JOINT COMMITTEE ON EUROPEAN UNION AFFAIRS debate -
Thursday, 15 Dec 2011

EU 2020 Strategy: Discussion with IBEC, ISME and SFA

Vice Chairman

I welcome the delegates from the Irish Business and Employers Confederation, IBEC - Mr. Brendan Butler, director of policy and international affairs, Ms Heidi Lougheed, head of European affairs, and Mr. Fergal O'Brien, chief economist. I also welcome Mr. Mark Fielding, chief executive officer of the Irish Small and Medium Enterprises Association, ISME, and Ms Patricia Callan, director of the Small Firms Association, SFA. The delegates were due to attend a meeting of the committee two weeks ago but our engagement had to be postponed due to unexpected developments in that meeting. I thank them for returning today.

The subject for discussion is the European Commission document, A Roadmap for Stability and Growth, and the delivery of the EU 2020 strategy. We are interested in the delegates' perspective on these matters. I propose to invite the representatives of each organisation to deliver an opening statement, after which members may comment and ask questions. I ask Mr. Fielding to begin.

Mr. Mark Fielding

I thank the Chairman for his invitation to address the committee. I am the chief executive of the Irish Small and Medium Enterprises Association, ISME, an independent body representing the owner-managers of small and medium-sized businesses. Obviously, our concerns and observations are primarily focused on SMEs and, in particular, the owner-managers who are the risk takers in the economy. We play an important role in both the economy and society and are at the centre of the social model.

The problems today cannot be solved by using the thinking that led to their creation. I am sure the Vice Chairman does not need to be reminded that it was not the SMEs which got us into our current economic difficulties. Small and medium businesses have a major role to play in rescuing the country, revitalising it and helping it to recover in the coming years. I firmly believe we can fulfil this role as long as the correct environment is created.

The European Commission has presented a roadmap outlining the comprehensive response needed in order to restore confidence in the euro area and the European Union as a whole. That response is designed to break the vicious circle relating to doubts about the sustainability of sovereign debt, the stability of the banking system and the European Union's growth prospects. There are five main issues facing small and medium businesses, some of which are dealt with in the context of the roadmap to which I refer. The first is that economic uncertainty is placing a complete dampener on consumer spending and also affecting small businesses in making investment decisions, regardless of whether these relate to the purchase of new equipment or employment expansion. The second issue is that the cost of doing business in Ireland remains a major inhibitor to competitiveness. The third relates to the lack of access to bank credit, a major hindrance to business sustainability and growth. The fourth is the scourge of late payment which continues to plague the country. On average, small businesses must wait 72 to 73 days to be paid by both Government agencies and other general interests. The fifth issue relates to red tape.

The five issues to which I refer are encountered by all businesses. However, the problems for small businesses are magnified by size, the lack of economies of scale and the absence of an independent voice in the social dialogue which took place during the past 17 or 18 years. As a result, the implementation of what the European Union terms its "Small Business Act" is very far from being complete. Progress must be made on the latter without further delay. National governments must place the principles and actions outlined in the Small Business Act at the centre of all SME-relevant policies in order to fully involve representative business organisations. That is one of the key issues. We must also fully embrace the "think small first" principle from the very early stages of policy making. This appears to have become lost in translation.

The principles and actions outlined in the Small Business Act are far from being established at EU level and among the vast majority of member states, including Ireland. EU institutions are still in two minds about embracing the think small first principle. In the interim, national governments appear to be paying mere lip-service to the Act. This is clearly highlighted by the examples of good practice contained in the review of the Act recently published by the European Commission. The proposals made by the Commission in its review could help to speed up the process and achieve concrete results in the near future. ISME requests that the joint committee closely monitor and co-ordinate the implementation of the Act, follow up on the guarantee that the interests of small and medium businesses be taken into account in all policy areas and - last but not least - ensure the full application of the think small first principle.

From our point of view, one of the greatest areas of neglect at national level has been the exclusion of the independent voice from national consultation. The key objectives of the agenda for recovery through entrepreneurship in Ireland must be to place entrepreneurs and their requirements at the centre of policy making. Legislators must take a think small first approach when drawing up new policies and legislation. This would have a direct benefit for 98% or 99% of businesses and manifest itself in the form of greater productivity and job creation. In order to ensure small businesses can take their rightful place, ISME requests that the joint committee use its influence to have the Government immediately replace the now defunct social partnership model with a national representation forum in order to drive economic recovery. Contrary to what was the case in the past, this newly proposed forum would include representatives from the SME sector and not be dominated by big business and big unions. Following the demise of the previous partnership arrangement, a vacuum has developed in the process of economic consultation and this is adding to the ongoing economic uncertainty.

The time is right for the introduction of a truly representative forum for all sectors of the economy which can have an input and provide for consultation and guidance for the Government. Our proposed solution is to replace the failed social partnership model with a national representation forum which would include input from, among others, small and large business interests, the unions, representatives from the ESRI, the National Competitiveness Council, the Central Bank, the Diaspora and Front Bench spokespersons. We know we cannot return to the failed social partnership arrangement which was completely unrepresentative of the wider indigenous business community. The elite big business lobby and the public sector trade unions dominated proceedings for their own ends and this resulted in numerous inappropriate, secretive decisions detrimental to the economy being taken. While it is accepted that the process was beneficial in the distant past, the reality is that in recent years social partnership became an insular inhibitor of progress and developed a veto in respect of change.

The remit of the new forum we are proposing would be to assist and advise the Government and independently evaluate all Government economic programmes and policies in order to ensure compatibility with the needs of the economy as a whole. If a genuine, all-inclusive social partnership process is to have any true purpose, it must include those in the SME sector - the drivers of economic growth. This proposal should strengthen the Government's mandate to introduce and drive a national recovery plan.

I ask the joint committee to promote the Small Business Act and the think small first principle. I also ask it to endorse the request of the 8,500 member companies of ISME to the effect that their 200,000 employees be included in the new social dialogue which must replace the old, discredited social partnership model.

Vice Chairman

I thank Mr. Fielding and call Ms Callan from the Small Firms Association.

Ms Patricia Callan

I am here on behalf of small firms, namely, those which employ fewer than 50 people. There are 200,000 such firms in the economy and they employ 655,000 people or half the private sector workforce. The great thing about our discussions during the past 12 months is there has been a real focus on the fact that small businesses are going to be at the heart not just of Ireland's recovery but also of that of the European Union. This is because they comprise some 99% of all businesses across the Union. My presentation will focus on the subject matter of this meeting, namely, the stability and growth enhancing policies relating to the roadmap and the EU 2020 strategy. There are many other issues which affect us domestically. In many ways, they are key. However, in view of the joint committee's remit, we will adhere to the agenda outlined.

The eurozone crisis is having an extremely negative impact on business investment decisions in this country. As recently as last week, evidence emerged which showed that the numbers unemployed were continuing to increase. This is despite the fact that our own surveys show that we will be obliged-----

Vice Chairman

I apologise for interrupting Ms Callan but a vote has just been called in the Dáil. As a result, we will be obliged to suspend proceedings.

Ms Patricia Callan

The bells are not ringing.

Vice Chairman

However, a vote has been called.

Sitting suspended at 11.50 a.m. and resumed at 12.10 p.m.

Vice Chairman

I apologise for that delay and ask Ms Patricia Callan to continue.

Ms Patricia Callan

In the context of the two headline priorities for member companies at present, one is a successful resolution of the eurozone crisis. Even though it is somewhat removed from our immediate circumstances in Ireland in terms of the IMF accord through which we are working, it has a huge impact on companies thinking about investing here. On the issue of threats to the currency, we took a recent poll of members which showed that two thirds of respondents view our membership of the eurozone as very important to their business. Therefore, any threat to it is taken very seriously and we need to have the crisis resolved. More locally, the issue of consumer confidence is also a critical priority. We can talk about all the issues facing small businesses but if people do not have confidence in the economy to spend their money and get goods moving again in the economy, then we are not going anywhere. As overarching priorities, those two are critical.

Specifically on the documents the committee asked us to examine, we certainly welcome the broad content of what is in them but as with every measure that comes from the EU, it is about what happens in translating the provisions of a measure into practice. Certainly, the key items highlighted in the annual growth survey for 2020 are exactly what we want the Government to focus on as well. I will start with our old favourite, namely, access to finance. In particular, I noted in the annual growth survey that there is specific reference to the fact that prudential supervision can have a knock-on negative impact on lending to SMEs. Notwithstanding all the conversations we could have about our domestic banks and all those issues domestically, we are concerned that even when people have been approved for finance, it has emerged that it takes six months to get it through because of the added prudential supervision of the Regulator. Obviously, the Regulator has got the banks to be more risk adverse but the pendulum has swung too far in the other direction. It is one of the recommendations in the growth survey which we should take to heart and implement.

Another key issue that has been a perennial problem in Ireland is our dependency on bank finance. In particular, we have a very poor equity market for SMEs - a very poor venture capital infrastructure. We certainly welcome the recommendation that there will be an EU-wide venture capital market. A business can register in one spot and that will make it much easier to access finance. Particularly, given that Ireland is such a small country, it is difficult for us to attract in these sorts of companies. That recommendation will make a big difference.

Moving on to the issue of public procurement, which is set out in the roadmap as very much one of the future areas the Commission will revisit, which we welcome, we do not know what that means in practice other than that it refers to giving more access to SMEs, simplifying the process and so on. When we challenge Departments and Government agencies on procurement issues in general, they stand behind EU regulations and the constant reply we hear is that they are bound to do it this way or that they have to do it that way because of EU rules. Yet we have evidence from countries such as France, Germany and Italy that, under the same rules, they are able to do things differently. There needs to be more focus on and attention given to that issue to tangibly make a difference for SMEs. It is a huge marketplace. Many people are interested in entering it, but the barriers in place, in particular the drive currently to achieve the lowest costs and not even value for money, shut out people. There are larger contracts which small companies cannot access, as there are criteria around thresholds, turnover and the time a business has been in existence. Action needs to be taken to address all of that. There is a great deal of goodwill and good policies but we have not seen their implementation, which is what we want to see happen. Certainly at the EU level we would welcome enhancement of those policies but, even with what we have got, Ireland has a tendency to take matters too much to heart relative to what everyone else is doing.

We have had a particular focus on innovation and research and development, the idea of upskilling all businesses, in recent years. It is not about research by people in white coats but about tangible improvements in business processes, systems and productivity at business level as well complex research and development. We certainly welcome the announcement in the budget recently that we will move to a volume based system of a research and development tax credit. That will make a big difference to small companies. It is very complex and burdensome to try to access EU funding. It is very geared towards third level institutes rather than business people availing of it. Funding instruments are available at EU level but it is very difficult for SMEs to gain access to them. Quite often there is a lag in getting the funding and the banks will not fill in and give a business person the money in advance, even on foot of a promise of the money from the EU.

Another big barrier to doing business across the EU has been the expense of the patent registration system. We welcome the target in the action plan that it will have an EU-wide patent registration system. That will reduce costs to SMEs by 80%. It is currently five to ten times more expensive to register a patent here than in the US or in Japan. That target will be significant in developing our smart economy and intellectual capital and most importantly protecting it within the EU and outside it. There is great deal of work to be done worldwide on that and in terms of encouraging people to enter new markets.

I would like to cover the issue of regulatory burden, on which most Oireachtas committees have a special hearing at one point or another. We adopted the EU target that by the end of 2012 we would have a 25% reduction in administrative burdens. As far as I am aware not a single item of analysis has been done to indicate where we are at in that process and whether we will achieve that target. That is critically important. The EU cannot fine us or impose penalties on us as this is a voluntary target. However, it is important and it is one of the better proposals with which the EU has come up. If tangible targets for the reduction of regulatory burden are not set, it will not happen. It is about costing the burdens and then proceeding to reduce them. At present, the costing exercise has only happened in a handful of Departments. Recent Governments, including this one, have said that they will do a regulatory impact assessment of every item of legislation. Where are those regulatory impact assessments? Have they been published or quality assured? What happened to the unit in central government in the transfer of responsibility for it from the Department of the Taoiseach to the Department of Public Expenditure and Reform? It seems to have disappeared. If there is not a central co-ordinating unit, how will any of this work be done? It is a very important priority and something that needs to be tackled. We welcome what is happening at EU level on it but its impact on our businesses comes down to the translation of what has been proposed. It is important that we keep track of directives and make sure that they are going in the right direction, but the issue is what the legislators here do on foot of their consideration of them, particularly when proposals are simply imposed as regulations rather than being transposed into primary legislation. That is a key burden and concern.

On the top-line issues around growth, competitiveness and tackling unemployment, the messaging is right. In terms of how it has impacted here and our analysis and assessment of where we are at, I have concerns. I also have concerns that despite the fact that we have all these main policy instruments, we are being dominated and the expectation is being dominated by the IMF-MOU only. Many of the policy instruments are comparable but I would like them all tracked as one to marry those issues in terms of what will make a difference to our growth strategy and to put that in place rather than our simply implementing the IMF deal, as the EU told us to do on the last occasion when it told us to implement the IMF deal and that was our box ticked. We want to see progress on many of these other issues because that is how we will get back our growth and competitiveness.

Vice Chairman

I thank Ms Callan for that. I invite Mr. Brendan Butler from IBEC to make his presentation.

Mr. Brendan Butler

The Chairman's letter invited us to give an overview of the impact of the current crisis on business and specifically to comment on the two projects. I will cover the current situation and my colleague, Ms Heidi Lougheed, who heads our IBEC Europe office in Brussels, will speak about the two particular programmes.

Several months ago it appeared that Ireland had begun to turn the corner. We saw strong growth in our exports, which was the highest level of export growth in any OECD member state. Any time we travelled abroad we got very strong positive messages about Irish business and what the Ireland was doing. It appeared as if we might be reaching a stage that we could get some growth back into the economy. The Irish economy will grow this year for the first time since 2007 and our exporting companies are still doing well. Recent surveys by IBEC suggest that despite the slowdown in Europe and throughout global markets Irish companies continue to perform well on exports and are expecting a good year next year. As Ms Patricia Callan from the Small Firms Association mentioned, the real issue is that we have a two speed economy. We have a strong export sector but the domestic economy is flat.

What is happening on the European stage is giving greater cause for concern. The biggest problem is uncertainty. Investors looking at Ireland and throughout Europe are holding back on decisions because they want to see a resolution to the eurozone crisis. The European reputation has been damaged in terms of other parts of the world.

We have strong pressure here in terms of business and capital flows out of the country. Companies are telling us that they are putting their investment decisions on hold. Jobs that could have been created several months ago are not being created. The decision at the recent summit by the United Kingdom to operate its veto with one of our main trading partners is a serious blow that we hope can be resolved over the coming months.

As we sit here this afternoon, however, we have not got a resolution to the eurozone crisis. There is as much uncertainty as there was several months ago. As Ms Callan stated, we need a credible solution to the eurozone crisis and to get some certainty back into the system. We need to restore confidence at home and abroad but while all of this is going on, European Governments and institutions are focusing singly on sorting out the eurozone crisis. They are not looking at the bigger picture which is that at the same time as we have the eurozone crisis we need to have a strong, competitive Europe, and Irish businesses must have a model that will allow them compete at home and abroad.

The current crisis is having a major impact on Irish business, jobs and consumers. We need to have that resolved but in parallel with that we must start talking about what will be a credible growth strategy for Europe. We should make the point that despite what we have seen here in the past two or three years Ireland can be nimble and flexible. We were hit with a tsunami three years and very quickly we took hard actions. The evidence of those hard actions being successful is this export performance.

Ireland has a great deal to bring to Europe in the coming months as we work our way through this problem. We should not sit back and be dominated by larger countries. We have a very good story to tell in Brussels and we should be out there giving examples of what this country and businesses here have done. We should be a model for other European countries as they face this crisis. I will hand over to Ms Lougheed who will talk about the roadmap and the Europe 2020 strategy but I wanted to give the committee that overview.

Ms Heidi Lougheed

The committee asked us to discuss two specific documents and I might split them in two, so to speak. If the roadmap had been published at any other time it would have been seen as a comprehensive strategy on how to solve the euro crisis in the immediate future. As it was, the markets dismissed it within two days stating that it was not credible and did not contain enough, and we saw events moving incredibly quickly. At this point it is almost a dead communication. What really matters is the fiscal compact on which we still do not know the detail and therefore we need to change our focus.

If the euro crisis, that communication, the fiscal compact and whatever comes out of that solve the immediate crisis facing us and we manage to get beyond that, Europe 2020 is part of a new structure on how we deal with the long-term future of Europe.

What we all need to understand coherently is that the world has changed at European level. If we take all of the economic governance structures - the new fiscal compact when it comes, the six pack being talked about and the European symmetrisation - and put Europe 2020 beside that, we will see there is a very different way of doing work but I am not sure we have all gone through that.

If we were to talk to our members or any other companies in Ireland they would say it is a branding issue but I am not sure anyone would have heard of the Europe 2020 strategy, and I am being kind in that regard. It is massive, over-arching and ambitious. We have one strategy, three priorities, five headline targets, seven flagship initiatives and approximately 300 other initiatives. It is difficult even to understand how that all fits together, and we need to make an effort to see how that develops.

It is also a change in attitude, and it is very different from the Lisbon strategy. The European Commission, and the Europe 2020 strategy, is clear. They are looking for a deepening engagement with stakeholders, with a particular role for national Parliaments, which is why I see the committee's engagement as being incredibly positive, and strengthening that on an ongoing basis in terms of how that works.

We can go through all of the detail but the members are probably as familiar as I am with it. It is complex and detailed. Some of it is aspirational. Some of it is headlines to reach with no direction as to how we achieve that. Some of it is a list of initiatives they will do. Some of them are a piece of work for member states to do. It is difficult to piece all of that together but taken as a full package, we would welcome this. It is going in the right direction. It refers to the issues that are important to all of us in a balanced way. There is a substantial focus on research and development, the digital agenda, which is very important for Ireland's economic make-up, poverty, education, training and many issues we must examine in the long term.

We have a number of aspects we would like the committee members to consider in terms of Ireland's future engagement with the Europe 2020 process. First, whether we like it or not this is a new system and a new way of engaging and it is in the best interests of all of us to make sure that Ireland engages the Europe 2020 strategy in a concerted effort and in the best way possible. We do not know what will happen with the multi-annual financial framework and the EU's money but if they match the money with the strategy it becomes even more important that we are engaging with that and making sure we take advantage of every possibility, and not just those we ask about. We must actively consider the other ways we could engage, be constructive and take advantage of it and we must ensure we show what we can bring to the table.

Second, there are now set deadlines under Europe 2020 and this European symmetrisation process. As a country Ireland, and particularly the Oireachtas and stakeholders such as ourselves, has a habit of doing things in a certain way at certain times of the year. It re-examines issues and does annual action plans, which I am sure we all do internally, but the symmetrisation at a European level has changed many of those deadlines. For us to be active at the right time, timing is everything. Events are moving incredibly fast and we must be ready to input and engage in a constructive manner at the right time. If we miss those deadlines or do things in a rushed fashion we will missing an opportunity and allow ourselves to miss certain levels of opportunity.

A third aspect, and it is a serious concern we have, in EU speak we are one of the five programme countries. We have our memorandum of understanding and it is a significant piece of work to do but its relationship with the Europe 2020 strategy is not clear. It refers to many similar items. It is more onerous in many ways. We have quarterly rather than the annual reviews that other countries would have, and that all fits together, but the Europe 2020 strategy was not just about giving countries a list of actions to take and report back on. It is supposed to be about member states and stakeholders learning from reach other and us all not committing the same mistakes. With the current attitude of the Commission, which is to take us out of that system and treat us according to the memorandum of understanding because we are a programme country, we are not getting the full engagement we should get under Europe 2020. The country specific recommendations that came out this year gave us one piece of work to do, namely, do what it tells us to do under the memorandum of understanding, and that is fine. It is not that we need more work to do but we miss out on the peer learning aspect. We have already started talking to the Commission about that and made the point that we believe it would be better if it found a way of involving us in that process as a country and as a series of stakeholders because we can engage in that. Also, this will go on for much longer than the period we will be covered by the memorandum of understanding. This is a long-term strategy up to 2020 and we need to be involved in it at all stages.

I do not know if members have any questions on the detail of some of the policies. We have different opinions on different parts of Europe 2020 but it is impossible to know where the members' interests might lie. With more than 200 or 300 initiatives I am not sure where to start. There are initiatives we are happy to see coming forward soon including an almost EU wide patent which will probably cover 25 or 26 countries, and member states will help in that regard. There is a big focus on the digital agenda and cloud computing. Broadband and cloud computing are very strong for us in determining our approach. I will not elaborate on them until I discover where the committee's interests lie.

Vice Chairman

I thank the delegates for their contributions.

Deputy Timmy Dooley

I apologise for not being present for all the contributions as I was required to be in the Dáil. While there has been good work on developing a programme of growth, jobs and sustainability in the Union over recent years, and while this continues to be the guiding principle by which the open market is used to the benefit of all, the euro crisis has resulted, rightly, in a shift of focus from the protection of the euro to the consideration of individual initiatives, which I am sure are being advanced in the expectation that the crisis will be resolved, as I hope will be the case.

What is the position on the markets? Many witnesses, be they motivated politically or by special interests, refer to the markets as distant phenomena. Because the delegates represent business organisations, they clearly have a greater connection with the people who are involved with and who make the markets. Are they concerned that the political agenda continues to lag behind the markets' agenda? Have they concerns about the agreement reached some days ago, which agreement was a political one leading towards an intergovernmental agreement or perhaps a treaty? It is not going to happen overnight. Commentators refer to a date in March, at the earliest. Are the delegates concerned that this will be too late for the markets, taking into account the next milestone of concern, which will be in January when Italy will seek to reissue or roll over bonds? What are their views on such actors within the markets?

Vice Chairman

I thank Deputy Dooley. I have two questions, one of which concerns the point Ms Callan made on the Europe-wide patent. Did she say 80%?

Ms Patricia Callan

Yes.

Vice Chairman

With that in mind, could she explain how applicable the saving would be for her membership base? Would some, most or all of her members be able to have access to it?

Ms Heidi Lougheed referred to Europe 2020 as being a system as much as a strategy. Could she elaborate on what she means by this?

Deputy Bernard J. Durkan

The delegates have raised an obvious question. There have been very interesting comments on the factors that affect the economy, about which we have all been talking at the same time. I refer to owner-managers in regard to ISME, for instance. Owner-mangers comprise a diminishing group. The owner-manager has a social and economic commitment, not just a commitment to himself or herself.

We have all been tabling questions to various Ministers over the past ten years on costs in the economy. What are these costs? Can the delegates identify them and tell us about them? We were first told there were no inflationary tendencies at all but there must be some because costs are increasing. This question is raised now and again. There is a variety of factors, and the business sector and legislators need to do more to identify costs and ensure they do not have such a negative impact.

Bank credit constitutes a considerable issue for all Oireachtas Members. Banks are squeezing the customer. Essentially, the solid customer, mostly in medium-sized and small business, is being squeezed. Slowly but surely, the smaller customer is being used by the banks to recover the ground they lost. It is sad that the system appears to reward those who are reckless and punish those who are prudent and frugal. This is very dangerous and we need to examine it.

With regard to late payments, there was a time when we did not depend on banks to the same extent as we now do. The small shopkeeper, grocer and butcher gave credit to customers. Therefore, the dependency of the customer was not so pronounced as it is now. Dependency is now evident in the banking system, which exerts control. Everything is controlled from the one place; one switch controls everything.

Think Small First is an interesting concept and is, therefore, worthy of analysis. It means different things to different people. We must start somewhere. We must start at the micro level and link our activity to the macro system. If we do so effectively and accurately, we will be able to make a major contribution. However, if we think small first, last and always, we will not go anywhere, and then there will be a problem. When there was an economic downturn and we were told there would be a soft landing, we were thinking very big in the belief that everything was okay. What actually happened was the equivalent of landing a seaplane in the middle of a road. We need to identify the degree to which we can encourage and nurture those who start at the minuscule level with a view to expanding. This is how business worked for countless years. When I was a very young man, I had experience of this, unfortunately.

With regard to Europe 2020, about which we have all spoken in the past, the really serious European problems have arisen because there was no supervision and because everybody said everything was fine. We took comfort from the Lisbon strategy and the Stability and Growth Pact but nobody bothered to recognise these other than vocally, thereby resulting in our current circumstances. Since we did not have semestral reviews, we reached the end of the strategy before we discovered we had been going wrong for ten years. This is crazy stuff. I will never understand how a sophisticated group of economists throughout Europe could have gone down that road for so long and not have recognised they were in a cul-de-sac. I cannot believe this happened but that is how it is.

Nobody mentioned upward-only rent reviews. I have been very cynical about this subject, as have all Members. We regard it as an armadillo that has arrived in the middle of the business community which can and should have been legislated for. It was unconstitutional in the first instance. I cannot understand how legal agreements on upward-only rent reviews were ever allowed. I cannot understand for the life of me how one was allowed to borrow on a business provided there was an upward-only rent review. This takes no account whatsoever of ambient conditions; it cannot and could not. The arrangement was totally wrong for both the lessor and lessee. I cannot believe we became hung up on a system that has no basis in fairness or law. I say this although I am not a lawyer.

Deputy Seán Kyne

The overview is of the crisis in Europe. There are factors one can control and others one cannot. Important negotiations must take place and if possible, a move towards eurobonds would be a huge help in respect of market confidence but one will see how matters develop. Mr. Mark Fielding mentioned social partnership and so on. How confident is he that more positive arrangements can be reached if and when the Croke Park agreement comes up for negotiation? Ms Patricia Callan referred to the 200,000 small businesses that employ fewer than 50 people and obviously, were each of those businesses to create a job, it would have a considerable impact on the live register, notwithstanding the retention of other jobs. Members recognise fully the importance of this sector and I believe some of the initiatives outlined in the budget will help in this regard. Moreover, I hope some of these labour activation programmes will be furthered next year. She mentioned the issue of patents and a Bill is before the Oireachtas, although I am unsure of the Stage it has reached, on reducing the cost of Europe-wide patents, which should reduce some costs in this regard.

Mr. Brendan Butler mentioned the existence of a positive view of Ireland in Europe at present, which obviously is welcome. Thankfully, one no longer hears the acronym, "PIIGS", as frequently. While the acronym, "PIGS" still is being used, one "I" has been dropped and hopefully Ireland is no longer associated with the other countries concerned. As for exports, the agrifood sector is of great importance and the budget again has recognised its importance. The initiatives announced therein for the farming sector and for agriculture have been well received by the IFA and many farmers. It is about getting back to basics and agriculture and tourism are of great importance for job creation and growth. Hopefully there will be more positive export-related developments in those sectors next year.

Deputy Joe O’Reilly

At the outset, I must apologise, as did Deputy Durkan, for having being caught up with other matters and with a vote in the Dáil. As I am at the disadvantage of not having heard the presentations, I apologise if this is reflected in my questions. However, I wish to place some points on record because they are important to everyone I represent and I seek a response from the witnesses. First, while I acknowledge it already has been touched on, I wish to bring up the issue of bank credit. The evidence encountered by members in their clinic work and as they meet people suggests that small businesses are encountering huge problems with credit and there is a lack of credit flow. The witnesses should first confirm whether this is the case and second whether they can posit a solution in this regard. As professionals in this area who deal with small businesses on the ground every day, what solution might the witnesses suggest as to how this problem might be dealt with? Do the witnesses possess evidence that the banks are restoring their position at the expense of small businesses? In other words, all the anecdotal evidence that comes to members suggests credit is virtually impossible to secure and that this is a huge issue. However, is this an exaggeration? Were the banking fraternity to appear before the joint committee, it would say the opposite. Banks claim the opposite, in that they state they are lending and they do so where there is a basis for so doing. This recently has been claimed, even by the Bank of Ireland etc., that they are lending effectively into businesses. I seek the witnesses' specific responses on the credit question, both on whether a problem exists or is a myth and if such a problem exists, on what they consider might be a solution, based on their practical experiences.

Another point continually made to members is there is too much regulation in Irish business. It is claimed this multitude of regulation and consequential over-regulation is a product of European directives and Ireland's implementation thereof. Is this the case and if so, can the witnesses cite specific examples on how members might address them from a legislative perspective? Alternatively, is this akin to almost being an urban myth and is not the case? I certainly would like to know.

I completely concur with the point raised by my colleague, Deputy Durkan, on rent reviews and I will be interested in the witnesses' response in this regard. The concept that rents cannot be reviewed both upward and downward is unthinkable.

Deputy Bernard J. Durkan

Yes.

Deputy Joe O’Reilly

Anyone who rents out property would love to think they could only be reviewed upward but this surely does not make sense.

Mr. Brendan Butler

Deputy Dooley's point about the markets raises an important question and it is clear the markets respond instantly and what they require is certainty. The chief executive of Standard & Poor's recently attended a conference organised by IBEC. While this leader of one of the three major rating agencies is a powerful individual, what was interesting in his discussion was that he did not specifically talk about individual countries but spoke of the importance of the eurozone. Questions were put to him as to what would happen were Greece to leave the eurozone and he immediately stated it would be extremely serious because contagion could arise in respect of countries being picked off, which is of great importance.

As for the summit, it showed a great problem, in that the political leaders of the 27 member states were unable to reach a unanimous agreement. For Ireland, the application by the United Kingdom of its veto has caused a significant problem. Moreover, much of what is happening in respect of solutions to this problem is politically driven, rather than what actually is required with regard to the role of the European Central Bank. Moreover, confusion and uncertainty persist and the markets have responded to this each day. While the Deputy quite rightly stated the next really big test will be the next big Italian bond issue in January, our view is this will not hold until March, when this great plan will emerge. I believe interventions will be necessary much sooner than that as the markets will not allow us to wait until then. We need to get a solution that gets us ahead of the markets and allows us to stay ahead of the markets. This issue must be dealt with but it has not been resolved and the summit did not resolve it.

As for Deputy Kyne's point on exports, he is absolutely correct. Ireland is fortunate in respect of its key economic sectors. On the foreign direct investment side, there is the ICT sector, financial services, pharmaceuticals and medical devices. However, the real star in 2010 and 2011 has been the performance of agrifood sector, which is the strongest indigenous-based export. It probably is fair to state the agrifood sector has a great number of years ahead of it. All the trends suggest it has a tremendous future, even despite the problems that might arise through reform of the Common Agricultural Policy.

Moreover, Ireland's international reputation is good and this is something on which we should build. Although we are standing back a little, we have a very good story to tell about the business case, particularly on the international side. We have a very good case to make in that we probably are the only country among those mentioned by the Deputy that has had absolutely no social unrest. People have been extraordinarily responsible up to now and we have handled our situation extremely responsibly. Consequently, I think there are bridges which we can build and we need friends at a European level now. We have been through a difficult time and we need smaller member states to work together. They can form a very powerful bloc and Ireland has a good story to tell.

Ms Heidi Lougheed

I revert to the Vice Chairman's question, which builds a little on the point explored by Deputy Durkan. Europe 2020 is much more than simply a strategy, precisely because there was much criticism of the monitoring of the Lisbon strategy. Europe 2020 is a completely different beast, which was the point I was trying to make, albeit not as well as I had hoped. However, we need to treat it differently and must be aware of it. A number of distinct major events will happen in the semesterisation process and everyone really must have them burned into their brains, both the big ones and what happens in between. The first event, which is due to take place every year in January but which the Commission already has moved forward to the end of November or two weeks ago, is the publication of an annual growth survey. In other words, the annual growth survey for 2012 was published early to give member states more time. This comprises the Commission expressing its opinion on what the European Union needs over the next 12 months and then inviting the member states to respond. It is a highly complex document with five annexes that is kick-starting a discussion at a very technical level with everyone, that is, with all stakeholders but particularly with governments. In between times, the Commission will start negotiations or discussions with member states - I am unsure what verb it will use - but the next big marker that will happen is the March tripartite social summit, as well as the March summit itself. That is where the Heads of State and Government have a discussion amongst themselves on how they think the Commission identified issues, on whether they think that has progressed in the first three months, and where they think they should go from there. They then go back into discussions again and by April - the last month - each member state has to develop, produce and send to the Commission both its national reform plan and its obligations under the growth and stability pact. One of the interesting things about all this timing is that now, instead of just having the Lisbon strategy and stability and growth pact, it is all one process at the same time. That allows the capacity for a great synergy between them so that not only could they say that one needs to do these three things to help with unemployment levels, they can also say that one's public budget is not effectively doing that.

When those plans have been sent in by the member states, by June the Commission will come back with country-specific recommendations. This is its considered opinion of what we, and all the other member states, say they will do. Between June and the end of the year, the discussion will move to the European Parliament and back to members of this committee. I hope members of this committee will have a massive influence at every level and some input on those points. Where it gets interesting - and which did not exist before - is that between June and the end of the year, there will be a discussion between member states on each other's budget aspirations and national reform plans. That is something we are not used to doing.

Last year was the first year, but it was not real. We now have one of each of these on the table and the Commission will come back to reinforce all of that. Perhaps by 2013, if a country has been given the same recommendation two or three years in a row and consistently does not even explain why it thinks the Commission is wrong, but also simply ignores it and does not do anything, under the new plan the Commission will have powers to impose sanctions and move forward to something else. That is precisely because of all the points that Deputy Durkan brought up. Let us face it, the Lisbon strategy was toothless. We are not sure whether they will have the confidence to strongly criticise member states but that at least is the idea; that is what it is supposed to do.

Vice Chairman

I thank Ms Lougheed for that and now call on Ms Callan.

Ms Patricia Callan

I will start with the point the Chairman made about patents. Essentially, the EU patent legislation is pretty much there. It is currently stuck at the Council on a decision of where the single court will be. It will apply to all member states except Spain and maybe Italy. The practical reality is that it would make more sense for an Irish company simply to go for a European patent because even if it does not have current plans to export, it may do so in future. In addition, because the product exists in this market it is easier for people to get their idea and then launch it in other markets. The critical thing about any patent system is not just about getting the patent initially, but ensuring that one can make people comply with its enforcement. That is expensive for a small company to do through civil proceedings in other jurisdictions where one does not know the market place. It is a very important aspect on which companies always have to seek professional advice. It is not something one can do oneself, like many other things in business. It will be important for every business and anyone who has any sort of intellectual property. The vast majority of businesses have some sort of intellectual property, even though they may look and sound normal, because they are doing things differently.

I will now go through the other issues as they were raised. At the outset I said that there are many issues for small businesses, but we specifically focused on the European ones today. I am happy to address all the more domestically-based issues that have been raised. They are certainly big issues for our members and to be fair, in many cases, they are bigger than the ones we have spoken about this morning. The Small Firms Association is a participant in the advisory group on small business that the Minister of State, Deputy John Perry, put in place. We have just released our first report which contains a detailed analysis. We received more than 400 submissions from member companies, as did other organisations. It was set up in June and over the summer we have had working groups on business costs. We have also gone through the nitty-gritty of exactly what the costs are, and we have issued recommendations we feel should be implemented immediately. We were cognisant of what was involved. The Taoiseach spent an hour with us and said: "Look lads, I'll be happy to do anything so long as it doesn't cost money." That is basically summarising it in the round. There are some good concrete suggestions in the report. The single biggest cost for business is labour, including market inflexibility, the minimum wage, joint labour committees and registered employment agreements. We are also looking at matters such as commercial rates and energy costs, about which I am sure members of the committee get an earful in their constituencies.

Government stealth taxes include licences, charges and permits. A retail store needs to have 20 different licences to operate. One must pay for those licences as well as for all the inspectors who come to inspect the premises. That also leads into regulation, so it is not just about putting primary legislation on the Statute Book; it is also about how it is implemented in practice and checked through.

On bank finance, the Department of Finance commissioned a fully independent study from Mazars, which showed that 30% of companies had been turned down for finance in the past six months. That would certainly match our own internal surveys of member companies. The biggest figure from it was that 70% plus of people did not agree with the reason the bank gave for turning them down. There is huge frustration there at the basic level of getting money. Even for those who get finance, it can take an extra six months to get through all the paperwork. They seek all sorts of information now. If one has been a bank customer for 20 years, why does one need to reproduce shareholders' or directors' agreements, and every piece of paper ever written? The banks tell me that is because the financial regulator is telling them to do this. That is why we have been engaging full on with the Department of Finance and the banks about sorting out that direct customer relationship. We now need to look beyond that and get the financial regulator to acknowledge that there is a balance between prudential supervision, which we all desire, and detrimental lending policies to the SME community.

Much of the additional money being lent out is about restructuring existing facilities. There are random things such as with Bank of Ireland which, in tiny print, had in its contracts that it could change from people's guaranteed euro bar plus rate to a cost of funds rate. Banks just issue these letters and it is a done deal. It is in the fine print and that is it, so even if one thought one had a contract with a certain interest rate, one does not any more. There are all sorts of problems with the system but the most fundamental thing is the fact that these organisations are in chaos. They are in a changed process and their front line people are so nervous about making a decision because of what is happening that we need to sort it out at a basic level. There are not that many high-minded things one can do; it is more about these organisations sorting themselves out structurally and running themselves like businesses.

The two things for which we have been lobbying strongly - and that we are guaranteed will come to pass in the first quarter of next year - are the Government-backed loan guarantee scheme and the micro-finance fund. We have already engaged with the consultants who are designing the partial loan guarantee scheme. The critical thing for us in that is that it is open to all businesses. In addition, it must address two problems. One is the collateral issue because a bank will not give any money unless one can prove that one does not really need it. In terms of collateral specifically, who knows where property is at? That is a traditional form of collateral, so they need to be able to make assessments on the business, person and idea.

The other problem predated the crisis, to be fair. It is about innovative start-ups of novel industries where no one knows what will be the next big Google or Microsoft, and neither do the banks. It is about engaging and allowing them great leeway in terms of traditional risk assessment. Those two things were promised and we are assured that they will happen in the first quarter of next year. They will make a difference, although they will not be a panacea. The business banking market is €33 billion and we are looking at a start-up finance fund of €100 million. No amount has been superficially allocated for the guarantee, so the only way we will resolve this is by banks being better businesses, and that is a much bigger issue.

We have had much progress on late payments this year. In the summer, the Government extended the commitment that Departments would pay their bills in 15 days, to State agencies, the HSE and local authorities. I am concerned about the implementation of that in practice because there is a technical issue whereby, basically, they have to have agreed the invoice value with a company. The likes of the HSE keep asking and clarifying so they then get to push out the payment date. It is only when they agree the amount that the 15-day period starts to run. We would certainly welcome the committee's support so that commercial State bodies should also pay within 15 days. Coillte has 60-day payment terms, which even contravenes the EU's late payments directive stipulating 30 days.

The new directive will not have that big an impact in terms of our normal systems in Ireland but it will make a big difference for exporters. As bad as things are here, it is atrocious getting paid in Italy where it can take 100 to 200 days. Hopefully, when the directive is implemented in those countries it will improve things. Some people say that it can take even longer. It took us three years to get money out of the European Commission itself, so we all suffer from it.

The "Think Small First" principle is not our wording. It is a form of wording within the European Commission's Small Business Act. The ethos of "Small First" is always there, given that there will be a disproportionate impact of any policy on small businesses.

The upward-only rent reviews is an important issue for the retail sector. We know many landlords have been negotiating with member companies with reasonable outcomes. It is the institutional investor-landlords which are the problem. I welcome NAMA's recent statement on its decision on rents, given it is such a big property owner. A mechanism has to be introduced for the others to follow suit. It makes no sense to put people out of jobs for the sake of notionally maintaining a value on a property when everyone knows that is not its real value.

One has to be in business to really understand regulations and European directives. When Members track legislation for a directive through the Dáil, it is only the one Bill with which they are dealing. A business takes the hit on all legislation dealing with the regulations. A business owner or manager has to deal with X, Y and Z and a million other things. It is the totality of the burden that counts, which is why the measurement exercise is important. One has to measure the impact of each provision on business, costing it and then setting targets for reduction. It is not about the theory behind the legislation but how it is implemented.

For example, a basic problem emerged with how working time is recorded. Businesses already may have had recording systems with their payrolls or some companies had a culture of not having employees clocking in. The way the Organisation of Working Time Act was written, and the fact it was introduced before widespread use of e-mail, means a manager must have all his or her employees put in their hours, print off their individual records and physically sign them because an electronic signature is not accepted. All these records must be kept on file for three years. Time has moved on but the legislation stays the same. That is what we mean by administrative burden.

We thought we had a success with raising the audit exemption threshold meaning that small businesses did not have to do audits. However, the notional savings are lost because a small business must have audited accounts for its bank.

I recommend the committee examines the report from our advisory group on small business. Its recommendations would make a big difference to small businesses. It would be great if the committee could help us with these.

Mr. Mark Fielding

Before one gets a patent, one has to do research and development. Up to 29% of our members are involved in research and development and received grants from Enterprise Ireland and similar agencies. Of this figure, 18% went for tax rebates through the taxation system. The difficulty in this area is the fourfold increase in Revenue Commissioner audits on research and development tax rebates which is frightening small businesses. This is one of the difficulties for small businesses. The cost of patents can certainly be reduced which would make a great difference.

On Deputy Durkan's point on costs, small businesses have been hit by a raft of cost increases over the past 20 years, many of which have government fingerprints on them. Electricity and gas costs, while shoved out to the Commission for Energy Regulation, CER, are still down to the Government. Local authority rates have increased by 42% even though there has been a stay on most other rates. Water charges have gone up 110% and waste charges, 160% in the past eight years. We are still way ahead of our European counterparts. When it comes to exports, our competitiveness is shot.

While I accept we are in difficult economic times, this year's budget does not help. It certainly was not a jobs budget when one sees we have been hit with carbon tax and increases in diesel, petrol and motor tax. Just to get product to market is costing more now.

If the Government had thought "Small First" on the redundancy rebate changes it made in the budget, then there would have been a derogation. The Minister referred to TalkTalk, Dell and other large companies leaving Ireland with a redundancy rebate which they could use to set up in sunnier climes. No indigenous business would do that.

Deputy Bernard J. Durkan

Some businesses have done it, however.

Vice Chairman

The Deputy can respond after Mr. Fielding has finished.

Mr. Mark Fielding

Regarding the banks, in March 2010, the then Minister for Finance, the late Mr. Brian Lenihan, stated that the two pillar banks would make €6 billion available for new and increased credit facilities for small and medium-sized enterprises, SMEs. In May 2011, the Credit Review Office informed us both banks had exceeded their sanction targets in new lending, giving a figure of €8.036 billion. The Central Bank's quarterly bulletin in October 2011 stated that in the same period, gross new lending to non-financial SMEs totalled €3 billion with €777 million of that issued to SMEs in the property-related sectors and construction which were meant to be excluded from this. Of this €2.3 billion, 24% was concentrated in the agriculture sector. Farmers were suddenly brought into SME lending. In effect, only €1.7 billion was made available in new lending to SMEs. There are difficulties with this lending arrangement. In the past three months, 52% of small businesses have been refused new lending facilities by their banks.

Deputy O'Reilly asked how we tackle this. We need to re-educate bank lending officers on how to reassess risk. The banks went through the past 15 years giving money out based on property plays. They cannot look at a set of projections and know the difference between a profit and loss account projection and a cash flow projection. Some lending officers do not even know the difference between net and gross. Neither are they acting as advocates when a credit application goes up the line. In the past, a bank manager would have acted as a small businesses help.

Small businesses are price-takers when it comes to rent. During the boom times, we did not have an option because the landlords were driven by their banks which put in upward-only rent reviews. The NAMA announcement after the budget does not give us a great deal of hope. Approximately 30 of our businesses which are dealing with upward-only rent reviews are not dealing with landlords who are in NAMA. However, in their dealings, there are three in the bed. The tenant is dealing with a landlord who has a bank stating that if the landlord decreases the rent, he or she is breaking his or her covenant with the bank and the bank will move in. There is difficulty in that regard.

Deputy Kyne asked about partnership and whether I was optimistic. There must be something in social partnership to replace what was there previously and the independent voice of small businesses should be heard in that. If that is the case, there will not be the madness that was perpetrated in the past such as the two instances of benchmarking and the Croke Park agreement. No doubt the Croke Park agreement must be renegotiated. The basic bottom line here is that we simply cannot afford what we are paying out there.

Deputy Bernard J. Durkan

I want to make a short comment.

Vice Chairman

Very short.

Deputy Bernard J. Durkan

We all took time out from other business because of the importance of this meeting. I do not accept the notion that indigenous industry has not moved outside this jurisdiction. It has. A very considerable sector of the insurance industry indigenous to this country moved to Bangalore in India. I can think of a manufacturing company, Jacob's biscuits, that moved outside of this jurisdiction in recent years for whatever reason. I have a fairly good idea of the reasons, but we need to address them.

There is a metaphor created that worries me most of all where we concentrate on what has now become known as the smart economy. I long ago suggested, as did many other members here, that maybe the stupid economy is something at which from time to time we should look, where there are tiers in the economy with various levels of incomes and various incomes generated by it. There is the basic one, which is the manufacturing one, in which we need to compete at all times, there is the middle one in which we must compete at all times, and there is this cloud computing one, for want of another metaphor, the smart economy. We must be present in all three and we must compete in all of them. If we do not do that, then we might as well forget about it.

The value of one's collateral was referred to. In this, we are almost unique, with the possible exception of our UK neighbours, where the overhang in terms of diminished value of property is appalling. That is one of the reasons the banking system is so unsure of itself. The banks do not know to what they are lending. They do not know the value of the collateral with which they are dealing. We are supposed to be well paid. We are written to every day and told how well paid we are. I could not afford the mortgages of most of my constituents under any circumstances and I would not even dream of them, but they are there. In the 1980s, property values were low. That is how we regained our composure quickly. We got the benefit of inflation. We were able to pass by our debt, but that will not happen on this occasion. There is a different issue on our hands and nobody seems to understand it. I am not saying that I understand it.

I apologise for intervening again, but we need to deal with these issues. We have the group in front of us who rightly comment on these issues on a daily basis and we should not allow ourselves to be precluded from addressing these issues because of time constraints.

Vice Chairman

On that note, I will bring in Deputy Costello.

Deputy Joe Costello

The Chairman will be happy to hear that I will not reopen the debate. I only want to tender my apologies for not being here. I was particularly anxious to be here for this debate because the issues involved are extremely important and I am interested in them all, and I particularly apologise because we kept the delegates waiting two weeks ago for a sustained period while another matter overran its course. I will have the pleasure of going through the transcripts and I look forward to that.

Ms Patricia Callan

I cannot let it go, even though Deputy Durkan has gone. We are still lobbying on the specific point, which is very important. Yesterday I met the Minister for Social Protection, Deputy Burton, on the redundancy rebate. I ask if the committee can help us with it. There is an entire difference between large companies, irrespective of whether they are foreign or indigenous, and small companies. If a small company makes somebody redundant, it is because it has no other option. The reason for redundancy in a small company is that the company is out of cash and it is a cash-flow issue. This has a particular impact on us in the context that if the price of making that person redundant is too high, one must make a second person redundant. It sounds the death knell in terms of ensuring even more workers will be made redundant. These are businesses on the margin which are trying to survive. It will have a detrimental impact bearing in mind that the costs here are two and a half times those in the UK because entitlements are more generous here. One can say they do not have the rebate, but in terms of the overall amount of money that we are paying out, we are paying out double what they are.

There is also an issue for those who had already issued RP50s before this budget announcement who have long-service employees - the longest is eight weeks - and who have already given the cheques to these persons who have left. They will now be struck with the 15%. A company was on to me which will be €50,000 down because of this. It acted in good faith, it has already issued all the forms, the persons concerned have gone with their money, and, just because of this technicality, these business will now be caught. Whatever about the big company-small company issue on which one should differentiate, those companies must be looked after. For those who acted in good faith and had already issued their forms prior to this change, it must be changed.

Vice Chairman

We will end on that note. I thank Mr. Butler, Ms Lougheed, Ms Callan and Mr. Fielding for coming in, for their work and for their contribution. Apologies again for what happened several weeks ago.

The joint committee went into private session at 1.15 p.m. and adjourned at 1.20 p.m. until 11.30 a.m. on Thursday, 12 January 2012.