Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 440 - 459)

TUESDAY 11 MAY 2004

EXPORT CREDITS GUARANTEE DEPARTMENT

  Q440  Chairman: That is very helpful. We appreciate that, we are not asking you to write it in blood although having given us that figure it may well have the same effect. Even allowing for the disparity between £4 billion and £1.8 billion, it has been suggested that nevertheless the responsible department will have to return to Parliament every year to get this figure increased and there is the possibility of Estimates Debates and things like that. Do you foresee this as a possibility? It is for others perhaps to pass comment as to whether or not it is a problem.

  Mr Weiss: No. I think the intention is that having agreed the capitalisation of the Trading Fund that ought to be a once-and-for-all event and that capital should suffice for ECGD for—

  Q441  Chairman: Three or five years?

  Mr Weiss: Yes.

  Q442  Chairman: For a public expenditure review?

  Mr Weiss: Yes. So unless we have it badly wrong and we are immediately into a problem, there should not be any need to come back and revisit that figure. I should perhaps qualify that by saying the intention is to run a pilot Trading Fund for a period to be agreed by ministers, but possibly one to two years, ahead of the statutory Trading Fund, and I suppose it could be that if in that period problems occurred then there could be some revisiting of that number.

  Q443  Chairman: Would this pilot fund be for a particular part of the operations, or would it be the whole of the operation but done on a pilot basis?

  Mr Weiss: The whole of the operation on a pilot basis.

  Q444  Chairman: So you are expecting to have a ministerial announcement in the summer, likely to be a figure of in the vicinity of £1.8 billion, but with the possibility of it running for up to two years on a pilot basis? Would that be a reasonable summation?

  Mr Weiss: I think I need to be slightly careful about what that ministerial statement might include. Ministers are working to reach agreement on these issues as quickly as possible and I am hoping that agreement will have been reached to make that announcement then. Whether it will be possible for it to be as detailed as you implied in your question, I cannot be sure. It is worth adding that the other stated intention of ministers is to have a public consultation in advance of the pilot Trading Fund, and we see that as the moment when all the details of the framework which has been agreed between ministers for the Trading Fund will be exposed, so in this sort of timetable that might be around the autumn sometime.

  Q445  Chairman: If our report comes out at the right time, the ministerial response to our report could well be this, but I think I can say on behalf of my colleagues that in the event of the ministers, your political masters, making an announcement of this proposal on the last day before the recess, which is the kind of time you are talking about, we will give notice that we have their telephone numbers and we know where they stay and we will be after them! So far we have not had ministers but we will have them once the statement is announced and we will cross that bridge. There is one other piece of the jigsaw which we need to look at before we go on to some of the other points, and that is the question of the return on capital expenditure. This is again an area in which figures have been kicked about, ranging from 18% down to 4 to 6%. Obviously the higher the rate of return, the less generous the terms are to those who are seeking cover. This is obviously something the potential customers would have a view on, but maybe you could tell us what the thinking is within the department at the moment on this question of the return on capital expenditure?

  Mr Weiss: Again I have to preface my comments with the statement that that is one of the items on which ministers are currently engaged and need to make decisions. Yes, there has been a lot of concern expressed about some of the higher figures you mention in your question, but we are currently working with the Treasury and DTI to agree on initially the appropriate methodology for arriving at a figure rather than just perhaps plucking figures out of the air. That is what the current debate is about, what is the appropriate methodology for determining the commercial rate of return and that is yet to be agreed, and then it is likely that will produce a range of figures and we will then have to decide what the appropriate figure is for that. Again, though, the key point which ministers have emphasised to our customers and stakeholders is that whatever that figure ultimately is, that will not actually determine ECGD's risk or pricing policy, we will maintain the same risk-reward balance as currently, and what will happen is, assuming for example ECGD achieves a natural 4 to 5% return on capital as it does at the moment, any gap between that and this commercial rate of return will be filled by means of a notional voted resource into ECGD to fill the gap. The main point is that our prices and cover risk appetite will remain as it is at present.

  Q446  Chairman: What you have told us is that there is going to be, hopefully, a statement before the end of the year, that it probably will be around about £1.8 billion, it is maybe going to be for two years, there will be a consultative process, that the consultative process will test the water, as it were, and you are not in a position yet to make a clear statement on the return on capital expenditure, but by and large the approach you are taking in terms of risk and reward will be much the same as it is at present. When you were telling me at the beginning that this has been two, four years, I was thinking about the gestation period of an elephant but I now begin to think that the elephant is going to give birth to a mouse, because there seem to be so many question marks here. It must be pretty frustrating for you folk. Who is to blame? Is it the Treasury? Is it the DTI? Which of your political masters is the one that is not providing you with the ability to get out and do the business and enable British companies to cut the deals across the globe?

  Mr Weiss: This has created uncertainty and that has been worrying our customers, but the fact is—and in the statement I did not make at the beginning I have made the point in there—notwithstanding that we are still continuing to support quite high levels of business, and over the last three years we have done between £3 and 3½ billion of guarantees. So this work on determining the right framework for the Trading Fund has not, I would suggest, actually got in the way of us doing our job, but it has undoubtedly created uncertainty and I know our customers would like to have clarity about the future of ECGD and we understand that need. That is why we are trying to reach some early conclusions on this. May I also say, Chairman, that you suggested the statement before the recess might include these figures, I cannot say that it will, I cannot say it will not.

  Chairman: We will not hold our breath.

  Q447  Mr Hoyle: Can I move on to customer service. Quite a lot of the evidence we have had brought before us goes on to state that other ECAs reach decisions quicker. What they are worried about is when they come to you to deal with applications, it is long-winded, bureaucratic and time has gone and everybody else has reached the decisions and in some cases have got the contract while you are still gesturing. Do you think that is fair? Are you guilty as charged?

  Mr Weiss: You will not be surprised to hear me say "not guilty".

  Q448  Mr Hoyle: Have you any evidence you can produce?

  Mr Weiss: It may be we should look at this in two respects. First of all, there is the stage at which exporters come to us, a very early stage when they have a bit of a gleam in the eye about a project and they want to know is ECGD on cover, what would the terms be and what would be the price be. We consider that an important part of our service to exporters. It tells them quickly whether or not they should spend their money pursuing a deal. So important that we have made this service part of our customer charter and we promise to turn these requests round in four days. Our ideal would be to do 100%. We have probably been scoring 70 to 80 over the past year. We actually reached in February 93% but I have to confess it fell back to the upper 70s last month. Overall it has been an improving trend and we have been doing a lot to improve our systems, streamline them, to get that performance better. The ones that fail to meet that target are very often more complex transactions, large transactions, ones which are under our regime are going to be capital-hungry, and we have to spend more time examining those and deciding how we respond. This is the area where perhaps some of our export credit agency equivalents may not have the same issues to consider because they are not operating against this capital framework, notional or real in the Trading Fund, and they perhaps have less rigorous financial targets than we do. I think it is true at that stage sometimes they can give a quicker and more positive response than we can, but as I say we are trying to get that better and better. In the area of our relationship with our customers, once a transaction has become more advanced and we are actually negotiating the deal with them, I would reasonably argue that we provide a very efficient service for our customers. In my normal job I chair our underwriting committee where all the airline cases for Airbus come through with great regularity, and I am always sitting there and saying to my colleagues, "Where do the French and Germans stand on this?" and almost 100% of the time I am told, "They have not made a decision yet." So my practical experience of the business that is advanced and we are negotiating is, I hope, quite positive and quite good.

  Q449  Mr Hoyle: So besides Airbus, which are pretty quick, everybody else suffers? Can I also say your customers, and that is the best way to describe them, claim you charge higher rates of interest than other ECAs. Is it true? If so, why is that?

  Mr Weiss: I would first of all say it is not a general case that we charge higher rates than the others. What we do is to charge prices which accurately reflect the risk we are being asked to underwrite, and this is something which in a sense we cannot compromise on if we are to meet the financial targets which ministers have set for us. In a limited number of countries this can come through in premium rates for us which are higher than the OECD minimum benchmarks, but we have that number of countries down now to about 17. I should emphasise this is for projects which are sovereign risk and of a medium size rather than perhaps buyer risks, corporate risks, or large size for example. There are now only 17 countries where we are above the benchmark. Many of our competitor export credit agencies purport to charge that benchmark, so there is a perception we are charging more than them in that situation, although in practice we find as we negotiate deals alongside them—because often we are in co-operation with them—we find they too charge more than the benchmark. So it is not something which is universal. It is interesting—and I did a little bit of research on this—that last year, in support of Airbus, 84% of the guarantees we issued we did charge the minimum international 3% rate, so it was 16% of the cases where we charged more. I know that is quite a bit of business, 16%, and it is quite a few, probably important, airlines for Airbus where we were possibly charging more than 3%, but it gives you a feel for the extent to which we are possibly, rightly or wrongly, being charged, as you say, with over-charging.

  Q450  Mr Hoyle: You use the Airbus as a strong example in both cases, do we charge more than the French?

  Mr Weiss: It so happens that we, I think, always all charge the same but it could be that the ECGD has set out its stall, because as I said before we are often quicker off the mark than the others, and the others say, "If ECGD is going to earn that, so will we." We all charge the same.

  Q451  Mr Hoyle: It would be a bit odd to charge a bit more for the wings than you do for the body. That is why it is interesting. If I can get you away from Airbus, where the companies have put together one bid, what about if we are up against the Americans? The Ex-Im Bank in the United States would charge at the minimum OECD guideline level.

  Mr Weiss: Yes.

  Q452  Mr Hoyle: Where does that leave our customers?

  Mr Weiss: I think generally, and Airbus specifically . . . another point, perhaps controversial, I would want to make is that we have seen little evidence that this pricing differential, where it does arise between us and the other agencies, is actually damaging the competitiveness of British exporters. We would like it best if we could all be charging the same and be on the famous level playing field, but as I have said before our financial constraints do not allow us always to do that. Where we are charging more, there is not in my view evidence that this has lost business for our customers or for the UK. Indeed, the NERA Report showed there was a high price elasticity here and these price differences did not really make that much difference. Where I have seen in my own personal experience business lost to the UK—which has often been not lost to a foreign competitor but a British company choosing to source it from the States or Germany or somewhere—it is where we have not had enough cover available. That is in ECGD's view, and in our customers' view through the customers' survey, the key issue, to get the cover available, ideally the price to be the same as everybody else's, but if it cannot be, that is less of an issue in competitive terms than the cover. So our strategy has been to make as much cover available on countries and buyers, for the price to be what the price should be from our risk assessment models, to try and be competitive but, in the end, to offer the exporter the cover at the price we think is a fair reflection of the risk; this, of course, reflecting that balance between supporting the exporter and not being a drain on the taxpayer, which is what is implied by our financial targets.

  Q453  Mr Hoyle: So you have no evidence, where the rates are slightly higher, this actually has an effect on contracts?

  Mr Weiss: Not in terms of seeing a transaction which has been put to us lost to foreign competition. What I would have to say is we do not know if the fact our price is known to be possibly higher deters companies coming to us in the first place. I do not have evidence of that. I think our customers, even Rolls-Royce and Airbus, might say, "The fact you have been charging more than 3% is not damaging today's sales but it may have a long term impact as airlines think, `These people charge more'." But having said all that, we are talking of differences in relatively small elements in the total equation, in terms of the price of the equipment, we are talking of a ½, 1, sometimes 2% difference in our rate, which when you take everything else into account is perhaps not a crucial competitive element.

  Chairman: Just before we start on the next area, we anticipate there being a vote at 4.35 pm so after this question we will adjourn and we will be back to complete the session. We will have to go over and do our democratic duty in a few minutes and we like to stop before the bells start.

  Q454  Sir Robert Smith: You provided us with a written follow-up paper following the evidence session we had on 20 April with the British American Security Information Council, where they were questioning some of the calculations on how you assess your costings. We have your paper, it has come quite close to our actual meeting but we have had a chance to look through it and it will be on the record. Is there anything you would like to say to that paper?

  Mr Weiss: I think we sent you a response to that. Perhaps I could ask Mr Jaffray to say a bit more.

  Mr Jaffray: The approach we use to price risk is based on best commercial practice and in our case we use the so-called value at risk methodology. This is used by many enterprises in the private financial services sector and it is also a cornerstone of the Basle 2 Accord which is being promoted as a risk measurement tool for banks. We are comfortable we are not reinventing the wheel, as it were, and we are basing our practice very much on standard Value at Risk techniques. The key difference between the paper tabled by Mark and Paul Ingram and our own approach is that we look much more closely at a risk within the context of our own portfolio. A simple point about insurance is that the better diversified your portfolio, the greater the spread of risk, its predictability, the less capital you need for each pound of risk, and therefore ECGD holding, say, £1 of Chinese risk would necessarily use more capital than, let's say, HSBC, who would have a more diversified portfolio. The thing about the value at risk is that it focuses on your portfolio specifically, which, given the unique nature of ECGD's portfolio, seems a better technique and it has been endorsed by a number of consultants in the field working for us.

  Q455  Sir Robert Smith: I would put in a footnote that there is a flaw in their arithmetic which alters something from 9 million to 0.9 million in your favour. Maybe we will get back to them and check that. You point out another conflict with their analysis, where you are not a direct borrowing from the Government, you say you are a contingent liability on them. Surely, in a sense, in economics, a contingent liability must have some impact on the UK's economic situation? If all contingent liabilities had no cost—?

  Mr Jaffray: In theory, economically there should be no difference between if you like giving a guarantee and making a loan. The markets will perceive it differently and I think that is the point we are trying to make. We know of no empirical evidence to back up the contention made in the paper by Mark and Paul Ingram.

  Q456  Sir Robert Smith: As you say in your earlier evidence, the move to a Trading Fund and the rate of return is in a sense to try and establish for the Treasury what the real cost of providing export credit guarantees is, and therefore in a sense the cost benefit analysis will come in the political climate of working out, "Is it in our interests to spend this money for the protection of defence supplies or for the job creation which comes from the kind of work which comes from export credit guarantees".

  Mr Jaffray: The practical problem is that there is no right or wrong way to work out how much capital ECGD might need. To take a theoretical example, you could look at ECGD within the wider portfolio of all the Government's holdings, all the risks for example on nuclear liabilities, and in theory one might suppose the spread of risk would allow ECGD to be supported on a much lower capital. Calculating such a capital would obviously be an impractical task and managing that kind of   portfolio would also present insuperable challenges. So there is a trade-off between having an ECGD in what is a very capital inefficient portfolio, because it is very narrow, highly correlated and unpredictable, and that means we need more capital per pound of exposure than we might otherwise need, but that is offset by the benefits of having more coherent risk management. But to arrive at what is the cost to the taxpayer is actually quite a difficult thing because it depends on which portfolio you pick. Therefore, although the Trading Fund will have a return on capital, to say the gap between that and what we can afford to pay from premiums at current rates is a subsidy, is a debateable point. What we are trying to do with capitalisation is show transparently all the potential costs associated with the Trading Fund, not just the cost of covering the claims and long-term losses and administration, but also the cost of supporting the capital base. But what is the cost to the taxpayer is actually quite a difficult thing to calculate.

  Chairman: We will finish there because there is every likelihood that your answer will be interrupted by the bells.

  The Committee suspended from 4.35pm to 4.46pm for a division in the House

  Q457  Sir Robert Smith: You outlined the process of establishing the Trading Fund idea and how there will be a statement and consultation, what is required to make it come about? Is there any legislation or regulations which have to come in?

  Mr Jaffray: The plan is to set up the Trading Fund under the Government Trading Fund Act. This is the piece of legislation which is being used to set up other Trading Funds and this can be done by means of secondary legislation using a Statutory Instrument. It takes about two or three months.

  Chairman: We know the procedure!

  Q458  Sir Robert Smith: That is all that is required, is it?

  Mr Jaffray: Yes.

  Q459  Linda Perham: Some witnesses we have had have commented favourably on the development of your policy on transparency with respect to applications and impact assessments, but others, notably Friends of the Earth, whom we have just interviewed, feel you are too selective over which impact assessments you publish. Could you not make it a condition of your support that all of them are published?

  Mr Weiss: On the specific point about publishing environmental impact assessments, following the revised OECD Common Approaches, which as you know we played quite a leading role in making happen, that now requires such assessments to be published for high potential impact cases, so that is now part of the rules of the game. I think the more controversial issue was in relation to a specific project a year or so ago where there was a demand from NGOs for the impact assessment to be made public, and in that particular situation—and this pre-dated the OECD Common Approaches—that assessment had been commissioned by the sponsors, paid for by them, was their document, and they were saying to us, "This is commercially confidential and we do not wish you to publish it." In a legal sense we had no choice in that matter. I think the position now under the revised OECD Common Approaches for high impact cases is that such reports must be made public.


 
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