Change is in the air in the UK: the May elections could mean a new government and the possibility of upgrading trade policies. Sofia Lotto Persio looks at which aspects most need refreshing.
The Chancellor of the Exchequer George Osborne is known to be a fan of long-term economic planning. Yet, when he set the target of doubling UK exports to £1tn by the end of the decade, he may not have been thinking long-term enough. The country’s exports are growing at a much too slow and unsteady pace to reach that goal.
In the first quarter of this year, as the British Chamber of Commerce (BCC)’s economic survey shows, most export balances weakened in comparison with the previous quarter: manufacturing export sales fell by 7 points to 19%, while service export sales
did slightly better, falling by 1 point to 21%.
Commenting on the survey, made up of responses from over 7,500 businesses across the UK, BCC chief economist David Kern said: “The balances still point to solid economic growth continuing in 2015. […]
But the UK recovery remains unbalanced – growth is still too reliant on consumer spending and the current account deficit remains unstable. While a healthy consumer sector is vital for the economy’s wellbeing, much greater efforts are needed to increase the contributions of exports and capital investment to Britain’s growth.”
As the country braces for the May parliamentary elections, and the coalition government that could possibly follow, there is hardly a better time to reflect on what needs to be done to better support British exports.
A solid foundation
Let’s look on the bright side first. “International banking is very strong in the UK, therefore exporters already benefit from a good foundation in terms of domestic services that they can use to access working capital and mitigate risk in most key export markets,” Karl Klink, trade finance sales Europe director at Scotiabank, tells GTR.
Along with the banks, businesses can count on two government agencies dedicated to the support of UK businesses: UK Trade and Investment (UKTI), which helps UK-based businesses going overseas, and overseas businesses coming to the UK, and UK Export Finance (UKEF), the export credit agency (ECA) specifically dedicated to the financial backing of British businesses going abroad.
Regrettably, UKEF could not be interviewed due to the pre-election-imposed period of not speaking to the press.
Mark Runiewicz, CEO at Trade & Export Finance Ltd, who works closely with UKEF, says the functioning of the agency is heavily dependent on its relationship with the banks: “When looking at the bonds and guarantees and the support that UKEF provides, we have to realise that UKEF only provides guarantees and indemnities to banks. This is where UKEF is doing a good job, but to be able to support exporters the finance has to be delivered by the banks.”
A complicated relationship
Bankers seem satisfied with the job UKEF is doing so far. “I think the co-operation between UKEF and the banking market is very strong,” says Gabriel Buck, head of ECA and capex financing solutions at Barclays and chairman of the British Bankers’ Association’s export finance committee. “We have frequent meetings and all sides speak very openly and candidly. That sense of co-operation and candidness is quite refreshing. I see this relationship as being the strongest it’s been for the last two or three decades, which is a really positive situation,” he says.
For Klink, only a strong relationship between UKEF and banks can deliver the best products: “UKEF has put in a lot of effort to work with the banks, and I would encourage even more of this dialogue. The concept works best when banks act
as a principle agent for financing and risk mitigation and receive backing from the ECAs,” he says.
Yet, the collaboration between banks and UKEF is not always as straightforward as it could be: banks’ risk appetite – particularly in emerging markets – plays a big role in influencing their ultimate financing decision.
Runiewicz agrees: “We have a client who’s got support from UKEF but the bank is not prepared to finance them, so they cannot avail themselves of the guarantees that UKEF offers.”
What complicates the relationship even further is that often banks do not feel they need UKEF support. “Do not underestimate how much short-term trade finance banks are doing that does not require support from UKEF. There’s a lot of liquidity for trade finance. There is not a particularly huge gap that the market is unable to fulfil that needs a huge amount of support from UKEF,” says Buck. According to him, UKEF can play a role in three areas: in transformational projects, when additional liquidity is necessary, and when needing support in a large capital expenditure programme.
Confusion regarding UKEF’s products and services, is a factor deterring its effectiveness. “When I speak to companies up and down the UK some of them are still unaware of all the practical things that UKEF can provide, particularly in terms of mitigating risks and providing attractive finance that can be used by their end buyers,” says Buck, adding: “There is an element of confusionwith the exporters in terms of who to go to within the UK government.”
The agency’s slow and bureaucratic responsiveness is also an issue. “The one thing that UKEF can improve is making documentation easier, which I think they are in the process of doing, and also speed of response. The demand is increasing and they need to be able to provide a quick response and a quick turnaround,” suggests Runiewicz. Buck adds that a clearer KPI could help improve UKEF’s overall turnaround time: “Turnaround times do vary from team to team: some are quick; others less so. UKEF and its stakeholders would benefit from having a standard KPI to provide more certainty on turnaround times, which could be measured in days rather than weeks or months.”
The ECA also came under the scrutiny of The Guardian newspaper earlier this year for spending 300 times more on fossil fuel deals (totalling £1.3bn) than on renewable energy (just £3.6mn), despite the 2010 coalition agreement promising to favour “British companies that develop and export innovative green technologies around the world, instead of supporting investment in dirty fossil fuel energy production”.
The Bank of England (BoE) recently warned against fossil fuel investment, which are susceptible to changes in environmental government policies. Later this year the BoE is due to release a report on the financial risk posed by a carbon bubble, which refers to the overvaluation of companies dealing in fossil fuel-based energy production, as the environmental costs of carbon dioxide on global warming are not taken into account in the company’s stock market evaluation.
For those in the business, UKEF’s responsibility in these matters is limited: “UKEF can only react to what the manufacturing capabilities are in the UK. There’s not a lot of companies that have been successful in the past few years in the renewable energy projects in which we, as a bank, have been involved,” says Buck. Runiewicz is also pragmatic: “We need to be ethical, but at the same time we need to be commercial. We have to follow the rules so as not to disadvantage our exporters. But if [other countries] are prepared to support certain markets, then why shouldn’t we?”
His logic is simple: “I think we should be supporting our exporters,” he says.
The way forward
Supporting British exporters involves strengthening UKEF’s products offering.
According to Runiewicz, allowing UKEF to provide direct credit could also improve the agency’s efficacy. Indeed, the recent appointment of Margaret Eyres as head of direct lending, a new role within the ECA, suggests that it is a path the agency is interested in pursuing.
But could a stronger ECA enter in competition with the banks? Buck is not worried: “As Barclays, we are a big supporter of the UKEF Direct Lending Scheme. We think that is a very important development that gives UK exporters the ability to compete with other countries that provide commercial infrastructure trade at the commercial interest reference rate.”
Although banks will always remain part of the deal, Buck believes changes on their behalf are needed: “Banks will still be needed to advise to structure and arrange the facility, and, I would argue, to operate the loan as an agent, because the infrastructure that UKEF has got is not in place to do the full functionality. How banks get rewarded, how they see that side of the business being profitable, I think, will require a change. We are in that transition period as banks start to evaluate how they offer the service to their customers both from the supplier side and from the buyer side.”
As GTR goes to press, we’re a few weeks from the UK elections, which will undoubtedly affect these and other policies. Whatever the changes awaiting, the message for the government emerging from the ballots is clear: “National interest must come before short-term political point scoring,” advises John Longworth, director general of the BCC.
As he points out, trade policy improvement is a point that all parties agree on: “The UK needs to strengthen its trade performance, and we need to encourage our businesses to invest more; these should be issues that unite – rather then divide – the parties in the weeks ahead,” he says.