What’s the future for investment grants in the North East?

What’s the future for investment grants in the North East?

The issue: The highly successful Let’s Grow Fund will come to an end next year but what follows?

Lets Grow Taking PartBrian Aitken: Recalled how, when he was editor of The Journal, he, Alastair MacColl and Neville Bearpark had been instrumental in setting up Let’s Grow and had recruited John Cuthbert as chairman of the investment panel. He pointed out how other people around the table had also served on the panel or were from companies which had benefited from Let’s Grow investments.

Neville Bearpark: “It’s been rewarding to see so many regional businesses come to the Let’s Grow programme and go on to deliver something and we have examples around the table. Having been involved in the grants scene for many years it does worry me that with current government policy things are going to change and if we don’t tackle that head on there is a significant risk that the North East will see that access to grant support diminish significantly and I think we need to do something about it.’’

David Greatorex: Pointed out that he represented a rare thing in the UK – a growing manufacturing company. Hydram Engineering employs about 220 people and has an annual turnover of between £40m and £50m manufacturing for OEMs such as Caterpillar, Mitsubishi and Hitachi Rail.

“We have benefited significantly from RGF support and have had three bites at the cherry. It really has made a difference to us, through RGF we have committed about £5m and been paid about £1m and through that we’ve created about 100 jobs. Would they have been created without RGF? Certainly we would have continued to invest as a business because that’s what we do but during the turbulent times we have seen over the last four or five years we would not have invested on the scale we have and RGF has given us the confidence to take a slightly bigger risk than we might have done without it.’’

He said there was a debate as to whether such grant schemes represent value for money for the taxpayer.

“I’m biased, it’s helped us grow, without it we wouldn’t have grown at the same pace. We’d be disappointed if RGF wasn’t to continue in the future for other businesses like us that could benefit.’’

Phil Hourigan: Explained that he managed a team of 14 commercial managers looking after businesses of between £250,000 and £40m in turnover and that they would shortly be rebranding to Williams & Glyn in April and will become an independent challenger bank
in 2017.

David Rose: Told the meeting that his 50-year-old family business had received RGF support to help it move into a new industry sector and to re-shore manufacturing back to the UK.

Stephen Catchpole: “I’ve really enjoyed my time on the Let’s Grow panel and looking at the details of the companies, what they want to do and why they want to do it.’’ However, he pointed out that TVU has had more involvement in RGF than Let’s Grow, having accessed some £200m.

Alastair MacColl: Explained that he was chief executive of business services company BE Group which specialises in business-to-business publishing, including magazines such as BQ, and manages business-to-business events. It also runs a range of commercial development programmes for the private and public sectors. It is responsible for managing, operating and accounting for the Let’s Grow programme, with the support of UNW, Trinity Mirror and the LEPs.

He added: “I’d like to say a big thank you to the investment panel and to John for chairing it. The panel took all the very difficult decisions and did all the heavy lifting to make the scheme possible.’’

Colin Bell: “This debate is timely and one thing that really interests me about it is local growth funding, where we should earmark it and where our priorities should be. Should we be trying to continue some of the good work that has been done through Let’s Grow?’’

Michael Morris: Described how Chirton Engineering had successfully applied twice for RGF funds. “It has allowed us to grow from a small company working in 500 sq ft to 62 employees with 50,000 sq ft. The most important thing for us was the acknowledgement from the powers that be that we are doing something correct, which gave us the confidence to carry on with that we were doing.’’

Sue Houston: Explained that her key role in BIS is business engagement and skills across
the North East.

Neil Warwick: Told the meeting that his specialism at Square One Law was EU competition with an emphasis on European Structural Funding. He said he was interested in how the positive story of Let’s Grow could be reconciled with the EU statement that there should be no more grant funding.

John Cuthbert: “There are some companies doing some really great things. Being in a position to be able to support some of those businesses take the next step in their growth has been tremendous.’’

He added that a guiding principle was that: “You should never give anybody anything for nothing’’.

Brian Aitken: Said that one of the most satisfying initiatives he was involved in at his time on The Journal was Let’s Grow.

Alastair MacColl: Outlined why he thought Let’s Grow was and is a good programme. It was a remarkable achievement to unite BE Group, Trinity Mirror, UNW, the LEPs, two universities, 12 local authorities and the Government with one purpose. By the time Let’s Grow reaches its conclusion, scheduled for the spring of 2017, it would have received and distributed about £57m from central government RGF money, would have worked with about 200 businesses, leveraged about £300m worth of private sector investment and should have created a minimum of about 5,300 jobs.

He added: “The numbers are impressive in themselves but there are four things which for me are important. The first is the fact that it’s delegated money and that’s important because it allows us to target that money at strategically important businesses in strategically important sectors.

Secondly, it’s money that allows us to de-risk investment up to a point in high potential projects and projects that carry an element of risk. It has only ever been seen as part of a mix of financial instruments that might include bank debt and non-traditional forms of finance. It’s often been that extra bit of money that has made a project possible, or possible more quickly, or has given a project much greater scale. The third is that it’s simply great value for Government.’’

He pointed to calculations which showed that over the five years of Let’s Grow the Government’s investment of £57m had returned just under £200m in PAYE and National Insurance from the jobs created. “That’s not a bad investment.’’

Finally, he pointed out that whereas unemployment in the South East is under 4%, in the North East it all almost double that rate. “For all those very good practical reasons Let’s Grow is making a great contribution and could in the future.

Lets Grow 22

Brian Aitken: “How important was capital grant fund delegation?’’

Stephen Catchpole: Said it had been important to be able to target sectors. He also argued that the end of Let’s Grow was not the end of grant funding, that on Teesside there was still the SSI fund and other possibilities, although he conceded that these would be on a much smaller scale.

He added: “I think Let’s Grow has been a fantastic success but, firstly, I don’t see this Government changing its mind. It’s what you do with the other access to finance instruments to make them more useful to SMEs. Second, you could argue that an absence of grant in Cambridge is what has led to the establishment of certain sectors and companies, which has led to far less unemployment than there is up here.

There comes a point in time – and I would say we haven’t reached it yet – where the North East should not have to rely upon grant. Generally, most of the successful parts of the country do not have the same sort of access to grant.’’

Brian Aitken: Pointed out that the investment panel could not make a grant if the investment was going to be made anyway. So surely Let’s Grow made a difference?

John Cuthbert: Paid credit to Government for listening and funding Let’s Grow and to agreeing to the delegated model. He said Let’s Grow did not breach his “never give anybody anything for nothing’’ principal because it was contingent upon clear and measurable outcomes and it was to meet an identified regional challenge around creating jobs.

“Other than that, we have flexibility around how that fund is deployed for maximum benefit and therein lies one of the other advantages of Let’s Grow – it’s a competition. So all the time, we are trying to gauge the relative merits, strengths and value creation.’’

He agreed that grants were only given where needed. “Let’s Grow should be the funder of last resort. It is very much a case of helping support those projects which otherwise wouldn’t happen.’’ He cited the amount of private sector investment leveraged by the grants and the grant per job ratio which compared favourably to the national rate and underlined that the PAYE and NI contributions from the jobs created gave the Government a pay-back period of between two and three years. In approaching government it should be argued that Let’s Grow was more of an investment than a grant.

He agreed that there was a jobs challenge in the North East and said there was a need to rebalance the economy with a stronger private sector. “Jobs are being created and companies are growing and becoming more confident so it’s a virtuous circle.’’

Brian Aitken: Asked David Greatorex what difference grant funding had made to Hydram Engineering.

David Greatorex: Argued that the total amount of RGF funding was tiny in terms of public spending and was a political gesture. He also said that the pay-back in NI and PAYE on his company’s grants, and only on the additional jobs, was two years.

“The Regional Growth Fund for us has been excellent, it’s been accessible, I’ve been able to speak to people who understand business and what we are trying to do. We wouldn’t have done what we have done without that support.

Live Debate 02Would we have done it in five years? Yes, we may have eventually got there. Something like this just gives you the confidence to do it. It certainly accelerated our growth.

Is it necessary? Without it we would certainly still be a growing business and we would still be doing OK. Many other businesses that could benefit from it and, if we cut off all funding of that type in years to come I think it will have an effect and it will have more of an effect in the North East than it will in Cambridge.

Should we have it? I don’t know, it certainly benefited us and I would like to see some kind of support continue. High tech companies get support through R&Ds, through other grants, through other funding, farming in the past has had support, fishing in the past has had support. It’s not unique and, from a manufacturing perspective, we are competing in a global market and there is support for manufacturing in other countries.’’

He said he liked the way Let’s Grow had been delivered and would not like to see a similar scheme administered by a large, bureaucratic regional body where much of the fund would be taken up in administration costs.

Brian Aitken: Asked Sue Houston whether BIS had seen Let’s Grow as agile in getting funds to the right recipients.

Sue Houston: “The simple answer to that is, yes. When the case was first put, it was recognised that there was a need, this region is very different to Cambridge.’’

She said the evidence was there that the grants had made a difference which had led to the second tranche of the fund and had prompted the creation of a similar fund for Teesside in the wake of the SSI closure with the same panel.

David Rose: Said the debate should be asking whether the region needed any grants. “Essentially companies that are looking for grants to get business moving are doing so obviously because they need the finance which they can’t get from traditional sources because the banks won’t give them any.’’

He added that in addition there were larger companies which are skilled at searching out and applying for grants but don’t really need them. However there are companies who are genuinely not able to go ahead with a project without grant funding and Let’s Grow has been successful in assisting them.

He said he remembered that in November 1979 the bank rate was 17% and with today’s interest rates “any company that’s worth its salt should be able to live on the cost of borrowing’’.

Brian Aitken: “Although companies do still complain that they can’t get the loans.’’

Phil Hourigan: Said that in 2015 his team in the North East and Scotland lent 50% more than in 2014. “More people were asking us for funding and I was impressed by the way we were able to support some businesses to the extent of 100% finance.’’

He added the bank’s lending criteria hadn’t changed significantly. He also said that his team had experience of a couple of cases where investments would not have gone ahead without assistance from Let’s Grow.

Alastair MacColl: “Our experience has been that most of the businesses that have benefited from Let’s Grow are also accessing bank finance.’’

Neil Warwick: “It’s clear from what everybody is saying around the table that Let’s Grow has been successful and there’s an undercurrent of `let’s lobby Government to extend this’. I think that’s pushing water uphill under the current regime and against the backdrop of the European Commission Common Strategic Framework which says grant assistance throughout Europe has to be gone by 2020.

To go, even with the success story you have got, and say Let’s Grow has been good, let’s extend it, you are probably wasting your breath. But, I think you can extend it using different language and playing to different agendas.’’ He explained that devolved tax powers could provide an opportunity to raise revenue for such purposes.

Stephen Catchpole: “The question is: should there be future grant investment in the North East? Then you’ve got to say: why?’’

He argued that it was always possible to find companies which had done well out of grants, but this was equally true of other parts of the UK. He agreed with Neil Warwick that it was necessary to come up with a positive message for Government to differentiate the North East and justify it having a grant regime.

Enterprise zone and devolution funds for the LEPs and Combined Authority might be used for grant schemes, though on a smaller scale, but he added: “What is there structurally about the economy up here that needs that when other parts of the country
could point to companies that would do well with grants?

Why is it systematically a necessity here, unlike other parts of the country? Let’s Grow has been a fantastic success and I don’t think the North East is ready to lose it but the case has to be made in a different way.’’

Brian Aitken: “But the talk around the table has sometimes been about grant rather than investment. Is that the kind of language change you are talking about, Neil?’’

Neil Warwick: “Absolutely.’’

David Rose: Suggested that the majority of private companies looking for an investment no longer rely on bank overdrafts because of the security – often in terms of personal guarantees – required. Means such as trade finance and invoice discounting have replaced overdrafts. Asset finance is also important in some cases. A combination of these could leave a small element of gap funding.

Michael Morris: Described how, when Chirton’s turnover was around £1.7m with 11 employees, it was faced with the decision as to whether or not to go for growth but RGF support enabled the business to reach the point it has today.

Brian Aitken: Asked whether there were other facilities available to allow businesses to fulfil their ambitions and break out of their current situation.

Colin Bell: “Picking up on the point about policy being against grants, funds that have traditionally gone into grants haven’t evaporated but there’s more encouragement to put them into a type of loan finance. Is there a way of structuring that type of product to still give that incentive? What type of product can give companies headroom?’’

Neville Bearpark: “It’s very easy to talk about the successes of Let’s Grow, and, let’s not forget, there are other versions of Let’s Grow in other regions. There aren’t many companies that argue against grants, it’s the cheapest form of finance you can ever get.

The fact is, the regime is against us and there will be less and less funding available for grant schemes. We need to be a lot cleverer in the way we deliver grant schemes and we probably need to be a lot more selective.’’

He explained that part of the Let’s Grow process was to establish whether a business really needed a grant but that he suspected there were businesses which were sophisticated and experienced enough to get support for projects which would have gone ahead anyway. However, there were other examples where the grant had genuinely made a difference.

“In the future we need to be much more focused on specific areas and be much more selective.’’ He also said that the possibility of grant support was critical to potential large inward investors looking at a region. The prospect for offering such grants was under threat for the North East, whereas they could still be available in Scotland or Wales.

Colin Bell: “That is an issue, it isn’t a level playing field.’’

Sue Houston: Said the Secretary of State feels decisions about economic recovery and how to create growth should be made at local level. Local people have a better understanding of their economies than civil servants in Whitehall, so LEPs should be allowed to work with local businesses to drive economic recovery.

Brian Aitken: Asked Sue Houston if she could envisage a Let’s Grow type partnership bidding to the LEPs for funds to help SMEs.

Sue Houston: “Potentially, it depends how the LEPs determine the use of the funding coming to them through devolution.’’

David Greatorex: Asked what was different about the North East. There were issues particular to the region, such as property, skills and infrastructure.

“Why does our region not function as it should without assistance? Would it function fine without assistance? This leads to a discussion on the region and that leads to a discussion on devolution.’’

David Rose: Said that historically the driver behind grants had been employment which means the process has been driven by politics.

Brian Aitken: “There seems to be a consensus that we should move away from grant funding and yet a recognition that our region differs from the rest of the UK when it comes to unemployment.’’

Alastair MacColl: “I wouldn’t necessarily go along with moving away from grant funding. Where does this Government want to get to? We have mentioned the Northern Powerhouse and rebalancing the economy North and South as a major aim and encouraging growth as a major aim.

If you start from that point, and ask pragmatically how do you do that? You do it by investing in infrastructure, in transport across the North and connectivity and skills and ultimately you also need to encourage companies and give them that extra confidence to invest. If that means having financial instruments to do that – it could be non-traditional forms of lending or some of the schemes that have been set up LEPs.

Lets Grow Live Debate Phil

I think Neil’s absolutely right, it’s the `grant’ word that provokes a reaction. I think if you have progressive programmes based on investment and the kind of returns we have been talking about in terms of private sector leverage of five or six times and the PAYE pay back, then I think that’s a very different proposition. Unless you’re an absolute purist or ideologically driven, why wouldn’t you do that as part of that mix of things, at least for a period when it’s required where it serves a purpose and where it has been proved to work?’’

David Greatorex: Argued that using job creation as a metric for aid could disqualify some high risk projects.

“I would argue that’s the wrong focus, if you get lots of other things right the jobs come. To be competitive, we’ve got to bring in more automation but eventually if you grow you do increase your workforce and usually you get higher skills levels and longer term jobs and a much more sustainable business because it’s much more competitive.’’

Sue Houston: “And there might be more jobs in your supply chain. We want to support innovation and we know that might mean fewer jobs, but increased skills levels, higher productivity and potential knock-on effect into the supply chain where there may be further growth. Things have evolved in the period since we first had Regional Growth Fund.’’

David Greatorex: Said he would be concerned by “a return to the bad old days’’ when grant funds were disbursed by “a plethora’’ of local authority bodies and other organisations often in insignificant amounts. If money were given to a new devolved regional authority, down to what level would it then be disbursed?

He feared areas within the region would then compete for the available funds. He added: “The reason I’ve liked the way Let’s Grow works is that it hasn’t been caught up in those politics.’’

John Cuthbert: Emphasised the need to be focused with clear objectives and hold people to account which is what Let’s Grow with its focus on jobs did. He pointed out that Let’s Grow had no geographical constraints within the region and its grants were spread across the North East because deserving projects were.

“Pure simple focus, it was all about high quality applications creating high quality jobs.’’ He argued that the region should not approach the Government with a begging bowl but with a programme for such clear and focused interventions.

Stephen Catchpole: “My heart tells me it would be really good to continue. My head tells me you have to put it in the context of making an argument to Government. I think generally that the business community – certainly in the Tees Valley – is more sophisticated than five years ago. The squeezing out of public sector jobs, whilst very painful, is arguably something that will boost the economy over a period of time. You’re right the simplicity of Let’s Grow was that it was just about creating jobs because we had been hit by a recession in the worst area for employment. That wouldn’t necessarily be the criteria for any future gap funding scheme because we’re not at that position anymore.’’

He argued that any future gap funding would need a much clearer focus as to its purpose. The Government could get a greater return for its money by investing in other regions.

John Cuthbert: “That runs contrary to the strategic objective of rebalancing the economy.’’

Stephen Catchpole: “If that’s your argument you’ll not be letting every job [creation] application be your criteria because you’ve got to be saying to the Government, `it’s about strategic rebalancing, these are the industries or types of companies.’’

Neil Warwick: Observed that it was virtually impossible to get a grant for the professional services sector and yet professional services were the most successful part of the North East economy.

He added: “Two of the most successful companies in the region are Go Ahead and Arriva and they have never had a single grant. So it is possible to be successful in the North East without grant assistance. So there needs to be some sort of evidence to say why manufacturing needs that help.’’

He asked grant recipients whether they would have still taken the money had it been a loan rather than a grant.

Michael Morris: Said the red tape would probably have deterred his company.

David Rose: Also said he doubted they would have taken the loan route.

David Greatorex: Said his business was traditional in its approach to funding and he doubted it would have taken an extra element of loan.

Alastair MacColl: Asked Stephen Catchpole what a replacement for Let’s Grow might look like.

Stephen Catchpole: Said the aim of any scheme would be simply to provide a stimulus. “The difficult bit is the bigger picture stuff as to why you are doing it. Any company in any part of the country could expand more quickly if they get free money. Why should this area have that opportunity? That is where you come back to saying there are underlying structural issues which I’m very nervous about because that’s much more the old style North East saying it needs outside help. Or it’s something that says if the Government is true to its word in wanting to see more of certain sectors, then we are ideally placed to have those sectors, therefore there is an investment which needs to be made and grant plays a part in that. It’s that top level narrative that says why we want it.’’

Alastair MacColl: Asked Sue Houston whether Government policy was still jobs and growth.

Sue Houston: Explained government policy has evolved, partly because of economic circumstances and partly because of a new Business Secretary who favoured less intervention. He also favoured local initiative rather than central Government action.

Colin Bell: “What I’ve been listening for tonight is those specific occasions where something was unlocked that wouldn’t have happened or where someone did something really special that wouldn’t ordinarily have happened. I take the point that things may have happened at a quicker pace. Is it a strong enough argument? Surely out of the 200 companies you have supported there are some stories to be unearthed?’’

John Cuthbert: Remarked on the diversity and range of companies, at varying stages of development and in different sectors from start-ups to long established businesses and multi-nationals which had been assisted by Let’s Grow. He added: “That’s where I get slightly concerned about the stock picking idea of selecting sectors.’’ Let’s Grow had not focused on particular sectors.

“If we had done that and bet big three years ago on subsea we would have started to feel a bit uneasy now wouldn’t we? Not because of what those companies have done but because the world has moved on. Let’s Grow has almost been a portfolio. I worry because the UK’s track record in terms of picking winners across the industrial sectors hasn’t been brilliant, so I’d be hoping for a much more broadly based intervention of some kind but I accept the current system is going to have to change, we can’t argue for more of what we’ve got, we’ve got to think of different ways of doing it.’’

Brian Aitken: Canvassed views from around the table for concluding thoughts and particularly any ideas for the way forward for investment.

Neville Bearpark: “I don’t think we do have a clearer idea. We have a very clear idea of what we have achieved to date and we have all contributed in some way to helping the region. It’s such a changing environment at the moment and we have to come up with new ways of doing things and not just more of the same. We’ve got to change the way we deliver support.’’

David Greatorex: Said he was not any clearer either. Statistics pointed to the value and success of Let’s Grow. The North East economy was growing and diversifying but issues remained.

He asked: “Is it time for the North East to go it alone without any support from London? I don’t know that for sure. These are turbulent economic times, so it’s a high risk strategy.’’

Phil Hourigan: Said it had been a worthwhile debate but wasn’t sure what the way forward was.

David Rose: “We don’t really need a grant environment, we want to direct that funding in the direction of schools.’’ He said teachers should be impressing on their students the breadth of opportunities available and more apprenticeships at all levels should be made available. There should also be a recognition of the importance of manufacturing.

Stephen Catchpole: Expressed “grave doubts’ that Government would repeat Let’s Grow on the prospect of job creation. “I think there needs to be a narrative about what we are trying to achieve and why we are trying to achieve it.’’

He said it was possible to argue that the North East economy has become more robust because it had a bigger service sector. Manufacturing only represented 12% of the region’s economy and, in terms of jobs, was shrinking. Within the new economy, however, it was possible to identify sectors which should be supported.

Alastair MacColl: Said Let’s Grow was right for its time but times had changed. He said he believed there was still a need for some kind of financial instrument and that the North East still needed some help to close the gap with the South.

Colin Bell: Agreed that the world had changed and that innovation and adaption were necessary to address issues.

Michael Morris: Emphasised the importance of skills and education and of changing parents’ perceptions of engineering as a career.

Sue Houston: “We obviously haven’t got the answer tonight but I think it’s good that we had this group talking about this, airing the challenges, identifying some potential ways forward. I would encourage you just to continue having the conversation.’’

Neil Warwick: Suggested that a way forward might be to adopt the exports agenda and create some kind of financial instrument in place of grants creating “something that looks different but is almost identical to what we’ve got’’.

John Cuthbert: “I don’t think we are going back to the begging bowl, this is all about the region playing its role in the national Government’s agenda and we’ve just got to find ways of articulating our propositions so that they tick the relevant boxes. There is still potential in the North East economy. There are still companies out there developing projects, some of which, without some sort of support, won’t go ahead or will be pursued at a lower scale or over a longer time-scale. If we are to maintain the momentum in the North East economy there’s a strong argument to produce some kind of package and help to deliver that change.’’