25 March 2003
Speech by the Chief Secretary to the Treasury, Paul Boateng MP, to the British Venture Capital Association
Chairman, members, ladies and gentleman, it is good to be here with you today. As you know, we have our own all party group devoted to venture capitalism at the House of Commons, and I am glad to see so many Parliamentary colleagues here tonight.
I would like to start by paying tribute to Michael Queen’s work – here at the BVCA – and at 3i – a key player in the venture capital industry.
The Government genuinely believes in partnership, and that means understanding that different partners can and will differ from time to time. What matters is respect for those differences, a willingness to reflect on them, to respond appropriately and come to occupy common ground with the partnership still intact. In that spirit, I would like to respond to some of Michael’s points.
First, let me stress the Government is absolutely committed to public sector reform – increased investment must be matched by real reform. Michael is right to say that we need to put the citizen at the heart of the reform process - an onerous responsibility, but we will not be found wanting.
We have not only shown our commitment to public private partnerships, but also to the devolution of power and responsibility which can reap benefits for innovation and entrepreneurship. For example, during recent visits to Scotland and Wales I have been struck by the enthusiasm with which the devolved administrations and local authorities have encouraged dynamic and effective partnerships with development agencies, universities and business incubators. In Glasgow, I visited a young business spun out from Strathclyde University building a world class platform of spectrum technology, having now secured US financial backing. In Swansea, I met a young man from Germany who had decided to set up a technology business spun out of the Technium incubator, choosing to locate in Swansea with the support of the University of Swansea, the local authority and the Welsh Development Agency. Wales was a better place to set up a business in than Germany, he said. That says a lot about how we do business in the UK, and shows how important partnerships can be in achieving the full potential of UK plc. That is why partnerships are at the heart of our reforms.
On demographics, the UK, like many countries around the world, faces an ageing population and a burgeoning pensions bill. The recent Pensions Green Paper sets out some of the challenges and sets out a coherent response building on the partnership approach that sits at the centre of the pensions system.
On migration, and the demand for skilled workers, we are not ducking the challenges – as the pilot Highly Skilled Migrant Programme launched in January 2002 demonstrates. We recognise the benefits to the UK economy that skilled migrants can bring. Since its introduction, the scheme has helped many highly skilled individuals enter the UK to live and work, making a valuable contribution to the economy.
On Europe, in the last few months we have seen: agreement to simplify and improve the EU's regulatory environment - including regulatory impact assessments for new legislation; new efforts to tackle the barriers in services - which constitute 70% of the economy; commitments to a proactive competition policy; and political agreement on the Community Patent - making it easier and cheaper for businesses and entrepreneurs to protect Intellectual Property Rights. All of this has been achieved in the last few months. All of this has been achieved by engagement with the process. And all of this is good news for the EU, for the UK and, particularly when you think about areas like the community patent, for the venture capital industry.
Improving the long-term productivity of the UK, focusing on areas like skills, like investment, and like innovation, is central to the aims of this government. It is important for the well being of our citizens. It is important for a world economy in troubled times. Your role in improving access to venture capital and bridging the gap between innovative ideas, growth companies, and the capital markets is a vital part of our strategy.
You have made the UK the centre and focal point of venture capital in Europe, second only to the USA in world importance.
It is your companies that help to bring £40bn of investment to UK industry, investing in over 19,000 companies since 1983 - £4.7bn in the last year, benefiting 1,300 companies.
And I think it is also fair to say, because we all know that venture capital is not just about the money but also about the expertise, that the support which BVCA members give to companies at a crucial stage in their development plays an important part in improving their competitiveness and enabling them to grow. Private equity backed companies, I know, value the financial advice, guidance on strategy, help with recruitment, contacts, and market information that private equity firms provide. And the evidence suggests that businesses backed by venture capital out-perform those that are not.
Indeed, issue-by-issue, we can see that the venture capital industry is playing an important role in our ambitions for an enterprising, entrepreneurial, productive Britain.
It is vital, as British companies attempt to develop, to reposition themselves in global markets, to move up the value chain, so 50% of private equity is aimed at expansions.
As British companies move away from traditional industries, and toward higher technology, higher value added production, so – in 2001 – the venture capital industry channelled £1.6bn to high tech companies alone. That is a real contribution and a contribution that the Government values.
Not least, in a time of global economic uncertainty, there are fears in some quarters about the ability of the economy to sustain high levels of employment and growth, so - over the five years to 2000/01, private equity backed companies increased their staff levels at a rate around three times that of FTSE 100 or FTSE Mid-250 companies and on average private equity backed companies increased sales by 27% a year - more than double that achieved by FTSE 100 companies.
These are uncertain times for the global economy and, as a trading nation; the UK cannot remain immune from the impact of that uncertainty.
What I would say to you, and I am sure you will appreciate that so close to the Budget what I can say is severely circumscribed, is that with inflation and interest rates low and stable, and levels of employment high, the fundamentals are sound, and the UK economy is weathering these global storms better than it has in the past and better than many of our competitors. Growth is expected to pick up throughout the year and is once again expected to be the highest in the G7, with the exception of North America.
Nevertheless, the global investment slowdown, particularly in the high-technology sector, has hit private equity more than most. Heightened uncertainties have inevitably led investors to take a more cautious approach.
The role of government has to be to create the right long-term conditions for the venture capital industry to thrive and, in so doing, to promote our wider objectives on improvements in productivity, employment, and economic growth.
That is why we have put in place a framework which:
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rewards investment in successful enterprise - with a generous capital gains tax taper that makes the UK regime one of the most favourable in the industrialized world;
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encourages innovation - with research and development tax credits for businesses of all sizes; and
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helps ambitious growth businesses recruit and retain the best possible staff – with the Enterprise Management Incentives allowing tax-advantaged share option schemes.
We are also putting in place measures to ensure that the benefits of venture capital are accessible to smaller businesses seeking smaller amounts. Market failures continue to exist in the risk capital market making it difficult for viable business propositions to attract the capital they are crying out for. Where there are clear market failures to be addressed we make no apology for our involvement. The economic consequences of not intervening are too great to ignore.
At a micro level, that means Community Investment Tax Relief, helping bring enterprise and entrepreneurial endeavour into our most disadvantaged communities. Further up the scale it means the Bridges Community Development Venture Fund, the Regional Venture Capital Funds, and our work with business angel networks. We are bridging the gap between innovative ideas, growth companies, and the capital markets for businesses beneath the attention of the mainstream venture capital industry. I would like to pay tribute to Sir Ronnie Cohen for his leadership in this work.
Through the tax system, we are encouraging smaller-scale investment with the Enterprise Investment Scheme and Venture Capital Trust tax incentives. And we recognize that factors restricting effective demand for risk capital are as important as obstacles on the supply side. We are acutely aware that smaller businesses in the UK are often less aware than those in the US of the different forms of risk finance and how to access them, and so the longer-term challenge is to improve knowledge of finance options amongst key intermediaries, including accountants and banks. There is much we can learn from the “can do” attitude of the United States.
Working through the venture capital model, we are striving to bring the benefits of investment to smaller scale companies operating at a local or regional level. But efforts to promote an enterprise culture must begin even before this. We need to celebrate the importance of entrepreneurship in our schools and colleges. Howard Davies found that only 30% of young people gain enterprise experience in their school career. This represents a serious problem and we need to go beyond this and ensure that we reach many more. That is why we have provided significant extra resources to help ensure that every child gets the chance of enterprise experience during their school career.
With all our interventions, our aim is to work with the private equity industry, levering in your expertise and finance, achieving our objectives by helping you to develop your strengths. There are structural reasons why the equity gap might continue to be with us for some time. As we work together to address this problem we want to stay true to these principles. In the longer term our aim must be to stimulate a private sector investor community sufficient to fill the gap. It is the dynamism and the ability to make effective investment choices of the venture capital industry – the engine of an entrepreneurial economy - on which we now rely.
We all need to strive to create a society in which building business is not seen as incompatible with concerns about social inclusion and social justice, in which wealth creation is seen as compatible with fairness. It is a big challenge that we face. There are those who believe they are incompatible. They are wrong. To the doubters, I recall the words of Rabbi Hillel, the Jewish scholar who detailed the importance of self reliance, interdependence and action over 2000 years ago. “If I am not for me, who will be for me?” he said, emphasising our need for self reliance. However, he went on to say “If I am only for me, what am I?” We, all of us, are interdependent. “If not now, when?” If we do not seize the challenge, no one will.
It is our privilege as a Government to be in a position of leadership at this critical time. Our challenge, and the challenge of all those like you in leadership in the world of business is to work in partnership, all the better to seize the real opportunities that these times present.
Thank you.