PUTTING ALL YOUR EGGS IN ONE BASKET?

Last week, I examined the role of demise of International Business Wales (IBW), one of the key recommendations that came out of the Economic Renewal Programme (ERP).

Indeed, given that much of IBW’s public face has been about attracting inward investment projects to Wales, it is not surprising that the line from the Welsh Assembly Government (WAG) has been one in which it has heralded "a move away from the traditional grant culture for big business to a culture of investment".

Of course, what WAG has conveniently forgotten to tell small businesses is that the ERP heralds a move away from a traditional grant culture for ALL businesses, large or small.

I sincerely hope that accountants and business support agencies across Wales have woken up to this fact and are now informing the thousands of small indigenous businesses that have benefited from previous financial support that the tap has been turned off.

Whilst a “culture of investment” is to be welcomed, WAG seems to have also conveniently forgotten to tell small businesses across Wales that whilst they are now replacing grants with repayable loans, these will only be available to a select number of companies within six “key” sectors.

So is your company within one of the lucky sectors? According to policymakers within WAG, the sectors chosen for support are

• ICT
• energy and environment
• advanced materials and manufacturing
• creative industries
• life sciences and
• financial and professional services.

Why these sectors?

Well, there is no real rationale given, as with much of the actions contained within the ERP, but the strategy does point out that these sectors correspond to around one third of private sector employers in Wales in business turnover and employment terms. In other words, these are the sectors dominated by large employers and not small firms.

Yet such logic is completely flawed on a number of levels.

For example, a recent study from the consulting firm McKinsey showed that in order to generate jobs, service sectors will continue to be necessary for strong job creation, and these are sectors dominated in Wales by the SME sector.

Such companies are your ‘cashcows’ that create much of the wealth needed within an economy and, more importantly, policy changes can impact sector performance in two to three years. In those traded sectors – such as the ones chosen by WAG there must be a focus on ensuring that local companies become globally competitive but with the clear understanding that this will take a number of years and is therefore not the remedy for supporting the Welsh economy out of recession.

There is also a hidden warning for Welsh policy makers in the McKinsey report, as it suggests that competitiveness in new innovative sectors is not enough to boost economy-wide employment and growth, with even mature high technology sectors, such as semiconductors, accounting for 0.5 percent or less of developed economies’ employment.

Closer to home, my experience of running the Wales Fast Growth 50 project for the last twelve years has taught me that success is not limited to any group of sectors but is down to the excellence of the individual company regardless of the industry in which it operates.

Only a third of last year’s winners were located in the six sectors proscribed by WAG and as I finalise the list for this year, it is clear that there will be a substantial group of fast growth businesses, the very ones we need to kickstart this economy, that will no longer be eligible for support from the Assembly Government

So there we have it.

WAG has decided that the economic fortunes of the Welsh economy will be driven mainly by a group of large companies within six key sectors, with no financial assistance given to the rest of Welsh business.

Simply put, if you are not in one of these sectors, then you do not get any financial support from the government. This is despite evidence that banks are simply not lending sufficient amounts to the SME sector.

For example, a recent study by the IOD shows that whilst 39 per cent of company directors had applied for finance in the first six months of the year, one in three were turned down.

I have no objection to having some focus on key sectors, but this should not be at a cost to the rest of the business community with the potential to grow and develop.

If WAG had decided that, in reorganising its £100 million grant fund that half would be turned into repayable loans for six key sectors and the rest for other businesses in Wales, not many would have objected. Instead, it has decided, without consulting properly with small businesses, that it will instead give the £50 million of funding that could have supported small firms through repayable loans to provide “next generation” broadband connections.

What evidence is there that all businesses in Wales need next generation broadband? Surely, a business can decide whether it needs faster broadband for itself and apply for a repayable loan to upgrade its system via one of the existing providers.

Why should government spend its money on this area when the private sector, such as BT, Virgin Media and specialist firms such as Fibrespeed, is already active across Wales?

More relevantly, who decided that access to broadband is more important than access to capital as businesses try to emerge out of recession?

It is not too late for WAG to change its mind on this matter, and almost no-one would argue about the move away from grants to repayable loans. However, restricting those loans to a few select businesses is tantamount to gambling with this country’s future prosperity when every business and every job is critical to get us growing out of the economic downturn.