The Business, Innovation and Skills Select Committee's report on the Government's Strategy to Support Industry

GOVERNMENT’S STRATEGY TO SUPPORT INDUSTRY

On 18 February 2011, the Business, Innovation and Skills Select Committee published its report on government’s strategy to support industry.

The report concludes that while the government has proposed a number of interventions that have the potential to help promote economic growth, it does not add up to a comprehensive growth strategy. It highlights the fact that in the absence of clear performance measurements the department's strategy runs the risk that economic success could mask failures in policy while economic hardship could overshadow excellent strategies or interventions.

Bank lending to businesses lies at the heart of the economic recovery. The report believes that the agreement struck between government and the banks (Project Merlin) is a step in the right direction. However, the report argues, "All that the department does will be of little consequence if business does not get access to sufficient levels of working capital."

The report concludes, "All the good that the department hopes to achieve in its industrial policies will suffer without a vibrant business community which has adequate access for working capital. That, more than any government initiative, will drive the recovery."

The report argues that different sectors of the economy have different requirements when it comes to government support. It argues that the department will have to develop a strong awareness of the needs of individual sectors and have the flexibility to react to them if we are to build capability across all sectors of the economy. While the government's growth strategy appears to move in this direction, our evidence from three sectors has shown that much work needs to be done.

Adrian Bailey, Chair of the Committee, said, "The department's focus on economic growth is welcome but warm words and aspirations are not enough. Unless the department develops detailed plans to help industry then this positive message will mean little to UK businesses.

“The banks' role in providing finance to business is crucial to the success of the economy, and this is a key theme in our report. The agreement between the government and banks may look like positive engagement, but the jury will remain out until it delivers real benefits to industry. If the economic recovery is to be sustained then both government and banks need to move quickly from rhetoric to meaningful support to the private sector."

Background to the inquiry
• The Department for Business, Innovation and Skills (BIS) has a wide remit that covers industry, trade, exports, skills, higher and further education and apprenticeships. While this may appear to be a diverse set of responsibilities, there is a common theme: that of pulling together the main policy drivers which determine the country's output and drive the economy.
• The stakes are high. The government has emphasised that in its opinion economic growth will be driven by the private sector, not the public sector, and the prime minister has stated the government's ambition is that the next decade would be "the most dynamic and entrepreneurial in our history". It is clear that for this to materialise, the Department for Business, Innovation and Skills will have to play a key role. It is also important to be realistic about the limits of what the BIS strategy alone can achieve.

• This report considers the approach which the department is taking to support industry and in what form it will provide assistance. Our inquiry covers the role of the department in delivering a prosperous and sustainable economy, its role in ensuring that the banks provide the necessary investment for business and a number of current and future programmes for assistance. We also took the opportunity to look in more depth at three different sectors to test how government policy supported their areas. While it is too early in the Parliament to set out in detail our views on the department's achievements, we believed it important to consider the government's new approach at an early opportunity.

• A significant part of the department's work will be to support and facilitate UK exports, and this was included in the initial call for evidence. However, we came to the conclusion that the importance of trade and exports to the UK economy merited an inquiry in its own right; this is currently underway, and we will report later in 2011.

Conclusions and recommendations

 Strategy for growth
• The branding of the department as the ‘Department for Growth’ has sent out a positive message that it will focus its efforts on creating the right environment in which business can flourish, but it will need to put significantly more flesh on the bones of this strategy if its actions are to match the rhetoric. The lack of a detailed strategy for sectoral support is a good example of where there remains a worrying gap between the department's ambition for growth and clearly defined policies to achieve that goal. The department may be pointing in the right direction but the recent disappointing growth figures demonstrate that a positive message is not enough. What is needed now is the delivery of tangible policies for business.

 • We remain unclear about how the department proposes to assess its performance in delivering sustained economic growth. Merely looking at the success or otherwise of the economy will not give an objective view on the department's record. This should be of concern to the department, because economic success could mask failures in departmental policy while economic hardship could mask excellent strategies or interventions. We, therefore, recommend that the government, in its response to this report, set out in detail how it will monitor its strategy and set out the criteria under which that strategy will be assessed. Furthermore, we believe that the department's performance management system must concentrate on outcomes and not processes if it is to be of any relevance to the economy.

Bank lending rates
• The Green Paper on banking policy contains many welcome initiatives, but the key challenge is to address bank lending. All that the department does will be of little consequence if business does not get access to sufficient levels of working capital.

• Working capital is the life-blood of business. If it is not available then the economic recovery will wither on the vine. We believe that the government has had sufficient time to debate with banks the need to provide sufficient finance and come to an agreement on appropriate levels of bank lending. We expect the government to deliver on its claim that it "will not stand by and let the businesses of tomorrow fail on the basis that they can't attract investment". The agreement between the government and the banks to increase levels of bank lending represents a step in the right direction. The only reliable assessment of the banks' delivery on commitment, however, will be the level of take-up of that additional finance. We are aware that the terms and conditions currently applied to loans can be onerous and far too often drive businesses to use inappropriate forms of alternative finance. Furthermore, the cost of that finance can also hinder access. If either of these factors are not addressed the agreement reached by the government will have been of little, if any, benefit to small and medium-sized businesses.

• The data on lending rates which the banks will provide to the department and the Bank of England should go some way to demonstrating whether or not the banks have delivered on their commitment to increase lending. We note the banks' undertaking to provide lending data to the government and the Bank of England. All of this data will need to be made public so that it can be examined by us and the wider business community. We will expect it to be published as soon as practicable after it has been received. We also recommend that the department include in its assessment of that data any survey information received from business organisations on the costs of that finance and the level of loan applications which are turned down before formal applications are made.

Small Business Economic Forum
• It is clear that all sides value the opportunity for dialogue offered by a forum which brings together banks, business and government to both discuss the needs of business and to improve the relationship between banks and business. The widening of the remit of the new Small Business Economic Forum has the potential to deliver that. But the forum should not be seen as an alternative to direct action to address shortfalls in lending. Quarterly meetings, while welcome, will not deliver on this in time.

• We note the view of the banks that they would prefer to be full-time participants rather than invitees when finance is discussed. This is a positive approach, and we recommend that government and business take a flexible approach to membership of the forum and consider extending full membership to the banks.

Relations at the local level
• At present, the relationship between banks and businesses can be characterised as distant and lacking in trust. As a result, banks have become far too risk-averse with decision-making based on formulas rather than local knowledge. The banking sector's proposals for banking mentors to assist businesses have the potential to develop a two-way process of understanding. Key to their success will be a change in bank culture, with banks at the local level making lending decisions based on the merits of individual applications and not merely acting as an intermediary between businesses and banks’ central offices. If they are to achieve this, banks need to develop a new approach to risk management with processes that are sufficiently sophisticated to balance local decision-making with the need for strategic risk assessment.

Specific interventions
• The Business Growth Fund has the potential to deliver significant investment to British industry. We believe that government should be represented on the board of the fund, but whether this is through a government minister or an official is open to question. However, we strongly believe that government representation in whatever form it takes should have, at its heart, the promotion of businesses and business need. We recommend that government representation on the board of the Business Growth Fund be founded in the Department of Business, Innovation and Skills. Relinquishing that role to HM Treasury will not give business the appropriate levels of expertise and support they require.

• 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 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.

• 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.

• 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.

Creative industries
• The Enterprise Finance Guarantee (EFG) scheme should be available to all sectors of the economy. It is, therefore, unacceptable that the creative industries sector — which generates around £4bn a year in the United Kingdom and is one of the six sectors designated by the government as growth sectors — is effectively being excluded from this avenue of funding. We recommend that the government, as a matter of urgency, ensure that the criteria for receiving EFG funding are sufficiently flexible to accommodate the creative industries. We expect the government, in its response to this report, to set out clearly how it will achieve this aim.

• The creative industries sector is a significant wealth creator in the United Kingdom. It is, therefore, surprising that government engagement with the sector appears to be somewhat haphazard. While we welcome the creation of an ad hoc ministerial committee to cover the sector, we believe that a more structured approach would be more beneficial. Industrial councils have been established for the automotive, aerospace and marine sectors, and we recommend that the department consider establishing a similar council for the creative industries.

Environmental sector
• While there was broad support for the government's engagement with the environmental sector, we heard concerns that the department had a tendency to leave environmental and climate change policy to the Department for Energy and Climate Change. Overall policy direction in those areas resides in that department, but the strategic importance of the sector to the economy requires an active Department for Business, Innovation and Skills. The department has to take the lead in delivering the right environment for the sector to thrive and ensure that all other parts of Whitehall formulate policy in that context.

• The environmental sector is a good example of a sector that can be significantly assisted by government, not through direct financial interventions but by a clear policy and regulatory framework. The industry believes that if such a framework was introduced it would provide the right environment to attract sufficient private-sector investment. If the United Kingdom is not to fall further behind its international competitors in this sector, it must deliver on this framework as a matter of urgency.

Engineering and machinery sector
• The engineering and machinery sector is a well-established sector that appears to have good relations with and support from government. However, access to finance, which we cover in an earlier section of this report, remains a priority concern.

• There also remains a perception in business that financial support for exporters remains inadequate in comparison to their European competitors. In particular, that European governments have used schemes similar to the UK's Enterprise Finance Guarantee Scheme to support exporters in a way that the UK has failed to do. The government needs to be alive to the strategies of our European partners in this area and ensure that it is not missing a valuable opportunity to support growth in UK exports. We will address government support for exports in more detail in our inquiry into trade and exports.

Conclusion
• Our report provides an initial assessment of the department's support for industry. The government has proposed a number of interventions that have the potential help promote economic growth, but they do not add up to a comprehensive growth strategy.

• The crucial issue of rates of lending by banks remains unresolved, and all the good that the department hopes to achieve in its industrial policies will suffer without a vibrant business community that has adequate access for working capital. That, more than any government initiative, will drive the recovery. The government has been talking a tough game since it came into power and, while bank lending rates are a complicated issue to manage, it is time for government to deliver.

• It is also clear that different sectors of the economy have different requirements when it comes to government support. In order to build capability across all sectors of the economy the department will need to develop a strong awareness of the needs of individual sectors and have the flexibility to react to them. While the government's growth strategy appears to move in this direction, our evidence from three sectors has shown that much work needs to be done. It has also reinforced the central theme of this report, that finance remains the critical issue to address, whether by direct intervention or by creating the right environment for investors.

• As we state at the start of our report, this is an initial assessment of the government's position. We intend to monitor closely the government's efforts in this area and will return to it at regular intervals.

Business, Innovation and Skills Committee — membership
Adrian Bailey MP (Chair) (Lab/Co-op)
Brian Binley MP (Con)
Paul Blomfield MP (Lab)
Katy Clark MP (Lab)
Rebecca Harris MP (Con)
Margot James MP (Con)
Simon Kirby MP (Con)
Gregg McClymont MP (Lab)
Ian Murray MP (Lab)
David Ward MP (Lib Dem)
Nadhim Zahawi MP (Con)

The Committee were appointed on 12 July 2010