Examination of Witnesses (Questions 120-
133)
TUESDAY 9 NOVEMBER 1999
MS MARIE-LOUISE
ROSSI AND
MR CHARLES
BERRY
Chairman
120. We have heard this morning already some
talk about the opening up of Iran as a potential market. It is
politically now acceptable and there was a long period when major
contracts had not been placed with anybody for, let's say, not
just environmental but certainly infrastructural work. What would
be your attitude, Mr Berry, to someone coming along saying, "ECGD
are a bit iffy about it"? Would you be prepared to go into
an area like that which has hitherto been a no-go zone for sanctions
reasons and others?
(Mr Berry) The market has, to some extent to its cost,
fairly consistently underwritten Iranian risks for the last dozen
or 15 years; predominantly of a short-term nature, letters of
credit up to 360 days. There would not be a great deal of appetite
for medium term business, I do not think, but there would possibly
be some. There is certainly a market, and consistently there has
been, for Iranian letter of credit business. I say "consistently",
there was a period in the early 1990s when they were in the middle
of defaults and the marked dried up.
(Ms Rossi) This is just an example where if the Government
wishes to pursue a particular trade policy, then ECGD or other
mechanisms—and it is quite possible other mechanisms can
be developed through or outside ECGD—can target the delivery
of Government policy through targeting the guarantees it gives.
This is one of the things which I hope this review will be exploring.
121. You think there would be an appetite within
your membership to enter into such a relationship?
(Ms Rossi) I am predominantly talking about the reinsurance
market and the market which is under review is very much a direct
market where the customers or insurance go to an insurer. That
activity does take place in the market place that IUA represents,
indeed it does represent people writing political risk reinsurance,
but the point I am trying to make is that the reinsurance market
can help develop a capacity in the direct market by taking on
spreads of risk, and it is how those spreads of risk are packaged
which will develop the market. The point was made earlier that
certainly there is interest in looking at the reinsurance of ECGD.
122. You are saying there is interest, but what
you are really saying is that there is not yet involvement?
(Ms Rossi) Well, ECGD has not, to my knowledge, gone
out to find the cover yet.
123. No, but since you are operating internationally,
where it would seem to be that other countries' ECAs tend to be
less conservative than their UK counterparts, the interest of
which you speak is really centred on one potential client, namely
the UK?
(Ms Rossi) There is an overall philosophical point
which is not entirely utopian, and that is that the activities
of ECAs in fully developed economies are distorting competition.
I do not expect it to be on the frontline agenda in Seattle in
the next few years of the WTO, but I do expect it to be an issue
which will come up in discussions of world trade, and I do expect
it to be an issue which will come up in OECD discussions. It is
the existence of governments still subsidising their exporters
through this mechanism which has hampered the development of a
medium term market in these sorts of risks. We indicated at the
outset that the reason why the private market was able to come
into this sector in the first place was because the government
export credit agencies withdrew their monopoly.
Helen Southworth
124. What future role do you foresee for ECGD
and presumably that translates across to other ECAs?
(Ms Rossi) My personal view is that there is a role
for Government to take on certain types of risk, and certainly
the retrocession of the UK terrorist risk, for example, with the
Government as the insurer of a consortium of reinsurers to the
market place, is a very good example. I would hope that ECGD and
ECAs would develop whereby they could be used to target Government
policy, I would hope with the European Union in concert, and within
the context of world trade as a discipline but not necessarily
providing front-end cover, where Government is probably better
standing back and letting the market place deal with the day-to-day
negotiation and placing of risk. The Government then in partnership
with the reinsurance market could reinsure that activity, and
the Government could step in where the international reinsurance
market felt these were risks which were more appropriate for the
Government to take on.
125. If the status quo is maintained,
what do you think ECGD could do to work more effectively with
the private sector?
(Ms Rossi) I would very much hope that the ECGD would
be interested in talking to those insurers who have already expressed
an interest in talking to it.
126. What in your opinion would be the worst
case scenario coming out of the review?
(Ms Rossi) One of the things which concerned us in
the emphasis on SMEs, which is entirely right and proper, was
whether there was any hidden agenda to unpick the existing arrangements
for the short-term market. Certainly our view is that the privatisation
of ECGD has been successful, in those areas it is working very
well in competition in a market place which has developed, and
Government interference and subsidy in that particular way we
would not find helpful. I would have thought that if the Government
is to subsidise and support SMEs, if it is to use ECGD or ECGD-type
mechanisms, that should be part of an overall strategy for the
subsidy and support of SMEs because ECGD-type support is not necessarily
the most effective and efficient.
Mr Morgan
127. You seem to be saying, currently we are
in a situation where the private sector is unwilling to pick up
the majority of these medium term risks. That effectively means
that the Government are subsidising these exports and distorting
competition. You want to get to a situation where most of these
risks are picked up by the private sector and the Government just
picks up stuff that the private sector is unwilling to pick up,
presumably the high risk stuff. I am not quite clear how you measure
the difference between the two or how we get, even assuming it
is desirable, from one to the other?
(Ms Rossi) It is not necessarily high risk or supporting
risks that are in pursuance of strategic interests or other policy.
128. Presumably if it is a risk that is commercially
worth picking up you will cater for it?
(Ms Rossi) Yes. The Government may have its own agenda
whereby it wishes to promote particular activities for particular
reasons.
129. Presumably if it is some firm that is wishing
to export something and if that firm gets the nod from the Government,
in the sense it gets an export licence, and then the market is
developed, there is nothing to stop it going to the market to
get the insurance?
(Ms Rossi) If I could give another example from another
class of business, the private market is very well able at the
moment to provide employers' liability cover in accordance with
that required by government and the statutory requirements on
firms to purchase it. If we are going to move into an environment—and
this is a debate that is taking place within the industry—where
social policy begins to be developed through the courts, which
is a worry, and has come out in the discussions about the IUA's
recent work on motor bodily injury, then it may be that if the
courts are being used in this social engineering way that there
will be certain types of employers' liability risk that would
be more appropriate to have to fall back to Government. I am just
giving "what if" scenarios. That could, perhaps, try
to illustrate the way risk carriers think.
130. Okay. You have painted a situation where
you would like to get to where the industry picks up a lot more
of the risk. How do we get from one to the other? What actions
would you like to see the Government take to begin to move us
from one to the other?
(Ms Rossi) There needs to be a long—and I am
sure it is going to be a very long—debate with our G8 partners
in discussing the future role of export credit agencies in developed
economies. If you think what they are: inventions of post-First
World War restructuring. They have evolved over time. It is very
interesting that the ECGD still retains its overall structure
of being Government departmental, albeit part of it having being
privatised. An example of an export credit agency that has been
formed more recently is the Hong Kong Export Credit Insurance
Corporation, which was formed in the 1960's as a Government owned
insurance entity, and obviously that was a British invention.
In the 1960s that structure was seen to be the most appropriate
one rather than a government department.
Mr Hoyle
131. What is your experience of other ECAs and
how does the ECGD compare?
(Ms Rossi) Personally I spent many years comparing the covers
produced by one versus another and advising clients on how to
structure their deals to get the best arrangements for the particular
business they had in hand. As I said at the outset, IUA members
have continued appetite for providing reinsurance programmes to
export credit agencies round the world. Of course export credit
agencies are in different stages of development, there are some
that are almost as old as ECGD in the developed economies, others
than have only been formed in last few decades and some that are
still under construction. There is a range. I think there is certainly
a role for ECAs and developing economies. I do think that developed
economies should start having a wider discussion as they go through
the evolution of the world trade discussions as to where they
think ECAs should be in the next decade or so or what they should
be doing in developed economies.
(Mr Berry) I do not have direct dealings with other
ECAs but we have quite an international client basis and we see
what they are doing with their ECAs, partly by what they approach
us for. It is difficult to generalise but I think an answer to
your question what ECGD needs to continue to do, is to provide
a competitive response to other government export credit agencies.
It may be an ideal situation to look at medium term or export
credit generally not being a factor in national competition. Perhaps
the worst thing that could come out of this review would be a
position where ECGD could not provide through export credit agencies
competitive responsive solutions to the offerings of other export
credit agencies. The fact of national competition through export
credit agencies is, I think, a regrettable fact of life.
Ms Perham
132. Very briefly, it is your view, really,
is not it, that public intervention distorts the market? Is your
ideal world that there would be no ECAs at all and that the private
industry would be covering all of the risk or would there always
be, if you can talk about ideal worlds, a fall back government
to come in on some very high risk?
(Mr Berry) The answer to that is that is an ideal
world but I cannot see that ideal world ever existing. Even if
there was a developed medium term export credit insurance market—and,
as I say, it is in the early stage of development—even if
it were to develop to some significance in five or 10 years, I
still think that very large scale projects would provide private
insurers with distortions in their books of business which they
would feel very uncomfortable with. There would also be a need
or a perception by governments that in certain circumstances they
wanted to actively support a particular business sector in their
country or a particular foreign country, for example what the
US Government did in supporting Russia in the early part of the
1990's. I cannot see the ideal world ever emerging.
(Ms Rossi) I think there is a possible world where
the ECAs in developed economies would concentrate on the very
big projects and some of the more day-to-day smaller projects
could be handled by other means. Markets develop, they are going
to need some form of export protection and subsidy until they
become developed economies. So ECAs are certainly extremely useful
for reconstruction and transition. As I say, I see them playing
a potentially distorted role in the fully developed economies.
I do see them having a role to play in regard to very large projects
or in pursuit of particular government policy.
Chairman
133. One last point before we go, there has
been eight years since the partial privatisation of ECGD. You
repeatedly refer to a developing market, there seems to be a kind
of caution here which is not normally displayed by people in the
private sector, the willingness to go out and get the business.
Are you saying we are moving in a kind of crab-like way, slowly
developing, that we would like to take risks but we do not want
to be exposed, let the taxpayer do that?
(Ms Rossi) It has not been crab-like, it has been
extraordinarily fast. We have a whole new set of classes of business
created, and in the very early days, in the late 1970s and early
1980s, there was only a handful of Lloyd's syndicates and a handful
of companies which would write this business, and we were talking
about handfuls of millions of business and not much more, and
now we have a very large, mature market place for short-term export
credits and political risk. So actually the pace of change has
been fast. If one thinks of other classes of business which have
grown up gradually over centuries—and the market is continuing
to change, as Charles Berry has already described, for the medium
term—it has changed quite a lot in the last three to five
years.
(Mr Berry) Again, if you are getting two pictures,
I think it is important to maintain this distinction which I mentioned
at the outset between the short-term, and the medium term type
of export credit. The short-term cover and the private sector's
involvement in that has evolved rapidly, basically by connecting
up domestic credit insurance businesses, so there was a basis
of that originally, to the point where, as I say, it is difficult
to understand why a government thinks it wanted to get into the
short-term business, why it thinks it would be effective in competing
with the private sector for the short-term business. The private
market underwriting is being constructed around the idea that
underwriting of buyers in the buyers' country is done by underwriters
in that country as opposed to somebody sitting in London or in
Cardiff and trying to assess credit risk in remote countries in
different parts of the world, so in the short-term arena it is
difficult to see why a government could even compete effectively
in that sector. Medium term it is very different, there is not
a tradition of medium term credit insurance underwriting in the
private sector even on a domestic basis. There are green shoots
appearing showing that there is beginning to be a market in the
medium term area, but my message to you is, despite there being
some encouraging signs and some real development in that area,
it is not at a stage or anything like a stage where you can contemplate
a unilateral disarmament of the British Government's role in export
credits. It is just nowhere near developed enough for ECGD's role
not to be very important, and a need for it is defined by the
other export credit agencies.
(Ms Rossi) But in the reinsurance market for this
type of risk, which hardly existed ten years ago, there is now
a very great interest in developing partnerships, dialogue and
a customer base among export credit agencies, whether from developed
or developing economies.
Chairman: Thank you very much. That has been
very helpful.
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