I spy the wonder of small companies

ANYONE with any interest in the world of finance will have noticed two things this week. One is that markets around the world have been in fair chaos. The other is that there has been an enormous advertising campaign to help sell the shares of a British financial institution with the odd name of 3i Group. Yesterday, despite the turmoil of the markets, the 3i launch went safely ahead.

The oddity of the name was the result of a fit of Eighties over-enthusiasm. The group, then operating under the accurate and descriptive title of Investors in Industry, hired a design consultancy for an image rehang. The consultancy decided to feature the three 'i's in its name. It then embellished the logo further by printing the dot on the 'i' as an eye. Only later did people at the top of the firm wonder how their new name might look in the telephone book.

The business they are in is boring, but also wonderful, and holds a lesson that goes far beyond the artificial razzmatazz of this launch. The boredom stems from the fact that the group has been owned since its inception in 1945 by boring institutions - the Bank of England and the clearing banks - and also because its main work is lending to small and medium- sized industrial companies.

But it is wonderful because it is doing, and doing competently, an important and worthwhile task, and because it shows how governments can intervene to correct market imperfections without creating giant bureaucracies. For anyone who is aware of the dreadful record of governments in trying to second- guess the markets, this is a model indeed.

A little history. Back in the late Twenties it became increasingly apparent that there was a financing gap. While the clearing banks could supply short-term working funds, they had no inclination to risk depositors' money by making equity investments. For risk capital, companies that were very small could go to family and friends; medium-sized companies could be launched on the stock market; but those in between had nowhere to go.

The gap was identified by the Macmillan Committee on Finance and Industry, which reported in 1931. No action was taken until 1945, when the Bank of England and the clearing banks put up the money to found the Industrial and Commercial Finance Corporation.

ICFC has slogged away since then helping small companies to expand, often through regional offices. The group now works in the US and continental Europe, but the UK regional business that ICFC developed over the years is still the most important single activity.

If this is the past, it is also the future. Open any newspaper almost any day, and you will read a story of a large company shedding labour. Jobs are being created, but almost entirely by small firms. Indeed, at the moment, the only category of firm which is a net creator of jobs is the tiniest one: those with fewer than six employees. If we want to generate more jobs, we need to find ways of helping these very small firms.

Many of these will be too small even for 3i. It specialises in companies with a turnover of between pounds 1m and pounds 100m. That is fine, worthy business, but achieving the first million is often the biggest problem for the fledgling entrepreneur. Once there, you can begin to hire the professional services you need to grow the business in an organised, structured way. You are big enough to be visible to the various agencies that will help you to find your way through the maze of grants and tax incentives that governments and development agencies can offer. But if you are two-and-a- half people trying to run an import business from a shed in west London, you are on your own.

Or nearly on your own. I went to the executive suite of the Fresh Olive Company of Provence last week, courtesy of Business in the Community. It is a tiny company, operating from a container yard in Park Royal, north-west London, which imports olives from France and delivers them to restaurants in southern England. It is three years old: turnover in year one was pounds 90,000; in year two, pounds 350,000; and this year it is projecting pounds 650,000.

It has been helped by a publicly-funded body, Brent Business Ventures, which has provided the professional advice that the company would otherwise find very hard to find. Its people are, in the view of the co- founder, 'not at all the sort of useless bureaucrats that most people expect from the public sector'.

And there is the rub. A financing gap still exists, but it is at the level of the very small business. True, there are some public sector bodies, like that one in Brent, which clearly can have a positive impact. But it is not easy for the public sector to intervene successfully. Too much of its effect on small companies has been negative: to impose regulations which, however fine the intent, place further burdens on people who temperamentally find them a pain to deal with. Many small businesses want as little to do with the public sector as possible.

It would be perfectly easy for the public sector to fund a new initiative that threw taxpayers' money at the problem. But the measurable effect is often disappointing - a report this week said that the pounds 10bn spent on urban regeneration seems largely to have been wasted. Even tax incentives for business have disappointing effects - witness the way in which the tax breaks for Business Expansion Schemes were largely used to finance residential accommodation rather than industrial or commercial enterprises.

Unable though 3i may be to meet the demands of today's smallest businesses, the ideas behind 3i offer some lessons. One is that the public sector can identify problems and encourage the private sector to help solve them. Another is that what often work best are not grand ideas, but a culture that pays great attention to detail - for that is one of the real secrets of 3i. A third is that the conventional pitch of politicians - that government can solve problems if only people would vote for them - is actually destructive.

A government can work very well as a catalyst by mobilising the private sector, but it cannot do much itself because the levers at its disposal are inappropriate. It can, perhaps, have a positive impact on big businesses, but unless it is very careful, its impact on small businesses may well be negative.

To help the smallest businesses, what is needed is not another 3i, but the culture that led to the creation of 3i. If the growth of the economy is increasingly coming from very small enterprises, it is time for governments to think small too.