House of Commons - Business, Innovation and Skills Committee

Exporting out of recession - Business, Innovation and Skills Committee Contents

Memorandum submitted by the Sponsors' Alliance

SUMMARY OF REPORT

1a) The current economic crisis requires the UK Goverment to provide an urgent and significant investment to boost export activity and encourage UK companies to engage in, or increase their international sales efforts. Resources should be targeted towards business schemes which directly benefit exporters across all industry sectors and directly encourage them to enter overseas markets. The focus must be on those schemes which bring the largest financial return on investment.

2a) UK Trade & Investment's (UKTI) current trade support policies and infrastructure are neither relevant nor viable in the present economic climate. UKTI's structure is over—burdened by internal staff, overheads and administrative costs, which utilise around 75% of its operating budget. Its trade development policy is focused on capacity building among UK exporters, marketing the UK's business strengths, and focusing on certain "key" business sectors and target markets.

3a) UK Trade & Investment must reduce its cost burden, by:-

— reducing staff and administrative budgets, including use of consultants.

— eliminating inefficient regional networks and duplication of resources and activities.

— dramatically reducing its marketing budget and activities.

— reducing expenditure on activities to promote foreign direct investment into the UK.

The resulting cost savings should be channelled into export business schemes which directly benefit UK exporters.

4a) UKTI can reduce the cost of delivering business schemes by greater use of existing industry intermediaries, such as trade associations and chambers of commerce. Many of these successfully offer export-related services and benefits and already undertake overseas exhibition and mission activities in conjunction with UKTI. Further cooperation with not-for-profit industry organisations allows both parties to leverage existing services and activities and create greater efficiencies.

5a) Opportunities exist for trade associations to play a greater role in delivering overseas market information services, and in providing advice, mentoring and support on behalf of UK Trade & Investment. These industry associations are keen to play a greater role in delivering export promotion services in partnership with UKTI.

THE SPONSORS' ALLIANCE:

1.1) The Sponsors' Alliance is an independent, national, multi-sectorial alliance of member-based industry trade associations and chambers of commerce, who engage in export promotion activity. These associations provide export-related services, support and benefits to their members and others, and engage in export promotion activities. These include organising overseas exhibition groups and overseas market visits (trade missions) in conjunction with UK Trade & Investment (UKTI). Many Alliance members also work with UKTI and regional organisations on sector—or regionally-based export promotion activities.

1.2) Sponsors' Alliance members work closely with UKTI on its Tradeshow Access Programme (TAP) to support UK companies exhibiting at overseas exhibitions. Members make up ~ 45% of active "Accredited Trade Organisations" working with UKTI, organising 59% of the events in the 2008-09 TAP programme[47] and utilising more than 61% of the TAP programme budget. The TAP programme provides an excellent example of an efficiently delivered trade promotion activity. It leverages existing activities of trade organisations to deliver a popular and cost effective scheme at very low expense to the taxpayer.

UK TRADE & INVESTMENT

2.1) UK Trade & Investment (UKTI) is the government organisation with lead responsibility for trade and investment services. It brings together the work of the Department of Business, Enterprise and Regulatory Reform (BERR) and the Foreign & Commonwealth Office (FCO). Its published objective is

"To enhance the competitiveness of companies in the UK through overseas trade and investments; and attract a continuing high level of quality foreign direct investment"

2.2) UKTI operates with a team of ~ 1,700 directly employed staff within the UK and overseas[49] (although staff are actually employed by BERR or FCO). This resource is then supplemented by a team of around 400 staff in International Trade Teams,[50] located within the nine English regions, who are employed as independent operatives through UKTI's regional partners, and by extensive use of secondees from industry and independent consultants.

The Value of UK Trade & Investment's Services

2.3) UKTI offers a wide range of services for new and experienced exporters. Most business schemes are targeted at SME businesses and fall loosely into the following categories:

— Help and advice: From international trade teams, Posts etc.

— Mentoring and Support—eg Passport to Export.

— Market Research— eg Online Market Introduction Service and Export Marketing Research Service.

— Support to companies to enter markets—eg Tradeshow Access Programme, Overseas Market visits, some sector-based activities.

UKTI also offers services and support to access "high growth" markets and to support innovative and Research & Development intensive industry sectors.

2.4) Many of UKTI's services are highly valued by individual companies and by industry intermediaries. Passport to Export is considered an excellent service, providing a systematic approach to ongoing mentoring; the Tradeshow Access Programme provides an excellent pathway which encourages new and experienced exporters to enter new overseas markets. Recent UKTI announcements suggest that UKTI is currently on target, during 2008-09, to help 20,000 companies, who are expected to generate an additional £3.6 billion in revenue. UKTI enjoys high levels of positive customer satisfaction in their service feedback surveys—no doubt due in part to UKTI's ongoing marketing campaign to increase customer awareness of the organisation's role.

2.5) Despite these positive indicators, experienced industry representatives continue to question whether UKTI generates sufficiently high returns on taxpayers' investment and whether it provides adequate value for money through its operating methods. A recent report from the National Audit Office found that only 30% of UK companies helped by UKTI reported that this intervention generated some financial benefit.[51] It is worth noting that UKTI's own figure of £3.6 billion of additional business generated represents just 1% of the UK's export value.[52]

UKTI Export Promotion Policy

2.6) UKTI's current policy was primarily established by two documents; a White Paper, produced by Patricia Hewitt (then secretary of State for Trade & Industry) in 2004, and the 2006 document "Prosperity in a Changing World"

2.7) The White Paper called for a greater regional role in trade development, and led to the establishment of a customer focused network of regional "International Trade Advisors". It also argued that export promotion was not best served by providing exporting companies with financial assistance, but by building capacity through provision of help, advice and support to companies to correct a "market failure" caused by inability to understand the benefits of international trade.

2.8) The 2006 document established UKTI's priorities and objectives for the five year period up to 2012,[53] and dictated that UKTI would focus resources into:-

— Marketing the UK's business strengths.

— Promoting key industry sectors, such as ICT, financial services, biosciences, creative industries and advanced engineering.

— Focusing efforts onto key emerging markets, and reducing resources from traditional markets.

— Marketing the UK as a centre of Research and Development, and promoting R & D intensive sectors and companies overseas.

2.9) As a consequence, UKTI resources have been transferred away from activities which provide companies with financial assistance (such as overseas exhibition support). These have been redirected into services which "build capacity" by providing mentoring and advice, or which promote the strengths of the UK indirectly (ie by marketing, or generic "soft" promotion). Much of the staff, administration and programme budget has been redirected towards priority industry sectors and target markets. As a result, UKTI commercial teams in established and successful markets, such as Europe and North America have seen dramatic reductions in resources. This has affected service levels for clients, whilst budgets for mainstream business schemes have been dramatically reduced.

Analysis of UK Trade & Investment Budget

2.10) UKTI's overall operating budget for the 2007-08 budget year (the most recent full year figures which are publicly available) was around £294.9 million.[54]

2.11) An analysis of UKTI's overall operating costs for the 2007-08 budget year reveals that staff costs for directly employed staff (DTI [now BERR] and FCO) amounted to approximately £63 million,[55] with an additional £16.4 million to maintain the International Trade Teams in the English regions,[56] plus a further £0.5 million for international business specialists, seconded from industry. Administrative and overheads costs, both in the UK and overseas, account for a further £144.1 million.[57]

Altogether, UKTI staff, administrative and overheads expenses amount to approximately £224 million, which is around 76% of its overall operating budget.

2.12) Within the overall operating budget, funds allocated directly for export trade support business schemes which directly benefit UK exporters is less than £30 million.[58] These schemes include the Tradeshow Access Programme (TAP), which encourages UK companies to participate in overseas trade shows or seminars or visit overseas markets (budget £8.5 million), Passport to Export (budget £4.9 million), sector specific trade promotion activities (budget £9.3 million) and the Online Market Introduction Service (OMIS)—(nett cost £0.9 million).

UKTI spent less than £1 in £9 of its overall operating budget on direct customer-facing international business schemes in 2007-08.

2.13) UKTI's overall budget is split between its two principal operating objectives ~ 75% for export trade support activities, and ~ 25% for the promotion of foreign direct investment into the UK.[59] Within the latter inward investment budget for 2007-08, some £17.2 million was delivered in grants to Regional Development Agencies, and a further £15.4 million was spent to promote the UK as a location for foreign direct investment.[60]

Regional Activities

2.14) Much of UKTI's export promotion activity is focused on their network of regional offices based in the nine English regions. In Scotland, Wales and Northern Ireland they work through business support infrastructures in the Devolved Assemblies.

2.15) Regionally based export activities include the management of the network of International Trade Teams, which deliver the "Passport to Export" programme and promote the Online Market Introduction Service (OMIS), organise regionally-based market visits and trade missions, and operate or manage projects. These are usually based around local industry "clusters", often working in cooperation with other local agencies, such as Regional Development Agencies (RDAs). Supporting and maintaining these activities requires the establishment of a number of duplicated staff and management infrastructures around the country.

This ineffective use and duplication of resources represents an unnecessary waste of valuable UKTI resources and budget.

2.16) Many regional infrastructures operate export promotion projects—overseas trade missions or exhibition participation, seminars and meet the buyer events. These may be multi-sector or focused on a specific industry sector or local cluster. In numerous instances, these activities have conflicted with nationally focused events in the same sector or market. It has not been uncommon in recent years to find regional pavilion groups at overseas trade exhibitions, often in competition to a national UK pavilion. This undermines the impact of UK national branding and confuses overseas buyers.

2.17) Regional initiatives are often able to draw funding from other sources (such as EU or Regional Development Agencies), which allows organisers to offer participating companies considerably more favourable packages or higher financial support than is available under UKTI national business schemes. This creates resentment and inequality of opportunity among UK companies.

2.18) The Sponsors' Alliance believes that export promotion is fundamentally a national UK activity, and that any regionally-focused export activity should be made secondary to a national strategy and programme.

International Trade Teams

2.19) The UKTI International Trade Teams serve two main functions:

— acting as UKTI's front-line "customer service team", promoting UKTI business schemes to companies in their region.

— dispensing export-related advice to companies in their specific region.

2.20) International Trade Teams are the core staff of UKTI regional operations, and comprise some 300 International Trade Advisors (ITAs), supported by assistants and Government office staff.[61] ITAs are employed under contract, at a cost of £16.4 million in 2007-08,[62] allocated from UKTI's "programme" budget. They are in reality an indirect staff cost, and are part of UKTI's overall staff and administrative cost burden.

2.21) The effectiveness of ITAs in promoting UKTI services is open to question. The two principal business schemes which they promote and manage, Passport to Export and Online Market Introduction Service (OMIS) have a combined programme budget of £7.9 million. In a commercial environment, a staff cost which is twice that of the programme cost it delivers would not be considered acceptable.

2.22) Anecdotal feedback from exporters consistently indicates that the quality of ITAs varies enormously in terms of their ability to dispense information and advice. Where ITAs are seen to be of value to exporters, or to deliver significant benefits, it is frequently due to their ability to access UKTI resources or funding to "make things happen", as much as the quality of their advice. The regional international trade teams act as a front-line sales force for UKTI, but they do not necessarily provide the most cost effective method of delivery of services.

UKTI BUSINESS SCHEMES

Overseas Tradeshow and Mission support

3.1) Industry feedback received by Sponsors' Alliance members indicates that exporters place highest value on those business schemes which help them to actively penetrate overseas markets; these include the Tradeshow Access Programme (TAP), Trade Missions and sector specific activities.

3.2) Recent UKTI policy has directed a reduction in expenditure on these business schemes. In 2004-05 UKTI's budget for overseas exhibition support and sector activities was £31.1 million, while the comparable budget for the same schemes in 2007-08 was £17.8 million[63]—a reduction of 43% in four years.

3.3) In the 2004-05 budget year, UKTI's overseas exhibition programme supported some 8,000 UK companies who exhibited at overseas trade shows, but by 2007-08 this had reduced to round 3,500 companies.[64] In 2004-05 the scheme's budget was £19.5 million; in 2007-08 it was £8.5 million.[65]

3.4) The consequence of this policy has been a dramatic fall in the number and size of UK groups at major international exhibitions, with a corresponding loss of profile for UK industry in important international markets. This contrasts strongly with our European competitors, notably Germany, whose budget for the equivalent business scheme in 2009 is €38 million (£34 million), more than four times greater than the UK. This investment has achieved a consistently high profile in international markets, supporting a strong industrial base of SME companies (Mittelstand).

3.5) Just as the overall budget for overseas exhibition funding has fallen, so too has the level of financial support offered to individual exporters been reduced. Furthermore the eligibility criteria which control an exporter's access to funding have been tightened, at the expense of experienced exporters, who are most likely to succeed in international markets.[66] Whilst aspects of these eligibility criteria have been relaxed in recent months, budgets have not been increased to support the increased demand. As a result many companies are now eligible to apply, but unable to receive tradeshow support as no funds will be available.

3.6) This reduction in funding has occurred despite UKTI's own feedback, demonstrating that this scheme achieves a good return on investment. The 2006 Vicky Price report indicated that UKTI's overseas exhibitions and missions programme achieves additional customer benefit of around £29.50 per £ invested.[67] This compares favourably with a return of around £15 per £ invested for overall UKTI activity.[68] This scheme is particularly cost effective as it is administered by trade associations in their role as UKTI's Accredited Trade Organisations, leveraging their own activities and resources, so imposing minimal operational costs onto UKTI.

3.7) The benefit derived by industry increases exponentially, year on year as companies are supported at exhibitions on an ongoing basis, further increasing the return on investment for taxpayers. This relatively low investment by UKTI in UK exporters, in the form of a simple exhibition grant also creates a belief within industry that they are individually valued and supported by government, and that government is encouraging them in breaking into markets by offsetting a proportion of their initial financial risk.

3.8) The Sponsors' Alliance believes that expenditure on proactive business schemes must be reinstated, and that programmes for overseas exhibition and trade mission support should be thoroughly overhauled and funded. The budget for this scheme should be reinstated to at least the level which was in place six years ago. Schemes should be accessible and effective to support both new and experienced exporters in breaking into overseas markets. Schemes must be guided by the needs of exporters, rather than by the Government or UKTI policy.

Other Business Schemes

i) Provision of Export Advice

3.9) Within the current UKTI infrastructure, export-related advice and support is generally provided by the regional International Trade Teams. In the current economic climate, the Sponsors' Alliance believes that this is not the most efficient method of delivery. ITAs rarely have relevant experience in a client company's industry sector. Those advisors with relevant experience in specific industry sectors are constrained by the boundaries of UKTI's regional infrastructure, and are unable to support and advise companies outside of their region. Better value for money and more effective services can be provided through greater use of third parties, such as trade associations.

3.10) General non-sector export advice, including "start-up" advice can be delivered most efficiently at a regional level, where local contacts and immediacy of response is a positive factor. In contrast, sector-specific advice and ongoing mentoring of companies requires a sound knowledge of the client's sector, and is best delivered by advisors who have sector-specific export experience.

3.11) Generic export advice could be delivered by a local business support network (such as regional chambers of commerce or Business Links). This would be considered a general business support service, in the same way as advice on websites, HR or general marketing.

3.12) More detailed, sector specific export advice and ongoing mentoring could be delivered by trade associations and chambers of commerce under contract to UKTI—utilising their in-depth experience of their industry sectors and specific knowledge of overseas markets. Many associations already deliver much-valued export advice as a part of their offerings to members and others. The more capable international trade advisors, particularly those with specific industry knowledge could be absorbed, possibly on secondment, to chambers and industry associations.

ii) UKTI Market Information Services:

3.13) UKTI offers two mainstream market information services for exporters, the Online Market Introduction Service (OMIS), and Export Marketing Research Scheme (EMRS). The Export Marketing Research Scheme provides a comprehensive and detailed market research resource, both for exporters and for industry associations. The OMIS service is intended to provide sector relevant background information and identify potential business partners for companies who are preparing to enter a new market.

3.14) The Sponsors' Alliance believes that the OMIS scheme is not currently effective. Feedback from exporters regularly suggests that the quality of OMIS reports is variable, and often does not meet customers' expectations, even at a subsidised rate. Although the uptake of this scheme is growing, much of this increase derives from "forced sales" of OMIS reports in connection with overseas events. The promotion, implementation and delivery of this service ties up considerable time and resources of UKTI international trade teams and the overseas commercial network. Whatever the level of staff input, this cannot be justified by the £2.3 million of revenue which is earned by UKTI by charging for the OMIS service.

3.15) The EMRS service generally achieves a high return on government investment, in contrast to OMIS.[69] This service is operated by an external industry-based service provider, the British Chambers of Commerce, at little cost to UKTI.

3.16) The Sponsors' Alliance calls for a review of UKTI's market information services, to create a programme which is more in tune with the requirements of exporters. Specifically, the OMIS scheme should be replaced by a more efficient and cost effective method to enable exporters to access specific market information and business contacts prior to market entry. It should make greater use of private sector research and the existing resources of industry associations. It could be facilitated through a combination of financial assistance for independent research and advice and support from existing business organisations, (possibly using the model of the EMRS service).

iii) Passport to Export

3.17) Many exporters value the "Passport to Export" scheme, and the key value of the programme is the ability to "make things happen" by accessing UKTI services and funding. This service depends on the quality of advice and support offered by the mentor. A sound knowledge of the client's industry sector, both at home and overseas, is an important element of this. Geographical proximity is not a requirement in delivering this scheme.

3.18) The Sponsors' Alliance believes that trade associations and chambers of commerce could deliver the "Passport to Export" programme effectively and efficiently by leveraging their own resources, activities and knowledge base. Trade association staff could be accredited by UKTI to necessary standards and existing International Trade Advisors might be taken on secondment by associations. Where necessary, trade associations within an industry sector could liaise or pool resources to ensure an even and consistent coverage. An independent organisation could manage the scheme, and ensure cooperation between organisations within the scheme.

Industry Associations could deliver Passport to Export and other mentoring business schemes.

UKTI Marketing Activities

4.1) A considerable proportion of UKTI's operating budget is allocated to marketing and promotional activities, which includes promoting "Brand Britain"—both in relation to inward investment and also in export promotion—as well as publicising its own activities and successes. In the 2007-08 budget year marketing activities accounted for around £18.8 million;[70] and, in addition, accounted for a substantial part of UKTI's staff and administrative budget. This level of marketing and staff expenditure is too high in comparison with UKTI's expenditure on customer-facing business schemes.

4.2) While fundamental business programmes are insufficiently funded, UK industry cannot afford such a high level of expenditure on "soft activities". Marketing is not a substitute for direct sales. Promoting "Brand UK" is not effective if the number of UK exporters entering the marketplace falls, and if companies are not able to pursue sales directly.

UKTI marketing activities must be reduced, and the cost savings ploughed back in to business schemes

Economic Situation;

5.1) Recent UK government policy, as outlined above, has dictated that UKTI should act as a facilitator and advisor, rather than a provider of financial assistance to exporters. This has led to successive reductions in expenditure on international business schemes such as tradeshows and missions, but to a corresponding increase in UKTI expenditure on staff, overheads and advisors. Even before the start of the current economic slowdown in late 2007 and the world financial crisis from autumn 2008, the effects of this policy were being witnessed. UK attendance at overseas tradeshows has decreased and proactive export activity has fallen in many industry sectors. The collapse of the UK's financial services industry, one of UKTI's key "crown jewel sectors", and the increasing difficulties facing UK SME companies in the current economic and financial climate mean that UKTI's policies must change. The organisation's structure must also change to accommodate this change in direction.

5.2) Since the third quarter of 2008, UK Government policy has become increasingly interventionist in its response to the world financial crisis. Enormous sums of credit have been committed in order to shore up the UK's banking and financial institutions. The government has identified the UK's SME industry base as a key factor in the UK's recovery, and has undertaken to support the SME community through the current economic slowdown and credit crunch. As part of this process, the government must support SME companies more effectively as they attempt to trade their way out of recession in international markets. This support must include a greater focus on direct financial support through business schemes.

5.3) Many emerging markets, targeted as priority key markets by UKTI have been affected more severely than the established Western economies. The decline of the UK financial services sector and the worldwide effects of the financial crisis demonstrate the need for a UK trade development policy which supports a broad base of industry sectors. This must allow companies to break into whichever markets they recognise as being the most appropriate for their sector. A policy which focuses resources only onto certain industry sectors and markets will not provide meaningful support to industry at large.

5.4) Following the government's intervention to support the UK's banking and financial sector, strains on the UK's public expenditure and the growing budget deficit are likely to place increasing pressure on public funding. UKTI must seek more cost effective delivery of direct business programmes within its limited budget. Its structure must be reshaped, with resources transferred away from staff and administration costs, and into business schemes which directly support SMEs to penetrate new markets. It is vital that UKTI makes better use of worthwhile intermediaries in order to achieve this.

6.1) The Justification for Working with Industry Associations as Intermediaries:

— Industry associations are predominantly not-for-profit, or industry-owned organisations and are not focused on generating short-term profit at the expense of clients or taxpayers, unlike commercial consultants.

— Many industry organisations already offer export-related services with synergies to UKTI services, allowing delivery of export schemes at little operational cost to UKTI.

— Industry associations and chambers of commerce provide a comprehensive national network across industry sectors and geographical boundaries.

— Industry associations have sector credibility—UK companies value their service offerings and are willing to subscribe continuously to gain access to them.

— Accredited Trade Organisations (ATOs) have a track record of working with UKTI and an infrastructure of cooperation is already in place.

— Most trade associations already have relationships with networks of business service providers, who offer export-related services relevant to export business schemes. These are usually more comprehensive and flexible than equivalent UKTI networks.

Conclusions:

7.1) The current UKTI policy is no longer relevant in the current economic climate.

Its current staff and administrative structure is no longer viable. At a time when government expenditure will come under increasing scrutiny, business and taxpayers will no longer tolerate an organisation which requires a £300 million budget to deliver £30 million of direct business schemes, with such a high proportion of its programme budget spent on marketing.

7.2) Government must review UKTI's policy on export trade support,

It must reconsider its strategy of "capacity building" among UK SME exporters. In the current economic climate, urgent action is required. Government must move quickly to inject a considerable additional investment of funds into business schemes which place exporters directly into contact with overseas markets, such as overseas exhibitions and missions.

7.3) UKTI's infrastructure requires a thorough overhaul.

It must reduce its staff, administration and overheads burden by utilising industry associations more effectively. The new-look organisation must focus on delivering business programmes of direct benefit to exporters. It must deliver these business schemes in the most cost effective manner, using intermediaries who are not interested in making a profit out of the role, ensuring that budget revenue is used for its primary purpose.

7.4) Export promotion business schemes must be re-evaluated openly and honestly.

Industry must play a leading role in directing policy and managing business programmes. Funding must be focused towards those business schemes which offer the best return on investment, which are most valued by exporters. The promotion of overseas inward investment should be separated from the role of export trade development.

7.5) High staff and administrative costs and regional duplication of resources must be reviewed.

These should be eliminated in order to free up resources to be reallocated to customer-facing business schemes. Regional networks should be significantly reduced and limited to those elements of export business support where local intervention is a key factor. Services must be rationalised, and overseas staff and administration costs reviewed from top to bottom. Costs must be dramatically reduced, while the most important and valued elements of services to clients should be retained—if necessary on a commercial basis, but services should be restricted to what is most important to exporters, as agreed by them.

7.6) UKTI should focus its activities on a directorial and project management role.

UKTI must delegate operation of certain business schemes to trusted and credible third parties, such as industry associations. Trade associations and chambers of commerce are able and willing to help to deliver export promotion services, such as market research, export advice and mentoring programmes, including Passport to Export. They could deliver programmes more competitively using their existing resources, and reduce the cost burden on the UK export programme.

20 April 2009