§ 3.10 p.m.
§ Viscount Caldecote rose to call attention to the contribution made by small businesses to the economy of the United Kingdom and the importance of stimulating growth in this sector; and to move for Papers.
§ The noble Viscount said: My Lords, I am delighted that there are to be two maiden speeches in this debate. I know we are all greatly looking forward to hearing them. Before introducing this Motion standing in my name I must declare an interest in that I am chairman of a small company employing four or five people.
§ There is no doubt that small businesses make a most valuable contribution to the economy. Those employing fewer than 20 people employ more than one-third of the private sector workforce and account for about one-quarter of the GNP. Those employing up to 200 people employ nearly 60 per cent. of the total. Some recent research has shown aggregate job creation in small firms to be remarkably stable throughout changes in the economic cycle. However, size itself is less significant than the structure of small independent businesses in determining the special contribution which they make to the economy.
§ The great majority of small businesses are managed by their owners, so management is free to concentrate solely on the long-term interests of the business without fear of takeover and other pressures. Many founder shareholders have sunk all their savings, or a legacy from the mythical Aunt Agatha, in the business: others less fortunate have mortgaged homes or given personal guarantees to banks to raise the initial investment. So these owner-managers have a strong personal commitment to the future success of their businesses.
§ At one end of the spectrum achievement may be no more than bare survival providing minimum personal income and constant worry over many years. At the other extreme, healthy profitable growth brings real 183 prospects of sale or flotation in the foreseeable future and the dream come true of making that first elusive million. It is the prospect of the rewards of success that encourages enterprise, hard work and risk-taking in these small companies. Those rewards, fairly earned, must never be denied to the successful by taxation or regulation.
§ Although life in independent small companies is tough, it is also relatively simple, with clear objectives, short lines of communication and close personal relationships as well as inbuilt motivation. These attributes give such companies many advantages, particularly in flexibility and quick reaction to changing market needs to which owner-managers are very sensitive. There is no inhibition to taking a long-term view of investment and growth. I remember a good example of quick reaction in a small company making knitted socks in which 3i had an investment. Sales were falling because customers disliked the patterns, so the joint owners, who knew every detail of the manufacturing process, worked flat out through a weekend to reset the machines for new designs. Soon the socks were selling like hot cakes.
§ An example of being able to take a long-term view bringing ultimate success is Oxford Instruments plc, which was founded many years ago in 1961 by a scientist who brought an idea out of an Oxford laboratory and developed it into the substantial, publicly quoted company of today. Long years of hard work and little financial reward were eventually crowned with success by flotation in 1983. That success owed much to singleness of purpose and independence of ownership. But although these factors give strength to small companies, their vulnerability to hard times is much greater than that of a large company. They usually have little fat to shed through cost reductions, nor family silver to sell. Accommodation, plant and equipment are often leased and as they are normally single-product companies there are no fringe businesses to sell off to raise cash and see them through a financial crisis. That puts an even greater premium on good management, especially cash control. That also applies in larger businesses.
§ There is evidence that a change in the optimum style of management occurs as the company grows to employ more than about 10 people. So training for managers, and advice obtainable from training and enterprise councils and similar sources, is of great value. I remember once attending a meeting of an enterprise agency. I spoke to many of the young people who were present who had started their own businesses. Without exception they all said the advice they had received from the enterprise agency was of great importance to them in making a success of their businesses. They said that advice was a far greater help to them than help in raising money and other such help. Management training for people in small companies is of the greatest significance.
§ It is important to appreciate the strength and the problems of small businesses so that they can be given the most effective support and encouragement, for their value to the community and contribution to the economy is immense. Not only are they the acorns 184 from which great trees such as Thorn, Tesco, Oxford Instruments and Trust House Forte grow within a single lifespan, but they are also substantial job creators; for virtually every investment in a small company is for growth, creating job opportunities, whereas the objective in large companies, particularly in manufacturing, is very likely to be the reduction in labour costs and consequently a smaller number of jobs in the admirable pursuit of greater competitiveness.
§ Small companies also play a vital part as specialist suppliers to big companies. That fact is not always as well recognised as it should be in terms of the treatment they receive. Therefore, it is encouraging that in the past 13 years of Conservative government we have seen valuable progress in the growth of small companies. Between 1985 and 1989 they created about 1 million new jobs; that is twice as many as in larger firms. Self-employment has increased by 75 per cent. since 1979. Virtually all of that has occurred in small firms. Most significantly, the number of small manufacturing businesses rose by an average of 5,000 per year between 1979 and 1990 compared to 1,500 a year in the previous 16 years.
§ Of course small businesses have not escaped the effects of the deep recession and lower interest rates are as welcome to them as they are to larger firms. Although badly managed companies of whatever size are obviously most likely to fail, even well-managed small ones can all too easily be put out of business by circumstances entirely out of their control, such as rapid changes in the economic situation. Even so, over the past three difficult years new business starts have continued at a rate of over 400,000 a year.
§ The enterprise allowance scheme has been of real value in providing income support to entrepreneurs during the difficult initial stages of a new business. In 1991–92 new starts supported by this scheme averaged about 1,000 per week, which shows what a help it is for these young people who are starting new companies to have an income through the enterprise allowance scheme while they are building up their businesses. However, in spite of the success of this and many other schemes designed to help small companies, there are many problems still to be tackled and much more support is needed for small companies if they are to play the full part in society of which they are capable.
§ Probably the most important way forward is the continuing deregulation and removal of red tape. In view of the limited management resources of small companies it is absolutely vital that they should be concentrated on managing the businesses and not be diverted by protracted negotiations and complex paperwork when seeking support from the various schemes available. The same applies to negotiations with banks and other financial institutions.
§ Similarly, large company customers should not take advantage of their strength to delay payments beyond the due date nor to rely on legal niceties to disclaim responsibility for payment which a small company cannot afford to challenge. The CBI's code on prompt payment is most welcome, and I was glad that it was relaunched at the CBI's national conference this week.185
§ Two further ideas to help solve the problem should be actively considered. Small businesses should be allowed to pursue claims up to £5,000 through the small claims court procedure, and the professional accounting institutions should include in their codes of professional conduct a requirement to promote prompt payment to small companies in a responsible way.
§ In the interests of helping managers of small businesses to use their time most effectively, I also welcome the plans to establish "one-stop shops" recently announced by the President of the Board of Trade. There they will more easily be able to discover which support schemes can best help them. If those shops are to be fully effective the whole procedure for participation in the schemes must be simplified and the time from application to implementation greatly shortened, even if that offends against the Treasury principle that every transaction must be fully documented.
§ I hope, too, that those shops will also be able to give clear guidance on the sources of finance most likely to meet a small company's needs. In that connection, the business expansion scheme has performed a most useful function in filling the equity gap between the limited funds available to the founders of a business and the lower limit of investment which venture capital funds will make—around £150,000.
§ I am concerned that the BES scheme is to be phased out at the end of 1993 without any plans having been announced for its replacement. BES investment in approved small businesses can be deducted from the taxable income of the investor, and that provides a real incentive to risk-takers. The demise of the scheme will further increase the difficulties of raising the relatively small amounts of capital which are often required in the early years of a growing company and will force companies to rely to an unhealthy extent on loans from banks, making them more vulnerable in difficult times.
§ As pressure on small companies has mounted during the recession the clearing banks have been severely criticised for their treatment of small companies trying to survive. The fact is that the managements of those banks have little experience of assessing business risks, particularly in small companies, which they seldom have time to visit. They cannot therefore be expected to support small companies through equity investment, which is the only practical way of achieving a profitable balance between risk of loss and potential reward in the long term.
§ Therefore, the importance of creating better ways of financing the growth of small companies cannot be overestimated. I very much hope that my noble friend who is to reply will be able to comment constructively on that issue.
§ The successful control of inflation will always be of immense significance to small businesses, particularly those which export, for it is extremely difficult for them to absorb inflationary cost increases. The 186 achievement, therefore, of lower inflation through Her Majesty's Government's policy has been of real value to small companies.
§ We should also look at experience in other countries, particularly the USA, where much of the growth over a long period was due to the attention given to the small company sector through the Small Business Administration. One requirement of the SBA has been that a specified proportion of sub-contract work in government procurement contracts must be placed with small companies. In current circumstances that example could be followed here to great advantage.
§ Similarly, large companies should help their smaller suppliers by giving notice well in advance of requirements. Suppliers then have a much better opportunity to meet them rather than being forced to respond to demands at short notice in competition with overseas suppliers. The good example set by such firms as Marks and Spencer and Rolls-Royce should be more widely followed.
§ In those and in many other ways, which I am sure will be covered later in the debate, we can support and strengthen our important small business sector. Above all, small businesses need stability of economic factors. They can readily react to market and other changes relating to their own businesses but even the best managed are very vulnerable to major changes in external conditions. Neither have they the resources to deal with unnecessary red tape and paperwork. Therefore, economic stability and simplicity through deregulation must always be kept in the forefront of policy to enable the small business sector to flourish in the interests of us all. I beg to move for Papers.
§ 3.25 p.m.
§ Lord Clinton-Davis
My Lords, the House will be indebted to the noble Viscount for having initiated this significant debate, not least because it will give the House the opportunity to hear a maiden speech from the noble Lord, Lord Weatherill. I look forward to that particularly having served with him in the House of Commons for some considerable time and served under him when he was Speaker, and a most distinguished speaker too. He did not call me often enough, but that is another matter. We shall also be able to hear a maiden speech from the noble Lord, Lord Inchyra, who will give us the benefit of his banking knowledge, which is so relevant to the debate today.
As the noble Viscount said, small businesses and medium-sized enterprises are critical to the strength of the economy and to employment. They need rather more help than the lip-service which, by and large, this Government have given them. Because their success is indivisibly linked with that of industry and other commercial enterprises, at a time when we are facing raging storms of recession and slump they are peculiarly vulnerable. That could not be more graphically illustrated than by the recent pit closure fiasco. It was not only 31,000 miners' jobs which were at issue but also 100,000 or more jobs elsewhere, and not least the price to be paid by small businesses.
187 One only has to go through virtually every high street, and indeed side street, of our towns and cities to observe the "To Let", "For Sale" and "Closing Down" signs which represent vivid testimony to the collapse of so many small businesses and the hopes and dreams of so many families who are dependent upon them. Last year 70,000 houses were repossessed. That is an issue which is integrally related to the one that we are discussing this afternoon. All that represents heartbreak, heartbreak produced by the catastrophic failure of confidence and equally the catastrophic failure of the Government, which combines inertia and ineptitude to a remarkable degree.
I have no doubt that, as in all economic debates in this House and in the other place, the Government will express sorrow. I shall believe it from this Minister. I like this Minister. She knows that. She always has to clutch the short straw; that is the trouble. She will express sorrow about the 70,000 small business failures, the 3 million plus unemployed and the decline of manufacturing investment, which is lower today than it was in 1979. However, I believe that we shall hear little about the resources squandered on a massive scale. It is a fact that we have squandered our North Sea oil reserves and the privatisation revenues, and we have squandered £14 billion in trying to rescue the poll tax. Will the Minister express sorrow about our balance of payments deficit, which is massive even for a time of slump? We have a manufacturing deficit, which was unheard of before 1983. Manufacturing has not been in surplus since that date. However, somehow or other it is never the Government's fault —it is the fault of the trade unions, the teachers, the work-shy, the short-sightedness of industrialists paying themselves too much, the Bundesbank, the Civil Service or the Opposition. It is never their fault. The worse the situation gets, the more the Government go on floundering almost daily from one crisis to another. Evidently, the more Mr. Lamont sings in his bath —the Pavarotti of the bath tub—the worse the situation becomes.
Confidence has oozed away and small businesses face an ever worsening prospect. They are frightened about it. They find themselves buffeted by high interest rates. Businesses are collapsing all around them and engulfing them. They are the victims of late payment by often unscrupulous activities on the part of bigger businesses. By and large their pleas to the Government have gone unheeded.
Warning after warning has been given to the Government about the plight of small businesses by their own federation. On 4th February 1991 we read:Tunnel vision at the Treasury is writing off Britain's small businesses".On 13th March 1992:The 1992 Budget measures would not put money into the pockets of ailing small businesses".So it has gone on. There is a call for some of the measures referred to by the noble Viscount: simplification of PAYE, reforms of taxation, mitigation of the system of fixed penalties for VAT regardless of the seriousness of the offence, and other VAT reforms; as well as more and cheaper access to 188 the courts. Indeed, many other proposals have also been put forward. What are the Government doing about it?
Like so many others, businessmen are bewildered by the Government's extraordinary contortions. They simply do not know where we stand on devaluation. On 11th September 1992 the Prime Minister said:I was under no illusion when I took Britain into the ERM. I said at the time that membership was no soft option. The soft option, the devaluer's option, the inflationary option would be a betrayal of our future and is not the Government's policy".It became the Government's policy.
§ Lord Gridley
My Lords, my name is not down to speak in this debate but I am a life president of a small business. Would it not be better to hear some constructive suggestion from the noble Lord as to how we can help small businesses? That is what we want to hear from Her Majesty's Opposition.
§ Lord Clinton-Davis
My Lords, I have just referred to propositions put forward by the federation. The noble Lord was deaf to them. The fact of the matter is that the success of small businesses depends upon the success of our economy and this economy is floundering, even if the noble Lord does not like to hear it. The Government have gone from one crisis to another. They have contradicted themselves. They have failed business and failed small businesses.
Yesterday Mr. Gordon Brown put forward a number of propositions which evidently the noble Lord does not want to hear. He spoke of new enhanced capital allowances for manufacturing industry in plant and machinery—that is necessary; a new investment programme, offering advantages for expenditure in new machine tools and production processes; providing engineering firms with special help; and giving individuals benefits when investing in new and growing manufacturing companies and those with technological bases. Those are some of the ideas that have been put forward. I recommend them to the House.
In addition to the present 100 per cent. allowance for research and development, why not have a 25 per cent. tax credit for additional investment? Why not have grant and loan assistance for innovative ideas in relation to small and medium sized industries to aid in developing new products and technologies? Those are ideas that the Labour Party put forward before, during and after the election. They are ideas which the Government ought to consider instead of brushing them aside and walking out, rather like the noble Lord did just now.
I welcome this debate and the opportunity to canvass such ideas and I congratulate the noble Viscount on having initiated it.
§ 3.34 p.m.
§ Lord Ezra
My Lords, I should like also to add my congratulations to the noble Viscount, Lord Caldecote, for introducing this debate. I can think of no one more qualified to do so. He has had a most distinguished industrial career. He is an eminent 189 engineer and above all he introduced in this House recently the report on innovation in industry, which was exhaustively debated and of great importance.
He was quite right to draw attention to the vital importance of the small business sector. In terms of numbers of enterprises it dwarfs all other sectors in the economy: 97 per cent. of all firms are small business firms. I have tried to find out the number of small businesses but there are so many classifications of small businesses that I cannot work out whether there are 2 million or 3 million. But whichever number one chooses it is very large.
Another factor to bear in mind is the enormous growth of small businesses in the 1980s. They grew by no less than two thirds. They were buoyed up by the apparent growth of the economy in that period and by the end of the decade they formed a larger proportion of the economy than ever before. But, like all businesses, they have suffered since then. I am afraid that the burden of business failures, which we have all seen repeatedly reported in the newspapers, has largely fallen on small businesses. In 1990 there were 24,000 business failures; in 1991 that figure rose to 48,000; and in 1992 the rate could be as high as 60,000. The whole process has been reversed. Regrettably, one reads stories in the press of small businesses with sales falling having to shed labour and spending less on investment, training and innovation. In this important debate we have to consider how that situation can be put right.
The small business sector plays a very large part in the economy as a whole. Any measures that the Government take to try to improve the conditions under which the economy can recover obviously will have an impact on small businesses. It is a pity that this debate is not taking place on Friday rather than today because tomorrow we shall, we hope, hear much of great interest to the whole economy. What small businesses need in particular and the economy needs in general are a recovery of confidence, more orders and a stable economic and financial environment.
But there are specific problems associated with small firms. The noble Viscount and the noble Lord, Lord Clinton-Davis, also mentioned them. First, I believe that they suffer more than larger firms from the high and fluctuating levels of interest rates. I speak of fluctuating rates because sometimes we forget that in the past decade there has been an enormous fluctuation in interest rates. Perhaps I may remind noble Lords that interest rates in October 1981 stood at 16 per cent.; by mid-1983 they were 9.5 per cent.; in February 1985 they were 14 per cent.; in June 1987 they were 9 per cent.; and in October 1991 they stood at 15 per cent. The base rate is now 8 per cent. and may fall. It is fine that interest rates are falling. But will we have stability or will we be permanently on a see-saw of fluctuating interest rates? As someone involved in business, I find it difficult to plan for the future not knowing whether one will be up or down in that crucial element.
My second point specifically in connection with small businesses is to ask whether we should not have a dedicated loan fund providing medium and 190 long-term financial support at stable and affordable interest rates. Other countries do that. In Germany they have an organisation known as the Kreditanstalt fur Wiederaufbau, which has existed since the end of the war for the specific support of small businesses. It works through the banks and manages to provide money at low interest rates on a consistent basis. The same is done in France with the Credit d'Equipement des Petites et Moyennes Entreprises. We should study very carefully what is done in those other countries to overcome the particular difficulties faced by small businesses.
In recent times there has been much criticism of the relations between small businesses and the banks. Many small businesses feel that they were overstimulated by the banks to invest in the good days of the 1980s and that now in many cases the rug is being pulled from under their feet. However in recent times the banks have issued codes of practice stimulated by the Chancellor to indicate the way in which they would deal with small businesses. I believe that the situation is improving. Nonetheless it must be watched with great care.
The question of late payment has been mentioned. Dun & Bradstreet estimates that the average payment to small firms is made on average 81 days after invoice. That is 51 days after the normal 30 day period. In Germany the delay after the normal 30 day period is 18 days. Such delay is an appalling imposition on small businesses. It pushes them into having to raise more money on overdraft in order to pay for those delays. That is a matter which needs attention.
I wish to be quite fair in what I say. The Government have taken action to ensure that the procedure is tightened up with regard to government organisations. I see that the noble Baroness nods. She was no doubt going to refer to the subject; I mention it for her. The Government have laid down that their subcontractors also should apply those more effective payments. Nevertheless, delay is still a serious problem. Whether there should be some statutory regulation on the subject leading to an obligation for interest to be paid on late payment is a matter now being debated. I shall be glad to hear the noble Baroness's views on that subject.
For small businesses, the uniform business rate, the VAT regime and national insurance charges appear to take priority. Even if they should be in great difficulty, those tax obligations seem to come first. The question therefore arises whether there should be greater flexibility in the tax regime vis-à-vis small businesses.
I should like to end on a positive note. Recently a number of organisations have been established which give advice to small businesses. The DTI has a very good advisory service. The banks have now set up such a service. We have Business in the Community, an organisation with which I have had the honour to be connected for some years. All those organisations are anxious to offer good advice to small businesses. But what is required above all else is that small businesses should be treated in a way which enables them to get over the difficult times and to look forward to times when the regime in which they operate is a more stable and beneficial one.
§ 3.42 p.m.
§ Lord Weatherill
My Lords, it is with some trepidation that I make my maiden speech in your Lordships' House. First, I should like to express to your Lordships my deep appreciation of the kindness of the welcome that I have received since I came to your Lordships' House, both from noble Lords and from the staff of this House.
I speak on this Motion because for some years before I entered Parliament I was actively involved in the family business which had been founded by my father in 1912, after he had led the last really successful strike of tailors against the sweat-shop conditions of that time. Unemployed and unemployable, he was forced to become self-employed. In February 1967 I was horrified to win the debate on the ballot for a Private Member's Motion in the other place. I put down a Motion very similar to that which we debate today. I well remember that on the following day I was sent for by Mr. Ian Macleod, the Shadow Chancellor of the Exchequer at the time, who first asked me my name and then complimented me on my speech. As I was a rather modest person in those days, and nervous about speaking, I said something to the effect that I was rather reluctant to speak in this place, "unless I really know my subject". I always remember his generous reply to me: "Dear boy, I am not certain that we shall be hearing you very often".
In truth he was quite right, because shortly after that I became a Government Whip serving under the noble Lord, Lord Pym, in 1979 the Chairman of Ways and Means, and in 1983 I had the great privilege of being chosen Speaker on the proposal of the noble Lord, Lord Colnbrook, seconded by the noble Lord, Lord Dormand, both of whom I am proud and pleased to say are noble friends of mine. I shall always he grateful to them for the confidence which they showed in me at that time. I join them in your Lordships' House, 10 years later, with my predecessor, my noble friend Lord Tonypandy, and with the noble Baroness, Lady Hylton-Foster, the Convenor of the Cross-Bench Peers, who as your Lordships well know not only is the daughter of a Speaker, but the wife of a very distinguished Speaker.
I am well aware that it is not good form in this Chamber to speak unless one does know one's subject. It should be done briefly and there should not be too much repetition. My credentials for speaking are simply that I was and still am connected with a family business. In 1967 the Motion I chose for the debate led directly to the setting up of the Bolton Committee on Small Firms. The later implementation in 1971 of most of its recommendations helped to improve the environment in which small businesses operate, and gave rise to a special small firms department in the Department of Trade and Industry and to a Minister for Small Firms whom I am delighted to see on the Front Bench this afternoon.
In this short debate I shall not have much time to do more than remind your Lordships that our country's 5 million small businesses employ one-third of the private sector workforce. They produce almost one-quarter of the United Kingdom's turnover. They are indeed the life-blood of the economy. It never 192 ceases to amaze me that 97 per cent. of all businesses in our country employ less than 20 people. Yet the emphasis of government policy is heavily focused on the big companies—the remaining 3 per cent.
As the noble Viscount stated, it is not the big companies which provide the lion's share of employment. Even ignoring the recession and the increasing trend towards rationalisation, larger firms are much more likely to discard jobs than to create them. My figures are from the Federation of Small Businesses. From 1985 to 1989 large companies created 120,000 new jobs compared with about 1 million created by businesses with under 30 employees. Therefore, is it not crystal clear that a healthy and thriving small firms sector is the key to future employment and to the future prosperity of our country?
A report recently commissioned by the National Westminster Bank entitled Bolton 20 Years On concluded that Government policy on small firms was still piecemeal and that administrative burdens had multiplied rather than decreased. I have been informed by the Federation of Small Businesses that the average owner of a small firm spends at least one day per week, and sometimes more, dealing with government paperwork for the Inland Revenue, Customs and Excise, the Department of Social Security, the Department of Employment and the Health and Safety Executive. Therefore it is no wonder that he sees himself as an unpaid tax collector for the Government.
If our country's economy is to recover, measures to help small firms to survive the recession and incentives to growth are urgently required. This short debate is not the occasion to go into detail but I ask the noble Baroness to ensure that the fiscal inequalities on small firms are removed, in particular the major deterrent to their growth which has already been mentioned; that is red tape. That would be of enormous encouragement and relief to them.
I promise that your Lordships will not be hearing me too often. However, as regards this subject I shall return to the charge from time to time; that is, unless the noble Baroness is able to put our minds at rest.
§ 3.50 p.m.
My Lords, on behalf of the whole House, it is a pleasure to congratulate the noble Lord, Lord Weatherill, on his maiden speech. Those of us who come from another place scarcely recognise him without his wig. He is gentle and warm in character and yet in his great office he conducted himself with firmness and dignity. He maintained the status of what has been and still is a great office. Now he need look forward no longer to scolding, guiding, advising and sometimes controlling a turbulent House. He has come into gentler waters, a harbour, where he can make civilised and constructive speeches as often as tempting possibilities arise. In spite of his last words we hope to hear him often in this House.
My Lords, I wish that I could speak with similar warmth about the contribution of the 193 noble Lord, Lord Clinton-Davis. Many of us—and I doubt whether all are on this side of the House—would agree with what was said by my noble friend Lord Gridley. I am not one who flinches from a proper debate on government mistakes, and during the past 10 years there have been government mistakes. However, to turn this debate on an important subject into a rehearsal of all the legitimate headlines in newspapers is unworthy of the noble Lord and of his party.
I am sure that I am one of many in this House who welcomed the way in which my noble friend Lord Caldecote set the scene for the debate. I shall not try to repeat or add to his figures. I wish to make a couple of general observations. Although I do not believe that there are figures to support it, my impression is that this country no longer has as many small businesses to compare with some of the rival economies. I think in particular of Germany, which has a long and historic interest in apprenticeship and in the support of small and middle businesses. According to the Anglo-German Industrial Foundation there is a greater proportion of what it calls high-technology new businesses, which span both the manufacturing and service sector, than we have. Furthermore, one has the impression that there is in Italy a great flowering of small businesses.
I wish to draw attention to some of the reasons for the situation which exists in this country. In recent years the birth rate of small businesses has been impressive. As was said by the noble Lord, Lord Ezra, there was a remarkable surge in the 1980s. Presumably there is a lesser surge in the difficult conditions of today. Many are one-man or one-woman businesses, but they are valuable for their potential and performance. Of course, there is always a high mortality rate among small businesses and therefore there has been a high death rate. Nevertheless, there has been a significant and fairly regular increase in the number of small businesses.
Ideally, we in this country wish to see a shade more of the talent, vitality and shrewdness of people setting up small businesses, which may or may not grow into middle or large businesses. As my noble friend Lord Caldecote reminded us, and the noble Lord, Lord Ezra, repeated, tax is important, as is regulation and the climate of the economy. However, the most important factor is far more difficult to grasp or to talk about; it is the culture of our times.
In a free society what on earth can be suggested about the culture and its effect on the decision of parents and their children about the career of adolescents? I imagine that all noble Lords will remember that lilting, catching, beguiling song which ran, "Don't put your daughter on the stage, Mrs. Worthington". I sometimes wonder whether that should not be translated today into, "Don't put your children into trade, Mrs. Worthington". Whether the reason is snobbery or a search for what is non-existent security, there appears to be an antipathy among many people to go into trade. I fear in particular that among our more highly educated people—and we all know of the Government's aspirations sharply to 194 increase the number of people who go into higher education—there is a hostility to what is seen as the vulgar and easy activity of trade. I hope only that the polytechnics, now promoted to university status, do not catch the infection because it would be sad if the proportion of our shrewdest people going into trade were to diminish.
All that is made the more relevant because today entry into many trades depends for success upon a grasp of science and engineering as well as on marketing and other necessary skills. What can be done? I repeat, what can be done? A scheme was imported from America called Young Enterprise. The importer was a man called Sir Walter Saloman; an awkward man but effective banker. It is a form—I do not want to call it playschool—of playing at trade involving schoolchildren supervised by local businessmen. Those schemes purport to produce annual profit or loss statements of accounts. It is a method of encouraging those with a propensity to trade to obtain an impression of what it might be like. I hope that the Minister will tell us whether Young Enterprise still survives in schools and whether it is growing.
I do not know what else can be done. Sometimes I think, although without sufficient knowledge to support the argument, that women's magazines would be a fruitful place in which to get across to mothers the argument that their children might not become policemen, doctors, lawyers, civil servants or social workers but in some cases opt for trade. Those are tenuous thoughts and I hope that the debate will produce more effective suggestions as to what could be done.
The impact of the Japanese in raising the standards of subcontractors and suppliers to the industries which they set up here may be having an effect on the performance of those businessmen. It may even induce some people who might not otherwise go into trade to become suppliers and subcontractors to firms which, like the Japanese, demand high standards.
I draw attention to one source for small businesses. It is not the school leaver but the man or woman who is dissatisfied with the confinement of working in a large firm. A man may leave, take the risk of taking a second mortgage on his house and may say to his wife, "The monthly salary, the pension and the company car will end. We are going to try it on our own".
Those are acts of considerable moral courage. We need to recognise the significance of those who make such a decision. I suppose that there are people who would say that we should hope that some television producer will take it into his or her head to make a series on small businesses without descending into the kind of scandalous coverage which might be followed.
I used to visit a number of schools and I asked the children what they thought lay ahead. They all spoke of having a job or not having a job. Very few of them spoke of self employment or of being an employer. We need to give them the perspective that that is the choice.
§ 4 p.m.
§ Lord Carr of Hadley
My Lords, I begin by saying to the noble Lord, Lord Weatherill, what a tremendous pleasure it is to have him with us. I feel happy to be once more in the same House of Parliament with him. I know that he spoke from great experience. The only part of his speech about which I felt a slight query is that I find it difficult to believe that he considered it to be a great ordeal to address your Lordships' House, when I think of the Seat in which he sat in another place over the past few years. I am sure that we all welcome him and look forward to many contributions from him in the future.
I thank my noble friend Lord Caldecote for introducing this debate. I must declare an interest in that I am the chairman of a very small company, which employs five or six people. Therefore, I speak from some experience.
I am in no doubt about the great importance to any economy of a large, thriving small business sector. There is no doubt that the small business sector in this country had become dangerously small by the end of the 1970s. Therefore, the big surge which took place in the 1980s was particularly welcome. It has obviously suffered some setbacks during the past two or three years, and it is extremely important that a new surge should take place in the 1990s.
I have a considerable amount of experience in this field because in the early 1980s I was chairman of what was known as the CBI's special programme unit and for the last part of the 1980s I had the privilege to be chairman of an organisation called Business in the Community, working particularly in the field of small businesses. While there were other instruments of importance in bringing about that expansion, I have no doubt that the nationwide network of local partnerships, commonly called local enterprise agencies, must take great credit for what was achieved in the 1980s. The advice and help which they gave led not only to a large increase in the birthrate of small businesses but also—just as important—a considerable decrease in the infant mortality rate of newly-formed small businesses.
The essence of those associations is that they were local and were partnerships with local authorities, local business communities, including the chambers of commerce, local leaders of the professions and also local branches of nationwide companies and organisations in each locality. That was building from the bottom and giving each and every community a feeling of owning its own opportunities and responsibilities. Interference from outside came only in the form of help to help themselves rather than in the form of imposition from above.
That network still exists. I believe that it is the right tested and tried basis on which to bring forward a new surge in small businesses in the 1990s. We must recognise that the past three years have given the small business world—the enterprise associations and small companies—a fairly heavy battering. I trust that the Government will look carefully to see whether anything needs to be done to revitalise it. Small businesses do not want dictation; they want help. They do not wish to be swamped with money, even if 196 the Government showed any desire to do so. In order to revive themselves they may need more financial pump priming, such as they had at the very beginning of their lives. Newly set up local enterprise associations had some pump priming for the first two or three years, before they were made to become wholly self-supporting.
Moreover, some help may be needed in financing again an adequate supply of properly trained managers for local enterprise agencies, and more help may be needed from the TECs in each area, because those are extremely important complementary agencies in every area. Although they are a splendid idea, I am afraid that there are indications that they may not be functioning as effectively as they should be in all areas. That may be due not only to the inadequacy of the funding but also to the form of the funding that they receive.
When I speak about more financial input from the Government, I wish to state my belief that it should be a vital general guiding principle that any money must follow the customer and not be given to the producer. There must be payment by results. In the health service, the money should follow the patient; in this case, any funding provided should follow the customer who comes to use the service.
The Government should try to market more effectively their own schemes of help. In the 1980s I was in no doubt that many government schemes of help were not well marketed. They seemed to come from a variety of directions which were difficult to understand. Schemes were not always well designed, either to tackle the problem which they claimed to tackle or to match in with other schemes. The idea, mentioned by my noble friend Lord Caldecote and spoken about by Mr. Michael Heseltine as President of the Board of Trade, of a one-shop service in each area is an extremely important possible way forward. That would mean that there would be one place to which people could go in order to be directed to all kinds of advice. It is then possible to co-ordinate the information and give more information about all forms of advice, including the best places to seek finance.
I ask the Government to look also at the Chamber of Commerce movement in this country. Where that is good, it is of enormous assistance in this sphere. Where it is not good—and it is quite variable—there is a large gap. I hope that the Minister will see whether anything can be done to bring the general standard of chambers of commerce in this country up to the standard of the best.
Finally, I hope that industry, government—both central and local—and the science and technology institutions will take very seriously and urgently into account the need to form a strong tripartite partnership within regional and national frameworks as advocated in the final report, published a few weeks ago, of the Working Group on Innovation. I believe that that is an extremely important way to achieve a natural growth of small companies which need to have a higher input of technology and other management skills. If we do all those things, we shall bring about a 197 new surge in the 1990s, as we had in the 1980s, which will be of great benefit to society as well as to the economy throughout the country.
§ 4.9 p.m.
§ Lord Inchyra
My Lords, I hope that it is not out of order for me to commence my maiden speech by thanking the noble Viscount, Lord Caldecote, for initiating this debate on a tremendously important subject. A thriving small business community is of vital importance for the future prosperity of the country. It is also of great importance for the banking industry in which I have spent the whole of my working life, as the noble Lord, Lord Clinton-Davis, was kind enough to remark earlier.
Although it is several years now since I was directly and personally involved in handling the accounts of any small businesses, nevertheless I like to think that I am quite well informed on the subject because I am currently director general of the British Bankers' Association, the representative body for all the banks of all sizes and nationalities authorised to do business in this country. It is part of my job to speak out on behalf of the banking industry. In doing so today I very much hope that your Lordships will not judge that I have strayed unacceptably far from the guidelines offered to maiden speakers.
I would like to try to dispel some myths which have become widespread about the relationship between banks and their small business customers. In a deep and enduring recession it is inevitable that there will be a high number of failures especially among those fairly recently established who did not have time to put down more than shallow roots before the economic downturn began. I believe that it is also inevitable and very understandable that many people find it hard to accept that their business venture has failed and that their hopes and dreams have been shattered. It is hardly surprising that some should be so resentful that they complain volubly to the press and others that they have been treated outrageously by their bank on whose support they have become almost totally reliant in 99 cases out of 100.
The most common complaint is that the bank has been over-hasty in forcing the closure of a business by refusing to lend more money or to extend agreed repayment periods. It is frequently alleged that the unfavourable decision came like a bolt from the blue; in other words, with no prior warning that the bank thought that the business was in danger of going under. Such allegations are meat and drink to journalists who enjoy the current popular sport of "bank bashing" because they know that the bank is very unlikely to obtain permission from the customer concerned to disclose the other side of the story. It would of course spoil their sport if it had to be reported that the bank had been pointing out the danger signs and recommending possible remedial action for some weeks or even months, but that that advice had been persistently ignored by the borrower.
I know from my personal experience that it is very tempting always to give the borrower the benefit of any doubts and to provide the extra finance or the 198 additional time that is being requested. That is the soft option, but it is rarely the right one. It is not often that it will help the borrower or the bank in the long run. One has to face the facts. To decline a request, particularly when it will have serious effects on the local community, requires moral courage in good measure. It is never a decision which is taken lightly.
Unless there are very exceptional circumstances or the borrower cannot bring himself to face the facts or to be completely open about his trading position, the decision to foreclose will always be the culmination of combined efforts by the bank and its customer to find ways of nursing the business through its difficulties. Throughout that process continuous and very careful assessments will have to be made of future prospects. But in the end it will boil down to what can be an extremely finely balanced judgment about a business's chances of survival.
If and when the axe has to fall it is only to be expected that some borrowers will find it very hard to accept that the bank has not been precipitate in judging that the business does not have a viable future. As their own livelihoods and those of their employees are threatened, borrowers cannot be criticised for believing that a little more time or a little more money would have enabled them to turn the corner. But equally, bankers cannot be criticised if, despite their efforts to nurse the business back to health, they find themselves led inescapably to the conclusion that the business has passed the point of no return. Knowing how hard it is to break that news to a customer who may be a neighbour, a long-standing acquaintance or friend, the banker is, as I have already said, often tempted to provide more money or more time. If one looks at the rate at which the big high street banks are piling up provisions against bad and doubtful debts, I believe that one will see that they succumb to that human frailty all too often. What that record cannot possibly suggest to any dispassionate observer is that the banks are giving their small business customers inadequate time or help to find ways to trade through and then out of the current recession.
The number of reported business failures certainly remains distressingly high, but it does need to be set in perspective. The big banks—using a different source from that used by my noble friend Lord Weatherill —reckon that they have in excess of 3 million accounts of small business customers. On any given date approximately half of those accounts will be running in credit with total deposits in the region of £24 billion. The other half borrow around £47 billion, which is something over £27 billion on overdraft and £19 billion on term loans. Those at least were the figures at the end of 1991 which are the most recent and reliable ones available.
What I regret that I do not have is a figure for the percentage of borrowing customers who are struggling to stay afloat. However, I am told by the banks that as long as the difficulties are diagnosed early enough they expect to be able to nurse four out of five cases back to health. They have set up special units to provide the active assistance which is required. Their success rate 199 hardly suggests that the banks are not devoting enough time, effort and resources to try to help their small business customers who have problems.
It is not my intention to portray the banks as paragons of virtue. I know that they are not and so do they. They make mistakes and misjudgments like every other commercial undertaking. But because of their central role in the economy and their crucial role above all as the main financiers of small businesses, their shortcomings tend to get blown up out of all proportion leading to their portrayal as hard-hearted villains with no concern at all about the impact of their decisions on individuals.
As I hope I may have been able to demonstrate, without excessive bias, that portrayal is unjustified. But it is also doing untold harm by undermining the mutual trust and confidence which are the essential ingredients for a successful partnership between banker and customer. That trust and confidence needs to be restored as quickly as possible because without it there will be many fewer businesses around to take advantage of the recovery when it comes.
It would be a very helpful step along the road to correcting public perception of the banks if the noble Baroness, Lady Denton of Wakefield, were able to acknowledge when she speaks that the banks recognise the importance of, and their responsibilities to, small businesses. It would be even more helpful if the noble Baroness were to feel able to go a little further and give some credit to the banks for the considerable efforts that they are making to be as helpful as possible to their customers in a time of extreme difficulty for everyone.
§ 4.19 p.m.
§ Lord Wade of Chorlton
My Lords, on behalf of the whole House it gives me great pleasure to congratulate the noble Lord, Lord Inchyra, on his maiden speech. It was a splendid speech and we hope to hear from him on many occasions in future. The speech was particularly useful as it was a banker's view within this important debate. It is not perhaps a view with which all those who are struggling out there in small businesses would agree, but it is one which it is right and proper for noble Lords to hear.
I must also declare an interest. Like my noble friend Lord Caldecote, I am involved with small businesses. One of the small businesses with which I am concerned as chairman is called Nimtech, which is the north-west technology centre. There we are particularly involved in encouraging new technology in small companies: I shall refer to it in a moment.
I agree, as is almost always the case, with everything that my noble friend Lord Caldecote said. I wish to enlarge on a point which he and many others made as regards regulation. In the eye of the small businessman regulation is probably even greater than we think it is on the outside; it is becoming of still greater importance set against the difficulties small businesses are experiencing. Since my time in this House I have seen regulations and controls placed upon businesses without any recognition of the build-up to which each little regulation leads. We are 200 inclined to see each new idea on its own without seeing the build-up that it creates and the pressures on companies.
I congratulate the Government on its deregulation unit, but there is an urgent need also to bring in an impact assessment of regulations likely to affect small businesses. This applies particularly to the environmental aspect. It is of some interest that we now have environmental impact assessments where businesses may be affected. It is now reaching the stage where we need to have environmental impact assessment of the regulationary aspects so that we can see what is happening and judge the full effect on small businesses. This applies particularly to EC regulations. Before they are brought into law we need to he able to assess exactly how such regulations are going to impact.
I mentioned that I am chairman of Nimtech. Information technology can be a great engine for growth, particularly in small industry. There is a large amount of technology in big companies that could be brought out if those involved with the technology within those companies could be encouraged to develop an entrepreneurial spirit. There is an opportunity here to bring together venture capital and government grants.
One of our activities within Nimtech is to act as an agent for government in grant aid in technology areas. Because of the pressures on the Government, which we understand, we now find that we are not able to receive the grant levels that many technology companies might have expected. In fact, grants that they have already been given might be reduced. There is an opportunity here. If government cannot meet a certain grant level needed for a research and development exercise in a major technology company, venture capital could be brought in alongside the government money. I have spoken to venture capitalists who are interested in this concept. It would enable a programme to go ahead that would otherwise not be possible. I should like the Government to look at that matter.
Recently the Government established the Energy Saving Trust under the chairmanship of Lord Moore. It takes its money not from the Government and the taxpayer but from the major energy companies, and particularly British Gas. The energy trust acts as agent for a considerable sum of money—the total is, I believe, about £100 million for the industry altogether —which it can then make available for energy-saving enterprises. A large amount of housing that needs to be made more energy efficient in terms of heating arrangements or insulation is inhabited by people who do not have the resources to do it. If we could use the money available to the energy trust to stimulate investment in this property that would encourage a large number of new businesses. They would be small companies, and if trade could be encouraged particularly in areas where unemployment is high, and therefore where the housing problem is great, we could utilise industrial money and not taxpayers' money to stimulate a great many new businesses.
I am sorry that the noble Lord, Lord Clinton-Davis, is not in his place at the moment. It is not right 201 for him to blame the Government for the problems of small businesses. I have heard more arguments from noble Lords opposite for regulations, controls, extra taxpayers' costs and government resources that would place enormous burdens on the small businessman than I have ever heard from anywhere else. There is no room for the noble Lord, Lord Clinton-Davis, to criticise the Government with respect to small businesses. No one did more than this Government during the 1980s to stimulate small businesses.
However, I appreciate the difficulty that the Government now have in balancing the books, with demands on one side for more social services, more handouts and support, and on the other, for finance to stimulate businesses and particularly small businesses. Government cannot do that unless there is support from the country to do it. In the early 1980s this Government spent a great deal of legislative time bringing forward support for small businesses. The noble Lord mainly responsible is sitting in front of me now.
However, in recent years there has been a tendency to look at other matters; to look at regulations, environmental controls and pollution controls to an extent which is probably unnecessary, and not to recognise the costs being imposed on industry. It needs to be understood not just by the Government but by the people of this country that the stage has been reached when economic growth, the support of small businesses, and the creation of wealth are the most important matters facing this country. If the Government are to bring that about they are going to need support from both Houses to make it happen. I give every support to my noble friend the Minister, and I hope that from tomorrow we shall be able to carry out such a policy.
§ 4.26 p.m.
§ Baroness Platt of Writtle
My Lords, it is with great pleasure that I too support my noble friend Lord Caldecote in underlining the importance of small businesses to the success of our economy, which has also provided the opportunity today for two most interesting maiden speeches. It is of particular importance this week when the Government are considering how they can do more to create a climate for growth in manufacturing industry at a time of high unemployment and world-wide recession. It is important to remember that of the approximately 3 million firms in the United Kingdom—this is Department of Employment information at the end of 1989–97 per cent. employed fewer than 20 people. If one excludes all one-person firms the numbers drop to less than 1 million firms, but the proportion employing less than 20 people is still around 95 per cent. Nearly half the total workforce in 1989 was employed in firms employing under 100 people, who provided over 17 per cent. of the total turnover.
What happens to them is important therefore to the prosperity of our country. They are very different from large firms who can afford to break up their organisations into departments consisting of experts, accountants, marketing people, designers, engineers 202 etc. Very often the top 10 people or less in those small firms have to be knowledgeable in all these fields, and executive in directing their company's policies. It is a hard world, my Lords, and competition is fierce. Time is not on their side, and they rarely have time to spare. Deregulation; simplified forms to fill in; civil service and local government attitudes that focus on the vital importance of customer service, rather than satisfying the minutiae of bureaucratic systems—the red tape so eloquently referred to by the noble Lord, Lord Weatherill, in his maiden speech this afternoon—will contribute greatly to the oiling of the wheels of successful industry. I am glad that my right honourable friend the President of the Board of Trade promised a new attack on this front at the CBI conference yesterday.
The plain English campaign tests need to be applied to all forms and regulations. Also liquidity is a constant problem, and they need their large customers to pay promptly and their banks to be on their side on a long-term basis. Those in charge of small firms do not want Civil Servants second-guessing what they ought to be doing. They themselves need to decide where their markets lie and how they can serve their customers best. In today's sharply competitive world, they will then need to bring their costs and overheads down to a minimum in selling their products. They will need to raise productivity, as has been emphasised at the CBI conference this week. That will mean investment in innovation, from the early use of research through to its development in practical applications, which will probably mean the purchase of new and expensive machinery. I am glad to see that the Chancellor of the Exchequer was reported in The Times on Monday to be considering giving industry a boost by allowing firms to offset more of their investment against tax. That is vital to small firms and I hope that it will be included in tomorrow's Statement.
I am glad too that from December 1993 the Government's own accounts are to make a proper distinction between capital and current transactions. That should result in better national investment in road and rail infrastructure, another vital means of lubricating industrial success. Manufactured goods need to arrive at their customers on time and not be caught up in traffic jams or held up on late trains. That goes for the people working in those industries, whether arriving at their places of work or travelling on the roads to ensure customer satisfaction. Without customer satisfaction, both before and after purchase, firms will go to the wall. Serving the customer has to be the most worthwhile thing that anyone does in the UK today. That has to be taught in schools, colleges and universities. It has to be put across in all training schemes at work and appreciated throughout society. We want enlightened and entrepreneurial young people to put industry first in their career choices. For my part, I would want them, both girls and boys, to think in terms of engineering. I am glad to be able to tell my noble friend, who is not at present in the House, that Young Enterprise is still very much alive.
There will be people today who have been made redundant by firms no longer able to sell goods for 203 defence and armaments. We all want to retain as peaceful a world as possible. Nevertheless, their redundancy is for them a traumatic experience and they need to consider how their experience in that field can be turned to good account in civilian markets—literally turning swords into ploughshares. In this respect obviously export markets must be considered, and again the CBI this week is ambitious to raise our performance in world trade.
I am glad to hear that the value of our manufactured exports in the first eight months of 1992 was 2.5 per cent. up on the same period last year. However, imports have risen more rapidly, leading to a balance of payments deficit, and certainly there are markets in our own country where small firms could perfectly well compete. As I said in your Lordships' House recently, my husband and I have had great difficulty in purchasing British deep-freezers, nonstick frying pans, hammers, toasters, and my hairdresser uses Japanese scissors. Those are not hi-tech products and we should be making and selling them in Britain, not importing them. Nissan in Sunderland sets a very good example in producing and selling motor cars, and British productivity there, I understand, is even better than in Japan. Recent exchange movements will help firms both exporting and selling in home markets and we must continue to keep inflation down. The fall in interest rates will encourage investment, especially if coupled with fiscal incentives.
Much is being done in my own county of Essex, with DTI help, to encourage small firms both to sell locally and to export throughout Europe. That includes the formation of a technology club to help small and medium-sized businesses to apply and develop innovative technology with the assistance, I am glad to say, of local larger firms and higher and further education institutions. It is altogether a practical plan, near at hand, and not demanding long travelling time and communications for hard-pressed management in small industry. It deserves to succeed.
Finally, we are on the threshold of the free European market in 1993. It is important if competition is to be fair that governments support their industries equally. One reads of other European governments subsidising their industries in ways that we do not. Either negotiations must be carried out successfully to stop that practice or our industries will have to be subsidised here, too. The GATT talks which must also be made to succeed are anti-subsidy, so that must be the aim within European markets as well. In that atmosphere, I am sure, given national encouragement, that British small firms can compete with the best, both at home and throughout the world.
§ 4.35 p.m.
§ Lord Orr-Ewing
My Lords, it is my privilege to congratulate the two maiden speakers. I knew the father of the noble Lord, Lord Inchyra, quite well. The noble Lord, Lord Weatherill, after making himself hoarse on an almost daily basis in another place with his "Order, order, order", must find addressing your Lordships' House almost like speaking in a goldfish bowl. He must have found 204 much greater appreciation from every quarter of the House for what he had to say to us. We hope that he will address us on many future occasions.
I am grateful to the noble Viscount, Lord Caldecote, who, with his experience in FFI, is first rate in this area and brings great knowledge to our debates. I want particularly to emphasise the effect on jobs and, indirectly, on the balance of payments. Many of these small firms are the subcontractors on which larger firms are deeply dependent. It is very important that they should be encouraged, enhanced and given the chance of growing.
Until 1979, 30 new firms were set up every week. Since 1979 100 firms have been set up every week. So the record is not all black, as one might suppose from reading our newspapers and looking at television. Those are net figures. Sometimes one wonders whether the figures take into account only the new firms and not firms that have died away. However, the figures I have given are net figures. The private sector provides 20 million jobs, of which 7 million are in small businesses employing under 20 people. It is amazing what a contribution small businesses make. This year 46,000 small firms employing about 500,000 people have closed. That is a tragedy to which we must pay attention. I hope that noble Lords will throw ideas in front of the noble Baroness, Lady Denton, and that she will take them all up. There is no harm in pinching other people's ideas when looking after small firms. I shall make that point again and again during my short speech.
Forty per cent. of new jobs come from very small firms with one to nine employees. I started my business career in a large firm, as do most people because large firms provide training. That is where people get their experience. I have four sons. For some inexplicable reason—I am not sure whether it is very profitable—they have all started their own businesses. They are practically one-man businesses and certainly three out of the four are paddling their own canoes and are only just afloat. On the occasions when they visit us at home, I hear of some of the problems which beset these small firms.
What can Her Majesty's Government do to help? The noble Lord, Lord Inchyra, spoke about the high street banks. Although there are some good ones, I have the impression that they are not all that friendly and sensitive. One becomes a little cynical when banks which have coughed up £600 million to the Al-Fayed brothers to help them buy Harrods make nasty telephone calls to their customers when they have run mildly over their overdraft limit, or they stop the overdraft completely. Surely when people have banked with them for year after year and have never gone bad on a debt they must have an interest in not bouncing cheques. My sons have had cheques bounced for ridiculous amounts. The explanation has been, "I am sorry, it was a new manager. He did not know that you had been with us for many years and did not know that you had 41 accounts". One one occasion, I said, "What the hell is the computer for if it does not know that? Surely you press the buttons and you get the information". On one occasion when the bank bounced a cheque—it was for £11.70 by the 205 way—I pointed out that if those concerned were rewriting their computer records they might add the fact that the chairman of the bank was godfather to the man whose cheque was bounced. I received an invitation to lunch very shortly afterwards.
In many cases the hardest task masters are the Inland Revenue and the VAT people. They have access and entry to people's houses. The sad fact is that for many small businessmen the collateral is their home, where their children and wives are. When the Inland Revenue or the VAT people put a company into bankruptcy, they are affecting the whole set-up. I hope that we can find some solution. I look occasionally at what happens in America. I wonder whether we could not pinch some of Chapter 11. I know we have the Insolvency Act but Chapter 11 seems to be quite widely used in the United States to keep people going while they are trying to get the matter right.
I like the idea of advice centres. When I saw the One-stop shops, I thought that they were hypermarkets, supermarkets or even ordinary markets. Such centres need to have a name which actually suggests that that is where you go for advice, help and training. As cash runs out, owners of businesses do not know where to go. That is one of the sad facts of the matter. What do you do when someone suddenly descends upon you and says, "We are going to pull the rug"? We want such centres; but they must be easily accessible so that people do not have to travel miles to reach them. I hope that Chapter 11 will be considered.
As regards accounting, there was a rather good article in yesterday's Independent newspaper. Surely we have allowed the matter of accounting to become too complicated. The idea that everything must be controlled right down to the tiniest detail may be necessary with ICI, Hanson, GEC and others, but it is not always necessary. Certainly, if some people had any drink in the house the constant efforts to keep up with the paperwork would drive them to drink, if not into insolvency. We all receive paperwork, though I suppose that most of it goes into the wastepaper basket. But if you are someone trying to run a small business, trying to keep the staff together and trying to obtain extra orders to cover the overheads, it is tiresome to be absolutely drained by the amount of paperwork. So, please, let us back up and support the idea that we must return to having less red tape.
As regards delaying payment, I know that we have been trying to do something about it. I was once so desperate that I had to ring up a big supplier and point out that the bank were going to pull the rug on me in respect of one of my companies if he did not pay £2 million which he had owed me for three months. But it is not always the big firms. Indeed, I recently met someone who was also put into bankruptcy. He employed three people. When he was asked why he used his VAT to pay his staff he said, "Because I am owed a vast amount for services that I provide to local government but they won't pay me". Incidentally, that is also true of government departments. Towards the end of the year when they are a bit short of money —that is, especially big spenders like the Ministry of 206 Defence—people may also find it very difficult to obtain payment. I hope that ideas to improve the situation will be stimulated.
Further, as regards small firms, ought we not to look at some special tax advantage—for example, to Aunt Joan, or whoever she may be, and Uncle So-and-So who is nearly falling off the perch anyhow —and try to get some help from friends, families and others? At present, there is no advantage in doing so. Of course, if you wanted the money back, you would probably never get it and there is no real small-firm stock exchange—it is very miniature—in this country.
Looking at all the facts in the matter, I gained the impression that the EC is more generous to its people. There is a very nice US slogan which says, "If you do not discriminate in favour of a small firm, you automatically discriminate against it". That is one slogan. The other, which I offer to my noble friend for use to the Treasury, is, "Not invented here". That is a terrible stopper. I urge her to take note of all ideas, wherever they may come from. Other people have the same problems. I hope that she will use those ideas to effect. If she does so, she will have every Member of this House, wherever he or she may sit, behind her to the maximum extent.
§ 4.43 p.m.
§ Viscount Bridgeman
My Lords, I congratulate the noble Lord, Lord Weatherill, on a wise and moving maiden speech. I hope that he will not be true to his word and ration his contributions to your Lordships' House in future. I congratulate also the noble Lord, Lord Inchyra, on his maiden speech, to which I may refer later. In thanking my noble friend Lord Caldecote for initiating the debate, perhaps I may take up his point about late payment which many other speakers have mentioned. I wish to mention particularly payment by large customers.
Anyone who has had experience of technological industries will know that one large company in particular, itself sitting on a cash mountain, has a bad reputation for paying its bills late. That highlights a problem. Executives who have spent their working lives in large corporations are apt to have no idea of some of the problems facing the smaller company. There is often an insensitivity, not of course deliberate, of the dreadful cash flow difficulties which late payment of what the large company will regard as a comparatively trivial sum can create. These days it can make the difference between survival and the receiver. There is a responsibility on the larger company to realise that the owner of a company employing even, say, 15 people carries a responsibility in human terms which is, and I use the word advisedly, enormous. In that connection, I very much welcome the CBI's initiative for introducing a code of conduct for payment of accounts, to which my noble friend Lord Caldecote referred.
We are really talking about two business sub-cultures—the large and the small. My plea is that in any small business forum, initiated either by government or by the private sector, representatives 207 from larger listed companies should be included. In that way, the impact, in particular of late payment, can be brought home to larger customers.
We heard a sensitive, informed and, if I may say so, persuasive maiden speech from the noble Lord, Lord Inchyra, which could not have been bettered. He will understand that I have now changed some of the things that I had intended to say. However, there are three points to which I should like to draw his attention. The first is the absence of choice among the clearing banks. If a small businessman is minded to move, the first question he will be asked by the new bank is, "Where were you before and why are you moving?" The answer may well be no more than, "I liked your tele-ad on small businesses." In other words, we are not talking about serious banking alternatives. It is a fair generality to say that the smaller businessman is likely to have less experience of financial and banking institutions and therefore be very vulnerable.
Secondly, the effect of the banks' policy has been to exacerbate situations. In the late 1980s, banks were falling over themselves to lend. It is certainly the general perception that those same banks are calling in the loans, in many cases, some may say, precipitately. We all realise that banks have to look to their own balance sheets. But if there is one thing that will help a small business it is consistency on the part of the bank. If its attitude is tough as to lending, the business knows where it is. Similarly, if the bank is somewhat adventurous, then that bank should treat the consequences with sympathy. It is the predicability of his bank manager that can be so helpful to the small businessman.
I have three points that I should like to address to the Minister. First, I hope very much that the BES scheme will continue and that some way may be found to encourage the small entrepreneur to put money into his own business with tax relief. At present that is not possible. I hope that there is a possibility of some legislation on that score. Secondly, I believe that the very stringent requirements of the Financial Services Act should be relaxed in certain defined and small cases to enable friends, neighbours and relations of the entrepreneur to put their money into the business without constraints, especially those relating to invitations to subscribe. Thirdly, there is the ever present question which troubles all small businesses; namely, the raising of the ceiling of VAT.
Finally, I have been given to believe that under Mr. David Trippier a great start was made in the removal of red tape and paperwork. There is a feeling among the professional community that a further prod is needed in that direction.
§ 4.49 p.m.
§ Lord Gisborough
My Lords, there is no doubt that small firms are in a particularly difficult trading position at the moment, even more so than medium or large concerns, and that the survivors are experiencing very considerable financial difficulties. As well as providing goods to the public, many small businesses provide services for larger organisations both in the public and the private sector. Both are taking credit 208 over a longer period on a unilateral basis which means that additional capital is needed by small firms to fund the debts. We have heard that said many times during the debate. The Government were supposed to have made some rules about the taking of excessive credit, but nothing seems to have happened.
Valuable advice for small businesses has become available through various agencies, many of which have done sterling work. In contrast, small firms do not have the muscle to obtain long credit from their suppliers themselves. It is often unwise for small firms to complain to the top of a large company that owes them money. If they do, the chairman is likely to order immediate payment of the debt with an apology. But the middle manager who is himself under pressure from his firm, and who caused the delay, and who is reprimanded by the chairman, is likely to ensure that that small firm is taken off the list and receives no more orders. The small firms knows that that will happen and so is wary of complaining too loudly.
The clearing banks are loth to fund additional credit which is why many small businesses go to the wall. Banks are often especially unsympathetic to small businesses, and even more so to those starting out. That seems to be due mainly to the rules laid down by head office. In the past, big international and property losses have been made. The smaller people are now being made to suffer as a result. Small firms and private customers are suffering from increased bank charges and less credit, as we have all discovered. That in turn obviously delays a general economic recovery.
So far as regulations are concerned, again, the small business seems to suffer the most and receive considerably more harassment. Local authorities can identify the person in charge of a small firm much more easily than with a larger company, and therefore find it easier to implement regulations. A larger employer is much more likely to receive good legal advice which makes the task of officials more difficult and time consuming.
Tax authorities find it easier to get to the bottom of small firms' accounts, whereas, again, larger companies can obtain good tax advice and launch into creative accounting. It is harder for the tax authorities to win. Also, of course, the large firm has a trained accountant to deal with queries, while the one-man business has to take time off from selling to talk out tax problems, as well as having to deal with all the regulations that pour in. There are too many regulations following one another.
It may not always be the case, but many a small proprietor feels that everyone is ganging up against him. Naturally, the recession hits everyone, large and small, but the small business, although more flexible, does not have the resources to weather the storm and many are driven out of business due to defaulting debtors. It always seems such a waste and a shame when a profitable firm, with an adequate order book, has the rug pulled out from beneath its feet merely because of a defaulting customer.
I come from Cleveland where in the 1970s the labour force was employed overwhelmingly by large business—British Steel and ICI. When those and other 209 firms rationalised, large numbers of people were made redundant, and our unemployment increased to about 25 per cent. Since then, many small firms have entered the county and have provided many jobs. I believe that our unemployment now stands at about 12 per cent. In view of the effect small firms have on employment, it comes as a surprise to me that there is a total lack of interest by the party opposite which has had no speakers in the debate apart from those on the Front Bench. Small firms are vital to us, but if one goes out of business, while it is sad and bad for those in it, it is not a catastrophe, as would be the going down of a big business. Collectively those firms are vital and not just for employment. The spending power generated by their employees is in turn crucial to the prosperity of banks and big businesses, some of which can behave thoughtlessly to those small firms.
The self-interest of banks and business should be enough to ensure that small firms are nurtured by them and given every assistance. All is not bad. Help is given, but they need even more: first, to start; and then so as not to be dragged down through no fault of their own.
§ 4.55 p.m.
§ Lord Chilver
My Lords, as the debate draws towards its closing speeches it becomes increasingly challenging to shed yet further light upon the importance of small businesses. I have been involved at various times in my work with the development of small businesses. In his opening remarks, my noble friend Lord Caldecote made an indisputable case for small businesses. That case has been wholly endorsed by noble Lords on all sides of the House. We have been reminded by noble Lords that the number of small businesses grew substantially in Britain to record levels during the 1980s.
While that growth of small businesses has been encouraging, we should bear in mind that small firms in Britain still account for a lower proportion of economic activity in the UK than in our main competitor countries. In the recovery from the recession, small and medium businesses will probably make the earliest advances towards an improved economy. Apart from the recovery from the recession, a case can be made out for the intrinsic further growth of the small business sector in this country. My noble friend drew our attention to an important national issue.
If increasing numbers of small businesses are generated in Britain, further pressure will be placed on the many services offered to them through many different channels. That factor again must be considered seriously.
I should like to direct my remarks to specific problems suffered by small businesses. The first is the financial problem which is crucial and which has already been mentioned. The need here is for long-term funding, usually in loan terms rather than equity. That need is not met adequately by bank loans which are essentially short-term. Nor is it met by the extension of traditional forms of equity funding in large corporations. In Britain there is a real need for 210 longer term loans for small companies—probably at fixed interest rates. That would bring an element of stability into the future funding of those companies. At present our financial sector lacks the necessary range of mechanisms to provide us with an adequate range of long-term fixed interest rate loans for small companies.
My second point is that in more benign economic times innovation by small companies is important. It is challenging then, but it is even more challenging in today's economic climate. Innovation is likely to be developed more widely in businesses through a greater awareness of the potential of innovations. The introduction of new ideas into small businesses requires the identification and understanding of those ideas and their transfer into the production of goods and the provision of services. In that area, effective mechanisms for the transfer of ideas from the many sources of such ideas, in this country and abroad, are lacking in Britain. That is frustrating for small companies and for the many centres in Britain that generate new ideas which could be developed industrially in Britain. Transfer mechanisms must be strengthened considerably if large, small and medium-sized companies are to grow. They will make up the economy in the years ahead.
My final point relates to ways in which small businesses are disadvantaged, especially vis-à-vis large companies. Noble Lords have already emphasised the need for deregulation. One aspect of that is that the work of small businesses is hampered by out-dated licensing requirements.
Trading licences are still required in these days for employment agencies, public exhibitions, theatres, cinemas and public entertainments, as well as scrap metal dealers. Many of these licences are quite archaic and serve only to impair the setting up of small businesses to provide such services.
In conclusion, may I reinforce the pleas made by noble Lords that we move as rapidly as possible to sensible deregulation for small companies and equally sensible reduction of administrative demands, especially those made on companies by government departments.
§ 5 p.m.
§ Lord Donoughue
My Lords, this has been a good debate and we all thank the noble Viscount, Lord Caldecote, for arranging it. There have been two notable maiden speeches: first, the noble Lord, Lord Weatherill—a familiar voice to us all, now becoming a familiar face. I must say that when he referred to the convention in this House that we speak only if we know a subject, I saw a tremor pass across the Benches on both sides and I nearly "scratched" this afternoon. Secondly, the noble Lord, Lord Inchyra, spoke as a banker; and we all listen with respect to bankers, especially on the subject of the problems of small businesses.
All noble Lords have stressed how important the small business sector is. Figures vary a little, but there seems to be agreement that something between 95 and 97 per cent. of all businesses in the UK employ fewer 211 than 20 people and have a turnover of less than £100,000. In total, that is around one-third of the British economy.
Since the war, these small businesses have contained on the whole the fastest growth, the fastest job creation—I believe that the noble Viscount said I million jobs—and the most dynamic technological innovation. That is a very potent combination. For the past 40 years, as many noble Lords will be aware, the small companies sector on the Stock Exchange has out-performed the average for the Stock Exchange and has certainly out-performed the large companies in terms of growth. So small has meant growth as well as beautiful.
That was until three years ago, but now small businesses are under-performing. That is very serious and worrying for the future of our economy. It means the most dynamic and creative section of our economy is now at best stagnant and at worst collapsing. We are left with the most mature and least innovative part surviving. That is not good for our future; it is like an aging society without sufficient children.
In this recession, since 1989, over 150,000 small businesses have collapsed. The latest survey figures show deterioration. They show that the decline in orders is accelerating; the decline in output is accelerating; job-shedding is accelerating. The unemployment implications are quite terrifying. We now have 3 million unemployed, on the Government's adjusted figures. That is over 3½ million unemployed on the traditional calculation. The forecasts are for a further quarter of a million unemployed from various industrial sectors: building, engineering, defence, the services. Small businesses will contribute negatively to a significant part of that. I saw that the Small Business Trust estimates that over 1 million jobs have been lost from small businesses in the recession.
What is particularly worrying is that in its latest survey, the CBI shows how small businesses are reacting to the recession. They are reacting by cutting spending on investment in plant and machinery, technological innovation and training. In other words, they are reducing their own future competitiveness. That process must be reversed.
So what should be done? I think the debate has been full of fruitful and positive suggestions from all sides. The first step must be in the area of interest rates which must be cut towards the rate of inflation. I believe that they should be cut by 4 per cent. by Christmas. They should be brought down to the level at which the real rate of inflation is minimal because, as I said in a debate on the economy last week, real interest rates have still not been cut. Real interest rates are still between 7 per cent. and 10 per cent., depending on the individual borrower.
A further fact on interest rates is that the banks must cut them in line with the decline in the Bank rate. Often recent reductions have not been fully passed on. We know that many mortgage holders wait three months in order to receive the benefits of the reduction. Many industrial borrowers do not benefit in full and find that the cut in their own rate is only half the reduction that has been made in the base rate. I understand why it happens and our bankers will 212 understand. Basically what is happening is that the banks are repairing their balance sheets at the expense of small businesses. It is natural, but collectively and socially it is disastrous and is very bad for the small business sector. When the Chancellor next announces significant cuts in interest rates, he should summon the banks and the building societies and say, "This reduction has to be implemented for your borrowers".
However, interest rate cuts are not enough. Confidence is low, so it is the debts that are repaid and economic activity is not stimulated to the extent we would expect. Therefore, monetary policy must be accompanied by industrial, fiscal and employment policies designed to assist the recovery of the whole industrial sector, but especially the small business sector.
The kind of measures that have been mentioned seem to me to be sensible. On capital allowances, I believe that they should be 100 per cent. for the next two years as a kick start and 40 per cent. after that. We have had discussion of investment grants. The noble Lord, Lord Ezra, mentioned what is done in Germany, and certainly there should be financial aid to small business at modest interest rates. We need more assistance for exporters. We are aware that the devaluation is helpful but the small firms find it most difficult to analyse and break into foreign markets. They do not have the resources for it, and I think that the DTI should provide more. I hope that the Minister will reassure us that full resources will be made available for small businesses to take the export opportunity.
In conclusion, the fact is that the Government have failed small businesses in recent years. The CBI has made that absolutely clear at its recent conference. There will be no improvement until the Government introduce sensible macro-economic policies to provide the proper climate for small businesses to succeed. At the more micro-level, they should introduce sensible industrial policies. Sadly, we do not yet have any signs of that, but I hope that the Minister will encourage us.
§ 5.9 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Baroness Denton of Wakefield)
My Lords, I too should like to thank the noble Viscount, Lord Caldecote, for moving this Motion. I thank him with personal gratitude because, as Minister with responsibility for small firms, I am exceedingly grateful to your Lordships for your input into the subject. It is greatly to my benefit.
I was very privileged to have two maiden speakers in the debate today. I am honoured that the noble Lord, Lord Weatherill, chose to make his maiden speech and welcome him into calmer waters. I agree with him; I have always personally felt there is so much knowledge in this House that it induces a certain sense of nervousness. I also thank him for leaving space in another place to be filled by a lady.
I was also pleased to hear the maiden speech of the noble Lord, Lord Inchyra. He is a worthy champion of the banks, and they should be grateful to him. As everyone has recognised, small firms are vitally important to the UK economy. As everyone has said, 213 they have done much to foster the development of an enterprise culture, extending consumer choice and making a valuable contribution to the quality of life. They stimulate competition and offer individuals the chance to realise personal ambitions. This debate gives the Government the opportunity to assure noble Lords that our commitment to their well-being remains undiminished, and to set out how we help small firms to start, survive and grow.
We have heard several variations of figures. As the noble Lord, Lord Donoughue, said, there are varying definitions of small firms which make direct one-to-one comparisons. However, all the figures show enormous growth in that field. I have a slightly different definition of small firms. The European Community defines a small firm as having 500 employees. I personally think 500 employees constitutes a pretty big firm. My definition of a small firm is one in which the end of the day arrives before the end of the work and no one will do that work tomorrow. I wish to consider the needs of small firms from their point of view and to consider the various watersheds that small firms hit in their growth.
We believe that business works best when it is given the maximum freedom to operate in a competitive market. The success of the economy as a whole depends on providing a context in which individual enterprise can flourish and is rewarded. While the Government have a role to play in setting a favourable economic climate for both large and small businesses, the crucial contribution is provided by the dedication, commitment and enthusiasm of individual small business people up and down the country. I meet those people and am impressed by them. I have great confidence in them. The success of these policies is reflected in the unprecedented growth that the UK small business community experienced during the 1980s. For example, between 1979 and 1989, the total number of businesses in the UK grew by two-thirds, representing a net increase of almost 500 businesses for every working day of that decade. All regions and most industrial sectors benefited from this growth. Even during the more difficult times of today, the number of new firms starting up is still impressive: bankers' surveys show 450,000 for 1991 and another 250,000 in the first half of this year. I hear that several noble Lords have been meeting undertakers, but there are still many more midwives around!
The number of businesses in the UK is around 3 million, of which, as has been said, 97 per cent. are small firms employing fewer than 20 people. Such firms provide 17 per cent. of UK turnover. My right honourable friend Mr. Sainsbury, the Minister of State for Industry, looks after large firms; but I should remind him that I have the big job in this respect in terms of where the great future for the economy lies. In this context, small is not simple. There is a tendency to underestimate the sophistication and the high-tech content of the small firms sector. That sophistication is vast and does not just occur among the mature industries.
As the noble Lord, Lord Donoughue, has said, the job creating role of small firms has been particularly 214 impressive. Small firms currently employ over one-third of Britain's private sector workforce. Since 1979 the Government have been working to create a more beneficial tax regime as a key factor in stimulating growth. The UK now has one of the most favourable corporation tax structures for small companies in the European Community.
As a Government, we also take a close look at the demands which we ourselves place on small businesses. Enterprises, as has so rightly been said, should not be distracted unnecessarily from their prime tasks. Governments must remember that the smaller an operation, the greater is the distraction in relative terms brought about by every single law to be complied with. The deregulation initiative has been instrumental in keeping the burden of bureaucracy to a minimum. Despite this, there is a widespread feeling that the needs of business have not been fully taken into account, and that something more must be done to create the right conditions for future growth. We are keeping up and increasing the pressure. The Prime Minister's recent announcement that my right honourable friend the President of the Board of Trade will lead a renewed initiative to cut burdens on business has been welcomed by small firms. I am delighted to confirm that we much appreciate the work that my successor, Mr. Trippier, did in this area. That work will be continued. I am delighted to reassure my noble friend Lord Chilver that licences will be one of the prime targets to be considered to enable companies to run efficiently.
As the Minister responsible for small firms, I am well aware that small firms suffer at the bottom of the late payment spiral, the compliance spiral and the regulation spiral. We are determined to look after them. I do not believe a person needs a Ph.D to take people on into employment. I do not know of a small firm other than an accountancy practice which set up in business because the employees were good at paperwork. Firms are good at the things they set up to do. We must let them carry on with what they are good at so they can grow. It would be my ideal wish that all small firms' paperwork could be pro forma and be reduced to an absolute minimum.
I believe that in the enormous growth of small firms in past years we have created a new generation of small firm owners. My noble friend Lord Bridgeman drew attention to that matter. Those small firm owners do not live in the same road as their bank managers. They do not play golf and they do not know accountants and solicitors. They need all the help they can get. It is indeed unfortunate if those firms should not succeed because they did not know how to reach the help that was available. Such a position is totally unacceptable. I have been pleased to hear the welcome given to my right honourable friend's One-stop shop initiative.
From time to time every small firm encounters hurdles in its growth process. Our task must be to help them overcome such hurdles as fast and as smoothly as possible. Apart from in the high technology field, there will be no hurdle they come up against which 215 someone has not already overcome. We feel it is important that firms should share their knowledge about such hurdles.
I was delighted to hear noble Lords agree today that small firms cannot be put into boxes and that each have individual needs. We must be there as those needs materialise. I am delighted to assure noble Lords that the One-stop shops will be visible and accessible both in terms of location and time. They will be branded for the benefit of the customer, not for the benefit of suppliers. However, suppliers are the key to success in this area and we shall harness the great strengths of the infrastructure from the chambers of commerce. the training and enterprise councils, the enterprise agencies, local authorities and those members of the private sector who are interested in the small firm economy.
It is important we ensure that small firms do not reinvent the wheel. That is expensive, and it is slow. I assure my noble friend Lord Orr-Ewing that the small firms Minister does not intend to re-invent the wheel either and will, as he puts it, pinch any idea which will work to the benefit of our small firm economy. I am delighted to tell the noble Lord, Lord Ezra, that I spent some time in Germany this summer trying to identify good practice which was relevant and which I could copy. Fixed rate loan money is an issue which is very high on my list of priorities.
I now turn to the question of funding, a major issue for small firms. However innovative we are in seeking to help small firms, the banks must and will remain the main funding agents of small business. It is therefore important that the relationship between small firms and banks is sound and happy and that they each understand the other's agenda.
I know that the noble Lord, Lord Ezra, thinks that sometimes my attacks on banks are a little too keen. Therefore, I should first like to thank the banks for giving me channels of communication so that we can check that there are two sides to every story. However, I am the Minister with responsibility for small firms and although I know of no bank manager who is frightened of his small firm visit, I know of many small firms which are frightened of their bank visit. We have to correct that balance. There is an issue of perception. There is a need for transparency of action, and there is a need for service. If we are considering having our one-stop shops open late at night because those involved in small firms have to be with their customers during the day, I hope that the banks will consider offering that service, too. I also hope that we shall not see a continuation of the backdating of charges. I am delighted to know that action is to be taken to correct the practice of the removal of funds from accounts without the holder of the account being informed in advance.
Of course, we have to worry about the fact that loans are based on property and the many revaluations which take place. We need a commitment from the banks in that area. I must agree with the noble Lord, Lord Donoughue, that falls in interest rates must be shared with small firms as well as with shareholders. The minimum lending rate is an issue which I hope the banks will address.
216 We have looked and are looking at other areas of support. We have seen much development in the area of venture capital. I find it particularly welcome that my noble friend Lord Caldecote introduced the debate because, through his leadership of 3i, he was instrumental in ensuring the starting up of many firms which are now significant players in our economy. We would welcome now an institution rather like 3i in its early days. I also pay tribute to the pilot scheme run by 3i in Birmingham, working with the community on appraisal costs under which loans of £50,000 could be considered rather than only of £250,000. That is helpful.
We have launched enterprise funds in Yorkshire and the East Midlands. They have a regional focus, as do the German banks. We hope that that will work. In Yorkshire we call it "Yorkshire brass for Yorkshire business". There is self benefit to the community.
I believe, and many Lords have said, that money with advice is most beneficial to small firms, enabling them to maximise the advantage from the funds available. We publish guides to sources of funding and the TECs direct businesses to sources of funding. The "local angel" schemes, with the Training and Enterprise Councils, direct companies to local sources which may be of help. I agree with my noble friend Lord Wade that partnerships in finance can also be crucial.
Both my noble friend Lord Caldecote and my noble friend Lord Bridgeman raised the question of BES. Unfortunately, only £15 million out of £420 million raised in 1989–90 went to small manufacturing firms. The Government's policy is for low overall taxation; but I note the points concerning the possibility of reinvesting one's own money, as company owner, into a business in a tax-efficient way. Noble Lords have also asked whether we could encourage pension funds to invest in small business, and to encourage committed persons to become involved.
My noble friend Lord Chilver rightly said that we must encourage firms to opt for fixed loans and long-term agreements.
I turn now to one of the other major issues facing small firms—late payment. That subject was raised by many noble Lords. The Government keep a constant eye on that subject. The noble Lord, Lord Ezra, was kind enough to say that we have tried to put our own house in order. In our contracts we insist that sub-contractors are paid on time. We have also audited all our departments and we support the CBI initiative. However, as my noble friend Lord Gisborough indicated, it is often the case that the chairman signs up to a principle while the credit controller is still rewarded for keeping money in the company. We have to make sure that the message goes all the way down. We have asked that payment terms be disclosed in annual reports.
We have not put aside the possibility of legislation, but I am conscious that it is difficult to bring the customer back to the order book once one has taken him to court. At present companies could apply interest charges for late payment, but if the supplier is strong they will not insist on that. I have a personal commitment to follow up the matter with large firms 217 and government departments. I must also pay tribute to the way in which the media have helped in drawing attention to the problem, not in order to create villains but to get the cash to flow.
In addition, I have initiated three pilot schemes in chambers of commerce and trade associations to see what help they can give on these matters because they have in their membership both small and large firms. If we can gain knowledge from that initiative, we shall certainly share it.
My noble friend Lord Caldecote drew attention to the fact that it is important that, when all other methods have failed, small firms should have easy and quick access to the court. My noble and learned friend is looking at that matter at the moment.
I must thank the noble Lord, Lord Clinton-Davis, for his kind words in relation to my commitment. However, I must say that I am proud to be part of a Government which has nourished so many small firms into life. This question of small businesses is not one on which I would wish to score political points. We must make sure that the economy is sound.
My right honourable friend's last Budget very much took into account the needs of small firms. I must also pay tribute to the way in which British Coal Enterprise has founded small businesses for miners. The growth in that area is tremendous.
The noble Lord, Lord Ezra, quite rightly pointed out that making this speech the day before the Autumn Statement is not easy; but I am sure that there will be other opportunities. I should like to thank my noble friend Lord Weatherill for his work on the Boulton Committee, which was a landmark in the way in which Government treats small firms. He knows that much of the work required is fiscal and that I need the support of the Treasury. However, I can assure him that I have large lungs and endless determination.
My noble friend, Lord Joseph, touched on many points. He mentioned intellect in small business as he found it in Germany. That is important and is something we continue to look at. He also drew attention to the fact that polytechnics had played a tremendous role in this area and it was very important that they did not become elitist and move away from the small firm market. We believe there is now an opportunity to encourage graduates into small business so that good. up-to-date practice can be shared, often in groups rather than individually, and to encourage large firms to do some of their training in small firms which gives their people much better project management.
I am pleased to reassure my noble friend that as far as self-employment is concerned, we have almost caught up with other Community countries (12 per cent. compared with 13 per cent.). We have a higher percentage of people working for themselves than in Canada or the United States. As my noble friend Lady Platt said, young enterprise flourishes and anyone who attends schools at speech days knows that to his or her personal expense. They are not only good producers but good sales people.
218 The Prince's Youth Business Trust does good work in small firm development, and I am hoping that it will publish a directory to which people will turn when looking for services. I believe many people will use it. My noble friend Lord Joseph mentioned women's magazines. We recognise that their awards in this area are of great value. I am delighted to tell my noble friend Lord Carr that we are supporting the chambers in their strategy to increase the strength of the movement throughout the country. Although obviously the TECs have hiccups, they are a very young organisation, the oldest being under three years and the youngest is one year only. I believe we shall see a watershed of good practice.
I am pleased to say to my noble friend Lord Wade that the DTI spends over £100 million a year on technology transfer, a large part of which is directed towards smaller firms. Schemes such as SMART do give funding of the venture capital kind as opposed to grants. Only small firms with fewer than 50 employees are eligible.
My noble friend Lord Orr-Ewing mentioned Chapter 11 as a possibility. The legal systems in the United States and Great Britain differ greatly and we need to hit the right balance between the time needed by firms to recover from temporary difficulties and preventing firms that are not going to recover from bringing others down with them. Nevertheless, we will continue to look at useful examples of legal actions here and abroad.
The United Kingdom's experience and approach to the small firms sector is highly regarded by our European Community colleagues and the Commission. We shall continue to press for and support steps in the Community to reduce administration, widen consultation with small firms organisations and secure a realistic appreciation of the cost of new measures to new firms before they are agreed. Our broad approach to the support of small firms remains the same as it has been over the past 12 years or so: to support and not to swamp them. We continue to aim to provide the right economic climate, pursue policies designed to keep inflation under control, minimise taxes and achieve low interest rates for both large and small companies. We must minimise bureaucratic burdens from Whitehall, the town hall or Brussels. I shall personally continue to ask my colleagues to be understanding of the needs of small business.
I believe that we can face the world positively from the point of view of our small firm sector. It is well; it continues to grow; and the Government have good reason to be proud of the support that is available to help it. I am pleased to have the privilege of being that sector's champion.
§ 5.33 p.m.
§ Viscount Caldecote
My Lords, I should like to add my congratulations to the two maiden speakers, both of whom spoke from real experience. I hope we shall hear them on many occasions in future.
This has been a fruitful debate during which many valuable ideas have been put forward. I am grateful to my noble friend for her full reply. I was encouraged to 219 hear her reconfirm the Government's recognition of the importance of small companies and their determination to reduce red tape in every way. I much appreciated her kind comments about 3i and the need to help smaller firms to a greater extent as in the early days of the company. My noble friend referred to the problems of BES not having attracted a great deal of investment. The problem was that the scheme, admirable in conception, became much too complicated and restrictive with far too many rules that prevented its use. I reiterate my firm belief that the encouragement of equity investment in small firms is of the utmost importance, because if they are too reliant on bank or any other loans they get into real trouble when there is a downturn in the economy. My noble friend Lord Chilver said that the percentage of small companies in our economy was lower than in most of our competitors. That is a clear sign that there is no room for complacency in this field. We must do all we can not only to support the current small companies but to help new ones to form.
I was surprised and perhaps a little disappointed that noble Lords opposite showed so little interest in the debate and contributed only two speakers out of 16 or 17. The noble Lord, Lord Donoughue, was perhaps suggesting that there was not much experience or knowledge about small companies. That may be, but it is disappointing that there has not been a greater contribution from noble Lords opposite.
§ Motion for Papers, by leave, withdrawn.