Industry and Exports (Financial Support) Bill

My Lords, the Government have introduced this Bill, certified as a money Bill, to make two small but important amendments to the law: one to the Industrial Development Act and one to the Export and Investment Guarantees Act. These amendments will provide the framework for supporting business through the downturn and accelerating our economic recovery. I shall deal with each in turn. The first clause in the Bill increases the cumulative limit on financial assistance that may be provided under Section 8 of the Industrial Development Act 1982. Section 8 lays down the basis for providing financial assistance to industry and specifies the limit allowed in law. The criteria for such assistance are also set out in the Act and include promoting the development, modernisation or efficiency of an industry and encouraging the growth of an industry or the arrangements for ensuring an orderly contraction of an industry. The scope of the power under Section 8 of the Act is wide, but it does not in itself authorise any actual expenditure. The Act provides for parliamentary oversight of expenditure through the need for the Government to secure a Commons resolution whenever assistance for one business or project is likely to exceed £10 million. The 1982 Act set the limit of available support at £1.9 billion, with a further increase to £2.7 billion possible using affirmative orders. The Industrial Development (Financial Assistance) Act 2003 raised the limit to £3.7 billion, extendable by orders to £6.1 billion. All the orders permitted under that Act have now been made. Since 1982, the legislation has paved the way for essential support to business, including: the enterprise fund products, such as the small firms loan guarantee scheme; enterprise capital funding; the Phoenix fund; support for the post office network; and, most recently, programmes of assistance such as the enterprise finance guarantee scheme, capital for enterprise and support to the automotive sector. Financial assistance under these programmes from 1982 until the end of March 2009 amounted to around £3.8 billion. I should stress that the financial assistance covers both actual expenditure—for example, grants—and the full amount of potential liabilities, such as loans or loan guarantees. This means that, if the Government support credit by issuing a loan guarantee of £1 million, the full £1 million would be counted against the financial limit even if the guarantee was never invoked and no expenditure incurred. This matters because, in the current climate, credit is at the core of the economic difficulties that we face and is therefore the focus of our response. It also means that we rapidly consume Section 8 headroom even though the actual taxpayer cost of the intervention, in terms of eventual defaults, is much smaller. Current estimates for potential additional liabilities for the proposed schemes under Section 8 stand at £7 billion. This includes £5 billion for the new trade credit insurance scheme, which has been given a broad welcome by business groups. The greater emphasis on support through loans, loan guarantees and equity schemes, as well as the new trade credit insurance scheme, provides the sort of real help that business needs in this financial climate. At the same time, such schemes offer better value for money to the taxpayer with the prospect of repayment over time and only a proportion of the guarantees needing to be met. These schemes are based on calculations of risk and default rates and are designed to reduce risk to the taxpayer. Such provisions were set out by the Chancellor of the Exchequer in the Budget and the Pre-Budget Report. However, because the full amount secured against the public finances counts against the Section 8 total, this reduces the amount of headroom available. The higher limit of £12 billion, increasable to £16 billion through four orders, will relieve that pressure and lay the legislative basis for further assistance to business, should it be necessary. I now turn to the second clause of the Bill, which amends the Export and Investment Guarantees Act 1991. The Act governs the work of the Export Credits Guarantee Department, a government department reporting to the Secretary of State for Business, Enterprise and Regulatory Reform. The ECGD helps exporters by providing insurance against non-payment for goods or services, or, more commonly, by issuing guarantees to banks offering loans to foreign buyers and project sponsors to purchase British exports. The ECGD supports capital and semi-capital exports where typically contracts are worth tens, and sometimes hundreds, of millions of pounds. The costs are such that buyers and project sponsors require extended credit terms to pay for them. The proposed amendment is small but important and is intended to solve a difficulty with the wording of the 1991 Act. Section 1 states: ""The Secretary of State may make arrangements under this section with a view to facilitating, directly or indirectly, supplies by persons carrying on business in the United Kingdom of goods or services to persons carrying on business outside the United Kingdom"." The use of the word "facilitating" is causing some difficulty. The department cannot be said to have facilitated exports if they have already been supplied by the time it decides to provide support. However, this situation is increasingly occurring for two reasons. First, the way in which the high-value capital goods market now functions has changed. Today, requests for ECGD support are often made after the export order has been placed, and it is often the buyer or overseas project sponsor, rather than the exporter, who seeks the department’s backing. However, it is not uncommon for them to approach the ECGD after they have procured the exports and, in some cases, after goods or services have begun being supplied. Secondly, the department’s own underwriting and assessment processes have changed since the 1991 Act was passed. The ECGD now assesses a wider range of issues when determining whether or not to support a project. Examples include undertaking checks for evidence of bribery and corruption, and assessing the environmental and social impacts of a project. Until the assessments have been carried out, the ECGD cannot give its backing to a particular contract, but the due diligence process may delay a decision until after deliveries have begun. I shall be very happy to provide illustrations of this if there are questions on the subject. In such situations, the ECGD will undertake all the due diligence required to be satisfied that the project is an acceptable risk and is environmentally sound or meets the other criteria. However, this is taking place after some supplies start to be made and the supplies might relate to front-end work that is necessary to get the project off the ground. The amendment does not necessarily mean that the ECGD will provide support where exports have already been supplied; this will still depend on the ECGD deciding that the financial risks are acceptable and that the project complies with, for example, international environmental standards. Therefore, the amendment will not weaken the standards that the project must meet or reduce the due diligence that must be carried out. The amendment will enable the department to support the exports that have already been made by the time it has completed due diligence. As a result, exporters, buyers and project sponsors can be sure that they will be eligible for support, although that will still depend on a positive evaluation. The revised wording will remove the degree of uncertainty that currently exists and ensure that British exporters are not disadvantaged by the time taken to carry out the due diligence process, which will continue to be thorough and rigorous. However, without the amendment, British exporters continue to risk being overlooked by overseas project sponsors because the ECGD cannot provide the type of support that they require. For exports involving UK companies which meet the relevant international standards, this amendment will mean that goods already supplied by them can now be supported. This will put them on the same footing as their competitors and export credit agencies, which are not bound by statute in the same way. Therefore, the amendment creates a more level playing field for our exporters and, indeed, has been supported by business groups such as the CBI, which has requested it to be enacted as soon as possible. The changes proposed today will ensure that the Government have the flexibility to deliver the support that businesses need in the current economic climate. I commend the Bill to the House, and beg to move.