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Government-driven funding for business comes under scrutiny

Are you a finance director at a growing business that wants to expand but is finding credit hard to come by? Do you want to create more jobs in an area that depends on the public sector for employ­ment? If so, the government may have finance for you. That is the message David Cameron’s coalition is trying to convey with various measures it has set up.

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.”

Regional Growth Fund

With banks accused of failing to lend to businesses, the government has said it thinks the current financing system needs to change to boost economic growth.

The Rowlands Review of 2009 identified a gap in the supply of finance of between £2m and £10m for UK SMEs looking to grow. In March this year, the Labour government announced a growth capital fund, backed by banks, to invest in SMEs looking for capital of between £2m and £10m. The eventual goal for the size of the fund was given at £500m.

One aim of the coalition government’s consultation with business, which closes in late September 2010, is to make it easier for companies ­– particularly the UK’s 4.8 million SMEs – to access a wider range of financing, including private equity investors and the bond markets, removing the need to rely on bank lending.

Announced in July, the £1bn RGF will fund projects that can show significant potential for sustainable growth and can create new private sector jobs. It is due to start in 2011 and last for two years.

The government is consulting businesses on the RGF until 6 September. It will reveal more details about it and on Local Enterprise Partnerships in a whitepaper later this year.

Priority will be given to applications from companies in areas that rely heavily on the public sector for employment. Businesses can partner with public sector bodies for bids, which should be for £1m or more, and former deputy prime minister Lord Heseltine will chair an independent approval panel for the fund.

Funding will depend on the needs of local areas. Examples of schemes likely to qualify for funding from the Department for Business, Innovation and Skills include programmes that develop skills and help bring people back into work; improve trans­port and housing; or encourage growth in the low-carbon and environmental sectors.

The government’s consultation seeks to make it easier for small- and medium-sized companies to get access to wider range of finance.

Enterprise Finance Guarantee Scheme

The Enterprise Finance Guarantee (EFG) scheme, which guarantees bank loans to small businesses, has been set at £700m and will run until March 2011.

The scheme – one of a series of initiatives to unlock access to the credit markets for SMEs – has proved controversial. Critics claim it got off to a faltering start due to confusion over the application process for loans.

Following criticism by businesses that banks were taking too long to decide on loans, the government has set a processing target of 20 working days for all major lenders in the scheme.

EFG supports lending to viable businesses in most sectors with an annual turnover of up to £25m seeking loans of £1,000 through to £1m. The government guarantees 75 percent of loans under the scheme.

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