BRITISH EXPORTERS ASSOCIATION

BExA Broadway House, Tothill Street, London SW1H 9NQ Telephone: 020 7222 5419 Fax: 020 7799 2468

UK Export Finance

Supporting the National Export Challenge

October 2014

BExA’s 5th

Annual Benchmarking, incorporating ECGD 2013-14 results

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Contents

I. Foreword ........................................................................................ 3

II. UKEF benchmarking ...................................................................... 4

I. Glossary ....................................................................................... 11

II. UKEF 2013 product review ........................................................... 12

III. ECAs product ranges8 .................................................................. 13

IV. ECA business volume trends since 2008 ...................................... 14

V. Sources ........................................................................................ 15

VI. International framework for ECAs ................................................. 15

BExA would like to thank all contributors with special thanks, once again, to Jon Coleman (BAE Systems), Susan Ross (Aon) and Guillaume Simonnet (Euler Hermes).

BExA’s 2013 key recommendations Out-turn

1. Accessibility Simplify application process. Remove unnecessary duplications. Reference UK Bribery Law to shorten anti-bribery and corruption declaration.

Very limited progress

2. SME support and awareness

Extend further UKEF’s regional adviser network. Improve engagement with high-street banks at branch level. Provision of concise website information. Apply for Small Company Exception allowing cover for EU trade.

Good progress on engagement with exporters and other players. No application made for the Small Company Exception

3. Competitiveness medium term

Deliver Direct Lending, put in place the Export Refinance Facility and re-instate Fixed Rate Export Finance’

Revised DLF parameters and re-introduction of CIRR alongside launch of ERF: excellent. No change re FREF for SCF and BC

4. Quality Improve turnaround times. At minimum match private market cover. Clear and concise definitions in policies.

Very limited progress

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I. Foreword

The Government’s continued focus on exports for job creation and growth is admirable. UK Export Finance (UKEF)’s strengthened product range, together with the increased number of regional export finance advisers, represents tangible action in support of the Chancellor’s ambition to provide UK exporters with the best export finance in Europe

1. The British Exporters Association (BExA) fully endorses

these enhancements, all of which it has championed over the last few years. The quantitative data and qualitative observations in this 5

th BExA Benchmarking of UKEF form the basis

of our Manifesto for Exporters ‘Winning the Global Race’:

BExA 2014 Recommended Actions

1. UKEF Accessibility & Cutting Red Tape

Simplify application process

Remove duplication

Permit non-material changes to contract scope

Strengthen and shorten declarations by referring to UK Bribery Law

Create a transactional website

2. UKEF Support SMEs

Allocate a portion of Direct Lending to the working capital facility

Provide contract bond issuance

Offer Tender to Contract foreign exchange cover

Become less risk averse on small value exports

Enable the Business Bank to provide clearing facilities.

3. UKEF Medium Term Re-instate Fixed Rate Export Finance

4. UKEF Cooperation Provide seed capacity to credit insurance syndications.

5. UKEF Resourcing Develop a medium to long term staffing and succession plan

Outsource credit risk analysis.

6. UKTI Charging and Information

Charge for marketing support when exports are won

Release basic marketing information free of charge

Consider replicating France’s Market Survey Insurance.

7. UKTI Trade Shows & Delegations

No time limit to Trade Show Access programme eligibility

Share in advance details of invitees to receptions and meetings.

The passage into law of the Small Business Enterprise and Employment Act (SBEEA) in 2015 will significantly widen the Secretary of State’s powers and enable UKEF to support in the broadest terms ‘the exporter’ rather than ‘the export contract’. This fundamental change to UKEF’s enabling legislation should allow UKEF to deliver the following enhanced support for SMEs and MSBs:

1. Credit insurance and finance guarantees for the supply chains of large exporters

2. De-linking of UKEF support from individual export contracts

3. Facilities for export contracting involving overseas subsidiaries and joint venture partners

4. Insurance of exports of intellectual property rights and other intangibles

5. Credit insurance and guarantees for both direct and indirect supply to overseas projects

BExA believes the implementation of our recommended ‘Actions’, including through the passage of the SBEEA, will result in more competitive and focused support from UKEF and UKTI, and is vital if the goals of the National Export Challenge are to be achieved by 2020. Jon Coleman Chairman

1 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293759/37630_Budget_2014_Web_Accessible.pdf

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II. UKEF benchmarking

A. UKEF product mix analysis

UKEF has increased its product range over the last 5 years and is now in the top tier of OECD ECAs.

Table 1: UKEF’s product range evolution since BExA’s 1st benchmarking paper

B. How did UKEF do in the last 12 months?

UKEF’s insured volumes remain low in comparison with other ECAs. Whereas 2012-13 included one large defence deal, 2013-14 insured turnover has fallen back to 2011-12 levels.

Graph 1: Comparison of selected ECAs’ business volumes since 2008

The recovery in banking appetite has resulted in a reduction in the need for support for the aerospace sector, but this has been offset by an increase in commercial and industrial business.

C. Portfolio sector analysis

There is an underlying trend growth trend in insurance of non-aerospace exports.

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Graph 2: UKEF’s business volume related to aerospace sector vs other sectors

D. Relative impact (value for money)

UKEF’s ratio of operating costs to exports supported has fallen back to 2009 levels. The peak of £211 in 2012 – when there was a single large defence deal - should be discounted. BExA maintains that UKEF would be able to improve the ratio by devolving credit decisions to operating teams, and outsourcing.

Graph 3: Selected ECAs’ ratio of generated business volume vs operating costs

E. Engagement with SMEs and MSBs

In 2013, UKEF issued more policies – up 70% on 2012 – and almost three times that of 2011. Having only commenced providing credit insurance, bond support and working capital guarantees in 2011, SME support, at £39,106,910, is low by comparison with the more established ECAs of Germany, the US and Canada.

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Graph 4: Number of issued guarantees/policies since 2008

With the private insurance market having no appetite for small value individual exports, it is imperative that UKEF should apply for the Small Company Exception allowing it to cover small exports to OECD (which are otherwise deemed ‘marketable’ by the EU). Finnvera of Finland supports its SMEs in this way

2.

Graph 5: Total business volume compared to number of facilities issued/approved

(size of the bubble shows support given to SMEs compared to overall support)

The increase in the number of Export Finance Advisors is helping to build UKEF’s profile. However, headcount is only one element of SME support. UKEF should make its products more accessible, concentrate on speed of response, and work more widely with the commercial insurance community.

2

http://www.finnvera.fi/eng/newsletter/Export-Financing-Newsletter-March-2014/Finnvera-provides-insurance-also-for-small-export-contracts

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Section III – Actions In anticipation of the General Election in May 2015, BExA produced a Manifesto for Exporters ‘Winning the Global Race’. BExA proposes seven ‘Actions’, 5 of which relate to UKEF.

Action 1 – Accessibility and cutting red tape/duplication

UKEF’s short term export credit insurance documentation is far wordier than that of Sweden (EKN) and Canada (EDC). In particular, UKEF’s bribery and corruption (B&C) text is noticeably longer. More than half is repeated in both documents, notwithstanding that both must be signed by the exporter. UKEF repeats 10 times more B&C text as EDC, and 20 times that of EKN.

Proposal form Wording Duplicated

no. of pages

total words

B&C words

no. of pages

total words

B&C words

B&C words

EKN 5 2,324 367 12 4,513 131 42 EDC 4 1,840 260 7 3,007 191 95 UKEF 13 4,501 1,776 14 4,935 1,032 897

UKEF should modernise and simplify its wording generally and take advantage of UK 2010 Bribery Law to both strengthen and shorten the B&C text. Finland’s ECA

3 supports this notion, mentioning the value of

‘quick and clear procedures’ in a customer’s selection of supplier. UKEF does not cover insolvency – which would shorten the waiting period for claims and allow full pre-shipment cover. Both of these features are valued by SMEs. EDC and EKN cover buyer insolvency.

EKN’s description of insolvency:

No waiting period applies if the buyer is insolvent. The buyer will be deemed insolvent if

- he has suspended payments or has been declared bankrupt or insolvent;

- distraint or a similar procedure has not resulted in performance of the payment obligation in question;

- he has moved to an unknown location or has otherwise made himself unavailable; or

- there are other circumstances constituting sufficient evidence of insolvency.

Action 2 – Support for SMEs

The Bank of England suggests that lending to SMEs is flat4 but is picking up for large business.

UKEF must continue its support for SME lending to enable companies to finance manufacturing and to purchase components. BExA recommends that where SMEs are not able to access trade finance from their bank:

a portion of the Direct Lending Facility is allocated to SME working capital, and

UKEF is enabled to issue contract bonds and tender bonds.

3

http://www.finnvera.fi/eng/Finnvera/News/(newsid)/3245 4

http://www.bankofengland.co.uk/publications/Documents/other/monetary/trendsjuly14.pdf

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Tender to Contract (TTC) Cover TTC foreign exchange variation is a real risk to small exporters who, to compete internationally, may need to bid in euros or dollars while their costs are in sterling. As the graph below shows, it is not uncommon for swings of up to 7% over a 3 month period. There is no longer a commercial solution for TTC risk, which, by definition, is of more significance for UK exporters than for Euro-denominated traders.

Source: Reuters

Coface provides TTC Cover - Exchange Risk Contract Insurance – to SMEs for bids/contracts of up to Euro 15m equivalent value; utilisation of this product has been steadily increasing. This provision makes Coface the lead EU ECA in terms of its product range; it offers all 10 key ECA products. Speed of response There are still unacceptable delays to response times and policy issue. Delegated underwriting authorities and streamlining of processes would facilitate faster turn-around. By comparison, EKN, which has introduced such changes reports turnaround times of typically 2-3 days. In the context of the National Export Challenge, UKEF needs to become less risk averse when assessing small value SME export bids. Widening UKEF’s Scope of Operations The passage into law of the SBEEA will significantly widen UKEF’s scope and remit and permit the introduction of supply chain finance products as well as allowing support for the ‘exporter’ rather than the ‘export’. These prospective changes are greatly welcomed. In addition UKEF should press ahead with an application to the European Commission for the Small Company Exception thereby facilitating UKEF support for SME exports to ‘marketable risk countries’.

Action 3 – Medium Term Products

The broadening of the parameters and re-introduction of the Commercial Interest Reference Rate (CIRR) under the DLF in combination with the launch of the ERF have significantly improved the competitiveness of UKEF support to exporters. However in order to ensure that UKEF can provide support on a par with other leading European and OECD ECAs – notably Coface, EKN, EDC and US EXIM – BExA urges UKEF to re-introduce CIRR based Fixed Rate Interest Rate support for bank-funded Buyer and Supplier Credit facilities.

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Action 4 – Co-operation with the Private Credit Insurance Market

During 2013-4, UKEF’s new facilities were concentrated in only a few countries. In medium and long term buyer and supplier credits, the top 10 countries accounted for 78% of exposure whereas for short term, the top 10 were 98% of the total. More than one third of new short term business was for Greece. UKEF new exposure – short term (EXIP) UKEF new exposure – medium + long term

By contrast, the top 10 new business markets of Berne Union members together account for 35-40% of total new exposure. Berne Union 2014 yearbook

5

short term exposure Medium & Long Term new business and portfolio exposure

If UKEF could use replicate best practice in the London Insurance Market, participating in syndicated risks, and using reinsurance, this would have the dual impact of acting as seed cover for High Value Opportunities as well as improving the risk profile for UK taxpayers.

5

http://www.berneunion.org/wp-content/uploads/2012/10/Berne-Union-80-Yearbook-2014.pdf

Saudi Arabia

Brazil

Dubai

Vietnam

Ghana

Abu Dhabi

Turkey

Sri Lanka

Malaysia

Ireland

Rest of world

Greece

Libya

Serbia

Ukraine

Russia

Lebanon

Nigeria

Iraq

Egypt

Saudi Arabia

Rest of world

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Action 5 – UKEF Resourcing

UKEF has on average 202 full time staff6 (up from 188 in 2012-3). Whilst the number of full time staff has

increased, UKEF remains vulnerable to losing experienced personnel through retirement. It therefore remains an imperative that UKEF develops a robust succession plan together with the hiring of experienced private market practitioners to ensure a high quality and responsive service. UKEF should have its own website pages that complement the UKTI website without content being shared between the two. At present, policies for inward investment – which is a UKTI activity – and export credit insurance, are co-mingled on the UKEF home page

7.

Action 6 – UKTI Charging and Dissemination of Information

Instead of charging up front for its Overseas Marketing Introduction Service (OMIS) reports, UKTI should introduce Market Survey Insurance (MSI) along the lines of the French Government support to its SME exporters. This would provide funding security for SMEs considering market entry, thereby encouraging them to increase market penetration.

The French scheme involves a premium (1%-4% of the funding value) and is tiered:

Funded MSI - Up to €30,000 over a 3 year period for export related costs (including advertising, consulting, website creation, participation in trade fairs, travel and hotel costs). Repayment commences at the end of the 3 year period, and is spread over a number of years scaled according to the increase in export turnover resulting from the funding.

Enhanced MSI - for developing prospects in existing export markets, amortising prospecting expenses over a number of years. A budget is agreed, to include participation at trade fairs, travel, recruitment, training and costs to create or reinforce an export department, market studies, legal advice, and the exporter is measured by its activity and increase in profits generated from new export sales. Repayment of the advance is amortised.

Advanced MSI – an agreed marketing budget is underwritten enabling the exporter to raise finance.

MSI fees are therefore directly related to new export orders won, encouraging entrepreneurial activity and at the same time providing a performance metric for the department. UKTI does not publish quantitative data relating to the number of OMIS reports produced, fees charged, or exporters supported.

Action 7 – UKTI Trade shows and delegations

The Trade Show Access Programme8 should be made available to existing exporters that are looking to

enter new markets, irrespective of the number of years they have been exporting. Their needs in understanding new markets are no different to those of the first time exporter. If UKEF outsourced credit analysis, it would be easy to add pre-checking of potential customers to the marketing reports provided to exporters and in preparation for visits and receptions.

6

page 124 of https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/326210/10132-UKEF-

Annual_Report_and_Accounts_2013-14_ACCESSIBLE16__3_.pdf 7

https://www.gov.uk/government/organisations/uk-export-finance

8 https://www.gov.uk/tradeshow-access-programme#eligibility

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Appendices

I. Glossary

DLF ECA

Direct Lending Facility (for medium term credits) Export Credit Agency

ECGD Export Credits Guarantee Department (now called UKEF)

EFA Export Finance Advisor

ERF EWCS

Export Refinancing Facility (for medium term credits) Export Working Capital Support

EXIP Export Insurance Policy

FREF Fixed (interest) Rate Export Finance for ECA supported medium term credits

HMT Her Majesty’s Treasury

HVO

High Value Opportunity

LCGS Letter of Credit Guarantee Scheme

MSB Medium-Sized Business

OECD Organisation for Economic Cooperation and Development

OII Overseas Investment Insurance

OMIS Overseas Market Introduction Service

SCF Supplier Credit Facility

SME SBEEA

Small and Medium-sized Enterprise Small Business Enterprise & Employment Act

TAP TTC

Trade Show Access Programme Tender to Contract (exchange risk) cover

UKEF UK Export Finance

UKTI UK Trade and Investment Small Company Exception

Under the EC’s Short term Communication9 for export credit insurance 19.12.2012, ECAs can apply

to the EC to provide export credit insurance for ‘marketable’ destinations for SMEs whose export turnover is less than €2m p.a.

9

http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52012XC1219(01)&from=EN

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II. UKEF 2013 product review

Scale from 7 (excellent) to 1 (product overhaul needed), taking into account feedback received from its members including exporters, brokers, bankers and insurers.

Product Required improvements Score

Bond Support

Scheme More flexibility needed on security offered by SMEs. 7

Export Working

Capital Scheme

Support, via the SBEEA, general working capital requirements. Allocate a portion of the DLF to EWCS. 2

Export Credit

Insurance

Faster turnaround. Clear and comprehensive wording in line with the private market. 5

Bond Insurance

Policy

Policy wording overly complicated, needs to reflect private market practice. 5

Overseas Investment Insurance

Overly complicated; needs to be usable by SMEs. 4

7 6 5 4 3 2 1

Letter of Credit

Guarantee Scheme

Pricing mechanism needs to reflect OECD premium formula. Cover up to 95% as some other ECAs. 1

Supplier & Buyer

Credit Financing

Reduce prescriptiveness, allow sourcing changes.

Reintroduce FREF. Increase knowledge of structuring. 5

Direct Lending

Scheme

Promote scheme, ensure effective delivery through partner banks, allocate a portion to SME WCGS. 6

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III. ECAs product ranges9

Methodology

BExA sourced data from ECA websites, supplemented by some direct contact. Where an ECA relies on another government department or institution to provide a product, e.g. direct lending, BExA took this into account. A ‘point’ was allocated for each of 10 key products or services. Where it was not certain if a particular product or service was offered, BExA did not give a point.

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IV. ECA business volume trends since 200810

n.a.: Not available

10

Although we made every effort to ensure the information contained in this Appendix is accurate, we cannot guarantee complete accuracy and

we invite you to contact BExA if you identify any inaccuracy so it can be corrected in our next benchmarking paper.

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V. Sources United Kingdom

www.gov.uk/government/organisations/uk-export-finance

Luxembourg www.ducroire.lu

Argentina www.bice.com.ar Malaysia www.exim.com.my Australia www.efic.gov.au Mexico www.bancomext.com Austria www.oekb.at/en Netherlands www.atradius.com/nl/en/dutchstatebusiness Belgium www.ondd.be New Zealand www.nzeco.govt.nz Brazil www.sbce.com.br Norway www.giek.no Bulgaria www.baez-bg.com Poland www.kuke.com.pl and www.bgk.com.pl Canada www.edc.ca Portugal www.cosec.pt China www.sinosure.com.cn and

english.eximbank.gov.cn Romania www.eximbank.ro

Croatia www.hbor.hr Russia www.exiar.ru Czech Rep

www.egap.cz and www.ceb.cz Slovakia www.eximbanka.sk

Denmark www.ekf.dk Slovenia www.sid.si Estonia www.kredex.ee South Africa www.dti.gov.za and www.ecic.co.za Finland www.finnvera.fi South Korea www.koreaexim.go.kr and www.keic.or.kr France www.coface.fr and

http://www.bpifrance.fr Spain www.cesce.com and www.mcx.es

Germany www.eulerhermes.de/en/products/products.html, www.agaportal.de/en/index.html and www.akabank.de/english/index.html

Sweden www.ekn.se

Greece www.ecio.gr Switzerland www.serv-ch.com Hungary www.exim.hu Taiwan www.eximbank.com.tw India www.ecgc.in and

www.eximbankindia.com Thailand www.exim.go.th

Italy www.sace.it Turkey www.eximbank.gov.tr Japan www.nexi.go.jp and www.jbic.go.jp USA www.exim.gov

VI. International framework for ECAs

UKEF, the UK's official ECA, provides export credit insurance and finance support to complement and enable rather than compete with commercial offerings. UKEF support is highly regulated. International agreements aim to prevent undue subsidies, and/or a credit race. These include:

OECD “Arrangement on Guidelines for Officially Supported Export Credits” applies to the official support of credits longer than 24 months

11.

Compliant support is a recognised exception to Article 3 of the WTO Agreement on Subsidies and Countervailing Measures which otherwise prohibits export subsidy.

Agricultural commodities and military equipment have different frameworks.

Chile, Iceland and Israel, while members of the OECD, do not comply with the Arrangement.

The Arrangement is incorporated into EC law and therefore compliance is mandatory for the EU. (Council Decision 93/112/EEC, amended by Decision 97/530/EC)

12.

The EC DG Trade co-ordinates policy (Council Decisions 73/391/EEC and 76/641/EEC) which provide for consultations among member states on official support for long term export credits.

EU members may not provide “State Aid” for intra-EU exports.

EU ECAs are not allowed to provide short term export credit insurance to ‘marketable’ countries, including North America, Australasia and Japan. The ECAs of these countries, on the other hand, have no such restrictions on providing cover for sales to the EU.

Poland’s ECA, KUKE, describes the international framework and co-operation between ECAs13

.

11

http://www.oecd.org/tad/exportcredits/ 12

http://eur-lex.europa.eu/JOIndex.do 13

http://www.kuke.com.pl/international_cooperation.php

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BExA is a politically independent national trade association representing the

interests of the export community Published by BExA

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BExA Telephone: 020 7222 5419 Fax: 020 7799 2468 hughbailey@bexa.co.uk www.bexa.co.uk Director: Hugh Bailey