UK EXPORT FINANCE (EXPORT CREDITS GUARANTEE DEPARTMENT1)
SUBMISSION TO THE ALL PARTY PARLIAMENTARY GROUP INQUIRY INTO UK
EXPORT FINANCE
Executive Summary

UKEF’s role is to complement the private market in its support for UK exporters.

UKEF plays an important, although relatively small, part in supporting the
Government’s export strategy.

UKEF support is available to all sectors, including green exports.

UKEF has recently introduced new products in order to help a wider range of
exporters, including SMEs.

UKEF abides by international agreements that apply to the operations of export
credit agencies including those on anti-bribery, environmental, human rights and
social impacts, and sustainable lending.

UKEF is accountable to Ministers and Parliament and has a duty to act on the
basis of proper financial management.
Role of Export Credit Agencies (ECAs)
1.
The principal role of ECAs is to support national exports. All industrialised
countries and, increasingly, developing countries have a national ECA. The
institutional arrangements and mandates vary between countries. Some ECAs are
wholly operated by governments; others are private companies that reinsure risks with
host governments. Some ECAs have particular mandates to promote exports and
trade to create national wealth and to secure employment; they operate as a tool of
industrial and trade policy. Others fill gaps in the provision of cover by the private
market without displacing it.
UK Export Finance
2.
UK Export Finance (UKEF) is the UK’s ECA. It is a separate Department of
State that reports to the Secretary of State for Business, Innovation and Skills. Its
statutory2 function is to support exports and investments made overseas. It does so by
providing exporters and banks (who provide loans for exports) with insurance and
guarantees against the risks of not being paid. It does not fund UK exports or provide
third parties with the funds with which to do so.
UKEF Policies
3.
Successive governments have required UKEF to operate within a policy
framework which requires it to: (a) complement and not compete with the private
market, and so respond to demand and not seek to create it; (b) operate within
financial objectives so that it is self-financing; (c) price to cover its costs and risks and
1
The formal name of the department remains the Export Credits Guarantee Department; however, in
November 2011 ECGD adopted the trading name of UK Export Finance.
2 As defined in the 1991 Export and Investment Guarantees Act.
1
to meet the financial objectives set for it by HM Treasury; and (d) adhere to
international agreements which affect the operations of ECAs.
International regulation
4.
The WTO (through the Agreement on Subsidies and Countervailing Measures)
requires ECAs not to provide subsidies and to operate on a break even basis over
time. The OECD is the main forum which regulates the activities of ECAs. It does so
with the aim of creating a level playing field in order to encourage competition between
exporters based on the quality and price of their goods and services and not on the
basis of more favourable support from their governments. The principal agreement,
known as the OECD Arrangement, relates to exports credits with a credit period of two
years or more (but excludes agricultural and defence exports). There are also OECD
‘ethical’ agreements which require ECAs to address anti-bribery, environmental, social
and human rights (ESHR) impacts, and sustainable lending to heavily indebted poor
countries, when they support exports through the provision of export credits.
5.
The OECD Revised Council Recommendation on Common Approaches on the
Environment and Officially Supported Export Credits (the OECD Common
Approaches) is the agreement that requires ECAs to take account of ESHR impacts in
their decision-making on project exports that fall within its ambit; such projects are
expected to meet international ESHR standards, usually those of the World Bank
Group. UKEF employs environmental specialists who undertake ESHR due diligence
before UKEF offers support for projects and who monitor the ESHR impacts during the
construction and operational phases of high or medium impact projects after support
has been provided.
6.
UKEF and all other EU ECAs are restricted by the EU Commission through the
so-called ‘Short-Term Communication’ from supporting export credits to all EU
countries (except Greece) and most OECD countries involving a horizon of risk of less
than two years; these are regarded by the Commission as ‘marketable risks’ capable
of being supported by the private insurance market. The restrictions are designed to
prevent government-backed ECAs from competing unfairly with private sector credit
insurers. The Commission is currently reviewing the Communication.
Governance and organisation
7.
The Chief Executive, as the Accounting Officer is the operating head of UKEF.
He is accountable to Ministers and Parliament for the management of UKEF’s
business.
8.
In discharging his responsibilities, the Chief Executive is supported by the
Management Board. The Management Board consists of the Executive Committee,
comprising of the Chief Executive, the Director of the Business Group, the Director of
the Credit Risk Group, the Finance Director, the General Counsel, and the Head of
Resources Division, and non-executive directors, of whom one is the Chair and one a
representative of UK Trade and Investment. The Management Board is responsible
for oversight of UKEF’s activities on behalf of the Secretary of State for Business,
Innovation and Skills and the Minister of State for Trade and Investment.
9.
Audit Committee, which is chaired by and comprising non-executive directors,
provides advice on the responsibility of the Chief Executive as the Accounting Officer
for UKEF’s Accounts and on issues of financial reporting and governance, internal
systems and controls, and associated assurance.
2
10.
The Export Guarantees Advisory Council (EGAC) provides advice upon the
request of the Secretary of State in respect of any matter relating to the exercise of his
functions under UKEF’s Act. In particular, the Secretary of State is required to consult
the Council in exercising his duty under Section 11(2) of the Act in relation to the
provision of potential reinsurance by UKEF. In practice, the EGAC advises the
Secretary of State, through UKEF, on UKEF’s policies relating to:
(i)
environmental, social and human rights impacts;
(ii)
anti-bribery and corruption;
(iii)
sustainable lending; and
(iv) disclosure in relation to its obligations under information legislation.
11.
The Shareholder Executive3 in the Department for Business, Innovation and
Skills provides advice to the Secretary of State on the exercise of ministerial
responsibility for UKEF. While the Shareholder Executive does not have any executive
responsibilities for UKEF’s operations, it monitors and reviews corporate governance
and financial performance on behalf of the Secretary of State through, for example,
shareholder review meetings.
12.
UKEF’s organisational structure is based on functional responsibilities, and the
need to separate business, risk and control functions. An organisation chart is at
Annex A.
Accountability
13.
UKEF publishes an Annual Report and Accounts to Parliament on its activities.
The Accounts are audited by the National Audit Office. UKEF and its Ministers
regularly account to Parliament on its activities, including to Select Committees.
Recent reports include:
(i)
House of Commons Trade and Industry Committee: Implementation of
ECGD's Business Principles - Ninth Report of Session 2004–05;
(ii)
House of Commons Trade and Industry Committee: Export Credits
Guarantee Department's bribery rules - Fifth Report of Session 2005–06;
(iii)
House of Commons Environmental Audit Committee: The Export Credits
Guarantee Department and Sustainable Development - Eleventh Report
of Session 2007–08;
(iv) House of Lords, House of Commons Joint Committee on Human Rights:
Any of our business? Human rights and the UK private sector - First
Report of Session 2009–10;
(v)
House of Commons Business, Innovation and Skills Committee:
Rebalancing the Economy: Trade and Investment - Seventh Report of
Session 2010–12.
14.
The Government’s response to each of these reports is available on the
Parliament website.
3 The Shareholder Executive’s role is to be a proactive, intelligent shareholder, working with government
departments and management teams to help government-owned businesses perform better. It operates out of BIS
and advises Ministers and officials on a wide range of shareholder issues including objectives, governance,
strategy, performance monitoring, board appointments and remuneration.
3
Transparency
15.
The entitlement to confidentiality, either for individuals or entities, is set by the
law of confidence, and the basis for balancing openness and confidentiality by
government and public authorities is established through the Freedom of Information
Act and the Environmental Information Regulations, where relevant. UKEF operates
within these frameworks. Where possible, bearing in mind the need to respect
commercial confidentiality, UKEF publishes details of transactions supported.
Credit risk associated with support for exports and investment overseas
16.
In providing support, UKEF accepts credit risks which create contingent
liabilities for the Exchequer. Credit risk is the risk of claims being made against UKEF
arising from the defaults of obligors or counterparties against which UKEF has
financial exposure, and of it suffering ultimate loss after recoveries.
17.
UKEF is, effectively, a guarantor/insurer of last resort; it accepts risks where
there is no private market provision because the private market lacks risk capacity
and/or is unable to absorb the amount and/or tenor of risks for sovereign and
corporate obligors. As a result, UKEF’s credit risk portfolio is inevitably more skewed,
concentrated and risky than those typically found in the private market. The financial
outcome of its portfolio is, therefore, difficult to predict, taking into account the long run
nature of the risks accepted and the constraints in UKEF’s ability to diversify, transfer
or swap risks.
18.
UKEF’s credit risk policy is established in line with the Consent of HM Treasury,
which is required under UKEF’s statute. The Risk Committee, which is a subcommittee of the Executive Committee, oversees the operation of credit risk policy
and practice. The Credit Risk Director leads the assessment, acceptance and
management of credit and treasury risk exposures.
19.
Since the privatisation of its short-term insurance business in 1991, UKEF has
met its financial objectives with a net positive contribution to the Exchequer from its
premium income on new business after meeting its operating costs and after incurring
claims-related losses net of recoveries on that business. Over this time UKEF has
provided almost £65 billion of support to UK exporters.
Support for exporters
20.
Since 1991, the provision of UKEF support has largely been confined to capital
and semi-capital goods and related services (“project exports”). Because of the high
values involved, buyers normally require finance to purchase such exports. Banks
make export credit loans available to buyers/borrowers, which are repayable over two
to ten years or longer. The loans are used to pay the UK exporter as and when goods
and services are supplied. UKEF provides guarantees to banks that the loans will be
repaid. The AAA-rated nature of the UKEF guarantee enables banks to allocate lower
levels of regulatory capital to such loans.
21.
Following the Trade and Investment White Paper of February 2011, UKEF
widened its remit to support all types of exports and introduced new short-term
products (mentioned in 22(iii) below) and extended the eligibility for its export
insurance policy.
4
Products
22.
UKEF offers the following products to those carrying on business in the UK:
(i)
insurance to exporters against the risk of loss from:
(a)
non-payment or termination of individual export contracts not due to
a performance failure by a UK exporter; and
(b)
the unfair call of an on-demand contract bond issued by a bank with
recourse to the exporter;
(ii)
guarantees to banks that provide bank finance to overseas buyers in order
to purchase supplies from UK exporters;
(iii)
guarantees to banks (on a risk-sharing basis) for the issue of on-demand
contract bonds issued on behalf of exporters, pre- and post-shipment
working capital for specific export contracts, and/or the credit risk
associated with foreign exchange hedging for specific export contracts;
and
(iv) insurance for investors against the political risks of investing overseas.
Contribution to UK exports
23.
UKEF supports less than 1% of UK exports. It is, therefore, not a significant
player in the UK’s export effort. It has a small customer base. But, it does play a
significant role in support of certain industries, for example civil aerospace, through its
support for Airbus, Rolls-Royce and Bombardier in Northern Ireland. UKEF has over
£6.7 billion at risk on aerospace exports (after co-insurance by its French and German
counterparts on Airbus transactions). Not only does UKEF support capital exporters
directly but it also supports, indirectly, the many companies in their supply chains,
including SMEs. Further details are provided in Annex B.
24.
The capacity and appetite of private markets to provide the medium/long-term
financing needed by project exports has been reduced since the 2008-09 economic
downturn and the related regulatory response, and so HMG support through UKEF
has been required to a greater degree than before 2008. Annex C provides a
breakdown by sector of support provided by UKEF over the past 10 years.
Civil Aerospace
25.
UKEF, together with the French and German ECAs, has provided support to
Airbus for a number of years. Demand for this support increased strongly after the
2008-09 economic downturn, as buyers of aircraft were unable to attract sufficient
finance from commercial sources to fulfil contracts with specific delivery dates that
would otherwise have incurred penalties for delay.
Defence exports
26.
UKEF does not offer support for defence exports unless the Export Control
Organisation (ECO) of the Department for Business, Innovation and Skills has issued
an export licence where this is required. The ECO is the body that decides whether a
defence export is permissible, consistent with relevant legislation and Government
policy. In doing so, it takes account of a number of factors, including international
5
relations, security and human rights. A number of government departments are
involved in the ECO’s decision-making; UKEF is not one of those departments.
Low Carbon and Environmental Goods and Services
27.
UKEF support is available to all sectors of the economy. To date there has
been low demand from the Low Carbon and Environmental Goods and Services
(LCEGS) sectors. UKEF has undertaken engagement activity through sector
representative bodies and directly with companies over recent years. Demand for
UKEF support has been low as the industry is focussing on the domestic market, is
still in early stages of development, or is exporting to ‘safe’ markets and is therefore
not focused on entering new markets or on growing its export capability.
Fixed Rate Export Finance (FREF)
28.
UKEF guarantees the repayment of loans, usually provided by commercial
banks. Unlike its counterparts in the USA, Canada, Germany and Japan, it does not
lend directly.
29.
Before March 2010, the UK, like most ECAs, had operated a fixed rate export
loan scheme. This enabled UK exporters to offer medium and long-term finance to
their overseas buyers at officially supported fixed rates of interest.
30.
The UK provided this support in accordance with the OECD Arrangement,
which, among other things, sets the minimum fixed interest rates under which such
support can be provided.
31.
The UK scheme was called Fixed Rate Export Finance (FREF), under which
interest equalisation arrangements were entered into between UKEF and the lending
bank to support the provision of fixed interest rate loans. Following a public
consultation, UKEF closed its FREF scheme for new business on 31 March 2010 and
the portfolio is now in run-off.
Refinancing of FREF loans
32.
In 1986, UKEF sought proposals from banks as to ways in which the cost of
FREF could be reduced. Lloyds Bank subsequently proposed that the Guaranteed
Export Finance Company plc (GEFCO), a UK-domiciled limited liability company,
should be created to refinance UKEF-guaranteed FREF loans.
33.
From 1986 to 2003, GEFCO refinanced in excess of £7 billion of FREF loans.
The funds for the refinancing were initially obtained by GEFCO by the issue of bonds
placed in the capital markets and later by means of loans provided directly to it by
UKEF. This achieved significant cost savings for the Exchequer as bank funding was
replaced with cheaper HMG-supported funding. Such refinancing had no market
distortion or competition implications, as a FREF loan was only refinanced after the
overseas borrower had awarded a contract to the UK exporter and the loan agreement
being supported by UKEF had been signed and drawings made.
Funding for export credits
34.
Some ECAs lend directly, for example Canada or the USA; others have access
to government-funded banks, for example Germany, Norway or Sweden. The UK
export credit system relies on banks being able to fund export credit loans for large
6
value exports that UKEF guarantees. The recent dislocation in the banking sector and
the prospective regulatory regime under Basel III has reduced the availability of bank
funding, while the global economic outlook has increased aversion to risk. This has
resulted in two main challenges for banks: (a) access to liquidity, as banks may face
constraints on access to funding, especially in US dollars (traditionally the main
currency of UKEF-guaranteed export credit loans); and (b) reduced appetite for long
loan maturities, as banks may not be willing to hold export credit loans repayable over
long credit periods on their balance sheets. There is a risk that, while UKEF may be
willing to issue a guarantee, sufficient bank funding is not available. Such a situation
has not occurred to date. If it did so; it would imperil UK project exports.
35.
UKEF has supported the use of the capital markets to fund export credit loans
for commercial aircraft sales. But this source of funding is likely to be difficult for
construction projects which involve long, irregular and uncertain drawdowns. UKEF,
HM Treasury and the banks are exploring options on whether the challenges faced by
banks in providing funding can be mitigated without unacceptable adverse implications
for public sector net debt.
Debts
36.
Debts owed to UKEF by developing countries are the result of claims paid
under guarantees and insurance policies that UKEF has issued, most of which were
over 25 years ago in respect of exports supplied at that time. UKEF has a duty to the
taxpayer, in line with its statutory responsibility for proper financial management and
wider Government debt policy (which is the responsibility of HM Treasury), to recover
such debts. Outstanding debts owed to UKEF as at 31 December 2011 are listed in
Annex D.
37.
In situations where a country has defaulted on its obligations, resulting in claims
being made on UKEF, it is normal for UKEF (and other official creditors) to recover
claims paid through a multilateral debt restructuring handled by the Paris Club. The
Club is an informal network of official creditors whose role is to achieve coordinated
solutions to the payment difficulties experienced by debtor countries. The Paris Club
provides a consistent process of restructuring debts alongside the international
financial institutions when they are concurrently providing financial and economic
support to debtor countries.
38.
A Paris Club debt restructuring only takes place in the context of an IMF
programme agreed with the country concerned. In return for a commitment to
undertake economic reform, the IMF undertakes analysis on the need for access to
finance from itself and other lenders. Should a financing gap still remain over the
programme period, it can be filled by a Paris Club restructuring.
39.
By acting collectively to establish multilateral agreements with debtors who
encounter payment difficulties, the Paris Club overcomes the problems that would
otherwise inhibit the achievement of a sustainable solution to such difficulties if
undertaken individually by creditors on a bilateral basis; such an approach could mean
that some creditors obtain more favourable treatment than others. For the poorest
countries, the Paris Club sometimes agrees a measure of debt forgiveness in line with
the International Monetary Fund’s Heavily Indebted Poor Countries (HIPC) initiative.
Regardless of the amount of forgiveness agreed by the Paris Club, it is the policy of
the UK Government to cancel one hundred per cent of the debts of those countries
that have completed the HIPC process.
7
Annex A – UK Export Finance organisation chart
8
Annex B - Business supported, premium income, claims, recoveries
FY
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Total
New
Business,
£ bn
2.5
3.8
4.1
3.0
4.1
2.6
3.2
3.9
5.5
5.7
3.3
3.5
3.0
2.0
2.2
1.8
1.8
1.5
2.2
2.9
2.3
64.9
Total exports of
goods and
services, £ bn
145
166
183
207
229
237
233
243
270
277
281
291
303
331
376
368
423
396
441
487
N/A
5,888
% of UK exports
of goods and
services
Premium
Income,
£m
1.71
2.29
2.23
1.45
1.77
1.10
1.36
1.63
2.04
2.05
1.18
1.22
0.99
0.60
0.59
0.49
0.43
0.37
0.50
0.60
N/A
Operating
costs,
£m
Claims
(in year),
£m
Recoveries
(in year),
£m
Average FTEs
during the
year
-52.1
-48.9
-31.3
-29.1
-24.4
-21.6
-22.7
-25.6
-23.9
-30.8
-30.4
-26.2
-30.5
-31.4
-28.5
-24.3
-26.3
-23.4
-24.7
-22.5
-19.9
-599
0
0
-3
-29
-25
-32
-17
-45
-214
-254
-223
-226
-205
-89
-79
-61
-59
-44
-48
-30
-6
-1,689
0
0
3
0
19
10
20
11
16
37
28
49
44
60
39
137
82
100
120
77
59
909
742
601
533
476
444
398
383
360
366
380
373
379
366
327
304
245
238
209
202
198
187
83.1
99.6
127.8
66.4
103.8
127.2
121.0
80.9
102.0
109.0
76.9
76.8
102.0
45.3
88.2
55.0
60.6
38.4
57.6
95.7
85.0
1,802
Source: ECGD Annual Report and Accounts, except Balance of Payments which is from the NAO Pink Book.
Capital and semi-capital export supported since privatisation of ECGD’s short-term trade credit insurance services business in 1991.
9
Annex C - UKEF support and breakdown provided by sector over the past 10
years
FY
Civil
aerospace
(£m)
%
Civil (nonaerospace) (£m)
%
Defence
(£m)
Total
(£m)
%
2011-12
1,832
79
486
21
<1
<1
2,318
2010-11
1,813
62
994
34
117
4
2,924
2009-10
1,985
90
199
9
22
1
2,206
2008-09
1,066
73
380
26
15
1
1,460
2007-08
2006-07
549
522
30
29
238
521
13
29
1,043
755
57
42
1,830
1,798
2005-06
1,048
47
669
30
513
23
2,230
2004-05
638
32
599
30
758
38
1,995
2003-04
688
23
1,137
38
1,166
39
2,991
2002-03
530
15
1,236
35
1,766
50
3,532
2001-02
726
22
1,550
47
1,022
31
3,298
10
Annex D
Outstanding Debt
As at 31/12/2011
Paris Club Markets
Market
Antigua and Barbuda
Argentina
Bosnia and Herzegovina
Cote D'Ivoire
Ecuador
Egypt
Grenada
Guinea
Indonesia
Iraq
Kenya
Pakistan
Serbia
Seychelles
Somalia
Sudan
Vietnam
Total
Debt Total (£m)
1.45
45.41
1.34
22.00
30.43
94.60
1.77
4.31
411.65
282.80
16.18
5.63
187.36
1.16
51.81
681.89
6.71
1,846.49
Non Paris Club Markets
Market
Congo, Democratic Republic of
Cuba
Dominica
Iran
Korea, Democratic People's Republic
Myanmar
Zimbabwe
Total
Debt Total (£m)
19.85
191.15
6.76
28.44
5.86
54.45
196.82
503.34
11