Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 9:17 pm on 10th March 1999.

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Photo of Colin Breed Colin Breed Liberal Democrat, South East Cornwall 9:17 pm, 10th March 1999

I shall take a few moments to deal with the small business aspect of the Budget, and I welcome the new tax regimes. However, I shall concentrate on the venture capital side. Last year, the Chancellor said that venture capital trusts would be reformed, and that initiative will continue this year. Frankly, in the past couple of decades, various Governments have recognised that small businesses are generally under-capitalised. They also suffer from far too much red tape and bureaucracy and from not being able to get skilled employees at the right time.

On under-capitalisation, it has always been difficult for Governments to inject public money into private businesses, even though small businesses find it extremely difficult to get hold of that capitalisation to provide them with the stability that they need to allow them to grow successfully and provide employment opportunities.

Far too many small businesses are just about managing. They really are under-capitalised and more than afraid of going to their banks to borrow money. Even if they did so, the banks would not be able to provide the sort of real capital that would give the businesses the stability that they need.

Venture capital trusts have perhaps concentrated on high-tech industries, which offer the opportunity of making not exactly a quick buck, but not a slow one either. They have supported businesses that have the opportunity of a meteoric rise. Such businesses are relatively small and, by their very nature, do not employ many people. Most high-tech businesses have a low ratio of employees.

How are we to help the majority of small businesses to get the capital that they need? I suspect that most of the help has to come from the private sector. Venture capital companies cannot provide low levels of help for small companies cost effectively. Amounts under £250,000 are difficult to invest and expensive too. However, the fact that venture capital companies and individuals find it difficult to get out of the investment when they want to realise some of the profit is one reason for those high-risk reward profiles. The reason for that is largely the huge hurdle between small private companies that have some outside investment and their ability to be listed on the stock exchange or even sell out to another company.

I hope that the Government—perhaps through the regional development agencies—may consider an opportunity to provide an interim step. We have heard from the Prime Minister that he wants us to consider American models. One of those models can be found in what is called the over-the-counter market. It offers an opportunity for private individuals, small venture capital companies and regional operations to invest in relatively small businesses that they may know and support. They may know the product or management. They may genuinely support a company that they believe to have good opportunities for growth.

Such a company cannot go to the stock exchange, and it is not cost effective to get in small amounts either from venture capital trusts or from small venture capital investments by bigger companies. The opportunity exists for private individuals and regional investment companies to support indigenous small business—not necessarily high-tech business, although they could be included.

I believe that a number of private individuals would welcome such an opportunity. Many people who are reasonably well off and who have decent investment portfolios sometimes find it rather boring to receive a return on their investments that is broadly the FTSE average. They would like something a bit more spicy for their money or something more local with which they can have a closer connection. Yet there is no such opportunity in the United Kingdom.

Some years ago, the Conservative Government tried to provide business expansion schemes. I am sorry that the schemes were largely misused for property companies, in which there was little risk, simply so that a tax shelter could be achieved for investment. That idea was not successful, but that does not mean that the intention was not right. I believe that opportunities must exist between the situation in which individuals put relatively small amounts of money into family businesses and that in which venture capital companies seek to invest the £250,000 or £500,000 that would make their investment both cost and time effective.

I am talking of investment of between £50,000 and £250,000 in companies that have been going for perhaps two or three years and which have an opportunity to expand. That level of investment simply is not available. Because of the nature of venture capital trusts, it is not likely to come from them. Such investment is equally unlikely to be attractive to some individuals because of the lack of opportunity to move the company on to the next stage and to realise a return on their investment.

I hope that the Treasury will examine the American models and consider how regional development agencies might be able to assist local or regional over-the-counter markets to provide opportunities for individuals to invest in small companies that they may know or wish to support. They could provide an added opportunity for real investment that would cure the under-capitalisation of much small business.

Successive Governments have recognised the problem, but have found it difficult to provide a model for putting public money into private companies. The Government must try to provide the means by which private individuals may more successfully promote and invest in small businesses.