Written evidence submitted by Creative England Ltd (GSB 20)

Executive summary

This submission is focussed on government support for businesses in the creative industries. It addresses the inquiry’s following terms of reference:

• The support strategies and programmes offered to business (in the Creative Industries) by the Department for Business, Innovation and Skills;
• The take-up of those programmes by business;
• The funding of those programmes; and
• The impact of those programmes.

Particular focus will be on:

• The Regional Growth Fund;
• The British Business Bank;
• Funding and support to Local Enterprise Partnerships

Key points:

• The creative industries are playing a significant role in the effort to create a balanced, high growth economy with international profile.
• Although investment expertise and activity continues to be concentrated in London and the South East, in the last two years there were increases in creative sector jobs of greater than 20% across the English regions.
• Access to finance is one of the biggest barriers to growth in the creative sector and the sustainability of small creative businesses, particularly outside London.
• The mechanisms deployed by the government to support the creative industries have never constituted an overall industrial strategy of the kind enjoyed by more traditional sectors and many government business support initiatives are not sufficiently flexible to be used by creative sectors.
• Creative England is using the Regional Growth Fund to help support small creative and digital businesses across the English regions, creating economic growth and sustainable employment and supporting the development of projects that may have otherwise found it difficult to get off the ground.

About Creative England

1.1        Creative England is a not-for-profit company that uses a mix of public (RGF, ERDF) and commercial capital to invest in and support creative ideas, talent and businesses in film, TV, games and digital media. The focus of our activities is outside the M25 - a recognition of the comparative disadvantages suffered by companies and individual entrepreneurs who do not have immediate access to the networks and opportunities that are associated with being located in London.

1.2        With offices in Brighton, Bristol, Birmingham, MediaCityUK, Sheffield, Pinewood Studios and Elstree Studios, our team of creative sector business specialists, along with their wider network of advisors, are delivering clearly defined interventions to stimulate innovation; generate jobs, increase profile and add value.

1.3        Creative England is also the designated body in receipt of DCMS funds via the British Film Institute for the delivery of film sector support in the English regions and is a legally delegated body for the distribution of Lottery funding.

1.4        Creative England’s chief executive, Caroline Norbury MBE, leads the Creative Industries Council Access to finance group and is working to help implement the council’s recent strategy recommendations in this area.

The UK’s Creative Industries

2.0           The creative industries are playing a significant role in the effort to create a balanced, high growth economy with international profile. According to DCMS (2014), the UK’s creative industries, which is comprised predominantly of small and medium sized businesses, are worth £71.4 billion to economy and have seen year-on-year growth of almost 10% (outperforming all other sectors of UK industry)[1]. They employ over 1.71 million people directly (employment in the sector is growing five times faster than the economy as a whole) and the wider creative economy (comprised of creative occupations outside the creative industries as well as all those employed in the Creative Industries) stands at over 2.6 million jobs.

2.1        Although investment expertise and activity continues to be concentrated in London and the South East (with almost a third (30.3%) of creative industries jobs based in London), between 2011 and 2013 there were increases in jobs of greater than 20 per cent in the East of England (27.1%); the East Midlands (25.0%); the West Midlands (20.6%) and Yorkshire and The Humber (20.1%)[2]. These figures are good indication of the economy’s direction of travel in the post-recession environment and send a clear message about the strategic importance of the creative industries to future jobs and growth.

2.2        Furthermore, in addition to being a significant source of jobs and growth in their own right, creative businesses have consistently proved to be key drivers of product and process innovation in other industrial sectors. Indeed, the fastest growing area for the digital economies of the UK and other developed nations is B2B trading, with an increasing range of highly innovative cross-sector ventures that are drawing the skills, technologies and business practices of the creative industries into hi-end manufacturing, marketing and retail, and the provision of health and other public services.

2.3        The UK is uniquely advantaged by having at least a dozen major cities with significant clusters of creative specialisms – Brighton, Bristol, Leeds, Dundee, Birmingham, Bournemouth, Newcastle – which are much more than pale and partial imitations of London. Each has their own unique areas of specialisation which evolve from the interplay of particular businesses, charismatic individuals, universities, research institutions and cultural heritage.

2.4        As is appropriate for a sector that is so thoroughly a product of the digital age, the strength and dynamism of the modern creative economy depends on networks spread across the country and emphatically not on the existence of one or two overwhelmingly dominant hubs. This important perception of the dynamics of the creative economy is powerfully endorsed by the most recent (2013) report on the global creative economy published by the UN.[3]

2.5        The UN report also highlights the extent to which the development of effective creative industry strategies at a local and regional level contributes to the cultural as well as the economic life of cities and regions.  

Support strategies and programmes offered to businesses in the creative industries by the Department for Business, Innovation and Skills

3.0        The creative industries are a key driver of economic growth but they need support and infrastructure to reach their full commercial potential. Creative England welcomes the government’s progress in supporting certain specific sectors of the creative industries (extending the film tax relief to high-end television, animation and the video games industry; introducing significant policy measures on intellectual property and introducing a robust methodology for gathering creative industries data).

3.1        However, as the Committee will be aware, the mechanisms deployed to support the creative industries, from both the current government and the previous Labour government, have never constituted an overall industrial strategy of the kind enjoyed by more traditional sectors such as aerospace, pharmaceuticals or, on a more generic basis, manufacturing.

3.2        In its 2010 Government Support for Industry inquiry, the BIS select Committee commented that; “The creative industries sector is a significant wealth creator in the United Kingdom. It is therefore surprising that Government engagement with the sector appears to be somewhat haphazard… we believe that a more structured approach would be more beneficial. Industrial Councils have been established for the automotive, aerospace and marine sectors and we recommend that the Department consider establishing a similar council for the creative industries”.[4]

3.3        The Creative Industries Council (CIC) has since been established, co-chaired by the Secretaries of State for the Departments for Culture, Media and Sport, the Department for Business, Innovation and Skills and Ms. Nicola Mendelsohn, VP EMEA Facebook.

3.4        The CIC recently published a set of proposals which form the basis of a wider growth strategy for the creative sector, informed by the work of thematic sub-groups which included access to finance; infrastructure; education and skills; intellectual property and international export. The strategy is based along the principles that its recommendations have been developed “for and by industry”.[5]

3.5        A specific issue for government to address is that many business support initiatives currently available for SMEs are not sufficiently flexible enough to be used by creative content sectors. For example, the innovation charity Nesta notes that the R&D tax credit excludes scientific and technological advances with an aesthetic or user-facing angle which are important for creative content sectors (and increasingly for other economic sectors too e.g. healthcare; education; retail). With limited resources for research and development, an extension of the tax credit in this area could be hugely beneficial and help drive innovation, jobs and growth across the creative and other industrial sectors.

3.6        Innovate UK, which reports to the department for Business, Innovation and Skills, offers support to technology companies through the connected Digital Economy Catapult and Knowledge Transfer Networks for research and development but this is at an earlier stage of development and the projects still require finance to take to market.

3.7        Many of the government business support opportunities that are available to the creative sector are not always marketed to or readily understood by creative businesses. Anecdotal evidence from our Business department also suggests that generic business advice delivered through Local Enterprise Partnerships (LEPs) and other general providers is rarely accessed by creative SMEs because it fails to meet their sector specific needs. Furthermore, cuts in public spending have had an impact on reducing the number of people who can connect and broker businesses to growth opportunities. 

Creative Sector Business Support Needs

4.0        Many creative businesses are founded by developers whose skills and experience is primarily based around creative production, not business, marketing and finance.

4.1        One of the recurrent issues that creative entrepreneurs report to us is a difficulty in navigating the finance landscape - information resources are often perceived as dense, technical and geared for accountants and property developers.

4.2        In addition, there is a dearth of reliable market information has long been a characteristic of the finance community’s relationship with the creative sector. It is only very recently that creative and content sector market intelligence has been collected and published systematically and there is a paucity of market information on creative industry business models, past performance and industry trends.

4.3        Market intelligence helps give investors the assurances they need to engage with a business proposition by demonstrating business growth models, capital exits and examples of how IP underpins the cash flow of creative business. Without basic intelligence, financiers can be deterred altogether or prepared to only offer finance at inflated costs – at high interest or higher equity stakes. 

Government Interventions: Access to Finance in the Creative Industries

5.0        Although the creative industries collectively comprise the UK’s fastest growing industrial sector - generating jobs quicker and with lower capital investment than any other part of the economy - the inability to access both equity and debt finance is one of the critical obstacles to growth for creative businesses.

5.1        The 2011 BIS & DCMS commissioned research paper ‘Access to Finance for Creative Industry Businesses’[6] reported that creative content sectors (including film, TV, games and digital media) are more likely to have their finance applications rejected by finance providers than non-creative industry businesses with similar risk profiles. This is largely due to the intangible nature of creative businesses; a lack of creative sector market intelligence and an often limited understanding of the finance landscape amongst creative entrepreneurs.

5.2        Having overcome the initial hurdles of financing a startup, often resorting to family, friends, personal bank loans or crowdfunding in the process, many entrepreneurs in the creative sector continue to experience great difficulties in accessing next stage growth finance. This market failure is a very real barrier to job creation and economic growth.

5.3        Many of the systems and mechanisms that have been established to help these size businesses just don’t acknowledge the specific characteristics of creative companies – small, nimble, collateral poor, IP rich businesses.

5.4        Creative England notes that the British Business Bank (BBB) set up to improve access to finance for SMEs has to date seemingly made little investment into the creative industry sectors.

The Regional Growth Fund and Creative Businesses

6.0        Using support from the Regional Growth Fund, Creative England is helping to create economic growth and sustainable employment and support the development of projects that may have otherwise found it difficult to get off the ground. Through its start-up programmes, grants, loans and supply chain funds, it is creating and safeguarding jobs and leveraging private investment.[7]

7.0        We are connecting businesses to local support networks and introducing them to new markets (e.g. through our partnerships with the NHS England; Microsoft; Unilever Ventures; Disney, Sony, BBC, Channel 4 etc.) to ensure they continue to flourish. This work is opening up new investment opportunities and supporting the creation of sustainable, IP rich businesses, innovation and entrepreneurship across England.

7.1        Our previous RGF programmes have been oversubscribed by a factor of ten and the organisation has so far delivered on its original job creation target of over 315 jobs (three years ahead of schedule). It is currently forecast to exceed this target by around 40%-50%.

7.2        However, the structure of RGF remains predicated on the assumption that bids are likely to be for major infrastructure projects, with easily defined impacts in terms of employment generation, submitted by large commercial organisations with the necessary assets to fulfil requirements for matched funding and with the necessary resources to monitor and administer funds on a very limited margin.

7.3        For example, the expectation from the government’s ambition for growth and new jobs will be delivered from traditional manufacturing and service industries, organised in large economic units.

7.4        Interventions based on this assumption do not reflect the reality of what is often described as ‘the new manufacturing sector” of the creative economy – small, agile businesses with enormous potential for generating jobs (as evidenced by recent economic estimates) but with little in the way of collateral or assets to match or administer funding bids.

7.5        Large, capital intensive businesses frequently have dedicated employees responsible for understanding and applying for grants and other funds. Small and micro businesses don’t tend to have this luxury and may see their efforts being better placed developing clients and getting on with their business at hand. This problem is beginning to be recognised within the Department for Business, Innovation and Skills but has not yet been addressed in any meaningful way.

The Enterprise Finance Guarantee

8.0        The Enterprise Finance Guarantee is, in principle, a great way for small creative businesses to access debt finance for growth. It has the potential to benefit small creative and digital businesses enormously as these sectors are disproportionately turned down for normal commercial loans due to a characteristic lack of security or proven track record.

8.1        In its 2010-2011 Government Assistance for Industry, the committee commented that with regards to the Enterprise Finance Guarantee scheme; “…the creative industries sector… one of the six sectors designated by the Government as growth sectors - is effectively being excluded from this avenue of funding. We recommend that the Government, as a matter of urgency, ensure that the criteria for receiving EFG funding is sufficiently flexible to accommodate the creative industries”.

8.2        In response to these comments; the government stated that “the creative industries are eligible for EFG. There are no EFG specific restrictions affecting these businesses”. However, the problem, as noted by the CBI, is that “administration of the guarantee is generally through finance providers who are responsible for identifying potential recipients. This places the reliance on finance providers to identify creative businesses as potential recipients of EFG”. [8]

8.3        Now that the British Business Bank (BBB) oversees the running of the Enterprise Finance Guarantee on behalf of the Department for Business, Innovation and Skills, it is vital that the BBB is staffed with sufficient creative and digital sector expertise to ensure that the creative industries have fair access to this avenue of support and that viable propositions are supported.

Funding and support to Local enterprise Partnerships

9.0        At a time of significantly reduced public expenditure, particularly at local authority level, developing partnerships to make what little public funding is available go further is crucial.

10.0    Government could explore ways of incentivising LEPs to collaborate with private and public sector bodies, and with each other, to avoid duplication and support the best interests of local creative sectors. LEPs must also ensure they play to their local existing strengths rather than using limited public resources to ‘artificially’ establish new sector specialisms or clusters.

10.1    Creative England can support LEPs by:

• Providing a macro profiling of the Creative Economy, whilst understanding of the influence of local creative economy agenda and connections.
• Offering specialist sector advisors to the LEP board.
• Enhancing the market profile and exposure of the LEP and local sector.
• Supporting larger projects and delivering economies of scale.
• Providing expertise in securing and managing EU funded programmes.
• Delivering creative business growth and job creation programmes.
• Sector mapping to communicate the scale and profile of the local sector.
• Increasing sector GVA by delivering IP commercialisation and export initiatives.
• Connecting the LEP to national initiatives and policy discussions affecting the Creative Economy.

10.2    There are existing structures in place to support the creative and digital sectors such as those delivered by Creative England, Arts Council England, BFI, Creative Skillset, Creative and Cultural Skills and the Innovate UK (TSB).

10.3    The current processes in place for LEPs and other partners to adopt a multi-partnership approach for funding bids is currently unconducive to promoting collaboration and partnership e.g. there is no process in place where a single bid can cover a number of LEPs. Amendments to this process could be hugely beneficial in terms of delivering initiatives that unlock significant scale, attract higher levels of inward and domestic investment and raise regional profiles.             

10.4    By pooling together the resources and dispersed sectorial-assets of a number of LEPs, a more strategic and higher impact approach to intervention can take place developing larger scale regional initiatives and avoiding duplication of effort.

10.5    For example: Creative England has been in conversation with a number of LEPs in the North of England to establish a “North of England Content Fund”. Such a fund could invests in the production of feature films, high-end TV drama and other content from companies based accross the North of England as well as from producers looking to establish a base to film in the region. It could unlock significant scale for the region and undoubtedly attract investment from major international studios.        

Conclusions

• The British Business Bank should explore the potential of developing a creative content fund and ensure it works with sector expertise so that outcomes and support have the greatest impact - introduce a new national programme which makes available small amounts of proof of concept and seed-corn funding specifically for creative and digital businesses to provide a test-bed environment for new products and services.

• The Creative Industries Council strategy includes a number of recommendations, including the call for an evaluation of the case for new fiscal incentives that incentivise investment in the creation and commercialisation of IP in the UK; e.g. an analysis of the impact of including creative IP in the Patent Box and the extension of the R&D tax relief to creative content innovation. Creative England would welcome the committee’s support in taking these recommendations forward.
• Engage business-to-business mentors and ensure that business advice is available that will specifically address the core issues preventing investors taking a second look at many creative businesses. The Manufacturing Advisory Service (MAS) is a good existing model of how this could look in practice.

• Support the development of a ‘common language’ to improve the flow of information between those looking to invest/lend and those needing finance. As a starting point, government, industry and the finance community could establish a Creative Finance Forum to promote a better understanding of the opportunities represented by the creative sector. This could help both parties – financiers and creative businesses – navigate what is at present a fragmented landscape.

• LEPs with significant creative clusters should work with creative sector specialists such as Creative England and Creative Skillset to ensure they provide appropriate, targeted information and guidance to creative firms and improve investment-readiness advice and support.

21 October 2014