Oral evidence: Government Support for BusinessHC 770-iiiTuesday 2 December 2014

Oral evidence, 2 December 2014.

Witnesses

Carl D’Ammassa, Managing Director of Asset Finance, Aldermore Bank, Irene Graham, Executive Director for Business Finance, British Bankers Association, and Stephen Pegge, Group External Relations Director, Lloyds Banking and Group, and Chairman, Small Firms Advisory Panel, British Bankers Association, gave evidence.

Chair

Good morning, and thank you for agreeing to help us with our inquiry. I am going to bat on very quickly. Could you introduce yourselves, starting with you, Irene?

Irene Graham

Irene Graham, executive director for business finance at the BBA.

Stephen Pegge

Stephen Pegge, external relations director for Lloyds Banking Group.

Carl D'Ammassa

Carl D’Ammassa, managing director of asset finance at Aldermore bank.

Chair

Irene, you wrote to us stating that: “Businesses are finding it easier to access bank borrowing and costs are falling due to competition between lenders.” How do you think banks have made it easier? You may have heard some of the comments from the previous participants, and you might like to respond to some of them.

Irene Graham

Sure. There are a range of players in the marketplace today in the banking industry, both traditional players and new players that have come into the marketplace, and that is making it very competitive. Funding for Lending has certainly played its role as well in increasing liquidity in the market and reducing price to businesses. That is reflected in a number of the Bank of England credit conditions. You are seeing a lot of different types of products and services that the banks are offering today. The focus is very much on the right type of finance at the right time and the right mix. Overall in the last quarter, £13.7 billion of overdrafts and loans of new money have gone in from the banking system to small and medium-sized enterprises. That is 30% up year on year, and that quarterly figure has been growing month on month, so money is going out into the marketplace. That is also reflected by businesses themselves. The SME Finance Monitor, which I think has been mentioned by other witnesses, has interviewed 72,000 businesses over the last couple of years, and it is consistently saying that seven out of 10 of those seeking finance are achieving the finance they need. It is about the right mix and the right types of services, and there is a lot of competition in the marketplace, with new players and traditional players.

Chair

The FSB wrote to us, saying that “47% of small businesses believe credit is unaffordable and 24.8% of small businesses have found the availability of credit is very poor.” There would appear to be a discrepancy between their perspective and yours. How do you account for that?

Irene Graham

First, there is a range of businesses in the marketplace. Those figures are improvements from previous surveys by the Federation of Small Businesses. Certainly, the SME Finance Monitor is showing that seven out of 10 businesses are getting the finance that they need. Clearly, it is about making sure businesses know how to get the right type of finance from the right providers of finance. What you are also seeing in the overall small and medium-sized enterprise environment is that cash held at the bank is the highest ever recorded—about £149 billion is held in cash. Indeed, even overdrafts unutilised are about £13 billion. So there is finance in the marketplace, and if you have a good business with a good credit rating and risk profile, you are getting the finance you need.

Chair

Carl, as a competitor bank, which will no doubt have customers who have been turned away from the larger established banks and the legacy banks, what obstacles do you see them facing and how do you overcome them?

Carl D'Ammassa

We obviously see the survey result from the SME Finance Monitor, and for sure confidence and ambition among SMEs is on the increase. As a new bank, we do not have a current account, so customers are having to come to us for the products and services that we offer. Increasingly they are saying to us that their existing bank has not been able to help them; and that is where they have had to hunt out opportunity with the likes of Aldermore. We are now supporting SME customers to the tune of £2 billion and we have got around 30,000 SME customers in our portfolio, so clearly people are finding their way to us, but I think, on some of the points that were made a little bit earlier, it is knowing where to go.

Chair

What are you providing that the established banks will not?

Carl D'Ammassa

I think our approach is much more flexible. We do not have a branch network. Our distribution model is through thousands of professional financial advisers up and down the country who are tapped into the small businesses and what their requirements are. They will introduce them to a number of different funders depending on their credit profile and what sort of financing they are looking for. I think what makes us unique is the fact that we do not auto-no things. We are at a point where we will look at every transaction on its individual merit. We are trying to fill the role that the bank manger used to, and we do make our underwriters accessible to both the introducer and also to the end user, to talk about the product that we are offering and how we can help them. So I think it is that more flexible approach than everything being driven off a computer saying “You don’t fit our profile.”

Chair

So you are the institutionalised legacy of Captain Mainwaring, are you?

Mr Binley

Forgive me, I have been a customer of Lloyds for a very long time, since 1989, and I have a lot to be thankful for to the banks in those days; but the banks in those days are not the banks now. It is a different banking situation, and the complacency of the high street banks is appalling. We talk about the low interest rate, but we do not recognise the high charges that we levy on small and micro-businesses—and they are considerable. We talk about cash being available in the SME sector, but the companies that hold cash reserves—and we hold quite a lot, too, in my own business—are not the companies that need to have the money to start moving, developing, and, indeed, in micro-business terms, starting up a business; and you are not interested. So can we get away from the complacency and talk about the reality? What are you doing, in banks, for new start-ups—very small new start-ups, micro-businesses? What are you doing when you say that 80% of your applications are accepted, when in fact you do not allow a lot of people to get to the application stage? There is a pre-application stage.

Stephen Pegge

The first thing to say, Mr Binley, is I absolutely accept there is a need to rebuild trust, confidence, and focus on what banks are really here for—that is supporting the real economy. I can speak for Lloyds and I think there are some differences in strategy between different banks.

Mr Binley

Not much.

Stephen Pegge

We are a UK-focused retail commercial bank and small businesses and SMEs in particular are a major priority for us. That has been reinforced by our new strategy again, and we have been growing our lending consistently over the last four years. The Bank of England’s funding for lending figures are published now, I am pleased to say, broken down by category, and Aldermore, Lloyds, Santander are some of the banks that have been growing on a net basis. In the first nine months of this year, we have grown our lending net by £1.2 billion, so it is 5% up year on year. That does require us to support those small businesses too. We have helped and opened banking relations with 100,000 start-ups in the past year. Many of them are future growth businesses, but even if they are not growing, they are important to their local communities and local economies. I do accept your point that it should be possible to see people locally where you want to see people locally. I am very happy to look into why you could not see someone in Nottingham—

Mr Binley

Northampton. I was being naughty—I did not go to my own branch.

Stephen Pegge

So we have local lending discretion for our relationship managers, typically dealing with those customers who borrow over about £50,000. By and large, those people borrowing £5,000 or £10,000 will either apply online, deal with their manager over the phone or see a local manager with local discretion, but I am happy to look into those circumstances. What is important is to rebuild that trust, and I can pick up on Mr Bailey’s question on confidence. The other thing that the SME Finance Monitor showed is that businesses are more likely to get finance than they think they are. There is a certain perception here that funding is not available, and there is a duty on all of us—that extends to the banks, but also to the business groups—to reinforce that ambition and confidence and to make sure that people know that finance is available. Across the market there are 500 different providers, and there is an appeals process, so people do have a right to a fair hearing and that is properly overseen.

Mike Crockart

May we turn to the role of the British Business Bank? The thought is that it is to work with partner banks, such as the two on the panel, to change the structure of finance markets. What is it that we need to change? What was the structure that was wrong? What failings do we have at the moment?

Irene Graham

For a long time there have been interventions that the Government have made into the small and medium-sized enterprise sector. You have heard about the enterprise finance guarantee scheme, which was previously the SBL scheme, and it has helped where there is a lack of security for business. What you are really looking at is two things, the first being working with the private sector, where there are difficulties for a business to borrow directly either from a bank or an alternative finance provider without some level of support, and the enterprise finance guarantee scheme is a good example where there is a lack of security. You need then to look at where other gaps in services might be. We have talked about micro-businesses and start-ups. Certainly, in many respects, that is more of an equity-type higher risk than is necessarily right for a bank to provide finance to initially, so the start-up loan scheme, which is managed by the British Business Bank, helps there. Many banks are partnering that scheme, both by referring businesses into it and in follow-on funding. That is working in a partnership way, providing finance to start-ups, along with the angel investment and co-investment scheme. The important thing is how the Government bring everything together with what the British business man does, working with the private sector where there are gaps or where there would be a lack of support for the business unless there was some sort of intervention that helps the private sector to come alongside the Government.

Mike Crockart

That is tinkering in particular areas of start-ups, exports or whatever. The evidence that you heard, although it might be anecdotal, was that of an entrepreneur sitting here saying that they went to 13 banks before finally getting the lending that they were asking for. The quote that I noted was, “The bank is no longer your first port of call” for funding. That cannot be a comfortable place to be.

Stephen Pegge

I would certainly hope that people feel—we would want people to feel—confident in coming to us, not just for what we can offer, but for signposting to other forms of support that might be appropriate, such as equity. We capitalised the business growth fund, which is now very active and has invested £300 million or more over the past couple of years, so referral opportunities should come there. The British Business Bank serves an important purpose—in answer to one of your earlier questions, or to Mr Zahawi’s earlier question about the alphabet soup of schemes—in bringing things together and in helping people to navigate the Government’s different interventions. We can be much clearer and make sure that people get what they need. Relationship managers need to know that they can go to one point of call to find out exactly what is available and to support their customers. By having it together in one place, we should be able to signpost people. It is not quite all together yet; there is more opportunity for the British Business Bank to bring further schemes within their remit, such as the regional growth fund, which is still run separately. Equally, I think it should be possible for all ports of call, whether it is the accountant, a specialist provider, the bank or a Government support agency, to make businesses aware of the full range of options in front of them. I accept we have to do more to raise awareness.

Mr Binley

What is the ratio of relationship managers to businesses in Lloyds Bank?

Stephen Pegge

It depends on the size of the business.

Mr Binley

What is the average?

Stephen Pegge

The average is about 200 customers per relationship manager.

Mr Binley

You don’t think that’s too many, and that that is one of the problems?

Stephen Pegge

We are investing in putting more relationship managers into local markets.

Mr Binley

So you do think it’s too many?

Stephen Pegge

You can always do more, but you have to balance that with the cost of providing it and the ability, then, to offer competitive finance.

Mr Binley

Forgive me, this is a vital point because it is about your coalface presence. If you look at the amount of money you have earned from the two companies I have started, which now employ 300 people, your return has been massive. I had a local business manager who became almost a director, saw us every three months and so forth. You have forgotten the return you make from a successful business on the amount of money you bring in. Can you think a little more about that?

Stephen Pegge

You must constantly look at where you have relationship managers and whether you have the right ratios. Equally, you have to make sure that the customer and the relationship manager aren’t spending their time on long-winded processes. The more we can do to streamline things and maximise the time that managers can go out and see businesses and meet people, the better.

Mr Binley

You can’t get to them.

Chair

We have debated this point. Mike, do you want to come back?

Mike Crockart

Yes, I have a question for Carl. You are trying to enter the market to give a better, more trusted version of the legacy banks. Is that behind the curve; have things moved on?

Carl D'Ammassa

The Business Bank plays an important role for us. We’re building our balance sheet. Capital and risk tolerance defines what would fall within the box of what we would like to take on, from a customer-profile perspective. The schemes that the Business Bank is proposing will help us widen that box and widen the number of entities that we can support. We’re already in conversations, as far as my own business part of the bank is concerned, to look at how we can apply the Enterprise Finance Guarantee scheme in the asset finance environment. So we do want to lend more, but, clearly, as a challenger bank, we haven’t got the balance sheet to do everything for everybody.

Mike Crockart

Finally, Mr Pegge has made it clear that he would support other Government business debt and equity finance schemes coming under the Business Bank umbrella. Is that something you would see as a forward step?

Carl D'Ammassa

We’d support the co-ordination of all initiatives, including the regional growth fund, falling under the British Business Bank. We’ve only got 800 people in the bank, which is phenomenal from where we’ve come from, but we can’t co-ordinate participation in all these schemes with the different Government agencies. That is very difficult for us, so having one relationship with the BBB is hugely helpful so that we can configure things in order to widen that box of people that we’re prepared to transact with.

Mike Crockart

There’s a lot of confidence in the British Business Bank’s ability to take on these extra powers, despite the fact that you’re only a year old. Are you willing and able to take on those extra responsibilities?

Irene Graham

We’re very supportive of the British Business Bank. The good thing is that it was built on infrastructure that existed and a known entity called Capital for Enterprise; so it has brought policy and operations together; it has been given its ability to be slightly separated out from day-to-day Government as a stand-alone entity. That will make it flexible and nimble to respond to market conditions, which is an incredibly important point. The regional growth fund is something that many of our members use and find very good, because they can deploy it relevant to their business and business model, and what is right for the business customers they are serving. But it is sometimes difficult to co-ordinate, so giving the British Business Bank the co-ordination function would be helpful.

Ann McKechin

The Green Investment Bank states that each investment it makes offers competitive returns against a “green and financial double bottom line”. If that is the case, why do you not make investments off your own bat?

Stephen Pegge

Thank you for that question. We certainly do and have done about £1 billion of green investment in our own right, but we also work closely with the Green Investment Bank. Although it is early days, they have a very good team and are making a bit of a difference. Obviously, as you know, they operate in three broad areas, of wind energy in energy efficiency, recycling and biomass and so on. We have done different investments in those fields. With these major infrastructure investments you often have a period of initial construction and development—a build phase, if you like—that banks and capital markets are best geared to provide finance for. That tends to be short term and can be quite high risk. Where the Green Investment Bank has really helped is by providing a bit of equity that can draw in debt capital, which we have done on a number of transactions. Then there is a period of operation—of long-term finance—and often it is the institutional investors who are best placed to do that. They have been able to connect the two. There is something, as well, about the fact that there are quite a lot of importance to tax in many of these green investment deals. When they are very long-term investments, you want to be confident that the tax regime is not going to change and undermine the profitability. Having the Green Investment Bank, an essentially Government-funded organisation, aligned with those interests can give people confidence to invest. In due course, you will see their demonstration effect, which is really important, leading to more and more private investment without the need for Government support.

Ann McKechin

So effectively they act as a catalyst.

Stephen Pegge

Yes, they are a catalyst. They are a source of expertise, as well. A lot of our experts in this area can talk to people who speak the same language and connect things. We are talking about big infrastructure, which often needs more than one institution to play.

Irene Graham

We would agree with that. There are other banks partnering with the Green Investment Bank in a number of ways. They act as a catalyst in a higher risk sector and bring in that investment alongside. The BBA is doing a broader survey into the UK infrastructure market at the moment and we would be happy to share the results of that research, which will be out in the new year. You may find that of interest when you touch on the Green Investment Bank.

Carl D'Ammassa

We do not participate in large projects. We have funded some smaller projects on our own basis, with straightforward loans.

Ann McKechin

This month, Gavin Templeton, the Green Investment Bank’s sustainable finance head, advocated bringing “green reporting into line with financial reporting”. Do you give any consideration to the green credentials of your investments at the moment—do you weight them in any manner?

Stephen Pegge

We do. We also have our own commitments on environmental and sustainable development as part of our prosper plan. Clearly, many businesses that are supplying other organisations have to meet a whole range of criteria, which will include sustainable credentials. That makes it important for them to be able to bid for their contracts. There is clearly risk, if businesses are not complying with regulation or potential future regulation. That is very much a consideration. But more than that, I would say that there is opportunity. We look at the whole area of alternative energy and of greening the supply chain as a business opportunity that the UK is quite good at and we could get more of, globally, if we are able to support those businesses.

Ann McKechin

Do you think that reporting an environmental impact is, in turn, changing investor behaviour to some extent?

Stephen Pegge

Yes and no. We issued a bond not long ago, backed by a number of our business areas, investing in ethical community and environmental areas. We had fantastic demand for it, so I am sure we are going to do more with that. The money we raise we are putting specifically to those sorts of purposes. But you have to also be conscious that there is a broad range of businesses out there who need support as well. It is clear, however, that investors are increasingly interested.

Ann McKechin

Mr D’Ammassa, you said that you used your own criteria.

Carl D'Ammassa

Yes. We are supportive of investment in environmental projects on a smaller scale. We tend to do a lot with our agricultural clients who we want to invest in. We do not have particular targets because we look at every opportunity that comes our way on its own merits. We are happy to support environmental organisations.

Ann McKechin

Has the Green Investment Bank contacted any of you about the creation of this A-plus to F ranking of investments? Are any of you aware of that?

Irene Graham

I am not aware of that. Many of the banks that work with the Green Investment Bank are adhering to the equator principles, which are a sort of global standard, but I am not aware of that particular point.

Mr Binley

The British Bankers Association has recommended that the regional growth fund be moved to the British Business Bank. We have already had evidence that over the last 10 years local service from banks has been appalling. It is improving now but it has been appalling and the banks’ reputation in that respect has suffered massively, as has been admitted by Mr Pegge. Given that, why do you think what is a very local requirement—feed-in for the regional growth fund at a local level—can be handled by the banks? Your logic seems to be totally unacceptable.

Irene Graham

Let me unpick a number of those points. Obviously the industry realises that trust and confidence has to be rebuilt in the industry. We are doing a lot collectively under the Better Business Finance programme to support businesses through mentoring for micro-businesses and start-ups, and growth businesses through the Mentors Me scheme, through the appeals process that Stephen has referred to, and also in terms of improving access to finance overall.

Mr Binley

Let me stop you. We have heard evidence that the ratio of relationship managers to businesses is one to 200. That is almost impossible for anybody to handle at any real level at all. How can you say what you are saying when Mr Pegge said what he said?

Irene Graham

I am merely saying that there is investment going into front-line staff, but businesses also want online services, and that is a critical fact.

Mr Binley

That was not my question, but carry on.

Irene Graham

In terms of the regional growth fund and movement into the British Business Bank, as I referenced, Lloyds and Aldemore and others are using the regional growth fund. They are working with Government in that regard as are many other finance providers. We are absolutely not saying about changing the bidding process, which should be open to everyone and be open for local entities to bid for monies under the regional growth fund. We are not suggesting that that should be different at all. All we are saying is that the administration of it should be with the British Business Bank. At the moment that is in different pockets of Government. The administration of the regional growth fund should be centrally co-ordinated to make it simple and easy to access for those that wish to seek monies from it. That should continue absolutely in the bid process as it is today.

Mr Binley

When at this moment it is being operated at a local level through LEPs to a large extent.

Irene Graham

There is a mix—

Mr Binley

How can you hit that local input when you are already admitting that banks aren’t able to do it?

Irene Graham

Every bank is investing in local resources.

Mr Binley

Look, I am a customer.

Irene Graham

I understand.

Mr Binley

Believe me, it is nonsense to make that statement.

Irene Graham

All I can talk about is what I know banks are doing and investing in and continuing to invest in—relationship managers, education of relationship managers and giving them local authority. I acknowledge the fact that after the crisis, some of that local decision making may have been pulled back centrally, but it is going back to local managers and local relationship managers now. That is a very important factor for the way in which the banking industry operates. We also have to recognise that businesses themselves are changing in the way they wish to seek to engage at times. The recent Business Banking Insight survey by the British Chambers of Commerce and the Federation of Small Businesses lists 137 different banks offering business services to small and medium-sized enterprises. In that, they have reflected the question that was asked, and found that 69% of businesses really want to also have online and electronic services, combined with branch and local services. We are investigating that.

Mr Binley

We have already made the point again and again this morning that the banks do not have the local presence they once did. They do not have the local understanding they had. What you are suggesting needs local understanding. It seems to me that what you are suggesting is actually dangerous, and you should be very careful.

Carl D'Ammassa

We are indeed. We are fortunate that we have a national distribution model.

Mr Binley

That is different. I accept that.

Carl D'Ammassa

That is through professional finance brokers who are well versed in dealing with the local needs of SMEs, and in working with other funders that provide RGF support. We are not dependent on the branch network or—

Mr Binley

I totally accept that, which is why I did not direct the question to you. But you are involved in LEPs, and you do know which LEPs are working well and which are not. The banks do not. They haven’t got a clue, frankly. I am a director of an LEP board, and you haven’t got a clue. Can I ask you to go back and look at that statement again?

Irene Graham

A number of the banks are part of the access to finance LEP local environment and do work very closely with them, but perhaps Stephen wants to add something.

Stephen Pegge

I was really just going to add one comment on the point about RGF, because we also supported the thought, not that—

Chair

I believe that your next question is on the RGF again.

Stephen Pegge

In that case I will stick to the LEP question. A number of our local managers are on the boards of LEPs.

Mr Binley

Some.

Stephen Pegge

Yes, absolutely. Clearly, you would not want every board to be dominated by bankers, but I think it is appropriate that we are involved in supporting them where it is most appropriate.

Mr Binley

A final point, Mr Pegge. You said that you had some. That is not dominating. You ought to encourage your people to get involved with the LEP—

Stephen Pegge

Indeed.

Mr Binley

And help them do the job more effectively, not make statements like this.

Irene Graham

I just want to—

Chair

We must get on. There was an issue around the number of applications that were withdrawn.

Mr Binley

I don’t think that question is very important to what we are discussing, frankly, which is why I decided not to ask it, but I will if the Chair wishes. The Government confirmed that more than 22% of the successful RGF bids were withdrawn, many because they were unable to secure the match funding required to proceed. What unacceptable risks had private financiers seen that the Government have missed? I don’t think there were any; I just think that some of the allocations were silly, but that is by the bye.

Stephen Pegge

There is a tender process for regional growth fund bids. You would want to see a competitive element, which means that some will get supported and others will not. At the same time, you want to make sure that that is well spread, and that it is available and distributed locally. We certainly do that with our RGF money. We use it to leverage grants to help businesses invest and create jobs, that are then added to by three or four times that amount in lending, so that they can have a bigger investment overall. One thing I think is helpful is having the British Business Bank—at the level of the top administration, not local distribution—take a bit of a hand in it. They are very experienced in negotiating on state aid. Often, one of the difficulties with whether or not things qualify is the rules and regimes which apply in Europe. If the British Business Bank were a bit more involved in that, I think we would have less confusion about that particular one.

Mr Binley

So you want a much more specialist involvement, rather than this rather bland statement that the British Bankers Association has made. Is that what you are telling me? You can disagree with the BBA.

Stephen Pegge

My interpretation of what the BBA had suggested, which I agree with, is that at the top level there is some specialist administrative control. I completely agree with you that the distribution needs to be very diverse.

Mr Walker

I want to touch on funding for lending. Mr D’Ammassa, you wrote to us to say that you were concerned that more lenders had not drawn more funding from the funding for lending scheme. Why is that the case?

Carl D'Ammassa

I think that, certainly for challenger banks such as ourselves, there is only so much you can do with drawing on funding for lending. I am sure you will have seen the stats which support our having drawn about £0.5 billion from the funding for lending scheme. We have actually lent £4 billion, so it is a smaller part of our funding model. It is very important for challenger banks to demonstrate that they can stand on their own two feet without lots of Government support. We have not drawn anything further during this year at all, despite our net lending stats increasing.

Mr Walker

So in a sense it is not really contributing to competition in the sector if the challenger banks can do without it; it is just propping up legacy banks.

Carl D'Ammassa

Yes, we are at a fortunate point now where we can transact without it, hence why we are not making any further drawings. If you go back to when FLS kicked off, clearly we threw ourselves into that at that point in time. Liquidity has moved significantly during the intervening period as well: it is a lot easier for banks like us to get the funds to be able to lend out. We think it has probably had its run.

Stephen Pegge

Could I add something on that?

Mr Walker

I wanted to ask you about that, because you specifically said that funding for lending was enabling you to offer a 1% discount to SMEs. Do you feel that it is adding to the offer?

Stephen Pegge

Yes. I think it was particularly important at the time it was launched: funding costs were high in the marketplace, many smaller entrants were liquidity constrained and I think it really helped to change the whole funding environment. Certainly, we have carried on offering discounts. The second thing that I think it did was to introduce transparency, since the Bank of England started reporting who is lending what in the marketplace. The third thing is, it has added a bit of confidence. We have actively marketed it, because it is a great way to showcase and say, “Look, money is available. It will be at affordable rates and you can access it here.” We have used it and drawn on it and I don’t think there should be any stigma to it. I can understand Carl’s point and concern about that, but this is a source of funding that is entirely legitimate, going back into the economy and is available on the basis of lending and increasing your net lending to SMEs. Equally, it is one of a range of funding sources. What you will see in January—the expectation is that it will not continue after that—is that the markets will have moved on sufficiently for other alternative funding mechanisms to be there to be used. But I do hope that the Bank of England or other agencies will carry on with the reporting of lending. We will certainly continue to report our lending and be transparent about where the lending is going to SMEs.

Mr Walker

It is certainly useful to see the comparative figures month on month, but that does not necessarily require money to be pumped into the system. You heard from the previous panel—I think you were all in the room—some worrying evidence about some of the perverse outcomes that can be driven by funding for lending. Do you have any comments on Norton Motorcycles?

Stephen Pegge

In the early days, I think it was limited as to which institutions and what type of finance could be drawn against it. That was expanded and improved in the latter part of the scheme and that has been a helpful part of the process. I am not sure that I see perverse outcomes. If there is good, low-cost finance and competition in the market, with the benefits being passed on in lower cost funding for the economy, and businesses are confident to invest and come forward with lending, that is a good thing, but maybe it has served its purpose and done its time. Interestingly, in Europe now—the Eurozone is in a very different state—there is an equivalent, the TLTRO, which is a very similar thing, based on funding for lending. One thing that I did want to mention: there was a report out last week comparing all the European countries, including those outside the Eurozone, on access to finance and the UK scored very well. It was up there with Germany and substantially better than many others. That is in part because policy on a consensus basis has been to deal with things quickly, focus on SMEs and provide the kind of support that we have seen.

Carl D'Ammassa

I think, for sure, the publicity around the scheme has raised awareness that the UK economy is there and we can invest for the future, and the banks are there to support it through the FLS. We do get lots of inquiries off the back of our participation in the scheme, so it certainly has raised awareness and it is encouraging SMEs to come forward to say they would like to borrow money, even though we are not drawing on it now.

Mr Walker

Moving on to the complexity of a range of issues. We have evidence that the BBA has said that business is often confused about where to look for support, and that Lloyds and the Government need to streamline the current schemes and improve their co-ordination. What practical recommendations would you make to streamline and target that support to businesses that need it most?

Irene Graham

As we said in our evidence, we think the British Business Bank has a key role to play in bringing the finance schemes together at the top level of the administration as well as the education part of that. The business finance guide, which we among others supported, is a step towards that—and working with us on better business finance, which has got a finance finder. We work with the BBB in relation to that to educate businesses on the different types of finance available. It is about continuing to consolidate schemes such as the regional growth fund into the business bank for a top level administration, as well as looking at some of the support for finance, such as the growth voucher, the growth accelerator being administered by the BBB. And then working with the private sector as it is today—accountants, ourselves—on that education part for businesses.

Mr Walker

I suppose this is a point that Brian touched on earlier, but does that not actually involve considerable centralisation of the processes? Surely we need to see these things being visible locally in communities where the small businesses are.

Irene Graham

No, I think that is then about the distribution side of it. You have the banks, the business groups and the LEPs all working together to get that information out there. I think that is the success of funding for lending. It has been distributed nationally but there is a recognition of it. It is about us working together to get the information to businesses in an effective and simple way.

Mr Walker

In terms of reaching the SMEs, the Federation of Small Businesses suggested setting up a small business administration like the one in the States. Do you think that is necessary, or would make a useful contribution?

Irene Graham

The important thing at the moment is to focus on what is in place today and give that longevity. As successive Governments come in, giving the brand you have now of the BBB and other strong brands, keeping that and keeping consistency, and keeping those in place, will give confidence and consistency. It is building on the existing infrastructure and making sure that it works effectively and is simple to access.

Stephen Pegge

May I add to that? I think there is an important role for LEPs to play. Building on that and some continuity after the next election—and I know Opposition parties are supportive—is important. There needs to be a build-up, probably, of their resource and ability. That includes support from banks and other local private sector organisations in being more involved in doing that. They are adopting a role in co-ordinating the appropriate local and regional differences to the national schemes. Clearly, in the midlands manufacturing is very important and you would expect to have a depth of expertise and resource focused on those sectors. We have 200 managers now trained as manufacturing specialists. They want to work with local advisers, whether it is from UK Export Finance or MAS, who can be engaged with their manufacturing clients. I think the LEPs have a very important role in pulling all that together and helping to co-ordinate.

Carl D'Ammassa

The important thing is the signposting. We don’t want SMEs to feel that when they have been rejected by their clearing bank, there is nowhere else to go. There are lots of alternative funders out there, and they just need some direction. There are a number of initiatives that industry bodies across a number of sectors that Aldermore deal with are trying to raise the profile of. We need to allow those to bed down and continue to push them to keep the signposting there for those small businesses, so they know where to go to get the support when their bank cannot help them.

Irene Graham

The industry itself and the large banks within that have very much taken that on board. They signpost many alternatives already, both through relationships with broker-dealers and with other finance providers, and we are supporting the small business Bill that is going through Parliament at the moment. We are actively supporting that with the referral mechanism that will go into play.

Mr Walker

With all these initiatives, the Government are inevitably trying to do a lot of different things through different mechanisms. We have talked about trying to bring them together and co-ordinate them. Are there any initiatives that you feel are not delivering value for money for the public?

Stephen Pegge

I would say that there are bound to be.

Chair

Could you be specific?

Stephen Pegge

No, because I think—this is a serious point—there is some value in a thoroughgoing review of schemes to see whether they are making a material contribution. I do not have the information to do that.

Chair

You may not want to give an off-the-cuff answer, but the fact that you said that there are bound to be implies that you must know that some are not. Perhaps on further consideration you would like, in a suitably diplomatic and coded way, to provide us with written evidence that would point out the deficiencies of some of the schemes to which you are alluding. Okay?

Stephen Pegge

I am happy to do that, Chair.

Chair

That concludes our questions. Thank you very much for your contribution. I am sorry I had to hurry you on one or two occasions, but I think you were there when the previous panel were informed that they could submit further written evidence. Obviously, we have asked you for that on some specific points, but feel free to do so on any other point. Thank you. Examination of Witnesses

Witnesses

Oliver Griffiths, Head of Government Affairs and Policy, Green Investment Bank, Shaun Kingsbury, Chief Executive, Green Investment Bank, Patrick Magee, Chief Operating Officer, British Business Bank, and Keith Morgan, Chief Executive Officer, British Business Bank, gave evidence.

Chair

Good morning. Welcome. I will get on very quickly, but before I do so, Robin wants to declare an interest.

Mr Walker

In the interests of transparency, I declare that my brother works with Patrick Magee at the Shareholder Executive.

Chair

We know who you are, but could you introduce yourselves quickly, starting with you, Oliver?

Oliver Griffiths

My name is Oliver Griffiths, and I am head of Government affairs and policy at the Green Investment Bank.

Shaun Kingsbury

I am Shaun Kingsbury. I am chief executive of the Green Investment Bank.

Keith Morgan

I am Keith Morgan, CEO of the British Business Bank.

Patrick Magee

I am Patrick Magee, chief operating officer of the British Business Bank. I recently moved from the Shareholder Executive. Jonathan does work at the Shareholder Executive, but not directly in the British Business Bank.

Chair

I seem to remember an illuminating and enlightening session that we had with the Shareholder Executive over Royal Mail, but we will not go down that route today. I emphasise that some questions will be person-specific and others will be general. Please do not feel with a general question that you all need to answer every point if you feel that it has already been covered adequately. My first question is on the Green Investment Bank and is for Mr Kingsbury and Mr Griffiths, although it may be unnecessary for both of you to answer. Where do you see yourself fitting within the Government’s overall offer for business? That is a pretty general question.

Shaun Kingsbury

We have a clear and specific role to play, which is to move the UK towards a greener economy and to invest in the infrastructure side of that. We build projects, and that was clear when the bank was set up. That mandate was agreed within Government and then agreed with Europe. We focus entirely on projects; we look at offshore wind, waste-to-energy, biomass-to-power and energy efficiency, and we could do some stuff around carbon capture and storage and wave and tidal, when there are infrastructure projects there to invest in.

Chair

What do you see as your biggest challenge?

Shaun Kingsbury

I think it is finding good projects that allow us to invest at about the right level. We invested £635 million in the first year and £670 million last year, and we are on track to do around £700 million this year. I would like to get that up a little bit—I would like to be at a run-rate of £800 million to £1 billion of new investments per annum, but we have to be very disciplined. We need some good projects, because without good projects we will not make good investments.

Chair

Turning to Mr Morgan and Mr Magee of the British Business Bank, what is your priority for the first year of independent operation?

Keith Morgan

Our priorities are focused on where we think there are issues in the marketplace. In fact, in our June strategic plan we laid out what our strategic priorities are. We are focusing on three areas. One is that we believe that there are areas of the marketplace that do not work properly or well and we want to put finance through the marketplace in the right structures to get more finance to smaller businesses. The second is specific to the structure of the market in this country, which is very concentrated. If you are a small business and you are looking for finance, there are what appear to be a small number of offers in the marketplace. Our priority is to increase the diversity of offers in the marketplace and to increase the choice and options for small businesses. The third is all about smaller companies knowing what is on offer. We have done plenty of surveying and speaking with small businesses, and it is very clear that there is a job to do to increase the awareness and understanding of offers in the marketplace. One area that we are particularly focused on—I think it was referenced by the BBA—is that we think there is a role to bring together much more consistency in the marketplace. When it comes to companies knowing what is on offer, we brought together the ICAEW, the CBI, the IoD, the BBA, the FSB and a clutch of other people to put out one shorthand document—one reference in layman’s terms—about what is available in terms of options in the marketplace. That is something we have been pushing very strongly since we launched it in July and it is one of our priorities for the year.

Mr Walker

In terms of promoting the options in the marketplace and the diversity of those options, you have “bank” in your title, but to what extent do you feel the remit is within banking or reaching out beyond that into alternative lending models?

Keith Morgan

It has to reach beyond banking and into alternative lending models. We see this as a very important area of diversity. If you think about the options on offer, there are many small, regionally based asset finance companies. It is very important for smaller companies if they want to increase their fixed investment and build their capacity. There are an interesting and growing number of non-bank lenders—debt funds—that go out and originate their business, and look for growth and finance opportunities. They are also interesting to sponsor in an accelerated marketplace. There are some promising signs that there are alternative models: for example, there is significant growth in the technology platforms—so-called thin tech—peer-to-peer lenders, invoice discounting and supply chain finance, which occur not through the banks but on technology platform-dedicated businesses. In the area we have focused on we have allocated £400 million of investment that will go into alternative lenders. We see our role as catalysing, accelerating and giving additional funding weight to those alternatives and delivering supply that is not there now, and alongside that increasing awareness of those alternative options. We see that as being central to our objective.

Chair

On restrictions as a result of state aid rulings, do you feel that limits your effectiveness?

Keith Morgan

We have state aid approval now, which means that as of 1 November we are operationally independent of the Government. The structure that we have negotiated and settled with Europe gives us quite a lot of flexibility, so there is one segment of our business where we can make investments on a pari passu or commercial basis, meaning that we will fulfil our strategic objectives but do it on a commercial basis; Europe has no reference to that business. We have other areas where we agree that we will work within the existing European mandates. There are various measures—things called the global block exemptions—which we can operate within; that is quite a wide spectrum of operation. The third area of our business is that we have said we will continue to work as an agent for Government, which also allows us to use some of the benefits of Government operating in the marketplace. So we have secured, in our view, a reasonably flexible settlement in Europe.

Chair

In its evidence or certainly in some evidence, I read that the Green Investment Bank can actually finance only about a third of the potential projects. Could you comment on that?

Oliver Griffiths

Certainly. Our state aid remit is set up slightly differently from the Business Bank’s, in that we had to pre-clear particular sectors. As you say, Chair, that is overall about a third of the green economy. Much of that is for very good reasons, because public money is not needed, so if we look at areas like ground mounted solar or large onshore wind farms, they are being financed by the market fine. There is no need for public finance there. Overall, it was a fairly good approximation in terms of the sectors that we are allowed to invest into, but the one thing I would say is that it is a fairly cumbersome process if you want to then add in additional sectors. We went through a process last year where the Co-op had withdrawn from the market for small-scale renewables. This was part of their general problems and it was a very clear case of market failure. We went and made that case to the Commission and they accepted it, but the whole process took over six months from beginning to end. I do not think that it is a bad set-up that we have from the European Commission, but it is a relatively unwieldy one.

Nadhim Zahawi

We have heard different views about how difficult it is for business to access finance in the current environment. The British Bankers Association has a fairly positive outlook, while the smaller business trade associations tell us that things are still quite difficult. What is your sense?

Keith Morgan

It is quite hard to see through the data. I do not think that any small business would say that it feels easy to raise finance, but if you look at the trends and at the survey data, there is a growing sense of confidence. There is some evidence that smaller businesses are saying that it is easier than it was to raise finance. I will give you some examples. If you look at bank lending, which is often a main focus for people, there has been some growth in gross lending—albeit the stock position has been fairly stubborn—and we have seen growth in asset finance as well. I mentioned that as a topic before because I think that it is quite important. Our surveys and contacts show that whereas two years ago the major demand for finance was for working capital, the major demand for finance is now for investing in new fixed assets. That, of course, is very consistent with a sense that there are growth intentions among small businesses. We can see that the demand is shifting towards growth finance and finance to build tangible capacity. What we have also seen versus 2012 is a 10 percentage point increase in small businesses saying that they were successful in gaining finance. Overall, the trend looks like it is improving, but we still think that there are some significant gaps in the marketplace, which is what has been driving us in terms of where we are focusing our activities for the first year.

Patrick Magee

We will be publishing a report in early December with our views on the small business finance projects.

Nadhim Zahawi

Without pre-empting the report, what is your sense?

Patrick Magee

The themes that Keith has just brought out are—

Nadhim Zahawi

So it is getting better but is not yet good enough?

Keith Morgan

That’s right, and there is a clear need for more diversity in the marketplace.

Shaun Kingsbury

In our case, when we look at green finance, we have seen the market improve on the debt side. We can do debt or equity in these large projects. I think that it is fair to say that there are more people in the debt market, but the tenor of those loans tends to be quite short—seven or eight-year mini-perm loans, where you have to refinance and repay people after a short period. We invest in 20 to 25-year long assets, which really need 15-year capital. We see more debt coming back but not quite the right debt, and on the equity side there is still a big gap. The majority of our transactions are probably more equity-based than debt-based.

Mike Crockart

This question is really for the Green Investment Bank witnesses. You may have been in the room when I asked representatives on the previous panel, from Renewable UK and Aldersgate Group, about borrowing powers. There was a clear preference that borrowing powers are needed right now and it is the right time to borrow because the costs are so low. Is that the feeling of the Green Investment Bank as well?

Shaun Kingsbury

This has been a question right from the beginning of the Green Investment Bank when people said that we need borrowing powers. My answer has always been that at the moment we have capital; we have invested about £1.8 billion of our £3.8 billion so we are about halfway through that capital. We will need borrowing powers in the next Parliament, for sure, but it has not held us back to date because we have not invested all the money. The other thing that I always like to point out is that at the beginning we had not built a track record or done anything with all that capital. It was the wrong time to make an argument for borrowing powers when we had not done anything. Two years after we started, we have demonstrated that we have been successful in the investments that we have made. People would now lend us money, whereas they would not before, but borrowing is only one source of capital for successful businesses. About five months ago, we announced that we were going to go to the market and raise an offshore wind fund—an asset management business, which is a different way of raising capital. I hope that in the next month or two we will have some good news on the first close. The size of that was £1 billion. We will need to borrow in the next Parliament. To date, it has not held us up and it is just one of the sources of capital that is available once you build a track record and a successful business.

Mike Crockart

My follow-up question to them was very much that it seems as though you still have money available. Is there the pipeline of projects to invest in? Certainly, the response I seemed to get from that panel was, “Absolutely, there is a bursting pipeline of renewables projects just waiting for the money, if only you could go out and borrow cash.” That does not seem to be the situation that you describe.

Shaun Kingsbury

It is not quite that simple. There is a big pipeline. We see about £4 billion to £5 billion of opportunity for us to invest. If we are providing about 25% of the capital—the size of that pipeline in total—there is circa £15 billion to £20 billion there. Not all those projects will come to fruition; they are development projects over the next two, three and four years. The development time on these things is very long, so it takes a while for them to reach the point of financial close. Not all of them will make it, of course, and certainly not all of them have done the front-end engineering work or the other pieces of work that they need to do to present themselves today for capital. We would like to find more projects, if I am honest, because £670 million to £700 million is our current run rate. I would like to get that up to between £800 million and £1 billion. The restriction is not the availability of our capital, but finding bankable projects ready for final investment decisions. We work with people to get them there. We do not just send them away and say, “Come back when you’re ready.” We tell them where the gaps are and how to fix them. We would like to see more of those so that we could do more.

Mike Crockart

So the priority for you is finding the projects rather than immediately getting the borrowing powers.

Shaun Kingsbury

Rather than immediately, but we will need borrowing powers in the next Parliament.

Mike Crockart

With the knowledge that it needs to come in the very short term.

Shaun Kingsbury

Correct.

Mike Crockart

You talked about finding areas and we have already talked a little bit about the state aid approval and the limits that are placed on you. You have gone to get the small-scale community renewables added in. Hopefully, we can get good results from that. Are there other areas that need investment that you could put in where there is a market failure where state aid is holding you back? I am particularly thinking about interconnectors.

Shaun Kingsbury

Yes. There are certainly a number of areas. On a community scale, we announced our first transaction a couple of weeks ago, which was non-bank lending—to follow up on the question asked by the Chair earlier on—where we put £100 million alongside KKR, which is not a bank, to finance the debt side of small-scale renewables. If we had more state aid clearance, we would be looking at transportation and potentially at interconnectors. Some interconnectors we could do today; the question is whether we are additional. If it is a National Grid kind of interconnector, that can form part of the regulated set of interconnectors and therefore they can borrow money against that type of background all day long. The area where we would play on interconnectors is that there are a couple of merchant interconnectors that are under consideration, which are not formed into the regulatory base, but people would invest in those as much as they would in a generating asset. We can also invest in the supply chain. I do not mean taking early stage venture capital and vast amounts in speculative technologies. That is not what we do: we do infrastructure. I think one of the other panellists mentioned earlier that we financed the first Siemens 6 MW turbines. That helped Siemens commit to the factory in Hull. As we think about it, if they had asked us to lend money to help construct that factory, we could not have done it today; yet, of course, we know more about that business than most other banks would do. So investing in the supply chain, investing in transportation; merchant interconnectors would fall within that. There are a couple of other areas.

Mike Crockart

Is it working under way to make a case?

Shaun Kingsbury

It is. Oliver, you might want to cover where we are with that.

Oliver Griffiths

Sure. We are in a fairly constant dialogue with the European Commission. We have just started another round of discussions with them, where potentially we could open up our definition of green and our sector remit rather more broadly than we have it at the moment. We are relatively optimistic.

Mike Crockart

You talked about there being other ways of raising funds. One of the areas that has been raised, particularly by Aldersgate Group, is that you might want to look at green bonds or green ISAs. I realise that that is a bit of a change from the way that the bank is constituted at the moment, but is it something you would be interested in moving into?

Shaun Kingsbury

Green bonds have been a tremendous area of growth. A lot of companies have gone out there and issued a green bond to do work that would be more sustainable. Not all green bonds are created equal. One of the things we are working on is how green is your green bond, and to try to set some principles around that, so maybe we can play a role in measuring how green these green bonds are.

Mike Crockart

So a rating service?

Shaun Kingsbury

Exactly—which are really green and which are green-washed bonds. So that is one of the areas—clearly, to issue bonds, but it is issuing debt, so we will need clearance on debt. When we think about ISAs, it is about going out to the man in the street and giving him an opportunity to invest alongside us and our Government shareholder in good projects. It is really important to spread the opportunity to invest. Renewable energy is a great investment, but it is very hard for someone in the street to say, “Well, I’d like to invest in that. How would I do it?” We have started with our offshore wind fund to look at pension funds, so pension funds are also saying, “We have lots of capital to deploy.” We have given them a product now where they can invest in the fund. We could create some green ISAs: imagine that we were investing at a rate of £800 million to £1 billion a year; we could package up some of those assets every year, securitise them and then issue some sort of ISA against that. It would be a great way for everyone to get a chance to participate in this great investment that will go on over the next 10 to 20 years as we decarbonise the economy.

Mike Crockart

You would have to employ more people in your headquarters in Edinburgh as well.

Shaun Kingsbury

We might have to do that, which would be a very positive thing.

Mike Crockart

Excellent.

Chair

Can we just look at short and long-termism? Obviously, when a company invests it needs certainty and needs to be confident that the regulatory regime or government policies are not going to change in the future in a way that would damage its investment. We have heard from the FSB and some of our previous panellists that, in effect, a piecemeal approach to business support without a clear, long-term strategy can be a problem. Is this over now, or do you think it is still there as an inhibitory factor to investment?

Oliver Griffiths

You are absolutely right in terms of the long-term certainty. That is what the Government have been trying to do through the electricity market reform process, which has gone on for a long time, but we are now getting to the stage where we are moving from one support mechanism to the other. We are about to reach the moment of truth where these investments are going through investment committees. We will see at that point, but we are optimistic. It has been very positive that we have all political parties saying that they want to stick with this new system that is coming in. That will really find its feet over the next months and years.

Chair

Do you broadly agree with that?

Keith Morgan

From my point of view, stability and long-termism are very important. When we did the work around designing the Business Bank, the very clear message from business was that chopping and changing and new-to-Government programmes were unhelpful and difficult to find your way around. The Business Bank is being set up as a long-term organisation, so that we can follow through on our programmes and adjust in line with cumulative experience to makes things better. What I see is a kind of evolutionary approach where we have put down our strategy, we have put down our resources, and as the marketplace reveals itself and we see how well our programmes are doing, we can develop them or withdraw funding from them. It is an evolutionary approach as oppose to a revolutionary approach. That long-termism is something that many small businesses have been calling for.

Chair

Are your staff rewarded for short-term or even long-term performance?

Keith Morgan

We have a senior management team whose reward in performance-related pay—obviously they get a salary—is entirely long term. There is a long-term incentive plan, there is no annual or short-term—

Chair

How long is long term?

Keith Morgan

Three years.

Shaun Kingsbury

Very similar to that, the leadership team of the Green Investment Bank has a three-year long-term programme where awards are tied to the investments you make in that year, then two years later you look at those investments and say, “Were they built on time? Are they performing?” If they are performing, then and only then is there a payout, and anything awarded based on the investments you made where the projects or investments did not work out can be removed.

Chair

You spoke earlier about opportunities to access the market, Mr Kingsbury. Your current funding settlement goes to 2016. Do you anticipate a similar one after 2016?

Shaun Kingsbury

It would be very helpful, when we get to that point in the political cycle where people are ready to make the next commitment to the bank, that we would see a further Government commitment. As I said, we hope to be on a run-rate of somewhere between £800 million and £1 billion a year of investments.

Chair

I would have thought it helpful to have that information now rather than in 2016.

Shaun Kingsbury

Sooner is always better, but we are only halfway through and we are about to top up the capital we have, hopefully with a successful close on our £1 billion offshore wind fund, which will be 80% private capital compared to 20% from our existing funding. We hope that, over time, we will have more private capital—today, it is about one part of Government capital to about three parts from the private sector. We have invested in 41 transactions and we have more than 70 co-investors who sit alongside us. When we move to the offshore wind fund, that is the first time; now we have built a bit of track record, people will give us their money to invest and other people’s capital to invest. Imagine that we were then able to borrow, as we just discussed in the previous question, we were able to raise equity and we were able to raise more funds. We would need, relatively speaking, less and less capital and more and more private capital. That is the plan.

Mr Walker

You mentioned the impact of the British Business Bank operating independently in terms of EU state aid rules, but does it have a broader impact in terms of your relationship with businesses and with other finance organisations?

Keith Morgan

The independence is a key thing because the marketplace wants an institution that can work with it. There is a perception that if you are operationally independent from Government then you can play your role in the marketplace without there being any short-term variations in activity. Some examples have worked really well. We have put funding through something called the Angel CoFund, which is a group of people from the industry who are venture capital or angel entrepreneurs, who themselves put their time into judging investment decisions to invest Government money. That model whereby you are harnessing the expertise and knowledge in the marketplace is easier to do when you are an operationally independent organisation.

Mr Walker

Why is that? Why could you not put funding through exactly the same fund as a branch of the Government?

Keith Morgan

You could, but it comes back to the short-term and long-term point again, as before. The horizon that we have got is a horizon that stretches with a commitment to a long-term institution, and there is no perception that the priorities will change in the short term. That is very helpful to developing a situation where people feel that, if an investment is made, that will be a long-term investment, and there could be follow-on investments of the same type. Equally, I think it helps people feel more certain that they can understand the landscape. If the landscape keeps changing, some people give up. Smaller businesses in particular have got very little time to work out what their finance options are. I think that certainty is much better for them.

Mr Walker

In terms of the landscape, one of the things likely to change at some point in the future is the funding for lending scheme. You came into the room while we were discussing that with the previous panel. Do you see the business bank as having a role in determining what follows that, or is it something that you are engaged with as a process?

Keith Morgan

We looked really closely at what we think the issues are in the lending marketplace and in the availability of funding. There are two things that we have drawn from the experience of funding for lending and what we think the environment is going forward. One is that we think there is still a funding issue for asset finance companies, and these are asset finance companies that have never been able to directly benefit from funding for lending. That has driven our recent announcement of what we call enable funding, which is getting funding to asset finance companies. Once we build up the group of asset finance companies, we will then organise the issuing of bonds in the marketplace to finance them, so that is one area where we think it is a focused area of funding that is required. We believe that the environment has changed. Whereas funding was an issue—clearly—coming out of and during the financial crisis, our view is that capital issues are quite important in determining what the decisions are in bank lending. That has led us to introduce another programme, which is called enable guarantees. These are guarantees that we will offer to banks, and the idea behind them is that by transferring and sharing some of the risk with us, it reduces the amount of regulatory capital that the bank has to hold. If you have got lower levels of regulatory capital, you can do more with the same amount of capital. So our focus has been to say: where is the singular piece of funding required?—asset finance—but then to turn our attention to the capital issues in lending.

Mr Walker

It is more of a comment than a question, but one of the challenges that the banks have with capital is that every time they stock up on their capital, at the moment they are paying it out in fines to Governments in the US, the EU and over here. It has been a drain.

Keith Morgan

Yes. We have found that some of the smaller and challenger banks are particularly attracted to this, because perhaps they are less concerned about the legacy issues and more concerned about growth. In growing and being successful and winning their place in the market, they want to make the most of their capital.

Mr Walker

Turning to another scheme, the enterprise finance guarantee is something that I think the business bank is involved in. How would you measure the success of that? How would you see it?

Keith Morgan

As a tiny bit of background, without departing too much, the enterprise finance guarantee pre-dates the formation of the business bank, but we have taken responsibility for it. It started in January 2009. In total, over 20,000 businesses have got a loan, which is made possible by an enterprise finance guarantee. The background is that the bank looks at a client, says whether it can service the loan, then asks for security—the big question is, “Do you have the security?” Of course, so many businesses these days do not have tangible security; they may have intangible assets, such as people doing analytical work, brands or digital assets. The programme allows a bank that would not otherwise give the loan to do so because we share the risk with it. So that is what it is. More than 20,000 people have taken advantage of it and there has been more than £2.3 billion of lending over the period. We look very closely at whether or not the programme is delivering an impact at the economy level. When you come to the bottom-line finances, the bottom line is that it costs us and the Government money to deliver that, but that is not the sole focus of our attention; we want to see what is happening in terms of the companies that receive the loans and what they go on to do. The most recent evaluation was conducted by Durham business school. We ask independents to perform these evaluations. They look at, obviously, how much it has cost to deliver it—the cost of the funding—but also at whether the company went on to grow, whether it invested, and what happened to its position in the marketplace. They measure the overall benefits versus the costs. The result that they derived was that it was very favourable: in fact, for every £1 that we put in, there is a £33 benefit in the economy. It just goes to show that we can push banks into positions by sharing risks with them that take them into territory that they would not go into themselves—that would not be commercial for them—and that we can deliver a benefit to the small business sector and the economy as a whole.

Mr Walker

You mentioned 20,000 loans under the EFG scheme; do you know how many applications were not accepted?

Keith Morgan

Yes; the acceptance rate is about 90%—it is very high.

Chair

Could you send us a written figure?

Keith Morgan

Sure.

Mr Walker

What is the default rate? Is it higher than the secured loan default rate?

Keith Morgan

It is, and you would expect it to be because of the lack of security. Together with the banks, we are taking on more risk. The running default rate is currently about 11.6%. That is clearly higher than you would expect from a normal SME loan.

Chair

Again, it would helpful if you could amplify that in some written evidence.

Keith Morgan

Sure.

Ann McKechin

Mr Morgan, you have spoken about the need for funding consistency, but we have heard from many businesses that they find it difficult to navigate because of the sheer volume of different Government support schemes that are available. Is that because there are too many schemes, not enough awareness among SMEs, or a combination of factors?

Keith Morgan

It is right to look at both of those factors. We are rationalising the schemes and ensuring that there are ones for the right stage of development, so that there is only one scheme that focuses on very early-stage start-ups, one on angel finance, one on venture capital, and one on bank lending where there is a collateral problem. We are trying to make it much more straightforward so that there is one scheme for each piece. I think that the issue of awareness or knowledge of what is on offer is perhaps a complicating factor. It may be that that is not only true of finance schemes; it happens with other business support schemes as well. You will find that there are business support schemes that operate out of the Design Council, and there are manufacturing advisory services and the Technology Strategy Board. In my mind, it is that landscape that is quite difficult to navigate.

Ann McKechin

Moving on from that, we have just heard that the British Bankers Association has recommended that the consolidation of all Government business debt and equity finance schemes, including the regional growth fund, should be placed under your control. Is that a role that you see the bank fulfilling in future, or do you see it going out on a different trajectory?

Keith Morgan

We are very keen that we are the consolidated position for finance schemes, but I would draw a distinction between grants and finance. When you have a grant-based scheme such as the regional growth fund you are not asking for the money back. It is not a financial institution in the same way as our work entails. Very often—take as an example the grants that are administered by what was the Technology Strategy Board and is now called Innovate UK—you have to have the absolute sector-specific knowledge to know whether a project deserves the grant.

Ann McKechin

With that kind of financing, yes.

Keith Morgan

So it makes a lot of sense to locate the grant-giving piece with the experts who know the technology or know the sector. That is the distinction I would make.

Chair

Following on the same theme, we have heard that the British Business Bank should have a greater role in administering funding for LEPs and that the regional growth fund should be better aligned with green policy objectives. Would you just comment on those positions?

Keith Morgan

One thing that we have taken on is working closely with the LEPs. We have a dedicated team devoted to working with the LEPS, and we have held meetings and seminars to discuss their access to finance strategies with them. In particular, the area where we are giving them the most support at the moment is that they can use some of their structural funding to go into access to finance. They wish to come together into groups, because one LEP by itself is a small organisation. We are working with them to come together to form a joint approach to lending funds and equity funds in the regions. We are doing that in the north-west and the north-east and are talking about it in Yorkshire and the midlands as well. We are bringing in the expertise around forming the funds. We are also helping them understand the source of matched funding, which in many cases comes from the European Investment Bank. We have quite an active role in working with the LEPs. When it comes to the regional growth fund, we are, equally, quite close to the activities that they perform. For example, they were the original source of the grant for the Angel CoFund and we are now working very closely with them to see how we can complement that grant to bring additional funding to the Angel network. In the same vein, we are looking at their activities in asset finance and at the work we are doing in our investment programme and our enable programme, to see how we are complementing their work in asset finance. The final point to make is that we also see the devolved Administrations as very important players and we keep up a regular dialogue on that. They obviously have their independence and can create their own strategies, but in the middle of October we held a roundtable with Scotland, Wales and Northern Ireland to discuss our strategy versus their strategies and how we could learn and complement each other. It is a time-consuming exercise because of the diversity that has been created, but it is something that we are active on.

Chair

Just a quick supplementary to Mr Kingsbury and Mr Griffiths. The Energy and Climate Change Committee recently commented on finance as one of the barriers to updating the green deal. What further interaction have you had with that scheme?

Shaun Kingsbury

We provided the original loan to support the Green Deal Finance Company, the entity that was going to back the folks who would go and install energy efficiency measures in your home. As I am sure you know, the take-up of green deal finance programmes has been much less than originally projected. I guess when the scheme was set up people believed there would be a big pent-up demand for this and so the company was set up not as a marketing company to go out and push the programmes but just as a finance company. That pent-up demand did not materialise, and as such the company could not actively chase customers and try to offer those things—it was dependent on local installers and some of the utilities to do so. We have worked with them, but the draw-down period on the loan we provided comes to an end at the end of the year. It is unlikely that it will be drawn before the end of this month, so that facility is now at an end. What we are waiting for now is them working very hard on a new programme, a new marketing campaign and a new set-up for the Green Deal Finance Company. We have offered to sit down with them when they have a new business plan, to look at that and to see how we can be helpful.

Mike Crockart

The original facility was for £125 million, I believe.

Shaun Kingsbury

That is right.

Mike Crockart

How much of that was actually drawn?

Shaun Kingsbury

None. It runs out of the end of this month, so none will be drawn and it will come to an end, so it will cease to be available to them.

Mike Crockart

It was reported that you had turned down an approach from the Green Deal Finance Company for an additional £50 million. What was that for, if the £125 million was not drawn on?

Shaun Kingsbury

They wanted to restructure the £125 million facility, because they realised that they would not need all of that capital. In fact, we ceased—

Mike Crockart

So they sought to replace it into the future.

Shaun Kingsbury

Exactly. We ceased to charge fees to them some time ago, because we did not want to add additional problems to the company as it was trying to sort its marketing plan out. They asked us to extend that, but we have not yet seen a business plan, because they are in the process of writing it so that it is backable. We are waiting on that, and when it is available—probably in the second half of next year—we will sit down, have a look at it and see what we can get comfortable with in terms of lending. But no, the facility has not been drawn and it will come to an end.

Chair

Very briefly, what was the main barrier that resulted in the low take-up of the scheme, from your perspective?

Shaun Kingsbury

It is quite difficult to answer that. There is a number of things. First, the company was not set up to market and it depended on the utilities and local installers. That programme did not work very well and there was not the demand. There is clearly a question about the product they offer: is it simple? The sign-up and the customer experience need some work. Then there have been questions—I heard one asked earlier—about the cost of capital. We pitched that cost of capital so that it sits somewhere between a secured loan and an unsecured loan, so it is not as cheap as your mortgage, as I heard in one of the answers earlier, but then your mortgage is secured by your property. This is unsecured; you cannot go and uninstall someone’s cavity wall insulation. It sits in and around the right area. It is a similar cost if you wanted an unsecured loan, for example to buy a car, so we think that it is around the right level. Of course if you make it cheaper, you will enhance the take-up, but it is not as simple, as I have heard suggested, as if we drop the price of the capital, and it will fly off the shelves.

Nadhim Zahawi

The What Works Centre for Local Economic Growth reported that while most programmes appear to improve access to finance, there is much weaker evidence that this leads to improved performance. We heard from Keith about the collaboration with the university in terms of measuring performance. Is that the only way—certainly for the British Business Bank—to assess the impact quantitatively? How did the Green Investment Bank assess that impact? Finally, from both of you, I would like to know, how in five years’ time will we know if your work has been successful?

Shaun Kingsbury

On the first question, how we measure it, first of all we have to be additional in all our projects. We always ask anyone coming to us with an investment idea, “Have you gone out and tried to raise the money?”, and if they say, “Well, not really”, we say, “Why don’t you go try and do that first?” Then we fill the gap. So we are always very clear that any projects we have invested in are projects that were previously stuck. That is part of our investment process. Over the past three years—we have been operating for two years, but that fell over three financial years—we have been involved in about half of the transactions in our markets by value. We provide somewhere between 10% and 14% of the total capital outlays, but it is about half of the market. So we know the impact, because we can say what the market size would be with us and without us, and it is about a 50% increase. How do we measure our impact aside from that? We talk about having a green and profitable business model, so we look at the green impacts that we have as well. If you go and look at our annual report—it is there on the web and you can download it—you will see that it is a financial P&L, the sort of stuff you would expect to see, with a financial balance sheet, but we also have a green P&L and a green balance sheet. It is an early concept—it is not perfect—but it looks at the three metrics that we measure: avoided waste to landfill, which is about 1.6 million tonnes a year; green power produced and, to give you an idea, when all the projects that we have invested in to date are built, there will be enough power for 3.1 million homes, which is all the residential demand in Scotland or here in London, so it is quite a big impact in two years; and, finally, avoided carbon emissions, which again, on the balance sheet side when all our projects are built and operating, will be equivalent to taking about 1.7 million cars off the road, or two thirds of the cars registered in Scotland. So we look at financial returns and green impact.

Keith Morgan

From my point of view, the simple answer is that in five years’ time we want to see small businesses saying that we are doing a good job—if they say, “Thank goodness the British Business Bank is here”—but to get into the detail, then the three things that we are aiming for are: clearly, a more diverse marketplace, with more choice, rather than just the big four or five banks, and we have played a role in sponsoring such organisations; more awareness, and we survey every year what the awareness of these different ranges of finance options are, so we will track and see whether small businesses do know the difference between crowd funding, invoice discounting and these kinds of things; and, thirdly, in five years’ time we will, as we have said, have had a £10 billion impact in terms of the multiplier effect of our business, and we will measure that in tracking.

Chair

Thank you. That concludes our questions. I am sorry that we had to rush you on one or two. Again, if there is anything that you feel that you should have said, but did not have the opportunity to say, please submit it in written evidence. I have asked you to submit one or two further pieces of evidence after this meeting, which we will be grateful to receive. Similarly, we might contact you if we feel that we ought to have asked a question, but failed to do so. I thank you very much. Oral evidence: Government Support for Business, HC 770-iii 44