Export-Import Bank: Improvements Needed in Assessment of Economic Impact
Published: 2007-09-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress established the Export-Import Bank of the United States (Ex-Im) to encourage U.S. exports. Congress has directed Ex-Im to consider the economic impact of its work and not to fund activities that will adversely affect U.S. industry. In this context, GAO reviewed (1) Ex-Im's policies and procedures for determining economic impact, (2) the extent to which Ex-Im appropriately identifies and analyzes projects that could cause adverse economic impact, and (3) the extent to which Ex-Im's process is transparent. To conduct this work, GAO reviewed Ex-Im's procedures, data on projects applicable for the economic impact process, and detailed economic impact analyses. GAO also interviewed Ex-Im and reviewing agency officials and industry representatives.
section_title: What GAO Found
paragraphs: Congress requires Ex-Im to assess whether a project requesting its financial support will negatively impact U.S. industry. Ex-Im uses a screening process to identify projects with the most potential to have an adverse economic impact, and then subjects the identified projects to detailed analysis. A negative finding could result in a denial of Ex-Im support. The screens--either explicitly required by Ex-Im's charter or introduced under the bank's statutory authority--include whether (1) the financed project will increase foreign production, (2) there are trade measures against the resulting product, (3) the resulting product is "undersupplied," (4) the requested financing is over $10 million, and (5) the financed project will increase foreign production by 1 percent or more of U.S. production. Between fiscal years 2003 and 2005, this screening process identified 20 projects (out of 771 applicable) that required a detailed economic impact analysis. In the detailed analysis, Ex-Im assesses whether the resulting product would be in surplus on world markets or in competition with U.S. production. Between fiscal years 2003 and 2005, Ex-Im approved most projects applicable for economic impact analysis, totaling approximately $6.1 billion in approved financing. GAO found challenges and areas for improvement in the screening and detailed analysis of projects for economic impact. The effectiveness of the $10 million screen, introduced under Ex-Im's statutory authority, is uncertain. Ex-Im has not determined whether it removes from review those projects that could meet the statutory definition of substantial injury (producing 1 percent or more of U.S. production in an industry). For example, a $9.9 million financing request that would allow a foreign company to produce an estimated 3.5 percent of U.S. production was screened out of the analysis. GAO also found that Ex-Im could improve some methods it uses in its detailed analyses, such as how it estimates displaced production. In addition, GAO found that Ex-Im could clarify how it characterizes the effect of its financing on the U.S. trade balance. Finally, GAO found that Ex-Im could strengthen the internal controls it uses to ensure that the screening process and detailed analysis are conducted consistently and accurately. GAO also found limitations in the transparency of Ex-Im's economic impact process. While Ex-Im publicly posts its procedures, they contain areas of ambiguity. For example, the procedures do not define the term "oversupply." Also, Ex-Im has not provided all public comments to the board of directors. GAO identified two practices--referencing in the procedures the list of sectors likely to require extra scrutiny and publicizing final economic impact conclusions--that would increase the predictability of the process.

section_title: Letter
paragraphs: Congress established the Export-Import Bank of the United States (Ex-Im)  in 1934 to support U.S. exports and create jobs for Americans. Over time,  Congress has recognized that Ex-Im’s support of exports by U.S. firms in  certain sectors could potentially adversely impact U.S. firms in other  sectors. Congress requires Ex-Im to assess whether its financial support  for a project would likely cause substantial injury to U.S. industry or  would result in the production of a good that is subject to a relevant trade  measure. A finding that would lead to either of these outcomes could  result in a denial of Ex-Im support. In reauthorizing Ex-Im in 2002,  Congress reiterated its concerns about potential adverse economic  impacts on U.S. producers by increasing the bank’s economic impact  assessment requirements. Although Ex-Im created a multistep process to  determine what impact the projects it finances could have on the U.S.  economy, Congress continued to be concerned that these procedures did  not ensure that projects were adequately identified, analyzed, or disclosed.  In December 2006, Congress again revised the economic impact  assessment to require more information disclosure. Congress remains  interested in how Ex-Im assesses the impact that its services have on the  competitiveness of U.S. producers.
In this context, we reviewed (1) Ex-Im’s overall policies and procedures  for determining economic impact; (2) the extent to which Ex-Im’s  procedures provide for the identification and appropriate analysis of  projects that could potentially cause adverse economic impact; and (3) the  extent to which its policies, procedures, and decisions are transparent to  interested and affected parties.
To assess Ex-Im’s policies and procedures for identifying applications for  a detailed economic impact analysis, we obtained and analyzed data on  applications that were applicable for economic impact analysis from fiscal  years 2003 through 2005, and discussed these data and Ex-Im’s screening  process with Ex-Im officials. To describe Ex-Im’s process for conducting  detailed economic analyses, we reviewed the 17 economic impact analyses  that Ex-Im completed between fiscal years 2002 and 2006 in light of their  procedures as they were written in response to the 2002 reauthorization.  We chose 5 detailed analyses to review in greater depth, reflecting a range  of countries, industries, and economic issues. We discussed those analyses  with officials from Ex-Im and other U.S. government agencies. We also  reviewed Ex-Im’s updated procedures, created in April 2007 in response to  the 2006 reauthorization. To assess the transparency of Ex-Im’s economic  impact assessment process, we reviewed relevant documentation and  interviewed officials from agencies that provide comments on Ex-Im’s  draft economic impact analyses and representatives from affected  industries. We conducted our work from September 2006 through August  2007 in accordance with generally accepted government auditing  standards. Appendix I contains a more detailed description of our  objectives, scope, and methodology.
subsections: section_title: Background
paragraphs: Ex-Im is the official export credit agency of the United States, and  operates under the authority of the Export-Import Bank Act of 1945, as  amended. It operates as an independent agency of the U.S. government  with a staff of approximately 370 full-time permanent employees. Ex-Im’s  core mission is to support U.S. exports and jobs by providing export  financing that is competitive with the official export financing support  offered by other governments. To accomplish its mission, Ex-Im offers a  variety of financing instruments, including loan guarantees, export credit  insurance, and working capital guarantees for preexport financing.  Between fiscal years 2003 and 2005, Ex-Im processed a yearly average of  3,055 requests for loans, guarantees, and insurance. Of the processed  applications, Ex-Im approved an average of 2,981 applications   (or 98 percent) per year.
In general, Ex-Im’s charter prohibits the bank from extending financing for  a project if doing so will adversely affect U.S. industry. Ex-Im tests for  adverse effects by (1) reviewing projects for applicable trade sanctions  and (2) conducting its own economic impact analysis. For this economic  impact analysis, the charter provides that, if a commodity for export  resulting from Ex-Im financing will compete with U.S. production of the  same, similar, or competing commodity, or will be in surplus on world  markets at the time of first production, Ex-Im must determine whether  extending the financing will cause substantial injury to U.S. producers.  (The charter defines “substantial injury” as the establishment or expansion  of foreign production capacity equal to or exceeding 1 percent of U.S.  production.) However, under its charter, Ex-Im may fund a project if, in  the judgment of the board of directors, the short- and long-term benefits to  industry and employment in the United States are likely to outweigh the  injury to U.S. producers and employment of the same, similar, or  competing commodity. This can put Ex-Im in the challenging position of  balancing the interests of two different industries—the industry of the U.S.  exporter it is financing and the industry that may face additional  competition as a result of the initial export (see fig. 1).
Economic impact is one of many factors Ex-Im considers when  determining whether to finance a project. Other factors that Ex-Im must  weigh include the project’s feasibility from an engineering point of view,  the project’s possible environmental impact, whether the project involves  small business, and the borrower’s creditworthiness.
Other countries, such as Japan and the United Kingdom, also have export  credit agencies with broad mandates to finance projects that benefit their  domestic economies. However, unlike Ex-Im, these export credit agencies  are not required to weigh the potential economic costs to domestic  industries against the benefits associated with a specific financed export.  Furthermore, these agencies do not consider the relevance of trade  measures to a project, as Ex-Im is required to do. In its 2005  competitiveness report, Ex-Im states that having to consider these  additional elements, such as the economic impact, when deciding whether  to finance a project puts Ex-Im at a disadvantage compared with other  export credit agencies.
section_title: Economic Impact Analysis Screening Process Identifies Projects for Detailed Analysis
paragraphs: Ex-Im’s economic impact analysis screening process is designed to  identify projects with the most potential to adversely impact U.S. industry;  Ex-Im then conducts a detailed analysis of those projects. Applications are  sequentially screened on the basis of criteria specified in Ex-Im’s charter  or established by Ex-Im in the exercise of its discretion under the charter.  For the applications that receive a detailed analysis, Ex-Im assesses  whether the products that will result from its financing will be in surplus  on world markets or in competition with U.S. production, and it estimates  the net impact of the projects on U.S. trade flows. Ex-Im also solicits  public and agency comments on the potential projects. Between fiscal  years 2003 and 2005, Ex-Im approved most of the 771 requests to finance  projects that involved increasing foreign production of an exportable  good, and that, therefore, passed the first screen and were deemed  applicable for further economic impact review.
subsections: section_title: Ex-Im Uses a Screening Process to Identify Projects for Detailed Analysis
paragraphs: Ex-Im’s economic impact analysis screening process consists of a series of  rules used to sequentially remove from further economic impact review  applications for projects it deems unlikely to adversely impact U.S.  industry. Ex-Im’s charter explicitly requires certain screens and Ex-Im  introduced others, using its discretion under the charter. Between fiscal  years 2003 and 2005, the screens identified 20 applications that required a  detailed analysis. The screens remove most requests from the process  because they involve financing of $10 million or less; however, Ex-Im  reviews those projects postauthorization in its Annual Review of  Economic Impact.
subsections: section_title: Ex-Im’s Charter Specifies Some Analytic Screens, Ex-Im Introduced Others
paragraphs: Ex-Im screens applications for economic impact on the basis of several  characteristics, some that Ex-Im’s charter explicitly requires, others that  Ex-Im established exercising its discretion under the charter. During the  screening process, Ex-Im staff in the Policy Analysis Division assign an  economic impact code to each application. These screens are as follows:    Foreign production of an exportable commodity. Ex-Im’s charter requires  it to review for economic impact those requests to finance projects that  would result in increased foreign production. Under Ex-Im’s procedures,  only requests financing the export of capital goods or services from the  United States that might allow a foreign company to increase production  of an exportable good are subject to further scrutiny. This screen removes  the bulk of applications from economic impact analysis. (Ex-Im codes  requests to finance projects that do not increase foreign production as “not  applicable,” or NA.)
Trade measures. Ex-Im’s charter requires it to consider whether trade  measures—antidumping or countervailing duty orders and section 201  injury determinations—apply to products that would result from Ex-Im  financing. According to Ex-Im officials, Ex-Im does not fund projects  directly subject to trade measures as a matter of practice, although it has  the authority to do so if the board determines that a project’s benefits  outweigh its costs. This screen removes applications whose projects are  subject to trade measures not just from further economic impact analysis,  but from eligibility for Ex-Im financing. (Ex-Im codes these requests as  “trade sanctions,” or TS.)
Foreign production of oil and gas or diamonds—”undersupplied”  products. Ex-Im has determined, with input from other agencies, that all  projects increasing the foreign production of oil and gas or diamonds are  unlikely to adversely impact the U.S. economy. This screen removes  requests to finance projects involving oil and gas or diamonds from further  economic impact analysis. (Ex-Im codes these requests as  “undersupplied,” or US.)
Financing threshold of $10 million. Ex-Im presumes that projects  requesting financing of $10 million or less are too small to adversely  impact the U.S. economy. According to a senior Ex-Im official, Ex-Im  selected $10 million as the threshold because that figure is used for a  variety of other bank purposes, including whether applications should be  reviewed by the board of directors or should receive an environmental  assessment. The official also stated that the use of this threshold is  reasonable for the economic impact process because $10 million financing  is likely to result in little foreign production and, therefore, is not likely to  adversely impact the U.S. economy. This screen removes applications  requesting financing of $10 million or less from further economic impact  analysis prior to final financing decisions (although these requests are  subject to an annual review after authorization, which we describe later).  (Ex-Im codes these requests as “annual review,” or AR.)
One percent substantial injury test. Ex-Im’s charter requires it to conduct  a detailed economic impact analysis when a project will cause “substantial  injury,” defined as an increase in foreign production greater than or equal  to 1 percent of U.S. production of the same or a similar good. To conduct  this test, Ex-Im calculates a simple ratio of the expected increase in  foreign production resulting from the project to current U.S. production in  that industry. Ex-Im’s procedures also allow for the use of  “proportionality” in conducting the 1 percent test, which Ex-Im defines as  the relation of the dollar value of the Ex-Im-financed U.S. component of  the project to its overall cost. This screen removes applications whose  projects would increase foreign production by less than 1 percent from  further economic impact analysis. (Ex-Im codes these requests as “no  substantial injury,” or NSI.)
The remaining applications are subject to detailed analysis. (Ex-Im codes  these requests as “hold for analysis,” or HA.) See figure 2 for information  on how Ex-Im categorizes applications throughout the screening process.
The screens Ex-Im uses in its economic impact analysis identify a small  share of applications for detailed analysis. Between fiscal years 2003 and  2005, the vast majority of applications was determined not to support  foreign production of exportable goods and, therefore, was not applicable  for economic impact analysis. Of the 771 requests that involved foreign  production of an exportable good and that, therefore, were applicable for  economic impact analysis, 679 were eliminated from the process because  they were $10 million or less. Of the remaining 92 applications, 72 were  eliminated by other screens and 20 were held for detailed analysis. Figure  3 illustrates the composition of applications by screening category, both in  terms of the number of projects and the dollar value of applications.
At the end of every fiscal year, Ex-Im aggregates projects it financed for  less than $10 million by foreign buyer, and then by product, to determine  if, collectively, a buyer’s portfolio of projects meets the definition of  substantial injury. Ex-Im staff report their findings in a document entitled  Annual Review of Economic Impact Cases. Ex-Im cannot rescind funding  if it finds after the review that a buyer’s projects collectively meet the  definition of substantial injury.
When Congress reauthorized Ex-Im’s charter in 2006, it introduced a new  process to ensure that smaller projects do not collectively meet the  definition of substantial injury. The new legislation requires Ex-Im to   review a foreign borrower’s requests on an ongoing basis, aggregating its  applications over the previous 24 months to ensure that its financed  portfolio does not surpass $10 million. If the aggregate financing does  exceed $10 million, the bank must subject the entire aggregate production  from the proposed project and relevant projects approved during the  preceding 24-month period to further economic impact analysis.  According to Ex-Im’s revised procedures, only the most recent, proposed  project will be affected by the results of this economic impact scrutiny.
section_title: Detailed Economic Impact Analysis Assesses Oversupply, Competition, and Net Trade Impacts
paragraphs: For applications that remain after the screening process, Ex-Im conducts a  detailed analysis. The detailed analysis’s components are designed to  address specific legislative requirements, including comments solicited  from the public and relevant U.S. government agencies. Ex-Im compiles its  findings, along with its conclusion regarding whether the project will  negatively impact the U.S. economy, in a memorandum to the board of  directors. (See app. II for a list of applications for which Ex-Im began a  detailed economic impact analysis between fiscal years 2002 and 2006.)
In its detailed economic impact assessments, Ex-Im addresses the specific  statutory requirements concerning the assessment of whether a foreign  product will be in surplus in world markets or in competition with U.S.  production, and estimates an overall impact on trade flows. The  components of this analysis include (1) an assessment of whether the  foreign product potentially supported by Ex-Im financing will be in surplus  on world markets—which Ex-Im terms as being “in oversupply,” (2) an  estimate of U.S. production that could be displaced by competition with  the increased foreign production, and (3) the net impact on U.S. trade  flows. According to its procedures, Ex-Im assesses whether the product to  be produced by the foreign buyer is in oversupply using a set of indicators  that include trade measures, such as antidumping duties on related  products, and stagnating global prices. Finally, Ex-Im estimates the net  effect on the U.S. economy by comparing the trade flows associated with  the initial U.S. export and any follow-on, spare-part sales with the  potential displaced production. This net economic impact assessment  provides the type of analysis that, according to a senior Ex-Im official,  could be informative to a board of directors’ decision to exercise its  discretion in approving applications where, for example, foreign  production could compete with U.S. producers and represents 1 percent  or more of U.S. production.
Ex-Im’s charter also requires it to solicit public comments. Ex-Im  publishes a public notice in the Federal Register when beginning a  detailed analysis and allows for a 14-day public comment period. For the  applications we reviewed, Ex-Im’s public notices contained (1) the  project’s value, (2) the country where the foreign borrower was located,  (3) the goods to be produced, (4) the expected resulting amount of  increased production of that good, and (5) the potential areas where the  end product would be marketed. We found that Ex-Im consistently posted  Federal Register notices containing the requisite information. The   2006 reauthorization codifies that practice and also requires Ex-Im to  include information about the amount of the financing involved. In  addition, the new legislation requires the bank to publish a revised public  notice and allow for another comment period if a project changes  materially. Ex-Im also consistently solicited comments on draft analyses  from relevant U.S. government agencies: the Departments of Commerce,  State, and the Treasury and the Office of the U.S. Trade Representative  (USTR). The 2006 reauthorization codifies that practice and additionally  requires Ex-Im to notify relevant congressional committees that it is  conducting a detailed economic impact analysis.
Ex-Im staff create an economic impact memorandum that is used to  describe their findings, along with their conclusion regarding whether the  project is likely to have a positive or negative impact on the U.S. economy.
section_title: Ex-Im Approved Most Projects Applicable for Economic Impact Review between Fiscal Years 2003 and 2005
paragraphs: Between fiscal years 2003 and 2005, Ex-Im approved financing for about  two-thirds of the projects that involved foreign production of a exportable  good, and that, therefore, were applicable for economic impact review.  When reviewing applications, Ex-Im’s board of directors considers  economic impact and other factors. Ex-Im’s 2006 reauthorization requires  the bank to provide a nonconfidential summary of the facts found and  conclusions reached in any detailed economic impact analysis to the  affected party, when requested.
Ex-Im considered 771 applications applicable for economic impact review  between fiscal years 2003 and 2005 and approved 525 projects, or   67 percent, which represented approximately $6.1 billion in financing. Of  the approved projects, most had been removed from the economic impact  process because the financing value was $10 million or less; however,  these projects represented a relatively small portion of the approved  financing ($615 million). Conversely, applications removed from the  economic impact process because the project involved an “undersupplied”  sector comprised a small number of approved projects (49) but the  majority of approved financing ($3.8 billion). Of the 20 applications held  for detailed analysis, Ex-Im approved 11, representing $1.7 billion.   Figure 4 compares the number of approved projects by each economic  impact code with the respective dollar value.
The board or its designee decides whether to approve or deny any  application on the basis of the economic impact designation in  conjunction with many factors, including several other evaluations, such  as an engineering feasibility study, an environmental impact assessment,  and credit information about the applicant and the project. For those  applications that undergo a detailed analysis, Ex-Im’s charter provides an  exception that allows the board to approve the application if it finds that  the short- and long-term benefits to industry and employment in the  United States outweigh the costs to U.S. producers of a competing good.  Under this authority, the board of directors could approve an application  even if the staff concluded that the project would create a negative  economic impact.
The 2006 reauthorization requires Ex-Im to provide affected parties with a  nonconfidential summary of the facts and conclusions of any detailed  economic impact analysis within 30 days of receiving a written request.  Prior to the reauthorization, Ex-Im published the board of directors’  financing decisions, but not information on whether the bank had  conducted an economic impact analysis or the analysis’s findings.
section_title: Challenges and Limitations Exist in Identifying and Analyzing Projects for Economic Impact
paragraphs: We identified substantial challenges and certain limitations in Ex-Im’s  economic impact process. Determining the economic impact of a project  is an inherently challenging process that requires defining which products  and geographic markets will be affected and projecting future market  trends. With respect to Ex-Im’s screening of applications to identify those  for detailed analysis, we found varying effectiveness; the effectiveness of  the $10 million threshold used by Ex-Im is uncertain and has not been  analyzed by Ex-Im. We identified certain methods used in the detailed  analysis that could be improved. These methods featured inconsistencies  and limitations in how Ex-Im has estimated potential costs to U.S.  producers related to their production being displaced over time by  increased foreign competition. Also, how Ex-Im characterizes the net  effect of its financing on the U.S. trade balance can be clarified. In  addition, Ex-Im’s internal controls could be strengthened to better ensure  that the identification process and analysis is conducted consistently and  accurately.
subsections: section_title: Screens Used to Identify Applications for Detailed Analysis Vary in Effectiveness
paragraphs: While the number of applications for financing received by Ex-Im annually  creates challenges in assessing all potential applications for economic  impact, we found that the screens Ex-Im established using its discretion  under the charter varied in effectiveness. Excluding requests to finance  projects in the oil and gas sector and the diamond sector from detailed  economic impact analysis because they are undersupplied has been an  effective screen; however, the effectiveness of the $10 million screen is  uncertain.
subsections: section_title: Volume of Applications Creates Challenges in Screening for Economic Impact
paragraphs: The number of applications for financing received by Ex-Im annually  creates challenges in assessing all potential applications for economic  impact. As we have previously discussed, Ex-Im processed 9,255 requests  for financing from fiscal years 2003 through 2005, 771 of which involved  foreign production of an exportable good and, therefore, were applicable  for economic impact review. While Ex-Im reviews all applications for  potential economic impact, the additional procedures it has introduced to  screen out projects that are unlikely to have an adverse impact on U.S.  producers are also intended to more effectively allocate Ex-Im’s limited  resources.
section_title: Exemption of “Undersupplied” Sectors from Analysis Has Been Effective
paragraphs: Ex-Im’s exclusion of the oil and gas sector and the diamond sector from  detailed analysis because they are “undersupplied” has been an effective  tool developed with input from other agencies and previous analyses in  those sectors. Ex-Im initially developed a list of 31 natural resource  sectors for which imports accounted for more than 50 percent of U.S.  consumption as potentially “undersupplied.” Ex-Im reduced the list to   2 sectors (Ex-Im designated oil and gas as a single sector) with input from  the U.S. government agencies that review the detailed analyses and the  Department of Energy. Importantly, Ex-Im officials stated that, in the past,  economic impact analyses of applications for projects in these sectors had  always yielded a positive impact on the U.S. economy, and that, because  these sectors were natural resources, the United States had limited ability  to expand production domestically. Ex-Im created the undersupplied list  to more effectively allocate its resources.
section_title: Effectiveness of the $10 Million Threshold Has Not Been Determined
paragraphs: The $10 million threshold’s effectiveness as a screen is uncertain because  Ex-Im has not determined the extent to which it identifies projects that  could meet the statutory definition of substantial injury. As we have  previously discussed, the threshold was chosen, in part, on the basis of  other Ex-Im practices that are triggered at $10 million, such as a board  review and an environmental impact assessment. Ex-Im officials stated  that requests for financing $10 million or less would generally be too small  to increase foreign production by 1 percent or more of U.S. production.  However, Ex-Im has not conducted an analysis to support that the   $10 million threshold captures the appropriate projects. In theory, even a  relatively small export of capital goods or services could be used to  produce 1 percent or more of production in a small U.S. industry. More  generally, the dollar value of a capital good project can be an imperfect  signal of the size of the project in terms of its production as a percentage  of the corresponding U.S. industry. For example, Ex-Im estimated that a  $14 million export of equipment to Russia would allow production of  polystyrene to expand by 1.4 percent of U.S. polystyrene production. In  contrast, Ex-Im estimated that a $16.25 million export of mining equipment  to Japan would allow a foreign company to produce roughly 14.6 percent  of annual titanium production in the United States.
We learned of or identified two requests for financing less than $10 million  whose projects were associated with estimated foreign production of over  1 percent of U.S. production in an industry; data limitations did not allow  us to do a thorough review of projects with a financed value of $10 million  or less. First, an export of $9.9 million of ethanol dehydration equipment  to Trinidad would allow a foreign company to produce an estimated   3.5 percent of U.S. production of anhydrous ethanol. We learned of the  ethanol project because Congress required Ex-Im to conduct a  postapproval detailed analysis in the Consolidated Appropriations Act of  2004. Second, we identified a $9.8 million export of mining equipment that  would allow a foreign company to produce an estimated 1.73 percent of  production in a U.S. industry. We identified the mining project when we  attempted to sample 10 applications requesting financing for $10 million or  less, from a universe of 80 applications between $5 and $10 million, to  examine whether they resulted in foreign production equal to or greater  than 1 percent of U.S. production in an industry. Of the 10 capital good  exports in our sample, Ex-Im could provide information on the amount of  production for 2—1 of which was the $9.8 million mining project that we  have previously described. Thus, we were largely unable to determine the  extent to which Ex-Im’s $10 million threshold screened out applications  that would have met the 1 percent substantial injury test. The mining  project and the ethanol project, while treated in accordance with Ex-Im’s  procedure to exclude requests for financing $10 million or less from  detailed economic impact analysis, indicate that requests of $10 million or  less can be associated with production of over 1 percent of a  corresponding U.S. industry. As we have previously noted, the 1 percent  threshold is an important legislative criterion because it establishes  whether a project meets the definition of substantial injury.
section_title: Detailed Analysis Has Challenges and Certain Limitations
paragraphs: Determining the economic impact of a project is an inherently challenging  process; however, we identified limitations in certain assumptions Ex-Im  makes to estimate potential costs to U.S. producers, and in how it  characterizes the net effect of its financing on the trade balance.
subsections: section_title: Detailed Analysis Has Inherent Challenges
paragraphs: The modeling of international economic markets to determine the impact  of government decisions and policies, including Ex-Im financing decisions,  features a number of inherent challenges. Simplifications are always  necessary to model complex economic interactions, and, even under  simplified assumptions, precise data may not exist to address the question  at hand.
In some analyses, Ex-Im has found it challenging to define the industries  that would be affected by Ex-Im-supported production, both in terms of  products and geographic extent, a determination that will also influence  estimates of the costs to U.S. producers. To calculate displaced  production, Ex-Im must define the relevant industry, determine the  regional or global markets in which there could be competition with   U.S. producers, and collect trade and consumption data that are based on  those markets. One case where Ex-Im officials noted challenges in  obtaining the appropriate product data concerned a project supporting a  denim plant in Turkey. To estimate potential displacement of U.S. denim  exports, Ex-Im used data on U.S. exports of high-cotton-content denim (to  reflect the Turkish manufacturer’s plan to produce “high-end” jeans).  However, Ex-Im stated there was a lack of data on broader supply-and- demand factors for this denim—such as global capacity utilization for  denim plants—and, thus, Ex-Im relied on projections for the price of jeans  because 85 percent of all denim is used to produce jeans. In addition, an  analysis of a semiconductor production facility in Singapore also  illustrates market definition challenges. Ex-Im identified a type of “leading  edge” semiconductor as the relevant product market, but also noted that  because of the on-demand nature of production in the facility, it was  difficult to conduct a trade flow analysis or determine potential  displacement of semiconductors made in the United States. Defining the  industry appropriately and collecting data to match that definition is an  inherent challenge in conducting an analysis of this kind.
More broadly, the full economic impact on U.S. industries of projects  financed by Ex-Im depends on determinations or assumptions regarding  what would happen in the absence of the financing. For Ex-Im, predicting  these effects can involve determining or making assumptions regarding   (1) what would happen to U.S. productive resources if Ex-Im’s financing  for a project did not exist or (2) how global prices would evolve if new  capacity were not added. Foreign competition for financing could also  have implications for what would happen in the absence of Ex-Im  financing. For example, if Ex-Im denied financing, the borrower might  seek financing from another country’s export credit agency, resulting in  similar capacity being added abroad without the use of U.S. goods or  services. However, because foreign competition for financing can exist for  many projects, a senior Ex-Im official noted that the application of this  rationale would risk undercutting other economic impact provisions. In  contrast, if a particular U.S. exporter would supply a foreign producer  whether Ex-Im financed the project or not, then those exports would not  be in addition to what would happen without Ex-Im support.
section_title: Calculation and Presentation of Some Potential Costs Could Be Improved
paragraphs: There are limitations in certain assumptions that Ex-Im has made to  estimate potential costs to U.S. producers related to displaced production  that is spread over time or lower prices for U.S. competitors, which are  important elements of the detailed economic impact analyses.
Calculation of Displaced U.S. Production  There are limitations and inconsistencies in how Ex-Im has calculated  displaced U.S. production that is spread out over time. In measuring the  potential cost of Ex-Im financing to U.S. industries, Ex-Im staff generally  begin by estimating the annual level of displaced production in specific  countries where U.S. production is expected to compete with the  production supported by the Ex-Im loan or guarantee. This estimate is  based on how much of the increased foreign production will be sold to  countries that U.S. producers also supply, and on the current U.S. market  share in those countries. While Ex-Im rightly considers both the present  and future costs and benefits of its projects, we identified limitations and  inconsistencies in its estimates—including its assumptions regarding   (1) whether displacement, when it occurs, will happen every year or every  other year and (2) how Ex-Im accounts for expected growth in global  demand for a product in its estimates of displaced production—that can  reduce or eliminate the amount of displaced production as initially  estimated. These assumptions can, in some cases, significantly affect  estimates of displaced production and, hence, net economic impact.  Importantly, OMB notes that in cost-benefit analyses, major assumptions  should be varied to determine how sensitive outcomes are to changes in  the assumptions.
Ex-Im has sometimes used an every-other-year method of calculating  displaced production that occurs over time. Assuming that U.S. production  would be displaced only every other year can significantly reduce  estimates of displaced production as compared with an annual approach;  it can reduce the estimated displaced production by close to half. In one  2005 case where Ex-Im used this approach, it estimated a net-positive  trade impact with increased exports of $14.9 million and displaced  production of $9.8 million over 8.5 years. Assuming every year  displacement would have yielded a net negative impact. In a 2006 analysis,  estimated costs were reduced from $221,000 to $123,000 by assuming that  displacement would occur every other year, although in that case the  estimated value of exports was substantially higher than the estimated  displacement, so the assumption did not change the net trade effect  estimate. Ex-Im has explained the use of every-other-year discounting on  varying grounds, including normal supply-and-demand cycles and regular  cyclical fluctuations in the industry. However, such cyclical fluctuations  are not likely to reduce the level of displaced production relative to what  would occur without Ex-Im’s financing, because the cyclical variation is  not induced by the additional capacity supported by Ex-Im. In contrast,  Ex-Im did not use an every-other-year approach to displaced production in  a case where it characterized the industry as cyclical.
Ex-Im has assumed in some analyses that growing demand for the  commodities it is analyzing would eliminate the initial amount of displaced  production it estimated. For example, in an analysis of a potential facility  to increase foreign production of polypropylene, Ex-Im assumed that an  estimated $83 million in displaced U.S. production over 8 years would not  actually be displaced because of growing global demand for  polypropylene. However, this implicitly assumes that, in the absence of  Ex-Im support for the larger facility, U.S. production would not have  expanded on its own to take advantage of that growing demand.  Therefore, Ex-Im’s estimate of displaced production will be highly  sensitive to assumptions regarding how U.S. producers would meet  growing world demand if new Ex-Im-supported capacity did not exist.   Ex-Im made similar assumptions—that growing demand would offset  potential displaced production—in an analysis of flat glass production in  Mexico. Officials at one agency from which Ex-Im solicits comments  stated that these assumptions were very optimistic, and that a sensitivity  analysis would be appropriate.
Potential Costs Related to Lower Prices  Ex-Im’s method of estimating displaced production does not adequately  acknowledge the potential costs to U.S. producers in some cases as a  result of lower global prices. Ex-Im’s methodology for estimating the  economic losses to U.S. competitors does not capture indirect costs that  are transmitted through changes in global market prices. As we have  previously noted, the estimate of displaced production is focused on  specific countries in which U.S. firms are expected to directly compete  with the new foreign production. However, some costs to U.S. firms may  come in the form of lower prices for homogeneous globally traded  commodities, instead of directly displaced production. These price  changes could occur even in markets where there is no direct competition  with the Ex-Im-supported foreign production, and should be  acknowledged even if they cannot be calculated precisely. An official from  one of the agencies that Ex-Im consults on economic impact also stated  that one cannot necessarily assume that an increase in production in a  single region will not affect global prices.
For example, in a detailed analysis of the economic impact of a plant in  Egypt that would produce ammonia, Ex-Im’s estimate of the costs to  domestic producers may not have captured the potential effect of lower  global prices on those producers. Ex-Im stated that output from this plant  was not expected to directly compete with U.S. ammonia exports.  However, the United States procures ammonia globally and, therefore, is  not insulated from even distant changes in market conditions. In  comments provided to Ex-Im, industry officials also noted that because  ammonia is a commodity, any increase in global supply would drive down  prices. Similarly, in a detailed analysis of the economic impact of a plant in  Israel that would produce polypropylene, Ex-Im focused on potential  losses to U.S. producers in specific export markets. However, Ex-Im also  noted in the analysis that polypropylene is a “bulk commodity that is  widely traded and can easily be transported worldwide.” This suggests that  additional polypropylene capacity abroad could reduce the polypropylene  prices faced by U.S. producers, even if they are not in direct regional  competition with the new production.
There are a number of potential techniques, which vary in complexity, to  estimate or characterize the potential impact of certain types of Ex-Im  financing on global prices. The United States International Trade  Commission often uses sophisticated and resource-intensive economic  models to estimate an array of effects of changes in U.S. trade policies on,  among other things, the prices faced by U.S. producers. However, other  less complicated and less resource-intensive techniques could be used to  approximate the impact of global supply changes on prices. According to  OMB guidance, an enumeration of the different types of costs and benefits  can be helpful in identifying the full range of potential effects, and, in  addition, analyses should include a statement of the strengths and  weaknesses of assumptions. Ex-Im officials stated that the separate  assessment of oversupply should address some of these price effects.  However, while the oversupply analysis may indicate the overall direction  of global prices, it is not intended to measure the impact of Ex-Im- supported production on global prices or the potential effect of relatively  lower prices on U.S. producers.
section_title: Characterization of Financing Effect on Trade Balance Can Be Clarified
paragraphs: Ex-Im’s characterization of its net trade flow analysis as reflecting impacts  on the overall U.S. trade balance is misleading and can be clarified. As we  have previously noted, a net comparison of how trade in two   industries—the exporting industry and U.S. producers of the foreign- produced good—would be affected by Ex-Im financing is a key component  of the detailed analyses. In its economic impact memorandums concerning  its detailed analyses, Ex-Im generally presents the amount of this  estimated net impact as a change in the U.S. trade balance, stating that the  trade balance will “improve” by the full dollar value of the exports it  finances, less lost production. This characterization is misleading because  the incremental impact of Ex-Im financing is likely to be less than the total  value of those exports. Economists generally agree that the aggregate  trade balance is largely determined by macroeconomic factors, especially  the domestic balance between savings and investment. Thus, the  incremental impact of Ex-Im financing is likely to be much smaller than  the total value of U.S. exports supported by Ex-Im or the total value of  displaced production. However, while the size of the impact on the U.S.  balance of trade is overstated, Ex-Im’s conclusions about net economic  impact are likely to have been unaffected by this practice because these  cost and benefits are both overstated.
section_title: Controls on Ex-Im’s Economic Impact Process Could Be Strengthened
paragraphs: We found that the internal controls Ex-Im uses to ensure the accuracy of  its economic impact identification and analysis process could be  strengthened. According to the Standards for Internal Control of the  Federal Government, internal controls should reasonably ensure the  effectiveness and efficiency of operations and the compliance with  applicable laws and regulations. Control activities include a wide range of  diverse activities, such as training, approvals and verifications, and the  creation and maintenance of related records that provide evidence of  execution of these activities as well as appropriate documentation. The  manner in which Ex-Im conducts at least three control activities does not  reasonably ensure effective analyses. First, Ex-Im did not provide the  employees conducting the analyses with formal training or guidance on  how to conduct the analysis. Second, Ex-Im did not consistently document  internal review of the analysts’ work. Third, Ex-Im does not maintain  documentation of certain important pieces of information. Without strong  internal controls, Ex-Im cannot ensure that all requests for financing are  appropriately analyzed.
subsections: section_title: Limited Training or Systematic Guidance Was Provided on How to Conduct a Detailed Analysis
paragraphs: Although appropriate training is a key internal control, Ex-Im provided the  analysts with whom we spoke with limited training or systematic  guidance on how to conduct an economic impact analysis. According to  the Standards for Internal Control of the Federal Government,  management should ensure that employees have the required skills to  achieve organizational goals. Training should be aimed at developing and  retaining employee skill levels to meet changing organizational needs.  According to the five analysts with whom we spoke, Ex-Im’s training  includes reading the economic impact procedures and previously  conducted analyses and informal mentoring from coworkers. One analyst  relied on a notebook compiled by his predecessor and another analyst  relied on a template; however, according to bank officials, neither of these  documents had been sanctioned by Ex-Im. This training and guidance may  not be sufficient to ensure the use of the same fundamental,  methodological approach across analyses, particularly given that the  Policy Analysis Division, which is responsible for conducting the analyses,  has had a lot of turnover since 2002.
section_title: Approvals and Verification Were Not Systematically Obtained
paragraphs: Officials from the Policy Analysis Division stated that the economic impact  analysts always consult with the engineers when conducting a detailed  analysis because they provide important technical expertise; however, the  engineers do not consistently approve final analyses. According to the  Standards for Internal Control of the Federal Government, key duties and  responsibilities need to be divided or segregated among different people to  reduce the risk of error. This includes separating the responsibilities for  reviewing the analyses. The Ex-Im policy division relies on the engineering  division for industry-specific information. For example, the Engineering  and Environment Division generally calculates the 1 percent tests for all  applications and helps the analysts define the appropriate commodity  markets. In addition, engineers contact the exporters and borrowers to  gather the technical information necessary to make those determinations.  However, while the employee who conducted the analysis and the head of  the policy division always signed the final economic impact analyses to  denote their concurrence with the analysis, the engineers did not.  Engineers signed only 6 of the 14 economic impact analyses for which the  board of directors made final financing decisions. Ex-Im officials  acknowledged that, although the policy division does consult with  engineers for every detailed analysis, Ex-Im does not have any rigorous  procedures prescribing when an engineer should sign an analysis. Without  the consistent signatures denoting engineer review, Ex-Im loses an  important layer of assurance that their analyses were accurately  conducted.
section_title: Ex-Im Does Not Maintain Some Important Documentation
paragraphs: We also found that Ex-Im does not maintain documentation of important  information concerning its detailed analyses. According to the Standards  for Internal Control of the Federal Government, all transactions and other  significant events need to be clearly documented, and the documentation  should be readily available for examination. The policy division does not  maintain records of the underlying data sources for its 1 percent test  calculations, just the results of the calculations. Without the underlying  data, the test cannot be replicated. The policy division also does not keep  copies of draft analyses that it circulates to the reviewing agencies for  their comments. The policy division also does not keep records of projects  for which it began a detailed analysis, but which the applicants withdrew  prior to the board making a final financing decision. A senior bank official  noted that it probably would be a good idea for the policy division to start  keeping files on the withdrawn data.
section_title: U.S. Government Agencies Have Provided an Important Review Function
paragraphs: Commerce, State, Treasury, and USTR have played an important role in  the quality assurance process regarding Ex-Im transactions that undergo a  detailed economic analysis. In addition to specifically notifying these  agencies when it begins a detailed analysis, Ex-Im provides them with a  copy of the draft detailed analysis and asks that they provide their analytic  and policy opinions. An Ex-Im official noted that the bank has voluntarily  circulated the draft analyses to be as inclusive as possible, but it is not  required to do so by its charter. Each of the four agencies reviews the  detailed economic impact analysis in light of larger U.S. government  policies, laws, and economic principles. The agencies often provided Ex- Im with important quality assurance feedback through informal dialogue.  For example, when reviewing a draft of a transaction concerning denim,  USTR noted in an e-mail to Ex-Im that the analysis had not considered  how the end of textile quotas, which had happened just prior to the  transaction’s application for financing, would impact the global supply of  textiles, including denim. Ex-Im modified its analysis to incorporate this  consideration.
In addition to providing quality assurance, the agencies’ comments can  influence a transaction’s outcome. For example, when agencies expressed  the opinion that steel production was in overcapacity, Ex-Im’s staff  changed their conclusion that the transaction would have a “net positive  impact” to that the transaction would have a “net negative impact.” In an  early draft of a detailed analysis concerning direct reduced iron  production, Ex-Im staff concluded that steel would not be in oversupply  when the foreign buyer’s factory came on-line. However, three of the four  agencies disagreed with this assessment. According to the economic  impact memorandum for this transaction, Ex-Im staff deferred to the  collective expertise among the agencies and changed its conclusion.
Ex-Im generally requests the agencies’ comments 1 week after it circulates  the draft detailed analysis to them. Several agency officials stated that   1 week is not enough time to thoroughly review an analysis because of the  complexity of the analysis and the need to get the views of those in  official, senior-level positions on the analysis. However, some agency  officials noted that Ex-Im does try to accommodate their requests for  additional information and review time.
section_title: Transparency of Economic Impact Procedures Has Limitations
paragraphs: We found that some aspects of Ex-Im’s economic impact process lacked  transparency. While Ex-Im publicly posts their procedures, the procedures  are difficult to understand and contain undefined terms. In addition, Ex-Im  does not provide all public comments to its board of directors as required  by its procedures.
subsections: section_title: Publicly Available Procedures Contain Areas of Ambiguity
paragraphs: Ex-Im’s publicly available procedures do not clearly lay out how it  analyzes applications for economic impact; therefore, interested parties  are unable to reasonably assess their project’s viability. In addition, Ex-Im  could increase the process’s transparency by referencing its list of  sensitive sectors in its procedures and publishing the detailed analyses’  outcomes.
subsections: section_title: Economic Impact Process Is Not Easily Understood
paragraphs: Ex-Im’s procedures for analyzing applications are unclear to lenders and  exporters directly involved in those projects, other industry officials, and  U.S. government officials. According to Ex-Im’s annual competitiveness  report, many lenders and exporters involved in projects requesting the  bank’s financial support expressed particular concern that the economic  impact issue needs greater transparency and predictability. One exporter  who participated in Ex-Im’s annual competitiveness survey noted that,  because the economic impact process is unpredictable, project sponsors  may consider finding an alternative to the U.S. product and financing if the  project would be subject to economic impact analysis. Industry officials  with whom we spoke also generally noted that the process was not clear.  One industry official called the process “a black box.” Similarly, officials  from one U.S. government agency with whom we spoke noted that Ex-Im’s  criteria and methodological assumptions were unclear.
section_title: Ex-Im’s Procedures Do Not Provide a Clear Basis for the Assessment of Oversupply
paragraphs: Ex-Im’s oversupply assessment—which can be a key factor in determining  economic impact—lacks a clear basis because Ex-Im has not defined  oversupply or matched the list of oversupply indicators in its procedures  with those that they actually use. As we have previously noted, a  determination of oversupply—Ex-Im’s interpretation of the statutory  consideration of whether production is in surplus on world markets—can  be a basis for denial of an application. Ex-Im has also referred to  information gathered in its assessment of oversupply in its determination  of potential displaced production and, thus, its estimate of net economic  impact. There is no generally accepted definition of oversupply, which Ex- Im’s procedures and staff both acknowledge. In fact, the excess supply of  a good over demand is not likely to be a persistent condition because, in  most markets, prices will adjust to bring the supply of the good in balance  with the demand. However, various indicators can provide perspectives on  the outlook for supply and demand, and on whether expansions in  capacity might come at a time of falling prices.
Ex-Im officials stated that they have not created an operational definition  of oversupply to guide their assessment of it in detailed economic impact  analyses. Instead, according to its procedures, Ex-Im analyzes transactions  on a case-by-case basis and assesses oversupply according to a series of  possible indicators. These indicators are as follows:    Final antidumping and countervailing duty orders on similar products  elsewhere.
Section 201 investigations.
Stagnating or falling global prices.
Falling gross margins of domestic producers.
Industry bankruptcy and unemployment trends.
Trade Adjustment Assistance petitions.
Preliminary antidumping and countervailing duty determinations.
Multilateral production limitation agreements.
Ex-Im has not generally used the more domestically focused indicators  listed in its procedures to support conclusions regarding oversupply, and  the procedures do not include a key indicator that it has used. Ex-Im  officials stated that the oversupply assessment is made on a global basis.  (Ex-Im’s charter refers to surplus on “world markets.”) However, most of  the indicators listed in Ex-Im’s procedures refer to laws, programs, or  conditions in the United States that are not necessarily reflective of  conditions on global markets. These include, for example, trade measures  used by U.S. firms to mitigate the adverse effects of competition from  foreign imports. While Ex-Im’s economic impact memorandums often  contained information on these trade measures in a separate section, the  presence or absence of these measures is not generally identified as the  basis for support of oversupply determinations. Furthermore, an indicator  that has been important to Ex-Im’s determinations, capacity utilization, is  not listed among the indicators of oversupply in its procedures. Ex-Im’s  conclusions about oversupply are typically supported by information  related to prices, capacity utilization, and direct measures or forecasts of  global supply and demand.
Differences in criteria considered important for determining oversupply  have been the basis for disagreements regarding whether Ex-Im should  deny an application on economic impact grounds. An Ex-Im official stated  that the lack of a definition for oversupply has been problematic because  individuals may differ regarding whether a commodity is in oversupply,  depending on the factors they consider. As a result of such disagreements,  some transactions at Ex-Im have “stopped in their tracks,” according to  the Ex-Im official. This was illustrated in the case of a transaction that  would have increased steel capacity in Saudi Arabia. Ex-Im and several  agencies initially disagreed regarding oversupply on the steel project. Ex- Im’s final economic impact assessment concluded that the transaction  would likely have a net negative impact on the U.S. economy, and Ex-Im’s  board denied the transaction. An official with one of the agencies from  which Ex-Im solicits comments also stated that oversupply has been an  area of disagreement.
section_title: Procedures Do Not Have Criteria for when to Use Proportionality
paragraphs: Similarly, Ex-Im does not clearly define when the concept of  “proportionality” would be used. An Ex-Im official noted that the bank  included proportionality in its procedures after the 2002 reauthorization to  retain some flexibility in how it analyzed the applications. A senior  official stated that, in some cases, it is not reasonable for the bank to  assume responsibility for all of a project’s increased production when it  only finances a portion of the overall project. Instead, the concept of  proportionality allows the bank to measure the potential for its financing  to displace the production of U.S. competitors in proportion to its funding.
Applying proportionality would reduce the estimated costs to U.S.  producers. For example, if Ex-Im financed $100 million worth of U.S.  exports associated with a larger $2 billion project, the bank would be  supplying 5 percent of the total project cost. If the $2 billion facility  produced 10,000 metric tons of an exportable good, Ex-Im would assess  the impact of its financial support on U.S. competitors on the basis of only  5 percent of the output—in proportion with its funding—or 500 metric  tons.
Using proportionality can change a net negative determination to a net  positive determination. For example, Ex-Im applied the proportionality  concept to the estimate of displaced production regarding a project that  would allow a Chinese company to increase production of petrochemicals.  According to documents provided by other government officials, Ex-Im’s  analysis of a petrochemical project noted approximately $170 million in  expected benefits from the U.S. export sale, but approximately   $750 million in potential indirect “lost opportunity” costs. Using standard  calculations, the analysis would have yielded a net negative impact of over  $580 million. However, Ex-Im applied proportionality and found that its  share of the project financing equaled only 4.5 percent of project costs— therefore, Ex-Im financing was associated with about $34 million in  potential indirect lost opportunity costs. This use of proportionality  yielded a net positive impact of $134 million. Ex-Im approved the project  in fiscal year 2003.
Ex-Im also has not systematically used the proportionality concept or  specified when it would be applicable. For example, in an application to  finance an ethanol facility in Trinidad, Ex-Im argued that the equipment  they financed did not allow the company to produce ethanol, but rather to  introduce a “simple refinement step”—that is, dehydration. At that time,  the price of hydrous ethanol (the input) was 10 percent lower than  anhydrous ethanol (the end product). Therefore, using the proportionality  approach, Ex-Im asserted that its financing was only responsible for   10 percent of the output. Using proportionality, Ex-Im concluded that the  project would increase foreign production by 0.35 percent of U.S.  production. Using standard calculations, foreign production would have  increased by 3.5 percent of U.S. production. Ex-Im asserts that its decision  to use proportionality when equipment refines a product rather than  produces a new product is fair and reasonable. However, in a similar  project involving the refinement of hot-rolled steel to galvanized steel,   Ex-Im did not apply proportionality.
In addition, several reviewing agencies have expressed concerns about the  use of proportionality when determining a project’s economic impact.  Without knowing the conditions under which Ex-Im would apply  proportionality, interested parties do not have a sense of the viability of  their proposed project.
Ex-Im acknowledged that both the oversupply and proportionality  language in the procedures is confusing. A senior Ex-Im official also noted  that the bank struggles with determining when to use the proportionality  concept. The bank also acknowledged that it should create more specific  guidelines in their procedures for defining oversupply and proportionality.  Specific criteria would make the process more transparent. However,   Ex-Im has not altered the language in its most recent procedures.
section_title: Public Comments Are Not Fully Included in Board Memorandums
paragraphs: Ex-Im does not regularly include the full text of the public comments that  they receive. Ex-Im’s economic impact procedures require it to attach the  full set of comments as an appendix to the economic impact  memorandums. In some cases, staff members attached selected  communications. There were seven cases that received public comments  and went to the board for decision but only two included copies of all of  the comments received. According to Ex-Im, the Policy Analysis Division  does not append copies of all public comments received because they are  sometimes too numerous. Instead, the policy division summarizes the  main arguments and often includes a representative letter. An Ex-Im  official noted that the division retains all public comments and would  make them available to the directors if requested. However, Ex-Im does  not note in its procedures what criteria it uses for deciding which  comments not to include, nor does it note in the memorandums that the  letters were available for perusal upon request. The 2006 reauthorization  now requires Ex-Im to provide in writing the views of all people who  submit comments.
section_title: Incorporating New Practices Would Increase Process’s Predictability
paragraphs: We identified two practices that Ex-Im does not currently incorporate into  their economic impact procedures that would increase the predictability  of the process’s outcomes—namely, referencing the sensitive sector list  and publishing detailed analyses results. First, in its revised procedures,  Ex-Im does not reference its list of industries unlikely to be financed for  economic impact reasons. In the 2006 reauthorization legislation, Congress  required Ex-Im to create a “sensitive sectors list” denoting sectors that are  unlikely to receive Ex-Im financing. Ex-Im has created this list and makes  it publicly available on its Web site. However, Ex-Im’s updated procedures  do not specify the list’s implications and indicate that requests for  financing projects in sectors on the list will receive close scrutiny during  the economic impact process. In contrast, the procedures do list  “undersupplied” sectors (oil and gas and diamonds) that will not be  denied on economic impact grounds. A direct reference to the sensitive  sectors list would enable interested parties to quickly identify whether  their projects were viable. Second, Ex-Im does not currently publicize the  results of its detailed economic impact analyses. Ex-Im publicly  announces when it begins a detailed analysis. It also posts minutes of  board meetings on its Web site that announce ultimate financing decisions.  However, the financing decisions do not include statements regarding  whether the project was subject to an economic impact analysis, or the  determination regarding whether there would be a net negative or net  positive impact on the economy. Publicizing such information would  provide interested parties with a record of what types of projects passed  the detailed analysis.
section_title: Conclusions
paragraphs: While many requests for Ex-Im’s financing do not require economic impact  analysis, the bank often faces the difficult task of balancing the interests of  different industries while working to achieve its broad mission to promote  U.S. exports and increase U.S. jobs. Ex-Im’s board of directors must  consider the economic impact of proposed projects while also weighing  other factors, such as creditworthiness, environmental impact, and small  business participation. Congress has given Ex-Im’s board wide discretion  in how it implements the economic impact requirements specified in the  bank’s charter. It directs Ex-Im to examine certain factors, such as  whether products are in surplus on global markets (or in “oversupply,”  according to Ex-Im), but gives the board the authority to approve  applications that it believes will have an overall benefit on U.S. production  and employment, despite some negative impacts. Determining the various  economic impact aspects that weigh into the board’s decision can be  challenging, requiring Ex-Im to identify what international markets are  likely to be involved and to quantify how economic trends may play out in  the future. While Ex-Im’s board of directors may sometimes have to  consider economic impact in the face of imperfect information, it needs to  be able to rely on a process that involves sound methodology and  consistent application of procedures, and to understand key assumptions  and areas of uncertainty. Moreover, Ex-Im clients and affected U.S.  industries need a process that is transparent and, where possible,  predictable.
Although Ex-Im generally follows its broad economic impact procedures,  we identified several areas for improvement related to the screening of  applications for economic impact, the analysis methodology, and the  transparency of the overall process. First, while Ex-Im has the discretion  to use screens to identify applications for further review and to allocate its  staff resources effectively, the effectiveness of Ex-Im’s $10 million screen  is uncertain because Ex-Im has not conducted an analysis to determine the  extent to which it identifies projects that could meet the statutory  definition of substantial injury. Next, we identified limitations in certain  assumptions Ex-Im makes to estimate economic impact in its detailed  analyses. In some cases, these limitations had not been adequately  disclosed nor had the sensitivity of economic impact conclusions to these  assumptions been explored. In addition, while Ex-Im makes the economic  impact procedures publicly available, the procedures do not provide  adequate transparency and predictability. This has been noted by  exporters, industry, and U.S. government agency officials. Ex-Im’s own  competitiveness survey cites one respondent as saying that the  unpredictability of the economic impact process hurts U.S. sourcing in  projects.
Congress demonstrated in Ex-Im’s 2006 reauthorization its continuing  interest in Ex-Im having a sound and transparent economic impact  process, and addressed certain transparency concerns. We believe that  several improvements in Ex-Im’s process are still needed to ensure that its  decisions stand up to the inevitable scrutiny of interested and affected  parties.
section_title: Recommendations
paragraphs: To improve Ex-Im’s identification and analysis of applications for  economic impact, we recommend that the Chairman of the Export-Import  Bank of the United States take the following three steps:    Review the $10 million threshold to determine whether additional steps  are needed to mitigate the risk of exempting from more detailed review  applications that could meet the definition of substantial injury. The  additional steps could include, for example, selectively reviewing  transactions that would affect relatively small U.S. industries or sensitive  sectors.
Create specific methodological guidelines for staff analyzing applications  for economic impact, bearing in mind relevant OMB guidance where  appropriate.
Review and strengthen internal controls concerning the economic impact  analysis to ensure, for example, that staff members conducting the  analyses have sufficient training and guidance in Ex-Im’s economic impact  methodology, that relevant Ex-Im staff verify and approve the analyses,  and that sufficient documentation is maintained to record key information.
To improve the public transparency of the economic impact process for  interested and affected parties, we also recommend that the Chairman of  the Export-Import Bank of the United States take the following three  steps:    Clarify publicly available procedures by including more information  regarding Ex-Im’s methodology for analyzing applications, such as  defining how it incorporates “oversupply” determinations in its analysis  and what measures it uses and specifying under what conditions  “proportionality” would be used.
Inform interested parties about the sensitive sector list by including a  reference to the list in the economic impact procedures.
Publish either individually, or in the publicly available board minutes, the  final determinations regarding whether a project would have a positive or  negative impact.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Export-Import Bank of the United  States. Ex-Im generally concurred with our recommendations and stated  that it will continue to explore feasible ways to improve the economic  impact procedures and make the process more consistent and user- friendly. Ex-Im stated that it will (1) review the $10 million threshold to  ensure that it satisfies its intended function; (2) enhance existing quality  assurance measures by attempting to standardize staff training and to  expand document maintenance; and (3) clarify the basis for an assessment  of “oversupply,” and create criteria for using “proportionality.” In addition,  Ex-Im agreed to seek to incorporate our suggestions as it refines its  analytic methodology, but the bank noted that a single approach would  not address the diversity of transactions it considers. We acknowledge  that a single approach is not necessarily appropriate for all analyses, but  we believe that a consistent set of methodological principles, such as  those embodied in OMB guidance, would nevertheless enhance the  economic impact analysis process. Lastly, Ex-Im agreed that increased  transparency and predictability will improve the economic impact process  and notes that it has amended its economic impact procedures to reflect  increased transparency requirements laid out in the Export-Import Bank  Reauthorization Act of 2006. We believe that the process’s transparency  and predictability can be further improved by several practices, such as  referring to the sensitive sector list in the procedures and publishing the  bank’s determination regarding whether a project will have a positive or  negative net impact. Ex-Im also provided technical comments, which we  have incorporated where appropriate. Ex-Im’s official comments are  reprinted in appendix III.
As agreed with your offices, unless you publicly announce the contents of  this report, we plan no further distribution until 30 days from the report  date. At that time, we will send copies of this report to other interested  congressional committees. We also will provide copies of this report to the  Chairman of the Export-Import Bank of the United States. In addition, this  report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-4347 or YagerL@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Other GAO contacts and staff acknowledgments  are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Ranking Member of the Senate Committee on Finance and a member  of the Senate Committee on Banking, Housing, and Urban Affairs  requested that we review the Export-Import Bank of the United States’  (Ex-Im) economic impact analysis process. In this report, we reviewed   (1) Ex-Im’s overall policies and procedures for determining economic  impact; (2) the extent to which Ex-Im’s procedures provide for the  identification and appropriate analysis of applications that could  potentially cause adverse economic impact; and (3) the extent to which its  policies, procedures, and decisions are transparent to interested and  affected parties.
Country.
Type of industry/commodity.
Finance amount.
Final board decision.
Staff members conducting analyses.
Methodological issues.
Given the small universe (17) of detailed economic impact analyses  conducted by Ex-Im from fiscal years 2002 through 2006, we determined  that selecting a random sample would not be necessary or appropriate.  While we used these 5 case studies to guide some of our work, we  reviewed all 17 detailed analyses because findings that are based solely on  a judgmental sample would not necessarily be generalizable to all detailed  economic impact analyses conducted.
To describe Ex-Im’s legal interpretation of its statutory economic impact  analysis mandate, we reviewed the statutory provision as it was written in  the bank’s 2002 reauthorizing legislation; reviewed other relevant legal  documents; and interviewed Ex-Im legal staff, including the General  Counsel, regarding their interpretation. To describe Ex-Im’s economic  impact analysis process, we reviewed Ex-Im’s economic impact analyses  procedures published in March 2003 and compared them with the   2002 reauthorization legislation for consistency. To describe how Ex-Im’s  2006 reauthorization will impact the economic impact procedures, we  reviewed the relevant legislation and the revised economic impact  procedures, and spoke with cognizant Ex-Im officials. To describe how  Ex-Im implements the economic impact procedures, we spoke with the  analysts who analyzed our 5 case studies, the engineers who assisted with  the analysis, and the supervising officials.
To determine how many applications Ex-Im coded for economic impact,  we reviewed data on all projects processed between fiscal years 2003 and  2005. Ex-Im did not use the same set of economic impact procedures when  reviewing applications in fiscal year 2002; therefore, we did not use data  from that fiscal year. In addition, Ex-Im did not have complete data for  fiscal year 2006 projects at the time of our review. These data have some  limitations that could result in small deviations from the values and  quantities that we reported. Despite limitations, we determined that the  transaction data provided by Ex-Im were sufficiently reliable for our  purposes.
To determine whether the exportable goods in each of our five case  studies were subject to antidumping orders and countervailing duty  orders, we reviewed the United States International Trade Commission’s  (ITC) list of current antidumping and countervailing duty orders in place  as of October 23, 2006, and February 15, 2007; the Federal Register from  1997 to the present for notices posted by ITC or the Department of  Commerce’s International Trade Administration (ITA); and ITA’s AD/CVD  Investigations Federal Register History. To determine whether the  exportable goods in our five case studies were subject to “safeguards,” we  searched the Federal Register from 1997 up to the date of the case for  notices posted by ITC or ITA that mentioned the name of the product  involved in our cases.
To assess the extent to which Ex-Im’s procedures provide for the  identification and appropriate analysis of requests to finance projects that  could potentially cause adverse economic impact, we reviewed the  economic impact provisions of Ex-Im’s charter and the procedures  implementing those provisions. To determine the effectiveness of the   $10 million threshold, we attempted to judgmentally sample 10  applications that requested financing for capital good exports between   $5 and $10 million. However, our ability to do so was limited because Ex- Im could provide the relevant information for only 2 of the 10 projects. We  reviewed 17 detailed economic impact analyses and documentation  related to some applications that had not received a detailed analysis, and  conducted interviews with Ex-Im officials on the 5 analyses that we chose  as case studies. We also reviewed the case studies within a panel of Ph.D.  economists in GAO. In addition, we interviewed officials from agencies  that conduct similar analyses at the ITC and the Overseas Private  Investment Corporation, and reviewed cost-benefit analysis guidance from  the Office of Management and Budget. We also reviewed relevant reports  from GAO, the Congressional Budget Office, and the Congressional  Research Service.
To assess the economic impact analysis process’s transparency, we  reviewed the Federal Register to confirm that Ex-Im posted public notices  for all detailed analyses it began. We reviewed Ex-Im’s Web site to  establish what information Ex-Im made public (including current  procedures and final transaction decisions). We also reviewed internal   Ex-Im documents. We interviewed agency officials from the Departments  of Commerce, State, and the Treasury and from the Office of the U.S.  Trade Representative who formally review the economic impact  memorandums. We compared draft analyses that the agencies received  from Ex-Im with final analyses and reviewed communications between the  agencies and Ex-Im. We also interviewed representatives from companies  whose exports relied on Ex-Im financing, and representatives from  organizations that expressed concern over the projects’ potential impact  on the industries they represent. We used our 5 cases to determine which  agency officials, exporters, and industry officials to interview.
We conducted our work from October 2006 through August 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: List of Detailed Economic Impact Analyses That Ex-Im Began between Fiscal Years 2002 and 2006
paragraphs: We requested and received copies of all detailed economic impact  analyses Ex-Im conducted in fiscal years 2002 through 2006. We also  requested data on all transactions processed during the same fiscal years.  However, Ex-Im only had complete and reliable data for fiscal years   2003 though 2005. Transactions processed in fiscal years 2002 were  governed by a different charter than the other fiscal years, and data for  transactions processed in 2006 were not available at the time of our  review. Thus, the number of detailed analyses presented in this appendix  does not correspond exactly with numbers cited in the report text.
section_title: Appendix III: Comments from the Export- Import Bank of the United States
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the person named above, the following people made key  contributions to this report: Celia Thomas, Assistant Director;   Miriam A. Carroll; Michael Hoffman; and Amber Simco. The following  people provided technical assistance: Karen Deans, David Dornisch, Etana  Finkler, Ernie Jackson, and Mark Speight.