Soft loans: a potential lifeline for rural growth and diversification

One of the success stories of the rural economy since the beginning of the 21st century has been the expansion of diversification and new diversified enterprises. This success has often been achieved through previous partnerships with the government via capital grants, as a result of the UK’s membership of the European Union (EU). As the UK is no longer part of the EU, new models are needed, particularly at a time when economic conditions are difficult.

Ingenuity and innovation are not new to rural businesses. They face a number of challenges, including remoteness, distance from integrated supply chains and a failure of many parts of the government decision-making machine to understand what actually constitutes ‘rural’. Given these hurdles to success, in a way, it is surprising that the rural economy makes such a contribution to the nation’s finances.

According to the latest data from Defra’s Rural Economic Bulletin, the rural economy in England contributed some £153bn to Gross Value Added (GVA) in 2022. One of the most effective financial tools that were available to rural businesses at this time was the programme of capital grants under the rural development programme. Here, businesses applied for grants for eligible projects, such as tourist accommodation, on the basis that the grant would cover a maximum of 40% of the capital cost of the project. The remaining 60% would need to be secured through private funding, in the main through the traditional retail banks. Evaluations of the rural development programmes show a benefit cost ratio of between 2.57 and 5.07, highlighting the importance of public-private investment for the rural economy. The evidence would suggest that the principle of public-private investment is beneficial.

We do, however, recognise the current economic situation. The government has already decided not to extend the UK Shared Prosperity Fund and the Rural England Prosperity Fund (REPF) which removes the availability of capital grants for rural development. The administration and delivery of the REPF was chaotic, with little idea from local authorities as to how capital grants work. This experience has proved that if public investment is to be effective, it must be based on a consistent framework that is able to unlock investment and incentivise growth.

However, as governing bodies move away from public capital grants for rural economic projects, there needs to be support in different ways for such businesses. One way forward, in promoting public-private partnerships as well as encouraging diversification and increased investment, is a policy of ‘soft loans’ held at 0% interest and a viable payback period, delivered through the British Business Bank.

We do not believe that the soft loans approach should be simply limited to rural diversification projects but extended to other sectors, such as energy improvement works.

Upgrading rented properties to meet government energy objectives leads to a mismatch in costs and benefits, with the costs borne by the owner but the tenant receiving a benefit in lower energy bills. However, landlords will often recoup costs through higher rents.

So, there needs to be a package of measures to support upgrading our least energy efficient homes. This would include funding for insulation, upgrading windows, new heating systems to move away from fossil fuels, solar panels, and any other works which may be listed as suggested upgrades on an Energy Performance Certificate (EPC).

Given the timescales involved, most landlords will not have access to sufficient capital to make the investment required to meet Efficient Energy Requirement (EER) C by 2030. The average monthly rent in rural areas (according to Zoopla) in June 2023 was £1,080, and, assuming a landlord had no other costs for the worst performing properties, it would take at least 15 months' worth of rent to make the necessary upgrades. In practice, this is simply not feasible as most landlords will have mortgage costs, agency fees, repairs and maintenance costs, and void periods. Rent would necessarily have to increase to meet a reasonable payback period for the works they will complete.

To meet the government’s objectives, the CLA has recommended to HM Treasury in our budget submission the continuation of the Boiler Upgrade Scheme until March 2028. For the financial years April 2028 to March 2030, a soft loans programme would be available to fund any works required to properties for them to meet EPC C by 2030. We have recommended the soft loan spread over a ten-year repayment period, set at 0% interest, and administered by the British Business Bank.

The presumption is that the soft loan would attract an interest rate of 0% in order to make it attractive to borrowers. However, in terms of coverage, the soft loan for rural development projects would work in the same way as capital grants, that is, the loan would have a maximum 40% intervention rate on the capital cost of a project. In addition, there will need to be other eligibility criteria, including provision to prevent the potential for fraud or payment defaults.

The projects must prove and set out:

• Value for money
• The potential of the project to increase growth within the local rural economy (the impact of the supply chain multiplier)
• A clear business plan for the project

Naturally, there would need to be a payback period that is realistic and that can avoid payment default. This period would be between a minimum five years and a maximum ten years, depending on the total value of the loan and the ability to repay. For example, a soft loan for £25,000 would have a payback period of five years whereas a loan of £50,000 would require a payback period of ten years to ensure the ability to payback.

This is a new response to the issue of access to finance. Given that the UK Government has taken the decision to remove the availability of capital grants for diversification, we need to look at viable alternatives that offer greater incentives for rural businesses as well as providing value for money.

The CLA would be particularly interested in the views of members so that we can take this initiative forward. If you would like to comment or share your views, please reach out via email here: charles.trotman@cla.org.uk.