APPENDIX 5
Memorandum by the British Exporters Association
(BExA)
SUMMARY
(a) In the attached paper, we review developments
since the Trade and Industry Committee presented its last report
on ECGD in 2000. Since that time, our members have witnessed a
sharp decline in ECGD's standing and competitiveness to the extent
that ECGD is no longer regarded as the foremost export credit
agency (ECA) in the world.
(b) We outline below the main issues that
we believe the TIC should focus on in its current review. We also
suggest the way forward in certain vital areas.
ESTABLISHMENT OF
AN ECGD TRADING
FUND
(c) One of the original objectives of establishing
a Trading Fund was to free ECGD from HM Treasury control over
its day-to-day decision-making processes, which had been a strong
theme in industry's response to the Mission & Status review
consultation in 1999-2000. Whilst strongly supporting that objective,
BExA has always maintained that the structure of ECGD is of less
importance than the quality and international competitiveness
of the service it provides. In practice, however, the process
of introducing a capitalised accounting system has been highly
disruptive to ECGD's effectiveness in recent years, and this has
been exacerbated by numerous reviews and changes in procedure.
Moreover, HM Treasury has ensured that it maintains a high degree
of effective control over ECGD's activities by introducing a series
of very tight consents which can sometimes hamper ECGD's flexibility
to react to the commercial requirements of particular projects.
(d) As preparations for the establishment
of the Trading Fund progress, we are becoming increasingly concerned
that it will be unable to deliver adequate and competitive support
to UK exporters in the long term. For example:
— We understand that only £1.7
billion of capital is likely to be made available to the Trading
Fund. Whilst this may be adequate to support current levels of
ECGD business, there is concern that—in the absence of any
apparent mechanism to increase the capital base of the Trading
Fund—this may become insufficient when there is an up-turn
in the cyclical global economy.
— At current premium rates, we understand
ECGD would be able to make a return on capital of about 4.5% real,
which seems to us a reasonable annual contribution to the Exchequer,
especially as other countries simply follow the WTO stricture
to break even over a period of time. However, HM Treasury is apparently
insisting on a higher target rate of return (reputably as much
as 18% above inflation). This could only be achieved either by
a swingeing increase in ECGD's premium rates (which would, of
course, result in ECGD becoming totally uncompetitive and has,
thankfully, been ruled out by the Prime Minister in a letter to
the CBI in September 2000) or by an annual injection of voted
funds. We understand that such voted funds will be made available,
but there must be a serious danger that Parliament (and others)
will eventually object to providing such funds on a regular basis.
Moreover, this could be misinterpreted internationally as a state
subsidy. In any event, it could create uncertainty over the long-term
viability of the Trading Fund. We therefore believe that the Trading
Fund's target return should be no higher than ECGD's currently
achievable rate of return.
CHANGE IN
ECGD'S OBJECTIVES
AND ITS
ROLE IN
PROMOTING SUSTAINABLE
DEVELOPMENT
(e) ECGD's Mission Statement continues to
refer to ECGD's role in helping exporters to win business, but
in addition now refers to the need to take account of Government's
international policies (to promote sustainable development, human
rights, good governance and trade throughout the world). We applaud
ECGD for taking these new responsibilities seriously, although:
— in some cases it has introduced measures
on a unilateral basis—thereby temporarily harming UK competitiveness—rather
than waiting for international agreement to bring all export credit
agencies into line; and
— insufficient attention now seems
to be paid to its statutory duty under the Export and Investment
Guarantees Act 1991 to facilitate exports.
GREATER OPENNESS
AND TRANSPARENCY
(f) ECGD has good record of being open about
its financial affairs, having published detailed reports and accounts
for many years. Despite this, there appears to be a reluctance
in the media and elsewhere to recognise the high degree of transparency
that already exists. It is difficult to see how much more open
ECGD could be without revealing commercially confidential information.
BENEFITS OF
ECGD-SUPPORTED TRADE
(g) Although the NERA report concluded that
ECGD had provided a net benefit to the UK economy over the last
10 years, there still seems to be a reluctance in some quarters
to recognise the true value of ECGD support, both:
— to developing countries who need
vital infrastructure, and
— to the UK economy through improved
balance of payments, more high-technology jobs, the so-called
trickle-down effect to sub-contractors throughout the country
(many of which are SMEs), improved trading/diplomatic links etc.
RELATIONSHIP BETWEEN
INDUSTRY AND
ECGD
(h) While industry continues to enjoy a
constructive relationship with ECGD's underwriters, increasing
frustration has arisen over the last few years as a result of
administrative changes that have reduced ECGD's ability to respond
in a timely and flexible manner to the demands of commercial negotiations
and the export finance marketplace. It is important that ECGD
has the ability to support projects in a wide range of markets,
and can introduce new product innovations—particularly in
response to market failure and competitive imbalance (which it
singularly failed to do when exporters demanded ECGD support for
bonds following the collapse of the surety bond market in 2000).
ECGD'S RELATIONSHIP
WITH COMMERCIAL
BANKING AND
INSURANCE COMPANIES
AND THE
DEVELOPMENT OF
THE PRIVATE
INSURANCE SECTOR
(i) As ECGD does not act as a direct lender,
it has very close relationships with commercial lenders who effectively
market export finance products to overseas customers and often
provide a wide range of commercial financing products and services
alongside ECGD-supported loans. Without ECGD support, the commercial
banks would not be able to provide financing at tenors, volumes
and prices that are required by overseas customers—particularly
on terms competitive with those available from other export credit
agencies. The availability of fixed rate export finance and zero
weighted lending (resulting from ECGD's 100% unconditional guarantees)
must be preserved.
(j) There is a high degree of risk-sharing
in the financing of any major project. In recent years, there
have been many attempts to allow ECGD to work more closely with
both the banking and insurance sectors to lay-off certain risks
and balance its risk portfolio, but in practice this objective
has rarely, if ever, been achieved for a variety of reasons—not
least because there is no adequate private market alternative
to ECGD in taking long and large exposures. The private insurance
market cannot consistently provide political risk cover beyond
a five year horizon, whereas typical tenors for large capital
projects in developing markets (in accordance with the OECD Arrangement
on Export Credits) extend to 10-15 year horizons.
ECGD'S CORPORATE
GOVERNANCE
(k) We support moves to strengthen ECGD's
top management structure, but believe there remains scope for
the Export Guarantees Advisory Council's role and membership to
be enhanced.
February 2004
INTRODUCTION
BExA's Credentials
1. The British Exporters Association is
an independent, national, trade association dedicated to exporting,
which uniquely brings together the export interests of manufacturers,
banks, credit insurers and export houses. In recent years the
Association's focus has been very much on matters relating to
ECGD. BExA's membership has a wealth of experience relating to
ECGD. BExA is pleased to have this opportunity to contribute to
the Trade & Industry Committee's review of ECGD. A list of
BExA members appears as an annex to this submission.
Decline in ECGD's Standing and Competitiveness
2. The TIC's last Report carried a paragraph
headed: "Praise for ECGD" which stated that "there
was some agreement that ECGD have been at the forefront of developing
flexible products for exporters". The products developed
prior to 2000 (eg One stop shop) are still in place. However,
few exporters today would sing the praises of ECGD in this way.
The perception is that, in the league table of export credit agencies,
ECGD has now slipped out of the top ten. Even more damagingly,
overseas customers are increasingly reporting that other ECAs
can be of greater assistance than ECGD and, therefore, in some
cases express a preference for not using ECGD.
3. The main considerations which ECGD has
to take into account and which we believe do not apply to other
ECAs:
— ECGD has had to devote resources
to too-many reviews and introspection in recent years.
— HM Treasury is still breathing down
ECGD's neck. The Treasury Consents inhibit flexibility on the
part of ECGD
— Unlike other ECAs, the UK Government
requires ECGD to break-even on FREF.
— The need to break-even on its insurance
account is a WTO/OECD requirement of all ECAs. However, the ECGD
Trading Fund will be required to make a return on capital.
ESTABLISHMENT OF
AN ECGD TRADING
FUND
4. In general terms, it is of little moment
to BExA how ECGD is structured provided that it is able to "do
its job". The appeal of the Trading Fund has been its perceived
mandate to deliver the following:
— An autonomous, flexible and responsive
agency, freed from HM Treasury control over its day-to-day decision-making
processes;
— No reduction in the competitiveness
of ECGD's support compared with that available to our competitors
in other countries from their official export credit agencies
5. At the same time, after the period of
excessive review and ensuing uncertainty, BExA looks to the Trading
Fund to provide:
— Urgent restoration of confidence
(amongst overseas buyers as well as UK exporters) in the future
of ECGD and in the consistency of its support for UK exports.
There is increasing concern as to whether the
Trading Fund will deliver what has been anticipated and is required.
Need for Adequate Capital
6. Adequate capital must be available to
the Trading Fund. BExA has been informed that a capital allocation
of £1.7 billion is being considered, whereas previously ECGD
had anticipated a need for some £4 billion of capital. The
main concern is that no mechanism has been proposed for increasing
the capital base should an upturn in the cyclical global economy
lead to an increase in demand for ECGD support.
Premium Rates
7. It would help win business if ECGD's
premium rates were internationally competitive. Already, ECGD's
premium rates for some markets are above the OECD benchmark applied
by other ECAs. There is a concern that the Trading Fund will need
to impose higher premium rates in order to meet its target rate
of return on capital (see below). However, we take some comfort
from the Prime Minister's letter to the CBI dated 19 September
2000 in which he stated that: "the capitalisation system
being developed will not be designed to force ECGD to increase
its prices to pay a return on capital".
Achievable v. Target Return
8. The Trading Fund's target rate of return
on capital employed (ROCE) must be set at a realistic level bearing
in mind that other ECAs are required simply to break-even. BExA
understands that, on the basis of existing premium rates, the
achievable rate of return is only 4.5% above inflation whereas
there are rumours that HM Treasury believes that a target ROCE
as high as 18% should be set. Although it is planned that the
difference between the achievable and target ROCEs will be met
by annual voted funds, we are concerned that this will simply
perpetuate the myth that ECGD provides a "subsidy" to
exporters, and it will therefore open ECGD to ongoing Treasury
and Parliamentary scrutiny, and could be misinterpreted in the
international forum. BExA believes that the Trading Fund's target
ROCE should be set no higher than ECGD's current achievable return
of 4.5% real.
CHANGE IN
ECGD'S OBJECTIVES
AND ITS
ROLE IN
PROMOTING SUSTAINABLE
DEVELOPMENT
Change in Objectives
9. The TIC report (para. 43) noted that
`ECGD's current Mission Statement is "to help exporters of
UK goods and services to win business, and UK firms to invest
overseas by providing guarantees, insurance and reinsurance against
loss". In addition, reference was made to supporting "High
Level Objectives" which were based on a need "to support
as much export business as possible, while limiting the risks
to the taxpayer".
10. Since 2000, the following words have
been added to the Mission Statement:
". . . taking into account the Government's
international policies".
The supporting "Objectives" have been
expanded along lines summarised by the Secretary of State in his
announcement on 25 July 2000. He stated then that: "The Report
recommends that ECGD should be reformed and strengthened so that
its activities become more transparent and clearly consistent
with Government's wider international policies to promote sustainable
development, human rights, good governance and trade throughout
the world . . .".
11. The Government's wider international
policies are laudable and BExA applauds ECGD for taking its new
responsibilities seriously. We do, however, feel that, despite
deteriorating trade figures, the facilitation of trade has been
low on the Government's agenda in recent years and that ECGD has
paid too little attention to its statutory duty to facilitate
exports. Our contention is that ECGD has taken its eye off the
ball so far as exporters are concerned.
ECGD's Role in Promoting Sustainable Development
12. Over the last few years, ECGD has introduced
a raft of environmental and social tests, including anti-corruption
measures, that need to be satisfied before a project can be supported.
In most respects these tests were introduced unilaterally in advance
of OECD guidelines that all of the major export credit agencies
now follow. All sustainable development measures should be introduced
on a multilateral basis to ensure, as far as possible, that UK
exporters are not put in a worse position than overseas competitors.
SMEs/New Policyholders
13. The main requirement of most SME exporters
is short-term credit insurance facilities, which have not been
generally available from ECGD since its short-term operation was
successfully privatised in 1991. It is rare that the type of exports
made by SMEs would qualify for medium term export finance. Resources
spent on publicising its facilities amongst SMEs could therefore
have been better spent elsewhere.
14. BExA applauds ECGD's initiative in establishing
a new unit to help new applicants. In addition, BExA believes
that there is scope for attracting newcomers by being more user-friendly.
To this end, we advocate a streamlining of ECGD's facilities,
documentation and procedures. Specifically, the application process
for ECGD's supplier credit facility should be streamlined to make
it more like the simple process used in the a forfait market.
GREATER OPENNESS
AND TRANSPARENCY
15. BExA considers that ECGD has been open
about its financial affairs, publishing very thorough annual reports
and trading accounts, departmental expenditure reports and various
other regular reports to Parliament. In addition, it issues informative
newsletters and provides a great deal of useful information on
its web site. Recent reports in The Times suggesting that ECGD
has covered-up the losses it incurred in the 1990s were totally
unfounded—indeed, suitable provisions for those losses have
been made and openly reported upon for over 10 years. Moreover,
those losses were incurred mainly on ECGD products that are no
longer available (eg: the short-term credit insurance business
that was privatised in 1991). There appears to be a reluctance
in the media and elsewhere to recognise the high degree of transparency
that already exists. It is difficult to see how much more open
ECGD could be without revealing commercially confidential information.
BENEFITS OF
ECGD-SUPPORTED TRADE
16. The NERA report into "the contribution
which ECGD makes to the competitiveness of the UK economy"
(published March 2003) concluded that ECD provided a net benefit
over the period 1992-2002 in the range of approximately £4.1
million to £23.1 million. However, there seems to be a reluctance
in some quarters to recognise the true value of ECGD support,
which BExA would identify as follows:
(a) For developing countries:
— developing much-needed infrastructure,
— improving the quality of life (in
terms of reliable power supply, clean water, flood relief etc)
— enhancing political stability
— promoting the technical development
of the workforce, and
— encouraging inward tourism and other
wealth-generating industries
(b) For the UK:
— protecting the manufacturing base
in vital capital goods—which results in the preservation
of jobs/skills, both in main contractors and in their UK sub-contractors,
many of whom are SMEs,
— improved balance of payments through
increased direct exports (main projects, follow-on orders, spares,
maintenance contracts etc) and, in the long-term, through reduced
imports (which is the likely result if UK factories close through
lack of export orders), and
— higher employment, both direct and
indirect, which results in greater social harmony, improved tax
revenues, lower social security payments etc.
— maintaining/developing trade links
with developing countries (thereby enhancing Britain's long-term
influence in the country and throughout the region).
RELATIONSHIP BETWEEN
INDUSTRY AND
ECGD
Decline in Number of Deals Undertaken by ECGD
17. The number of deals done by ECGD in
2002-03 was 26 (excluding Airbus and Rolls-Royce). This is only
partly a reflection of the decline of UK manufacturing industry
and capital goods exports. BExA understands that other ECAs—such
as SACE of Italy—have managed to increase their business
activity over the same period.
Administrative Changes for the Worse.
18. Industry enjoys a constructive relationship
with ECGD's underwriters. Nevertheless, there is a mismatch between
the high-level willingness to do business expressed by senior
ECGD officials and the working level timidity and lack of confidence
in terms of decision-taking by underwriters. The committee system
put in place in recent years has produced a slower system and
a less can-do approach. The switch from geographic specialisation
to product/sector specialisation has resulted in a loss of country
expertise and a need for exporters and bankers to consult more
widely, thereby losing time. ECGD has been the focus of unfair
criticism from the NGO lobby, when the latter's real target is
the buying country, which initiated the project/order and is not
so susceptible to pressure.
Reduced Flexibility and Appeal for Exporters
19. ECGD continues to offer good products
for exporters: their delivery has deteriorated. The constant reviews
and reorganisation over the last five years and, perhaps, the
time-lag in the appointment of a new Chief Executive, have demotivated
ECGD staff to the detriment of the exporter and have caused unwelcome
uncertainty amongst overseas customers. The new systems and policies,
mentioned above, have made ECGD less flexible and less attractive
to do business with in the following ways:
— It is more difficult to get fixed
rate export finance (FREF) at OECD commercial interest reference
rates (CIRRs).
— All too often, ECGD's premium rates
are set above the OECD benchmarks whereas other ECAs tend to keep
to the benchmark rate,
— Some members report difficulties
in obtaining ECGD facilities for business in rich markets (although
we understand no final decision against the provision of cover
for rich countries has been taken). We expand on this matter below.
— When opening cover for a new market
ECGD's response is often too little and too late compared with
other ECAs,
— Increasing unwillingness to go to
the maximum credit period,
— Bond support has been refused despite
market failure (See below),
— Relative to other ECAs there is an
unwillingness to underwrite corporate risk,
— ECGD is unwilling to commit its support
at a sufficiently early stage,
— In addition, the restrictive Treasury
Consents introduced in 2002 have contributed to an inflexible
approach to commercial requirements of individual export projects—eg
in terms of support for foreign/local content.
20. Members have reported just one positive
change since the last TIC Report: permitting 40% foreign content
for contracts under £10 million.
Bond Support
21. ECGD's lack of an innovative approach
is exemplified by its failure to introduce a bond support facility.
Over the last couple of years, a number of BExA members have experienced
a market failure in the capacity of the bank/surety markets to
issue bonds and guarantees. The requirement for performance bonds,
advance payment guarantees, etc, has been firmly established in
most export contracts for many years, and the total value of these
bonds can often represent between 25% and 100% of the contract
price. The issuing banks require exporters to indemnify them against
the calling of such bonds and these indemnities count against
the exporters overall borrowings. A number of factors have conspired
over recent years to reduce the market capacity to issue such
bonds, including:
— The near-collapse of the surety market,
with many players withdrawing from the market and capacity down
from $6,850-8,150 million in 2001 to only $1,500 million in 2004,
mainly because of the knock-on effects of 11 September 2001 on
the insurance market,
— corporate failures (eg Enron) have
caused banks and insurance companies to become more cautious about
corporate exposures, and they have therefore scaled-back on their
lending limits with the result that bonding facilities are severely
reduced,
— banks are revising their risk assessment
procedures in preparation for the introduction of Basle II guidelines
in 2005, and in some cases this too has resulted in a reduced
appetite for bond exposures,
— many exporters' balance sheets (for
large groups and SMEs) are not as strong as they have been in
previous years
— mergers of financial institutions
have further reduced the availability of credit to individual
market sectors.
22. BExA has campaigned for HMG to introduce
a form of bond support for exporters in order to stretch the available
market capacity, and has proposed a risk-sharing structure that
would provide a commercial rate of return. Many other countries
have introduced similar schemes to help their exporters, but DTI
Ministers have thus far refused to consider following suit because
of a lack of hard evidence of market failure. Meanwhile, until
the private market's capacity returns to acceptable levels, BExA
members will continue to need HMG bond support in order to pursue
export contracts on a competitive basis.
Rich Markets
23. Illustrative of ECGD's attitude towards
facilitating exports is its approach to rich markets. For some
years, there has been an internal debate within ECGD about whether
it is appropriate for the Department to support any projects in
rich (ie developed) markets. This debate emanates from the view
that ECGD should not compete with the private sector, but it overlooks
several important factors, including:
— The private market cannot consistently
provide support for particularly long and large exposures, especially
for the very long credit periods that are required to make major
infrastructure projects viable; thus ECGD support is often needed—alongside
private sector funding—to enhance the market's capacity,
— Export credit agencies in other countries
have no qualms about providing such support for their exporters,
— In order to build a balanced portfolio
of exposures, ECGD needs to support some projects in relatively
rich markets, otherwise its portfolio will soon comprise only
developing market risks—and it would, in effect, become
simply a "guarantor of last resort"
— ECGD should be able to sell its exposure
on rich market projects once the size and period of the exposure
have reduced to a level that becomes acceptable to the private
sector.
ECGD'S RELATIONSHIP
WITH COMMERCIAL
BANKING AND
INSURANCE COMPANIES—AND
DEVELOPMENT OF
PRIVATE INSURANCE
SECTOR
Relationship with Commercial Banking
24. ECGD has a long-established relationship
with the commercial banks active in the London-based export finance
market. These include UK clearing banks and the London branches
of major international banks, totalling some 20 active export
finance banks today.
— ECGD and commercial banks have enjoyed
an open working relationship which aims to provide and improve
the export finance service to exporters to assist in their winning
of export orders and projects for the UK.
— The commercial banks provide their
exporter/overseas buyer clients with a wide range of commercial
financing products and services in addition to those export finance
services guaranteed by ECGD. The commercial banks will seek ECGD
support where the commercial market is unable to provide a viable
export finance solution in terms of tenor and/or amount and/or
competitive pricing.
Service/Responsiveness:
25. The commercial banks originate and submit
to ECGD potential export financing and overseas investment transactions
for ECGD underwriting. These transactions are originated by the
banks from 1. their UK corporate clients—Supplier Origination,
and 2. from their overseas corporate, bank and government clients—Buyer
Origination.
— Whilst the ECGD and commercial banks'
relationship has remained open, the continuous Government reviews
of ECGD and restrictions imposed by HM Treasury over the last
four years have dramatically reduced the service level to exporters
and reduced their success in winning export orders and projects.
ECGD can no longer be described as "user-friendly".
Potential buyers are also recognising that ECGD is less responsive
and flexible than in the past.
— The continuous governmental reviews
and uncertainties surrounding the proposed ECGD Trading Fund have
discouraged sourcing of capital plant and equipment from the UK,
with project managers preferring to source from countries where
the support of the Export Credit Agencies are more certain and
predictable.
— The proposed introduction of the
ECGD Trading Fund has brought a significant decrease in ECGD's
ability to respond to enquiries due to the rigid committee approach
to the allocation of ECGD risk capital.
— The commercial banks have increased
the amount of business they transact with other OECD and non-OECD
ECAs as a result of ECGD's lack of competitiveness.
Products:
26. ECGD provides commercial banks with
1. export finance guarantees : under its
supplier credit and buyer credit programmes, ECGD provides up
to 100% guarantees to the commercial banks for political, commercial
and transfer risks on loans for up to 85% of contract price. The
balance is financed on commercial terms. Under supplier credits,
the commercial banks take the documentation risk and the onus
is on the bank to justify the claim to the satisfaction of ECGD.
Under Buyer Credits, ECGD assumes the documentation risk and provides
unconditional guarantees of payment. These 100% unconditional
guarantees from Government are essential for ECGD-supported loans
being classified as zero-weighted for the lending banks capital
allocation purposes.
2. overseas investment insurance: political
risk insurance for commercial loans made by the commercial banks
in respect to overseas projects and purchases. ECGD underwrites
and takes 90% of the political risk on up to four categories of
political risk. The commercial banks take the remaining 10% political
risk and 100% of the commercial risk.
— ECGD maintains a comprehensive range
of export finance products. However the essential ability to refine,
improve and customise products for all sectors including SMEs
(eg cover for L/Cs or forfaiting-type transactions) has largely
been lost as a direct result of HM Treasury's efforts to limit
the Treasury Consents under which ECGD operates and reduces the
flexibility for which ECGD was highly regarded throughout the
world in the last two decades and before.
Competitiveness:
27. ECGD as the UK Export Credit Agency
needs to provide a competitive product range at a competitive
price if the UK exporter is to compete with his/her competitors
as supported by their respective national Export Credit Agencies.
— The comprehensive ECGD product range
has been maintained but the quality of those products has largely
stagnated or reduced in the last four years due to the lack of
flexibility ECGD has today to refine and improve its products.
— With the introduction of the ECGD
Advanced Portfolio Management system, ECGD charges a number of
premiums at a higher level than its OECD peer Export Credit Agencies.
These higher charges are often in those markets where UK exporters
have traditionally been successful, reflecting the concentration
of risk as a result of this success, but resulting in potential
penalisation for this very success.
— ECGD is the only Export Credit Agency
today which requires each and every transaction with an ECGD support
interest rate to breakeven. Although the OECD-agreed Commercial
Interest Reference Rate is recognised by most countries as a truly
commercial rate (being set at one percentage point above the government
borrowing rate in most major currencies), the insistence on 100%
hedging of interest rate exposures to ensure break-even of fixed
rate export finance (FREF) on each contract can sometimes result
in application of a one percentage point surcharge over CIRRs
by ECGD, making UK totally uncompetitive.
Basle II:
28. The introduction of self-regulation
of commercial bank risk capital reserves under the Basle II agreements
will permit banks significant flexibility in the management of
their risk capital. Today ECGD Guarantees are zero- weighted for
risk capital.
— During this process of major change
it is critical that the zero-weighting of ECGD Guarantees is not
jeopardised by uncertainties surrounding the Government's intentions
towards ECGD and the proposed Trading Fund. ECGD guarantees will
become even more critical for exports to developing countries.
Relationship with Commercial Insurance and Reinsurance
Companies and Development of Private Insurance Sector
29. There have been discussions over many
years as to how ECGD might work with the Commercial Insurance
Market in relation to major contracts with buyers in non-OECD
countries. Proposed structures have ranged from providing insurance
on a syndicated basis, to ECGD or the Commercial Market providing
reinsurance support to one another. The object has been for both
ECGD and the Commercial Market to attempt to create adequate appetite
to support British exporters, in terms of risk, capacity, tenor,
finance or a combination of each.
30. Where risks are short in overall duration,
and where extended credit is not required, the Commercial Market
provides a viable alternative to ECGD. The Government maintains
a commitment to provide last resort top-up reinsurance to specified
Commercial Market insurers where capacity for short term political
risk becomes limited.
31. The experience of BExA members is that
for medium term credit risks where the risk horizon exceeds three
years, the Commercial Market is entirely inadequate to support
the needs of British exporters. Moreover, attempts by ECGD and
the Commercial Market to share risk on major contracts rarely,
if ever, succeed in achieving their objective for a variety of
reasons. The most prominent of these are as follows:
— The reluctance or inability of the
Commercial Market to support medium or long-term credit risks
in politically risky markets. This results from the volatility
of the Commercial Market, which is susceptible to constant changes
in its perception of political risks. Although there are a very
few insurance companies which can write up to three years credit
risk, or exceptionally five years in some markets, there is no
constancy either of capacity or tenor. ECGD, on the other hand,
is able to offer consistency of capacity and tenor, and premium
rates which bear a relationship to those offered by other ECAs.
— The inability, or unwillingness,
of the Commercial Banking Market to provide finance on competitive
terms against the security of cover provided by the Commercial
Insurance Market. The banks' appetite for medium or long-term
credit transactions is influenced by their ability to obtain unconditional
government-backed guarantees to support commercial lending, and
their capacity to provide funds on a zero-rated basis. Commercial
insurance policies provide neither guarantees nor access to zero-weighting.
— The practical difficulties in getting
ECGD to work with the Commercial Market in terms of wordings,
variable premium rates, agreed action in the event of a potential
loss, and recovery rights and duties.
32. BExA's view is that if British exporters
are to be able to compete satisfactorily on medium and long-term
credit contracts with those non-UK companies which are supported
by their own ECAs, there is no adequate alternative to ECGD. A
competitive Commercial Market will not be available in the foreseeable
future, either to work with ECGD, or to provide such cover independently
of ECGD. As such, BExA believes that ECGD deserves the full support
of the Government in providing stand-alone export finance facilities
to exporters and banks.
ECGD'S CORPORATE
GOVERNANCE
33. We welcome the appointment of outside
Directors to ECGD's executive board, and the recent appointment
of a Chairman to that board, but there is considerable uncertainty
about how the executive board will co-exist with the Export Guarantees
Advisory Council. In our view, there remains an important role
for the EGAC, and we feel that the EGAC should be mandated to
provide advice to ECGD's ministers and management on a very wide
range of topics. We would be strongly in favour of EGAC's mandate
being widened and its membership strengthened to include more
members with recent exporting experience.
British Exporters Association
LIST OF MEMBERS (as at 1.2.04)
ABC International Bank
ABN AMRO Bank
AgustaWestland
AIG
Airbus UK Ltd
Alperton International Limited
ALSTOM T & D Ltd
—Power Conversion
ALSTOM Ltd
ANZ Investment Bank
AON Trade Credit
Ashwood Timber & Plastics Ltd
Atradius
BAE SYSTEMS plc
Bailey & Davison Ltd
Bank of Scotland
Barclays Bank
Barlow Lyde & Gilbert
Berry Palmer & Lyle
BlueFinger Ltd
BNP Paribas
British Arab Commercial Bank
C Phillips Jones & Co Ltd
Camara Ltd.
Coface UK
Colomendy Limited
Commerzbank
Corus UK Ltd
Credit Agricole Indosuez
Credit Lyonnais
Crown Agents Services Ltd
Danske Bank
DCD Trade Services Ltd
Demag Delaval Ind.
Turbomachinery Ltd
Denton Wilde Sapte
Deutsche Bank AG
EIL Services Ltd
| EULER Hermes
GE Energy (UK) Ltd
GMAC Commercial Finance plc
Hesley Trading (London) Ltd
HSBC Bank plc
HSBC Insurance Brokers Ltd.
JCB Sales Ltd
Keith Johnson Consulting Ltd
Kirans (London) Ltd
LloydsTSB Bank
London & Scottish Int. Ltd
Mabey & Johnson Ltd
MAN B&W Diesel Ltd.
Marconi Selenia
Communications Ltd
Mercantile Services Int. Ltd.
Mr Michael Possener
N & C Building Products Ltd
Newstead International Ltd
Omni Whittington Emerging
Markets Ltd.
Quantum Trade Finance Ltd.
R A Watts Ltd
Raytheon Systems Ltd.
Rolls-Royce Capital Ltd.
Sabanci Bank
Samac Overseas Ltd
Shingleton & Co Ltd
Singer & Friedlander
Standard Chartered Bank
Stemcor Ltd
Thales plc
The Royal Bank of Scotland plc
V A Tech T & D
Wallace Cartwright & Co Ltd
Wallis Shipping Services Ltd
Woldtare Export Ltd.
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