Industrial Strategy: British Business Bank

Baroness Wheatcroft Excerpts

Tuesday 8th July 2014 Lords Chamber

Asked by

[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?

--- Later in debate ---

[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.