State-backed "business bank" included in Government vision for UK industry

Speaking at Imperial College, London, Vince Cable said that the Government would focus on "specific sectors" and work in "strategic partnership with industry" to deliver targeted support to areas including advanced manufacturing, "knowledge intensive" industries such as higher and further education and the "enabling" industries including information, construction and energy.

As part of the plans he announced the creation of a new Government-backed institution to enable businesses to invest and get credit flowing to small businesses. Although the set-up of this institution is still under discussion, he said, it could be operated by new, smaller 'challenger' banks and non-bank sources of lending rather than the so-called 'big four'.

"Government makes decisions every day that affect the British economy, but has for too long done this in an ad hoc way," Cable said. "Government needs to be more like business, by making strategic plans and sticking to them. Our first part of that plan is lifting the barrier that poor access to finance puts on growth."

The new sector-based approach will see the Government develop a series of "collaborative but challenging" strategies including industry partnerships and targeted support. Appropriate sectors will be identified with reference to their historic performance, likely drivers of future growth and potential barriers to that growth. Likely disciplines could include aerospace, automotive and life sciences, education and professional and business services.

"British business has been challenging the Government to put in place firm foundations on which our companies can build their long-term futures and rebalance our economy," said the CBI's John Cridland, who welcomed the proposals as a "valuable first step".

"The UK is a world leader in many sectors and if we are to secure significant growth in the decades to come, the Government must enable them to capitalise on their competitive advantages and stay ahead of international rivals," said Cridland.

Terry Scuoler of EEF, the manufacturing trade body, said that in order for the approach to be effective it would have to be "rooted in a robust analysis of which technologies will generate the greatest future opportunities and in which the UK has the greatest potential".

"In addition, Government must now show the same sense of clarity and purpose to develop a vision for the economy overall to help any business looking to invest and grow," he said. "Government must do everything it can to encourage the financial sector to better support business investment. This means raising the level of competition within the banking sector and developing a range of alternatives to bank finance."

In his speech, Cable said that although proposals for the new business bank were still to be confirmed it could operate through smaller providers such as the Co-op, German lender Handelsbanken and Aldermore, which announced in March that it would participate in the Government's National Loan Guarantee Scheme (NGLS) allowing small businesses to borrow at a cheaper rate. The partnership would, Cable said, boost these smaller banks' lending capacity as well as round up existing co-investment and guarantee schemes.

Speaking to MPs in the House of Commons ahead of the speech, Cable said that there was a "real shortage" of the "long-term patient capital" needed by businesses in order to grow. Although larger businesses were "by and large" still able to raise short and long-term finance via capital and equity markets, the latest SME Finance Monitor showed that in the last 12 months 33% of businesses that applied for loans were rejected.

Current Government initiatives including the NGLS and the Enterprise Finance Guarantee (EFG), which allows smaller companies without the credit history to secure a normal bank loan to access Government-backed funding, had made some difference, he said, while its Business Finance Partnership (BFP) has made funding available through private investors rather than banks. In addition, the Funding for Lending scheme announced by the Government in June has promised to provide more cash to struggling banks which intend to fund mortgages and business loans.