In March, Network Rail signed up to British Standard 11000—Collaborative Business Relationship Management Systems—with its five major suppliers through the Institute for Collaborative Working. I declare an interest in that I am on the board of the institute. It really is a major step forward. I talk to a lot of contractors and suppliers of Network Rail and they welcome it. It is not often that suppliers to any big organisation welcome the payment terms, and this is really a positive step forward. Let us hope that it continues—I have every reason to believe that it will—as it will help getting value for money on a £7 billion programme.

Now for the bad case, and it is pretty bad. I refer to National Grid, which is a company that is probably of a similar size to Network Rail. It is a pretty strong company. It made a profit of £644 million in the year to 31 March 2011, and the credit agencies indicate that it can be provided with over £46 million in credit by its creditors. One could reflect in passing why, with this kind of financial result, its regulator, Ofgem, does not require it to cut some of its charges to customers, although that is a slight aside. My question really is: what is the company doing? I would call it screwing its suppliers so that they have to go to banks, which sometimes find it difficult to lend to them.

National Grid pays an average of 24 days beyond the terms in its contract. It also has very tough procurement processes for small suppliers, which it forces to accept these non-standard terms. It has 42 days as a standard for payment of invoices and is actually paying suppliers, on average, 66 days after it receives the invoice for the work done. This hides the fact that over 34% of the suppliers have to wait 91 days to be paid by National Grid. According to Dun & Bradstreet, this company has one of the worst payment records in the UK. Only 7% of all UK businesses have a

24 May 2012 : Column 951

worse delinquency score, as I would call it. Of every 10,000 National Grid payments, 5,683 are significantly late. At one time last year its payment terms were 60 days over standard, which means that it is taking over 100 days to pay its suppliers. I suggest that the company is using its monopoly position to force suppliers into lending it millions of pounds—which then forces the banks into lending to the smaller suppliers, through what are probably expensive overdraft facilities, to keep them solvent.

Network Rail and National Grid are both regulated monopolies, as the House will know, but Network Rail has this code of practice while National Grid sits on what I believe is a pretty fat profit and thinks that it is reasonable to delay payment to SMEs for over 100 days, thereby putting some of those businesses into financial difficulties. My question to the Minister is: what is Ofgem doing about it? Has it got any teeth, or has National Grid achieved what I call regulatory capture? The Government want to encourage SMEs and investment, as do we all. They also want to encourage growth—as the noble Lord, Lord Taylor of Holbeach, said in winding up the last debate. Will the Minister therefore ask Ofgem to require National Grid and the other companies in this sector to adopt a fair code of practice on the lines that Network Rail has so successfully operated in the rail infrastructure industry?

5.09 pm

Lord Young of Norwood Green: My Lords, I thank the noble Baroness, Lady Kramer, for providing the opportunity for what might be a micro-debate in terms of numbers but a macro-debate in terms of the issue. I start with what my noble friend Lord Myners referred to as the core issue—if we do not get some growth and confidence back into the economy, we face a situation where potential borrowers and small businesses see borrowing as the very last resort because they do not have confidence in the current financial situation.

I am also glad that we are having a debate on an issue which something like 28% of SMEs said was one of the key issues that they face. I am afraid I did not agree with much of what the noble Lord, Lord Popat, said except when he got on to the Beecroft report. I do not think that that is going to encourage small businesses to take on more employees. Confidence and the ability to borrow if they feel confident are much higher up their agenda. If we had to give a message on how they should treat their employees, it would not be on the ability to fire them without giving them a reason for dismissal. It might be on recognising the need to invest in their employees and have decent HR policies. They might find that they would get a much better return in productivity and retention. That has been my experience over the years.

I must admit that, listening to the noble Baroness, Lady Kramer, I found myself in agreement with much of what she said. She talked about the different developments in the US, Switzerland and Germany and the social obligation and local nature of their banking. That is a view about which the Federation of Small Businesses, if one looks at its report, was asking the Government. I look forward to the

24 May 2012 : Column 952

noble Lord, Lord De Mauley, commenting on whether the Government intend to pick up on any of the recommendations of that report from the Federation of Small Businesses.

There seems to be some disagreement, as some have suggested, including, I think, the noble Baroness, Lady Kramer, in relation to innovative, online peer-to-peer lending. I do not feel confident about saying who is right. The noble Lord, Lord Smith, referred to that as something that would be of value, although my noble friend Lord Myners did not necessarily agree with that. I must admit that I was fascinated to hear the comments of the noble Lord, Lord Smith, about Mondragon—I do not know whether I have pronounced that right—and the expansion of Co-ops. That was an interesting point.

Whatever Merlin did, it certainly was not a magic bullet. It did not deliver. My noble friend Lord Myners delivered a far more comprehensive analysis of the failure of Merlin. What is the Government’s strategy, given that Merlin has failed and credit easing does not yet seem to have emerged to solve the serious problems that we face? The plain fact of the matter is that the Government are failing to get the banks lending to SMEs and that is one of the contributory factors to holding back growth and job creation. Credit easing has failed to get banks lending to more small businesses. If we were in government, we would have established a British investment bank to support SMEs—an infrastructure that was backed by the British Chambers of Commerce and by Adam Posen from the Bank of England.

In relation to other measures that the Government could take that might assist small firms to take on extra workers, a national insurance tax break might well provide some relief and encourage companies to consider taking on extra workers. In our view, it would reverse the Government’s damaging VAT rise. Interestingly, the Bank of England’s lending report of April 2012 said:

“The stock of lending to businesses decreased by around £9 billion in the three months to February … The net monthly flow of lending in February was at its lowest in almost two years”.

It went on to say:

“Spreads over reference rates on lending to small and medium-sized businesses widened in 2012”.

That is not a good picture at all of the Government’s attempts to get banks to lend to small businesses.

Interestingly, in the Queen’s Speech debate on Monday 14 May in the other place, Vince Cable said:

“Nobody ever argued that the credit easing scheme would solve the problem of small business lending. We argued that it would cheapen the cost, and that will happen. All the major banks are now engaged in arranging packages to enable those lower costs to be passed through”.

He said that we were going to be,

“pleasantly surprised by the take-up within a few months”.—[

Official Report

, Commons, 14/5/12; col. 289.]

That sounds different from what the Chancellor told us in October in his description of the credit-easing scheme. I would welcome the Minister’s opinion on whether the Government feel that that scheme is having any effect.

24 May 2012 : Column 953

In the other place, Labour’s shadow Small Business Minister, Toby Perkins, said that the Bank of England survey showed that many businesses are seeing the cost of finance rise and that small and medium-size businesses are finding it hard to get finance at all. He said that we are looking to the private sector to grow our economy, but 50 businesses are going under every day and too many are struggling to get the finance that they need to grow and take on extra employees. He said that Ministers promised that the credit-easing scheme would help firms unable to get finance, but the report shows that the scheme is failing to make a difference. He went on to say that the Government continue to let down small firms under pressure because of the recession made in Downing Street. Labour is planning a British investment bank to help small businesses get the finance that they need to grow. Our five-point plan for jobs and growth will provide real help, including a one-year national insurance tax break for small firms hiring extra workers.

I was interested in the comments made by my noble friend Lord Berkeley when he gave us the idea of the good guy and the bad guy. This is a serious problem for SMEs. I would be interested to hear what the Minister has to say about what he described as a fair payment charter. It seems a worthwhile proposal for industries which are regulated.

I conclude by coming back to small and medium-size businesses. When I speak to them, they tell me that they see this as an issue of high importance. They do not tell me that the ability to hire and fire is their number one concern. Given that Project Merlin has failed, what positive steps are the Government intending to take? Are they going to pick up recommendations made by the Federation of Small Businesses? I look forward to the Minister’s response.

5.18 pm

Lord De Mauley: My Lords, I thank my noble friend Lady Kramer for initiating this debate, and all noble Lords who have participated. This is a vital issue and has been for a long time; it is not a recent phenomenon, although it is even more acute in the current environment.

The Government are committed to rebalancing the economy, encouraging private sector investment and creating the conditions for confidence to return, small companies to thrive and growth to revive. Ensuring that small businesses and micro-businesses can access the finance most appropriate for them is a core priority. While we want to ensure that there are alternatives to high-street banks for businesses, the majority will remain reliant on banks. It is vital that SMEs are able to access bank finance. I will explain what we are doing in that area before dealing with alternatives.

First, the Government provide guarantees to viable SMEs lacking sufficient collateral to secure commercial finance. The enterprise finance guarantee scheme plays an important role in facilitating credit to viable small businesses and micro-businesses. Over 12,800 businesses with a turnover of under £1 million have been offered EFG loans. That equates to 70% of all the loan offers under the scheme. The enterprise finance guarantee is

24 May 2012 : Column 954

delivered by lenders directly. They include banks, and alternative finance providers such as community development finance institutions.

Secondly, in the Budget the Government launched the national loan guarantee scheme, which reduces the cost of bank lending to smaller businesses by up to 1%. This is achieved by the Government providing guarantees on unsecured borrowing by participating banks to enable them to borrow at a cheaper rate, and therefore to pass on the entire benefit they receive to small businesses through cheaper loans. The Government will provide up to £20 billion of such guarantees. Thousands of businesses have already benefited from LGS loans and the scheme is proving popular. Ulster Bank formally launched the scheme in Northern Ireland last Monday.

Thirdly, to improve relationships between banks and small businesses, we are working with the BBA on the delivery of a range of bank commitments. As a result—and this is very significant—the banks have put in place: first, an independent appeals process to deal with situations where businesses have been declined loans; secondly, an online mentoring portal for SMEs to find sources of advice; and, thirdly, a lending code that makes it clear what standards businesses should expect from their banks.

It is also important that we do what we can to encourage the development of diverse sources of finance for SMEs beyond just the banks, which is the gist of my noble friend’s Question. Increased competition not only between banks but between forms of finance will improve outcomes for businesses. The Business Secretary recently commissioned a report, which has been referred to in this debate, from Tim Breedon that explored alternative finance options such as supply chain finance, mezzanine finance, peer-to-peer lending, retail bonds and so on. All these should be fostered and encouraged, to create a more resilient business finance environment. The Government have a role to play but so do financial institutions and, crucially, businesses themselves.

To diversify the sources of finance available to smaller businesses further, BIS has received £100 million from the business finance partnership. This funding will focus on alternative lending channels which aim to lend specifically to smaller businesses. The key aims of this scheme are to stimulate the development of non-bank lending channels and to increase the supply of capital to smaller businesses. In support of these objectives, we are considering investing business finance partnership money through peer-to-peer lending platforms, mezzanine loans and supply chain finance products.

For businesses seeking other forms of debt finance, community development finance institutions offer an alternative to the banks. They provide microfinance and small loans to enterprises that banks consider too costly or too risky to serve. Such businesses can nevertheless be viable and tend to have a positive impact on their local community. The Government support the CDFI sector in a number of ways. A key aspect of this community investment is tax relief. This encourages investment in CDFIs by providing a tax relief worth up to 25% of the value of the investment over five years. The funds so invested are then on-lent by the CDFIs to small businesses and social enterprises.

24 May 2012 : Column 955

We are currently looking at ways to simplify the rules to encourage more usage and make it more effective. This is because public investment of this type has been shown to be an effective method of generating and protecting economic output. Our evaluation has demonstrated that every £1 of tax incentives generates an additional £1.89 of net gross value added. We also support CDFIs through the regional growth fund by contributing £30 million to the sector to facilitate £77 million of lending through small loans—around 4,500 loans—to small and micro-businesses.

In addition, we are about to launch a pilot scheme at the end of this month to help young entrepreneurs set up their business and access finance when doing so. Aimed at 18 to 24 year-olds, the start-up loans scheme will provide microfinance and mentoring support to enable young people to start and grow a business.

I have focused so far on debt finance. The Government are also committed to supporting equity funding. We have committed £200 million over four years to the enterprise capital funds programme, bringing our investment to more than £300 million for SMEs with the highest growth potential. We are also working to stimulate business angel investment through the establishment of a £50 million business angel co-investment fund. This partly addresses my noble friend Lord Popat’s point. Through this, we co-invest with business angels in high-growth-potential early-stage SMEs, particularly in areas most affected by public spending cuts. My colleague Mark Prisk announced the first deals under this scheme earlier this month.

However, we are not limiting our support to finance itself. To help businesses navigate the various support programmes, we have launched the “Business in You” website to help businesses access support and mentoring and determine which financial support package suits them best. The growth accelerator programme will also provide intensive management and training support to high-growth-potential SMEs.

Noble Lords asked a number of questions. I will address as many of them as I can. My noble friend Lady Kramer compared the German, US and Swiss local banks and their emphasis on localness favourably against our branch networks; my noble friend Lord Smith made a similar point. We recognise the value of the bank branch network and relationship banking for SMEs, where the manager knows the area and understands the business. Indeed, these values are still present in the UK banking sector. In particular, some of our smaller banks have chosen to adopt more traditional banking models, with an emphasis on good customer service, personal relationships with customers and local focus to operations. The larger banks, too, recognise the importance of having managers with a clear understanding of businesses and the local area.

However, my noble friend makes an important point, and the Government remain committed to ensuring that viable businesses can access the finance that they need at an affordable rate. My noble friend suggested that RBS’s network should be used as the basis of a regional banking network. The Government’s shareholding in the Royal Bank of Scotland is managed on a commercial and arm’s-length basis by UKFI, whose overarching objective is to protect and create value for the taxpayer as shareholder, with due regard

24 May 2012 : Column 956

to financial stability and acting in a way that promotes competition. Splitting it up into a regional banking network might be a considerable undertaking and would take a fair while. It is uncertain whether it would improve lending conditions for small and micro-businesses. However, UKFI continues to work closely with the bank’s management to assure itself of the bank’s approach to strategy and to hold it rigorously to account for performance.

My noble friend suggested that credit unions and CDFIs are too fragmented and small. That chimes with something that the noble Lord, Lord Myners, said; he was basically sceptical of alternative forms of finance in general. The Government recognise the important role that CDFIs play, but are aware that the sector needs to operate on a greater scale to widen their coverage across the United Kingdom. The Government’s regional growth fund award of £30 million will help to address this issue, as it will facilitate £77 million of lending. It will also allow the Community Development Finance Association, which developed the fund, to build its capacity and capability to act as a wholesaler to the sector. This will allow it to look to private sector funders and European institutions. This, combined with the community investment tax relief and enterprise finance guarantee scheme, will enhance the sector’s capacity to grow.

My noble friend was critical of the barriers to entry to the banking industry; a number of noble Lords referred to that. All prospective new banks must apply for and receive a banking licence from the FSA. This is an essential step to ensure that all banks in the UK operate to the required standard and that consumers are protected. It is right that standards are robust. The FSA has, however, recently implemented a number of improvements to the banking licence process which will make it easier for potential new entrants to navigate. These include holding pre-application meetings with the applicants and the introduction of a modular approach to assessing deposit-taking applications.

My noble friend suggests a less onerous licence for small, local banks with a community obligation. We are clear that prudential standards for capital and liquidity should not act to dampen the effective competition and that new banks should not be treated disproportionately subject to the level of risk. That is why we have supported the Independent Commission on Banking’s recommendation that the OFT should work closely with the Prudential Regulation Authority to review the application of prudential standards, to ensure that they do not pose excessive barriers to entry and expansion from new entrants.

My noble friend was concerned that the new online lenders should be regulated under the Consumer Credit Act and by the OFT, and about the feeling that the responsible players are bracketed with the cowboys. The Government have noted the online peer-to-peer lenders’ concerns and are keeping the case for further regulation under review. Any decision to regulate would need to balance the needs of borrowers and lenders and the possible impact on new market entrants.

I am afraid that I am running out of time, so I will write to noble Lords whose questions I am unable to address. My noble friend Lord Popat had several. He

24 May 2012 : Column 957

was concerned about low participation in government lending schemes and the poor publicising of schemes available. We recognise the lack of awareness of government schemes and, following the Breedon review earlier this year, we have already committed to consider how best to improve awareness of such schemes. We are working to raise understanding of the support available to SMEs, including through a new online finance finder tool at

The noble Lord, Lord Myners, referred to the Vickers report. I enjoyed his thought-provoking speech. Let me just answer his point. The Government welcome the work of Vickers and further analysis is ongoing to confirm the detail. As the noble Lord said, a White Paper and formal consultation will be launched next month.

The noble Lord, Lord Berkeley, raised a very important point. May I say, rather rudely, that most of it was slightly outside the scope of this debate? However, I can see exactly where he is coming from. He addresses the finance that is available to suppliers—for example, to National Grid. The Government acknowledge that this is an important issue. Many SMEs report that working capital and late payment are obstacles as great as access to external finance. Mark Prisk has

24 May 2012 : Column 958

convened a working group with business representative bodies to explore how to tackle this issue, which also relies on SMEs agreeing payment terms in advance.

Several noble Lords referred to Project Merlin, through which the banks have lent £215 billion to businesses in the United Kingdom, including £75 billion to SMEs against a target of £76 billion. I acknowledge that they have not hit the target by £1 billion in £76 billion, but this none the less represents a 13% increase in gross lending on 2010 and Project Merlin has clearly focused the minds of senior bank officials on SME lending.

Lord Myners: My Lords—

Lord De Mauley: My Lords, I am sorry—I am out of time and I cannot allow interventions. I have to conclude.

As I hope noble Lords can see, we have a large menu of measures to support the provision of diverse sources of finance. We will carefully assess the impact of these policies to ensure that businesses of all types are able to access the finance that they need.

House adjourned at 5.33 pm.