Supplementary memorandum submitted by
Department for Business, Innovation And Skills (Export Credits
Guarantee Department)
1. This memorandum is to assist the Committee's
inquiry into Exporting out of recession.
INTRODUCTION
2. The Government recognises the role that ECGD
can play in helping companies take up opportunities overseas.
The downturn has highlighted the need for effective export support,
and ECGD has been responsive to the increased demands being placed
on it. The Government is committed to improving the effectiveness
of ECGD. ECGD will continue to comply with its statutory and international
obligations and the financial disciplines which are designed to
protect the interests of the taxpayer.
3. What follows outlines the steps taken to
address the concerns of exporters. A background note on the role,
remit and policies of ECGD is attached.
RECENT DEVELOPMENTS
4. The economic downturn has led to a significant
increase in demand for ECGD's support, largely due to:
(i) the scarcity and the increased cost of credit
internationally; and
(ii) a deterioration in the global risk environment.
5. As well as receiving more applications for
support in emerging markets, ECGD is being requested to support
exports to developed markets (EC and certain OECD countries),
which had not normally required government-backed export credits
because financing could be obtained from the private markets.
6. As a result, ECGD expects to see a substantial
increase in the exports it supports by the end of this financial
year (March 2010). Current expectations suggest that volumes of
new business will increase by 70% over the previous financial
year. The increase in demand is across a number of sectors, led
by civil aerospace and including oil/gas and construction.
7. ECGD has responded by recruiting specialist
skills to augment its staff resources.
TRADE CREDIT
AND SHORT-TERM
CREDIT INSURANCE
8. Before ECGD privatised its Insurance Services
Group operations, it had been effectively a monopoly provider
of short-term trade credit insurance. Following the sale of the
business to NCM (now Atradius), new companies, such as Coface
and Euler Hermes, also entered the UK credit insurance market.
This brought more competition, leading to more products and lower
premiums for UK exporters than previously available from ECGD.
ECGD has continued to offer short-term credit insurance for capital
and semi-capital contracts and related services to buyers in emerging
markets.
9. The economic downturn has seen a global reduction
in the availability of private trade credit insurance, principally
because the deterioration in the risk environment led to a sharp
increase in claims and related underwriting losses. This exposed
the under-pricing of risk and lowering of risk standards by credit
insurers during the previous benign global risk environment.
10. As a result, UK exporters saw the withdrawal
and/or reduction of credit limits on their buyers and an increase
in premiums. Some exporters were left uninsured, which 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. At the same time, exporters have also suffered
from the slowdown in global demand which reduced export opportunities.
11. The European Union and North America are
the dominant destinations for UK exports. ECGD's ability to provide
support by way of short-term trade credit insurance is limited
because the European Commission's Short Term Communication 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.
12. In the face of the problems that existed
in the short-term trade credit insurance market, the European
Commission agreed to a temporary waiver of the Short Term Communication.
This allows governments to seek approval from the Commission for
interventions that address the shortfall in risk capacity, subject
to meeting certain tests that demonstrate market failure. This
waiver is due to close at the end of 2010. A number of Member
States have succeeded in obtaining such approval.
13. 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.
14. The Government is accordingly not minded
to provide an intervention to support short-term export trade
credit insurance, either directly to exporters (which would not
be possible for ECGD as it does not have the staff or systems
to provide such support without substantial investment and delay
within the limited period of waiver), or indirectly through private
trade credit insurers by way of reinsurance. The Government will
continue to monitor the market closely.
Bond support
15. ECGD provides insurance for exporters against
the unfair calling of performance bonds issued by banks on their
behalf in favour of buyers. 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.
Letter of Credit Guarantee Scheme
16. Following a public consultation, ECGD has
recently launched a Letter of Credit Guarantee Scheme, under which
it will support exporters by providing partial guarantees to banks
against the non-payment of letters of credit which they confirm.
This product is targeted at exports to developing countries. It
will close on 31 March 2011.
CONCLUSION
17. The Government recognises the importance
of credit insurance and export credit guarantees to help finance
exports and to protect exporters and banks against the risks of
non-payment. The Government believes that it is the role of the
private sector to support exports sold on short terms of credit.
The disturbance to the banking and credit insurance markets since
the economic downturn is now beginning to abate, in part due to
the measures that the Government has taken acting in tandem with
the other leading economies. While the Government will continue
to monitor the situation, it expects the private markets to come
up with new risk products to support trade. The Government accordingly
does not envisage ECGD intervening further in this area under
current circumstances.
BACKGROUND
1. ECGD is the UK's export credit agency (ECA).
ECGD's primary role is to support exports and investments made
overseas by issuing guarantees and insurance contracts.
Regulatory framework
2. ECGD's operations are bound by:
(i) statute (the Export and Investment Guarantees
Act 1991, as amended by the Industry and Exports (Financial Support)
Act 2009) and its standing consent from HM Treasury;
(ii) international agreements that emanate from:
WTO (the Agreement on Subsidies and Countervailing Measures);
OECD (principally the Arrangement on Officially Supported Export
Credits); and EU (the Short Term Communication);
(iii) government policy that ECGD should:
(a) complement, not compete with the private
market;
(b) cooperate at no net cost to the taxpayer;
(c) price to risk and to comply with its
financial objectives;
(d) seek to achieve a level playing field
internationally among government-backed ECAs; and
(e) take account of the Government's wider
policies in the exercise of its primary purpose.
3. As a public body, ECGD must also comply with
the Freedom of Information Act and the Environmental Information
Regulations. Private companies (exporters, banks, buyers, project
sponsors) who seek ECGD support must be aware that information
provided to ECGD may be disclosable publicly in accordance with
terms of the FOI legislation, even if that party considers it
to be sensitive or commercially confidential.
4. ECGD aims to respond to the needs of exporters.
But ECGD must be satisfied that that the transactions it supports
are acceptable in terms of:
(i) credit risk—transactions must be properly
assessed to ensure they meet ECGD's minimum risk standards and
financial objectives accordingly;
(ii) environmental and social impacts—transactions
must meet international standards as required by the OECD Common
Approaches on the Environment and Officially Supported Export
Credits;
(iii) bribery and corruption—that no corruption
is involved in the transaction, as far as ECGD can reasonably
ascertain, in compliance with the OECD Recommendation on Bribery
and Officially Export Credits; and
(iv) sustainable lending—where the export
is to a poor (HIPC or IDA-only)[11]
country that the borrowing represents appropriate spending and
the related debt service is sustainable, in accordance with the
OECD Principles and Guidelines to Promote Sustainable Lending
Practices in the Provision of Official Export Credits to Low-Income
Countries
5. These requirements may constrain ECGD's ability
to be flexible in the provision of its support for exports. Moreover,
although it enters into private law contracts with exporters and
banks, as a public body ECGD's decision-making must comply with
its public law obligations, and can be challenged accordingly.
Exports supported
6. Since 1991, following the privatisation of
ECGD's Insurance Services Group which was responsible for providing
short term trade credit insurance in respect of exports such as
raw materials, consumer durables, components or light manufactures,
sold on short terms of credit (usually up to 180 days), ECGD's
role has been principally to support exports of capital and semi-capital
goods and services, normally, but not exclusively, sold with medium/long-term
credit (2-15 years). Such exports have included commercial aircraft,
construction projects, defence, and hydrocarbon and telecommunications
equipment and services.
7. Over the past decade there has been a gradual
reduction in the amount of exports supported by ECGD, as a result
of the changes in the pattern of capital goods manufactured in
the UK, and because of the benign risk conditions that enabled
the banks to finance exports without the need for support from
ECGD. In 2008-09, ECGD supported £1.46 billion of new business
(under one half of 1% of all UK exports).
8. ECGD has supported about 20 capital goods
exporters, although many hundreds of companies have benefited
from ECGD support indirectly through industrial supply chains.
Since the onset of the economic downturn, ECGD has received inquiries
and applications for support from a wider range of exporters.
ECGD's total exposure is £12.8 billion (October 2009).
9. A consequence of the decline in business
was a reduction in ECGD's premium income, which covers its risk
and the cost of its operations. As a result, ECGD had to cut its
cost base, including staff numbers from an average of 366 in 2003-04
to 208 in 2008-09.
18 November 2008
11 HIPC-Highly Indebted Poor Countries. IDA-International
Development Agency of the World Bank Group: very poor countries
can only access concessional loans from the IDA. Back
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