The Role of State-Backed
Export Credit in
Export Promotion
World Bank’s Seminar on
POLICIES TO PROMOTE EXPORT GROWTH AND
DIVERSIFICATION
Diana Smallridge, President
International Financial Consulting Ltd.
May 10th, 2006
tel: 1.613.742.7829
100 Queen Street, Suite 1350. Ottawa. Ontario. K1P 1J9. Canada
fax: 1.613.742.7099 www.i-financialconsulting.com info@i-financialconsulting.com
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What is Export Credit?
Export Credit as Public Policy
Instrument
 Export credit is a critical instrument to secure
foreign sales and facilitate outward FDI
 Almost all OECD and most developing countries
have an export credit agency (ECA), or an export
credit facility
 The existence of such facilities arises out of the
inherent risk present in international
transactions, whether trade or investment
 International trade involves additional and
distinct risks as compared to domestic commerce
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What is Export Credit?
 Export credit plays a role of central importance in
international trade.
 Risks of various sorts are inevitably associated with
international trade transactions, arising regardless of
whether or not goods are sold on credit.
 As soon as an exporter or seller begins to produce
goods or services to sell to someone else, there is
the risk that:
 they may be unable to ship the goods or deliver the services
or, even if they can do so,
 they may not be paid.
ECAs play an important role in
trade and investment flows
The basic role of an ECA is to support
and encourage exports and outward
investment by providing financial
support, through insuring or
guaranteeing international trade
and investment transactions and, in
some cases, providing loans or
finance directly.
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ECAs are significant providers of
capital to developing markets
 Between 1982 and 2001, members of the
International Credit and investment Insurance
Association (the Berne Union) supported exports
of US$7.3 Trillion and FDI of US$139 Billion.
 In 2004, members insured or financed US$775
Billion.
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Timeline of ECA Development
1910s
UK
Germany
1960s
Hong Kong
1920s
Netherlands
Norway
1970s
Australia
Denmark
Korea
Taiwan
Portugal
Spain
Sri Lanka
1930s
US
Mexico
Switzerland
Sweden
1980s
Egypt
Jamaica
Turkey
China
Indonesia
1940s
Canada
Austria
France
Italy
1990s
Nigeria
Colombia
Romania
Thailand
Philippines
Malaysia
Hungary
Bosnia
Slovenia
Slovakia
Bulgaria
Czech Republic
Poland
Singapore
Brazil
1950s
Japan
Finland
Belgium
India
Israel
South Africa
2000s
New Zealand
Pakistan
Africa
Yugoslavia
Macedonia
Vietnam
Bangladesh
There is no such thing as a
typical ECA
While the mandates and roles of all ECAs
are broadly similar, there is no such thing
as a “typical” ECA.
 ECA business models, status, objectives,
institutional arrangements, and government
involvement vary widely from country to
country.
 These differences reflect unique national
circumstances and histories.
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Nor is there a single, perfect
model for an ECA
 Variety of forms, structures, products, delivery
mechanisms exist
 Each must be tailored to individual national or
regional circumstances
 Some ECAs underwrite business on their own account
as well as the Government’s.
 Some insure only Short-term business, some only
Medium/Long-term business, and some do both.
 Some only insure or issue guarantees, some only lend,
and some do both.
 Some are called insurers and some Export-Import
banks.
 Some only insure exports, while another institution
insures investments.
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Main ECA Business Models
Model
Description
Countries
Private
Company
acting as an
Agent
• Government has an exclusive arrangement with
a private company that issues policies as agent
for the Government.
France
Netherlands
Germany
Government
department/
facility
• Separate department of the government
operating under the authority of a government
minister, secretary etc.
UK
Switzerland
State-owned
Agency
• Autonomous institution owned by the
government (or governments if regional)
Canada, US
Turkey, Japan
Virtual ECA
• Government is only involved in the risk taking
and decision-making. No underwriting expertise
or “bricks and mortar” institution exists
New Zealand
Government
Provider of
Reinsurance
• Government will not underwrite ST business
directly, but will provide reinsurance to insurers
UK
Australia*
ECA facilities vary according to
national and regional circumstances
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Facilities offered may vary to reflect the
difference in the market gaps
Developing
Country
•Import finance
•Domestic investment finance
•Refinancing
•Working capital finance (tier 2)
•Working capital guarantees
•Finance to overseas buyers
•Credit insurance
Developed
Country
•Working capital guarantees
•Refinancing
•Outward investment finance
•Finance to overseas buyers
•Credit insurance
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Challenges of ECAs
Most governments see the role of ECAs as
filling market gaps and encouraging privatesector participation in export credit.
 Gov’ts recognize the need to
regularly evolve and adapt
their export credit systems.
 Gov’ts make a conscious
effort to strike the right
balance between promoting
exports and promoting
private-sector participation.
Market gaps may arise for two
main reasons: (i) privatesector reluctance/inability to
accept certain risks (e.g., host
country political/market risks,
long-term fixed-rate lending,
etc.); and/or (ii) private-sector
reaction to market cycles or
economic crises.
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Need to identify market gaps
Market gaps must be under constant review to ensure
that the ECA is not creating disincentives to private
sector participation.
 Need for regular monitoring of systems, products
and market changes
 Responsibility to adapt to market changes
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Need to identify market gaps
In defining market gaps, three points must be
taken into consideration:



It is dangerous to assume that a gap, which
may have existed for many years, still exists; or
A gap may exist because of the actions (or
unintentional consequences of actions) of the
development bank itself which crowd out the
private sources; or
Just because a gap exists, it is not necessarily a
good reason for the ECA to fill it.
Export Credit Products take four
main forms
 short term credit insurance
 medium and long-term credit insurance and
finance
 investment insurance
 Working capital guarantees
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Short-Term Credit Insurance
 Term: up to 2 years, but most under 180 days
 Coverage: Pre- and post-shipment risks; political
and commercial risks
 Also other products, eg L/Cs, forfaiting, factoring
 Trends: dominance of three international private
insurance groups
Medium- and Long-Term Credit
Insurance and Finance
 Term:over 2 years
 Coverage: Political and commercial risks
 Other products, eg bank lending, capital markets,
forfaiting
 Trends: decline in traditional sovereign risk
business and rise of project finance structures
 Subject to the OECD Arrangement
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Investment Insurance
 Traditional coverage: Political risks
(expropriation, convertibility/transfer, war/civil
unrest)
 Trends: applied more to loans than equity
leading to arbitraging between medium/longterm credit insurance and investment insurance
 Some interest in expanding beyond three
traditional political risks
 Offered by private sector insurers and MIGA
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Working Capital
 Strong demand, especially from SMEs
 Not a core area for ECA support
 However, export credit insurance policy can be
used as security for bank working capital loan
The relevance of International
Guidelines on export credit
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 Berne Union:
 goods sold mainly on short terms
 OECD Consensus Arrangement:
 capital goods and services on terms of two years and more
 establishes basic terms and conditions for Participants
 WTO Agreement on Subsidy and Countervailing
Measures:
 Prohibited export subsidy where government provides
contribution of which the benefit is greater than that
available from private market
 Implications: OECD Participants and non-Participants alike
can claim safe haven of OECD Arrangement; support on
market terms subject to full rigors of WTO SCM
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The Role of MDBs
 The rationale for MDBs involvement in export
finance is based on the clear linkage between
international trade/ investment and economic
growth
 MDBs involvement usually part of a larger trade
development or facilitation project
 Typically there are three basic approaches:
 Technical assistance either to establish or further develop
a facility or institution
 Direct support, eg for on-lending of working capital to
exporters
 Counter-guarantees or confirmation of L/Cs issued by
local banks for purchase of imports for value-added
exports
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What Do Exporters Need?
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Getting Export Ready
Getting
Export
Ready
Opportunity
Identification
Tender /
Proposal
Contract
Award
Production
Payment
Period
“I am assessing my export
potential. I need to learn about
Export Finance and find sources
for assistance”
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Opportunity Identification
Getting
Export
Ready
Opportunity
Identification
Tender /
Proposal
Contract
Award
Production
Payment
Period
“I am ready to pursue export
opportunities. I need quality,
accessible information; I am
willing to invest in acquiring this
information, but I lack the
financial resources”
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Tender / Proposal
Getting
Export
Ready
Opportunity
Identification
Tender /
Proposal
Contract
Award
Production
Payment
Period
“I am bidding on a contract or
negotiating a deal. I need to
offer a competitive package to
participate in the tender
process”
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Contract Award
Getting
Export
Ready
Opportunity
Identification
Tender /
Proposal
Contract
Award
Production
Payment
Period
“I have been awarded a contract,
and am now negotiating its
content. What contract terms
and arrangements related to
financing should I be aware of?”
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Production
Getting
Export
Ready
Opportunity
Identification
Tender /
Proposal
Contract
Award
Production
Payment
Period
“I need to expand my operations or
acquire new assets to fulfill the
contract. I have a working
capital issue” (i.e. I need money
to pay for raw materials and/or
labour)
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Payment Period
Getting
Export
Ready
Opportunity
Identification
Tender /
Proposal
Contract
Award
Production
Payment
Period
“I need to meet my accounts
payable obligations, repay credit
lines, loans, etc., but have yet to
get paid for the product/service
that I have invoiced for”
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Conclusions
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Good reasons for having an ECA
 Provide risk protection to exporters / investors
 Give access to bank finance for exporters
 Provide information, expertise and training
 Develop international cooperation, eg multisourcing agreements
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Bad reasons for having an ECA
 Encourage exports to bad credit risks
 Provide subsidized working capital
 Provide subsidized medium/long term credit
 Guarantee local exporters and banks, rather than
to take foreign risks