Export-Import Bank: Reauthorization Issues
Released: 1997-04-29T00:00:00

Letter

Background

Created in 1934, the Eximbank is an independent U.S. government agency that operates under a renewable congressional charter that expires on September 30, 1997. In conducting its operations, the Eximbank must comply with several statutory requirements. The Eximbank is required to supplement and encourage, but not compete, with private sources of seek to reach international agreements to reduce government-subsidized provide financing at rates and on terms that are “fully competitive” with those of other foreign government-supported export credit agencies (ECA) (12 U.S.C. sec. 635 (b)(1)(A)(B)). loans to foreign buyers of U.S. exports, loan guarantees to commercial lenders, export credit insurance to U.S. exporters and lenders, and working capital guarantees for pre-export production.

Reflecting the growing move toward privatization in the developing world, the Eximbank has recently expanded its activities to include project finance. Project finance involves financing where repayment is provided through the project’s anticipated future revenues rather than through sovereign (government) or other forms of guarantee. In fiscal year 1997, the Eximbank estimates project-financing deals will account for about 30 percent of its total financing commitments (these deals accounted for about 14 percent of its assistance in 1996).

Rationales Regarding Eximbank Programs

I would first like to discuss the various rationales that have been advanced for and against government involvement in export finance and GAO’s position on this matter. The arguments for and against the programs focus on three issues: (1) trade policy leverage, (2) industry effects, and (3) employment and trade effects. Supporters of the Eximbank export finance programs say that this assistance provides leverage in trade policy negotiations, helps to “level the international playing field” for U.S. business, corrects “market failures,” and helps to increase exports and employment. According to Eximbank officials, the direct and indirect benefits include follow-on sales and support contracts, high-paying jobs, and federal tax revenues. Opponents say that the Eximbank’s programs result in no net increase in national employment and output, misallocate resources, and are a form of corporate welfare.

Trade Policy Leverage

Supporters believe that the Eximbank’s programs (1) help assist U.S. companies to compete against foreign companies that receive similar types of government support and (2) provide leverage in trade policy negotiations. Supporters hold that the Eximbank helps to neutralize the foreign exporter’s advantage in such situations by providing similar financing for U.S. exports. However, critics have questioned the usefulness of these programs in getting countries to reduce subsidies. As discussed below, the foreign competitor countries we studied offer a variety of government-supported export finance programs.

As already noted, the Eximbank is required to seek international agreements to reduce government-subsidized export financing. OECD nations, including the United States, have made progress since the late 1970s in negotiating reductions in officially supported export subsidies. U.S. Treasury officials who participate in these negotiations told us that the Eximbank’s programs have provided them with leverage in negotiating subsidy reductions.

Industry Effects

Another rationale that proponents make is that markets do not always lead to an optimal allocation of resources and that so-called “market failures” provide an additional justification for government export finance programs.

Eximbank claims that the following are examples of market failures:

Private financial institutions may be unwilling to support exports to emerging markets even when the risk is correctly priced.

Foreign buyers in certain markets may be unable to secure long-term financing for capital equipment.

Finally, and probably the most often-cited example is that small business exporters may have difficulty in obtaining export financing.

Supporters of government export finance programs believe that correcting such “market failures” can improve economic efficiencies and overall economic well-being. Opponents hold that there is no credible evidence that private capital markets do not function efficiently and that government intervention can potentially distort markets.

Employment and Trade Effects

According to the Eximbank, the exports it financed in fiscal year 1996 “supported or maintained” nearly 300,000 jobs. We do not dispute that some jobs are directly supported through the Eximbank’s programs. However, economists and policy makers recognize that employment levels are substantially influenced by macroeconomic policies, including actions of the Federal Reserve. At the national level, under conditions of full employment, government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy. Hence, the jobs figure that the Eximbank reports may not represent net job gains.

Others have supported export promotion programs as a way to substantially reduce the U.S. trade deficit. These programs, however, cannot produce a substantial change in the overall U.S. trade balance. The trade balance is largely determined by macroeconomic conditions, such as savings and investment and the government budget deficit. According to the President’s Council of Economic Advisers, significantly reducing the trade deficit will require macroeconomic policy measures, such as eliminating the federal budget deficit.

Distribution of Eximbank Financing

During fiscal years 1994 to 1996, the Eximbank provided an annual average of $12.8 billion in export financing commitments (loans, guarantees, and insurance) at an annual average program cost of $877 million. The Eximbank projects that it will provide about $16.5 billion of export finance support in fiscal year 1997, an all-time high. Program costs are projected to fall from $934 million in fiscal year 1996 to $773 million in fiscal year 1997 and to $681 million in fiscal year 1998 because of a projected increase in lower-risk financing (such as project finance and aircraft transactions, which consume relatively lower amounts of its program budget). (See table I.1.) Another reason for the decrease is that no additional money for tied aid was included in the Eximbank’s fiscal year 1998 budget request.

In fiscal year 1996, China was the Eximbank’s top export market ($1.2 billion), followed by Indonesia ($825 million), Mexico ($753 million), Trinidad and Tobago ($632 million), and Brazil ($488 million). (See fig. I.1 for a list of the Eximbank’s top 10 markets and their associated program costs for fiscal year 1996.) Relative to total U.S. goods exported to these markets, the Eximbank supported about 11 percent of U.S. exports to China, about 22 percent of U.S. exports to Indonesia, about 1 percent of U.S. exports to Mexico, about 93 percent of U.S. exports to Trinidad and Tobago, and about 4 percent of U.S. exports to Brazil.

During fiscal years 1994 through 1996, the 15 largest users (lead U.S. exporters or contractors) of Eximbank financing accounted for about $14.4 billion, or about 38 percent, of the Eximbank’s total export-financing commitments made during that period. (see fig. I.2). The export finance transactions involving these companies absorbed about 27 percent of the Eximbank’s total program budget, or about $682 million over the same period. However, these data do not capture the full range of U.S. companies associated with Eximbank-financed deals such as subcontractors and other suppliers.

About 20 percent ($7.5 billion) of the Eximbank’s financing commitments—about 79 percent of its total transactions—went to small business, primarily through its insurance programs. (See table I.2.) The Eximbank also supports the export of several dual-use (military and civilian) items. (See app. V).

The Eximbank has participated in international (OECD) negotiations to limit the use of tied aid and has used its tied aid capital projects fund to counter foreign countries’ use of tied aid. The OECD efforts have resulted in a decrease in reported international levels of tied aid—the annual average level of tied aid decreased from about $10 billion in 1992 to approximately $4 billion in 1995. During 1994-96, the Eximbank board of directors approved the use of war chest funds in 40 instances. (See app. II for a list of firms and countries that actually received war chest assistance in 1994-96.) The balance in the tied aid war chest was $337.7 million as of September 30, 1996.

Since fiscal year 1993, the Eximbank has issued guarantees related to 23 project finance deals totaling $5.6 billion (the estimated value of these projects was $21.5 billion). (See table III.1.) Because these projects tend to be large, the Eximbank often shares project risk with other export credit agencies, the Overseas Private Investment Corporation (OPIC), or with multilateral institutions such as the International Finance Corporation. With regard to project finance, the Eximbank’s activity in this rapidly expanding area has increased from one deal in fiscal year 1993 to seven in fiscal year 1996. According to the Eximbank, this growth is a reflection of the rising demand for capital projects in emerging market economies.

Foreign Competitors’ Export Finance Programs

The six G-7 countries we studied—Canada, France, Germany, Italy, Japan, and the United Kingdom (U.K.)—all have ECAs, each with different roles and structures. (According to Euromoney, a total of 73 ECAs now exist worldwide). The support the G-7 ECAs provide for their exporters can be measured in various ways. In terms of the percentage of national exports these ECAs have financed, the Eximbank is tied for last. In 1995, the Eximbank supported 2 percent of total U.S. exports (the latest year for which comparative data are available). This figure is at the bottom of the range of support provided by the other G-7 nations. In contrast, Japan’s ECAs supported 32 percent of its country’s exports in that year. France was second, with 18 percent. The support provided by Canada, Germany, the United Kingdom, and Italy ranged from 7 to 2 percent.

In terms of the share of financing commitments extended by ECAs in 1995, the Eximbank ranks fourth: Japan, France, and Germany accounted for the largest shares. Japan extended over half (56 percent), followed by France (20 percent), and Germany (9 percent). The United States and Canada extended smaller shares—5 percent each—followed by the United Kingdom (3 percent) and Italy (2 percent).

Comparing ECA programs is difficult for a number of reasons:

Each nation has structured its export financing differently — there is no single export finance model. ECAs in the six nations we studied function as independent government agencies, sections of ministries, or private institutions operating under an agreement with the government. Most of the countries we studied offered overseas investment insurance through their ECA. However, in the United States, overseas investment insurance is offered through a separate agency, OPIC. (Table IV.1 provides a summary of the principal differences between the Eximbank and the six ECAs we studied.)

Unlike the Eximbank, other ECAs appear to compete to varying degrees with private sources of export financing. They do not aim to function exclusively as “lenders of last resort,” as the Eximbank strives to do. For example, the Japanese government’s export insurance provider is Japan’s only export insurer and reported that it insured about 28 percent ($124 billion) of all Japanese trade transactions in 1995—the highest level of trade and investment insurance underwriting in the world (private or public). Similarly, Canada’s Export Development Corporation (EDC) does not function as a lender of last resort. The Eximbank aims to complement and not compete with private sources of capital.

ECAs also have different fee structures. As stated earlier, the Eximbank must set fees that are “fully competitive” with the pricing and coverage offered by other major ECAs. The Eximbank has interpreted “fully competitive” by setting its fees at levels below most of the foreign competition (as low or lower than about 75 percent of those offered by other major export credit agencies). U.K.’s ECA aims to set fees at levels high enough to cover operating costs.

Other ECAs we studied over different amounts of political and commercial risks. Currently, the Eximbank provides 100-percent, unconditional political and commercial risk protection on most of the medium- and long-term coverage (coverage over 5 years) it issues. Other ECAs generally require exporters and banks to assume a portion of the risks (usually 5 to 10 percent) associated with such support. This concept of risk-sharing is a fundamental difference between the Eximbank and these ECAs.

Finally, ECAs use different budgetary and reporting standards thus making it difficult to directly compare the Eximbank’s program costs. The 1990 Federal Credit Reform Act (P.L. 101-508, Nov. 5, 1990) requires the Eximbank to estimate and budget annually for the total long-term costs of its credit programs on a net present value basis. Other nations operate on a cash basis and are not subject to similar budget constraints. Under this approach, a government reimburses an ECA for total cash losses sustained on its operations during the year. Moreover, costs reported may not always represent total expenses to the government. For example, Canada’s EDC uses a separate national interest account (“Canada Account”) to support some export finance activity. The costs of this support are accounted for separately in its year-end reports. (Table IV.2 provides information on the costs of the G-7 nations’ export-financing programs.)

ECAs Costs Are Difficult to Compare

Although direct cost comparisons between Eximbank and other national programs are difficult to make, the available cost data we reviewed suggests that several ECAs in the six countries we studied have reported improved financial results. France, Germany, and the United Kingdom all reported positive financial results for their ECAs in 1995, the most recent year for which complete information was available. The Berne Union reported that among its member countries there was an aggregate loss of $501 million in 1995 compared with $6.5 billion in 1994. According to the Berne Union, this change was attributed to an improved global debt scenario and tighter ECA underwriting standards.

In sum, the Congress may wish to assess Eximbank’s reauthorization within the context of the international competition. While these ECAs operate under different mandates and are subject to different budgeting and reporting standards than the Eximbank, they all help their exporters compete for contracts in the world market. The costs of these programs need to be weighed against their benefits to exporters and the leverage they provide in international negotiations to reduce government support for these types of programs.

Mr. Chairman and Members of the Subcommittee that concludes my prepared statement. I will be happy to answer any questions you may have.

Distribution of Eximbank Financing

Table I.1: The U.S. Export-Import Bank’s Financing Commitments and Program Costs, 1994-98 N/A = Not available.

Total costs are defined as the Eximbank’s program costs and administrative costs.

Figure I.1: Top 10 Country Recipients of Eximbank Financing Authorizations and Associated Estimated Program Costs, Fiscal Year 1996

Figure I.2: Top 15 Recipients of Eximbank Financing, Fiscal Years 1994-96

W estinghouse Elec.

U.S. Firms That Received Tied Aid War Chest Assistance, 1994-96

Project Finance

Telecom.

Political risk coverage only.

Table III.2: Infrastructure Projects in Emerging Markets Utilizing ECA Financing

N/A = Not applicable because no projects reported.

At least one completed project with ECA financing.

Proposed project(s) with ECA financing.

Comparison of G-7 Nations’ Export Credit Agency Structures and Roles

Public, independent government agency. —Statutory mandate to supplement and encourage, but not compete with, private sources of capital. —Receives a credit subsidy appropriation each year from the U.S. Congress.

Export Development Corporation (EDC)

Public, independent government agency. —Some competition with private sector. —Aims to be financially self-sustaining.

Private. Both COFACE and BFCE have recently been privatized. Government covers deficits incurred on state account activities. —COFACE exercises a dual role by administering export-financing support on behalf of the French government and offering export finance assistance through its own programs.

Private consortium. Hermes and C&L Deutsche Revision jointly administer German export finance program on behalf of the state. KfW offers export loans to German exporters. Government covers deficits on state account activities. —Hermes and C&L exercise a dual role by operating the government’s export finance programs and offering export finance assistance privately.

Special Section for Export Credit Insurance (SACE) and Central Institute for Medium Term Credits (Mediocredito Centrale)

Public agencies. —Some competition with private sector as Mediocredito Centrale also functions as commercial bank.

Public. JEXIM is a independent government agency. EID-MITI is housed in Japan’s Ministry of International Trade and Industry. — JEXIM aims to supplement and encourage commercial bank financing but not compete with it. —EID-MITI competes with private sector providers.

Export Credits Guarantee Department (ECGD)

Public, independent government department. —Short-term business was privatized. —Has a specific mandate to break even financially.

COFACE = Compagnie Francaise d’Assurance Pour Le Commerce Exterieur.

BFCE = Banque Francaise du Commerce Exterieur.

Table IV.2: Reported Financial Results of Government-Supported Export-Financing Programs in the United States and Six Competitor Countries, 1994-96

($979) ($716) ($934) ($503)

Hermes/C&L and Deutsche Revision ($1,985) ($1,501) ($1,821) ($822) ($80) ($113)

N/A = Not available.

Note 1: There are several caveats with regard to how the numbers in this table should be interpreted. The type and nature of each nation’s export credit agency (ECA) business varies in ways that ultimately influence its costs. In the case of Japan’s Export-Import Bank, 44 percent of its fiscal year 1995 commitments were for loans not “tied” to Japanese exports, 37 percent were for overseas investment loans, and 8 percent for import loans. Only 11 percent of JEXIM’s total financing in that year was reported to have been used for export loans. Where there are two ECAs, we have combined financial results.

Note 2: Negative amounts indicate a deficit. Positive amounts indicate a surplus.

The figures for the Eximbank represent the credit subsidy obligation and administrative costs obligated for the fiscal year.

Canada’s EDC reported net income of $171 million, $44 million, and $112 million in 1994, 1995, and 1996, respectively. However, these amounts do not include the support separately provided through the Canadian national interest account ($200 million in 1996 but not available for 1994 and 1995). EDC conducts a significant (42 percent) level of business with Organization for Economic Cooperation and Development (OECD) nations, which influences its profitability.

The totals for Germany include interest revenues from debt reschedulings.

The Japanese fiscal year ends March 31. The figures for Japan’s EID-MITI include direct transfers from the Ministry of Finance for Paris Club debt writeoff of $272 million in fiscal year 1994 and $233 million in 1995.

The United Kingdom’s fiscal year ends March 31. ECGD figures include amounts spent on foreign exchange insurance and interest rate subsidies.

Eximbank’s Financing of Dual-Use Exports

For the last 3 fiscal years, the Eximbank has had the authority to finance exports of nonlethal defense items whose primary end use is for civilian purposes. The Eximbank is authorized to use up to 10 percent of its annual commitments to finance the exports of these dual-use (military and civilian) items. As depicted in tables VI.1 and VI.2 the Bank has financed several items but well below the 10-percent annual cap. The Eximbank’s authority to finance these items expires on September 30, 1997. We are required to report to the Congress no later than September 1, 1997, on the end use of these items. We plan to issue a report to the Congress on this matter by late July 1997.

Cap on dual-use commitments (10% limit of total projected commitments)

Romantsa (Romanian Air Traffic Administration Services)

Related GAO Products

Ex-Im Bank’s Retention Allowance Program (GAO/GGD-97-37R, Feb. 19, 1997).

Export Finance: Federal Efforts to Support Working Capital Needs of Small Business (GAO/NSIAD-97-20, Feb. 13, 1997).

Export-Import Bank: Options for Achieving Possible Budget Reductions (GAO/NSIAD-97-7, Dec. 20, 1996).

Retention Allowances: Usage and Compliance Vary Among Federal Agencies (GAO/GGD-96-32, Dec. 11, 1995).

Export Finance: Comparative Analysis of U.S. and European Union Export Credit Agencies (GAO/GGD-96-1, Oct. 24, 1995).

Export Promotion: Rationales for and Against Government Programs and Expenditures (GAO/T-GGD-95-169, May 23, 1995).

International Trade: U.S. Efforts to Counter Competitors’ Tied Aid Practices (GAO/T-GGD-95-128, Mar. 28, 1995).

International Trade: Combating U.S. Competitors’ Tied Aid Practices (GAO/T-GGD-94-156, May 25, 1994).

Export Finance: Challenges Facing the U.S. Export-Import Bank (GAO/T-GGD-94-46, Nov. 3, 1993).

Export Finance: The Role of the U.S. Export-Import Bank (GAO/GGD-93-39, Dec. 23, 1992).

The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.

U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.