Financial Assistance to Industry (Small and Medium Sized Enterprises)
The Committee consisted of the following Members:
† Birtwistle, Gordon (Burnley) (LD)
† Coffey, Dr Thérèse (Suffolk Coastal) (Con)
† Cox, Mr Geoffrey (Torridge and West Devon) (Con)
Crabb, Stephen (Lord Commissioner of Her Majesty's Treasury)
† Dakin, Nic (Scunthorpe) (Lab)
† Fallon, Michael (Minister of State, Department for Business, Innovation and Skills)
Field, Mr Frank (Birkenhead) (Lab)
† Gardiner, Barry (Brent North) (Lab)
† Lee, Dr Phillip (Bracknell) (Con)
† Lloyd, Stephen (Eastbourne) (LD)
† Meacher, Mr Michael (Oldham West and Royton) (Lab)
† Perkins, Toby (Chesterfield) (Lab)
† Roy, Lindsay (Glenrothes) (Lab)
Simpson, David (Upper Bann) (DUP)
Sutcliffe, Mr Gerry (Bradford South) (Lab)
† Wharton, James (Stockton South) (Con)
† Wiggin, Bill (North Herefordshire) (Con)
Margaret McKinnon, Committee Clerk
† attended the Committee
Eighth Delegated Legislation Committee
Wednesday 12 June 2013
[Jim Sheridan in the Chair]
Financial Assistance to Industry (Small and Medium Sized Enterprises)
2.30 pm
The Minister of State, Department for Business, Innovation and Skills (Michael Fallon): I beg to move,
That the Committee has considered the motion, That this House authorises the Secretary of State to undertake to pay, and to pay by way of financial assistance under section 8 of the Industrial Development Act 1982, sums exceeding £10 million and up to a cumulative total of £300 million in respect of investments to support lending to small and medium sized enterprises.
On behalf of the Committee I welcome you to the Chair this afternoon, Mr Sheridan. We look forward to sitting under your chairmanship.
The motion for which the Committee’s approval is sought was laid before the House in May and is being made under the Industrial Development Act 1982. The Government are absolutely clear that getting credit flowing to small and medium-sized enterprises is a priority if we are to support the economic recovery. The current picture is not good. SME lending has fallen 25% in real terms since its peak in 2009, and today is some 10% lower than in 2006.
SMEs find it particularly difficult to access debt finance. Not only do they face specific challenges proving their creditworthiness to lenders, but they have very little choice as to where to go for debt finance if they are turned down by their bank. The five largest banking groups dominate approximately 90% of the market for SME lending and their risk appetite has been decreasing.
Our role in Government is to help kick-start investment and ensure that the supply of finance is there. That is why in September last year we announced plans to create a new business bank, allocating it £1 billion of new capital, and in March we announced that the bank would be set up in stages so that support is made available to businesses as quickly as possible.
One way we can increase the supply of finance is by encouraging greater diversity in the business finance markets. That is why we recently launched the £300 million investment programme as the first new phase of the business bank initiative. The programme builds on the business finance partnership and has been designed to promote diversity in the supply of lending by encouraging new entrants and the growth of smaller lenders.
While the business finance partnership focused on non-bank lending channels, the investment programme we are considering today has a wider remit, with opportunities to invest in equity and debt in financial institutions, debt funds, asset-backed lenders and other non-bank channels such as supply chain finance, peer-to-peer lending and other platforms.
Our key aims are to support the development of diverse debt finance markets for SMEs, to promote competition and increase supply through new finance providers or products, and to increase the supply of finance in total to SMEs. To make sure we meet those
aims, the Government will invest only in opportunities that meet clearly defined investment criteria. For example, through the investment programme, the Government will be attracting match funding from the private sector. That means the money made available by the Government for business lending is effectively at least doubled, increasing the impact of our commitment.We have also decided that we will make investments only at market rates and on equal terms with the private sector. That ensures that we stimulate the development of sustainable long-term solutions to SME access to finance issues. We are well positioned to launch the investment programme, thanks to our recent experience with the small business tranche of the business finance partnership. Through that, we received a strong level of interest from a diverse group of lenders, and successful applicants to the programme are already lending to SMEs.
We also undertook an extensive period of market engagement as part of the business bank programme prior to launching the investment programme. That has assisted in identifying the different channels that can be used to deploy the £300 million funding we have allocated to the initiative.
All investments under the programme are to be made using spending authority under section 8 of the Industrial Development Act, save for those that involve financial assistance to banks or financial institutions, for which spending authority is available under the Banking Act 2009. We launched the investment programme on 10 April and published a request for proposals to provide applicants with details of the programme’s objectives, the application process, how bids will be assessed and the time limits. The investment programme is open for applications until next spring. Proposals can be submitted at any time during that period and they will be assessed and funds will be committed on an ongoing basis. That approach is different from the business finance partnership, in that it provides a greater degree of flexibility in making the right investments at the right time.
Notwithstanding that flexibility, our preference is to deploy funds quickly. We therefore encourage applicants to submit their proposals as soon as they are able. Since launching in April, we have already received an encouraging number of early stage applications from a wide range of lenders, including challenger banks, debt funds, asset finance companies, supply chain platforms and peer-to-peer lenders. Those expressions of interest are being assessed.
That early interest is encouraging, and a number of the proposals that have progressed through to completion fall under section 8 of the 1982 Act. The Industrial Development Advisory Board has been consulted on the governance arrangements that we have established to assess the proposals. Those arrangements include stages to examine and select proposals. In addition, an investment committee will decide whether to move a proposal forward to due diligence. The committee will comprise non-remunerated external members with relevant business finance experience, complemented by officials from my Department with responsibility for the business bank programme. Her Majesty’s Treasury will have observer status on the investment committee and we will obtain Treasury consent before making investments.
Due diligence will be undertaken by assessment teams, drawing on the experience of Capital for Enterprise, a non-departmental public body that already delivers all
our other business finance schemes. Capital for Enterprise most recently ran the business finance partnership competition, and that included assessing and negotiating proposals. The assessment teams will be supplemented by support from external professional advisers where appropriate.In addition to being consulted on the establishment of the governance arrangements, the advisory board will have an ongoing role in the investment programme. That includes ad-hoc consultation with individual advisory board members and the participation of board members on the investment programme’s investment committee, where proposals fall under section 8 of the 1982 Act. The advisory board will also review those proposals that fall under section 8 where the Government’s proposed investment is more than an agreed threshold. That final review will take place when due diligence has been completed. The investment committee will then make a recommendation to my colleague, the Secretary of State for Business, Innovation and Skills, on whether to proceed and award funding. My Department will closely monitor lending by successful applicants to ensure that Government funding results in increased responsible lending to small businesses.
Priti Patel (Witham) (Con): The Minister will know that Essex is a county of entrepreneurs and, despite tough economic conditions, we have some 8,000 enterprise births a year. What guidance and encouragement will he give to SMEs in my constituency and across the county to tap into the fund?
Michael Fallon: We have been looking at how we can better market all the various Government support schemes to SMEs. My hon. Friend will see more details of those schemes as they are marketed under the GREAT campaign, which she will be familiar with. I will certainly ensure that SMEs in her constituency are aware of these new opportunities. Those who participate in the investment programme will be in the market for clients as well, so they will be hunting down firms in her constituency that can best benefit from this new finance.
The investment programme will build on the momentum that has been established through the business finance partnership. It will help bring more diversity to business finance markets, and ensure that SME finance markets continue to develop and much needed credit flows to SMEs in all our constituencies. As such, I would welcome Committee members’ comments on the motion before formally seeking their support for it.
2.40 pm
Toby Perkins (Chesterfield) (Lab): I echo the Minister’s comments about the pleasure of serving under your chairmanship, Mr Sheridan. I welcome his statement, and he is absolutely right that access to finance for small businesses has been a problem for several years. The problem is escalating and continues to cause considerable worry to organisations such as the Federation of Small Businesses and chambers of commerce. We speak to small businesses throughout the country. A few days ago, we were in Reading and the Wirral, and every small business we spoke to raised the issue of access to finance, the lack of which is regarded as one of the key barriers to growth.
The Minister identified the need for greater diversity in the market and for greater competition for the big five banks, and we share his aspiration. That net business lending has fallen each year since 2009 shows the scale of the problem. According to the Bank of England, net lending to business has been positive in only six of the past 24 months. We were saying a couple of years ago that this issue is one of the big barriers to growth, and what was then was a crisis has become even worse. There has been no lack of discussion of the issue, but it is clear that the Government’s ideas have completely failed to meet the scale of the challenge or to deliver what is required.
There is a real need to increase the size and diversity of the market, and to ensure that small businesses have a real choice. At the moment, if they are turned down by one bank they are usually turned down by all the others, which all follow the same model. Businesses feel that the relationship with their bank manager, as someone who understands their business, has completely broken down. They want local decision making.
It is for precisely that reason that my right hon. Friend the Leader of the Opposition announced that a future Labour Government would introduce a new generation of local banks. We heard earlier about entrepreneurship in Essex. What better than to be able to say to businesses in Essex, “Decisions will be made locally by someone who understands your business, the community and the entrepreneurial spirit of this county; not by someone a hundred miles away who couldn’t even locate you on a map”? We want a new generation of local banks that can change the culture of banking and have a real impact on the availability of credit to small businesses, but which can also influence the behaviour of existing banks. That would bring about a far more radical change in the performance of banks than the Government have achieved so far.
The Minister spelt out some of the conditions that will be attached to this policy. Care must of course be taken with taxpayers’ money. The Government announce such policies but when they are evaluated 12 months down the line, how much of the money involved has actually been delivered? The regional growth fund is a classic case: very little of that money has ended up where it needs to be. The process has been far too slow, which is one of the reasons why we have a stagnating economy.
I ask the Minister to try to strike a balance between proper and vital due diligence, and ensuring that the conditions are not so numerous that the money allocated is never actually spent on making the difference it needs to make to our economy.
When Labour spoke to the German Savings Banks Association as part of our policy development, we investigated the work being done in Germany to allow small businesses to access finance. When the banking crisis was at its fiercest and lending was falling off a cliff here in the UK, lending in Germany did not go down at all. An assessment made a couple of years later found that bad debts associated with those loans did not increase. On comparing the failure we have seen under this Government with Germany’s economy and the ability of its small businesses to access finance, those businesses tell us that the British system is so complicated that too little money actually ends up doing what it should.
Although we welcome the Government’s attempts to take action to increase diversity in the market, we remain of the view that they have done too little over the years to deal with this pressing issue. Their initiatives have failed to deal with the scale of the problem. A new generation of locally based banks with local decision making at their core will make the necessary significant difference for Britain’s small businesses, which are the engine of growth and need access to finance.
2.47 pm
Michael Fallon: I am grateful to the hon. Gentleman for what I think was a welcome for the proposals. Let me try to respond to some of his points.
First, the hon. Gentleman said that we were not doing nearly enough quickly enough. Some £4 billion of taxpayer money is now being made available through Government support for the SME sector and £1 billion of that is through the business bank, so it is not true that the Government are not getting behind and assisting SMEs. Secondly, the first round of money from the business bank was allocated, as I explained, through the business finance partnership. A first round of some £55 million was followed by match funding of another £55 million, meaning a total outlay of about £110 million. Earlier this year, the second round provided another £30 million—I think the hon. Gentleman attended the Committee where we approved the proposals—and a match funding total of £70 million. In this instance, £300 million is going out, which will again be match funded, giving a figure of some £600 million. Those amounts on their own are not going to solve all the problems SMEs face when accessing finance, but I hope they will make some difference.
The hon. Gentleman asked how quickly the money will be spent. I caution him not to rest too much of his argument on the regional growth fund. He may not be up to date with the latest figures, and he will certainly see shortly just how much of that money is now flowing. I accept that it takes time to get money through to the regions when setting up a new fund, but the trigger dates included in round 3 of the regional growth fund
have certainly helped to accelerate funding. Some of the programme spend from rounds 1 and 2 is now flowing out to benefit the SMEs in the programme.The money under discussion must be spent within three years. SMEs can start to spend it as soon as their proposals are agreed, which can be any time from now until next April, but they do not have to wait until then—we have already received expressions of interest. On receiving the money, they have up to three years to get it out into the SME sector.
I was not wholly clear about the hon. Gentleman’s alternative, except for the rather intriguing proposal for a state bank in every county—the people’s bank of Essex, or Doncaster—no doubt staffed by local bureaucrats choosing one project over another. We are not doing that. We are not replacing the banking system with some state bureaucracy. On the contrary, we are complementing what is out there. We are saying that we need to think about other ways, alongside the big four or five lenders, of getting money through to SMEs.
Toby Perkins: I am happy to set the Minister’s mind at rest. We have no visions of banks staffed with Government bureaucrats deciding on the correct application. The local licences that my right hon. Friend the Leader of the Opposition proposed will absolutely be available for private sector partners to bid for. It is not about having a state bank. I am glad to set the Minister straight on that.
Michael Fallon: I think we would all like to see a few more of the details of this proposal, including what kind of licence there will be. There can clearly only be one people’s bank of Essex, and we would all like to see exactly what shape that monopoly licence will take and how it will fit in. We are not choosing that route.
We accept that SMEs do have problems when trying to access finance. Too much of that lending has been concentrated in the hands of the big four or five banks. We need to do more to encourage other routes—challenger banks, non-traditional lending sources and so on. That is the purpose of the money I am asking the Committee to approve today.