APPENDIX 13
Memorandum by ECGD Trades Union Side (TUS)
May I introduce myself as the Secretary of the
Export Credits Guarantee Department's Trades Union Side.
We are aware that the Trade and Industry Select
Committee is currently conducting an inquiry into ECGD; I am afraid,
though, that we have missed the deadline for providing evidence
to the Committee.
However, following our meeting with the Minister
of Trade (Mike O'Brien) we have (at the Minister's request) recently
submitted a paper to him in which we have set out our views concerning
ECGD's Business Strategy and proposed Capitalised Trading Fund.
We, therefore, believe that the Committee might find this useful
for their inquiry.
I apologise if this is an unorthodox way of
doing things, but I should be grateful if you would kindly bring
the contents of the attached submission to the attention of the
Committee, please.
ISSUE
1. This paper contains the views of ECGD's
Trades Union Side (TUS) concerning ECGD's Business Strategy and
proposed Capitalised Trading Fund. Imminent decisions are being
made about ECGD's status and, therefore, we request the Minister
to give our comments serious consideration.
2. We represent ECGD's trade union members
(that's the majority of ECGD staff, including many experienced
senior managers who believe that a Capitalised Trading Fund is
an inappropriate vehicle for ECGD). In the past (for example concerning
the reorganisation of the Business Group) our views on the consequences
of proposed changes have proved more accurate than those of the
Management Board.
SUMMARY
3. A Capitalised Trading Fund is not appropriate
for ECGD.
4. It will exacerbate ECGD's current lack
of competitiveness with other export credit agencies (ECAs).
5. The Pilot Trading Fund should not go
ahead until a formal review, fully involving the TUS, has been
undertaken to identify benefits from the "shadow" capitalised
regime currently operating.
6. ECGD should adopt a Business Strategy
that enables it to play a proactive role in an innovative government-led
strategy to assist UK exports and UK industry.
7. A move to a Capitalised Trading Fund
status will not result in greater operational autonomy for ECGD.
8. The requirement to make a return on capital
inevitably means that ECGD will be faced with further increasing
premium rates and inappropriately cutting administrative costs.
9. Treasury equivalents in many other countries
seem to have a more consistent and professional working relationship
with their ECAs.
10. ECGD support is not a subsidy.
11. The majority of the claims paid by ECGD
are recovered over time.
TRADING FUND
12. We do not believe that a Capitalised
Trading Fund is appropriate for ECGD.
13. The idea of a Trading Fund was initially
presented to staff as the only way to stave off the threat of
privatisation and the so-called "zero option", not as
a good idea in its own right. The original plan was to introduce
the Trading Fund several years ago but its introduction has been
repeatedly delayed, primarily because the Trading Fund was poorly
thought out. Furthermore, we believe that those people in ECGD
who first thought of the idea of a Capitalised Trading Fund have
changed their views, but are unwilling to acknowledge that their
judgement was erroneous.
14. Unlike decisions to convert other Government
Departments into Trading Funds, export credit insurance is an
area that many other Departments (including HMT) do not fully
understand. A key issue is that the Trading Fund legislation envisages
a much shorter business cycle than pertains for ECGD, whereas
ECGD's business is more "lumpy" and involves judgements
about long-term risk.
15. The "shadow" capitalised regime
has been operating in ECGD since April 2001 but there has been
no review of this whatsoever. As a result, it is not known whether
there are in fact any benefits to ECGD, customers, HMT or, indeed,
whether it achieves what you are looking for. Therefore, we consider
that the Pilot Trading Fund should not go ahead until a formal
review, fully involving the TUS, has been undertaken to identify
what has happened over the last three years. This should include
a detailed outline of the positive benefits to ECGD and its customers,
of both the current "notional" regime and the proposed
"real" capitalised regime.
BUSINESS STRATEGY
16. We are pleased that the zero option
and privatisation are no longer being considered. However, we
are concerned that disputes and years of continuous review, over
ECGD's direction and its benefit to the UK economy, have impaired
its ability to operate effectively (despite the efforts of staff)
and have contributed to ECGD falling from the highest point among
major ECAs to now being perceived as being one of the worst in
terms of offering a level playing field.
17. To rectify this, a Capitalised Trading
Fund is not the answer. Instead, ECGD needs to adopt a Business
Strategy that enables it to thrive proactively as a key player
in an innovative government-led strategy to assist the UK export
industry. ECGD should be empowered to compete on an equal footing
with other ECAs. (The OECD Consensus CIRR regime, premium pricing
and attitude to business in rich markets are all areas where ECGD
already lags, or will lag, behind other ECAs.) ECGD must be properly
funded and the general view amongst ECGD's customers is that the
currently proposed capital amount will be insufficient.
18. We recognise that the Government is
torn between i) promoting the development of the private sector
to take on the risks traditionally assumed by ECGD, and ii) the
need to assist the export industry with effective use of taxpayers'
money. We are concerned that the end result will be an unsatisfactory
compromise that will severely constrain ECGD's ability to assist
UK exporters competing for business and thus weaken support for
UK industry in general. As explained in the recent joint TUC/CBI
submission,[70]
export credit support can be a key factor in winning orders for
major capital goods and projects.
AUTONOMY
19. Capitalisation was pushed by some members
of the Management Board as a means of achieving greater operational
autonomy from HMT. There is no evidence to support this contention.
20. Firstly, HOA3 will not give ECGD more
freedom; instead, Treasury Consents would, as you can see, constrain
its operations. HMT is saying that ECGD can have more autonomy
but it must be within strict financial controls. Whilst not arguing
against strict financial controls per se, HOA3 is a set
of restrictions that will operate more like a straitjacket. Despite
attempts to relax Treasury Consents, it would be a mistake to
think that a move to a Capitalised Trading Fund would really result
in greater operational autonomy for ECGD.
21. Secondly, there is the experience of
other Trading Funds in the UK. At the outset, HMT promised them
that they would not interfere. However, when ECGD (and the TUS)
consulted other Trading Funds, it was clear that, after they had
been established, the promised autonomy did not happen; indeed
the opposite happened and HMT were found to be even more intrusive.
We believe that HMT would do likewise with ECGD, particularly
as ECGD would be the largest Trading Fund in the UK (indeed, its
asset base would be significantly larger than those of all other
Trading Funds put together).
22. We are very much aware that the good
relationship that other ECAs have with their Treasury equivalents
seems to allow them the freedom to run their business effectively
and ECGD should be allowed the same opportunity.
TAX-PAYERS'
MONEY
23. We are pleased that Ministers are determined
to provide an ECA that can deliver. UK exporters clearly want
a strong, reliable and competitive ECA to stop the erosion of
the flagging capital goods manufacturing base. ECGD's TUS remains
convinced that a Capitalised Trading Fund would not achieve this
because it requires ECGD, in effect, to move from a break-even
to a profit-making objective. A profit-led ECGD would be keen
to attract only profitable business and, when it picks and chooses
who gets ECGD's cover, it will tend towards this need for profitability
rather than the wider good to the UK economy or, indeed, the wider
international development aims of the Government.
24. Regardless of any assurances that Ministers
may have been given, the requirement to make a return on capital
inevitably means that ECGD will be faced with further increasing
premium rates and inappropriately cutting administrative costs.
Premium rate increases are not a realistic option for customers
because, in many important markets, ECGD is already uncompetitive
in terms of price.[71]
Cutting staff is not a solution either, as this will result in
a reduced service to customers and the further deterioration of
support for UK exports. Factories would close, jobs will be lost
and will go overseas. Also, as ECGD support has a cascading effect
on SMEs, small businesses that depend on larger prime contractors
would suffer.
25. With a Capitalised Trading Fund, the
UK will be exporting jobs instead of exporting goods and services—and,
instead of paying claims to banks and exporters, taxpayers' money
would be used to pay unemployment benefits. The difference is
that a high proportion of claims paid by ECGD are recoverable.
Banks in the UK already admit to steering multi-national clients
away from sourcing export contracts in the UK towards sourcing
in a country with a user-friendlier ECA that provides a better
level of support. The future of UK subsidiaries of overseas parents
is also being questioned by such parents who are in a position
to compare the premium rates charged by ECGD with those charged
by their home country ECA.
26. HMT equivalents in many other countries
seem to be able to maintain a less emotive and more professional
working relationship with their ECAs. They acknowledge that the
agencies must pay claims and recognise that the money is well
spent in support of the economy and in support of exports. In
the UK, however, there has been much discussion concerning export
credit support being regarded as a "subsidy". In fact,
previous studies[72]
have highlighted that there is no actual subsidy inherent in ECGD
support. It is also worth highlighting that ECGD has managed to
break-even over the last 10 years.
27. We clearly share concerns about the
impact of ECGD on taxpayers' money. Whilst perhaps not appropriate
to this paper, we have ideas about how ECGD can save money (for
example, we suggest that close attention be given to the amount
of money that ECGD spends on employing consultants, particularly
as much of the work they do could be carried out by ECGD staff,
for less money).
TAIL-END
RISK
28. We understand HMT's concerns about the
so-called tail-end risk in ECGD's portfolio (the possibility that,
if everything goes wrong, ECGD will need to pay claims on all
its current exposure). However, ECGD recovers a high percentage
of claims, over time. It is important to bear in mind that ECGD's
business includes projects with long horizon of risks and, therefore,
when making decisions about ECGD's future it is essential to think
long term.
29. If ECGD were faced at some time in the
future with paying claims on absolutely everything, that would
only be as a result of a major world catastrophe, ie no one will
be paying anybody anything because the world economy will have
totally collapsed. On the other hand, there could well be a significant
up-turn in the global economy. Government policy should create
the economic climate to help achieve this. However, ECGD must
be ready to handle this situation and this can only happen if
it has an appropriate operating framework and sufficient staff
to help customers compete with their overseas competitors.
CONCLUSION
30. We believe that a Capitalised Trading
Fund is not appropriate for ECGD as, inter alia, it would
exacerbate ECGD's current lack of competitiveness with other ECAs.
There is no evidence that ECGD's "shadow" capitalised
regime has been beneficial and, therefore, we consider that the
Pilot Trading Fund should not go ahead without a formal review
and a detailed outline of the tangible benefits.
31. A move to a Capitalised Trading Fund
status will not result in operational autonomy for ECGD and, instead,
HOA3 will operate more like a straightjacket. The requirement
to make a return on capital will mean that ECGD will be faced
with further increasing premium rates and inappropriately cutting
administrative costs; both options would result in a reduced service.
Treasury equivalents in many other countries value the role of
their ECAs. Support for ECGD is not a subsidy and the majority
of claims paid by ECGD are recovered over time.
32. We urge you to assist the UK capital
goods export industry, and ECGD staff, by strongly arguing for
a proactive public service role for ECGD, competing on an equal
footing with other ECAs, properly funded, fully staffed, with
the operational autonomy necessary to return to its previous level
of service. In our view, this means rejecting the case for a Capitalised
Trading Fund.
33. We would welcome the opportunity to
meet again soon to discuss this paper with you.
ECGD Trades Union Side
23rd April 2004
70 Joint letter dated 27 February 2004 from Brendan
Barber and Digby Jones to the Prime Minister. Back
71
ECGD's Customer Survey (2003). Back
72
National Economic Research Association (NERA) report, published
March 2003 ECGD. Back
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