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Answers: Export credit agencies
What is an export credit agency?
Commonly known as ECAs, export credit agencies are public financial institutions that help companies conduct business overseas in developing countries and emerging markets. This they do by providing government-backed loans, guarantees and insurance to corporations in the home ECA country. ECAs are now the world’s largest class of public international finance institutions (PIFIs), collectively exceeding in size the World Bank Group.
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What is an export credit?
An export credit arises whenever a foreign buyer of exported goods or services is allowed to defer payment. As a result, the buyer is required to pay interest on top of the loan. When export credits are provided to buyers in developing countries and emerging markets, companies selling those goods and services often take out export credit insurance to insure themselves, among other things, against buyer insolvency.
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How significant are export credits?
As private capital flows have increased to the developing world, so too has the demand for the services of the world’s export credit agencies, that insulate these investments against unforeseen risks. In fact, in 2001, ECAs committed over US$500 billion in financial services. In contrast, total foreign aid from all sources amounted to only US$55 billion annually, and World Bank lending amounted to a little over US$17 billion.
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Who coordinates export credit agencies?
In theory, the Organisation for Economic Co-operation and Development (OECD) Working Group on Export Credits and Credit Guarantees (ECG) addresses issues related to export credits and the environment. The Export Credit Group was established in 1963 as a forum in which countries define common policies, and discuss emerging issues on export credits. There are 24 Participants, including Australia, Canada, the Czech Republic, the European Community (15 countries), Japan, Korea, New Zealand, Norway, Switzerland and the United States. The European Commission negotiates on behalf of the EU Member states. Observers to the negotiations typically include the Berne Union, the WTO Secretariat and the European Bank for Reconstruction and Development, as well as non-OECD members that have ECAs, such as India and Brazil. The ECG houses the Consensus Arrangement guidelines. These guidelines set out the broadest terms and conditions governing export credit business in an effort to standardize the conditions through which governments can promote their exports.
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Why a campaign on ECAs?
ECAs are the world’s largest public financiers of large-scale infrastructure projects to developing countries, of nuclear power plants (12 out of 25 nuclear reactors under construction in the world today are backed by ECAs) and of arms sales (approximately 50% of UK export credits go to arms sales, often to countries with deplorable human rights records). They account for fully one quarter of all developing country debt, and over half of the official debt owed to governments and government supported agencies.
Given the amount of capital flowing through ECAs, the disastrous social, environmental and human rights impacts many ECA-financed projects have had, and the standards that other public financial institutions, such as the World Bank group, have adopted to mitigate such problems, reform of ECAs is essential. This will help ensure policies that take into account the environmental, social and human rights impacts of ECA-backed projects, that protect affected communities against these impacts, and guarantee greater public participation, transparency and accountability.
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So what have ECAs done in response?
In 2000, following increasing pressure from civil society for ECAs to take account of the environment in export-credit funded projects, international press attention, and ministerial mandates from the OECD itself and the Group of Eight largest economies (G-8), policy negotiations on environmental issues began at the OECD Working Party on Export Credits and Credit Guarantees (otherwise know as the Export Credit Group or ECG). In December 2001, the members of the ECG finalized a proposed set of guidelines for ECAs called the 'Common Approaches'. Despite broad agreement on Revision 6 of the Common Approaches, the US judged the agreement to be insufficient, and failed to endorse the agreement. Nevertheless, the rest of the OECD members decided to adopt the text on a voluntary basis.
In September 2003, negotiations were reopened in an effort to achieve consensus on the agreement. Civil society, trade unions and the business community were consulted on a draft of the document, but governments, notably Germany, Japan, Italy and Spain, all refused to allow the draft to be circulated. Countries eventually agreed to consult with civil society on an ad hoc country basis. Three months later, in December 2003, governments finally reached a consensus on the agreement, and began implementing the recommendation in January 2004. The text was further revised in 2006-2007, with articles that substantially weakened the agreement.
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Do other countries have export credit agencies?
Most industrialized countries have export credit agencies. Canada’s ECA is called the Export Development Canada, formerly the Export Development Corporation.
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Export Development Canada
What is Export Development Canada?
Export Development Canada, or EDC, is a federal Crown corporation that was set up in 1944 through the Export Development Act “for the purposes of supporting and developing, directly or indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to international business opportunities.”
EDC is the main source of publicly-supported export financing in Canada, and was designed to complement financial support provided by private sector banks and financial institutions. In 2007, it provided over CDN$77 billion in trade finance and risk management services to finance and insure export sales and investments.
EDC is regulated by both the Export Development Act and the Financial Administrations Act.
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What makes EDC a public financial institution?
Apart from being 100% owned by the government, EDC’s initial capital base (for making the loans) was provided by Canadian taxpayers, and the crown corporation also still periodically receives capital inflows from the government. Equally, when it borrows money on international capital markets, its credit is backed by the Government of Canada and Canadian taxpayers. This means that when a sovereign state is either unable to pay or delays a payment, the Canadian government assumes the risks. In some instances, the Canadian Government has reimbursed EDC a portion of the interest payments due from defaulting countries.
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What does EDC do?
It provides Canadian exporters and investors with financing, and commercial and political risk insurance, in particular for higher-risk and emerging markets. By providing such a service, EDC and other ECAs attract additional private financing because they reduce the risk for private investors and commercial banks to invest in a project.
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What is trade financing?
Trade financing consists of a series of financial services to facilitate the export (or import) of equipment and services. Export financing includes a range of financial and risk management services, including 1) export credit insurance, 2) financing to foreign buyers of Canadian goods and services, 3) guarantees and 4) working capital.
Export credit insurance - Also known as accounts receivable insurance, this insures companies for up to 90 per cent of their losses if their buyers default on a payment, refuse to pay or go bankrupt. This helps ensure that companies get paid for their goods and services.
Other types of insurance
Risk insurance – A type of export insurance, this insulates exporters from various losses stemming from a broader set of commercial and political risks, including buyer insolvency, default on payments, repudiation of goods, contract termination, foreign exchange conversion or transfer payment difficulties, war, revolutionary insurrection preventing payment, cancellation of government import export permits, wrongful calls on bid/performances letters of guarantee, and inability to repatriate capital or equipment due to political problems.
Financing
EDC provides flexible, medium and long-term financing to foreign buyers of Canadian goods to enable them to buy Canadian goods and services.
Sovereign loans
A loan to a government.
Syndicated loan
Loans to finance large-scale projects that involved a group of lenders who desire to share both the risks and the opportunities posed by a project.
Loan guarantees
Whereas the different types of insurance highlighted above cover the various types of losses an exporter may incur in doing business abroad, loan guarantees insure a portion of a loan against a default. This provides an incentive to commercial banks to lend money to private exporters or investors. Sovereign governments back these guarantees, and the government of the ECA that issued the guarantee assumes the liability in the case of default (See also ‘Canada account’). Occasionally the ECA recovers its losses through the government that hosts the project or borrower. In this case, the loss becomes part of the official debt owed to the country that issued the guarantee, essentially transforming a private loan into a public debt. In exchange for the loan guarantee, companies provide ECAs with a guarantee fee, often a portion of their profits for a project.
Working capital
Insurance and loan guarantees are often important, as they help attract working capital from a bank because the bank is more confident that the exporter will collect the payment from the buyer or EDC.
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What is project financing?
Project financing is a method of funding investments (as opposed to exports or imports), in which the lender relies primarily on the revenues generated by a single investment (the project) as the source of repayment and as security for the exposure. EDC provides project financing to overseas projects that involve Canadian companies.
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To whom does EDC report?
EDC is responsible to Canada’s Department of Finance and Department of Foreign Affairs and International Trade, but it reports to Parliament through the Minister of International Trade.
In addition, two Parliamentary committees typically consider issues related to EDC: the House of Commons Standing Committee on Foreign Affairs and International Trade and the Senate Banking Committee.
As a crown corporation, EDC operates at arms length from government and on commercial principles. Therefore, its budget is not approved by Parliament per se. Instead, as required under the Financial Administration Act, it tables its Annual Report every spring and Corporate Plan Summary every fall before Parliament. The full Corporate Plan (a five year forecast of activities) is approved by Governor-in-Council on the recommendation of the Minister. The Plan includes EDC's Operating Budget, Capital Budget and Borrowing Plan, and outlines its public policy objectives and financial plan within the broader context of how EDC operates. The Annual Report then situates the corporation's annual performance against those objectives and plan.
Canada's Auditor General, as per Section 21 of the Export Development Act, audits EDC's financial statements on an annual basis, and also periodically reviews EDC's policies, such as its Environmental Review Directive and Corporate Social Responsibility policy. The ERD is reviewed every three years. The next review takes place in 2008.
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How does EDC finance itself?
In simple terms, EDC finances itself through the interest and guarantee fees it collects on the loans and insurance it provides. But it also employs a number of other strategies both common to, and distinct from, other ECAs, that keep it afloat.
- Most of EDC’s money is raised by issuing bonds on capital markets (like the International Bank for Reconstruction and Development (IBRD) of the World Bank). These bonds are listed separately from Government of Canada bonds, but fall in the same section in the financial papers since EDC bonds are guaranteed by the government and hence are a highly secure investment.
- It also makes money by turning a profit. This it does by charging just slightly better than market interest rates and selling political risk and commercial insurance. The majority of its profit comes from this insurance work.
- EDC spreads its investments between low and high risk markets. Unlike most ECAs, EDC has been profitable every year because the majority of its business is in "low-risk" markets, like the US and Europe. In contrast, other ECAs predominantly target “higher risk” emerging and development markets. EDC also targets high-risk projects, such as the loan guarantee for the Cernavoda nuclear reactor, but shifts these into a separate “Canada” account. Decisions on financing from this account come directly from cabinet, and the government assumes the risk and financing for such projects directly from its Consolidated revenue fund. This also helps EDC keep its books in the black.
- EDC uses some of its profits annually, as do commercial banks, as loan loss reserves. This enables them to write down poor investments rather than relying on taxpayer infusions to cover losses. The net income is therefore the net interest/insurance it makes minus the provision for these credit losses.
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So EDC isn’t subsidized by the government?
Although it is “self sustaining”, like other ECAs, EDC has an inherent subsidy by virtue of the fact that its loans are below commercial bank interest rates, which is itself a result of the fact that its loans are government backed and therefore triple A.
EDC also never writes off bad "sovereign" loans to HIPC countries through its "provision for credit losses", but rather waits until the Canadian government cancels or reduces the country's debt and then is reimbursed.
Last year alone, EDC has received over 400 million in debt repayments from the Canadian government for uncollectable sovereign loans from various HIPCs. That said, the government has also said that EDC will not be reimbursed for new collectable loans (made post 2001) to HIPCs. The bail out comes from government's current account.
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Who makes decisions on projects at EDC?
For the most part, projects seem to get approved by management, rather than EDC's board. Transactions are not referred immediately to the Board if they hit a certain threshold, but rather this is determined through a more complicated and multi-faceted system of credit management. Besides monetary thresholds, there are a number of considerations that determine whether transactions go to the Board, such as credit policy overlay (e.g. country, borrower, insured party ceilings) and general risk management, to name just a few. Category A projects are not automatically subject to Board review.
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What is the Canada Account?
EDC uses the Canada Account for projects that fall outside the scope of its corporate account. This may be because of the size of a transaction, market risks, borrower risks or financing conditions. For example, the loan may exceed the amount EDC wants to expose itself to in a specific market, it may be in excess of what EDC is willing to loan to a single borrower, or it may simply be too risky a venture. Nevertheless, the project may receive funding because it is determined by the federal government to be within Canada’s national interest. National interest covers such issues as the economic benefit the project brings to Canada and the importance of the market to Canada. Projects funded by the Canada Account are approved by cabinet (through the Trade Minister with concurrence from Finance), rather than by EDC.
Exporters using the Canada Account must pay a fee for these services. Exporters pay premiums for Canada Account insurance coverage, and fees for financing and guarantee services.
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What are the risks of the Canada Account?
Since it is the federal government that is approving the loan, if a country or buyer defaults on the loan, then the federal government, its consolidated revenue fund, and the Canadian tax payer are ultimately held to account.
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Can the public access information about EDC operations?
Virtually no information is available to the public regarding EDC decision-making processes. EDC does not disclose how it assesses client proposals; what constitutes an acceptable project; the conditions it imposes on successful clients, if any; how it assesses whether clients remain compliant with imposed conditions and/or relevant standards; or how it addresses cases of non-compliance.
In 2007, Export Development Canada became subject to the Access to Information Act. Unfortunately, the application of the Act to EDC is severely hampered by an extensive “carve out” in subsection 24.3 of the Export Development Act. The effect of this provision is to indiscriminately characterize all information received by EDC from its clients as confidential. This includes information, the public release of which would not prejudice EDC clients. Subsection 24.3 also causes EDC to treat as confidential any internal EDC documentation developed during project assessment, approval and monitoring phases, given that these documents necessarily contain information received from clients. These legislative measures effectively undermine the application of the Access to Information Act to EDC.
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What is EDC’s policy on Human Rights?
See the section of our web site on human rights.
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Does EDC apply environmental and social standards to its clients?
Export Development Canada has adopted a number of social and environmental standards to demonstrate its commitment to corporate social responsibility. These include the International Finance Corporation’s Performance Standards and the Equator Principles. However, it’s unclear whether compliance with these standards is a strict requirement by EDC. Moreover, in several key areas, these standards fall short of international best practice.
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