Export Credit Agencies - General Introduction and Regulation

Introduction

Export credit agencies and investment insurance agencies, commonly known as ECAs, are public or parastatal institutions that provide government-subsidised loans, guarantees and risk insurance to corporations seeking to do business in countries where the investment climate is judged to be too risky to do conventional corporate financing. The policy rationale behind ECAs is to contribute to the economic well-being of the home country by boosting the domestic companies’ ability to win major export and construction contracts abroad. In exchange for a premium payment, the exporter will be reimbursed with public money in the event of default. Through a mechanism called “sovereign counter guarantee” the exporter’s government will then seek to recover the loss from the government of the host country.

Most industrialised countries and a growing number of countries with emerging market economies possess an ECA. In 2004, ECAs worldwide supported US$ 788 billion in trade and investment – some ten percent of the world’s total export trade (The Berne Union Yearbook 2006). During the 1990s, financing directly facilitated by ECAs averaged US$ 80 to100 billion per annum, approximately twice the world’s total overseas development assistance at the time. In 2004, ECA of provision of medium and long-term insurance stood at US$ 76 billion – a 16 per cent increase from the US$ 66 billion in 2003 (The Berne Union Yearbook 2006). ECAs are a very large and important source of finance to the corporate world.

According to the Berne Union, the international union of credit and investment insurers, the trend since 2004 has been to move back towards ECAs funding large scale mining, water, infrastructure, oil and gas projects. Investment in these had reduced since the financial crises in emerging markets that began in 1997. Without ECAs many of these large scale projects in countries in the South would not have gone ahead.

In addition, once companies have ECA backing, they are usually able to leverage even more funding. ECA involvement tends to allow much greater access to sums from the private sector and often functions as the ‘door opener’ to the international capital market. So while the overall contribution by one or more ECAs to a given project may be small in comparison to other financiers, the project may not have been possible without this crucial public component in the financing consortium. In other words, the importance of ECA funding goes beyond the amount of capital they can bring in.

In addition to direct support for projects, it has been argued that export credit guarantees can actually serve to undermine normal due diligence regimes by banks investing in risky projects. This is because ECA-backing ensures that any potential loss will be recovered by the investor through “sovereign debt arrangements”, reducing the pressure to judge the risk of default accurately. Poor lending by ECAs can therefore lead to an increase in Southern countries’ debts. Up to one third of the debt owed by Southern countries has been linked to ECA financing (OECD: External Debt Statistics 1998-2002).

ECAs perform different tasks, and work under diverse conditions; they can be private companies acting on behalf of the government or government departments; they differ in their legal and financial status; and to some degree have varying mandates and missions. ECAs often compete with each other to win contracts for their domestic exporters and are thus unlikely to push for unilateral improvements which would put them at a tactical disadvantage. Because of this, improvements need to be implemented at a regional or international level.

(Text from Judith Neyer, Fern and Jade Saunders, Jade Saunders, Associate Fellow – Energy, Environment and Development Programme Chatham House, out of “Exporting destruction – Export credits, illegal logging and deforestation” Fern, May 2008)

The business portfolio of ECAs usually reflects the main industries of their host countries. Within Export Development Canada, the Canadian ECA for example, extractive industries represent the single most important sector, reflecting the strong mining industry in Canada. Similar, the US Export-Import Bank supports the domestic oil companies and EulerHermes massive support for machinery and industrial supplies reflects the strong German engineering industry.


Regulation within the OECD

Despite being public bodies, ECAs have been slow to develop clear guidelines that show how they are accountable or will deal with environmental or social risk, even in sensitive areas such as forestry. Internationally, ECAs are not subject to any legally enforceable social or environmental standards. Even where specific recommendations have been made, for instance by the World Commissions on Dams, application of them has been ad hoc at best.

Within the Organisation for Economic Co-operation and Development (OECD), ECAs are governed through the Arrangement on Officially Supported Export Credits, establishing a legal and financial framework for export credit provision. Non-fiscal issues (e.g. environmental matters, measures to deter bribery and the question of competition from non-OECD ECAs) are discussed in the OECD’s Export Credit Group (ECG), providing a forum in which to negotiate non-binding common guiding principles, resolve difficulties and improve co-operation between national competitors.

In the last decade most OECD-based ECAs have adopted some policies regarding the environmental and social impacts of their business. As a consequence, Environmental Impact Assessments (EIA) for projects with potentially significant adverse effects are now required, or ‘typically required’ for all OECD ECAs. In response to civil society and G8 pressure, the ECG undertook to develop its first environmental and social guidelines for ECAs in 1999: the OECD Recommendation on Common Approaches on the Environment and Officially Supported Export Credits (hereafter ‘Common Approaches’) was finally adopted on a voluntary basis by all OECD ECAs in late 2003. The Common Approaches aim to level the international playing field by identifying and evaluating the environmental and social impacts of ECA-backed projects and government projects supported by export credit guarantees or loans of greater than 10 million SDRs (US$ 15,3 million or Euro 11,2 million). The latest revision includes the following recommendations:

• Projects should in all cases, comply with the environmental standards of the host country. When the relevant international standards against which the project has been judged are more stringent, these standards should be applied.
• Projects should be screened and classified according to their potential environmental impacts. For category A projects (with the potential to have significant adverse environmental impacts) ECAs should require an Environmental Impact Assessment and make it publicly available thirty calendar days before final commitment to grant project support.
• The relevant international standards to screen projects against are the ten safeguard policies developed by the World Bank or, where appropriate, the International Finance Corporation (IFC) Performance Standards, standards of Regional Development Banks, or of the European Community.

However, it should be noted that the Common Approaches are a non-binding recommendation. Moreover, the recommendation contains a clause (Article 13) that allows member ECAs, “should they so decide” to opt out of applying any standards at all, provided they report and justify this to the ECG on a semi-annual basis but without any requirement that such cases be shared publicly. This derogation clause severely limits the effectiveness of the Common Approaches.

Annex I of the Common Approaches identifies an indicative list of ‘Category A’ projects (those requiring an EIA) that includes:

• Large-scale logging;
• Industrial plants for the production of pulp, paper and board from timber or similar fibrous materials with a production capacity exceeding 200 air-dried metric tonnes per day;
• Large-scale primary agriculture/silviculture involving intensification or conversion of natural habitats;
• Projects which are planned to be carried out in sensitive locations or are likely to have a perceptible impact on such locations, even if the project category does not appear in the above list. Such sensitive locations include National Parks and other protected areas identified by national or international law, and other sensitive locations of international, national or regional importance, such as wetlands, forests with high biodiversity value, areas of archaeological or cultural significance, and areas of importance for indigenous peoples or other vulnerable groups.

However, the ECG’s annual report from 2004 details three pulp and paper mills as category B investments (compared with five classified as Category A). No EIA is required for Category B projects and no further information on the projects (e.g. production capacity) has been made public. A public verification of the correct and coherent classification of such projects is virtually impossible and the incorrect classification of some projects as category B by some ECAs (to avoid more comprehensive due diligence) has already been a point of contention among ECAs in the OECD.

Short-term credit options represent another potential gap in due diligence. They are rarely covered by the application of the Common Approaches, as they are invariably identified as Category C (likely to have minimal or no adverse environmental impacts). As category C projects, they are not subject to voluntary disclosure recommendations, and as such, information about them is limited. Unsubstantiated anecdotal evidence from International Crisis Group representatives identifies Belgium ECA, Ducroire, as providing this sort of flexible financial support for timber exporters operating out of the Democratic Republic of Congo during its civil war despite the dubious legality of trading in what is known as “conflict timber”.

In June 2007 the OECD issued a revised Recommendation on Common Approaches. The number of World Bank group standards that ECAs are required to benchmark projects against has increased (from four to ten) and minor changes to both prior and after the fact reporting requirements were added to the 2003 version of the Recommendation. However, the retention of the derogation clause (Article 13, see above), allowing members to opt out of applying any standards at all, with no effective peer review and no public justification, renders the Recommendation ineffective. It appears that ECAs still have little ambition to address the environmental and social impacts of their business through international best practice.

(Text from Judith Neyer, Fern and Jade Saunders, Jade Saunders, Associate Fellow – Energy, Environment and Development Programme Chatham House, out of “Exporting destruction – Export credits, illegal logging and deforestation” Fern, May 2008)

• The Common Approaches can be found on the OECD website. 
• A network of NGOs watchdogs the work of export credit agencies: ECA Watch

“Regulation” within the Berne Union

More ECAs than those in the OECD are part of the Berne Union, among them a couple of emerging economy ECAs. The Berne Union includes as well private entities providing export credits and investment insurance (without a public mandate). For the members of the Berne Union “Guiding Principles” apply. These 10 principles are quite vague: On environment for example, principle six says: “We are sensitive about environmental issues and take such issues into account in the conduct of our business.” Corruption is tackled in principle seven: We support international efforts to combat corruption and money laundering.” And transparency in principle nine: “We are committed to further transparency amongst members and in the reporting of our overall business activities, reflective of international practices and respectful of the confidentiality of third party information.”