House of Commons - Business, Innovation and Skills Committee

Government Assistance to Industry - Business, Innovation and Skills Committee Contents

Written evidence from the Department for Business, Innovation and Skills (UKTI and ECGD)

1. EXECUTIVE SUMMARY

This paper sets out the joint response from BIS, UK Trade and Investment and the Export Credits Guarantee Department to the Business, Innovation and Skills Committee inquiry into Government Assistance to Industry. It outlines future Government policy to support industry through delivering sustainable growth; banking support; Government programmes and assistance to industry; and steps to encourage exports and inward investment through UKTI and ECGD support.

Delivering sustainable growth

BIS is the department for growth and is committed to fostering long-term sustainable growth which plays a crucial part in cutting the fiscal deficit. In July this year we launched a new growth strategy, setting out our agenda to address the UK's long term challenges, with Government playing a crucial role as an enabler of balanced and sustainable growth.

"A Strategy for Sustainable Growth" is based on the three key strands of: promoting the efficient operation of markets to support growth; smarter public and private investment in the economy, including creating a highly-skilled workforce; and encouraging entrepreneurialism and individual engagement in the economy to support growth. Section 2 of this evidence sets out BIS's approach to delivering sustainable growth and how this will be developed through a cross government Growth White Paper, to be published later in the autumn.

Banking support and Government policy

Ensuring access to appropriate finance is also essential to facilitate business growth. In July, BIS and HMT launched the Green Paper, "Financing a Private Sector Recovery". This shows that ensuring the financial system delivers for business is central to our growth ambitions and that Government intends to work with business and the financial community to ensure that access to finance is not a barrier for companies looking to invest.

The Government already has a range of measures to help ensure that the supply of finance, and the banking sector, supports the economic recovery. An Independent Commission on Banking has been set up to consider the structure of the UK banking sector and look at structural and non-structural measures to reform the banking system and promote competition, reporting in September 2011. There are also frequent meetings with a range of stakeholders across industry, including roundtables with the banks and regular engagement with the Bank of England, Financial Services Authority, Office of Fair Trading and British Banker's Association.

Additionally, BIS has a range of SME access to finance schemes, recognising that ensuring the flow of credit to viable SMEs is vital to support growth. A number of measures to help small businesses access credit have been announced, as well as the continuation of some existing policies. The Enterprise Finance Guarantee (EFG) facility has been increased; the 2nd year of legally binding lending commitments with Lloyds Banking Group and the Royal Bank of Scotland have begun; a Growth Capital Fund and a new Enterprise Capital Fund have been announced; and a "Big Society Bank" will be established using funds from dormant bank accounts. Section 3 of this paper provides further details of these schemes, a range of other current Government interventions and the latest BIS SME lending data.

Government programmes and assistance to industry

Government provides a range of programmes and assistance to industry. These include the Automotive Assistance Programme (AAP), aimed at automotive companies hit by the recession and facing difficulties in financing new investment; and the Strategic Investment Fund (SIF), which has targeted resources to areas where strong opportunities for growth and employment exist and where Government action would make a positive difference (such as the construction of a large-scale industrial Biotechnology demonstrator, development of an innovation campus, and collaborative R&D projects in new generations of wind turbines and air engines). In addition, assistance has been provided through the Working Capital Guarantee Scheme (WCS), which was designed in the midst of the financial crisis as part of a comprehensive approach to stabilising the banking system and maintaining lending to business; and Business Support Programmes (offered under the `Solutions for Business' banner) which deliver a range of help for businesses, covering the whole life cycle from start-up to development and growth.

Government funding of science and research also provides support to industry, with the UK Research Base contributing to economic growth through creating new businesses, stimulating improvement to existing businesses and providing highly skilled people to the job market.

Section 4 of this evidence outlines the objectives, rationale, outcomes and effectiveness, and future of these programmes.

Steps to encourage exports and inward investment

The Government appreciates the key role that exports and investment will play in driving growth over the next few years. As outlined in section 5 of this evidence, actions are being taken to encourage exports and inward investment, recognising that they provide significant benefits to the UK economy through boosting productivity, innovation, R&D, and generating increased profit, sales and jobs.

UK Trade & Investment (UKTI) helps UK-based companies to develop their capacity to trade and to maximise their international success. UKTI also helps bring high quality inward investment to the UK's economy, providing support and advice to investors at all stages of their business decision-making. The focus of UKTI's support; the range and effectiveness of trade and inward investment services it offers; the overseas and UK networks it has established; and relationships with the Regional Development Agencies and Devolved Administrations, are detailed in section 5.1, along with an overview of UKTI's effectiveness and efficiency.

The Export Credits Guarantee Department (ECGD) provides assistance to industry in two main ways: first, by supporting loans to overseas buyers to purchase goods and services from UK exporters, and, second, through providing insurance directly to exporters and investors overseas against the risks of not being paid. ECGD principally supports exporters of capital goods and services and has a small customer base, although hundreds of companies, including SMEs, indirectly benefit from that support through the supply chains of these exporters.

The recent economic downturn has seen an increase in demand for ECGD support. ECGD's response included introducing its first new product for many years. Its levels of new business have risen materially (more than 50%) over the last year; this looks set to continue. Although the business supported by ECGD represents less than 1% of UK exports, ECGD remains an important source of support for certain industrial sectors, such as civil aerospace and process engineering for the oil and gas sectors.

2. FUTURE GOVERNMENT POLICY TO SUPPORT INDUSTRY

Delivering Sustainable Growth

UK economic growth in recent years has been driven by the accumulation of unsustainable private sector debt and rising public sector debt. The Government has taken decisive action to reduce the fiscal deficit and has put this at the centre of its agenda. The OECD and the Governor of the Bank of England also agree that we need early action on the deficit. However, the growth prospects of the UK economy will be undermined if we do not have a credible deficit reduction plan, but equally, deficit reduction over the medium term requires significant and sustained growth. BIS is the department for growth and is committed to fostering long-term sustainable growth, the flip side of spending reduction.

The Government recognises that a new growth agenda is needed to address the UK's long term challenges, with Government playing a role as an enabler of balanced and sustainable growth. In the long-term we need to build a sustainable economy, that is greener, more enterprising, more technologically advanced, more balanced across the regions and grounded in diverse sources of sectoral strength. As outlined in "A Strategy for Sustainable Growth", BIS plays a crucial role in supporting businesses and individuals through the changes needed to return the economy to this sustainable growth. It is about creating an environment that enables businesses to invest with confidence and the conditions for businesses to start out, invest, grow and be profitable. We recognise that we must find efficiencies and reduce our levels of spending, but also that supporting growth-related activity is essential.

"A Strategy for Sustainable Growth" is based on three key strands:

— Promoting the efficient operation of markets to support growth;

— Smarter public and private investment in the economy, including creating a highly-skilled workforce; and

— Encouraging entrepreneurialism and individual engagement in the economy to support growth.

Promoting the efficient operation of markets to support growth

Government plays a critical role in maintaining a stable framework within which businesses can set up and grow. BIS will support industry by creating the best market frameworks through appropriate regulation and ensuring that the regulatory framework is fit for the challenges of the future. Well functioning, competitive markets are essential and we need to provide the necessary certainty for firms to conduct their business with confidence by ensuring our legal and institutional frameworks are fair, efficient and transparent.

BIS has taken the lead across Whitehall in driving the agenda to achieving a level of regulation that promotes competition and stability without impinging on businesses ability to effectively operate. Recently introduced measures such as the Reducing Regulation Committee, a "One In One Out" rule and actions to ensure regulations are regularly reviewed through requiring "sunset clauses" are a critical part of this agenda to support industry and growth. We are also conducting a fundamental review of all legacy regulations left by the previous administration.

It is also key that Britain isn't left behind following the rapid emergence of the large developing economies which have radically reshaped global patterns of production and commerce. Removing barriers to trade globally is a cornerstone of the growth strategy and essential part of the rebalancing agenda. There is a key role for government in driving down, and keeping down, barriers to trade and in helping British businesses to take advantage of opportunities to trade. BIS will continue to work closely with the Foreign and Commonwealth Office and UK Trade and Investment to support this agenda—to strengthen the UK's relations with the fastest growing areas of the world; to press to reduce trade barriers and to support British businesses to ensure they are able to access the support and advice they need to seize overseas opportunities; and to attract foreign investment in to the UK. BIS is currently working with other key government departments to develop a Trade White Paper, setting out the Government's strategy for growth through free, fair and open markets, including trade agreements, promoting trade facilitation and cutting global red tape.

Investment in our productive capacity to drive growth

Investment in the UK's productive capacity is critical to driving growth. Sustainable growth must be driven by the private sector. Government can play a role in encouraging investment by minimising uncertainties and correcting sources of market failure, both in capital markets and in areas where there would otherwise be under-investment as the benefits are not fully recognised by business and individuals. Investing in capital, infrastructure, higher education, science and innovation are all crucial to creating growth and being economically competitive but it is neither optimal nor affordable to rely on government expenditure alone. Public investment is complementary to private investment and we must target any spend in areas that have the greatest impact and also consider where there is the possibility to leverage in greater levels of private investment. Securing improvements in productive capacity may be delivered by providing direct support to industry and industrial projects, through grants, loans or loan guarantees. Where this happens, Government support should be clearly additional (ie the project would not be brought forward by the market alone), and aimed at locking-in wider economic, technological and social benefits.

Significant infrastructure investment—such as in better transport links, ICT, green energy, water and waste—will be needed to maintain our competitiveness as we move to a greener economy. Given the need to reduce public spending, we must look at how greater private sector investment can be facilitated. Infrastructure UK and the publication of the National Infrastructure Plan are key elements of this approach as are changes government intends to make to the planning regime.

Investment in higher education and skills is also integral to supporting the economy and driving sustainable growth. As in all areas, however, reducing the fiscal deficit must mean that public money is used more effectively. Actions already taken include the newly refocused Apprenticeship programme and further work this year to provide incentives to encourage provision and take-up of training in priority areas, including a growth and innovation fund. A consultation document outlining the Government's future strategy for skills, `Skills for Sustainable Growth' was published in the summer and following responses the full strategy will be published after the Spending Review in October. Lord Browne's Independent Review of Higher Education funding and student finance will also report in the autumn.

Additionally, investment in science, research and innovation are essential for the UK economy and long-term growth. BIS will continue to fund the most excellent research and will continue to support collaboration between universities and businesses; the commercialisation of new technologies; and the building of relationships between institutions and businesses which foster the exchange of new knowledge. Innovation policy will focus on realising the benefits of better links between universities, enterprise, skills and access to finance and we are also looking at the facilitative role government can play in developing a network of innovation infrastructure.

Encouraging Entrepreneurialism

The final strand of BIS' strategy to deliver sustainable growth is based on restoring a spirit of entrepreneurialism in the economy and providing the opportunities, or removing the constraints, that limit the ability of businesses and individuals to reach their full potential. Elements of achieving this include making it as easy as possible to start and run a business; encouraging individuals to take more business opportunities; growing enterprise awareness and skills; and supporting existing businesses in growing to their potential by encouraging them to develop their internal capabilities.

It will be important for government to work both with business and with individuals to achieve these aims. The forthcoming White paper on sub national growth will develop proposals for local enterprise partnerships and set out the Government's approach to improving incentives for local economic development. Government also needs to work more collaboratively, both through working in partnership with business but also encouraging businesses to work better together to identify and address barriers to growth. Rather than supporting individual businesses, there is a role for BIS in understanding the impact government has in delivering horizontal policies and where the challenges are faced by certain sectors and industries. Manufacturing or low carbon industries are good examples of where this approach is needed to ensure UK businesses are best positioned.

Government also needs to work more closely with individuals; ensuring they have access to quality information to drive informed choices about their skills needs and work prospects; and enabling those at the lower end of the labour market to access the skills and training needed to enter and progress in work. There is also the need to work with employers to help them make full use of their workforce and ensure more satisfying and better quality jobs; to provide advice to help them make more informed choices on skills; and work to ensure skills are better aligned with employers' priorities and the benefits can be better captured.

Developing the Growth Strategy

Government's agenda to achieve sustainable economic growth will be built upon in the cross government Growth White Paper, to be published later in the autumn. The White Paper will analyse the current economic conditions and set out what further we can do to remove barriers and enable strong and sustainable growth by improving our productivity and increasing levels of employment.

Rebalancing the Economy

The Government is committed to rebalancing the economy and is undertaking significant reform to unleash the economic potential of localities. A key element of this involves the creation of local economic partnerships. In addition, the Government will create a £1bn regional growth fund which will have two main objectives:

— To encourage private sector enterprise by providing support for projects with significant potential for economic growth and create additional sustainable private sector employment.

— To support in particular those areas and communities that are currently dependent on the public sector make the transition to sustainable private sector led growth and prosperity.

3. BANKING SUPPORT AND GOVERNMENT POLICY

The growth strategy outlined in the previous section recognises that access to appropriate finance is important to facilitate business growth and that a key challenge is to ensure that the supply of finance in general, and the banking sector in particular, supports the economic recovery rather than constrains it.

The recently launched Green Paper, "Financing a Private Sector Recovery", shows that ensuring the financial system delivers for business is central to our growth ambitions and government intends to work with business and the financial community to ensure that access to finance is not a barrier for companies looking to invest.

"Financing a Private Sector Recovery", sets out the range of finance options for different sized businesses, explores where the market is failing to provide and if there is a role for government intervention. Although government already plays a key role in supporting access to finance, risks remain to the supply of finance as the economy recovers and demand increases. Ensuring sufficient finance is available to businesses as confidence recovers is of central importance.

Through the consultation document, BIS and HM Treasury are seeking views on whether there are further actions needed from industry, financial institutions or Government and what form this should take. Potential risks surround the future price and availability of finance but where problems are identified, industry and market-led solutions are generally preferred. However, the Government recognises the need for stable financial conditions for business and if needed stands ready to act to prevent downside risks to the economic recovery materialising. While government has already set out a number of criteria which any intervention must meet, responses to the consultation will also be used to inform any future intervention and will be used to understand how business and the government can better work together to produce a diverse, competitive and sustainable financial environment.

The deadline for responses to the Green Paper was 20 September, enabling them to be used in informing the spending review. Following this, the Government will publish a summary of responses, giving feedback on how the consultation process influenced government policy.

The Green Paper also announced a task force led by the British Bankers Association, which will identify, analyse and review ways the banking system can, over the next three years, help viable UK businesses of all size access appropriate finance and other support.

Independent Commission on Banking

The Government has also announced the set up of an Independent Commission on Banking, which will consider the structure of the UK banking sector and look at structural and non-structural measures to reform the banking system and promote competition. The Commission will produce a final report by the end of September 2011, formulating policy recommendations with a view to:

— Reducing systemic risk in the banking sector, exploring the risk posed by banks of different size, scale and function.

— Mitigating moral hazard in the banking system.

— Reducing both the likelihood and impact of firm failure.

— Promoting competition in both retail and investment banking with a view to ensuring that the needs of banks' customers and clients are efficiently served, and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail.

Government Engagement with Industry and Banks

Government has frequent meetings with a range of stakeholders across industry, on a collective and bilateral basis. These include recent roundtables with the banks, as well as regular engagement with organisations such as the Bank of England, Financial Services Authority, Office of Fair Trading and British Banker's Association.

Effective engagement is key to improving communication between banks and businesses. Following on from the Previous Small Business Finance Forum, a Small Business Economic Forum will be chaired by the Minister for Small Business. Membership will be similar to that of the SBFF, although individual entrepreneurs will be invited and banks will only attend when relevant items are on the agenda.

3.1 SME ACCESS TO FINANCE SCHEMES

Ensuring the flow of credit to viable SMEs is essential for supporting growth and is a core priority. Government is not only committed to increasing the flow of lending to SMEs, but also to improving the standards and behaviour that businesses can expect from banks.

In that respect, Government has announced a number of measures that will help small businesses access credit, as well as the continuation of existing policies:

— An increase in the Enterprise Finance Guarantee (EFG) of £200 million to support £700 million of additional lending until 31 March 2011. In addition, a processing target of 20 working days was introduced for each of the main lenders from 1 August 2010.

— Year 2 of the legally binding lending commitments with Lloyds Banking Group and the Royal Bank of Scotland began on 1 March 2010. LBG committed to lend £44 billion to businesses, including £11 billion to SMEs and £33 billion to mid and large corporates. The Royal Bank of Scotland committed to lend £50 billion to businesses, including £30 billion to SMEs and £20 billion to mid and large corporates.

— A Growth Capital Fund to address a gap in the market for growth capital for SMEs.

— A new Enterprise Capital Fund to provide early stage risk capital to innovative small business with high-growth potential.

— Use of funds from dormant bank accounts to establish a "Big Society Bank" that will provide new finance for neighbourhood groups, charities, social enterprises and other non-government bodies, and creation of a Green Investment Bank.

Enterprise Finance Guarantee Scheme (EFG)

The Enterprise Finance Guarantee is a loan guarantee scheme for lenders to enable them to provide additional lending to viable SMEs. It addresses the long term market failure in the provision of debt finance to credit-worthy SMEs which lack collateral or track record, who are unable to secure a normal commercial loan.

Following an announcement in the June Emergency Budget, the facility was increased from £500 million to £700 million for this financial year, facilitating additional bank lending to viable SMEs.

A network of 46 approved lenders is providing access across the whole of the UK, and since becoming operational in January 2009, as of 4 August 2010 the scheme has achieved the following:

— 14,175 eligible EFG applications with a value of over £1.58 billion have been recorded.

— 11,245 businesses have been offered loans totalling £1.15 billion.

— 9,600 businesses have drawn down loans with a value of £960.7 million.

Enterprise Capital Fund (ECF)

A new £37.5 million Enterprise Capital Fund to provide early stage risk capital to innovative small businesses with high growth potential was announced in the Emergency Budget. Government will commit up to £25 million, with the remainder coming from the private sector. ECFs are used to establish funds targeting investments of up to £2 million to provide venture capital on commercial terms for innovative SMEs with high growth potential in the "equity gap" that have the potential to provide a good commercial return. Previous ECFs have secured total investor commitment in the ECF programme to £238.6 million of which BIS commitment represents £156.2 million and private investors the remaining £82.4 million. As at 31 March 2010, 70 portfolio companies have received a total investment of £72.6 million.

Growth Capital Fund

The Budget also confirmed the creation of a Growth Capital Fund, to provide funding of between £2 million and £10 million for small and medium-sized businesses (SMEs) with strong growth potential, to address the funding gap identified by the Rowlands Review of Growth Capital published in November 2009.

Current Government Interventions

— Microfinance—Community Development Finance Institutions (CDFIs) undertake enterprise lending in disadvantaged communities or groups who are unable to access finance from mainstream banks. They are supported by Community Investment Tax Relief (CITR) and Regional Development Agencies (RDAs). BIS is also supporting work developing the capacity of the sector at a national level though the CDFA (CDFI's trade association).

— European Investment Bank (EIB) SME Facility—In 2008, £1 billion of EIB funding was negotiated by UK banks for SME on-lending, against an overall UK share of £4 billion of EIB lending between 2008 and 2011. EIB makes credit lines available to lenders with good credit rating at close to sovereign debt rates, enabling them to on-lend to SMEs at a competitive rate. Of that £1 billion, around £700 million of SME applications for funding have already been agreed by UK banks.

— Aspire—A £25 million co-investment fund (with up to £12.5 million of public funds) aimed at high growth businesses seeking equity of £100,000 and £2 million. The fund acted as a beacon to encourage female entrepreneurs to seek appropriate risk capital finance; to demonstrate that attractive and viable investment opportunities existed; and to provide improved investment readiness support. As at 30 June 2010 a total of £1.9 million had been invested.

— Capital for Enterprise Fund (CfEF)—set up as an overall response to the acute difficulties SMEs were facing accessing finance and sustaining their businesses during the financial crisis and recession, CfEF was a £75 million time limited scheme from January 2009 to March 2010, when it ceased making new investments. It provided equity or quasi equity investments of up £2 million, targeted at SMEs that had exhausted their normal borrowing capacity. So far 30 businesses have received investment totalling £41.6 million, and twelve businesses have accepted the terms of the funding offered with a total value of £17.6 million. We believe there is demand remaining for this type of intervention which provides investment flexibly through debt, equity or mezzanine finance. Part of this demand is met through EFG, and work is continuing on the development of a Growth Capital Fund, as confirmed in the June Budget.

BIS SME Lending Data

Data supplied to BIS from the main lenders to SMEs at May 2010 indicate that:

— Demand for credit remains subdued—the number of applications per working day was 4.5% down on a year ago and almost a fifth below the level in May 2008;

— Approval rates continue to edge upwards—currently at around 69% for loans and 75% for overdrafts for businesses with turnover of under £1 million.

— The value of loan draw-downs was the lowest since data is available at £1.8 billion—under half the value of the peak in early 2008.

— Repayments were £200 million greater than draw-downs, continuing the high levels of repayments seen over the past 18 months.

— Stock of lending was £118 billion at end of May, down £2.8 billion on peak reached in March 2009.

— The subdued outlook from these figures reflects the fact that there is relatively little new lending as demand for finance for new investment is subdued and companies continue to de-leverage.

— Little is known for certain about the extent of debt aversion or discouraged demand. A distinction should be made between "pure" discouraged demand (where SMEs believe applications will be rejected and therefore do not apply for a loan) and secondary discouraged demand (where SMEs believe they would be accepted but that the price or other conditions would be unacceptable).

4. GOVERNMENT PROGRAMMES AND ASSISTANCE TO INDUSTRY

Government provides a range of programmes and assistance to industry. Details of a selection of these are given below, including those specifically highlighted in the announcement of this inquiry.

4.1 AUTOMOTIVE ASSISTANCE PROGRAMME

Objective

The Automotive Assistance Programme (AAP) was announced in January 2009 by the previous Government. It was aimed at automotive companies hit by the recession and facing difficulties in financing new investment to ensure continued investment in:

— Development of cutting-edge green technologies that can contribute to CO2 reduction, and a low carbon future for the industry.

— Advancement of research and development (R&D) in UK vehicle manufacturing.

— Creating and sustaining jobs.

Rationale

The automotive industry is a pivotal part of the UK manufacturing sector. Whilst the manufacturing sector as a whole was down 5.5% in the year to February 2009 compared to the previous year, automotive sector output was down 14% on the same basis. In response, the then Government introduced a range of measures to support the automotive sector through the recession—including the Automotive Assistance Programme.

Outcome

AAP has provided a £360 million loan guarantee to Ford Motor Company Ltd, in support of their £450 million loan from the European Investment Bank (EIB) to fund six projects in the UK worth a total of £1.5 billion to support R&D and production investment related to new generation, environmentally friendlier vehicle and engine technologies.

In addition, three formal offers of support were made under AAP to General Motors Europe, Jaguar Land Rover, and Tata Motors European Technical Centre (TMETC). These were not taken up due to the applicants' success in accessing financial support elsewhere.

Other companies, who expressed an interest in the scheme and discussed it with officials, have found that the willingness of Government to engage has allowed them to find support or external investment without a government guarantee—either through their bank, or with support from their parent company or key Original Equipment Manufacturer (OEM). The details of such companies are commercially confidential.

Future

AAP was introduced by the previous Government on an exceptional basis during a period of acute stress for the industry and in a very particular set of economic and financial circumstances. As was proper, we have reviewed outstanding automotive decisions made by the previous Government and are winding up AAP appropriately, but the acute crisis is over and the AAP is no longer accepting new applications. The Government is considering those cases left in the AAP "pipeline" on their merits. Rules under the EU Temporary Framework for State Aid prohibit the current scheme from operating after 31 December 2010.

4.2 STRATEGIC INVESTMENT FUND

Objective

The Strategic Investment Fund (SIF) is a two-year, predominantly capital fund consisting of around 45 projects and programmes. Following rigorous prioritisation and appraisal processes the SIF has targeted resources to areas where strong opportunities for growth and employment exist and Government action would make a positive difference.

SIF intervention is aimed at those industries or areas of the supply chain where there are barriers to the commercialization of technology and where there is evidence that the UK could have a comparative advantage. It is geographically diverse to ensure widespread benefits across the UK economy.

Rationale

With manufacturing supply-chains increasingly global in nature, SIF supports areas in which UK capabilities are able to attract high value jobs and processes for UK industries. SIF helps firms exploit new "platform technologies" that are relevant to multiple sectors and long supply chains. Key areas include composites, plastic electronics and industrial biotechnology, where investment is aimed at use by SMEs, with open access facilities, as well as larger firms.

Outcome

Below are some examples of where SIF funding is being deployed:

— The construction of a large-scale Industrial Biotechnology demonstrator at Wilton, Teesside (£12 million of funding) which will enable companies (including SMEs) to scale up and develop bio-based processes to commercialise new products. Forecasts indicate that in 2025, the market for these chemicals could be worth up to £360 billion worldwide.

— The Printable Electronics Centre in County Durham is being expanded (£12 million funding) to become a national centre of excellence in plastic electronics, a technology that could underpin growth across in a range of sectors. The Centre will offer capability in ultra-efficient lighting and photovoltaic manufacturing, contributing to the low carbon agenda.

— An innovation campus in Stevenage (£12 million funding) is being developed in partnership with, among others, GlaxoSmithKLine. It will provide incubation facilities for new life sciences companies involved in drug discovery and development, and was flagged in the Dyson report as an example of best practice in industry and research base collaboration.

— SIF funding is also directed at developing the low-carbon sector where demand is under-stated in the market as commercial solutions are related to long-term environmental needs. This includes collaborative R&D projects in new generations of wind turbines and air engines, test facilities in offshore wind and marine power, and low carbon vehicles, including accelerated deployment of an electric vehicle charging infrastructure in the UK.

— SIF supports science and research that the market exploits but wont always fund itself, such as "science clusters"—facilities which provide access to specialist equipment, services and knowledge-sharing in pre-commercialised science.

— A new International Space Innovation Centre (ISIC) at Harwell (£12 million funding) will establish a centre of excellence to exploit data generated by satellites, use space data to understand climate change, and enhance the security of space systems and services.

Future

SIF is a time-limited fund; all spend needs to be completed by April 2011. Most SIF funding forms part of larger projects whose effectiveness can only be evaluated longer-term. We will conduct an initial evaluation of the main SIF projects in 2012, with a final evaluation conducted in 2015.

4.3 WORKING CAPITAL GUARANTEE SCHEME

Objective

The Working Capital Guarantee Scheme (WCS) was announced in January 2009 as part of the package of measures to help manage the impact of the recession on businesses in the UK. Its purpose was to enable banks at the time of the credit crunch to provide new lending to businesses operating in the UK. It was designed to help stabilise the financial system by providing banks with the capital required to meet business lending requirements, working in conjunction with other Government initiatives such as the Asset Protection Scheme to help companies through the difficult economic climate.

Rationale

Prior to the credit crisis, UK financial markets were able to provide the majority of business with the finance required. During the credit crunch bank lending was constrained by inadequate levels of bank capital. It was feared this would impact on corporate lending leading to rising insolvency rates.

Under the Working Capital Guarantee Scheme, Government provided banks with guarantees covering 50% of the loan value on portfolios of working capital loans with less than 12 months to maturity. This guarantee in turn released regulatory capital for the banks. Participating banks were required (through Lending Agreements) to increase lending on normal commercial terms to SME and Mid Corporate UK businesses. Like the Asset Protection Scheme, but unlike the Enterprise Finance Guarantee Scheme, companies themselves did not apply for the guarantees under the Working Capital Scheme.

Outcome

Royal Bank of Scotland and Lloyds Banking Group obtained WCS guarantees totalling £2.2 billion out of the £10 billion guarantee offered to all UK banks. The RBS and Lloyds portfolios contained £4.4 billion of short term commercial loans. The scheme was designed in the midst of the crisis as part of a comprehensive approach to stabilising the banking system and maintaining lending to business.

The Working Capital Guarantee Scheme is operating within its expected parameters. The quality of the loans and the expected probability of default are carefully monitored through management information provided by banks. Maximum exposure to BIS on any single default is £25 million. To date there have been no defaults and no claims have been made. The Scheme is designed to break-even, so that no final costs fall to the Government. Like all insurance schemes, the insurance premiums are calculated on assessments of the likely future risks. As of 7 September 2010, premiums received by BIS amounted to £11.8 million.

Future

In November 2009 it was announced that new guarantees would not be available under the Working Capital Guarantee Scheme, as similar Government support was now available through the broader Asset Protection Scheme. Existing guarantees will remain in place until 31 March 2011.

4.4 BUSINESS SUPPORT PROGRAMMES

The table below summarises the support from government to help businesses succeed, provided under the "Solutions for Business" branding in England. These products deliver a range of help for businesses, covering the whole life cycle from start-up to development and growth. The portfolio is flexible, with new business support products made available when the need exists.

Product and Area Target Type of Support

Start Up

Enterprise Coaching Groups unlikely to be involved in enterprise Mentoring

Intensive Start Up Support Under-represented start-ups Advice and small grants

Business Mentoring (pilot) SMEs Mentoring

Starting a Business Start-ups Advice and guidance

Starting a High Growth Business High-growth potential start-ups Advice, guidance, mentoring

Access to Finance

Enterprise Finance Guarantee SMEs up to £25 million turnover Loan Guarantee

Finance for Business SMEs Finance Fund

Small Loans for Business Start-ups/SMEs Loan (up to £50,000)

Skills

Train to Gain All Sectors/Sizes Funding for training

Business Growth

Business Collaboration Networks Specialist intermediaries Intermediary Funding

Business Premises Commercial property developers Intermediary Funding

Coaching for High Growth SMEs Coaching

Manufacturing Advisory Service Manufacturing SMEs Specialist Advice

Grant for Business Investment Disadvantaged Areas Financial Grant

Innovation Advice and Guidance SMEs Specialist Advice

Designing Demand SMEs Specialist Advice

Understanding Finance for Business SMEs Specialist Advice

Selling to the Public Sector (pilot) SMEs Advice and Training

Transformational ICT (pilot) SMEs ICT Advice

Innovation

Specialist Facilities and Environments Specialist intermediaries Intermediary Funding

Collaborative Research and Development All Sectors/Sizes Grant Funding

Grant for Research and Development Start-ups/SMEs plus all Low Carbon sector Grant Funding

Innovation Vouchers (pilot) SMEs Funding for R&D Support

Knowledge Transfer Partnerships All Sectors/Sizes Financial Support for Specialist Placement

Networking for Innovation Specialist intermediaries Intermediary Funding

Environment and Efficiency

Improving Your Resource Efficiency All Sectors/Sizes Specialist Advice

Low Carbon Energy Demonstration Low Carbon Sector Grant Funding

Rural Development Programme for England: Business Support Rural SMEs Training and Grants

International Trade

Accessing International Markets All Sectors/Sizes Specialist Advice and Financial Support

Developing Your International Trade Potential All Sectors/Sizes Advice, Training and Funding

Export Credit Insurance All Sectors/Sizes Insurance/Loan Guarantee

Maximising Foreign Direct Investment Overseas Companies Inward investment support

Train to Gain

Train to Gain is the main mechanism through which Government provides skills and training support for businesses, and is open to employers of all sizes and sectors in England. It aims to develop the skills of employees as a route to improving overall business performance. Free, expert support is available to help employers to make an assessment of their skills needs and identify and access appropriate training solutions. Eligibility for funding or subsidies is identified to enhance the employers own investment in skills, reflecting the shared responsibility for training.

In 2008-09 over 817,000 Train to Gain programmes were started, resulting in over 540,000 achievements.

4.5 SCIENCE AND RESEARCH WORKING WITH INDUSTRY

Science and Research lie at the heart of many of those areas the UK will need for growth and to rebalance the economy. The UK Research Base contributes to economic growth through creating new businesses, stimulating improvement to existing businesses and providing highly skilled people to the job market. The strength of the research base helped attract 250 R&D investments in Britain in 2007-08 and a further 200 during 2008-09. Research Councils provide funding to universities and other eligible organisations, rather than funding for business, but through collaborative grants and other activities, they currently work with around 3,000 companies. The Engineering and Physical Sciences Research Council, for example, already spend over 40% of their budget in collaboration with business (£340m per annum). Universities work directly with many more firms. BIS is working with Research Councils to drive up the economic impact of their research further, and universities will be further encouraged to work with businesses with the development of the "Research Excellence Framework", which will assess the quality of research in UK universities.

The Higher Education Innovation Fund (HEIF) is the primary Government incentive to encourage universities to interact with business. It is allocated to English universities to enable them to build capacity and capability to work with business and other external organisations. HEIF funding strengthens technology transfer offices, provides proof of concept funding to help commercialise intellectual property outputs, and supports business development functions. BIS is working with HEFCE to focus HEIF on further increasing university-business interactions.

5. STEPS TO ENCOURAGE EXPORTS AND INWARD INVESTMENT

The Government is clear that exports and investment will be the key drivers of growth in the next few years, providing significant benefits to the UK economy through boosting productivity, innovation, R&D, and generating increased profit, sales and jobs.

5.1 UK TRADE & INVESTMENT

UK Trade & Investment (UKTI) is the government organisation that helps UK-based companies succeed in the global economy, tailoring its services to the needs of individual businesses to help them maximise their international success. UKTI also helps bring high quality inward investment to the UK's economy, providing support and advice to investors at all stages of their business decision-making.

Current economic challenges mean that UK businesses must be flexible, innovative and able to seek out opportunities throughout the world. UKTI services help to position UK companies as the global trading partners of choice, promoting and building the UK's reputation, and working to attract high-value investment to the UK, with support focused on:

— strengthening the social networks (contacts, knowledge, advice, etc) that underpin international trade and investment flows, helping individual businesses to gain access to key contact networks by acting as a trusted intermediary;

— building and strengthening the capability of innovative and high growth businesses to maximise their chances of succeeding in international markets;

— providing access to information and advice the private sector alone would not or could not provide, both to inward investors and to potential UK exporters;

— building UK reputation as a backdrop for potential investors/overseas buyers; and

— facilitating co-operation among businesses, enabling them to work together to overcome barriers and develop international trade and investment opportunities.

Trade Services

UKTI trade services help companies from all sectors who can lead sustainable UK growth. Helping these companies to gain access to new business overseas enables them to generate additional revenues and to maximise the returns on their investment in R&D and innovation, thereby increasing resources available for them to invest in growth and innovation. Many customers also improve their products and services by gaining exposure to new contacts and new ideas.

UKTI offers a range of support services to UK companies, providing individually tailored packages of practical assistance to help them develop the capacity needed to trade internationally, including:

— Access to a local International Trade Advisor to help develop a plan of action;

— Specialist help with tackling cultural and language issues;

— Advice on how to go about market research; and

— Ongoing support to help businesses continue to develop their export potential and enter new and more sophisticated markets.

Once the initial research has been done, UKTI can assist new and experienced exporters with information, contacts, practical assistance, advice, mentoring and ongoing help before they go overseas and while they are there, including:

— Tailored information and advice about the market (normally a chargeable service), which can include identification of relevant business contacts, and facilitation of introductions, for example through arranging meetings or networking opportunities on the client's behalf;

— Alerts to the latest business opportunities through its website.

— Support to participate in trade fairs overseas;

— Opportunities to participate in sector-based trade missions and seminars;

— Access to major buyers, governments and supply chains in overseas markets;

— Advice on forming international joint ventures and partnerships;

— Exploratory visits to new markets;

— Access to marketing toolkits and support on marketing overseas.

Independent evaluations of the effectiveness of trade services carried out for UKTI consistently find strong firm-level impacts and high benefit:cost ratios, demonstrating a very cost effective means of enabling UK exporters to exploit overseas markets and facilitating stronger growth. UKTI helped 23,600 UK businesses in 2009-10, with the latest independent surveys showing that:

— British companies attributed an additional £5 billion to their bottom line profits as a result of working with UKTI, up from £3.6 billion the previous year, representing £19 benefit for each £1 spent on UKTI trade services, up from £16:£1 the previous year.

— The £5 billion additional profit reported by UKTI clients represents over £35 billion additional UK exports generated as a direct result of the support UKTI provided.

— 41% of UK companies reported new or safeguarded jobs as a result of using UKTI trade services, with 23% reporting the former.

— 67% of UKTI customers reported significant business benefit from upgrading their approach to overseas markets, gaining access to contacts and information not otherwise accessible, and overcoming legal or regulatory difficulties or cultural differences affecting access to opportunities overseas.

— 39% of UKTI clients expect substantial growth over the next five years compared with 23% of other UK exporters. Some 87% of UKTI trade clients expect at least moderate growth, as compared with 78% non-user exporters. UKTI users are also more likely to have grown substantially over the previous five years.

— On average, UKTI trade support generates an additional £65k of R&D per trade client. This reflects the important role trade support plays in increasing UK innovation capability and R&D;

— Some 53% of all businesses assisted through UKTI trade services, to the end FY 2009-10, improved their business performance as a direct result of UKTI support.

— UKTI helped 23,600 UK businesses during 2009-10, up from 20,700 the previous year. Combined with the increasing average impact, this reflects a real rise in productivity.

— 60% of UKTI users, and 40% of non-user exporters expect to be selling to a larger number of markets within 3 years. 66% of UKTI trade clients, and only 43% of non-user exporters, expect to increase the export proportion of their turnover over this period.

Inward Investment Services

High quality inward investment creates jobs and stimulates productivity growth in other firms, via competition effects and knowledge spillovers. UKTI is the national lead for delivering foreign direct investment, providing a free, bespoke and confidential service to potential inward investors on a range of issues, dependent on the company/project nature and requirements, and the stage of development. UKTI Account management teams are constantly working with some 2000 investment projects that are in the pipeline for the UK at any one time. Investment services include:

— Segmentation and bespoke proposition development—to ensure a tight focus on the needs of high value investors in making global location decisions.

— Outstanding access to Government and other networks relevant to the success of investment projects and ensured by client relationship management of the 200 most strategically important investors led at a senior level in UKTI, BIS or another directly relevant Government Department.

— Targeted marketing to cover subjects such as the UK business environment, sectoral and sub-sectoral information, and bespoke sales information, all the way to key information needed to reach the final decision to invest in the UK.

— A systematic investor development programme to ensure UKTI remains a high value-adding partner for those investors growing their business in and from the UK. Foreign-headquartered companies that have a UK presence can also avail themselves of the full range of UKTI export services.

UKTI's investment network helps Government to develop a better understanding of investor concerns and ensure that investment drivers are considered in all areas of policy development. UKTI regularly raise with Whitehall Departments issues such as planning, transport infrastructure, migration, and skills availability.

Evidence shows that help from UKTI can have significant influence on investor decisions, resulting in a more than seven fold increase in High Value Foreign Direct Investment (FDI) over the past four years, helping to maintain the UK as a top location in Europe for inward investment, and globally second only to the USA. In 2009-10, UKTI played a role in securing 759 investment projects into the UK—almost half the total UK figure of 1,619 and a 26.5% increase on the previous year. These projects have helped create some 47,000 jobs (more than 32,000 new jobs created and some 14,000 jobs safeguarded), a 61% increase on 2008-09.

Over 70% of inward investors report some significant influence from working with UKTI, most often through enabling the inward investor to overcome barriers to accessing information and contacts. Within this, 49% said UKTI had influenced their decision to locate in the UK. Some 57% report significant business benefits as a result of UKTI help enabling them to overcome such barriers.

Overseas and UK Networks

UKTI works across both BIS and the FCO, with some 1,300 people delivering services in 162 locations in 96 overseas markets, covering in excess of 98% of global Gross Domestic Product (GDP). This overseas presence is bolstered by the formation of a new UKTI-FCO Commercial Task Force that will drive a central commercial imperative into all aspects of FCO activity to support the whole of government to deliver for UK business.

In the UK, UKTI works with businesses in a variety of ways, including engaging private sector organisations to deploy local networks of specialist trade advisers who are able to offer help to exporters and potential exporters across England. UKTI also has sector-based teams working closely with key industry partners nationally to direct the UK's export efforts in a number of important sectors.

UKTI also works closely with external partners, engaging with Chambers of Commerce, Universities, banks and the business representative organisations such as the CBI and IoD. Nationally, UKTI sector teams work closely with a wide variety of trade associations, major UK corporate businesses and key people from the sectors with global business experience.

Regional Development Agencies and Devolved Administrations

UKTI's local networks are currently organised regionally along the same geographic lines as the RDAs. While UKTI delivers trade development support as part of a UK strategy, our teams in the English regions have always maintained a close dialogue with RDAs, ensuring trade development work is aligned with the economic development work of the RDAs and giving UKTI visibility of the broader economic strategies being pursued by the RDAs. UKTI expects to maintain these close working relationships locally once the new Local Enterprise Partnerships are created. UKTI is already working with BIS and the RDAs to establish the most effective and efficient way of continuing to provide essential support at a sub-national and local level for foreign direct investors. Detailed structures, functionality and costings of a new delivery model will be developed, with the aim of implementing the new arrangements from 1 April 2011.

At the BIS Select Committee session of 20 July, the point was raised that a disproportionate number of UKTI involved projects went to London and the South East compared with the regions in the North (North West and East and Yorkshire & Humberside). Historically, London has taken around 40% of all involved investment projects. However, many of these would be an initial footprint, creating a small number of jobs; expansion to other regions would often follow.

The Devolved Administrations (DAs) have fully devolved powers for all trade and investment activities. As well as delivering their own suite of services to local businesses, the DAs have access to the majority of UKTI services, including the resources available from the commercial teams in overseas Posts. UKTI maintains good working links with all three DAs and co-ordinates UK wide activities through the International Business Development Forum, on which the DAs play an active role.

UKTI Effectiveness and Efficiency

UKTI is assisting more businesses than ever at a diminishing cost to the taxpayer. Over the last three years, UKTI has cut the average cost of assisting business by 25% from around £14k to around £10.5k now. Over this same period, the quality of our work and the satisfaction of our trade customers have remained steady, and the number of businesses who have recorded improved performance as a result of working with UKTI has increased. Taken together this is a strong demonstration that UKTI is becoming more efficient and effective while maintaining the standard of service to our trade customers.

UKTI supports overseas companies looking to invest or expand their operations in the UK, through managing relationships and working closely with key clients. Consequently, efficiency and productivity are not measured in exactly the same way as trade services. We undertake an extensive analysis of the effectiveness of our Inward Investment network, providing a rigorous assessment of performance that allows us to optimise our use of resources. The average cost of UKTI's support to each inward investment project has greatly reduced over the last three years, dropping by 27% from around £147K to £107K. This is set against a backdrop of continuing delivery of high value inward investment wins, which further demonstrates UKTI's efficiency and effectiveness.

5.2 EXPORT CREDITS GUARANTEE DEPARTMENT

Introduction

ECGD is the UK export credit agency (ECA). ECGD supports UK exports and investments made overseas by issuing insurance contracts to exporters and investors and guarantees to banks that make loans to overseas borrowers. ECGD does not lend directly.

Most industrialised nations have an ECA that supports exports by providing government-backed guarantees, insurance and sometimes loans. The status of ECAs varies: in some countries private companies write business for the government account (France, Germany), while in others they are public bodies (the Canadian ECA is a Crown corporation). ECGD is, uniquely, a government department.

Regulatory framework

ECGD's operations are bound by:

(i) statute (the Export and Investment Guarantees Act 1991, as amended by the Industry and Exports (Financial Support) Act 2009) and its standing consent from HM Treasury;

(ii) government policy that ECGD should:

(a) complement, not compete with, the private market;

(b) price to risk and to comply with its financial objectives;

(d) seek to achieve a level playing field internationally among government-backed ECAs; and

(e) take account of the Government's wider policies in the exercise of its primary purpose of supporting UK exports and overseas investments;

(iii) international agreements that emanate from the WTO (the Agreement on Subsidies and Countervailing Measures), the OECD (principally the Arrangement on Officially Supported Export Credits), and the EU (the Short Term Communication).

As a public body, ECGD must also comply with the Freedom of Information Act and the Environmental Information Regulations. Exporters, banks, buyers, project sponsors and overseas governments who seek ECGD support must be aware that information provided to ECGD may be disclosable publicly in accordance with the terms of freedom of information legislation, even where that party may consider it to be sensitive or commercially confidential.

Although ECGD enters into private law contracts with exporters and banks, as a public body ECGD's decision-making must comply with its public law obligations and, accordingly, can be challenged through Judicial Review.

BUSINESS OPERATIONS

Operating model

Unlike a private sector insurer or bank, ECGD does not seek to create demand but to respond to it (see also customer base and market awareness below). ECGD must be satisfied that the transactions it supports are acceptable in terms of:

Credit risk

Environmental and social impacts

Bribery and corruption

Sustainable lending

These requirements may constrain ECGD's ability to be flexible in the provision of its support for exports.

Business domain

Since 1991, following the privatisation of ECGD's Insurance Services Group which was responsible for providing trade credit insurance for exports such as raw materials, consumer durables, components or light manufactures, sold on short terms of credit (usually up to 180 days), ECGD's role has been principally to support exports of capital and semi-capital goods and services, normally, but not exclusively, sold with medium/long-term credit (two to 15 years). Such exports include commercial aircraft, construction projects, defence, and hydrocarbon and telecommunications-related equipment and services.

In common with most other ECAs, ECGD is able to support "foreign content" included in an exporter's contract, usually in situations where certain goods cannot be sourced domestically, the buyer requires certain goods to be sourced from other countries, or UK prices are too expensive. ECGD requires a minimum of 20% UK content.

Volumes of exports supported

Over the past decade there was a gradual decline in the amount of exports supported by ECGD (see Annex A), largely as a result of the changes in the pattern of capital goods manufactured in the UK, and the benign risk conditions that prevailed over most of this period causing support to be provided by private markets and not from ECGD.

The economic downturn in 2008-09, however, led to a material increase in demand for ECGD support, largely due to the scarcity and increased cost of credit internationally and to a deterioration in the global risk environment. As well as receiving more applications for support in emerging markets, ECGD has also been requested to provide support for exports to developed markets which previously had not required such support because insurance and finance could be readily obtained from private markets.

In 2009-10, ECGD supported £2.21 billion of new business (up from £1.46 billion in 2008-09), due primarily to an increase in Airbus transactions. ECGD expects to see a further material increase in the amount of exports it supports by the end of this financial year (March 2011), possibly by over 50% by comparison with the previous financial year. The increase in demand has been across a number of sectors, led principally by civil aerospace and the oil, gas and civil construction sectors.

ECGD's total exposure to credit risk is just under £16.5 billion (July 2010).

A consequence of the downward trend in business over the last decade was a reduction in ECGD's premium income, part of which finances the cost of its operations. ECGD accordingly took steps to increase its operational efficiency and effectiveness and to cut its cost base, including reducing staff numbers from an average of 366 in 2003-04 to 207 in 2009-10. Despite the recent increase in demand, ECGD expects, without negatively impacting on its ability to support exporters, to reduce its staff numbers further over the lifetime of this Parliament in compliance with government policy to reduce the costs of the public sector.

Customer base and market awareness

ECGD mainly supports a core of large exporters, particularly Airbus and Rolls-Royce. It does provide support to SMEs under the Sovereign Star Trade Finance facility, which is a financing programme aimed primarily at supporting SME export contracts. The exporters supported since April 2000, including SMEs, are detailed at Annex B. Many hundreds of other companies, however, have benefited from ECGD support indirectly through supply chains. Since the onset of the economic downturn, ECGD has received inquiries and applications for support from a wider range of exporters than in previous years.

Within the resources available to it and consistent with not competing with the private sector, ECGD actively promotes its products to the exporting community, both directly and through trade bodies and banks, with the aim that exporters should be aware of them and, where appropriate, take advantage of them. Over the last two years, ECGD has particularly sought to make contact with UK renewable energy companies so that they are aware of how ECGD may assist them to expand their export efforts. ECGD also promotes its products overseas, particularly to project sponsors engaging in substantial investment programmes with the aim that their procurement decisions should take into account the availability of ECGD-backed finance in order to assist UK exporters pursuing business.

Collaboration with UKTI

Although much of UKTI's business is not directly related to ECGD, the two organisations collaborate, both domestically and overseas, to exploit opportunities for UK exporters. This has been especially close in the oil and gas sectors.

OTHER ISSUES

Trade credit and short-term credit insurance

Before ECGD privatised its Insurance Services Group operations, it was effectively a monopoly provider of short-term trade credit insurance. Following the sale of the business to NCM (now Atradius) in 1991, other private credit insurers, including Coface and Euler Hermes, entered the UK credit insurance market. This brought more competition, leading to greater choice, more products and lower premiums for UK exporters than previously available from ECGD.

The economic downturn in 2008 and 2009 saw a global reduction in the availability of private trade credit insurance, principally because of the deterioration in the risk environment that led to a sharp increase in claims and related underwriting losses for insurers. As a result, UK exporters experienced sudden withdrawals and/or reductions of insurance limits on their buyers and an increase in premiums which hampered their ability to fulfil export orders. Moreover, some exporters faced constraints on obtaining finance from banks that had relied on the existence of short-term trade credit insurance as a form of risk mitigation for their lending.

In the face of the problems that existed in the short-term trade credit insurance market, the European Commission issued a temporary waiver of its Short Term Communication in 2009. This Communication bans governments of Member States from providing short-term (below two years credit) support for ommercial and political risks involving trade within the European Union and exports to certain "rich" OECD markets (including Australia, Canada, Japan and USA), these being the dominant destinations for UK exports. Of the total £227.5 billion UK exports of goods to all destinations in 2009,[2] around 75% of goods exports went to this group of markets. Total exports of goods to the EU were £124.3 billion (54.7% of the total) and total exports to Australia, Canada, Japan and the USA were £43.8 billion (19.3%). The waiver allowed EU governments to seek approval from the Commission for interventions that addressed this shortfall in short-term credit risk capacity, subject to meeting certain tests that demonstrated market failure. A number of Member States (but not the UK) obtained such approval. The waiver is due to expire at the end of 2010; the Commission is expected to engage with Member States on exit arrangements. The Communication is also due to expire at the end of 2010 and the Commission is considering the basis of its renewal.

More recently, the trade credit insurers have advised the Government that new capacity has been entering the reinsurance market for trade-related risks, so that they have been able to reinstate cover that had been withdrawn or reduced subject, as previously, to the acceptability of risks on individual markets and buyers. Although there are reports that problems still persist for some exporters, there are currently no plans for ECGD to intervene, whether on a direct basis (which would be very difficult as it does not have the staff, products or systems to provide such support without substantial investment) or indirectly through private trade credit insurers by way of reinsurance.

Letter of Credit Guarantee Scheme

Following a Public Consultation, ECGD launched a Letter of Credit Guarantee Scheme (LCGS) in October 2009. This provides support for exporters who export on short terms of credit to countries not covered by the EU Short Term Communication with the benefit of payment security under letters of credit. Under the scheme ECGD provides partial guarantees to banks against the non-payment of letters of credit opened by foreign banks on behalf of buyers which they confirm, thereby providing a secure means of payment for exporters. This product was designed to provide additional risk capacity to UK banks who confirm letters of credit for UK exporters in response to capacity constraints in the trade finance market.

Six UK-based banks are participating in the scheme, which covers more than 300 overseas banks in more than 30 countries. So far, the LCGS has supported five UK export transactions involving confirmed letters of credit totalling just under £3 million. The scheme is due to close on 31 March 2011.

Possible bond support scheme

ECGD provides insurance for exporters against the unfair calling of performance and related bonds issued on their behalf by UK banks and in favour of overseas buyers. Exporter organisations have pressed ECGD to provide support for the raising of such bonds, where banks are unwilling to do so. There appears to be some evidence that some exporters are facing constraints in obtaining such bonds from banks and that there may be insufficient bank lending capacity to support very large value bonds involving creditworthy mid-sized companies. ECGD is exploring whether and on what terms it might provide assistance. A decision is expected later this year.

Fixed Rate Export Finance

Under its Fixed Rate Export Finance (FREF) scheme, ECGD provides interest make-up support to banks which fund export credit loans to buyers at internationally agreed fixed rates of interest. The future of the FREF scheme is under review, given that it is now little used and there are market alternatives. This review has included a public consultation launched in January 2008 with an interim response from the Government and with successive extensions to the scheme until 31 March 2011 (unless exhaustion of its remaining budget requires earlier closure). A decision is expected later this year.

Public Consultation on Business Principles

In 2000, ECGD adopted certain Business Principles to guide the way in which it conducted its business. Earlier this year, following a public consultation, these principles were substantially revised, largely because the international agreements (see above), which govern the activities of ECAs, had been adopted since 2000. Moreover, the Government decided that ECGD should no longer operate policies which separately and additionally went beyond those international agreements in order that UK exporters should not be put at a competitive disadvantage.

Sovereign debt and debt forgiveness

Debt is owed to ECGD where it has supported business with overseas governments and subsequently claims have been paid. The UK is committed to providing 100% debt relief to countries qualifying for the World Bank/IMF HIPC[3] Initiative. For this group, ECGD has already written off about £1.5 billion of debt. The remaining £750 million owed to ECGD by HIPC-qualifying countries is expected to be written off as countries comply with the terms of the Initiative. In the meantime, these countries are not required to make interest payments on their debts. This means that resources that would otherwise have been spent on debt service to ECGD can be directed at poverty reduction.

New claims

Despite the economic downturn in 2008 and 2009, to date ECGD has continued to face a low level of new authorised claims over the last five years: none in 2005-06 or 2006-07; two new claims totalling £4.6 million in 2007-08; one new claim for £4.1 million in 2008-09; and one new claim for £0.5 million in 2009-10.

Developments over 2008-09

Given the importance to Airbus of export credit support from France, Germany and the UK, ECGD continued to work with its French and German counterparts to align their working practices more closely to improve their service. During 2008-09, ECGD was able to take forward its co-operation arrangements on this business, involving the provision of a form of re-insurance support in most cases. Under these arrangements, one of the three ECAs fronts the transactions with the buyer; the other two provide support to the lead ECA. Airbus has welcomed the efficiency benefits from these measures.

In the economic downturn of 2008 and 2009, there were concerns about the availability of sufficient funding from bank markets for guaranteed export credits. In the event no ECGD-supported export failed to be put in place due to insufficiency of bank funding. ECGD has further agreed to support for funding from capital markets to supplement finance available to exporters; the first such issue took place in June 2010.

As a result of the economic downturn and an increase in enquiries from exporters, ECGD adopted in November 2009 a more open policy towards medium-term business in rich markets,[4] which it had hitherto left to the private sector.

CONCLUSION

ECGD support for industry is concentrated on those companies that export, and particularly those which export capital goods and services. Despite its very low proportion of total UK exports, ECGD support is of key importance to several leading sectors. ECGD is responding to higher levels of new business in response to the needs of exporters where the risks to the taxpayer are acceptable.

24 September 2010

Annex A

ECGD BUSINESS: FY 2000-10

Financial Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Projected

Value of business supported £5,662m £3,298m £3,532m £2,991m £1,995m £2,230m £1,798m £1,830m £1,460m £2,206m £3,283m

Value of business supported by Sector:

Aerospace 22% 22% 15% 23% 32% 47% 29% 30% 73% 90% 55%

Civil 30% 47% 35% 38% 30% 30% 29% 13% 26% 9% 42%

Defence 48% 31% 50% 39% 38% 23% 42% 57% 1% 1% 3%

Number of Guarantees/Policies issued in FY 250 190 150 155 113 151 91 96 136 198 163

of which were issued to SMEs: 3 2 7 3 2 4 0 2 3 1 2

Notes:

— A small number of insurance policies/guarantees issued have not been disclosed for reasons of commercial confidentiality.

— SMEs refers to enterprises with fewer than 250 staff and turnover of less than €50 million and which do not have a parent that falls outside of this criteria. SME at time of underwriting may have been taken over later by a larger company.

Annex B

EXPORTERS WHO HAVE BENEFITED FROM ECGD SUPPORT: FY 2000-10

Exporter Sector

Aedas Architects Ltd Architectural services

Aeromatic-Fielder Ltd Manufacturer of pharmaceutical processing equipment

Airbus SAS Aircraft manufacturer

Air Products plc Manufacturer of industrial gases and speciality chemicals

Alderley Systems Ltd Manufacturer of metering systems and processing equipment to oil and gas industry

Alstom Power UK Ltd Supplier of power generation equipment and technology

Alvis plc Manufacturer of armoured vehicles

Angloco Ltd* Manufacturer of fire fighting and rescue vehicles and equipment

BAE Systems Defence contractor

Balcke Marley UK Ltd Manufacturer of cooling towers

Balfour Beatty Rail Projects Ltd Rail engineering, equipment and supplier of rail infrastructure services

Battenfield Gloucester Europe Ltd Manufacturer of plastic products

Bombardier Incorporated Aircraft manufacturer

BP Exploration (Caspian Sea) Limited Oil and gas contractor

Brackett Green Ltd Manufacturer of water filtration, treatment and desalination equipment

Capital Valves Ltd* Supplier of valves to the oil, gas, petrochemical, power and industrial gases industries

Carillion Construction (West Indies) Ltd Construction services

Caterpillar (UK) Ltd Manufacturer of construction and mining equipment

CB&I John Brown Limited Oil and gas contractor

Cementation Skanska Building, civil engineering and infrastructure services

Chinook Sciences Ltd Provider of technology and equipment to the metal, industrial gases and environmental industries

Cleveland Potash Ltd Producer and supplier of potash fertilizers for agriculture and industry uses

Corus UK Ltd Manufacturer of steel products and services

CRI Catalyst Company UK Ltd Provider of catalyst technology to the refining and petrochemical industry

Crown Agents Services Ltd International development consultancy services

Demag Delaval Industrial Turbomachinery Ltd Manufacturer of gas turbine engines

Dennis Specialist Vehicles Ltd Vehicle manufacturer

Diamond Offshore Drilling (UK) Ltd Drilling services contractor

Doncasters Middle East Ltd Manufacturer of turbines and turbine generator sets

Dunlop Oil & Marine Limited Manufacturer and supplier of hoses for the oil, gas, petrochemical and dredging industries

Europa Crown Ltd* Supplier of processing and edible oil refining equipment

European Marine Contractors Ltd Pipeline and piping installation contractor

Fairbank Brearley Ltd Manufacturer of spring making machinery and rapid heat gas furnaces

Faun Municipal Vehicles Ltd* Vehicle manufacturer

Fernau Avionics Ltd Supplier of ground based navigation aids for military, naval and civil aviation needs

Findel Education Ltd Supplier of educational products to schools, nurseries and learning environments

Fira International Ltd* Consultancy service and testing of the furniture supply chain

Fitzpatrick Contractors Ltd Civil engineering, building and property development

Flakt Woods Ltd Supplier of energy-efficient air solutions

Fluor Limited Engineering, procurement construction, maintenance and project management services

The Football Association Premier League Ltd Football broadcaster

Foster Wheeler (GB) Ltd Engineering and construction contractor and power equipment supplier

Gall Thomson Environmental plc* Supplier of marine breakaway couplings to oil and gas industries

Gateway (Textiles) Ltd Manufacturer of machinery for the bedding trade

GEA Process Engineering Ltd Supplier of engineering services and complete process plants and equipment within the pharmaceutical and chemical industries

Gentec Energy Plc* Engineering, procurement and construction contractor in the gas and diesel power generation industry

Greys Exports Ltd* Supplier of explosive ordnance disposal equipment

Guralp Systems Ltd* Manufacturer of seismic instrumentation systems

Hawker Beechcraft Inc Aircraft manufacturer

Howden Power Ltd Manufacturer of regenerative air heaters and associated equipment

Hydroflow Europe Ltd* Manufacturer of industrial filtration equipment and supplier of services

Invsat Ltd* Supplier of integrated telecommunication services to the oil and gas industry

John Gordon Ltd* Manufacturer of coffee plantation machinery

Johnson Matthey Plc Manufacturer of chemical products and precious metals and supplier of catalysts and related technologies

Lagan International Ltd Civil engineering and construction contractor

Leafield Logistics & Technical Services Ltd* Supplier of equipment and logistics services to defence and commercial organisations

Kellogg Brown & Root Ltd Engineering and construction services

Kelton Engineering Ltd* Engineering consultancy on oil and gas flow measurement and specialist software

Kier International Ltd Building and civil engineering services

Koch Chemical Technology Group Ltd Manufacturer of process and pollution-control equipment and provider of other process technologies and related specialty services to refinery and chemical plants

Mabey & Johnson Ltd Manufacturer of bridges

MAN B&W Diesel Limited Manufacturer of diesel engines

MAN Ltd Supplier of mechanical, piping and electrical engineering equipment

Marlborough Communications Ltd* Producer and supplier of radio and telecommunications systems

Martin-Baker Aircraft Company Ltd Manufacturer of ejection seats and related survival equipment

MBDA UK Ltd Defence contractor

Motherwell Bridge Engineering Ltd Engineering services

Motorola Ltd Telecommunications manufacturer

MRB Schumag Ltd Designer and supplier of equipment to the copper tube industry

M W Kellogg Ltd Engineering, procurement and construction services within the process plant industries

Northey Technologies Ltd* Manufacturer of rotary compression and vacuum pumps

NSG Exports Ltd* Purchaser and supplier of equipment and services

Odebrecht Oil and Gas Services Limited Oil and gas exploration and production contractor

Pipeline Tube and Casing Ltd* Supplier of tubular products and accessories

P W Ltd Civil engineering and mining contractor

Reviss Services (UK) Ltd* Manufacturer and supplier of sealed radiation sources, radioisotope technologies and services

Rolls-Royce Plc Manufacturer of aero-engines and power generation systems

Rolls Wood Group (Repair and Overhaul) Ltd Gas turbine repair and overhaul specialist

Saipem UK Limited Engineering and operational services for offshore oilfield design and installation

Salzgitter Mannesmann (UK) Ltd Supplier of steel-related products

Saywell International Ltd* Supplier of aircraft spares and components

Sedgewall Communications Group Ltd* Manufacturer of communications equipment

Sembcorp Simon-Carves Ltd Engineering services

Shell Research Limited Oil research and development

Siemens VAI Metals Technologies Ltd Engineering and construction of ironmaking and steelmaking plants

Sir William Halcrow & Partners Ltd Engineering consultancy

SLP Engineering Limited Engineering services

SMS Mevac UK Ltd Supplier of vacuum degassing and secondary steel making plant and equipment

Snamprogetti Ltd Engineering design and consultancy services

Surrey Satellite Technology Ltd Manufacturer and supplier of small satellites and related services

Telspec Europe Limited Manufacturer of telecommunications equipment

Thales ATM Ltd Manufacturer of navigation and aeronautical equipment

Traffic Safety Systems Ltd Manufacturer of traffic safety systems

VAI Industries (UK) Ltd Manufacturer of steelworks plant and equipment

Vikoma International Ltd* Manufacturer of oil spill containment and recovery equipment

Voith Paper Ltd Paper manufacturer

Volvo Bus Exports (UK) Ltd Vehicle manufacturer

VT Shipbuilding International Ltd Defence contractor

VWS Westgarth Ltd Designer and constructor of water treatment and desalination plants and supplier/operator of sulphate reduction membrane systems

Wellstream Ltd Manufacturer and supplier of flexible pipe systems and solutions to the offshore oil and gas industry

York International Ltd Manufacturer of air conditioning, refrigeration and heating equipment

* SME.

1 IDA-only: countries that are only eligible for concessional loans from the IDA, International Development Association of the World Bank group. Back

2 Source: ONS Pink Book 2010. Back

3 Heavily Indebted Poor Country. Back

4 A "rich market", also known as a "category zero" market, is a high income OECD or non-OECD country as defined by the World Bank for the purposes of the OECD Arrangement. Back



© Parliamentary copyright 2011	Prepared 18 February 2011