Select Committee on European Union Written Evidence

Memorandum from One NorthEast

  I welcome the opportunity to submit evidence to Sub-Committee B of the European Union Committee on the European Commission Green Paper: Entrepreneurship in Europe. This submission sets out a number of issues that are most pertinent to the North East of England in the context of entrepreneurship and Europe. I am sure that evidence from others, including the Department of Trade and Industry, will have explained the national issues in detail.

  One NorthEast is the Regional Development Agency for the North East of England and is constituted as a non-departmental public body. The Agency, which is charged under statute with raising the economic performance of the region, covers the administrative counties of County Durham and Northumberland, together with the unitary authorities within Tyne and Wear and Tees Valley.

  In keeping with the specific scope of the Sub-Committee's inquiry, the comments below address issues around access to finance and management and workforce skills. Also outlined are some of the key additional factors constraining enterprise development in the North East.


  The region is developing a comprehensive range of financial instruments available to SMEs within the Region. Capital NorthEast, a joint public-private sector venture capital fund, has proved a successful mechanism for providing important growth capital to many North East businesses. It addresses the "equity gap" faced by businesses in the region, ie the reluctance of the private sector to invest in smaller scale ventures because of the costs associated with an equity investment.

  EU state aid regulations limit the maximum investment that a joint public-private sector funded venture capital fund such as Capital NorthEast can make in a small or medium-sized enterprise. Within Objective 2 areas, which cover most of the North East, this is currently



750,000 level is based upon old research which shows that an equity gap exists in private sector provision at or below this amount. The Agency's experience is that, in reality, the equity gap is much higher than this, and may even be as high as

3 million.

  Similarly, the regulations surrounding state aid to assist commercial research and development (R&D) impose certain constraints that may hamper the Agency and other partners to stimulate enterprise and innovation.

  The introduction of a Research and Development Block Exemption procedure will allow RDAs and other public bodies to administer approved state aid to companies without the need for a full notification process. This will enable more flexible and responsive funding of innovation in SMEs. Currently, R&D innovation funding is administered through the R&D Framework. Projects submitted through this route can take up to 12 months to receive approval.

  In addition, the de minimis level for state aid is somewhat restrictive standing as it does at

100,000 funding over three years for all public sector funding. This could be raised substantially. The need to aggregate all public sector funding within the de minimis is a significant impediment to providing effective business support. It is impractical for all SME owners to be fully aware of the source or full value of assistance provided to them and this presents the risk of the de minimis allocation being exceeded unintentionally.

  Since 1999 the North East Investment Funds (NEIF) 1 and 2 have provided gap mezzanine finance to Regional SMEs. An £18 million NEIF 3 is currently being developed with both public (ERDF and Agency) and private sector funding.

  In addition to Capital NorthEast and NEIF, a number of additional schemes exist within the Region to encourage entrepreneurship to address areas of particular need or market failure. These include:

    —  the North East Seed Capital Fund—University spin-outs;

    —  Community Loan Fund for the North East (CLFNE)—Community based entrepreneurs; and

    —  Spirit of Enterprise—Entrepreneurs with disabilities.


  One NorthEast has worked with universities and businesses to put together a strategy comprising a Regional Science and Industry Council covering key areas of scientific and engineering excellence. These areas include Life Sciences, New and Renewable Energy, Process Industries, Digital Media and Nanotechnology, Photonics and Microsystems. The role of the Centres is to act as intermediaries between the research base and markets to encourage entrepreneurship in universities and SMEs. The Agency is working with the European Commission to align Objective 2 funding with the investment the Region is making in these areas of science and engineering.

  One NorthEast is working with partners to develop a new exploitation company (NorthSTAR) which is charged with transferring knowledge and technology from the research base. NorthSTAR will provide commercial expertise, access to sources of finance (including proof of concept funding), and access to potential customers, and will therefore maximise the commercial value generated from the regions technological assets.


  The need for entrepreneurial skills development is widely accepted, with a number of successful schemes and projects in the NorthEast actively pursuing this objective. However, we acknowledge the need to address low demand for management skills development amongst the region's SME community.

  One of our main challenges is ensuring that the region's universities are able to address these issues. It is often not possible to embed this provision within the mainstream curriculum, and this can result in "stop-start provision", which has a negative effect on the perceptions of enterprise/entrepreneurship in students. There are many programmes which encourage university graduates to consider working within SMEs (such as TCS) but this is highly subsidised and currently excludes those graduates with non-vocational degrees. Finding innovative ways of embedding enterprising behaviour in the SME base through the utilisation of graduates is crucial.

  The region is giving more consideration to enabling business support agencies to help entrepreneurs identify specific needs and use ICT to find the most appropriate programmes of learning, as these can often be daunting for any SME owner or manager.

  Another key target group for enterprise skills development are our teachers, who need the skills to deliver the curriculum in a more innovative way. Very few teachers and lecturers have received this type of training, which has resulted in a lack of understanding of the benefits enterprise education can bring.


  The North East of England is challenged by some of the lowest levels of business creation in the country. European Regional Development Funds ERDF has been a crucial element in beginning to address these disparities and opportunities remain to increase ERDF effectiveness.

  The ability to utilise EU monies on a wider range of pre-start business activity would be particularly useful. Many potential entrepreneurs in the region lack the resources to test their business opportunity and would benefit from early stage counselling and support. The Green Paper identifies the need to invest in developing an entrepreneurial culture. This investment is crucial if we are to begin to make long-term changes in the North East's levels of business creation and entrepreneurship. It must be accepted that these investments are for the long-term and that their full impact will not be felt for many years.

  Continued support for activity to share best practice in enterprise support activities between EU member states is most welcome. Each region faces its own challenges but the mechanisms to address these are often similar. Transnational programmes are a fundamental element of sharing best practice and expertise.

15 April 2003

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