The development of an innovative, global capacity exchange hubin London could improve productivity by reducing marginal sparecapacity, stimulating innovation and providing an alternative toconventional credit, according to a new report released today (8December) commissioned by the City of London Corporation, Recipcoand the Economic and Social Research Council.

Capacity Trade and Credit: Emerging Architectures forCommerce and Money highlights how businesses with sparecapacity in their own goods, services or infrastructure " often thecase in economic downturns " could utilise their surplus via anexchange to 'finance" the purchase of other goods and services thatthey need. Capacity exchanges have the potential to offer SMEs andlarger businesses an alternative credit stream in the face of achallenging environment for conventional credit as banks rebuildbank balance sheets.

According to some reports, 20% of global trade (over US$ 100bn)takes place in non-monetary exchanges. Capacity trading across theworld has traditionally taken the form of simple bartering, whichinvolves two parties " commonly SMEs in local or national tradingnetworks " settling a transaction through a flow of goods orservices rather than sovereign currencies - or cash. This form ofexchange has traditionally been seen as less efficient thanmonetary trade since it requires finding a suitable counterparty atone point in time and is often contractually more complex.

In contrast, the internet-based multilateral exchange discussedin the report could potentially lower transaction costs throughmarket clearing. The report finds that London is uniquely placed tofacilitate the expansion in scale needed for larger government andmultinational organisations to utilise capacity trading moreeffectively.

Stuart Fraser, Policy Chairman at the City of LondonCorporation, said:"The UK has a long history of responding quickly to thecompetitive challenges of new technologies and forms of commerce.

In a fast-changing world, now more than ever our future depends onmeeting these challenges.

"Innovative capacity exchanges with common tender haveparticular relevance now as we face a weak economic recovery andwidespread constraints on the flow of credit to SMEs, in that theyhave the potential to ease counter-cyclically the liquidityproblems facing businesses coming out of recession. But while theadvantages may be highlighted in a downturn, reducing the need fortraditional financing saves money and makes sense at any time forbusinesses, large or small.

"Helping businesses to trade more efficiently and to depend lesson traditional financial credit is one of the exciting potentialbenefits from such exchanges, as well as helping companies gainbetter access to external supply chains and encouraging moreeffective utilisation of capital. There is also a challenge and anopportunity for government: to welcome such innovations, to fosterthem and to help ensure that they reinforce Britain"s place inglobal trade."Paul Boyle, Chief Executive of ESRC, added:"It is clear from this report that capacity exchanges could helpeconomic performance and sustainable growth - including bothfinancial and environmental sustainability. Capacity exchanges canreduce the environmental footprint of growth by making better useof existing but under-utilised resources."James Fierro, Chief Executive of Recipco said:"The report exposes the scope of what could be possible, if anew economic architecture for the exchange of value were created tofacilitate trade and overcome some of the limitations oftraditional credit. Such a system of exchange could have a materialimpact on stimulating economic growth and social development in theUK and around the world."The study, authored by Z/Yen, also finds that such marketinfrastructure would need to provide confidence that deals agreedand contracts made will be honoured and delivery made in a secureexchange using an acceptable trade unit. It finds that if capacityexchanges were formally recognised, a more solid regulatoryframework might encourage more rapid development.

The full report and summary findings can be downloaded from 8December fromwww.cityoflondon.gov.uk/researchpublications