Export Credit Agencies, commonly known as ECAs, are public agencies and entities that provide government-backed loans, guarantees and insurance to corporations from their home country seeking to do business overseas in developing countries and emerging markets that are considered too risky (commercially or politically) for conventional corporate financing. Unlike commercial banks that seek a market return on their loans or insurance, ECAs only seek to recover their operating and financing costs. ECAs are part of a broader government policy context of industrial policy, trade and investment promotion.
For providing financial services, ECAs charge premiums and/or interest from clients, usually at a lower rate than those of commercial players for comparable risks. The majority of ECAs provide insurance and other services for medium-term (from 2 to 5 years) and long-term (5 to 10 years and above), transactions which are usually associated with large projects. Although the Organisation for Economic Cooperation and Development (OECD) argues that public ECAs’ contribution to underwriting the aggregate financing of world trade is relatively small, it confirms that “official support plays an increasingly important role in individual transactions and for projects in developing countries where the availability of official support is decisive in allowing the project and the related exports to be realized.” (www.berneunion.org/pdf/Berne%20Union%20Yearbook%202012.pdf) ECAs thus exert a powerful leveraging effect. When providing export credit guarantees they lower the risk of private lending and consequently, they have emerged as one of the leading players in project finance, particularly for large infrastructural and industrial projects, which are risky, highly capital intensive and have long gestation periods.
The main problems associated with export credits include the exacerbation of heavily indebted countries’ debt problems, negative impacts on human rights, and support to projects that increase greenhouse gas emissions.
One of the main impacts of the global financial crisis has been the lack of provision for financing trade transactions. It reasserted the position of public ECAs as dominant players in the trade finance markets, as they have stepped in to fill the huge gap left by the private sector. Some public ECAs have reported an increase of new commitments in their portfolios of between 30 and 272 per cent. Within the EU as well, many Member States have increased the financial capacity of their official ECA. It is therefore vital that ECAs are subject to consistent and effective scrutiny and control.
ECA and climate change
Collectively, ECAs provide among the largest global sources of public financing and guarantees for fossil fuel projects, a sum which is estimated to rival or exceed financing for these activities by all multilateral finance institutions combined. Examples of ECA fossil fuel financing include US Ex-Im Bank’s support for the Sasan ultra-mega coal power project in India; and the German ECA Euler Hermes, the French ECA COFACE, and potentially Ex-Im Bank’s guarantee for the financing of the Kusile coal power project in South Africa. If constructed, Sasan and Kusile would be among the world’s largest coal power projects, emitting a combined total of 56.9 million tonnes of carbon dioxide (CO2) annually, plus extensive pollution to local water and air. The UK ECA, UKEF, has underwritten a US$52 million loan in 2005 taken out by the Brazilian state-run energy company, Petrobras, for an offshore oil production platform operating in the Atlantic Ocean in nearly 2000 metres of water. Although the Brazilian offshore oil and gas reservoirs are considered to be among the most hazardous in the world to access, UKEF never undertook any assessment of the risks of a blow-out, whether the platform's safety valves were adequate, or of it had a strong enough emergency response plan.
We believe ECAs should not be supporting carbon-intensive industries, but instead play an important role in promoting the transition to a low carbon economy in coherence with their national government climate commitments.
Regulation and guidelines at the OECD level
ECAs from the industrialised countries coordinate their policies within the OECD Export Credit Group (ECG).
ECAs in OECD countries use what are known as the “Common Approaches” a set of recommendations for addressing environmental and social aspects of officially supported export credit. According to Amnesty International the Common Approaches “do not use robust enough standards to guarantee that operations or projects supported by ECAs do not negatively impact on human rights.” This can be proven by the fact that the Common Approaches have failed to prevent ECAs from backing a range of egregious projects. Examples include the Baku-Tiblisi-Ceyhan oil pipeline which Amnesty International accused of creating a “human rights-free corridor” across the Caucasus through a series of agreements which put corporate profit ahead of improved environmental laws in participating countries. The Nigeria Liquefied Natural Gas plus project in Nigeria is another destructive project which is implemented with the support of a number of European ECAs in a joint venture that paid massive bribes to Nigerian civil servants. In June 2012 some minimal and incomplete references to social and human rights language were included, but there are as yet no examples of this leading to positive change.
ECA Regulation at the European Union level
When the Lisbon Treaty entered into force, the European Parliament and Council became co-legislators on trade matters, including export credits. The Parliament was involved in ensuring transparency and accountability requirements were included in the Regulation 1233/2011 on the "Application of certain guidelines in the field of officially supported export credits". The ECA Regulation requires Member States – and thus their respective ECAs to “comply with the Union's general provisions on external action [Article 21], such as consolidating democracy, respect for human rights and policy coherence for development, and the fight against climate change, when establishing, developing and implementing their national export credit systems and when carrying out their supervision of officially supported export credit activities.”
It is an important first step towards strengthening the transparency and accountability of ECA activities abroad. Under the ECA Regulation, EU ECAs must report to the European Commission who in turn report to the Parliament on the extent of ECA compliance. To that end, the Commission has sought responses from the ECAs on their activities and procedures. In 2013 the EC published its first report and the Parliament response called on Member States to monitor and report on the existence, outcome and effectiveness of due diligence procedures for screening export credits. It also states that specific attention should be given to their potential impact on human rights, and calls on the Commission, the Council and the European External Action Service to develop a methodology for meaningful reporting on compliance with Article 21.
Category: Export Credit Agencies (ECAs)