Industrial Strategy: British Business Bank
(9 years, 10 months ago)
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Baroness Wheatcroft
To ask Her Majesty’s Government what is their strategy in relation to industrial policy, and in particular the British Business Bank.
Baroness Wheatcroft (Con)
My Lords, I am delighted to be leading this debate on the industrial strategy and the role of the British Business Bank within it. The good news is that there is a strategy. The even better news is that it is working. We have in the past seen Governments meddle with industry with less happy results. In steel, in motors and even in travel agency, Governments have demonstrated that they are not great when it comes to running things.
However, this Government have a well thought-out strategy which is not about short-term froth but about long-term benefits for the country. Establishing the British Business Bank is an important facet of that strategy, helping smaller firms to overcome that perennial problem of how to get their hands on finance. Governments sometimes seem to struggle to breach the divides between various departments but, on the industrial front, we really do have joined-up government: the Treasury working with BIS and UKTI to get the right results, to help our businesses grow and, crucially, to export.
The overarching policy is to provide an environment which nurtures business generally, with low corporation tax and sensible, not overburdensome, regulation. Although there are some difficulties which cannot be addressed overnight, and will in fact take years to put right, such as infrastructure failings and the skills shortage—which all too often means a failing of numeracy and literacy—the UK is nevertheless now an attractive place to start, build and grow a business. It is Europe’s top destination for foreign direct investment, the money flows that create jobs.
There is one school of thought that argues that government should not attempt to intervene in industry beyond providing that hospitable environment. Certainly, picking winners is a dangerous occupation, not that some Governments do not still attempt it. Choosing individual companies to be nurtured into being national champions is a recipe for national disaster. This Government have avoided it and wisely chosen to look not at companies, but at those sectors where we already have an edge and where an extra push might produce the greatest benefits for the country.
There are 11 such sectors. Another Administration might have rounded the number up and gone for a neat dozen, or rounded it down to come up with a top 10. The fact that both those options have been resisted in favour of 11 chosen sectors surely indicates that a genuine plan, rather than passing headlines, is what this is all about. The sectors are aerospace, agricultural technologies, automotives—and here I declare an interest as a director of Fiat; we do not yet manufacture in the UK but I am doing my best—construction, information economy, international education, life sciences, nuclear, offshore wind, oil and gas, and professional and business services.
Is it not instantly cheering to reflect that in all those really important and high-growth sectors, the UK already has some world-class businesses and they are going to get better? There are things that an enlightened Government can do to help. Within each sector, top executives now get together, not to collaborate on price—which would see them land up in jail, which is not part of the Government’s industrial strategy—but to look at where there are barriers to growth and things that Ministers can do to make life easier for them.
The Government can, and do, help to fund research which will benefit these chosen sectors. For instance, there is now a £7 million centre for “extreme engineering” at the University of Newcastle. The Neptune Centre for Subsea and Offshore Engineering brings together industry and academia to develop technologies that can withstand the world’s harshest environments. Future success in the oil and gas industry will depend on being able to employ the best science and technology, and what emerges from this centre will keep British companies at the forefront of these developments. Siting this ground-breaking centre on the north bank of the Tyne will give a boost to the revival of this part of Tyneside.
It is absolutely vital that our industrial strategy is not just about rebalancing the economy in terms of its dependence on the service sector, but about rebalancing it geographically. The concentration of wealth and wealth creation in London and the south-east is simply not healthy. In terms of gross value added, the average Londoner generates more than £37,000, while in the north-east the figure is marginally over £16,000, and in Wales it is even less than that.
While I am sure that we here in the capital like to think that we are doing our bit for the economy—although there are of course some who doubt that we do much of it in here—I am confident that in the north-east and Wales people feel the same way. These figures are a reflection not of a lack of energy or enterprise but of the huge growth in the financial services sector which has benefited London and of a lack of investment in the regions. Perhaps the Minister could tell the House how industrial strategy is contributing to rebalancing that. We need to make sure that the profits of growth are shared across the country and not just in the wealthy south-east. The growth is coming but we need to be sure that it is shared.
Remarkable evidence of that growth has come just today, with the latest figures from the National Institute of Economic and Social Research. It estimates that in the previous quarter Britain enjoyed its fastest growth for four years, at 0.9%; that really is cause for celebration. Yet, despite that remarkable achievement, we could do better. Too many of our small businesses stay just that way. For some that is a lifestyle decision, but for many it is because they hit hurdles that they simply cannot get over.
That was why the Government established the British Business Bank. In some ways this is still a notional entity, as it has to go through the laborious process of getting EU approval before it can take on a life of its own. That should come, I hope, by the end of the year. However, for now, the British Business Bank is part of the Department for Business, Innovation and Skills, and here it is already at work.
I confess to something of a maternal interest in the British Business Bank as I was a member of the steering group which tried to plot a useful course for this innovation. It was conceived as a potential solution to growing complaints from smaller businesses about the banks’ reluctance to lend, or at least to lend on reasonable terms. It is all very well to make an offer of funding to a small firm, but if it is at an interest rate and on terms which are completely impossible that does not really constitute an offer at all. The latest available figures indicate that banks’ reluctance to lend remains. According to the Bank of England, in the first four months of this year total lending to small and medium-sized enterprises was almost £2 billion lower than in the same period last year, which was itself £1.5 billion lower than in the previous year.
Now, maybe demand has really shrunk, but it is hard to believe that it has evaporated on that scale. The British Business Bank is therefore attempting to bridge the gap, encouraging new lenders into the market and channelling funds into innovative operators such as the peer-to-peer lender Funding Circle. Here I must confess to a touch of nervousness when I read the bank’s promotional material and see: “We’ll use … securitisation techniques”. It goes on to say:
“By using leverage as a tool”,
we will be able to—noble Lords will get the gist of what concerns me. Securitisation and leverage are not of themselves ruinous, but anyone who has lived through the ravages of the financial crisis has learned to treat them with a degree of caution. Can the Minister reassure the House that the business bank will remain focused on helping smaller firms rather than becoming a government-owned investment bank? I have always struggled with the term “investment bank” anyhow, because investment seems to be the antithesis of what those organisations do. Will the business bank specifically help companies in those 11 sectors that have been set out as the strategic sectors for the country?
The business bank can do much useful work in just guiding smaller firms through the various schemes available for them—all 810 of them, according to the website. From the Armagh Business Centre through the Survive and Thrive programme to the Wood Energy Business Scheme, there surely must be something for everyone—but finding it may be difficult. A bit of streamlining might not go amiss. The business bank website is on its way to becoming a user-friendly information hub, but there is still a way to go. Often money is not the key to what smaller firms need.
I will end—and I promise that I will end here—by mentioning a scheme launched at the beginning of this year to bolster the 8,900 mid-sized businesses in this country. Currently those businesses make up just 0.5% of all businesses, but contribute around a fifth of employment and turnover. The CBI reckons that if they were to reach their full potential, they could add £20 billion to £50 billion to the economy. I cannot see why the sky should not be the limit. However, only 17% of those businesses export. The Government have now sent a personal letter to each one of those companies, asking if they would like individual support from UKTI to get them exporting. There are specialists ready to work with them. Is that not an industrial strategy in action?
Lord Haskel (Lab)
My Lords, I am most grateful to the noble Baroness for moving this Motion, because it provides us with an opportunity to learn more about the business bank. It seems to have been below the horizon in recent months, but I notice it published a strategy document last month, in June.
The noble Baroness puts the business bank in the context of an industrial policy strategy. My response is: what strategy? Yes, she explained actions that the Government are taking, and Ministers refer to an industrial strategy that was announced in 2012. Last Thursday, the Minister spoke of a strategy in a debate on manufacturing and mentioned several initiatives, all of which are very welcome. However, the noble Baroness described initiatives reacting to market opportunities or to issues that have arisen in the economy: skills, training, technologies and sectors for support, exporting and, yes, financing. She also described existing businesses.
However, that does not add up to a strategy. Those are piecemeal responses to changes or problems that have arisen over the years. A strategy has to be intellectually coherent. It has to provide a framework for all of these activities. It has to be a means to an end—a means for achieving a vision. If we have one, perhaps the Minister can tell us what is the purpose of our strategy? Is it economic growth, or to benefit us all?
Ministers like to learn from Germany. Fifteen years ago, Germany was the sick man of Europe. Their strategy was laid out in Lisbon 2000 and the Haas report. It was economic, social and environmental, and yes—it has worked. It has provided a path for everybody in Germany to improve their quality of life and their ability to earn a living, and their economy is winning the race to the top. That is a strategy.
The noble Baroness is therefore right to put the question of the business bank in the context of a strategy. However, I put it to her that this is yet one more example of the Government reacting to events. Indeed, she told us as much when she said that the bank had resulted from what occurred during the banking crisis, because of lack of investment funds for small and medium-sized enterprises.
I welcome what the bank has done, acting as an intermediary in supplying credit, unlocking funds through guarantees and filling in other small funding gaps. I also welcome the way it has tidied up the work of the small loans guarantee and the capital for enterprise initiatives. The website gives us the numbers, but it does not make clear how much are loans on the bank’s own account and how much are for acting as intermediaries. Perhaps the Minister can tell us that. Although welcome, the amounts are quite small in relation to the size of the financial market and will have a modest impact on the market.
A proper strategy would deal with the financial market itself, not just one of its failures. It should be a market which provides patient capital to allow small and medium-sized enterprises to develop their businesses. It should provide investment in capital intensive schemes such as power stations or cement works, which are mainly foreign owned because our financial market is adverse to this kind of investment. The same goes for infrastructure investment. The market should work for us all instead of finance largely being an end in itself.
We know that just giving the banks more money to lend to business obviously does not work—the money goes elsewhere. A proper strategy would encourage putting money into industry for the public benefit instead of inflating the value of our homes for private benefit. For instance, in many European countries, including Germany, you cannot borrow against the rising value of your house, so rising property values do not suffocate lending to business. A proper strategy would encompass more competition. In this morning’s Financial Times there was news of the potential for 30 new banks. That is good.
If the objective of the business bank is to raise the quality of life of us all and help our industry win the race to the top, all those issues have to be part of a strategy, throughout government. An industrial bank can help, especially as part of a coherent strategy, but it cannot do it alone.
Lord Stoneham of Droxford (LD)
My Lords, it is a pleasure to take part in the debate initiated by the noble Baroness, Lady Wheatcroft, and to have her tour d’horizon of the Government’s industrial strategy from her perspective of experience in the business world and business journalism.
As the noble Baroness said, there are very good and encouraging signs of recovery as the economy starts to rebalance and growth resumes. When Vince Cable first started to refer to the term “industrial strategy”, I must say that I had certain concerns about that terminology, because I always associated it with the Government’s failed ventures to intervene in industry in the 1970s. However, the work at BIS over the past four years matches the Treasury in providing the essential components of recovery and the hope for sustainable growth. The brand “industrial strategy” is clearly being restored and reinvigorated, and it looks like a winner. I want to explain to the noble Lord, Lord Haskel, that there are components of an industrial strategy here. They are very clear, have been set out very clearly by the Secretary of State for Business, and a lot of them build on the good foundations left by the previous Secretary of State for Business, the noble Lord, Lord Mandelson.
There are four key components of this strategy. The first is the partnership activity concentrated on the key strategic sectors. We have seen the recovery in the automobile sector: it is remarkable. We are now one of the leading producers of motor cars in Europe. Now we have to concentrate on making sure that the component supplies are provided in the UK and not simply imported. This weekend in Silverstone we saw the spotlight on the specialist engineering companies which are behind the development of Formula 1, and all the reforms that they have introduced, particularly on energy conservation. Many of these SMEs are based here in the UK.
Two weeks ago, I visited Airbus in Toulouse, another example of where partnership between Government and industry has been remarkably successful. In 1995, 20% of passenger aircraft were made in Europe by European manufacturers; the rest were made in America. Today, more than 50% of those planes are made in Europe, largely through Airbus and its suppliers, and we have 10,000 employees in Airbus and 100,000 working in the supply chain of this company. It is impossible to see how success would be possible in that sector without a partnership between the Government on research and development and a vision of what a European industrial strategy could achieve in this sector. Any idea that a partnership with the German and French aviation sectors could take place so successfully outside the EU is, in my view, ludicrous.
The second key component of the strategy is the promotion of key technologies, particularly based on the partnership with universities and the development of catapult centres. The role of universities has been recognised as essential to economic growth. They are building on the competitive advantages in research, which we must now exploit in a successful industrial strategy, whether it is in energy storage, robotics, regenerative medicine or the other sectors and technologies that they have identified as part of the strategy.
The third component—and where the coalition has had great success, although I will not go into the detail tonight—is addressing skill shortages and unemployment through the growth of the apprenticeship scheme and a refocus on the importance of technical education. The provision of skills in these technical areas is vital for our industrial strategy.
The fourth component of the strategy is to provide financial support, particularly for small and medium-sized enterprises. We know that SMEs are a major provider of jobs and have been over the past couple of years—remarkably so as we have recovered from recession. There is great potential now through more start-ups and more growth from these companies. It is remarkable that until 2012 this country was the only one of the G8 countries without a specialist institution seeking to intervene and provide finance and advice for SMEs. Germany has its KfW bank; the USA, despite moves in Congress, still has the Small Business Administration. These are bodies with vast resources and expertise which all help with financing and advice for small businesses. I hope that our British investment bank, once it is approved by the European Union’s competition authorities in the autumn, will be a further force for us in this competitive market.
We are grappling with market imperfections in respect of financing small businesses. At a time when bank choice is down to four, with many withdrawing from high-risk, high-cost, more risky finance for small businesses, we needed to do something to fill that gap. It is long overdue. It is a problem that has existed in this country since the 1930s and when markets do not work then the Government have to help make sure that they do. There has been a lack of provision for debt and equity financing for these companies and there has been demand weakness as well. There has been a lack of awareness of business potential and of the benefits of raising finance at cheaper rents. Without the funding, these companies will not fulfil their potential. The first step is to develop the local networks, through investment partners, to form a strategic plan, which we have now seen published by the business bank, and then to develop the key partnering to help private finance think longer term and take advantage of government backing to lever lower borrowing costs. We have seen substantial progress in the first year of the bank: £282 million lent to 30,000 businesses; and the formation of 80 financial partners, with the aim of increasing this investment to £10 billion by 2018.
For the country to make its mark and to gain competitive advantage we have to see some continuity in these policies over the next four to 10 years. It is important to recognise that we will not see the benefits of some of these policies until the next Government or the Government after next—these policies take time to emerge—but we have got to see ongoing work to simplify financing schemes and to finesse them in different markets. We have to develop the bank to match the best of our competitors in other countries, particularly in Germany.
There are two final elements to the industrial strategy. The Government are making moves to ensure that government procurement is aimed at helping small businesses, particularly with the success of the Olympics in 2012. In the regional economic partnerships we have the basis for encouraging growth in the regions, and I hope that these organisations will be used to help promote financial opportunity for small businesses.
Just as the Treasury’s determination and focus on the financial and economic policy of the country are showing signs of working, so the industrial strategy, led by BIS, is ensuring that the firm foundations for industrial recovery and export growth are built on a genuine partnership between the Government and key industrial sectors: knowledge, the strength of our universities; firm initiatives to improve skills; government procurement policies; and, at last, the establishment of a heavy-weight, specialist organisation, the British Business Bank, to assist and advise SMEs on financing, which is long overdue.
Lord Leigh of Hurley (Con)
My Lords, I thank my noble friend Lady Wheatcroft for instigating this debate. Her insightful remarks come as a result of her very distinguished career as a business journalist at the Times and the Wall Street Journal, where her articles were a must-read for any businessperson for many years. I am particularly pleased to be able to take part in this debate because the financing of SMEs is an area in which I have had an interest all my working life. I refer your Lordships to my various interests as declared in the register of interests. I shall focus my remarks on the British Business Bank.
It was very clear to many of us in 2010, when the coalition Government first came to power, that the country’s finances had been left in a ghastly state in many areas and directions. It was not just the out-of-control debt and deficit which were threatening the whole economy and country, but the shock of the global financial crisis meant that banks were making life extremely difficult for many perfectly good businesses that desperately needed finance, both for working capital, or short-term finance, and longer-term equity injection.
It is probably safe to say that the incoming Government were shocked by the inability of the traditional banks at that time to take on the role they had previously undertaken in providing finance to SMEs and were acting a bit like rabbits caught in the headlights. The numbers bear this out. Successful loan applications for SMEs had dropped from 88% in 2007 to 65% in 2010, as opposed to 76% in Germany. In addition, the changing capital requirements, commonly known as Basel III, applied a risk weighting system with increased premiums for lending to SMEs which simply exacerbated one of the main areas in the UK for retail clearing banks. Indeed, it seemed clear that the retail banks simply could not, or would not, lend money to SMEs and found themselves incapable of doing so on a cost-effective basis. As the noble Lord, Lord Haskel, mentioned in the debate on Thursday on manufacturing, the noble Lord, Lord Young, reminded us of his recent enterprise report and noted that more than 95% of firms in this country currently employ fewer than 10 people. Smaller businesses are crucial to economic growth, and the current ratio of 80% of UK smaller business having as their bankers one of the four big banks is not sustainable.
There are particular circumstances for SMEs, which mean that they need special help. Many do not have a finance director but rely on the owner’s ability to do a service function and many other functions, and they rarely have time to shop around for finance. Indeed, research shows that 71% of SMEs seek finance only from their existing provider and, on average, in terms of median, the time spent by all SMEs looking for alternative sources of finance is less than one hour. Like all of us, SME owners do not enjoy filling out forms. Accordingly, in 2010, the word was out that banks were no longer interested in lending to them and, as a result, the problem became self-fulfilling as SME owners did not bother to apply to banks for such finance.
It then transpired that around the world, as the noble Lord, Lord Haskel, said, there were better ways of doing business. The noble Lord, Lord Stoneham, mentioned that in Germany there was the successful KfW model, which dwarfs anything that has been done in this country. We were the only country in the G8 not to have a comparable institution—by which I mean an institution that lends and invests in banks themselves. This is the work of the British Business Bank, which is probably misnamed. Although it is certainly British and certainly business-focused, not domestic, it is not really a bank as commonly understood, but rather an investor in challenger start-up organisations, which themselves pump-prime finance in a mixture of debt and equity to their own clients. This is infinitely preferable to the well trodden route of government direct intervention and subsequent massive write-off and losses.
I understand that the British Business Bank is tasked to achieve a return roughly equivalent to five-year gilts. It is not money that is written off; it is money on the books of BIS that seeks a return. I hope that we see full transparency on the results of BBB and, equally important, of each of its partners, some of whom, such as the start-up loans, will find profitability a stretch. I note that £300 million has been allocated to the investment programme to promote choice and competition in business finance, of which £203 million has been recommended. This is an excellent initiative, but it contains a large element of risk. Trying to achieve a return comparable to five-year gilts will prove a challenge.
There has in the past, before BBB, been a plethora of direct schemes available to entrepreneurs but, as I have said in this House, finding out about government grants and availability of funds has not been easy. Although the Government have reduced the schemes down to one government website, which is very helpful, the results are not produced in a way that is easy for an entrepreneur to select the appropriate scheme. The last time I looked, I found 791 schemes available to entrepreneurs seeking grants. I then tried a more selective search and I chose to look for a business in London with up to 250 employees in the service sector; by pressing the button, I was offered 42 grants, which is still too confusing.
The creation of the British Business Bank is a huge step forward and reflects the approach taken by this coalition Government to business, often by people in government who have had real experience of running a business with all the frustrations and pleasures that this entails. It is particularly pleasing to see that only 19% of British Business Bank’s business has been in London, so more than 80% is in the rest of the UK. It has ambitions to unlock further substantial sums as the new legislation allows. This is, of course, in addition to the £6 billion of growth deals announced by the Government yesterday, which is a separate matter.
I want to emphasise that the British Business Bank is not the only source of finance to businesses arranged by the Government. I particularly recommend to your Lordships the Business Growth Fund, an organisation that is finally coming to fruition and is investing equity finance into British business. I look forward to the British Business Bank reporting that its allocation of close to £3.9 billion has been deployed. I very much hope that all parties, while they may not have supported every aspect of the Chancellor’s successful recovery, will commit in their forthcoming manifestos to support the British Business Bank.
Lord Wrigglesworth (LD)
My Lords, I join in congratulating my noble friend Lady Wheatcroft in introducing this short debate, which provides us with a very useful opportunity to discuss industrial strategy and the role of the British Business Bank and banking more generally. The comments from my noble friend Lord Stoneham set out very clearly, when linked with what my noble friend Lady Wheatcroft said about industrial strategy, exactly what the Government are seeking to achieve. I am somewhat surprised by the comments of the noble Lord, Lord Haskel, because I think that BIS and the Secretary of State have set out a very clear industrial strategy.
We have a lot of history in this. If you go back to Tony Benn, you have the extreme of wanting to nationalise the 40 top companies in the country. You then go through the Industrial Reorganisation Corporation and the National Economic Development Council, picking winners. That is another strategy. I think that the Government have got it absolutely right, as the noble Baroness said. They are facilitating the success of the banking sector and the other sectors and activities pointed out by my noble friend Lord Stoneham.
I wanted to intervene in this debate because I have had experience in two banks. One of them was a state bank, established by Tony Benn when he was Secretary of State for Trade and Industry, called the National Girobank. I worked in the City for that bank for a number of years. The intention was to give everybody in the country a bank account, so that everybody could transfer money from one account to another by the new electronic means that was just becoming available. It all sounded absolutely wonderful; but of course it paid no attention to what was going on in the market. The bank ended up being privatised and sold off to the Alliance Building Society. It is still doing a useful little job there, but nothing like the major ambitions of Tony Benn in that time.
Because of my experience I want to bring some reservations to this debate about government policy at the moment—although I heartily endorse all that the Government are seeking to achieve. There is a great risk that expectations are raised too high about what can be achieved in creating competition in the banking sector. I was delighted to read—as the noble Lord also pointed out—in the Financial Times today that there is potential for another 30 banks. I hope that there are going to be 30 new banks; but I shall believe it when I see it. It also reported that five new banks had been given a certificate. I tried to start a bank in the north-east some years ago and know what it was like to try to get a licence to operate. There are five new banks—two of them Nigerian, two of them Indian and one British. The British one, Paragon, began life financing buy-to-let flats and houses in the boom before 2007-08.
We are therefore a long way from seeing the competition appearing that I think everybody would like to see. We hear a lot about challenger banks appearing on the scene. Nobody can disagree with it, but the greatest force in banking, from my experience, is inertia. People do not change their bank accounts. We need more competition in order to encourage them to do so; but to get carried away and think that in the term of one Government we can completely change the structure of the banking system in the country is pie in the sky. This is a very good start. It is very well worth doing and should be supported, but it is important that we do not get carried away and think that it can achieve everything in five minutes.
Similarly, on the regulatory side, there is a great danger that people think more can be achieved than actually can be achieved. In a previous incarnation I went to the United States to look at banking regulation there, which has always been rather more rigorous than it is here. I visited the comptroller of the currency; I remember meeting Paul Volcker; I met the chairmen of the Senate committee on banking and the House Committee on Financial Services, and a whole host of other people. The one message I got from it was that, no matter how much regulation we introduce, we will still get problems in the banking sector. I am slightly concerned that while we are spending our time discussing deregulation Bills and everybody is calling for deregulation in every other sector, if we are not very careful, in the stampede to regulate our banks we are going to kill the goose that has laid the golden egg in recent years.
That is not to say that things have not to be done; but there are over a million paragraphs of regulation in the FSA rulebook. When the Bank of England was given statutory responsibility over bank supervision in 1979, fewer than 80 people were engaged in the supervision of financial firms. Since then the number of UK financial supervisors has increased to around 1,200. In 1980 there was one UK regulator for every 11,000 people employed in the UK financial sector. By 2011, there was one regulator for every 300 people employed in finance. Those numbers do not even include compliance people in the private sector, the number of which has exploded since the crisis.
In 1974 returns could have around 150 entries. Today, UK banks are required to fill in more than 7,500 separate cells of data—a fiftyfold increase. Forthcoming legislation could see that rise to between 30,000 to 50,000 data cells spread across 60 different regulatory forms. We are in danger of killing the goose that laid the golden egg. While we are rightly concerned to control the banking sector, we need to realise that there is a limit to what should be done and what can be done.
The British Business Bank is getting off to a really good start. As my noble friend said, it is not really a bank; if anything, it is a wholesale bank. It is supporting or partnering other institutions. I think that that is the right way ahead; as a result, it is getting quickly to a very substantial number of small firms. The truth is that 80% of the lending to firms in this country is coming from the big institutions. Clearly, that is not a desirable situation so we want to see this institution succeeding.
I am slightly concerned, in reading the bank’s documents, that it says that:
“Unlike most banks, our impact is not measured in terms of profits generated but rather by the benefit of increased economic activity it creates”.
That is all very fine. I hope that the bank achieves the rates of return to which my noble friend referred because I do not want to see this institution crowding out other banks and other financial institutions seeking to operate on proper rates of return. Therefore the rates of return that it achieves are terribly important. I am pleased to see the objectives in there and the monitoring of them that the institution is proposing.
The British Business Bank deserves support. It is targeted in the right way through a whole host of institutions and it clearly has made a very good start in helping firms in the small and medium-sized enterprise sector which so clearly need the support that the bank is giving.
Lord Stevenson of Balmacara (Lab)
My Lords, I thank the noble Baroness for securing this debate. I very much enjoyed listening to her comments. She is someone to whom the House always listens carefully because she knows a lot about the subjects she discusses. I am sure the Minister will reflect on her comments as he prepares to respond to the debate.
However, like my noble friend Lord Haskel, I found the noble Baroness’s somewhat unrelenting optimism about what she called the industrial strategy a little hard to take. I liked it better when she talked about some of the problems that still remain to be solved, including rebalancing the economy and trying to get more of a regional spread. That, I felt, was the more authentic voice which I have come to enjoy listening to. However, we look forward to what the Minister will say in response to the important points that she made.
I was very struck by what the noble Baroness said about the content of the industrial policy in the sense that she made play, I think, of 11 sectors. It was an interesting little number that I initially fell for, but I do not think that 11 is a particularly magic number. I am not an expert on the magic of Hogwarts, or anything like that, but I do not think that 11 features in that. Why 11? I think it is 11 because it is not 12. It is not 12 because, if you read the document produced by BIS last year, from which that is taken, you will see that it covers the 11 sectors which the noble Baroness listed, which are important and are being picked as winners. That may or may not please some noble Lords. The 12th and most important of these is, of course, the creative industries, but they do not appear in the document because they are not covered by BIS. That seems to me to suggest a fractured approach, meaning that the Government are not joined up about this. There is a danger that the sectors which BIS selects and supports are the ones that it provides for. As the noble Baroness pointed out, that would be rather ridiculous. Therefore, those 11 sectors but not the creative industries may well be in a beneficial place as regards the British Business Bank, export support or UKTI. That would be a terrible shame. I hope that is something the Government have picked up and are working on.
The 2008-09 crash exposed long-standing structural problems in our economy: an economy unbalanced by sector and region; short-termism in our corporate culture leading to low levels of business investment and low productivity; a dysfunctional finance system; and a stubborn and increasing trade deficit. Although some growth has finally arrived, which we certainly welcome, it is not the balanced and sustainable growth that we need. Prices are still rising faster than wages and the continuing cost of living crisis for many means that individuals are, on average, £1,600 a year worse off compared with 2010, so “business as usual” is certainly not good enough. To set the foundations for future success, we need to take a different approach.
Labour has a long-term plan to earn and grow our way to higher living standards. Our goal is a high-productivity, high-skilled, innovation-led economy. To get there, we need more British-based businesses creating good jobs, investing, innovating and exporting. If elected in May 2015, we will deliver an economy creating good jobs and opportunities, offering people a ladder up and the best chance to make the most of their potential. We will take action on immediate pressures that businesses face and cut business rates. We will reform the energy market and boost competition in the banking sector. To lay the foundations for long-term success, Labour’s plans already include: radically reforming vocational education and apprenticeships; creating a proper, independent British investment bank and a network of regional banks with a responsibility to boost lending in their areas; supporting green growth by backing the 2030 decarbonisation target; and establishing a small business administration to champion small businesses at the heart of government. Some of these points were raised by the noble Lord, Lord Stoneham. When we come to power, I hope that we can count on his support for these measures. I think that he wants to see an all-party approach to ensuring that our economy is sustainably supported over the long term.
What is the problem that the British Business Bank is trying to solve? I agree with the noble Lord, Lord Leigh, who said that in some senses it is a misnomer. I think that point was also picked up by the noble Lord, Lord Wrigglesworth. Indeed, it is more of a wholesale operation. The bank picks up that point in its strategy document and says that it is not a bank in the conventional sense. We understand that. According to the business bank’s new strategic plan, which was published only last month, its goal is to,
“change the structure of finance markets for smaller businesses, so these markets work more effectively and dynamically”.
Any scheme that helps small businesses to access finance is clearly welcome but the record of the Government in getting the clearing banks to lend to small businesses is one of complete failure. This, presumably, is a statement endorsed by the Government confirming what we have been saying to the Government for some time: every scheme, from Project Merlin—remember that one?—to Funding for Lending, has completely failed to deliver to the small and medium-sized businesses.
Indeed, as was quoted by the noble Baroness in her opening remarks, according to the Bank of England's most recent Money and Credit statistical release, net lending to SMEs has fallen by £1 billion in the last quarter and is down by £2.2 billion overall compared to last year.
We have a bit of a problem here and it is very interesting to read in the strategic plan of the business bank what it thinks about it. For example it says very early on in its strategic aims:
“We will increase the supply of finance available to smaller businesses where markets don’t work well”.
If we unpick that, this means there is a problem in that the present system is not supplying finance to where it is needed. Markets are not working well and the supply of finance is therefore reduced. The strategic plan also says:
“We will create a more diverse and vibrant finance market for smaller businesses, with a greater choice of options and providers”.
Again, if we duck behind the language, that means that the existing system does not provide the funding, the existing banks are not worth working with and they need to come up with something that will make more of a difference in terms of the flow of funds to those who can use them. I think we would agree with that.
The plan also says:
“We will build confidence in the market by increasing smaller businesses’ understanding of the options available to them”.
That is an interesting point; if you go behind the language, it suggests that the bank is saying that the people who start businesses—the people who are in charge of the small business sector—are untrained in trying to raise finance, probably not very good managers at that either, and do not understand what they need to do in order to get the finance, so they will have to embark on education in order to get to the point where they can even complete all the forms that the noble Lord, Lord Leigh, was saying are very difficult. I enjoyed his riff about the trouble of getting through the website. He mentioned that in an earlier speech to which I was responding. I followed him through it and I had even more trouble than he had in getting to anything. I am glad to say that the British Growth Fund, which he also mentioned, has a much simpler website where you can get to very easy options straightaway. I understand why he recommends that.
I have had a bit of fun with the wording of the strategy document, but I do not think the Minister necessarily needs to go through it. Unless he says anything to the contrary, I will take it to be a validation of what we have been saying. There is a problem and the banks are not solving it. We also have a bigger problem in that people do not really understand what they need to do to get the funding they want.
This section that I have been quoting ends with the proposition:
“We will achieve this whilst managing taxpayer resources efficiently and within a robust risk … framework”.
The noble Baroness, Lady Wheatcroft, was on to that as well. I understand where she was coming from. I too had great difficulties with this section of the report—I do worry about it. Having said that, I want to get the compliments out of the way first. The strategic plan is really good. It is a very good read—and I mean that as a compliment. It gives some interesting figures and background to the context which I have not seen brought together before. For example, there is a little table that shows very clearly that 53% of businesses with up to 50 employees who have applied for a loan from the clearing banks were declined. This is slightly bigger than the figure that the noble Lord, Lord Wrigglesworth, mentioned. It really is a disaster—if nearly 50% of the businesses cannot get the money, there is a problem.
I also liked the direct funding programme that they have in the strategy. The Aspire programme which is up to £1 million for women-led SMEs seems to be a very good proposition. That is an area of the market that has not been looked at in any detail, and I pay tribute to the British Business Bank for picking up the opportunities that are there for women-led SMEs.
I also like the enterprise finance guarantee, which uses the financial strength that is available in the bank to help those who need guarantees to get lending, because they may not have collateral or assets that they can pledge in return for their money.
I also think that there is still a huge opportunity for start-up loans, which used to come from the banks and of course have dried up completely. Throughout the report, which I recommend to noble Lords, the case studies are very interesting about what is happening on the ground and the way in which the bank is operating.
I am, however, concerned about the way the bank operates for the majority of its interventions. In the Written Ministerial Statement, which accompanied the lodging of the strategy in the House of Commons, the Secretary of State draws attention to the fact that 61% of the bank’s activity is channelled through smaller investors and lenders, with only 39% going through the big four banks. He continues:
“Over the coming years, I expect that this bias away from the big banks will continue”.—[Official Report, Commons, 26/6/14; col. 21WS]
I have already explained that I smell where that is coming from. But that 61% going up and being channelled in a wholesale manner through other institutions is interesting and, like the noble Baroness, I worry about that.
My worry is slightly different in practice because examples of what are called “innovative investments” over the past year have included: £7.8 million to the Dawn Capital II venture capital fund; £25 million to the Episode 1 venture capital fund; £30 million committed to the Praesidian Capital Europe debt fund; £15 million to BMS Finance; £40 million invested through Funding Circle, which is a good thing, and £20 million in the Sussex Place Ventures capital fund. These are somewhat opaque titles and giving money to venture capital funds and hedge funds, which already seem to be quite good at gathering cash to reinvest, seems an odd way to supply support. Perhaps the Minister might reflect on that when he comes to respond. For instance, why are those companies not doing their own funding alongside existing sources, including the British Growth Fund?
This will of course raise issues of propriety. I draw the Minister’s attention to a recent report in the Independent on Sunday. It said:
“Millions of pounds of taxpayers’ money is being spent on a venture capital fund overseen by one of the Conservative Party’s biggest donors … The British Business Bank, which is run by the Department for Business, has committed £7.8m to the Dawn Capital II investment fund … Dawn Capital II’s parent company is Dawn Capital, whose chairman is Adrian Beecroft”.
Does the noble Lord wish to intervene?
Lord Newby (LD)
I was seeking to draw the noble Lord’s attention to the time.
Lord Stevenson of Balmacara
I am sorry; I got carried away and I have overrun. I will not go on, as I think the point is made, but the report asks whether there is a problem about a company drawing money from the state and giving money to an individual who is a well known supporter of the Conservative Party. I would be grateful if the Minister could respond to that.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie) (Con)
My Lords, I am extremely grateful to my noble friend Lady Wheatcroft for initiating this important debate. I pay tribute to her for her contribution to the business bank steering group.
Changes in international economies are creating new challenges and opportunities for business across Britain. Last week, in a debate in this House, I talked about what we are doing to support manufacturing in the UK, which was mentioned earlier. This debate allows me to go in to more detail on the Government’s industrial strategy and how the British Business Bank is providing access to finance for smaller businesses to help them grow and prosper. I fear that I will not be able fully to address the questions raised by the noble Lords, Lord Haskel and Lord Stevenson, because there were some particularly negative opinions given. As my noble friend Lord Stoneham said, I believe that the industrial strategy is clear and I seek to try to explain that today.
Your Lordships will be aware that the industrial strategy, launched by Vince Cable in 2012, has given impetus and focus to this Government’s long-term plan for growth. I am pleased to hear that there was much agreement today on that. It provides businesses, investors and the public with more clarity about the long-term direction of the economy, looking beyond this Parliament. The Government are working in partnership with industry to provide support across a wide range of sectors. They are broad sectors rather than picking winners, as my noble friend Lady Wheatcroft said.
The noble Lord, Lord Haskel, asked what the purpose of the industrial strategy is. The industrial strategy is providing a spectrum of support for a range of sectors and this partnership with industry is giving both government and industry confidence in the future direction of the economy and confidence to set policy to address the needs of business, and for business to invest in long-term growth. But it is more than that. The industrial strategy is about economic growth and providing benefit for us all.
The noble Lord, Lord Stevenson, asked about the creative industries not being one of the industrial strategy sectors. The Government are providing a spectrum of support for a wide number of sectors, over and above the 11 listed in the industrial strategy, and BIS is working closely with DCMS on the creative industries strategy. Nicola Mendelsohn, the industry chair of the creative sector, sits on the industrial strategy council, which is a sign of the breadth of engagement outside the 11 sectors.
The UK also has great strengths in the life sciences field—a sector I want to focus on—where, among other successes, and as evidenced in the news today, we are world leaders in ground-breaking dementia research. Last week, we launched “Create UK” in support of the creative industries, which are worth £71.4 billion to the UK economy, a sector that I know well in my role as the Minister for Intellectual Property.
My noble friend Lady Wheatcroft asked how we would address regional imbalances in terms of investments and funding. Only yesterday we launched the growth deals for the 39 local enterprise partnerships further to support local growth throughout the country through £6 billion of funding for transport, housing, business support and skills projects in the regions. These growth deals are the latest part of the Government’s long-term plan to boost growth around the country, following, among other projects, the multi-billion pound regional growth fund, and the city deals signed with 26 urban areas across the country.
My noble friend Lady Wheatcroft raised the issue of ensuring that the impact of the industrial sector is felt across the UK. As the House will be only too well aware, my noble friend Lord Young of Graffham is working hard with the sectors to increase their help for small and medium-sized enterprises, and in the professional and business services sector, which I co-chair, we run regular regional workshops for SMEs. Members of the council, including my co-chair, attend these and offer advice.
I will be focusing primarily on access to finance but there are some cross-cutting themes that underpin our support for all sectors. As I mentioned last week, we have invested £600 million in the “eight great technologies”. These are the technologies where we have the research expertise and business capabilities to be a world leader. They are supported by the Technology Strategy Board and include robotics, big data and energy storage. We are helping to bridge the gap between research and development and the market through £74 million of investment in nine catapult centres, which are complementary to our industrial strategy.
On the important subject of skills, which was raised by my noble friends Lady Wheatcroft and Lord Stoneham, we need to address the current and future shortages. We need to strengthen our science, technology, engineering and maths skills base by building a skills pipeline at all levels from technicians through to postgraduates. To do this, we are, first, investing £185 million in the teaching of STEM subjects; secondly, offering traineeships to young people; thirdly, we are building and delivering a network of new national colleges to provide specialist vocational training; and finally, as the House will know, we have set up university technical colleges.
As my noble friend Lord Stoneham highlighted, we are unlocking procurement opportunities, advising businesses in advance what the Government are planning to purchase so that they can invest in the right skills and equipment to make the most of these opportunities. Through UKTI we are helping our companies to export. In April 2014, UK organisations won four new contracts worth £1 billion to establish 12 technical and vocational training colleges in Saudi Arabia. Key events such as the International Festival for Business in Liverpool, which I attended two weeks ago, help us to showcase our companies and technologies on the world stage. The festival is creating new business-to-business relationships, and unlocking commercial openings for small, medium and large companies, both at home and overseas.
I now turn to the important point of access to finance. Well-functioning markets for finance are crucial for ensuring that firms can invest and operate when they need to, producing new and improved goods and services, and in turn boosting the UK’s productivity and competitiveness. We do understand that there are some well-documented long-standing supply and demand issues, which mean that smaller firms cannot always access the finance that they require. My noble friend Lady Wheatcroft alluded to this. We have been addressing these issues, and hence the reason that this Government have established the British Business Bank.
The business bank is providing funding and guarantees through private sector finance providers, allowing them to offer more targeted and appropriate finance products for smaller firms so that they can prosper and grow. My noble friend Lady Wheatcroft raised issues about using securitisation techniques as part of the modus operandi of the business bank. I agree with my noble friend that the business bank should operate for the good of the economy. It will not operate for its own benefit. It is already staffed by skilled professionals who know how the markets work. But it will operate within the rules set by BIS and the Treasury, and with a sensible risk appetite.
Over the next five years, the bank aims to unlock up to £10 billion of financing for commercially viable smaller businesses. A range of British Business Bank programmes is already making a real and significant difference, catering for the diverse needs of smaller firms, such as start-up loans, which support entrepreneurs looking to start a business with a repayable loan of up to £25,000, and give access to a business mentor. I am delighted to report that more than 18,500 of those loans have now been offered to entrepreneurs, with more than £92 million approved to finance start-up businesses.
The British Business Bank also provides guarantees through the enterprise finance guarantee scheme to support loans to firms that would otherwise be declined funding due to a lack of collateral for working capital purposes. This programme has proved a considerable success, providing nearly 15,500 loans since the election and resulting in more than £1.6 billion of additional lending to smaller businesses.
The bank also provides a suite of venture capital interventions, including enterprise capital funds, which support and promote a diverse and vibrant market to help early-stage and high-growth firms. The enterprise capital fund programme currently has 16 separate funds, nine of which are investing in early-stage opportunities, with a combined capacity of more than £530 million.
As my noble friend Lord Leigh mentioned, a £300 million investment programme has been developed to provide support for a range of finance providers, including debt funds and peer-to-peer finance platforms. To date, £198 million of awards have been recommended by the investment panel, which will support more than £800 million of lending capacity.
The British Business Bank will also provide information and advice to smaller businesses about how to successfully go about getting the right type of finance. One example of this is the recently published Business Finance Guide, produced in association with the Institute of Chartered Accountants in England and Wales.
We believe that the investments made by British Business Bank programmes are already delivering significant results. In total, British Business Bank programmes facilitated £782 million of new lending and investment in the last financial year. Over 60% of this funding was provided through new, emerging or smaller finance providers.
My noble friend Lord Wrigglesworth mentioned the need to balance good regulation in banking with promoting sensible risk-taking. Banking regulation has tightened greatly. This Government have led global efforts to increase capital and liquidity requirements but we are also aware of the need to promote competition. This is why rules for small and new entrants are not as strict and the process for new banking licences has been streamlined. We see the results in new banks coming into the market.
My noble friend Lord Stoneham asked about success measures for the British Business Bank. Last week we published our success measures in the bank’s strategic plan, which are: increasing the amount of finance for small firms; increasing choice; increasing small firms’ confidence in finance markets; and finally, doing all this while managing taxpayers’ resources efficiently. These will be turned into detailed KPIs over the next few months and this will be monitored by the British Business Bank’s board, which itself will report to BIS Ministers.
My noble friend Lord Leigh asked to see greater transparency on the British Business Bank’s results. I assure my noble friend that all results will be published and fully transparent.
The noble Lord, Lord Haskel, if I read him correctly, asked how much of the British Business Bank’s activity is effected on its own account. All the bank’s lending and investment is exercised alongside private sector providers. So, of the £782 million of lending and investment last year, around one-quarter is public sector money and the rest is new money from the private sector.
To conclude, the British Business Bank is integral to the UK’s long-term industrial strategy and is playing a vital role in removing the barriers to businesses accessing finance. This Government’s commitment to a long-term industrial strategy has already proven a success in supporting growth and turning our economy around, and its impact will continue to be felt long after this Parliament. It is essential that we continue to work in partnership with industry to address barriers to growth, both to unlock the potential of British business and to deliver strong and sustainable growth.
Baroness Wheatcroft
My Lords, I thank the Minister for his comprehensive response, and I take comfort from the fact that he reassured us that the business bank will work within strict limits as to the risk it takes. I take rather less comfort from his reassurance—
Lord Newby (LD)
My Lords, I am sorry to interrupt the noble Baroness, but I should perhaps remind her that in this type of debate she does not have the right of reply.