MEMORANDUM SUBMITTED BY THE EXPORT CREDITS
GUARANTEE DEPARTMENT
PURPOSE
1. This memorandum has been prepared for
members of the International Development Select Committee (IDC)
to assist their inquiry into the role of the Export Credits Guarantee
Department (ECGD) in relation to developmental issues.
2. It provides:
— (paragraphs 3 to 10 and Appendix
A) some basic background on ECGD and its operational context;
— (paragraphs 11 to 17) a brief account
of the work being undertaken in the current Review of ECGD's Mission
and Status;
— (paragraphs 18 to 29 and Appendices
B and C) a description of ECGD's current position in relation
to support for developing countries;
— (paragraphs 30 to 34) a description
of ECGD's handling of environmental and good governance issues;
— (paragraphs 35 to 39) details of
ECGD's support for defence exports; and
— (paragraphs 40 to 41) what else is
being considered in the Review.
BACKGROUND ON
ECGD
3. The UK Government established the world's
first Export Credit Agency (ECA) in 1919. After the First World
War, Britain was facing a new pattern of international trade and
needed to rebuild its economy. ECGD has performed a number of
different functions over the years, adapting its products and
services to changes in the global trading environment and private
market insurers' and lenders' risk appetite. There are now government-sponsored
ECAs in 39 countries.
4. ECGD's main function has always been
to provide insurance cover or guarantees for commercial transactions.
Export credit insurance cover protects against the risk that British
exporters (or banks who finance export loans in favour of British
exporters) will not be paid by overseas banks or borrowers. Under
its Overseas Investment Insurance scheme (OII), ECGD also insures
investors against a range of political risk events that may adversely
affect their overseas investments.
5. ECGD charges its customers premium, when
it takes on risk. If a borrower or buyer defaults on repayments,
ECGD pays (valid) claims under its policy or guarantee. It makes
recoveries, where it can, of amounts paid out in claims—as
any insurer would.
6. Under its existing Mission Statement
ECGD is required to limit the risks to the taxpayer. This is achieved
through a financial objective, which Ministers set, for ECGD to
break even (to a specified confidence factor) over time. ECGD
operates a more financially prudent regime than many other ECAs
and a tighter breakeven objective than required by the WTO.
7. It is important to take a long term view
of ECGD's activities. For the approximately £30 billion of
business underwritten since the privatisation of its "short
term" business in 1991, ECGD has been a net contributor to
the Exchequer. ECGD does, however, carry a significant portfolio
of debt from substantial claims made on business underwritten
in the 70s and 80s, much of which is being recovered through rescheduling
agreements, some of which ECGD will be unable to recover. However,
a large proportion of debt owed by poorer countries has been written
off.
8. Further details of ECGD's operations
and working processes are set out in Appendix A.
9. The rationale for what ECGD and indeed
other ECAs do, is to fill a gap in the marketplace. ECGD facilitates
trade by underwriting commercial projects and investments, for
which the private market has little or no appetite: ie high value,
long risk horizon business in non-OECD countries (including "emerging
markets" and "transition economies"). While support
from ECAs, like ECGD, is primarily required for business with
countries for which private market appetite is constrained, the
projects and borrowers it underwrites must be commercially viable.
10. A key difference between ECGD, as an
insurance organisation, and an aid agency or a private investor
or sponsor is that it does not sponsor or help develop projects.
ECGD provides insurance cover to UK exporters or lending banks
when UK exporters have been successful in the procurement for
a defined project and the buyer wants to pay for goods and services
over an extended period (normally up to 10 years) and the
exporter or financing bank wants to cover the risks through ECGD.
ECGD does not therefore exert the same control as a donor; nor
can it "direct" the use of its risk capacity as if it
were disbursing an aid or concessional loan budget in favour of
a particular country or project.
REVIEW OF
ECGD'S MISSION
AND STATUS
11. The Review was announced in July 1999.
In launching the Review, the Secretary of State for Trade and
Industry said it should particularly look at what else ECGD could
do to "help the Government achieve its wider sustainable
development objectives, as the UK continues to play a leading
role in assisting the poorest developing countries to emerge from
debt and poverty burdens and return to the international trading
community".
12. There are four main inputs into the
Review process: independent studies commissioned by ECGD; a public
consultation exercise; an Interdepartmental Working Group and
inquiries by Parliamentary Select Committees.
Independent Studies
13. Various independent studies are informing
the Review; their findings are likely to be announced formally
and published later this year. KPMG have undertaken a Risk Management
Review of ECGD's country risk management systems. Another study
confirms the economic rationale for continued public provision
of medium and long term export credit insurance, and argues that
there is no rationale for this provision to be subsidised. The
study also concluded that ECGD's remit should not be expanded
to incorporate additional aid or industrial policy objectives,
as doing so would be likely to undermine operational effectiveness.
Public Consultation
14. A Consultation Document was published
in August 1999 and distributed to ECGD's customers and other parties—including
about 70 NGOs—who expressed an interest in commenting on
the Review. Following the closing date in mid-October, more than
240 replies have been received (30 from NGOs). Although the comments
are still being analysed, the key points are:
— The private market cannot do what
ECGD does in underwriting medium and long term risk in emerging
markets. Given the nature of the risks ECGD underwrites, a long
term view should be taken of ECGD's financial performance and
its strategic role both in opening up new markets for exporters
and in sticking with markets which are going through difficult
times but are expected to pull through;
— Exporters' competitiveness would
be affected (jobs lost, R&D affected, production re-located
abroad, etc) if ECGD did not exist or was not allowed to offer
the same broad terms as other Export Credit Agencies (ECAs), all
of which are backed by their Governments;
— ECGD's service has been adversely
affected and some orders lost because of delays this year as ECGD
operated under tight constraints on cover and pricing; ECGD is
perceived to be more restrictive at present than other ECAs;
— NGOs suggest ECGD should take greater
account of environment, good governance and other sustainable
development issues, allow a public debate on individual cases
and introduce greater transparency. Business is not against these
ideas provided ECAs adopt a multilateral approach and provided
commercially/price sensitive information is respected. Unilateral
changes could make multinationals and overseas buyers avoid UK
supply;
— Some NGOs have suggested banning
ECGD cover for all defence sales; others, cover for defence sales
to Developing Countries. Exporters have said export control is
not a matter for ECGD and should remain subject to current export
control/licensing arrangements;
— Developing countries: Some NGOs pressed
for 100 per cent debt forgiveness for Heavily Indebted Poor Countries
(HIPCs). Exporters said ECGD cover is vital for credits for developing
countries as the private market has little or no appetite—but
lending should be on a prudent basis to avoid recreating debt
problems; some exporters suggest we could support more projects
in conjunction with DFID if mixed or concessional[1]
credits were allowed in appropriate circumstances;
— SMEs already benefit substantially
from ECGD cover. While most ECGD guarantees are issued in favour
of larger contractors who have the resource to pursue projects
in more difficult markets abroad, most of the benefit of
ECGD cover passes to smaller companies in the UK supply chain.
Select Committees
15. As well as the International Development
Select Committee, the Trade and Industry Select Committee is carrying
out a review of ECGD and its functions.
Inter-departmental Working Group
16. These various inputs to the Review process
are being analysed by an Inter-departmental Working Group (IWG).
This is chaired by ECGD and includes representatives from British
Trade International, Cabinet Office, DETR, DFID, DTI, FCO, MAFF,
MoD and HM Treasury.
17. ECGD has a Review Team which services
the IWG and will put together recommendations for Ministers to
consider collectively.
WHAT CAN
ECGD DO FOR
DEVELOPING COUNTRIES?
18. As UNCTAD has commented, one of the
key requirements for developing countries is access to external
finance to underpin their adjustment and growth.
19. ECAs operate in areas where private
sector support is in many cases restricted or not available. ECA
activities are therefore largely concentrated on non-OECD markets
of which a large number are developing countries. ECA support
can contribute considerably to much needed financial flows into
such countries. Although our Act would enable us to facilitate
exports for the purpose of providing economic assistance, it would
be inappropriate to do so when the real need is for grants or
other forms of development assistance. Furthermore, because ECAs
are required to achieve financial break-even, ECGD would not be
able to underwrite significant amounts of business involving high
risk markets or projects.
20. What ECGD can do for developing countries
falls into two main categories:
— support for new projects or investments
where we apply rigorous risk assessment processes to ensure we
do not support new unsustainable commitments. We encourage private
sector involvement whenever possible;
— managing our existing portfolio of
debt in accordance with the Government's policy on debt relief,
including debt write-off for Heavily Indebted Poor Countries (HIPCs).
21. This is explained in more detail below.
In carrying out its assessment of Developing Countries, ECGD is
keen to work closely with DFID to ensure our assessments capture
the particular risk issues for those countries. ECGD also plays
a key part in the (Treasury-led) work to implement the Government's
debt relief strategy.
SUPPORT FOR
NEW PROJECTS
OR INVESTMENTS
22. A number of different facilities are
available, but each country will have different needs and for
some, export credit cover would be inappropriate as they would
not be creditworthy.
23. However, the range includes:
(a) Cover for Medium and Long Term Credits
in support of a wide range of transactions in a particular country:
if a country is assessed as sufficiently creditworthy, ECGD will
be "on cover" for transactions in that market within
an overall limit;
(b) Medium and Long Term Cover for Specific
Projects. Under its "Good Projects in Difficult Markets"
scheme, where it would not generally be "on cover" for
a market, ECGD will consider supporting well structured, viable
projects. These would generally be foreign exchange earning projects
where risks are externalised. ECGD works in collaboration with
private equity investors/sponsors, organisations such as Commonwealth
Development Corporation, IFC, MIGA, Development Banks or other
International Financial Institutions and commercial lenders;
(c) "Productive Expenditure"
cover for HIPCs and IDA only Countries—where ECGD offers
medium and long term cover for countries which are judged to be
emerging from debt problems (eg Bolivia). This cover is only available
for projects contributing to the economic or social development
of the country. ECGD assesses such projects in conjunction with
DFID and other Departments. This scheme was introduced unilaterally
by the UK in December 1997 as part of the "Mauritius Mandate"
and, as announced by the Chancellor on 11 January 2000, has now
been extended indefinitely to include IDA only countries too.
This means that export credits for non-productive expenditure
will be banned for 63[2]
countries;
(d) Overseas Investment Insurance Cover
(OII): This provides UK investors with cover against certain
political risks, which could affect the viability of their overseas
investments—war, expropriation, restrictions on remittances
and, in some cases, other risks of government action/inaction.
This is widely available for Developing Countries;
In December 1997, again as part of the "Mauritius
Mandate", ECGD made £100 million of OII cover available
for HIPCs for "productive" projects ie those which contribute
to sustainable development. Under ECGD's current legislation,
investors are required to bear commercial risks themselves.
Unfortunately, no cover has so far been taken up;
(e) Contract Frustration Cover for
contracts transacted on "cash or near cash" terms eg
engineering consultancy contracts. This is often sought where
a contractor may expect to be paid from aid funds in due course,
but is exposed to a range of risks before aid disbursements can
be claimed;
(f) Co-operation between ECAs and International
Financial Institutions: The ECAs and the International Financial
Institutions (IMF, World Bank and the Regional Development Banks—the
IFIs) have recently started to discuss how they could work together
more closely to finance projects, particularly private sector
projects, in emerging markets. A conference, chaired by the International
Finance Corporation (the arm of the World Bank responsible for
investments in developing countries) in April 1999, focused on
ways of assessing and strengthening the regulatory and enabling
environment of developing countries to facilitate private sector
development—both indigenous and FDI. This work is being
followed up by ECGD and other ECAs.
24. A summary of ECGD's current cover position
for all countries is at APPENDIX B.
DEBT RESCHEDULING
AND WRITE-OFF
25. The Government has already either written
off or announced its intention of writing off in due course, 100
per cent of the debt owed to the UK by 34 of the 41 HIPCs. (32
HIPCs currently owe ECGD a total of £1.9 billion under Paris
Club Agreements. Rwanda and Myanmar do not have Paris Club Agreements).
Details of debt owed by HIPCs and written off to date are at APPENDIX
C.
26. ECGD is part of the (Treasury-led) team
which negotiates multilateral settlements with debtor countries
in the so-called "Paris Club" of (mainly OECD) creditor
nations, and supports the UK Government's efforts to bring multilateral
relief to the poorest countries and encourage debtors' commitment
to sound economic policies.
27. However, as an insurer (and as reflected
in its statutory duties) ECGD is also obliged to manage its portfolio/finances
prudently and will therefore seek to recover as much debt as it
can. Depending on the debtor country's circumstances (ability
to pay, commitment to economic reform programmes) debts can be
rescheduled—stretching payments over a longer timescale—or
for the poorer countries reduced.
28. On 21 December, the Chancellor of the
Exchequer announced that the UK would unilaterally forgive 100
per cent of the debt owed to ECGD by eligible HIPCs. This additional
debt relief will be committed once countries are granted multilateral
debt relief under the enhanced HIPC initiative and will be subject
to the same conditions. As ECGD's legislation would not permit
it to write off 100 per cent debt, the additional (unilateral)
forgiveness will be effected via DFID, using funds provided by
HM Treasury. DFID will make grants to the countries involved,
to enable them to service any outstanding obligations to ECGD
after multilateral write-off, as and when they are due, over an
extended timeframe. The UK initiative could cover up to £300
million of ECGD debt. Estimates of how much this will cost the
UK are sensitive to the amount of multilateral relief a country
gets under HIPC2, and the timing of that relief. The funds will
be voted to DFID for this purpose.
29. ECGD also operates a Debt Conversion
scheme, which allows a proportion of Paris Club debts to be converted
into local currency at a discount, and sold to investors to fund
local projects and investments. This benefits both the debtor
country as the debt is no longer on its "books" and
is converted to a productive use—and the UK taxpayer, as
value is received from this form of recovery. Since the scheme
was launched in 1992, debt conversion projects have included a
number of projects in the areas of agricultural rehabilitation,
education and healthcare, in Egypt, Tanzania and Mozambique. The
most recent transaction involved the conversion of $20 million
Mozambican debt in return and the transfer to the investor by
the Mozambican Government of a majority stake in a large sugar
estate. Not only will this mean a major boost to the declining
sugar industry, but it should bring significant benefits to the
local community, in the form of additional housing, roads, electricity,
schools and medical facilities.
ENVIRONMENT AND
GOOD GOVERNANCE
30. ECGD already takes good governance and
environmental issues very seriously, not least because the way
Governments, buyers and borrowers manage environmental, social
and other factors can have a major impact on ECGD's risk exposure.
ECGD's policy in these areas is being considered in the Mission
and Status Review, including the question of how sustainability
objectives can be reflected in ECGD's objectives.
31. ECGD has already implemented the Montreal
Protocol and will not support the export of plant which can manufacture
ozone depleting substances.
32. At a case level:
— we screen all applications (through
a strengthened process announced by the Secretary of State for
Trade and Industry on 23 November 1999) to identify any projects
where there may be environmental, social or other issues;
— for those cases which raise such
issues, we assess the particular circumstances the risks may entail
in consultation with other Departments, bringing in specialist
independent expertise where necessary and co-operating with other
lenders or ECAs as appropriate. The aim is to use ECGD's leverage
to bring about any required improvements through negotiation of
terms wherever possible—before committing cover.
Where this can be achieved, the project can be improved and exports
secured for the UK.
33. At a country level, ECGD already takes
account of IMF-imposed limits on a country's non-concessional
borrowing in its cover policy. ECGD's Portfolio Management System
methodology for country risk assessment incorporates an assessment
of the commitment of the Government of that country to responsible
economic management. Since they may affect country risk, assessments
are made in relation to human rights and other good governance
issues.
34. Internationally, ECGD is pressing to
accelerate the work in the OECD to reach multilateral agreement
among ECAs to "converge" methodologies for assessing
environmental impacts and developing common guidelines. ECAs already
share assessments of individual projects. The aim is to ensure
best practice and avoid competitive pressures for exporters where
buyers may exert pressure for less demanding/less costly environmental/other
conditions.
DEFENCE
35. For all markets other than HIPCs and
IDA only countries (where productive expenditure criteria apply),
ECGD does not discriminate between industrial sectors in offering
cover to UK exporters.
36. ECGD cover is given to exporters on
a first come, first served basis. In other words an exporter who
wins a firm contract gets any cover that is available. However,
medium and long term cover is not available for many Developing
Countries.
37. Historically, defence exports represent
around 20 per cent of ECGD's business. This reflects the comparative
advantage of UK industry in this sector. The percentage can vary
considerably from year to year around the 20 per cent long term
trend. In 1997-98 defence business accounted for about 24 per
cent of the total value of ECGD guarantees issued for the year;
for 1998-99 the figure rose to 52 per cent. This reflected support
for two very large projects.
38. Although BAE Systems is ECGD's major
customer in the defence field, we deal with a number of other
companies including some quite small ones. For contracts undertaken
by the major defence contractors there are usually a large number
of UK sub-contractors. This can consist of companies of varying
sizes, including SMEs.
39. All business guaranteed by ECGD must
have a valid export licence, where that is required. The provision
of export licences for defence related equipment is subject to
the criteria announced by the Foreign Secretary in July 1997.
Through export licensing control the Government is committed to
denying the sale of arms to regimes that might use them for internal
repression or international aggression.
WHAT ELSE
IS BEING
CONSIDERED IN
THE REVIEW?
40. The Review team and Interdepartmental
Group are looking at a number of other issues to inform options
for Ministers, such as:
— transparency and disclosure: what
information we might disclose in addition to the substantial range
of material we already publish;
— whether it would be appropriate to
use our "Account 3" scheme to take on some more difficult
risks in Developing Countries under Ministerial Instruction;
— whether a form of concessional finance
could be developed in partnership with DFID, although DFID has
indicated it would not be willing to finance such an initiative.
41. It is expected that the conclusions
of the Mission and Status Review will be announced in Spring 2000.
Export Credits Guarantee Department
21 January 2000
1 Mixed or concessional credits involve mixing Export
Credit Agency covered loans with grant aid or subsidised interest
rates to produce lending on concessional terms. A number of other
countries still mix export credit and development assistance funding
in this way. The UK has not done so since the Aid/Trade Provision
was withdrawn-although the White Paper "Eliminating World
Poverty: A Challenge for the 21st Century" did not preclude
the use of mixed credits consistent with DFID's objectives. Back
2
While this generally precludes support for defence business, cases
can be considered if there could be a "productive" outcome
eg arming patrol boats to combat drug smuggling. Back
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