Whilst this statement was made prior to any consultation regarding the Economic Renewal Programme, this may begin to explain the zeal with which the Department of Economy and Transport seems to have interpreted the First Minister’s focus on large businesses as a sign to abandon general support for small businesses in Wales.
Last week, this column discussed the abolition of financial support to the general small business population in Wales, a change of policy that the Welsh Assembly Government (WAG) has singularly failed to communicate properly to the business community in Wales.
By focusing its new repayable grant system on six key sectors predominantly within high technology industries, WAG has turned its back on the majority of small businesses in Wales.
If we are to create jobs as we come out of the recession, then surely we must focus on every opportunity that arises from the economy?
Wales is the poorest region in the UK, has the highest unemployment rate of any of the four home nations and has lost over 45,000 private sector jobs during the worst economic downturn for a generation. Is now the time to abandon financial support for the one part of the economy - the small business sector - that will create the majority of jobs as we come out of recession?
However, it is not only funding that WAG has stopped for the majority of small firms. It has also decided to close down its business support activities that were previously administered through its FS4B programme. This will mean that there will be little, if any, support for small businesses across Wales to grow and develop after March 2011.
What exactly is the rationale for abandoning business support to small firms in Wales?
Could it be that there is no case for the existence of such services to help businesses grow and develop?
Failure in the supply of information and advice is a recognised market failure problem for small firms not only in Wales, but across all developed nations. Even in the USA - the bastion of free market economics - there is a dedicated agency - the Small Business Administration - whose role is to provide support for entrepreneurs across America.
Could it be that business support in Wales simply wasn’t working?
There is certainly backing for that proposition, given the recent critique by the head of Welsh Assembly Government’s corporate governance division. As was widely reported earlier this month, this damning report stated that the DET did “not have in place a fully effective framework of control", that there were management weaknesses identified which had exposed the department to "significant risk" and that only a limited assurance could be provided on its overall arrangements for risk management, control and governance.
As a result, the auditors concluded that there was a major risk of "loss, fraud, impropriety, poor value for money, a failure to achieve objectives" and there were "significant concerns" about the way the department was being managed.
Yet, does such abject failure by senior management within DET actually justify the abandonment of WAG’s entire small business policy? Is this wholesale change being used as an excuse to do what a number of senior civil servants in DET have privately wanted for years, namely to abandon any interventions to support the small business community in Wales and hide their own shortcomings in managing such a policy?
Yes, there are challenges in delivering business support during this period of economic austerity but that does not mean you get rid of the policy entirely. Instead, there should have been an increased focus on improving the quality and appropriateness of support with limited resources, keeping in touch with the changes in the small business community and managing the network of Welsh private sector expertise.
Whilst small business support should have become simple to administer and deliver, all DET did during the last three years was create a bureaucratic nightmare that has ground the whole system to a juddering halt. What was therefore needed was a complete rethink of business support, not its abandonment due to failings within WAG.
As we come out of recession and firms begin to consider further investment opportunities, the demand for business support is likely to increase substantially in Wales.
Whilst the private sector – such as accountants and lawyers - may well take up the slack in some of the more prosperous areas, it would be expected that there will emerge a gap in support within rural areas and those areas which are currently in receipt of European Convergence Funds.
If an increased number of firms do not get support, then it will give them less chance to maximise their potential for job creation and reduce their competitiveness, thus compounding the low levels of economic activity within these more deprived communities. Indeed, WAG has indicated that its £30 million growth programme to support businesses in the poorest areas of Wales will come to an end in March 2011 and the funding reallocated to the six identified priority sectors of the economy.
To go against conventional wisdom and abandon support to small businesses in the most deprived region in the UK and instead spend the £240 million saved on superfast broadband could be an inspired vision.
On the other hand, it could be the single biggest economic mistake ever made by an elected administration in recent times.
The jury is clearly out and we will wait to see the result.
However, one thing is certain, namely that if this strategy fails to generate the jobs so desperately needed by the Welsh economy over the next few years, then WAG will have no-one else to blame but itself.
Comments
To cut funding to support the private sector when the public sector is being hit hard is a lunatic act. We can't wait until 2016 for shiny super broadband to create jobs in Wales. We need those jobs NOW in places such as Merthyr, Ebbw Vale and the rest of the Valleys.
I have since 1999 helped to set up and managed a number of successful and globally used Web applications and services in Wales and have absolutely no business requirement for this type of capacity. now or in the future.
If WAG had any appreciation of how content is used and managed in a datacentric economy and its increasing mobility, they might understand that this is a profligate subsidy to private sector providers to introduce a Speer like data edifice that will be obsolete before it is completed.
10 years ago North West Wales desperately needed something to be done with regard to connectivity. It was delivered last year and was / is from the perspective of my business (and others) totally irrelevant as the highly visible and empty facilities in a North Wales Technium server room demonstrate.
This is another example of how the authorities have no empathy with producers of goods and services in this country. I suggest that the proposed super broadband will be out of date, irrelevant and provide nothing other than an avenue for money and resource to be spent watching 3D/HD Pirates of the Cardiff Bay or Telecottaging - the Sequel in Llandeilo.
There should be full employment in Wales given its massive investment in higher education and research, but for whatever reason Wales remains very inefficient at turning its discoveries into commerce for Wales.
Just a few varied points:
The ERP policy was clearly a hatchet job, and the real findings from the consultation will never be known. An associate of mine went to the ERP meetings and doesn’t recognise anything in the new policy that was discussed in the meetings.
Of course if the public sector is to be cut then the private sector needs the most support to absorb the jobs. (Interestingly, an associate pointed out to me Glasgow and Manchester have a population of approx £2.5m each and one local authority each. Wales has 22 local authorities and a devolved Government).
Last night, Newsnight reported that bank lending to SMEs had gone down by a whopping 42% from last year. So IJW how can you justify scrapping SIF, if access to capital is obviously still so difficult?
A source tells me IJW was slow hand clapped out of one of the IBW offices, not surprising really. I’m told the team are reporting into work with very little to do, their mobiles and cars have been taken off them and they are waiting for the next announcement. Looks like Wales is closed.
Unfortunately due to time scales I couldn’t get some of my clients through the SIF application process and they have decided not to proceed with their projects as they can’t access the additional capital. I’ve totalled the potential jobs and it comes to 46.
I set up my own business following redundancy, it was worse because we were all sacked by the Receiver the day before pay day, so the mortgage and all the other direct debits bounced. (The gold digging Receivers took £500k in fees). It took 6 weeks to get my £50 a week from the dole office and my mortgage protection insurance failed me. So I’m now thinking of those 46 people who were in the same position as me who could be in a job next month, who now will have to wait longer, a lot longer.
Of course they could try and set up a business, but your Deputy First Minister doesn’t give a toss!
So how many other applications didn’t go in this month?
It's also very funny to hear self-proclaimed Conservatives talking like this... special pleading for the soggy statism of old Labour.
Thanks for nothing, Minister.
He has said that grants will be rare in the future. How on earth does he expect to attract large companies over the next few years? 65 projects were given grants to come to Wales last year? How many will be coming this year WITHOUT grants? One rule for large firms, another for Welsh firms.
If you really think that the majority of businesses in Wales are “rent–seeking”, then where is your proof?
Such a term is a simple throw away line from someone who clearly knows little about the Welsh economy in a clumsy attempt to discredit those hard working businesspeople who seek profits for their businesses and create wealth and employment in Wales under difficult conditions.
Is that the best you can come up with in smearing the Welsh small business sector?
You also have not read my responses to the ERP in detail as my argument is not for grants to continue (although there is considerable proof that such financial mechanisms are critical for start-ups and R&D intensive businesses), but for the new system of repayable grants to be extended to all businesses in Wales.
If you are such a free market economist, then why not get rid of government support to all businesses, as you seem to be suggesting, although that wouldn’t fit in with your continuing allegiance for the ERP, would it?
Indeed, it is worth noting that you choose to attack the small business sector but not the larger firms that have received the majority of grant support during the last decade and will continue to do so under the new ERP regime. To paraphrase your term, “Do you think money should be shuffled to large businesses via bureaucrats?” Perhaps you should focus your rent-seeking analogy towards those companies instead.
Finally, you show your true colours by referring to this as a political issue. It is not and I make no apology for wanting to support the efforts of entrepreneurs in Wales, something that should be the aim of every politician in the Assembly, whatever their political colour.
Grants are equally vital to SME's. Speculative projects like R&D or overseas trade are notoriously fickle and grants should be available for these pioneers. Otherwise, we all go back into our shell and sell imported goods to our home market. Once again, grants should only go to those worthy and need to show a return. Just to turn of the grant tap is short sighted in the extreme and shows little appreciation of business. Our Government needs to use all the tools at its disposal to give the best opportunities to home grown companies.
I admire your passion - and given all that has happened, it probably is time to bring more emotion into economics.
But shouldn't we consider the following too?
There are about around 100,000 businesses in Wales - the vast majority SMEs. Which should get a grant?
In the Welsh economy about 200 businesses form and 200 close every week outside recessions. Who should get a grant to 'save' them from failure or for 'launch-aid'?
If the Welsh economy is £46 billion GDP (approx), why does anyone think £30 million (0.07% of GDP) will make even the slightest impression?
If I give a grant to one company, but not to its competitor, what is my justification for weakening the competitor?
What about when I give a grant to a firm to do something they would have done anyway? Isn't that just a dumb transfer?
If grants are so effective, and Wales has in the past been generous with grants, why is the economy not roaring away? What is the evidence that grants work at the level of the economy? Not much to nothing, I submit.
By their very nature, SMEs are many and everywhere... Hoping that government can nourish them as a sector through a few grants to a tiny fraction of the total is a strange view with no empirical basis. If you want to help SMEs then what matters is the conditions for business everywhere:
+ Regulation
+ Planning
+ Infrastructure
+ The available skills / migrants
+ Labour market flexibility
+ Labour market burdens
+ Business taxes
+ Effective banking services and VC
+ ... and, dare I suggest, the wider aspects of Wales 'offer' that might attract good people to live there - schools, environment etc.
Luckily, the Conservatives and Liberal Democrat Coalition in London seem to share my view - have a look at Vince Cable's speech from the Cass Business school in June. He gives the Party line:
"What we shouldn’t be doing is trying to micromanage the economy at the level of individual companies or so-called national champions: trying to supercede the judgement of markets.
Perhaps a fascination with state hand-outs comes from a brand of Conservatism distinct to Wales?
Finally, can I offer help in understanding 'rent-seeking', a term to which you have taken exception... a definition on 'Investopedia' is:
An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don't create any benefit for society, they just redistribute resources from the taxpayers to the special-interest group.
How many businesses, if asked, are going to say: "no, I don't want free money from the government"? But if you ask an individual business what the economy needs, are they going to say: "more competition, the energising forces of creative destruction and a better but level playing field for all players"?
To their credit, some enlightened business people do get it and reject grant culture. But most are, rent-seeking - quite rationally and understandably but mistakenly, conflating the interests of an individual business with the interest of the wider economy and competitive markets. Just like you seem to.
(...and I don't know where you got the idea I support subsidies to large businesses - I certainly don't and didn't say I did).
Thank you for your detailed response.
As I mentioned in my earlier comment, I am not in favour of providing grants to businesses except in circumstances where those grants address a real market failure (small grants to start-ups and support for innovation). Therefore, your points are well made and I have little disagreement with them.
My point is that the repayable grants system to be introduced by WAG should not be restricted to those in sectors that have merely been chosen by a bunch of economists in WAG but should be extended to all businesses in Wales that have the potential to grow and develop through access to this financial support.
If this was done, then around £100 million would be available to all businesses in Wales in the form of repayable grants. You also conveniently forget that the ‘soft support’ in the form of business support is also being abolished, which will again seriously impact on the small firm sector in Wales.
“If grants are so effective, and Wales has in the past been generous with grants, why is the economy not roaring away? What is the evidence that grants work at the level of the economy?”
Actually, WAG itself commissioned a paper from the London School of Economics that found that grants lead to higher employment and investment in firms which receive them and the effect is larger for small firms. Perhaps the case is whether those grants have been applied in the right companies – growing SMEs – or in those large “rent-seeking” companies which were here to milk the system? I will come back to that later.
You note that “By their very nature, SMEs are many and everywhere... Hoping that government can nourish them as a sector through a few grants to a tiny fraction of the total is a strange view with no empirical basis. If you want to help SMEs then what matters is the conditions for business everywhere”
There is empirical evidence to the contrary and a major decade long research programme to boot. Having been involved in the Global Entrepreneurship Monitor (GEM) programme for ten years, I would therefore take a very different view. The framework you describe applies mainly to the development of large firms and you need a different framework for small businesses.
If entrepreneurship is to flourish then certain conditions but be in place with national or regional economies. I will not bore you with the long list here but suggest you examine the latest GEM reports (www.gemconsortium.org). That will show you the conditions which government can support to encourage greater enterprise.
“Luckily, the Conservatives and Liberal Democrat Coalition in London seem to share my view…perhaps a fascination with state hand-outs comes from a brand of Conservatism distinct to Wales?”
You seem obsessed with trying to make a political point here but I certainly do not have any fascination with state handouts only with providing a level playing field for all small businesses in Wales. Indeed, I would prefer if we could get replace the majority of government support with a far better corporation tax regime for Welsh businesses but that is not going to happen in the near future and the reality of the situation is that we have to do the best with what levers we have. My argument is that in this context and the current settlement, the government has chosen the wrong levers.
With regard to your description of “rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don't create any benefit for society, they just redistribute resources from the taxpayers to the special-interest group.”
As very few small businesses in Wales are in a position to “lobby the government”, your description can only surely apply to those large businesses that have, during the last decade, received the majority of grant funding in Wales? Are you also seriously saying that Welsh companies, such as those I examine every year in the Fast Growth 50 project, don’t create benefit for their local economies. If you do, then I am afraid you show very little understanding of the small firm sector in Wales and, more importantly, of the people who run these companies, all of whom are passionate about create jobs within their localities and adding real value to any support they receive.
Finally, you talk about “level playing fields” but given the regional disparities across the UK, the playing fields that small businesses in Wales have to compete with can be compared to the mountains of Snowdonia. You also mention that
“some enlightened business people do get it and reject grant culture”. Again, you have mistaken my article as I do not make the case for grant support at all, only for fair access to the new programme of support. I would be interested in your view on whether the provision of the £240 million broadband network, under the description you give, is merely another rent seeking action, this time by large telecoms companies?
I don't doubt that telcoms companies, like any other, can sniff a full trough a hundred miles away.
I don't want to labour the point about politics, but you have parted company with Cameron on the role of the state and you are more statist even than Vince Cable. If you think they are wrong to reject an approach to economic development they incorrectly believe to have failed, then why not say so?
I am exceptionally proud to be a Conservative I can assure you!
However, I believe, in this instance, we should be debating the merits (or not) of the actual strategy being proposed by WAG rather than resorting to the usual "he would say that wouldn't he because he is a Tory/Nationalist/Socialist/Liberal".
Even you must see the funny side of sharing a party affiliation with John Redwood (who also has an enjoyable blog) and who chaired the Conservative Policy Group on Economic Competitiveness. Maybe you and he should debate the right approach to economic development - two titans locked in a struggle for the ideological future of Conservatism...
Or you could come out as Brown-ite Labour or a PC economic nationalist, a more natural ideological home for such state-centred, anti-market views. I'm sure they'd welcome you.
That is not say that Redwood is wrong as the report emphasises the importance of the small business sector and how government through lower taxes abolition of red tape can help businesses.
If Michael Davies had read the report itself than trying to be clever and quoting a link to it, he would find that there is no reference whatsoever to the abolition of grants or business support to SMEs and there is no criticism of business support by government.
The right approach is somewhere between Heseltine and Redwood, both of whom are staunch conservatives although from very different backgrounds - one a successful entrepreneur and the other a successful academic.
From 1974 to 1977, he was an investment analyst at Robert Fleming & Co.. From 1977 to 1978, he was a bank clerk at N M Rothschild & Sons, becoming a manager in 1978, assistant director in 1979 and a Director of the Overseas Division from 1980 to 1983. From 1986 to 1987, he was Overseas Corporate Finance Director and Head of International (non-UK) Privatisation.