Memorandum from Barclays (NE 09)
Barclays welcomes the opportunity to participate
in the North East Regional Committee's inquiry into Industry and
Innovation in the North East region.
Brian Thorpe and Amanda Shepherd will be representing
Barclays, in their capacity as Head of North East (Barclays Commercial
Bank) and Regional Director (Barclays Local Business), at the
Committee's oral evidence session on 5 June. I set out in this
letter further information on our operations and views on business
banking generally and on our experience in the North East particularly.
EXECUTIVE SUMMARY
Small to Medium-sized Enterprises (SMEs) are
suffering the sharpest contraction in business conditions for
a generation. Many of Barclays SME customers have never experienced
such difficult circumstances before.
Barclays is working hard to support as many
of these customers as possible through difficult times including,
where appropriate, providing additional loan and overdraft finance.
We have already increased lending above our 2007 levels, despite
a reduction in the number of customers seeking finance.
Barclays has a continued appetite to provide
finance to SMEs at our current levels as a minimum (these levels
already being higher than in 2007). In April this year Barclays
announced its intention to increase lending to its UK business
customers, subject to customer demand, commercial terms and credit
criteria by £5.5 billion. This includes a £1.5 billion
increase in lending specifically earmarked for small and medium-sized
enterprises, which will increase our SME lending stock from £15
billion to £16.5 billion if loan demand conditions improve.
Our branch based network relationship staff
are working day-to-day to help customers, treating each one as
an individual and helping to deliver a finance solution for them
that is both responsible and in line with our credit policy. This
work is going on in the North East as much as any other region
of the UK.
We particularly value the Government support
available to help underpin our activities in providing finance
to SMEs. One North East is viewed by Barclays as the driving government
agency within the region, mobilising key stakeholders in providing
a clear and co-ordinated response to the current economic conditions.
For example, it has worked with Barclays and other local banks
to raise the profile of the European Investment Bank funding and
the Enterprise Finance Guarantee Scheme, and provide dedicated
support in offering financial advice to local businesses.
One North East has also encouraged Barclays
and other members to:
— Review lending knowledge and expertise
and provide upskilling where relevant.
— Promote new supportive products and services
to local businesses more effectively.
— Work together to support businesses having
difficulty securing finance (eg seeking assistance from Business
Link).
Barclays also continues to maintain close links
to a number of government agencies and other independent support
groups including the Chamber of Commerce and the Federation of
Small Business, as part of efforts to support SMEs in the region.
As economic activity improves in 2009-10, our
commitment to the SME sector will also be a key component in support
of business growth and expansion over the medium term.
Manufacturing
In terms of manufacturing in the North East,
our view, based on analysis of official statistics and what our
customers are telling us, is that the environment is exceptionally
tough, albeit with specialist pockets of the sector performing
relatively well. We agree with a growing consensus that the aggressive
decline in the sector seems to have subsided and that we are approaching,
if not already arrived at, the bottom of the cycle. What is less
certain is how long it will take for the upturn to begin, and
our view is that manufacturers need to continue to operate prudently.
Barclays, throughout the downturn, has remained
fully committed to the manufacturing sector; and we believe that
it has a major role to play in the long term growth of the North
East economy. To assist customers in the downturn and to prepare
them for the upturn, we continue to make finance available for
viable businesses and provide expert advice through the network
of specialist Relationship Directors and Managers who have specific
manufacturing expertise.
Skills and Training
For over a decade, Barclays has advocated greater
use of training and advice for people considering going into business
and this led to a long term partnership with the National Federation
of Enterprise Agencies (NFEA) and local agencies such as Project
North East (PNE).
Barclays continues to fund a large number of
events to promote this aim. Barclays has also shown a commitment
to support training in small firms as part of a range of core
current account packages for small firms. Since the start of 2008,
all of Barclays 4,547 new start-up customers in the North East
have been offered this service.
On renewables, Barclays takes the view that
the renewable energy industry will continue to play an important
role in the further development of the North East economy. This
role will be built upon robust foundations already established
in the region over the last decade, such as in Research &
Development, technology innovation, major project deployment (such
as the Wilton 10 wood-burning power station). There are also set
to be new opportunities in relation to development of the UK's
offshore wind industry in the North East.
1. INTRODUCTION
TO BARCLAYS
BUSINESS BANKING
OPERATIONS
1.1 Banking support for the small and medium
sized (SME) business sector is a central part of Barclays banking
operations, reflecting Barclays origins in the 1670s as a source
of entrepreneurial finance. The North East Regional Committee's
hearing represents another important opportunity to focus on the
needs of SMEs in the current economic downturn, in addition to
the recently established BERR Small Business Finance Forum, of
which we are a member.
1.2 In the UK, Barclays broadly categorises
its SME customers as follows:
— smaller firms with a turnover up to £1
million are typically within the Local Business banking division
of Barclays; and
— larger SMEs with a turnover over £1
million and up to approximately £20 million are typically
within the Medium Business unit (MB) of Barclays Commercial Banking
division.
1.3 For the purposes of this submission,
references to SMEs means customers of Local Business and of MB
whilst references to "small businesses" and "larger
SMEs" are references to Local Business and MB customers respectively.
1.4 The majority (approximately 85%) of
SME customers are in Barclays Local Business division. This response
focuses mainly on businesses within our Local Business division,
but naturally we are happy to respond to any question on SMEs
and Barclays activity within this sector.
2. MARKET OVERVIEW
FOR SMALL
AND MEDIUM
SIZED ENTERPRISES—BARCLAYS
OBSERVATIONS
2.1 Focus on Small and Medium Sized Enterprises
(SMEs)
2.1.1 Barclays currently provides business
banking services to nearly one-in-four SMEs in England and Wales,
as well as an increasing involvement in Scotland and Northern
Ireland. Barclays SME customer base totals around 720,000 firms
and covers all areas of economic activity.
2.1.2 Current characteristics of the SME
sector include:
— The value of sales receipts credited
to Barclays small business current account base has fallen steadily
during the course of 2008-09. The figures for the three months
to end March 2009 were circa 10% lower than in the same period
in 2007, the sharpest decline for over a decade.
— For much of the period 2005 to early
2007, the profitability for SMEs was buoyant. However over the
last 12-18 months, many customers have seen cash flow reduced
with spending often at times running ahead of sales receipts leading
to a cut in cash reserves (and as a consequence reducing the ability
to meet repayments of new and existing debt).
— Even so, we consider that most SMEs are
still in a strong net liquid position. In the case of Barclays
customers, at present only about one-in-six of our small business
customers have either a loan or overdraft and the number of firms
in credit outnumbers those borrowing by a ratio of 3 to 1. Also,
in recent months we have observed cutbacks in spending amongst
our smaller business customers restoring a positive trend in cash
reserves to replace the losses of last year.
— At the time of the last major recession
(early 1990s) borrowing from the banking sector exceeded deposits
by a significant margin (£20 billion) whereas today, savings
and borrowing across the smaller business segments are broadly
complementary.
— Another impact of recent economic conditions
has been a reduction in the number of business start-ups and an
increase in business closures. In the SME sector, business closures
now exceed start-ups, leading to a fall in business stock of about
30,000 during 2008, a drop of approximately 1%. However this should
be set against the experience of a substantial net increase in
the stock over the last ten years (about 18% from 1997 to 2008).
3. INDUSTRY RESPONSE
TO CURRENT
MARKET CONDITIONS
— As evidenced by data published by the
British Bankers' Association,[32]
the main high street banks have continued to increase the level
of support to the small business sector during 2008. At the end
of the quarter to end of March 2009, total borrowing by the small
business sector was £54 billion and some 5% higher than a
year before; an increase was reported in both loan and overdraft
availability.
— Loan balances for small firms have continued
to increase, particularly for short maturity loans (under three
years) and loans for over 10 years. This indicates a continuing
willingness of the main banks to commit both flexible short term
funding and long term development capital to the small firms sector.
Medium term loan balances have also increased.
4. BARCLAYS RESPONSE
TO CURRENT
MARKET CONDITIONS
4.1 Barclays commitment to the UK SME sector
— Barclays is very much committed to SME
business—in 2008, more SME customers switched their relationship
to Barclays than left us, leading to a growth in our SME customer
base despite a general contraction in the marketplace. We are
also seen as one of the top banks for start-ups.
— In line with this account growth we have
seen increases in our engagement with this marketplace. Our SME
customer stock has increased by over 17,000 during the last year.
Our lending origination to small business customers has increased
by more than 8% per year to date (to end March 2009) and even
after refinancing/repayments made, our stock of SME loans was
still 4% higher than a year before (including growth of over 10%
amongst smaller business alone).
— Through its relationship teams, Barclays
is committed to taking fast and decisive action to help SMEs through
the current economic downturn.
— Our relationship managers are available
for customers to discuss the best way we can help their businesses.
For example, on average every working day in Q1 2009 our staff
had nearly 1,800 face to face meetings with customers. Also, we
sanctioned a new small business loan or overdraft every 66 seconds
(on average every working day in Q1 2009), based on the number
of loans agreed during the course of a year.
4.2 We offer high quality products and advice
4.2.1 Barclays overall approach to SMEs
is to provide a blend of financial products and invaluable business
advice to construct solutions that meet the needs of customers:
— A choice of small business accounts that
they can tailor to their needs and the provision of up to two
years free banking to start-ups, subject to remaining in credit.
— Day to day small business banking support
through a team of Business Managers who are available over the
telephone for everyday and urgent banking needs during the daytime,
evenings and weekends.
— Free consultation for small businesses
with a local accountant, marketing expert and solicitor to advise
on topics such as the best legal status, how to advertise or draft
supply contracts.
— Barclays offers a free nationwide small
business seminar and workshop programme. This is designed to help
small business owners network and gain practical help on relevant
challenges such as marketing, trading online or how to generate
more business profits.
— Business management software has also
been developed to help small business customers complete their
account work quickly and efficiently; support their hiring efforts;
help back up their business data securely; and avoid late payment
and bad debts.
— Creditfocus is an innovative web based
service provided to small business customers to help them reduce
the risk of late payments and bad debt, with elements of the service
provided to customers for free. Businesses often encounter issues
as a result of late payment of invoices and bad debt, and this
Creditfocus service is a tangible example of how Barclays is reflecting
a strong understanding of its customers' needs in our product
development. Creditfocus won the Institute of Financial Services
(IFS) Award for Innovation Excellence.
— Barclays customer satisfaction levels
for relationship managers remain high; in Q4 2008, over two thirds
of customers surveyed were either very or extremely satisfied
with the service they received from their manager.
— For our larger SMEs we provide a more
sophisticated offering in terms of product set and services. For
example, our teams are increasingly industry focussed, with staff
undergoing training to become specialists on a particular sector.
This enables relationship managers to be customers' trusted business
partners, helping them identify opportunities and manage risks
more effectively. Furthermore, this year we have launched the
Barclays Latitude business club which offers products and advice
to support business development and growth, domestically and internationally.
4.3 Key features of Barclays lending strategy
to SMEs
4.3.1 There has been considerable focus
in press commentary about lending to small businesses in particular.
Over a typical business lifespan, about 60% of small businesses
will need to borrow money for one reason or another (even though
only a minority are borrowing at any one point in time). In some
industry sectors, access to working capital is an almost perpetual
requirement. In other sectors, debt finance is more associated
with business development opportunities.
4.3.2 Our lending strategy can be summarised
as follows:
— As outlined above, in spite of difficult
market conditions Barclays lent more money to SMEs in 2008 than
in 2007 and this trend has to date continued into 2009; new lending
flow to small businesses alone is up by more than 8% year-on-year
to end March 2009.
— Across our SME customer base as a whole,
Barclays loan stock increased by 4% in the year to March 2009,
despite the evidence of a much weaker economy and customer cashflow
than a year ago.
— Barclays has a continued appetite to
provide finance to SMEs at our current levels as a minimum (these
levels already being higher than in 2007). In April this year
Barclays announced its intention to increase lending to its UK
business customers, subject to customer demand, commercial terms
and credit criteria by £5.5 billion. This includes £1.5
billion increase in lending specifically earmarked for small and
medium-sized enterprises, which will increase our SME lending
stock from £15 billion to £16.5 billion if loan demand
conditions improve.
— Barclays charges for debt on a risk adjusted
basis: higher rates for higher risk customers, lower rates for
lower risk customers. During 2008 we increased rates for a small
number of businesses and reduced rates for a similar number whilst
the vast majority remained unchanged. As a result of our policy,
customers representing lower/improved risk do not subsidise others.
— Base rate movements are passed on in
full to all base rate linked borrowing customers (approximately
80%).
— Barclays ensures that up front lending
fees are communicated clearly and in advance. Any other fees are
clearly articulated in our tariff charges and we actively explain
to our customers how to save money.
— Barclays maintains a consistent approach
to risk—lending responsibly. Risk decisions are made jointly
by centrally based credit experts and locally based relationship
teams, with local knowledge.
— We treat each business on an individual
basis with no "blanket" policies for industry sectors.
— We are leading users of European Investment
Bank (EIB) funding in the UK passing the full benefit on to SMEs.
— We are fully involved with BERR in shaping
the Enterprise Finance Guarantee (EFG) and have actively marketed
this since January 2009.
4.4.1 Enterprise Finance Guarantee
4.4.1.1 Since the Government's launch of
the Enterprise Finance Guarantee on 14 January this year, Barclays
has supported this scheme. The latest BERR weekly data up to 31
March 2009 highlights that Barclays had made 40% of all the loan
offers under the scheme to date and reported 25% of all EFG loan
drawdown in the UK. Currently our sanction (loans approval) rate
stands at more than £1 million per day.
4.4.1.2 Between 14 January and 31 March
2009, Barclays has seen the following EFG related activity:
— Over 1,000 Loans approved, totalling
approximately £100 million.
— The application and take up rate is so
far on track to utilise our allocation in full this financial
year.
4.4.2 European Investment Bank
4.4.2.1 On 16 December 2008 Barclays signed
up for the latest European Investment Bank (EIB) funding line
of £150 million. This continues a 15 year history for Barclays
of offering EIB schemes to customers as cash backs.
4.4.2.2 Between 16 December 2008 and 31
March 2009, Barclays has generated the following EIB related activity:
— 599 applications for term finance agreed
eligible for the scheme.
— 177 applications have already gone through
to completion and the cash back paid to customers.
4.5 Focus on North East Region
4.5.1 Following initial engagement led by the
Government Office of the North East, One North East is now viewed
by Barclays as the driving government agency within the region,
mobilising key stakeholders in providing a clear and co-ordinated
response to the current economic conditions. For example, they
have worked with Barclays and other local banks to raise the profile
of the European Investment Bank funding and the enterprise Finance
Guarantee Scheme, and provide a dedicated support in offering
financial advice to local businesses.
One North East has also encouraged Barclays
and other members to:
— Review lending knowledge and expertise
and provide upskilling where relevant.
— Promote new supportive products and services
to local businesses more effectively.
— Work together to support businesses having
difficulty securing finance (eg seeking assistance from Business
Link).
4.5.2 Based on an internal regional analysis
of credit turnover, it appears that the reduction in economic
activity in the North East has so far been less pronounced than
in England & Wales as a whole. Nationally, credit turnover
fell by 10% in the year to Q1 2009 whereas the decline was 7%
in the North East. Although this reduction was lower than in any
other English Region it should still be remembered it is still
a decline and many of our customers are clearly having a difficult
time. Sectors hit harder than others in the North East include
post and telecoms, hotels and catering and construction.
4.5.3 In the year ending March 2009, Barclays
SME customers in the North East opened 859 new loans, over 3%
of the national total volume with new facilities agreed exceeding
£100 million (including over £10 million for manufacturing
firms). At the end of March 2009, the stock of loans outstanding
in the region was nearly 5% higher than a year before and the
region's share of new loans was a very similar percentage to its
share of the loan stock, suggesting no regional variation has
been evident in lending policy in the recent past. Similarly,
it is impossible to identify any significant regional differences
in use of EFG or EIB.
5. BARCLAYS VIEWS
ON THE
PLACE OF
MANUFACTURING INDUSTRY
WITHIN THE
NORTH EAST
5.1 Barclays view is that the prospects for
the manufacturing sector in the North East and across the UK remain
very challenging.
5.2 Market conditions in the manufacturing industry
5.2.1 Trading conditions deteriorated further
in the first quarter of 2009, having collapsed in the second half
of last year. According to official data from the Office of National
Statistics (ONS, May 2009) British manufacturing output fell at
its fastest rate for a calendar quarter since records began in
1948 in the first three months of 2009, though the monthly decline
was better than expected. Total production output fell 5.3% in
the first quarter of this year compared with the previous quarter,
and was down 12.1% on the same quarter last year.
5.2.2 Widespread destocking has exacerbated
the impact of depressed final demand as manufacturers have scaled
back production and unwound inventories. Business surveys suggest
that stock levels remain historically high and destocking seems
to have further to run.
5.2.3 Manufacturers continue to contend with
a contraction in consumer spending and business investment. Mechanical
and electrical engineers are suffering from tighter spending on
capital goods, motor manufacturers have scaled back production
markedly in response to the collapse of new car registrations
and those manufacturing building related products have responded
to a downturn in construction. We have seen this now having widespread
impact on those companies that manufacture materials and intermediate
products.
5.2.4 In contrast we have seen high value, highly
specialised sectors, such as pharmaceuticals and aerospace, as
relatively better placed. They will continue to benefit from a
strong international reputation and highly specialised technologies;
although the aerospace sector, in particular, is facing a cyclical
downturn in new orders as a result of the difficulties of the
airline industry.
5.2.5 The sharp depreciation of sterling over
the past few months, against both the euro and the dollar, means
that UK output is now increasingly competitive in both the domestic
and export markets. However, the impact of this improvement in
competitiveness is being undermined as the global economy continues
to slow.
5.2.6 Overall, given the weakness in the opening
months of the year, we expect production to decline by 9% in 2009.
Two factors seem to be particularly important for the prospects
of the manufacturing sector for the remainder of 2009:
— How quickly stocks are reduced to desired
levels: even an end to destocking, rather than a beginning of
restocking, would be beneficial to the output of the sector, but
the latest CBI Industrial Trends Survey continues to indicate
that stock levels are still high.[33]
— The extent to which manufacturers are
able to take advantage of their increase in competitiveness resulting
from the sharp depreciation of sterling in both export and the
domestic markets.
5.3 Manufacturing in the North East
5.3.1 Despite the pressures facing the sector,
Barclays remains fully committed to Manufacturing in the UK.
5.3.2 North East manufacturing-specific lending
by Barclays totals c£200m as at the end of March 2009.
5.3.3 In addition to our ongoing commitment
to providing finance to viable businesses, Barclays has invested
in its Manufacturing specific industry expertise. Each of the
five city hubs that comprise the North East region has a dedicated
Relationship Director with specific manufacturing expertise.
5.3.4 Analysis of recent Chamber of Commerce
statistics, aligned with anecdotal customer evidence, suggests
that the accelerated decline in Manufacturing in the North East
seems to have abated. For example, the key indicators of domestic
and export orders are up in 26 points and 16 points respectively
in Q1 2009 compared to Q4 2008. The sense therefore is that we
are at, or nearing, the bottom of the cycle.
5.3.5 However, confidence in the sector
remains low, mainly because there is little indication on when
the recovery will begin.
5.3.6 Anecdotal customer feedback regarding
the position of manufacturing in the North East includes the experience
of a manufacturer/supplier to the construction sector. The company
believes that the sector has been hit very hard. For example,
fewer school capital projects—and the withdrawal of finance
by foreign banks to fund two major shopping centre developments—
have impacted its "forward order" books. Another major
issue is the trade debt insurance position, which means that the
company is struggling to get the cover it needs.
5.3.7 Barclays position is to continue to
advise and support manufacturing customers to manage their businesses
effectively given the economic backdrop. This involves offering
the support they need to help them withstand the downturn, whilst
also helping to position them well for the eventual upturn.
6. BARCLAYS VIEWS
ON TRAINING
AND SKILLS
ACROSS INDUSTRY
IN THE
REGION
6.1 Whilst Barclays understands the importance
of industry skills in regional economic performance, regional
bodies such as One North East provide valuable assessments on
this sector.
6.2 Barclays greater expertise is in training
and advice in business performance and notably in the small business/start-up
market. For over a decade, Barclays has advocated greater use
of training and advice for people thinking about or going into
business. This led to a long term partnership with the NFEA and
local agencies such as PNE. As a direct consequence of this partnership,
Barclays has, for many years, funded and subsidised a large number
of events to promote this aim. Evaluation of these events has
shown that the businesses that attend are more likely to prosper.
6.3. Looking at the North East in 2008, under
Barclays' "Let's Talk ..." brand and in conjunction
with the NFEA, Barclays funded over 60 events for pre-start delegates
with 1,098 people attending. Barclays also hosted eight larger
events for more established firms, focused around improving survival
and growth prospects in the recession. These events were attended
by 736 additional delegates.
6.4 Plans for 2009 include at least a further
60 pre-start and a further six larger events, with a target of
reaching a further 1,460 delegates. Information gained from the
2008 events has also been used as part of a wider review of our
national relationship with the Business Link network.
6.5 Barclays has also shown a commitment to
support training in small firms as part of core current account
package for small firms. For example:
— Through a partnership with Mindleaders,
any UK based small business can apply for one free training package
covering a range of business topics. Further information on Barclays
Small Business Skills Training can be viewed on our website: http://www.barclays-skills.com/skillstraining.
— In addition, all Barclays start-up customers
are offered a choice of packages when they start a relationship
with the bank. All packages include 12 months free day-to-day
banking and in two of the three packages on offer Barclays includes
access to more in-depth online and video-based training for new
firms. Since the start of 2008, all of Barclays 4,547 new start-up
customers in the North East have been offered this service.
6.6 For firms with over £1 million in turnover
in Barclays Commercial Banking more bespoke training and support
opportunities are available, notably around the Barclays Latitude
Club. This is a national network which offers products and services
for owners of larger businesses and access to networks of potential
business partners globally.
7. BARCLAYS VIEWS
ON THE
ROLE OF
RENEWABLES IN
THE NORTH
EAST ECONOMY
7.1 Barclays takes the view that the renewable
energy industry will continue to play an important role in the
further development of the North East economy. Specifically there
is set to be continued advancement in the areas of Research &
Development (R&D), direct deployment of renewable power and
heat generating capacity and a possible new role in supporting
the growth of the UK offshore wind industry.
7.2 In the sphere of R&D and technology
innovation, the region hosts the New and Renewable Energy Centre
(NaREC) in Blyth. This is an important organisation that supports
investors and developers across a range of renewable technologies.
Its services include: testing of wind turbine blade applications;
concept evaluation and technical expertise; determining deployment
routes for marine Renewables; advisory services for the development
of energy storage; and testing and trialling of offshore cable
technology. In addition, Durham University is currently leading
a £6.3 million programme to develop affordable solar panels
from sustainable materials.
7.3 As a result of the North East's reputation
for R&D, major players in the renewable energy industry have
been attracted to the area to test and develop technology. For
example, US energy company Clipper Windpower located its European
R&D facility in North East England where they are developing
the world's largest offshore wind turbine in collaboration with
NaREC. Japanese market leaders Yanmar chose the region to develop
its 100% biodiesel heat and power system at the NaREC testing
facilities.
7.4 In terms of the deployment of renewable
power, the region's renewable energy plant in the region is also
making a valuable contribution to the national climate change
and energy security agenda. The plant represents part of moves
to meet the targets set out in the North East Renewable Energy
Strategy, ie 10% of electricity consumed in the Region to be generated
by clean and renewable sources by 2010, rising to 20% by 2020.
7.5 There has been some positive progress to
deliver on these targets. According to Energy North East there
are currently 184 renewable energy installations in the North
East.
7.6 The region also contains the UK's biggest
biomass power station—Wilton 10—at Wilton International
on Teesside, which generates 30MW of power. There is also 24MW
of land fill gas generation in the region, in addition to 62MW
of onshore wind generation.
7.7 The North East has also been identified
as a major development area for the UK offshore wind industry
with a number of projects identified for construction in the North
Sea. Over 800 turbines are to be potentially deployed in the Round
3 North Sea offshore wind development zone 150km off the North
East coast. The final outcome with regards to deployment of the
scheme will be determined under the Crown Estate's tendering scheme.
7.8 Aside from direct deployment of offshore
wind turbines in the coastal waters the North East (based on its
existing R&D and technology hubs) is well placed to play a
leading role in supporting the UKs wider offshore development.
A report commissioned by the British Wind Energy Association (BWEA),
and produced by management consultants Bain & Company, suggested
that the model of developing industrial clusters around existing
support services and infrastructure was a model that had been
successfully employed in Spain and Germany and could be replicated
in the UK, with the North East well placed in this regard.
7.9 However, while progress is being made
in terms of meeting the North East's renewable energy targets,
it is evident that further progress will be necessary in order
to better support the wider national and international obligations
that the UK will be measured against; including the requirement
to source 15% of all energy from renewable sources by 2020. This
will involve growing UK renewables electricity generation to a
share of 30-35% of total capacity. Currently the UK renewables
stands at 4-5%. The scale of the challenge is therefore immense
and will rely upon rapid deployment of proven and viable technologies
such as onshore wind in the short term, the creation of a vibrant
and stable environment for the financing and servicing of offshore
wind in the medium term, and the fostering of new technologies
(wave & tidal) to support the long term policy objectives.
7.10 Projects with established developers,
proven technology, and structures to control risk on commercially
acceptable terms, are still able to secure project finance but
the debt markets have generally tightened through a reduction
in the number of project finance banks operating in the UK market.
This has placed a general constraint on available capital for
the renewables project finance market.
The European Investment Bank is increasingly
being asked to fill the gap left by commercial banks who would
have ordinarily financed renewable energy projects, culminating
in the announcement in the 2009 Budget of an additional £4
billion of EIB capital being made available to the energy market,
partly through direct lending and partly through intermediated
lending schemes with commercial banks. There are a range of possible
avenues for the deployment of the EIB capital but it may best
be deployed (if required) for strategically important projects
in offshore wind in order to support the achievement of the UK's
renewable energy targets.
7.11 The contraction of debt availability
has coincided with a simultaneous tightening of the equity markets.
Although equity investment held up in the renewable sector for
much of 2008 this immunity finally broke down in the last quarter
of 2008 and first quarter of 2009. Equity investors have become
increasingly risk averse in the sector, looking to invest lower
capital amounts and at later points in the development cycle than
before. The net effect in 2009 has been a global reduction in
venture capital flows into clean technology of 41% between quarter
four of 2008 and the first quarter of 2009. This has been combined
with a retrenchment into familiar sectors and to more attractive
countries amongst equity investors. This has resulted in a lack
of cash for early stage development of technologies (marine based
predominantly) and therefore has impacted upon smaller and more
innovative development companies.
7.12 Despite the current dislocation in
the renewable equity and debt markets projects the outlook for
financing of the renewables sector is positive once we enter a
period of stabilisation and recovery. Notwithstanding the constriction
in the financial markets the renewables sector was slower to be
impacted than other sectors and has still benefited from sustained,
if reduced, lending and equity financing activity which is clearly
preferable to the stagnation of investment in other sectors. Renewables
remains an attractive lending and investment propositions relative
to other sectors predominantly due to the historic record of low
defaults and the level of long term regulatory and government
support that stands behind the sector and these will be important
factors in encouraging a faster increase in investment activity
in renewables than in other areas of financing.
7.13 Within the North East, there have been
strides in the direct deployment of renewable generation, but
it is clear that against this context there is still a significant
further requirement for development of renewable energy sources
in the region; particularly in onshore wind where a number of
projects are awaiting planning consent. This is a familiar national
obstacle and is not peculiar to the North East. 2007 saw a record
number of renewable energy projects rejected in the planning process
and it has been estimated that on average it takes up to 24 months
for a project to receive a planning decision. The UK Government
has sought to address this through National Policy Statements
to guide planning decisions for various forms of infrastructure
and the creation of the Independent Planning Commission to centralise
planning decisions for projects with a capacity in excess of the
50MW.
Further thought perhaps needs to be given to
increasing localised benefit from the presence of renewables projects
within the authority's jurisdiction such as replacing general
rates levied on projects with a tax that is directly reinvested
into local infrastructure, controlled by the local assembly/council.
With regard to grid connection, viable projects are sometimes
expected to wait for long periods before being given a connection
date in order that the costs of network improvements can be kept
to a minimum level.
7.14 Without further reform to both the
grid and planning permitting systems there is potential for investment
flows to be diverted to other countries where the regime is perceived
to be more supportive.
7.15 Barclays has played a meaningful role
in the development of the renewables industry both nationally
and in the North East, demonstrated through examples such as its
involvement in the financing of the Wilton 10 wood-burning power
station and its continued engagement and desire to support the
major wind farm development companies in the region. This is part
of a wider business focus on financing renewable energy developments
in the UK as a whole, which Barclays has maintained since the
earlier part of this decade, funding over 600MW of project capacity
through our Renewables & Natural Resources project finance
team. This year in the North East, as well as in the rest of the
UK, Barclays has approved an additional amount of lending capacity
to the renewables sector, reflecting its willingness to support
new renewables projects. It is also actively engaged in regular
dialogue with the Department of Energy and Climate Change (DECC)
and other key stakeholders to address the challenges and meet
the opportunities in the renewables sector.
32 BBA press release Support for Small Firms, April
2009. Back
33
Confederation of British Industry's (CBI) Industrial Trends
Survey for the first three months of 2009, published April 2009. Back
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