In 1934, the Eximbank was created to facilitate exports of U.S. goods and services by offering a wide range of financing at terms competitive with those of other governments’ export financing agencies. Such financing includes (1) loans to foreign buyers of U.S. exports; (2) loan guarantees to commercial lenders, providing repayment protection for loans to foreign buyers of U.S. exports; (3) working capital guarantees for pre-export production; and (4) export credit insurance to exporters and lenders, protecting them against the failure of foreign buyers to pay their credit obligations. The Eximbank is to absorb credit risks that the private sector is unwilling or unable to assume. Over the last 5 fiscal years, Eximbank financing commitments increased from $12.3 billion in 1992 to a high of $15.1 billion in 1993 and then declined to $11.5 billion in 1996. Because of the continued expansion of U.S. exports from $448 billion in 1992 to $706 billion in 1995, the proportion of U.S. exports supported by the Eximbank declined from 2.8 percent in 1992 to 1.7 percent in 1995. Although it is given broad discretion in implementing its programs, the Eximbank must comply with several statutory requirements. Among other things, the Eximbank is required to provide loans, loan guarantees, and export credit insurance at rates and on terms that are “fully competitive” with those of other foreign government-supported export credit agencies (12 U.S.C. sec. 635 (b)(1)(A),(B)); provide loans only in circumstances in which there is a reasonable assurance of repayment (12 U.S.C. sec. 635 (b)(1)(B)); seek to reach international agreements to reduce government-subsidized export financing (12 U.S.C. sec. 635(b)(1)(A)); and supplement and encourage, but not compete with, private sources of capital (12 U.S.C. sec. 635 (b)(1)(B)). The Eximbank operates under a renewable congressional charter that expires on September 30, 1997. The Eximbank’s activities and policies are overseen by its board of directors. The board, or appropriate designees, is responsible for approving support for individual transactions and making determinations of reasonable assurance of repayment. Prior to 1992, the budget did not measure the true costs of federal credit programs at the time of commitment. The Federal Credit Reform Act of 1990 (P. L. 101-508, Nov. 5, 1990) aimed to improve the budgeting of federal credit programs and requires government agencies, including the Eximbank, starting in fiscal year 1992, to estimate and budget for the total long-term costs of their credit programs on a net present value basis. Congress funds the Eximbank’s estimated credit subsidy costs (hereafter referred to as “subsidy costs”) through the annual appropriations process. Subsidy costs arise when the estimated program disbursements by the government exceed the estimated payments to the government, on a net present value basis. Administrative expenses receive separate appropriations and are reported separately in the budget. The act changed the budget treatment of credit programs so that their costs can be compared more accurately with each other and with the costs of other federal spending. (See app. I.) Executive branch agencies are required to calculate the subsidy costs of foreign loans and guarantees using annually updated ratings and risk premiums provided through the Office of Management and Budget’s (OMB) Interagency Country Risk Assessment System (ICRAS). Under this approach, each sovereign borrower or guarantor is rated on an 11-category scale ranging from A through F- -, although the Eximbank limits support to those rated in the top eight categories (A through E-). Generally speaking, A and B-rated markets are considered “low risk”; C, C-, and D markets are considered “medium risk”; and D-, E, and E- markets are considered “high risk.” In the future, many discretionary federal government programs, including the Eximbank’s programs, are projected to face increased budgetary constraints. The House Committee Report (104-600, May 29, 1996) accompanying the 1997 Foreign Operations, Export Financing, and Related Programs Appropriations Bill (H.R. 3540) states that the Appropriations Committee will be “hard pressed” to sustain appropriations for the Eximbank at current levels in future years and urged the Eximbank to consult with the Committee on its plans for overcoming the likely gap between demand and future federal resources. The OMB’s fiscal year 1997 Analytical Perspectives also projects a decline in Eximbank resources over the next 5 years from $726 million in fiscal year 1997 to $587 million in fiscal year 2001. From fiscal years 1992 to 1996, the Eximbank supported an average of $13.3 billion in export financing commitments (loans, loan guarantees, and export credit insurance) per year at an average subsidy cost of $750 million. These financing commitments supported U.S. exports to a number of low-, medium-, and high-risk markets. In fiscal year 1995, financing commitments to high-risk markets such as the NIS represented a relatively small percentage of the Eximbank’s total financing commitments but accounted for a relatively large share of total subsidy costs. As shown in figure 1, the Eximbank’s export financing commitments reached an all-time high of $15.1 billion in fiscal year 1993. According to the Eximbank, the subsequent decline in export financing commitments is largely attributable to the economic downturn in some Latin American countries and a cyclical decline in U.S. aircraft exports. The Eximbank’s subsidy costs ranged from a low of $603 million in fiscal year 1992 to a high of $937 million in fiscal year 1994 and dropped to $864 million in fiscal year 1996. This trend is a reflection of the Eximbank’s financing activity in high-risk markets. Credit subsidy (obligations) As shown in figure 2, most of the Eximbank’s fiscal year 1995 financing commitments were in the low- and medium-risk categories. Financing commitments for high-risk markets represented a relatively small (13 percent) share of total financing commitments yet absorbed a relatively large (44 percent) share of credit subsidy costs. Program subsidy (obligations) 2.”Other” category includes short-term insurance and working capital guarantees. In 1995, the Eximbank approved 2,049 financing transactions. As shown in figure 3, most of these transactions—83 percent—were made at or below a subsidy rate of 10 percent. The average subsidy rate for the 2,049 transactions was 5.6 percent; the range of the subsidy rates provided through these transactions varied from 0 percent to 63 percent.0% to 5.5% Eximbank support is provided to a variety of markets. In 1995, Latin America represented the largest single geographical region of Eximbank financing commitments and consumed the largest share (31 percent) of the Eximbank’s total subsidy costs. On the other hand, financing commitments to the NIS represented a relatively small share of overall financing commitments yet absorbed a relatively large share (23 percent) of the Eximbank’s total subsidy costs (see fig. 4). In fiscal year 1995, Mexico was the largest market for Eximbank-financed exports ($1.3 billion in total commitments) and absorbed the second largest individual share ($79 million) of the Eximbank’s total subsidy costs. In contrast, Russia was the fourth largest market ($521 million in fiscal year 1995) yet absorbed the largest individual share ($94 million) of the Eximbank’s subsidy costs. (See fig. 5.) Since 1992, Mexico has been the largest market for Eximbank-financed exports; Eximbank-supported exports to Russia increased from $65 million in fiscal year 1992 to $521 million in fiscal year 1995. One option we identified for reducing subsidy costs at the Eximbank would be to increase the fees charged for the Eximbank’s financing programs while still satisfying the congressional mandate for setting program fees at levels that are fully competitive with other ECAs. The Eximbank currently sets its fees so that they are as low as or lower than about 75 percent of the fees charged by other major ECAs in the same importing country markets. Our analysis showed that if the Eximbank had raised its fees to a level as low as or lower than 55-60 percent of the fees charged by other major ECAs in the same markets, the Eximbank’s subsidy cost would have been about $63 million less in fiscal year 1995. The actual cost reductions associated with any fee increase would depend on the magnitude of the fee increases and on other variables, such as the sensitivity of U.S. exporters to price increases, as well as the risk levels, terms, and conditions of future transactions. Eximbank officials expressed concerns that raising fees could affect the international competitiveness of U.S. exporters who rely upon Eximbank programs. The U.S. government has been an advocate for ongoing efforts among OECD members to establish guidelines for setting fees for government-supported export financing. Ideally, such guidelines would provide all ECAs, including the Eximbank, an opportunity to reduce their subsidy costs without putting their exporters at a disadvantage relative to their competitors. Any proposed Eximbank fee increases need to be considered within the context of the ongoing OECD negotiations to reduce government export credit subsidies. The Eximbank charges fees in an attempt to compensate for the financial risks associated with direct loans, loan guarantees, and insurance. (Credit subsidy costs arise when the present value of fees, principal repayments, and interest payments is below the levels necessary to offset the present value of the expected government outlays.) Under its system, the Eximbank places each borrower/guarantor in one of eight country risk categories—A, B, C, C-, D, D-, E, and E-. Fee rates are based primarily on the assessed risk of the particular credit and the repayment term of the transaction. For example, a transaction with a repayment term of 5 years in the lowest risk category (A) would be charged a fee of $1 per $100, whereas one in the highest risk category (E-) would be charged a fee of $7.59 per $100 of each disbursement. The Eximbank periodically revises its fee levels to help ensure that they appropriately reflect credit risks and, at the same time, remain competitive with those of other ECAs. In 1995, the Eximbank adopted a transaction pricing approach for assessing risk and assigning fees for individual, nonsovereign credits in order to better deal with a growing portfolio of private risk. The Export-Import Bank Act of 1945, as amended (12 U.S.C. 635), gives the Eximbank discretion to set fees at levels that are commensurate with risks, but at the same time at levels that are “fully competitive” with the pricing and coverage of the export credit programs offered by other major ECAs.According to Eximbank officials, the Eximbank has interpreted “fully competitive” to mean that the Eximbank’s fees should be as low as or lower than about 75 percent of the fees charged by other major ECAs in the same importing country markets. They noted that the Eximbank’s goal is not to beat the lowest fee, but to be in the “best 20-25 percent” range. The implementation of this benchmark means that the Eximbank’s fees are generally as low as or lower than those charged by foreign ECAs. To illustrate the potential savings associated with changing the benchmark, we considered three possible scenarios. Our analysis shows that the Eximbank could have reduced its subsidy costs by about $63 million if it had set its fees to be as low as or lower than 55-60 percent of the fees charged by other major ECAs for sovereign financing in the same importing country markets. We used Eximbank program authorization data for fiscal year 1995, Eximbank fee data, and the same OMB financial model that the Eximbank uses to calculate its subsidy costs. To perform this analysis, we modeled the effects of raising fees by different percentage rates while holding all other variables in the OMB model constant, such as the dollar value of Eximbank-supported transactions, the interest rate, and the repayment term. Using the same methodology, we estimated that the Eximbank could have achieved approximately $35 million in subsidy savings by setting its fees so that overall, they were as low as or lower than about 65-70 percent of the fees for sovereign financing charged by its major ECA competitors in the same markets, and approximately $84 million in savings by setting fees so that they were as low or lower than about 45-50 percent of the fees charged by these competitors. (See table 1.) According to the Eximbank, several factors play a role in the competitiveness of the loan, guarantee, and insurance programs that the Eximbank offers. These include both external factors (those that contribute to the overall demand for Eximbank support) and factors that are, to a greater extent, within the control of the Eximbank, such as the fees it charges and other technical program characteristics. Although interest rates and repayment terms for export credits (i.e., direct loans) are elements of cost competitiveness, they are highly constrained by the provisions of the OECD’s Arrangement on Guidelines for Officially Supported Export Credit. These provisions limit the variability of interest rates charged and repayment terms allowed by member ECAs. Since exposure fees charged for loans, loan guarantees, and insurance are now excluded from the OECD Arrangement, differences in fees are the most significant factor accounting for program cost differences between the Eximbank and other ECAs. When we asked Eximbank officials about the prospects for future fee increases, they responded that the Eximbank had raised fees in August 1994 and expressed concerns about how future increases would affect U.S. export competitiveness. They said that should the Eximbank lower its “competitiveness target,” the number of instances in which U.S. exporters would risk losing sales as a result of uncompetitive financing would also increase. At the same time, Eximbank officials said it is difficult, if not impossible, to predict the impact of fee changes on exporter behavior, because exporters’ sensitivity to fee changes would vary by transaction. As noted earlier, Eximbank fees are generally as low as or lower than those of its major competitors in most country markets. In some of the higher-risk markets, the Eximbank’s fee advantage over some of its competitors is even greater. For example, Eximbank fees are as low as or lower than those of its major competitors for about 85 percent of medium-term transactions in high-risk markets. Thus, we believe it would be possible for the Eximbank to further offset subsidy costs by raising fees while remaining competitive relative to other major ECAs. For instance, if fees were set at the 65-percent competitiveness level, Eximbank fees would still be as low as or lower than those of other ECAs in 65 percent of the same importing country markets, and the proportion of cases in which its fees would be higher than other ECAs would increase from 25 percent to 35 percent. The trade implications of increasing the Eximbank’s fees are uncertain and would depend in part on the magnitude and timing of such action. It is possible that charging higher fees would result in an incremental reduction in program participation on the part of U.S. exporters selling to some higher-risk markets. However, the overall impact of Eximbank fee increases are speculative. U.S. exporters’ sensitivity to a fee increase would depend on factors such as the size of the fee increase, the volume of U.S. exports to a particular market, and the risk of the importing market. Raising fees for financing transactions in the higher-risk markets, such as the NIS, could lead to a decline in U.S. exports to these countries, but we were unable to quantify the precise impact. The Eximbank, under the leadership of the U.S. Treasury, participates in ongoing OECD negotiations to minimize export financing competition and reduce government export credit subsidies. In order to remain competitive, any potential Eximbank fee increase should be considered within the broader context of progress made in these international negotiations. The United States, European Union (EU) member states, and other countries are attempting to limit government export credit subsidies and create a level playing field among their ECAs through the OECD. The OECD has promoted efforts to limit government subsidies and provide common guidelines for national export-financing assistance programs. The OECD’s Arrangement sets terms and conditions for government-supported export credits and has been progressively strengthened since it was first established in 1978. Although it was last modified in 1994 to require member countries to use only market-based interest rates on all government-provided export loans, it does not currently contain guidelines as to the minimum fees member ECAs must charge for officially supported loans, loan guarantees, or export credit insurance. In 1994, the participants in the OECD Arrangement formed a Working Group of Experts on Premia and Related Conditions to create a framework for more uniform risk premiums (i.e., exposure fees). The working group’s goal is to develop guiding principles for setting fees, among other issues, before the 1997 OECD Ministerial Meeting. As part of this overall effort to gradually reduce government export finance subsidies, OECD members have tentatively agreed to work toward creating member export financing systems that include, among other things, (1) risk-based premiums (defined to include exposure fees) based on a common reference country classification system, (2) premiums that are set high enough to cover long-term operating costs and losses, and (3) establishment of a fee benchmarking system. According to an Eximbank official, it is hoped that these negotiations will eventually lead to an agreement for fee convergence that would allow for reductions in the costs of OECD members’ officially supported export financing programs. The agreement would be implemented after an appropriate transition period. The U.S. government is an advocate for reaching an OECD agreement in this area. Although the working group has developed a set of broad guiding principles, members have yet to agree on the extent to which fees should be covered by the OECD disciplines (practices), according to the Eximbank. The level and scope of the risks of the Eximbank’s programs could be reduced by several means, such as placing a ceiling on the maximum subsidy rate allowed in Eximbank transactions, reducing or eliminating program availability offered in high-risk markets, and offering less than 100-percent risk protection. Although these options, if implemented, could lead to significant subsidy savings for the Eximbank and an overall reduction in U.S. exposure to high-risk markets, they would also result in reduced levels of Eximbank-financed exports and could present important foreign policy tradeoffs. Representatives of the Eximbank, private financial institutions, and export finance trade associations we spoke to generally opposed making any changes to the Eximbank’s programs on the grounds that potentially disruptive effects would result. As shown in table 2, the options we identified, if implemented separately, would have resulted in subsidy savings of up to $157 million in fiscal year 1995, with only a slight effect (5 percent or less of total exports financed) on the overall level of U.S. exports supported with Eximbank financing. The estimated subsidy reductions and export losses listed were based on our analysis of Eximbank subsidy estimates and authorized commitments for fiscal year 1995. Our estimates assumed that all other factors, such as the volume of financing to specific markets, were unchanged and there was no reaction by other ECAs. To reduce its subsidy costs, the Eximbank could consider placing a cap (limit) on the maximum subsidy rate that it could incur in a typical transaction (this would not include tied aid transactions). For example, although most of the 2,049 transactions completed in fiscal year 1995 had a 10-percent subsidy rate or less, a relatively few (38) transactions had a subsidy rate of 25 percent or more. These transactions consumed approximately $123 million (about 18 percent) of the Eximbank’s total subsidy costs yet supported 3 percent of Eximbank export financing commitments for the year. We estimate that if the Eximbank had capped its subsidy rate for each transaction at 25 percent for fiscal year 1995, it would have saved about $123 million (assuming that fees were held constant and deals over a subsidy rate of 25 percent were not refinanced at lower rates). Eximbank officials noted that a subsidy cap could have a disproportionate impact on high-risk markets, such as the NIS, and therefore would limit the Eximbank’s ability to support high-risk transactions in these markets. However, we noted that this option consists of a subsidy cap that exceeds the average subsidy rate (21.6 percent) for all Eximbank-supported transactions to the NIS. In other words, this option is unlikely to eliminate all financing transactions in this market—just those with a subsidy rate greater than 25 percent. Before 1994, the Eximbank provided short-, medium-, and long-term financing in low- and medium-risk markets. In 1994, as part of an effort to provide additional support to emerging market economies, the Eximbank expanded the level of financing available to U.S. exporters to high-risk E and E- markets to include long-term coverage for E markets and medium-term cover for E- markets. As a result, in fiscal year 1995, Eximbank services were available in more E- markets than were those of any of its major competitors, and the Eximbank provided unrestricted program coverfor almost twice as many markets as did Germany, its nearest competitor. The Eximbank cannot operate in certain high-risk markets (F risk category) because, in the judgment of its board, the Eximbank cannot expect reasonable assurance of repayment. Another way in which the Eximbank could reduce its risk and associated subsidy costs in the high-risk (E and E-) categories would be to provide only short-term support in high-risk markets. Short-term transactions typically involve lower risks and subsidy expenditures than medium- and long-term transactions in the same market. We estimated that this option would have reduced subsidy costs by up to $157 million (23 percent of the Eximbank’s total subsidy costs) and reduced the Eximbank financing commitments by approximately $582 million, or about 5 percent, in fiscal year 1995. Another option that the Eximbank could consider would be to withdraw completely from E- markets; this would substantially reduce its exposure to high-risk transactions. Eliminating coverage in the Eximbank’s most risky markets (E-) would have produced subsidy savings of up to $122 million and eliminated approximately $394 million in Eximbank export financing commitments in fiscal year 1995—about 3 percent of the Eximbank’s total financing commitments for the year. This option would result in a reduction of Eximbank subsidy costs but there could be implications for trade promotion and foreign policy objectives. First, Eximbank officials and some U.S. exporters stated that while exports to high-risk (E and E-) markets are small relative to total U.S. exports, the long-term export potential of these markets could be substantial. Eximbank officials point out that one of the agency’s primary objectives is to help U.S. exporters gain an early foothold in the high-risk, potentially high-growth markets in which the private sector is unable or unwilling to venture. Second, reducing program availability in high-risk markets would result in a reduction in Eximbank-supported transactions to transitional market economies, such as Russia, that the U.S. government’s foreign policy establishment is trying to assist. Eximbank officials said that the Eximbank is an independent agency and not part of the U.S. foreign policy or assistance apparatus ( i.e., the Eximbank will not support a noncreditworthy transaction to meet U.S. foreign policy objectives). However, they stated that restrictions on Eximbank financing to high-risk markets such as the NIS may be perceived as a reduction of U.S. support for the region and detract from the U.S. government’s efforts to promote regional stability. The potential negative effect of this option on trade and foreign policy objectives could be moderated in a number of ways. Various export financing techniques exist that would allow the Eximbank to reduce the risks of some of the transactions in these markets. For example, the Eximbank’s Russian Oil and Gas Framework Agreement, which gives support for longer-term transactions that generate hard currency earnings, has relatively lower risks and thus is the recipient of full Eximbank support. These transactions are budgeted at lower subsidy rates. It is also important to note that a number of other federal programs support U.S. foreign policy objectives in the NIS. Since 1990, 23 government agencies have obligated $5.4 billion for technical assistance programs, grants, exchange programs, training, food and commodity donations, science and technology projects, and support of joint space efforts. The U.S. government also made available $10 billion in credit for bilateral loans, loan guarantees, and insurance programs for fiscal year 1990 through December 1994. Trade and investment programs include those sponsored by the Department of Agriculture and the Overseas Private Investment Corporation (OPIC). Thus, concerns about restrictions on Eximbank support and its impact on U.S. policy objectives in this region would need to be viewed in the broader context of the overall U.S. assistance effort. Currently, the Eximbank provides 100-percent unconditional political and commercial risk protection on virtually all of the medium- and long-term cover that it issues. Some of the Eximbank’s major competitors, such as European ECAs, on the other hand, generally require exporters and banks to assume a portion of the risks associated with such support and do not absorb 100 percent of the risks involved. Instead, they require that exporters or banks assume a minimum percentage (usually 5 percent to 10 percent) of the risks. This concept of risk-sharing is a fundamental difference between the Eximbank and EU ECAs. One way to reduce the Eximbank’s subsidy costs across all risk categories would be to have private sector participants assume more of the risks in Eximbank-supported transactions. For example, if the Eximbank only financed up to 95 percent of the risks of an export transaction, private sector banks or exporters would have to assume the remaining 5 percent risk. According to Eximbank officials, this requirement may also provide private sector lenders greater incentives to properly evaluate loan applications for which they seek Eximbank support because they will share more of the risks associated with such transactions. Eximbank officials said that the Eximbank does not generally require the private sector to engage in greater risk-sharing in its loan guarantee program because the private sector is usually unwilling to accept the risks associated with Eximbank-financed transactions. These officials cited a number of other concerns related to greater risk-sharing, including (1) the presence of bank regulatory requirements that banks maintain higher loss reserves for foreign loans not fully covered by Eximbank guarantees, (2) the higher cost of trade financing that would result if private lenders were required to raise their fees to compensate for additional export risks, and (3) the reluctance of smaller U.S. banks to engage in trade finance if they have to take on additional risk. Representatives of trade associations that we interviewed also stated that greater risk-sharing requirements will frustrate the small businesses that have fewer options to structure alternative financing than do large firms. Eximbank officials also told us that the introduction of increased risk-sharing requirements may result in higher administrative costs to the Eximbank and may also impair private banks’ ability to “securitize” loans backed by Eximbank guarantees. However, several factors may mitigate some of the effects of a requirement for increased risk-sharing and should be considered as well when assessing the feasibility of this option. According to Eximbank officials, the agency used to require some risk-sharing and only started offering 100-percent risk coverage (principal and interest) through its loan guarantee program beginning in the late 1980s. Before that, it offered 95-percent loan guarantees on interest. Similar objections about increased private sector risk-sharing requirements were raised when the Eximbank reduced its risk coverage on its export working capital guarantee program from 100 percent to 90 percent of principal and interest in September 1994. However, U.S. exporters and their commercial lenders continued to use this program at an increased rate after these changes went into effect. The volume of Eximbank export working capital loan guarantees increased 99 percent from fiscal year 1994 to fiscal year 1995. U.S. banks that we interviewed acknowledged that they utilize the services of competitor ECAs that generally provide less than 100-percent risk coverage in support of their trade finance activities. Private sector lenders and a representative of Moody’s Investor Services stated that Eximbank-backed loans with less than 100 percent cover could still be securitized, although the structure and pricing of the security would reflect the higher marginal risk associated with the reduced U.S. government cover. Project financing is a rapidly expanding export financing mechanism that the Eximbank is using to meet the needs of U.S. exporters and project sponsors while taking advantage of the growth of privatization and private sector-oriented reforms in various developing countries. It involves lending for major capital projects where the assurance of repayment is provided through the project’s structure and anticipated future revenues rather than through sovereign or other forms of guarantee. In contrast to traditional Eximbank financing, the Eximbank and lending institutions depend primarily upon the financial success of the project for the repayment of loan principal and interest. Project financing provides the Eximbank considerable flexibility in stipulating which risks it will assume on a project-by-project basis, thus permitting the government to reduce risk and subsidy usage. Eximbank project financing support is generally available in A through D risk markets, is available in E markets only in limited circumstances, and is not available in E- markets. Project finance requires a relatively stable legal and commercial environment in the host country in order for risk mitigation of the project to be possible. Some high-risk markets do not yet have the legal and commercial structures that would make project finance possible. Once a project is completed, the Eximbank provides the same level of risk coverage, that is, 100 percent guarantees, under its project finance program as is currently available in its traditional program—but only for the share of the project that is financed by the Eximbank. During the project construction period, the Eximbank provides only political risk coverage; other risks are assumed by the private sector. The Eximbank’s policy is that the project sponsor and other participants must assume a portion of the entire project risk and all or most of the commercial and technical risks during the construction phase of an infrastructure project. The Eximbank may also share project risks with other ECAs, multilateral institutions such as the International Finance Corporation, or OPIC. The Eximbank may also look for opportunities to establish hard currency escrow accounts outside the project country for certain projects and seek other risk mitigation to protect taxpayer interests and to reduce the associated subsidy costs. According to the Eximbank, if properly structured, these techniques can lower the risks for the Eximbank that would otherwise be involved in supporting these transactions in risky countries. Because this program is fairly new, it is too early to determine if budget estimates are accurate. Under the project finance program, many of the administrative costs that the Eximbank traditionally incurs in evaluating a project’s financial, legal, and technical risks are to be borne by the private sector rather than the Eximbank. When the Eximbank assumes any risks, private sector project participants are expected to pay premiums that compensate the government for most of these risks. However, the Eximbank’s ultimate flexibility in passing these costs on to the private sector may be constrained by the level of fees charged by competitor ECAs. Eximbank officials told us that the Eximbank’s goal is to structure project financing transactions in a manner that will ultimately require no taxpayer subsidy. Although the Eximbank has yet to meet this program goal, the average subsidy rate for project finance transactions was lower than the overall subsidy rate incurred for all Eximbank transactions in 1996. In that year, the average budgetary cost for project finance deals was about 3 percent, whereas the average cost for all Eximbank-supported transactions was 7.5 percent. According to Eximbank officials, the Eximbank’s success in meeting this goal will ultimately depend on its willingness and ability to limit risk in high-risk transactions while complementing, but not competing with, the private sector. The Eximbank’s project finance program has expanded over the past few years and has accounted for an increasing proportion of Eximbank transactions. In 1993, project finance accounted for less than 1 percent of the Eximbank’s total financing commitments. By fiscal year 1995, project finance constituted almost 20 percent of the Eximbank’s total financing commitments. The Eximbank attributes this growth to developing countries’ emphasis on privatization, their need to reduce sovereign debt obligations, and the rapid economic growth in emerging markets. As shown in figure 6, Eximbank project financing commitments expanded from $150 million in 1993 to $2.1 billion in fiscal year 1995—the program’s first full year of operation. Eximbank project financing declined slightly, to $1.7 billion, in fiscal year 1996. From fiscal year 1993 to 1995, the Eximbank approved a total of 11 project finance transactions valued at more than $2.6 billion. Six of these projects were located in Asia, four in Latin America, and one in Europe. These projects were generally located in countries that the Eximbank rates as medium-risk category countries and were mostly power generation infrastructure projects. The growth of project financing is consistent with the Eximbank’s expanded financing of exports to private sector buyers in developing countries. According to Eximbank officials, in fiscal year 1992, 71 percent of the Eximbank’s financing commitments were used to support foreign public sector purchasers, while 29 percent was used to support foreign private sector purchasers in emerging markets around the world. By fiscal year 1995, the ratio was reversed—about 35 percent of the Eximbank’s commitments supported foreign public sector purchases and about 65 percent supported foreign private sector purchasers. Although private sector purchasers are becoming larger users of export financing in developing countries and the Eximbank’s project financing program provides the flexibility necessary for reducing the subsidy cost of these transactions, this method of financing is not suitable for all transactions. It is best suited for large transactions, for example, major infrastructure projects, that generate revenues that are sufficiently high to repay debt obligations. Eximbank financing helps support the sale of billions of dollars of U.S. goods and services to foreign markets each year consistent with U.S. foreign policy interests but comes at a cost to U.S. taxpayers—about $3.75 billion in appropriated program funds over the last 5 years. OMB projects a substantial decline in these resources over the next 5 years. We identified two options for reducing the Eximbank’s subsidy costs: (1) raising fees (based on a modified definition of “fully competitive”) and (2) reducing program risks. If implemented, these options may help the Eximbank respond to the projected decline in resources over the next 5 years. These options would not require a change in the Export-Import Bank Act of 1945, as amended, because they fall within its present authority. However, these options need to be considered within the full context of their trade and foreign policy implications and should be consistent with the Eximbank’s other statutory obligations. Raising exposure fees within the context of ongoing international negotiations to reduce government export credit subsidies seems to be the least disruptive of the two options for a number of reasons. First of all, Eximbank fees for sovereign financing are generally lower than those of other ECAs in most country markets. Second, a fee increase could be implemented without raising some of the foreign policy concerns associated with restricting or eliminating program coverage in certain risky markets. Third, exposure fee increases are compatible with U.S. government efforts to minimize competition in government-supported export financing among OECD members and consistent with its legal directive to do so. The magnitude and timing of any fee increases should take into account progress in the ongoing OECD negotiations to minimize the possible competitive impact on U.S. exporters. In commenting on a draft of this report, the Eximbank made four general observations: The subsidy cost computations should only be interpreted as approximations of the cost of the Eximbank’s programs. Because no estimate of the amount of lost exports, jobs, federal tax revenue, or other potential adverse consequences of raising fees or lowering the amount of the Eximbank’s risk have been developed, the implementation of the options presented needs to be considered with great caution. Taking unilateral action to increase fees could undermine the U.S. negotiating position with other OECD members. Other alternatives for reducing the Eximbank’s budget that would not adversely affect the Eximbank’s programs have not been considered. Regarding our cost computations, we used the same methodology for our analysis that the Eximbank uses to estimate the subsidy costs for its official budget submission to Congress. We agree that the methodology utilized to meet the requirements of the Credit Reform Act yields estimates and that the actual costs for a particular case may be higher or lower than the estimate. However, since the actual costs cannot be predetermined, these estimates can be used to make rational program decisions. In preparing this report we did consider the likely impact of the options we identified on Eximbank-supported exports. We acknowledge that we could not precisely quantify the impact of implementing the fee increases. Nevertheless, our review indicated that the Eximbank could raise fees while still maintaining a competitive position relative to other ECAs. Moreover, we did estimate that the reduction in Eximbank-financed sales associated with reducing program risks would only have a slight effect (5 percent or less) on the overall level of U.S. exports supported with Eximbank financing in a given year. Our past work has shown that no definitive empirical research exists that demonstrates unequivocally the net macroeconomic impact on the nation—positive or negative—of government funding for federal export promotion programs or of reductions in Eximbank funding levels. It is difficult to fully quantify the net benefits of federal export promotion programs because it is difficult to demonstrate “additionality,” that is, the level of exports that would have been provided in their absence. Proponents and opponents of these programs have mainly relied on qualitative arguments to state their cases rather than demonstrate quantitatively the impact on exports, jobs, and federal tax revenue. We recognize that the most efficient means to reduce Eximbank subsidies without disadvantaging U.S. exporters is to reach agreement with other ECAs to lower and eventually eliminate export subsidies. We clearly stated in the report that any proposed fee increases should be considered only in the broader context of the ongoing OECD efforts to negotiate minimum fee schedules and that the magnitude and timing of such an increase should take into account progress in these negotiations. Eximbank also commented that we did not recognize other alternatives for reducing the Eximbank’s budget without adversely affecting its program. While other options for reducing the Eximbank’s funding may exist, we believe that we focused on the two most feasible ones—raising fees or reducing program risks—that could be implemented within the Eximbank’s existing authority. The two options proposed by the Eximbank (changing its program mix and making greater use of asset-based financing) would have some drawbacks that were not disclosed in its letter. For example, the budgetary and possible implementation difficulties associated with the greater use of Eximbank loans as opposed to guarantees are not addressed in the Eximbank’s comments. In addition, the potential for extending asset-based financing beyond the areas noted in the Eximbank’s comments is uncertain. Finally, it is not clear whether OMB would endorse any of the Eximbank options noted in its letter. The Eximbank’s comments are reprinted in appendix II, along with our specific evaluation of them. The Eximbank also provided technical corrections and updated information that were incorporated throughout the report where appropriate. To develop information on how the Eximbank spends its program funds, we reviewed budget data provided to us by the Eximbank and reviewed various Eximbank reports, including annual reports, budget reports from the Office of the Chief Financial Officer, and the Eximbank’s 1992-96 Report to the U.S. Congress on Export Credit Competition and the Export-Import Bank of the United States. In addition, we completed a transaction analysis of the Eximbank’s financing commitments made in fiscal years 1994 and 1995, including an analysis of the Eximbank’s high-subsidy transactions. We defined “high-subsidy” transactions as those transactions that consumed $1 million or more of the Eximbank’s subsidy budget in a given year or consumed a subsidy of 15 percent or more of the financed amount. We did not independently verify the accuracy of this data. Our report focused on the Eximbank’s use of its program subsidy appropriation—the largest component of its annual appropriation. To create a conceptual framework for identifying and assessing the available options for reducing the Eximbank’s subsidy appropriation, we reviewed various governmental, research, and trade association reports, including those of the Eximbank, the Congressional Budget Office, the Institute for International Economics, the CATO Institute, the Coalition for Employment Through Exports, and the National Association of Manufacturers. We also interviewed officials from these organizations and the private banking industry to obtain their views on the feasibility and likely impact of the options. To illustrate potential subsidy savings associated with different levels of fees, we estimated the possible subsidy savings that would have been obtained in fiscal year 1995 by setting fees within the 45-50, 55-60, and 65-70 percent competitiveness levels, holding all other variables (such as dollar value of transactions, interest rates, and repayment terms) constant. We used aggregate Eximbank fee data and an OMB financial model to perform this analysis. (We did these calculations by setting fees at a level that fell within the range we specified. Specifically, the fees selected for our analysis at the 45-50, 55-60, and 65-70 percent competitiveness levels included medium- and long-term fees set at the 47th and 46th, 57th and 56th, and 66th and 65th percentiles, respectively). These fee comparisons were based on medium- and long-term sovereign financing, which is currently the only basis for comparison, although we recognize that an increasing portion of Eximbank program activity is for nonsovereign transactions. Eximbank officials told us that any interpretation of such analysis must include a recognition of the potential pitfalls of fee comparisons. The differences in program characteristics, coverage restrictions, and other variables may limit the accuracy of such comparisons. We did not independently verify the accuracy of the Eximbank’s fee data or test the OMB’s ICRAS subsidy model for accuracy in predicting subsidy cost estimates. Instead, we have accepted the validity of the current model and explored the options for reducing program subsidies through the data generated by the current OMB-approved model. To assess the effects of limiting program risks, we identified the Eximbank’s financing and subsidy commitments made in various risk categories. We focused on the effects of limiting program risks in higher-risk markets because the Eximbank’s subsidy costs in these markets are large relative to other markets. We did not model the effects that increased risk-sharing would have on the Eximbank’s subsidy expenditures; rather, we accepted the analysis that the Eximbank completed on this issue. To complete our work related to project finance issues, we reviewed trade and academic literature and interviewed project specialists at the Eximbank and the World Bank, and interviewed financial experts in Washington, D.C.; New York; and London. We conducted our review from February 1996 to September 1996 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to other congressional committees and the Chairman and President of the Eximbank and will make copies available to other interested parties upon request. This review was done under the direction of JayEtta Z. Hecker, Associate Director. If you have any questions concerning this report, please contact Ms. Hecker at (202) 512-8984. Major contributors to this report are listed in appendix III. After over 20 years of discussion about the shortcomings of using cash budgeting for credit programs and activities, the Federal Credit Reform Act of 1990 was enacted. The act changed the budget treatment of credit programs so that their costs can be compared more accurately with each other and with the costs of other federal spending. Prior to the act’s implementation in fiscal year 1992, it was difficult to make appropriate cost comparisons between direct loan and loan guarantee programs and between credit and noncredit programs. Credit programs—like other U.S. government programs—were reported in the budget on a cash basis (i.e., loan guarantees did not show up in the budget unless and until they defaulted). This created a bias in favor of loan guarantees over direct loans. In the budget year, loan guarantees appeared to be free, while direct loans appeared to be expensive because the budget did not recognize that at least some of the loan guarantees would default and that some direct loans would be repaid. Under the act, the President’s budget for fiscal year 1992 and after must include the total estimated net cost to the U.S. Export-Import Bank (Eximbank) of the cash flows, discounted to present value, of its direct loans, guarantees, and insurance. Credit reform requirements separate the government’s cost of extending or guaranteeing credit, called the “subsidy cost,” from administrative costs. Administrative expenses receive separate appropriations and are reported separately in the budget. The Credit Reform Act defines the subsidy cost of direct loans as the present value—at the time of disbursement—of the net cash flows, that is, the disbursements by the government minus estimated payments to the government after adjusting for projected defaults, prepayments, fees, penalties, and other recoveries. The act defines the subsidy cost of loan guarantees as the present value—at the time of disbursement—of cash flows from estimated payments by the government (for defaults and delinquencies, interest rate subsidies, and other payments) minus estimated payments to the government (including fees, penalties, and recoveries). Agencies subject to the Credit Reform Act, such as the Eximbank, use a special budget system to record the budget information necessary to implement credit reform. Three types of accounts—program, financing, and liquidating—are used to handle credit transactions. Credit obligations and commitments made on or after October 1, 1991—the effective date of credit reform—use only the program and financing accounts. The program account receives separate appropriations for the administrative and the subsidy costs of a credit activity. When a direct or guaranteed loan is disbursed, the program account pays the associated subsidy cost for that loan to the financing account. Figure I.1 diagrams this cash flow. If subsidy costs are accurate, the financing account will break even over time as it uses its collections to repay its Treasury borrowings. The program account has a permanent, indefinite appropriation for re-estimates made to cover estimation errors. Credit activities conducted before October 1, 1991, are reported on a cash basis in the liquidating account. This account continues the cash budgetary treatment used before credit reform and has permanent, indefinite budget authority to cover any losses. Loan disbursements, payments for loan guarantees Collections(i.e., fees, principal/interest, and recoveries from defaults. The following are GAO’s comments on the Eximbank’s letter dated November 6, 1996. 1. The Eximbank’s portfolio reestimates are not directly comparable to the Eximbank’s credit reform estimates made for fiscal year 1996. Portfolio reestimates are conducted for the Eximbank’s past commitments that are still on the books, typically spanning a number of years. These projections are also estimates and the actual costs of a particular commitment may ultimately be higher or lower. Credit reform subsidy allocations reflect only those commitments made in a given fiscal year. 2. The report noted that it is difficult to estimate the full impact of fee changes on exporter behavior and states that U.S. exporters’ sensitivity to a fee increase would depend on several factors, including the size of the fee increase, the volume of U.S. exports to a particular market, and the credit risk of the importing market. We did acknowledge that raising fees for financing transactions in the higher-risk markets, such as the newly independent states of the former Soviet Union (NIS), could lead to a decline in U.S. exports to these markets. 3. The report notes that to minimize the possible competitive impact on U.S. exporters, any proposed Eximbank fee increases should only be undertaken in the broader context of ongoing Organization for Economic Cooperation and Development (OECD) efforts to reduce government export subsidies. 4. Export financing commitments could still be made in high-risk markets even under the subsidy cap option we have identified. This option would not necessarily eliminate the financing of transactions to high-risk markets—just those with a subsidy rate exceeding a certain threshold. Furthermore, transactions with subsidy rates exceeding the threshold could potentially be restructured. Moreover, the foreign policy concerns associated with reducing Eximbank coverage to the NIS could at least partially be mitigated by numerous other U.S. assistance programs that we identified. 5. The scope of our review did not include a consideration of this option. Thus, we cannot comment on the feasibility or the full implications of this option contained in the Eximbank’s comments. 6. As we noted in the report, our fee comparisons were based solely on sovereign lending rates—the only type of lending where comparative data was available. 7. We acknowledge that several factors may play a role in determining the overall competitiveness of the Eximbank’s programs. However, fees are generally the most significant difference between the Eximbank and other export credit agency (ECA) programs. Other factors, such as interest rates and repayment terms, are highly constrained by OECD agreements. Richard Burkard, Senior Attorney 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. 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Summary: Pursuant to a congressional request, GAO reviewed: (1) how the Export-Import Bank of the United States (Eximbank) spends its program appropriation; (2) program options that the Eximbank may want to consider to reduce the cost of its export financing programs; (3) potential implications of these options; and (4) the nature and extent of Eximbank's involvement in a type of financing known as project financing. GAO found that: (1) in each of the last 5 fiscal years (FY) 1992 through 1996, the Eximbank has used an average of $750 million of its credit subsidy appropriation to support an average of $13.3 billion in export financing commitments; (2) these appropriations have facilitated exports to areas with important U.S. commercial and strategic interests; (3) high risk markets constituted a relatively small share of the Eximbank's total financing commitments yet absorbed a relatively large share of its subsidy costs in FY 1995; (4) GAO identified two broad options that would allow the Eximbank to reduce subsidies while remaining competitive with foreign export credit agencies (ECA): (a) raising fees for services; and (b) reducing the risks of its programs; (5) both of these options could result in significant reductions in subsidy costs and would allow the Eximbank to continue to operate with reduced federal funding; (6) the specific level of subsidy savings resulting from these program options would be dependent on several factors, including the willingness of exporters and participating banks to absorb increased costs and risks and the reaction of competitor ECAs; (7) the options GAO identified have several trade and foreign policy implications that decisionmakers would need to address before making any changes in the Eximbank's programs; (8) Eximbank officials noted that: (a) any proposed fee increases need to be considered within the broader context of current international efforts to gradually reduce government export finance subsidies; (b) these options could make Eximbank programs less competitive relative to other ECAs; and (c) these options would undermine U.S. government efforts to provide support in some higher-risk markets; (9) the project finance program was created to help U.S. exporters and project lenders compete for contracts for large capital projects in various developing countries; (10) the program has expanded over the past few years and has accounted for an increasing proportion of Eximbank transactions; (11) for FY 1996, project finance deals constituted about 3 percent of the Eximbank's total subsidy costs; (12) although project financing techniques appear to highly leverage available Eximbank resources, Eximbank officials said that this technique is suited only to long-term capital projects that the Eximbank expects to be self-sustaining; and (13) the Eximbank aims to structure its project finance program so as to limit its risks and minimize its budgetary costs.