7 Export Credits Guarantee Department
144. One of the main impacts of the credit crunch
on businesses is the reduction in the availability of trade credit,
the short-term financing that underwrites international trade.
This has been principally caused by the increased risk that banks
face in lending combined with a sharp increase in claims and related
underwriting losses.[181]
145. As a result, UK exporters saw the withdrawal
of credit or the reduction of credit limits on their buyers and
an increase in premiums. Some exporters were left uninsured, which
severely hampered their ability to accept and fulfil export orders.
And some exporters have struggled to obtain finance from banks
that relied on the existence of short-term trade credit insurance
as a form of collateral for their lending.[182]
As Lord Davies told us "I think one of the most common issues
for SMEs [
] is around short-term insurance."[183]
Similarly the Midlands World Trade Forum reported that one of
the main factors impacting on businesses since the onset of the
recession was the "lack of credit insurance."[184]
146. The Export Credits Guarantee Department [ECGD],
is the UK's official Export Credit Agency. It describes its aim
as "to help UK exporters of capital equipment and project-related
goods and services win business and complete overseas contracts
with confidence."[185]
It does this by:
- providing insurance to UK exporters
against non-payment by their overseas buyers;
- guaranteeing bank loans to facilitate the provision
of finance to buyers of goods and services from UK companies,
and
- supplying political risk insurance to UK investors
in overseas markets.
147. Before the downturn, the Government had encouraged
the ECGD to play a more modest role in the market, through the
privatisation of its Insurance Services Group operations in 1992
and a reduction in the amount of trade it covered.[186]
Since then ECGD's role in providing short-term credit insurance
for capital and semi-capital contracts and related services has
been focused on emerging markets.[187]
Responding to the recession
148. When he appeared before us, Patrick Crawford,
Chief Executive of ECGD, reported that the organisation was predicting
a large increase in demand for their services:
ECGD has responded to the downturn. Inquiries by
exporters have gone up 50%. We supported just under £1.5
billion of new business in the last financial year to 31 March.
We expect that that will double or even more in this financial
year. We have played a key role in helping Airbus aircraft exports.
We have historically been supporting 17-18% of their deliveries.
It is quite likely that we will support double that in this financial
year."[188]
149. Mr Crawford explained that back in July the
ECGD had just concluded a consultation on a possible new product
for risk-sharing on confirmations by British banks of UK export
contracts and letters of credit.[189]
150. The Parliamentary Under-Secretary of State for
Business, Innovation and Skills, Ian Lucas MP, formally announced
this scheme in a written ministerial statement to the House on
20 October 2009. Under this scheme the Government will share the
risk of UK banks confirming letters of credit issued by other
banks. When it was launched five banksBarclays, RBS, HSBC,
Lloyds TSB and Standard Charteredwere supporting the scheme
which aims to cover 282 overseas banks in 36 export markets, with
more banks and export markets expected to be added.[190]
The scheme will be focused on emerging markets.[191]
151. The CBI welcomed this development but argued
that there was still much more that the Government needed to do
to ease the current pressure on trade credit. The BCC took a similar
position, noting that "only 10% of trade deals are concluded
this way [using letters of credit], and therefore will not meet
the total needs of exporters."[192]
152. The first recommendation made by the CBI was
that government should extend the current Fixed Rate Export Finance
(FREF) scheme. This initiative enables UK exporters to offer medium
and long-term finance to their overseas buyers at officially-supported
fixed rates of interest. The end date of the programme was extended
in the November 2008 Budget Report until 31 December 2009, and
the CBI "wishes to see the current FREF Scheme to again be
extended or an acceptable alternative to be in place and operational
by 1 January 2010." Since taking evidence from the CBI on
this subject the Government has announced that the FREF scheme
will again be extended until March 2011.[193]
We fully support this decision.
153. The second form of support that the CBI would
like to see ECGD extend is its bond support. This would involve
ECGD insuring against the calling in of bonds issued to finance
international trade. ECGD already provides insurance for exporters
against the unfair calling of performance bonds issued
by banks. ECGD's evidence acknowledged that the business community
would like this extended to the fair calling in of bonds, and
made the following comments on the proposal:
Exporter organisations have pressed for some years
ECGD to provide cover for the fair calling of bonds, where
banks are unwilling to do so. If ECGD were to provide such cover,
it would be doing so on business that the banks have judged to
be unacceptable. ECGD is exploring whether it might be possible
to provide cover to banks on a risk-sharing basis, which would
require the banks to share in any related security provided to
them by the exporter.[194]
We welcome ECGDs decisions to examine
the possibility of extending the bond support it offers by entering
into a risk sharing agreement with banks. We urge it to make haste
with these discussions and to provide us with an update on these
negotiations in its reply to our Report.
154. We acknowledge that it has previously been difficult
for ECGD to provide short-term credit to established markets because
of the European Commission's Short Term Communication which bans
governments of Member States from providing support for commercial
and political risks involving intra-EU trade and exports to certain
'rich' OECD markets, including Australia, Canada, Japan and USA.[195]
155. However, since the onset of the global recession,
other Member States have been able to get a time limited waiver
from the Short Term Communication. Several European countries
have taken advantage of this opportunity to extend the cover they
offer their exporters. For example the Dutch Government has launched
a scheme to provide export insurance coverage to businesses unable
to obtain cover, or partial cover, from the private market as
a result of the current financial crisis.[196]
156. Under the Dutch scheme the state provides a
reinsurance facility to top up cover offered by credit insurers
in cases where the existing credit limits have been reduced or
new limits given by credit insurers which are lower than the amount
requested by the insured company; premiums are set at a level
that provides an incentive for exporters to have recourse to private
insurers once there is again sufficient cover on the private market.[197]
157. The Department commented on the European Commission's
waiver in its supplementary evidence, stating that the Government
had decided against intervention to support short-term export
trade credit insurance,[198]
because:
At recent meetings, the trade credit insurers have
advised the Government that: they are now in a position to re-instate
some of the buyer limits that they had withdrawn; new risk capacity
is entering the reinsurance market in advance of the annual reinsurance
round which for many insurers is at the end of the year; and they
expect to be able to obtain sufficient reinsurance capacity to
be able to support increased levels of cover next year, subject
to the acceptability of risks on individual markets and buyers.[199]
158. We have some concerns about this response. This
does not match the evidence that we have repeatedly received from
small businesses.[200]
For example the BCC's evidence stated that "Chamber Network
Trade committees across the country report that the reduction
in available finance is preventing businesses from concluding
export deals."[201]
The Government's decision to merely "monitor the market"[202]
also seems at odds with Lord Davies' own analysis that a lack
of trade credit is one of the main challenges facing businesses.[203]
159. The European
Commission waiver of the Short Term Communication provides the
Government with an opportunity to address the failure of the market
to provide business with trade credit. Neither we, nor any of
the businesses who we have spoken to, have seen evidence that
this situation is improving and therefore the Government's decision
to merely "monitor the market" is inadequate. We strongly
recommend that the Government reassess its decision not to use
the opportunity presented by the Commission's decision to re-enter
the short-term trade credit market until the financial situation
improves.
Organisational culture
160. While we heard concerns about the deficits in
the specific programmes being run by ECGD as part of its response
to the recession we also heard calls that its response to recent
events should form a backdrop for "a more fundamental look
at the way in which ECGD operates going forward."[204]
Mr Scott's opinion was that ECGD had:
actually lost some of its focus in terms of being
there to primarily be driving and supporting UK exports, it has
been too slow to respond to its established customer base, we
feel that some of its internal processes have been too much driven
by concerns in terms of their legalistic implication rather than
actually responding to customers' demands [
][205]
161. The CBI was not the only organisation to feel
that the ECGD needed a change in its organisational culture. The
Energy Industries Council's evidence raised concerns about the
skills, qualifications and professional backgrounds of the staff
that work for ECGD, arguing that "it should not be run by
bankers for bankers" but instead be "staffed by experts
who understand the needs of specific sectors."[206]
162. The Management Consultancies Association noted
in its evidence that ECGD was obliged by the Treasury to make
a profit. While this appears to be a prudent decision, their opinion
was that it can result in the ECGD being more conservative in
the coverage it provides than many of its international counterparts.[207]
However the MCA did acknowledge that dropping this requirement
"would obviously require additional funding at a time when
public finances are stretched."[208]
163. We are
concerned by reports that businesses feel that ECGD is not properly
reacting to customer demands. It is especially important that
during these challenging times ECGD are properly equipped to deal
with, and able to focus upon, businesses' needs.
Support for Airbus
164. During our visit to Toulouse as part of our
inquiry into the motorsports and aerospace industries we were
told by Airbus about the difficulties that their customers face
in securing export credit as they have to co-ordinate with three
export credit agencies; Coface in France, Euler Hermes in Germany
and ECGD in the UK. They suggested the creation of a single export
credit agency support by the four governments[209]
that would make the process of getting credit easier for their
customers. This is an interesting suggestion which has some merit,
not least that it would free up ECGD time to focus on its other
customers as currently Airbus represents a significant proportion
of ECGD's workload. The
UK aerospace sector is an example of UK excellence in higher value-added
manufacturing, and we believe that the Airbus proposals for simplifying
export credit arrangements for customers in the aerospace sector
merit consideration. Clearly the current system involving three
different organisations is not ideal. However, we have not yet
had time to examine this proposal in full and we shall return
to it in our Report on the motorsport and aerospace industries.
181 Ev 75 Back
182
Ev 75 Back
183
Q 190 Back
184
Ev 121 Back
185
http://www.ecgd.gov.uk/ Back
186
"Mandelson export pledge" Financial Times, April
6 2009 Back
187
Ev 75 Back
188
Q271 Back
189
Q 271. A letter of credit is trade finance mechanism where a UK
bank guarantees payment to its exporting customer, provided documents
stipulated in the letter of credit issued by the buyer's overseas
bank are presented to it. In this way, the UK exporter is able
to eliminate the risk of non-payment by its buyer. Back
190
HC Dec, 20 October 2009, col 49WS Back
191
Ev 76 Back
192
Ev 86 Back
193
"EGDC extends fixed-rate support for exporters", Department
of Business, Innovation and Skills Press Release, 30 November
2009 Back
194
Ev 76 Back
195
Ev 75 Back
196
Ev 85 Back
197
Ev 85 Back
198
Ev 76 Back
199
Ev 75 Back
200
E v 87-89 Back
201
Ev 86 Back
202
Ev 76 Back
203
Q 190 Back
204
Q 352 Back
205
Q 347 Back
206
Ev 105 Back
207
Ev 113 Back
208
Ev 113 Back
209
Spain also contains Airbus production sites but is not involved
in current export credit arrangements. Back
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