Volatile trade deficit figures in the UK show that more needs to be done to achieve a full-blown exporting culture, helping SMEs face the unknown. Sofia Lotto Persio reports.
As the saying goes, things need to get worse before they get better. After months of bleak reporting on UK trade deficit figures, exports of goods and services are recovering. The Office for National Statistics’ (ONS) latest figures for April 2015, released in the beginning of June, show a reduction in the total trade deficit to £1.2bn from £3.1bn the previous month.
This is the narrowest the trade deficit has been since March 2014, reflecting both an increase in exports and a decrease in imports. Exports of goods increased by £700mn, £600mn of which was attributed to demand from countries outside of the EU including the US and China.
But statistics can show different pictures depending on the lens used. As the ONS pointed out, if we look from a wider perspective at the three months from January 2015, the UK’s deficit on trade in goods and services has actually widened by £1.6bn, mostly due to the fall in oil prices affecting the export of fuels.
Overall, the trade balance in April sees a deficit of £8.6bn on goods, only partially offset by an estimated surplus of £7.4bn on services. No matter which way we want to see this, it is clear that more needs to be done to support British exporters – but what exactly needs changing?
A disjointed approach
“We are not winning at exports,” remarked Gabriel Buck, head of ECA and capex financing solutions at Barclays and chairman of the British Bankers’ Association’s export finance committee at the GTR UK Trade and Export Finance conference. Buck was presenting the findings of the Cole Commission, which he is a member of, and which was launched in October 2014 to conduct an independent review on how the government can better support British exports. The final report, published at the end of June, said that more needs to be done to speed up the process of achieving the ambitious £1tn by 2020 export target set by Chancellor George Osborne three years ago.
According to Buck, a lack of finance was not an issue preventing British companies from exporting; a lack of information and guidance was, with government support that often seemed “patchy, difficult and disjointed”, particularly in the way the UK Trade and Investment (UKTI) and UK Export Finance (UKEF) agencies operate. The concern over lack of co-ordination or coherence among government activities was shared by Lesley Batchelor, director general of the Institute of Export and International Trade (IoE), speaking at the GTR event: “We work very much as silos,” she said. As an example, she recounted the disbelief of the Malaysian government in hearing about the UK process for export support: “They thought I overcomplicated it to earn money for my consultancy. But no, really, that is how it works!” The problem, according to her, is that the different offices are not working together as an organisation. “There is a lot of protectionism going on and we need to get over it,” she remarked. To address these concerns, the Commission called for enhanced collaboration between the two, uniting them under “a core set of KPIs that place enhancing exports as the first order priority” and “enabling greater access to UKTI’s international network”.
The first action point advised by the Commission, a co-location of the agencies, finds more support than the idea of a UKTI-UKEF merge previously suggested in the Commission’s interim report. Paul Croucher, head of trade finance and insurance solutions at UKEF, described the two agencies as having “different, complementary missions” but said that the two are already co-operating on some levels. He noted too that there is an overarching export task force to make everybody involved in exports in the government work more closely together. More co-operation may come from sharing office space, which he described as “a possibility we’re looking to explore”.
In terms of product offering, UKEF’s work “ticks all the boxes” said Buck, noting however that adding more products, like foreign exchange risk cover, would be beneficial. One of the latest products, the Direct Lending Scheme (DLS), was seen as a positive addition that, in the words of James Pumphrey, head of structured trade and export finance UK at Deutsche Bank, puts UKEF “on the same level as other ECAs in terms of level of financing”. The DLS, explained Margaret Eyres, UKEF’s head of direct lending, can offer different products depending on different funding needs. “We can offer interest rates that are seen as very attractive at the moment, they are the commercial interest reference rates that are determined by the OECD on a monthly basis,” she told GTR, adding: “We find that, say, buyers in Africa, Asia and the Middle East, are very attracted by this scheme.”
The first and – so far – most famous use of the direct lending facility was through the Carillion deal, in which the British construction services company won a £75mn contract to develop phase 1 of the Dubai World Trade Centre thanks to a £34mn facility provided by the ECA. “UKEF has helped us level the playing field,” said Zafar Khan, group financial controller at Carillion. However, there is still an issue with the timing the funding becomes available, as Khan pointed out that it takes six to nine months. “Getting access more quickly would be appreciated,” he remarked.
UKEF is working on addressing shortcomings concerning the speed of its support. As Croucher explained, the agency is undergoing a cultural change to delegate to more people the ability to deliver decisions and speak intelligently to exporters, as well
as revising their processes to get rid of unnecessary, time-consuming steps. “It used to take weeks or months, now when we get the info we need, we do it within two to three weeks. Frankly that’s still too long.
Our ambition is to get to one week,” said Croucher. As part of the simplification effort, the ECA is also undertaking a big investment in digitising its processes so that everything can be done online, he added.
Fearing the unknown
The question is, do companies know about what the ECA offers? Figures analysed by the Cole Commission show that only a small percentage of SMEs are reaching out to government agencies or government websites to look for advice on how to export. When that advice is sought, SMEs are put through a cumbersome process that hinders their chances of winning support, wrote the Commission, which called for an end of the “one-size-fits-all approach” to “streamline the application process for SMEs”. The Commission also recommended the creation of a “One Stop Shop” for SMEs, supervised by the British Chamber of Commerce and reporting
to the trade minister, which would help address what Croucher dubbed as “fear of the unknown”, which makes “convincing companies to export the hardest challenge”.
Professor George Feiser, executive dean at Aston Business School, agreed in his keynote speech at the GTR conference that companies’ attitude to trade is a challenge. According to him, too many SMEs in the UK lack aspiration and ambition. Adding to that, Batchelor noted that many companies also lack awareness of what the exporting process will entail, from understanding contracts to insuring their goods, to understanding the differences between risk insurance and compound insurance to understanding market research, the culture in which they operate, and the risk that they’re taking in terms of finance, among other factors. This lack of awareness is why, according to Buck, it is necessary “to encourage SMEs to have exports as part of their DNAs”.
The Cole Commission’s report emphasised the need for more education to support an export culture: as suggested during a panel at the GTR event, something as basic as making a foreign language mandatory at school could go a long way in developing that mentality. But as Feiser pointed out, even when the language is the same, there needs to be an awareness of cultural differences that is currently lacking. These become particularly problematic when facing corruption concerns, which can be “astonishing for people who have spent all their lives in the UK”, said Feiser. The UK’s own culture, which sometimes regards seeking help as a weakness, is also damaging trade prospects. As Batchelor put it: “80% of German companies use consultants, but only 20% of UK companies do. If you don’t ask the question, you don’t get the answer.”
Asking the right questions at the right time is, according to Buck, a crucial aspect for an SME to get funding from a bank. “Those clients who come to a bank early in the thought process about export, they are the ones who are best prepositioned, they are the ones who get serviced. If you come in late, don’t expect the cupboard to be full,” he said. Any effort to get SMEs to export has to involve the banks, but the amount of support available was vigorously questioned by Marc Runiewicz, CEO of Trade and Export Finance Limited (TAEFL) consultancy, who believes that it is still very difficult for SMEs to access the necessary funding.
Whereas Buck and Runiewicz’s views may differ on banks’ support for SMEs, they both agreed that staying in the EU would be key to the UK’s export performance. Voting “yes” to stay in the EU, in the much discussed yet still vague referendum proposition (as it remains unclear what a “no” vote would entail) was an explicit recommendation with which Buck concluded the Cole Commission report presentation. Most businesses seem ready to do so, as 57% of those consulted in the IoE’s international trade survey 2015 agreed that membership of the EU was critical to their business. The survey showed that 26% disagreed with this point, while 17% did not know what the effect would be. Reducing uncertainty over the referendum would take at least one item off the list of “unknowns” British businesses have to face.