HL Deb 23 January 1980 vol 404 cc442-54

3.2 p.m.

Baroness SHARPLES rose to call attention to the problems facing small businesses; and to move for Papers. The noble Baroness said: My Lords, I wish at the outset to thank those noble Lords who intend taking part in this debate. Owing to the interest shown in this subject, it would seem, if I may presume to say so, that a maximum of five to six minutes each would be appropriate within the time limit to which we are committed.

Though I have asked for a debate about the problems facing small businesses, I shall in fact be referring to independent businesses because the word "small" has no precise meaning and has led to much misunderstanding. An independent business means any business which is not a public company, whether it be a little shop employing a couple of assistants or a factory with 1,000 employees. Their problems will be similar, but for the most part quite different from the problems of public companies and nationalised industries. I know the Government intend to carry out their undertaking to improve the environment for independent businesses and are considering various ways of helping them, but time is running out and the matter is so urgent that there is no time for experimental measures.

The situation was very similar in America after the last war; industry was depressed and independent businesses were going bankrupt in large numbers, partly because they found it so difficult to obtain enough equity capital or even long-term loan capital. Although bank deposits were rising and the banks declared that they were willing to finance the needs of independent businesses, they did not do so. Immediately after President Eisenhower came to office, he investigated the situation and finally solved the problem in 1953 by amalgamating several agencies into the American Small Business Administration, ESBA, which changed the whole climate for independent businesses in America. Since then, their independent business sector has prospered. It has made an outstanding contribution to the huge growth of American wealth by developing a mass of new applications for advanced technology.

I repeat, there is no time for us to experiment, so why should we not use those measures which have been tried and proved successful in America since the Small Business Administration was set up for the express purpose of overcoming the very difficulties which face independent businesses in Britain today? I would remind noble Lords that a few years ago many Americans were predicting that the new technology in the form of microelectronics would lead to an intolerable increase in their unemployment. Indeed, this has now been predicted in Britain today.

However, the American prophets of gloom have been proved wrong because independent businesses, particularly those engaged in the micro-electronic industry in America, created a vast number of entirely new jobs which were actually more attractive to workers than the jobs in heavy industry from which they were displaced. I quote from page 31 of the American BIRCH Report of 1979: Small firms, despite their difficulties in obtaining capital and their inherent high death rate, are still, on balance, the major generators of new jobs in our economy and, in slow growing areas, the only significant provider of new jobs". Of course, some of the measures introduced by the American Small Business Administration were less successful than others, but those which have proved outstandingly successful in America should, I submit, be copied here without delay.

I therefore suggest, first, that Members of Her Majesty's Government should encourage those enterprising individuals who start and develop independent businesses by continually stressing in public their value to the community. Secondly, the Government should set up a special department to promote the interests of independent businesses, similar in all respects to the American Small Business Administration. It might well be staffed—and here I know that there will be many people who disagree with me—by combining, into one streamlined administration, the Council for Small Industries in Rural Areas (CoSIRA), the National Research Development Commission and various other development commissions and hoards.

Thirdly, it must be in our national interest to copy the American policy of specifically charging its Small Business Administration with the task of securing that contracts for a substantial part of all Government civil and military purchases are placed directly with independent businesses. Fourthly, it is often asserted that the financial needs of independent businesses can be met by loans from banks and financial institutions. But this is not the best way to finance independent businesses, particularly in the early stages of their growth, because independent businesses need equity capital rather than loan capital, and they need intimate links with their financiers.

Independent businesses are, by their very nature, risky. They cannot cope with a heavy load of loan capital on which they are obliged to pay interest each year. They should be financed by risk capital. To overcome these problems, the Americans devised the Small Business Investment Company, known as an SBIC. Provided an SBIC complies with rules laid down by the Small Business Administration, it can borrow three dollars from a bank for every one dollar of its equity capital. These bank loans to SBICs are then guaranteed by the Government, so the interest rate is only slightly above the Government borrowing rate.

The merit of this scheme is that the banks lend their money to SBICs, and so their loans, quite apart from the Government guarantee, are protected because the SBICs must lose all their equity capital before the money which they have borrowed from banks is lost. It is interesting to note that the total losses sustained by the American Government as a result of guaranteeing loans to SBICs have dropped from 5 per cent. at the end of 1976 to 3.3 per cent. at the end of 1978; but these losses have been more than offset by the extra taxes paid by expanding independent businesses and by the reduction in payments to the unemployed.

The results which have been achieved by the SBIC scheme have been remarkable, not so much because of the actual funds they have made available to industry, but because their existence has shown the banks and institutions, as well as private individuals, the advantages of providing equity capital to independent businesses and has given them a better understanding of the needs of independent businesses. The outcome has been that in America today there is a large pool of private capital available for investment in the equity of small and developing independent businesses.

Fifthly, I urge the Government to make it clear that they would like our Stock Exchange to provide a genuine over-the-counter market similar to that which operates in America. It is said that our independent businesses are reluctant to come forward and ask for help from institutions like ICFC. The reason is that they do not like to be dependent on loan capital supplied by banks or institutions on which interest must be paid whether they make a profit or loss; and, worse still, the institution can threaten to withdraw the loan at the end of a few years.

American independent businesses are not reluctant to seek loans from institutions after they have passed the earlier stage of development which has been financed by "risk" capital. This is because they know that institutions do not want to tie up their money indefinitely, and so in due course will help the independent business to repay the loan by obtaining equity capital from the public through the American over-the-counter market. Our Stock Exchange has so far been unwilling to help unless at least £1 million is required and the company has been earning £400,000 a year. Thus, there is a serious gap in our financial structure between the early stages of an independent business, which can be financed by the founder and his friends, and the stage when the independent business can earn £400,000 a year and seek equity capital from the public through the Stock Exchange. Indeed, many independent businesses will never earn £400,000 a year.

The financial ladder is easier in America. At the first step, their independent businesses are generally financed by the founder and his friends, as in the United Kingdom. The second step in America is when equity capital, supported by loans, is made available by an SBIC. At the third step, the SBIC will obtain a loan from an institution for an independent business which it has fostered.

The gap comes at the fourth step, when the business expands and requires still more equity capital. In America, this is obtained through the over-the-counter market. In Britain it is not yet easily available through the Stock Exchange until the business has become very large indeed.

There is one more American practice that we could, with advantage, copy. We should change the law so as to allow companies to buy back their own shares. The original reason why this was made illegal is no longer relevant. In America, it is legal and it has not been abused, but has attracted a great deal of private capital into American independent businesses. This is because so many people who now earn large incomes and so can accumulate savings, are still nervous of the Stock Exchange, and so are inclined to invest their savings in property, even at inflated prices. In America, such individuals are inclined to invest at least a part of their savings in the equity of expanding independent businesses. They are well aware of the risks. They do not need dividends from such investments. The attraction is that they can take a real interest in the business and, if it is successful, the business will some years later be able to buy back their shares, at assets value, which often shows very handsome profits. This arrangement enables the investor to help an independent business, with the prospect of making a capital gain himself.

I should now like to mention three points which are peculiar to the British scene. The first point is that there are a number of public companies which are entrusted with main contracts for civil and military equipment by Government agencies and can, therefore, rely on regular progress payments. However, they can exploit their buying power by extracting between 90 and a hundred days' credit from their component suppliers, who, for the most part, are relatively small independent businesses. Some of these companies have large credit balances at their banks earning handsome interest, made possible by extracting long credit from their suppliers and so forcing them to borrow from their banks and pay high interest.

This abuse of near-monopoly can be exerted by main contractors on their component suppliers, and it has a most damaging chain reaction. The Government may well claim that they have no power to intervene in private business, but our Government purchasing agencies have the right, as well as the power, to insist that, as a condition of a contract, main contractors shall pay their suppliers within 30 days of invoice, which is normal trading practice. I can supply my noble friend the Minister with examples, should he wish for them.

The second point is that the training levy system should be abolished because it proves a hardship to independent businesses which are obliged to pay, while it is no burden to big businesses which enjoy the benefit without paying. The training levy is I per cent. of the wage bill, and if this proves to be less than, say, £5,000 to £6,000 a year it is not worthwhile for a small business to pay the salary of a man, and a secretary, in order to fill in the paperwork necessary to avoid paying the levy, even though the business probably trains operators, which would entitle it to exemption. On the other hand, a big company with a personnel department can take this work in its stride, and so does not pay the levy.

The third point is that the last Government declared their intention of fostering the expansion of the British electronic industry in order to take advantage of the micro-electronic age. However, according to the Press, a Post Office contract has lately been placed with a Canadian company for £30 million-worth of equipment (known as the CDSS). Bearing in mind that the last Government handed out cash grants to encourage the development of electronic components, and that the prototype of this particular equipment was developed in Britain for the Post Office with the help of many component manufacturers who developed special parts, our electronic component manufacturers have been most discouraged by this news, because the Canadians are more likely to buy their components from America than from England.

Here I should like to pay a tribute to the noble Lord, Lord Lever of Manchester—who will be speaking later in the debate—who understood the points I have tried to make and who in the last Government did so much to improve conditions for independent businesses.

I have attempted to highlight some ways in which the Government could assist independent businesses, but I should also like to suggest an overall objective at which they should aim. For many years it has been said that the Government should encourage a property-owning democracy. This was a grand project, but it has now virtually been achieved. It requires very little further special attention from the Government. I suggest that today it is more important for the Government to concentrate on promoting an equity-owning democracy. A very large part of our population is now able to save money, but the bulk of these savings is, by various fiscal devices, syphoned off into savings funds, insurance companies and building societies where they have, for the most part, been used as loan capital to finance excess Government expenditure, or to finance big business. Very little of these savings has been used to finance independent businesses. Without going into detail, I suggest that the time has come for the Government to adjust the fiscal incentives so as to encourage equity investment in independent businesses, which would promote a more stable equity-owning democracy in which every family could look forward to owning an equity interest in some business activity. My Lords, I beg to move for Papers.

3.18 p.m.

Lord BYERS

My Lords, the House is indebted to the noble Baroness, Lady Sharples, for introducing this very important Motion. I am only sorry that it is not the subject of a long debate and that we are constrained to two and a half hours. There has been an increasing, if slow, recognition over the past three years of the important part which the small firm can play in job creation, in the reduction of unemployment, and in the development of new and profitable ideas. It is also coming to be recognised that a small firm, starting up from scratch or expanding in size, can make an important contribution to the regeneration of our derelict inner cities. It is remarkable, I think, how one or two people with a bright idea, good advice and adequate resources can develop an innovation whose production, packaging, marketing and dispatch gives employment to unskilled workers as the firm develops; and there are many examples of that.

There is no shortage of talent in this country. In fact, there is almost a new Parkinson's Law, which is that if premises are provided at a suitably low rent, they will be filled by a man, or a girl, or both, to create a new business venture. The application of this can be seen in the numerous workshop ventures in London and elsewhere: the Barley Mow at Clerkenwell, the Rotherhithe co-operative, and many others.

However, we should not delude ourselves into thinking that everything is going smoothly. The proper encouragement of the small firm is a complex problem in which many agencies have an increasing part to play, and a great deal more to learn. I think that it was one of the bonuses of the Lib-Lab Pact that we were able, without any difficulty, to secure from Mr. Callaghan the appointment of Mr. Harold Lever, as he then was—now Lord Lever; and we welcome him to our House—as the Minister with primary responsibility for small businesses; and he did an extraordinarily good job. Much impetus was given to the better understanding, and the importance, of the small firm in the regeneration of the inner cities by the leadership shown by Mr. Peter Shore.

There is, however, a great deal which remains to be done if the small firm is to make its maximum contribution to the well-being of our economy. I cannot possibly list all the things which I believe should be done, but let me mention just a few. From the Government, I think that first of all there ought to be a Minister in the Cabinet responsible for ensuring that policies are developed to help the small firm and that other policies, particularly those emanating from the Treasury and the Department of Employment, do not impede or undermine the viability of the small firm. This, as the noble Baroness said, is very much in line with American thinking.

Next, I believe, is the need to make it easier to acquire and develop unused land. There are acres and acres of land in the big cities owned or leased mainly by the public sector—in particular, the railways—and this land would be developed by developers or local authorities if it could be made available without too much fuss and too much bureaucracy. One of the principal needs of the small business is finance. The high level of the minimum lending rate has exacerbated this problem, and, unlike the United States, we are lacking the individual investor—the Aunt Agathas of the world.

The most important action I think the Government could take in this field, and at very little cost, would be to create a climate of incentive for the individual investor to take part of the equity in small firms. That should be an aim of the Treasury policy in this country. One scheme which has been put forward by the London Chamber of Commerce would use the profit-sharing tax legislation as a model, so that individuals would get tax relief according to the length of time they held the shares, with full relief after, say, 10 years. Finally so far as the Government are concerned, may I ask this: What is happening to the money which was to be made available under the Inner Urban Areas Act? Is it achieving results? If so, what are those results, and how are they being achieved?

That brings me to the role of the local authorities. At a time of public expenditure cuts I believe some authorities are reluctant to use this Act, since they have to find 25 per cent. of any money they seek from the Government under the Act; and this, I believe, also applies to individuals. I think it is time, after 18 months' working of the Act, that we had an authoritative statement of what it is achieving at the present time. There are two other ways in which local authorities could help small firms. Rent and rates relief is one. If such a policy were to lead, as I think it would, to more start-ups and to expansions, then the income forfeited in the short term would be very easily recouped in the longer term by the income from the rates. The second method which the local authorities could use to help is to cut out red tape and to increase the tempo of dealing with applications, particularly those in the planning field.

Apart from central and local government, there are two other areas with an important part to play in helping the small firm. There are the voluntary agencies. I am not going to name them all, but a good example is the Action Resource Centre, which, in addition to its other activities—and they are manifold—has developed a small business counselling service in Islington; and already, in a few months, it has dealt with something like 150 cases. It looks like a potential success. It is manned by people seconded from big business, and it helps small companies with advice. It does not manage and it does not provide finance, but it steers applicants in the right direction and deals with them objectively and with candour; and this service is much appreciated in the community.

I would not be doing justice to the private sector if I did not refer to the real contribution which some of our leading companies are making to the combined task of aiding the small firm and helping with the inner city problems. I have been closely associated over the last three years with the development of the concept of an enterprise agency through which large companies can help small companies to start up and to expand, and, working closely with central Government, local government and the other, voluntary agencies, make advice available and give help speedily and effectively. The enterprise agency with which I am most closely associated is the London one, and this has served as a pilot model. There are plans, I am glad to say, for several other cities to adopt a similar pattern. It was launched on 11th April 1979 with the object of identifying projects worthy of support, to provide a link with central and local government and to give help and advice to existing firms and start-ups. It is already helping firms to find premises. While it does not provide finance, it will put firms in touch with financial sources and help them in the preparation of their cases and their applications. It also has an important research function.

Already it has become clear that big business can not only help small business but, in the process, help themselves. They help themselves by broadening the horizons of the employees they second. It is quite remarkable the effect on a seconded employee when he is given responsibility for running or helping in a counselling service. But it is not only that. In this way big business obtains a clearer view of the problems of the community. The problems of the small business, my Lords, are not just the responsibility of Government. They can be solved only if all the relevant agencies, public and private, make a positive contribution.

3.26 p.m.

Lord GRAM

My Lords, I join the noble Lord, Lord Byers, in thanking the noble Baroness, Lady Sharples, for giving us the opportunity of this debate, because it enables us to recall that increasingly today in business—and, indeed, in public affairs generally, not least in local government—we have all become the victims of bigness. Economists have rightly taught us about the economies of scale, and those economies are of course real and important. But the economies of scale are by no means universal. Even when they can be clearly identified by accountants there are countervailing factors on the other side—factors of bureaucracy and of imperfect communication, which seem to bedevil large organisations and very often result in human frustrations. It is especially true that where the market is local and personal the big organisation tends to fail, and it is here, therefore, that in my view the need for the small business is most obvious. Increasingly, when something in the home goes wrong and needs repair, the housewife finds it more and more difficult to get prompt service; and it is the small firm, and perhaps only the small firm, which can benefit from what I would call economies of small scale. The small firm benefits from being small because it can respond more effectively than a big firm to the local and personal needs of its customers.

We have heard from the noble Baroness, Lady Sharples, and from the noble Lord, Lord Byers, however, that small firms suffer from handicaps in comparison with large organisations. I think those handicaps really fall under two headings: handicaps in relation to finance and handicaps in relation to know-how, particularly when a small firm is starting up. At that time it has no financial record, and perhaps little collateral, with which to impress the bank manager; and, as to business know-how, even the best of small businessmen cannot be expected to have all the knowledge that modern business life requires. He may be first-class in organising the manufacture of an excellent product, but he may not have the knowledge (or, if he has the knowledge, he may not have the time) to deal effectively with marketing and publicity, with taxation or legal matters, with the form-filling to which the noble Baroness referred, or, indeed, with detailed accountancy. He has to try to be a kind of Poo-bah, covering all these things, or else buy in professional services, and this puts him at a costly disadvantage compared with the big firm, which can provide such services for itself internally. In other words, the small firm, because it is small, is faced with what I would call an "organisational minus" by comparison with its larger competitors. Therefore, what we have to look for, I suggest, on behalf of the small firm, is an "organisational plus" to counterbalance that minus factor.

I believe—and it is my own personal philosophy in my public life—that that plus would be found if small businesses would organise themselves as co-operative societies. They can do so either under the Companies Act or, preferably, under the special legislative framework provided by the Industrial and Provident Societies Act. There are several hundreds of examples in this country of this having been done successfully and many hundreds more in Europe. I have in mind, for example, a group of workers made redundant when a Courtaulds factory closed at Skelmersdale, who had the initiative to set up their own wood-working co-operative. A more local example is that across the river in Lambeth where a group of ladies have successfully organised an office-cleaning co-operative. These people are finding what I suggested they need, an organisational plus". Working in a co-operative team, they know that they can join in making business decisions and that they will benefit personally from the greater productivity of the team as a whole.

This industrial co-operative movement is growing at an encouraging rate. It is a movement which can be acceptable and welcome to people of different political ideologies. I am glad that the present Secretary of State for Industry, Sir Keith Joseph, is on record in another place as favouring the growth of a producer co-operative sector; and he and I had a constructive exchange recently when I had a talk with him in my capacity as chairman of the Co-operative Development Agency. Co-operative societies can take many forms. I believe that they could help overcome many of the problems towards which today's debate is directed. It is not just the business itself which can be a co-operative; there can also be a co-operative of small businesses which can greatly benefit the individual enter- prises by providing them with common services. I know, for instance, of a co-operative society, the members of which are the proprietors of independent toy shops. Their co-operative provides them with a central warehouse and, by bulking their purchases, gives them the benefit of discount terms which would otherwise not be available to them.

What all this means, I suggest—and one could give many examples all over the country—is that by using the method of mutual aid, which is at the heart of the recognised code of co-operative principles, small businesses can get the best of both worlds. They can have the benefits that I have described of the individual enterprise in meeting the personal needs of their customers; that is, they can get the benefit of what I call the economies of small scale; but by working together and supplying themselves co-operatively with their common needs they can also get the benefits, the economies, of large-scale operations. I believe that, because of these considerations, this method of co-operative working, which is very flexible in its application, deserves greater attention in this country than it has had so far.