Examination of Witnesses (Questions 100-119)|
MONDAY 12 MAY 2003
100. It is obviously high risk.
(Mr Marratt) Yes, very high risk. We are always being
approached "I have this great idea". I have actually
had it put to me by one public sector adviser that if the Queen
is putting her money inbut I think they meant the taxpayerto
a SMART award or whatever, the bank should automatically match
that with funding. If it is a good idea, we should do that. Our
experience and the experience of other countries has been that
once we start going down the line of putting loan finance or debt
finance into an idea, when it is possibly years away from generating
enough cash to meet the repayments and may not ever generate that
cash, it is not a place that the commercial retail banks can go.
It is just not our market. There is a need for us to be able to
assess the idea and pick out a good idea or company which has
a good idea, which is then one which is worth working with and
sticking with, and trying to help them find sources of suitable
funding. If we just load them with debt finance, which they cannot
afford to pay, they end up with a bust company and we end up with
a bad debt. We are keen to identify the companies with the good
ideas, then work with them through various means we have to try
to help them get funding from elsewhere. There is a lot we can
do for them in the meantime.
101. You partly implied that in the SMART scheme
the numbers of people receiving grants was getting to the point
where the failure rate was starting to go up. That was the implication,
though you put it slightly differently.
(Mr Bateman) Yes; we were talking about this before
we came in. That the SMART award has been very successful in driving
up numbers is now creating a problem because the follow-on scenario
is that there are more projects which require funding and only
so many funders in the marketplace ready to invest at the current
time. It has been a victim of its own success to some extent and
that is why we have come across these second round funding problems
in progressing things.
102. That is a different problem; that is a
different proposition. You are saying that the scheme is in fact
successful, despite being expanded.
(Mr Bateman) It is a very successful scheme but there
is a slight risk that if there is a drive to get numbers up, or
whatever, if the management potential of the people putting the
proposal forward is not addressed at the early stage, then you
could see more failures later on because they will not get the
funding from the venture capital funds because they will not have
the management in place to get suitable funding.
Baroness Cohen of Pimlico
103. I think I should declare, if not an interest,
at least a warning. I am an ex member of HSBC Investment Bank.
I came in with the furniture from Charterhouse Bank and I have
a great deal of experience of funding small start-up companies.
I think what you are saying about the trouble with the SMART scheme
is that if you are not very careful you get everything funded
to stage one, complete with bank debt, then it falls flat on its
face, complete with bank debt, when you try to get to stage two.
(Mr Marratt) Yes.
104. Which is, of course, important. In a way
you are being slightly bludgeoned: if the chap has a SMART award
and some equity it is difficult not to lend to him, but it may
not go through the next hoop.
(Mr Marratt) Yes, and with the current state of the
venture capital market, at the moment is not exactly the best
time to be going for follow-on funding. If it is a technically
feasible idea, but without the management ability to take it forward,
then, as we know, venture capitalists look at management, management,
management and an idea with it. If ones are getting through which
do not have the management skill, in a sense they are just delaying
the issue they are going to have to face later on.
105. How many of these do you have roughly?
(Mr Marratt) I would have to come back to you with
that. Of our network of Technology Banking Managers, which is
about 18 in the country, I would say each one probably has about
ten SMART winners on its books, but that is only a sample of 18
managers. If you multiply that over the bank as a whole . . .
106. HSBC is one of the banks with the biggest
coverage, so if we had an answer to this we would probably know
the answer about the Royal Bank and HBOS.
(Mr Marratt) Yes. It may not be a very easy number
to collect as SMART winners are not a box we have ticked in the
past, but it would be useful information for us to have. We can
certainly do a sampling amongst our managers and see.
Chairman: The DTI should be able to tell us.
Baroness Cohen of Pimlico
107. Yes, the DTI should know the answer to
the question, but do they know the failure rate? I suppose they
might. What do you understand to be the objectives of the Small
Firms Loan Guarantee Scheme? If the scheme is well understoodand
it has been around a long timewhy do you say in your note
". . . many potential customers fail to take account of the
restrictions"? Which restrictions are they falling over?
(Mr Marratt) It is an interesting point because at
every seminar we run I can almost open a book on the point at
which the SFLGS will become the point of contention amongst managers
or customers or whomever. There does not seem to be an easy answer
to it. We understand the official objective is to provide debt
funding where the proposition is, that if absolutely suitable
for debt funding in everything except one item, that is the lack
of availability or suitable security, the government guarantee
kicks in to replace the security which would otherwise have been
taken over land or assets or machinery or whatever. What the scheme
effectively becomes, partly through the slight spin which is put
on it and also the understanding of some advisers and some individual
firms, is an offering of start-up finance for those companies
which are not suitable for debt finance, for traditional bank
loan finance, and the aspect of "simply because they do not
have the security available" somehow gets lost in the telling.
An awful lot of professional advisers, private sector advisers,
accountancy firms and so on, do understand exactly how the scheme
operates and what the requirements of DTI are for the guarantee.
The understanding amongstto put it in broad termsthe
public sector, business link type advisers, is less heightened
than it is with the accountancy firms. I would not say they do
not understand it, but there is more than an expectation that
this is a loan which people are somehow guaranteed to get rather
than that it is a government guarantee. We have had people say
to us that they are entitled to one of these loans, are they not,
because the government is guaranteeing 100 per cent of it, therefore
what has the bank got to lose? It is the old thing of the more
change something has to go through, the more the tale gets altered
a little bit inevitably and sometimes, by the time it finishes
with the end user, the customer or the start-up firm, they are
slightly of the impression that this is a government subsidised
loan, almost grant. We have to have a constant education process
both internally and externally to say no, you have to be able
to demonstrate that you have a reasonable chance of meeting the
repayments as they fall due, because if we lend money where those
criteria are not met, the guarantee could be invalid and then
we end up with 100 per cent of the debt and no security at all.
108. I am sure that is not well understood.
Nonetheless the SFLGS is very widely used, is it not? Could you
suggest any ways of improving it or a better way of achieving
its apparent objectives? What would you like to see?
(Mr Marratt) One issue, particularly in relation to
technology firms, which we face and why the SFLGS becomes quite
popular for technology firms is that they tend to have a lack
of tangible assets, because they are all tied up in intellectual
property and they are new companies and so on. Just looking at
the technology sector particularly, one comment which has been
made to us is that, particularly now that under any circumstance
the guarantee only covers 75 per cent, that does leave 25 per
cent unguaranteed and totally unsecured with no comeback at all.
You do not need many 25 per cents of £250,000 loans to build
up quite a portfolio of bad debts and possible losses. One issue
we have is that, a little bit because of the perception of it
as an entitlement, there is a feeling that the directors of a
limited company who have an SFLGS feel it is guaranteed by the
government. There is a risk, shall we say, that they feel if things
go wrong they can walk away from that loan and the bank is fearful,
because they might feel they can walk away from that loan with
no liability at all attaching to the directors of the company
because the debt lies with the company and the bank and we have
no direct call on the directors. Of course if we were able to
take a guarantee from the directors of the company for the remaining
25 per cent, okay, there might not be big assets available to
support that guarantee, almost by definition, because if the assets
were available they would not have qualified for the SFLGS. At
least they would feel they had bought into the project and would
know that they could not just walk away from it without at least
that guarantee being invoked and that would then have to go through
due process and they would at least owe that much.
109. Were you thinking of a personal guarantee,
secured on a personal asset?
(Mr Marratt) If it were secured on personal assets
it might then invalidate the loan guarantee scheme.
110. It is not meant to do that, is it?
(Mr Marratt) If those assets were really there, then
we should not be using the SFLGS. Even if those assets were not
there, or were not of the value, I am not saying that is something
we would always want to do, but at least if it were feasible,
if it were something which would not invalidate the guarantee.
The other improvement would be if the publicity were a little
clearer for it, that simply qualifying under the criteria for
the guarantee, that is being in the industry sector you qualify
for, not being a hotel or whatever the excluded sector and being
within the loan amounts and being a company running for so many
years and whatever . . . We do sometimes get cases where people
think that because they are within those criteria, they therefore
qualify automatically for the loan. If it were made clearer in
some of the government information on the DTI website and so on,
that you must be able to demonstrate the ability to meet the payments
as they fall due in order to qualify, then that would be a step
(Mr Bateman) That loan capital is not to be seen as
a substitute for equity capital since equity must be the first
source of funding for the companies.
111. Yes, the point of all this being that if
it is not clear to the consumers, then banks get a bit reluctant
about it and the scheme does not go as it should.
(Mr Marratt) Yes and then, to be colloquial, it gets
a bit of a bad press sometimes.
(Mr Bateman) I would say that in 99 per cent of the
loan applications I have received nobody has seen that the minimum
amount is £5,000 or £10,000I cannot remember
the exact lower threshold. Every application is in at the full
amount, that is they have two years of revenue, they want £250,000
tops, or if they are just a start-up business they want £100,000
tops. Very rarely is there ever anything for a lesser figure.
(Mr Marratt) It is a little bit like looking at it
as a grant. Let us put in for the maximum amount we can get and
then negotiate down, rather than let us look at the business and
see what it actually needs and what it can afford to repay. If
you do not get those two right, then you will end up with a bust
Lord Faulkner of Worcester
112. I find your description of the various
schemes very helpful and very clear. The one I want to ask you
about is the one which quite clearly you are the most critical
of, which is the TCS. What do you think are the objectives of
(Mr Marratt) As we understand it, we think it is a
cracking scheme. We think it is a very, very good scheme. We are
only critical in a way of the way it is not known about enough,
it is not marketed enough, it is not well enough known or used
throughout the university or business community. As I understand
it, it is a scheme where it is a win, win, win. The university
proverbial bright young graduate, keen to work on a project with
industry, is enabled to transfer his or her knowledge from the
university usually into a smaller local company. That company,
which has a project, a problem to which it requires a solution,
needs its manufacturing system revamped or looked at or whatever
it may be but does not have the resources itself to do that, can
get the services of the bright young graduate from university
working on that project with a large proportion of the cost of
that graduate paid for by the government scheme. The university
wins because it sees its research and its people transferred over
to the company. The company wins because the graduate is still
mentored by the university, so they get the transfer of knowledge
from the university research department into the graduate and
UK PLC wins because a piece of industry gets some innovative work
done which it might not otherwise have been able to afford. We
have no criticism of the scheme as a scheme. I am sure there is
tweaking as to the amounts paid to the individuals and the length
of time it runs for or whatever, but our criticism is simply that
it is not well known enough.
113. Whose fault is that though?
(Mr Marratt) It is partly that there is no clue in
the title as to what it is. I was talking to an aerospace engineering
student of A N Other university in London at the weekend and he
said he was looking for employment fairly soon. I asked whether
he had thought about the Teaching Company Scheme, TCS. He said
he did not want to be a teacher. There was no clue as to what
114. So you think the name may be the cause
of the problem, do you?
(Mr Marratt) It is going to be renamed the Knowledge
Transfer Scheme, so that will be of benefit. There are not enough
local champions of the scheme within each university. Maybe the
development of enterprise centres within universities, as we heard
about earlier, will help with that. It has been moved a little
bit from pillar to post as Teaching Company Scheme, Teaching Company
Directorate, where do you find out about it?
115. Is it a job for your Technology Banking
Managers to promote it?
(Mr Marratt) This is something we do in that we run,
in conjunction with Brunel University, regular seminars for all
HSBC managers on the issues faced by early stage technology firms
and the various ways there are of supporting them. One session
will be on it tomorrow morning. We have a whole hour on government
support schemes, what universities can do for technology firms,
grants and so on, an introduction, and the Teaching Company Scheme
is very highly featured in that, the hope being that if our management
come across a company which has a need for it, they can at least
point the customer in the right direction and suggest they contact
their local university, suggest which websites.
116. What does the government itself say about
the effectiveness of it? Do they recognise that it is obviously
(Mr Marratt) We have not had a direct response on
that. Until this consultation, I am not sure we have been asked
the question. Obviously we have made informal representations
at seminars and meetings and whatever, but perhaps they have recognised
it by the fact that the name is being changed and it is crying
out for re-launch and a bit of marketing spend.
Baroness Cohen of Pimlico
117. I notice that Mr Bateman runs Oxford, so
presumably you have experience of this.
(Mr Bateman) I have to confess, of my three years
in this role, I have probably had three instances of TCS being
118. Is that because nobody knows about it?
(Mr Bateman) Yes.
119. Not a terribly good scientific investigation.
(Mr Bateman) It is ironic really, when in the earlier
presentation you were talking about the human resource recruitment
being an issue and the skills shortage. It should be used a lot
more. I would say in Oxford that the type of spin-out or company
which establishes itself in Oxford tends to be a bit of a bigger
entity, quite reasonably funded on the whole, quite a few university
graduates involved in the setting up of the company. I was speaking
to a company on the way down here today and ironically they are
an Oxford spin-out, but they are using the TCS in the recruitment
of an individual from the Aberdeen area.