Select Committee on European Union Thirty-Fourth Report

CHAPTER 3: Policy co-ordination, best practice, and evaluation

The nature of the challenge

37. The plethora of schemes to support enterprise at EU and national level raises two key issues. The first of these is coordination between policies and departments within Member States such as the UK or within the EU; and coordination between Member States' policy and those of the EU. The second key issue is how to know which schemes to adopt in support of entrepreneurship, and how to identify good practice schemes already in place as exemplars for policy development. Identification of good practice implies the existence of appropriate evaluation tools to measure actual outcomes against intended outcomes, and to assess value for money.

Coordination of EU and member states policy

38. Mr Zourek explained that the purpose of EU level policy was to complement that of Member States. The EU therefore concentrated on comparing Member States' activities and highlighting differences and sharing good practice. This role for the EU was endorsed by Mr Van der Horst in his oral evidence (Q145). The introduction of the 'Open method of co-ordination' in 2000[31] and the formation of the Competitiveness Council had led to the joint identification between Member States and the Commission of best practice in selected areas. Mr Zourek stated (Q229) however, that this did not mean that the purpose of policy was to coordinate Member States' policies and that

"we do not really have a comprehensive overview of everything that is going on that would merit better co-ordination"; and "we do not evaluate whether there is a lack of co-ordination in general"

39. The Committee is not, however, convinced that there was clarity either in the Commission or at Member State level over which aspects of EU policy are complementary and which appear to be aimed at carrying out activities best left to individual Member States. This was particularly the case in relation to Financial Instruments and the role of the European Investment Fund. Here Mr Van der Horst told the Committee that

"There is this huge budget of the European Investment Fund. They provide money to banks in all the countries and those banks provide credit to small enterprises. If you look at the average sum of these loans it is 200,000 euros; that is not for the average SMEs, it is for the top SMEs. I really wonder if that should be - I have to be a little cautious - a role for the European Union. It is the money of the Member States. It is going to Luxembourg, and then, again, it is going back and everybody likes to have a juste retour."(Q145)

The Committee recommend that in any action plan to be based on the Green Paper close attention should be paid both by the Commission and by Member States to the arguments justifying EU action as opposed to actions properly left to individual Member States.

UK and EU coordination

40. As for policy coordination between the UK and the EU, each group and agency of the DTI has an international team which monitors EU and domestic policy in that area. In addition, following the recent DTI review of business support, all proposals for new schemes are checked to ensure that they complement existing UK and EU policy. The UK has been successful in securing European funding via the European Investment Fund (EIF) to invest in the Regional Venture Capital Fund and the Enterprise Technology Fund (ETF) Start-Up facility although the latter was marginal in relation to the total UK flow of venture capital[32].

41. Notwithstanding these links, in written evidence from the Regional Development Agency for the North East, it was argued that the current EU state aid regulation, which imposed an upper limit of 750,000 euros of venture capital investment in a joint public-private funded SME, was too restrictive and based on outdated evidence[33].

Coordination of policy in the UK

42. The DTI pointed out that the co-ordination of enterprise policy across departments within the UK was assisted by a cross-Whitehall group jointly chaired by the Small Business Service and the Treasury. This was intended to co-ordinate policy between DFES, DEFRA, Inland Revenue and other departments. The Committee was interested to learn from the DTI that following the cross-cutting review of small business support policy[34], the DTI was in the process of reducing its current list of over 150 schemes of support to fewer than 20 which should go some way towards reducing coordination problems and making schemes more accessible to potential users. This was welcomed both by HSBC[35] and the Institute of Directors[36] as was the new on-line directory of support services. As the Institute of Directors pointed out however, complexity of institutions still abounded. In addition to the SBS there were still 45 Business Links (BL) in the BL network and 47 subsidiary local Learning and Skills Councils, alongside the nine Regional Development Agencies and the Government Offices for the Regions.

The Committee welcomes the proposed rationalisation of DTI support schemes and recommends that more be done to clarify and rationalise the structure of administering agencies delivering enterprise policy.

Best practice policies

43. The Committee was provided with several examples of good practice policies in the EU and the UK.

Small Firms Loan Guarantee Scheme (SFLGS)

44. In the UK, in the area of financial support, HSBC, the IOD, and the CBI all provided evidence supporting the activities of the Small Firms Loan Guarantee Scheme (SFLGS)[37]. The DTI also told us that the scheme had been the subject of several broadly positive formal evaluations. Loan Guarantee Schemes in the Netherlands and those more generally facilitated by EU policy received support from Mr Van der Horst[38] and Mr Zourek[39], respectively. These schemes have a well developed history, have been revised from time to time, and meet a recognised market failure. This failure arises from an inability on the part of banks to assess risk in SMEs and the inability of small firms to provide the necessary collateral to guarantee their loans.

Small firms merit award for research and technology (SMART)

45. Another UK scheme which was recognised as representing good practice by HSBC in the private sector and by the DTI was the evolving set of programmes collectively known as SMART (Small Firms Merit Award for Research and Technology). SMART is directed at SMEs and is designed to increase their capacity to grow through innovation by providing grants for product and process development and prototyping. (See Box 1).

46. This is a scheme addressing an established market failure in providing finance for high risk firms with little track record and low collateral. It is also a tightly defined scheme with specific objectives and has been the subject of a favourable formal evaluation.
Box 1

Small Firms Merit Award for Research and Technology (SMART)

SMART is a Small Business Service (SBS) initiative that provides grants to help individuals and small and medium-sized businesses to make better use of technology and to develop technologically innovative products and processes.

Up to June 2003 it consisted of;

  • Technology Reviews (Grants of up to £2,500 for individuals and small and medium-sized firms (fewer than 250 employees) towards the costs of expert reviews against best practice);
  • Technology Studies (Grants of up to £5,000 for individuals and small and medium-sized firms (fewer than 250 employees) to help identify technological opportunities leading to innovative products and processes);
  • Micro Projects (Grants of up to £10,000 to help individuals and micro-firms (fewer than 10 employees) with the development of low cost prototypes of products and processes involving technical advances and/or novelty);
  • Feasibility Studies (Grants of up to £45,000 for individuals and small firms (fewer than 50 employees) undertaking feasibility studies into innovative technologies), and;
  • Development Projects (Grants of up to £150,000 for small and medium-sized firms (fewer than 250 employees) undertaking development projects.

A small number of exceptional high-cost projects could attract grants of up to £450,000.

From June 1st 2003 SMART research and development (R&D) project grants were replaced by a new R&D grant product. The important differences are:

  • Research projects (previously called Feasibility studies) - 60% of eligible project costs up to a maximum grant of £75,000,
  • Development projects - 35% of eligible project costs up to a maximum grant of £200,000;
  • Exceptional development projects - 35% of eligible project costs up to a maximum negotiable grant of £500,000, and;
  • Micro projects - 50% of eligible project costs up to a maximum grant of £20,000.

Financial barriers to Small Firm growth

47. It has been suggested that financial barriers to small firm growth are in general terms decreasing in significance. The IOD pointed out that:

"In broad terms, access to finance for businesses in general in the UK is probably not a problem at the present time"

and argued instead that greater attention should be paid to basic general educational standards[40].

Teaching Company Scheme (TCS)

48. In view of this, and given that the Government was in the middle of a major consultation on financial support schemes (HM Treasury/SBS 2003), the Committee was concerned to identify good practice in schemes supporting human capital development. In general, the evidence provided by DFES was less well based on formal evaluations than schemes provided elsewhere. It was clear however that the Teaching Company Scheme (TCS) was highly regarded by HSBC in the private sector, as well as by the Association for University Research and Industry Links (AURIL) in the public sector. The scheme provides for long term research projects linking university and business partners. It has also been the subject of favourable formal evaluation. AURIL expressed some concern that the scheme was not properly promoted by Business Link, whilst HSBC also expressed the view that it was not as well known as it should be, and could be re-launched to raise its profile. (See Box 2).

49. The Committee was struck by the emphasis placed by Professor Roos of the Massachusetts Institute of Technology (MIT) on the key role of Universities as providers of skilled and well educated graduates, and on the interaction available at MIT and elsewhere in the United States between industry and academia. In view of this, and the generally favourable view of its role, the Committee recommends that greater attention should be paid to the exploitation of the potential of the Teaching Company Scheme and to continued support for schemes that work well such as SMART.
Box 2

The Teaching Company Scheme (TCS)

The Teaching Company Scheme (TCS) is designed to promote industry/academic collaboration to improve product design, efficiency, manufacturing processes, skills, training and R&D, market access and process quality.

It provides grants to Higher Education Institutes (HEIs) to pay part of the staff and project-related costs of one or more graduate Teaching Company Associate(s) (TCA) who are placed with a company to work on a collaborative project linking the company and the HEI.

The company pays part of the total costs—typically £16-18000 per TCA per year for a company with fewer than 250 employees, or £24-27000 per TCA per year for bigger companies. About 10% of awards go to firms with fewer than 10 employees.

With effect from June 2003, the TCS was replaced by Knowledge Transfer Partnerships which are managed under contract for the DTI. The essence of the scheme remains the same.

Failed Schemes

50. The Committee also sought evidence of bad practice. Mr Zourek provided evidence of a failed scheme. The Joint European Venture was aimed at promoting joint ventures between SMEs in two Member States to locate activity in a candidate country. It failed because there was no demand for it and, perhaps not co-incidentally, the administration of the scheme was extremely cumbersome. More generally, Mr Zourek argued that in his experience schemes were more likely to succeed where they addressed clear market failures and had clearly specified objectives. This was reinforced by Mr Rees, Head of the DTI Evaluation Unit, who also pointed out, as did representatives of the Treasury and the DTI, the importance of including both a monitoring system and an information system capable of supporting evaluation against agreed and clearly specified programme objectives (Q182).

51. The Committee formed the view that there was a great deal to be learned from the examination of past successes and failures and that the availability of formal evaluations would greatly assist in that process. We approve of the newly established practice in the UK of publishing evaluations on appropriate Departmental web-sites and of the proposed integration of monitoring and evaluation information systems into project and programme design.

Evaluation of Fiscal Measures designed to support Entrepreneurship

52. The Committee also formed the view that the evaluation process was better established in some Departments in the UK than in others. They noted the lack of evaluation by the Treasury of the impact on entrepreneurship of general taxation changes (e.g. to capital gains tax) as opposed to tax breaks associated with particular schemes (e.g. Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)). The sums involved are extremely large with overall tax breaks amounting to over £2 billion in 2001/2. The Committee recommends that HMG pay attention to devising methods to assess the impact of general tax changes on entrepreneurial activity in the UK.

53. The evidence the Committee received on the EU from Mr Van der Horst and Mr Zourek suggested that there was less formal evaluation in other Member States than in the UK. This made it difficult properly to assess the impact of EU policy. Mr Zourek told the Committee that a major strategic evaluation of EU enterprise policy, especially in relation to financial instruments, was under way (Q242). The Committee recommends that no action plan based on the Green Paper should be agreed before the lessons have been drawn from the Commission's ongoing evaluation programme of EU enterprise policy. It also recommends that where new EU schemes are proposed, no action plan should be agreed before a clear framework is established setting objectives and a system is in place for monitoring and evaluating such schemes. The Committee further recommends that in disseminating best practice, the Commission stress the importance for Member States to set clear objectives and to establish a system for monitoring and evaluating national schemes to promote entrepreneurship.

31   Presidency Conclusions, Lisbon European Council 23-24 March 2000 Back

32   ETF start up facility funds of £15.4million went to 11 UK SMEs by year end 2001, compared to total British Venture Capital Association investment in high-tech companies that year of £1658million - DTI Supplementary evidence June 23rd paras 1.9-1.10 (page 64). Back

33   Ref. page 100. Back

34   Treasury/SBS 2000a. Back

35   HSBC's written evidence, para 6(b), page 27 Back

36   IOD's written evidence, para 11, page 99 Back

37   The SFLGS provides a guarantee to banks making loans to eligible companies which reduces the risk they face in lending in this sector. Back

38   Q138 Back

39   Q231 and Q232. Back

40   IOD; written evidence para 14, page100. Back

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