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FINANCIAL SECRETARY TO THE TREASURY PAUL BOATENG

SPEECH TO COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS CONFERENCE : 11 JULY 2001

1. It is a real pleasure for me to be here today. Before I begin, I would like to thank you for what you have done for the many communities throughout Britain that have been given a real future through your work.

2.      Community finance is a very important issue for the Government: It has a central role to play in delivering some of the Government’s highest priorities: 

• creating a new culture of enterprise in Britain, and one that is open to all; 

• building real prospects, and real hope, in some of our most disadvantaged communities; 

• ending social exclusion and opening opportunities that have been closed to many people for too long.

3. But, working in Westminster, it is easy to lose sight of the real reasons community finance is important: the people who are able, because of the help of the community finance sector, to put their ideas into practise and start their own businesses; the people who have found real jobs in companies which are now able to invest and grow; and the communities which have been given new hope, new opportunities, and a new lease of life. 

4. Bringing these opportunities to disadvantaged and under-invested communities will have a real impact on the economy as a whole: it will raise productivity and help build a real culture of enterprise in Britain. But the new hope and new life it can bring to communities are the reason we should - and do - support it.

5. So I am pleased to have this early opportunity to meet you, and to share with you the reasons why the Government is so keen to support the community finance sector, and tell you something about the Government’s plans for the next few months - including some details about how we plan to implement the Community Investment Tax Credit.

Government aims

6. Last month, the Chancellor launched “Enterprise for all”  - a drive to broaden the opportunities for enterprise in Britain, and create for the first time, a truly entrepreneurial culture in Britain. If Britain is to remain successful in the modern, global economy, we need to build the strongest possible economy. In our first term, we put stability and job creation first. Now, building on the stability and low unemployment we have achieved, we need to concentrate on raising the country’s productivity - building a strong economy on the foundations that have been laid for it.

7. And a strong economy means an inclusive economy, where everybody has a chance to play their part, and where nobody is left out through permanent unemployment, inadequate education, or lack of investment. So the culture of enterprise we are building must be open to all.

8. Everybody with ideas and initiative, in every community, should have the chance to start and succeed in business. Community finance meets a very real need in widening the opportunities for enterprise. Lack of access to these opportunities is only one of the network of interlocking problems faced by people living in disadvantaged communities. And because problems such as poor housing, high crime, and poor skills reinforce each other, it is important that we do not allow lack of attention to any one of them to undo our efforts to tackle the others.

9. One of the forms of exclusion which we have responsibility for at the Treasury is financial exclusion - lack of access to even basic financial services such as bank accounts, savings, insurance and credit - and we have been working with financial services providers and voluntary and community groups to find ways of reducing and removing the obstacles people face in gaining access to financial services.

10. But it is not only individuals who suffer financial exclusion. Lack of access to commercial financial services: to business advice and support, to loans and to venture capital, can be as damaging to people and to communities as lack of access to personal financial services. I see lack of access to capital as another form of financial exclusion.  This makes tackling that lack of access an important supporting part of the work we are doing to end all forms of exclusion.

11. This means a new approach to regenerating our poorest communities. In the past, Governments have taken a bricks and mortar approach, bringing new houses, but no new jobs, and meaning frustration and disappointment for communities. To make community development successful, it is vital that we address all of the foundations - economic, social, and environmental - on which thriving communities are built.

12. Revitalising communities must mean ensuring their long-term future, rather than only giving short term support. In our inner cities and old industrial areas we need more businesses, not more benefit offices. We need to place enterprise - the creation of wealth and jobs  - at the heart of reviving communities.

13. Future jobs and prosperity will not come from benefit cheques or subsidies, but through a radically new approach that encourages economic activity and business development : an enterprise culture open to all, with Government playing an active, enabling role.

14. The rate of small business creation in high unemployment communities is still a sixth of the more prosperous areas - and unemployment is still twice as high.  We have tended to think of disadvantaged areas just as problem areas.  But in fact there is great enterprise potential in those areas, and we need to look for the opportunities instead of just the problems.  The potential has often been overlooked and has remained untapped altogether, or has remained outside the mainstream economy. 

15. Building enterprise in these areas is not a matter of subsidising loss-makers, or of giving support to enterprises that would not be viable on their own. There is real potential in our under-invested communities, the potential for self-sustaining, even thriving enterprises. Community investment is about removing the obstacles that prevent those businesses from starting and from growing - releasing the potential these areas have.

16. We want to harness that potential for the mainstream economy, through a culture of enterprise open to all in every part of the UK.  Even in areas where in the past it was assumed you could never get a job – and there have been quite a few areas like that in the UK in the past twenty years – even in areas like that, perhaps especially in areas like that, we want in the future people readily to be able to start up in business for themselves. Because when they do so, they will be helping not just themselves and their immediate family, but helping in reality their whole community too.  Increasingly, we see the encouragement of start up businesses as the key to turning round the fortunes of our most disadvantaged areas.

17. And this does not mean just starting up new businesses. Start-ups have an important role to play, but as you all know, community development finance supports a wide range of businesses, from helping people start out in self-employment to helping already established businesses expand and invest. And to the Government it also means supporting social investment - paying back to investors some of the social value that their investments bring to disadvantaged communities.

18. Bringing enterprise to our most disadvantaged communities is essential to many of our key priorities for this Parliament. It will:

• lay the foundations for the sustained, long-term revitalisation of communities;
  
  
• help build a real culture of enterprise and opportunity for all;
  
  
• reinforce our struggle against other forms of social exclusion; and;
  
  
• mean a more productive and stronger economy.

19. So we are committed to extending opportunities for enterprise to all communities in Britain. Community Development Finance Institutions play a central role in delivering on that commitment.

The Government role

20. It would be a great mistake for Government to direct or control the experts and specialists who work with and understand their communities. It is important that we listen to your views about the approaches that work in your communities, and that we do not stifle the ability of community finance practitioners to innovate.

21. Our vision is for a genuine partnership between Government, businesses and communities that promotes enterprise and wealth creation. Government’s role is not to take control, but to facilitate the work you do in communities across the country. We want to set the right framework for businesses and communities to thrive, and create a structure in which you can work effectively and innovatively to bring enterprise to disadvantaged communities in ways that are appropriate for them.

22. But that leaves a great deal for Government to do. Of course, we can address some of the difficulties faced by people in under-invested communities through national measures such as the extension of the New Deal for Over 25s to include support for self-employment, which we announced in April, giving long term unemployed people the chance to start their own business.

23. However, our primary role in this partnership is in creating the right conditions for enterprises in our poorest communities.  This means helping to close the gap that exists between the mainstream capital market, and the enterprise potential that exists on these communities.

24. Community Development Financial Institutions (CDFIs) are a vital connection between capital markets and enterprises in disadvantaged areas. They are able to channel capital to enterprises that would otherwise be seen as too small or too expensive to serve by mainstream financiers.

25. CDFIs have started to fill that gap in the capital markets, but it is clear that another gap still exists. CDFIs themselves sometimes face difficulties gaining access to capital on the mainstream market. Government needs to address that issue, making sure that CDFIs have access to the capital they need, by removing the obstacles that prevent them fully accessing capital markets, and by making new sources of capital available.

Recent Developments

26. This was one of the main themes of the report by the Social Investment Task Force last year, which recommended five ways in which the Government should encourage enterprise in our most challenged communities. The Task Force’s main proposal was for a “Community Investment Tax Credit” which would increase the returns to investors in enterprises in disadvantaged communities. In March, as part of the Budget process, we launched consultation on the details of this, and a package including five other measures aimed at regenerating the UK’s most disadvantaged areas.

27. The consultation document proposed a 25 per cent tax credit for social investments, spread over five years and channelled through Community Development Financial Institutions. The consultation period closed last week, and we are still evaluating responses.

28. When we went out to consultation, we wanted to make sure the Tax Credit would make a real contribution to developing a vibrant community finance sector in the UK. Even at this early stage, results from the consultation are encouraging, and I am confident that the tax credit will have a significant impact, so I can tell you that the Government is strongly minded to introduce the tax credit as planned.

29. The responses we have had are an opportunity to look again at the detailed design of the tax credit, and there are a number of modifications to the scheme that we will be considering and announcing in the coming months, and indeed, there are two modifications I am able to announce today.

30. An important part of the capital base for CDFIs is raised not through companies, but from semi-commercial, socially-minded individual investors. The investment these people provide can be a valuable financial cornerstone, allowing CDFIs to access harder forms of funding such as bank loans.

31. Most of the responses to the consultation felt that allowing individual as well as corporate investors to benefit from the tax credit would allow CDFIs to access a wider pool of investment from individuals who invest for more commercial, but still partly social reasons.

32. This will mean administering the tax credit through income tax as well as corporation tax, but the benefits to CDFIs of including individuals will outweigh the additional cost of administering the credit, and so I can announce today that we will allow individual, as well as corporate investors to benefit from the tax credit.
    
    
33. A second point raised in consultation was whether the tax credit should cover debt or equity investments. Nearly all of those who responded felt both debt and equity should qualify for the tax credit, allowing significant commercial activity by banks, without encouraging CDFIs to leverage themselves too much. 

34. So I can also announce that the tax credit will apply to both debt and equity investments. Again, there is a price to pay in the complexity of the scheme, but again, the benefits of including both will more than pay that price.

35. We are introducing this tax credit to secure a long-term role for the community development finance sector in the UK. There have been CDFIs in Britain for almost 30 years, but the sector has yet to become properly established, and there is a great deal of room for it to expand.

36. We want the community investment tax credit to help create the conditions, and bring in the new investment, which the community development finance institution sector needs if it is to become properly established in the UK. I am confident that the tax credit will be a success, and that you will use this opportunity to make the CDFI business model an accepted one in the UK.
37. Of course, there is still work to be done evaluating the responses we have received to the consultation, and on the detailed design of the tax credit. We expect to announce the full results of the consultation, and the Government’s response to the points raised within the coming months, when we also hope to be able to announce the appointment of the new Community Finance Champion - to give the community finance sector a more powerful voice in Westminster.  After that, I expect the tax credit to be introduced in the second half of 2002.

38. The community investment tax credit will be a significant milestone in the development of a thriving community development finance sector in the UK; but it is not the only part of the framework of support we are creating for the sector.

39. The UK’s community development finance sector needs to expand and it needs to become more firmly established. While the tax credit will be a great help in this process, there is also a clear need to increase the capacity of the sector in the UK.

40. The community investment tax credit will not remove the need - in the short to medium term - for capacity building financial support from Government to the Community Development Finance Sector.  So we remain very much committed to providing capacity building funding to CDFIs through the Phoenix Fund.

41. Of course, we recognise that there have been some difficulties with the first round of funding distributed through the Phoenix fund. We have learned a great deal from the process, and we will be taking the concerns that have been raised by CDFIs very seriously in future rounds of the fund. I hope this means you can expect a smoother ride next time.

Conclusion

42. The work you do makes a real difference to disadvantaged communities, and in the past it has often been work that has gone unrecognised and unsupported. The past year has been a landmark one for social investment in the UK. The work of the Social Investment Taskforce has made clear the real value of the work you do, and a recognition that the CDFI approach has the potential to build a long-term future for hard-pressed communities.

43. In Government, we want to help the community finance sector realise that potential, and we want to continue to build on the momentum the sector has built up over the past year. We all have work to do - in preparing for the introduction of the community investment tax credit and in developing the capacity of the sector, as well as in developing the business potential of our inner cities and former industrial areas.

44. I can assure you of the Government’s continuing support for that work. I would like to thank you for all that you have done, and wish you the best of luck in the future.