Prior to the inception of the Enterprise Finance Guarantee (EFG), there was detailed discussion in Whitehall about what form it should take, and how the mechanics of it should work. Building on the structure of the Small Firms Loan Guarantee and announced in the 2008 Pre-Budget Report as the Small Business Finance Scheme with a specific focus on exporters, the EFG was eventually launched in January 2009 with a broader approach, as a component of the then Labour government’s recession-fighting stimulus package.
The EFG can potentially provide access to debt finance for viable SMEs that have no security available to them, or any financial track record. It has evolved in different ways over time, from the lifting of some sectoral restrictions to increases in the amount of funds available to it.
I represented the British Chambers of Commerce in discussions with the Department for Business, Innovation and Skills when the scheme was being designed, and I have worked with the government since to assess its performance. But on several occasions, businesses – and finance directors – have expressed the view to me that the EFG is just not working. This view is then used as a proxy for criticism of the banking sector.
The nuance of the scheme leads me to a different view. Quite often, in analysis of public policy initiatives, the narrow experience of the individual can trump the reality of the bigger picture. To be sure, the EFG has not been without difficulties: there was a lack of clarity over what the scheme actually represented, and some businesses believed it was essentially “free money”. This manifested itself in a debate about personal guarantees and what could – and could not – be included as security in the commercial decision to offer an EFG loan. Finance directors have complained that the paperwork involved in using the scheme is too complicated and the advice they have received in completing it so confusing that it has put them off even trying. And there is evidence of poor communication down through bank hierarchies to FDs and others about the importance of the scheme.
A lot of the criticisms I have heard come down to individual interpretations of those that failed to access the scheme or found the terms too onerous. Complaints about having to provide personal guarantees are a perfect example of this. But the argument will always hold that the chance of default is reduced if an individual has “skin in the game” through a direct stake in the loan, meaning a fairer outcome for government, lenders and taxpayers.
I also heard stories of banks who, on turning down EFG loan applications, were told by the applicant company that they had not previously sought that loan from another lender. This myopic view, which fails to test banking competition and fails to even entertain the possibility of unsuitability for an EFG loan, belies the fact that more than £1 billion has been drawn down from offers provided under it. The reality is that government interventions can never be a silver bullet: in complex areas of market failure, the goal must be to reach as many that could potentially benefit from it as possible.
Ultimately, though, this is where the lesson should be learned from the EFG’s implementation. The government’s lead in communicating and promoting the scheme was sometimes poor. The message of what the product actually represented was clouded, and there was little coherence in the strategy for fully exploiting routes to market. That hindered the ability of potential beneficiaries to find out about the scheme, and subsequently their ability to exploit it. A business would not expend enormous amounts of resource on innovating, developing, and building a new product, and then make only a cursory attempt to market it. And neither should the government.
Worryingly, there is a danger that history could repeat itself with newly designed, state-backed financial products recently released to market. At a time when government advertising spend is frozen, the need for its communications approach to get smarter is even more important.
The coalition government has announced that the EFG will continue until 2014-15. This is fundamentally good news. It is undoubtedly true that some businesses trying to take advantage of the EFG have had a bad experience, and it would also stand to reason that some businesses have been on the wrong end of a bad decision. Nevertheless, expecting a public policy scheme, through the phases of conceptualisation, design and implementation, to become a cure-all solution is misguided, and we should remember that the EFG is more successful than most.
Steve Hughes is a policy adviser at the British Chambers of Commerce.
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