APPENDIX A
THE OPERATIONS
OF ECGD AND
OTHER ECAS
1. In 1991, ECGD sold its short term export
credit insurance business (where UK exporters offer their overseas
clients up to two years to pay for exports of consumer goods)
to the Dutch company NCM. This left ECGD with the function of
supporting a narrower portfolio of capital goods and services
contracts, typically on medium and long term (M/LT) credit (where
major capital goods and services projects, usually financed by
UK banks, are paid for by overseas customers over a number of
years—typically eight and a half to 10 years).
2. The value of new M/LT guarantees underwritten
by ECGD post-privatisation has settled at around £3 billion
to £4 billion a year.
INTERNATIONAL CONTEXT
3. Thirty-nine other countries have so far
established ECAs.
4. ECAs underwrite a substantial volume
of exports. In 1997, Berne Union members covered in total (short
term and medium/long term credit) US$409 billion of new business
and paid a total of US$5.25 billion in claims. ECAs' total export
credit insurance exposure—(ie the amount still at risk)
at the end of 1997—was US$508 billion and total investment
insurance exposure was US$39 billion.
5. ECAs account for a large volume of medium
to long term credit lending to non-OECD markets. All ECAs covering
business with non-OECD markets on M/LT terms have State backing:
even if cover is delivered through a private agent the risk is
underwritten by the State.
6. ECAs perform a variety of different functions.
In some cases they deliver their Government's Development Assistance
programmes (eg JBIC of Japan, EDC of Canada and KfW of Germany).
7. Some countries still offer mixed credits
through their ECAs. The rules governing "tied" aid finance
(ie mixed credits, loans or grants which are "tied"
to the recipient country buying goods and services solely from
the donor country or a restricted number of countries) are designed
to ensure that the aid is genuinely concessional and that tied
aid is not given for commercially viable projects in richer developing
countries.
ECGD'S ACTIVITIES
Statutory position and mission
8. ECGD is a free-standing Government Department.
It operates under its own Act of Parliament and reports to Parliament
via the Secretary of State for Trade and Industry. ECGD's current
mission approved by Trade and Treasury Ministers is:
"To help exporters of UK goods and services
win business, and UK firms invest overseas, by providing guarantees,
insurance and reinsurance against loss."
In its current Mission, ECGD's high level of
objective is:
"To support as much export business as possible,
while limiting the risks to the taxpayer".
9. ECGD draws its powers from the Export
and Investment Guarantees Act 1991.
ECGD'S BUSINESS
VOLUME
10. The graph below shows the volume of
risk underwritten, broken down by sector, since ECGD was "reconstructed"
in 1991.
11. The graph below shows the volume of
business underwritten by sector for Developing Countries—excluding
Upper Middle Income countries. Please note that no defence business
has been underwritten for HIPC or IDA countries.
12. The total amount at risk for all non-OECD
markets is as follows:
13. The total amount at risk on business
with Developing Countries is as follows:
WHO BENEFITS
FROM ECGD COVER
AND HOW
IS IT
GIVEN?
14. Overseas buyers and borrowers benefit
from export credits because they are given medium and long term
credit, so that they have a reasonable amount of time to pay for
capital goods.
15. Exporters can undertake a variety of
contractual roles: eg Manufacturer; Main Contractor; Procurement
Agent/Contractor; Sub-Contractor to a UK Main Contractor; etc.
16. Exporters directly benefit by taking
out ECGD insurance cover themselves and, if they need to, making
claims against loss under ECGD policies. Sub-contractors also
benefit from this kind of cover, when UK main contractors take
out insurance with ECGD (because they are able to pay their suppliers,
even when the overseas buyer does not pay, out of claims paid
by ECGD). Exporters mainly benefit, however, from Buyer Credit
and other facilities ECGD underwrites for banks providing finance
to UK exporters. Under a Buyer Credit arrangement, an Agent bank
disburses money to exporters on behalf of an overseas borrower,
so that exporters receive cash payments in the UK, for work done/goods
delivered. ECGD is not currently a direct lender in the sense
that some other ECAs are, and does not generally have a direct
commercial relationship with overseas Governments or importers.
17. A common misconception about ECGD is
that its cover supports only large exporters. Because of the way
major deals are structured, a large contractor may, on the face
of it, be the beneficiary of ECGD support, but in reality funds
are passed on to many smaller sub-contractors in the UK supply
chain.
HOW DOES
ECGD ASSESS RISK?
18. It partly depends on the type of risk
ECGD is being asked to underwrite. There are two broad categories
of risk:
— Country Risk ie political
or economic events that will affect all buyers or borrowers in
a country, and are therefore likely to affect repayment prospects
for all the business we underwrite in that country. For example,
war, expropriation of assets/nationalisation; moratorium on external
debt; force majeure; transfer delays (running out of foreign exchange);
other Government interference; UK Government breaking off trade
relations and revoking export licences or making it illegal to
trade with country X;
— Case Specific, Project or Buyer Risks:
these risks tend to affect only the particular transaction eg
the risk the project will not be completed or is not commercially
viable; the buyer may become insolvent, refuse to pay or the Government
may interfere with the particular project.
19. The assessment of economic and political
prospects of a particular country to determine whether ECGD should
have cover capacity to underwrite transactions in that country,
is based on a well-established process, called the Portfolio Management
System. Country risk assessments under this system are forward
looking, taking into account a wide range of factors, including
"Governance" as this can impact on economic performance.
On or off cover decisions and changes in cover policy for particular
countries are taken in consultation with other Departments.
20. For a specific transaction, depending
on the type of cover requested, ECGD underwriters will look at
political/economic features which may have a particular significance
for a project: (for example, the risk of a government reneging
on a concession agreement)—and all factors which would impact
on project completion, performance or debt repayment—including
environmental and other wider factors, consulting other Departments
as necessary.
PREMIUM
21. Premium for country and individual case
risks is charged at levels which are sufficient to cover ECGD's
perception of market and buyer risk and cover administration costs.
The rates for sovereign and country risk are in accordance with
an OECD agreement which sets minimum premium benchmarks. In addition
to the elements to cover the expected loss and costs, a "reserve
margin" is added to the premium rate to deliver the confidence
of break-even required by Ministers.
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