EXF0024

 

Written evidence from Stephen Dodgson

 

INTRODUCTION

 

  1. This Memorandum is intended to assist the EAC’s inquiry into UKEF and its support for fossil fuel exports. It is in two parts: part 1 is background information on UKEF to provide the Committee with knowledge of its operations and part 2 suggests lines of inquiry the Committee may wish to pursue to inform its analysis, findings and recommendations for action.

 

BACKGROUND

 

Status

 

  1. UKEF is the official Export Credit Agency of the United Kingdom.

 

  1. UKEF, formally the ‘Export Credits Guarantee Department’, is a separate Department of State established by statute - Section 13 (1) of the Export and Investment Guarantees Act 1991.

 

  1. UKEF reports to the Secretary of State for International Trade (presently, the Rt. Hon. Dr Liam Fox MP) and the Minister for Trade and Export Promotion (presently, Baroness Fairhead).

 

Function

 

  1. UKEF’s principal function is to support exports[1]. It does so by assuming financial risks, mainly associated with the provision of insurance and support for loans both of which facilitate exports. Ultimately, these financial risks are borne by the taxpayer if defaults and losses occur.

 

  1. UKEF has been tasked by successive Governments to complement the private market, not compete with it. Therefore, UKEF is, in essence, an insurer/guarantor/lender of last resort. 

 

  1. UKEF operates under the consent of HM Treasury – Section 4 (2) of the Export and Investment Guarantees Act 1991. A financial framework agreement between UKEF and HM Treasury establishes the risk parameters under which UKEF may take risk decisions.

 

  1. UKEF is expected to conduct its business at no net cost to the taxpayer. There are no subsidies in its operations[2].

 

  1. UKEF’s ability to underwrite these financial risks generates exports which would not otherwise happen. Therefore, its role assists the UK’s export performance. In practice, UKEF supports 1%-2% of total UK exports of goods and services per annum.

 

Regulation

 

  1. UKEF’s support for exports is regulated by the Organisation for Economic Co-operation and Development. The OECD Arrangement on Officially Supported Export Credits (known as the OECD Arrangement) is a multilateral agreement which places limitations on the terms and conditions of officially supported export credit loans e.g. minimum interest rates, risk fees, maximum repayment terms, etc. In practice, it provides for a level playing field whereby competition between countries is based on the price and quality of the exported goods and services and not the financial terms offered by a member Export Credit Agency.

 

  1. For some export sectors, particular financial disciplines are set out in Sector Understandings annexed to the OECD Arrangement. These include nuclear power plants, renewable energy, climate change mitigation and adaption and coal fired electricity generation projects. These understandings recognise that certain sectors have specific construction and financing requirements and are aimed at ensuring coherence with international commitments and domestic policies of member countries.

 

  1. UKEF must apply other OECD agreements related to ethical matters, being: (i) the OECD Recommendation on Common Approaches on Officially Supported Export Credits and Environment and Social Due Diligence; (ii) the OECD Recommendation on Bribery and Officially Supported Export Credits and (iii) the OECD Recommendation on Sustainable Lending Practices and Officially Supported Export Credits.

 

Exports supported

 

  1. UKEF can support all types of goods and services; it does not discriminate against any particular industrial/manufacturing/service sector.

 

  1. UKEF supports exports in response to requests from exporters when it is unavailable from commercial sources. UKEF must determine whether (i) the financial risks are acceptable i.e. a loan has a good chance of being repaid, and (ii) the export/project meets other requirements, for example, OECD ethical agreements where applicable. If so, UKEF will normally provide support; if not, it is entitled to refuse support.

 

Principal forms of support

 

  1. UKEF’s main area of business, as measured by aggregate value, is support for exports of capital/semi-capital goods and services, usually of high value (millions of pounds).

 

  1. UKEF supports such exports/projects by way of its (i) Buyer/Supplier Credit Guarantees products and (ii) Direct Lending product. In essence, under each of these products, loans are made available to overseas buyers/project sponsors, who may be sovereign, public or privately owned entities. They use the loan money to purchase supplies of goods and services from UK based companies. The loan money is provided by banks (in the case of Guarantee products) and the Exchequer (in the case of its Direct Lending product). Borrowers pay commercial rates of interest and also a risk premium to UKEF for the benefit of the loan. Typically, the loans are repayable over 5, 10 and sometimes 15 years or longer in line with the rules of the OECD Arrangement and specific Sector Understandings, depending on the size of the export/project, industrial sector, etc.

 

Environmental risk

 

  1. UKEF must have regard to the OECD Recommendation on Common Approaches on Officially supported Export Credits and Environment and Social Due Diligence (known as ‘the OECD Common Approaches’) where it is applicable to the particular request for support[3]. It sets out how member Export Credit Agencies should carry out environmental and social due diligence to identify, analyse, and address potential environmental and social impacts and risks of projects. It requires projects to be classified ‘A’ (High), ‘B’ (Medium), ‘C’ (low), potential environmental risk which informs the due diligence which should be carried out. Projects must be constructed and operated in line with relevant international environmental standards, mainly those of the International Finance Corporation of the World Bank Group. The OECD Common Approaches also sets out arrangements for monitoring a project’s compliance with international standards over the life of the loan being supported by a member Export Credit Agency.

 

Disclosure

 

  1. UKEF publishes an Annual Report and Accounts which details its financial performance. This includes information about exports/projects supported during the year and the environmental risk classification as defined by the OECD Common Approaches. It also includes a report of the work of UKEF’s environmental advisers.

 

Export Guarantees Advisory Council (EGAC)

 

  1. The EGAC is a pubic body established under Section 13 (2) of the Export and Investment Guarantees Act 1991. It is classified by the Cabinet Office as an ‘Expert Committee’. The EGAC’s statutory function is to give advice to the Secretary of State at his request on the operations of UKEF. It is independent of UKEF.

 

  1. In practice, the EGAC advises the Secretary of State on the policies that UKEF applies when doing business, particularly those established by the OECD ethical agreements, including potential environmental and human rights impacts of the export transactions and projects UKEF has supported. The EGAC does not have executive powers and, therefore, is not involved in decision-taking on business that UKEF supports but reviews decisions made and how the OECD ethical agreements were applied. It reviews projects supported by UKEF.

 

 

LINES OF INQUIRY

 

  1. The EAC Inquiry is investigating “the scale and impact of UKEF’s financing of fossil fuels in low and middle-income countries” in the context of the UK’s Clean Growth Strategy. The Inquiry is looking at “alternatives to fossil fuel investment and subsidies, and at the UK Government’s plan to respond to a growing consumption of energy in middle income nations.” The Committee will need to explore a number of issues as set out below (in no particular order).

 

Definition of fossil fuel

 

  1. What constitutes a fossil fuel export/project? Is it related to the extraction of fossil fuel e.g. on/off-shore oil. Does it include the generation of fossil fuel e.g. coal-fired power stations? Is it concerned with the consumption of fossil fuel e.g. civil aircraft? Is it confined to goods and services that directly contribute to the extraction, generation and/or consumption of fossil fuels e.g. supply of coal mining equipment? Should it include goods and services which may indirectly facilitate the extraction, generation and consumption of fossil fuels e.g. supply of office equipment to an overseas oil company?

 

Alternatives

 

  1. The inquiry is also looking at alternatives to fossil fuel investment and subsidies. Although UKEF helps to finance, rather than invest, in fossil fuel projects, and responds to demand i.e. is reactive, should UKEF proactively reach out to suppliers of alternatives e.g. renewable technologies, to make known its role, the products and services to assist growth in the export of such alternatives. How does UKEF engage with the renewables industry?  Is it meeting the needs of renewable exporters? Can and should it do more to promote renewables exports? Has it got the right products to meet the needs of renewables exporters?

 

Joined-up Government

 

  1. How does UKEF take into account Government policy on fossil fuels? How does the Government’s Clean Growth Strategy fit with the provision of UKEF support for fossil fuel exports? To what extent does UKEF and other Departments responsible for the delivery of the Clean Growth Strategy collaborate to ensure coherence and consistency between its environmental aims and objectives and export credit trade policy? What mechanisms exists for UKEF to consult other Departments when it is asked to support fossil fuel exports/projects?

 

Environmental risk management

 

  1. How in practice does UKEF consider and address environmental risks of exports/projects it is ask to support? Can it sufficiently demonstrate the due diligence it undertakes for particular exports/projects to satisfy itself that environmental risks are managed in accordance with applicable international environmental standards? What are the standards? Are the international standards appropriate, comprehensive and sufficiently robust to remove and/or acceptably mitigate environment risks? How solid are the arrangements for UKEF to ensure project sponsors follow, apply and implement the international standards during the construction and operation of projects? What levers does UKEF have if projects fail to meet the standards?

 

Export Guarantees Advisory Council

 

  1. Is the oversight of the Export Guarantees Advisory Council sufficient? How does it satisfy itself and Ministers that UKEF is properly applying the OECD Common Approaches (and the Equator Principles) to the exports/projects it is asked to support? Is the role of the Council effective in monitoring and, as necessary, challenging, UKEF’s approach and adherence to environmental risk management?

 

Regulation

 

  1. Is the current regulatory regime i.e. the OECD Agreements, particularly the OECD Common Approaches, adequate to address the environmental impacts of fossil fuel projects and mitigate potential egregious impacts? To what extent does UKEF participate in, and seek to influence, efforts to ensure the content and coverage of the international standards are adequate and up-to-date? Is there a need to enhance and strengthen the environmental standards which apply to fossil fuel projects? If so, how best could this be achieved? Should UKEF take the lead? Is a multilateral approach appropriate? Should the UK take a unilateral stance? How can UKEF and the OECD ensure international standards are applied by those Export Credit Agencies that do not belong to the OECD and, therefore, are not subject to the OECD Common Approaches?

 

Restricting support for fossil fuels

 

  1. Would it be appropriate for UKEF to restrict support for fossil fuel exports/projects (assuming they can be clearly defined)? Would it be feasible to do so? Are there legal impediments? How would it work? What would be the impact on UK businesses and employment? Would it encourage more exports of renewable technologies? Would such an approach help to halt fossil fuel projects?

 

January 2019

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[1] UKEF has power to support UK investments made overseas by way of political risk insurance but demand for its Overseas Investment Insurance product is moribund.

[2] The WTO Agreement on Subsidies and Countervailing Measures is also relevant

[3] UKEF also applies the Equator Principles, a risk management framework adopted by financial institutions for determining, assessing and managing environmental and social risks in projects.