Supplementary Memorandum from the Export
Credits Guarantee Department
THE TREATMENT
OF THE
WRITE OFF
OF HIPC DEBTS
IN GOVERNMENT
ACCOUNTS
The total value of recoveries abandoned by ECGD,
including those in respect of debts forgiven as a result of international
initiatives, is published in Note 19 to ECGD's annual Resource
Accounts and to the extent that the likelihood of non-recovery
has not already been taken into account in existing bad debt provisions,
the value of assets appearing on both ECGD's balance sheet and
that of HMG (through the "Whole of Government Accounts"
published by the Treasury) will be reduced.
The value of recoveries abandoned represents
the total value of insurance claims paid where ECGD no longer
plans to actively pursue recovery of those claims, either because
such action would not be a cost effective use of ECGD resources
(eg the costs of recovery would be greater than the potential
benefits, recovery attempts would be futile etc.), or central
Government policy (eg the HIPC debt forgiveness initiative) deems
write off necessary for reasons unconnected with ECGD's trading
operations.
As at 31st March 2002, the cumulative amount
abandoned by ECGD was £1,526m.
This figure will be higher than the net cost
to the Exchequer, because it does not take account of insurance
premiums received by ECGD in respect of the insurance contracts
that led to the original claims, or interest earned by the Exchequer
on such premiums during the period prior to claims being paid.
Furthermore, the risk pooling basis on which an insurance entity,
such as ECGD, operates means that profits and losses are not calculated
in respect of individual risks, but segments of ECGD's total insurance
book, based upon the date at which a risk was accepted by ECGD.
On this basis, losses (as reported in ECGD's
Resource Accounts) in respect of insurance risks accepted by ECGD
prior to 1991 were, as at 31st March 2002, expected to total £874m,
using a prudent provisioning policy reflecting the risk environment
as at that date. Risk's accepted since 1991, have, as at 31st
March 2002, recorded a cumulative profit of £183m.
LEGAL STATUS
OF ECGD'S
STATEMENT OF
BUSINESS PRINCIPLES
ECGD's Business Principles are statements on
behalf of the Secretary of State as to how ECGD will conduct its
business. They are not contractual. Any redress for those who
consider themselves aggrieved by ECGD's operation of these principles
would have to be sought in the sphere of public law.
BONDED AND
FORCED LABOUR
At the evidence session on 21 May, the Committee
asked several questions about ECGD's policies on bonded and forced
labour. Although ECGD has to consider any application it receives,
we would like to assure the Committee that it is the Department's
policy not to provide support for any project that involves the
use of bonded or forced labour. The policy statement in the guidance
notes for the Impact Questionnaire will be amended to provide
greater clarity on this point.
June 2003
APPENDIX
Memorandum from Oxford Research Group
Mark Ingram and Paul Ingram
OXFORD RESEARCH
GROUP
1.1 Oxford Research Group (ORG.) is an independent
team of researchers and support staff established in 1982 to develop
effective methods for people to bring about positive change on
issues of global and local security. The Group combines rigorous
research into nuclear weapons and arms control decision making
with an understanding of the people who make those decisions.
Our areas of research also include the reduction and control of
the arms trade and the effective non-violent resolution of conflict.
1.2 Oxford Research Group published `The
Subsidy Trap: British Government Financial Support for Arms Exports'
in July 2001, which first outlined our method for measuring subsidies
provided by the ECGD. We have since been in discussion with government
officials from a number of relevant departments. Our focus has,
of course, been on arms exports, but the findings have relevance
to all ECGD's activities.
INTRODUCTION
2.1 This submission addresses in particular
the Environmental Audit Committee's investigation into the ways
in which the transition to a trading fund may affect transparency,
with an explanation of the subsidy debate as it has been progressing.
2.2 ECGD is a significant tool of government
subsidy to a small number of exporters. A disproportionate amount
of ECGD support is supplied to defence contracts. Contracts requiring
an arms export license do not have to meet the ECGD environmental
code standards. If the government is to support exports in this
way, it is our contention that they should be assessed against
Government policy objectives, in particular non-proliferation
and the protection of the environment, in addition to the requirements
outlined in the arms export licensing regime.
2.3 It is out further contention that ECGD
operations should be a great deal more transparent in the manner
of its subsidy provision in order to facilitate accountability
both within and outside Government.
THE ROLE
OF THE
ECGD
3.1 The ECGD website states: "Our role
is to help UK manufacturers and investors trade overseas by providing
them with insurance and/or backing for finance to protect against
non-payment[15]".
Note that their mission is explicitly to help the exporters and
investors, not the UK economy. The York report[16]a
joint study between academics at York and the MOD, concluded that
if the ECGD subsidy were to be removed the impact on the UK economy
would be minimal.
3.2 Exports of goods and services insured
by ECGD amount to £2,289m—less than one per cent of
total UK exports in goods and services.[17]
3.3 The support ECGD gives to different
export sectors obviously varies year on year. The proportion of
overall guarantees supplied to the defence sector has varied between
23% and 51% of the total over the last five years.[18]
Yet defence exports amount to less than 2% of UK exports. ECGD
support amounts to over half of all arms export subsidies[19]when
calculated in `The Subsidy Trap'.
THE ISSUE
OF SUBSIDY
4.1 The claim made by ECGD is that insurance
available on the open market tends to be short term and weak in
the `emerging markets" (developing countries). Clearly the
deep and liquid international financial markets are perfectly
able to provide insurance for exporters—but at a price.
The fact they do not do so is evidence that the export credit
agencies (of which ECGD is one) effectively out-price them. Why
go to the market if you can acquire the same cover for a much
lower (subsidised) premium?
4.2 So how much is this subsidy worth? Or
is the ECGD, as they claim, simply "more efficient"
at providing this service than the private financial markets?
There are two competing methods for measuring the subsidy provided
by the ECGD to each export sector.
4.3 The first is that proposed by the ECGD,
and is a `value at risk' approach. This estimates future claim
levels and associated levels of capital required to cover them.
So long as premia charged cover claims, plus a return on the capital,
then there is no subsidy. Of course estimating future claims is
problematic, as is estimating the required return on capital (the
ECGD uses a 6 per cent real rate to cover what is some of the
riskiest business in the market.) This approach quickly (and perhaps
conveniently) runs into a mathematical and financial quicksand
of estimation and complexity in which debate about `catastrophic'
and `systemic' risks and the opportunities for diversification
open to the Government in `closed' or `open' economic models become
critical.
4.4 Our approach seeks to measure the risk
premia (as a percentage) that the market would charge and compare
them to those charged by ECGD. As may be expected, there are several
possible market mechanisms for taking on risk.
4.5 The customer in most arms deals is an
overseas government. Most overseas governments have outstanding
dollar debt. The difference between the overseas government dollar
debt interest rates and equivalent UK rates represents the additional
required return to cover the overseas sovereign risk. This sovereign
risk is what the ECGD is effectively covering (plus a bit of contract
specific risk). Multiply the gross amount guaranteed (whether
a loan or insurance) by the sovereign risk premium, and bingo,
you have the annual subsidy. Except we suspect the answer is far
too large to be acceptable.
4.6 Alternative market mechanisms may include
options and credit derivative markets (where risks are traded
explicitly), although these markets tend to be priced off the
international debt markets anyway.
4.7 When such international finance mechanisms
exist, questions are increasingly asked as to why the government
is involved at all in distorting the market in the interests of
a very small number of arms exporters.
4.8 This subsidy is effectively borne by
the exchequer as an increase in the Government Borrowing rate
for all Government debt, so is invisible in the Government's accounts.
TRADING FUND
STATUS—COSTS
5.1 The conversion to trading fund status
might enhance the transparency of the ECGD's operations if the
ECGD accounts for its full costs on a market basis. This will
not happen unless the ECGD pays for the Government Guarantee that
underpins its business at market rates.
5.2 Whatever the internal accounting processes,
the publication of sector based reports comparing the market cost
of guarantees sold at contract initiation with the value of the
contract premia would achieve this in a broadly objective fashion.
5.3 Decisions could then be made as to which
Government Department was responsible for any subsidy, and whether
that subsidy met the policy objectives of Government.
TRADING FUND
STATUS—EXPORT
CRITERIA
6.1 We would also question why arms exports
in particular are not required to meet the environmental sustainability
criteria that other exports are required to meet. We believe this
anomoly derives from the mistaken belief that arms exports generate
British jobs.
AUTHORS
Paul Ingram is senior analyst at Oxford Research
Group. He is co-author, with Ian Davis, of "The Subsidy Trap,
British Government Financial Support for Arms Exports and the
Defence Industry", 2001.
Mark Ingram is Director of FME Training and
is a technical consultant on Oxford Research Group's project on
ECGD subsidies.
May 2003
15 The main business areas of the ECGD are: Back
16
"The economic costs and benefits of UK defence exports"
2001; Chalmers, Davies, Hartley and Wilkinson; University of York
Centre for Defence Economics; Research Monograph series 13. Back
17
National Statistics, figures for 2002. Back
18
Arms exports insured by the ECGD as a percentage of the total
for the year: - Buyer Credits and Supplier Credits (last year
worth £1,137 million); the provision of guarantees to UK
banks to enable them to finance deals.
- Supplier Credit insurance (last year
worth £1,152 million); protection against payment default
by the customer.
- Overseas Investment Insurance (last
year worth £1,009 million), security for UK investors in
overseas projects. Back
19
`The subsidiary Trap: British Government Financial Support for
Arms Exports and the Defence Industry', ORG/Saferworld, 2001.
1997-98 23%
1998-99 51%
1999-00 29%
2000-01 48%
2001-02 31%
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