JOINT COMMITTEE ON JOBS, SOCIAL PROTECTION AND EDUCATION díospóireacht -
Tuesday, 27 Sep 2011

Proposals to Enhance Credit for Business: Discussion

Chairman

I welcome Ms Clare Dunne, assistant secretary general, Mr. Eamonn McHale, principal officer, Mr. Gerry Monks, principal officer and Mr. Gerry Wrynn, assistant principal officer, all of whom are from the competitiveness and jobs division of the Department of Jobs, Enterprise and Innovation. I also welcome Mr. Niall O'Donnellan, head of investment services, Enterprise Ireland. It is not long since some of the delegates were before the committee but we appreciate them returning to discuss another topic.

Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to do so you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that where possible you should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

I ask Ms Dunne to begin the briefing on current and future proposals to enhance the availability of credit for business, with specific reference to the partial loan guarantee scheme, credit insurance and export credit insurance.

Ms Clare Dunne

I thank the Chairman and committee for the invitation to discuss enhancing the availability of credit for business, with particular reference to the partial credit guarantee scheme, credit insurance and export credit insurance. Arising from our appearance before the committee on 14 September 2011, the committee has already had some discussion on the partial credit guarantee scheme and access to credit and is also aware of the supports provided to businesses through the enterprise support agencies.

The availability of credit to viable businesses, particularly SMEs, is a recurring challenge across many countries. The challenge for the Government is to ensure it does not inhibit the effort of enterprises to develop new products and services and explore new markets, thereby protecting and creating jobs. The Government has addressed this challenge in different ways. It has recapitalised the banking sector. The Department of Finance has the lead role in the recapitalisation process. The Department of Jobs, Enterprise and Innovation works closely with the Department of Finance to ensure the interests of business are central to Government actions in the banking sector.

The initiatives taken by the Minister for Finance to restructure and recapitalise the banking system is the principal response to making credit available. These initiatives are designed to secure an adequate flow of credit into the economy to support economic recovery, even as the banking system is downsized. The latest restructuring of the domestic banking sector creates capacity for the pillar banks to lend in excess of €30 billion over the next three years to the SME and other important sectors. This is in excess of the estimates of the Central Bank on the likely demand for SME and mortgage credit over this period.

The pillar banks are concentrating on the Irish economy and need to issue credit to make profits and rebuild their balance sheets. As part of the process the Government has imposed lending targets on the two domestic pillar banks for the three calendar years 2011-13. Both banks will be required to sanction lending of at least €3 billion this year, €3.5 billion next year and €4 billion in 2013 for new or increased credit facilities for SMEs. The Minister for Finance has written to both pillar banks, asking them to provide him with their plans to ensure the 2011 target is achieved.

Businesses having difficulty with credit refusals can use the services of the Credit Review Office, CRO, which will carry out an independent and impartial review of a bank's decision to refuse or reduce credit. This is another means of ensuring the money is lent to the productive sector. With effect from 9 July 2011 the limit for loan applications that can be reviewed by the CRO has been increased from €250,000 to €500,000. This is a positive development and should encourage more businesses to use the CRO.

As a complement to the initiatives taken by the Minister for Finance, my Department is actively working on the introduction of a temporary partial credit guarantee scheme which was announced in the Government's jobs initiative in May. It will be a targeted scheme aimed at commercially viable businesses that can demonstrate repayment capacity but cannot secure credit facilities. The scheme is in the design stage and it is expected further details will be announced before the end of October. It is important to stress the temporary partial credit guarantee scheme will be additional to, and not a substitute for, normal bank lending.

Another component of addressing the finance needs of enterprises which the Minister is putting in place is the micro-finance start-up fund. Getting access to working capital is critical for the start-up and development of micro-businesses which generally find it difficult to access working capital from the traditional banking sector. Such businesses typically comprise fewer than ten people and are often sole traders. We are currently working on arrangements for the establishment and operation of the micro-finance fund which is being developed in consultation with the relevant stakeholders. The aim is to formalise proposals for the consideration of the Government before the end of the year.

A further measure to improve cashflow for SMEs is the requirement from 1 July 2011 for the HSE, local authorities and other public bodies, excluding commercial semi-States, to pay their suppliers within 15 days of receipt of a valid invoice. This should improve the cash flow of businesses and enhance their operational capabilities. The Department is also examining how access to public procurement opportunities can be improved for SMEs. In this context, the Minister has established a steering group chaired by the Department and working with the Department of Public Expenditure and Reform and the National Procurement Service. This committee will examine how access to public procurement for SMEs can be further improved. The advisory group on small business, which was established in June 2011 and is chaired by the Minister of State with responsibility for small business, will also play a key role in identifying the issues that must be addressed to support small business and realise the job potential of that sector.

A State export credit insurance scheme was established under the Insurance Act 1953. This provided State-supported export credit insurance to exporters to cover against the risk of non-payment for their goods by buyers abroad for a variety of reasons. This scheme operated on a significant scale until 1991, when certain types of cover were withdrawn. In 1998, the State withdrew fully from providing export credit insurance on the grounds there was no longer any necessity to expose the State to significant and avoidable financial risks. Over its lifetime, the State scheme insured exports valued at approximately €6 billion. Since then, this Department's involvement in the original scheme has involved the recovery of old debt previously considered irrecoverable.

After the Department withdrew from providing cover, the commercial market for export credit insurance operated satisfactorily, with exporters able to get cover on the commercial market at reasonable terms. In 2009, arising from the dislocation of financial markets, some failures in the commercial market caused by the international financial upheaval became evident. As a result, insurers began raising premia and in some cases reducing or withdrawing cover. The lack of affordable export credit insurance was then highlighted by certain sectors as an impediment to exporting. As a result, the Department undertook an initial assessment of the position and concluded the suggested insurance scheme proposed was very high risk and would not address the fundamental difficulties being faced by exporters at that time.

Following this initial analysis and given growing concerns about the difficulty for companies in obtaining export credit insurance on the open market, the Department commissioned international consultants KPMG to carry out an assessment of the position. The KPMG report, which was completed in autumn 2009, had the benefit of access to confidential industry data that assisted its forensic analysis. KPMG established, inter alia, that approximately 96% of Irish exports did not avail of export credit insurance and therefore only approximately 4% of exporters sought export credit insurance. The consultants also discovered that the existing cover was heavily concentrated in a single sector, mainly food, and a single market, the United Kingdom, that total withdrawals of cover were more prevalent than reductions and that a top-up scheme would be extremely expensive and would have a negligible impact on jobs overall. It also was apparent that a significant cause of the difficulties being experienced by some exporting companies at the time was the strength of the euro against sterling, as the exchange rate for the euro had risen sharply to more than 94p sterling to the euro in early 2009.

Accordingly, based on the overwhelming weight of evidence in the report, the Government decided in November 2009 that a State-supported scheme of short-term export credit insurance should not be introduced. Since the end of 2009, there have been strong indications the commercial market has recovered, with short-term export credit insurance becoming more easily available. In addition, new companies have entered the market and additional products are being offered, thereby considerably easing the problems companies encountered previously. In the past 12 months, the Department has received no formal requests either from individual firms or from business associations to revisit its earlier decision. As I explained earlier, in any case the vast majority of exporters were not covered by export credit insurance and did not seek it.

Irish exports have shown strong growth in recent years, which illustrates that the availability or otherwise of export credit insurance is not an impediment to export growth. Apart from slight declines of less than 2% in the recession years of 2008 and 2009, exports have experienced solid growth. Last year saw an increase in exports of 8% over 2009, reaching a new record of €163 billion. For the first six months of this year, the value of merchandise exports was 6% greater than the equivalent period in 2010. In addition, the trade surplus for June last was the highest on record, at €4.1 billion. These trade figures are very healthy and have an additional economic benefit, and net exports have been a solid contributor to economic growth in recent years. In 2009, when we experienced a significant fall in GDP, net exports contributed a positive 3.86% to GDP, and both last year and in the first quarter of 2011, when GDP was essentially stagnant, net exports made a solid and positive contribution, thereby keeping the economy much more buoyant than otherwise would have been the case. All indications are that this export-led recovery is continuing strongly. Moreover, it is not just the multinationals which are doing well in terms of exports, as Irish-owned companies are contributing to the process. Last year, Enterprise Ireland client companies generated exports of €13.9 billion, an increase of 10% on the previous year. These companies provide 133,522 jobs and generate expenditure within the economy of €19 billion.

The joint committee also has raised the issue of domestic credit insurance. This is a sector in which this Department and the State in general have no involvement. The provision of credit insurance cover for suppliers providing goods to buyers within the State operates in the open market, with commercial insurers providing such cover in most instances.

I thank the Chairman and members for the opportunity to make this presentation. My colleagues and I will be happy to answer any questions they may have.

Deputy Willie O’Dea

I thank Ms Dunne for the presentation and thank the Chairman for his initiative in preparing that highly informative report on credit availability. On page 3 of the report circulated to members, it states the CSO survey on access to finance for enterprises shows-----

Chairman

Deputy O'Dea should note the officials will not have had access to that report.

Deputy Willie O’Dea

My apologies.

Chairman

He may refer to it, once he identifies it.

Deputy Willie O’Dea

Basically, a report received by members states the CSO survey on access to finance for enterprises shows the successful loan finance applications for all credit institutions decreased from 90% in 2007 to 50% in 2010. These figures are pretty bleak. All the anecdotal evidence suggests there is a severe shortage of credit within the economy. There is a credit famine at present, especially for SMEs. As the assistant secretary has stated, the banks have now been heavily recapitalised following rigid stress tests. While the theory is the now adequately capitalised banks have sufficient capital and sufficiently strong balance sheets to make available adequate credit for business and SMEs in particular, in my experience this is certainly not happening in practice.

In an earlier response to me in the Dáil, the Minister for Jobs, Enterprise and Innovation stated the terms of the recapitalisation included the idea that dedicated teams of managers in both pillar banks would be established to ensure there was an adequate flow of credit to small business. Has this been done and if so, how is it working? Ms Dunne's presentation mentioned targets of €3 billion in lending to SMEs for the current year, €3.5 billion for next year and €4 billion for the year after that. Does Ms Dunne believe these targets will be met and are we on track to so do?

As a fair percentage of lending to SMEs comprises restructuring finance, that is, money to enable them to restructure existing loans, has Ms Dunne figures to hand in this regard? Can Ms Dunne provide figures on the two initiatives mentioned by her, namely, the micro-finance initiative and the partial credit guarantee scheme? I understand the programme for Government mentioned a sum of €100 million or something like that in respect of the micro-finance fund. Does Ms Dunne have figures to hand as to how much money the Government proposes to guarantee under the partial credit guarantee scheme?

Ms Clare Dunne

I thank the Deputy for this comprehensive range of questions. At the outset, I will set out some of my views as well as some facts, after which I may bring in my colleagues, Mr. Eamonn McHale and Mr. Niall O'Donnellan, to supplement my observations. As for the CSO survey, I presume the Deputy was referring to the survey entitled, Access to Finance 2007 and 2010. The Deputy is absolutely correct in that if one considers some of that survey's headlines upfront, it shows there has been a reduction in the sanctioning of loans from approximately 95% in 2007 to approximately 55% in 2010. If one looks behind some of those figures, and I acknowledge I have not completed a full analysis of the document, it also shows that in 2010, if one adds up the figures, the average and arguably more normal rate of lending to SMEs was approximately 74.6%. One could also argue that 95% loan sanctions is a very high proportion and would not necessarily represent the norm because, generally, it would be taken that the background level of banks declining credit would be typically 20% to 25%. I am not suggesting there has not been a decrease in lending to SMEs. I accept there has been. We need to look further at the figures. I have undertaken some preliminary analysis but this has not been finalised.

In terms of access to credit and bank lending, we in the Department are hearing two stories. We are hearing what the banks are telling the Central Bank, which is that demand is down, that they are open to lending and that they are restructuring, which I will come back to a little later on. Essentially, the banks say they are open for business from SMEs, that they will lend in every circumstance where they can actually say a business is commercially viable, and that they have the money but there is no demand for it. The representative bodies for small business tell a different story, which is that SMEs simply cannot access credit. Members will be aware of ISME's surveys. Somewhere in the middle lies the truth.

The committee will have seen the reports of the Credit Review Office, the fifth of which has been published recently. The head of the Credit Review Office is of the view that demand for credit from SMEs is down and that the banks are lending. From our perspective, we need to get to the truth of the matter because it is unacceptable for the Government to have recapitalised banks that are not lending in the way they should be. The Department of Finance, working with the Department of Jobs, Enterprise and Innovation, has recently commissioned an independent demand survey. This goes directly to SMEs rather than the banks or the representative bodies. It involves a very well structured questionnaire, which I have recently studied. That process is in train and we should have results in early November, which I hope will tell us something that is closer to the reality of demand for bank lending so we can act on that and tailor our policies.

I will ask my colleagues to talk about the way banks lend and how their teams of lenders operate. On the restructuring figures, the Deputy asked whether I believed the €3.5 billion and €4 billion targets will be met. I cannot answer that. I hope they will be met and I certainly hope that demand is met, although that is a slightly different issue. We will have a fuller picture when we see the results of the demand survey.

The loan guarantee is now at an advanced part of the design stage. We have commissioned a UK consultant to do this for us and we are working as quickly as we can with him. We want to ensure the scheme fits the Irish situation when it is introduced. The consultant and his team are consulting widely and are spending most of their time in Ireland talking to the banks, my Department and Enterprise Ireland. They are going back to the banks next week. We are having a lot of one-to-one meetings with him and with the steering committee. The Deputy will appreciate that this is at the design stage. We are negotiating with banks and examining what demand there might be, so I cannot give the Deputy exact figures at this point.

The proposal for a micro-finance fund is at a reasonably advanced stage of development. I have not had a chance to brief the Minister on either of these two important initiatives, which are a work in progress but are coming to a conclusion. While I cannot say any more at this stage, as soon as we have them firmed up, I am sure the Government will be happy to announce that. Mr. McHale or Mr. O'Donnellan may wish to add to that.

Mr. Eamonn McHale

There is not much more to add to what Ms Dunne has said on the credit issue. There is certainly a different perception in regard to what is available. Clearly, the banks are lending to SMEs and there is a large volume of money on loan to SMEs. What one hears more of is a lack of willingness among SMEs to approach banks. We need to find out what is behind this. Many SMEs are just trying to deal with the current issue and to hunker down and not necessarily go into further development. There may be a decrease in demand in regard to what they want.

The Minister for Finance has recapitalised the banks and has assured everyone there is sufficient capital to provide for current rates of demand. It is a question of trying to see why that demand is not there and what can be done to stimulate it. The first point, as Ms Dunne said, is to try to find out the actual situation in regard to demand. While there are already various surveys in existence, I do not believe there is a broad-scale survey of demand across all SMEs. This is what the Minister for Finance is now undertaking, with input from ourselves and from representative bodies of SMEs, to try to ascertain the level of demand and compare it with previous levels of demand. This will give us a good picture of the real figure.

The Deputies and Senators present are meeting the people with the most serious problems in their clinics and perhaps this is not a representative sample of all the cases that exist and all the applications being made. It must be recognised that not all applications warrant access to finance and they are not necessarily soundly commercial. Perhaps there are entities which were in existence owing to the particular state of the economy a couple of years ago but which may no longer have a prospect of being commercially viable. One has to see how the banks assess those risks and make sure that, in giving money to the banks, we do not have a situation where the banks are then giving the loans to entities that are not capable of repaying them. That is the issue in regard to the demand survey. Ms Dunne has covered the other issues.

Ms Clare Dunne

I ask Mr. O'Donnellan to refer to how Enterprise Ireland and the banks are engaging in terms of educating the banks on lending to SMEs in particular.

Mr. Niall O’Donnellan

It would be fair to say the banks had been very comfortable up to the crisis in lending to companies on the domestic market and also to companies in the agribusiness sector, including farmers and food companies. It is also fair to say they have been very slow and lacking in knowledge of the modern exporting sector, namely, the technology companies and software services, as well as clean tech and med tech. As a consequence, we have engaged with the banks, especially the three primary banks and in particular AIB and Bank of Ireland. We have worked with them to develop central teams in both banks that are increasing their focus on and knowledge of the new exporting sectors to which I referred. It is still very much early days. This is an area of the economy of which and on which the banks traditionally had little or no knowledge or focus respectively, which goes back many years.

With regard to our exporters' experience of the banks at present, it would be accurate to say that they are certainly seeing a change in the sense that, since the increase in capital in the banks as part of the recapitalisation, the banks are now offering more loans to companies but are doing so on very tough and demanding conditions in regard to, for example, collateral, personal guarantees, charges and so on. This works for some companies but not for others. Obviously, there is also a decline rate. To sum up, they are adopting a very cautious approach.

It should be accepted there are many companies which are more cautious than they would have been prior to 2008 in terms of borrowing and taking on new and extra debt. Having said that, there is a strong interest, particularly in working capital, from an exporter's point of view to service the increased demands for exports.

Chairman

It would be fair to say that Mr. O'Donnellan's clients would have great detail in their business plans and much help from Enterprise Ireland as well.

Mr. Niall O’Donnellan

They would be typically more complex companies, they would have business plans and they would be better prepared on average. Clearly there are variations.

Chairman

I will take supplementaries from Deputies O'Dea and Ryan before we go to Deputy Tóibín.

Deputy Willie O’Dea

I thank the delegation for its response. I do not want to hog the time, but I have two brief supplementaries.

I do not know what results the demand survey will come up with but I would suggest that the reason for the drop in demand from SMEs is the knowledge that it will not be any good. The word out there is that it is useless to try. One will either be turned down or there will be so many obstacles put in one's way, or the barrier will be raised so high. It is simply a pointless exercise.

Without wishing to be offensive to anybody on the response on the amounts we are talking about, the €100 million is referred to in the programme for Government. It is written into the programme for Government, which is a public document. The Minister indicated to me on a number of occasions in the House on the partial loan guarantee scheme a figure of approximately €400 million. I find it extraordinary that something that is mentioned in the programme for Government and freely mentioned by the Minister in the House cannot be relayed to us by officials.

Deputy Brendan Ryan

It strikes me that the demand survey could be quite difficult in terms of quantifying the demand. What methodology is the Department using to go about that?

Ms Clare Dunne

I will be brief, and then hand over to Mr. McHale on the demand survey. The demand survey is being commissioned by the Department of Finance. It will be a survey of a minimum of 1,500 SMEs, which is not insignificant. Mr. McHale might speak in more detail about that.

In terms of it not being worth trying, if I was in business and I thought I had a good idea, I would try and I would keep trying and if I got the wrong answer, I would go to the Credit Review Office. That is a personal view.

Chairman

The point probably is that they are told it will be refused before they even start. It is not that they are not willing to try; it is that they are told "No" before they even print the documents. We are all experiencing that. I accept it is from those who come to us, but that is what we are hearing.

Ms Clare Dunne

Okay. People just feel it is not worth it.

Deputy Ray Butler

Many SMEs have renegotiated loans. If one renegotiates loans, one is outside the terms of one's original agreement and one's credit rating is gone for four to six years. That is a significant point. I brought this up previously, that if we are to move forward, we must review the credit ratings on those in business and see what their credit ratings were like up until 2008-09 when the crash happened. If these businesses had good credit ratings they should be given the benefit of the doubt and if they are willing to give employment, we should move on and help these SMEs in any way we can. I am constantly hearing that in my constituency office.

Ms Clare Dunne

I completely agree, if somebody has a solid proposal and can demonstrate either collateral, which is often an issue now, or cashflow. If they can demonstrate cashflow, the banks should be lending against cashflow on the basis of a business plan.

There is a process of re-education going on across the banks. Mr. O'Donnellan mentioned it briefly in terms of the way they lend. We also need to get the message out to businesses that they should be a little more pushy with the banks. People are a little concerned that they do not want to damage a relationship with the banks.

Senator Fidelma Healy Eames

The banks are so pushy. The banks are not for pushing. With respect, it is not as simple as that.

Chairman

Senator Healy Eames will be next.

Ms Clare Dunne

We hear a great deal of anecdotal evidence where somebody would mention it to the bank manager in town but without putting anything formally on paper. I suppose that is what I mean. It might be no harm to push for that.

With regard to the amount in the loan guarantee, various options were discussed at the very early stages when it was in design and the Minister is on record - he has mentioned €400 million and he has spoken of tranches of €100 million. It could be more than that. To be honest, I would be uncomfortable in going into any great detail about amounts until I have had that discussion with him.

I want to hand over to Mr. McHale who might speak briefly about the demand survey.

Mr. Eamonn McHale

The demand survey will be similar to what was done in the context of the Mazars report, Mazars I and Mazars II. It is a questionaire-based telephone survey which will be conducted on a sampling of SMEs, which will be telephoned and asked various questions about their credit facility. The document, which is available on the tenders website, went out last week.

It is the same type of questionaire as that which was used for Mazars I and II. In that process, there was an acceptance of the objectivity of that particular exercise because it was carried out by a research company. Later on, in Mazars III, there was some fudging about its objectivity which was not necessarily correct, but Mazars I and II, in relation to demand, certainly were accepted by all parties as legitimate measurements of what demand was. It will be a similar process.

Deputy Ray Butler

Is it of 1,500 SMEs?

Mr. Eamonn McHale

It will be up to the consultants to decide what a representative sample is, but it was a large sample.

Deputy Peadar Tóibín

It is interesting that, by Ms Dunne's own admission, there are three separate perspectives on what is happening within the market. ISME issued a report in June which stated that 54% of businesses could not get loans when they need them. Some of the reports that we have read here state that 25% of businesses stated that they cannot grow because they are not getting loans and 19% of businesses are not even getting answers back as to why they are not getting loans. I have anecdotal evidence, as has every member present, of individuals who got loans fairly easily four years ago having to jump through all sorts of hoops to get those loans, if they get them at all.

It is a shock that sometimes healthy businesses, because they have cashflow problems, are not getting loans from the banks. Often it is because the banks do not want to be on the end of a cashflow problem, in other words, if the business is not getting paid, the bank feels that it will be at the end of the chain of those who will not get paid.

One of the issues that can help with that is for there to be proper payment in time of invoices for public procurement. I note that there is a policy in place which states that invoices must be paid within a certain timeframe, but I can inform the Department that some local authorities are telling individuals not to date invoices because if they date them, the local authorities will not get to pay them on time and then the local authority will get into trouble. The business must go through not dating the invoice because it does not want to be blacklisted by the local authority in future tendering. There is a complete loop outside of that policy that is preventing proper payment on time in that regard.

There is a view that we need extremely good regulation, but there is also a view that regulation, in itself, has been pro-cyclical, that it was lighter in the good times and it is much more stringent when times are tough. There is even a view that credit unions are being prevented from delivering loans to small business.

I have a couple of questions. How many interventions has the Credit Review Office made and what type of interventions has it made? What percentage of exports is derived from larger SMEs, those with over 50 employees? In Britain, for example, such SMEs with over 50 employees account for 30% of the business make-up.

Ms Clare Dunne

There were quite a few questions and I will field some of them to my colleagues. In terms of prompt payments and the administrative arrangement in place, I would say it is unacceptable for local authorities to demand of their suppliers that they do not sign the invoices. That is not the intention of the scheme. If that happens wholesale we cannot monitor it and will not be able to come back and tell the committee about it.

That is the sort of report we need to hear. On the last occasion I attended this committee I said that one of the many benefits in the engagement is that we hear things we might not hear otherwise. Mr. McHale can take up on this point.

Mr. Eamonn McHale

I shall give some history in regard to the particular initiatives. In 2009 there were many complaints from SMEs to the effect that central Departments were not paying their bills on time. At that stage we introduced the 15 day prompt payment requirement for central Departments. We have a very transparent reporting mechanism whereby every quarter returns are made on the performance of individual Departments which we publish through our Department. The last quarter returns show that about 97% of invoices by value are being paid on time by central Departments. That was one issue we addressed.

From 1 July this year the same arrangement applies to the broader public sector, with the exception of the commercial State bodies. They are now within the first quarter of that exercise and will report to their Ministers on their performance in that regard. The Ministers will be obliged to report on a quarterly basis, giving a composite detail of agencies within their Departments and how they are performing. Within our Department we will try to help by providing a composite of the composites. I will be very disappointed if there are still instances of any public sector body trying to abuse the system. The message should be clearly sent out that such cases should be raised with the Ministers in charge of those bodies, and also with us so that we can pursue them. I do not believe there will be any question of Ministers allowing clients of local authorities to be blacklisted by the same authorities. Deputies and Senators should encourage people to go to their Ministers and make formal complaints in that regard. That is one way of addressing the matter.

In the past there were suggestions about what would happen but these did not materialise when we introduced the arrangement for central Departments. It is a very serious issue. This is just the start of the process for the broader public sector. If there are problems, now is the time to start identifying them so that we can address them with the relevant Ministers.

Ms Clare Dunne

I will hand over to Mr. O'Donnellan. The Deputy spoke about regulation being too stringent and mentioned terms and conditions on SMEs applying for-----

Deputy Peadar Tóibín

There is a view among economists that regulation can be used in a procyclical or countercyclical manner. Right now we need a countercyclical policy from the Government. In the past we had lighter regulation when we needed it to be stronger. There is a view, which is not necessarily mine, that regulation might actually be too stringent now and in itself be counter to business.

Ms Clare Dunne

That is more a matter for the Department of Finance, given that it is concerned with banking regulation and credit unions.

Chairman

We will speak with the Department. If any questions remain they will be dealt with next week.

Ms Clare Dunne

Mr. O'Donnellan may wish to say something, in brief.

Mr. Niall O’Donnellan

There was a question about the percentage of exports accounted for by SMEs.

Deputy Peadar Tóibín

For those with more than 50 employees.

Mr. Niall O’Donnellan

I do not know the precise numbers and will have to return to the Deputy. My broad recollection of our overall exports gives a figure of €13 billion, about one third of which is accounted by SMEs. I will confirm a more precise figure in terms of firms with 50 employees.

Deputy Peadar Tóibín

It is in order to have an understanding of how business is growing and migrating. There is a view, especially among members of ISME, that getting to the next stage is often the most difficult development stage for small businesses.

Mr. Niall O’Donnellan

Sure. Clearly, there have been major shifts, particularly driven by SMEs, into software, med-tech and other areas. The sectoral composition changes significantly over time. Perhaps we can comment on that too when we return.

Deputy Peadar Tóibín

There were the interventions by the credit review officer, CRO. How many were there and of what type?

Mr. Eamonn McHale

I expect this information is available in the CRO's fifth report which was published at the end of August but, from memory, I believe roughly 100 applications came before him for examination. Of those he would have suggested to the banks that there were some 30 to which they should give credit. If the Deputy wishes to put it in terms of successful interventions 30% would have got access to credit following that intervention by the CRO. That is a very low number.

The Deputy asked why businesses do not go through that process. There were criticisms about the publicity for the CRO office, whether people knew about it. There has been some adverse criticism by some of the business organisations in regard to the objectivity of Mr.John Trethowen that I believe to have been unfair. The more people who go through the process the more chance there is it will be seen to be successful. The Deputy should realise when any case goes to the CRO there is an opportunity beforehand to go through the banks' own internal appeals procedure. Some people use that route to get satisfaction and therefore do not go near the CRO. The fact that the office was established forced the banks to reinforce their own appeals mechanism and have more formal structures.

I am not an apologist for the banks but they would tell us that they are open for business and must provide loans to the SME section in order to grow their own profits and get back to a functioning position, that they are very amenable to looking at business proposals and trying to provide credit. The Deputy's anecdotal evidence obviously does not suggest that but there is a space in between where the banks are providing that type of credit.

Another point is that when loans were given very freely in recent years during the boomtimes, the assessment by the banks was not very robust. Now they must apply a more rigid cash flow basis in regard to applications. That may be causing a strain for some businesses which are not used to that type of approach. Mr. John Trethowen is trying to work with the two pillar banks at present to try to develop a standard application form which would allow businesses know what type of information was required of them. There would not then be situations where they would be going backwards and forwards with the bank each time to provide additional information before they could get to the next stage. From that point of view improvements are being made in how customers access bank loans and what is demanded of them

Deputy Peadar Tóibín

Thirty does seem a very small figure given the avalanche of representations made to us on this issue. Mr. McHale mentioned that sometimes when people take the CRO route they may go through the banks' own systems in order to review their applications. Is there any measure of that?

Mr. Eamonn McHale

The banks would have measures of the number of cases going through their own processes but it is a requirement of the CRO that a customer should try to use the banks' internal mechanisms before going to its office so that the bank will already have had an opportunity to review the case.

Deputy Peadar Tóibín

Is there a measure of that?

Mr. Eamonn McHale

There are numbers but I do not have them here. The banks would have them.

Chairman

To clarify, there is confusion in businesses about whether they are obliged to appeal to the bank before they go to the Credit Review Office. I am confused even by Mr. McHale's answer. Is there a requirement to try the bank first? If Mr. Hale does not have the answer, that is fine, but the matter must be clarified for businesses.

Mr. Eamonn McHale

The website states that internal mechanisms must be used.

Chairman

That is very slow.

Mr. Eamonn McHale

The Credit Review Office has been very flexible in trying to get credit for companies and it will be flexible in dealing with them.

Chairman

I call on Deputy Joan Collins, with Deputy Áine Collins to follow.

Deputy Joan Collins

I have one question regarding export credit insurance which is connected to the questions about the CRO. It is interesting to see in the 2009 report that perhaps 96% of Irish exporters did not avail of export credit. Although they went through a certain process and the situation is better now, 96% of Irish exports are not covered by insurance.

Ms Clare Dunne

That figure reflects the data available when the report was conducted in 2008 and 2009. I do not have a figure for those who avail of it now.

Deputy Joan Collins

The last paragraph states that the vast majority of Irish exports were not covered, even when such assurances were more easily available.

Ms Clare Dunne

That is prior to 2008. This became a critical period as cover was rapidly withdrawn or severely reduced. According to confidential data obtained by KPMG, which we would not be able to access, this was the position taken by the insurers.

Mr. Niall O’Donnellan

This issue is not material to many of our multinational exporters or the services sector, which tends not to use credit insurance. It primarily pertains to manufacturers. The 2008 data indicates that the problem largely affected food companies and those which exported to the UK in particular. It is a question of the tactics pursued by individual companies as well as the supply of credit insurance in the sense that there are alternative options, such as operating on a cash basis or using letters of credit. In 2008 a significant number of companies were not fully aware of the credit insurance requirements in terms of their own businesses and their customers' businesses. That has since changed, however, and businesses better understand the information required by the suppliers of credit insurance. As with every other supplier of capital, insurers have become more demanding in regard to information and companies have to respond to these demands if they are to avail of supply.

Deputy Áine Collins

Funding is clearly a serious problem for the SME sector. However, the pillar banks argue that the quality of the information they are receiving is very poor. Can the idea of soft supports and mentoring for businesses be given better publicity? The banks appear to have money they are willing to lend but there is considerable miscommunication.

Ms Clare Dunne

I recall the committee gave us a very strong message on this topic when we appeared before it on 14 September. We entirely agree with the Deputy. Enterprise Ireland engages in extensive mentoring and the county enterprise boards mentor their own clients. These are the two principal ways in which the State gets involved and I presume other local organisations, such as partnerships and Leader companies, also provide mentoring. It is something we need to investigate further with a view to refocusing on mentoring. Our own knowledge of the SME and micro-enterprise sectors bears out the need for such an approach and we will strongly advocate mentoring as part of the micro-finance fund when it is introduced.

Deputy Áine Collins

It is interesting from the banks' perspective that the quality of information is so poor.

Deputy Peadar Tóibín

The further education sector is being restructured with the development of SOLAS from elements of FÁS and the VECs. Would it be efficient to transfer the mentoring and training functions of Enterprise Ireland and the county enterprise boards to SOLAS, given its focus on further education?

Banks know how to give loans on properties but they are not necessarily knowledgeable about loaning to businesses.

Chairman

It was agreed at a previous meeting that the Minister for Education and Skills would consider that proposal.

Mr. Niall O’Donnellan

We have worked with the banks on their orientation to exporting companies and several bank officials have been briefed on the key sectors we referred to earlier. I acknowledge, however, that further work will be required at the level of exporting companies, particularly among micro-enterprises and small businesses.

Ms Clare Dunne

The expertise for providing mentoring and training to businesses resides with Enterprise Ireland and the county enterprise boards.

Deputy Peadar Tóibín

They already outsource most of this work to consultants and SOLAS will be responsible for maintaining lists of trainers.

Chairman

The issue is the cost of the advice. Multinationals can afford to hire the best people but an SME is not in a position to fork out the money required for professional advice on business plans or getting loans. Deputy Tóibín is referring to making such supports available through educational programmes or grant aid for mentoring. Enterprise Ireland and the county enterprise boards have a limited capacity in this regard and it can only reach so many companies. There are many more companies in need of help.

Deputy Tom Fleming

It is practically impossible for small businesses to access credit from lending institutions. With all due respect to the officials, who have given a comprehensive overview of the issues arising, we need to meet representatives of the banking and small business sectors.

Chairman

That is planned.

Deputy Tom Fleming

We can get a true picture of what is happening on the ground. In regard to access to finance, I welcome that the Minister for Public Expenditure and Reform has established a steering group to examine barriers to achieving value for money in public procurement. Perhaps we should establish a liaison committee to assist businesses in accessing the finance they require. The track record of SMEs which received funding from Enterprise Ireland has been very successful with last year's exports of €13.9 billion representing an increase of 10% on the previous year. They will be the lifeblood of the economy and they are committed to their employees and the country. In many cases, larger companies have pulled up sticks after receiving considerable amounts of grant aid.

Deputy Áine Collins

There is a huge difference between training and mentoring. Training involves a large number of people whereas mentoring involves working with a company on a one-to-one basis. The cost of mentoring for Enterprise Ireland is €175 per session and that can last as long as three hours. Usually, companies receive approximately nine sessions. The cost is not prohibitive but the problem is that the mentoring is only available to agency led companies. Bord Gáis in Cork has set up its own mentoring programme. There are 40 or 50 mentors in this and it is being done pro bono, with no money involved. They are working with companies that are not agency dependent, and the process is proving to be quite a success. The only problem is that not enough people know about it. There is much willingness to act on the issue.

Senator Fidelma Healy Eames

I have two questions. There was a question on why banks are not lending. Last June, a person with a business in Galway came to me indicating that the company needed a €500,000 loan that would lead to it filling a €5 million order from overseas. Some equipment was required and the business could have created eight jobs. The person went to the two big banks, AIB and Bank of Ireland, which the business had dealt with before, for the €500,000 loan. From June to September I worked, with the permission of the company, to liaise between the bank and the company. By September it had received €350,000.

The banks are putting companies through the ringer. Why are people running companies fearful and why did this company need my help? Time was critical and the company in question was about to lose the order. There is also the significant cost of what the bank is putting the business through when it seeks formal reports. That is putting off business. The bank told me that financial management is an issue as many entrepreneurs in creative areas are not good financial managers. Is the Department providing assistance to companies with financial management, as it must do so?

The Credit Review Office is useless for any company that wants to borrow €500,000, as I understand the cap is €250,000.

Chairman

The cap has been changed.

Senator Fidelma Healy Eames

Has it been changed? The €250,000 figure was the cap at the time so the company in question would have had to split the loan in two.

Last week I was in Brussels and we met Commissioner Máire Geoghegan-Quinn, who indicated that Commissioner Ollie Rehn was working on a loan scheme for small and medium enterprises because of the credit crisis here. Has that scheme arrived or are the officials aware of it?

Deputy Brendan Ryan

I have an observation before my question regarding the imperative behind the lack of finance for small businesses. Two of the responses outlined are a temporary partial credit guarantee scheme and a micro-finance start-up fund. I was disappointed as the officials went through the details of the guarantee scheme to hear of the current stage of the process, which is in design, with further information available in October. The micro-finance process may happen at some stage, perhaps at budget stage. It seems that responses are slower than they ought to be and I am interested in the opinion of the officials as to whether they are moving as quickly as possible.

Chairman

The final question will be from Deputy Crowe.

Deputy Seán Crowe

The officials mentioned the independent demand survey, and I presume this deals with small businesses. Central Statistics Office figures suggest that perhaps we should be examining banks with respect to loans. In 2010, 90% of applicants were not given a reason for complete or partial loan refusal. That figure is up from 9% in 2007. If businesses do not know, we must ask banks why applications are being turned down.

We have spoken about the 15-day period for payment, which is positive. For those involved in construction, the difficulty has been that with many of the larger contractors there are sub-contractors as well. I presume for State contracts payment is being made within 15 days to the contractors but unfortunately, the sub-contractor is not being paid, which is an increasing difficulty. I do not know if the Department can act on this but legislation is required in the area. How many businesses have availed of the Credit Review Office?

Chairman

That was dealt with already. Approximately 100 businesses have used the office facilities.

Ms Clare Dunne

I will do my best to answer the questions quickly. Senator Healy Eames spoke about financial management training, which is provided by both Enterprise Ireland and the county enterprise boards. The agency companies deal with client groups, although that is not to say if people go to a county enterprise board they will not receive some advice on financial management. It is available and my colleagues may have something to add to the issue.

The Senator gave an example and I have heard these stories in the past. I occasionally engage with companies in the exporting sector and some of the stories are unbelievable.

Senator Fidelma Healy Eames

It is not a story; it is a real account.

Ms Clare Dunne

I am referring to the way it was presented. I deal in reality as it is the only way we can address these matters. It is a negative. I have heard the same real stories from companies which are trading and doing exactly what we want them to. In trying to break into new markets they can find it impossible to access finance and may have to run down any reserves they might have in the bank. As a result such companies are unable to scale and grow.

There will be a suite of responses to this. Elements include the loan guarantee, the micro-finance fund, education of banks and using the Credit Review Office. As the Chairman told us, the cap was increased to €500,000 very quickly. The Senator also referred to Commissioner Ollie Rehn, and we are aware that the EU is working on the Progress Microfinance fund. We are moving ahead with our own proposals and with regard to the micro-finance fund, we hope to get those loans partially underwritten by the European Investment Fund. We are already in negotiation in that regard.

Senator Fidelma Healy Eames

Is the financial management support an ongoing facility or a one-off to be provided by Enterprise Ireland the county enterprise boards?

Mr. Niall O’Donnellan

With regard to Enterprise Ireland and exporting companies, we provide several services relating to financial management. We have mentors working on an individual basis, as has already been described. That is an ongoing service dependent on the needs of a company. We also have grants to allow companies to employ full-time personnel with financial expertise. That is also ongoing. We have chief financial officer, CFO, networks, including one for established companies that are exporting. There are approximately 300 CFOs involved in the monthly series of discussions on particular topics involving expertise, etc. We also have a CFO network for scaling companies. We have a special team working intensively with the high-growth, "gazelle" type companies, taking in overseas operations, business plans and organisational development. There are a number of fora for these companies, taking in the CFO networks, and we are running a programme with Stanford for those companies.

Mr. Eamonn McHale

The CB clients may not be as sophisticated as other clients so the level of mentoring or assistance would be much more discreet with regard to particular courses. It may not be seen as financial management but rather cash flow assessment or more direct financial arrangement for businesses. The courses are provided throughout the CB network and are available to companies. They would also be available to some non-core clients as well.

Ms Clare Dunne

I accept that it would be wonderful if we could develop and begin operating a loan guarantee scheme in a fortnight but that is not possible. We have worked extraordinarily quickly on this and we must go through certain hoops in terms of advertising and public procurement, which takes a certain length of time. When we got the go-ahead as announced in the jobs initiative in May, we started the next day. We had already done some pre-work in anticipation of getting a signal.

There is a process to be gone through with consultants. Designing a partial loan guarantee scheme from the start is not easy. We want to ensure this scheme is developed in such a way that it will do what we want it to do. Most of the consultants we interviewed complained we were giving them too short a timeframe in which to develop it and that they would have preferred at least an extra month. Given that my own officials are working 12 hour days, people are working extraordinarily hard, we would hope to have something we can discuss with the Minister by the end of next week. That has not been easy. It will then go through the Government finance.

The position with micro finance is the same, it is complex, as is sourcing funding in these difficult times. We need to design a scheme that will work and put it through certain tests and work with people who are in the field. All these things appear to take three months as opposed to three weeks. They are the constraints within which we work in the public sector but we must have full consultation and must be careful when we go to the Department of Public Expenditure and Reform with a case that it is well worked out and represents value for money. It is important that we are convinced so that in the event of us asking the Government to put a significant sum of money behind a proposal we can stand over it and say we believe this is value for money.

Chairman

I thank Ms Dunne and her officials for the presentation. On the matter of urgency, we are speaking about all these issues for the past three or four years since the crisis commenced, that is why we want to see change happening as quickly as possible. I accept, on behalf of the committee, that the Department of Jobs, Enterprise and Innovation is not the full driving Department for all the decisions that have to be made but it has an important role to play in joining with the committee in putting pressure on the Department of Finance to make changes. Department of Finance officials will be appearing before the committee.

I thank Ms Dunne and her officials.