Environment Audit CommitteeWritten evidence submitted by UK Export Finance

Role of UKEF

1. UKEF (formally the Export Credits Guarantee Department) is the United Kingdom’s official Export Credit Agency. Its principal statutory1 purpose is to support exports. It does so mainly by providing insurance to exporters and guarantees to banks (in respect of export credit loans they make available to finance exports) that protect them against the risk of overseas buyers/borrowers not paying UK exporters, or repaying loans to banks, in respect of supplies made. In consequence, there is a risk transfer from the private to the public sector whereby the Exchequer ie the taxpayer, assumes contingent financial liabilities; if and when claims are made against the insurance policies and guarantees that are issued, caused by the buyer/borrower defaulting on payment, the Exchequer must provide cash resources to meet those liabilities.

2. In fulfilling its role, UKEF complements the private market: it does not compete against it and, therefore, acts an insurer, guarantor and lender2 of last resort. As a consequence, it is asked to support exports that the private market will not support. Thus, UKEF responds to demand but does not seek to create it. UKEF can support the export of goods and services from all industrial and service sectors; it does not discriminate the provision of its support between different sectors which would otherwise be contrary to its Act.

UKEF’s Operating Policies

3. UKEF must operate under the consent of HM Treasury which requires it to meet minimum credit risk standards, price to risk, recover its operating costs and achieve particular financial objectives.

4. UKEF also operates under international agreements that regulate the activities of Export Credit Agencies. These include:

(i)the World Trade Organisation (WTO)—the Agreement on Subsidies and Countervailing Measures (ASCM) which prohibits governments from providing export credit guarantees or insurance programmes at premium rates which are inadequate to cover the long term operating costs and losses of their programmes;

(ii)the Organisation for Economic Co-operation and Development (OECD) which has established a gentleman’s agreement3—the OECD Arrangement on Officially Supported Export Credit (the OECD Arrangement)4—to help create a level playing field in the provision of export credits and prevent trade distortions and minimise export subsidies. The OECD Arrangement establishes the most generous export credit terms and conditions that may be supported; it places limitations on the terms and conditions of officially supported export credits eg minimum interest rates, risk fees and maximum loan repayment terms.

(iii)The EU—the EU Medium and Long Term Harmonisation Directive which incorporates the OECD Arrangement and the Short Term Communication which regulates the provision of credit insurance by the governments of Member States for exports supplied to EU and OECD markets on short terms of credit ie up to 2 years.

Financial Performance

5. Over the past decade and longer, UKEF has met all the financial objectives set for it by HM Treasury. It has been a net contributor of funds to the Exchequer, partly because of the low incidence of claims against issued insurance policies and guarantees, over that period. UKEF publicly discloses its financial performance through the publication of its Annual Report and Accounts5.

6. It should be noted that until March 2011 UKEF operated a Fixed Rate Export Finance Scheme (FREF)6. The FREF scheme enabled export credit loans to be made to overseas borrowers at fixed rates of interest (the rate was informed by prevailing OECD rules). However, as such loans were funded by the banks at floating rates of interest, it was necessary to establish interest equalisation arrangements so that when floating rates (plus a margin payable to the banks) exceeded the fixed rates, the banks received a subvention (subsidy) from the Exchequer equal to the difference between the two rates. Conversely, when floating rates (plus a margin payable to the banks) were below the fixed rates, the banks paid the difference to the Exchequer. In practice, floating rates generally exceeded fixed rates, resulting in significant cash outflows from the Exchequer. The level of subvention peaked in the 1980s and declined substantially by the 2000s as the OECD reformed its rules on minimum interest rates, UKEF sought to limit exposure to interest rate movements through purchasing interest rate swaps and by tightening the terms of the FREF scheme.

Environmental, Social and Human Rights (ESHR)

7. UKEF adheres to the OECD Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (OECD Common Approaches). This agreement establishes the basis upon which member Export Credit Agencies should address the potential ESHR impacts of the projects (to which exports are being supplied) they are asked to support. It requires projects to meet international standards, principally those of the World Bank Group ie the World Bank Safeguard Policies and the International Finance Corporation (IFC) Performance Standards. Projects UKEF has supported which fell within the ambit of the OECD Common Approaches and required ESHR review have been benchmarked against the IFC Performance Standards.

Coalition Government Commitment

8. The Coalition Government included in its programme for government7 the following commitment: “we will ensure that UK Trade and Investment and the Export Credits Guarantee Department become champions for British companies that develop and export innovative green technologies round the world, instead of supporting dirty fossil-fuel production”. The Secretary of State for Business, Innovation and Skills explained in a Ministerial Statement in July 2012 how the Government would implement the commitment. The statement is reproduced at Appendix A.

Energy Exports Supported

9. At Appendix B is a list of “energy” exports/projects supported8 by UKEF over the past 5 years. The list includes exports supported under UKEF’s Short-Term products9 and those supported by way of export credit loans guaranteed by UKEF including the ESHR categorisation of those which fell within the ambit of the OECD Common Approaches.

APPENDIX A

WRITTEN MINISTERIAL STATEMENT

Dr Vince Cable, The Secretary of State for Business, Innovation and Skills, Department for Business, Innovation and Skills

UKTI and ECGD Support for Green Technologies

17 July 2012

The 2010 Coalition Programme for Government contained a commitment that:

“We will ensure that UK Trade and Investment and the Export Credits Guarantee Department become champions for British companies that develop and export innovative green technologies round the world, instead of supporting investment in dirty fossil-fuel production.”

UKTI set out in its strategy “Britain Open for Business” how it would promote low carbon exports; this includes a Green Export Campaign that aims to build the UK’s reputation in the green and low carbon sector and to promote this capability overseas. UKTI is embedding this campaign into trade work in all markets where there is a clear opportunity to do so.

The Export Credits Guarantee Department (ECGD), operating as UK Export Finance, has been engaging with companies and trade bodies based in the UK which are involved in the development and export of green technology exports. The purpose has been to ensure companies are aware of the support that is available to them from ECGD if they require credit insurance, export working capital finance, contract bond support or if their buyers require export credit loan finance. Through engagement with overseas project sponsors ECGD has also promoted the availability of export credit finance to help to influence them to purchase supplies from companies based in the UK.

This work by UKTI and ECGD is intended to assist UK exporters of low carbon technologies and support them in taking advantage of international opportunities.

As to support for dirty fossil-fuel energy production, “dirty” should be taken as referring to projects which produce pollution in excess of international environmental standards. The standards which ECGD applies are those set out by the OECD in the OECD Council Recommendation on Common Approaches on Officially Supported Export Credits and Environmental and Social Due Diligence and are usually those of the World Bank Group. ECGD will normally refuse support for exports to projects that do not meet those standards.

The UK will seek to promote the strengthening of the relevant World Bank Group international standards to include limits on emissions of greenhouse gases.

APPENDIX B

Country	Market/Exporter/Investor	Buyer	Project/Goods and Services	Case Impact	Liability
Azerbaijan	Johnson Matthey Plc	Azerbaijan Methanol Company	Catalysts for Methanol Plant		£5,951,324.00
Bangladesh	Withheld1	Withheld	Design of refuel rig		£182,875.00
Brazil	Various	Petrobras	Oil and gas exploration and production facilities	High	£920,720,894.00
China	Clyde Union Holdings Ltd	Chinese Nuclear Energy Industry Corp	Pumps and spares		£5,834,632.00
China	Clyde Union Holdings Ltd	Jiansu Jintung Surfactant Corp	Pumps and spares		£73,200.00
Egypt	Pinnacle Re-Tec Ltd	Ministry of Electricity and Energy	Boiler feed pump cartridges		£122,130.00
Germany	Viper Subsea LLP	Cameron GmbH	Oil & gas distribution connection plates		£95,758.00
Ghana	BES (Europe) Ltd	Ghana Grid Co Ltd	Transmission line and substation refurbishment		£4,714,537.00
India	Rolls-Royce Power Int’l Ltd	GAIL (India) Ltd	Centrifugal compressor		£9,579,960.00
Italy	Clyde Union Holdings Ltd	Saipem Energy Services SpA	Spare parts for pumps		£54,519.00
Italy	Stansted Fluid Power Ltd	Rosetti Marino SpA	Gas boosters		£139,744.00
Korea, Republic of	Sensonics Ltd	Korea Electric Power Corp	Vibration monitoring equipment		£43,630.00
Nigeria	Gentec Energy Plc	Tower Power Utilities Ltd	Gas-capture Power Plant	Medium	£7,992,882.00
Nigeria	Gentec Energy Plc	Coronation Power & Gas Ltd	Gas-capture Power Plant	Medium	£13,541,179.00
Nigeria	Gentec Energy Ltd	Green Fuels Ltd	Compressed natural gas delivery system		£6,002,010.00
Norway	Perry Slingsby Systems Ltd	DOF Subsea AS	Remote Operated Vehicles		£18,892,768.00
Philippines	ABN Amro Bank	N/A	Gas Power Project		£38,266,004.00
Russian Federation	Rolls-Royce Power Eng’g Ltd	Gazprom	Steam Compressor Station	High	£330,255,780.00
Russian Federation	Joy Mining Ltd	Siberian Coal Energy Co	Mining Equipment		£4,808,863.00
Russian Federation	Joy Mining Ltd	Southern Kuzgbass Coal Co OAO	Mining Equipment		£8,742,166.00
Russian Federation	Joy Mining Ltd	Siberian Coal Energy Co	Mining Equipment		£53,627,280.00
Saudi Arabia	Fluor Ltd and other UK exporters	Saudi Kayan Petrochemical Co	Kayan Petrochemical Complex	High	£375,128,077.00
Sierra Leone	Dawnus Sierra Leone Ltd	London Mining Co Ltd	Iron ore mine		£4,614,959.00
Slovakia	Rolls-Royce Power Eng’g Ltd	PPC Energy	Gas turbine	Medium	£15,285,959.00
South Africa	BNP Paribas/Deutsche Bank	N/A	Mozal Aluminium Smelter		£29,908,795.00
Tanzania	Diak Technical Export Ltd	Tanzania Electric Supply Co Ltd	Hydro electric power station		£38,388.00

¹ Withheld for reasons of commercial confidentiality.

3 September 2013