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4.54 p.m.

The Earl of Kintore: My Lords, I also thank the noble Lord, Lord Trefgarne, for introducing this important debate. I should like to address a few points about small and medium-sized businesses which not only do not increase their output but actually cease trading, not because they are making the wrong product at the wrong price but because their internal financial procedures are poor or even non-existent.

I must immediately declare an interest as president of the International Association of Bookkeepers. The association, founded over 20 years ago, offers a professional qualification in manual bookkeeping. It also offers diploma courses in computerised bookkeeping, small business financial management and payroll administration. I am delighted to learn that my noble friend Lord Weatherill still has the office bike. I hope that the noble Lord also has good internal financial procedures, as many small and medium-sized companies do. But, sadly, far too many businesses are going into liquidation. Many will have gone under from lack of financial control. Very basic mistakes are made, such as failing to send out invoices; taking too long to chase up moneys that are owing; and taking too much cash out of the business too early.

I believe that some companies really do still put all their paperwork into a box and present the box to their accountants at the end of the year. Apart from considerable expense, it means—unless the accountants work considerably more sharply than many whom I know—that the financial state of the business will not be known for 10 to 12 months after the year end, and vital information that the chairman's Rolls costs more to run per month than the company is making may not be available until it is too late. The Inland Revenue and

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Customs and Excise—and, I imagine, the banks—feel rather unloved over this period as they do not receive the returns that are required. I know that the Inland Revenue starts with blue-coloured demands, and then, round about Easter, the demands change to a rather fetching shade of red. I imagine that, red being the final colour, once it is ignored the game is up. It probably comes as no surprise that, in desperation, both the Inland Revenue and Customs and Excise institute insolvency proceedings.

I was pleased to read in the Budget snapshot, HMT1, published on 29th November, that there are to be consultations on the reform of the insolvency law to help firms in difficulty and to help avoid wasteful liquidations. But surely problems must be identified at a much earlier stage. I therefore welcome the Government's initiative which appears on page 2 of the Budget Day press release, HMT5, under the heading, "To Widen Small Firms' Access to External Finance". I quote:

    "Representatives of small business and others will shortly be consulted on the development of a financial management certificate. The aim would be to devise a certificate that provided a clear signal of a firm's financial competence, thus providing an additional incentive for firms to improve and implement their financial management skills".

I appreciate that the Government are to consult, but I should like to ask the noble Earl the Minister two questions, of which I have tried to give him prior notification. The first is: can he give any more details about the financial management certificate than appeared in the press release? Secondly: can he say whom the "others" who are to be consulted are likely to be?

5 p.m.

Viscount Caldecote: My Lords, in the welter of discussion on the economy—inflation, interest rates, PSBR, competitiveness, productivity and a stable currency to encourage growth in the GDP—I believe that, important though they are, we are in danger of failing to see the wood for the trees. We need to remember that the ultimate objective of all economic policy is to give everyone the opportunity to lead a full and satisfying life. Unemployment is a major obstacle to achieving that. So I very much welcome the subject of today's debate, so ably introduced by my noble friend Lord Trefgarne, with its emphasis on increased output and on SMEs (small and medium-sized enterprises), both of which create jobs.

Everywhere, increased output is largely dependent on investment. Recent OECD and IMF data show the connection clearly in the figures averaged over the past 30 years—which may account for the slight difference from the figures given by the noble Lord, Lord Haskel. The United Kingdom's GDP growth averaged 2¼ per cent. per annum. With fixed investment at 18 per cent. of GDP, we were at the bottom of the league, compared with Japanese growth of 6 per cent. and investment of over 30 per cent. of GDP. Other competitors were between those two limits. Nevertheless, the UK has

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made huge improvements in productivity and competitiveness, particularly over the past 15 years. But others have improved, too.

The figures quoted earlier are for fixed investment. Of equal importance—as the noble Lord, Lord Desai, so clearly said—is investment in innovation in competitive products which will sell all over the world. For price is not the only factor which affects sales. Quality and value for money are just as relevant. Switzerland is a good example. The products that they make are usually very expensive but of the highest quality, and they have a very good record in the export field.

Those considerations apply to every company, from the biggest to the smallest. Among them are many world-class companies which make a full contribution to output growth. But there are too few of them. There are many reasons for inadequate investment—for example, short termism; bias of taxation in favour of earnings distribution rather than investment, which means that more of the earnings are used in consumption rather than being reinvested in the company for innovation and the like; and a lack of confidence in demand in the future and in a stable value for sterling.

We have often discussed this topic in this Chamber. I shall not go into the issues today because there is not the time. They have been well covered in the past. I should like to emphasise the enormous progress that has been made under this Government in creating the right climate for investment. But the fact is that, overall, industry has not taken full advantage of it. So there is much more to do.

SMEs can make a major contribution. Many of them—probably the great majority—are owner-managed. That gives them greater flexibility to react to market conditions and invest for the future. There is no short-termism there. Just as important is that investment in SMEs is almost always investment for expansion of both output and employment, whereas in larger companies the objective of investment is frequently to produce the same output with fewer people employed.

What then are the main obstacles to even greater growth in the sector? They are, I believe, largely financial. Adequate cash flow is vital to the success of SMEs or even their existence. In that connection I hope that the Government, the CBI and others will continue to press for measures to deal with the great problem of late payment of bills to small companies. It is a very important issue which must be dealt with.

Also, funding for smaller companies is a major problem. I regret that the Budget did little to help SMEs by, for instance, granting 100 per cent. capital allowances for the purchase of plant and equipment up to a limit, say, of £250,000, as was widely recommended. Similar allowances to encourage investment in innovation should also receive high priority. But much more can be done by the financial institutions and industry itself, without waiting for government action. There is genuine difficulty in raising relatively small amounts of risk capital. Owing to the setting up and administration charges, no venture capitalist will consider investing less than £250,000 and

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more often less than £1 million. There is a major problem for fledgling SMEs and it is important to find a solution.

The noble Lord, Lord Weatherill, mentioned the Prince's Youth Business Trust, of which I once had the privilege of being a trustee. That is an example of how the problem is overcome at the lowest level of investment—probably under £5,000, unless it has changed very much since my day. The administration costs, advice given and so on are either undertaken by voluntary workers or paid for by money subscribed on a charitable basis. Perhaps for larger companies—those that are not dealt with through the Prince's Youth Business Trust—there could be a fund contributed to by banks and other big financial institutions which would facilitate smaller investments to SMEs by contributing to the administrative costs. Thereby, they would benefit from the resulting growth in the longer term future.

But, as has been said, many SMEs depend heavily on overdraft and other forms of bank lending. That makes them very vulnerable to a recession, when cash flow comes under pressure. Banks should be more flexible and not too greedy in providing fixed term loans. That gives great confidence to a smaller company that the overdraft facility or other type of loan will not be withdrawn at a difficult moment. Above all, it should be made absolutely clear by bank managers at the start of negotiations when dealing with SMEs whether they are acting as principals with power to make a binding agreement or simply as messengers making recommendations to some higher authority.

A few years ago I was chairman of a very small company. At a difficult time, we thought that we had made a satisfactory and firm agreement with the bank manager with whom we had dealt for several years, only to find some three weeks later that a higher authority had vetoed the agreement. That was certainly a factor in the ultimate collapse of the company.

Lastly, I should like to see more SMEs prepared to fund their growth by selling, say, 20 per cent. of their equity, as an alternative to more bank loan finance of whatever kind. It is better to own 80 per cent. of a successful company than 100 per cent. of a failure. I hope that investors, especially those taking advantage of investment through the new venture capital trusts, which my noble friend Lord Oxfuird mentioned, will make a real contribution to solving the problem and will not be too greedy in the terms of the agreements that they make with SMEs.

I emphasise again that much has already been achieved in the past 15 years in encouraging enterprise and investment. But we must always remember that our competitors too are improving all the time. We have to get and remain ahead of them. Greater investment is essential to achieve that.

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