Date: 13th July 2007
EDD – Loans Guarantee Scheme
Purpose of the report
The Minister has previously delegated his authority to lend for the purposes of the Small Firms Loan Guarantee Scheme to the Treasurer (Ministerial Decision TR40 refers). The previous delegation has been reviewed by the States Greffe and is deemed erroneous on the basis that it refers to Article 9 of the Public Finances (Jersey) Regulations 2005, which should correctly be to "Regulation 9 of the Public Finances (Transitional Provisions) (No. 2) (Jersey) Regulations 2005".
The Minister is asked to re-approve the delegation on the correct basis.
The Minister is asked to ratify five loans that have been approved by the Treasurer under the former delegation.
Background
The States approved the principle of the SFLGS in P38/2005 – The Economic Growth Plan in April 2005. This Plan outlined a loan scheme, underwriting £5m of loans to small firms, in order to stimulate entrepreneurial activity.
The Scheme has now been finalised and has the following summary criteria:
o Loans will be taken between the Business and the Bank, interest rates are set by the bank
o All applications will require EDD approval
o EDD will underwrite upto 75% of loan
o Total underwriting of £2m
o Expected default rate 10% (based on UK benchmarks)
o Expected annual cost £200,000 if and when the loan scheme is fully subscribed
o Loans must not exceed £250,000
o Loans must be repaid within 10 years
o Borrower will pay EDD 2% arrangement fee
o Sector specific restrictions apply
o The scheme will be reviewed on an annual basis and closed if not meeting its objective
Per Financial Direction 3.3, the Minister is allowed to approve upto £500,000 for any one loan agreement provided that the overall scheme does not exceed £3m.
The scheme mirrors a UK scheme, the benchmark 10% UK default rate is therefore considered appropriate.
EDD accept all the risk and costs associated with the scheme, and retain the ability to cease new entrants to the scheme at short notice if costs and risks become too high.
reCOMMENDATIONS
That the Minister re-approve the lending upto £2m by way of four separate £500,000 guarantee agreements with four banks in accordance with Financial Direction 3.3
reASONS FOR THE DECISION
To encourage entrepreneurial activity in the Island, in accordance with the Economic Growth Plan, at reduced risk and administration cost to the States.
On the basis that EDD monitor the risks and costs of the scheme on a monthly basis and cease the scheme if the costs become unaffordable from EDDs cash limit.