Enterprise and Small Business Principles
National policy
UK governments have attempted to respond to criticisms of the regulatory burdens that undermine small firms development through better regulation initiatives. An important step was the establishment in 1994 of first a Deregulation Task Force and, since 1997, a Better Regulation Task Force. Demonstrating the breadth and difficulty of the problem of controlling government regulation, both of these Task Forces have operated outside the main government departments. They have been administered within the Cabinet Office, but are independent with an independent chair, reporting to a Cabinet Committee chaired by the Deputy or the Prime Minister. This Task Force approach has been prominent in attempting to seek to change the way in which government departments work so as to encourage greater sensitivity to the problems of business compliance and costs, particularly for smaller firms. Its principles of good practice are: proportionality, accountability, consistency, transparency and targeting. The chief efforts have been as follows:
■ All departmental proposals with an impact on businesses must carry a compliance cost assessment and a risk assessment, personally approved by the minister responsible.
■ A quarterly report from all departments must be produced on what secondary legislation has been introduced and its compliance costs to business.
■ A streamlined procedure for primary legislation to be amended or repealed for deregulation purposes, as well as improving fairness, transparency and consistency of enforcement procedures.
■ Simplification and improved information on relevant business licences and regulatory requirements with an alignment of registration and notification for start-up businesses (with a single point of contact for all tax, social security and VAT matters being developed).
■ Reduction of burdens of completing government surveys to businesses with less than ten employees, plus reduced compliance costs for other surveys.
■ Simplification of many official forms, including Intrastat (recording imports and exports between EU countries).
■ Reducing or amending existing regulation and abolishing some licences.
■ Attempts at improved and more business-friendly enforcement procedures with clearer appeals mechanisms.
■ Attempts to reduce compliance burdens for all businesses with respect to health and safety, building regulations etc., to ensure regulations apply only to relevant businesses.
■ Repeal of all local government acts in England and Wales that duplicate or contradict national requirements, plus setting up pilots of ‘one-stop-shops’ by local government to provide a single point of contact on planning, building and fire safety.
It is also sought to enforce change through a Regulatory Impact Unit, also situated within the Cabinet Office (see Deregulation Task Force, 1995, 1996; Steering Group, 1996; Cabinet Office, 1995; Better Regulation Task Force, 2000, 2002a 2003, 2004; www. cabinetoffice. gov. uk/regulations;www. brtf. gov. uk).
Some specific examples of changes are proposals to change the Consumer Credit Act, following the recommendations by the Office of Fair Trading, that businesses should be excluded from the scope of the Act, but progress has been shown. The statutory audit requirement for small firms with a turnover of less than £90,000 was abolished from 1996 and extended to all companies with less than £350,000 turnover from April 1997. Various attempts have been made to modify the rules for corporate insolvency for small businesses and late payment legislation. Progress on these has also been slow.
Despite some developments the chairs of these Task Forces have been critical (e. g. Deregulation Task Force, 1996): ‘the culture of Whitehall needs to change more. Regulation is a form of government spending. The Government forces businesses and people to spend their own money to meet public interest objectives. But whereas there are stringent controls that inhibit the growth of conventional public spending, no comparable constraints exist for new regulation’. There has thus been doubt whether the government’s ‘impact and risk assessment’ procedures carry enough weight to inhibit growth of regulatory burden. Indeed one Task Force member threatened to resign in 1997 because there ‘was not enough support from ministers who are too willing to accept new regulations from Brussels’ (ibid.). For the case of new European fire regulations, for example, there was ‘an absolutely clear-cut example where there are no benefits and absolutely enormous costs’ (see Fisher, 1996). Similar conclusions are drawn for the effect of employment regulations (SBC, 2004b). The Better Regulation Task Force (2004) comes to a similar conclusion: ‘It is time we did something more to reduce the burden, to achieve deregulation as well as better regulation - a spring clean of existing stock... I think we need to target a better balance’ (Graham, 2004). The Bank of England (1996) has also commented that too much attention has been given to reducing the number of regulations rather than ameliorating the negative impacts of new legislation.
A Small Business Council was established in 2000 to act as the voice of small business across government. Although slow to develop real teeth, it has also become a prominent critic of the growth of regulation. Its 2004 report states that: ‘it is time that the cost of being governed should start to reduce year on year. The regulatory burden needs measuring, particularly as it has a disproportionate effect on small firms. The cost of regulation should be reduced. The appraisal process by civil servants should be changed. . . to provide incentives for officials not to introduce new regulations’ (SBC, 2004a, pp. 3-4). Despite these comments, progress is slow.
The constraints on all these better regulation initiatives is that they work outside the main departmental decision making that creates the regulations in the first place. What is clearly required is for the designers of regulations to be far more sensitive to the needs of those who have to comply with them in business. The criticism has been that, rather than simplifying, civil servants over-design or ‘gold-plate’ regulations with needless detail and complexity (Better Regulation Task Force, 2004). Overcoming this requires a culture change in Whitehall with major re-training of staff and politicians.
4.9.2 Financial assistance to SMEs
The major national governmental financial package available to small businesses from government is the Small Firm Loan Guarantee. This provides a government guarantee for loans by approved lenders (chiefly the major banks). Loans are intended to be for businesses or individuals who cannot obtain commercial finance because of lack of security or a proven track record. The guarantees generally cover 75% of the loan and are available to businesses that are over two years old. Most loans are less than £70,000 for periods of two to seven years. The minimum is £5,000 and maximum £250,000. The scheme has run since the early 1980s, but has become more significant in number of loans and total value since 1994 (see Table 4.2). Since 1995 simplification of SMART
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Table 4.2 The Loan Guarantee Scheme
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Source: Small Business Service, quoted in Bank of England, Quarterly Report on Small Business Statistics, various years |
and SPUR schemes has focused about £2.3m per year on technological development feasibility studies. EU funding elements are important in these programmes, but complexity and inflexibility are criticised. There is also a Phoenix Fund and other special initiatives for deprived areas.
Following a review of start-up assistance in 1994, central government grants to small firms, which had been initiated in 1982, were terminated in 1995, with the resources now available through neighbourhood or urban regeneration schemes or Business Link (see Section 4.12). The former Enterprise Allowance Scheme and Business Start-up Scheme had a major impact on stimulating self-employment through the 1980s and these have evolved to new forms of grant assistance for the unemployed since 2000. Other sources of small grants and loans are via Scottish and Welsh development bodies, English Regional Development Agencies and Business Link. Larger grants of £10,000
100,0 may be available in Assisted Areas (relating to EU Structural Funds regions) through Regional Selective Assistance (re-named Selective Finance for Investment in 2004), provided that they create new jobs or safeguard old ones. Since 2004 this scheme is also evaluated by the increase in gross value added per full-time employee. These are discretionary grants related to relocations or expansions. In addition there are smaller grants for Innovation Projects in eligible locations.
Important tax incentives have also been introduced since 1995, which have subsequently been extended, for Enterprise Investment Schemes, Venture Capital Trusts and Business Angels to encourage equity participation in small firms, as well as participation in management development by Angels. In addition the Alternative Investment Market (AIM) aspect of the Stock Exchange has had significant success in improving equity flows into larger SMEs; the European market EASDAQ will further enhance this development. It should be noted that, as well as government initiatives, Britain has one of the best developed venture capital markets in Europe, the largest agent being 3i, although it does not rival that in the US.
For small firm management training, there have been Small Firms Training Loans available from government through major banks. There have also been Career Development Loans to individuals from government through major banks for education or training (Marshall et al., 1993). For the unemployed a number of other special assistance schemes exist. The main framework since 2003 is Learn Direct, a directory of training providers and financial supports. This directs small firms, their employees, or the unemployed, to Work Based Learning provision for adults, or New Deal to get people into employment through training. There are also the Prince’s Youth Business Trust and Livewire for those aged 16-25, which are sponsored initiatives by major companies.
In addition, since 1994, the government, with the Bank of England, has sought to stimulate, debate and improve the relations between SMEs and banks and other financial institutions. Banks are the largest source of funds for SMEs, lending £40bn in 2004. Significant changes have been:
■ a lower and more transparent pattern of bank charges for small businesses - a previously much-criticised area;
■ a shift of resources by the banks towards the mid-corporate sector (approximately in excess of £500,000 turnover) to which they devote more time and advice, conversely turning services to micro firms into a more basic service at lower cost;
■ most significantly, a shift away from overdraft to term loans, accounting for about 75% of bank lending to SMEs in 2003, increased from 50% in 1992, which now comes close to many European countries - for example in Germany it is over 80% (Bank of England, 2004) - and has important implications: namely, to encourage longer-term thinking by small firms and closer working with their bankers.
Exporters are only about 1% of all SMEs and it has been a major concern of policy to try to expand the export outlook, particularly since most SMEs that do export are chiefly concerned with European and not wider world markets.
The chief aspects of UK export support are the Export Credit Guarantee Scheme (which insures against non-payment for exports) and a range of DTI/Foreign and Commonwealth Office services (marketed through Trade Partners UK). These services were enhanced in the late 1990s by the reorganisation of foreign staff positions in embassies, to give a higher priority to trade issues, and the establishment of a more focused DTI approach regarding its staff in this area. The main activities are trade fairs, outward missions, overseas seminars, overseas promotions, and inward missions and funds to facilitate development in specific overseas markets. Trade fairs and outward missions have been given a particularly strong emphasis.
The emphasis on support for small firm R&D and technological innovation in the UK has historically been low, with a preference for development of pure research in universities and institutes and an implicit bias towards larger firms. Some attempt to change this is occurring through Innovation and Technology Counsellors in Business Links, through greater pressure on research councils, universities and research institutes to be more involved with applied R&D, particularly in SMEs, and through various innovation and research tax credits introduced by the Chancellor since 2000. Much of this development is slow or uncertain as yet. The applied R&D spend is still low in the UK and connections are weaker between research and business than in many other countries, particularly in the US, Korea or Germany. At present, therefore, most initiatives are small and localised rather than diffusing to the whole network of SMEs or research bodies. European programmes are often disproportionately significant as a result, although their economic output is often unclear. Important research funding initiatives are EUREKA, Regional Technology Centres, Teaching Company Scheme, Shell Technology Enterprise Programme, and Innovation Research and Development Grants. Some local university initiatives such as science parks have been particularly successful (e. g. Cambridge, Heriot Watt, Warwick), though the success elsewhere is patchy. Shifts in university funding regimes since about 2000 have sought to emphasise technology transfer and innovative research spin-offs through so-called ‘third stream funding’ (which is additional to teaching and general research income).
It has long been recognised that one of Britain’s chief competitive weaknesses has been a poor general level of education and training. This has been reflected, not so much at the most senior levels of management, but chiefly in the employee semi-skilled and unskilled categories, and has been argued to have led Britain into a so-called ‘low-skill equilibrium’ (Finegold and Soskice, 1988). As recently as 1981 Britain had only 50% of workers with recognised qualifications and only 13% of the population going into higher education. By 1989, 45% of children left school at 16 with no qualification or only one pass at GCSE level. The pattern has improved significantly but there is still a long way to go, particularly at the level of basic and vocational skills. For example, in 2003, 40% of the adult population aged 16-65 was classed as functionally innumer - ate; 14.9 million adults had numeracy skills below that expected of 11-year olds, and
5.2 million adults had literacy below that level (DfES, 2003b). The deficiency of basic school achievements confirms that, whilst Britain is continuing to produce a very good level of output of highly qualified people, at the basic and vocational levels there is still a major deficiency and this has severe impacts on small firms. This is thrusting attention to the earlier years of basic schooling (age 5-14) as well as to the more vocational area (age 14-19). For example, in the first ever national test statistics for 11-year-olds in England published in March 1997, 25% of pupils failed to achieve level 4 or above (the required standard) in English, Maths and Science. These deficiencies have profound implications for SME workforces and for policy on school management and teacher training which are only beginning to be tackled.
Poor education and training skills are arguably one of the most crucial constraints on small firm growth in Britain. SMEs rely to a greater extent on the general quality of the labour market, especially on government-financed basic education and skills, because they more than all other companies can usually least afford training. In addition, they are more subject to labour poaching because they have a less dominant market position and frequently can be outbid in wages. A more formalised training system, such as that in Germany, has many advantages for SMEs in overcoming these problems. Deficient education also undermines the more general scope for entrepreneurism, the culture of enterprise and spirit of risk taking.
There have been various attempts to improve SMEs’ workforce training. For example: in the 1990s a Small Business Initiative gave a 1% reduction in overdraft interest rate, or £150 reduction in bank charges per year, for three years, in exchange for a pattern of management training agreed with a bank; and Skills for Small Business involved firms of fewer than 50 employees identifying a key worker who was given subsidised training and assessment skills to develop a company’s training programme. Since 2000 much of this effort has devolved to training providers, industry-led bodies and Sector Skills Councils, including the Small Firms Lead Body, to develop specific qualifications and standards for small firms. In addition, apprenticeships targeted on higher vocational skills, and Investors in People (IiP) have been used to improve training standards assessment and badging of companies to accredited training levels. Other subsidised training to encourage start-ups, business development and business skilling in specific areas such as finance, marketing and management are run through Business Link (see Section 4.12).
Whilst there has been a lot of activity to develop the education and training system in Britain since the late 1980s, it is still far from clear that the right mix of programmes and incentives exists to encourage smaller firms. Indeed it is increasingly being recognised, as noted above, that the most important investments needed for business developments as a whole, but small firms in particular, are in the most basic skill areas of literacy and numeracy.
Failures in the supply of information are a recognised problem for small firms, which inter-relates with their relatively low level of market power. In Britain until the mid - 1980s the main government-supported information service was focused through the Small Firms Service, which was set up at a regional level largely in response to the 1971 Bolton Report. The Department of Trade and Industry also acted as a direct supplier of information, as did other departments in relation to the specific industrial sectors with which they were concerned.
From about 1990 this system began to change with a greater emphasis being placed on local delivery and access points. From 1993 a system of Business Links has been used as the main delivery mechanism (see Section 4.12).
As well as direct government-supported providers of information and advice, there are also many other providers, nationally, sectorally and locally. Major policy efforts have been made to bring some degree of integration to these systems by signposting, referrals and one-stop shops, across the public and private sectors, and between central and local government. The form of this exchange is now becoming highly focused either on sectoral or local approaches, although it is far from clear that these two approaches are themselves integrated with each other (see below).
