The role of the OECD export credit agencies
| Corporate finance | |
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| Author | |
| David Godfrey | Chief Executive, UK Export Finance (UKEF) |
Introduction
Export credit agencies, commonly known as ECAs, are entities that support broader government trade and investment policies. They provide government-backed loans, refinancing, interest-rate support, guarantees and insurance to support corporations from their home country seeking to export to or invest in overseas countries that are considered too risky – commercially or politically – for conventional corporate financing and insurance. They provide an important counter-cyclical role, which helped to maintain global trade flows during the recent financial crisis.
Although the contribution of ECAs to the aggregate financing of world trade is relatively small, official support plays an increasingly important role in individual transactions, especially for projects in developing countries where the availability of official support is decisive in allowing projects and their related exports to go ahead. In recent years ECAs have been asked to support an increasing number of export contracts within developed countries, in response to lower risk appetite and capacity amongst commercial banks.
ECAs can be government institutions or private companies operating on behalf of governments. UK Export Finance (UKEF) is the world’s oldest ECA. It was formed in 1919 to promote UK exports lost after the First World War. UKEF is the operating name of the Export Credits Guarantee Department (ECGD), a ministerial department led by the UK Secretary of State for Business, Innovation and Skills. It derives its powers from the Export and Investment Guarantees Act 1991 and undertakes its activities in accordance with a specific consent from HM Treasury.
Following the sale of its short-term export credit business to a private sector credit insurer in 1991, UKEF’s focus had been on underwriting long-term (five years and above) loans to support the sale of UK capital goods, such as Airbus aircraft, bridges, machinery and services. But now UKEF support is also increasingly being provided to small UK companies, sometimes for contracts worth just thousands of pounds, as the ECA has enhanced its product range to embrace more short-term, smaller exports.
Shifting markets
ECAs share a dynamic interface with their private sector counterparts as most are mandated to complement rather than compete with the provision of private market export finance and insurance. A regular occurrence is that an ‘ECA market’ considered too risky for the private sector can improve to the stage where private players begin to underwrite a growing volume of export business, reducing the need for ECA support. By contrast, if another country, where the private sector is comfortable in taking various export risks onto its books, suffers an economic downturn, ECAs will typically remain on cover, ready to step in to ensure the continuity of trade and investment. One of the main impacts of the global financial crisis has been to reassert the position of public ECAs as important players in trade finance markets. Stepping in to fill the huge gap left by the deleveraging private sector, most ECAs have reported very substantial increases in new business since the Lehman Brothers’ collapse in October 2008. The new financing paradigm was well illustrated in mid-2013, when UKEF took a major role in a massive US$12.5bn lending package that was secured for the US$19.3bn Sadara Petrochemical Plant in Saudi Arabia. This transaction involved ECAs from six countries providing a huge US$8.5bn in financing and guarantee facilities to the two strong and experienced sponsors, Saudi Aramco and Dow Chemical. Seven or eight years previously, commercial banks would probably have provided a far greater proportion of the lending.
Regulation of ECAs
The hefty financial capacity now offered by many official ECAs means it is vital that the sector is subject to consistent and effective scrutiny and control. This has been pursued over the last 50 years through the Organisation for Economic Co-operation and Development (OECD), which was established in 1961 with the aim of building strong economies in its member countries and to promote free trade and economic development.
Although the OECD Working Party on Export Credits and Credit Guarantees (the Exports Credits Group, or ECG) had been formed in 1963 to facilitate the exchange by members of information on the export credit environment, the most significant development was the realisation in the 1970s that regulation was needed to bring some order to the provision of government support. Until the late 1970s, many governments used their ECAs to offer subsidised financing to their exporters in order to assist them in competing with exporters from other countries. This increasingly fractured scenario led to a “race to the bottom” with ECAs undercutting each other and the private sector credit insurers and financiers creating distortions in competition. But, of course, no OECD country felt able to unilaterally halt the subsidies, fearing that its own exporters would lose out.
Instead, multilateral agreements were negotiated. Building on an export credit “Consensus”, agreed among a number of OECD countries in 1976, international negotiations resulted in the creation in 1978 of the Arrangement on Guidelines for Officially Supported Export Credits. The OECD “Arrangement”, as it is termed, aims to foster a level playing field for official support among its “Participants”, in order to encourage competition among exporters based on quality and price of goods and services exported rather than on the most favourable officially supported financial terms and conditions. To this end, OECD rules are applicable to any official support provided by, or on behalf of, a government for exports of goods and/or services that have a repayment period of two or more years. It is a “gentlemen’s agreement” not a legally binding treaty (although it is indirectly incorporated into EU law), but as the terms and conditions have been agreed through consensus there is a very high level of adherence to the agreement which is kept under regular review by the Participants, Australia, Canada, the European Union, Japan, South Korea, New Zealand, Norway, Switzerland and the United States.
With the Arrangement, there are also a number of Sector Understandings, which provide specific export credit terms for civil aircraft, ships, nuclear power plants, renewable energy, climate change mitigation and adaptation, water projects and rail infrastructure. Together with the World Trade Organization’s (WTO) Agreement on Subsidies and Countervailing Measures, the Arrangement has established a global framework for export credit provision, which stipulates the most generous financial terms and conditions that members may offer when providing officially supported export credits, and places limitations on the provision of tied aid. It also includes procedures for prior notification, consultation, information exchange and review for certain export credit offers as well as tied aid.
Both the ECG and the Participants consult with relevant stakeholders, such as non-governmental organisations (NGOs), business and banking groups, labour unions, and other international organisations, on an annual basis and in one-off special sessions when negotiating revised disciplines.
Ethical concerns
The UK government has stood four-square behind the Arrangement, both in the latter’s earlier drive for a level playing field and with regard to the ECG’s more recent work in ethical areas, including the environment and human rights. Since the late 1990s, ECG members have worked to ensure that their official export credit programmes operate in a manner consistent with wider government policies. A range of sustainability issues have been incorporated into the ECG’s work, although implementation can often prove to be a difficult process.
During the 1990s, NGOs increasingly shone a spotlight on ECAs for financing and guaranteeing exports to large projects with perceived inadequate environmental due diligence or any obligation to adhere to environmental and social standards. In 1999, OECD ministers reacted to this pressure and mandated the ECG to develop environmental and sustainable development standards for export credit support. Negotiations achieved a consensus resulting in a formal OECD Recommendation on Common Approaches on Environment and Officially Supported Export Credits in December 2003, which has been kept under regular review by OECD members to incorporate changes to international standards.
The ECG has also agreed good governance disciplines in the form of measures to deter and detect bribery in international business transactions benefiting from official export credit support. Further, it has agreed principles and guidelines to promote sustainable lending practices in the provision of official export credits to low-income countries in support of the World Bank and International Monetary Fund’s efforts to help countries achieve their Millennium Development Goals without creating future debt problems. In addition, the ECG has agreed to promote awareness of the OECD Guidelines for Multinational Enterprises among appropriate parties involved in applications for officially supported export credits as a tool for responsible business conduct in a global context.
Non-OECD agencies
In the light of the global paradigm shift, with an increasing volume of exports and export credits coming from non-OECD member countries, for the OECD members outreach has become an important goal. Several key non-members, such as Brazil, China, India and South Africa, regularly observe meetings of the ECG and the Participants.
There is an inevitable concern at UKEF that UK exporters face a significant competitive disadvantage when foreign exporters are able to muster support from non-OECD ECAs able to operate in a relatively unfettered mode. Yet UKEF – like its OECD peers – also sees evidence that governments around the world are beginning to desire participation in the global standards adhered to by ECAs within the OECD. A good example is the Aircraft Sector Understanding (ASU), a self-contained annexe to the Arrangement. The ASU is important as Brazil, a non-OECD country and the world’s third largest producer of commercial aircraft, decided to join with OECD members to negotiate export terms for civil aircraft, which resulted in a new ASU in 2007. This followed a period when its national ECA had competed hard against its Canadian counterpart, in an attempt to help Brazilian aerospace conglomerate Embraer win its commercial battle against Bombardier.
As with the Arrangement itself, the ASU is a gentlemen’s agreement, but is no less a product of dialogue, conviction and trust, pieced together in order to pursue mutually beneficial fair play and common interest. There are obviously policy areas where the challenges in achieving communality of approach are substantial. Fossil fuels, for example, bring a plethora of questions around energy sector standards and clean technology use outside the OECD to which there are sometimes no common answers. The requirement for citizens globally to have access to heat and light places limits upon the drive for formal consensus, but that is no excuse not to persevere.
An encouraging trend for UKEF has been our growing dialogue and cooperation with China Exim Bank. The recent signing of renewed cooperation agreements with China’s official export credit support agencies will hopefully develop our relationship and allow us to become more comfortable with each other’s modes of operation.
One very useful forum in this respect is the Berne Union – the International Union of Credit and Investment Insurers – where the non-OECD ECAs are heavily represented, and the information exchanges and discussions are sufficiently informal to ensure that ECAs talk freely. Another helpful forum is the regular Head of G11 ECAs meetings that have commenced. At the last such meeting, held in Rio de Janeiro, the ECA heads from Brazil, China, India and Russia all attended.
More recently the pursuit of a global agreement on export credit terms and conditions has taken a positive step forward with the creation of a new negotiating forum known as the International Working Group (IWG) on export credits. The IWG brings together both OECD and non-OECD countries and discussions are underway to try to reach agreement on export credit terms and conditions for initially two specific sectors: ships and medical equipment.
