Financial Institutions

Part of Bills Presented – in the House of Commons at 11:51 am on 23rd January 1981.

Alert me about debates like this

Photo of Mr John Loveridge Mr John Loveridge , Havering Upminster 11:51 am, 23rd January 1981

I was interested to hear the hon. Member for West Bromwich, West (Miss Boothroyd) emphasise the "higher gearing" of companies abroad. There is no doubt that in this country the shortage of investment has had a profound effect on the capacity of our industry, particularly our small industry, to expand and to create the jobs that we need so urgently.

I welcome the initiative of my hon. Friend the Member for Winchester (Mr. Browne) and his important contribution, to which I hope that the Government will pay much heed. I should also like to associate myself with what my hon. Friend said when he paid tribute to the right hon. Member for Huyton (Sir H. Wilson) for the work done on the reports under his chairmanship. The affection that the House feels for the right hon. Gentleman comes from, for example, the fact that he has stayed on until now to listen to the debate. That is a courtesy to the House that adds to the regard felt for the right hon. Gentleman. We are grateful to him.

As chairman of the Conservatives' smaller businesses committee, I am pleased to be able to take part in the debate. I wish to refer particularly to the part of the report dealing with small businesses—the interim report on the financing of small firms, Cmnd. 7503, published in March 1979. The debate is particularly convenient, because my Small Firms Expansion (Inquiry) Bill, which covers much similar ground, was presented to the House last Friday. I have the honour to be supported on the Bill, amongst others, by my hon. Friend the Member for Luton, East (Mr. Bright), and I am glad to see him here today.

In the introduction to the small firms part of its report, the Wilson committee states that it found: virtual consensus in the submissions we have received that there are problems with the arrangements for financing smaller businesses. My committee found the same.

We should have regard to that in the context of the admirable new report published by the Economist Advisory Group Limited for Shell (United Kingdom) Limited and written largely by Mr. Graham Bannock. After a study of seven other nations it states: the scale and range of measures to promote small business in Britain is tiny compared with all the other countries studied. That is a tragedy for a nation once described as "a nation of shopkeepers". We must wonder whether our industrial backwardness compared with that of some other advanced countries—considering the base from which we started—does not spring from the fact that our smaller business sector has been neglected. It may be that our large business sector has gone ahead on a natural cycle from the Industrial Revolution, and that therefore we have, in a sense, moved forward in the cycle, so that our large institutions have grown, leaving the small sector behind. However we will prosper at a terrible price if we destroy the seedcorn of the future, which must come from the smaller and medium-sized firms.

I am glad to welcome the recommendations in the report, but it refers to the fact that reliable information about the number of small firms in this country is surprisingly meagre. It says: The general impression is that the total number of small firms in the UK has now reached something of a plateau after falling virtually continuously between the 1920s and the end of the 1960s". There is, I am glad to say, some sign of a renaissance, because more small firms are being founded, partly from the preliminary encouragement contained in the last Budget, and we shall hope for more in the next Budget.

The report tells us that small companies were found to be reliant on internally generated funds for about 65 per cent. of their total funds during 1973–75 and on bank borrowing for a further 15 per cent. That bank borrowing may be growing too much for the safety of some firms. For example, in agriculture, we find that the dependence on borrowing is up by 75 per cent. during the present recession. That is an example of how small firms are increasingly indebted to the banks.

As banks often require security—even the home of the proprietor—to be pledged, there must be a greater sense of nervousness among proprietors about their funds. They want not so much cheaper money as money that is secure and that they know will not be taken from them suddenly, leaving them with a financial crisis. Any helpful investment finance that the Government or other bodies can generate must have security. Any loan should not be withdrawn for reasons unconnected with the success of the business run by the borrower. In this respect my committee considered at length the prospects of the introduction of a loan guarantee scheme, which we believe could help. I shall return to that later.

There is no doubt that there is a shortage and need of funds for expansion. The question was considered by the Bolton committee in 1971, which concluded that the gap precisely identified by the Macmillan Committee had largely been filled by the ICFC and other institutions but that small firms were nevertheless still disadvantaged in seeking external finance. On the question of finding equity for new businesses, the Wilson report says: Few new businesses now have any source of equity other than that provided by the proprietor himself, or by his immediate family". there is a grave difficulty. Fewer and fewer proprietors or their families are in possession of substantial funds. As the right hon. Gentleman said, the nature of fund holding has changed. Pension funds, insurance companies and similar bodies are the main sources of the bulk of money that can be lent. Banks also have considerable assets and money available. These bodies have one thing in common—a duty to ensure that the money that they lend is safe. Banks also have a duty to ensure that they can provide cash across the counter to their customers.

For prudent reasons, therefore, none of these bodies is anxious to pour money into the new venture capital investments that the country so urgently requires. We must find a way to ensure that this capital is available. On page 69 the Wilson report says: Illiquidity is the foremost barrier to investment in small companies. That point arises again and again, yet successive Governments do not appear to have heeded it. More is the pity, because small companies are a vital sector of the economy. In the two surveys on the Nottingham manufacturing area, the committee found that the level of security demanded by banks was typically set in the range of net assets to borrowing of 2 to 1 or 4 to 1 compared with Europe, where banks were said to be prepared to invest much higher gearing ratios.

Arising from that, one of the report's recommendations is that a publicly underwritten loan guarantee scheme with a limited subsidy element and some part of the risks retained by banks should be set up on an experimental basis as soon as possible. I welcome that. However, I fear that time has already moved on. If there is to be full employment again before the ravages of cyclical unemployment become worse, the Government must activate the small business sector now. We do not have time for any experiment. The money must go into investment today—this year.

I am concerned about another recommendation, which suggests that there should be a subsidy element in the loan guarantee scheme. No Government seeking to save money will be anxious to a subscribe to subsidy element. The small business sector does not need a subsidy element. What is needed is the knowledge and security that the money cannot be called back. Most bank lending in this country is nominally repayable on demand. Banks do not often make that demand, but the proprietor of a business does not know when such a demand may be made. In respect of security, the loan guarantee scheme suggested by my committee and elsewhere has a vital and substantial role to play, and hope that the Government are prepared to try to persuade banks to be associated with it.

The detail of such a Government-sponsored loan guarantee scheme must be administered by the clearing banks and similar institutions. It would be wrong to try to do it through a Government agency. Only the banks have enough knowledge of the intimate details of businesses throughout the country to handle the applications. It is important that the banks should have themselves to be responsible for part of the moneys advanced—say, onequarter—so that they take the risk for that part of the loan. Otherwise, they may be tempted to lend too freely in the light of the guarantee given by the Government, which I believe should be for about three-quarters of the loan.

The loans are especially needed by small firms that have expanded rapidly—perhaps with up to £200,000 a year turnover soon after being founded. They want to expand to double that turnover, but the proprietors may have no assets to pledge, or any assets that they have may have been pledged or spent in getting the firm off the ground. They apply to the banks which agree that they have sound businesses, making good profits, but say that there are limits to what they can lend without security. That is understandable, because banks have a duty to pay cash over the counter. A bank will turn a proprietor to some form of agency that will advance money against equity. But the proprietor wants to have his hands on his own ideas and to create in the way that a painter creates a picture—and there is a strong similarity between a small business man and the growth of his firm and a creative work of art. He asks himself "Do I want to give up the equity in my business and lose part of the control?". Often the answer is "No". Indeed, my committee received evidence from one financial institution of a number of cases where it had been prepared to advance capital against equity, but the firms had replied "No, we would rather stay small than accept the money. We are not prepared to give up the control of our business".

In that connection, the remarks of my hon. Friend the Member for Winchester were important. We need some form of scheme in which the money advanced by the financier can be bought back by the business if it succeeds. In that way, any objections to accepting outside equity, because of the temporary basis, vanish. It is better for the financiers themselves that some such arrangement should become part of our normal practice. Their duty is to handle money, not to become personally involved—either directly or through their subordinate agencies—in risk-taking enterprises. As soon as they do that they become unsafe financial institutions.

It is in the same context, therefore, to be greatly welcomed that one of the clearing banks has instituted a scheme called royalty lending, where they will not take equity in such circumstances, but will instead take a share of the profits. Such schemes may have come about because in the present climate of politics so many people have stressed the need for money to finance small businesses. Unfortunately, these schemes are coming into operation only on a minimal scale. The Government should encourage the banks by a loan guarantee scheme, such as that put forward in the Wilson report—perhaps amended as I have suggested.

Another important recommendation in the report concerns the need for the creation of a new type of institution, the small firms investment company. In a sense, this is similar to what has been described colloquially as "inducing Aunt Agatha to subscribe in business." This would be a machinery for doing this. Rightly, the suggestion is made that such a small firms investment company should be exempt from taxation on capital gains.

Taken as a whole, the report on the financing of small firms is a remarkable document. But, as my hon. Friend the Member for Winchester said, it is one on which we require bold and fast action. My hon. Friend spoke of the need for a "bombshell" change in our attitudes, and he was right.

The Shell report, which I mentioned earlier, contains some important figures. It tells us that the number of small firms relative to the population is much smaller in this kingdom than in any of the other six countries surveyed. There is a table headed Number of small firms per thousand of human population. If the United Kingdom is the index base of 100, we find the highest ratio in Holland, where it is 370. In the middle we find the United States, with 157. But that is on a very low estimate of small businesses in the United States, where again there are substantial variations in the statistics available. One figure, gives 8 million small firms. Another gives 14 million. But, even on the smaller figure, it is clear that the United States is vastly ahead of us. Most notably, we should remember, in the light of the fast growth of Japan—which is the sort of growth that we ourselves now need—that Japan's small firm population of 5·4 million compares with our own of 1·3 million, which, taking into account the population of Japan, is double ours per unit of population. That should be our target.

If we turn to manufacturing employment and compare the seven nations concerned we find Japan at the top of the manufacturing employment list, with 66 per cent. in small establishments employing fewer than 200 persons, whereas the figure is only 29 per cent. in the United Kingdom. Those figures relate to 1975. But, again, we are at the bottom of the list, and we ought to have special regard to the fact that the ratio is so immensely higher in Japanese manufacturing industry than it is here, because it is our manufacturing industry which has borne the brunt of our comparative decline, and it may be the fact that we have too few small and medium-sized businesses which is at the very heart of our decline.

I am glad to note that there is an increase in the view that the smaller and medium-sized firms should be regarded as being those employing up to 500 staff. Two hundred staff is generally taken as the limit now for small firms, as it is in the Bolton report, and 500 is often taken in Europe for medium-sized firms. It is important to distinguish between the two. In this kingdom of ours, there is a tendency for small firms, which grow rapidly, to grow up fairly quickly towards 100 staff. However, once they reach that level, they stop growing. The proprietors lose interest in pushing them on. In the other countries in the survey that I have mentioned there seems to be a tendency for the numbers of staff to grow fast, up to 300, before the proprietors lose the incentive to surge forward.

The Massachusetts Institute of Technology survey has been mentioned many times. In that survey it was found that in America, over a long period, two-thirds of new jobs came from small firms employing fewer than 20 staff. Most of those were firms that had not long been founded and were therefore fast growing. From those statistics, it is not generally realised that the figure of under 20 was taken at the start of the MIT survey. Many of the firms had an up-sweep of staff into the hundreds. That up-sweep created the statistic that showed that two-thirds of the new jobs had come from small firms.

It is therefore of the greatest importance that we should concentrate on rescuing our medium-sized sector. I believe that the Government did much in the last Budget to encourage the founding of the smallest firms. However, I am concerned that the medium-sized firms—and perhaps I should declare an interest, because I run a medium-sized firm—should be cherished.

In the manufacturing industry alone, whereas in 1973 there were 71,000 firms employing up to 99 staff, in the next range, employing from 100 to 199 staff, alas, there were only about 2,800 firms altogether. That is a pitiful scale for a great manufacturing nation. The Government should act on that matter with the utmost urgency, or we shall find that there is no medium-sized sector left.

Medium-sized firms are especially suited to one specific activity—the turning of science into production. The smallest firms do not have the capital or funds behind them even to attempt to use new science to develop ideas, except in special sectors where some of the smallest firms have a commendable record.

The largest firms are not always interested in having other than a clear, clean production line with low costs. Thus, the medium-sized businesses are best adapted to changing ideas into practice. In Britain it is notable that, associated with the decline of medium-sized firms there has also been a decline, widely commented on, in our capacity to translate the inventions of our scientists and their discoveries into practical business endeavour. Even with new ideas that originated in Britain, other countries have used those ideas, but we have not. I believe that that decline is closely associated with the decline of our medium-sized firms.

The Government should consider three aspects in particular. The first is to reform capital taxation, which is a real inhibition for firms to increase above 100 staff. In this regard, a scheme associated with the name of my hon. Friend the Member for Luton, East proposes that the Government should issue tax credit certificates for the payment of capital transfer tax. Tax credits have been a normal way for the Government to obtain money. It is beneficial for them to get cash in advance. In order to save his business when he dies it would be beneficial also for a future donor of money, contingent on a capital transfer tax arising on his death, to be able to set aside money so as to be sure that the tax would be paid. However, the tax certificates paid for would have to be non-aggregable with his other estate to make the scheme work.

Such certificates would ensure that the Government had money in advance and that the life of the firm after the death of the proprietors could be carried on. The Government should look closely at that, as well as cutting in half the effective rates of capital transfer tax, which can be totally destructive of small firms owned by two, three or four people.

Capital gains tax should cease to be a tax on inflation. It should be a tax only on improvement—on real added value. That is something that we may hope to see in the next Budget if the Government are awake to what we are saying.

Another aspect consists of the so-called "Aunt Agatha" schemes. Unfortunately, "Aunt Agatha" has not much money left, so it is doubtful how much cash will come from schemes designed to give her a greater interest in paying money into small firms rather than into insurance companies, pension funds or building societies, where she is tempted to go because there is a tax advantage compared to putting money into a small firm. We should ensure, as my hon. Friend the Member for Winchester said, that investment money is relieved against taxation where it is put to the purpose of production and productive output. It is not enough merely to say that we will relieve in that way machinery which is bought.

It is not only machinery which is needed to run businesses. More capital is required merely to cover the cash flow and growth costs—the gap between receiving cash after sales, and spending cash on raw materials before manufacture. Why should not that gap be covered in the same way as machinery is? Why does one part of the business deserve Government support but not another? That offends common sense. However, I hope that all those "Aunt Agatha" schemes will be pursued in the Budget and that outside investors will be encouraged to put their money into small businesses.

As I have said, we want a loan guarantee scheme to increase the banks' interest in investing in the area where there is fast growth but no security available. That could have a profound effect without cost to the Government other than the clerical cost of setting up the machinery. If such a scheme were covered by an insurance premium of, say, 2 or 3 per cent. above the normal interest rates charged by the bank, that should adequately cover any losses.

All that is needed is the Government's effective consultation with the banks to get their co-operation. That would not be wanting if the Government were prepared to do it. Whatever happens, it is no good doing it on a "mini" basis. The country's needs are urgent, and any schemes must be carried out on a substantial scale—a scale that will awaken the whole land to the needs.

How many jobs could we create by such a process? We need at least 2½ million. Perhaps half of those could comfortably come from the natural expansion of the economy after inflation has been conquered, but it is a difficult world at the moment and it is doubtful whether natural expansion could easily provide 1¼ million new jobs. Apart from that, investment in large firms will create difficulties, because investment money will go into automation and robot machinery, and that will increase the number of those needing jobs. The small firms, therefore, must fill the gap. There is no one else to do it. The Government must recognise that and make sure that the gap is filled and that the small firms are not denied the weapons to enable them to do so.

If every small firm took on one man that would create over 1 million new jobs. Perhaps it is more practical to think of some of them taking on 10 men and some of them taking on none. Even so, more than 1 million jobs can be found through the encouragement of the small business sector.

Equally, jobs can be found in the medium-sized company sector. Even with the diminished number of medium-sized firms in manufacturing—2,800—if these are added to the other medium-sized firms in service industries around the country it would be possible to provide the kingdom with another 250,000 jobs.

I am therefore pleased to be able to tell the House that my Small Firms Expansion (Inquiry) Bill asks the Government to appoint a committee of inquiry to examine how the small business sector can create a large number of new jobs. I do not apologise for repeating myself about jobs. Unemployment is painful and dreadful. We have here a way of curing it in association with the natural uplift of the economy after inflation is conquered.

My Bill calls on the Prime Minister herself, in view of the urgency, to appoint the members of the committee of inquiry. It asks for a small firms research institute to be set up related particularly to the application of new inventions. The existence of such institutes in other countries is part of the reason why their small business sectors contribute more to the output of their nations than ours does. Although we call for the research institute to establish more facts, we have enough information now for the Government to take the necessary measures to ensure that jobs can be created by small firms.

My Small Firms Expansion (Inquiry) Bill calls for inquiry into many financial aspects, affecting small firms, one of these being the appointment of a loan guarantee board along the lines that I have already discussed. I emphasise that it would be self-financing, because I want the Government to press ahead and get on with setting up the board. I believe that there is improved bank lending for smaller businesses because of the efforts of those who have spoken out about the need for it. Already the banks are responding, but it is not enough. The scale needs to be improved, and the Government need to be active to make sure that it is enough.

I have already explained why there should be a reduction of capital transfer tax. For the medium-sized firms there is the problem of corporation tax. What an extraordinary thing it is. The system of corporation tax relief gives small firms relief down to 40 per cent., and we are grateful for that. It charges 52 per cent. for large companies. But for medium-sized companies the system, for a substantial part of their taxation, charges 66 per cent. corporation tax. Surely that is daft. It discourages any small firm from going through the medium barrier to become a large firm. If the Government say that they cannot afford the money to change the scale they can alter the whole scale. They can give less benefit to the upper end available to small firms so as to make certain that there is at least a straight line connection right through from the relief of small firms to the relief available for large firms. It is plainly unwise to have a higher rate for medium-sized firms, if we want firms to grow.

My Bill calls for a graduated system of corporation tax to be examined, with a view to it being less for the very small firms, with perhaps, exemption on the first few thousand pounds. The question of stock relief also needs re-exmination. The nation needs high output, not high stocks. There is the possibility of the Government giving special relief for early years in trading, for "Aunt Agatha" type investment reliefs including capital gains tax roll-over relief for money moved from listed investments into small firms.

There are 50 measures in the Bill, which has been closely examined by members of my committee and derives from many consultations and documents. I hope that the Government will look at the list and see whether they can bring forward a large number of the measures relating to financial matters for the forthcoming Budget.

Small businesses, too, should have a proper share of public contracts as they do in other countries, especially the United States. They should also have some protection against the economic malpractice of delaying payments to them while at the same time forcing them to pay their debts quickly, often under the threat of withdrawal of supplies. Government agencies, local agencies and large businesses can help greatly in that respect.

Pension rights and their transfer also need careful examination. Although there are arrangements for transfer at present, they often result in a substantial loss to the pensioner if he moves from a large firm to start up a small firm. The national insurance surcharge, as well, has annoyed many small businesses because it is effectively a tax on employment.

All those and many other matters deserve exacting consideration but, even more, they require urgent action, even if the Government were to make some errors in their action due to speed, because we have a high level of unemployment and we must do something about it. It is better to get on with it now than to wait. In that connection I ask the Government to ask themselves whether the machinery of government in this country is adequate to enable small and medium-sized firms to play their full part in the economy and whether we should have an independent Department of Government, along the lines of the Ministry of Agriculture, to ensure that there is rapid growth and an effective application of modern science to the small and medium-sized sector.

It is not enough to have a junior Minister within a large Department, particularly when he has additional responsibilities apart from small businesses and when small business matters cut across the whole area of government. Most Departments have some connection with small businesses. However, that is a matter for the Government, and however they manage their machinery they must somehow get on with the job of ensuring that capital is injected into the small business sector, which is the only sector that can conquer unemployment. My committee believes that that is just what it can do.

Those of us who are connected with the further revival of small businesses give to the Government the weapons within my Bill and within the list in the report by the right hon. Member for Huyton and all the other reports that have latterly come out in relation to small business. There is available to the Government the mechanism by which they can help to create full employment again for this kingdom. I beg them to act, and to act now.