The New Local Enterprise Partnerships

Memorandum submitted by the Federation of Small Businesses (FSB)

The Federation of Small Businesses (FSB) welcomes the opportunity to submit evidence to the Committee Inquiry.

The FSB is the UK’s leading business organisation. It exists to protect and promote the interests of the self-employed and all those who run their own business. The FSB is non-party political, and with 213,000 members, it is also the largest organisation representing small and medium sized businesses in the UK.

Small businesses make up 99.3 per cent of all businesses in the UK, and make a huge contribution to the UK economy. They contribute 51 per cent of the GDP and employ 58 per cent of the private sector workforce.

We trust that you will find our comments helpful.

EXECUTIVE SUMMARY

1. This submission addresses the Federation of Small Businesses’ (FSB) current thinking on the emerging Local Enterprise Partnerships (LEPS). It considers the firstly the future role of LEPs and makes the point that the functions of the partnerships should be focussed exclusively on economic development. In doing so sets out some key issues which LEPs will need to be able to address. It states that LEPs should be both business led and reflective of areas of economic activity, rather than existing boundaries. As part of this there must be representation of the interests of small businesses and the self employed in the area. The submission suggests that there should be basic independent funding for LEPs. The FSB also has some concerns regarding the transition from RDAs to LEPs and the submission asserts that we would like to see detailed plans for handling it in a way which ensures minimum disruption for business.

2. The submission goes on to address issues related to handling those functions which the government has indicated it wishes to be led nationally in a post RDA environment. In particular it outlines:

· The need to ensure than any future approach to inward investment is fully responsive to local need.

· That there are opportunities for better provision of business support at a national level, but that good, direct face-to-face local provision must be retained.

· That LEPs could still have a role to play in promoting innovation and sector leadership.

· That better access to finance is of vital importance to small businesses and that LEPs provide an ideal vehicle to drive and co-ordinate local investment through a variety of local schemes.

· That skills and training provision would benefit from a demand led system if it focuses on the needs of business, but that there may be opportunities for LEP involvement through working with local education and training providers in a commissioning capacity.

3. The submission also touches on the issue of rebalancing the economy and urges that it is approached in a way which recognises the complexities of the current reliance on public sector investment.

INTRODUCTION

4. This submission addresses some basic principles which the FSB believes are vital for the future roles of LEPs including the functions and funding of the partnerships and co-ordination both between different LEPs and with national government led functions.

5. The committee particularly asked for submissions focussed on the FSB’s views on:

· Handling the activities that the Government has said it is considering making national such as inward investment, sector leadership, business support, innovation and access to finance under a non-RDA structure

· Rebalancing the Economy under the new structure

· The capacity of local authorities to cope with a new structure at a time of reduced budgets.

· The future of skills and training

THE FUTURE ROLE OF LEPs

Function

6. The LEPs’ role should be exclusively to promote economic development and the proposals for the key areas on which the LEPs should concentrate are in principal correct. The FSB believes that the LEPs need to retain a narrow focus on driving employment and enterprise. Issues such as planning, local transport and infrastructure are also key factors in economic development. So LEPs need to be able to tackle them effectively. However it is important that they remain focussed within the context of promoting local economic development. Originally, the RDAs were given five roles / functions centred on economic development, regeneration, investment, competitiveness, and employment and skills. But since 2000 no less than 16 additional responsibilities, including Business Link, were placed on them so the original objectives were diluted and lost. LEPs need to retain their focus.

7. The information provided by government as to the functions and powers LEPs will be granted to address these issues has so far has been extremely limited. Also, in advance of the Comprehensive Spending Review it is difficult to know what funding streams will be available and which, if any, will be available to LEPs to lever in tackling their priorities. The FSB realises that we are now operating in a different environment where government intervention and public spending cannot be seen as the solution. If the economy is to grow strongly in that new environment then there is need for local communities to generate solutions. The FSB firmly believes that small businesses are in a strong position to help deliver these. We know from our own membership how good small businesses are at problem solving and finding efficient ways of achieving results. Bringing these skills and knowledge together behind LEP priorities will be key to their success.

8. If LEPs are to enhance the economic performance of their area it is vital that the powers that they are given are appropriate and sufficient, particularly if spending power is limited. For example LEP’s should be given the freedom to use planning and licensing levers or targeted business rate discounts to encourage business development in a particular area. Existing local authority business levers need to be considered in the context of how they can be improved and utilised by LEPs.

9. LEPs should give the lead in strategic economic development and leadership in their area. Using ‘improving local transport’ as an example, transport issues, especially road transport, are of fundamental importance to small businesses. Transport and travel to work patterns are closely related to the geography of economic areas and therefore it is right that local transport strategy is approached in a way which crosses traditional local authority boundaries. If the new LEPs are genuinely reflective of natural economic areas then they should be better positioned to address these issues. In order for them to do so effectively they should be given the power to develop an economic strategy for their area and to prioritise investment in transport and infrastructure within the LEP area accordingly. If LEPs are to be able to generate the right environment for business and growth in their area then this approach needs to be mirrored across all issues on which LEPs are to take a lead.

10. LEPs must have the capacity to address all issues which impact on economic development. In particular:

· Transport.

· Infrastructure, including encouraging local solutions to deliver high speed broadband connectivity.

· Planning and Housing at a strategic level where it relates to economic development.

· Tourism – This is a major economic driver in many parts of the country but especially in rural areas. Promotion of and support for tourism relies on funds from the RDAs and local authorities, which is under threat. LEPs must be enabled to continue to invest in this key part of the local economy;

· Low Carbon agenda - If moving towards a low carbon economy remains a priority then the LEPs should be well positioned to help drive it, through for example, encouraging the procurement of more services and goods locally.

· Skills & Training - By being able to commission local businesses to work in partnerships with local colleges, universities and training providers to set up Group Training Associations and Apprenticeship Training Agencies where there is local business need.

11. In pushing some responsibilities down from RDAs to LEPs while at the same time taking others upward to be led nationally there must be some clear coordination so that local initiatives gel with national strategy. It is also important that emerging LEP policy recognises the interconnected nature of local economies. Mechanisms must be put in place to allow LEP’s to both work together on a sub national level, for example when considering co-ordination of transport connections which run between multiple or neighbouring LEP areas and also to co-ordinate with those departments handling national level strategy. LEPs should also be encouraged to work together to promote specific one off projects such as the creation of a key rail or road transport route. The FSB would also support collaborations between LEPs in the creation of focussed, targeted partnerships to promote enterprise in particular areas such as infrastructure or sub-regional economic development.

12. While the government has expressed an intention to place certain RDA functions under national leadership, there is a lack of clarity about how this would work and how much of the delivery and capacity to manage local activity will be retained by LEPs. There is a danger that this will contradict the government’s ‘localism’ agenda and undermine the capacity of LEPs to deliver economic development if it is not handled correctly.

13. LEPs must be sustainable in the long term, including surviving political change at both local and national level. They must also be able to influence national government and its agencies, particularly given the intention to transfer a number of functions upwards to national level.

14. If LEPs are to remain efficient and value for money then their role should extend to identifying strategic priorities and undertaking appropriate commissioning work, but not into areas of direct delivery.

Form

15. The FSB supports LEPs of any size and coverage provided that they are reflective of the local economy. However, care must be taken to ensure that they have the capacity to deliver economic development. In some cases RDAs were seen to be too large and diffuse to represent a genuine local economic area. Conversely, it is vital to ensure that the reverse does not occur with LEPs. They must represent an area of economic activity rather than being allowed to reflect existing local authority boundaries or through a reluctance to collaborate more widely. In the smaller LEPs both the public sector and business community must be sure that the LEP is viable. In particular the FSB would like to clear plans for ensuring that the proposals for LEPs have the full backing of their local business community before they are given the go ahead by government.

16. The FSB has welcomed the government’s indications that business will be equally represented on LEPs, with business taking the chair. We also welcome the commitment by the Secretary of State for Communities and Local Government1 that the small business voice should have a central role in the partnerships. It is vital that the voice of small businesses and the self employed is represented on LEPs. The FSB would like to see clear stipulations which ensure representation for small and micro business interests is consistent across the country.

17. In order that the LEPs have the strongest independent business voices possible the FSB would like to see provisions for preventing commercial conflicts of interest between LEP membership and involvement in delivery of LEP related activity.

Funding & Capacity

18. The FSB has concerns over the funding of LEPs and this links closely into the issue of the capacity of local authorities to cope with a new structure at a time of reduced budgets. It is the FSB’s view that the LEPs should not be funded from local authority budgets but provided with basic funding for a streamlined secretariat and administrative function and to access research and advice. This will assist with identifying the correct priorities and developing strong proposals and bids.

19. If the administration of LEPs is left to local authorities this is, firstly, likely to lead to local authority dominance of the agenda and, secondly, there will be concerns about whether local authorities have the capacity to help deliver economic development over and above their current activity given the public sector funding climate. At present, other than undertaking Local Economic Assessments, economic development is not a statutory requirement for local authorities who are already facing significant pressures right across their budgets. It is absolutely vital that LEPs are private sector led and do not become a form of local strategic partnership. Moreover, given that the Regional Growth Fund appears likely to be particularly targeted at those areas that are more dependent on the public sector it raises questions as to how those LEPs outside of these areas will have the capacity to deliver outcomes for their businesses and communities. If LEPs are required to rely on local authority and large national business funded support then there is a significant danger that the voice of small and micro businesses who are the drivers of their local economies will get squeezed out. Funding streams for economic development which the LEPs have access to should also remain independent of local authority budgets so that it can truly drive economic development and not risk being drawn into covering budget shortfalls.

Transition from RDA to LEPs

20. It is vital that during the period of transition between RDAs and LEPs that the skills, experience, and useful networks now present in the RDAs are not lost. For example, an important aspect of the RDAs’ work was the routing of European and Government investment funds. Among the beneficiaries are Rural Regeneration Zones (RRZs) and Accelerated Development Zones (ADZs). And equally important to business was the identification of employment land and brown field sites. Most RDAs also have, or had, a Regional Observatory, which collected regional data and with statistics from ONS, produce statistical reports about the state of the region.

21. At a lower level there are Local Development Frameworks, which will be set in stone next February, and Community Strategic Partnerships (CSPs). Added to this there are Local Area Agreements (LAAs), which together with Local Strategic Partnerships (LSPs), are responsible for the routing of some local authority funding, including economic monies. A number of areas have also formed Multi Area Agreements (MAAs). Significant care needs to be taken as to how these different structures and strategic approaches fit together in the new environment, as business will want to focus resources where it is most effective.

22. The previous Government also asked all the English unitary and upper tier shire councils to prepare an economic assessment of their area. Many authorities will have done work on these assessments. The data gained so far could be of use in the future, particularly as LEPs begin to look at the priorities for their local area. Work already undertaken should not be thrown out with the change in structures.

23. It is important for business that there is as much continuity as possible and the FSB would like to see the government issue clear plans for handling the process of transition as soon as possible.

24. The FSB would also like to see some clarity from the Government on a number of questions. Firstly, how will the Government utilise LEPs on EU funding? Currently, RDAs are the portal at which the EU supports the regions, across the member states. As LEPs will not be bounded by regional constraints, this needs to be considered. The FSB recommends that this finance is kept at national level and distributed to LEPs on a project basis. This must be done in a way which ensures distribution according to the needs of LEP areas and prevents larger LEPs from dominating the process.

25. Secondly, there is a question about the existing loan, grant and equity projects RDAs have. Many organisations and firms will be mid-way through contracts and projects and as such, will need clear guidance of how the demise of RDAs will impact on them. LEPs will not be taking over the existing regional boundary, or even carrying out the same process and functions, so this may cause concerns.

ACTIVITES THE GOVERNMENT HAS INDICATED IT WANTS TO MAKE NATIONAL

26. The government is proposing to move responsibility for some functions including inward investment, business support and access to finance to a national level. If this is to happen then it is vital that proper mechanisms are put in place to ensure that LEP’s and local business have a strong voice in influencing the implementation of those strategies in their area and ensuring they take account of local need.

Inward Investment

27. The current system has led to some duplication and overlap in terms of inward investment strategy (for example through multiple overseas inward investment offices and RDAs competing to attract the same organisations to their region). Better co-ordination of inward investment activity across the UK is therefore needed. Nevertheless, the FSB has some concerns about the responsibility for inward investment being led exclusively on a national level. As mentioned above there is a risk that this contradicts with the localism agenda. Investment must not be allowed to gravitate to the economically stronger areas of England, creating further imbalance in the economy.

28. The FSB believes that aspects of inward investment strategy must still be driven locally. For example the identification of an area as a destination for a particular sector requires a local business perspective. If the Government decides to proceed with their proposals to lead inward investment activity at a national level then any approach must be strongly influenced by local need and priorities. It should be for LEPs to identify the strengths and weaknesses of their local economies and decide how they would benefit from inward investment and/or focus on developing local business growth, and then co-ordinate with the national body on any activity. The Government must ensure it works with all LEPs in attracting the right businesses to the right areas.

Business Support

29. There have clearly been changes in terms of the way that businesses can access information and therefore scope to bring together some of that provision nationally; for example, through the improvement of online resources. Management of functions such as web-based portals should be handled nationally and should help to ensure a consistency of business support services across the UK. However, it is vital that direct, face to face, advice and support is preserved and continues to be provided at a local level. Any new system must ensure that services remain easy to access and are of direct benefit to businesses. Access to IT technology and broadband services are not universal, particularly for small businesses and centralised provision should not be seen as a replacement for direct support.

30. If regional business support programmes are going to be contracted on a national basis then a mechanism needs to be in place to give LEPs an input into their delivery. The ability to monitor centrally contracted business support services should be made an integral part of LEPs role. In particular LEPs should be given the powers to influence the provision of support for business start ups and businesses that are in the early stages of growth. The role of enabling small and micros businesses requires a perspective based on knowledge and insight into the local economy and the capability to oversee and monitor progress.

Innovation

31. It is not clear that there are sufficient differences between the needs of regions to justify the management of innovation at a sub-national level. Like elements of business support there is scope for this function to be simplified and managed nationally in a more efficient manner. Nevertheless, like business support, it is vital that face to face advice continues to be delivered in an accessible manner on the ground. Innovation should be seen as more than simply applying to high tech sectors such as IT and bio-technology. It should be used to encourage investment in innovations, such as opportunities in the media industry, that can improve business productivity and profitability. This is particularly important for start ups and emerging small businesses where margins are often tight. For example, a LEP could help to promote increased public procurement with local small businesses. Part of this would be helping businesses deliver services more efficiently through utilising innovative technologies or techniques and therefore be in a position to bid for contracts.

Sector leadership

32. The ability for local economies to support and drive particular sectors and clusters must not be diminished by putting sector support into a solely national function. It is important that this can be properly coordinated with the LEPs’ overall approach to economic development. There is already a tendency for businesses to cluster where they can best collaborate together and LEPs could offer a good opportunity for local economies to help encourage this type of growth locally.

Access to finance

33. Access to finance is the lubricant that will drive economic prosperity. It requires both national drive and local innovation and delivery because its availability is vital to all businesses, particularly small and medium sized enterprises.  The banks have the capacity to deliver the access to business finance in a manner and on a scale which will make it easier for small businesses to survive and grow.  This requires a strong top down push to ensure that enterprises across the country are given the access to finance that they so desperately need. 

34. It is vital that the banks and other lenders fulfil their obligations and lend locally to all businesses large and small, irrespective of sector, so that firms can invest in growth and help rebuild the economy. The FSB has undertaken research on small business finance since 2008 and have seen slight improvements in the cost of new and existing finance, and the number of firms being accepted for finance2. However, more work needs to done to improve the situation and the FSB believes that LEPs will have role to play.

35. The new environment is going to require efficient and responsive local solutions and the FSB recommends that LEPs are an ideal vehicle to be able to drive local investment through schemes such as Community Investment Trusts (CITs). These vehicles would draw down money from organisations and state agencies (EU, Government Funding Streams, Lottery, big business, etc) which is then invested into worthwhile community business projects such as social enterprises, keeping social hubs open – pubs and post offices for example – and other business related causes. The structure of CITs is a board of people (from local authority and business) who decide funding priorities and manage the fund investment team. All monies would be retained by the CIT and invested giving community investors a dividend. Investees would enjoy the same tax incentives as those who invest in Venture Capital Trusts. Capital Gains Tax is not paid on any gain made on the disposal of VCT shares. Also dividends on ordinary shares in VCTs are exempt from income tax. LEPs are in the best position to know what is needed in their area.

36. Certain local authorities have decided to set up council banks, such as the Bank of Essex. While the council brought in a bank to provide the back office services and administration for the project, the local authority devised the criteria and priorities. LEPs should be allowed the freedom to explore these routes of economic development especially where bank branches have closed and other access to finance is particularly challenging.

37. Additionally, LEPs should look into the potential to use the Financial Intermediary Scheme which helps small business who find attracting credit through the major banks difficult. This scheme could be funded by the proposed streamlining of Business Link and administered through private financial intermediaries, where the LEP could take a commissioning role. The scheme could also help start up businesses in developing business plans and sourcing alternative financing models if necessary.

Skills and training

38. The FSB is supportive of a demand led system so long as the focus is also on the needs of micro and small businesses as opposed to providing skills at a deadweight loss.  FSB members were largely unimpressed by Train to Gain in terms of awareness.  Those who experienced the Information, Diagnostic, Brokerage element felt the service was suitable. But, reaching the hardest to reach businesses has proved difficult.  In an FSB survey in May last year, 88 per cent of businesses had not taken up an offer of training through Train to Gain in the previous six months.

39. At the local level the FSB is concerned by the focus on driving up numbers on programmes as opposed to the demands of small businesses.  The FSB is keen to see a system whereby employee training is commercially focussed through colleges and training providers so that skills are obtained to better suit small business.   Unitisation of learning is critical in the skills system and we encourage the Qualifications and Credit Framework to make it easy for training providers to gear learning in this area.

40. An excellent example of why LEPs need small business representation is that for too long employee training has been focussed at the majority rather than the hardest to reach smaller businesses who cannot get their training recognised.   In terms of apprenticeships, fully functioning Group Training Associations and Apprenticeship Training Agencies are critical to reducing the bureaucracy on smaller businesses who wish to offer apprenticeships.

Rebalancing the economy

41. The FSB welcomes the recognition of imbalances in the UK economy and the fact that only private sector growth can help to reduce the dependency on the public sector in some areas of the country. The private sector must be enabled to drive economic development to assist with the transition and the inevitable cuts in public sector employment. However the reduction in dependency on the public sector must be managed carefully so as not to stifle much needed growth in the private sector. A significant number of FSB members do business with the public sector and this will be mirrored across other business organisations. There is a delicate balance to be struck as spending priorities are addressed.

42. The FSB also urges that attempts at rebalancing are not seen in overly simplistic geographic terms. Although public sector dependency is on average higher in certain regions of the UK such as the North West and North East, it should not be assumed that other areas will be unaffected if they are not given similar assistance. For example although the East of England region is overall well balanced towards the private sector, areas within it such as Cambridge, South Norfolk and Ipswich have significantly high levels of public sector employment. Distribution of spending and measures taken to aid transition such as through the regional growth fund need to be sophisticated enough to take account of this.

13 August 2010