Motion to Take Note
My Lords, I was delighted to be appointed to this Select Committee and honoured to chair it. I have long thought and argued that SMEs—small and medium-sized enterprises—are the single most important variable in whether our economy is successful, and that the Government have a duty to do what they can to help them succeed.
Economists argue, particularly on days like today, about what the Chancellor of the Exchequer and the Governor of the Bank of England should do. That is interesting but not the real clue to whether our grandchildren will live in prosperous times. I am an accountant and have seen some companies falter and others flourish because of the enterprise, long-sighted decisions and flair of the people who run them. These days, it is no easy task to run an SME at a sustained profit. Regulations of every kind stand around you to prevent you doing the wrong thing. However, a positive attitude matters—spotting the opportunities and making the right decisions on time. If we can get the climate for SMEs right, if our entrepreneurs are motivated and successful and if sufficient of our young people have the optimism to take responsibility for their own future and for employing others, we will prosper as a nation. If we value our SMEs, we lay the foundations of the future. In particular, if our SMEs can export, we can thrive in world markets and pay our way in a vastly changing world.
Our committee was set up to see if government could help more. The initiative came from my noble friend Lord Popat, and we are grateful to him for that. He served on our committee until he was—as one can see—rightly appointed to the Government. The noble Lord, Lord Mitchell, was also promoted to the opposition Front Bench from among our ranks. The committee members have proved to have huge practical experience in running businesses of very varied kinds. Two of our members have apologised to me for not coming today because of board meetings that they have to attend.
Personally, I found serving on the committee most encouraging. Wherever we went—we travelled widely across the UK and a bit in Europe, too—we met vigorous businesses, many of which were taking advantage of the Government’s various programmes of assistance and finding them valuable. In south Wales, Concrete Canvas impregnates fabric with cement so that one can line a ditch or erect a hut with fabric that turns into concrete when you wet it. It is selling that all over the place, including to the MoD for use in Afghanistan. Viv Parry from Leeds opened up a market in New York for her Exquisite Handmade Cakes, although she was allowed to take over only a sample of the tin she sells them in, not the cakes. Noble Lords will understand that they are food products. Who would have thought a few years ago that a combination of plasticine models and sheer wit would give rise to Aardman Animations, which we met in Bristol and which sells all over the world, including in China? We give other examples in our report. We had to pick only a few and I have picked those, which is unfair. However, I wished to give some examples.
There is a whole series of ways in which UK Trade & Investment—UKTI—and other government agencies help SMEs, both directly and, most importantly, through local enterprise partnerships, chambers of commerce and so on. Our message to SMEs, if there is a single message, is, “If you have a problem, share it. Don’t be frightened of the undoubted complexities of exporting. Take them on and get advice”. Our main criticism of UKTI was not the services it delivers but the fact that it is too little known and therefore too little used. In the case of UK Export Finance, the very low take-up of its programmes shocked us, and very little use is made in the United Kingdom of the European Investment Bank facilities to support SMEs.
There is no doubt that availability of finance is a most serious problem for SMEs, as your Lordships’ House discussed again only yesterday. The large clearing banks did their best to reassure us. However, as we went round we heard constant criticism of their distant, formulaic and sometimes slow decision-making processes, which inhibit the ability of SMEs to borrow from them. We also heard of other options for funding, which are available and growing. The Government’s agencies, including UKEF, the coming business bank, Funding for Lending and the new regional export finance advisers are addressing the problem. We shall see in the next few years how successful this proves to be.
In the time available I will mention briefly three of the other specific areas that concerned us: languages, intellectual property and the Bribery Act. Languages are important in exporting. As we all know, English is very widely spoken in the world and for that reason we are not good at speaking other languages. Some businesses in very expert sectors said that they needed no other language. Clearly, however, in most sectors people prefer to buy from someone who speaks their own language. We drew attention in our report to the fact that these days the United Kingdom has a high degree of linguistic diversity as a result of immigration. We should use that fact more to help exports. I also think that more careful thought about how languages are taught could prove valuable.
Intellectual property protection is ever more important as the world gets smaller. The Government have been negotiating hard internationally and stepping up their ability to advise firms on the risks and what to do about them. It is most important to keep up this work.
The vagueness of the Bribery Act 2010 also proved a controversial issue. In the two years since it came into force, there have been no prosecutions, but it has caused constant worry to exporters about just what is permissible. We want more clarity about all this and suggested post-legislative scrutiny to find out what the authorities and others concerned think the Act means and promulgate it more widely. The Government’s attitude, shared, it seems, by the House of Commons Justice Committee, is that until the courts have pronounced, there is no value in having post-legislative scrutiny. In other words, we have to wait until some particular businessmen are selected to spend months and no doubt much money being dragged through the courts over some practice deemed doubtful in this country, but normal in the country in which they were trying to sell. Meanwhile, everyone concerned becomes thoroughly inhibited when selling in some markets by comparison with their competitors.
It has been an interesting time for me and I want to thank all my colleagues on the committee for their very positive and supportive approach. We had first-class help from our clerks, firmly led by Christine Salmon Percival, even after an accident from her sick bed. The noble Baroness, Lady Cohen, did the same, when she, too, suffered in the snow and ice. We had an excellent adviser in Professor Robert Blackburn of Kingston University, one of the most entrepreneurial universities in the land. By the way, in case any noble Lords read the small print in some of the Sunday papers, I should make it clear that they advised me as chairman what I might say, as you would expect, but I chose what to say and bear sole responsibility for my words. Our committee was also assisted by the positive attitude to our work of my noble friend Lord Green and his colleagues.
We were an ad hoc committee, which means, of course, a temporary one. Our collective work as a committee is finished, but the Government’s work goes on. It is urgent but long-term, and given the importance of SMEs, I think our most important recommendation was Recommendation 1—that the Government should report back, not only now, but in a year’s time. I am delighted that the Government have committed themselves to do this in 2014 and 2015. We are promised further debates then. In that way, I hope, the work of our committee will live on. Meanwhile, I commend the report to the House.
My Lords, rebalancing the economy is in favour all round the House and rebalancing means a move away from consumer spending and a rising housing market fuelled by debt towards producing and selling more goods and services through investment. It particularly means selling overseas so that we can cut our current account trade deficit and cut it by encouraging SMEs to export.
During my business life, part of my activity was exporting, so I was delighted to serve on this topical committee; a committee so ably led by the noble Lord, Lord Cope, so ably advised by Professor Blackburn and so conscientiously served by staff led by Christine Salmon Percival. We are fortunate to have such an able and versatile staff. To my knowledge, Christine Salmon Percival has been clerk to a committee reporting on science and technology; a committee reporting on legal and constitutional matters; and a committee reporting on the economy—now that is versatility.
We started our inquiry by taking evidence from BIS. It soon became obvious that it was in the process of setting itself up, of putting into practice, its plans to encourage SMEs to export. The Government’s response tells us that UKTI continues to hire more staff. The Chancellor in his Autumn Statement provided additional funds for support in the next two financial years. We are also told that there are plans to use a number of websites to bring existing and future services of UKTI to the attention of business; services for contacts, for mentoring and for other practical help. All this confirms the importance the Government attach to encouraging SMEs to export and it is very welcome, as are the Minister’s efforts, because I know he travels around a lot.
However, it has to be put into practice. The noble Lord, Lord Cope, told us that our inquiries indicated that many SMEs are not aware that all these services are available. We would like business intermediaries, professional advisers, LEPs, chambers of commerce and all the professional organisations also to convey the message. The Government's response agrees with this and I think this is beginning to happen. I do not know whether the Minister went to the BIS open event in the Jubilee Room last Wednesday, but we were told that the Government’s commitments are to do more of the same. It was a very good demonstration of what the Government are proposing to do.
Is it working? Figures published last week show that the value of exports has fallen by 1.3% in the past quarter. The CBI describes these trade figures as “unsatisfactory” and comments that the Government need to do more to help to raise exports to the fast-growing economies. Is there anything more or anything different that can be done?
Did the Minister hear the maiden speech of the noble Baroness, Lady Lane-Fox? She is working with the Cabinet Office to help us make the most of digital technology in communications. She said:
“British businesses also need support, as has been mentioned here already, and small and medium-sized business in particular. We know that only 30% of them are able effectively to use online tools, and that there is a potential £18 billion in the economy if we are able to give them more advanced skills to sell and buy online”.—[Official Report, 13/5/13; col. 160.]
If 70% of SMEs do not have the IT skills to use online tools, maybe UKTI should be working with the Cabinet Office and the noble Baroness to train UK small and medium-sized businesses to use these tools—a bit of joined-up government perhaps?
On 13 June, at col. 1716 of Hansard, the Minister’s noble friend Lord Howell of Guildford argued that trade is operating in a completely different way and that the world's largest single market is now the cybermarket on the world wide web. Are the Government listening to their friends and advisers? What is being done to give SMEs these more advanced skills to help convert them into exporters?
The world of business is changing in other ways. There are other ways of exporting which may be more suited to particular companies or markets or products. Franchising, licensing the product, licensing the know-how, the patent, the trademark—is UKTI helping with this? There was very little evidence of this. Perhaps another way is for UKTI to be more selective and to try to nurture new export sectors—those sectors where the UK has a competitive advantage. Last November the Chancellor, in his address to the Royal Society, listed eight such sectors that would receive special encouragement and money. Again, a bit of joined-up government could make UKTI part of this arrangement by encouraging the SMEs in these sectors to export.
Our report and the noble Lord, Lord Cope, spoke of the problems that SMEs have in getting export finance. We learnt of one solution during our visit to Bavaria. Incidentally, the single state of Bavaria exports to the United Kingdom more in value than the whole of the United Kingdom exports to Germany. For 60 years, it has had its own local state-backed investment bank, which makes export finance one of its priorities. Surely this must be one of the reasons for its success. What is happening to our Government’s business bank, and will it be as local as the noble Lord, Lord Heseltine, would obviously like it to be? In fact, aiding and encouraging local firms to export could well be part of the Heseltine proposals to localise business services by government. However, today’s Statement is not very encouraging about that.
We know from our inquiry—and the noble Lord, Lord Cope, reminded us—that it is not easy for small companies to export. There is the inconvenience, the time, the expense and the preparation. Time and again we were told that the most important thing is for people to have the get up and go—the will and the initiative—to do it. In small and medium-sized companies, exporting often depends on the personality of just one or two people, irrespective of the benefits and financial rewards that exporting brings to the business. So how do you identify these people and these companies? There is a supplement in today’s Financial Times telling us how. Firms using big data identify a potential customer for their style of clothing or people who like a particular kind of holiday or food. Could not UKTI write an algorithm that would identify from big data potential exporters among the SME community? That would be a wonderful cost-cutter.
The point I am trying to make is that the objective of inquiries such as this is not criticism by political point-scoring; it is to question the policy, to question the strategy and to question what is being done.
I think that we all welcome the enthusiasm and energy that UKTI is putting into the work, but the Government’s response seems to say, “Yes, we agree with your analysis. Thank you for your recommendations but we are going on as we are”. I found that rather disappointing because there is obviously more that can be done to achieve what we all seek, which is to rebalance the economy.
My Lords, I want to comment specifically on Chapter 6 of the report, which deals with the topic of languages and culture. I declare interests as vice-president of the Chartered Institute of Linguists and as chair of the All-Party Parliamentary Group on Modern Languages, on whose behalf I submitted evidence to the Select Committee.
I congratulate the Select Committee on taking language skills seriously as a mainstream issue. This makes a very welcome change from the approach that we often see, which is either to overlook language skills or, at best, to mention them as a footnote. However, since the report’s publication, two new authoritative pieces of research have been published—a new report from the British Academy and another, only two weeks ago, from the British Chambers of Commerce. I think that if the committee had had the benefit of these two latest studies, its recommendations might have been even stronger and had a slightly different focus. The Government, of course, do have this advantage, so I hope that in his reply the Minister will comment on how they might update their response to the recommendations on languages in the added light of the recent findings.
It was disappointing that the committee received mixed evidence on the importance of foreign languages and that in some sections of British business there is still an outdated belief that English, vital thought it is, is enough. The latest British Academy report shows how ingrained monolingual attitudes are not only harming the export potential of current businesses but standing in the way of developing a strong supply of language skills for the next generation by preventing successful functioning of the market for language skills.
It is true that some surveys show very small numbers of firms identifying languages as a barrier to export growth. However, the British Academy points out that discrepancies in findings can be accounted for by differences in the sample and profile of respondents, whereas in Kingston University’s more focused study of SMEs’ approach to doing business overseas, The eXport Factor, issues relating to language and foreign cultures were seen as the biggest barrier of all, cited by 31% of SMEs.
The recent report from the British Chambers of Commerce showed that the proportion of non-exporters who would like to trade internationally has risen slightly even since the Select Committee’s deliberations. Its latest survey covered 4,500 businesses, more than 90% of them employing fewer than 250 people and three-quarters fewer than 50. The BCC calls the extent of the language deficit “sobering”, pointing out that 70% of respondents had no foreign language ability for the markets they served, and that the deficit is greatest in the fastest-growing markets. For example, only 0.5% had any ability in Russian or Chinese. With the importance of market growth in Latin America, it is equally shocking to me that 64% speak no Spanish, never mind Portuguese.
The impact of this on the bottom line of business, and therefore on the UK’s economy and competitiveness, is plain and was clearly recognised by the Select Committee. The UK could be missing out each year on contracts worth between £9 billion and £21 billion, whereas firms that proactively use their language skills and the cultural knowledge that goes with them achieve on average 45% extra sales.
The report acknowledges the weakness in the argument that English is enough because it is the universal language of business, pointing out that only 6% of the world’s population consists of native English speakers. Even the dominance of English on the internet is declining. In the past decade, the report tells us that web content in English has increased by 300% but that content in Chinese has gone up by 1,500%, in Russian by 1,800% and in Arabic by 2,500%.
There is also a circularity in the argument that English is enough because, as the report points out, UK companies tend to trade only or mainly with other English-speaking markets. Therefore, the lack of language skills is self-limiting and constraining. We are cutting ourselves off from opportunities for growth by being blind to the languages barrier.
A perfect example of that is the languages industry itself. This sector includes interpreting, translating, language-teaching tools such as text books, CDs and online resources, subtitling, dubbing, web localisation and much more. In 2009, the EU published the first ever study of the size of the language industry, estimating its value at €8.4 billion and on target to double to €16.5 billion by 2015. The study makes recommendations to help businesses to seize the opportunities to benefit from multilingual competence. SMEs in particular are advised, for example, against assuming that localising a website into the language of a target market is enough to generate sales, and EU member states are urged to introduce compatible statistical measures to help foreign language planning. I should like to ask the Minister whether this particular recommendation is what the Government had in mind when they said on page 9 of their response to the Select Committee report that they were developing a metric to quantify the problem. Can the Minister say what that metric might be?
I should also like the Minister to comment further on the recommendation that UKTI should make a priority of dispelling misperceptions to do with language difficulty and help SMEs to deal with the problem. I find this recommendation a little unsettling because it is not clear to me whether the committee regards the employment of native speakers and outsourced translation services as the best strategies. I would be concerned if it were or indeed if that were the opinion of the Government. The report overstates what can be done with technology and native speakers and is not quite strong enough on the importance of developing the UK’s own capacity on languages. Every native speaker employed for their language skills acts as a disincentive for UK nationals to develop their own.
The committee indicated just how bad the UK is in comparison to its EU partners. It is pretty much bottom of or worst at every type of language skill you can measure. The take-up of languages at GCSE has halved since they were made optional after the age of 14 in 2004. The boost provided by the introduction of the EBacc seems already to have run its course, with last year’s take up showing no increase over the previous year’s. Although I am in strong agreement with the Select Committee in welcoming the Government’s move to make languages compulsory in primary schools from 2014, this will certainly not be enough on its own to redress the country’s language deficit.
The languages taught in schools do not necessarily match the ones business says it most needs, nor do they build on the existing linguistic diversity of many pupils. Added to which, as the report says, we need a cultural shift in attitudes within businesses, too. The British Academy says businesses underestimate their current and future needs and do not invest enough in the training and management of language skills. In the light of such enormous opportunities for growth if only SMEs could scale up their language skills, can the Minister say why the Government will not consider introducing financial incentives for such training as proposed by the British Chambers of Commerce? I acknowledge the wide range of support services available through UKTI should companies know about them and have the good sense to choose to access them. However, it seems to me that something more proactive and innovative is needed if our SMEs are to seize their fair share of global growth in a sustainable way and not just adopt a quick fix approach to the language deficit.
My Lords, forgive me, I was just trying to work out how many members of the committee were speaking today. I know that they will all be the best informed and that those like me will have relatively little information or knowledge.
I am extraordinarily impressed by the change that has taken place, probably over the past 12 months, in the attitude of the UKTI and the public sector to the promotion and development of trade. I wonder why my noble friend Lord Green has decided to leave a ship that is not sinking. I pay tribute to him because of this change of attitude.
I started my life in industry in the asbestos industry, working in new products called plastics. I suddenly thought I was in the wrong business, tried to get another job and ended up doing market research. My two greatest clients were the Government of Japan, through JETRO, and the Government of India. For several years we looked at what they could sell abroad and at the marketing and never realised that India and Japan would be two of the biggest investors in the United Kingdom. We probably never dreamed that our automotive industry would be saved by Indian investment.
I want now to look a little into the balance of trade. We suffer from a major deficit on manufacturing and always have done. I declare my interest in that my great uncle Stafford Cripps was president of the Board of Trade and drew attention to those problems. Every time I have spoken here I have drawn attention to it. Does it matter that we have a deficit on manufacturing if we have a surplus somewhere else? We have to accept that the balance of payments deficit on manufacturing is going to continue for quite a long time. Whether it will be supported by a surplus from the financial institutions, which are under quite an aggressive attack at the moment, is another matter.
We are left with the initiatives that can be taken. I was on the British Overseas Trade Board, I chaired the Middle East trade committee—I was on all these things. I used to go to the DTI practically weekly. I could not understand why suddenly at a stroke one of the previous Governments got rid of the British Overseas Trade Board and all the advisory bodies related to the promotion and development of trade. Suddenly they were replaced by a lot of new advisers, many of whom did not necessarily know the country they were going to deal with. Hundreds of them were being appointed, but the Government forgot that in the days of the BOTB the area advisory groups had, free of charge for the Government, advisers who worked on the ground in all the countries. My own responsibilities lay particularly with the Middle East and with Africa. I was told, “My dear chap, you are young enough to be alive when something important happens, but it is going to take a long time”. Now when we look at our balance of payments, we do not seem to be worried.
Occasionally I get asked to start things. I started something recently and I went into the UKTI for the first time. The biggest problem was that it could not get a room to fit enough of us in. It was busy and humming and someone had the decency to think that I looked prosperous and tried to sell me the helicopter in the entrance. A new attitude has come out of all this that I find stimulating and far from worrying.
I look back to the small and medium-sized enterprises. I do not know why we call them SMEs; I just call them people. We want people who will take the initiative. The term entrepreneur used to be used. I used to use that term until I was told—the noble Baroness, Lady Coussins, could probably help—to try to translate it back into English. If you do that it becomes “undertaker” —someone who undertakes things. Translate that back into French and it becomes croque-mort, which is a different form of undertaker. The English language makes life fun. Here we have SMEs. Why do the Government want to have initials? Have you ever tried to pronounce UKTI in different languages? It is not possible. No one can understand what you are talking about. The same is true for SMEs; it is a girl’s name in one of the countries, I have forgotten which. Why have we suddenly dropped the word “trade”?
The small entrepreneurial business, as it may be called, was always the lifeblood of the United Kingdom historically. Someone would go off abroad, find an opportunity, come back and try to demonstrate it. He might even have bought himself a new briefcase to look more important or invented a nice name. I have always enjoyed and loved the sole trader. The balance of payments deficit on manufacturing now is desperate with every country, except for what we used to call the countries of the third world, which is now known as the emerging markets. They always used to be great markets for the United Kingdom. My grandfather when he was in trade—he was on the Board of Trade at one time—would trade with Mongolia, the West Indies and Latin America, which seem to have been rediscovered. Why did we suddenly change all these names? Why can we not go back to trade?
It is quite intriguing too when we ask for money. Most of the banks these days recognise that if they finance trade projects they get a very large fee, and if you are providing export credit you have the United Kingdom state guarantee and can make a 1.5% margin virtually risk free. These are the sorts of incentives that encourage the financial sector to look for trading opportunities.
When our original empire—if that is what it may be called—started, it was based on technology, engineering, building railways, building bridges and providing connections. Now we move into the strange new electronic world, which is perhaps beyond my own pay grade. Anyone starting a business now has to realise that they do not have to leave their office to be able to communicate worldwide. They do not necessarily have to travel. I keep saying to people, “Do not travel there. First, send an invitation asking them to come and see you”. An awful lot of people from all around the world want an invitation to come to London or to the United Kingdom. You find people who are looking for clients and invite them over here. They come on holidays. The relationships get built, and while we may criticise ourselves for being a multicultural society, if that is what it is, it is what we always were in the days of the British Empire when it developed and was built.
I end with a point not just about the size of our small country but about the influence that stems from the Commonwealth and others. It is a little bit of fun being treasurer of the House of Lords Yacht Club. We do not have much money. I sat down one day to look at where our influence lay. I have raised this in the House before. I looked at economic exclusion zones. There is a 200-nautical mile limit that goes around your own country. The region around the Commonwealth and our own territories accounts for 60% of the entire EEZs of the world. The French have another 15%. If we got together with the French, we would have 75% of the 200-mile limits. The resources and all the developments are there.
We are a maritime nation. We were entrepreneurs or “undertakers” and now we are small businesses, which are the ones that will grow. I so enjoy it when a man comes into my office to see me, I say, “What are you doing?”, and he says, “I have just started my business. I am moonlighting at the moment. I hope I can make it work so that I can leave my boring job in a rather big organisation”. The enthusiasm is there. I congratulate the Government on this change of attitude within UKTI, and I hope that it continues.
My Lords, I would also like to thank the chairman of this committee, who has paid such graceful compliments to me and to the clerk. It must have been pretty discouraging for the chairman to have his treasured clerk and a senior member of the committee both flat on their backs sending him comments on the report from hospital on mobile phones. I commend him for staying steady through that.
I formally declare my interest as a director of the London Stock Exchange, a facilitator of equity for small and medium-sized companies and, no doubt any day now, a facilitator of raising equity for banks—several of them.
I should like to talk about one of the missing links in all this, which is the shortage of actual bank lending for small and medium-sized companies. The committee’s subtitle was Roads to Success: SME exports—Select Committee on Small and Medium Sized Enterprises. However, as a witness from one of the big banks observed, the companies best equipped to export were those that were well managed, profitable and solidly financed—qualities that you would want in any company, but even more so in a small company launching itself on the less predictable and more difficult field of exporting, particularly exporting outside the EU.
So far, so reasonable and I am sure that we can all agree about the need for well managed and well financed companies. But what part are the big commercial banks —RBS, Lloyds, HSBC and Barclays—playing in the financing of SMEs? Our report identified major discrepancies between the banks’ fair words about lending to SMEs and what the SMEs’ experience had been. I quote the report:
“Few SMEs had a kind word to say about banks”.
No, indeed, they noted that lending, even to SMEs with full order books, strong collateral and strong cash flow, had dried up. Onerous guarantees were being demanded, including that directors put their houses up as security, which is lazy banking.
Most of my colleagues on the committee and I were, on the whole, inclined to believe the SMEs’ account of the relationship. Our own experience as well as external facts support the SMEs’ views on the matter. Even the Secretary of State for Business, Innovation and Skills described the banks as having had a collective nervous breakdown in the financial crisis. If they had had several different nervous breakdowns it might have worked better, but they had exactly the same one. It involved reacting identically by cutting their costs—to be fair, in the only way that a bank can cut its costs quickly—by making savage redundancies, drawing in regional networks and sucking all the power back to the centre. That leaves authority and a great deal of regional expertise vested in people who do not know their customers and whose authority in many cases is limited to a lending power of something like £50,000, which does not get you very far.
It was also clear—to us, at least—that a good many managers were simply terrified to lend except on a rock-solid covenant. They are petrified of making the bank’s position worse. They wish only to do their best for head office and to follow its agenda of getting rid of any loan or customer viewed as even slightly doubtful, and of raising the prices being charged to less doubtful customers. UKTI, we began to observe, was beginning to perform a secondary and very useful role of wandering around finding bank financing for people. That is interesting, but not what it was set up to do.
The banks, of course, are not doing this for fun or all of their own volition. In the valedictions given to Stephen Hester, the retiring—I suppose we are calling it that—CEO of RBS, the Government’s agenda is clear. He was praised for cutting costs, for terminating less than solid lending and for getting more profit from his better lenders. That is commendable if you are, as he was, trying to save a bank and return it to profitability. However, it is absolutely not useful if you want to coax small and medium companies to grow and prosper.
In all this, as in other matters, all the big banks, including those that the taxpayer does not largely own, have been doing the same painfully pro-cyclical things, such as cutting down on regional staff and centralising and standardising their procedures to the point where it is doubtful that the Archangel Gabriel and staff would have got a loan, at least if they applied in Hull or in Liverpool, even with a personal guarantee.
Again, much of this has been at the Government’s behest. If you demand that very large amounts of regulatory capital be held against business lending, banks will seek activity where less capital is required, such as investment management, as UBS did, or safe-as-houses, low loan-to-value mortgages, which is where many banks are going.
The banks are not only swinging in line behind the Government’s and the regulator’s wishes but adding a few refinements of their own, such as seeking personal guarantees to support lending and charges on directors’ own houses. Nothing more inhibiting to enterprise could be managed and the worst of it is that they all do the same thing.
What we need is either a radical change sparked by the Government—who else?—or a new banking system. So far, the Government’s offer has consisted of exhortation, which is never useful in my experience, an embryo bank, which may well be useful but we do not know yet, and the Funding for Lending scheme. This fund would be fine if it is not also hypothecated on lending on housing. It is pretty clear that the bulk of this cash will inevitably go to mortgage lending. It is easy, can be secured on bricks and mortar and you get the equivalent of a personal guarantee with it because there is a person living in the bricks and mortar who really wants to hang on to it. I think an anxious bank manager struggling to do safe profitable lending for his employer would much prefer mortgage lending to business lending to SMEs; why would they not?
The signs of a new and more useful banking system—more innovative and differentiated—are beginning to appear but they are small and delicate. I hope that the business bank announced by the Government will be useful, but it is far too soon to tell. There are other hopeful but small and new organisations such as the Funding Circle and experiments in crowd funding. We also heard from Bibby Financial Services, which took an amazingly robust view of its ability to get good loans for its customers from some of the 600 foreign banks with branches in this country. Those are all useful, but none will secure enough lending for serious growth any time soon. For that, you need your country’s big commercial banks back in business, spreading out again into the regions and no longer terrorised by their recent history or some ill considered regulation.
Meanwhile, it is to be hoped that more equity funding will fill at least some of the gap. Very few companies get by without any equity base and in these hard times companies are looking to equity to fill some of the void left where bank lending should be. I commend a couple of government schemes—the Enterprise Investment Scheme and the small companies investment scheme. They enable high taxpayers to invest up to £100,000 per annum more or less free of tax and have been the foundation of a lot of start-up companies. Again, this is not the revolution, but it is a help.
That help is much needed. We heard, discouragingly, that other private sector sources of venture capital have slumped to the point where about 60% of venture capital raised last year came from government sources as opposed to about 10% from government sources in 2007. I would guess that we were no more than holding our own in raising private sector venture capital for privately held SMEs.
The equity story gets better as you approach the public markets. I am a director of the London Stock Exchange and, as such, responsible for the AIM market. If a company is big enough to get on to AIM, it typically increases its turnover by 37% and employment by 20% in the first year after admission to the market. There are other important advantages to do with visibility which make growth and exporting easier for SMEs. Wearyingly, it is also true that it is much easier to get a bank loan if you are a publicly quoted company.
Equity can never be the whole story. Entrepreneurs, the life-blood of the SMEs, are often very unwilling to give away as much equity as present-day conditions require. I suspect they are, like all of us, waiting for things to get better before they try to raise money. On present form, we could be waiting some time and that is a tragedy for the people we met in the regions and for many others who could expect to be cheerfully and gainfully employed. We need our big banks now, not cowering behind the barricades of the regulators in London. They all need to get out more.
My Lords, I briefly declare an interest as a director of three SMEs.
Every week when I come to this House and join your Lordships, I leave home and come to a different atmosphere, but until last year I had never been tempted to go speed-dating to fill up my time. However, last year I was, and I took a trip down the M4 to a speed-dating service in Bristol, organised by UKTI, as a member of one of the companies that I am associated with. I went to a hotel where there were some 40 advisors from different nations, right across the globe. I spoke to people from Austria, the Netherlands, Ethiopia and Argentina. There was a fantastic variety; some of them were Brits who were based in embassies, but many were foreign nationals based in our embassies—and it was really exciting. The noble Lord, Lord Selsdon, has mentioned some of these occasions. We spoke to around 10 of these advisors; it was very well organised, and we have followed some of those up. I will come back to that later.
I congratulate UKTI on that experience. The great thing about the Passport to Export programme was that it had a good balance to it, and it gave you opportunities as you went through it—not completely at the taxpayer’s expense. You had to contribute to it yourself, so you took some responsibility for the outcomes. You met other people in different sectors who had gone through those experiences before, so you learnt and found out about the export business. Information barriers and risks were explained and taken away, so you had a much better ease into that market. This is all essential for smaller companies and organisations.
At that time, I was also a member of a Local Enterprise Partnership in the south-west. Some research done on behalf of LEPs more broadly was very factual and pointed; in reality, the factors which determined whether an SME was a good exporter were whether it invested sufficiently in research and development, and whether its products and staff were knowledge-led. It helped if it was in a cluster of businesses in the area that thought in a similar way, and whether that cluster had connections to other growth areas in the globe. However, the key factor as to whether you were going to be good at exporting was, I regret to say, size. The larger you are, the more you are able to commit resources and be able to negotiate barriers to moving out into export markets. That is one of the things that, in terms of my work with the Local Enterprise Partnership, made me think about SMEs.
I am going to commit complete heresy in this forum. In some ways, SMEs have acquired a sainthood in British politics and beyond over the last 15 years. They are an incredibly important part of our economy, but most of them are risk-averse, lifestyle businesses; they deal only with local, not even national markets. I would accuse the so-called entrepreneurs—although we used to call them “capitalist pigs” when we were students in the 1970s—of not actually playing the role which their staff, their colleagues and employees deserve, which is to grow those businesses. There are huge numbers of exceptions in Cornwall, where I come from, and the noble Lord, Lord Cope, mentioned some fantastic examples of successful businesses that export and work worldwide, through the internet or whatever. I would disagree with the noble Lord, Lord Haskel, when he said that we should concern ourselves with those businesses that cannot get their heads around IT. If they cannot do that, they should either not be in business or should be written off as potential exporters. Let us concentrate on those entrepreneurs who really want to move forward, take sensible risks and give their employees the opportunity to develop their careers.
I come to the message that I want to put over this evening. We talk a lot about corporate business, which I was privileged to be a part of in the early part of my career, and SMEs, but we forget the mid-sized businesses and some of the medium-sized businesses at the top end of this category. Companies that have a turnover of £10 million to £100 million and have 50 to 500 staff account for only 1% of UK businesses but they have 20% of business turnover and 16% of employees. This says something about their efficiency and how they work. I congratulate the CBI, for which this is not natural territory in our minds, for bringing out a report called Future Champions around this area. Was this a clever invention? No. If we look to Germany or even to France, we see that this sector of business is the engine of their economies. The Mittelstand—and it sounds as if the committee went and saw some of this—is the engine of the German economy and is excellent at exporting. Those businesses tend to use local supply but export globally; they think globally, but act locally. They tend to have quality products, niche markets and highly skilled employees, which gives them a higher earning capacity. They tend to be more in the manufacturing area, which causes rebalancing. Most importantly, for people like me who come from the regions, they are far more geographically dispersed than large businesses and, perhaps, some small businesses as well. They also tend to allow their staff to have real career progression within the organisation. If things are difficult, they tend to have deeper pockets and financial substance.
France and Germany have learnt the importance of that sector in driving their economies forward, yet we hear almost nothing about it in the UK. The noble Lord, Lord Haskel, is absolutely right about KfW, the big bank which helps promote these, SMEs and green technology. I welcome the attempts of BIS to start that sort of process here as well. I ask the Government not to forget the middle-sized business community in the UK, which could be an excellent area of growth and export. SMEs are vital. The good news is that the company I went speed-dating with in Bristol will, next week, be recruiting its first person to concentrate on exports. I am pleased to say that she is a Spanish-speaking Brit, and that the company will be looking not just within the European mainland but to South America. Do not forget the middle-sized companies and let us make sure that we help the SMEs which want to move forward and take their staff with them, but let us leave the lifestyle ones to get on with life.
My Lords, I, too, congratulate our chairman on his tenacity and exuberance in guiding us through this extremely interesting exercise. I declare an interest as a director of a couple of small companies. I also chair one of the 39 LEPs that the Government have created, in one of the more difficult parts of the country.
My overall impressions of the experience we have gone through are that there are lots of success stories in the report. Clearly, there is no question about that but, at the same time, underlying it there is relatively poor overall performance by our SMEs, particularly when compared to many other countries. One country that we obviously looked at closely was Germany. In Germany, there is a strong commitment of business organisations towards the well-being of SMEs and a strong community feeling that SMEs matter and help each other. The noble Lord, Lord Heseltine, who I shall speak about later, said that he was in Mumbai recently and ran into no fewer than 150 people representing German commerce there. They were helping SMEs and larger companies to do business there.
The engagement of regional governments and regional banks has been referred to. It is very powerful, particularly in Bavaria but right across Germany. There is a supply chain made by large companies for small businesses. Seven days a week, a train leaves Munich and heads for Shanghai, over the trans-Siberian railway line. It is full of cars and components made by BMW’s small businesses. The understanding of the supply chain is great in Germany as well. The careful nourishment of SMEs generally came across. While it is certainly bureaucratic, it is effective. The Mittelstand miracle, which the noble Lord, Lord Teverson, has mentioned, was invented by Bismarck 140 years ago and is a huge driving force in the strength of the German economy. There is also a strong emphasis on localism, which I will come back to. I am in cahoots with the noble Lord, Lord Heseltine, on this agenda.
We can contrast that with Britain, where we have lots and lots of start-ups—that is not bad—but far too many failures at an early stage. That has been endemic for many years in this country because of a lack of training, engagement and understanding about what those businesses are taking upon themselves when they go into it. Sporadic government interventions are constantly changing, not just on this but right across the piece. Successive Governments have turned the course of events, which makes it difficult for businesses to follow them. There was the initiative that the noble Lord, Lord Heseltine, had with Business Links. Some of us had mixed feelings about them, but that idea has gone and something else has come in their place. The other element in our businesses is their inability to grow beyond employing two or three people. In Germany, that element is to be ambitious and grow to employ five, 10 or 20 people. That does not happen here.
I question the Government’s policy on exports, where there is a strong emphasis on the importance of making the BRICS countries a priority. That is fine for Rolls-Royce and the big companies, but is it realistic for most SMEs? They will have to tackle the tariffs and trade barriers that are there. They will have to tackle the political instability which we are seeing in Brazil, and may see in India and South Africa, and tackle the transactional complexities of dealing with those countries—never mind the corruption and bribery which exists in many of those countries, which people at least have to reckon with in doing business there, and never mind the distance or, particularly, the language, which is more acute in those countries than in Europe. There are also, of course, human rights issues.
We should contrast that with small businesses doing business within the European Union which, even if it is in the doldrums today, still shows that we have an inadequate share of that market. That is so right across the piece but particularly with SMEs. Small businesses do not have tariff problems or trade barriers to deal with there. They have one set of market regulations which, for the most part, work reasonably effectively. The rules within the EU are pretty tough on corruption, so you do not have to worry about that. There is now substantial growth in the eastern countries of the EU and an increasingly accessible infrastructure, where people can move goods around Europe with much greater ease than in the past.
Should not the EU be the ambitious target for any small business that is starting up? Is the EU yesterday’s news? I spent a day last week in Rotterdam, looking at its port, and I was humbled by the scale of the activity going on there and by the huge potential that still remains. I could take your Lordships to Antwerp, Hamburg or Amsterdam, all of which have thriving trade right on our doorstep. There is widespread dismay and disbelief among many small businesses about talk of full withdrawal from the European Union. A poll last week showed that 70% of small businesses, while they have their reservations, wanted to stay in the Union.
We found in our discussions of the Government’s support for SMEs that UKTI is well thought of, but not sufficiently widely recognised for what it is making available. Embassies are doing much better than they were—a lot better than 20 years ago. Rather than patronising business, they are beginning to think that businesses have something going for them. I suppose that they may be looking after their own careers by doing that, but it is better. However, too much attention is applied to larger businesses. It is too easy for civil servants and ambassadors to talk to the head noises in Rolls-Royce, which can look after itself. The attention should be directed more towards the smaller businesses. There is a need for more communication with small business. I certainly find this in the LEP, which has a job to improve the communication with small business about what is offered by the Government.
The noble Baroness, Lady Cohen, mentioned the finance issue. I will not say very much about it, except that it is a confusing picture. Lots of SMEs have told us that they are charged penal interest rates, that the security demanded of them is excessive and that the banks do not seem to want to do business. The banks, on the other hand, say, “Nobody is coming along to borrow money from us”. I think there is a bit of truth on both sides; not as many people want to borrow as we would like.
I have mentioned devolution. There is no question that the ideas of the noble Lord, Lord Heseltine, are widely supported by business. There is more local support for SMEs through the LEPs than anywhere else, and the LEPs are crucial in getting SMEs off the ground. It is certainly my main priority to have the relationship with the SMEs as the driver for the local economy. The banks also have to learn about devolution. We learnt in our studies that a local bank manager—at any rate, one in my area—is not allowed to authorise more than £50,000 to a small business. It otherwise has to go through the computer to the central system to make that judgment. Banks need to think about restoring the power and authority of local bank managers, to give them the discretion to make business judgments face to face with businesses, rather than relying on computers to do the job for them.
Finally, what can businesses do to help themselves in this? Time and again, we find the situation is that local authorities and businesses are saying, “What are the Government going to do for me?”. That is important, but what can businesses do for themselves? First, big businesses must look more to small businesses for innovation. That is where the innovation has come from in the past. Big business must recognise that and search out those businesses which are innovating and support them. Secondly, small businesses should collaborate much more with each other. We saw some excellent examples of collaboration in Wednesbury, which I should say is also promoted by UKTI, where high-tech small businesses in the aerospace industry that are trying to get into the American market were working together to establish a base in America. That is the only way you can do business in America, and it was working very successfully.
The small businesses that we saw being really successful had just got on with it. They had nothing to do with government. They did not even know where the Government were but they were getting on with it, mainly because they had a great idea which they believed in. They had the get up and go that is so necessary. Nothing can compare with the flair, innovation and leadership in achieving business success, whether the business is big or small. The Government must do all they can to support these policies and make sure that they do not inhibit them.
My Lords, I thank the noble Lord, Lord Cope of Berkeley, for the courtesy and patience which he exhibited in great measure throughout the Select Committee’s work. It was the first opportunity that I have had to be on a Select Committee in your Lordships’ House and it was a thoroughly enjoyable experience. I thank the noble Lord, Lord Cope, for his consideration. We were also extremely well served by a very active and dedicated staff. As has been pointed out, due to the accidents that we seemed to attract, there was a sense of embattlement as we came towards the preparation of the report. Members of the committee and staff seemed to be dropping like flies. However, they all rallied round—even from hospital beds—to produce the report. That indicates their commitment. I would also point out that, as I am sure all noble Lords will know, nobody puts words into the mouth of the noble Lord, Lord Cope of Berkeley. What he says, he says for himself.
I should like to touch briefly on the finance from a slightly different point of view. As was said by the noble Lord, Lord Teverson, there are two sides to this story. I was recently invited to chair a meeting of a business forum in London. A representative of the Institute of Chartered Accountants in England and Wales was present and we looked at alternative sources of finance. In this country we are heavily dependent on bank finance, which accounts for about two-thirds. However, that is not the case in other countries, such as the United States. We now have things such as Funding Circle and peer-to-peer lending, and new opportunities are out there.
What struck me most on that occasion was a story relayed by the accountants. They had carried out a survey of SMEs, asking them how much preparation they did before putting a business case to their banker. The average answer was two days. I was shocked by that. The fact is that banks should not agree to all applications from SMEs, and in fact that is part of the reason we got into difficulties ourselves. I remember being in business and paying at one stage an interest rate of 22.5% on business loans. Can one imagine what would happen in this country if interest rates began to rise to any extent? We have been living in a fool’s paradise, believing that you can have money for next to nothing. It is not going to be like that for ever. SMEs must sharpen up their act. No matter who you are, putting a business case together in such a short space of time is totally unrealistic and, in fact, reckless.
As was mentioned by the noble Lord, Lord Cope, we were shocked by the statistics given to us by UK Export Finance. Of course, most of the work that it was doing when it came to see us in the summer of last year was for Rolls-Royce and BAE, which we fully understand. When we pressed the organisation, we discovered that at the time it was helping 17 SMEs. I know that since then it has appointed regional representatives, and it is widening its scope and trying to make its services more available. However, I would be very interested if the Minister could update us on how that process is going. Are the regional representatives settling down? Are they actually helping to deliver the growth that we all want?
The other area I want to mention is training. The noble Baroness, Lady Coussins, gave us a very interesting speech on language. The committee heard a lot about that, and I think we have lots of lessons to learn there. However, other qualifications are necessary, over and above language. I declare a non-pecuniary interest as a vice-president of the Institute of Export, a charity which was established in 1935. It is the only professional body in the United Kingdom offering recognised, formal qualifications in international trade. It seems to me that if you are going to drive a car, you get a lesson in how to drive. If you are going to become a mechanic, you learn and you serve and you become a mechanic. If you are going to export, why should it be any different? Why should you not learn the ropes? Why do you not get qualifications in it? Why do you not learn what is involved in international trade? Having that knowledge enables you to avoid many of the pitfalls. These qualifications are recognised by Ofqual, and they are not hugely expensive. There are short courses, and they can be done by distance learning.
It is essential to have that basic skill as taking on exports can be a very difficult business. People are afraid of not getting paid and they do not know the customs in a local area. As the noble Lord, Lord Cope, pointed out in his opening remarks, with the change in the population mix in this country, people came to the committee to offer their services, because they had connections in some of our future key markets. There are people living in this country who are dedicated to doing business and we are not actually using that expertise which is on our own doorstep. We need to ensure that people get these qualifications.
The whole business ethos and the culture in this country have been anti-business for a number of years. I know the Minister has tried very hard during his term of office to change people’s minds about that. At the end of the day, as was said by the noble Lord, Lord Selsdon, it is true that we have a huge trade deficit, but a country which is economically weak is weak from a defence point of view, is weak from an international point of view and is weak from an influence point of view. We need to get that message to our schools and get mums and dads to say, “Well, there could be career opportunities here”. I think it is a matter of drawing all those things together.
I would like the Minister to tell me what progress has been made with UK Export Finance, and what advice he and the Government would give on trying to promote the acquisition of suitable international trade qualifications. This would ensure that when people in SMEs knock on the door they have the expertise and they know what a customer is. That knowledge is somewhat lacking in this country. I have often felt that we have to readjust, because we should be an outward-looking nation. We can survive only if we can trade and move in and out, keeping our inlets and our outlets open. We will succeed only if that is ingrained in people at a much earlier stage throughout the education system.
My Lords, I, too, would like to take the opportunity to compliment the noble Lord, Lord Cope, on his admirable chairing of the committee and on the excellent support that we received from the staff.
Increasing the contribution of SMEs to export-led growth acquires a new imperative when one looks at the structural shift taking place in the UK economy. The 1.3 million increase in the business population, from 3.5 million in 2000 to 4.8 million in 2012, has been mainly driven by SMEs. Over that same period the number of large private sector enterprises decreased by 10.2%, falling from 7,200 to 6,500.
SMEs are acquiring an increasing importance in the UK economy and delivering the step increase in exports that we so badly need. Finance to exporting SMEs must be assured. It is beyond dispute that bank lending to businesses has fallen, but the causes of this decline are contested. The noble Lord, Lord Heseltine, said that there did not appear to be a definitive answer as to whether the decline is due to a lack of supply from banks or to limited demand from businesses. What the report did identify, as my noble friend Lady Cohen mentioned, was the extent of the complaints by SMEs and executives about the insufficiency of loans and other services from the banks on “reasonable terms”. The distinction between the finance available for loans and the terms under which it is available may in part explain why some banks, such as RBS, argue that supply is not the problem, while at the same time exporting SMEs frequently argue that it is insufficient supply on “reasonable terms” which is at fault. Contributing to the problem are bank lending practices such as setting punitive charges and interest rates; onerous guarantees; exclusion of certain overseas markets from loan approvals; and the exclusion of certain activities from loan approvals. The replacement of relationship banking, where loan applications are judged on their merits, with a centralised, formulaic approach to lending decisions, is also part of the problem.
A pervasive formulaic approach may be a consequence of banks’ need to strengthen their balance sheets, comply with tighter regulations and reduce their risks, but it has to be confronted and addressed if SMEs are to access the finances needed for exporting. A return of local bank managers is unlikely to improve the position unless they are also empowered to have the discretion to decide on loan applications.
On Funding for Lending, billions may be drawn down by participating banks but insufficient is getting through to SMEs. The report recommended that the Government should study how banks assess the credit risk of SME exporters and different overseas markets in some detail. The Government’s published response was disappointing. While it said that the new business bank is expected to work with relevant bodies to reduce the obstacles to accessing finance on reasonable terms, it went on to say:
“It is not thought that a further study at this time would be productive”.
It was pleasing, therefore, to see the recent announcement by the OFT that it is bringing forward its review of banking for SMEs. The proposed scope of the OFT review includes whether SMEs have access to services that meet their needs and represent good value and whether there are types of SME that face particular difficulties and, if so, why. I acknowledge that the industry is working towards a voluntary disclosure regime, but as the Parliamentary Commission on Banking Standards observed, increased disclosure of lending decisions by the banks is crucial to enable policy-makers to identify markets, communities and geographical areas currently not well served by the mainstream banking sector.
The report also notes the very small number of SMEs helped by UK Export Finance, but recognises that the Government have now started to put more emphasis on it helping SMEs export overseas. However, new products such as the bond support scheme and export working capital scheme, launched to meet the gaps in the support to exporters from private sector providers, are accessed, again, through the banks.
The Government may have reduced the amount of risk that the banks are required to accept on these new schemes, but if the UKEF is using the high street banks as its route to market, given current bank lending practices these schemes are unlikely to deliver the desired help to SMEs to export. This is a view shared by bodies such as Science, Engineering and Manufacturing Technologies Alliance and Trade & Export Finance Limited.
Similarly, British SMEs cannot apply directly to the European Investment Bank for loans, but must go through one of the participating banks, which are required to match European Investment Bank loans from their own funds. Again, there is the potential for bank lending practices to constrain SMEs’ access to finance. The European Investment Bank’s own reports show that British SMEs have borrowed relatively little compared with several major EU economies such as France and Spain.
It is welcome that in response to the report the Government have committed to providing updates on activity in 2014 and 2015. Will the Government commit to commenting specifically and in some detail on what progress has been made in reducing the obstacles to financing SME exports on reasonable terms and the extent of the increase in the support from UKEF and EIB to SMEs’ export contracts?
An objective of the new business bank is to support the development of diverse debt and equity finance markets for businesses and increased supply through new finance providers. It is true that private sources of venture capital have fallen in number in recent years, but investment provided by both private equity and venture capital still makes a significant contribution to exporting SMEs. In 2012, 90% of the companies invested in by British Venture Capital Association members were SMEs. It is important that UKTI provides advice to SMEs on all sources of finance.
As the economy recovers, there must be confidence that the supply of finance will meet future demand and that there will be sufficient provision of long-term capital for SMEs to sell overseas. In his Statement on Building the Business Bank, Vince Cable, Secretary of State for Business, Innovation and Skills observed:
“Economic analysis suggests that the following types of firms are particularly underserved for finance: SMEs of all sizes who seek finance to expand their business or to develop new products and services; SMEs who lack the collateral to take out a secured loan; SMEs at the smaller end of the SME scale; Young SMEs which have existed for less than five years”.—[Official Report, Commons, 21/3/13; col. 50WS.]
Those four categories add up to a significant proportion of SMEs which have the potential to export being underserved.
My Lords, first, I convey the apologies of my colleague, the noble Baroness, Lady Kramer, who served on the committee and was intending to speak this evening, but she has been invited by Barclays Bank, no less, to have dinner with some senior directors. She thought that it would be a good opportunity perhaps to influence or change their views.
After the Second World War, the then Government urged businesses to either export or die. I suggest that this motto is as important today as it was 60 years ago. Indeed, the accelerating effects of globalisation, combined with increasing competition from the world’s emerging economies, have, if anything, increased this maxim’s resonance.
Here in the UK, we do not have as large a percentage of businesses exporting as do our neighbouring competitors such as Germany, France or Italy. If we could increase the number of exporting firms to the EU average, we would go a long way to reducing Britain’s trade deficit, a shortfall that we have shouldered almost every year since the end of the Second World War. Why is it that the French, the Italians and the Germans are able to export more than us?
It is imperative we ensure that we are doing all we can to encourage an export-led recovery. We therefore established this Select Committee on Small and Medium Sized Enterprises to see which steps could be taken. It was my first Select Committee and it was a privilege to sit on it. I pay tribute to the chairmanship of the noble Lord, Lord Cope, and the committee staff’s professionalism. It should also be mentioned that it was the suggestion of the noble Lord, Lord Popat, that this topic be looked at in depth.
After months of collecting oral and written evidence and visiting exporter “success stories”, our Roads to Success: SME Exports report was published this spring. If its recommendations are taken seriously, and if government agencies take action to ensure that SMEs know where to go for help, I suggest that we will see major improvements.
The committee rightly concentrated on the wider benefits of increasing SME exports, but of course exports are also invaluable to each individual company. It is crucial we get more firms exporting; it is essential that we encourage those that already do so to look to new and higher-growth markets.
I was taken with some work carried out by the University of Glasgow which looked at the benefits to their own business of those individual companies that exported. The most striking statistic they found is that businesses setting out on their export journey achieve on average a 34% boost to their company’s productivity; that is, a rise of over a third in their first export year. The university’s research also found that these exporting businesses were 12% more resilient to weather tough economic times and, finally, that such firms are also better at innovation.
When you export to a range of countries, you need to be aware of the different tastes, needs, fashions, cultures and, indeed, foibles of each market. The lessons learnt are so powerful that almost every firm that begins to export also witnesses an increase in its domestic sales. The result of these learning processes is that firms, having been exposed to the competitive world of international trade, spread best practice here in the UK.
Countries have four engines of growth: government spending, consumer spending, investment and trade. Government and consumer spending is not likely to rise significantly, so the importance of getting more firms both to export and to invest in their technologies, plants and equipment is the only way in which the UK can pursue the growth we so desperately need.
The Select Committee found that there is plenty of help out there for firms. UK Trade and Investment, as we have heard, is worthy of considerable note. As we also know, many businesses are members of trade associations, chambers of commerce and support organisations such as the Institute of Directors, the Confederation of British Industry and the Federation of Small Businesses, to name a few. All these organisations must pledge—and have pledged, I hope—to increase exporting. I very much hope to see UKTI and UK Export Finance blowing their trumpets even louder to promote the services that they can offer.
The UK currently exports half its goods and services to the other 26—soon to be 27—European Union states. This is good news, although it is largely to be expected in our quota-tariff and free-trade economic area. However, that 50% goes to a group of nations that together represent only 7% of the world's population and only 18% of the world's GDP. Furthermore, this group of nations is potentially shrinking, not growing. We need to seek out new markets wherever they are. We have to take advantage of wherever growth is emanating from. I was pleased to learn that, for the first time, UK exports to China averaged more than £1 billion a month between February and April. We must remain optimistic about our SME exporters, and those who can must help SMEs on their journey to further growth. The Roads to Success report will undoubtedly assist us in this important enterprise.
My Lords, I thank the Select Committee and, of course, its advisers for this excellent report. I wish to focus mainly on paragraph 6, which concerns language and diversity. There is no doubt that exporting is vital to economic growth. A number of young people were sitting in the Gallery watching this debate. That reminded me of the tragedy of more than 1 million young people unemployed. For their sake alone, we need to increase growth, and that must come from increasing exports.
My noble friends Lord Cope and Lord Teverson and the noble Baroness, Lady Coussins, all mentioned the language problem, which we can no longer ignore. The National Centre for Languages has produced a report called Talking World Class. It asserts that a language gap leads to a trade gap. It criticises the lack of language skills that we have in this country. It was quite shocking to see the research produced by the European Commission that the UK has the lowest number of people able to speak other languages in a league table of 28 European countries. According to the report, 80% of export managers in the UK cannot communicate competently in another language.
In the year to March 2013, the annual export value from all regions in the UK fell, except in two regions: East Midlands and West Midlands. It cannot be a coincidence that, for example, UKTI East Midlands has been proactive in taking advantage of the diversity of its workforce. Its initiatives include developing the understanding of the business culture of the country which it visits on trade missions. It organises day-long language and culture sessions for people travelling overseas. It liaises with translators, interpreters and training providers. It identifies opportunities to use overseas students. There is an annual international communication masterclass, which is a day-long seminar, attracting about 100 delegates.
Understanding cultural and linguistic diversity, both domestically and overseas, is key if we are to increase trade and exports. There have been several reports in recent years demonstrating beyond doubt that diversity is good for business. It is not just about equal opportunities. Diversity produces new ideas, new markets and new customers. The Federation of Small Businesses, the Confederation of British Industry and the Institute for Small Business Association have produced ample evidence for this. As for immigration, immigrants are on average younger, more highly skilled and more likely to be of working age than their host counterparts. Black and ethnic minorities in Britain are now having a real impact on small and medium-size businesses. I give as an example my home city of Birmingham. Only last summer, Prince Charles presented a Jamaican bakery company, based in Birmingham, with the prestigious UK Small Business of the Year award. Indeed, Prince Charles was so keen to test the evidence that the company sent a few of its delicious pasties to Clarence House for, shall we say, closer scrutiny. The owner of that company had left Jamaica with his family in the 1960s and started a very small bakery in 1988. Now it has a factory employing 50 staff and supplying the five major supermarkets. We need to utilise the skills of men such as that. About 12 miles from Birmingham is Wolverhampton. There, another Jamaican started a medical technology company in 2004. Now it has 200 employees and has produced award-winning equipment such as a device to reduce the risk of deep vein thrombosis.
I should point out that I have no connection with either of the two companies but each is another success story. They were immigrants who came to Britain with nothing. Immigrants are coming from more countries than in the past, including Poland, China and India. In our business community there is potentially more access to different language skills and knowledge of different cultures when it comes to trade delegations representing Britain abroad. Through our universities, we have access to overseas students who can help us bridge the language gap that the noble Baroness, Lady Coussins, spoke about. We know that Mandarin is now very much the language of business and we have Mandarin speakers in our localities. We need to capitalise on their skills and experience.
Many in the small business community have the energy and ambition—the get up and go as the noble Lord, Lord Haskel, described it—but lack awareness of the help available to them. While I am pleased that the Department for Business and BBA have a national mentoring portal, Mentorsme.co.uk, there is evidence that the small business community is unaware of these kinds of facilities. I am very impressed by the Get Mentoring project where small business owners can get free access to experienced business people for advice. But the small business community is not aware of that and more needs to be done to publicise these excellent initiatives.
My next point may surprise noble Lords but, in my submission, faith groups can play an effective role in promoting small business both here and trading abroad. A new report, Faith in the Community, provided fresh insight into the role of churches and other faith groups, and the ways they can liaise with business. The report contains information from 150 local authorities which shared how church and other faith groups help them carry out many of their tasks, especially in liaising with local business. Many black and ethnic minority businessmen have their roots in the churches, and indeed in mosques and temples. Again, I urge the Minister to look at the faith groups and churches, because therein lies a tremendous reservoir of talent that it seems is being ignored.
There is one Government policy of great concern to the Caribbean business community: the air passenger duty. This tax is charged on every airline ticket from the United Kingdom. The problem is that it is based on a price-banding system related to the distance to a country’s capital city. That means it can be cheaper to fly to more distant locations in the United States than to destinations such as Jamaica or Barbados. The levy is set to rise each year by the rate of inflation, pricing many in the UK Caribbean community out of being able to travel to the region on business.
The Select Committee did not have a lot to say about diversity but the issue is crucial to Britain’s future economic growth. The Prime Minister set a target of doubling UK exports by 2020. Does the Minister feel we can attain that target? This is an excellent report but it has to be acted upon if the target is to be achieved.
My Lords, I was a member of this Select Committee when it began its hearings. I was getting myself all fired up to contribute to a subject that means a great deal to me when the rug was pulled from under my feet. On my giddy elevation to the Front Bench, I was ordered to stand down from the committee. Of course, I had no option—the rules are the rules—but I was sad to leave.
That said, it is with great pleasure that I welcome the opportunity today to debate Roads to Success. What a tour de force it is: forensic, totally focused and clearly written. Throughout its pages the very clear fingerprints of its chair, the noble Lord, Lord Cope, are distinctly visible. From these Benches, I congratulate him and his colleagues on producing it. I have two reservations, which I would have pushed had I been on the committee. First, the digital revolution is barely addressed. Secondly, I am not convinced that it reaches out to the new, young entrepreneurs—those who dress in T-shirts and jeans, and are for ever plugged in to their music. That apart, I am much heartened by its contents.
I very much hope that the report will attract the attention it deserves within government but somehow I doubt it. The truth is that Select Committee reports produced by your Lordships’ House get scant attention in the corridors of Whitehall. I have had the honour to sit on several Select Committees. On each occasion, noble Lords are chosen to serve and have impeccable backgrounds, the witnesses are grilled and the clerks and advisers are of the highest calibre. The reports produced, just like this one, are outstanding—but what happens? They disappear into the bowels of the relevant department and eventually the Government produce their answer, just as they did for this report. It is always the same. It is obfuscatory, avoids the recommendations and sends the report back to Parliament with the clear intention of kicking it into the long grass. This is not an attack on the parties opposite. It also happened when we were in government. So often Ministers and their civil servants regard our Select Committee reports as a pain to be endured and they treat us accordingly. This is my second rant in your Lordships’ House today. Enough is enough—it is time to stop. This high horse will be ridden no more.
When I was in my 20s—light years ago—I remember an advertisement in Piccadilly Circus. The noble Lord referred to, “Export or die”. I remember, “Either exports go up or Britain goes down”. As I remember it, there was a little flashing Union Jack underneath it—nothing new there. Low exports and low productivity have been the bugbears of our post-war economic performance. Small businesses are critical to our economy; everybody is agreed on that. They employ 60% of our workforce and—a hugely important point—they are the route back into employment for many of our long-term unemployed.
Much of our time is spent looking for ways to support the UK’s small businesses; encouraging them to export is a good way of doing this. New research from the Enterprise Research Centre shows a clear correlation between exporting and growth in businesses of all sizes, and we have touched on that this evening. EU companies that export grow twice as fast as companies that do not, and internationally focused SMEs are three times more likely to introduce an innovative product. My view is that it is in the mindset of a management that is interested in new projects and developing in all areas, not just exporting.
Today, we rightly focus closely on the many important recommendations made in the report. However, we should also look at ways to encourage innovation in British companies, given this strong link between companies that innovate and those that export. The latest EU figures suggest that the UK is currently 32nd out 35 countries when it comes to innovative products and processes, and 25% of UK SMEs are innovative, compared with the EU average of 34%. Recent figures from the Big Innovation Centre, which works with government, higher education and industry, illustrates how the difficulties of getting finance stifle innovation.
More than one in three innovative firms looking for finance in the period 2010-12 received none of the credit that they wanted. There is no shortage of statistics to support the diagnosis that the lack of support from our financial institutions harms businesses in the UK. We know about this, it is discussed almost every day in your Lordships’ House and it is a big problem that we have in this country. The report shows that the three-month average rates of lending to small businesses have been negative since August 2011. Looking at the Bank of England figures, I also count only three individual months over that period when net lending to small businesses has been positive.
The lack of small business lending harms innovation and exports. We need a laser-like focus on improving access to credit for these companies. The Government’s expansion of Funding for Lending this April was a positive step, but it is clear that to resolve the market failure at the core of this issue, we need to be more radical and look at structural change. Many noble Lords will no doubt have shared my surprise on reading that between March 2011 and August 2012, UK enterprise finance helped 31 companies, of which 21 were SMEs. Noble Lords could be forgiven for thinking that a couple of zeroes had fallen off these numbers.
This cannot be enough. Will the Minister please tell us whether there are any plans to co-ordinate the activities of UK enterprise finance and the Business Bank? The case study within the report of Alderley plc, the engineering business that felt that it was being harmed by credit decisions being made in London rather than regionally, is compelling. It is a scenario that we often hear about and was mentioned by the noble Lord, Lord Young of Graffham, in your Lordships’ House yesterday. The end of relationship banking has harmed small businesses, which find that instead of local bank managers who understand them and can use judgment about whether they should have credit, decisions are now made on a centralised basis, which is often also computerised. Ticking the boxes is not the way to proceed.
I also agree with the committee’s recommendation that more attention should be paid to SMEs when the Government draw up trade agreements. The EU-US trade negotiations are critical and I would like the Minister to update the House on how these talks are proceeding. I am by any assessment a serial entrepreneur; my businesses were in IT services. To me, overseas activities were always crucial. Our customers were international, how could we provide a service if we were not international too?
Of course, you actually have to like abroad. You need a feeling for other people’s culture. My language skills are halting, but I forced myself to learn enough German to be able to stand up and make presentations in Frankfurt. Whether they understood me is another question, but they were too polite to say. Today, new technologies such as Google Translate are coming to the rescue, but nothing—nothing—replaces being with your customers and being able to talk to them.
I have to say that doing business in other countries is really good fun. It is testing, of course, but if you roll up your sleeves and are prepared to catch early planes and attempt to speak your customers’ languages, it really pays off. I have also found that taking just a little time to brush up on another country’s politics—what is the story of the day—and even talking about football works a treat.
I really enjoyed the speech of the noble Lord, Lord Teverson. I feel that I have a soulmate in him, although I have to say that when he started on the subject of speed dating, I began to keep my distance. I agree. There are many lifestyle companies out there, many of them are static and we must not confuse them with the small and medium-sized companies that are dedicated to growth.
I was disappointed that the report barely touched on the digital revolution. When I give speeches, I highlight how the world is changing and the speed of that change. If businessmen are not having sleepless nights about digital changes—if they believe that the digital revolution does not concern them and that it is just a passing phase—they are in for the chop. Ask Jessops, HMV or Blockbuster video—many more will follow them. Competitors in every country are obsessed by changes in the digital revolution, and we should be too.
My final point is about young entrepreneurs. If I were a young tech city entrepreneur, I doubt that UKTI would have much appeal to me. It is too uncool by half. Does UKTI have a branch in Shoreditch or on the Cambridge Science Park? That is where the action is. Its people need to take off their ties, get themselves personal iPads and drink skinny lattes, just like everyone else there. They need advisers in their 20s, not in their 50s.
In summary, this is an outstanding report. Despite my pessimism, I hope that the Government take serious note of its contents. One day soon, I hope that the lights in Piccadilly will read, “British exports up yet again”.
My Lords, I begin where everyone else has by congratulating my noble friend Lord Cope on securing what I believe passionately to be an important debate on trade and investment relating to small and medium-sized businesses. My noble friend has long supported British business and British exports, as, of course, have all the committee members. He and his committee undertook the inquiry thoroughly and asked searching questions not only of my officials and of businesses and business support bodies but of me and my colleague and friend the Business and Enterprise Minister.
Of the 23 recommendations in the report, I think that I can say truthfully that we agree. We have essentially fully accepted all of them, with one or two exceptions where we may not agree with the specific recommendation but absolutely share the intent behind what is proposed. Above all, on recommendation 1, which concerns a report back next year and the year after, I am happy on behalf of the Government to endorse and accept that.
This is an important topic for us all. More than one noble Lord has called attention to past advertisements saying “We export or we die” or, “Exports go up or Britain sinks”. Briefly, I go back even further than that, prompted by the recent Diamond Jubilee of the Queen’s coronation, to remember that in 1953, the UK’s total exports were just £3.6 billion. Last year, they were £488 billion. More importantly than the nominal figures is that in 1953, the value of exports to UK GDP was about 10%; it has now risen to 30%, which reflects how Britain is participating more in an increasingly international economy. The bad news is that Germany’s percentage is more than 40%, so we may have come some way since the 1950s, but we still have some way to go.
A number of noble Lords have referred to the various targets and challenges that we have set ourselves: those of doubling trade exports by 2020, getting 100,000 new SMEs into international markets, again by 2020, and doubling the client base of UK trade in investment from 25,000 to 50,000 by 2015. We are well on track with the last of those. The client base of UKTI is growing rapidly. The target of doubling exports by 2020 is a challenge. Frankly, if we got somewhere near it we should feel extremely pleased. It would involve increasing exports as a share of GDP to over 40%, which is where, as I have just mentioned, the German economy now is. This is not a completely unfeasible challenge, but it is certainly a demanding one.
I assure the noble Lord, Lord Mitchell, that we shall take this report very seriously. I am not going to allow it to gather dust. There are a number of important suggestions in it. There is repeated reference in it, and in comments by noble Lords, to the awareness issue. UKTI gets good satisfaction ratings. They are not as good as they could be and could be better, but they are in the mid to high 70s. I would like to see them at around 90%. Dissatisfaction levels are low, at around 6% or 7%. This is clearly a case of “good but could get better”.
The level of awareness is not satisfactory. For UKTI this is in the mid 50s. For UKEF it is in the 20s. This is not good enough. It is a priority for me and the Government to ensure that we raise awareness of these important services that are available. In particular, as we speak we are running a pilot marketing programme in the north of England to raise awareness of UKTI and UKEF. I will be analysing carefully the results of that pilot when they are complete in the next few weeks. If we get encouraging figures, we will consider extending that advertising campaign to the rest of the country.
In the short amount of time available to me, I will try to cover a number of issues that have come up in your Lordships’ comments, especially language, intellectual property and the reference that my noble friend Lord Cope made to the Bribery Act at the start. I say to the noble Baroness, Lady Coussins, that I share her passion for languages. I am a linguist by origin. This was admittedly a long time ago, but I strongly believe that not only do we need to invest more in languages, but that investing in languages improves your English. To paraphrase Rudyard Kipling, what does he know of England who only England knows, or what does he know of English who only English knows?
This important area is quite complex. It is unrealistic to expect an SME, unless it has a Chinese speaker, to be able to gear itself up in Mandarin to the point where it can speak business Mandarin in pursuit of business opportunities in China. We must be realistic about what is achievable. We have recently updated a brochure on language management strategy. We will continue to work on it. I would like to write to the noble Baroness on some of the complexities of the language issue. There are some long-term issues about the teaching of language in schools, and noble Lords are aware that the Government have recently focused much more attention on this. That will take quite a long time to pay dividends. In the mean time—and I do not just mean in the mean time—we need to celebrate the fact that, because of the diversity in this country, we have a terrific language base on which to draw, in terms of skills that can be brought in for marketing, for example, with an appropriate language attached to it. I assure the House that we take the issue of languages seriously.
Finance is quite properly of concern to a number of noble Lords. The noble Baronesses, Lady Coussins and Lady Drake, made a detailed analysis of some of the issues that we face. Given my former career, I am perhaps better placed than many to reflect on the weaknesses of commercial and business banking in this country. From that experience and from my experience going round this country in the past two and a half years and meeting businesses of all shapes and sizes, there is indeed an issue. It is quite plain that there are circumstances where companies with legitimate financing requirements cannot get financing because the normal templates are being required and inadequate imagination is being applied to the topic.
What I think has happened over not just the past three or four years of the financial and economic crisis but over the past 20 years is that the skill base of business banking in high street banks has been deteriorating. This has happened partly because average career bankers with a reasonable dose of ambition have wanted to head either for the excitements of corporate and investment banking or for the sexy end of the retail banking market and did not see themselves spending the rest of their career in a relationship management role in, let us say, Rotherham. The central functions have responded by disempowering those relationship managers, so we have the result that the noble Baroness, Lady Coussins, commented on. If I have some good news, it is that all the CEOs with whom I have regular dialogue and the heads of commercial banking are focused on this and are determined to address the problem. I hold regular round tables with the banks under the auspices of the British Bankers’ Association. The general problem, I have described. In international trade, in particular, there is even more of a problem with the skill base. They are focused on that. The challenge is that it will simply take time to turn the supertankers.
In the mean time, we need to be doing two things—first, to ensure that as it gets going the business bank is able to challenge them on the way in which business lending is provided and, secondly, to encourage new challengers. There are some new challengers. There are a number of new challenger banks, and a number of noble Lords referred to the various other techniques for financing that are gaining some traction, although I do not believe that those other financing sources can ever be an adequate alternative to, or substitute for, a properly run business banking presence on our high streets. This is an important issue, and we will continue working at it.
Specifically with regard to UK export finance, I can report, first, that there is an awareness issue, to which I have already referred, and secondly, that new products are beginning to get more traction. Like noble Lords, I have been extremely disappointed by the take-up. I put it down to a considerable extent to lack of awareness. We have therefore put export finance advisers in every English region and in Scotland, Wales and Northern Ireland. We had one in place in each of those areas by the end of last year, and I have just authorised a doubling so that it will go from one to two in each of the regions, plus in each of the devolved Administrations. I have also started putting export finance advisers in key locations overseas. We have one in Singapore, we are going to have one in Dubai, and I have authorised the recruitment of further EFAs in other markets of importance to us around the world, in Brazil and in Africa, where I think we need one in the Francophone part and one in the Anglophone part, on the ground at that end, whose job is, first, to help incoming British companies, and secondly, and very importantly, to negotiate sponsor credit lines with the sponsors of big infrastructure projects around the world so that British companies can get access to finance as they seek to win business as part of those infrastructure projects. So we are on that case.
It is early days to tell what quantitative results this is going to have, but there is anecdotal evidence. The most recent was at lunchtime today when I was with the Suffolk Chamber of Commerce, which reported that the presence of the UKEF financial adviser is making quite a lot of difference to a number of its members. I hope that we will have more specific hard evidence when we report next year.
My noble friend Lord Cope raised the important issue of intellectual property. The British Government will continue to work hard at lobbying in international fora for better protection and recognition of intellectual property. As I think the House is aware, we have started putting intellectual property attachés in some of the key markets—China and Brazil—and will look at how that is working in the course of this year. We will consider expanding this coverage at the end of this year if it looks as though it is delivering value to British companies that are worried about theft of intellectual property as they go into those markets.
Finally, I assure the House that I take this report very seriously, as do the Government, and that this is a long-term commitment. If there is anything in public policy which needs to be treated with a sort of apolitical consistency over the years, this is it. As a number of noble Lords have mentioned, we have lived with a constant weak trade position in all of our working careers—I can safely say that. It has not got any better of late; again, one or two comments have been made about the first quarter, which was not good. We suffer from the headwinds from the eurozone. Roughly speaking, our exports are still growing quite nicely to the emerging markets, but they were down in the eurozone. We have a long way to go.
I find myself saying regularly to my ministerial colleagues, to my official colleagues, to the media and to anyone who will listen, that this is a marathon, not a sprint, and we have to stick at this as a national collective effort over at least the next 20 years. The good news is that we can do it. I mentioned that I travel round this country a great deal—I visit each English region and the three devolved Administrations at least twice a year. I have seen businesses from every sector, of every shape and size—some of them the mid-cap companies—and I see companies that are taking on the world. As the noble Lord, Lord Mitchell, said, it is fun to do that. If you are not the kind of person who finds other countries and cultures fun and interesting, you will never be a successful exporter. You find these people across the range of the sectors of our economy. This is not just about high-tech or manufacturing but about all sectors.
Finally—another finally—I say to the noble Lords, Lord Haskel and Lord Mitchell, that clearly the digital economy is becoming more important. We are obsessed with making sure that the support that we provide to small businesses takes into account the increasing importance of digital trading. That is partly about ensuring that they know how to use online trading and that they think about language in the design of their websites—all those kinds of things. It also involves participating in the negotiations within the European Union about the implementation of a digital single market. There are still too many barriers to cross-border digital commerce in the single market and we need to work hard at that.
On international trade negotiations, the noble Lord, Lord Mitchell, asked about the state of play on the US-EU negotiations. The truth is that we have only just started. Clearly, it is as important to SMEs as it is to the rest of the economy that we do our best to complete a successful free trade agreement with the US, as well as with Japan—another major country with which negotiations are under way. This will be a difficult and, I suspect, quite long haul, even though we are publicly committed to achieving heads of agreement by the end of next year if we possibly can. We all know that the prize is huge, and the prize for SMEs is very significant. We should never forget the linkage between that and the importance of realising a full single market within the European Union. If we are to complete a deal with the Americans, they will demand a deal that covers the full single market, so we have a job of work to do, not only to negotiate with the US but to see through the full implementation of the single market.
I close where I started, by thanking my noble friend Lord Cope and his committee for a report that will not gather dust. I am happy to commit the Government to giving a report on what we have done and on further progress in the course of next year.
My Lords, it has been an interesting debate and I am grateful to all those who have taken part, both members of the committee and the others who have come and joined in and for the kind remarks about myself. I would also like to congratulate those who took part in the debate for very nearly sticking to the advisory time limits, which is more than you can say for the previous debate.
The noble Lord, Lord Mitchell, was concerned that the report might sink below the parapet. I know exactly what he means, but as the Minister has just been emphasising, this is an ad hoc committee which has, if I can put it this way, life after death. That is to say, we are promised a further update on these long-term matters. These are not matters which will be solved quickly. We are promised an update and we are promised further debates, next year and the year after. I am very grateful to the Minister for his positive approach to all our recommendations and, indeed, to his duties as a whole, and the way in which he is carrying them out. I do not want to go back over the ground we have been discussing today, but I thank everybody who took part in the committee and in this debate.