotion

3. Lord Mayor currently spends approximately 90 days a year overseas promoting the markets and services of the UK based financial community. The focus of these visits has evolved and a substantial business delegation drawn from financial and business services companies now usually accompanies the mayoral party. The planning of the Lord Mayor’s visits now involves UK-based financial service firms, institutions and trade associations at an early stage in order to understand which countries are important for them, and how a visit by the Lord Mayor could help. The results are analysed jointly with UKTI, and then FCO diplomatic posts are invited to bid for visits according to the priorities that have come out of the consultation exercise. Bids are assessed by a City of London Corporation committee, which includes members from UKTI and FCO amongst others. Selection of successful bids is made on the basis of the potential value to the financial and related business services industry.

4. Each visit programme is delivered in market by UKTI staff based in the Embassy and Consulate network, with the aim to increase the profile of the UK based financial services industry in overseas markets (predominately high growth markets), promoting business development opportunities for UK based firms and influence senior interlocutors to increase market access for UK based firms.

5. As well as including the key emerging economies such as Russia, India and China which are visited annually, considerable effort is made to incorporate within the programme visits to less high profile countries which are visited less often by UK Ministers. For example, this year the Lord Mayor will be visiting Columbia and Mexico and last year, Kazakhstan and Azerbaijan were included in the programme. Feedback from posts in such countries suggests that there is disproportionate benefits derived from these visits and they are highly valued.

6. Although it is difficult to measure the immediate impact of these visits in terms of business developed and contracts awarded, their strategic benefit is demonstrated by a continued interest from participating companies to be involved in the visits programme and by feedback from Posts.

7. Effective and well-resourced UKTI teams are essential to the successful delivery of the visits. To this end, the City of London runs an annual ‘Industry briefing course’ for overseas based representatives from UKTI, who have a role in promoting the industry within their geographic remit. The week long intensive course arms UKTI staff with a core understanding of the UK based financial and professional services industry and its role in support of the broader economy, with a view to increasing the effectiveness of its promotion.

Inward Investment

8. In addition to the trade promotion work undertaken in tandem with UKTI, the City further supports the delivery of inward investment services to assist foreign firms from the financial and related business services sector set up or expand in London and the UK. This includes working with firms that have been identified as targets by UKTI staff based in the overseas Embassy and Consulate network which, in turn, are usually referred to the City from the UKTI inward investment team based in London. The City then provides prospective investors with a range of services including market intelligence (research reports) detailing the UK based financial and professional services industry and facilitates introductions to relevant contacts in the sector. London’s foreign direct investment agency, Think London, is also a key partner in this work.

9. The UK’s Embassy and Consulate network provides a valuable and high profile point of contact for overseas firms looking to invest in the UK and posts form an essential tool in facilitating access to firms to discuss and encourage their inward investment plans. UKTI is well placed within central government to work with other departments on issues that affect inward investment into the UK and this can be extremely valuable. However, this is not always fully exploited and coordination between departments is not always as clear as it perhaps could be.

SME finance

10. The presence of small and medium sized enterprises (SMEs) in and around the City forms an valuable part of the attractiveness of the Square Mile as they provide essential support services (such as hospitality, cleaning, management consultancy and advertising) to City firms and contribute to the area’s economic prosperity through the creation of large numbers of jobs. However, London currently faces significant challenges in maintaining the productivity and sustainability of SMEs. Boroughs on the City fringe have high SME start-up rates, but they also suffer from some of the highest failure rates. The change in emphasis of Government support to SMEs towards those with high growth potential should not be at the expense of start up SMEs. Finance plays a key role in the creation of SMEs, alongside other support. The City therefore believes that the encouragement of bank lending for SMEs remains important.

11. In order to address these challenges and support a thriving SME community, the City of London Corporation recently commissioned research to assess the contribution made by the City (UK financial services) in meeting the equity finance needs of small and medium-size enterprises (SMEs) in the UK [1] . It has also initiated a business support programme to facilitate the development and growth of small businesses in the City fringe through the provision of premises, finance and guidance.

12. Together with workspace, the availability of finance is essential to the growth of SMEs. Unfortunately many struggle to access external finance from mainstream banks, particularly if they lack an established track record or assets against which to secure a loan. As a result, publicly backed finance plays a critical role in promoting the development of SMEs particularly within deprived communities where banks may be more reluctant to lend. Accordingly, since 1999, the City of London Corporation has invested £8.7 million in the following SME loan funds:

· Barings English Growth Fund managed by Nova and providing capital for small businesses with growth potential.

· London Regional Venture Capital Fund a £50 million venture capital fund for Greater London, supported by the Department for Business, Innovation and Skills (DBIS). The Fund provides equity finance to high growth, innovative businesses requiring sums below £500,000. Co-investors include DBIS, the European Investment Fund, Barclays Bank, Royal Bank of Scotland and a number of local authority pension funds.

· The Chandos Fund, dealing with expansion capital for high growth businesses, management buy-outs and buy-ins, pre IPO funding, partial sales, and release of equity.

13. One of the biggest obstacles to SMEs in supplying City businesses is cash flow. Many large businesses do not pay promptly, so credit is often critical for SMEs’ cash flow to enable them to take on contracts with City businesses. City fringe SMEs report that, although the payment terms of the majority of City based companies are within 30 days of invoice, frequently payment is not made until 45 or even 60 days after supply. This places considerable pressure on SMEs especially if they have to source supplies/staff to deliver the contract prior to payment being made. Banks' unwillingness to advance credit or extend overdraft facilities can add to problem.

14. Anecdotal evidence suggests the current supply of credit to SMEs, despite Government encouragement, remains inadequate. Current lending criteria, based predominantly on the size and amount of 'security' directors of SMEs can offer, rather than on the strength of the proposition do not work in favour of London SMEs, which tend to be service-oriented. To improve SMEs' access to unsecured loans, the Enterprise Finance Guarantee (EFG) banks could promote it more effectively and actively. For the most part it is currently unprofitable for banks to issue loans through the EFG scheme.

15. Access to micro-finance (loans under £10,000) also remains difficult. Many SMEs or credit worthy entrepreneurs previously used personal loans prior to lending criteria tightening in 2008 but as lending criteria have tightened, SMEs have been starved of start up and growth funds. An easily accessed Government-secured micro-credit scheme could help to alleviate this issue.

16. A further tool that could assist SMEs would be if local enterprise agencies and banks worked more effectively together to improve the quality of the applications and business plans that SME’s submit when asking for credit. If all applications were automatically referred to an agency for support then the quality of application would improve and the decline rate fall.

Business Incubation

17. The City of London is also a founding partner in a new-concept business incubator model with a team of entrepreneurs – the first incubator premises will open in Smithfield in the Autumn. It is hoped that this, financially sustainable model with a unique range of services provided by a diverse support community including investor mentors will be capable of being replicated elsewhere in the country. It is envisaged that the City of London Innovation and Incubation Centre (to be known as the City of London Innovation Warehouse), could support significant new business growth in the capital and potentially be a model for other parts of the UK and abroad.

18. The Warehouse will provide high-growth start-ups with incubation workspace, support to access financing, networking and training opportunities, and professional business advice delivered by experienced mentors.

4 October 2010