Written evidence from UK Export Finance (UEF0033)
B. INTRODUCTION
- UK Export Finance welcomes the opportunity to submit evidence to the International Trade Committee’s inquiry.
UKEF’s Legal Status and Statutory Powers
- UK Export Finance (UKEF), the operating name of the Export Credits Guarantee Department, is the export credit agency (ECA) for the whole of the UK, Isle of Man and the Channel Islands. Established in 1919, it is the world’s oldest ECA. Most developed, and many developing, countries now have an ECA. ECAs can be critical in making exports happen[1]. In 2019/20 UKEF directly supported 339 UK companies, and indirectly benefited thousands of smaller UK businesses in supply chains[2]. Without UKEF many of these UK companies would not have been able to proceed with their exports or supplies and these contracts would have gone to suppliers from other nations. The support that UKEF provides, including through its innovative Supplier Fair model which introduces international buyers to UK suppliers, can also help to generate exporting supply relationships for UK companies which progress beyond the initial transaction. In that way, UKEF can help to promote the ‘exporting habit’ and facilitate ongoing exports including those which it does not support directly.
- UKEF reports to the Secretary of State for International Trade and is strategically and operationally aligned with the Department for International Trade (DIT). UKEF has, however, been a separate government department since its establishment under an Act of Parliament in 1919. UKEF has its own departmental budget and is expected to live within its Spending Review settlement. UKEF’s CEO is the Principal Accounting Officer for UK Export Finance.
- UKEF is an income-generating government department. By charging a risk-based premium for the support it offers, UKEF covers both the its operating costs and calculated losses it may suffer on its portfolio. UKEF is, therefore, a self-financing department and has consistently been a positive net contributor to HM Treasury – exceeding its Financial Objectives under the terms of its HMT Consent to operate at no net cost to taxpayers
- UKEF’s powers to support UK exports and overseas investments derive from the Export and Investment Guarantees Act 1991 (EIGA)[3]. UKEF undertakes its role by providing insurance, guarantees and, in some cases, loans. All of these financial products directly or indirectly support UK exports. UKEF does not “invest” (i.e. by purchasing equity) in companies or projects either in the UK or abroad.
- Under the EIGA, UKEF may only exercise its powers with the consent of HM Treasury (HMT). Under this consent, UKEF has a total capacity to support UK exports of £50 billion, which is made available to support businesses of all sizes and in all sectors, taking into account wider government policy. At present, UKEF’s liabilities under these insurances, guarantees and loans are predominantly contingent, and amount to around £32 billion. Under the EIGA, claims, calls or losses on UKEF’s commercial arrangements are met from funds voted by Parliament or charged on the Consolidated Fund.
- HMT’s consent includes the requirement for UKEF to apply minimum credit risk standards. HMT has also set financial objectives for UKEF including requirements to price its support so as to provide for the risk of future losses and recover its costs. These controls reflect UKEF’s requirement to operate at no net cost to the taxpayer, which it achieves by charging premiums for the support it provides (described in more detail below). This also reflects the requirement in the WTO Agreement on Subsidies and Countervailing Measures that governments don’t provide export credit guarantee or insurance programmes at premium rates which are inadequate to cover the long-term operating costs and losses of the programmes. UKEF also rules out the possibility of any subsidy in products by operating within the EU state aid rules where relevant.
- UKEF operates under international (principally OECD) agreements designed to create a ‘level playing-field’ by setting terms under which national export credit agencies can support their exports. However, not all ECAs are party to these international agreements and competition for UK exporters is increasingly from non-OECD countries whose ECAs are not bound by these agreements.
- In fulfilling its role, UKEF complements the private market but does not compete with it. UKEF fills gaps in the provision of finance and insurance by the private sector. In particular, it becomes involved in transactions where there are risks which the commercial market will not accept without ECA support (for example, risks deriving from the duration of the financing period, commercial market capacity, the jurisdiction in which the relevant project is to be performed and/or credit quality of the recipient of the finance).
- Accordingly, as UKEF’s provision of support is demand driven, the volume and proportion of UKEF’s support for UK exports in specific sectors to some extent reflects prevailing private sector liquidity and risk appetite. Where support is available from a commercial bank or an insurer, UKEF does not seek to displace this.
Fossil fuels
- UKEF’s support is provided where buyers have chosen to procure from the UK supply chain and are seeking financing support, or where UK businesses involved in exporting are seeking working capital, bond support or insurance.
Climate Change
- UKEF takes climate change into account in its decision making in an appropriate manner, and continues to review and develop its approach in this regard. It also continues to develop the breadth of its support for clean growth and climate resilience sectors proactively. The 2020 Budget increased UKEF’s direct lending[4] capacity by providing a new £2 billion lending facility for projects supporting clean growth. UKEF’s marketing and origination activities focus on these areas, to develop the UK’s industrial capacity and increase the proportion of business supported in these sectors.
- For example, in November 2019, UKEF announced £230m in support for a large-scale windfarm off the Taiwanese coast, UKEF’s first major involvement in an offshore wind project, and one that will contribute significantly to Taiwan’s target of generating 20% of its power from renewable sources by 2025. UKEF has since further agreed support of approximately £77.3 million for the Changfang and Xidao windfarm project off the west coast of Taiwan.
- Also in 2019, UKEF guaranteed £47.6 million financing to build two of the largest solar plants in Spain. Together, these developments will generate enough energy to power more than 250,000 homes each year. UKEF recently provided £27m of support to a solar powered water purification project in Ghana and has several other renewables projects at an advanced stage in its business pipeline. In addition, UKEF was ranked third in TXF’s league table of sustainable deals supported by ECAs in 2019.[5]
- Under its commitment in the Green Finance Strategy, UKEF is further strengthening its robust capabilities in risk assessment. It will make climate related financial disclosures in line with the Task Force on Climate-related Financial Disclosures’ recommendations, as soon as practicable following the close of the 2020/21 financial year.
UKEF and environmental, social and human rights (ESHR) compliance
- UKEF is committed to high standards of environmental, social and human rights (ESHR) risk management. It follows the OECD Common Approaches[6] and the Equator Principles, which set frameworks for ECAs and International Financial Institutions in managing such risks. UKEF is in the process of reviewing and updating its approach to environmental, social and human rights.
- Through its dedicated team of professionals, UKEF actively examines ESHR risks and potential impacts of projects it is asked to support and monitors the ESHR performance of projects supported for the duration of its exposure, all in line with its published ESHR policy.
- UKEF also collaborates with other ECAs and financial institutions regarding ESHR matters, to establish a ‘level playing field’ for ESHR risk management across these institutions, meaning the pursuit of consistent and diligent application of the relevant standards and requirements.
- In June 2018, UKEF was appointed to the Steering Committee of the Equator Principles. The Equator Principles, which UKEF adopted in March 2016, are a voluntary environmental and social risk management framework for ESHR due diligence and monitoring to support responsible risk decision-making. They are followed by 110 international financial institutions, including seven ECAs. They represent the benchmark for best practice in ESHR matters for the international finance industry.
Anti-bribery and Corruption
- UKEF is committed to deterring bribery and corruption, and safeguarding taxpayer funds by taking reasonable precautions to avoid loss through becoming involved in export transactions tainted by financial crime (including bribery, sanctions, fraud etc). UKEF rigorously applies the procedures outlined in the OECD Recommendation on Bribery and Officially Supported Export Credits, as well as in UK legislation (including the Bribery Act), conducting anti-bribery due diligence before providing support.
- UKEF is not a law enforcement agency and has no statutory investigatory powers. However, it does have a dedicated compliance function that assesses financial crime risk, and refers cases of suspicious activity to law enforcement agencies and co-operates fully with Serious Fraud Office (SFO) investigations.
Leading with Finance
- UKEF’s ‘Leading with Finance’ (‘LwF’) initiative focusses on international engagement and awareness raising. This global outreach programme, which UKEF pioneered amongst its ECA peers, identifies major projects, via the UK Government’s overseas network together with UKEF’s growing network of regionally based, country heads, with opportunities for significant supply from the UK, and uses UKEF’s attractive finance offer to incentivise overseas buyers/sponsors to procure from UK companies. This initiative makes use of the UK Government overseas network to promote UKEF’s offer.
- The LwF approach is manifest in the supplier fairs that UKEF has sourced, co-ordinated and hosted to-date (matching demand overseas with UK supply) connecting over 1,500 UK SMEs with global opportunities worth hundreds of millions of pounds in sectors as diverse as healthcare, construction and energy. The supplier fairs are a component part of UKEF’s LwF approach and are highly-valued by internationally based clients with little visibility on what can be procured from the UK together with the SME and MSB supply chain communities.
- UKEF has strategically deployed a network of regionally-based country heads to promote its overseas activity. In partnership with DIT and the Foreign and Commonwealth Office[7], 11 regions have been successfully covered to date (Brazil, China, Colombia, Ghana, India, Indonesia, Kenya, Mexico, Turkey, South Africa and the UAE ) with additional country heads to be added during 2020/21, enhancing its marketing and communications offer both overseas and domestically.
UKEF support for developing countries
- As noted in its recent business plan, UKEF provides support and commercial financing, as relevant, in markets and sectors where there are also demonstrable developmental and prosperity benefits. During 2019/20 and the current financial year, UKEF’s Direct Lending Facility has supported projects across Africa, including in Angola, Benin, Cameroon, Cote D’Ivoire, Gabon, Ghana and Zambia, on projects such as agriculture support, hospital construction, and vital infrastructure development. Further details are shown in Annex C.
C. OPERATIONAL
a. HOW COMPREHENSIVE IS UKEF’S PRODUCT OFFERING – AND HOW ATTRACTIVE ARE PARTICULAR PRODUCTS WHEN COMPARED WITH PRIVATE SECTOR OPTIONS?
- UKEF’s mission to ensure that no viable UK export fails from lack of finance or insurance from the private sector, while operating at no net cost to the taxpayer. Through its range of products and support, UKEF helps UK exporters across the three key stages of successful exporting:
- winning contracts (by helping to arrange attractive financing terms for overseas buyers of UK goods and services, making their offering more competitive);
- fulfilling orders (helping UK companies access the working capital they need to fulfil a contract, and giving them the confidence to take on more contracts and increase their turnover); and
- receiving payment (ensuring that they get paid even where the private market is not able to offer insurance)
- To deliver this, UKEF continually reviews and develops its range of financial support products, reacting to the needs of the market. A full list of products is available here: https://www.gov.uk/government/collections/our-products. UKEF also works in close association with a number of banks and financial institutions to develop and operationalise its products.
- The British Exporters Association’s (BExA) external benchmarking shows that UKEF’s offering is comprehensive. This compares favourably with other OECD ECAs. Global Trade Review (GTR), the industry publication, awarded UKEF the title of ”Best ECA” for each of the last 3 years (2018-2020), and [TXF] the same for the last two years.
- That BExA report[8] shows the evolution of UKEF’s product range since its first ‘scorecard’, published in 2009. BExA advised that the score would have been 10, but for ‘the absence of tender-to-contract foreign exchange risk cover (TTC)’ (a product which UKEF’s research has not suggested is required by the market).
- UKEF recently introduced its Export Development Guarantee (EDG), enabling general (i.e. non-contract-specific) working capital support for larger companies, and will shortly augment this with the General Export Facility (GEF), extending similar general working capital support to SMEs. This reflected findings of a recent BBB/UKEF survey that finance enabling SMEs’ general growth is more beneficial for exports than specific export designed financial products. The EDG/GEF are very flexible guarantees, with banks able to make them meet their own needs and products and appealing to exporters of all sizes.
- Recognising the vital role of UK supply chains, which can extend to thousands of SMEs for companies such as Airbus or Rolls-Royce, UKEF launched its Supply Chain Discounting scheme. This combines beneficial extended cash flow for UK corporate exporters with favourable payment terms for their suppliers. UKEF’s buyer finance solutions support large projects worldwide and the expanded range of solutions now includes lower value deals (down to approximately £500K), helping overseas buyers benefit from UKEF support when dealing with UK enterprises of all sizes.
b. HOW SUITABLE IS UKEF’S PROCESS FOR ASSESSING APPLICATIONS FOR SUPPORT?
- UKEF will approve every application it can, but there will be some that are not approved. UKEF must apply eligibility criteria required under: international frameworks (including the OECD); the terms of HM Treasury’s consent; and necessary due diligence referred to above. These requirements can put UKEF and other adherents to OECD Arrangement (and their national exporters) at a competitive disadvantage to non-OECD ECAs. In 2018, China (not governed by OECD rules) gave official export credit support of £39 billion – more than the next three largest ECAs combined, and on terms that varied from minimum OECD pricing rules.
- UKEF’s application process ensures external obligations are met, and appropriately rigorous due diligence procedures are employed to protect public money. At the same time, the process cannot be so onerous as to discourage application or prevent good business being underwritten.
- In order to streamline the process in particular for SMEs, UKEF introduced a partnership model for some products with five high street banks in 2017. In delegating use of its guarantee to the banks, UKEF has removed any incremental process for an SME beyond that required by its bank. This has materially reduced turnaround times, allowing immediate provision of cover where key criteria are met. The new digital portal through which banks inform UKEF of the guarantees it has initiated allows for easy submission and tracking of applications, with almost 60% now processed automatically and immediately.
- As a government department in its own right, underpinned by the EIGA, the requirements of “Managing Public Money” are strictly followed. At the same time, UKEF continues to develop as a customer-centric organisation, being responsive to customers’ needs, and finding ways to do business within the framework of requirements to which it is subject.
c. DO PARTICULAR SECTORS, TYPES OF PROJECTS, OR PROJECTS INVOLVING CERTAIN EXPORT DESTINATIONS RECEIVE MORE UKEF SUPPORT THAN OTHERS?
- UKEF is open to approaches for support across all sectors and locations, subject to government policy. In the last five years, the defence, construction, aero and oil sectors have received the largest amount of UKEF support, while Qatar, Oman, Dubai, Brazil and Iraq are the destinations receiving most support. Please see tables at Annex A for more details of the top 10 sectors by value of support from 2015/16 – 2019/20; and the top 10 countries supported by maximum liability: 2015/6 – 2019/20.
- While UKEF is demand-led, it is not passive about applications. It has employed its origination and communications/marketing functions to promote its offer to particular sectors and markets in order to facilitate export activity in those sectors and markets (e.g. renewable energy).
- This is reflected in the fact that in 2019 UKEF was the third most active ECA globally in sustainable financing. It has collaborated actively with DIT sector teams to promote its renewable offer and brigade the supply chain. In this area, in the 2020 Budget UKEF was given an additional direct lending facility of £2 billion specifically for clean growth projects.
d. ARE UKEF’S PERFORMANCE TARGETS SUITABLE? IS UKEF’S CURRENT FINANCIAL ALLOCATION FROM HM TREASURY AND RISK APPETITE APPROPRIATE TO ALLOW IT TO MEET THESE TARGETS?
- A realistic assessment of UKEF’s performance should consider its ability to cover its operating costs and credit losses while providing that support, as well as the potential demand for its services to complement but not compete with the private sector.
- Demand for UKEF support is partially determined by external factors beyond its own control, including the ability of UK firms to win business overseas; regulatory and economic environment internationally; demand for finance and insurance to support UK exports; and the ability of commercial credit insurers and finance providers to meet the market’s demand for finance and insurance.
- There are further factors over which UKEF has some control, including UK exporters’ awareness of UKEF’s ability to help, and the willingness of our commercial partners such as banks and brokers to use and promote our services. UKEF can also set pricing to comply with its objectives, which is reflected in the premium and/or interest it charges. Key to its performance is whether it offers the appropriate product range to fill particular market gaps. UKEF’s success measures are detailed in its Business Plan (also at Annex B).
- UKEF has formal targets and limits set by HM Treasury. These are, rightly, stringent value-for-money tests designed to ensure UKEF fulfils its mandate of supporting UK exporters while ensuring that credit risk and pricing are undertaken on a basis that UKEF should recover the cost of the risks it assumes, and does not expose the taxpayer to excessive risk.
- UKEF met all the financial metrics set for it by HM Treasury in 2019-20 (as it has consistently done). UKEF aims to at least break even over business cycles. UKEF’s total premium income between 2017-20 was £612million[9]. UKEF exceeded its costs by £274 million for this period. UKEF generally makes a return to HM Treasury but could be subject to large outflows of cash if required to pay claims against its guarantees (although it will subsequently seek to recover any claims made and has a positive track record in doing so).
- There are, however, no formal or fixed financial targets on business levels. This is because UKEF’s role is not to grow its market share by displacing commercial providers of loans and insurance, but, rather, to fill market gaps for viable exports.
- Instead of formal targets UKEF attempts to estimate the size of the market gap and sets internal aspirations accordingly. The aspirational figure of 500 customers to be supported in 2018/19 was an internal estimate based on performance in 2016 but lacked granularity and definition. The corresponding figure of 270 for 2020/21 is the estimate for companies directly using a UKEF product and reflects the fact that, before the onset of COVID-19, feedback from banks and market surveys showed 99% of the needs of UK exporters were being met by the private sector.
- However, that aspiration to support 270 customers is only part of the story. UKEF is equally keen to increase the number of UK companies in the supply chains for the large projects and exporters it supports. For example, Airbus has around 2,400 suppliers across all parts of the UK, including around 1,150 SMEs, all of whom are supported indirectly by UKEF when support is directly given to the purchaser of an Airbus aircraft. This is, therefore, a different customer segment that UKEF aspires to grow. That segmentation data was lacking in 2016.
- An example of how UKEF’s intervention has had wider ranging impact was the use of its Buyer Credit Facility and Direct Lending Facility. A direct loan and bank guarantee to Ghana’s Ministry of Finance helped secure the Kumasi Central Market contract for Contracta Construction UK Ltd. As Fabio Camara, Contracta Construction UK Ltd’s Director explained, ‘Kumasi is a vital trading hub for the Ashanti region and West Africa’s largest market, and this modernisation will have huge benefits for vendors and customers, as well as for our continued international growth and UK supply chain.’
- UKEF’s risk appetite limit, set by HMT, means UKEF must manage credit risk-taking activities such that total losses, as modelled by our portfolio risk management simulation model, will not (with a 99.1% degree of certainty) exceed £5 billion. In other words, at no time should portfolio expected loss, plus provisions against claims already paid, plus portfolio unexpected loss, exceed £5 billion.
- As at 31 March 2020, the projected portfolio loss to the 99.1%ile was c.£2 billion, still comfortably below HMT’s financial objective limit of £5 billion. This shows that UKEF is well within the limits set out by HMT. Furthermore, UKEF considers HM Treasury’s allocation of risk appetite appropriate in the context of its business ambition and forecasts over the next few years.
- UKEF also has limits for the total amount of risk exposure that it can take on. Up to £31.7 billion of the £50 billion limit was consumed in FY2019/20, but business volumes in recent years have grown significantly – in FY2015/16 exposure reached a maximum of £21.4 billion.
e. HOW CAN UKEF CONTINUE TO SUPPORT ECONOMIC RECOVERY FROM THE COVID-19 PANDEMIC?
- One consequence of Covid-19 has been that private financial providers are less likely to extend support to businesses or projects, despite their underlying profitability. UKEF’s role is vital to ensuring that credit continues to flow, allowing UK exporters to continue exporting.
- During the Covid-19 crisis the Government established a temporary £10 billion risk framework (UKEF Temporary Covid-19 Risk Framework) to allow UKEF to continue to provide financial support to UK exporters whose ratings have been impacted by Covid-19. This framework sits alongside UKEF’s existing offer to exporters and has allowed UKEF to provide over £2.3 billion of additional support so far, supporting over 100,000 jobs.
- Further to this, UKEF took advantage of the EU’s relaxation of previous restrictions to expand the scope of its credit insurance product - Export Insurance Policy (EXIP). This now covers transactions with the EU, Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland and the USA, and UKEF’s insurance, which can cover up to 95% of the value of an export contract is now available in more than 180 countries. EXIP cover protects against the risk of non-payment should UK exporters’ customers become insolvent or their government actions make fulfilling the contract impossible. Further intervention in the credit insurance market was not necessary due to the introduction of the Trade Credit Reinsurance scheme by BEIS, where UKEF has been involved in the development and implementation.
- As mentioned above, UKEF has expanded its working capital products, launching the EDG in July 2020, and will shortly add the GEF to its product portfolio, extending similar general working capital support to SMEs. The EDG enables UKEF to provide support a wider range of companies than currently. For example, UKEF has seen several positive enquiries from the automotive sector, a sector that had previously underutilised UKEF support, but for which UKEF has seen requests for support in terms of the development of electric / hybrid vehicles and engine efficiency.
- In addition, UKEF has been involved in listening to the needs of business and working with DIT’s sector teams in developing sectoral “bounce-back plans”. It will continue to proactively work with others across government as these plans expand and develop. These plans cover a wide range of sectors that have been affected by the Covid-19 pandemic including agricultural and food, technology, education, the creative industries, retail and consumer goods, defence and professional financial services.
15
September 2020
