Trade and investment whitepaper offers risk and reward

Has the government pulled off a rare coup – a whitepaper that actually has support? The largely positive reaction to the Department for Business, Innovation and Skills’ (BIS) January whitepaper on trade and investment for growth suggests the answer to that question could be yes.

The paper’s big idea, which signals that ministers may be serious about helping more small to medium-sized enterprises (SMEs) trade internationally, is to re-tool UK Trade and Investment (UKTI) and the Export Credits Guarantee Department (ECDG) by providing them with cash to throw at SMEs. Policies include setting up a Bond Support Scheme to help exporters raise tender and contract bonds by sharing risks with banks that issue bonds, and extending its short-term credit insurance over a range of products, both of which will be available at the end of March. Another idea on the cards is the launch of a Working Export Capital Scheme to help SMEs access working capital finance on loans above £1m, and a Foreign Exchange Credit Support Scheme to help manage exposure to exchange rate movements.

As every 10-percentage point increase in trade openness translates to a four percent increase in per capita income, the benefit of promoting exports is plain to see – but will it genuinely make a difference to SMEs, and their finance directors, seeking to exploit overseas markets?

Advice needed

In theory, working capital will be freed up for SME exporters by the Bond Support Scheme, as banks should now not hold advanced payments supported by bonds as security. “Opening up credit insurance to small and medium-sized export firms should, in theory, make them far more attractive to lenders,” says Andy Meadwell, director of international trade finance at Bibby Financial Services. “This will provide more liquidity to the export finance market and give businesses more choice of funding options available to them.”

But Chris Allner, managing director of venture capital outfit Octopus Ventures, which helps UK businesses break into new markets, is sceptical.

“The truth is that banks are still not helping SMEs as they should,” he says. “There is still a minefield out there for them to tackle, and it requires FDs to spend time and money talking to unresponsive banks.”

Allner argues that it is not trade and funding support deals that SMEs need, but advice about what they mean and how SMEs can use them.

This is a view echoed by Simon Ratcliffe, FD at Applied Languages, a provider of translation services and software which does about 30 percent of its business in the US, Singapore, India and across Europe.

“Our experience is that exporting has never been difficult for us. I have to find out whether we are even able to benefit from the new changes, but, from reading the paper, it is not clear,” says Ratcliffe. “What I really need is a simple explanation without having to jump through hoops.”

He says that he has picked up on headlines suggesting that the ECDG will guarantee loans or bonds for above £1m – a figure which will be far above the financing needs and abilities of many SMEs. Not only that, but the pre-existing Export Enterprise Finance Guarantee system already does exactly the same for exports of a value up to that level.

“I am not sure who the whitepaper is aiming at,” says Ratcliffe. “But I am slightly put off having to go into a lot of detail just to find out that it does not make a difference to me.”

For many years, the ECGD has provided insurance cover to UK exporters against the risk of unfair calling of on-demand contract bonds (for example, advance payment bonds, performance bonds or retention bonds) by overseas buyers. With the new scheme – which sees SMEs supposedly sharing these risks with the banks – business secretary Vince Cable asserts that exporters will be helped to raise bonds from their banks. Generally, the ECGD’s guarantee will be for 50 percent of the credit risk on the exporter, but the ECGD will be willing to go up to 80 percent in “appropriate circumstances”, which could include advance payment guarantees and progress payment, or other cash-related bonds.

“There is no doubt these measures are very welcome and reflect precisely what we have been lobbying the government for in recent months,” says Phil Orford, chief executive at the Forum of Private Business (FPB). “The UK government will now be a step closer to other European nations in terms of support it gives to SME exporters.”

But Howard Lewis, international liaising partner at accounting firm MacIntyre Hudson, thinks the whitepaper may be part of an effort to raise UKTI’s profile as a helpful arm of the government.

“I am glad to see UKTI and ECGD making moves to be more seamless, and that UKTI will now play a greater role in providing SMEs with the market intelligence they need before embarking on an export drive. But the ECGD did not work well in the past and it will be interesting to see what real change this makes,” he tells Financial Director. “I have noticed UKTI becoming more prominent at recent trade shows, but reading the whitepaper I was left feeling that there is still so much FDs have to figure out for themselves. I think the British Chambers of Commerce needs to take the mantle here; they could really position themselves as the people FDs can turn to for advice.”

Mercantile spirit

With a recent survey by Global Reach Partners (GRP) concluding that just one-fifth of small UK companies that currently do not export at all would consider doing so, the need for this sort of support is there. But FDs think it will take more than this whitepaper to change behaviours. Some of the skills and structures that are critical to being able to break new markets remain hard to reach. High on the list of priorities on GRP’s survey was the lack of information on overseas markets available to UK SMEs, lack of local presence, lack of language skills, and uncertainty over how much demand there may be for specific products and services overseas. Concerns over cashflow came lower down the list.

“There is more that can be done to help promote export readiness among smaller firms, such as having mentors who have actually done exporting in the past,” says FPB’s Orford. What is government – or appropriate business support or lobby groups – doing to facilitate that?

Currently, very little. In its summary of responses to the whitepaper, BIS has noted that businesses see barriers to competing internationally that go much further than the finance issues addressed by the new schemes. Poor infrastructure in the UK, particularly in transport networks and aviation, were cited as having equal importance to burdensome regulation, limits on migration of skilled workers, and the difficulty in obtaining visas.

A lack of investment in research and development also worries SMEs. But perhaps most alarmingly, many feel the UK lacks “mercantile spirit” and is unwilling to engage in “international culture”, exacerbating poor government advocacy for business overseas that businesses observed in their feedback to BIS. In addition, UKTI was criticised for the charges associated with the advice and support it provides to SMEs, in particular its Overseas Market Introduction Service, which charges the same fees as commercial agencies – well out of their price range.

One SME suggested that there should be a “two-tier approach for UKTI, differentiating between the needs of smaller and bigger companies with a sliding scale for chargeable services based on the turnover of particular SMEs”, reports BIS. And many want the government to fund training for SME managers to learn the languages of the markets they want to break.

While greasing the wheels of credit and export finance will help, it will not make much of a dent if the sheer will to break new ground and do business with foreign markets is not there.

Read the whitepaper here