House of Commons - Exporting out of recession - Business, Innovation and Skills Committee

Exporting out of recession - Business, Innovation and Skills Committee Contents

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 banks—Barclays, RBS, HSBC, Lloyds TSB and Standard Chartered—were 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