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Citi Perspectives for the Public Sector |
2014
13
Challenges for governments
SCF relies on the superior credit quality of the
buying entity, in this case a government or
public sector entity. However, because of large
deficits, in some instances the credit quality of
a government is insufficient to enable it to play
such a role.
Fortunately, an alternative solution is possible.
Multilateral financial institutions have an
explicit mandate to improve access to credit
and support SMEs. Given their AAA-rated
credit quality, multilaterals are able to lend
at competitive interest rates to stimulate
economic activity. The potential involvement
of multilaterals in Trade Finance was clearly
demonstrated in June 2013 when the European
Investment Bank (EIB) provided up to €500
million for short-term trade finance to support
foreign trade oriented SMEs in Greece. Citi
provided up to €200 million of trade finance as
part of the program.
The EIB, as a long-term lender, adapted to the
needs of the economy in Greece by introducing
a new short-term lending instrument
to support international trade by Greek
companies. The bank provides guarantees to
the commercial banks for trade financing – for
85% of the risk – to be used on a revolving
basis to support a volume of transactions up to
a total of €1.5 billion a year.
The partnership demonstrates how other
multilateral financial institutions can leverage
SCF programs, which are similarly short-term in
nature, to stimulate economies. Such programs
also present an opportunity in Latin America
and Asia. Notably, the IMF and the World Bank
have indicated that they support the use of
multilateral guarantees for SCF programs.
Already, there are examples of successful
government SCF programs. Citi has worked
with the UK’s National Health Service (NHS)
to unlock new credit for approximately 4,500
community pharmacies that prescribe £10
billion of drugs to patients. The Department
of Health (DoH) previously reimbursed these
4,500 pharmacies in 36 days on average. By
introducing SCF, the DoH enables pharmacists
to receive payment in eight days, lowers their
cost of finance, improves their liquidity, and
frees up cash in the economy – without costing
taxpayers anything.
Citi also operates an SCF program with the
Export-Import Bank of the United States
(Ex-Im Bank). This is the first program that
uses an export agency guarantee to support
the discounting of supplier receivables
from exporters. The program facilitates
US-domiciled small businesses’ access to
liquidity by allowing Citi to purchase supplier
receivables based on payment obligations
of two exporters: Case New Holland and
Boeing. Ex-Im Bank guarantees up to 90%
of the payment value of eligible receivables
discounted by Citi under the program. The
program allows suppliers to obtain cash more
quickly to fulfill new orders.
Given its strong relationships with export
credit agencies and other multilateral financial
institutions around the world, Citi is well placed
to combine its SCF structuring expertise with
access to multilateral credit support to develop
innovative solutions. As a result, Citi can offer
SCF solutions that allow governments worldwide
to achieve their objectives of supporting SMEs
and stimulating economic recovery. At the same
time, they can demonstrate prudent financial
management, as SCF involves no costs to
taxpayers and can potentially lower government
procurement costs.
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Citi can offer
SCF solutions
that allow
governments
worldwide to
achieve their
objectives of
supporting
SMEs and
stimulating
economic
recovery.