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Three reasons (at least) why we need a new Investment Bank (S+M+E)

Posted on November 11, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Speaking at a recent conference of the Irish Small and Medium Enterprises  I outlined, in my presentation, a number of key challenges facing public policy over the coming decades and how Irish-owned small and medium-sized enterprises (SMEs) need to be facilitated in much more ambitious strategy and vision that goes beyond the laudable aim of Ireland being ‘the best little country in the world in which to do business’.

SME’s are the backbone of the economy in both parts of Ireland. Recent data published by the Central Statistics Office confirm that SME’s in the Republic account for 99.8% of all businesses, contribute almost one half of all gross value added in the State and provide employment for over two in three persons employed in the business economy.  Business SME’s account for the bulk of net additional employment in the non-agricultural sector since mid-2012.

Yet, SME’s remain severely challenged on a number of fronts in recent years. These include:

  1. loan impairment due to the overhang of the 2008 crash
  2. the continuing harm caused by fiscal austerity across Europe including Ireland where the volume of retail sales has been flat since 2010
  3. rising non-wage costs as energy and public service charges impact on businesses.

A recent European Commission report on SME’s provides interesting data on a range of issues confronting SME’s. It shows that the rate of rejected loan applications in 2011 was well above the EU15 average.  With investment at an all-time low (approximately 10% of GDP in any recent year) and with unemployment and under-employment still at very damaging levels there is a need to channel support and finance into viable SME’s. The Nevin Economic Research Institute in its first Quarterly Economic Observer in March 2012 has outlined the case for, and feasibility of, a modest additional investment shock over a five-year period sourced from off-balance sheet borrowing from public and private sources.

The Government commitment to a strategic investment fund of over €6 billion drawn from the National Pension Reserve Fund is to be welcomed. However, timely action is needed in addressing the investment needs of SMEs now as well as put in place a mechanism by which the large amounts of cash held on deposit or in long-term bonds by large corporates can be channelled into SME’s. The case for a strategic investment bank has already been accepted in principle and is reflected in the Programme for Government (2011). However, action has been much too slow and the mention of a Strategic Investment Fund falls short of the initial commitment to set up a bank. What we need now is urgent legal and administrative steps to establish a new Investment Bank – not as part of some existing pillar bank.  Lessons may be learned from international experience where investment banks have been successfully operating for decades (e.g. KfW in Germany).  Indeed, the former Industrial Credit Corporation (ICC) provides an example of how state enterprise can work with private firms in a way that is effective and useful for economic and social development. Vic Duggan in a NERI working paper earlier this year has researched the options for establishing such a body.

Michael Hennigan over on finfacts.ie provides a timely warning:

"Michael Noonan, finance minister, is also trying to ride two horses at the same time — so on his second objective, after ending the bailout, is to get debt relief from Europe, but when should the story on SME debt be revealed? The domestic economy has been in a depression since 2008, SMEs, its main economic engine, are deep in debt and with little prospect of significant growth, the banks will have to write off a lot of it. Where will the money for recapitalisation come from? At least, it would be a first step if the Central Bank had detailed information on the loan situation that it clearly hasn't at present."

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