Telegraph | Money | Brown tries idea that lost $4bn: "Brown tries idea that lost $4bn
(Filed: 09/05/2005)

Brown tries idea that lost $4bn

(Filed: 09/05/2005)


The Chancellor is to launch his own version of costly US scheme that invests public money in young companies, writes Richard Tyler

The head of the US Small Business Administration has said his department has lost as much as $4billion from investing public money in young companies.

Speaking as the Chancellor prepares to launch his own version of the idea in England and Wales, Hector Barreto, who runs the Federal agency, said it was hard to justify the resurrection of the 15-year-old scheme. "Until we can find a way for the programme to pay for itself we are not going to fund it," Mr Barreto said.

The US scheme was originally launched over 40 years ago and offered loans to small businesses struggling to find backers from an immature venture capital market. Later it introduced equity finance on a two thirds public, one third private money ratio. The equity scheme had some notable successes, making it possible for the likes of Intel, Compaq and FedEx to get off the ground.

The debenture programme is still running and has been allocated a $4billion budget this year. But the equity scheme, which ran into trouble during the dotcom crash, has been frozen. Mr Barreto said: "There were a lot of technology companies that were ambitious but when the bubble burst they didn't make it. A lot of investments we made did not come to fruition."

It also became clear, he added, that the fees the SBA charged to the venture capitalists it had authorised to invest the taxpayers' money were not sufficient to cover the risk that the money could be lost. So far $2billion has been lost. "That could rise to more than $4billion," Mr Barreto said.

Congress, the SBA and the National Association of Small Business Investment Companies, which represents the venture capitalists, are in talks to see if the scheme can be restructured so it pays for itself. Mr Barreto said: "We are open to coming up with another business model, but the best minds here have not been able to figure that out yet."

Chancellor Gordon Brown believes he has. Having secured state aid clearance from Brussels last week, he plans to launch trials of his version, called Enterprise Capital Funds, within the next year. The UK model offers up to £2 of public money for every £1 of private money raised, up to a maximum exposure per fund of £25m.

The Small Business Service team overseeing the launch has told potential bidders that it wants between three and four trial funds, suggesting that in total a maximum of £100m of public money will be at risk. The model is structured to ensure that once an investment starts to make a profit, taxpayers get paid back first. They could also earn enough profit from successful investments to offset the losses from unsucessful ones.

Officials say that over the 10-year life of the scheme it will become self-funding.