Select Committee on European Union Minutes of Evidence


Memorandum from the Department of Trade and Industry

ACCESS TO FINANCE AND THE FINANCIAL INCENTIVES FOR ENTREPRENEURSHIP AND ENTERPRISE

  1.  Although the UK has strong financial markets and debt finance is accessible to most businesses, SMEs can still face particular difficulties in obtaining the appropriate finance. It is for this reason that most Government financial interventions are targeted at SMEs. In the EU as a whole, according to the Green Paper: Entrepreneurship in Europe: "The risk capital market is under-developed and banks increasingly avoid risky lending".[4]

  2.  Financial incentives in the form of R&D tax credits were introduced in 2000 and are available to small, medium and large companies. Small or medium companies receive an extra tax deduction of 50 per cent on qualifying R&D spending over and above the normal 100 per cent deduction they would get under the normal rules of the tax system. This equates to nearly a 10 per cent subsidy for a company paying corporation tax at 19 per cent. Additionally SMEs making a loss can surrender the credit for a cash payment.

  Large companies get a 25 per cent credit instead of 50 per cent and cannot surrender losses. This is equivalent to 7.5 per cent subsidy for a company paying corporation tax at the main rate.

  Designs of the new credits were heavily influenced by consultation, and the Government continues to work closely with business on ways of improving the understanding and delivery of the credits. Budget 2003 announced further improvements to both the large company and SME schemes as well as a consultation on improving the definition of R&D used for tax purposes.

  3.  Additionally, the UK offers financial support for incubators, as, along with many other governments, we recognise the value of business incubation in helping business start-ups survive and grow. Funding support is therefore given to help increase the supply of incubators, although the SBS Business Incubation Fund is currently undergoing a European Commission Article 88(2) full state aid procedure. The SBS co-sponsors UK Business Incubation (UKBI) and the UK Science Park Association (UKSPA) for the development of best practice and networking. Through UKSPA the SBS is supporting research into the quality and impact of Science Parks in the knowledge-based economy and the final report is due in October 2003.

  4.   What are the main programmes or schemes in the UK (EU)?

    —  Smart

    —  UK High Technology Fund

    —  Regional Venture Capital Funds

    —  Small Firms Loan Guarantee Scheme

  5.   Are the objectives of these programmes well specified?

  The programmes highlighted above, which are operated by the Small Business Services, aim to address a recognised market weakness in the provision of finance to SMEs. In developing them, the SBS has worked closely with existing financial providers and benefited from the advice of the independent Small Business Investment Taskforce. Intermediaries are required to provide regular monitoring reports and programmes are subject to periodic evaluation.

  6.   Do the programmes clearly identify the annual costs and benefits in each case? What are they?

  Under the Business Support Review—all new products will have clearly identified costs and benefits.

    —  Smart—Annual cost is £30 million for which beneficiary businesses generate estimated £500 million additional turnover and £270 million additional exports.

    —  UK High Technology Fund/Regional Venture Capital Funds (RVCFs)—Costs: programmes are cost-neutral, ie Government gets its money back as well as cost of capital. If all nine RVCFs and High Tech Fund fail, the cost to Government is around £100 million. Benefits around £396 million are available for investment in SMEs with growth potential.

    —  Small Firms Loan Guarantee Scheme—Annual costs vary as they depend on the level of claims against guarantees but they are currently around £40 million. Benefits: since 1981, over 83,000 loans with a value of around £3.2 billion have been made to SMEs.

  7.   Which, in your view, are the most effective programmes currently? Why is this?

  It is not possible at this stage to give a definitive view on which of the above programmes are most effective. Each programme is designed to address a specific need, which makes the issue of direct comparison difficult. This is because the level of intervention required to achieve the same outcomes varies according to the needs being addressed and the methods of evaluating additional outcomes associated with each programme also vary. There are also issues relating to evaluations not being undertaken at the same time, namely adjusting results so that they are comparable and taking into consideration the wider economic environment.

  The Small Business Service is committed to a more strategic approach to evaluating the programmes it manages, in that it will be evaluating programmes with similar aims either as part of a single over-arching evaluation or in parallel to ensure greater consistency in approach and comparability in terms of timing. This financial year SBS programmes relating to encouraging enterprise in less advantaged areas and underrepresented groups are being evaluated in parallel which will give the SBS the opportunity in April 2004 to review the effectiveness of the total SBS offering on this strategic theme. Plans are being worked up on other strategic themes as part of a three-year strategic research and evaluation plan.

  8.   What improvements to existing programmes, or what new programmes of support, do you consider desirable and why?

  All DTI Business Support schemes have come under review. The objective of the programme has been to create new, broader, more flexible products that focus on driving up productivity. With specific reference to the schemes mentioned above, details are as follows:

    —  Smart as a whole has been subject to the DTI review of business support, which has recommended that the research and development elements be built upon to create a new "R&D Grant for SMEs" product. Some improvements will be made to grant rates and sizes. A new product, "Grant to prepare your business for innovation", will be launched on 1 June 2003, initially as a two-year pilot.

    —  Regional Venture Capital Funds and the UK High Technology Fund are 12 to 15 year funds and have only recently been launched.

    —  Changes to the Small Firms Loan Guarantee Scheme were announced in November 2002 and introduced on 1 April 2003. They include a single guarantee rate, the removal of exclusions from certain industry sectors and a change in the premium paid by borrowers. The SBS is also looking to add to the list of approved scheme lenders. The aim is to simplify the operation of the Scheme at the same time as opening it to more SMEs.

    —  New Programmes: Early Growth Funds are being created in each Region to provide small amounts of risk capital to growth-oriented SMEs and we are about to issue a consultation paper on a new programme based on the United States Small Business Investment Company (SBIC) programme. The SBS is also testing ways of helping more SME entrepreneurs to become "investment ready" through a small number of demonstration projects, with the aim of developing a national programme.

EU SCHEMES

  9.  The multi-annual programme (MAP) supports a number of financial measures including:

    —  the ETF Start-Up facility: this makes investments in venture capital funds established specifically to provide equity or other forms of risk capital to SMEs, in particular those operating at a regional level, those focussing on specific industries or technologies and those that exploit R&D results. It has recently been adapted to support the establishment and financing of start-ups by providing support for specialised VC funds and incubators;

    —  the SME Guarantee Facility: this operates by increasing the capacity of guarantee schemes in Member States and aims to increase the availability of debt finance for SMEs, particularly for micro-enterprises, start-ups and innovative, fast-growing businesses; and

    —  the Seed Capital Action Plan: this is intended to support seed funds, incubators or similar organisations in which the EIF participates. It is aimed at the long-term recruitment of additional investment managers to reinforce the capacity of the venture capital industry to invest in seed capital.

  10.  Benefits to UK Business: At year-end 2001, total disbursements to VC funds through the ETF Start-Up Facility amounted to

50 million. At 31 December 2001, the VC funds had invested a total of

184.6 million in 179 SMEs, including

15.4 million (8 per cent) in 11 beneficiary SMEs (6 per cent) in the UK. This compares with a total invested in 2001 by members of the British Venture Capital Association (BVCA) in UK high-tech companies of £1,658 million. These figures suggest that the ETF Start-Up Facility invested

124.7 million in UK SMEs, which equated to about 18 per cent of total VC operations in that year.

  The Small Firms Loan Guarantee Scheme (SFLGS) operates on a national level. The majority of the UK clearing banks are lenders under the scheme and most provide guarantees to a comprehensive range of SMEs. As SFLGS is demand-led, the EIF early on took the view that it would be difficult to accommodate it within the SME Guarantee Facility's "additionality" principle. However, under "new" MAP, it is possible that this could now be re-considered and the UK could also take advantage of the guarantees for micro-credits. Exploratory discussions have taken place on these issues between the EIF and the Small Business Service.

  Support for the recruitment and training of new investment managers under the Seed Capital Action plan seems a very worthwhile activity and we are aware that some UK fund managers, including one of the Regional Venture Capital Funds, have used this facility.

  11.  The sixth EU Framework Programme (FP6) was launched in Autumn 2002 and is the European Union's main instrument for the funding of research in Europe. With a total budget of

17.5 billion, FP6's objective is to encourage improved collaboration in research and exploitation of knowledge. As in previous Framework Programmes, there will be significant participation by SMEs. 15 per cent of the

11.285 billion budget allocated to seven priority thematic areas of research covered by FP6 will be taken up by SMEs. In addition, another

430 million will be specifically set aside for activities involving SMEs covering other areas of research. FP6's administrative procedures are intended to be simplified, streamlined, and increase efficiency and flexibility, thereby increasing its attractiveness to SMEs.

  In the FP5 programme there was a close link between innovation and SMEs. This is less obvious now, however, there is some element of service for SMEs in the separate Research & Innovation Programme, mainly via Innovation Relay Centres and Economic and Technological Intelligence projects. UK SMEs have also been involved extensively in earlier Framework Programmes.

US SCHEMES

  12.  The Small Business Administration provides financial, technical and management assistance to help Americans start, run and grow their businesses. It is the nation's largest single financial backer of small businesses, with a portfolio of business loans, loan guarantees and disaster loans worth more than $45 billion, and a venture capital portfolio of $13 billion.

  The Manufacturing Extension Partnership, a nationwide network of over 400 local centres, offers technical and business assistance to smaller manufacturers. Business Angels are a widespread phenomenon.

POLICIES TO SUPPORT MANAGEMENT AND WORK FORCE SKILLS

  13.  The DTI Business Support Review identified the need for government to greatly simplify its support services. The DTI will, therefore, close its existing schemes and replace them with a limited number of products designed to:

    —  Encourage a higher number of planned new business starts;

    —  Strengthen productivity and competitiveness of start-ups and small firms;

    —  Increase innovation activity; and

    —  Increase ability of businesses to access and exploit leading edge knowledge.

  14.  What are the current programmes or schemes in the UK (EU)? The three main SBS support services CONNECT, Benchmark Index and Inside UK Enterprise, which are linked in a logical progression, each address a particular aspect of best practice. These are aimed primarily at SMEs and can make a valuable contribution to an improvement of their competitive performance and growth. The Industry Forum Adaptation is a scheme, whose objective is to establish sectoral partnerships which are supported by DTI.

  In addition to schemes targeted at business, the Government has in place a range of schemes aimed at improving commercialisation from the science base more broadly, these include Science Enterprise Challenge and University Challenge. Science Enterprise Challenge provides access to entrepreneurial training for scientists and engineers within universities (both staff and students), whereas University Challenge provides seed funding. Although these schemes are focused on encouraging entrepreneurship and exploitation in universities, a beneficial side effect might be provision of entrepreneurship training for people who subsequently take up posts in large companies, for whom intrapreneurship might then be a viable option.

  15.   Are the objectives of these programmes well specified?

  The common theme running through each of the SBS best practice services is the adoption of business excellence. The SBS's three best practice programmes, facilitated by knowledgeable business advisors in support organisations, provide a solid grounding for SMEs to improve their performance and growth, and make a very worthwhile contribution to the UK's competitiveness position. The objective of the Industry Forum Adaptation is to transfer skills at the workplace using proven best practice tools and processes that deliver sustainable improvements in performance and productivity.

  16.   Do the programmes clearly identify the annual costs and benefits in each case? What are they?

    —  CONNECT is a series of interactive "international award winning" best practice modules (available on CD-ROM and from the CONNECT website) designed to be used as an advisory tool by business advisors/intermediaries (over 16,000 this year saw a CONNECT module). As a business-to-business tool based around "real-life" filmed documentary case studies, CONNECT acts as a wake-up call to SMEs, resulting in companies adopting a "next steps" action (over 70 per cent and reporting annual savings/increased profits of nearly £6 million), therefore having a positive impact on the productivity of organisations experiencing a CONNECT presentation (source: independent impact assessment report December 2002).

CONNECT currently consists of a series of 24 programmes and apart from delivering knowledge transfer to meet DTI and SBS objectives, CONNECT also performs the same task across Whitehall, as a key component of supporting best practice programmes to SMEs.

    —  Benchmark Index is a facilitated performance measurement service helping SMEs to implement business improvement polices and strategies in order to increase profitability and productivity and achieve competitive advantage. In total the improvements in profit following use of the Benchmark Index is estimated at £8 million a year.

The Benchmark Index is the largest service of its type in the world and has been used as the measurement tool in an EC backed project that benchmarked over 1,500 small businesses in nine member states. The service is fully facilitated by trained advisers from a wide range of business support organisations, including Business Link Operators, Trade Association, Best Practice programmes, private consultants, etc. 70 per cent of medium sized users of the benchmark index had taken action or planned to take action to implement their business.

    —  Inside UK Enterprise facilitates the transfer of management knowledge and experience from selected host (exemplar) companies to other managers (visitors) wishing to improve the performance of their own business. In the last year 93 per cent were either satisfied or extremely satisfied, with 45 per cent had made changes to their business following an IUKE visit.

IUKE main function is to deliver knowledge transfer to meet SBS objectives but it performs the same function for Partner organisations as a key component of their own best practice programme content. Partners include Fit for the Future (CBI), Farm Business Advisory Service (DEFRA), Construction Best Practice Programme (DETR), Health and Safety Invest to Save (HSE and Social Enterprise (Phoenix Fund). Impact assessment has evidence of customer profit increase of £11 million resulting from long and short-term improvements initiated by use of IUKE.

    —  For the Industry Adaptation Forum, a typical DTI intervention is £1.5 million over three to five years, which represents 40 per cent of the total project cost with regard to benefits, these range according to the sector, but typically 20 per cent improvements in value added per employee result.

  17.   Which, in your view, are the most effective programmes currently?

  Why is this? As stated previously, each programme is designed to address a specific need, which makes the issue of direct comparison difficult. For the three SBS programmes outlined therefore: CONNECT provides awareness to SMEs; Benchmark Index is the opportunity to measure performance; and IUKE offers the opportunity to see best practice in action. These services are also effectively working together in providing workgroup seminars and establishing a one-stop shop for the knowledge base inherent in the three services. This approach provides a favourable comparison to providing individual services, together the services offer an impact of £25 million profit increase to SMEs from a programme budget of £2 million.

  18.   What improvements to existing programmes, or what new programmes of support do you consider desirable and why?

  The fundings of the Business Support Review in the area of skills have been fed into the ongoing work of the Innovation review within the DTI and the wider Skills Strategy development within DfES. These are expected to report back during the summer, and their findings will then be examined to build up any new programmes of support that might be desirable.

ARE POLICIES ACROSS AND WITHIN EACH OF THE AREAS OF ACCESS TO FINANCE AND POLICIES TO SUPPORT MANAGEMENT AND WORKFORCE SKILLS EFFECTIVELY CO -ORDINATED BY THE GOVERNMENT/THE EUROPEAN COMMISSION?

  19.  Ensuring a co-ordinated approach to entrepreneurship policy at EU and Member state level is a key UK objective. At one level, co-ordination takes place through the Multi-Annual Programme's enterprise projects, which identify and exchange best practice in the various spheres of enterprise. However, entrepreneurship policy is a Member State competence, and the role of the EU is largely focussed on best practice and ensuring that Member States get the most from sharing the message of co-ordination. The creation of the Competitiveness Council was an important step towards an integrated approach to policy development and delivery.

HOW APPROPRIATE IS THE EXISTING BALANCE OF SUPPORT, BETWEEN EACH OF THE BROAD AREAS REFERRED TO ABOVE?

  20.  Following the review of DTI Business support, the Department is looking at how it can better align its products with those of other government players and the EU. All proposals for new products will need clearly to indicate how they complement the wider government (and EU) picture. A new framework is also being established with GO colleagues, which will result in greater match funding and co-financing (ERDF). Further, we are working with RDA colleagues to identify ways to create a more coherent DTI/RDA business support product mix.

PROMOTION OF INTRAPRENEURIAL BEHAVIOUR IN LARGE FIRMS

  21.  The Green Paper identifies the importance of intrapreneurship, also known as "spin-offs", in which opportunities resulting from R&D or innovation in large firms are exploited by (former) employees. Although intrapreneurship exists in the UK, most examples of it occur within companies and so go unrecorded and unobserved. If there is reticence on spinouts, it is more likely because the firm feels guilty about downsizing, or embarrassed at discarding a business which is subsequently successful. There are no specific government support measures of policies to promote intrapreneurship.

Nigel Griffiths MP

Parliamentary Under-Secretary of State for Small Business

9 April 2003


4   Green Paper: Entrepreneurship in Europe, European Commission, 2003. Back


 
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