Rebalancing the Economy: Trade and Investment - Business, Innovation and Skills Committee Contents

Examination of Witnesses (Questions 1-48)

Q1 Chair: Good morning, and thank you very much for agreeing to attend this morning's session. I apologise that it is a little on the chilly side; I think it is all part of the Administration's efforts to cut costs. I emphasise that we are all in this together. Can I just ask you to introduce yourselves, so that we can get voice levels for transcription purposes?

Adam Marshall: I am Adam Marshall. I am Director of Policy for the British Chambers of Commerce.

Susan Ross: I am Susan Ross. I am Chairman of the British Exporters Association, BExA.

Q2 Chair: Thank you very much. We will be asking you questions. If one of you feels the other has covered the answer quite adequately, do not feel obliged to supplement it, but there may be particular questions to either one of you as appropriate. May I start with the British Chambers of Commerce? Your submission to us makes the comment that British industry needs to recover its "mercantile spirit". First, can you define what you mean by that? Secondly, how do you think we have lost it and, lastly, how can we get it back?

Adam Marshall: We define "mercantile spirit" as a willingness and an interest in exporting both goods and services overseas. We did some survey work during 2009, and a very large business sample suggested that only about 30% were exporting, and six in ten were doing so because they had been approached from overseas. They had not proactively gone out to potential customers overseas and sought out business. Whilst some of our largest companies are indeed trading around the world and many of our medium­sized manufacturers, because of their particular businesses, are also trading around the world, there are many companies, especially in the SME sector, whose sights are not set on foreign horizons. We want them to look to those overseas markets in future.

Q3 Chair: Interestingly—we were just having a conversation on the subject before you came in—a relatively small proportion of SMEs export, and of those that do not, a very significant number do not even consider exporting. What do you think are the reasons for this?

Adam Marshall: A lot of businesses will say to us that the home market is sufficient for them to grow to the size to which they want to grow. We do not believe that that is setting the bar particularly high, to be honest with you. We would like to see more businesses converted from lifestyle businesses or "big enough" businesses into fast­growing businesses. In many cases, companies will simply say to us, "Look, I have got enough demand in the domestic market. I do not really need to go overseas; it is too much risk right now." What we would like to see is a cultural shift to push businesses—and this involves businesses helping other businesses, in a lot of cases, to do so—to internationalise their operations and to look overseas for new markets. That also involves the Government. We think that, in this country, we need to see trade promotion activity on the ground with small and medium­sized businesses, not as a "nice to have" or a luxury, but as an absolutely core part of what Government funds.

Q4 Chair: Thank you. Certainly I think there is a considerable body of survey evidence to substantiate what you have said there. You have made the point that it is a cultural difference. Government does have a role. Now, I have to say that I think that SMEs have an instinctive and, you could say, cultural aversion to having anything to do with Government. How do you think you could bridge that gap and what could the Government do to change this?

Adam Marshall: We want the Government to do three things. One is to reform and boost trade promotion services for SMEs, to which I referred before. It is not necessarily about simply increasing the budget of UK Trade & Investment, for example, but helping companies in a variety of different ways to get to overseas markets or to think about exporting for the first time. For some it is as small as a £2,000 travel grant to go on a trade mission. Those are the kind of very small interventions that can make a very big difference. Second is sorting some of the persistent problems with trade finance and trade credit insurance that businesses talk about as an obstacle, and that is something I know Susan will come on to discuss in greater detail.

Chair: We are going to go on to that in a moment.

Adam Marshall: The third one is around tax incentives and looking at ways to use the tax system perhaps to encourage exporting amongst those who are more reticent. There are certain ways you can use tax allowances, both on the corporation tax side and on the income tax side, to encourage both individuals and companies to look to export markets. Clearly at a time like this, money is in short supply and finding ways to pay for that could be difficult, but it is something that should be considered over the medium to long-term.

Q5 Chair: That is interesting. Have you actually put any proposals on that to either this Government or the previous one?

Adam Marshall: Well, we have commented on the withdrawal of quite a large number of allowances that favoured exporters over time. We have not put forward proposals for new forms of allowances or new forms of incentives. I think it is a bit early and, in general, our companies are very supportive of consolidation of our fiscal position before we get back to that stage of the game, but it is something we would see as a medium to long­term priority.

Q6 Chair: What products do you think we could export that we are not at the moment?

Adam Marshall: If you look at the UK economy, we have got manufacturers who tend to be the backbone of our export population, as it were. A great number of small and medium­sized manufacturing companies are exporting their goods around the world. A big chunk of the UK economy—more than 75% of the economy overall—is services. We are the world's second­largest services exporter but, when you strip out financial services, where we are of course one of the global hubs, our service businesses do not necessarily get out there as much as we would want them to. With everything, including professional services—for example, health and safety consultants, or lawyers—there is more that could be done to help these people export their services abroad.

Q7 Chair: Have you put forward any proposals to do this?

Adam Marshall: The points that I made at the beginning were about trade promotion and helping these companies really realise that there are markets out there for their products, whether it is a non­tangible product, as in a service, or a tangible product, as in a manufactured good.

Q8 Mr Ward: Without wanting to open too big a debate on the subject, it is quite topical at the moment with all the things that are happening. I am quite interested in this "mercantile spirit" and the culture. Is language a problem? Most German, French, Italian, Chinese and Japanese businesses and companies will all have English speakers. It is not the same with many small manufacturers in particular in the UK. Is that an issue?

Adam Marshall: I think it certainly is an issue. If you look at the outcomes of our educational system, unfortunately we are not good in the global league tables of speaking foreign languages. One of the things that businesses say to us is a big problem for them going into a new market is familiarisation with the local culture. Language plays an important role in that—in making connections, in building up the sorts of networks that turn into a new client pipeline. It is something that could be improved. Indeed, a past President of the British Chambers of Commerce some years ago spent quite a bit of time working on this, because she herself was in the language and translation business, working with a number of companies, both at home and overseas. She said that this was a deficiency that we needed to address.

Q9 Mr Binley: Let me talk about something I know a little bit about. I am non­executive Chairman of a company that provides a database­building service to business­to­business publishing. We are now doing sizeable trade with the USA, sizeable trade with France, Belgium and hopefully with Germany, and with Australia. The point about it is that they all came to us; we did not go to them. That underlines your point. I want to make a point about outreach. To my knowledge, and I could be corrected on this by executive members of the company, we have never had an approach from UKTI. How do we deal with that outreach problem with the SME sector?

Adam Marshall: It is a difficult question, because of course we have 4.7 million SMEs around the country, if I remember correctly, of which some one million are companies of an appreciable size that might have a service to export. That is a lot of people to target. I am encouraged by the pronouncements by the newly appointed Trade Minister, Stephen Green, who said that he will spend a lot of time on the ground in the UK working with small and medium­sized companies that have the potential to export. That is very important. While of course you want a Trade Minister who is going overseas regularly to bang the drum for businesses, it is also important very important to work with SMEs at home. That is useful profile­raising of export possibilities among SMEs.

In a lot of cases, what businesses will say to us is it is not about having an approach from UKTI; it is about having some basic knowledge of markets. There is a big role for businesses that are exporters to play here in working with those that are not yet exporting and—I hate using the word, "mentoring", at the moment, because everything is about mentoring right now and it seems to be getting devalued, to be honest with you. Exporting businesses can mentor non­exporting businesses and help them open their eyes to some of the possibilities. That would play an important role in helping where government institutions have not been able to contact some businesses. Chambers of Commerce might play a role in that.

Mr Binley: Could I pass this briefly to Ms Ross and get your impression?

Susan Ross: The sales process is very difficult. We have seen advertising on billboards for UKTI, maybe a year ago, which was excellent. I do not suppose it brought in too much, because I think from business we do tend to know our own world and we do not search out. The first place you look though is the website. I do think, if we could somehow have a better, more coordinated, refreshed, up­to­date, easy­to­access website, which pointed companies in good directions, they might search for information about Brazil and then realise actually there is a trade mission going, realise if they are small that there may be a grant for something. To me, accessibility is important.

  On networking, you cannot just network; you have to have sponsored networking. Maybe part of it is for UKTI, or through the Chambers, to have events that bring in non­members of the Chambers, people who have never exported before, but I am afraid to say they will have to be dug out; they will have to be invited. You cannot put a price on it, you cannot say that it is £100, the commercial people charge £1,000 to join a networking event.

Q10 Chair: Before we move off this issue, I could come back to a point Adam made earlier about small grants potentially for businesses to go abroad. I am not aware of any government scheme that disburses such grants. Has there ever been one and, if there hasn't, could you recommend a model that would be appropriate?

Adam Marshall: There have been things like the Tradeshow Access Programme, which have been very successful for a lot of small businesses, which previously had no real incentive to go on a trade mission for the first time. Those provided small grants of around £1,000 to £2,000, literally to help cover the airfare, so that they could get out to a potential market and learn about what that market might offer them. This is the sort of thing where we spend considerably less, as a Government and as a country, than some of our foreign competitors and counterparts. Trade missions and trade promotion of that sort form a bigger part of the budgets of export promotion agencies in many other countries. Having a volume of support available that enables more companies to take that first step or go on that first mission is very important.

Q11 Chair: Have we got actually any sort of measurement of outcomes arising from such missions, to give some sort of value­for­money indicator?

Adam Marshall: I would venture to say that the only agency that might have access is UKTI itself, but you touch on a very big problem, a very big issue, for us overall, which is that it is very difficult sometimes to measure the outcomes of trade promotion generally. From our perspective, we would like an emphasis on the measurement of outcomes whereas, now, we very often have an emphasis on outputs. UKTI measures the number of companies that have been through the front door, for example, or the number of companies to which a chargeable service has been sold. Those seem to be the metrics against which our trade promotions agencies are judged right now, rather than "Business X has got £5 million of exports going out to China. Business Y did the same in Australia."

Q12 Nadhim Zahawi: How important do you think the effect of the British Business Ambassadors is?

Adam Marshall: I think I would start by saying that it is a positive idea on several fronts. It does help to increase the brand recognition of a number of British companies abroad. You have heard comments from the Chinese in recent weeks, for example, saying, "French, German and Italian brands: we recognise them more because they have got more people travelling abroad and because our consumers are interested in their brands." These people can play a role in boosting the profile of British business and British exports. However, if you look at the list of Business Ambassadors, they are almost all drawn from the very large companies and the very notable and recognisable companies we have here in this country. A lot of SMEs with which I come into contact from my membership or even just from the wider SME community would say to me, "I do not see how this person can help me represent my interests overseas, because actually I manufacture mechanical parts for combine harvesters and this person is the managing director of a fashion company," for example. There is a bit of a disconnect there and I do not think that the programme yet has got the SME bit of the market taken care of.

Nadhim Zahawi: Ms Ross, do you want to comment on that question?

Susan Ross: I think they need to be active and visible.

Nadhim Zahawi: Have you met any of them?

Susan Ross: No. I would like to.

Nadhim Zahawi: Have you, Adam?

Adam Marshall: One or two.

Q13 Nadhim Zahawi: Looking at the list, I counted companies that could be classed as SMEs, but none from the manufacturing sector. You mentioned, Adam, that there are 4.7 or 4.8 million SMEs. How would you envisage getting that sort of representation among the Ambassadors?

Adam Marshall: I think it is a very good question and a very tough one. Business organisations like my own might be aware of a number of very dynamic SME owners or managers who might be interested in helping or taking part in the programme. I am constantly surprised, going up and down the country talking to our members, about the number of small business-people who are worked off their feet, but who are still willing to give up their time to help others, whether that is through local economic development partnerships and things like that, which are emerging, or doing something like this. Quite a lot of them say, "I will do this. I would get involved, but I do not know what the mechanism is. How do I get into it in the first place?" That is the principal barrier, but I think that business organisations would be very willing to work with the Government to identify more SME Business Ambassadors and SME export champions.

Q14 Nadhim Zahawi: In the last couple of years, there has obviously been a focus on the emerging markets. We have all heard of the acronym coined by Goldman Sachs—the BRICs. Less well known is CIVETS, which includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Is this the right approach and targeting or should we concentrate on more established markets?

Adam Marshall: I am thinking through the acronyms! Effectively we need a focus on both established and emerging markets when we talk about trade promotion. I would say that, wouldn't I? Very large numbers of first­time exporters will want to go somewhere familiar, and that means generally Europe or North America, because they are seen as the easiest markets, in many cases, to start out in. They are often looking for a bit of support, a bit of advice or a bit of help to move into those markets for the first time. That said, however, these are markets whose economic growth levels are relatively stagnant, whereas the BRICs, the CIVETS and any other number of emerging markets are the ones where we are seeing 6%, 7% or 8% year­on­year growth and the potential for new markets opening up. If I was sat in UKTI right now, I would probably defend a focus on the emerging markets because of the potential returns from their growth to British exporters. At the same time, I would be saying, "I wonder how we could unlock more resource or more money so that we could actually help businesses get into established markets if they are first time exporters."

Susan Ross: I think there should be a focus on markets where our UK products will go down well. We sell leading­edge technologies in a whole range, from fashion through to engineering, service industries and project management. That is not going to go down so well in some countries as it is in others. Let us concentrate on where it will go down well, where perhaps trade might be a stepping stone for diplomacy, so there might be a good reason to go there and, lastly, where either there are commercial ways of helping with the risk of non­payment under the trade finance, or where ECGD can come in and supply that—a targeted, focused, smart view on how to get there.

Q15 Nadhim Zahawi: Are you saying that UKTI and UK plc need to segment better—i.e. there is no point in having a broad­brush approach and running around the world after the CIVETS, the BRICs or whatever acronym? It is much better to think of what we are good at and what are we good at exporting, and then target those towards those countries that have those needs.

Susan Ross: It could be for example that South America is more attuned to North America than to Europe. Where do British products go down well? In the Middle East, the Far East, so perhaps the "V" rather than the "C".

Adam Marshall: I agree with Susan. At a time of limited resource and limited capacity, we need to target our efforts on what generates the most returns. However, I would caution against a retreat from higher­growth markets where we currently do not have a presence, because that effectively leaves the territory open to our major international competitors, when in fact we may have something within a very short time period that we could be selling into those markets. It is a question of being a bit omnipresent, but being smart when you are investing major resource.

Q16 Mr Ward: Something we are trying to do in Bradford is to take advantage of the large amount of immigration and harness that. To some degree, latterly, East Europeans have come in, but of course there is a big Indian community in this country. Have we done anything strategically to build on that natural advantage that we have to get into markets such as India?

Adam Marshall: The trade mission that is going to India at the moment and the Prime Minister's prioritisation of India as a market are recognitions of the importance of those links. There are two things that we need to consider. One is historical links to a number of countries that are either members of the Commonwealth or ex­colonies, where the trading links survived long after the British departed. The other thing that we have to think about is those countries from which we have had recent immigration. You do not necessarily think about a country like Poland, for example, from where we have seen recent immigration, as a major export market for the UK. That is a cultural problem. We would like to say we now have a large number of Polish people in this country; we actually do have good economic links with Poland now. Why isn't it a bigger export market for UK companies and what can we do to make it so?

Q17 Nadhim Zahawi: Can I now move on to thinking about UKTI? Following the announcement of the budget cuts for BIS through the Comprehensive Spending Review, which services would you be most worried about losing at UKTI or being cut back? Mr Marshall, your own research survey showed that most companies that you spoke to felt that UKTI needed rationalisation and a more joined­up service. Can you expand on those comments? What does UKTI need to do more of, stop doing or scrap altogether?

Adam Marshall: I think I indicated earlier in my evidence that trade promotion and promotion of exporting as a route to business growth is our absolute top priority. In many cases, this needs to be done with small and medium­sized business in the regions, rather than necessarily large businesses in and around the capital. UKTI is having significant cutbacks. What we would like to see protected is frontline advice to businesses wherever possible. Now, that also needs to be done in the context of a reform of how UKTI does business. I mentioned earlier a focus on outcomes rather than on number of businesses seen as being extremely important. Also, there are possibilities for UKTI to work with other providers of support for exporters—Chambers of Commerce is one of many—to deliver a better service over time. What I do not think we have taken into account here though is the fact that UKTI's budget, or the trade promotion budget of UK plc, as it were, was very small to begin with. When we went into the Spending Review, we said there are only two things we need to protect in this country in terms of budgets. One is our infrastructure budget and the other is our trade promotion budget. Certainly there are ways to reform how we spend both of them and spend them both better, but those are the two things that will help our economy grow.

Susan Ross: My view is that, as companies get bigger and merge, they tend not to keep the same HQ functions duplicated in the individual companies; they tend to cut down on staff numbers in central functions, such as human resources, IT and finance. I suggest that perhaps the same could be achieved in order to keep plenty of frontline staff, but just be a bit wiser about how the budget is spent.

Q18 Nadhim Zahawi: Thank you for that. Do you think that diplomats can make good salesmen?

Adam Marshall: This is a question that has been doing the rounds for a number of years. I think we have seen a number of successive Governments say that they want to use our embassies better as shop windows for potential exporters. The current Foreign Secretary is no exception to that. He has gone at it with a good degree of zeal and zest, which is very welcome. We need the reality though to match the rhetoric. That means that we need qualified business-people, often in these overseas posts, who understand the needs of a company, whether it is an SME or a large company, coming to try to develop a new market. I think our members would say there has been significant improvement in very recent years in the quality of local, on­the­ground staff, both of UKTI and the FCO, in those overseas posts, but that that quality could still be significantly higher. You would like to see more seasoned business-people, after a 30­year business career, perhaps becoming our representative in Delhi, in Beijing, in Seoul, etc, rather than someone who has spent a 30­year career within the diplomatic service.

Susan Ross: My view is yes, I think they are important. I think overseas posts, though, should not be trying to earn money out of making their premises available for meetings or get­togethers, particularly from SMEs, which are the ones that do not have a local presence. If those embassy commercial staff were to spend time working on secondment in business, they would get a much greater understanding of what business-people need when they come to them overseas. The reports that we have had back from members are that some overseas embassies and consulates are fantastic and others are not so good.

Q19 Mr Binley: I would particularly like to follow that up. We have made a number of visits to important potential export areas as a Committee, and we have found exactly that: the point that you have just made that, where we have good people it works very well; where we have not, it is a pretty bureaucratic operation. The fact that you concentrate your remarks on process and not outcomes is very much a bureaucratic way of looking at the world and certainly not a business way of looking at the world. While the quality has improved, it is very patchy. How do we ensure in practical terms that we get people involved in UKTI out in those countries who know about business? How do we get them? It is not happening; it is accidentally happening. When you get somebody, it is almost by accident and not by design. How do we do that?

Adam Marshall: The first thing is to recognise that career diplomats are not market makers, and that is something that UKTI, BIS and the FCO need to agree between them. This is a classic Whitehall thing, isn't it? The money comes from three separate sources and there are three separate sets of personnel involved, three separate sets of initial priorities, etc. On the ground, overseas, it is FCO personnel very often and FCO money that has gone into that. I think that secondments into business of FCO staff, over the long-term, are one way we could get around this. Another way is to bring people into the diplomatic service later in their careers, on the express premise that they are there to perform a commercial service rather than to be well­rounded diplomats who are doing consular work, political representation, etc.

Q20 Nadhim Zahawi: Do you think there is a cultural issue here? On a recent all­party group visit to the Kurdish region of Iraq, some of the evidence we got back was that, to compare and contrast us with the French, the French Foreign Service would lead with business questions or business development and then follow with the political questions when meeting leaders of those countries, whereas we do the reverse. Also, they are not shy about using their president. We had direct evidence of two or three major contracts won because President Sarkozy actually very directly led not just a general trade mission but a very specific mission to win a contract or to deliver an agreement for Carrefour or France Telecom, whereas we culturally are more reticent about going out and actually selling specific companies.

Adam Marshall: We must not be shy about banging the drum for our businesses, and we must not beat about the bush if the principal reason for us going overseas is to generate income for UK plc, generate turnover for our businesses. The Prime Minister in his first months has been positive on that front, in the sense that he has been on a number of serious overseas visits with the express recognition that his top priority was commercial relationships. That is quite positive. What you need to see is that across the system, across the variety of encounters that we have over time. Whenever any politician goes overseas and, indeed, whenever any senior official goes overseas, those commercial interests need to be front and centre.

Susan Ross: I do not think there is a recognition, in the diplomatic side, of the value of commerce in winning over the hearts and minds of people. If you see your products overseas, definitely you start to have an appreciation of the tie between the countries.

Q21 Chair: Could I just follow up this argument? It has been put to me that, valuable though these headline­making trips are by senior politicians and so on—and yes, certainly when we visited the Gulf area it was emphasised just how important it was for top people to be going there to represent industry—there was a certain feeling that, in effect, they were highlighting only deals that would have happened anyway; and that there is a need for business and Government to be engaged, if you like, at a level that would enable, as Nadhim has just outlined, our senior politicians—Government members—to go out and help prepare the ground abroad at an earlier stage for the realisation of successful contracts. I am not sure if that culture, as opposed to the headline PR coronation culture, if you like, has really been developed. I would welcome your comments on that.

Adam Marshall: I think unfortunately that goes back to the short­termist nature of our political system in this country, where short­term outcomes are often valued over the patient long­term work required to make some of these deals a reality. I would not put the blame for that on any single politician or any single party, but really on the system itself. Any Prime Minister who goes abroad is going to want to come back with a clutch of contracts in hand, and I can understand that because that is what our newspapers are after. Otherwise, the trip is a failure in media terms. We in the business world, conversely, would not see the trip as a failure if a Prime Minister, a Foreign Secretary, a Business Minister indeed, went abroad and simply patiently met a wide variety of companies to open markets. The two types of visits go hand in hand.

Q22 Chair: In effect, what can you do to ensure that there is engagement at a level that would enable that to take place?

Adam Marshall: It is a difficult question. We would certainly make that point to senior Ministers and senior politicians in our conversations with them. What we would also do is use the Chambers of Commerce network itself; with a front door in towns and cities across the world, you can also begin to make markets for SMEs without involving Government. You have a lot of 'Bilateral Chambers', we call them—Chambers of Commerce between Britain and single countries overseas—whose effective job is to create those links between companies on the ground. That is something that both the Chambers of Commerce here in the UK and those Bilateral Chambers abroad will continue to do.

Q23 Margot James: Just before I ask my question, I wanted to follow up on the conversation about diplomats and our embassies abroad. I would just like to put on record, if I may, that on my recent trip to Japan at the end of last year, I really was very impressed by the commercial savvy of our diplomats in Japan whom I met. The British embassy in Japan is a huge draw for local businesses, because it is such a beautiful historic building of such renown, and our ambassador there is thinking about business for much of the time. In the evidence presented to us, it has been suggested that the lines between the various Chambers, trade associations and UKTI that are all charged with a mission to help exports are rather blurred, and that businesses do not really know who to go to for help. Do you see any truth in that? If so, what do you think could be done about it?

Adam Marshall: I think the business support landscape for SMEs in general is extremely crowded, though becoming less so day by day, as the number of services are cut and as particular branded organisations close their doors. Some competing routes of advice are starting to fall away. SMEs want to be able to walk into a local institution, where they have a certain level of trust, in order to ask first questions about how to export, how to get overseas, how to meet embassy staff in Japan, a commercial advisor in Delhi or whoever else it might be.

Not to paddle my own canoe, as it were, but I think Chambers of Commerce are those front doors in many places around the country. They are the sorts of places where local business can feel confident walking through the door and not feeling like they have possibly gone to the wrong place. The Chambers of Commerce that have international trade staff, which are the vast majority, can either help them directly or signpost them to the right type of assistance. We also provide quite a lot of training for inexperienced exporters and for companies thinking about going abroad for the first time. I think there is a role there for organisations like the Chambers of Commerce in the private sector to do more of this and to take on more of the role of helping SMEs get into exporting. There are other organisations as well that could do that.

Susan Ross: I think that the Chambers do a great job. I think UKTI does a great job in broad terms. I would like to see UKTI getting to understand what commercial solutions are out there. For example, export trading houses can pick up and run with an export. Let us say you want to develop the Libya market; you have never been there before. You go to UKTI or you could go to a trading house that says, "Yes, now then. Let us work it through. This is what you need. This is the type of approach you need to make. This is what you have got to put in your bid. This is going to tick the boxes." UKTI can offer so much, but somebody who has an office there on the ground, who knows how to collect money, who knows the system, will take a commission but get the job done; they will get the export done. I would like to see UKTI understanding better what is available commercially and, dare I say it, making it available, or more accessible, through their system for new exporters to find those sorts of solutions.

Q24 Margot James: What do you think about the addition of the Foreign Office in their responsibilities on the export side now? Do you think there is a danger that that might confuse businesses further or do you see it as a wholly good thing?

Adam Marshall: I do not think that the Foreign Office is doing anything particularly different from what it did before. It is just emphasising more the export side and the commercial side of their role. I do not think they are visible or tangible to most SMEs on the ground as a player in that provision of advice. Businesses would be more likely to think of UKTI, Chambers of Commerce, Regional Development Agencies, local banks, accountants, etc. They would be looking at a wide variety of far more local systems of support and wondering who to go to.

Q25 Margot James: Moving on to the UK brand, you have suggested that inward investment has been quite successful in recent years, but has there been any dilution of the UK as a country that all potential investors see, with the RDAs promoting their own regions in different markets?

Adam Marshall: I remember giving evidence to an inquiry on exporting out of recession about a year and a half ago, and one of the topics that we brought up at the time was that there was too much on­the­ground competition in major foreign markets looking for inward investment. We wanted there to be a single front door to the UK in a major overseas capital like Beijing, Delhi, Brasilia, wherever it may be, for foreign inward investment into the UK; competing missions, for example, of differing RDAs, UKTI or the devolved nations' institutions makes us look a bit fragmented. We did campaign quite hard at the time and continue to believe that we should not have that level of fragmentation overseas, when it comes to inward investment.

Susan Ross: The British Exporters Association is less involved in inward investment, except that it is worth noting that some of our biggest exporters are international or multinational companies. Therefore, as a separate but related issue, inward investment is important.

Q26 Margot James: Adam, just following up on that, I think you have answered the question I was going to ask you, which was: should LEPs have a role in place of RDAs with trade and inward investment? I presume from what you have said about the form of fragmentation that you would not be in favour of that, but what would you say to LEPs, which want to maximise inward investment into their regions? What advice would you give them on how to maximise the inward investment opportunities?

Adam Marshall: Let's remember that LEPs are non­statutory partnerships. They do not have significant budgetary resources, so I seriously doubt any of them will be creating their own inward-investment missions and sending people over to foreign markets in order to try to secure inward investment. If they do that, it is probably a mistake, I would suggest. What I would like to see Local Enterprise Partnerships doing, and particularly the business heads who are leading those Local Enterprise Partnerships—not necessarily the local authorities—is, when a foreign investor does come calling in a city or town around the UK, to take that investor by the hand, show them around the area, why it is dynamic, why they should be there, etc. It is really the service on the ground here in the UK where the LEPs may have a role in making sure that a potential investor has seen the best of an area. That is something that can be done both on a voluntary basis, i.e. businesses getting involved and trying to get other businesses in to create a critical mass in a particular area, and also using resources from the local authorities where possible in order to provide data, etc, about the attractiveness of the area.

Q27 Margot James: Is there a danger that inward investment will revert to London and the South-East as a default, now that we do not have this regional representation abroad?

Adam Marshall: This is a difficult question. Company location decisions are extremely complex. You have things like land prices, cost of labour, etc, which go into a really complex set of calculations. Companies that choose to locate in London and the South-East know they are locating in one of the highest­cost areas of the world, and will probably be different from companies that would locate in other regions of the UK, where that cost base is lower. I do not intrinsically see this as a competition between the South-East and the rest of the UK for inward investment; I see this as a competition between UK regions and provincial cities, and those on the continent and further afield. What we need to be paying attention to is how Birmingham, for example, competes with a city like Bordeaux—or Bari in Italy, just to keep the theme of the "Bs" going—rather than how it competes with London for inward investment.

Q28 Chair: The Committee has asked this question at various inquiries, and I received correspondence from BIS advising me that UKTI will shortly launch a procurement to identify a contractor to deliver the necessary support. This procurement will seek to appoint a single organisation to support the delivery of foreign direct investment within England. Were you aware of this? Is BCC involved at all? Do you know anything about it?

Adam Marshall: Yes, I am aware of it. I would not like to comment on ongoing tenders.

Q29 Mr Ward: Just to bring this bit together, we have been talking, in Margot's previous question, about blurring, and various organisations being available to support a business that wants to export. I want to go a stage before that. Take the example of a small manufacturing business in, say, Bradford East—who takes the lead in going to that business and saying, "Have you ever thought about exporting?"

Adam Marshall: Quite often, actually it will be the Chamber of Commerce. Bradford Chamber, for example, might be the very first to contact that business and say to them, first, "Are you a member?", and second, "Are you interested in learning more about export opportunities? Are you interested in getting trained up so that you can go out into potential export markets?" Sometimes it will be UKTI through its regional teams. The answer is that there are various routes, and various people who may be the first callers to ask that particular question. The thing that we hear more than anything else, to be completely honest with you, is it is the first time that that firm receives a telephone call from an overseas market and someone interested in buying their products; then they spring into action and other players become involved.

Q30 Chair: Before I go on to the next section, which is basically export credit finance, we are getting into a very arcane area with financial instruments that are not totally clear to laypersons. In particular, we are told the UK does not offer bond support. I wonder if anybody could clarify exactly what bonds are in this particular context. Fixed­rate export finance also, I think, would be useful. Before we get to the detailed questions, would you like to give a summary of what these particular instruments are and perhaps what role they could play?

Susan Ross: Bonds first: bonds are used to support export contracts. For capital and semi­capital goods, there is a little bit of development work usually going on. The customer overseas has had to write quite a complicated specification of what it needs, so it has put an investment in just for the tendering process. It wants to be sure that whoever it chooses, number one, is going to turn up and do the job and, number two, is going to do it properly, so they ask for a bond. They ask for a bid or tender bond to cover the tender and make sure that, if they are selected, that company will do the job. For the contract, once it is won, they require a performance bond. More often than not, the exporter will say, "Look, I am doing a lot of work here. I would like an advance or mobilisation payment." The customer says, "I will make that advance payment to you if you give me a bond." That is called an advance payment guarantee.

Q31 Chair: How are these bonds financed in other countries?

Susan Ross: For an exporter to have a bond issued, it goes to its bank and says, "Could you arrange for a bond to be issued to this overseas entity?", which might be private sector or public sector. The bank says, "Yes, of course I will arrange it for you, but I would like a fee and I would also like some security." In other countries—France, Germany, Canada, Australia—you can go to your export credit agency, the equivalent of ECGD and, although the fee is still there, the export credit agency solves part of the security issue, so you are not having to take some of your fixed assets and put them as security for the contract bonds.

Q32 Chair: Thank you, that was very helpful. Fixed­rate export finance, would you like to do a quick explanation of that?

Susan Ross: Usually overseas Governments, if they are putting out a tender for a big project, say, "I would like to have a fixed­rate interest. I would like to pay over five years and I would like it to be at a fixed rate of interest." When we bid, we need to provide a bid that shows we have got a fixed rate of interest. If we do not provide the bid with a fixed rate of interest, the bid goes in the bin. Nobody's going to open it and look and see if the goods and services are right or perfect for the job; the bid goes in the bin before it is even looked at. The overseas customer will require the fixed­rate export finance, FREF, to come from the export credit agency. It is a demonstration of the Government's support for that project.

Q33 Simon Kirby: You have been kind enough to explain some of the differences between the ECGD and other countries' export credit agencies. Can you expand on that and compare the service offered in this country with our competitors elsewhere?

Susan Ross: Yes I can, and I am afraid it makes dismal reading. We produced a report in the summer, which set out where we are for UK exporters with ECGD, and we looked at 38 different export credit agencies. We picked 10 of the most important facilities that export credit agencies provide, and ECGD ticked five. Of the 38, it was in the bottom set. Some export credit agencies ticked all 10; some, nine; some, eight. France and Germany were eight and nine; I cannot remember which way round. We are down at five. We then looked at something else; we looked at our world ranking for GDP and our world ranking for exports. It became very clear that those countries with effective export credit agencies actually had a better ranking in export terms than their GDP would suggest. Now, that might be circumstantial; we just make the observation.

Q34 Simon Kirby: I am very interested in your answer to the question, because it clearly is an area where there is considerable room for improvement. Can you be specific about what changes you would like? You mention 10 targets and only five being achieved in your report. If you were to tell us here, as a Committee, two or three areas that you think specifically could result in improvements, what would they be?

Susan Ross: I will go back to something that David Ward mentioned: India. A company that is setting out to export, has Indian ties, wants to export to India and is selling something that is paid for normally at 60 or 90­day terms—a short­term export—goes to a commercial credit insurer and says, "I have one contract. It is for India." The commercial credit insurers will probably say, "I am terribly sorry, but my minimum premium is going to make the purchase of my offering uncompetitive." We need ECGD to be able to offer short­term covers where there are good risks, but it is uneconomic for a commercial export credit insurer to provide. That is the first thing: short­term export credit insurance.

In theory, ECGD can provide it; they have been allowed to provide it for what is known as 'non­marketable risks', non­OECD risks, but they just have not been very active. If you look at last year's financials to March 2010, 90% of ECGD's business was aerospace. That is fantastic for aerospace, a brilliant team, but the problem is we also need them to be there for other industries. Germany has an enormous SME customer base, and the turnover from Hermes Germany is way above ours.

Q35 Simon Kirby: Sorry, we are having a conversation here, and I do apologise, Chair, because I will stick to a questioning format. Why do you think it was that the ECGD did not provide greater support to SMEs during our recessionary times, when clearly competitors abroad did? It doesn't make any sense to me at all.

Susan Ross: There had been a general decline year on year. We looked at 10 years and there was a decline of 60% odd in ECGD's business. At the same time, other European ECAs (export credit agencies) were improving by multiples—hundreds of per cent. To me, that points to a lack of political will. Maybe there are signs of change now, but I think more needs to be done. If I can mention bonds as well—I talked about bonds earlier—we really do need ECGD to be there for small and medium­sized companies that want to have bonds issued on their behalf, and for which they do not want to hand over the security. We are having discussions with ECGD at the moment about bond support, but they want a sharing of security. If you have some security, you pledge it to the bank; they pick up the calculator and give you—this is very basic, I am sorry—they give you whatever in borrowings. If you take half that security away to give it to ECGD, what is going to happen to the calculation? It is the same percentage. You are going to have a reduction in the available lending. We need ECGD to be there, as other ECAs are, to support the security aspect of bond­issue support.

Adam Marshall: Our SME members say to us continuously that ECGD is not there for them and that its products, whilst they may work for some of our biggest exporters and some of our biggest companies, do not really help at the SME level. A lot of that is a structural problem because, since 1991, when ECGD privatised their short­term trade credit insurance business, a lot of their capacity to help small and medium­sized businesses went away overnight. What you do have are some teams of very good specialists, who can do work for some of those big companies in particular markets like aerospace, as Susan mentioned, but you simply do not have the ability to help volumes of SMEs with a suite of products that gives them the confidence to say, "My national export credit agency is working on my behalf in the same way the Germans are, the French are, etc."

Q36 Simon Kirby: That is very interesting. We have had a number of interesting sessions about the Enterprise Finance Guarantee scheme, and part of those discussions came up with the idea that a similar scheme might be useful for trade. Would you agree with that?

Adam Marshall: Absolutely. Our view on the EFG scheme generally was that, whilst it had a slow start, it has become increasingly important and has been very important to a large number of SMEs, both over the course of the recession and as we have entered into recovery. We have been pleased that the Government has extended it as well. What a lot of companies did say to us, however, was that it was not adapted properly to enable them to export or to get the sorts of financing they needed for export—whether it is bond support, as Susan mentioned, or some other very technical forms of export financing and export support. They would certainly welcome the introduction of an export­focused variant of EFG.

The questions I would ask are whether the price and the terms are right and whether the Government and its partners are willing to take a sufficiently long­term view on something like this, rather than simply wrap it up in six months or a year if there is not high take-up right away. All too often we create quite a lot of support schemes, and Governments decide to stop them or to discontinue them on the basis of very small amounts of evidence. I think what we would like to see is the maximum portfolio of support schemes possible, so that businesses operating with particular problems or in particular niches can get the help that they require and always have those schemes open. That is what the Germans do and that is what others do as well to ensure that they have got this broad portfolio and that all their SMEs can get access.

Q37 Simon Kirby: If I may, Chair, ask a final question just to pick up a point made about having a suite of finance options, do you think that simplification is the way forward? Companies are there and they know what is available, and it is a straightforward process for them. Is that an important element of changes to the current regime?

Adam Marshall: Susan is better placed to answer on the complexity of the structured financing. All I will say is that companies will want to walk through a door and speak to someone who can advise them on a wide range of potential options that suit their needs, at a particular time. Usually a company will walk into a conversation like this and say, "I have a problem," and explain the problem in terms of their business. What they cannot do is walk in and say, "By the way, I need bond support for a non­marketable country," etc. That is what the specialists are here for.

Susan Ross: If there are new facilities, and I understand they are going to happen, they need to provide additionality. If you can go to the bank and borrow, the Government needs to be there. It needs to focus on what companies need. It needs to find out from the exporters what they need; talk to the exporters. ECGD, of course, is going to need a distribution method, because it hasn't got innumerable staff on the ground, so use the banks for the administration of distribution, but do not try also to use the banks' decision taking and what they are doing on security, taking pledges of security, because that is not going to provide additionality. ECGD acts as an insurance company. It is profitable. ECGD should start to think as an insurance company and to assess risk from an insurance perspective. It can outsource that assessment to credit insurers, for example, but it needs to think differently from what the banks are doing and not require this sharing of security.

Q38 Mr Binley: We have pretty much established by dint of your evidence that the Government could do much more to help the SME sector. Indeed, I talked to the Forum of Private Business, to your own organisation, as you know, Adam, and to the FSB, and they all said that much more could be done by Government to promote export credit guarantee schemes and other schemes to aid the SME sector. The whole argument is irrefutable and we need to make that point very firmly.

The Forum of Private Business gave me one example, which I would like to read into the record. I apologise for doing so. It takes just a little time, but I think it is very worthwhile. "One of our members had real problems accessing these guarantees; a company called Delta Design Systems Limited, near Clacton, Essex. They needed help over a contract in Iraq worth £57 million. They raised a performance bond of £1.27 million but, despite repeatedly trying, received no support from the Export Credit Guarantee Department, which told them that, if they were a company such as BAE, they would probably have been able to help." I think that comment absolutely makes the point you have been stating, and we need that firmly stated, I believe, in our Report. Forgive me for reading that out, but I assume that this is not an isolated case.

Adam Marshall: Unfortunately, the number of members who have come to us reporting similar stories is far too large for me to mention in the limited time we have available. At the last inquiry of this nature, I talked about a wallpaper manufacturer from Lancashire who could not get short-term export credit insurance for Russia, and lost market share to its German competitor. The number of stories like that, which I can tell you, is quite large. Unfortunately, what we come up against, time and time again, is a classic civil service answer, which is, "Unless you can provide me with evidence at scale of what the problem is, we do not think it is necessary to take action." That is what we have been fighting against for a number of years. We could simply say, "Look, I can provide you with anecdote after anecdote after anecdote."

When they get to the scale that I have seen and problems such as the one, Brian, that you have just described, it is very obvious that there is a problem here. That is why we have recommended a state backed short-term export credit insurance scheme. That is why we have recommended that we always have something on the shelf, in terms of export credit insurance, to activate when times get tough for SMEs. Invariably they will get tough again, from the lessons of the last two years. Yes, the situation has improved in recent months, but that does not mean this could not happen again at very short notice, and we are not doing enough as a country to be prepared when those situations arise, so that we do not get more horror stories like the one that you have just read out.

Q39 Mr Binley: That is a pretty firm recommendation and I am grateful that you have given it. Ms Ross, your figures show in that in 2009-10, and I think you have already touched on this, ECGD's non­aerospace business declined by nearly 90%. Can I ask what you think the reason for that was?

Susan Ross: I think they got into a rut. They are very good at aerospace, but they were not out there looking for other business. As I say, I do not think the will was there to do other than what they knew they were good at. They also had the problem of their business principles, which were set up at the beginning in 2000 or 2001, and which meant that they had to have a consultation about anything new they wanted to do. They have cleared those; we have got a new set of business principles. I think, with help from folk such as you, we might see a change. I hope it is going to be that the figures are not going to be so dismal for non­aerospace next year.

Q40 Mr Binley: Would I be being too robust by saying that the words that come into my mind, from both the evidence and your answer, is that they became lazy and complacent? Go on, push it.

Susan Ross: I think they lost the understanding of their role. They were covered in the problem of having always to explain to NGOs what they were doing, and gradually withdrew to things that were tried and tested. They were not prepared to stick their necks out and say, "No, we have got good engineering businesses here. Why aren't we doing enough of them? Why are we not taking a snapshot of all the capital and semi­capital goods in this country and helping these companies to go abroad to new markets, such as Iraq, where surely the export credit insurers on the commercial side are not going to have acres of capacity?" I think they just did not have that vision.

Q41 Mr Binley: One of the things we have got to do is kick this Government into ensuring a greater diversification. You imply that privatisation could be an idea. To be fair, I think that you both say that a state­backed export trade credit insurance scheme can run through a private company. Am I being over­zealous?

Adam Marshall: Yes, but I would not characterise that as privatisation. What both Susan and I are looking for is the state to step in where the commercial market does not. The state can always work through a private company but, at the end of the day, it is the state's guarantee.

Q42 Mr Binley: Thank you; that explains it for me. I am grateful. One of the things we can do is highlight this matter very effectively and robustly, and bring it to the attention of the Minister and the Secretary of State, when we meet the Secretary of State, as we do on a regular basis. What else can be done to achieve the objectives you wish?

Adam Marshall: I think there are three watchwords in terms of ECGD or any export credit agency that you should be looking for, especially in terms of their dealings with SMEs. The first is agility. Susan touched on this when she said that, before, ECGD found it difficult to react in short amounts of time in order to help SMEs when business conditions changed. I think you should be looking for that. The second is responsiveness. We should not see cases where someone has proactively gone to our national export credit agency and been told that there is no help available for them. The third is capacity, at the end of the day, and of course that brings on the question of how you resource it. ECGD needs to be able to help SMEs in greater numbers but, unfortunately, it has a very dedicated but very specialist team that cannot do that at the moment. I would not like to say that they have gotten lazy in any way, shape or form; they are just overly focused on a very specific segment of the market, because that is what they have the resource to do.

Q43 Mr Binley: Can I conclude, Mr Chairman, by asking about the importance of ECGD's fixed­rate export finance, and what the consequences will be of phasing it out for UK industry?

Susan Ross: The consequences of throwing out, I am going to call it FREF, are that big business will not be able to have a Government­supported fixed­interest­rate option on medium­term projects and contracts, which means that when the bids are assessed by the overseas entity, only the fixed­rate options will be looked at. The ones that are non­compliant, because they do not have a Government supported fixed­interest­rate option, will be thrown out. We then cut ourselves out of these big projects. As you know, it is very important to support big business with big projects, because a lot of the innovation that they have is brought in from SMEs. Take Airbus, for example. The Airbus wings business in Wales is responsible for about 10,000 Airbus jobs in the UK and 135,000 in the supply chain. The SME aspect is there. The other aspect about big projects is, further along the line, somebody is going to need spares, support, training, services. If you have got the original project, 10 years down the line, the phone call comes, "Can you supply the replacement part for something or the upgrade?" If you do not have the project, if the project has gone to France or Germany, we have cut ourselves out of those follow­on orders.

Q44 Mr Binley: A final supplementary question: do you think the Government simply does not understand that any form of growth, be it in the manufacturing sector or in the service sector, needs financing and that is a major problem at this moment?

Susan Ross: I think the interest in cuts, the time spent talking about cuts, has prevented them from seeing the real world. You never get anywhere unless you invest. You cannot grow without investment.

Adam Marshall: I would simply say that we need to have the maximum portfolio of financing options available for businesses to draw on, when they are required. It does not cost the Government a lot of money to keep FREF going, for example. They cite low take­up as a reason to discontinue it. That is because, at the end of the day, it is simply a tick box thing that is needed in order to tender for the contracts that Susan is talking about, but it is still needed. That goes for a range of other schemes, whereby there will be businesses that will lose out if they are closed.

Q45 Chair: Can I just conclude this section with, quite frankly, rather frightening figures? The ECGD reduced its staff numbers from an average of 366 in 2003-04 to 207 in 2009-10, so you are talking about something like a 40% reduction in the last six years, which could have resulted in some of the problems we have just heard or been a consequence of them. It is not altogether clear. What is even more frightening is that it expects to reduce its staff numbers further over the lifetime of this Parliament, in compliance with Government policy to reduce costs to the public sector. This has enormous implications as far as I can see. Obviously we as a Committee can make representations. Is there anything from the business community that you can do or say that could, if you like, mitigate the potential consequences of these reductions?

Adam Marshall: We have said, and we will continue to say, that export financing is a bit like the National Health Service; it is a necessity, not a "nice to have". That is a position that we have taken for a long time. At the end of the day, jobs are dependent on exports; company growth is dependent on exports, and tax revenue is dependent on exports. What we have said to both the current Government and the previous Government, and will say to successive Governments, is that this may be a technical, difficult and long­term set of issues, but it requires their full attention from day one.

Susan Ross: It is very scary. I wonder, in the figures that you quoted, what proportion was of frontline staff. What we have seen at ECGD is a lot of retirements of very experienced personnel, and that is a great shame, and they are not being replaced. Fair enough if it is HQ staff merged with another Department, using somebody else's HQ, but frontline staff are really important. I think ECGD has the potential to have a great role and I think it could outsource more, but it still needs proper frontline staff, who can help exporters to get where they want to with contracts and projects.

Q46 Chair: Arising from what you have just said, Susan, it would appear that possibly there might be a connection between the reduction in its role with SMEs and the retirement of long-standing and experienced personnel. Do you think that could be correct?

Susan Ross: ECGD sold off its short­term arm in December 1991, so it does not really explain what has been going on in the last decade. However, we have seen a decline in turnover for the UK: in 2003-04, turnover was £3 billion; it was halved in 2009, but came up to £2.2 billion. Heavens, inflation must have run at some per cent over that period.

Q47 Chair: Do you know if the comparable organisations in countries such as France and Germany have had a reduction in staff?

Susan Ross: France in the last decade: up 258%. Germany: up only 37%. If I may quote you Italy: up 325%. Belgium is up 188%. There is a list.

Q48 Chair: Yes, that could be very significant. Can I thank you for attending? That really has been very helpful. Obviously we will be following through the issues that you have raised rigorously with other bodies. If I could just conclude, Adam, I refer to my earlier question on foreign direct investment and you could not comment on the tendering process. Is that because BCC is involved?

Adam Marshall: Yes. As I said, I would not want to comment on an ongoing tendering process.

Chair: Okay, thank you. We have got the information we want. Thank you very much anyway.

Susan Ross: Thank you. That was very encouraging.

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