Government Assistance to Industry

Memorandum submitted by the British Chambers of Commerce

Introduction

1. The British Chambers of Commerce (BCC) welcomes the opportunity to respond to the Business, Innovation and Skills Committee’s inquiry into Government Assistance to Industry. We would also welcome the opportunity to give oral evidence on this issue, if that would be helpful.

2. The BCC is an influential network of fifty‐five Accredited Chambers across the UK. No other business organisation has the geographic spread or multi‐size, multi‐sector membership that characterises the Chamber Network. Every Chamber sits at the heart of its local business community, providing representation, services, information and guidance to member businesses and the wider local business community.

3. In summary, our position is the following:

· The government has an important role to play in addressing market failures and provision where the private sector is not meeting clear needs;

· Specific schemes such as the Enterprise Finance Guarantee (EFG) have been useful, but there needs to be better understanding of the scheme from both banks and businesses;

· The Small Business Finance Forum has been an important forum for dialogue between business, the financial service industry and Government. Its replacement, the Small Business Economic Forum, must pick up the Small Business Finance Forum’s good work;

· The services provided by UK Trade and Investment (UKTI) are vital for encouraging British exporters and offer levels of support comparable to other major trading nations;

· The lack of intervention into the export trade finance and export trade credit insurance markets, which have caused serious problems for British exporters during the past two years, has stood in stark contrast to other European countries. This has placed British exporters at a competitive disadvantage; and,

· Inward investment has been a success story during the past decade, but the government must ensure that efforts are not duplicated by competing regional and national bodies.

The role of the Department of Business, Innovation and Skills in supporting industry

4. We believe that the state has an important role to play in assisting industry where there are clear market failures. The Department of Business, Innovation and Skills (BIS) is a natural home for all of this activity, and for the sake of simplicity and ease of both engagement and access, all business related activities of government should be co-ordinated, disseminated and managed from BIS and its related agencies.

The Enterprise Finance Guarantee (EFG)

5. The EFG has helped underpin a large number of loans to businesses throughout the course of the recession. Improving it is dependent on ensuring that advisers in banks are fully aware of which situation the product is suitable for, and exactly how it operates. The problems seen with EFG in its early days were symptomatic of wider knowledge gaps of the frontline in the banks – a by-product of over-centralised decision-making procedures that have become common in recent years.

6. Equally, there needs to be an understanding on behalf of the business community that this is not "free money". There is clearly still a breakdown in communication in some areas around the need for personal guarantees, as best articulated by one of our members in recent representations:

"We are aware of other local banks who have decided not to use the EFG Scheme due to the difficulties involved with it and in particular, there is a situation of "smoke and mirrors" whereby clients think that there is a 75% guarantee and cannot understand why they are being asked for personal guarantees and in particular, for more than 25%. [One high street bank] seems to be asking for a 25% personal guarantee while other high street banks are looking for 100% personal guarantees.

"Banks are also unclear in their advice as to the application of this and we feel that they have a duty to spell out the exact position….to the client as to their potential liability under the scheme".

7. Given the figures on EFG lending, and the amount of money that has been allocated to it, it would seem that the scheme is meeting the current level of demand. There has been no overwhelming evidence to suggest that certain sectors require greater access to state backed schemes, or are losing out because of a lack of one. However, there is a strong belief that an extension or a successor scheme will be required beyond 2011.

The Small Business Finance Forum

8. We believe the Small Business Finance Forum was an effective vehicle for dialogue and the resolution of difficulties between SMEs and the banks. The Forum’s discussions had also broadened to include the provision of alternative forms of finance (e.g. invoice discounting, factoring, trade credit insurance, etc) that are of critical importance to the economic recovery. Ultimately, the dialogue between senior bank representatives and business representatives was constructive and led to important relationships being formed between banks and business. The BCC was able to bring specific cases to the attention of senior bank executives, and to arrive at a satisfactory conclusion for all parties.

9. Its replacement, the Small Business Economic Forum, must pick up the Small Business Finance Forum’s good work.

Access to Finance Green Paper

10. Overall, the evidence base included in the ‘Financing a Private Sector Recovery’ Green Paper is an accurate and objective reflection of the business financing environment. It includes a detailed evaluation of nearly all areas of the access to finance debate, with the possible exception of a detailed analysis of the bank/SME relationship, which the BCC has argued repeatedly requires attention from both parties as well as regulators. It is a good starting point for the next stage in the access to finance policy debate, and should form the basis of the work of BIS going forward. We attach our response to the Green Paper with this response.

UKTI and trade promotion

11. All sources agree that exporting more of what we manufacture in the UK is one of the keys to a successful, sustainable and balanced economic recovery. As the global demand in world trade improves, British manufacturing companies must become more adept in selling their goods and services abroad – not just into the established markets of Europe and the developing world, but into high-growth developing markets who have only witnessed a fraction of the economic problems experienced by the developed word.

12. Governments across the world provide trade promotion services for their exporters. The British trade body, UKTI, performs many vital functions for British companies that wish to engage in international trade, such as organising trade delegations into different markets, funding tradeshow access and creating British pavilions, providing market research, and running schemes to help SMEs export for the first time.

13. State-backed trade promotion and export support are therefore vital to the UK’s present and future exporters. We believe that the current budget of £350 million for UK Trade and Investment is a small price to pay for the contribution that UKTI services make to the growth of private sector companies. We believe that UKTI services cannot be significantly cut and still provide services to businesses that are comparable with those in our principle competitor countries.

14. However, there are a number of things that the organisation could do differently. For example, currently UKTI operates under a quantitative, target driven culture, where the number of companies assisted and value of revenue generated to UKTI takes precedence over the outcomes of help offered to both new and existing exporting companies. BCC therefore believes that UKTI’s targets should be changed to monitor the value of results associated with help given, such as growth in export sales and employment generated, rather than purely on the number of companies assisted, as this distorts the true value of the organisation.

15. We are currently undertaking a report on manufacturing for export, which we will be happy to share with the Committee when published. While many exporting manufacturers that we have spoken to have used UKTI and see it as a vital service, they often had mixed views about its effectiveness and efficiency. While some found it useful, especially for its investigative work in new markets, the majority felt that it could be further rationalised with a more joined-up service offered, and that its quality of service could be variable. The number of different Government organisations that attempt to help exporters also added to confusion. Our quantitative survey showed that 32.7% of businesses responded saying that they felt that better export support from the Government would be one of their top three policy changes to help manufacturers, along with continued low interest rates and better access to growth capital.

16. UKTI now charges for many of the services that it once offered free of charge. A number of companies commented negatively on this, and also said that they felt UK staff were very keen to sell them charged-for services whenever they came into contact with them. Despite these charges, such as for the Overseas Market Introduction Service (OMIS), companies often reported receiving variable quality work. One interviewee from an SME technology company commented that a bad OMIS can set a small business’s growth back considerably. Companies such as these often only a have a small marketing budget that dictates a gradual approach to new market entry; a bad OMIS and in-market service from UKTI therefore has the potential to damage growth strategies based on exporting for a considerable time.

17. We understand the need to recoup some costs from businesses, both because of the current state of the public finances, and to act as a gate-keeper to make sure companies genuinely have a commitment to exporting. However, fees should at a level that encourages and supports new SME exporters without strong cash-flows. Furthermore, UKTI must ensure that the focus on raising funds through collecting fees for services does not detract from qualitative help for exporters.

18. Despite these problems, businesses have often commented that UKTI services can be effective. The UKTI organised British presence at international trade shows was considered a particular success. Such events were often made especially effective by the attendance of a Government minister. BCC welcomes the delayed appointment of Stephen Green as Minister for Trade and Investment, and hope that he will play a critical role leading trade delegations and helping to open new markets for sometimes risk-averse UK exporters.

19. Export trade finance plays a vital role in underpinning exports and helping mitigate the substantial risks of international trade. However, access to these sources of finance has been severely curtailed during the recession, while businesses from other major trading nations have access to much greater sources of trade finance support – especially for trade with developing markets.

20. The BCC believes that unless the Government intervenes to support SMEs’ access to sources of trade finance, British businesses will not benefit from the predicted rise in global trade flows over the coming year. There has been a market failure in the trade finance industry, especially around short-term export trade credit insurance. The Government must therefore intervene to rectify this by providing a publicly-backed scheme. Without such action, it is unlikely that British businesses will benefit from the likely rise in demand for consumer goods to ‘BRIC countries’ and other emerging markets. This is reflected by the Business, Innovation and Skills Select Committee itself who "strongly recommend[ed] that the Government reassess its decision not to use the opportunity presented by the [European] Commission’s decision to re-enter the short-term trade credit market until the financial situation improves". [1] While banks and insurers maintain that there is some evidence to suggest that the problems of the past year are easing, the Government needs to establish support in this area to ensure that British businesses can access short-term financing for non-capital goods during any subsequent economic downturns, or periods of uncertainly, which have the potential to disrupt finance flows.

21. Currently the Government believes that the export credit insurance market is rectifying itself, but our members have not found any greater liquidity within the market and are still being hamstrung by insurance being withdrawn from credit lines both to, and from their companies. Furthermore, the Government must ensure that British exporters are able to access trade finance for high-growth developing markets in the same manner that all other comparable trading nations provide for their exporters.

22. The BCC believes that the Government should consider creating a state-backed export trade credit insurance scheme run through a private company, who would share the risk and the profits. Both France and Germany have successfully applied this model.

23. The application of such a model would mean that exporters would not be dependent on the private market for exporting into emerging markets, or during periods of recession or economic uncertainty. While in times of economic growth developed markets in the EU, North American and Australasia would not be allowed to be covered by such a scheme under EU State Aid rules, the European Commission relaxed the rules which govern this during the economic crisis. EU countries that already had such schemes were able to take full and immediate advantage by widening the scope of their cover. The British Government was unable to help its’ exporters in such a way, but should have a scheme ready to help exporters both in the short-term and when the market fails again.

24. While greater support is critical, so is the need to ensure a level playing field. The Government needs to remain vigilant to ensure that other countries are not extending support to their exporters that would infringe upon State Aid rules.

25. The BCC recently held an SME trade finance roundtable with businesses, banks, insurers and government officials to thrash out the problems faced by SMEs when accessing export trade finance and insurance. We recommend that this forum be placed on an official footing and held at regular intervals to ensure that the Government is receiving a full evidence-base of what is happening in the trade finance market. We attach the notes of the roundtable with this response.

Inward investment

26. Central government clearly has an important role to play in attracting inward investment into the UK; indeed, this has been a particular success of the UK during the past decade, partially down to government action in this area co-ordinated through UKTI and the Regional Development Agencies (RDAs). However, despite these successes, there are a number of issues that the Government should take into account around duplication of effort among the different regions and nations of the UK. During the past few years RDAs have sometimes competed against each other to win investment for their regions. The UK brand abroad is watered down by separate representation from all three devolved nations and nine English regions. Separate efforts from Scotland, Wales, Northern Ireland and the English RDAs only serve to confuse potential investors who are likely to be unaware of the constitutional particulars of the UK.

27. Now that RDAs are being wound down, and the functions of Local Economic Partnerships (LEPs) are being determined, there is a discussion about how these functions should be delivered. Many Chambers in the North and Midlands (including the North East, North‐West and Yorkshire and the Humber) believe that there is a continued need to retain control over some of the strategic economic functions presently exercised by RDAs, notably around inward investment and place‐marketing. When establishing these functions, central government must ensure that provision is made to reduce externally visible competition between different organisations.

6 October 2010