Government Assistance to Industry - Business, Innovation and Skills Committee Contents

4  Specific BIS business support schemes


77.  The focus of the Department's strategy must be to create the right environment for economic growth across all sectors of the economy. As we note earlier in this Report, we await the detail of how this will be achieved. However, the Department has a number of on-going and proposed interventions to assist industry which it either sponsors or administers. In this section we consider the relative merits of a number of schemes as an indicator of where the Department should concentrate its efforts and interventions. We note that most of these schemes were established under the previous administration.

Enterprise Finance Guarantee Scheme

78.  The Enterprise Finance Guarantee (EFG) replaced the Small Firms Loan Guarantee Scheme and was launched in conjunction with a network of approved lenders in January 2009. It is a loan guarantee scheme for lenders to enable them to:

Provide additional lending to viable SMEs. It addresses the long term market failure in the provision of debt finance to credit-worthy SMEs which lack collateral or track record, who are unable to secure a normal commercial loan.[117]

79.  Under the scheme the Government provides a guarantee of up to 75% of the requested loan value. In return for this guarantee the Government charges a premium of "2% per annum on the outstanding balance of the loan" which is collected quarterly throughout the life of the loan. Lenders are permitted to take an unsupported personal guarantee on an EFG backed loan for up to the full value of the loan.[118] It is run by UK banks and administered by the Government.[119]

80.  A network of 46 approved lenders provides access to the scheme. Despite the large number of approved lenders, we were told that the "Big Six" banks handle 96% of all EFG loans and Lloyds and RBS between them process around 70% of all EFG applications. Peter Ibbeston suggested that part of the reason for this was the cap on guarantees of 9.75% (now reduced to 9.225%) of total lending guaranteed under the EFG per institution which discouraged smaller, more specialised institutions using the facility.[120]

81.  Government figures suggest that, as of 27 October 2010, 12,460 SMEs had been offered loans to a value of £1.27 billion, of which 10,734 had been drawn down. These loans are worth £1.07 billion. It also stated that since 1 April 2010, of a potential £700 million which was available, loans of a value of £221.8 million have been drawn upon by 2,388 separate loan packages.[121]

82.  In the 2010 Budget, the Government increased the funds available through the scheme from £500 million to £700 million.[122] The Comprehensive Spending Review also announced that the EFG would be continued past 31 March 2011 and the Government's Green Paper, Financing business growth: The Government response to Financing a private sector recovery, confirmed that the scheme would be extended until 2014-15 and would receive "over £2 billion" of funding over the four years.[123]


83.  The Scheme was a response to the difficulties faced by SMEs during the recession and therefore it needed to be delivered quickly to the market. In its written evidence RBS set out the timetable of events:

Initial discussions on the design of the EFG were held in early December 2008 and detailed scheme parameters were provided to lenders in mid-December. The EFG was formally launched on 14 January 2009 and implementation was achieved in challenging timescales. From start to finish, the speed of the EFG launch was significantly quicker than would usually be the case for a new product.[124]

When he gave evidence to the Committee, Mr Ibbetson described this as "pretty impressive for any scheme that Government and banks have launched".[125] He also believed that the Scheme has had the single greatest impact of all Government measures.[126]

84.  However, while the speed of delivery was acknowledged by our witnesses, it was also the cause of a number of problems. Roger Bibby, from the Federation of Small Businesses, believed that the initial problems were caused by miscommunication on the reason for the Scheme at and after its initial launch.[127] Phil Orford, from the Forum of Private Business, agreed and said that the initial advertising of the Scheme "frankly gave the impression that it was a small business bailout: 'If you cannot lend or borrow, go for the EFG.'"[128] Both Angela Knight of the BBA and Peter Ibbetson from RBS were also of that view and argued that "in the early stages the Scheme may have been misunderstood". Ms Knight went on to state that "some of the [Government] statements around it were not quite right".[129]

85.  Peter Ibbetson acknowledged that banks also were at fault in the early stages of the Scheme. He believed that they were guilty of not adequately communicating the Scheme to their staff. Although he was confident that business managers were aware of the Scheme he conceded that all staff should have been appraised of the Scheme and its availability:

Of course, what people tended to do, which we failed to recognise, was to walk into the branches and ask the receptionist or the cashier, "What's all this about the Scheme?" [130]

Phil Orford of the Forum of Private Business believed that it was "not ready for market" at the time of its launch,[131] and that the banks had not committed sufficiently to it. This view was echoed by the FSB which argued that the attitude of the banks was a significant barrier to the success of the Scheme until they realised that they "had to get on with it".[132]

86.  Our representatives from business agreed that the performance of the scheme had improved markedly. Phil Orford said of the Scheme "mechanically, it works very well now," while Roger Bibby told us that "the volume of applications has certainly improved and the pace of decision making".[133] Matthew Fell believed that the Scheme was operating much more successfully than it did at the outset "through word of mouth and other measures" and that awareness of the scheme was running at quite a high level.[134]

87.  A number of refinements have been made to the Scheme. For example, the introduction of a 20-day target for approval of loans. Emma Squire confirmed that the 20-day target was a "binding target on accredited lenders" and that broadly speaking, loans were being approved within that time frame. She also told us that in addition to the target the Department had agreed with banks a new principle "to give absolute clarity to SME borrowers on when they can expect a decision".[135]

88.  Mark Prisk MP, the Minister for Business and Enterprise, confirmed that the Government was now looking at widening participation in the Scheme, specifically at the viability of including Community Development Financial Institutions as lenders as part of the EFG programme.[136]

89.  It is clear that the Enterprise Finance Guarantee Scheme represents a positive intervention by the Department and that in general it is now running efficiently. We note that there were significant problems when it was launched but accept that, to some extent, these were caused by the need to bring the Scheme to market before it was fully ready. We welcome the Government's commitment to the Scheme and the extension to its lifespan but caution that it will continue to require close monitoring to ensure that it continues to make a positive impact for business.

The Automotive Assistance Programme

90.  The Automotive Assistance Programme (AAP) was announced in January 2009 to help tackle the significant problems faced by the industry during the recession. The industry experienced a 14% fall in automotive sector output in the year to February 2009, compared to a fall of 5.5% for the manufacturing sector as a whole. Rules under the EU Temporary Framework for State Aid prohibited the Programme from operating after 31 December 2010.[137]

91.  The Programme offered £2.3 billion of loan guarantees to the UK automotive sector in order to:

  • encourage "the development of cutting-edge green technologies" and a "low carbon future for the industry";
  • advance R&D in UK vehicle manufacturing; and
  • create and sustain jobs in the sector.[138]

92.  As our predecessor Committee was told, to be eligible for assistance under the scheme companies needed a turnover of at least £25 million per annum and the proposed investment needed to be at least £5 million. While theoretically the Programme allowed the provision of loans and loan guarantees, it was anticipated that all offers would be of loan guarantees of not more than 75% of the value of the loan.[139]

93.  The Department told us that the AAP had provided a £360 million loan guarantee to Ford Motor Company Ltd, in support of a £450 million loan from the European Investment Bank (EIB) to fund six projects in the UK worth a total of £1.5 billion. The projects included R&D and production investment relating to new generation, environmentally friendlier, vehicle and engine technologies.[140]

94.  In addition, the Department stated that an additional three formal offers of support were made to General Motors Europe, Jaguar Land Rover, and Tata Motors European Technical Centre (TMETC). However, these were not taken up due to the applicants' success in accessing financial support elsewhere.[141]

95.  Written evidence submitted to our inquiry raised concerns about the operation of the AAP. While praising the Programme as a signal that "the Government was serious about supporting the automotive industry" and suggesting the Government support for the development of low carbon technologies was "crucial", the Society of Motor Manufacturers and Traders (SMMT) complained that:

The application process and subsequent approval procedures were lengthy, complicated and may have impacted negatively on timely support needed.[142]

In addition to the loan guarantee to Ford, Nissan Motors UK received a direct grant to support the development of electric vehicles at its Sunderland plant. While Nissan initially applied for funding under the AAP, ultimately funding was provided via the Grant for Business Investment scheme. While it welcomed the introduction of the Programme, Nissan was "ultimately disappointed that the programme failed to meet its original intentions", and that in the end, the "loan guarantee offer was simply not competitive enough" nor did it reflect business needs.[143]

96.  Nissan argued that the scheme would have been more effective and provided greater stability to businesses had loan guarantees been based on the life of the project instead of a maximum two-year guarantee. It also criticised the costs of the AAP under which additional fees charged by the Government to cover the risk of default ultimately meant that lending under the AAP was less competitive than normal commercial lending. It concluded by stating that the AAP compared unfavourably to schemes operated in other countries such as France which provided direct government financing in the form of grants rather than loan guarantees.[144]

97.  The SMMT also noted that the design of the AAP meant that there "was a significant gap" in support for medium-sized companies who were too large to be eligible for funding under the Enterprise Finance Guarantee scheme, but were too small to benefit from the Automotive Assistance Programme.[145] The eligibility criteria and the investment threshold were both subsequently changed but SMMT believed that these were late changes and did not sufficiently address assistance for smaller automotive companies".[146]

98.  Of the £2.3 billion available in loan guarantees, Jane Whewell from the Department confirmed to us that only £378 million had been committed[147] and that there were "no plans for automotive-specific schemes in the future".[148] Under any assessment this figure represents a very poor return for an intervention which could have levered in significant funds for the automotive industry.

99.  The AAP was not the only intervention targeted at the automotive industry. The previous Government also introduced a voluntary discount scheme—the Car Scrappage Scheme—under which motorists were given £2,000 or more towards a new vehicle if they traded in a car or van over 10 years old for scrap. The Department, under the previous administration, explained that the aim of the scheme was to:

Provide a boost to demand and immediate support on a short-term basis to the car industry and its supply chain in the wake of falling sales. It would also get older vehicles off the road and encourage consumers to invest in new, safer and potentially more environmentally friendly models.[149]

100.  Data released by the Department in March 2010 provided the following information on the scheme:

  • Scrappage contributed to approximately one fifth (20%) of all new car registrations since the scheme started
  • Half (54%) of scrappage buyers surveyed had never bought a new car before
  • More than half (56%) of those surveyed said they would not have bought any vehicle at this time if the scrappage scheme had not been introduced
  • Cars bought through scrappage had average CO2 emissions of 133g/km—27% lower than the average CO2 of scrapped cars
  • The average age of cars scrapped under the scheme was just over 13 years—90% of all cars scrapped in the scheme were between 10 and 16 years old (SMMT)
  • Government data estimates that there may have been as many as 4,000 jobs supported by the scheme at manufacturers and suppliers across UK.[150]

101.  In marked contrast to the AAP, the Car Scrappage Scheme was considered to have been a highly successful intervention. The SMMT described it as "far more influential than most imagined, delivering a major increase in vehicle demand."[151] It also argued that the scheme "helped support the economy, played a vital role in providing a much-needed boost to the UK automotive industry, while retaining skills and jobs, in turn making the industry better placed for the upturn".[152] Data collected by the SMMT showed that in the region of 392,500 new cars and some 7,300 new light commercial vehicles were registered through the scheme.[153]

102.  The Automotive Assistance Programme is a salutary example of how a well-intentioned intervention failed to deliver for the sector it was supposed to support. By contrast the Car Scrappage Scheme was widely seen as a success. The contrasting fortunes of these two interventions should be considered in detail by the Department so that any future interventions in an industry or sector are well targeted, well run and deliver meaningful benefits to the industry.

Strategic Investment Fund

103.  The Strategic Investment Fund (SIF) was established by the previous Administration in the 2009 Budget as a two-year fund with a budget of around £1 billion. The Department explained that the Fund was designed as:

A two-year, predominantly capital fund consisting of around 45 projects and programmes [...] where strong opportunities for growth and employment exist and Government action would make a positive difference.[154]

104.  The rationale behind the Fund was to support areas in which the United Kingdom's capabilities were able to "attract high value jobs and processes for UK industries".[155] Primarily, the SIF was aimed at those industries or areas of the supply chain where there were barriers to the commercialisation of technology, where there is evidence that the United Kingdom could have a comparative advantage and where the United Kingdom was able to attract high value jobs and processes for UK industries. It was targeted at composites, plastic electronics and industrial biotechnology, where investment is aimed at use by SMEs, with open access facilities, as well as larger firms. Examples of projects supported by the SIF included:

  • The construction of a large-scale Industrial Biotechnology Demonstrator at Wilton, Teesside;
  • An expansion of the Printable Electronics Centre in County Durham to enable it to become a national centre of excellence in plastic electronics;
  • The development, in partnership with GlaxoSmithKline and others, an innovation campus in Stevenage for new life sciences companies involved in drug discovery and development; and
  • A creation of a new International Space Innovation Centre at Harwell as a centre of excellence to exploit data generated by satellites.[156]

105.  The Department also listed a number of other projects in receipt of SIF funding which were aimed at developing the low-carbon sector, including collaborative R&D projects in new generations of wind turbines and air engines, test facilities in offshore wind and marine power, and low carbon vehicles, including accelerated deployment of an electric vehicle charging infrastructure in the United Kingdom. In addition, it supported science and research "that the market exploits but won't always fund itself, such as 'science clusters'—facilities which provide access to specialist equipment, services and knowledge-sharing in pre-commercialised science".[157]

106.  Our witnesses believed that it had a positive impact, but that its design also contained some serious flaws. Roger Bibby of the Federation of Small Businesses supported the aims of the Fund but argued that its time-limited nature was not helpful to business:

Development capital is a long-term issue; you cannot just say it is on the supermarket gondola for 12 months and then it is gone.[158]

In his opinion, the "artificial" deadline for applications was not in line with "creating the right environment for small businesses and consistency of policy."[159]

107.  Philip Ruttnam, from the Department, believed that the decision to limit the fund to two years was made in the context of the previous administration's Spending Review and the fact that "there were only two financial years in relation to which the Government then felt it could make decisions".[160] He also told us that while the Fund was initially set up with a budget of around £1 billion, that had been reduced during the course of the scheme to a level of around £670 million. He explained that £200 million had already been committed and that the remaining £470 million would be allocated by April 2011, when the scheme closed.[161] There were no plans for a second round of the SIF but Mr Rutnam believed that the gap in funding would be filled by the £1.4 billion Regional Growth Fund.[162]

108.  The Minister acknowledged short-term initiatives had their downsides but equally noted that:

A Government will feel that it needs to act promptly and it can't necessarily guarantee that the actions appropriate in a recession are appropriate when we're into recovery. I can see that you cannot have a continuous open-ended situation.[163]

109.  Mr Prisk went on to say that "what industry looks for is initiatives that can last for a longer period, rather than be sticking plasters"[164] and stated that the Department was trying to develop initiatives in this area which ran over a longer time period. Both the Minister and Mr Rutnam highlighted the Enterprise Finance Guarantee Scheme and the Regional Growth Fund as examples of where the Department had pushed for longer time frames for assistance.[165]

110.  The Department confirmed that it would not reopen the Strategic Investment Fund but the Minister highlighted a number of other avenues for investment, including the Enterprise Capital Fund route and the UK Innovation Investment Fund. He asserted that these funds would more than compensate for the ending of the Strategic Investment Fund and that business would benefit from the fact that they would "run on beyond the political cycle, which is often what business and industry are looking for".[166]

111.  The Strategic Investment Fund has proved to be a worthwhile intervention by the Government and it is clear that all of its funds will have been allocated by the time of its demise. That said, the limited timetable for applications was seen as a significant drawback by business. We welcome the fact that other avenues for funding are being developed by the Department and that those avenues will have a longer lifespan. We look forward to receiving an update on the Government's proposals in its response to this Report.

Manufacturing Advisory Service

112.  In addition to direct and indirect financial support, the Department also provides technical assistance and expertise to certain industrial sectors. Examples of such work include the Manufacturing Advisory Service (MAS) which is currently run by the Regional Development Agencies (RDAs) and has a budget of around £15-20 million per annum.

113.  The Department describes the Manufacturing Advisory Service to business as:

designed to help you, the manufacturer, streamline your processes, reduce waste, become more energy efficient and generally improve your business. Regardless of the size of your business our experienced and highly skilled practitioners can help you. They all have 'hands-on' experience of both shop floor working and management skills. They will work with you and your workforce to ensure that your business is run in the best way possible and our initial services are FREE and we also offer grants if you decide you need more specific help. [167

114.  Philip Rutnam, Director General of the Business Group in BIS explained that the role of MAS advisers was to help individual companies to develop their business, with support for "business plans and strategies and the way in which they can turn those into action".[168] He asserted that the MAS received a very good response from business as a "very practical, action-oriented approach that engages with manufacturers" and declared that the Department was "very committed to its future".[169] On 10 December 2010, Mark Prisk MP, the Minister for Business and Enterprise announced that the Manufacturing Advisory Service would receive £50 million over the next three years.[170]

115.  The Manufacturing Advisory Service was overseen by the Department but run and delivered by the RDAs. The Engineering and Machinery Alliance believed that its regional structure had made the introduction of new schemes "very complicated and time-consuming", and that it could take up to 18 months to complete presentations to MAS consultants in every region.[171]

116.  The Government's decision to abolish the Regional Development Agencies will change that delivery structure. When he came before us the Minister explained that the Manufacturing Advisory Service would be redeveloped as "a national service" led by his Department and delivered locally through contracts. The model for delivery was still under development but Mark Prisk MP gave us an insight into his Department's thinking:

Clearly, local delivery is important, so we need to make sure of the delivery partners we work with, and also we want to make sure that we work better with LEPs, as new players in a sense, so they are well placed to understand the MAS offer, and that the trade bodies—the Engineering Employers Federation or whoever—are also sighted on what it is and they can promote it through their channels.[172]

117.  The Manufacturing Advisory Service is a well-used and well-regarded avenue of advice for business. While the Government is committed to its future, the abolition of the RDAs through which the MAS was delivered has left local delivery of the Service in a state of confusion. The financial commitment to the Service is welcome but those resources will be wasted unless there is a clear delivery strategy in place. Furthermore, there is a danger that the Service could lose ability to retain valuable expertise while that strategy is developed. The Government, as a matter of urgency, needs to set out how the MAS will be delivered at a local level and how it will retain the necessary local knowledge for it to continue to be a success.

117   Ev 91 Back

118 Back

119   Ev 110 Back

120   Q 111 Back

121   HL Deb, 8 November 2010, col wa6 Back

122   Ev 91 Back

123 Back

124   Ev 163 Back

125   Q 108 Back

126   Ev 163 Back

127   Q 203 Back

128   Q 203 Back

129   Qq 83 and 107 Back

130   Q 108. Back

131   Q 169 Back

132   Q 203 Back

133   Q 202 Back

134   Q 204 Back

135   Q 344 Back

136   Q 320 Back

137   Ev 91 Back

138   Ev 91 Back

139   Business and Enterprise Committee, Tenth Report of Session 2008-09, Ev 55. Back

140   Ev 91 Back

141   Ev 91 Back

142   Ev w34 Back

143   Ev w25 Back

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145   Ev w34 Back

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147   Q 33 Back

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151   Ev w34 Back

152   Ev w34 Back

153   Ev w34 Back

154   Ev 91 Back

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157   Ev 91 Back

158   Q 178 Back

159   Q 178 Back

160   Q 59 Back

161   Q 57 Back

162   Qq 57 to 60 Back

163   Q 335 Back

164   Q 335 Back

165   Q 335 Back

166   Q 336 Back

167 Back

168   Q 68 Back

169   Q 66 Back

170 Back

171   Ev 129 Back

172   Q 339 Back

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