The impact of UK overseas aid on environmental protection and climate change adaptation and mitigation

Written evidence submitted by Export Credits Guarantee Department

Introduction

1. The Export Credits Guarantee Department (ECGD) is the UK’s export credit agency (ECA). The primary function of ECAs, which exist in all developed countries, is to assist their countries’ exports.

2. ECGD is a Ministerial Department. With staff headcount of 214, it is the smallest such department. It reports to the Secretary of State for Business, Innovation and Skills (BIS).

3. ECGD provides:

(i) insurance to UK exporters against non-payment risks on overseas contracts, and guarantees to banks financing those contracts against default risk; and

(ii) insurance against political risks to UK firms investing overseas.

4. The largest part of ECGD’s activities is the issue of guarantees for long-term loans to support the sale of capital goods and services by UK exporters. Since the privatisation of its short-term trade credit insurance business in 1991, the main scope of its operations is to support a very small number (relative to all UK exports) of high value contracts.

5. ECGD support enables UK exporters to compete internationally against overseas companies supported by their national ECAs; it thereby preserves UK competitiveness and jobs. ECGD has supported more than £59 billion of exports since 1991, excluding multiplier effects.

6. ECGD operates within a policy framework intended to prevent market distortion and under a financial framework intended to protect the interests of taxpayers, which includes the objective to cover all its costs (claims paid and administration) from its income (premium charged to those receiving its support and recoveries of claims).

7. In 2009-10, the volume of support provided by ECGD for new business was £2.21 billion, a 50 per cent increase over the previous year. This reflected the dislocation to market sources of finance and insurance caused by the 2008-09 economic downturn. For 2010-11, ECGD expects this growth in support to continue.

8. ECGD complies with the relevant international Organisation for Economic Co-operation and Development (OECD) environmental, social and human rights standards. In accordance with OECD requirements, ECGD gives public notice in advance of its decisions on support for a project where its potential environmental and social impacts are material.

2011 Priorities

9. In addition to continuing to meet high levels of demand for support, ECGD’s proposed priorities for 2011 are to:

(i) Deliver on the new short term products for exporters to be set out in the Trade White Paper;

(ii) develop a closer working relationship with UKTI in order to provide more coordinated and effective support to UK exporters; and

(iii) press within the OECD for strengthening its agreement (the Common Approaches) that regulates the assessment and acceptability for ECAs of environmental and social impacts for all business that is not civil aircraft or in the defence sector;.

Annexes

1. Background

2. Key Policy Issues

3. ECGD’s Statement of Mission and Principles

ANNEX 1: BACKGROUND

Legal Powers

1. ECGD conducts its functions on behalf of the Secretary of State under powers derived from the Export and Investment Guarantees Act, 1991, as amended by the Industry and Exports (Financial Support) Act 2009, (the 1991 Act).

Treasury Consent

2. ECGD’s powers under its 1991 Act may be exercised only with the consent of HMT. This is documented in a formal standing consent that sets requirements for ECGD’s financial objectives, risk and pricing policies, product range and reporting.

Statement of Mission and Principles

3. ECGD’s Statement of Mission and Principles (at Annex 3) was issued in April 2010 (and came into effect on 1 May 2010) following a Public Consultation. It replaced a previous Mission Statement and Statement of Business Principles, which had been in place since 2000.

Corporate Governance

Accounting Officer and Management Board

4. The Chief Executive of ECGD is the Accounting Officer and is responsible to Ministers and Parliament for the management of ECGD.

5. In discharging his responsibilities, the Chief Executive is advised and supported by a Management Board, led by a non-executive Chair (Guy Beringer, since January 2010, formerly Senior Partner of Allen & Overy). Its members comprise five independent non-executive directors (all from the private sector) and five executive directors (of whom four have private sector backgrounds).

Export Guarantees Advisory Council

6. The 1991 Act established the Export Guarantees Advisory Council (EGAC) to provide advice at the request of the Secretary of State on any matter relating to the exercise of his/her functions under the Act.

7. EGAC focuses its attention on ECGD’s decision-making relating to its Mission and Principles. It only reviews transactions after support decisions have been taken. EGAC members are appointed by Ministers and are unpaid. They are selected for their expertise in corporate social responsibility issues, sustainable development and trade. Its Chair is Andrew Wiseman (Head of Environmental Law, Stephenson Harwood).

Shareholder Executive

8. The Shareholder Executive (ShEx) in BIS provides advice to Ministers on the exercise of their responsibilities for ECGD. ShEx has no executive powers over ECGD’s operations: it monitors and reviews corporate governance and financial performance on behalf of ECGD’s Ministers through ‘shareholder’ review meetings, board/management effectiveness reviews and strategy reviews.

International Regulation of ECAs

9. ECGD conforms to EU and OECD regulations on export credits, including the OECD Arrangement on Export Credits. This is the primary source for regulation of the terms on which ECAs can provide support (including minimum premium rates and maximum repayment periods) and is incorporated into the EU acquis.

10. The OECD Arrangement is underpinned by the WTO Agreement on Subsidies and Countervailing Measures. This requires all ECAs to operate their schemes on a break-even basis over time (although this test is not defined), and not to confer a ‘benefit’. These obligations are reflected in ECGD’s policy remit to complement the market. The UK has traditionally taken the WTO requirements more seriously than other governments.

11. The OECD also sets policies on anti-bribery and corruption procedures, environmental and social impacts, and debt sustainability. These standards are not part of EU law but, as long as it is ECGD’s stated policy to adopt these agreements, adherence to them is a legally enforceable obligation.

ECGD’s Business Activities

12. The largest part of ECGD's activities is the issuing of guarantees for long-term loans to support the sale of capital goods and services by UK exporters. The amount of any guarantee is set in relation to ECGD’s risk appetite for a particular market/obligor and its assessment of the risk of the transaction.

Role in relation to the Private Market

13. Nearly all other advanced countries have a government-supported ECA. UK exporters would complain of being at a competitive disadvantage if the UK did not also have an ECA able to offer insurance and guarantees at premium rates that broadly matched those of other ECAs, or to provide capacity that is not available from private sector sources.

14. Even if the private sector were able to offer at acceptable prices the sort of products provided by government-supported ECAs, the impact of the credit cycle could mean the availability of such products would be unreliable, thereby potentially disrupting world trade at times of economic distress. ECAs therefore provide stability at times of financial market stress, as occurred during the recent economic downturn.

Policy Objectives

15. ECGD has a number of non-statutory policy objectives set by Ministers. These are that ECGD should:

(i) Complement, not compete with, the private market. ECGD accordingly responds to demand for its services; it does not seek to create demand in competition with private market providers;

(ii) Operate at no net cost to the taxpayer. Over most of its history, ECGD has operated with a surplus;

(iii) Price to risk. In order to meet its financial objectives, ECGD charges a premium on each transaction to cover its estimate of the risk (‘expected loss’), and to make appropriate provisions for its administrative costs and for its exposure to possible ‘unexpected losses’ on its credit risk portfolio as a whole. (Few other ECAs recognise the concept of ‘unexpected losses’, let alone price for it);

(iv) Pursue a level playing field internationally among ECAs. Through the UK’s membership of the EU and the OECD, ECGD works to promote the setting and uniform application of sound policies and practices, and the removal of trade-distorting practices by other ECAs. In doing so, ECGD’s aim is that UK-based exporters should compete on the same basis as those from other countries, as far as is consistent with the policies set for it by Ministers; and

(v) Take into account the Government’s wider policies on anti-bribery and corruption, debt sustainability, and environmental and social standards in the exercise of its primary purpose.

ANNEX 2: KEY POLICY ISSUES

Public Finances

1. ECGD expects to contribute to the Government’s growth agenda through the delivery of a number of possible new products to support UK exporters. Announcement of new initiatives is expected through the forthcoming Trade White paper.

ECGD’s Role

What role does ECGD play in supporting exporters?

2. ECGD supports roughly 0.5 per cent of total UK exports of goods and services. Of all G7 ECAs, ECGD provides the lowest amount of support in relative terms (share of national exports) and in absolute terms (volume of support provided and number of exporters supported). However, through its guarantee and insurance policies ECGD helps to support jobs in primary exporters (e.g. Airbus) and in companies, including SMEs, within primary exporter supply chains.

Why is that role so small?

3. ECGD’s limited role reflects:

(i) its remit: to complement and not compete with the market;

(ii) its financial objectives and its aim to avoid a net loss for the taxpayer;

(iii) its exit from the provision of whole turnover short-term export trade credit insurance following the 1991 privatisation of those activities;

(iv) the nature of the demand put to ECGD for support, which reflects UK manufacturing industry’s focus on low risk countries, with around 75 per cent of UK exports going to OECD countries; and

(v) its role in supporting capital goods and services, and the absence in the UK of strong export capacity in such sectors as large civil ships, nuclear power, fossil fuel power generation, or high-speed rail.

4. The French and German ECAs support 1.5 per cent of national exports. Even if ECGD provided as much support as its major EU counterparts, it would continue to be directly relevant to a small minority of UK exporters.

What action did ECGD take to respond to the 2008-09 economic downturn?

5. ECGD:

(i) secured an amendment to its 1991 Act to remove an unintended technical obstacle, in order to permit, for instance, support for exports already supplied under a contract that had only partially been completed (an increasingly common feature of ECA business);

(ii) reduced its premium rates, after agreement with HMT, to reduce its risk coverage margin;

(iii) introduced a short-term Letter of Credit Guarantee Scheme, to run until 31 March 2011, following a Public Consultation. The scheme will be reviewed shortly for the purposes of a decision on whether to extend it for a further period;

(iv) supported increased volumes of business, 50 per cent higher at £2.21 billion in 2009-10. The total number of guarantees and policies issued rose to 198 compared to 136 in 2008-09;

(v) acting jointly with the French and German ECAs, supported 33 per cent of Airbus sales (whereas historically the three ECAs covered about 17 per cent of Airbus sales). The value of guarantees represented by Airbus deliveries grew to 90 per cent of business underwritten and 83 per cent of number of facilities in 2009-10;

(vi) undertook a Public Consultation to revise its Business Principles, resulting in a new Statement of Mission and Principles, which established international competitiveness as a key policy objective and brought ECGD into line with other government departments’ policies on Public Consultations;

(vii) undertook a Medium-Term Review of options for the provision of export credit support by the UK with recommendations made to Ministers;

(viii) increased its cooperation with UKTI;

(ix) made it easier to use ECGD’s guarantee to support a bond issue to investors rather than a bank loan, widening the pool of ECGD-guaranteed financing available to UK exporters.

6. In mid-2010 ECGD undertook a review of the scope for contracting out ECGD functions to the private sector in the context of the Public Bodies Bill. Ministers decided that ECGD should retain its current status. One of the factors Ministers considered was the need for continued high standards of factual and analytical work on credit risk and ethical issues on which ECGD bases its decisions.

What is ECGD doing to support more exporters?

7. ECGD is seeking to raise awareness among key market players, both overseas and in the UK, of the benefits of its support, and to identify specific opportunities where that support might help UK exporters to win acceptable business, working alongside UKTI.

8. Before the financial crisis, requests for ECGD to support civil and defence business outside the aircraft sector were on a declining trend. However the position has now substantially changed, and the range of UK exports (in terms of markets, exporter types and business sectors) supported by ECGD in 2010-11 has grown markedly. So far this financial year ECGD has supported a number of large civil deals including:

(i) Rolls Royce’s US$400 million contract with Gazprom to supply a compressor station at Portovaya for the Nordstream pipeline project;

(ii) three Carillion and Mivan (Northern Ireland) construction contracts totalling around US$500 million in aggregate for Emaar in Dubai and for Al Futtaim in Egypt (in respect of the Cairo Festival City project);

(iii) Astrium Ltd’s supply of €91 million of goods and services to its French parent which has the main (€532 million) contract for the supply of a satellite to SES in Luxembourg; and

(iv) the continuing supply by the Football Association, under a three-year, US$330 million contract, of Premier League broadcasting rights to the UAE.

9. This enhanced level of demand seems set to continue. The current business pipeline features a number of significant deals that could be supported by 31 March 2011 or in 2011-12. Sectors include steel, construction, electricity transmission, water treatment and energy, for markets such as Brazil, Uruguay, Egypt and Nigeria. The largest case is a prospective US$1 billion line of credit to Petrobras in Brazil to finance UK supplies for offshore drilling and exploration activity (now undergoing enhanced environmental due diligence in view of the implications of BP’s Macondo oil field spill in the Gulf of Mexico).

10. ECGD is also expecting to be involved to a greater degree in major project financings (previously stalled by the financial crisis), where its support has been, or is likely to be, requested. Such cases can involve substantial values of UK supplies (typically front-end engineering and design) but require substantial due diligence.

11. In the course of 2010-11 ECGD has also supported a number of smaller contracts across a range of sectors and markets, including for SMEs who had not previously come to it for support.

12. In late-2009, ECGD launched a Letter of Credit Guarantee Scheme. Its aim was to boost the availability of short-term export finance for UK exporters. Under the scheme ECGD shares with UK banks the credit risk associated with confirming letters of credit from certain emerging markets, so that these banks will have greater capacity to support exporters to these countries.

Should ECGD do more to support SMEs?

13. As a matter of government policy since 1991, ECGD’s focus has been capital and semi-capital goods exports. Through the provision of that support, however, ECGD indirectly supports many SMEs in supply chains.

14. Support for exporters of consumer durables and light manufactures, normally sold on cash and short terms of credit, is provided by private credit insurers. State-backed credit insurance is normally banned by EU State Aid rules for exports to the EU and rich OECD markets for short-term business. Although the European Commission waived this ban due to the economic downturn, and has since extended its waiver on the ban for a further year to the end of 2011, those EU ECAs that introduced schemes either withdrew them or modified them so as to be available for fewer markets, as from 31 December 2010.

15. From time to time ECGD has directly supported small exporters. It operates an export finance scheme through Sovereign Star Trade Finance, which offers streamlined ECGD support for small and medium-sized export transactions.

What is ECGD doing to improve the effectiveness of its support for exporters?

16. ECGD is working with UKTI to develop a more coordinated service to exporters. This includes improving the understanding in each organisation of the services that the other organisation can provide to exporters, and making customers of each organisation aware of the services the other can provide. ECGD’s customers will also benefit from the improved access that ECGD will have to UKTI’s regional and international network.

What concerns and criticisms do exporters express about ECGD compared to other ECAs?

17. Exporters have complained that:

(i) ECGD has a narrower product range than other ECAs. In effect, exporters argue that HMG policy has resulted in ECGD playing too narrow a role, and that HMG’s policy of avoiding competition with the private market has impaired ECGD’s ability to complement the market. In particular, exporters have criticised the absence of:

(a) whole-turnover short-term export credit insurance support, given constraints in private market capacity which first arose in the autumn of 2008 (and, unlike other ECAs, that ECGD did not make use of temporary flexibilities introduced by the European Commission); and

(b) support against the fair calling of bonds issued in favour of overseas buyers by banks in support of exporters’ performance obligations. ECGD expects to launch a product to address this need shortly;

(ii) ECGD’s risk standards can be higher than those of other ECAs, so that it may impose stricter terms than other ECAs or, occasionally, refuse to support a transaction which another ECA would support;

(iii) ECGD is subject to public law and to Freedom of Information legislation, like any other government department but unlike many other ECAs. Some exporters have complained that ECGD is less easy to work with than other ECAs, with slower internal processes and a greater concern about legal risks (for example, statutory compliance and exposure to judicial review); and

(iv) exporters were disadvantaged by the requirement to comply with ECGD’s unilateral standards, where they have exceeded the requirements set out in the relevant international (OECD) agreements, especially on environmental and social impact assessments. The response to the Public Consultation on ECGD’s Business Principles set out a policy presumption that ECGD will always apply international standards in future and not unilaterally place new and additional requirements on UK exporters. In the negotiations in the OECD in 2011 on the Common Approaches (which sets the relevant standards for ECAs) ECGD will press for the removal of ambiguities in the text, which can be exploited by other ECAs to justify lower standards.

Climate Change and Sustainable Development

How much support does ECGD provide for fossil fuel power stations?

18. While ECGD regularly provides support for UK process contractors in the oil and gas process and transportation sectors, it only does so occasionally for gas-fired power stations. ECGD has not supported a coal-fired power plant since 2002.

Could ECGD do more to support exports in the renewable energy sector?

19. Experience to date is that demand from the sector for ECGD support is low. ECGD has made firms aware of its products through bilateral contacts and attendance at relevant trade seminars and conferences. ECGD has also maintained contact with the various trades associations such as RenewableUK (previously the British Wind Energy Association), the British Hydropower Association and the Renewable Energy Association.

20. In the tidal and wave energy sector, most of the companies have yet to reach commercial stage on their developments, with the exception of Pelamis Wave Power and Marine Current Turbines, who have both advised ECGD that they have no current need for its support.

21. ECGD has worked closely with DECC to put forward the UK’s position in OECD negotiations on enhanced export credit terms for renewable energy and climate change mitigation technologies. The UK has taken the position that there should be minimum requirements to justify a coal plant’s entitlement to preferential finance. In particular, the UK has wished to see carbon capture and storage (CCS) readiness as a minimum requirement (which makes it much cheaper to retrofit a plant with CCS when it becomes commercially viable).

ANNEX 3

27 January 2011