Joint Committee on Jobs, Enterprise and Innovation debate -
Tuesday, 7 Oct 2014

Credit Guarantee Scheme and SEEDS Report: Minister for Jobs, Enterprise and Innovation

Chairman

I remind members, visitors and those in the Visitors Gallery to, please, ensure their mobile phones are switched off for the duration of the meeting, as they interfere with the broadcasting equipment, even when in silent mode.

We will hear a briefing by the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, on the credit guarantee scheme and an update on the joint committee's south-east economic development strategy, SEEDS, report. I welcome the Minister and his officials. A briefing document has been supplied to all members. I now invite the Minister to address the committee.

Minister for Jobs, Enterprise and Innovation (Deputy Richard Bruton)

Most committee members will be familiar with this scheme which was introduced in 2012 after lengthy consideration. It was a novel approach at that point; we had not tried a credit guarantee scheme before in Ireland. In retrospect, one could certainly say it was designed conservatively. There was a 75% guarantee on individual loans, with a portfolio cap of 10%. The loans were up to €1 million and there was a 2% premium on them. The scheme was put together under the de minimis state aid programme and less than one year in operation when we decided to review it because it was clear that the volume of applications had been lower than expected. The volume to date is approximately €15 million, as can be seen in the brief, involving 110 companies. However, the impact on jobs has been surprisingly strong. As members will see in the document, 870 jobs were impacted on, whether through the creation of new positions or maintaining existing jobs. The scheme, therefore, has a clear impact, but its take-up is low.

We brought forward the commitment which had been given in the legislation to have an early review which many Deputies had been of the view would be needed. We have conducted that review. As can be seen in the brief, following a competitive tender, we brought in consultants to look at the scheme. That review was overseen by our steering committee and we undertook widespread consultations with all key stakeholders in the course of the review. The review found that the scheme had real merit, but its complexity, the narrow range of products covered and the apparent disproportionate skewing of risk distribution in favour of the State as guarantor made it unattractive to the banks to operate. It, therefore, proposed the following changes to procedure: the inclusion of a wider range of financial products, not just traditional credit products, including invoice discounting, factoring, leasing, overdrafts, etc.; a wider range of providers in order that it would not be confined to banks with a licence from the Central Bank; an increase in the guarantee on individual loans from 75% to 80% and an increase in the portfolio cap from 10% to 13%, as well as the removal of the restrictive annual portfolio cap.

Those changes will be in the legislation but there are other, equally important changes that we can do without putting into the primary legislation. They are extending the maximum length of guarantee from three to seven years, removing the requirement for a formal letter of guarantee and appointing a dedicated owner or manager of the scheme to drive performance. Previously we were effectively relying on the banks to be the promoters and act as the client-facing element. We had a group to manage the back office, as it were, the processing of the loans and capitalisation. We are now going to have conscious promotion of the scheme to drive it. We will also re-launch the scheme with a strong campaign behind it. Based on best practice in the banks that have operated it, the scheme will be managed within the credit function of each bank so that those who will be managing it will be client facing. This structure is based on the bank which had the best performance and was regarded as having the best approach. Although it is over a longer period, the overall cost will be no higher than what it was. We are projecting a default rate on the longer period that will be no greater than the default rate on the shorter period. While the loan is outstanding for a longer period, we are not reckoning on a higher default rate.

These are the proposals that we will be seeking to integrate into a piece of legislation. We have got approval from Government to draft heads of a Bill. We are coming to the committee to get an input at this point. It has been tabled on the A list for the autumn session. The committee will understand that it is something we would like to push through as quickly as possible because it offers a better product. In terms of our expectations, it is very difficult to predict. We have put in a figure of €75 million as what we would hope the annual turnover of the scheme will hit, but we will continue to have a higher ceiling than that, should the volume be greater. The refinancing of lending within the same bank is not permitted under the current guarantee, but difficulty in refinancing for SMEs whose banks are exiting the Irish SME market has been flagged by SMEs, the banks and the Credit Review Office as the most pressing issue for SMEs at this time. In order to deal with that issue we have prioritised the preparation of a revised interim scheme under the current Act to allow refinancing of SMEs which have loans with banks that are exiting the Irish market. A possible State aid issue has been raised by the Office of the Attorney General and we are in discussions with the Commission on how this revised scheme can be introduced.

I am happy to take queries or suggestions.

Deputy Peadar Tóibín

Go raibh maith agat, a Chathaoirligh, agus ba mhaith liom mo bhuíochas a ghabháil leis an Aire Bruton mar gheall ar a chur i láthair, bhí sé an-suimiúil. Looking back, I believe the initial objectives of the scheme were to have a turnover of €450 million and for approximately 4,000 separate businesses to be involved. It was a much larger objective than the actual outcome achieved, so I imagine there is some level of disappointment regarding its success to date. There have been 470 new jobs, which we welcome. One of the problems is that the whole of the credit system still seems to be in a state of inertia when it comes to enterprise. I always find it disappointing that although we are such a large shareholder in AIB etc., we have not managed to use this tool to resolve the problems somewhere along the way. There is a lot of SME debt out there and many SMEs in debt default.

They are significant brakes on the economy and on an individual level it is very difficult for those businesses. Before the crash, there was a view that the necessary training within banks and credit facility providers was not there for them to properly understand a business plan, cash flow issues or the type of problems businesses experience. Is the Minister confident that this product and the issue in general has been resolved? Has the Minister considered an ICC-type approach? Has the Minister considered working with the credit unions to try to resolve this problem? What is the effective cost, in terms of the interest rates experienced, for these types of products? The interest rates experienced by Irish businesses tend to be higher than interest rates elsewhere in Europe. Obviously, cost is a significant influencer on demand.

I welcome the changes that the Minister mentioned, including the wider range of products that will be available and the lengthening of time which will make it more attractive to businesses that need a flexible credit solution for their problems. I would appreciate it if the Minister would deal with those questions.

Deputy Richard Bruton

Undoubtedly, we have had to restructure the scheme to try to make it more attractive to the banks. As the Deputy notes, a longer period is provided for now. It remains - this was the important thing that came out of the study - an effective tool. We need to make it more effective and more usable. I think the Deputy is right to say banking inertia exists. There is no doubt about that; one just has to look at the new lending to SMEs. It has been pretty much static at €2 billion for the last number of years. No sign of significant recovery increase has been shown. Part of that - and the banks are correct in saying this - is due to a retreat from borrowing. SMEs are not as interested in borrowing as they were. The one positive piece is the Red C poll of SMEs shows that the refusal rates are coming down pretty significantly. They have come down from 30% to 19%. There is progress on the refusal rate. I continue to say to SMEs - and encourage members to say it to them also - not to take no for an answer. Some 70% of those who question the decisions get the decisions reversed. This occurs in the case of one third when they question the decision internally with the bank and another 56% of those who go to the next step and have the decision reviewed by the Credit Review Office, CRO. Some 70% get it overturned but it is still a small proportion of those refusals.

One of the things we are doing this year is restructuring the loan application so that there will be a pre-ticking of consent to have the decision reviewed. That will allow the CRO to look at refusal rates where decisions were not appealed. This would allow us to examine a sample to see if good bankable projects are being turned down. There are continuing problems but we are hoping to get to grips with those. To be fair to the banks, they have a significant SME restructuring problem. The capital requirements for lending to SMEs under Basel III have gone up. The banks are in a mode that is risk averse. That is one of the reasons we have sought to put more non-bank sources of finance into the marketplace.

I am not fully content that the banks have the requisite skills. I certainly would not agree they have but I am satisfied they are taking considerable strides to put appropriate resources in place . They have recruited new people and Enterprise Ireland works closely with them in order to get them sector-familiar. They attend various events run by Enterprise Ireland, for example the exporting event held in the RDS recently. They are more engaged with SMEs and they definitely have recognised that SMEs are their future. I think there is a conversion of belief.

Mr. Hennessy has reminded me that there was an allocation for training in last year's budget for SMEs because, genuinely, part of the problem discovered was that the quality of loan applications was often not up to standard. We found the same in the case of micro-finance. The discipline expected forced people who sometimes were able to go back to the banks and have a loan approved using the new approach. We must work on this problem with both sides of the marketplace.

The strategic bank corporation is an ICC-type model. The State puts money in through the strategic investment fund; there is the German KfW money and also EIB money. This will be a new source that I think will be lending within the next quarter.

The legislation is open to the participation of credit unions, but they must obviously obtain approval from their regulator to be lenders to SMEs. Someone who lends to SMEs can apply to be approved by my Department. However, the first hurdle for credit unions is to make sure their regulator is happy, but we have made legal provision to ensure they can be participants.

The interest rate is the market rate plus a premium. The Deputy was correct, therefore, to say it was higher. Generally, credit costs are higher here than elsewhere in the European Union, but the rate still reflects the banks' credit ratings and their ability to raise funds in the markets and so on. They are in a more pressurised position, but, happily, they are showing some signs of shaking from it and being able to borrow more competitively.

Deputy Anthony Lawlor

It is an excellent idea to look at why people have failed to obtain loan approval. Is there an issue with data protection?

Deputy Richard Bruton

Not if they have pre-ticked the consent box.

Deputy Anthony Lawlor

We should encourage people to pre-tick the consent box in order that we can access information. It is an excellent idea.

I have met bank officials locally on a number of occasions and definitely Bank of Ireland seems to be more proactive and wants to become more actively involved. The Minister should, in a press statement, encourage banks to be more proactive. Young entrepreneurs receive some capital. However, they may need additional capital and it would be good if we could encourage banks or their representatives to attend which is what I will be doing on Thursday in Kildare. We should undertake such an initiative throughout Ireland. There are some brilliant ideas which could be the source of huge success.

Deputy Richard Bruton

One of the things that has frustrated me is that 97% of people take a refusal lying down and go away with their tails between their legs. Only 3% of people challenge and generally they have a good outcome. I hope that by pre-ticking the consent box we will at least have sight of information on the issue. There is no guarantee, however, that all of the loan applications will succeed. There is no guarantee that all of the geese are swans, so to speak.

I agree with the Deputy's suggestion. We will contact local enterprise offices to ask them to contact the banks to see if they can attend such events when they take place. I know that many entrepreneurs attend a type of bootcamp and are exposed. I am sure the banks are involved in some of this scrutiny of entrepreneurs. The figures are very encouraging, as 1,100 young entrepreneurs applied, which shows that there is an appetite. The special competitive start for women initiative was massively over-subscribed. We need to look at subsets or groups that are under-represented among entrepreneurs and try to set something up for them. Young people and women in particular have been and continue to be under-represented. We will look afresh at the issue.

I know that Julie Sinnamon is very keen that we strengthen the offer to women entrepreneurs, because they are significantly under-represented. In the past year, we have been drafting a policy on entrepreneurship. There are some fantastic role models out there that we need to develop.

Chairman

Is everybody satisfied with the questioning? I thank the Minister and his officials for coming along this afternoon. We will suspend for one minute to allow the Minister of State with responsibility for business and employment, Deputy Nash, and his officials to take their seats.

Deputy Richard Bruton

I am dealing with the south east.

Chairman

My apologies. We will move on the south east economic development strategy, SEEDS, report.

Deputy Richard Bruton

The situation in the south east has been problematic for a number of years. There has been high unemployment in the region, its manufacturing base has suffered a very high level of attrition and it has suffered in particular from the collapse in construction. Talk Talk collapsed a few months into my term as Minister with the loss of 650 jobs. That led us to put together the south east employment action plan. Since then, this committee has carried on much good work on developing its own proposals for SEEDS. It runs a good deal wider than my remit. I will respond as best I can and try to deal with questions as they come. We have put a spotlight on the south east in both our Enterprise Ireland brief and our IDA brief. We have more than doubled the number of site visits to the region from an IDA perspective. We have established an advanced 2,500-square-metre medical technologies facility which is now close to completion.

We have had a number of successes. One of these, Eishtec, which was run by three former executives from Talk Talk, has gone from virtually a standing start to employing 950 people, which is a far greater number than was ever employed by Talk Talk between Waterford and Wexford. We have expansions in Dawn Meats and the Glanbia project, which is building on the really optimistic prospects for the dairy sector. Another story is that of Nypro - again, in the medical devices arena - and there was the case of West Pharma last week. West Pharma is a very sophisticated medical devices company that focuses in particular on diabetes treatment. Last week we also had the stories of Danone Baby Nutrition and Ribworld, which are really exciting. We are creating what one might call an Irish mittelstand with companies such as Ribworld, a global brand with the ambition to be a global company producing innovative pork products. It is a really exciting business and a fantastic story. This country needs to set its flag to deliver companies like these. Thankfully, more and more of these companies are emerging.

We continue to focus on this. I might take questions as they come. A number of issues in the committee's report went well beyond my brief. There is, obviously, a continuing interest in the shared application by Waterford and Carlow for a technological university. There are other programmes to do with the airport and broadband, which the committee has set out. In the next month, my Department will produce a regional enterprise framework. Every region is benefiting from the recovery but not all are benefiting to the same degree.

We must look under the bonnet to get an understanding of where the competitive advantage lies and work to make decisions that build that out. That work is in progress. We have made other important decisions. The local enterprise offices, which are a new alliance between Enterprise Ireland, the local authorities and what were the county enterprise boards, are now open. I have great optimism for them. At a time of renewed interest in start-up business, they are a first-stop shop. There are 31 offices across the country and they will be players.

An issue raised in the report of the joint committee was that of the south east, which is now on a level playing field with the BMW region in terms of regional aid. That was one of the issues of concern. As I have already mentioned, we have made an investment in Waterford in an advanced facility. Our ambition, when we create the regional framework within which we will approach it, is to roll that out within each region, starting with the midlands and the south east as the areas that we need to get to grips with first. We will move on progressively from those. We will be sitting down with stakeholders to determine where the competitive strengths lie and what initiatives we can take collectively to deliver change. We will work towards an annual action plan at regional level involving different players to deliver change to enhance employment performance. This is a work in progress in terms of the south east. I am happy to take suggestions or queries.

Deputy Peadar Tóibín

I have been canvassing in Roscommon for a good few weekends at this stage and I have detected a strong feeling or experience of a two-tier economy in the State. The experience of the south east is an example of that. With regard to jobs, emigration and poverty, people in Dublin and those in the rest of the State have vastly different experiences. Deputy Lawlor will tell me that it is not just inside the M50 and that there are also bits and pieces out in Kildare as well, but there is a strong feeling that this is still a problem. I welcome the work that has been done on the south east and the developments there. Can the Minister tell us how the regionalisation policy of IDA Ireland and Enterprise Ireland is developing? The IDA is focusing to a greater extent on regionalisation than it has previously, which I welcome.

How did the Government double the level of FDI visits to the south east? We have been on this side of the table a number of times and always request an increase in visits to particular regions. We are usually told that FDI will go where it goes and that we are in competition with Scotland, Singapore, etc. It is stated that a win is a win for the country and we cannot dictate where FDI should go. What tools were used with regard to doubling visits to that area?

Interestingly, the Minister mentioned mittelstand, an area where Irish enterprise is very weak. Can he speak about some of the developments in growing that section of enterprise?

Deputy Richard Bruton

The numbers in the south east are good. Having been in relentless decline, employment numbers stabilised in the year to quarter 2 of 2012, with an increase of just 1,500. That trend was repeated the following year, with 1,700, and in the year to the second quarter of 2014, with 10,800. That is a good, solid improvement which was also reflected in a steady decline in the number of unemployed persons over those periods. Unemployment is down 9,000 in the most recent 12 months, which corresponds to the trend in employment. There is a positive story in the regions, but not all regions are progressing on the same basis. Not all regions start from the same level of advantage. There is absolutely a case for a regional approach.

We put a spotlight on Waterford and examined its strengths in the south east and looked at what sectors we should focus on. We have been fortunate in that the pharmaceutical sector, which is a strength in the south east, has come back somewhat and has been performing well, so we have been able to win significant investment in the pharmaceutical and medical devices areas. Therefore, it is no surprise that the two gains were in Nypro and West Pharma, a company which was already in Dublin and was able to find the skills it required here. Development is starting with companies that already have a presence in Ireland and looking at where they might expand. We are playing to the strength we had. Nypro had been in Waterford previously and had that experience. Clearly, having a company which had worked successfully previously is always a positive sale. We also look at companies that are expanding and at property solutions, which is why we have invested in an advance facility.

We try to ensure that the message gets out throughout the system that we are seeking to promote this area and we highlight its competitive strengths. How we do this is in a mixture of ways. The IDA strategy is to diversify, but it has not yet been able to reach the regional targets set for it. As I indicated when we looked at the spending plans, it has done better this year than last year and last year was an improvement on the previous year. There is now a better regional spread in the IDA. Generally, the Enterprise Ireland spread is much better. Some 75% of investment there is outside of Dublin.

While I do not wish to dwell on one company, Ribworld is fresh in my mind. The CEO of Ribworld participated in an Enterprise Ireland Leadership 4 Growth programme specially designated for the food sector and delivered by some of the best people in Lucerne. This CEO attributes the ambition of the company to having had that experience. Ribworld has had intensive support from Enterprise Ireland's Lean programme also. It examines the process and as one can imagine, Ribworld is in an extremely cost competitive sector. It is in food processing of pork ribs, pulled pork and so on and there is keen bidding to get into the Aldis and Lidls of this world. The company has the processes down to a T now and it is also innovative. Enterprise Ireland has supported Ribworld in innovation. It has a high class chef who has worked at the highest level who is part of the innovation team. Ribworld is ticking the right boxes - leadership, Lean, innovation and the ambition to go global and it uses Enterprise Ireland's resources in the markets it supplies.

The supports exist and a number of companies with ambition are making progress. These companies are all over the country and not confined to any one region. We need to get more involved in that. This year, we have targeted manufacturing as a sector for a step up. We have seen a number of companies, particularly in the food sector, make a step up and there has been an increased flow of Enterprise Ireland into these companies in response to the openings for these companies to become global players, rather than sell just to the Irish or UK market.

Chairman

I thank the Minister for his presentation and welcome the progress being made in the south east. I am interested in and welcome the additional information we have been provided with in regard to the regional enterprise development strategy. I have been anxious to hear some work is being done in that area and welcome the fact the midlands area is a pilot region for that strategy.

I note there is a recommendation for linkages between the local authorities, the LEOs, Enterprise Ireland and the IDA. I wonder if there is scope for consulting with the local development companies as well, given they have done a lot of community work.

I am thinking about the midlands in particular. If we think about the type of skillset that would be available in the midlands, it is an area where there was a significant reliance on ESB and Bord na Móna and it could almost be said a culture developed of being used to the fact there were jobs in those areas over decades. With regard to stimulating the culture of entrepreneurship, the question of what we can do now with those skills is something I would be very interested in developing. While everybody is looking at new technologies, which is as it should be, there are people out there who are very skilled in other areas and there is great potential in that region that could be tapped into. Does the Minister see a role in this regard for local development companies, given the kind of reach they have into communities?

Deputy Richard Bruton

We intend to look first at the existing enterprise base and then at the region's enterprise assets, which are across a range in that there are incubators, technology centres, industrial parks, enterprise networks and community enterprise centres. We are looking at the whole gamut of the region's assets in seeking to identify a consensus on what are the competitive opportunities and what sectors are best positioned to be built upon. We will then look at a gap analysis, if one likes. We will look at what is missing in terms of fulfilling those ambitions, having early stakeholder engagement and, as we progress, we will try to get the contribution of the local education and training boards and the institutes of technology because these are key players in building out the areas of competitive advantage that the Chairman identifies.

We will look at this issue collaboratively. We will certainly dovetail it with the work that is going on in the Department of the Environment, Community and Local Government. While it has a broader, regional economic focus and we are focusing on the enterprise piece, we are making sure we dovetail with its efforts.

We would look at the contribution from all sectors and hope to work to get some initiatives. Deputy Tóibín asked what sort of tools will be used. As an example, we will be looking at competitive tools for the LEOs. If LEOs are being innovative in a region and we have an agreed set of priorities in the region, and if a local enterprise office is being innovative or is collaborating across a number of agencies to deliver something, that is the sort of innovation we would like to seed. Obviously, we will be trying to seed new initiatives as well as making sure we are all collaborating on the areas we have.

Given the advanced facilities, I believe that will continue to be a potential instrument. This year we made an investment in an advanced facility at Athlone, as the Chairman probably knows. These will not be like building programmes in the past where we built and then hoped they would come. They will be built with regard to the very clear and established competitive edge in medical technologies that justifies creating a modern facility that would attract the sort of companies that are interested in the strengths of the region. They will be identified on a strategic basis in the context of the regional enterprise opportunity.

That is the approach we will take. We will be seeking to participate with public representatives and other stakeholders as we develop it.

Chairman

I have no more questions. I thank the Minister and his officials for coming in to brief us today. We will suspend for one minute to allow the Minister of State, Deputy Nash, and his officials to take their seats.

Sitting suspended at 2.34 p.m. and resumed at 2.35 p.m.