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 isand
in the statement I did not make at the beginning I have made the
point in therenotwithstanding 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 thembecause often
we are in co-operation with themwe find they too charge
more than the benchmark. So it is not something which is universal.
It is interestingand I did a little bit of research on
thisthat 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 UKwhich has often been not lost to a foreign competitor
but a British company choosing to source it from the States or
Germany or somewhereit 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 situationand this pre-dated
the OECD Common Approachesthat 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.
|