Government-driven funding for business comes under scrutiny

Amid fears of a double-dip recession, the government has launched its Regional Growth Fund (RGF), a £1bn scheme to encourage economic growth among mid-sized businesses that can demonstrate “significant potential for sustainable eco­nomic growth” and create private sector jobs. It has also launched a review of the wider barriers to business finance.

With thousands of public sector job cuts expected over the next five years, the gov­ernment hopes the private sector will be robust enough to pick up the slack.

The first round of bids on the RGF is expected to close at the end of this year, with successful bids revealed in February 2011. Finance directors and accountants broadly welcome the initiative and the funding review, but there remains scepticism about whether these efforts will lead to significant benefits for business.

Concerns include the perennial fear that government funds will be bogged down in red tape, making accessing the funds quickly very difficult, and scepticism that banks will ease restrictions on business loans, some­thing the review aims to encourage.

Robert Edwards, finance director at Next Generation Data, which runs one of Europe’s biggest datacentres, works with the kind of businesses the government is keen to support and is considering a London flotation in early 2011 to fund further development on the 750,000 sq ft datasite, which serves clients including BT.

Edwards says that, though the RGF is a good idea in principle, he is concerned that the scheme will be overly bureaucratic and slow to release cash to growing businesses.

“The problem is in how it ends up being administered,” he tells Financial Director. “From my experience in going for any kind of government grant, the process seems very onerous and slow to get to where you want to go. When you are working on growing a company you need to be making very quick tactical decisions. Marketplaces are very competitive, especially where we operate.”

Medium-sized businesses have faced similar problems over the past 18 months getting speedy access to loans from banks, he adds. “If this government funding is going to provide quicker access to get funds, then great. But if it is going to mean months of red tape and form-filling then it is not going to work,” he says.

What about the business finance review, which is exploring ways to help small-to-medium-sized firms raise more funds from private equity, or to float?

Medium-sized companies looking to go public need an independent sponsor, or “nomad”, such as an accounting firm to help. Edwards believes it is a good idea for the government to approach mid-sized companies to explain the process of listing on the stockmarket.

“A bit of education on the A-to-Z of taking your company public might be a good thing,” Edwards says. “The process isn’t that compli­cated until some acronyms are thrown in. But consultants can make it sound easier than it is because they want to charge a lot of money for their time and effort.”

New wrapper
Other FDs are also sceptical. Bob Eastoe, finance director of Hypnos, the bed manufacturer, is unimpressed by the RGF, thinking the fund is old money in a new wrapper. He also thinks the bidding process, which allows different projects looking for government investment to be included in a package, risks being difficult to administer and may deter private investors.

“The idea of packaged projects being sub­mitted begs the question of complexity of ownership and responsibility,” says Eastoe. “The more complex and varied the package, the less likely private capital will be involved in the individual components. If an award is to be made, how will the funds be allocated to each element and what happens if there are overspends on different elements?”

He is also sceptical about the value of forthcoming Local Enterprise Partnerships (LEP), aiming to partner local authorities with groups representing business, such as the Institute of Directors, due to replace England’s nine regional development agencies (RDAs) by 2012.

Matthew Fell, director of com­pany affairs at the Confedera­tion of British Industry, supports the RGF but wants more detail on how it will work, the criteria for successful bids, and details on the bidding process.

Currently, LEPs leave FDs cold on how it will lead them to funding.

“If ever there was an indication this is a non-starter of a proposal, it is the expecta­tion that a new group of quan­gos will rush to form into cohesive groups,” Easote adds. “What is the form of these LEPs? What happens to good ideas that don’t happen to come from LEPs?”

Manos Schizas, SME policy adviser at the Association of Chartered Certified Account­ants, also has doubts about whether the RGF will be of signifi­cant help to business.

“The principle of rebalancing regions that are too depen­dent on the public sector is sound, but as a rule, re­gional funds out­­side the south of England have come under fire for being too small and too restricted in their invest­ments to make any kind of difference,” Schizas tells Financial Director.

Politically speaking, it will be impossible for the regional fund to be run centrally, so we are very likely to end up with regional manifestations of the fund ­– which will be just as small and restricted as their predecessors within the RDAs.”

For their part, RDAs say that every £1 spent achieves a return of at least £4.50 for regional economies, increasing to £6.40 when the long-term benefits are considered.

What about the government’s review of business financing? Here, prospects for business look better. Schizas says the review is addressing the right issues and may include proposals on mezzanine finance – lending debt that is subordinate to bank debt, but preferential to equity – a tool private equity groups and investment banks have turned to during the credit crunch.

Schizas thinks the government may start to act on Europe-wide proposals affecting the funding availability for UK companies.

“Another exciting possibility is that we’ll see the government take a position on the French proposals for a European Union Small Business Listing Act, which is a set of proposals intended to improve the regula­tory environment for small equity issuers in the Union,” he says. “The Lib Dems have in the past consulted on a system of regional stock exchanges and may have further ideas on this. Only a small number of SMEs raise funds through IPOs, but this is an interesting possibility.”