Export Promotion: Export-Import Bank Has Met Target for Small Business Financing Share
Published: 2008-01-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Export-Import Bank (Ex-Im) provides loans, loan guarantees, and insurance to support U.S. exports. Its level of support for small business has been a long-standing issue of congressional interest. In 2002, Congress increased the proportion of financing Ex-Im must make available for small business to 20 percent. In 2006, Congress directed Ex-Im to make organizational changes related to small business and to better evaluate its small business efforts. This statement discusses (1) trends in Ex-Im's small business financing since fiscal year 2000 and (2) the weaknesses GAO found in the tracking and reporting of Ex-Im's small business financing and the steps Ex-Im has taken to address them. This testimony is based primarily on GAO's March 2006 report (GAO-06-351) concerning Ex-Im's small business program. In that report, we recommended that Ex-Im (1) improve the data it maintains on its customers with regard to their small business status; (2) improve its system for estimating the value and proportion of direct small business support for those transactions where the exporter is not known at the time of authorization; (3) more accurately determine and clearly report the number of transactions that directly benefit small business; and (4) have its auditor audit Ex-Im's reporting of its direct support for small business. Ex-Im agreed with three of the four recommendations. We discuss the actions Ex-Im has taken to implement our suggestions in this statement.
section_title: What GAO Found
paragraphs: The share of Ex-Im financing directly benefiting small business has increased over recent years, surpassing the required 20 percent in 2006 and 2007. The percentage increase reflects a slow increase in Ex-Im financing for small businesses, while financing for non-small businesses was noticeably lower in 2006 and 2007 compared to 2005. Ex-Im continues to finance most small business transactions through insurance or working capital guarantees. In our 2006 report, we found weaknesses in Ex-Im's data and data systems for tracking small business financing and made recommendations for improvement, and Ex-Im has taken steps to address those weaknesses. We reported that while Ex-Im generally classified companies' small business status correctly, weaknesses limited its ability to accurately determine small business financing values. For transactions where Ex-Im can identify the exporter at the time it authorizes the transaction, we found that internal control weaknesses in Ex-Im's data systems limited its ability to accurately determine small business financing amounts and share. For transactions where Ex-Im cannot identify the exporter up-front, we found that weaknesses in its system for estimating small business financing also limited its ability to accurately measure and report on such financing. We also reported some limitations in Ex-Im's calculation of the number--as opposed to the value--of transactions benefiting small business. GAO made four recommendations. Ex-Im has taken several steps in response to those recommendations. Most notably, Ex-Im replaced its previous data systems with "Ex-Im Online," an interactive, web-based process that allows exporters, brokers, and financial institutions to transact with Ex-Im electronically. According to Ex-Im, this has resulted in more timely and accurate information on Ex-Im's financing.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the Export-Import Bank of the  United States’ (Ex-Im) small business program. I appreciate the  opportunity to provide some insights from GAO’s work on this issue. As  you know, since the early 1980s when Congress first directed Ex-Im to  make available a specified percentage of its export financing for small  businesses, there has been considerable interest in Ex-Im’s support for  small business. Initially, Congress directed Ex-Im to make 10 percent of its  financing authority available to small businesses, but increased the  requirement to 20 percent in the 2002 reauthorization of the bank’s  charter. While Congress did not change the percent required in the 2006  reauthorization of Ex-Im, it did direct the bank to make organizational  changes related to its small business financing, and to better evaluate its  small business efforts.
As requested, today, I will discuss (1) trends in Ex-Im’s small business  financing since fiscal year 2000 and (2) the weaknesses GAO found in the  tracking and reporting of Ex-Im’s small business financing and steps Ex-Im  has taken to address them.
My remarks are based primarily on a report that GAO published in 2006,  done at the request of this committee, and analysis we conducted to  update selected information and follow up on our recommendations. For  the 2006 report, we analyzed data on Ex-Im transactions, examined Ex-Im  documentation regarding its small business calculations, and interviewed  knowledgeable staff. The work for this statement was conducted in  accordance with generally accepted government auditing standards.
I would also note that GAO has work underway that should be of  particular interest to this committee. Ex-Im’s 2006 reauthorization  legislation requires Ex-Im to develop—and GAO to assess—performance  standards related to its small business program, including financing for  businesses owned by disadvantaged individuals and women. GAO is  specifically addressing the following questions: (1) What performance  standards has Ex-Im developed? (2) How well do they meet established  criteria such as tracking progress and providing managers needed  information to make decisions regarding assistance under the mandate?  and (3) What steps has Ex-Im taken to implement these standards? We  look forward to working with the officials at Ex-Im to complete this work,  and to reporting our findings to Congress later this year.
subsections: section_title: Background
paragraphs: Established in 1934, Ex-Im operates as an independent agency of the U.S.  government and is the official export credit agency of the United States. In  1983, Congress required Ex-Im to make available for fiscal year 1986 and  thereafter not less than 10 percent of its aggregate loan, guarantee, and  insurance authority for financing exports by small businesses. In 2002,  Congress established several new requirements for Ex-Im relating to small  business, including increasing from 10 to 20 percent the proportion of Ex- Im’s aggregate loan, guarantee, and insurance authority that must be made  available for the direct benefit of small businesses. When reauthorizing  the bank’s charter in 2006, Congress again established new requirements  for Ex-Im, including a small business division with an office of financing  for socially and economically disadvantaged small business concerns and  small business concerns owned by women, designating small business  specialists in all divisions, creating a small business committee to advise  the bank president, and defining standards to measure the bank’s success  in financing small business. Ex-Im has taken steps to meet these  requirements.
Ex-Im uses the Small Business Administration methodology to determine  whether a company qualifies as a small business. To apply this  methodology, Ex-Im obtains company information through its application  process. Ex-Im also subscribes to Dun and Bradstreet, a commercial  information vendor, which provides information about companies,  including Standard Industrial Classification (SIC) codes. Ex-Im uses the  SIC codes provided by Dun and Bradstreet to determine a company’s small  business standing by obtaining the corresponding North American  Industry Classification System (NAICS) code through the Small Business  Administration website.
Ex-Im offers a variety of financing instruments, including loan guarantees,  export credit insurance, and working capital guarantees. Ex-Im provides  its insurance either directly to exporters (non-bank-held insurance) or to  banks which in turn finance U.S. exporters (bank-held insurance). For the  bank-held insurance policies, Ex-Im authorizes the policy for the bank,  which does not know at the time it applies for the financing which  exporters will eventually use the export credit insurance.
section_title: Trends in Ex-Im’s Small Business Financing
paragraphs: Between fiscal years 2002 and 2007, Ex-Im increased the percentage of its  financing for small businesses and continued to finance most small  business transactions through insurance or working capital guarantees.
subsections: section_title: Ex-Im Small Business Financing Share Has Recently Exceeded 20 Percent
paragraphs: Ex-Im met the Congressional requirement to make available not less than  20 percent of its financing authority for small businesses in 2006 and 2007.  In fiscal year 2006, Ex-Im’s small business financing was 26.2 percent of its  total financing and in fiscal year 2007 it increased to 26.7 percent. In fiscal  years 2002 through 2005, Ex-Im did not reach the goal, with its small  business financing share ranging from 16.9 percent to 19.7 percent. (See  fig. 1.)
The percent of Ex-Im financing directly benefiting small business depends  on the value of small business financing compared to the value of non- small business financing. (See fig. 2.) While the small business financing  value slowly increased between fiscal years 2001 and 2007, the value for  non-small business financing was noticeably lower in 2006 and 2007,  compared to 2005.
section_title: Ex-Im Finances Most of Its Small Business Transactions through Insurance or Working Capital Guarantees
paragraphs: Ex-Im has primarily used three types of tools to finance small business  transactions: non-bank-held insurance, working capital guarantees, and  bank-held insurance (see fig. 3). In 2007, each tool was used to finance  about 30 percent of the $3.4 billion Ex-Im made available for small  business transactions. The remaining 8 percent of small business financing  was through medium- and long-term loans and guarantees. This pattern  contrasts with non-small business financing, where the largest share is  through medium- and long-term loans and guarantees.
Ex-Im’s use of bank-held insurance has posed some challenges for  accurately calculating the small business financing share, in part because  Ex-Im does not know who the exporter will be prior to authorizing the  bank-held insurance transaction and therefore cannot make a small- business designation at that time. For bank-held insurance and credit  guarantee facilities, Ex-Im estimates the share of the financing benefiting  small business based on data regarding previous shipments under those  types of transactions. These estimates of the small business share of  authorized transactions can differ significantly from the small business  amounts actually shipped under the authorizations. For example, in 2005  Ex-Im authorized a $10 million short-term insurance policy under which  no shipments had been reported prior to our March 2006 report. In  contrast, in 2005 Ex-Im also authorized a $50 million short-term insurance  policy where shipments under the policy exceeded $87 million for a 6- month period (or $174 million on an annualized basis).
section_title: Weaknesses Limited Ex-Im’s Ability to Measure Small Business Financing; Ex-Im Has Implemented Improvements
paragraphs: In our 2006 report, we found weaknesses in Ex-Im’s data and data systems  for tracking small business financing and made recommendations for  improvement, and Ex-Im has taken steps to address those weaknesses. We  reported that, while Ex-Im generally classified companies’ small business  status correctly, weaknesses in its data and data systems limited its ability  to accurately determine its small business financing amounts and share. In  implementing “Ex-Im Online” and certain internal control measures, Ex-Im  has improved its ability to accurately measure small business financing.
subsections: section_title: Ex-Im Generally Classified Companies’ Small Business Status Correctly
paragraphs: Based on our review of independent data and Ex-Im’s paper transaction  files, GAO reported in 2006 that Ex-Im’s classification of companies’ small  business status was generally correct. From our review of Ex-Im’s  electronic databases and Dun and Bradstreet data on companies’ sales and  employment, we estimated that, 83 percent of the time, Ex-Im’s small  business designation matched the designation based on Dun and  Bradstreet data. Based on a review of Ex-Im’s official paper transaction  files in instances where Ex-Im and Dun and Bradstreet’s designations  differed, we determined that Ex-Im’s designation was justified in most  instances.
section_title: Weaknesses Existed in Ex- Im’s Process for Calculating Its Small Business Financing
paragraphs: In our 2006 report, we identified weaknesses in Ex-Im’s process for  calculating its small business financing and made some corresponding  recommendations for improvement. The weaknesses ranged from internal  control weaknesses that may affect only a few transactions a year to more  significant weaknesses in Ex-Im’s system for estimating about one-third of  its small business support.
subsections: section_title: Internal Control Weaknesses Existed in Ex-Im’s Data Systems Used to Measure Small Business Financing
paragraphs: We reported two internal control weaknesses in Ex-Im data systems used  to calculate and report on Ex-Im’s small business financing; by  implementing its interactive database, Ex-Im Online, the bank has largely  addressed those weaknesses.
First, we found that Ex-Im’s electronic data systems used to calculate its  small business support did not contain complete or up-to-date information  on companies’ small business status. As a result, to obtain the most  current information for these companies, Ex-Im officials needed to  identify and locate paper transaction files. While Ex-Im’s paper files  generally supported its small business designation, we found a significant  number of discrepancies between Ex-Im’s paper and electronic files.
Second, we found that Ex-Im’s data systems sometimes contained  conflicting information for the same company. Ex-Im maintained  information about insurance transactions and participants in one data  system and information about loans and guarantee transactions and  participants in another data system. According to Ex-Im, updating  information in a company’s record (including its small business  designation) in one database did not update the company’s record in the  other database. As a result, the two databases could, and in some cases  did, have conflicting information about the same company.
GAO recommended that Ex-Im improve the completeness, accuracy, and  consistency of its transaction data. Since the issuance of the GAO report,  Ex-Im Bank has implemented a number of controls to enhance and  reinforce the bank’s methodology for capturing relevant information for  reporting small business statistics. Most notably, Ex-Im replaced its  previous data systems with Ex-Im Online, an interactive, web-based  process that allows exporters, brokers, and financial institutions to  transact with Ex-Im electronically. According to Ex-Im, more than  seventy-five percent of all applications are now submitted online, omitting  the need to transfer information from paper copies to the bank’s electronic  files. Ex-Im officials stated that Ex-Im Online also includes a direct feed  from Dun and Bradstreet, which provides current demographic  information about a company so that Ex-Im can make an accurate  assessment of the company’s small business status. In addition to initiating  Ex-Im Online, Ex-Im changed its internal procedures to require  documented dual signoff on the small business determination for each  transaction.
section_title: Weaknesses Existed in Ex-Im’s System for Estimating Small Business Financing When the Exporter Is Not Immediately Knowable
paragraphs: We reported two weaknesses in Ex-Im’s system for estimating small  business financing when the exporter is not known at the time Ex-Im  authorizes the transaction, which applied to about one-third of Ex-Im’s  total small business financing for fiscal year 2004. First, we found that Ex- Im’s estimates might not accurately reflect the amount of small business  financing under bank-held insurance policies because of large differences  between the amount of financing authorized and the amount of financing  used to actually ship goods. For both fiscal years 2004 and 2005, the value  of shipments under bank-held insurance policies was a fraction of the total  authorized value of the bank-held insurance policies. For example,  according to Ex-Im records, it authorized $3.4 billion of bank-held  insurance transactions for fiscal year 2004, but there were only $280  million in shipments under bank-held insurance policies in the first 6  months of the fiscal year. Ex-Im applied its estimate of the small business  share of transactions, based on these shipments, to the $3.4 billion of  bank-held insurance policies it authorized during the year, and determined  that about $720 million of the authorized value of bank-held insurance  policies during the year directly benefited small business. Thus, the  method resulted in estimates of small business shares for the authorized  value of these types of transactions based on a very small share (about 8  percent) of the total authorized value.
Also, we found that Ex-Im classified the small business status of a  significant portion of the companies making shipments as “unknown” and  excluded them from its calculation of the estimate of its small business  support. Of the $280 million of shipments under bank-held insurance for  2004, for example, an Ex-Im official classified about $128 million (or  nearly half) as shipments by companies whose small business status was  “unknown” and excluded these shipments from its calculation of total  shipments.
GAO recommended that Ex-Im improve its system for estimating the value  and proportion of direct small business support for those transactions  where the exporter is not known at the time Ex-Im authorizes the  transaction. According to Ex-Im, its implementation of Ex-Im Online  improves these estimates because borrowers can now enter their  shipment reports directly into Ex-Im Online. According to Ex-Im, two- thirds are being entered in this manner. Ex-Im officials stated that such  automated submission of shipment information has significantly reduced  the amount of shipments by exporters whose small business status is  unknown. They stated that only 3 percent of the fiscal year 2007 shipments  under bank-held insurance were by exporters whose small business status  was unknown. They also stated that, for credit guarantee facilities, no  shipments were recorded by exporters whose small business status was  unknown.
GAO also recommended that Ex-Im engage an external auditor to audit its  annual, legislatively mandated report on its direct support for small  business. Ex-Im engaged Mayer Hoffman McCann P.C., its internal auditor,  to perform the audit. With respect to credit guarantee facilities, bank-held  policies, and non-bank-held insurance (i.e., single buyer/multi-buyer)  policies, the auditors found that Ex-Im’s process to obtain and calculate  eligible small business counts operates in accordance with its policy and  approved methodology. However, the auditors found exceptions to stated  policy during their review of the working capital guarantee and non-credit  guarantee facilities programs. For example, in the working capital  guarantee program, the auditors noted a number of exceptions related to  the completion of data fields that would have “flagged” these accounts as  small business. The auditors stated that they believed that Ex-Im  management was taking action to strengthen supervisory edit controls  over these processes.
section_title: Ex-Im’s Reporting on the Number of Transactions Directly Benefiting Small Business
paragraphs: Ex-Im is statutorily required to report on the number of its authorized  transactions that directly benefit small business; in our 2006 report we  found that Ex-Im’s method of determining this number included some  transactions that did not directly benefit small business. Ex-Im has  frequently reported that about 85 percent of its authorized transactions  directly benefit small business. For instance, in fiscal year 2004, it reported  that 2,572 (or 83 percent) of its authorized transactions directly supported  small businesses. This count was based on crediting all 698 bank-held  insurance policies as directly benefiting small business. We reported that  while many of these transactions directly benefit small business, they may  not all directly benefit small business, as evidenced by the fact that Ex- Im’s own estimate showed that about 20 percent of the value of bank-held  insurance policies directly benefited small business during 2004.
GAO recommended that Ex-Im more accurately determine and clearly  report the number of transactions that directly benefit small business;  however Ex-Im officials disagreed with this recommendation and have not  changed their methodology. Ex-Im officials stated that they reviewed their  process and believe that it is appropriate. A senior official also noted that  since the methodology has been used for a number of years, the bank can  confidently report trends. The bank also believes that their methodology  provides a conservative estimate.
section_title: Conclusions
paragraphs: Since GAO’s last report on small business financing in March 2006, Ex-Im  has made a number of changes. It also surpassed the target of allocating 20  percent of its financing to small business for both 2006 and 2007. While  this is partly due to a drop in the overall level of financing provided to  other customers by the bank, Ex-Im has shown increases in the level of  business with small firms over several years. In addition, Ex-Im has made  changes in its data systems which allow Congress to have a greater level of  confidence in its reporting on small business and other matters, and it has  instituted new internal controls to further increase accuracy in  categorizing firms’ small business status. Managing its resources going  forward to respond to ongoing Congressional interest in the composition  of Ex-Im’s financing will, undoubtedly, entail new challenges for the bank.  We look forward to working with Ex-Im further on issues related to  evaluation of its small business financing efforts, including those directed  at businesses owned by disadvantaged individuals and minorities, as  mandated by the Congress with the strong support of this Committee.
Madam Chairwoman, this concludes my prepared remarks. I would be  pleased to respond to any questions you or other members of the  committee may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: Should you have any questions about this testimony, please contact Loren  Yager at (202) 512-4347 or YagerL@gao.gov. Celia Thomas, Miriam A.  Carroll and Jason Bair also made major contributions to this testimony.
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