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ADB SME DEVELOPMENT TA

BACKGROUND REPORT

INSTITUTIONAL SET-UP FOR SME POLICY DESIGN AND IMPLEMENTATION

CASE STUDY UNITED KINGDOM

ROB HITCHINS

JULY 2001

Published by: ADB Technical Assistance

SME Development

State Ministry for Cooperatives & SME

Jalan H.R. Rasuna Said Kav.3

Jakarta 12940

Tel: ++62 21 520 15 40

Fax: ++62 21 527 94 82

e-mail: [email protected]

ADB SME DEVELOPMENTTA

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I. TABLE OF CONTENTS

I. TABLE OF CONTENTS ..........................................................................................3

II. TABLE OF ABBREVIATIONS.................................................................................5

III. TABLE OF FIGURES ..............................................................................................6

IV. TABLE OF REFERENCES......................................................................................7

V. EXECUTIVE SUMMARY ENGLISH ........................................................................8

VI. EXECUTIVE SUMMARY BAHASA INDONESIA..................................................10

1 INTRODUCTION....................................................................................................12

1.1 Objectives of the case study ..................................................................................12

1.2 Structure of the case study ....................................................................................12

1.3 Country comparisons .............................................................................................12

1.4 Overview of UK economic performance.................................................................14

2 CHARACTERISTIC OF SMEs ..............................................................................15

2.1 Role of SMEs in the UK economy..........................................................................15

2.2 Definitions ..............................................................................................................15

3 GENERAL UNDERSTANDING OF SME POLICY................................................16

3.1 The wider policy context.........................................................................................16

3.2 Important influences of privatisation and deregulation...........................................17

3.3 SME-specific policy ................................................................................................18

4 INSTITUTIONAL SET UP......................................................................................19

4.1 Nature of government ............................................................................................19


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4.2 Central government................................................................................................19

4.3 Regional or sub-central government ......................................................................20

4.4 Important trends in UK government .......................................................................22

4.5 Government's role in business promotion ..............................................................23

5 REGIONAL/LOCAL DEVELOPMENT...................................................................34

5.1 Important challenges in regional development.......................................................34

6 MAJOR POINTS OF INTEREST FOR INDONESIA..............................................36

APPENDICES.......................................................................................................................I

Appendix 1: SME definitions in the UK and EU .................................................................... i

Appendix 2: Map of United Kingdom ................................................................................... ii

Appendix 3: Structure of the UK constitutional and political set up..................................... iii

Appendix 4: Industrial development and SMEs in East Anglia ......................................... xiii


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II. TABLE OF ABBREVIATIONS

BSI British Standards Institution BTI British Trade International CBI Confederation of British Industry DTI Department for Trade and Industry DfEE Department for Education and Employment DETR Department for the Environment, Transport and the Regions DSS Department for Social Security EU European Union ESRC Economic and Social Research Council FCO Foreign and Commonwealth Office FDI Foreign Direct Investment FSB Federation of Small Businesses FSA Food Standards Agency FSA Financial Services Authority GO Government Office for the Regions IMF International Monetary Fund IOD Institute of Directors IUK Invest UK LSC Learning and Skills Council MP Member of Parliament MAFF Ministry of Agriculture, Fisheries and Food NMD Non-ministerial department NDPB Non-departmental Public Bodies NTO National Training Organisation OECD Organisation for Economic Cooperation and Development OFT Office of Fair Trading RDA Regional Development Agency RIU Regulation Impact Unit SBS Small Business Service SITPRO Simpler Trade Procedures Board SME Small & Medium Enterprise TPUK Trade Partners UK UK United Kingdom of Great Britain and Northern Ireland


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III. TABLE OF FIGURES

Figure 1: Comparative national statistics ....................................................................................13

Table 1: FDI in UK (1998) ...........................................................................................................14

Table 2: EU definition of SMEs ...................................................................................................15

Table 3: Principle responsibilities of local authorities in England................................................21

Table 4: Examples of indicators used by local authorities ..........................................................22

Table 5: Registering the incorporation of a limited company ......................................................27

Table 6: Selected business support in England..........................................................................28

Figure A: Structure of UK legislature and executive ..................................................................... v

Table A: Core functions of key central government departments ................................................ vi

Table B: Principle responsibilities of local authorities in England ...............................................viii

Figure B: Structure of UK regional and local government............................................................. x


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IV. TABLE OF REFERENCES

(1) Yergin, D., J.Stanislaw, The Commanding Heights, Touchstone (1998)

(2) DTI Statistical News Release Small and Medium Enterprise (SME) Statistics, 1999, DTI (August 2000)

(3) SME Outlook, OECD (2000)

(4) Managing Across Levels of Government: United Kingdom, OECD (1997)

(5) Opportunity and Skills in the Knowledge-driven Economy, DfEE (2000)

(6) Final report of Programme-wide Appraisal of the Yorkshire and Humber Region Objective 2 Programme 1994-6, University of Sheffield (1997)

(7) Small Business Service Integrating the Business Support Infrastructure for SMEs: A National Framework for Business Support, SBS (2000)

(8) Bennett, R., P. Robson, W. Bratton, Government Advice Networks for SMEs: An Assessment of the Influence of Local Context on Business Link Use, Impact and Satisfaction, ESRC (2000)

(9) Bryson, J., D. Ingram, P. Daniels, Evaluating the Impact of Business Service Expertise & Business Links on Performance of SMEs in England, ESRC (1999)

(10) Ernst & Young, Thematic Evaluation of Structural fund Impacts on SMEs, European Commission DGXVI, (1999)

(11) University of Strathclyde Barriers to Survival and Growth in UK Small Firms: A Report to the Federation of Small Businesses, Federation of Small Businesses (2000)

(12) Bennett, R., P. Robson, The Use and Impact of Business Advice by SMEs in Britain: An Empirical Assessment Using Logit and Ordered Logit Models, ESRC (1999)

(13) Bennett, R., P. Robson, The Market for External Business Advice Services in Britain, ESRC (1999)

(14) Keeble, D. Local Industrial Development and Dynamics: the East Anglian Case, ESRC (1998)

Selected bibliography

List of Ministerial Responsibilities, Including Agencies, Cabinet Office (2001)

World Factbook, CIA

Standard Names and Codes Database, Office of National Statistics (2000)


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V. EXECUTIVE SUMMARY ENGLISH

This case study examines the institutional set up and policies of UK government for promoting private sector - and SME - development and how this has evolved over the past two decades.

UK government structure and SME policy Identifying clear lessons from the UK institutional set up is challenging. The UK's distinctive constitutional arrangements reflect a process of evolution and tradition over several centuries which underpins much of the way in which the UK governs itself, and therefore do not lend themselves to direct replication or lesson learning.

Central government in the UK has a powerful role, it controls the bulk of public finance is responsible for shaping the national strategic direction and policy framework, and to a large extent determines the scope and standards of government services. Other layers of government at the regional or local levels have relatively little policy formulation or legislative role. Specific SME policy and support structures in the UK remain rather unfocused and uncoordinated, and have suffered from a tendency to short term, stop-gap and politically-driven measures as opposed to longer term investment in basic functions necessary to promote SME competitiveness, such as vocational education. The instructive experience from the UK is in reality the wider approach and policy framework for private sector development and the context within which this has developed.

Economic transformation The UK has made a dramatic recovery from the economic crises it faced during the 1970s. By the end of the 20th century the UK's macroeconomic performance was consistently above the EU average and the UK stock of businesses had grown by 54%, 99% of which were SMEs. Productivity and investment rates had improved and the UK had become a leading destination for foreign direct investment.

The role of government in changing economic performance has been significant Government's response to 1970s crises was an ambitious process of reform during the 1980s-1990s - tight macroeconomic management, privatisation, deregulation and liberalisation - which has had three notable effects:

Stable macroeconomic performance, market liberalisation and privatisation of government-owned industries created space for the private sector, in terms of greater competition and opportunities. As a result UK economic performance has improved and the UK business stock has increased.

Emphasis on private initiative and market mechanisms positively influenced UK culture and attitudes towards business, risk taking and pursuit of reward, in both the public and private sectors. Overall UK society has become more entrepreneurial and is more business-friendly than it was two decades ago.

The focus of public debate on the role of markets and the private sector brought about a parallel scrutiny of the appropriate role of government, and has influenced moves to less interventionist, more streamlined government.


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Strategic vision for private sector development The underpinning philosophy of government has been to introduce greater competition in markets for goods and services, with the objective of promoting efficiency, innovation and consumer choice. A business and investment environment characterised by flexibility and lightly regulation, combined with a competition framework that makes little distinction between firm size of domestic and foreign firms has facilitated business formation, encouraged domestic and foreign investment, merger activities and a pronounced trend in spin-off ventures and outsourcing which SMEs have been able to take advantage of.

Redefining the role of government There are several distinct trends emerging from this re-evaluation of government's role:

Government's primary focus has been on shaping the overarching national strategic direction, particularly the macro-level policy framework and the core elements of economic development - legal framework, health and education and essential infrastructure

Government has shifted away from direct service provision of public services to a more facilitative and regulatory role. In terms of SME development this has meant 'gateway' facilities which link businesses to private sector service providers and agencies which attempt to fast-track government procedures and regulations and ameliorate their burdens.

Where government has retained service provision roles, changing public sector attitudes towards business has seen government adopt practices and mechanisms of the market, such as competitive tendering and 'benchmarking' of performance standards across all tiers of government. In part this has been driven by pursuit of greater efficiency. More significantly, it reflects the introduction of 'customer service' to the public sector.

Points of interest for Indonesia As a wealthy nation with a long history of liberal democracy, industrial development and established institutions of government, the UK at first glance may not appear to offer relevant lessons to Indonesia's current situation. However three salient points can be identified:

Clarity and consensus about the role of government among most stakeholders has been established, which has underpinned vital reforms of government and economy.

A redefined role for government - focusing on the basic 'enabling' conditions for private sector market development and ensuring that competition in those markets is appropriately regulated and individuals protected - has influenced the emergence of a strong SME sector.

Market-oriented reforms and deregulation bring tremendous benefits in terms of competition, choice and innovation. However, they are not risk-free and the total withdrawal of government can have negative consequences both for consumers and business. An indispensable role of government has been establish effective systems for individual protection and redress, regulation of anti-competitive behaviour and transparent scrutiny of delegated functions.


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VI. EXECUTIVE SUMMARY BAHASA INDONESIA

Studi kasus ini mengkaji penataan kelembagaan dan berbagai kebijakan pemerintah Inggeris untuk mempromosikan sektor swasta – dan pengembangan UKM – serta perkembangannya selama dua dasawarsa terakhir.

Struktur pemerintah Inggeris dan kebijakan UKM Mengambil hikmah dari penataan kelembagaan Inggeris, merupakan suatu tantangan. Penataan lembaga konstitusi Inggeris yang khas merupakan proses evolusi dan tradisi selama beberapa abad yang menunjukkan bagaimana Inggeris melaksanakan tata-cara peme-rintahannya, dan dengan demikian tidak dapat ditiru secara langsung atau dipakai sebagai hikmah pelajaran.

Pemerintah pusat di Inggeris mempunyai peranan yang sangat kuat: mengendalikan sebagian besar anggaran pemerintah, bertanggung-jawab menentukan arahan strategi nasional dan kerangka kebijakan, dan secara umum menentukan ruang-lingkup serta jasa-jasa pemerintah yang baku. Pemerintahan pada tingkat regional dan lokal hanya sedikit berperan dalam merumuskan kebijakan atau perundangan/peraturan.

Di Inggeris, kebijakan khusus UKM dan struktur dukungannya masih tidak fokus dan tidak terkoordinasi; pada umumnya cenderung merupakan tindakan jangka-pendek, mengisi kekurangan dan bersifat politis dibandingkan dengan investasi jangka-panjang dalam fungsi-fungsi dasar untuk mempromosikan daya-saing UKM, seperti pendidikan kejuruan. Secara nyata, pengalaman yang dapat dipelajari dari Inggeris adalah pendekatan yang lebih luas dan kerangka kebijakan untuk pengembangan sektor swasta serta konteks pertumbuhannya.

Transformasi ekonomi Secara dramatis, Inggeris telah pulih dari krisis yang dialami tahun 1970-an. Pada akhir abad ke-20, kinerja ekonomi makro secara konsisten tetap berada di atas rata-rata EU dengan laju perkembangan usaha 54% dan pangsa UKM mencapai 99%. Tingkat produktivitas dan investasi berkembang dengan baik, dan Inggeris menjadi tujuan utama investasi modal asing.

Peran pemerintah yang signifikan dalam perubahan kinerja ekonomi Tindakan pemerintah mengatasi krisis tahun 1970-an merupakan proses transformasi yang sangat aktif selama masa 1980 – 1990; antara lain, manajemen ketat ekonomi makro, privatisasi, deregulasi dan liberalisasi; yang memberikan 3 dampak nyata sebagai berikut:

Kinerja makro ekonomi yang stabil, liberalisasi pasar dan privatisasi industri milik negara telah menciptakan ruang gerak bagi sektor swasta dalam hal persaingan dan peluang usaha yang lebih besar. Hasilnya berupa perbaikan kinerja ekonomi Inggeris dan jumlah unit usaha tumbuh dengan pesat.

Besarnya prakarsa sektor swasta dan mekanisme pasar bebas secara positif mempengaruhi budaya dan sikap bangsa Inggeris terhadap bisnis, menanggung risiko dan mencari laba, baik di sektor publik mapun sektor swasta. Secara umum, masyarakat Inggeris menjadi lebih bersikap wirausaha dan ramah bisnis dibandingkan dengan dua dasawarsa yang lalu.

Debat publik tentang peran pasar dan sektor swasta menghasilkan penelitian paralel tentang peran pemerintah yang wajar serta mempengaruhi sikap untuk mengurangi intervensi dan merampingkan pemerintah.


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Visi strategis untuk pengembangan sector swasta Falsafah dasar pemerintah ialah menggairahkan persaingan yang lebih besar dalam pasar barang dan jasa-jasa dengan tujuan meningkatkan efisiensi, inovasi dan pilihan konsumen. Suatu lingkungan usaha dan investasi dengan karakteristik fleksibilitas dan peraturan sederhana yang dikombinasikan dengan suatu kerangka persaingan yang tidak membedakan antara perusahaan domestik dan asing telah mendorong investasi domestik dan asing, aktivitas penggabungan (merger), kecenderungan pertumbuhan usaha sampingan baru yang mencolok dan order keluar (outsourcing) perusahaan yang dimanfaatkan oleh UKM.

Meninjau ulang definisi peran pemerintah Hasil kaji ulang tentang peran pemerintah menimbulkan beberapa kecenderungan sebagai berikut:

Fokus utama pemerintah ialah membentuk arahan strategi nasional, secara khusus kerangka kebijakan tingkat makro, dan kerangka hukum elemen-elemen inti pengembangan ekonomi, kesehatan, pendidikan dan infrastruktur pokok.

Peran pemerintah yang beralih dari penyediaan jasa publik secara langsung menjadi peran yang lebih fasilitatif dan pengaturan. Dari aspek pengembangan UKM hal ini berarti ‘pembukaan jalan’ fasilitas yang menghubungkan perusahaan-perusahaan ke para penyedia jasa swasta dan badan-badan yang mencoba mempercepat berbagai prosedur dan peraturan untuk mengurangi beban pemerintah.

Dalam hal pemerintah masih mempertahankan peran penyediaan jasa-jasa, maka perubahan sikap publik memperlihatkan penyesuaian ke praktek-praktek dan mekanisme pasar seperti tender bersaing dan ‘benchmarking’ standar kinerja lintas sektoral di semua tingkat pemerintah. Secara parsial hal ini dipacu oleh keinginan untuk mengejar tingkat efisiensi yang lebih baik. Lebih penting lagi, hal ini menunjukkan introduksi ‘jasa konsumen’ ke sektor publik.

Hal-hal yang penting bagi Indonesia Inggeris sebagai negara yang kaya dengan sejarah panjang dalam demokrasi liberal, pengembangan industri dan lembaga-lembaga pemerintahan yang sudah lama berdiri, sekilas tampaknya tidak dapat menawarkan hal-hal yang relevan dengan kondisi Indonesia saat ini. Namun demikian, terdapat tiga hal yang sangat penting, yaitu:

Telah terbentuk kejelasan dan konsensus tentang peran pemerintah di antara para stakeholders yang menjadi landasan reformasi vital pemerintah dan ekonomi.

Redefinisi peran pemerintah, yaitu fokus pada kondisi-kondisi dasar yang ‘kondusif’ untuk pengembangan pasar swasta dan jaminan bahwasanya persaingan dalam pasar-pasar tersebut diatur dengan wajar dan kepentingan individu perorangan dilindungi. Semua hal itu telah mempengaruhi pertumbuhan sektor UKM yang kuat.

Reformasi berorientasi pasar dan deregulasi menghasilkan keuntungan besar dari aspek persaingan, pilihan dan inovasi. Namun demikian, hal-hal tersebut tidak bebas risiko dan pengunduran diri total pemerintah dapat menyebabkan dampak negatif baik bagi para konsumen maupun perusahaan. Peran pemerintah yang tidak bisa dialihkan ialah pembuatan sistem yang efektif untuk perlindungan perorangan dan kompensasi kerugian, pembuatan peraturan persaingan sehat dan secara transparen memeriksa pendelegasian ketiga fungsi yang telah dipaparkan diatas.


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1 INTRODUCTION

1.1 Objectives of the case study

The purpose of the case study is to examine how the United Kingdom governs itself, focusing in particular on those aspects of government dealing with private sector development (and within this, SME development) and how the nature of governance has changed over the past two decades. In doing so, the case seeks to identify major points of interest for Indonesia with respect to the role of government in the formulation of national and regional policies and structures for economic development and the promotion of SMEs.

1.2 Structure of the case study

The case is structured in six main sections, of which this introductory section is the first. Section 2 briefly outlines the role and characteristics of SMEs in the UK economy. The general nature of SME policy and, more significantly, the UK experience of privatisation and deregulation are examined in Section 3. Section 4 looks at the structure and functions of UK government at national and sub-national levels, and provides an overview and brief critique of government support to SMEs, in terms of indirect measures to enhance the SME environment and specific measures to support SMEs directly. In section 5 the experience of regional development is considered, looking in particular at East Anglia region. Important issues and lessons are highlighted at the end of each section. However for those that do not wish to read the entire case study, major points of interest for Indonesia are presented in section 6. Appendices cover SME definitions, a map of the UK, more detailed discussions of government structure and functions and a mini-case looking at regional economic development.

1.3 Country comparisons

The UK comprises a group of islands off the northern coast of mainland Europe. The UK has a population of 60 million and with a gross national income of US$1.4 trillion is the fifth largest economy in the world, with a significant dependency on international trade and investment. The UK is densely populated and highly urbanised with a particularly strong concentration of population and economic activity in the South East of England centred around the UK capital, London. For a more detailed discussion of the UK's territorial make up see section 4.


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Figure 1: Comparative national statistics

Gross National Income (GNI) (Trillion USD)

Population (Millions) and Population Density (Persons / km²)

125

1,163

1,404

1,453

2,104

4,055

8,880

0 1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

USA (1)

Japan (2)

Germany (3)

France (4)

UK (5)

Italy (6)

Indonesia (31)

114207

19658

24560

10759

23582

336127

30278

0 50 100 150 200 250 300 350

USA (3)

Japan (9)

Germany (12)

France (21)

UK (20)

Italy (22)

Indonesia (4)

Population Density (Inh. per km²) Population (million)

GDP per capita (USD, Atlas Method)

Surface Area ('000 km2)

600

20,170

23,590

24,170

25,620

32,030

31,910

0 5,000

10,000

15,000

20,000

25,000

30,000

35,000

USA (8)

Japan (7)

Germany (13)

France (21)

UK (23)

Italy (29)

Indonesia (150)

1,905

301

245

552

357

378

9,364

0 1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

USA (4)

Japan (54)

Germany (55)

France (41)

UK (69)

Italy (63)

Indonesia (14)

International Trade (% GDP)

Urbanisation (%)

12%

35%

45%

44%

52%

23%

20%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

USA

Japan

Germany

France

UK

Italy

Indonesia

40%

67%

89%

75%

87%

79%

77%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

USA

Japan

Germany

France

UK

Italy

Indonesia


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1.4 Overview of UK economic performance

1.4.1 The Sick Man of Europe In the 1970s the UK was in deep economic and political crisis. Successive governments buckled in the face of crippling levels of labour unrest (in 1979 over 1,200 working days lost to strikes per 1,000 employees1), double-digit inflation, high unemployment and persistent, severe budget and trade deficits. In 1976, the dysfunctional economic situation forced the UK to seek assistance from International Monetary Fund.

The birthplace of the Industrial Revolution was now the "Sick Man of Europe", the "Nation of Shop-keepers" which Napoleon had once referred to had stagnated - in terms of innovation, investment and private enterprise - beyond recognition. At this time the UK was characterised by a large public sector with substantial swathes of the economy dominated by loss-making, monolithic nationalised industries2, and where a culture of enterprise and private initiative was repressed, not least by punitively high marginal tax (of between 83% and 98%) and interest rates. In the words of commentators the UK had become "the East Germany of the Western world, a corporatist state, ground down to a grey mediocrity, and one in which any kind of initiative was regarded as pathological behaviour, to be stamped out"3.

1.4.2 Radical transformation By the late 1990s the UK had been transformed. Rates of inflation and unemployment were consistently below the European Union (EU) average, economic growth was strong and the budget in surplus. Labour unrest had fallen to 12 days lost per 1,000 employees in 1998, 20% below the EU average. Between 1980 and 1999 the UK stock of businesses had grown by 54%4, reaching a total of 3.7m businesses in 2000, 99% of which were small businesses5. Productivity and investment rates had improved and the UK had become a leading destination for foreign direct investment with inward investment growing from £44bn in 1985 to £196bn in 1998, accounting for 8% of total global investment (see table 1). UK companies were second only to the United States as both targets and purchasers in mergers and acquisitions. Why did this transformation occur? More importantly how was it achieved? This case study tries to answer these questions.

Table 1: FDI in UK (1998)

UK share of:

Total FDI in EU 23% US FDI in EU 38% Japanese FDI in EU 44%

Source: KPMG

1 Office of National Statistics (1999). 2 For example annual subsidies to the coal industry were approx. $1.3bn in the early 1980s; Yergin & Stanislaw (1). 3 Ibid. 4 DTI Statistical News Release Small and Medium Enterprise (SME) Statistics, 1999, DTI (August 2000). 5 DTI (2), OECD (3).


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2 CHARACTERISTIC OF SMEs

2.1 Role of SMEs in the UK economy

In the 1980s the number of SMEs in the UK economy grew by over 50%, largely as a result of a dramatic expansion of the service sector (which has offset a decline in manufacturing) and structural changes within companies, such as downsizing and outsourcing. As noted above SMEs account for account for over 99% of all UK businesses, approximately 49% of total business turnover6 (over £900 million) and 58% of employment. Although the latter remains below the EU average of 66%, the trend is strongly upward, and between 1995 and 1999 SMEs were estimated to account for over 70% of additional jobs7. SMEs in the UK tend to be less trade oriented than many of their EU counterparts - about 43% of SMEs export - despite the UK's strong international trade presence.

The productivity performance of SMEs is mixed; in some sectors - IT, financial services and biotechnology - SME productivity is above national and international norms. However on average productivity for firms with over 1,000 employees is twice as high as that of most SMEs. Innovation in SMEs is equally mixed; government estimates suggest that 88% of all 'novel innovators' (firms introducing a technologically new or improved product to the market) are SMEs, despite the fact that overall levels of SME patent applications are lower in the UK than Germany, France or Italy. However there is a strong disparity between the service sector where (for all enterprises) innovation spending is 40% above the EU average, whereas in the manufacturing sector it is 15% below average.

2.2 Definitions

Countries classify their business populations as part of administration and information systems and as a basis for delivering specific support and promotion. No standard global definition for SMEs exists, despite decades of striving. Most countries have adopted their own definitions, with significant variations according to context and intended usage, but typically based on measures of employment, turnover, asset value or ownership structure. The EU uses a standard set of definitions (see Table 2). Appendix 1 presents other UK definitions.

Table 2: EU definition of SMEs

Criterion Micro Small Medium

Employees (max) 9 49 249 Turnover (max) - E7m E40m Balance sheet total (max) - E5m E27m Max % owned by one, or jointly by several enterprise(s) not satisfying same criteria

- 25% 25%

To qualify as an SME both the employee and independence criteria must be satisfied, and either of the turnover or balance sheet total criteria

6 Excluding VAT, excluding the financial sector. 7 Statistical sources include Office of National Statistics, DTI, SBS and Derwent Thomson Scientific.


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3 GENERAL UNDERSTANDING OF SME POLICY

3.1 The wider policy context

It is not possible to discuss specific government policies for SME promotion in the UK without first considering the wider policy context over the 1980-2000 period.

Government in the UK has seen some devolution of power from central to regional government and to flexible, quasi-autonomous organisations. However the most marked transfer of power in the UK has been from government to the market place. Privatisation and deregulation have been the most significant instruments in redefining and streamlining the role of government.

The radical (and at the time, painful) reforms implemented under the Thatcher/Major Conservative governments of the 1980s and 1990s grew out of desperate circumstances, which forced the UK government to re-assess how it ran its economic affairs. In the late 1970s the economy was on the verge of collapse, and was subject to some of the highest levels of state ownership and control outside the Soviet bloc. Government-owned industries were highly inefficient, inflexible, unable to resist political and public-sector union pressure to expand employment and increase wages and as a consequence made huge losses requiring state subsidised 'life-support'. In response the Thatcher government embarked on a reform programme comprised of three main elements:

• Emphasis on conservative macroeconomic management (particularly monetary policy) and control of the public finances, which has resulted in remarkably consistent and stable macroeconomic performance continuing into 2000/1.

• Widespread economic restructuring, either by the transfer of corporations and activities under state ownership to the private sector - 'privatisation' where they were saleable (generally through flotation on stock markets), or if they could not be restructured and sold, closure.

• Liberalisation and 'deregulation' of large parts of the economy to introduce greater competition and flexibility into the economy. The underpinning thrust of this was to curtail the power of intermediary institutions which came between the individual and markets, inhibiting flexibility and innovation. However as Keith Joseph, a principle architect of the reform programme, pointed out this did not imply "…a free-for-all. Government must act to make and enforce rules to ensure the security of human life, protection against fraud and protection of those values and standards - social, economic, ecological - which represent the accumulated and current aspirations of our community"8. To this end, a series of specialised, quasi-autonomous regulatory bodies were established to oversee privatised industries, particularly in the utilities, transport and financial sectors.

The scale of reform cannot be understated. The rolling back of government and particularly the privatisation of government-owned enterprises resulted in a decrease in public sector employment by 33% between 1980-19959. The heavily interventionist role that government

8 Quoted in Yergin and Stanislaw (1) 9 OECD (4)


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had traditionally played also came to end. By 1995-7 UK state aid to manufacturing represented only 4% of all EU government support to that sector10.

Deregulation of the labour market, including reform of trade union legislation, has resulted in one of the most flexible labour markets in Europe, with low levels of labour unrest11. Significant cuts in taxation and public expenditure have left the UK with lower aggregate tax and social security costs than most other major EU economies12. The tax system was simplified and rates have been reduced: corporation tax from 52% in 1982 to 30% in 1999 (and 20% for small businesses), the top marginal rate of personal income tax from 83% in 1979 to 40% in 1999.

In 1983 the programme of privatisation and liberalisation began. The economy was opened to the private sector, with former public monopolies privatised and exposed to global competitors. The transport sector was liberalised and ports and airports were privatised as was the manufacturing sector including British Steel and British Aerospace. The telecommunications sector was liberalised, with the privatisation of British Telecom (BT) and Cable & Wireless; by 1998 over 200 licensed operators were active in the UK. Most dramatic was the energy sector, where not only were British Petroleum and Enterprise Oil privatised, but the public electricity, gas and water utilities were broken up into generation and distribution components and sold off.

By 1992 two thirds of government-owned enterprises had been privatised, 46 major businesses with over 900,000 employees. Government realised over $30bn from these sales. Significantly, a new form of stakeholder society had emerged, with the level of individual shareholding tripling during this period, to 9m people.

The liberalisation of the UK economy has also seen a dramatic increase in FDI and corporate merger activity in the UK, stimulating productivity and the competitiveness of domestic businesses. One of the first major international investors, Nissan of Japan, has contracts with over 200 domestic businesses, many of which have been driven to conform to international quality standards. More significantly Nissan's operations have expanded beyond lower value-added assembly operations to include design and development, again working with domestic companies. Such 'embedded' know-how and practice has seen UK productivity double (admittedly from a low base) in the past decade.

3.2 Important influences of privatisation and deregulation

The process of privatisation, deregulation and economic reform during the 1980s was undoubtedly a climacteric in the UK's economic development. It had three notable effects:

• Widespread market liberalisation and privatisation of government-owned industries created space for the private sector, in terms of greater competition and increased opportunities. As a result UK economic performance has improved immeasurably and the UK business stock has increased dramatically.

• The economic reform process, with its emphasis on private initiative and market mechanisms, has positively influenced UK culture and attitudes towards business, risk

10 By contrast, France, which is similar to the UK in terms of population and GDP, accounted for 11.4% Source: European Commission (DG IV). 11 Membership of trades unions fell by 40% from 1979, with approximately 30% of the labour force currently unionised. 12 Index; UK = 100, France = 180, Germany = 138.7, Italy = 140, Spain = 142.4. Source: Ernst & Young 'Tax Misery' Index (1999).


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taking and pursuit of reward, in both the public and private sectors. Overall UK society has become more entrepreneurial and is more business-friendly than it was two decades ago.

• The focus of public debate on the role of markets and the private sector has been accompanied by a parallel scrutiny of the appropriate role of government, and has influenced moves to streamline government.

3.3 SME-specific policy

The privatisation and liberalisation process of the 1980s and 1990s have unquestionably shaped the environment and opportunities for SMEs. Government has had a clear, overarching vision to stimulate private enterprise and competition; an ethos that has framed market-oriented and pro-business macroeconomic management, competition policy and regulatory frameworks.

In practice, however this overarching strategic clarity about private sector development has rarely been translated into a coherent rationale and approach to government promotion of small business. As discussed later (section 4.5 Government's role in business promotion) small business promotion in the UK has been influenced both by traditional government support for industry and also the ethos and practices of the welfare state - individual counselling and grants for example. Certainly in the 1980s high levels of unemployment resulting from economic restructuring and the decline in traditional heavy industries, saw small business promotion assume the de facto role of social and regional development.

As a result, the culture of support has until recently been about assisting individual businesses (to survive and employ more people) rather than promoting the competitiveness of the small businesses in general. Moreover political expediency has seen the rise of a disparate range of measures, across all parts of government in response to short term crises and 'issues of the day' rather than the development of focused and coherent approach.

In recent years, many of these concerns have been recognised, and a more streamlined, business-like approach to developing competitiveness is emerging.


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4 INSTITUTIONAL SET UP

4.1 Nature of government

The United Kingdom of Great Britain and Northern Ireland is a unitary state and a member of the EU13. It shares many aspects of public management and administration with other OECD member countries, such as parliamentary government, separate executive, legislative and judicial functions and a variety of local government structures. However the UK has a number of distinctive features, which are discussed in Appendix 3. In particular the UK has some distinctive constitutional arrangements, which have two important implications. Firstly, the combination of a first-past-the-post electoral system14 and an unelected (or indirectly elected) executive makes for a relatively strong executive compared to governments formed on the basis of proportional representation or coalition, and affords the Prime Minister considerably more discretionary power than, say, the US President. Arguably this has allowed governments in the UK in the past 20 years to push through quite radical reform programmes. Secondly, these 'messy' constitutional arrangements reflect a process of evolution and tradition over several centuries which underpins much of the way in which the UK governs itself, and therefore do not lend themselves to direct replication or lesson learning.

4.2 Central government

The executive can be broadly divided into three main elements; policy-making and co-ordination, management and line functions. An indication (not exhaustive) of key agencies responsible for each element can be found in Appendix 3.

Central government in the UK has a powerful role, and is responsible for shaping the national strategic direction and policy framework, and to a large extent determines the scope and standards of government-funded services. Other layers of government at the regional or local levels have relatively little policy formulation or legislative role. Key functions of central government include:

• Formulation of primary and most secondary legislation15;

• Most policy formulation, particularly macroeconomic, foreign, defence, trade, immigration, employment, social security policies;

• Strong control over almost all areas of government finance;

• Oversight and ultimate responsibility for many areas of regulation and regulatory agencies.

13 Great Britain comprises England, Wales and Scotland. 14 The UK's national electoral system is based on constituencies of representation. Each constituency is represented in Parliament by one 'seat' - there are a fixed number of seats (651). There is an election for each constituency, in which the winning candidate is decided by a simple majority (not necessarily an absolute majority). Which ever party gets a majority of seats (not share of total votes) forms the government. It is called 'first-past-the-post' because whichever party crosses the winning post of 326 seats first wins. 15 Primary legislation lays down the scope of legislation. Secondary legislation establishes the way that primary legislation works in practice.


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4.2.1 Central government representation at the regional level Historically, Scotland, Wales and Northern Ireland have had a form of deconcentrated (see Box 1) representation in the form of specific central government departments (Scottish, Welsh and Northern Ireland offices), focusing on domestic policy responsibilities, and with cabinet-level representation. These roles have reduced with the recent devolution of power to representative bodies for Scotland, Wales and Northern Ireland (see section 4.3 Regional government and Appendix 3).

In England, key government departments have maintained offices in regional locations. In 1994 Government Offices for the Regions (GO) were established, bringing together regional offices of departments responsible for trade and industry, employment, environment and transport. The purpose of GOs was to coordinate policy and programmes of these key departments at the region level, improve efficiency and provide a comprehensive service to local authorities and other stakeholders, via a single point of reference.

4.3 Regional or sub-central government

The structure of government at the regional or sub-central levels in the UK reflects the complex and evolutionary nature of UK socio-political history. Rather confusingly the first tier of 'regional' government actually relates to the component nations of the United Kingdom. (See Appendix 3.)

4.3.1 Government of the 'nations' Power in the United Kingdom is heavily skewed to the centre - government in Westminster (London) - and by extension, England. Traditionally, this has applied to the whole UK, with central government departments respon-sible for the countries of Scotland, Wales and Northern Ireland. With the election of the Labour government in 1997, calls for devolution of power were answered (to some extent) with the establishment of elected represen-tative bodies; the Scottish Parlia-ment, the Welsh Assembly and the Northern Ireland Assembly. However in the true UK tradition the devolution process has been messy. The level of autonomy (none are fully independent) of each country varies considerably. Moreover England itself has no specific representative body.

4.3.2 Regional government Historically, the UK has had no regional level of elected government. As noted above central government has a presence in the regions in the form of Government Offices of the Regions.

Box 1: Terminology of autonomy

Decentralisation: the transfer of responsibility to democratically elected lower levels of government

Deconcentration: the transfer of responsibility from central ministries to more autonomous agencies, while remaining part of central government.

Devolution: umbrella term covering all transfers of responsibility

Delegation: formal relationship in which competence for an aspect of the regulatory process is given by one level of government to a second.

Source: OECD (3)


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With devolution in Scotland, Wales and Northern Ireland, the inconsistency of a lack of England-specific representative bodies has become increasingly apparent, particularly given that many English regions suffer from high levels of poverty, social deprivation and economic underdevelopment. English regional assemblies have therefore been proposed. Regional Development Agencies (RDA) have also been established with the principal purpose of promoting regional economic development. (See section 5 Regional Development.)

The UK's membership of the EU has also highlighted the regional vacuum in the UK. In order to be eligible for EU structural and social cohesion funds (whose purpose is to develop those EU regions that have per capita incomes of less than 75% of the EU average), regions need to have a tier of government that corresponds to EU standard territorial classification (NUTS 1 level). Ironically, in the UK GOs - part of central government - currently fulfil this role.

4.3.3 Local government Structure. Although there is a long history of representative local government in the UK, its structure has been subject to considerable change, particularly since the 1970s. This has essentially comprised streamlining and redefinition of geographical boundaries. For example, in England the number of local authorities (outside London) has fallen from over 1,600 in the 1950s to 450 in 1997. In the same period, similar reductions have occurred in Scotland (430 to 32) and Wales (180 to 22). The situation in Northern Ireland has been influenced by the conflict and measures to reconcile dramatic social and political divisions.

The result of the restructuring of local authorities in England has produced a complex mix of single-tier and two-tier systems. Scotland, Wales and Northern Ireland have a system of single-tier authorities. Until recently the UK has not had directly elected city or town mayors; in 2000 government of London was reorganised to include a directly elected mayor with specific powers and responsibilities.

Functions. Local authorities have limited revenue-raising powers. In the 1980s central government funding accounted for less than 45% of local government income: that figure is now closer to 85% (over $40bn). In fact, local authorities (in England) only collect two local property-based taxes, both of which are subject to central government control. Local authorities also raise revenue from service-user fees for leisure facilities and public amenities

Generally the functions for which local authorities are responsible relate to 'local' services and functions (see Table 3).

Table 3: Principle responsibilities of local authorities in England

County councils District councils

Education and libraries Public housing

Fire and civil defence Planning control and implementation

Highways and traffic Recreation

Personal social services Collection of local taxes

Strategic planning Car parking (delegated from county council)

Consumer protection Refuse collection

Waste disposal & recycling Environmental health


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Since the 1980s the culture and role of local authorities has shifted from direct service provision of public services to a more facilitative and regulatory role. Where local authorities retain a service provision role, the emphasis on serving 'consumers' is stronger. A number of important mechanisms have driven this change, most of which have emanated from central government:

• Tight financial controls imposed on local authorities by central government;

• A requirement to use competition in the delivery of services: compulsory competitive tendering is required before local authority staff can carry out certain functions, which has in effect seen local authorities look to others to provide services such as waste disposal and management of certain facilities;

• National standards have been established in relation to the services which local authorities are responsible;

• A 'Citizen's Charter' entitles citizens to know the level and scope of service to which they are entitled and their rights and mechanisms for redress;

• Performance assessment based on performance indicators, the results of which are published regularly (see table 4). Staff remuneration - as in the rest of the UK civil service - is increasingly being linked to performance assessments.

Table 4: Examples of indicators used by local authorities

Performance area Sample indicators used

Level of service provided % of 3-4 year olds with a school place

Efficiency Average time taken to re-let a council home

Effectiveness % of council tax collected

Cost Per capita spending on libraries service

Quality Comprehensiveness of refuse collection against a checklist of criteria

Other Response time in answering letters or telephone calls

More detailed discussion of the structure, authority, functions and oversight of local authorities can be found in Appendix 3.

4.4 Important trends in UK government

The centralisation of power has been a feature of government in the UK for a considerable time. Indeed cynics might characterise this centralisation as the long term trend in UK government, punctuated periodically by placatory, piecemeal measures to devolve power to local or more recently to regional levels. This, may however, be a rather simplistic assessment, and it is possible to identify several important trends or changes in the way the UK governs itself:

• A pronounced increase in central government control as a means of shaping the overarching national strategic direction, policy framework and scope and standards of government-funded services;


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• A parallel shift of power to service users through a combination of increased user control over local service provision and the introduction of market-based mechanisms for service delivery such as contracting out and competition, in order to stimulate the quality, diversity and responsiveness of government-funded services;

• Increased emphasis on a 'culture of the consumer' of services, established through nationally established standards and rights of protection and redress;

• Improved efficiency of public resource management, achieved by introducing new management techniques and incentives, borrowed from the private sector16;

• A deconcentration of power away from conventional government departments and civil service hierarchy to Executive Agencies and range of quasi-autonomous agencies, in order to separate policy-making from implementation, service delivery and regulatory functions;

• A substantial programme of privatisation of formerly government-owned enterprises and a variety of other conventionally government-run activities, and significant deregulation of economic activities.

Despite these trends towards a rationalisation of government's role, considerable pressure - from the electorate, political parties, special interest groups and also its own inertia and interests - continues to be placed upon government to be "seen to do things". This pressure to deliver services and support has proved irresistible for government, leading to the creation new tiers of government in the form of bewildering array of specialised, publicly funded organisations at national, regional and local levels (which many feel are less accountable than conventional public bodies). Some of these organisations and initiatives, relating to business support, are examined in the next section.

4.5 Government's role in business promotion

Beyond its primary legislative, policy formulation and macroeconomic management roles, government in the UK, like most other countries, plays an influential role at a more microeconomic level, in terms of a variety of regulatory and promotional functions. With respect to small businesses, these can be divided into two categories:

• Indirect measures: activities of government that are not focused on small businesses directly but which influence the operating environment of businesses, in terms of business formation, operations and markets for inputs and outputs.

• Direct measures: specific support measures for small businesses.

4.5.1 Indirect measures Government activity loosely relates to three main areas - competition, quality and standards, and regulation ('red tape').

Competition. The primary motivation of government reforms from the 1980s onwards has been to introduce greater competition in markets for goods and services, with the objective of promoting efficiency, innovation and consumer choice. The role of government has been 16 For example DTI's insolvency service uses indicators such as: (a) % of open bankruptcy cases more than 36 months old, (b) unit cost of administering a bankruptcy case, (c) % of visitors with appointments seen within 5 minutes of appointment time.


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relatively light, with a view to 'creating space' for private initiative. The primary function of government - specifically the DTI - in this process has been to establish a national regulatory framework which promotes competition and constrains monopolistic behaviour, particularly with respect to the privatised public monopolies. Sub-central government plays little role in competition policy and regulation. Key national organisations include:

• Competition Commission - a non-department public body (NDPB) sponsored by the DTI, which has the power to investigate issues raised by other UK regulatory bodies, eg corporate mergers;

• Office of Fair Trading (OFT) - a NDPB sponsored by DTI, which has responsibility for both competition policy and consumer affairs. OFT investigates anti-competitive behaviour, refers cases to the Competition Commission and proposes changes in competition legislation and regulation.

• Independent regulators - in parallel to the privatisation programme a relatively complex system of independent and quasi-autonomous regulatory bodies has been established (somewhat similar to the US system) with oversight over a diverse range of (usually) former public sector activities, including telecommunications, transport, utilities. Responsibility for these agencies varies, but they usually report to specific national line ministries and Parliament.

• Insolvency Service - an executive agency of the DTI that administers and facilitates bankruptcy procedures, to streamline the process of corporate liquidation and make it more transparent.

The process of liberalisation and privatisation in the UK, combined with a competition framework that makes little distinction between firm size of domestic and foreign firms, has seen increases in FDI and merger activities and a pronounced upward trend in spin-off ventures, outsourcing and sub-contracting. These have generally had positive impacts on SMEs.

Standards. The promotion of standards for quality - to enhance productivity and competitiveness and to protect the public - has long been a weapon in government's regulatory and promotional armoury. Emphasis on consumer protection increased in particular with market liberalisation and privatisation, and subsequently in response to a range of EU directives on consumer protection. Strong protection of workers' welfare has a longer history in the UK, particularly on a collective basis through the union movement. With the weakening of unions in the 1980s, workforce protection may have been eroded, but individual worker protection has been subsequently strengthened through a range of government and EU employment legislation. The UK's historical 'productivity gap' with many of its industrialised competitors, has seen initiative after initiative launched with the elusive goal of improving 'national competitiveness'. As a result there is no centralised departmental home for either consumer protection or other standards promotion. At a national level almost all key departments play a role; DTI, Department for Education and Employment (DfEE), Department of Health, the Treasury and DETR, along with the independent regulators and a range of specific bodies such as the National Consumer Council.

• Product standards: Key agencies in the oversight of product standards, and in particular consumer protection are, at the national level the OFT and at the local authority level, the Trading Standards Service. To some extent these agencies work in concert in such areas as trade descriptions, the pricing, presentation and safety of goods and services, and provision of consumer information. Other national bodies include the Food Standards Agency (FSA) (under the Department of Health), the Financial Services Authority (also


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FSA!) (under the Treasury), the Weights and Measures Laboratory and the Patent Office (both under DTI). (See Box 2.)

Process standards: The protection of the employees and the general public from the practices and processes of businesses and other corporate bodies, falls under the aegis of both national government (legislative, strategic role) and local authorities (interpretative and enforcement role). In particular, the DETR is responsible for a huge variety of agencies relating to environmental protection, transport, construction, planning and zoning, and health and safety. For example the Health and Safety Executive (HSE) which is overseen by the DETR, works through local authorities and is responsible for enforcement of health and safety legislation relating to the workforce and those who come into contact with business premises.

• Labour standards: Improving labour force productivity and more equitable employment have been the driving forces behind labour standards initiatives, mainly on a national basis under the DfEE and DTI. The Low Pay Commission is responsible for the operation of new Minimum Wage legislation. The Equal Opportunities Commission and Commission for Racial Equality both have statutory roles to promote more widely distributed employment opportunities. These equality-based regulations apply to SMEs.

Reflecting concerns about UK productivity, a myriad of initiatives have been established to improve workforce skills. These have included numerous training schemes for individuals and businesses, a system of national vocational qualifications17 and accredited training organisations and a new apprenticeship scheme. A series of nationwide standards have also been established, such as National Training Awards, and most notably the Investors in People Awards, administered by DfEE. Investors in People is in effect a quality brand which organisations can achieve by adhering to a national framework of standards and assessment, focused on improving business performance through workforce development.

17 DfEE has highlighted relatively weakness of the UK's vocational education and training system and the need for its radical overhaul; DfEE (5).

Box 2: The Pension Mis-selling Scandal; regulation of financial service markets

In the 1980s the UK financial sector was significantly deregulated and the financial services market experienced massive expansion, in terms of new market entrants, new products and innovations and extremely high penetration of consumer markets, in particular.

By the 1990s the perils of untrammelled market forces had become manifest; a number of financial service providers had been mis-selling a range of personal financial products, particularly pensions and some types of mortgage. Consumers had been misled by product sales persons over the projected returns of such schemes, their administration costs and other deleterious small print. Consequently a large number of consumers had ended up with products that were, at best, inappropriate for them and, at worst, entirely fraudulent.

Under pressure from consumer groups the government was forced to take action. It transpired that the existing regulatory regime was fragmented between 8 different organisations, uncoordinated, lacking power and was overly dependent on self-regulation. Moreover it had failed to adapt to the transformation in the financial services market, particularly for individual or personal finance, in that its focus was heavily skewed to the oversight of institutional and market practices, protecting interests rather than consumers. The government responded by pooling the various regulatory agencies under one independent, powerful 'super-regulator', the Financial Services Authority. The personal financial services industry has subsequently been forced to become highly transparent, adhering to highly publicised and explicit codes of practice and disclosure.

The lesson from this experience is that deregulation brings tremendous benefits in terms of competition, choice and innovation. However, it is not risk-free, and complete withdrawal of government has negative consequences both for consumers and business. Government has a critical role in protecting consumers and promoting competition and appropriate standards.


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While the importance of government in protecting the public and investing in individual education and skills development cannot be questioned, its effectiveness in directly promoting productivity is less clear. Arguably the private sector has had a more influential role in promoting quality standards. For example, the British Standards Institution (BSI) established over 100 years ago, introduced a system of stringent product testing and certification that awards products a 'Kitemark' of quality and safety. This was essentially a private initiative and a forerunner to other private sector-led standards initiatives like ISO18. Equally much of the UK's quality improvement and productivity gain has come as the result of significant rises in FDI, sub-contracting and competition. Government's role has been more facilitatory; through publicity and awareness raising, and to some extent market stimulation (eg by stipulating ISO or BSI/CE certification for its external suppliers or contractors).

Regulation. The deregulation of the UK economy, simplification and reduction in taxation and legislation pertaining to company formation and liquidation have resulted in a generally lighter regulatory regime than in most European economies. Responsibility for regulation formulation usually lies with national line ministries, while implementation and enforcement is delegated to a variety of national and local government and quasi-autonomous agencies. Certain regulations (eg planning, health and safety) fall more clearly under the remit of local authorities, but even here ultimate decision-making and arbitration remains at the national level.

Government has recognised the pitfalls and costs of complex and uncoordinated regulatory regimes. Within central government, a Regulation Impact Unit has been established to coordinate and oversee the introduction of regulations and their impact, particularly on small business. The RIU has no substantive track record as yet, but it has issued guidelines on good regulatory practice and requires ministries to perform regulatory impact assessments for new regulations. A DTI agency, the Simpler Trade Procedures Board (SITPRO) acts as a national trade facilitation agency, and seeks to remove red tape and simplify documentation required for international trade. The Inland Revenue operates a Payroll Service that guides businesses through the complexities of tax and National Insurance compliance.

Business registration and the provision of company information in the UK is the responsibility of Companies House, an executive agency of DTI. Companies House has regional offices throughout the UK, while a range of services are available on-line or through a central enquiry point. The process to register the incorporation of a limited company is relatively efficient and can be done in person or by post (see Table 5). To avoid the registration process, ready-made companies can be purchased from private company formation agents.

To assist businesses through the regulatory jungle, government has established 'one-stop-shop' schemes that provide a single gateway to information on government regulation and government documents relevant to small businesses. This kind of scheme has operated via a variety of institutional homes, but its current incarnation is in the form of the Direct Access Government website operated by the Small Business Service (SBS) which operates a parallel physical service through its business advisory networks (Business Link). One-stop-shops have also sprung up in the private sector, although their main focus is on specific service areas such as finance, IT and other business services.

18 BSI links to ISO quality systems standards and the EU's 'CE' standard.


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Table 5: Registering the incorporation of a limited company

Requirement Information

Memorandum of Association company name, registered office address, objects of company

Articles of Association internal organisation of company (not required in some cases)

'Form 10' directors' personal information

'Form 12' declaration of compliance with legal requirements of incorporation

Registration fee £20 standard fee (processed in 5 days)

£80 premium fee (processed on same day)

The reappearance of government interference. The 1997 Labour government has maintained low rates of 'headline' taxes like personal income tax and corporation tax. It explicitly recognises the importance of reducing the burden of regulation and taxation on small businesses, and has created several new institutions and tiers of government to deal with it, such as the RIU and the SBS. However many observers have noted that the UK's regulatory environment has become increasingly burdensome for businesses and accuse the government of micro-management and meddling, primarily to raise revenue and implement its social and environmental objectives. The Financial Times19 summarised this tendency succinctly: "the government believes in an initiative for all occasions".

Organisations such as The Confederation of British Industry and McKinsey estimate in the 1997-2001 period the total cost of new measures to UK businesses is estimated to be in the region of £40bn. The tax burden has increased by approximately £32bn, through tax changes such as the abolition of dividend tax credit, and introduction of the climate change levy. Regulatory and welfare costs have increased by £13bn, as a result of the adoption of EU directives on working time, data protection and parental leave and the introduction of a national minimum wage, and the bureaucratic burden of administering schemes like the Part Time Workers Directive and Working Families' Tax Credit.

Partly as a consequence of these changes UK competitiveness has been eroded in recent years and despite considerable growth, productivity continues to lack behind other industrial nations, particularly the US. The UK-based Industrial Society suggests that the causes are continuing under-investment in education, training and skills development, government responses which have been short term in outlook and uncoordinated (eg employment policy is covered by four different ministries), and an increasing level of business burdens arising from new legislation.

4.5.2 Direct measures Government in the UK has a long history of support for industry and trade, through direct ownership, heavy intervention and substantial state aid, mainly to the large-scale industrial sector. The reforms of the 1980s saw such state aid to industry reduced dramatically. However economic restructuring and widespread industrial decline in many regions, coupled with the emerging private sector ethos within government, saw the birth of a new focus for state 19 Wolf, M., in The Financial Times, 30 May 2001.


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support: the promotion of small business and entrepreneurship, in order to address a perceived absence of enterprise culture and commercial dynamism and an all-too-real increase in unemployment. Government business support has typically taken two forms, financial and non-financial, although the two are often closely linked20.

Structure and scale. The sheer complexity and extent of business support activity almost defies description. A recent Scottish Parliament inquiry estimated that there were between 300 and 800 agencies involved in public business support in Scotland, with national annual expenditure on economic development in the region of £600-750m. Scotland has a population of 5m.

Across the UK the involvement of government - at all levels - in business support is extensive. Most major central government departments; DTI, DETR, the Foreign and Commonwealth Office (FCO), DfEE, Ministry of Agriculture, Fisheries and Food (MAFF) and the Treasury have hatched major initiatives. Regional and local bodies have also traditionally assumed a prominent role in different forms of business support, in spite of the fact that their statutory obligation to do so has not always been well established. This role is set to increase with devolution of power to regional administrations, in the form of GOs and RDAs, and as a result of EU regional development funding.

As a result of this ill-defined, often highly politicised framework, the structure and nature of government business support has been subject to perpetual evolution, expansion and 're-branding'. It has experienced discernible 'mission creep' as new initiatives and agencies have been established to address the issue of the day, most recently for example in response to the rural business crisis arising from the Foot and Mouth epidemic. It is impossible to document this morass of public support: currently approximately 500 government grants are available to small businesses in the UK (not including concessionary lending schemes), while central government alone operates 38 major small business support schemes. Most support is usually provided free of charge or at highly subsidised rates. One of the flagship government schemes in England and Wales has been the Business Link network; which comprises of variety of organisations (often partnerships involving the private sector, voluntary sector and other government business support agencies) that provide information, advice and consulting services to SMEs, essentially on a contractual basis for government. The Business Link network and brand has now been absorbed within the Government's new Small Business Service, which is intended to be a 'gateway service' or one-stop-shop for a variety of government support initiatives, as well as linking to private sector service providers.

Table 6: Selected business support in England

Area/department Organisations Schemes and services

Agriculture, rural

MAFF, DETR

Farm business advisory services

Rural enterprise scheme

Trade

DTI, FCO, Treasury

British Trade International

Trade Partners UK

Invest UK

Export Credit Guarantee

Export Finance & Insurance

Export Assistance

20 It has not escaped some commentators that the UK government's criticism of its EU neighbours for comparatively high level of state aid to industry is rather inconsistent given the massive expansion of government small business financing and support initiatives, such as the Regional Venture Capital Fund.


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Learning, skills

DfEE, DTI, DETR, DSS

Learning and Skills Council (LSCs)

National Council for Vocational Qualifications

National Training Organisations (NTOs)

UK Skills

Lifelong Learning Initiative

Modern Apprenticeships

Small Firm Training Loans

Regional development

DETR, DTI, EU

Small Business Service

Business link

RDA

Regional selective assistance

Structural and cohesion funds

Regional Venture Capital Fund

Enterprise Zones

Local competitiveness schemes

Small business

DTI, DETR, Treasury,

Small Business Scheme

Business Link

Enterprise Agencies

Small Business Council

Information Society Initiative Centres

Inland Revenue

Information & Advisory Services (Gateway)

SMART (innovation) scheme

TCS - Teaching Company Scheme

Inside UK Enterprise Scheme

Phoenix Fund

Small Firm Loan Guarantee Scheme

Enterprise Fund, Enterprise Grant

Inside UK Enterprise Programme

Payroll Service

Incubator and cluster initiatives

Efficacy of government business support. In this climate of benevolence and largesse, one would expect to find dramatic evidence of positive small business impact. However, a relatively weak culture of evaluation within many programmes21 means that definitive assessments cannot be made. However a number of weaknesses have been identified (some by government itself).

• Complexity and accessibility. The diversity and complexity of schemes has been found to confuse businesses. A recent government report22 suggests that too many schemes and organisations, combined with relatively weak marketing and a lack of scheme continuity has meant that many businesses do not realise what schemes are available. For those that

21 An observation supported by reviews of a number of programmes, see for example University of Sheffield (6). 22SBS (7)


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do, schemes have been found to be relatively bureaucratic and time-consuming, undermining incentives to utilise services.

The rationale for the government's new Small Business Service is an explicit recognition of this problem of inconsistency and incoherence, and is intended to reduce the number of entry points to government-funded services, and improve the marketing of the support package. While these are reasonable goals the overarching rationale for government intervention is not coherently stated, and concerns have been raised about the clarity and credibility of SBS's objectives and ability to measure its performance.

• Outreach and usage. The outreach of government business support programmes, while improving over recent years, is low, as SBS recognises; "public sector funded support is, and will continue to be, a relatively small proportion of the business support offered by the private sector"23. SBS's own estimates suggest that less than 15% of small businesses have ever used Business Link advice. Other independent assessments suggest less than 10%24. Similarly low proportions have used government-supported finance schemes.

• Quality and relevance. The quality of government-funded business advice has been found to be highly variable, depending for example on the individual advisers in question25, although EU studies suggest that UK enterprise support is generally better regarded by SMEs than in other member states26. Government itself has identified problems of inconsistent quality, lack of customer focus, not providing what customers want, and a degree of isolation from other private sector providers such as accountants, consultants and banks. An Economic and Social Research Council study indicates that the types of service typically provided by government schemes such as business strategy services and management services are in relatively low demand at 3.2% and 0.9% of SMEs' stated service requirements respectively. A survey of 22,000 small businesses for the Federation of Small Businesses27 found only 8% of small businesses were satisfied with government business support services and 2% satisfied with government loan schemes (with local authority schemes faring even worse). In contrast 41% were satisfied with their banks. The financial performance of government-funded loan schemes is also not record-breaking, with loan losses estimated to be in the region of 18%, far higher than for corporate or personal lending in the commercial sector.

• Impact and sustainability. Impact assessment of business support - in particular isolating the specific influences of a scheme from the complex influences of the wider environment - is notoriously difficult. Studies in the UK indicate that support schemes have some business impact, but this is highly variable and dependent on a range of factors, including the adviser, the firm and its location.

ESRC studies identify findings by Ernst & Young28 that Business Link had often provided subsidies to customers that did not need them or would have used services provided at commercial rates. Similarly DTI-funded export-assistance programmes for small and new

23 Ibid. 24 Bennett, Robson & Bratton (8) 25 Bryson, Ingram & Daniels (9). 26 Ernst & Young (10). 27 University of Strathclyde (11). 28 Bryson, Ingram & Daniels (9)


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exporters have been found to be utilised most extensively by larger businesses and experienced exporters, rather than small businesses and fledgling exporters.

There is also some evidence that businesses use government non-financial support simply in order to get access to concessionary finance. For example, a University of Sheffield review (6) has observed that the majority of supported technical assistance projects had also obtained the maximum 50% grant rate, concluding in effect that businesses were "grant chasing", a fact supported by anecdotal evidence. Similarly, an ESRC study points to a significant negative relationship between business profitability and the use of government-funded services, suggesting that public services attract unprofitable firms, essentially as a form of life-support29.

The sustainability of these services is dependent on on-going public funding, as cost recovery rates on most services remain insignificant and the performance of financing schemes are not commercially viable. This leaves them exposed to the vagaries of political trends and manoeuvring, and as SBS has identified, there is a mixed record of scheme continuity.

Role of the private sector. From the mid-1990s use of external advice has increased dramatically in the face of an increasingly competitive business environment and the need to develop new products and markets, improve quality, control prices and expenditure. A study by ESRC estimates that between 60-95% of businesses use some form of external advice30. Of this some 75% is provided by the private sector, while as noted previously, government-funded schemes account for less than 15% (the remainder being from other informal sources). In this context the rationale for government intervention is not entirely clear. As SBS points out "the existence of public sector support creates the potential for unfair competition with the private sector. Some of the services provided on a subsidised basis are also offered on an unsubsidised basis by the private sector".

Financial sector deregulation, a relatively low interest rate regime and traditionally high levels of home ownership (and thus personal equity) has led to massive expansion of the financial services market, offering business a choice and flexibility of financial instruments which completely overshadows government finance schemes. In terms of external finance31, the majority of firms continue to finance their businesses through bank overdrafts and loans, credit cards, supplier credit and mortgages. The use of specialised financial instruments such as factoring, hire-purchase and leasing has also increased significantly. The use of venture capital finance and so-called business angels, while increasing, remains relatively rare and exhibits marked regional distribution eg towards London or the East Anglian region.

The quality of private sector services also appears to be higher, with another ESRC study finding that private sector business service suppliers have a higher business impact than government-funded schemes32. Similarly the DTI has recognised in recent studies have identified that although the UK does not have a high degree of clustering, the influence of clusters on small business performance can be significant, but has concluded that clusters need to be driven by the private sector and cannot be created by government33.

29 Bennett &. Robson (12) 30 Bennett & Robson (13) 31 The FSB survey shows that personal sources of finance - eg savings and pensions - are very significant. 32 Bennett &. Robson (10) 33 Minutes of DTI Clusters Policy Steering Group Meeting (23 May 2000) in respect of a report Business Clusters in the UK - A First Assessment.


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Business membership organisations - trade associations and chambers of commerce - such as the Confederation of British Industry, Federation of Small Businesses and the Institute of Directors play a supportive role. Unlike other European countries these organisations do not have a statutory role, membership is voluntary and small34. For specific sectors or professions, trade associations sometimes act as recognised bodies, for self-regulation and promotion. Generic business membership organisations' main role is in relation to advocacy, information provision and research. With the exception of certain associations (eg for professional services) the overall influence of BMOs on business is relatively marginal, and their distinctiveness as membership organisations often tends to be lost amidst a plethora of other initiatives to 'support' businesses.

4.5.3 Important issues in UK government business promotion In thinking about the nature and efficacy of government's involvement in business promotion a number of wider issues arise:

• The difficulty of reducing government. Clearly the role of government has evolved considerably over the past 20 years, but from looking more closely at its role in small business promotion, it is equally evident that that government finds it difficult to withdraw totally. Many of government's reforms have been about how government does things rather than what it does. For example, the UK is often praised for its innovative use of partnerships with the private sector, significant 'localisation' of schemes and higher levels of fee-charging in its business support programmes. However these remain government schemes for which the overarching rationale for government's involvement and its efficacy are seldom questioned.

• The costs of being 'initiative-led'. It is all too easy for the more basic functions of government to get neglected in favour of higher profile, populist and short term responses to deeper-seated problems, particularly under pressure from interest groups. Moreover, supposedly temporary measures often acquire permanency, as they establish themselves within the civil service machine. As a result of this neglect, UK business continues to suffer - from an inadequate skills base, low productivity and bureaucratic burdens.

• A clear need for government facilitation and protection. A redefined role for government does not lessen the importance of the role that government has to play in a market economy. However it is clear that this role is more focused and facilitative, undertaking roles that the private sector cannot play - such as the provision of information, investing in the business environment, skills and knowledge, easing bureaucratic procedures - and protecting individuals from adverse market outcomes.

Amidst the dauntingly complicated picture of government direct support for business, two points in particular need to be highlighted:

• Efficacy: what difference does it all make? While there have been a variety of small, piecemeal 'studies' on the impact of individual initiatives, these offer a mixed and often contradictory picture of impact, and there is certainly no significant evidence that the UK's substantial, long term publicly-funded efforts to promote small businesses directly have made a significant impact on SME performance.

34 Accredited chambers of commerce in the UK have 135,000 members (only 3.5% of all UK firms) according to The British Chambers of Commerce, a national network of all accredited chambers of commerce in the UK.


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• Rationale: why does government do this? Despite, or perhaps because of, the momentum generated by years of government-supported initiatives, the growing number of agencies and the vested interests of the UK's economic development 'industry', there has been minimal analysis or justification for the involvement of government in business promotion - beyond 'helping' businesses - in terms of improving service markets or wider competitiveness of the business environment.


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5 REGIONAL/LOCAL DEVELOPMENT

In the UK there has been an increasing emphasis on regional development, largely in response to disparities in regional economic development, which have resulted from economic restructuring in the 1980s. The 1997 Labour Government has intensified this emphasis amidst growing calls for regional representation in England to mirror that in Scotland, Wales and Northern Ireland. In doing so it has built upon the presence of GOs as central government representative and administrative centres in the regions, to establish region-specific bodies such as RDAs and in the longer term, elected regional assemblies. Equally influential has been the availability of significant EU funding for regional development.

Broadly speaking regional development in England35 falls under the remit of the Department of Environment, Trade and Regions, a ministry with extremely wide-ranging responsibilities including 9 executive agencies, 9 GOs and about 48 other NDPBs. Regional bodies such as RDAs and local authorities also fall under the aegis of DETR. As noted above, there is a considerable history of regional development and regeneration programmes in the UK, which has expanded considerably with increased levels of DETR and EU funding.

In terms of their key objectives of promoting regional equality, the impact of these programmes is mixed. In the UK, many areas (for example Wales, West Central Scotland, and parts of the North, South West and Midlands of England) which have suffered severe structural decline in the agriculture and fisheries, mining and heavy industrial sectors, have not experienced demonstrable regeneration, despite considerable levels of EU and UK government support. There may be myriad and complex reasons for this, but arguably many of these areas had extremely narrow economic bases, often dependent on a single industry such as shipbuilding or mining. The unfortunate reality is that their very reason for existence, eg proximity to coalfields is no longer a competitive advantage. These areas suffer from problems of isolation, skill deficiencies, inadequate infrastructure and are ill adapted for new economic circumstances. These problems will not be ameliorated by high profile, short-term intervention. They will require massive structural and social transformation, including substantial long-term investment in public services and economic infrastructure. In contrast, areas that have experienced regeneration, eg Leeds, parts of the Midlands and the Edinburgh region, have had something to build upon - a more diversified economic base - that has lent itself to more rapid transformation and which State aid may have been able to facilitate.

5.1 Important challenges in regional development

Again the appropriate role of government is called into scrutiny. Under political pressure, successive governments have attempted to address the symptoms of economic decline - unemployment, low business start up rates - with high profile, but often short-term regeneration measures, rather than address the underpinning problems of inadequate education, labour markets and infrastructure with the needed long-term, but perhaps more 'mundane' investment in basic public services and economic infrastructure. Focusing on, and delivering, these basics effectively is the primary role of government: the challenge for government is to establish strong consensus for this role amongst a diverse range of stakeholders with divergent priorities. 35 Devolution of power to representative bodies in Scotland, Wales and N. Ireland has included direct responsibility for much economic development activity, including that funded by the EU.


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The experience of one English region, East Anglia, highlights some important lessons with regard to government's role in regional development. A detailed mini-case can be found in Appendix 4. In brief, East Anglia is a region that has made a transition from a historically agriculture-based economy to a diversified modern economy, dominated by SMEs, with both significant manufacturing and high technology activities. It has managed to overcome its relative isolation and small size to penetrate international markets.

The region's economic success and particularly the expansion of small businesses has been underpinned by a complex series of factors. Most notable have been wider macroeconomic trends including corporate restructuring, technological change and innovation, together with a range of distinctive local socio-economic and geographical characteristics, including the presence of a leading university in the region and access to major markets.

More specifically, the contribution of government and the private sector are quite clearly discernible:

• East Anglia's industrial development has been driven by a dynamic private sector, who have been responsible for much of the knowledge, skill, dynamism and capital which has underpinned the region's development.

• Government has not played a discernible proactive or direct role in regional development.

• Government has played an influential role in developing and shaping the framework for regional development, in terms of basic provision of infrastructure (eg airports) and public services (eg education), creating a liberalised, flexible environment for private sector dynamism, influencing the 'culture' of academia, stimulating more commercially-oriented research and the divestment of activities with commercial potential.


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6 MAJOR POINTS OF INTEREST FOR INDONESIA

Identifying clear lessons from the UK experience is challenging; the scope is broad, the context continually shifting, information is subject to interpretation, and no study can claim to be exhaustive. In looking at the various element of the SME environment in the UK, the structure and functions of government, the effects of privatisation and deregulation and the nature of measures to promote businesses and regional development, this case study has attempted to identify key issues and challenges, from which a number of major points can be drawn.

6.1 Defining a more streamlined, focused role for government

Increasingly the primary role of government in the UK has been to shape the overarching national strategic direction, policy framework and scope and standards of government-funded services. Implicit within this is a more streamlined and focused role for government characterised by deconcentration of responsibility for direct provision of many services and functions. At the heart of this change has been the development of far greater clarity about the respective roles of the private sector and government.

6.2 Creating more space for private enterprise

There can be no doubt that former heavy state intervention in market mechanisms distorted private initiative and behaviour, and contributed to a wider culture within UK society of expectation and dependency on a state that was increasingly incapable to satiate these demands. Government's withdrawal from large parts of the economy and a reduction in regulatory and bureaucratic burdens, created space for the private sector. The 'free flow' of knowledge and skills, as well as capital, arising from greater domestic and international competition has transformed levels of investment, productivity and wider economic performance. However less widely discussed is the influence that privatisation and deregulation has had in promoting an enterprise culture, more positive attitudes towards business and greater scrutiny of the appropriate role of government, which is influencing moves towards more streamlined, focused government.

6.3 Emphasising what government should do: delivering the basics

The experience of deregulation and privatisation has left one very clear message; government remains critically important in the UK economy. Government created the framework conditions within which the market economy developed, conditions that expanded opportunities, conditions which permit the market economy to continue to operate efficiently. Most important here has perhaps been remarkable macroeconomic stability, but government has invested in the basic ingredients of economic activity; infrastructure, education and health ensuring that high quality factors of production have been available for the private sector to utilise. Government has provided an effective legal system which permits the trading of property, facilitates increasingly complex commercial relationships and maintains a 'climate of confidence' for efficient investment and decision making. Most critically, government has recognised that markets are amoral and can produce adverse outcomes for individuals and


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parts of society, and that therefore a core role of government is to ensure that effective systems of protection and redress for individuals are in place.

6.4 Changing 'how' government does things

A change in public sector attitude towards business has seen government adopt practices and mechanisms of the market, such as competitive tendering and 'benchmarking' of performance standards across all tiers of government. In part this has been driven by pursuit of greater efficiency. More significantly, there has been a fundamental shift in culture within the public sector, which has emphasised the consumer or user of services. This change in 'how' government works has made publicly-delivered services more responsive. It has fundamentally altered the conventional public sector culture of "the individual is there to serve government" to a culture which recognises that "government is there to serve the individual". This change has underpinned more tangible measures to transfer power and choice to individuals and ensure their protection. It has also resulted in more facilitative functions within government. Examples include the Small Business Service's 'Gateway' which links businesses to private sector service providers and agencies which attempt to 'fast track' government processes and regulations and ameliorate their burdens such as the Regulation Impact Unit, the Insolvency Service or Payroll Service.

6.5 Recognising the natural tendency of government to 'sprawl'

Although government has evolved considerably over the past 20 years - characterised by a new orthodoxy of conservative macroeconomic management, greater focus on basic functions and private sector-orientation - government has continued to sprawl in terms of the regulatory and promotional instruments it uses to achieve its economic and social objectives. The reasons for this continued sprawl are myriad, but can be characterised as follows:

• An imperative to be "seen to do something" in response to political pressure;

• A tendency to focus on short term, stop-gap measures (in response to timebound electoral cycles and an increasingly 'instant' society) rather than core functions and long term investment, for example in vocational education, to the detriment of UK labour productivity;

• The inertia and self-interest of government, which finds it hard to stop 'temporary' measures and constrain its own activities, power and budgets;

• An absence of clarity about the rationale for government's role and evaluation of its efficacy; this has been typified by a culture of delivery of volume or outputs, rather than achievement of impact or quality.

There is no easy solution to this problem. However increasingly in the UK there is recognition that "something will have to go"; as government's ability to fund and deliver fundamental public services is under ever greater pressure, the need to withdraw completely from areas becomes ever more apparent.

6.6 There is no blue print for government structure

The complex, Byzantine nature of UK government does not appear at first glance to offer many lessons to the observer. However this very complexity is the lesson. States, societies,


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regions have widely differing histories, cultures, geography and traditions. Governance structures evolve, often over considerable periods, to reflect this diversity. In the UK, government appears relatively shambolic and illogical, it has embarked on apparently endless schemes and initiatives, often to little discernible benefit; however, in terms of the basic functions that society, markets and businesses need to function - laws, stable macroeconomic management, education, health, infrastructure, security and protection - it has delivered. The critical lesson is that it is not the structural organisation or appearance of government that is important, but its appropriateness and ability to deliver its basic statutory functions.


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APPENDICES

Appendix 1: SME definitions in the UK and EU

In the UK the 1971 Bolton Committee Report on Small Firms established a number of different definitions, and identified the key characteristic of a small firm as being "an independent business, managed by its owners or part-owners and having a small market share".

The 1985 Companies Act classifies companies as follows:

Small; if satisfying at least two of the following criteria:

• A turnover of not more than £2.8m

• A balance sheet total of not more than £1.4m

• Not more than 50 employees

Medium; if satisfying at least two of the following criteria:

• A turnover of not more than £11.2m

• A balance sheet total of not more than £5.6m

• Not more than 250 employees

The Department of Trade & Industry uses the following definitions:

• Micro: 0-9 employees

• Small: 0-49 employees (includes micro)

• Medium: 50-249 employees

• Large: over 250 employees

The European Commission has stipulated that from 1998 onwards EU programmes must adopt a single definition as follows:

Criterion Micro Small Medium Employees (max) 9 49 249

Turnover (max) - E7m E40m

Balance sheet total (max) - E5m E27m

Max % owned by one, or jointly by several enterprise(s) not satisfying same criteria

- 25% 25%

To qualify as an SME both the employee and independence criteria must be satisfied, and either of the turnover or balance sheet total criteria


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Appendix 2: Map of United Kingdom


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Appendix 3: Structure of the UK constitutional and political set up

Constitution The United Kingdom actually comprises four nations, England, Wales, Scotland and Northern Ireland (see map in Appendix 2). While there is considerable UK-wide commonality between these four countries, considerable differences also exist, so that, for example, there is no single legal system or system of policing, local government or other administrative functions.

The UK is headed by a hereditary monarch. The political executive itself is not directly elected and formally governs in the name of the Crown. It is made up of ministers mainly drawn from the lower chamber of the legislature36. The executive in practice exercises many of the powers of the Crown as well as statutory powers. Although in practice the monarch's is a largely a symbolic role, the monarch 'invites' the majority party in the lower chamber of the legislature to form a government (the executive) and gives 'Royal Assent' to any new legislation. Traditionally the leader of the majority party in the lower chamber of the legislature becomes Prime Minister and heads the government.

The UK has an 'unwritten' constitution, which is not codified and contained in a single document, and which is based partly on convention, partly on common law and partly on statute.

The legislature or Parliament is bicameral (made up of two chambers). The upper chamber or House of Lords is unelected and made up of a combination of hereditary and appointed 'peers' or members. By convention the House of Lords functions as a revising chamber for legislation proposed by the lower chamber and as the supreme court of appeal. The lower chamber or House of Commons is made up of elected members (confusingly referred to as Members of Parliament - MPs) in a 'first-past-the-post' electoral system. Most government ministers are MPs, some will be Members of the House of Lords.

The UK has no constitutional court or single system of courts and no division of public and private law. EU law takes precedence over domestic law.

Parliament is completely sovereign within the UK, unconstrained by the executive or the judiciary, holds the executive to account, oversees the bulk of public administration and has power to overturn judicial decisions via legislation.

Central government structure and functions The structure and function of the executive can be broken down into three main elements:

(a) Policy making and co-ordinating

• The Cabinet comprises senior ministers who have overall control of government, co-ordinate departments and ultimately determine policy.

• The Cabinet Office co-ordinates policy between departments, manage general government business (including that relating to the EU) and other specific functions.

36 The political executive therefore has a representative mandate, albeit indirect. It is primarily made up of members of the lower legislative chambers, who have are elected in national elections, and the leader of the majority party will also have been elected, usually by a ballot among members of the party.


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Recently the Cabinet Office has been strengthened considerably in order to promote what is known in government jargon as 'joined-up' government. One notable feature of this is a new Regulation Impact Unit (RIU) which issues guidelines and advice to departments on how to formulate, assess and implement regulation according to best practices.

(b) Management

• The Treasury (the UK's finance ministry) is the key central management body of UK government and is responsible for economic strategy, fiscal policy, and the budget. The control of resources exercised by the Treasury gives it a significant role in all areas of executive activity. In 1997 the central bank, the Bank of England, was made independent from government. The Bank has responsibility for monetary policy and achieving inflation targets set by the Chancellor of the Exchequer (the minister responsible for the Treasury).

(c) 'Line' ministries or departments

Government departments are traditionally the main vehicles for effecting government policy and are funded via the Treasury, subject to approval by Parliament.

Departments or ministries usually have a single-headed hierarchy, major departments being headed by a Cabinet minister, with a range of subordinate junior ministers responsible for specific portfolios or policy areas within a department. Departments are staffed by civil servants. A summary of key departments, their principal functions and their relevance to the business environment can be found in Table A.

Non-ministerial departments (NMD) are headed by either Boards or individuals (Director-Generals) usually civil servants. They are often given statutory powers, eg the Inland Revenue, in order to separate (operationally) politicians from sensitive areas such as personal records, tax administration and decisions regarding prosecution.

Executive Agencies were created to break down unwieldy government structures into more flexible, free-standing units, and to separate the service delivery and implementation functions of departments from the core responsibilities of policy-making and strategy, eg the Department of Trade and Industry's (DTI) Insolvency Service. Executive Agencies are responsible for service delivery/implementation functions and are headed by a chief executive who is directly accountable to a minister. The relationship is based on Service Delivery Agreements which are essentially contracts defining explicit financial and quality-of-service targets.

Non-departmental Public Bodies (NDPB) are neither departments nor within departments and operate semi-autonomously from ministers, such as the Competition Commission or Office of Fair Trading.

Other public bodies include Executive Bodies, Advisory Bodies and Tribunals, which have specialised executive, regulatory, administrative, advisory or judicial roles.

The executive is held to account by Parliament. Parliament delegates oversight responsibilities to a series of committees. Standing committees are created to examine specific legislative proposals. Select committees are formed scrutinise actions of the executive and focus on specific issues such as deregulation or tax simplification, rather than legislation. Committees have considerable powers to call witnesses, collect information and evidence and make recommendations to Parliament.

Public spending and service delivery is also scrutinised by the National Audit Office (NAO), an influential agency independent of government, which reports to Parliament.


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Figure A: Structure of UK legislature and executive

Legislature

Executive

CROWN

PARLIAMENTcomprising

HOUSE OF LORDS HOUSE OF COMMONS

Prime Minister & Cabinet

SessionalCommittees

National Audit Office StandingCommittees

SelectCommittees

PARLIAMENT

Ministers

Ministerial governmentdepartments

Non ministerialgovernment departments

Executiveagencies

Other public bodies excludinglocal authorities


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Table A: Core functions of key central government departments

Ministry Core functions - get missions/statutes

Selected functions of relevance to businesses

Ministry of Agriculture, Fisheries & Food (MAFF)

Responsibility for agriculture, fisheries and some food-related issues

• Agriculture-related policy, including trade

• Regulation of agriculture-related products and processes

• Rural development

Department for Education and Employment (DfEE)

Responsibility for education system and labour force issues

• Labour market policy, regulation and information

• Education skills development policy , funding and delivery

Department of the

Environment, Transport & the Regions (DETR)

'Super-ministry' with wide ranging responsibility for regional and local affairs, transport and environment

• Responsible for regional and local government, including funding and economic development

• Planning framework and oversight

• Transport strategy

Foreign & Commonwealth Office (FCO)

Responsibility for UK external affairs (except development assistance)

• Trade and investment promotion

• Market information and research

Home Office Responsibility for UK internal affairs eg security, immigration

• Criminal justice policy and oversight

• Data protection

Department of Health Responsibility for health issues, national health service

• Health and safety regulation, including food safety

Lord Chancellor's Department

UK department of justice • Judiciary and civil law policy

• Legal services regulation

Department of Social Security (DSS)

Responsibility for social protection, welfare and pension issues

• Policy and regulations relating to workforce (pensions, income support, welfare-to-work)

Treasury UK ministry of finance (note central bank is independent)

• Tax, duty, excise setting (incl. Inland Revenue and Customs & Excise)

• Oversight of financial sector


Department of Trade & Industry (DTI)

Responsibility for wide range of trade and industry issues, including small business promotion. Responsibility for industry-specific issues may lie with other

• Company law and corporate governance

• Business licencing

• Competition policy and regulation

• Trade and investment policy, regulation and promotion


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departments. • Insolvency

• Product and process standards and regulation

• Consumer protection

• Private sector promotion


Note: at the time of writing (post-2001 election), several government ministries are being re-organised, notably responsibility for employment is being transferred to a new Ministry of Work & Pensions and a new Ministry of Rural Affairs & Environment is replacing MAFF.

The Nations The United Kingdom actually comprises four nations, England, Scotland, Wales and Northern Ireland. Recent devolution of power from central government to the nations has seen the development of new representative national bodies:

Scotland, reflecting its separate legal system and established tradition of devolved administration since 1886, has established the strongest form of representative body, the Scottish Parliament with a budget of approximately £15bn/year. It has limited tax-raising powers (for example it is permitted to vary the rate of income tax by up to 3% from the UK rate), with responsibilities including health and personal social services, education, agriculture, fishing and forestry, law and home affairs, economic development, transport and local government. UK central government retains control over macroeconomic policy, foreign policy, defence, employment legislation, social security and to some extent regulation of common markets for goods and services across the UK.

Wales and Northern Ireland, do not enjoy similar powers of autonomy37, and have established national assemblies, rather than parliaments. UK central government retains control of all areas of primary legislative power. The assemblies' responsibilities include the following: education, health and social services, economic development, agriculture, fishing and forestry, transport and local government. Neither assembly has any tax-raising powers. The Welsh Assembly has an annual budget of approximately £7bn.

All devolved institutions receive a considerable proportion of their funding from central government.

Local government Although there is a long history of representative local government in the UK, its structure has been subject to considerable change, particularly since the 1970s. This has essentially comprised streamlining and redefinition of geographical boundaries. For example, in England the number of local authorities (outside London) has fallen from over 1,600 in the 1950s to 450 in 1997. In the same period, similar reductions have occurred in Scotland (430 to 32) and

37 Due to the on-going peace process in N. Ireland, central government control there remains far more influential than in Wales; indeed the Northern Ireland Assembly has at one point been temporarily suspended by the UK Minister for N. Ireland due to political deadlock in the process.


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Wales (180 to 22). The situation in Northern Ireland has been influenced by the conflict and measures to reconcile dramatic social and political divisions.

The result of the restructuring of local authorities in England has produced a complex mix of single-tier and two-tier systems. Scotland, Wales and Northern Ireland have a system of single-tier authorities. (See figure B.) Until recently the UK has not had directly elected city or town mayors; in 2000 government of London was reorganised to include a directly elected mayor with specific powers and responsibilities.

Local authorities are accountable to their electorate, and are not subject to supervision by an external body. However they remain strongly influenced, if not directly controlled by central government and Parliament. For example Parliament can alter local authority structure and operations. More significantly local authorities have limited revenue-raising powers. In the 1980s central government funding accounted for less than 45% of local government income: that figure is now closer to 85% (over $40bn). In fact, local authorities (in England) only collect two local property-based taxes, both of which are subject to central government control:

• Council tax is levied on domestic dwellings, based on property value, and is set by the local authority. However central government can 'cap' local authority spending. In 1997-8 80% of local authorities were setting their budgets at the pre-announced expenditure limits stipulated by central government38.

• Non-domestic rates are levied on industrial or commercial property, based on property value and set by central government. This is collected by local authorities, pooled nationally and then redistributed to local government on a pro rata basis (linked to population).

Local authorities also raise revenue from service-user fees for leisure facilities and public amenities

All local authorities (in England and Wales) are subject to audit under the auspices of the Audit Commission of Local Authorities, a non-department public body (sponsored by The Department for Environment, Transport and the Regions, DETR), which is concerned with the legality and value-for-money of local authority expenditure. DETR is the main central government department which deals with local authorities. It disperses the bulk of central government funding to local authorities (£37bn in 2001-2) and retains overall control over certain functions, eg planning regulation and transport. The Treasury, through its controls on public spending is also highly influential albeit indirectly.

Functions. Generally the functions for which local authorities are responsible relate to 'local' services and functions (see Table 3).

Table B: Principle responsibilities of local authorities in England

County councils District councils

Education and libraries Public housing

Fire and civil defence Planning control and implementation

Highways and traffic Recreation

Personal social services Collection of local taxes

38 Source: Institute of Fiscal Studies (2000)


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Strategic planning Car parking (delegated from county council)

Consumer protection Refuse collection

Waste disposal & recycling Environmental health

Certain functions may be shared between two-tier authorities (eg economic development promotion). Single-tier or unitary authorities in England, Scotland, Wales and Northern Ireland carry out all these functions. Subsidiary local authorities - wards, town councils etc - have minor powers for provision and maintenance of amenities (eg community centres).

However local authority functions have been subject to considerable scrutiny and reform. The objectives have been to offer taxpayers better value for money and to control public expenditure, although some observers would argue that reducing local government political influence was the prime motivation behind the reforms. As a result local authority power and responsibility for managing public services has been eroded, transferred either upwards to central government or downwards to local institutions, the market and service users. For example, schools have been permitted to opt out of local authority control, public housing estates have been permitted self-managing status, and a considerable amount of the local authority-controlled public housing stock has been sold to the private sector.


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Figure B: Structure of UK regional and local government

England

England

Government OfficesRegions (GORs)

EU ElectoralRegions (ERs)

Metropolitancounties

Counties (nonmetropolitan)

GreaterLondon

LondonBoroughs

Non-metropolitan

districts

Unitaryauthorities

Metropolitandistricts

Electoralwards

Electoralwards /Divisions

National(Westminster)Parliamentaryconstituencies

Electoralwards

Electoralwards

Electoralwards /

Divisions


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Scotland Wales

Scotland


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ElectoralWards

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Appendix 4: Industrial development and SMEs in East Anglia39

The experience of one English region, East Anglia, highlights some important lessons, particularly for government's role in regional development. East Anglia is a region that has made a transition from a historically agriculture-based economy to a diversified modern economy, dominated by SMEs, with both significant manufacturing and high technology activities. It has managed to overcome its relative isolation and small size to penetrate international markets. A detailed mini-case can be found in Appendix 4.

Background East Anglia is a small region approximately 100km to the north east of London comprising of the three counties of Cambridgeshire, Norfolk and Suffolk, and has four main urban centres Cambridge, Peterborough, Norwich and Ipswich all with populations under 200,000 and has a generally low population density, although it has experienced high population growth since the 1960s.

Historically E Anglia has had an agricultural based economy, and food manufacturing remains its largest industry (primarily grain milling and brewing, but also vegetable packing, meat processing and production of convenience foods.) Agriculture however has experienced a rapid decline and currently accounts for only 5% of the region's GDP and 3% of employment; rural parts of the region in fact qualify for EU structural fund assistance (under EU Objective 5b status). The food manufacturing sector whilst still large, has not experienced significant growth.

Dramatic transformation By contrast over the past 20 years, the region has come to be characterised by considerable economic diversity (rather than specialisation) where manufacturing accounts for 15% of GDP and business and financial services for 24%. Since the 1960s E Anglia has been the fastest growing region in the UK, with GDP per capita rising from below national average in 1960s to above national average by the 1990s and a lower rate of unemployment than all regions outside the economically dominant South East of England40. Historically the region has had a high proportion of self-employed workers and currently has the highest density of SMEs per 1,000 capita in all UK regions, and experiences consistently high levels of new firm formation.

The region, and Cambridgeshire in particular, is distinctive for high technology, both in manufacturing and services; in 1980s it experienced the highest growth in high technology employment anywhere in UK which continued to expand in 1990s. Leading sectors are research intensive and technologically dynamic, the fastest growing being electrical and electronic engineering, computers and office machinery, motor vehicles (specialising in high technology components and high performance engineering for motor sports) and media-related equipment. The business and professional services sector has also expanded rapidly, for example in terms of a cluster of engineering firms such as Atkins, Mott MacDonald, Ove Arup, Hannah Reed, Sibley Robinson in the Cambridge region.

39 This mini case is adapted from Keeble (14). 40 Between 1975-1996 E Anglia's rate of employment growth was 21% in contrast to an overall decline in UK overall employment of -3%.


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Foreign direct investment has been more limited, and has generally been targeted at a small number of sectors and locations, for example multinationals such as Microsoft, Olivetti and Nokia have established research and production facilities in the region.

Understanding the transformation In order to understand the economic transformation it is necessary to consider some of the typical factors that underpin regional development; infrastructure, social make up, government policy and programmes and economic and industrial structure.

• Infrastructure. Historically much of the region's transport infrastructure is below average when compared to the rest of the UK perhaps due to its low population density; it has inadequate major road and rail links and although it has access to ports on the English Channel but these have been found to have little influence on firm location. Similarly the region's telecommunications infrastructure is of no higher standard than the rest of the UK.

However East Anglia has benefited considerably from two infrastructure strengths. Firstly it has close to two international airports on the outskirts of London, which is seen as having been a critical locational factor for East Anglia's many internationally active businesses. Secondly the region has a particularly strong academic and technology base, influenced by Cambridge University and associated research institutions, and is an internationally recognised centre of technological and scientific research.

The university in particular has played an influential role. It acts as an internationally recognised 'quality brand'. Most importantly by permitting and facilitating spin-off ventures and investment (such as the Trinity College Science Park, and 1997 agreement with University of Microsoft to establish first ever non-US research laboratory) it has been a catalyst for high technology sector growth41.

• Social factors. Due to its high population growth, East Anglia has a high level of recent immigrants, particularly from London and the South East, with the result that close social or institutional networks have not really developed outside of predominately rural areas such as Norfolk. Similarly the business community is perceived to be rather disparate and lacks cohesive or vocal representation. Therefore the 'social capital' within the region does not appear to have been particularly high.

Immigration has not been negative for E Anglia. Immigrants have brought with them dynamism, adding to the region's traditionally high levels of self-employment. Immigrants have also brought skills, which combined with the presence of a major university means that E Anglia has a well-educated labour force, with a comparatively higher proportion of the economically active population possessing higher education qualifications than other regions of the UK.

• Government policy and programmes. Post World War 2 government in the region can broadly be characterised as low-expenditure and non-interventionist. Local authorities have little history of pro-active local government development policies and regional cooperation has been sporadic, while links with business have generally been weak. The Government Office for the region, actually covers the far wider eastern region incorporating the counties of Essex, Hertfordshire and Bedfordshire which tend to carry far greater economic weight than E Anglia.

Government policy has however been indirectly influential. For example, spatial policy; during the period 1950-1970, central government actively promoted movement of

41 It is estimated that the University has been directly responsible for 17% of high technology start ups and spin-offs.


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population away from large cities, especially from London to secondary towns through 'overspill town' designation and the creation of new towns, like Peterborough, reinforcing the spontaneous migration referred to above. State funding for public services - education, infrastructure and research cannot be overlooked. Finally Government policy in the 1980s liberalised the business environment, and influenced universities move towards greater levels of commercially-oriented research.

• Economic and industrial structure. There are four salient issues with regard to E Anglia's economy:

(a) E Anglia, unlike many regions of the UK, had no '19th century-style' heavy industries and escaped their subsequent decline42. Instead its manufacturing sector was characterised by smaller, more specialised firms in sub-sectors like electronics which were able to take advantage of expanding demand.

(b) There was a wave of relocation of manufacturing firms to East Anglia form London and the South East during 1960s and 1970s, attracted by to a cheaper, less congested, more attractive environment and the availability of non-unionised labour43. This relocation was partly spontaneous and partly stimulated by government spatial polices, although government offered few relocation incentives for firms. Significantly many of these firms relocated in their entirety and did not simply establish branch offices; in effect there was a self-selection of the most dynamic and expanding firms - mainly SMEs - to the region.

(c) Since the 1970s, there has been a dramatic increase in business creation and growth, particularly in high technology start ups and spin-offs from existing firms and larger organisations. This growth has been private sector-led, often by entrepreneurs who were recent immigrants to the region.

(d) The private sector has played an influential role, particularly in relation to finance for new small high tech firms in Cambridge region. Private venture capital and business angels, such as the Cambridge Quantum Fund, Cambridge Research and Innovation Ltd, 3i plc and Amadeus mean that the region receives a disproportionate amount of the UK's venture capital in comparison to its economic size. By contrast government financial support has been limited and mostly concentrated on rural development and other 'priority' areas.

Conclusions: critical factors in East Anglia's industrial development The industrial development of the E Anglia region and particularly the expansion of small businesses, has been underpinned by a complex series of factors:

• Macroeconomic forces: (a) Wider, rapid technological change and innovation - associated with new products,

services and market growth;

(b) Tertiary sector expansion - the dramatic growth of producer and personal services;

(c) Corporate restructuring and growth of new, small businesses as a consequence;

(d) Increasing global and European integration;

42 Although since 1945 E Anglia had a disproportionately large share of UK defence expenditure due to the location of a number of airforce facilities in the region. Their closure due to the post-Cold War 'peace dividend' had adverse consequences for the regional economy. 43 E Anglia has a very low level of labour unrest, approximately 3 working days lost per 1,000 workers.


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(e) A process of population decentralisation from larger to smaller urban centres and rural areas.

• A range of other distinctive socio-economic and geographical characteristics: (a) Presence of a leading university in the region;

(b) Residential attractiveness of the region;

(c) Accessibility to London and especially international airports;

(d) A tradition of self-employment and small business;

(e) Low level of trade union affiliation and labour unrest.

In addition the clear roles of the private sector and government have been apparent in this development:

• East Anglia's industrial development has been driven by a dynamic private sector, who have been responsible for much of the knowledge, skill, dynamism and capital which has underpinned the region's development.

• Government has not played a discernible proactive or direct role in regional development.

• Government has played an influential role in developing and shaping the framework for regional development, in terms of: (a) Basic provision of infrastructure (eg airports) and public services (eg education);

(b) Creating a liberalised, flexible environment for private sector dynamism;

(c) Influencing the 'culture' of academia, stimulating more commercially-oriented research and the divestment of activities with commercial potential.

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