Covid-19 has caused unprecedented disruption to supply chains around the world. In the UK, government efforts to support businesses have been popular, yet financing programmes specifically targeting suppliers have not materialised, and details of Westminster’s “Project Defend” remain scarce. John Basquill examines the steps taken by government so far, and what the future for supply chains might look like.
UK government efforts to help companies hit by the Covid-19 pandemic have experienced significant uptake. As of early August, nearly 1.2 million businesses had obtained financing through one of four support schemes put in place to keep businesses open and stave off the risk of a severe liquidity crisis.
By far the most popular has been the Bounce Back Loan Scheme, which allows companies to borrow up to 25% of their turnover, capped at £50,000, with a fixed 2.5% interest rate that is paid by the government in the first year. For lenders, the loans are subject to a 100% government guarantee, meaning they take on no credit risk themselves.
Despite some initial teething problems – Barclays was forced to apologise in May after technical glitches meant large numbers of valid applications were rejected or delayed – the scheme has delivered a total of £34bn to more than 1.1 million successful applicants.
The Coronavirus Business Interruption Loan scheme (CBILS), which lets firms apply for a loan that is 80% government-backed, has provided £13bn to around 59,000 firms, with an application success rate of 49%.
A similar scheme for large businesses (CLBILS) has seen £3.27bn provided to 482 companies.
For investment-grade corporates, the Covid Corporate Financing Facility (CCFF) aims to bridge disruption to cash flows by enabling the purchase of short-term debts in the form of commercial paper.
The Bank of England, which oversees the facility, says 202 businesses have been approved so far, with commercial paper purchases totalling £50mn. Another 76 businesses have been approved in principle but are not yet permitted to issue paper under the scheme.
However, not all proposals have come to fruition. It emerged in May that officials were considering adapting the CCFF to facilitate faster payment of SME invoices, with a call for evidence circulated among banks and providers of supply chain finance (SCF).
SCF providers have reported a surge in demand since the pandemic struck. In many cases, large buyers have suffered a squeeze on working capital and responded by seeking to extend payment terms to their suppliers; in those situations, some types of SCF facilities can enable earlier supplier payment while letting the buyer hold cash for longer.
But the proposed amendments to the CCFF were ultimately not taken forward by the government.
“Our support schemes have helped provide a lifeline to businesses of all sizes across the UK, protecting millions of jobs and ensuring they survive the outbreak,” a spokesperson for HM Treasury tells GTR. “We have discussed a number of proposals with industry in developing support schemes, and are confident that we give businesses the help they need.”
GTR understands that the Treasury ultimately decided against the proposal on the grounds that it may not bring sufficient benefits to SMEs, and that other schemes should be prioritised.
According to a source familiar with the matter, some respondents to the call for input argued the existing CLBIL scheme is already suited to supplier payments. The source said the Treasury was mindful businesses would need support quickly and was concerned that attempting to launch a new scheme immediately could prove complicated and costly.
London-headquartered SCF provider Greensill is already an accredited lender under the CLBIL scheme, and is using that position to provide supplier payment programmes. Invoice financing programmes are also available through CLBILS from several other providers, including Close Brothers, Investec and Secure Trust.
The source says they believe that was deemed adequate by the government.
For its part, Greensill has also been vocal on the risks facing suppliers due to the pandemic, and the steps it is taking to facilitate early payment programmes. It warns in a recent whitepaper that for businesses in a crisis, conserving cash “trumps all else”.
It cites a Deloitte guide to cash conservation that recommends companies extend payables intelligently to maximise working capital, but adds: “The reality, though, is that few businesses will apply it intelligently. In the rush to shore up the balance sheet, it is usual for working capital and cash flow considerations to outrank all other concerns.”
At times of crisis, Greensill says, smaller suppliers “need all the help they can get”.
Another response to supply chain disruption has been a growing trend towards localisation, and the UK’s business community is no exception.
In May, reports emerged that Prime Minister Boris Johnson had instructed civil servants to produce a strategy for reducing dependence on individual countries for critical supplies – widely characterised as an attempt to cut the UK’s reliance on goods imported from China.
The government has been notoriously reluctant to discuss so-called Project Defend. However, in a report published in late July, the cross-party International Trade Committee (ITC) cites evidence given by trade secretary Liz Truss suggesting onshoring supply chains “is not being proposed” as part of the scheme.
Truss told the committee she could not “go into the details of Project Defend for obvious security reasons”, but that localising supply chains risks creating new vulnerabilities to production shocks in the UK.
In its response, the committee expresses relief that localising supply chains is “not on the table”.
“Any proposed measures to bring about onshoring of production in the UK need to be approached with caution,” it adds in the report, which is part of an ongoing inquiry into the impact of Covid-19 on UK trade.
“Onshoring may not be easy to achieve; it may have unintended consequences in respect of factors such as the price of goods and tit-for-tat actions by other countries; and it may replace one form of vulnerability with another. In addition, it may have implications regarding the terms of international agreements.”
However, prior to the publication of the report, there had already been indications from the private sector that firms are already looking to localise their supply chains.
A survey by trade association MakeUK found that 46% of manufacturers believe they will “significantly or moderately increase supplies in the UK”, when asked how they expect their supply chains to change in the next two years.
Figures provided to GTR in July by the association show that nearly 30% of UK manufacturers expect to decrease supplies from the Asia Pacific region, while 19% plan to do so for EU imports.
The ITC report does acknowledge the underlying motivation for onshoring.
Manufacturers “have suffered significant adverse effects from the disruption of international trade caused by the pandemic, with the flow of raw materials, parts and sub-assemblies seriously impeded, and the ability to sell finished products greatly curtailed”, it says.
It refers to evidence given by Dr Sam Roscoe, a lecturer at Sussex University’s business school, saying the pandemic has laid bare firms’ reliance on complex, global supply chains with several points of failure. A fundamental shift towards localisation would be “good business sense”, Roscoe said.
However, the committee says it does not necessarily share those conclusions. It cites Professor Simon Evenett, the coordinator of policy monitor Global Trade Alert, arguing that vulnerability due to overreliance on individual countries is “a problem that has been grossly exaggerated”.
For example, Evenett says the UK imports 151 different types of medical goods from China. However, Chinese goods make up the majority of imports in just six of those cases.
Distribution, not protectionism
These issues are not unique to the UK. World Trade Organization chief Roberto Azevêdo, who is due to leave his post at the end of August 2020, has warned that the body is becoming increasingly concerned around countries’ efforts to become more self-sufficient.
According to a Reuters summary of an online industry event in Brazil, Azevêdo said concentrating production in a country exposes it to a wide range of shocks, and that nations should instead focus on diversifying sources of supply.
There are also major questions in the US over how quickly companies could bring supply chains within the country’s borders. James Valentine, a former branch chief at the US Coast Guard, said during an online industry event in April that reconfiguring countries’ vital trade pathways is “in many cases simply not feasible”.
Commenting on support from the Trump administration for localising manufacturing processes where possible, he said: “It will take years for many countries to develop the kinds of infrastructure to do local production of the kinds of things we’re talking about.
“There are massive worldwide implications of that and a quick fix of just shifting parts of your manufacturing sector, or reinvigorating it, is just not going to happen.”
The ITC report proposes several alternatives to onshoring, such as increasing supply chain diversity, building in overcapacity, stockpiling or sourcing more from nearby countries.
With medicines, it suggests the government looks into the possibility of building “surge capacity” within parallel supply chains.
In effect, that would mean UK companies produce a small proportion of required supplies in normal times but, in times of stress, can significantly increase that capacity to meet domestic demand.
Rebecca Harding, an independent economist and chief executive of Coriolis Technologies, believes practitioners are generally focusing on reducing dependency rather than greater protectionism.
“What we’re likely to see is distributed supply chains, with smaller inventory held in different places,” she tells GTR. “That’s the best way of hedging bets. That does involve more lean management and more of a just-in-time approach, but it doesn’t have to be more costly if you can get the right kind of finance.”
Harding adds that supply chains were already moving in that direction before the pandemic.
“Another very important driver has been environmental sustainability,” she explains. “A lot of companies have been talking about making supply chains shorter, as have a lot of banks, which means that irrespective of the cost, supply chains are closer to home, leaner and easier to manage.
“I think inventory finance providers are also moving into this direction. The problem we have had with inventories is we have had a just-in-time system, but without having those inventories distributed. Now we understand the need to have multiple suppliers, not just one.”
Similarly, the Confederation of British Industry – an influential industry association representing nearly 200,000 UK businesses – urges the committee to “set a global example by building resilience through economic diversification and not protectionism”.