H.M. TREASURY

Micro-credit and Micro-enterprises for Growth and Employment Conference

Paris, 11 December 2000

Micro-enterprise creation by the Unemployed and Socially Excluded – the British Experience

Speech by Stephen Timms MP, Financial Secretary to the Treasury

Thank you for inviting me to speak today. 2000 has been a landmark year for social investment and microenterprise in Britain, and I am glad to have this
opportunity to share some of our experiences with you. I am also very pleased to be taking part at this conference with a number of those from the UK who have played a leading role helping us to develop our ideas –Malcolm Hayday of the Charities Aid Foundation; Thomas Fisher of New Economics Foundation; Rosalind Copisarow of Street UK who undertook pioneering work on microcredit in Poland; Erika Watson of Women’s Enterprise and Enterprise Training Unit in Norwich; and Alan Read of The Prince’s Trust, with whom much of this thinking began in the UK.

The British Government’s ambition is to build a new Britain, which will have a strong economy and a strong society too – where, as the Prime Minister said in opening the debate on the Queen’s Speech for the new session of Parliament last week, a strong economy and a strong society are seen as two sides of the same coin, not as alternatives so that we have to choose one or the other.

Our strong economy rests on a foundation of economic stability which has been built through a new framework of macroeconomic policy since 1997. We want to see more and more thriving knowledge-based firms exploiting the know how, creativity and expertise of British people. We want to create the best environment for electronic commerce. Higher levels of investment, in information technology, in infrastructure, in skills. Higher levels of productivity after decades of slipping behind.

But we need a strong society too – an inclusive society where everyone has the chance to play their full part, where nobody is left out through permanent unemployment or inadequate education. Because if we don’t, then not only will we suffer the dislocation which characterises a weak society, but our economy will also miss out on the potential contributions of those who have been left out. So it is central to the vision of the British Government, that we build a strong society alongside our strong economy.

I represent an area in East London with high unemployment, and I was briefed not too long ago about the work of the Prince’s Youth Business Trust in my area. I was introduced to a young African man from my area who was determined to set up his own business, and who had turned to the Prince’s Trust for help. His idea was to develop a business out of printing adverts on the plastic bags given away by local grocery stores to their customers. It was a very simple idea, he was a determined young man, and in succeeding, he will create not just income for himself but opportunities for others in our local community as well.

It was an effective reminder for me of the potential of start up businesses to generate opportunities in our disadvantaged areas – and that is potential we are determined to harness, 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. We have tended to think just of disadvantaged areas as problem areas. But the fact is that there is great enterprise potential in those areas, and we need to switch our thinking round to 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. We want to harness that potential for the mainstream economy.

To create more enterprising communities, we need to start with our young people. So we are increasing our support for enterprise classes in schools, through organisations like Young Enterprise which arranges for business people to link up with schools and explain what is involved in starting up and running a business. And to help bright young people like the one I met through the Prince’s Trust, we are piloting New Entrepreneur Scholarships targeted at young entrepreneurs from disadvantaged areas for management training at some of the country’s leading business schools.

Microenterprises in the UK

Of the 3.7 million businesses in the UK, 2.3 million are sole traders and 1.2 million have 1-9 employees. So, using that definition of microenterprise, microenterprises account for 94% of all enterprises. They also account for 30% of all business employment and 22% of turnover, though the picture varies sharply from one part of the UK to another.

The microenterprises themselves are extremely varied, from high turnover IT companies to part-time childcare providers. But whether they are for-profit businesses or non-profit social enterprises, they can make a real contribution to wealth and job creation and to the sustainable, community-led regeneration of our local economies.

My colleague Patricia Hewitt – Minster for Small Businesses and E-Commerce – last week launched an important new UK study on MicroEntrepreneurs. It commented that there is very little research into enterprise activity in disadvantaged areas. We want to change that and to raise the profile of successful enterprises in those areas. That is the reason for two specific initiatives which we shall be taking from next year:

we shall be piloting the development City Growth Strategies in a number of UK cities, which will map the existing business base in certain inner-city areas and then build detailed, fact-based strategies for future business growth in those areas.

and we shall be working with the New Economics Foundation and Lloyds TSB bank on the Inner City 25, which will profile the fastest growing, unquoted companies currently doing well in our most disadvantaged inner-city areas and give the opportunity to draw attention to and celebrate their success.

Barriers to microenterprise

But setting up a business in a disadvantaged area can be very risky. The Government’s Social Exclusion Unit last year identified three main barriers to enterprise creation in deprived communities which work against community-based micro-enterprises:

lack of access to business support and advice

the perceived complexity and disincentives to work in the tax and benefit system

and lack of access to finance.

We want to remove all those barriers and to create a framework in which businesses can thrive in all of our communities. So I will set out briefly some of our initiatives to overcome each of those barriers:

First, access to business support and advice

The new, nationwide Small Business Service was launched in April, with a specific remit to promote enterprise in disadvantaged communities - especially among women and ethnic minority groups. It provides information and advice to small businesses and helps keep red tape to a minimum.

Second, disincentives in the welfare system

At the time of the election, we said that the UK tax and benefits system needed to be reformed with work as its focus, and on the basis of recognising both the rights and the responsibilities of those participating in the welfare system.

A key initiative in reducing unemployment has been the New Deal, which has provided young people aged 18 to 24 who have been unemployed for six months or more with help and support to move into a job. The New Deal recognises the rights of young people to be offered opportunities, but it requires them to act responsibly and take up those opportunities as well. We have just passed the milestone of 250,000 young people moving from welfare to work through the New Deal since 1997. Youth unemployment has fallen by 70% in that period, and the rate of youth unemployment in the UK is now the lowest it has been for 25 years.

The New Deal Self Employment option is one of the opportunities open to young unemployed people throughout the country, offering them the chance of returning to work by starting their own business. They receive training, counselling, and up to six months of test trading, where an allowance continues to be paid, but profits cannot be drawn from the enterprise. Of the 6000 young people who have started to explore self-employment through the New Deal, over 500 have already moved into independent trading. This model will be extended to long-term unemployed people over 25 from next April. Early research also suggests that over 10% of those entering the New Deal for over fifties, which supports starting businesses on a different basis, have gone into self-employment.

The New Deal is just one element of a wider package to rebuild our tax and benefit system so that it encourages people into employment, instead of trapping them in unemployment as has far too often been the case in the past.

Third, access to finance

The Small Business Service runs the Phoenix Fund, which will direct nearly Ł90 million over the next three years towards encouraging enterprise in disadvantaged areas – through mentoring, loan guarantees and supporting Community Finance Initiatives and other innovative projects.

But, recognising the scale of the challenge of securing private sector investment in disadvantaged areas and in social enterprises, the Chancellor of the Exchequer Gordon Brown commissioned a taskforce, the Social Investment Task Force, to investigate what we could do. The task force was led by one of Britain’s leading venture capitalists, Ronald Cohen, and, in October, the Task Force presented its report, “Enterprising Communities”. It is a landmark report which I commend to you and it sets out a five-point programme of action to encourage more private sector investment in disadvantaged areas, in particular through Community Development Financial Institutions – which support microenterprises.

The five recommendations are these:

First, a new Community Investment Tax Credit to encourage private investment to be channelled through Community Development Financial Institutions to both not-for-profit and profit-seeking enterprises in under-invested communities. We believe that a tax incentive for community investment could help to bring more investment and expertise to disadvantaged communities. So the Chancellor has announced we will consult widely on this, with a view to taking it forward.

The second recommendation is for a new Community Development Venture Fund - a matched funding partnership between Government on the one hand and the venture capital industry, entrepreneurs, institutional investors and banks on the other. The Chancellor has already committed Ł10 million in matched funding for this purpose. We will now work closely with the venture capital industry and others on setting up the first Community Development Venture Fund.

In its third recommendation, the Task Force calls for disclosure by individual commercial banks of their lending activities to businesses in under-invested communities, and the creation of a rating system to reward excellent performance. We are looking forward to the response of the banks to that recommendation.

The fourth recommendation is for greater flexibility and encouragement for charitable trusts and foundations to invest in community development initiatives. There has been some uncertainty in the past about what is permissible for charities given the legal constraints imposed upon them. The Charity Commission will issue a range of further guidance next year on how charities can provide equity finance and loans, as well as grants, to further their charitable objectives; and on the important role that charities can play in community development finance.

Finally, the Task Force attached a high value to the contribution of Community Development Financial Institutions and I believe they are right to have done so. This is a growing sector, with a few long-established institutions like the Prince’s Trust alongside newer, smaller scale and locally based newer institutions. The Task Force saw a real opportunity for the CDFI sector to expand and increase its expertise.

Chancellor Gordon Brown has welcomed the Task Force report, and endorsed its central message, that a thriving community development finance sector is vital to boosting enterprise and wealth creation in under invested communities. Our vision is for a genuine partnership between Government, businesses and communities that promotes enterprise and wealth creation. Government’s role is not to direct and control, but to set the right framework in which businesses and communities can thrive. So we have proposed a radical reform of tax incentives designed to raise business investment in high unemployment areas by Ł1 billion.

The UK Government is also promoting the wider agenda of Corporate Social Responsibility, through champion minister Kim Howells. Being socially responsible is not only the right thing to do but makes good business sense too, for small and large companies. We want all companies to take that message on board. We want them to become more integrated with their communities, including with microenterprises in disadvantaged areas.

Conclusion

Our understanding of the role of microenterprises and microfinance is still growing, as the progress we have made over the last year alone shows. Microenterprises can play a vital in helping people back to work. They are essential in revitalising disadvantaged communities, and important in wider strategies for tackling unemployment and encouraging business growth. But realising their great potential and overcoming the obstacles they face are not matters for Government alone.

The role of Government is not to pick winners, but to create the circumstances in which these obstacles can be overcome: in which businesses, Government, local authorities, and community development organisations work together to help people start and grow viable businesses, in the way that is best for the individual and the community. We want to create a culture where enterprise really is open to all. That is the way to ensure that everybody and every community can share in the rising prosperity of the nation, the way to build a strong society alongside a strong economy.

Thank you.