Mr. Martin Shanahan:

A detailed briefing paper on my presentation has been circulated to committee members, which I hope will be of assistance to the committee in preparing its report on the matter. With the Chairman's permission I intend to take it as read and draw out some of the key messages from the paper for the purposes of my introductory remarks.
Most members are aware of the role of Forfás. It is the national policy advisory board on enterprise, trade, science, technology and innovation. We work closely with our sister agencies, IDA Ireland, Enterprise Ireland and Science Foundation Ireland, and undertake evidence-based research and analysis to advise the Minister for Jobs, Enterprise and Invitation and the Government on a range of policy areas connected to enterprise. Forfás, together with the Department of Jobs, Enterprise and Innovation, also developed the Governments Action Plan for Jobs and is responsible for implementing some of the actions therein.
With regard to the interest of the committee in access to finance for SMEs, in the past two years Forfás has published two reports of direct relevance. The Irish Enterprise Funding Environmentwas published in April 2012 and A Review of the Equity Investment Landscape in Irelandwas published in January last year. Both reports have been circulated to members with my briefing note.
The paper I have circulated clearly shows a number of issues including the importance of SMEs to the Irish economy. SMEs dominate our economy. They account for 99.8% of active enterprises in Ireland and employ seven out of every ten people employed. Young, small and medium-sized enterprises in particular contribute more to employment creation and are therefore extremely important in the context of achieving the targets set out in the Action Plan for Jobs. It is not easy to disentangle the impact of the supply and demand effects on access to finance and there is a range of issues on both sides. On the supply side the availability of credit has declined as has the number of banks. The cost of credit has increased and those banks which remain are concentrating on growing profitability. The banks have reduced resources, particularly with regard to the number of staff and staff with the skills required to assess new lending opportunities. Some of these resources have been diverted to deal with non-performing loans.
Access to finance is broader than just access to banking finance and the committee has already heard today about equity investment through venture capital. There are also other products which are not as well developed in Ireland with regard to equity investment.
On the demand side, issues for some SMEs relate to poor cash flow and low profitability based on a continued weakness in consumer demand, particularly for those reliant on the domestic economy. Over-indebtedness is an issue in some cases. Credit institutions which are risk averse to certain types of businesses or certain sectors are also an issue and there is a lack of wherewithal in some SMEs to develop a business plan or make a business case.
Businesses in Ireland have traditionally been over-reliant on bank debt financing, and other models of financing have not received as much attention. Even before the financial crisis emerged a number of long-standing issues were evident in the market for funding in Ireland. Innovative exporting small and medium-sized enterprises traditionally had trouble in accessing external credit finance. The reasons may be that newer technology and business models might not neatly fit into existing lending criteria of financial institutions, a lack of collateral or a lack of track record.
With regard to current performance, based on the ECB's most recent survey published in April we can see the financial performance of Irish SMEs is starting to show signs of improvement when compared to recent years and other European countries. In aggregate terms turnover is growing and indebtedness is falling, although in net terms SMEs are not yet reporting increased profits. It is important to acknowledge many SMEs have had a very difficult number of years. Many have suffered from flat consumer demand in Ireland, challenging export markets and some managers are struggling with significant debt overhang. The ECB data also suggests that while a high share of Irish SMEs regard access to finance as a pressing issue, demand for bank funding is relatively weak. Demand is also more focused on short-term finance, for example overdrafts for working capital, rather than on longer-term capital for productive investment. Of those Irish SMEs which apply for bank funding, 38% reported they had received the full amount for which they had applied as opposed to 66% of euro area SMEs. The ECB survey finds a relatively high share of SMEs in Ireland, 19%, still face significant financing difficulties versus an EU average of 12%.
Examining the Irish data highlights that over the course of the past six months credit advanced to the enterprise sector has declined at an annual average rate of 5.1% to the end of January 2014. The decline in credit advanced to SMEs was most evident in certain sectors, with hotels, restaurants, business and administrative services and the manufacturing sector having the greatest decline. Irish data also confirms the demand for credit remains relatively weak. The latest data also indicates a higher percentage of businesses believe banks are open for business and bank refusal rates for loans are falling.
The cost of finance continues to be an issue for Irish enterprises. Cost competitiveness may weaken further as the banks need to rebuild profitability and competition has reduced. While demand may be weak the extent to which the financial system can provide adequate funding for firms once aggregate demand recovers and the economy grows may be a challenge. Research highlights that credit constraints affect between 4% and 11% of small and medium-sized enterprises.
As I stated earlier, while banking finance is important it is just one source. Since 2008 we have seen strong growth in the use of share and other equity and the use of accounts receivable. The initiatives on bank lending are now being complemented by greater focus on non-bank sources of finance to increase funding options and ensure SMEs have necessary equity to get bank credit.
I draw members attention to figure No. 2 on page 7 of the presentation circulated to them which demonstrates the supports available at various stages of development of business. The committee has already heard a presentation today on some of these elements. Different types of finance support different types of enterprises at different stages of development.
The State has put in place a number of new schemes and initiatives in recent years to address specific issues, such as the credit guarantee scheme introduced in October 2012 and the microfinance loan fund which was also introduced in 2012. Enterprise Ireland has committed €99.5 million to a new €175 million seed and venture capital scheme which was launched in May last year. The remit of the Credit Review Office was extended in budget 2014 to increase the threshold by which small and medium enterprises can appeal a refusal from €500,000 to €3 million.
The Action Plan for Jobs 2014 sets out a range of additional actions for implementation before the end of the year. These include collating more detailed data from the banks on lending, particularly new lending; increasing participation in Government-sponsored access to finance initiatives for SMEs, including enhancing the credit guarantee scheme and the micro-enterprise loan fund; raising the level of awareness among SMEs and entrepreneurs on the full suite of Government supports available; and developing new sources of finance for SMEs including European sources.

Given the depth of the financial crisis and its legacy impacts on the enterprise sector, the banks and the broader economy, it can be expected that it will be some time before debt levels and funding flows return to what might be regarded as normal levels. As I noted earlier, it should also be remembers that during the good times small innovative export-oriented businesses had difficulties in accessing the appropriate funding.

From the perspective of Forfás, some of the key challenges that face Ireland in this regard includes the continuing need to ensure that the efficacy of measures put in place to improve credit flows through recapitalisation, deleveraging and restructuring of the banks can be assessed and further action taken if required. In this regard, there is a need to continue to monitor bank lending carefully at a detailed level. This is particularly important as the economy returns to growth and demand for funding increases.

The State needs to continue to work to ensure that the banking system is aligned with the strategic economic growth targets of the economy. In this regard, a move towards a banking system with a deeper understanding of innovative sectors is required such as software, telecoms, digital content, medtech and life sciences. Also, a proactive overseas banking network is required in the medium term.

More immediately there needs to be a focus on supporting internationally trading businesses in terms of both the provision of credit and banking facilities and products. The scaling back of the domestic bank sector and the withdrawal of many foreign banks highlights issues over the levels of competition in the banking sector as the business banking market has become more highly concentrated. A particular challenge exists for SMEs who rely on the banks that are withdrawing from Ireland.

The programme for Government contained a commitment to establish a strategic investment bank. Since I submitted my presentation last week the Government has announced the establishment of the strategic banking corporation of Ireland. The corporation will make €500 million in credit available to SMEs. It will be important that this mechanism and other mechanisms put in place address the challenges that I have outlined here.

Encouraging equity investment represents a mechanism to help some over-indebted but viable businesses to rebalance their balance sheets. Equity begins from the earliest stage of the business life cycle with friends, family and founders investing at the pre-seed stage to business angels, and venture capitalists investing in the seed and start-up phase right up to the latter stages, through mechanisms such as trade sales and initial public offerings. Members will already have heard quite a bit about this matter so I will not go into it again in detail.

The Department of Finance is carrying out a review of the employment and investment incentive scheme and seed capital scheme. The aim is to ensure it delivers on its potential to support the funding needs of growing enterprises so the outcome of the review will be important. The State can also support other forms of funding and recently the committee heard from peer-to-peer lenders and businesses that it has supported. There is strong potential for the State to provide a supportive environment for alternative sources of finance such as these.

I thank the Chairman and the committee for inviting Forfás here today. My colleagues and I are happy to take any questions.