Business funding scheme ''too risky''

Tuesday, March 09, 2010

The Department for Business, Innovation and Skills has been rewarding failure and wasting £338m on venture capital funds intended to help small businesses to grow, according to the Committee of Public Accounts which said the plan was "a risky and experimental".

For a decade, the department and its predecessors made investments without putting in place a robust framework for measuring and evaluating the impact of the funds, the committee said, and it wasn't clear whether the investments represented value for money. Also, the departments were remiss in failing to place vital information about the funds in the public domain.

The money had been invested in a series of funds managed by private sector fund managers and by December 2009 taxpayers had contributed £338m to go with the £438m from private investors. However, the department hadn't set clear objectives for the funds, including the expected rate of return and it didn't properly evaluate the progress of its early funds until late 2008, only publishing information on their performance in December 2009.

As at December 2008 the largest category of early funds showed negative returns and the average rate of return was minus 15.7 per cent. In comparison, private European venture capital funds of a similar size but with fewer investment restrictions had an average rate of return of minus 0.4 per cent. Also, fees for managing £130m worth of funds came to £46m and substantial fees were paid to fund managers even though the performance of the funds has been poor.

To make matters worse, distribution of the funding for small businesses was been concentrated in London and the South East, reflecting the location of many fund managers.

Committee chairman Edward Leigh said: "This was a risky and experimental initiative and yet for 10 years the departments made investments without putting in place a robust framework for measuring and evaluating the impact of the funds. Whether the investments represent value for money is entirely unclear. Among the many causes for concern in this story are the substantial cumulative fees being paid to the private sector fund managers who manage the funds, even though the performance of the funds has been poor. This has been tantamount to rewarding failure."

Committee member Richard Bacon added: "It is scarcely credible that the government's venture capital funds have cost taxpayers £46m in management fees, while producing such spectacularly unimpressive results. The government's original investment in these funds has tumbled in value from £74m to £5m, while proving blisteringly expensive to manage. One might have thought that the Department for Business, Innovation and Skills would want to keep a very close eye on whether these venture capital funds were providing value for money. However, after launching the programme in 2000, it took eight years before the department evaluated the impact of the funds. Taxpayers knew almost nothing about how their money was performing until 2009."