Examination of Witnesses (Questions 60-79)
DAVID CARO,
DENISE CRAIG,
CHRIS ROSIER,
BARRIE WILLIAMS
AND GARY
WOODMAN
11 MAY 2009
Q60 Joan Walley: Would you like
it to continue?
Barrie Williams: For some time,
yes.
David Caro: A lot of companies
will be using up their own funds before they apply to such bridge
funds, and you are now getting into the deeper time of the recession,
and those funds that they have been relying on are probably starting
to run out. They will want to access the transition fund, and
if it is not there, then the companies that have been using their
own facilities, if you like, could have a problem—they are
the ones that are accessing it at the later stage.
Barrie Williams: I have always
felt that when companies' order books and debtors shrink, they
very often have a cash inflow into the business. It is when you
come out the other side of the recession, and business starts
to improve, that the working capital in business needs to increase.
The working capital in business reduces during a recession, although
you may make losses. However, it is when you start to come out
of recession that the demand on funds is at its greatest, and
that period has yet to come.
Q61 Joan Walley: You mentioned
the £50,000 threshold and companies that need less than that.
There are other sources of community finance available, but they
are more costly, are they not? What do you think should happen
to ensure that everybody who needs it has access and that they
are not paying over the odds if they are below the threshold?
David Caro: I presume that their
funding is expensive because the money that they access is expensive.
If you can, you should find cheaper money for them to use. In
this crucial area of the regional economy, smaller businesses
need to access smaller funds. If the money to the Community Development
Finance Institutions is cheaper, then they can put it out at a
cheaper rate. If the money that they access is expensive, the
price has to be carried on down.
Denise Craig: It is often cited
as a reason for the high interest rates that these types of loans
are often more risky, but they often tend to be in smaller amounts.
So, there is a risk to the public purse in lending to very small
businesses, but such businesses tend to require a much smaller
amount. A lot of small businesses feel disadvantaged because they
have to compete with the bigger businesses which have a lot more
clout and can negotiate cheaper money. We hope to use the small
businesses as the route out of this economic crisis. Traditionally,
they have always been the ones that kick-started economies, but
they often feel that they are expected to do that with higher
costs, and a greater regulatory burden proportionately. I think
that they often feel insulted when they are told that a lot of
things are there for them when, in reality, such things are not
fit for purpose.
Chairman: Thank you. James.
Q62 Mr Plaskitt: One last thing
on the banks before we leave them, what is at the top of your
list of things that you want the banks to do, to stop doing, to
change or to start doing that will help you?
Denise Craig: Expecting people
to put up their homes as security when there is sufficient collateral
in the business.
Mr Plaskitt: You want to stop that?
Denise Craig: Yes, because when
a small business goes under and it has been secured by someone's
home, they lose absolutely everything.
Barrie Williams: I would like
to see more realistic interest rates return on overdraft facilities.
Chris Rosier: I would like to
stop reducing overdraft facilities. If they have one in place
and you have the assets within the business without putting your
house on the line they should be able to take charge over your
business assets to ensure that you can run your businesses. The
problem will be when people run out of cash, particularly in property
and construction. Things are selling, but it is taking months
to do.
Gary Woodman: My point would be
about the localness of decisions. We have obviously gone from
a period of very cheap money to a risk-averse period. Clearly,
a balance has happened within the banks, but it feels as though
the decision has been taken way above the relationship managers
on the ground. Such managers' hands are tied. I do not know how
it is described in the trade, but if the computer says no at a
regional level, then forget it.
David Caro: Hearing now from small
businesses, many have been more pragmatic about the money that
is there for borrowing and feel that they do not particularly
want to borrow. If there is no real way of guaranteeing repayment
of that money, they do not want to increase their problems within
the business. A lot of them are saying, "What we need is
an increase in trade and not more loans that we may not be able
to pay." Of course that is a difficult problem to resolve.
If we had a solution, we would not be in this situation. We are
hearing more and more people saying that now. They are really
aware of the risks of taking on loans, and the difficulty of getting
loans that they cannot repay or foresee a way of repaying.
Q63 Chairman: Thanks. I am going
to bring Adrian in shortly to ask you some questions about the
trade credit insurance issue. Before I do that, I would like to
ask you one question about the issue of prompt payment. I think
that it was in October 2008 that the Government committed themselves
to trying to pay their bills within 10 working days. In the pre-Budget
report, it was announced that regional development agencies would
try to do the same thing, and that commitment would also be extended
to include the health service and local authorities. If I understand
it correctly, FSB has suggested that in the West Midlands we are
doing reasonably well on that.
Denise Craig: We are actually
doing better than any of the other regions.
Q64 Chairman: Perhaps you can
give us your sense on that. If there are any particular public
bodies that are doing very well and are examples of good practice,
or indeed that are examples of particularly bad practice, now
is your chance to tell us about them.
Barrie Williams: In general, members
of the business council have commented that the situation is fairly
good and that, by and large, most Government bodies are paying
fairly promptly and it is very well appreciated.
Gary Woodman: Those that are not
meeting the 10-day recommended period are working towards it.
You can see a reduction over a period of time. Clearly, sometimes
internal systems just mean that 10 days is pretty tough, actually.
So there is a degree of sympathy, which local authorities and
the NHS may be surprised to hear. It is tough. The difficulty
comes from the larger businesses; we are talking about supermarkets
and those types of businesses, which are notoriously bad. Terms
seem to have gone further out.
Denise Craig: I was going to say
that it is the private sector where the big problems are, including
people changing their terms of payment. The FSB would actually
like to see Companies House given far more teeth to enforce the
terms that are published and that it operates to. We have heard
that some of the really large plcs vary payment times post the
implementation of it. A memo sent out in June that went back to
April for payment to be increased from 70 days to 105 was one
example. That was Boots Alliance.
David Caro: And taking a discount
to pay, as well.
Denise Craig: And taking a discount
to pay—when it finally paid, it did not pay the full amount.
The other one that we are starting to get responses on is one
of the big breweries. It is not changing its payment terms, but
it has restructured its internal processes. [Laughter.]
That effectively means that they are not paying as quickly as
they were. I think that we have seen this happening in previous
recessions too. Large companies will use small suppliers as a
cheap—in other words, free—source of credit. Yes,
there is legislation that allows late payment to be charged at
interest rates, but many small businesses will say that they are
very reluctant to do that, particularly when there is not a lot
of business around, because they do not want to lose the client
altogether. So, the small businesses are often between a rock
and a hard place. The legislation is not that helpful in practical
day-to-day terms. So we would like to see Companies House enforce
the payment regulations, name and shame, and fine those companies
that behave badly.
David Caro: We have a problem
that if the large private companies are slow in paying and they
are reported by their creditors, those creditors are then at a
disadvantage. So you have this Catch-22. There are fines if you
exceed a company's terms, but very few small companies will impose
those fines on their larger companies for risk of losing them.
Q65 Mr Bailey: May I first apologise
for being late? I had a constituency function that I really had
to attend prior to coming here. I want to focus on credit and
credit insurance, which has certainly been reported anecdotally
to me as a very important issue. It was in the light of that problem,
of course, that the Government introduced the measures in the
Budget that will match trade credit insurance where businesses
have had their insurance reduced. First, how big do you think
the problem is? What is the scale of the problem in the West Midlands?
Secondly, how far do you think that Government measures will go
to address that problem?
Barrie Williams: Are you going
to include export credit?
Mr Bailey: I will deal with that separately.
Let us just deal with the existing measures.
Chris Rosier: Particularly in
construction and property, there are problems with suppliers and
manufacturers supplying the construction industry. You then have
an issue of contractors going into liquidation and clients not
paying contractors for contractual reasons, and that being passed
down the line. Insurance companies have dramatically reduced their
willingness to insure trade suppliers, and so the big boys—Jewsons
and Travis Perkins—and some of the large regionals—EH
Smith and people like that who are fairly cash-rich—are
tackling the issue themselves. I think that the smaller suppliers
are really struggling. I haven't had any real feedback on how
well the Government's proposals are being handled. I don't know
if you guys have.
Gary Woodman: No. To answer the
question, in terms of the size of the problem, it is pretty big.
It is long-established companies and brand names, and we would
probably sit there and say, "They've got to be safe."
The reality is that they are having to pay on pro forma invoices,
which is slowing everything down completely. In terms of the Government
measures, I still think that it is early days. The reality is
that some of those medium-sized and larger businesses have taken
a risk themselves at this stage. They are either waiting for pro
forma payments, or are saying, "Well, we're just going to
take a flyer." We are exposing ourselves to that risk, which
clearly can lead to absolute disaster. In terms of the Government
measures, it is probably early days to get any sort of meaningful
feedback. Whether they have gone far enough might be the crux.
I would be happy to feed in information; we could perhaps come
back at a later date and feed that in in writing, to give a better
view. I wouldn't want to put my neck on the block and say yes
or no on that.
Denise Craig: In the FSB, fewer
than 20% of our members say that they use credit insurance. Some
10% have said that costs have stayed the same and just under 8%
have said that they have found it more expensive. But I think
that it depends on what sector you are in. Those that are based
in the construction industry and the automotive sector have found
that it has just disappeared—it is just not there for them,
it has gone. Of those working in different sectors—wholesalers
perhaps—the long-established ones are often having to rely
on previous good relationships with their suppliers, so that suppliers
are prepared to continue to supply them without being able to
take credit insurance themselves. So it is a very mixed picture,
and there are a lot of people having to wing the actions they
take by sort of making it up as they go along and making a judgment
call. There will inevitably be some people who get burned in that
process.
David Caro: From a personal point
of view, it is not something that we have ever taken on. I am
in the automotive industry—in supply.
Mr Bailey: Perhaps it's a good job.
David Caro: But when we looked
at it, before the recession ever hit, we found it extremely expensive.
A lot of small businesses look at that and balance the risk of
how their trading position has been over the years.
Q66 Mr Bailey: That is an interesting
point; I will just follow it up. Certainly, the impression that
I have—I have quite a few automotive supplier companies
in my constituency—is that it has been a potentially devastating
removal. But perhaps it is not appreciated that many have not
been protected by it, because it was so expensive in the first
place that they never took it out. Is your experience fairly widespread?
Barrie Williams: I was formerly
the chief executive of a medium-sized public company that did
a lot of exporting, and we did not insure. We had a lot of automotive
business, around £10 million a year I think, but we did not
trade insure.
Q67 Mr Bailey: It has been put
to me that one of the problems is that the Government are prepared
to match up to 50% of the risk, but where it has been withdrawn
totally, 50% of nothing is of course no support whatsoever. That
could be particularly relevant in the automotive supply chain.
Have you any feedback or examples of where this has been devastating
for a company?
Denise Craig: As I understand
it—perhaps David can confirm or shoot me down in flames—there
has not always been consistency in having contracts in the automotive
industry. You will get orders and an order number, but there is
no contract signed in the long term. Credit insurance is probably
a bit more necessary in certain instances in that industry because
of the nature of supply.
David Caro: The nature of the
business also means there are always price pressures that create
survival issues for businesses. A lot of big suppliers throughout
the country went out of business long before the recession because
of price pressures from the automotive and original equipment
manufacturers. That is probably a reason why trade credit within
the automotive industry has been expensive, probably a lot more
so than in other areas.
Chris Rosier: There is the problem
area of construction supplies. For building merchants and all
suppliers to the construction industry, insurance has been an
integral part of making sales. Now pro forma is becoming more
prevalent. Not having reasonably priced trade credit insurance
is going to affect the process when we come out of the recession,
when we want to build more and there will be a reluctance to supply
except on a pro forma basis.
Q68 Mr Bailey: It is interesting;
to a certain extent it reflects earlier comments about James and
bank balances. I have received submissions pointing out that this
is devastating. The difficulty is working out how representative
these companies are—either of the sector or of manufacturing
as a whole. If you had to put it on a scale of one to 10, how
significant would you put trade credit insurance as a factor in
determining the viability of companies within the area?
Barrie Williams: It is difficult.
Gary Woodman: The problem is in
the example that David took you through from the automotive industry.
Sometimes the margins will be fine, similarly with construction.
Q69 Mr Bailey: Feel free to refine
your response to point out particular sectors.
Gary Woodman: If one of those
goes bad, it can take down the whole company. That is the risk.
So the reality is it cannot be lower than eight.
Chris Rosier: I think construction
is pretty important because there will be a nervousness to supply.
Barrie Williams: I am not sure.
Gary Woodman: Clearly, regarding
the invoice factor and that side there are other ways of doing
it.
Barrie Williams: To some extent,
it will depend on the size of the company and the number of customers
it has. The distribution of customers mitigates the risk—it
also increases it—but mitigates it in size.
Denise Craig: Where the smallest
companies are concerned, the ideal is not to have all your eggs
in one basket, not to supply more than 20% of your business to
one particular customer. That is not always realistic for the
smallest businesses in certain situations. Those are the ones
that are very vulnerable. They could be new businesses at the
start of their business progress, loss of which would be devastating
to the future health of the economy because it is those fledgling
businesses that we need to keep going regardless. They are the
ones that will bring those green shoots out eventually. If too
many of those start to go down, it will knock business confidence
in that smallest part of the business sector.
Q70 Mr Bailey: So it would be
fair to say in the context of new businesses that it is proportionately
more important.
Denise Craig: I would say so.
Barrie Williams: Yes.
David Caro: I think that it is
sector and size driven as well. My own business was not completely
aware of trade credit guarantees. It was such a widespread thing
until the recession hit, and people started to talk about this
not existing, and to think that they had not applied for it. Occasionally
you get somebody phone up and say, "Are you interested?"
and that is as far as it has come. When we have inquired, "How
much is it?", you find out, and that frightens you off. I
think it is probably intermediate business, and sector driven
as well. Small businesses may not be aware of it for whatever
reason, or when they have come across it, it is just in passing,
and they have found it extremely expensive. But that is my own
personal experience, and I might well be wrong across the board.
Q71 Mr Bailey: In terms of the
Government measures, you say it is too early to make an assessment.
Is that a feeling across the board?
Chris Rosier: I think so.
Barrie Williams: We have not had
a lot of feedback about that.
Q72 Mr Bailey: Have you noted
a diminution of complaints about it, as a rough and ready way
of doing it?
Denise Craig: I would say that
it was less of a topic of conversation.
Barrie Williams: Yes. I think
so.
Mr Bailey: That may be a rather vague
and imprecise measure.
Chris Rosier: Not a constructive
one.
Q73 Mr Bailey: May I move on to
exporting? Obviously, you did not cover exporting, and the Government
are consulting on measures in that regard. Again, how big a problem
is it with exporting companies? Is it a bigger problem than with
domestic companies?
Barrie Williams: I think it is.
We have had examples given to us in the West Midlands Business
Council of companies turning down quite sizeable orders—£250,000,
for example—because they are unable to get export credit
guarantees. As we move out of the recession, with the value of
the pound as it now is, we would be looking towards exporting
being more of a major driver of any upturn. Since there would
be new customers and new products, people will want insurance
and export credit guarantee in those situations. I think it will
hold things back considerably if we do not have such credit in
place.
Q74 Mr Bailey: Are there any further
comments? I have had submissions to me by a company that would
accord with what you said. I think that it is an interesting point.
We have the potential for an export-driven revival, and unless
we have the measures in place to underpin it, it will be inhibited.
Denise Craig: The vast majority
of FSB members are not actually involved in the export industry—David
is probably one of the few who is.
David Caro: Although I have not
heard much about credit guarantees within the country, I have
always heard about export credit guarantees. We do a little bit
of exporting, but long before we ever did, we had heard of export
credit guarantees, and people said, "If you are going to
do that, you should take that out." It was something that
was much more on the radar than domestic guarantees. Barrie has
mentioned in the past that there are specific, critical countries
for which you cannot get credit guarantees, such as the US and
Portugal, where it has been extremely difficult to get credit
guarantees. With the US being such a big market, you can understand
the problems that that could cause.
Gary Woodman: I think that that
is the problem. When we see the upturn, if we are hoping to drive
that by export, the reality is that that will be new markets and
new customers. Therefore, there is a risk factor. Certainly, as
a UK Trade and Investment operation in the region, we are finding
that we are overwhelmed because people are looking at those new
markets and opportunities. There is still a long way to go in
terms of the businesses actually finding where they are going
to place themselves and how they are going to do that. Some formal
insurance would be required.
Q75 Mr Bailey: That is interesting.
I have one other question to conclude on the matter. I recently
attended a breakfast meeting with the Aluminium Federation, and
there were some robust comments made about credit insurance. One
of them was along the lines of, "They are a load of crooks."
I am not asking you to substantiate that—or not. Is there
a feeling collectively, within the business community, that this
particular industry, at the moment, is inadequately structured,
or inadequate in other ways, to meet the needs of industry, given
the sort of fluctuations and vicissitudes that the economy is
suffering?
David Caro: There will always
be insurance companies charging these rates given the current
risk. If the risk is extremely high, fees will also be extremely
high.
Barrie Williams: Or they withdraw.
David Caro: Yes. That is the problem.
If the Government can help to reduce those fees, so that the insurance
is within the reach of many more companies—through the 50%
help, or whatever—that will be the biggest help. The problems
come when insurance premiums are set so high as to be inaccessible—or,
as was said, with withdrawals. Whether you class them as crooks
depends on which side of the fence you are standing.
Barrie Williams: It needs to be
a competitive market as well. If people have withdrawn, there
are only a very small number of players.
Q76 Mr Bailey: That is what I
am getting to—the structure of the market. One accepts that
there will always be a pricing of risk, but the feedback that
I am getting is that effectively companies are so risk-averse
and their prices so disproportionate that more competition or
perhaps some sort of Government back-up scheme would be appropriate
to change it. Very briefly, how do you feel about that?
Barrie Williams: I think that
that is true.
David Caro: Perhaps the Government
should consider how schemes in other countries work. We seem to
lag behind other countries in so many measures that perhaps this
time we should see how Germany or America operate and protect
their exports.
Q77 Chairman: Thanks. We are coming
to the end. I would like to ask a couple of questions about actions
that the Government have taken and their effectiveness. I know
that you have been lobbying for further action. First, what has
been your experience of the VAT cut announced last year to stimulate
demand? Is it having an effect, or is it too early to say? As
the Bank of England said, are you anticipating that, as we get
towards the end of the cut period, household spending might increase
in advance of the rate going back up?
David Caro: I think that the response
has been universally negative. The worry now is about what happens
when it is put back on.
Denise Craig: That is especially
the case for retailers. As has been pointed out, it ends on 31
December, just as they come round to the new year, having given
staff time off. It is always difficult anyway for retailers to
do the pricing for sales and all the rest of it. To incorporate
that halfway through the sales, which usually start the day after
Boxing day, feels like another example of an initiative with an
arbitrary date that has not taken into account the sector that
has to apply it.
David Caro: I would have liked
it to have been kept at 17.5% and the money ring-fenced and targeted
where it's really needed rather than trying to put it across the
sector. It has been so minor because everyone is offering discounts
anyway and it really hasn't gone through—nobody has noticed
it.
Denise Craig: It was introduced
at a time when an awful lot of the big high street retailers were
discounting 10% to 15% anyway, so it lost a lot of impact for
consumers and caused a lot of extra work for retailers.
David Caro: It was also introduced
at a time when people were buying anyway for the Christmas market.
Sales are always up at Christmas. If it had been introduced after
the January sales when sales always take a dip, it might have
had more effect.
Q78 Chairman: We have recently
received anecdotal evidence about policy adopted in France—I
think—with a fairly major and ambitious cut of VAT on housing
repairs. It is sometimes speculated that that might not only increase
demand but bring into the mainstream "legitimate" economy
businesses that would otherwise have been in the informal economy.
What is your view?
Chris Rosier: The main area would
be insulation at home and replacement windows—bringing green
issues into the VAT issue. It would do two things: give you manufacturing
and supply issues and people wanting to improve their green effects,
and work for local tradesmen. From that point of view, that would
be a very good thing. Targeted, that reduction is far better than
the broad-brush approach, definitely.
David Caro: One thing I would
like to add about the VAT—a slight issue—is the flexibility
of the Inland Revenue. The flexibility of the Inland Revenue to
allow you to spread rates has been welcomed and is worth while.
Putting that on the end of what you were saying, I think that
that was a good policy, allowing people to spread payments.
Q79 Mr Plaskitt: May I pick up
one more policy from the Budget for you, Mr Caro, which is the
car scrappage scheme? We are seeing on television lots of the
manufacturers promoting further reductions in the prices of their
cars; ads in the newspapers are starting to appear. What they
are promoting is small, compact cars—Citroën C1s, things
like that—which you can now get for a retail price of less
than £5,000, because of all the scrappage scheme factors.
Do you think that that will have a significant impact?
David Caro: You've said it there
yourself: Citroën—nothing built in this country.
Mr Plaskitt: I gave that as one example,
it is obviously across the range.
David Caro: We have not seen any
adverts for cars built in this country. I said this before it
was brought in, that it needs to be targeted. I know that you
then get into issues of protectionism, which no one likes to hear,
but the French are doing it and these are the people that we have
to compete with. If you bring in a scheme like this, it has to
be targeted. We cannot use our public money to subsidise foreign
companies. It has got to be used to subsidise our own companies
and keep our own businesses in work. I feel really strongly about
this. As I said, I know there are issues of protectionism, but
if we are using British taxpayers' money, it has got to be supporting
jobs in British industry.
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