Foreword p.1

Executive Summary p.2

Introduction p.3

1 A comparison with other countries p.5

2 The recession p.8

3 Government Initiatives p.13

4 Recommendations p.15

5 Conclusion p.17

The British Chambers of Commerce is thenational body for a powerful and influentialNetwork of Accredited Chambers of Commerceacross the UK; a Network that directly servesnot only its member businesses, but the widerbusiness community.

Representing 100,000 businesses who togetheremploy more than 5 million employees, theBritish Chambers of Commerce is The UltimateBusiness Network. Every Chamber sits at thevery heart of its local community working withbusinesses to grow and develop by sharingopportunities, knowledge and know-how.

No other business organisation has thegeographical spread across extensive multi-sectoral, multi-sized businesses achievedthrough local Chambers of Commerce. Lying atthe heart of their local community, Chambersreach and serve all businesses, with specialemphasis on providing services to theirmembers.

Editorial note:The opinions expressed in this report are those ofthe authors and may not necessarily representthose of the British Chambers of Commerce.

Written by John Lucas, Policy Adviser, The BritishChambers of Commerce

AcknowledgmentsThe British Chambers of CommerceKevin Hoctor, Senior Policy AdviserAdam Marshall, Director of Policy & External AffairsKaren Clements, Consultant on EU AffairsSteve Hughes, Policy Adviser

Greater Manchester Chamber of CommerceCatherine Fleetwood, Assistant Policy ManagerChris Fletcher, Deputy CEOAlan Gerrard

Geoff Parry

The British Chambers of Commerce65 Petty FranceSt. James’s ParkLondonSW1H 9EUTel: 0207 654 5800Fax: 0207 654 5819Email: info@britishchambers.org.ukWebsite: www.britishchambers.org.uk

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ABOUTUS

FOREWORD

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Global trade is vital to the UK. If we are to retainour place at the economic top table, we mustcreate more goods and services that the rest ofthe world wants to buy, and export more of whatwe already produce. Gone are the days wherewe could rely on the financial services industry,property, or the public sector to be the maindrivers of employment, wealth and tax receipts.

Although this is widely acknowledged amongpolicy makers, many of the financial schemesthat underpin trade have been withdrawn,undermined, or are not fit for purpose. Forexample, we believe that the Government needsto do more to ensure exporters access to tradefinance, which in many cases has put Britishexporters at a disadvantage compared to theirmain rivals during the past ten years.

Some form of trade financing underpins around90% of all exports, easing the flow ofinternational trade by moderating its risks. Yetdespite this, British exporters have experiencedsevere difficulties when accessing the tradefinance products that are essential to theirbusinesses. While the Government hasimplemented a Letters of Credit GuaranteeScheme, serious issues remain around access toexport trade credit insurance. Unlike othercomparable trading nations, the BritishGovernment sold its short-term export creditbusiness and refuses to intervene in the exportcredit market, putting British exporters at acomparative disadvantage during times ofeconomic uncertainty.

While there is some evidence that the problem isdiminishing in its scale, the Government needs to

support those exporters who are still struggling,and prepare for future market shocks to ensurethat there is a state-backed solution ready whenneeded. While we welcome the October 2009Letters of Credit Guarantee Scheme, we believethere is still work to do to ensure that Britishexporters are protected during any subsequenteconomic shocks, and are able to compete indifficult markets.

If the Government is serious about encouragingBritish exports as a driver of employment,economic growth and prosperity, it must seek toresolve what we believe are market failures andlack of provision in the trade finance industry.This would help British exporters to be able tocompete more effectively with competitors fromother comparable trading nations who are bettersupported during difficult times, and help putBritain on a stable path to full recovery. AsExporting out of recession, the latest report fromthe Business, Innovation and Skills SelectCommittee suggests, Chambers of Commerceacross the country are well placed to helpbusinesses grow through exporting.

David FrostDirector GeneralBritish Chambers of Commerce

1. There is now a general consensus that theeconomy must move away from a relianceon financial services and the public sector,towards the production of innovativegoods and services that the rest of theworld wants to buy, and the moreeffective exporting of what we alreadyproduce. However international trade ishighly risky for many businesses,especially SMEs, and they require somesort of trade finance facility to mitigateagainst this problem. Recently, tradefinance has been hit by the global bankingcrisis, like many other financial services.The true impact of this has not yet beenfelt, but a lack of liquidity risks harmingBritish exporters as global trade increasesalongside economic recovery. The BCCbelieves that the Government must act toensure that British exporting businessesare effectively supported.

2. A comparison with other major tradingnations demonstrates that they offer amuch greater degree of short-term tradefinance support to their exporters thanthat provided by the UK Government.While the UK’s Export Credit Agencyarrangements were broken up and themarket liberalised, our competitors suchas Germany and France, continued toprovide a significant level of state supportand guarantee for their exporters. Thiswas re-enforced by the EU’s suspension ofState Aid rules during the recession,which enabled many European countriesto offer greater trade finance support fortheir exporters through the provision ofshort-term export trade credit insuranceon non-capital goods to developedmarkets. No such support has beenforthcoming from the British Government,leaving UK exporters unable to offer thesame payment conditions to customers astheir foreign competitors.

3. This situation has put British exporters at adisadvantage when accessing difficultmarkets during normal economic conditions,and in all markets during the presentrecession. According to a BCC survey withGreater Manchester Chamber of Commerceone in eight companies have experiencedsevere difficulties when accessing trade

finance. Chamber members have alsoreported examples of export credit beingarbitrarily withdrawn, restricted, or reduced orhave experienced prohibitive rises in theirpremiums. This has resulted in lost contracts,the scaling back of exports, and an inability toaccess certain markets.

4. The British Government’s measures toaddress the problems associated withtrade finance have failed to adequatelyaddress this issue. Measures to bolsterdomestic export credit insurance and thecreation of a Letters of Credit GuaranteeScheme have been beset by problems andunderutilised, and the Government’ssingle intervention into the short-termexport credit market has not beenduplicated as yet. The BCC believes amuch more comprehensive approach isneeded if British exporters are to be ableto take play their full role in driving theUK towards short-term recovery.

5. The BCC therefore recommends that thefollowing actions are taken by thegovernment, trade insurers, andbusinesses themselves:� The Government should consider

funding a state-backed export tradecredit insurance scheme run through aprivate company, who would share therisk and the profits. Both France andGermany have successfully applied thismodel.

� The Government needs to remainvigilant to ensure that other countriesare not extending support to theirexporters that would infringe uponstate-aid rules.

� Trade finance professionals in general,and insurance companies in particular,must ensure that risk is properlypriced, and make their decisions on acase-by-case basis, rather thanapplying a blanket approach as hasbeen the case during this recession.

� Businesses themselves must becomemore proactive in looking at thedifferent finance options available tothem. The BCC and the ChamberNetwork stand ready to help exportersdo this.

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1. During the past decade, the importanceof exports to the UK economy as a sourceof growth, prosperity, employment andtax receipts has declined. This is borneout by the Government’s own figures,which show that, while exports accountedfor 28% of national wealth in �995, thesehad shrunk to 25% in 2008,1 with furtherfalls expected for the recessional year of2009.

2. The financial problems of the past twoyears have shown that the economicmodel pursued by successivegovernments since the early �980s is anunsustainable one. There is now a generalconsensus that the economy must moveaway from a reliance on financial servicesand the public sector, towards theproduction of innovative goods andservices that the rest of the world wantsto buy, and the more effective exportingof what we already produce. As ProfessorPeter Spencer, chief economic advisor tothe Ernst & Young ITEM Club stated inJanuary 2009, “it is vital the UKrejuvenates its overseas investment modeland starts selling into countries such asChina, where we have an exceptionallylow market share compared to our leadingcompetitors. The UK’s recovery is relianton a roaring trade with the tigereconomies”.2

3. However, international trade is highly riskyfor many businesses, especially small andmedium sized firms. Many of the problemsinherent in domestic trade are alsoevident when trading abroad, but areharder to predict and much more difficultto resolve once they occur. These can

include: buyer insolvency; non-acceptanceof goods; credit risks caused by allowingthe buyer to take possession of goodsprior to payment; regulatory risks, wheredifferences in rules prevent transactions;interventions, where governmental actionprevents transaction being completed;political risks, where leadership changesinterfere with transactions or prices; war;and, ‘Acts of God’. In addition,international trade also faces the risk ofunfavourable exchange rate movements.

4. International trade is also more damagingto cash-flow than domestic trade, becauseof the longer lines of credit that itdemands. Many businesses choose to usetrade finance options such as forfeiting3

and factoring,4 as well as letters of credit5

in some instances, in order to free upcash. International customers also oftenrequire longer payment terms than arecustomary for UK trade. Furthermore,during an economic downturn, customersare likely to ask for the longest paymentterms possible.6

5. Because of the risks associated withinternational trade, the World TradeOrganisation (WTO) calculates that 90%of the $�4 trillion value of world trade isfinanced by some form of trade financefacility designed to mitigate risk, such asletters of credit, or covering trade withinsurance when operating on an openaccount basis.7 Regarded in this context,it is trade finance that makes the UK’sglobal trade viable, especially for BritishSMEs which make up the backbone of theeconomy. Without finance, tradingglobally would simply be too risky for

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1 Source - ONS.2 Ernst & Young - www.ey.com/UK/en/Newsroom/News-releases/Item---�0-0�-�8---ITEM-Club-Winter-20�0-forecast.3 Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at adiscount, in exchange for immediate money with which to finance continued business.4 Forfaiting involves the purchasing of receivables from exporters. The forfaiter will take on all the risks involved with the receivables. It isdifferent from the factoring operation in the sense that forfaiting is a transaction-based operation while factoring is a fir- based operation,meaning, in factoring, that a firm sells all its receivables while in forfaiting, the firm sells one of its transactions.5 A letter of credit is a method of payment underpinned by a bank’s undertaking to make a payment to a named beneficiary, against thepresentation of documents which comply strictly with the terms of the letter. Its main advantage is in providing security to both the exporterand the importer, but the security offered comes at a price.6 BExA Guide to Exporting (2009), p.5.7 WTO - www.wto.org/english/news_e/news08_e/trade_finance_�2nov08_e.htm.

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many companies to make it a realisticoption for business growth.

6. In the short and medium-term, exportshave the potential to help the Britisheconomy move from recession to growth.The competitive price of sterling creates agolden opportunity for exporters to selltheir products abroad. However, untilrecently the trade figures have been lessthan encouraging. Rather than beingbolstered by a fall in Sterling as manycommentators predicted when thecurrency depreciated in 2008,8 theNovember 2009 trade deficit in goodsand services was £2.9 billion, comparedwith a revised deficit of £2.2 billion inAugust 2009. The deficit in goods alonewas £7.� billion, compared with £6.� billionduring the preceding August. Likewise,the trade gap with the rest of the EUwidened to £�.5 billion during November2009 compared with a deficit of £�.0billion in August.9

7. One of the reasons for the UK’scontinuing poor trade performance is thatin line with many other financial facilities,trade finance has become less readilyavailable during the recession. While thishas been a global phenomenon, it hasbeen particularly acute in the UK. Bankshave been less willing to participate inletters of credit transactions, insurershave withdrawn export trade creditinsurance10 from many businesses andindustries, and many companies have had

their risk ratings downgraded resulting intheir suppliers withdrawing credit lines(see Chapter 5).

8. In the short-term, there are difficultiesassociated with taking advantage of thedrop in the value of the currency. Theeconomic slowdown is global and demandis therefore weaker in the UK’s mainexport markets; history tells us thatdepreciation of the currency has led toexporters raising their sterling prices inthe short-term to boost profits; and, itinevitably takes time for exporters, orpotential exporters, to identifyopportunity and exploit it.

9. Further to the benefits to exporters, aweaker pound will benefit UK producersas businesses substitute theirconsumption away from imports andtowards domestic goods. However, this isnot necessarily an instant win and thebenefits will take time to filter through tothe economy.

10. As the volume of global trade increases,poor trade finance availability couldfurther strangle the potential growth thatexporters could offer the British economy,especially from high growth emergingmarkets. This is especially true of short-term export credit insurance, wherewithdrawal or prohibitively higher pricingmean that many SMEs are not able totrade even if there is strong demand fortheir products.

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8 Telegraph - �7 Dec 08 -Sterling fall is a life-saver forUK economy.9 ONS – Trade figures - �0Nov 09 -www.statistics.gov.uk/cci/nugget.asp?id=�99.10 The purpose of ExportTrade Credit Insurance is tooffer protection toexporters of goods orservices who sell theirproducts on credit terms.The exporter is insuredagainst losses arising from awide range of risks, whichmay be convenientlycategorised into eithercommercial risks or politicalrisks, although many privateexport credit insurers offercover for commercial risksonly. In order to protect theinsurers in the private sectoragainst adverse selection,an exporter is usuallyrequired to insure its entirebook of export orders filledon credit terms, rather thanbeing allowed to seekcoverage in respect ofcountries where the peril isperceived to be thegreatest.

1. A COMPARISON WITH OTHER COUNTRIES1.1. British exporters receive poor levels of state

support in comparison to other majortrading nations. Because of the importanceof trade finance to global trade, thegovernments of many developedeconomies have traditionally provided tradefinance facilities through their own ExportCredit Agencies (ECAs). This is becausethey believe that exporters must besupported both in difficult but profitablemarkets (that private financing is adverseto), and during economic downturns whenthe private market fails to provide.

1.2. Up until the �990s, the British Government’sExport Credit Guarantee Department(ECGD) had a virtual monopoly over exporttrade credit insurance on large, small, short-term and long-term contracts. However, in�99� the short-term credit insurancebusiness was split from longer-term capitalfinancing, privatised, and sold to the Dutchcredit insurance group NCM (now calledAtradius).

1.3. After �99�, ECGD became a re-insurer of lastresort, supporting capital (or semi-capital)

exports of goods and services usually soldon two or more years' credit, often for highvalue transactions on capital goods andprojects.11 The ending of ECGD’s virtualmonopoly on short-term credit insuranceand subsequent liberalisation of the marketmeant that British exporters found exportcredit insurance became both cheap andreadily available until the current globalfinancial problems. Some businesses stillfound it difficult to access short-termfinance for non-capital consumer goodsinto high-growth emerging markets,however.

1.4. All comparable trading nations offer a muchgreater degree of state support andguarantee to their exporters than isavailable to British companies. This isespecially true of exporters seeking tradefinance for short-term non-capital goodsand service exports, as shown in Table �.The stated purpose of nearly all ECAs is tohelp their country’s exporters in difficultmarkets which the private sector will notcover, and during market difficulties toensure a continued ability to trade.

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11 House of Commons Tradeand Industry SelectCommittee - Third Report -January 2000 -www.publications.parliament.uk/pa/cm�99900/cmselect/cmtrdind/52/5208.htm

Table 1. Comparable state supported trade finance services

CCoouunnttrryy EECCAA NNaammee EExxppoorrtt LLeetttteerrss AAssssiissttaannccee PPrree-- EExxppoorrtt BBuuyyeerrTTrraaddee ooff ffoorr sshhoorrtt-- EExxppoorrtt wwoorrkkiinngg ffiinnaanncciinnggCCrreeddiitt CCrreeddiitt tteerrmm FFiinnaanncciinngg ccaappiittaall

iinnssuurraannccee GGuuaarraanntteeee nnoonn--ccaappiittaall ggooooddss

CCaannaaddaa EExxppoorrtt DDeevveellooppmmeenntt CCaannaaddaa ((EEDDCC)) YYeess NNoo YYeess YYeess YYeess YYeess

FFrraannccee CCoommppaaggnniiee FFrraannççaaiissee dd''AAssssuurraannccee ppoouurr llee CCoommmmeerrccee EExxttéérriieeuurr ((CCOOFFAACCEE)) YYeess NNoo YYeess YYeess YYeess YYeess

GGeerrmmaannyy HHeerrmmeess KKrreeddiittvveerrssiicchheerruunnggss--AAGG PPwwCC AAkkttiieennggeesseellllsscchhaafftt WWiirrttsscchhaaffttsspprrüüffuunnggssggeesseellllsscchhaafftt YYeess NNoo YYeess YYeess YYeess YYeess

IIttaallyy SSeerrvviizzii AAssssiiccuurraattiivvii ddeell CCoommmmeerrcciioo EEsstteerroo ((SSAACCEE)) YYeess NNoo YYeess YYeess YYeess YYeess

JJaappaann NNiippppoonn EExxppoorrtt aanndd IInnvveessttmmeenntt IInnssuurraannccee ((NNEEXXII)) YYeess NNoo YYeess YYeess YYeess YYeess

UUKK EExxppoorrtt CCrreeddiitt GGuuaarraanntteeee DDeeppaarrttmmeenntt ((EECCGGDD)) NNoo YYeess NNoo NNoo NNoo YYeess

UUSSAA EExxppoorrtt--IImmppoorrtt BBaannkk ooff tthhee UUnniitteedd SSttaatteess ((EEXXIIPP)) YYeess NNoo YYeess YYeess YYeess YYeess

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1.5. For example, in Germany there is a federallysponsored ECA that helps Germancompanies with export trade creditinsurance, which is run by Euler HermesKreditversicherungs-AG andPricewaterhouseCoopers AktiengesellschaftWirtschaftsprüfungsgesellschaft. Widelyknown as Hermes Cover the scheme itselfstates that ’Federal export creditguarantees support German enterprises intheir efforts to open difficult markets andexpand traditional markets in unfavourabletimes’.12 As the scheme itself states, ‘theexport credit cover available from privateinsurers is severely restricted over a widearea of business’. The Federal Governmentthus ‘steps into the breach when theprivately owned insurance industry doesnot provide sufficient cover’. Because nearlyall other major exporting economies do this,such support ‘provides a level playing fieldfor German exporters in the internationalcompetitive arena’.13

1.6. Although French state support isadministered through Coface, which is aprivate firm, much of the short-term exportinsurance is still state-backed, especially fortrade with emerging markets. The state-owned insurer of last resort, Caisse Centralede Reassurance, has also been providingFrench companies with export creditinsurance to ensure that they remaincovered should their customers potentiallyfail to pay their bills throughout therecession.14 Likewise, in the Netherlandssupport is managed through private firmAtradius, but much of the risk isunderwritten by the Dutch state.15

1.7. Thus as Table � shows, in stark comparisonto other major trading nations, the BritishGovernment offers comparatively littletrade credit support for the majority of itsexporters. ECGD concentrates on supplyingmedium-term finance spread over two or

more years for capital or semi-capitalprojects, e.g. for a power plant upgradeinvolving five years credit, or on an aircraftwhere payment is spread between ten andfifteen years.16 Projects requiring short-termfinance, or non-capital goods or services,such as those for the consumer market, areunlikely to receive help from the ECGD. Forexample, unlike its counterpart ECAs, ECGDdoes not have an export trade creditinsurance scheme for exporters who wish toaccess markets which the private sector isuneasy about. In a normally functioningmarket, this might not be such a problem.However, during a recession, this severelycompromises the ability of British exportersto compete with their rivals.

1.8. A 2009 report from Goldman Sachs hassuggested that key drivers for exportgrowth during 20�0 will be demand fromthe growing middle classes of BRICcountries and other emerging markets.17

However, it is precisely when exporting intothese markets that businesses find difficultyin accessing trade finance. For example, inCase Study �, Graham and Brown’s businessto Russia is limited by not being able tooffer open account trading supported byexport trade credit insurance.18 Converselytheir German competitors can offer full linesof credit over extended periods to theRussian wallpaper market – the world’slargest – because of state backedguarantees on consumer items.

1.9. As can be seen from Case Study �, UKsupport for trade finance has been farbehind that of our main trading rivals. Thishas meant that British businesses haveoften been disadvantaged when seeking totrade with high-growth emerging marketsbecause of the better payment conditionsthat many foreign exporters are able tooffer their customers.

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12 http://www.agaportal.de/en/aga/grundzuege.html13 Ibid.

14 BBC News - France tooffer credit insurance -Thursday, 27 November 2008- http://news.bbc.co.uk/�/hi/business/7752�75.stm.

15 http://www.atradiusdutchstatebusiness.nl/dsben/index.html.

16 BExA Guide to Exporting(2009), p. �8.

17 Goldman Sachs BRICsMonthly Issue No 09/07,August 2009, p�.

18 OOppeenn aaccccoouunntt ttrraaddiinngg iswhere exporters receivepayment once the good havebeen received.

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Case Study 1

Graham & Brown are the leading wallpaper manufacturer in the UKand third largest globally. Based in Blackburn, they employ over 400people with a turnover of around £80m of which �0% is exported,selling internationally via divisions based in France, the Netherlands,Germany, the USA, Canada, China and Russia.

Despite the size and undeniable success of the company, they arebeing hamstrung by the British Government’s own trade financepolicies. This can be seen in their relationship with Russia, which is theworld’s largest market for wallpaper. The market works on 90 dayterms and as a private family business Graham and Brown cannotafford to expose themselves to more than €2million euro aggregatedebt. This of course limits their sales potential.

The availability of export credit insurance would mean they couldtarget sales of €20million annually in the Russian market, whichwould feed through to the local and national UK economy throughthe creation of jobs and tax revenue. However, private export creditinsurers will not currently work in the Russian market, and theGovernment does not provide short-term export credit facilities.

Regrettably, this places Graham & Brown at a serious disadvantageagainst their main German competitors, who can use state-backedexport credit insurance to leverage much larger sales into difficultmarkets where risk coverage is highly priced privately, or unavailable.

Graham & Brown believe that a scheme similar to that in Germanywould help create a level playing field with their Europeancompetitors, and enable them to take better advantage of thedemand for their products.

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2. THE RECESSION 2.1. During the global economic crisis, some

British exporting companies have foundthat their access to export trade credit,insurance and guarantees has been severelylimited. Businesses have had their coverwithdrawn for certain customers andmarkets, while in other cases it has been re-priced to the extent that it has becomeunaffordable. Some businesses have hadtheir own ratings downgraded by insurers,which has hampered their production linesas their suppliers have had to withdrawcredit lines.

2.2. By the Department for Business, Innovationand Skills’ own estimate, about 5% of totalexports (£9.2bn) are being put at risk dueto lack of finance,19 while the InternationalChamber of Commerce reports that pricingof trade instruments have increasedbetween 50 and �00 basis points during thepast year.20 This situation was furtherunderlined by Pascal Lamy, director-generalof the WTO, when he commented that“trade finance is being offered at �00 basispoints above the London Interbank OfferedRate and even at this high price, it has beendifficult for developing countries toobtain.”21

2.3. As part of the BCC’s work on trade finance,in conjunction with Greater ManchesterChamber, we surveyed 250 exportingbusinesses from the Manchester city-region.Greater Manchester was chosen because itoffers a good selection of exporting firmsof various sizes, from differentmanufacturing and service industries.22 Thesurvey found that 57% of businesses (�4�)used some form of trade finance to insureor fund their exports, the vast majority ofwhich (9�.8%, �2�) used letters of credit,with a smaller number (22.5%, 29) usingexport trade credit insurance.

2.4. Of those businesses that used trade finance,�2.7% (��), or around one in eight, reportedthat they had experienced problems withtrade finance during the previous twelvemonths. This suggests that the economy islosing out on possible export-led growth, assignificant numbers of businesses are beinghampered as they try to export. Over half

(56.7%) said that they had reduced exportsto existing customers, while just under halfwere unable to exploit new exportopportunities (48.�%), stopped exporting tocertain markets (46.7%), lost business toexporters from other countries with statebacked schemes (46.7%), or had increasedbusiness exposure to risk (44.4%). Theseproblems seriously hamper the ability ofsome exporters to take full advantage oftrading opportunities, and also act as adeterrent to businesses thinking aboutexporting more of their products, or thosetrading internationally for the first time.

2.5. As illustrated by Case Study 2, somebusinesses within the Chamber Networkhave reported that export credit cover forcertain companies, markets and evencountries has been withdrawn, often at veryshort notice. One business, which derives90% of its turnover from exporting,reported having cover withdrawn on creditlines to many of its customers renderingtheir policy nearly worthless, despite havingheld cover for 25 years. Another companyfound that its cover for credit lines to theUnited States was restricted to £�0,000 perannum, which naturally has severely limitedthe possibility of exports into a largemarket.

2.6. Another company found that despitehaving been with the same insurer for someyears, more than £�,000,000 of cover ontheir credit lines to their customers waswithdrawn one month after they renewedtheir policy. In many instances, cover hasbeen limited due to unfair risk assessmentson markets and countries, rather than on anindividual company’s credit worthiness.

2.7. In many cases, withdrawal of cover hasbeen arbitrary, and damaging to business.For example, in Case Study �, ConveyorUnits was halfway through the largestproject they had ever undertaken with asuccessful Spanish company. This haspermanently jeopardised Conveyor Units’relationship with their customer, who hastaken their business to another Europeancompany offering better payment terms.

2.8. Businesses have also reported prohibitiverises in the costs of their premium

19 Telegraph - 05 Oct 09 -Government expands exportcredit guarantee role.20 Source – InternationalChamber of Commerce.21 Quoted in The Times – 0�Nov 08 - Commercebecalmed over letters ofcredit.22 25� businesses from theGreater Manchester city-region were surveyed bytelephone in conjunctionwith Greater ManchesterChamber of Commercebetween �5 and 22 January20�0.

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23 From interviews withChamber of Commercemembers.

payments, as seen in Case Study 4. Onecompany found that its premiums hadincreased by �0%, while their insurers hadwithdrawn cover for some markets. Therewas also an 840% increase in the cost ofone company’s premium, which grew fromjust under £�,000 per month to £8,000 - afigure which would prove prohibitive formany SMEs. Some companies have alsofound that the amount insurers are willingto cover has been severely cut. Onecompany sought to renew their premiums,but cover had been cut to 50% of itsoriginal rate.23

2.9. As seen in Case Study 4, some companies

have found that they have been down-ratedby their suppliers’ export credit insurerseven if they are still in rude financial health.In line with the experience of businessesthat have had lines of finance cut, decisionshave usually been based on arbitraryclassifications such as which particularindustry the firms operate in. This hascaused serious cashflow problems forbusinesses who are now having to payupfront for their supplies, while for thosewho re-export it has impaired their abilityto do work for their customers withoutpayment up-front themselves. This showsthat export credit insurers and banks alsoneed to take a more objective view of risk

Case Study 2

Metallisation Ltd is a manufacturer of metallic coating sprayingsystems, based in the West Midlands, which had been in businesssince �922. The company currently employs over �0 people and hasan annual turnover of around £7 million. An experienced exporter,over 70% of the firm’s business is based on exporting to over 54different countries.

Over the last year and a half, the company has found the exportinsurance situation much more precarious, with export insuranceharder to come by. Also, rather than merely raising premiums as aresult of increased risks, there have been instances of insurance beingwithdrawn completely at short notice. Left with the option of eitherlosing the business or taking on the credit risk of their customers, thecompany has used the bank balance it has built up to do the latter.

As an experienced exporter, the company argues they should nothave to bear this additional risk, but more importantly believe thatsuch a situation four or five years ago would have put their businessin a perilous position and are concerned for businesses that are not inas strong a position as themselves. As Financial Director Rob Hillstates,“the current export insurance model is broken and we urgentlyneed both a short term fix to protect businesses that are basicallysound and profitable but find themselves exposed and vulnerable atthis time”.

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Case Study 3

Conveyor Units are a Midlands based SME that produces completematerial handling units, as well as having a separate arm whichdistributes bearings and components for conveyer systems.Approximately 40% of the business’s £��million turnover is dependenton exports, mainly to European markets. The company has heldexport trade credit insurance with the same insurer for the past eightyears, and have had similar policies for the past 27 years. Around 90%of the exporting turnover of the company is covered by the insurance.

Since the recession began, their insurer has continuously strippeddown levels of cover on Conveyor Units’ export customers, usuallywith no notice period given. This occurred most seriously when Eulerpulled credit line cover on a customer in the material handlingindustry, which promised to be the biggest job they had ever won.The customer was linked to another financially healthy companyoperating in the Spanish construction industry, but their insurer took ablanket decision to withdraw credit cover on any businessesconnected to that sector. Conveyor Units had taken “ContinuationCover Insurance”, but because the insurer required supplementaryinformation on the customer, the working relationship was ruined, andno subsequent orders have been placed despite work having beenput out to tender. Conveyor Units has also had to turn down otherpotential export sales because of reduced or withdrew export tradecredit insurance.

Conveyor Units believes that the problems of the export trade creditinsurance market are not easing, despite the Government’s claims tothe contrary. This is because initiatives from insurance companieswhich are superficially designed to address the problems in themarket are ineffective in reality. For example, the insurance companyhas asked customers to supply the names of three key customers forwhom they will try and push through the underwriters in order tosecure decent credit cover. Even though Conveyor Units supplied sixnames for consideration, no further communication has beenreceived. They have also promised to give a �4 day notice period forwithdrawal of policy cover, but this is too little, too late as suchpolicies did not exist during the most difficult days of the recession.

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Case Study 4

Team Leyland is a company in the North West of England whichoperates in the automotive sector. With 90% of their £� million annualturnover based around export sales, international trade is the life-bloodof the business. They have customers in places as diverse as Malta,Kazakhstan and the Caribbean. While the vehicle side of the business isgenerally based around payment upfront, their component sales aresupported by trade finance facilities in the form of export trade creditinsurance. This has been provided by the same incurrence companysince the company was founded in �99�.

During the past year and a half, Team Leyland’s export business hasbeen severely undermined by its credit insurer. Firstly, insurance on linesof credit from Team Leyland to their main supplier have beenwithdrawn, despite the fact that the suppliers insurer was the samecompany who covered Team Leyland’s own lines of credit. They weretold that any company in the UK automotive sector was considered as ahigh risk. As a result, Team Leyland now has to pay their supplierupfront, seriously limiting the business’s cash-flow.

Secondly, Team Leyland’s own lines of credit to their customers havebeen significantly curtailed, hampering the business’ operation.Premiums have increased by over 20%, but far more detrimental to thebusiness is their insurers insistence upon the reduction of cover on somekey customers, and total withdrawal on others. Before the economiccrisis began, the company had insurance cover of up to £2 million onlines of credit to its customers, but this cover has been reduced by£700,000. The result of this is that business with customers is curtailed,undertaken with full exposure to credit risks, or lost to competitors fromother countries where the export credit insurance market is functioningbetter and who can therefore offer full credit.

Export trade credit insurance is vital to Team Leyland’s business.Withdrawal has meant the reduction of its trade with some markets, orin some cases losing customers to rivals from other countries. At a timewhen the competitive value of the pound should mean that Britishexporters are in a ideal position to drive economic recovery, businessesare being hamstrung by an ineffective and overly cautious trade financeindustry.

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when assessing exporters, their customers,and foreign markets.

2.10.Despite the Government’s claims tounderstand the gravity of the situation, ithas repeatedly stated in public that thesituation is improving for many companies.However, the BCC survey with GreaterManchester Chamber revealed that 92.9%(�7) of those who had experiencedproblems with trade finance thought thatthey had stayed the same or had got worseduring the past three months. Lookingahead 82.2% (�9) thought that the situationwould stay the same, or improve during thenext three months. The majority ofbusinesses (5�.6%, �5) who use tradefinance are typically covering less of theirexports with such products than they werethree years ago, meaning that many areworking on an open account basis andtaking on the risks of trade wholesale. Thisis confirmed by the Business and InnovationSelect Committee that stated that “neitherwe, nor any of the businesses who we have

spoken to, have seen evidence that thissituation is improving and therefore theGovernment’s decision to merely ‘monitorthe market’ is inadequate”.24

2.11. As our research has shown, a significantnumber of British exporters hasexperienced serious difficulties accessingshort-term trade finance. As seen inChapter 4, exporters from the UK’s keytrading rivals already have schemes in placewhich many have broadened during therecession to ensure that exporters are stillable to access vital lines of trade finance.Conversely, the British Government hasbeen slow to act, and exporters havemissed out on opportunities, cut back ontheir trade, or have lost key clients. Britishexporters’ experience shows that help fromthe Government must be forthcoming now,and also for when there are subsequentshocks to the market to ensure that theexperiences described here are notrepeated.

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3. GOVERNMENT INITIATIVES3.1. The British Government has been

concerned about the problems associatedwith trade finance. While a fully backedexport trade credit insurance scheme hasnot been forthcoming, a number ofactions have been taken, as outlinedbelow.

Domestic trade credit insurance scheme

3.2. Domestically, the Government hasattempted to shore up domestic tradecredit insurance with a £5 billion schemebut it has been taken up by only 52companies, with a mere £7 millionguaranteed. There are several factorscontributing to its poor performance:many businesses have suffered completewithdrawal of policies and are not eligiblefor the scheme; the communication of theexistence of the scheme has been poor;and, businesses have altered theirmanagement of risk to adapt to thechanging market.

3.3. These lessons should be taken intoaccount when designing any schemes forexporters. Potential users need to know ofa schemes existence and their eligibility,and the application process for a schememust be as straightforward as possible.

Letters of Credit Guarantee Scheme

3.4. In October 2009, the Governmentannounced a Letters of Credit GuaranteeScheme covering 282 banks in �6developing markets (see Appendix 1 -Glossary for explanation of Letters ofCredit), which will run until �� March 20��.Exporters requiring a confirmation of aletter of credit will approach aparticipating bank in the UK. If the UKbank is not able to take the full risk onthe overseas issuing bank, it can accessthe guarantee offered by ECGD and shareup to 90% of the risk with the UKGovernment.25 Developed markets aregenerally excluded from the schemebecause of EU State Aid rules, howeverkey emerging markers such as Brazil,

India, Russia and China are covered.Profits from the scheme will be splitequally between the issuing bank and theGovernment.

3.5. While the BCC welcomes the Letters ofCredit Guarantee Scheme, it must beremembered that letters of credit are onlyused in some �0% of trade deals, andtherefore they will not meet the totalneeds of exporters to covered markets.The Government must also ensure thatthe scheme is set at the right price forSME exporters as one of the majorproblems of trade finance is not just alack of availability, but a prohibitive pricerise.

3.6. As of January 20�0, only one letter ofcredit has been issued under the remit ofthe scheme during the first three monthsof its life. This can be seen from theresults of the BCC’s survey with GreaterManchester Chamber of Commerce, whichrevealed that 8�.�% of businesses whohad experienced difficulties in obtainingletters of credit had not been informed ofthe Government’s scheme. While somebanks report that the market hasimproved slightly compared to the outsetof 2009, some sources within banks whohave been tasked with running thescheme have reported that they considerit to be overly bureaucratic, which hasacted as a bar to banks offering this totheir customers.`

Short-term credit lines

3.7. Until 2009, the Export Credit GuaranteeDepartment (ECGD) hadn’t operated inthe small firms market since �99�.However, in September 2009, ECGDinsured a short-term $�4.4m (£9m)contract secured by Cleveland PotashLimited with Brazilian fertiliserconglomerate, Fertipar. Cleveland Potash’sparent company, Israel Chemicals Limited,had its group credit insurance limitreduced at the height of the creditcrunch. Without intervention from ECGD,the deal would have fallen through, withjob losses among the company’s �000

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employees, and the 4000 employees whoare part of the extended supply chain.26

3.8. No further interventions into the short-term market have been made, and at thetime of writing ECGD reports that there

are no plans to do so in the future.However, as the Cleveland Potash casedemonstrates, there is no legislative barto such interventions by ECGD into theshort-term market.

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4. RECOMMENDATIONS4.1. The BCC believes that action needs to be

taken by the Government, the export tradecredit insurance companies, and byexporters themselves in order to helpaddress trade finance issues.

Recommendations for Government

4.2. The BCC believes that unless theGovernment intervenes to support SMEs’access to sources of trade finance, Britishbusinesses will not benefit from thepredicted rise in global trade flows over thecoming year. There has been a marketfailure in the trade finance industry,especially around short-term export tradecredit insurance. The Government musttherefore intervene to rectify this byproviding a publicly-backed scheme.Without such action, it is unlikely thatBritish businesses will benefit from the likelyrise in demand for consumer goods to BRICcountries and other emerging markets. Thisis reflected by the Business, Innovation andSkills Select Committee who “stronglyrecommend[ed] that the Governmentreassess its decision not to use theopportunity presented by the [European]Commission’s decision to re-enter theshort-term trade credit market until thefinancial situation improves”.27

4.3. While there is some evidence to suggestthat the problems of the past year areeasing, the Government needs to establishsupport in this area to ensure that Britishbusinesses can access short-term financingfor non-capital goods during anysubsequent economic downturns thatmight disrupt finance flows.

4.4. Currently the Government believes that theexport credit insurance market is rectifyingitself, but our members have not found anygreater liquidity within the market and arestill being hamstrung by insurance beingwithdrawn from credit lines both to andfrom their companies. Furthermore, theGovernment must ensure that Britishexporters are able to access trade financefor high-growth developing markets in thesame manner that all other comparabletrading nations provide for their exporters.

4.5. The BCC believes that the Governmentshould consider funding a state-backedexport trade credit insurance scheme runthrough a private company, who wouldshare the risk and the profits. Both Franceand Germany have successfully appliedthis model.

4.6. The application of such a model wouldmean that exporters would not bedependent on the private market forexporting into emerging markets, or duringperiods of recession or economicuncertainly. While in times of economicgrowth developed markets in the EU, NorthAmerican and Australasia would not beallowed to be covered by such a schemeunder EU State Aid rules, the EuropeanCommission relaxed the rules which governthis during the economic crisis. EUcountries that already had such schemeswere able to take full and immediateadvantage by widening the scope of theircover. The British Government was unableto help its’ exporters in such a way, butshould have a scheme ready to helpexporters both in the short-term and whenthe market fails again.

4.7. We also believe that the Governmentneeds to remain vigilant to ensure thatother countries are not extending supportto their exporters that would infringe uponstate-aid rules.

Recommendation for trade financiers

4.8. Trade finance professionals in general, andinsurance companies in particular, mustensure that risk is properly priced, andmust make their decisions on a case-by-case basis, rather than applying a blanketapproach as has been the case during thisrecession. Too many successful companieswith healthy balance-sheets and orderbooks are finding themselves blacklistedmerely because of connections to particularindustries and markets.

Recommendations for exporters

4.9. Businesses must become more proactive inlooking at the different finance optionsavailable to them. For example, because

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ECGD offers a greater range of medium-term and long-term financing for capitaland semi-capital goods, eligible companiesshould look at such options with closerattention than they would in normalconditions.

4.10. In the BCC survey with Greater ManchesterChamber of Commerce, it was revealed thatonly 57% of exporters used any form oftrade finance at all. This means that it islikely that other firms conduct their tradeon an open account basis, supplyingordered goods, and extending un-guaranteed lines of credit to their overseas

customers. Trade financing is oftendesigned to mitigate risk, and as such,provides a spur and encouragement topotential exporters. It enables current SMEexporters to export more with confidenceand greater leverage into BRIC countriesand other emerging markets. While thiswould obviously be encouraged by a state-backed short-term trade finance scheme,SME exporters should be more proactive insourcing trade finance, and understandingthe options available to them. The BCC andthe Chamber Network stand ready to helpexporters do this.

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5. CONCLUSION5.1. Trade finance oils the wheels of global

trade. Without recourse to products such asexport trade credit insurance, businessesare often unable or unwilling to export theirproducts. The economic problems of theprevious two years have seriously impactedupon the availability of trade finance,particularly short-term credit insurance.

Because other countries are supportingtheir export credit insurance markets,British businesses are being placed at a realdisadvantage. As the global upturn comes,UK Government action is required – or elseBritish exporters will be unable to play theirfull role in driving the UK towards short-term recovery and longer-term growth.

BRITISH CHAMBERS OF COMMERCE65 PETTY FRANCELONDON SW�H 9EUUNITED KINGDOM

T +44 (0)20 7654 5800F +44 (0)20 7654 58�9info@britishchambers.org.ukwww.britishchambers.org.uk