Report
Introduction
1. The Committee published its Third Report of Session
2010-12 on Friday 18 February 2011. The Government's Response
was received on Wednesday 27 April 2011 and is appended to this
Report. Also appended is a letter from the Secretary of State
to the Chair of the Committee on the Business Growth Fund.
2. Under normal circumstances we publish Government
Responses without comment. However, in this instance we believe
that certain parts of this Response are lacking in clarity.
Business Growth Fund
3. Our Report considered a number of initiatives
aimed at improving access to finance for business. One such initiative
is the bank-led Business Growth Fund. Our report welcomed the
establishment of the Fund. We concluded that:
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.[1]
4. In his letter of 21 March 2011 to the Chair of
the Committee, the Secretary of State explained that while the
Government would not be represented on the Fund's Board there
would be "a quarterly meeting of Ministers, Sir Nigel [the
Chair of the Fund] and the Fund's senior management".[2]
However, this approach was not reflected in the Government's Response
which only committed itself to "maintain strong links with
the Funds senior managers"[3].
The latter appears to be a significant watering down of the Secretary
of State's proposed engagement with the Fund. In view of the importance
of the Business Growth Fund to UK business, we believe that Ministerial
engagement with the Board is necessary. We
look to the Government to make clear which position accurately
reflects Government policy on the Fund; the Secretary of State's
letter or his Department's Response. If it is the latter, we will
expect a detailed explanation of why a lower level of engagement
was considered preferable.
Bank lending rates
5. Our primary concern with the Government's Response,
however, is the way in which it addresses the serious problems
with bank lending to business. Our Report highlighted the central
importance of bank lending to the Government's strategy for growth.
One of its conclusions stated that:
The Green Paper on bank lending 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.[4]
A second conclusion declared:
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.[5]
6. The Government, in its Response to these conclusions,
set out a number of assistance programmes and interventions sponsored
by the Department. While we recognise that these are useful tools,
they are of only minor importance when compared to mainstream
bank lending. The Response also restates the headline features
of Project Merlin—the agreement between the Government and
the banks— but says nothing about how the Government will
police that agreement and ensure its successful delivery. Nor
does it give any indication of what sanctions, if any, Government
is prepared to impose should the banks not honour their side of
the bargain. The Government's statement that it will "continue
to monitor the situation" does not address the seriousness
of the problems faced by SMEs when trying to access finance. The
publication of Trends in Lending on 21 April 2011 by the
Bank of England stated that:
Official data covering lending by all UK-resident
banks and building societies indicated that the stock of lending
to businesses contracted by around £5 billion in the three
months to February. Data from the five major UK banks[6]
indicated that their net lending to businesses was -£2 billion
in 2011 Q1.[7]
7. The Government has had 12 months in which to talk
and to debate the banks' commitment to business. Project Merlin
is in its early stages but the Bank of England figures—which
predate the agreement—clearly demonstrate the size of the
challenge facing both the banks and Government.
8. As we publish this Report, we
wish to make clear our disappointment with the Department's response.
We will therefore be calling on the Secretary of State for Business,
Innovation and Skills and the Chancellor of the Exchequer to come
before us to explain in detail how it will ensure and if necessary
enforce sufficient access to finance for UK businesses.
1 Business, Innovation and Skills Committee, Third
Report of Session 2010-2011, Government Assistance to Industry,
HC561, para 37 Back
2
See Appendix 2 Back
3
Appendix 2, p.11 Back
4
Business, Innovation and Skills Committee, Government Assistance
to Industry, HC561, para 37 Back
5
Business, Innovation and Skills Committee, Government Assistance
to Industry, para 58 Back
6 Banco
Santander, Barclays, HSBC, Lloyds Banking Group and Royal Bank
of Scotland. Back
7
www.bankofengland.co.uk/publications/other/monetary/trendsinlending.htm Back
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