BRITISH EXPORTERS ASSOCIATION

Transcription

1 Bexa response to eu consultation - final BRITISH EXPORTERS ASSOCIATION Broadway House, Tothill Street, London SW1H 9NQ Tel.: FAX: hughbailey@bexa.co.uk European Commission Public Consultation: Review of the Communication on short term export credit insurance British Exporters Association response About BExA BExA represents UK capital goods and other exporters and their service providers. The Association has particular expertise in the fields of export/trade finance and export credit insurance. BExA is responding in relation to the UK export credit insurance market and its Export Credit Agency (ECA), the Export Credits Guarantee Department (ECGD) which is a Department of Central Government. Section A General Questions A1 Supply of trade financing and credit insurance a) by publicly supported insurers/ecas - short term (risk period < 2 years) State interventions In the period , ECGD introduced one new support scheme, that of guaranteeing confirmations of letters of credit (LCs). This LC Guarantee Scheme was designed for banks to ease inter-bank credit restrictions during the banking crisis. Pricing was as a percentage of the bank s confirmation fee. Because 85% or so of international trade is on open terms, and much of the LC business is unconfirmed, this had little impact on trade. ECGD s Annual Report does not provide clarity about its usage but we understand this has been little used. The UK Government organised a domestic credit insurance support the top-up scheme - (for intra-uk sales) during but this was little used because it was a multiplier of an underlying credit limit decision, yet the problem was limit cancellations not reductions. This facility was set up in conjunction with commercial credit insurers and was used perhaps times. It was not extended to export. It was initially very expensive (pricing was later halved). Exporters in many other EU Member States benefited from a European Commission Communication (OJ C 16/1, extended to 31st December ) which recognised that cover for marketable risks could be temporarily unavailable and that, therefore, such risks might be covered by export credit agencies. Regrettably, ECGD never applied for this concession. Therefore, unlike their EU counterparts, UK exporters were unable to obtain short-term credit insurance from ECGD for exports to OECD markets during the height of the economic crisis. 1

2 ECGD extended its Export Insurance Policy (EXIP) from March 2011 so that it became available for a wide range of short term exports to non-marketable risk countries. (EXIP was previously only for capital goods/services exports to non-marketable countries). The EXIP is for single contracts. It does not compete with commercial whole turnover export credit insurance, rather it complements it by allowing covers for single contracts where there is not commercial appetite either through size, complexity, or destination. The development of the EXIP was welcomed by the exporting community, in particular those selling on short terms of payment to riskier markets and SMEs whose business was too small to be economic for commercial credit insurers. Exporters to e.g. Portugal whose credit limits were withdrawn during the credit insurance crisis of were not able to be helped by ECGD. b) By publicly supported insurers/ecas - medium to long term (risk period > 2 years) ECGD s Annual report provides a breakdown of its instruments, geographical coverage, volumes etc. ECA support is vital for the risk and finance aspects of medium term repayment and medium term delivery contracts/projects, and large value exports. Such cover will, of course, be subject to normal credit vetting procedures and compliance with International requirements relating to human rights, the environment, sustainability, and bribery and corruption. c) By private insurers/credit providers The following private whole turnover credit insurers offer export credit insurance to UK exporters: Ace Europe Group Ltd Atradius Credit insurance CIFS Ltd Chartis Insurance UK Ltd Coface UK Ducroire Delcredere Equinox global Ltd Euler Hermes UK plc HCC International Insurance Co Plc Markel Corporation QBE Zurich Versicherung AG These credit insurers produce consolidated accounts that do not split out the cover provided to UK exporters separate from multinational, domestic and export insurance. Insurance brokers play an active role in the UK market, developing solutions to suit exporters needs, and ensuring that it is a healthily competitive credit insurance marketplace. Commercial credit insurers have commercial reinsurance, and there is currently adequate reinsurance capacity. However, that does not lead to all exporters needs being met: commercial credit insurers manage their market appetites, sector appetites, minimum premium for a policy, coverage for particular contract structures, etc, to suit their own commercial goals. While commercial credit insurers provide good service in the UK, they cannot be expected to write covers that would be inherently unprofitable through their size, destination or business type, or overly risky because it is an exporter s first foray outside the UK or to a high risk market.

3 A2 Impact of publicly supported schemes a) Legal framework governing publicly supported ECAs Publicly supported ECAs are not subject to the same regulation regarding capital requirements, taxation and bankruptcy as private insurers/credit insurers. It is for this reason that ECAs (with their sovereign weighting) are a vital part of medium term lending and support for individual risks (short or medium term) that are not commercially underwritable. b) Operation of publicly supported ECAs Both ECGD and private sector insurers price according to risk and to cover their management, information, finance and other overhead costs. ECGD prices to balance its portfolio. Commercial credit insurers will need to make a return on capital and their cost of operation includes also reinsurance premium. So long as ECAs are restricted from direct competition with whole turnover export credit insurers, they will not have an impact on fair competition, rather they will have a vital role in supporting business that is not commercially viable for commercial credit insurers. A3 Market Developments Market Trends: The slowdown in world trade is well-documented, as is the rise in China s support for short and medium term exports. The global recession has resulted in deferral of many capital projects. The result of this is that it is now a very competitive global marketplace. To be able to win orders, it is necessary to offer attractive commercial terms i.e. terms of payment that suit the budget of the customer rather than the finance needs of the exporter. Asian exporters have very active ECAs. There is therefore a vital role for European ECAs. Impact of the crisis on private trade finance and credit insurance: When the recession hit, there was a double whammy as credit insurers withdrew cover so companies that used the cover to obtain finance then had the option of either not doing the business or trading at their own risk and with reduced finance. For many exporters, the problem was exacerbated when credit insurers withdrew cover on them so that they could no longer receive credit for their purchases of components. Furthermore, banks reviewed lending limits and in many cases these were reduced. The list of marketable risks - which, throughout the recession, remained the EU, USA, Canada, Japan, Australia, New Zealand and Iceland, Norway and Sweden - became totally unrealistic. The following countries, which had well-documented financial problems, became un-marketable: Iceland, Hungary, the Baltics and cover for Portugal and Spain was cut. Since then, Greece has become totally non-marketable and Italy may well join that category very soon. In addition, some sectors became non-marketable, even in marketable countries: retail, construction and printing. Any company that does not have publicly available financial data is potentially non-marketable. New companies (i.e. with no track record) are also nonmarketable (either as policyholders or buyers). Without credit insurance cover, it is not possible to arrange short term trade finance, except on a with recourse basis (i.e. with the seller retaining the risk of bad debt). Forecasts for the years to come: The impact of Basle III is only likely to intensify the current trend whereby large well-capitalised companies have good access to finance, but small and/or growing companies borrowing lines are restricted. Domestic trade finance: A healthy domestic economy is vital for exporters. They need a good flow of credit and finance.

4 A4 Rationale of public intervention ECAs should pick up where commercial insurers have limited appetite or are offering exorbitant terms. The ECA product range should at least include: 1. Short term credit insurance cover for A company's first export Small value exports individual exports or portfolios < 1m, whatever the destination Very large exports e.g. contracts valued at 1bn + where there is limited capacity in the commercial markets. An ECA could take a share in a syndication led by a commercial insurer or provide reinsurance capacity to achieve the same result. Sales to 'non-marketable risk' countries such as non-oecd including those countries in Europe that are temporarily non-marketable such as is currently the case for Greece. This could also apply to domestic covers for sectors where there is no or limited coverage. The quality of such cover should be the best: a first time exporter or SME needs a policy that is simple to understand, quick to put in place, affordable, and has minimal exclusions. The exporter needs all round assurance that if there is insolvency, a political event, a natural disaster, licence cancellation etc, then a claim will be paid promptly if the policy terms have been adhered to: in particular, SMEs will need short claims waiting periods. 2. Medium term insurance and bank guarantee support for all export destinations Supplier credit Buyer credit Project finance 3. Finance support for exporters for all export destinations Working capital support where there is limited appetite amongst banks or to add security that will provide stability of facilities to an exporter, either for individual contracts or for a committed export facility such as for the export element of foreign exchange Bond issue support, supporting the guarantees and warranties necessary for capital and semi-capital goods exports (thus maximising bank funds available to exporters). Fixed rate export finance Tender to contract cover The focus should be on creating and sustaining jobs. ECAs improve competition - In relation to short term cover, the allowance for an ECA to underwrite non-marketable risks extends the competition between private credit insurers. This is because some credit insurers cover only OECD risks, and so if the company has a first export to a non-oecd country which can be underwritten by an ECA, this will enable the existing credit insurance (covering OECD markets) to stay in place as opposed to needing to move, for example, to one of the big three whole turnover insurers that have non-oecd capabilities. Section B The Communication B1 Scope Medium Term Finance: While there is a medium term capability in the private insurance and banking market, this does not enable a company to compete, so far as finance terms are concerned, with non-european industrial exporters whose finance has sovereign backing. The private medium term cover is only suitable for top risks. Its niche is to write business that does not suit the country of origin or structure required by ECAs. There are already OECD

5 and World Bank regulators of ECA medium term support, and additional controls are not necessary. B2 Marketable and non-marketable risks Non-marketable risks should be defined as those where there is no market for the cover, and this will change from time to time. An EU definition that takes the form of a rigid list of countries is too broad brush and is liable to become out of date within a short time. On the other hand, it has a certain value in simplicity. A more relevant definition of non-marketable risk would be Very small individual contracts or portfolios (< 1m) Very large individual contracts (> 1bn) Contracts of 2 years or longer duration (either pre-shipment or credit period or a combination of both) Sales to non-oecd countries Sales to OECD countries if there is proof from two large credit insurers that cover is not available. This could be defined as temporarily non-marketable. The definitions of marketable and non-marketable should only be used for short term cover (horizon <2 years). All finance support (e.g. working capital support, bond support, foreign exchange credit, buyer credit finance, tender to contract cover, fixed rate export finance) should be available for all destination countries. If there are too many restrictions, the EU will lose business to China, India the US and Canada who have active ECAs. B3 The escape clause In respect of sales to OECD countries where the insured risk is between 1m and 1bn in value and contract performance/credit period is shorter than 2 years in duration: The demonstration of unavailability of cover evidence from two credit insurers should not be needed to prove non-marketable risks if there is an adequate permanent definition. This definition should embrace countries that become nonmarketable over a period that has been too short for the existing EU definition to catch up and encompass. An example of a recently temporarily non-marketable risk is Greece. It is not currently possible to obtain new cover for exports to Greece. It would be possible to obtain statements from two credit insurers in confirmation. We need a definition of temporarily non-marketable for business that is not coverable, even if in previous years it has been possible to obtain cover. The most appropriate evidence of non-marketability is a no thank you from an insurer. It would be appropriate to supply copies of two such s from credit insurers. The Communication 2 describes that lack of market should be demonstrated by evidence from a large well known private export credits insurer and a national credit insurer. BExA contends that the UK credit insurance market includes both the wholeturnover insurers mentioned in A1c and also the thriving London Market capability for single risks, which includes the Lloyd s Market and well-known multi-line international/multinational insurers. If an applicant for cover only requires protection for a single export, then evidence from the London Market should be equally acceptable. 2

6 If the premium rate or cover terms indicated by a private credit insurer are exorbitant, i.e. more than 2% premium rate on the credit limit or more than 2% on the contract value or the coverage is less than 75% of the risk, then this should also be deemed temporarily non-marketable. It should be made clear that evidence demonstrating that the private market is not willing to underwrite a risk does not mean that the ECA is obliged to offer cover, only that it is allowed to offer cover. Short term trade requires protection and finance to be organised in short time-frames. Obstacles that delay decisions on the availability of cover, and thus an exporter s ability to accept a short term export order should be kept to a minimum. If an ECA insurance or guarantee is in place, then, as a result of the ECA being sovereign-risk, trade finance can follow. There needs to be space for commercial decisions on lending to be made by the banks. There is a wider range of export finance solutions available in the private finance sector (banks, boutique financiers, venture capital, factoring houses) than there is insurance from private sector export credit insurers. ECA support of non-marketable and temporarily non-marketable risk is vital if we are to develop EU sales to areas of the world that are developing, because these are the areas where there is less commercial credit insurance available. This particularly applies to smaller contract values and very large contract values. We agree that there should not be a need to demonstrate the unavailability of cover where an SME has a total annual turnover of 2m or less. Small value exports will be uneconomic for private credit insurers unless the premium is set at a very high rate, and high premium would make an SME s export uncompetitive. There is a risk that an SME, faced with a very high premium, would choose not to protect itself against the risk of bad debt, with the potential devastation of a bad debt write-off perhaps causing it to become insolvent and have to close down. Section C Options for the future of the Short Term Export Credit Insurance Communication Allowance for sales to countries whose economies deteriorate: To a large extent, the communication is reasonable. However it should be amended to allow ECA support for temporarily non-marketable risks without the need for an EU communication to re-define the list of non-marketable countries. Size: ECAs should automatically be able to provide support for SMEs and for very large exports. Security for EU companies: There is a need to re-build the reputation of credit insurance, which was damaged during the credit insurance crisis, in order to encourage good financial risk management practice. ECA support plays a part in this. Open account trade: the value of export credit insurance should not be underestimated. 85% of international trade is on open account payment terms. Bank alternatives (particularly, payments by letter of credit) tend to be more expensive, less flexible, and introduce documentary risk. By contrast, export credit insurance provides coverage that allows exporters to offer flexible open account payment terms to potential customers. Small and new exporters: ECA cover should be the best quality, in particular to support a first time exporter or an SME, providing all-encompassing cover and a fast claims service. Medium term: the traditional role of an ECA in supporting 2+ years credits for all destinations should be continued, along with support for fixed interest rates where appropriate. Short term finance: ECA support is necessary where there is a need for working capital support (short or medium term) or bond support for any exporter, especially

7 where there is or may in future be limited appetite amongst banks. ECA security can provide stability of finance facilities for an exporter in case of another banking crisis or recession. Tender to contract cover. While there are banking solutions for fixing forward exchange rates where foreign exchange payments are anticipated as payment of invoices, there is no longer an insurance-based commercial solution to guard against adverse exchange rate movements during the period from the submission of bid to the award of contract. Banking solutions involving the purchase of foreign currency options can be prohibitively expensive, so an affordable form insurance support from the ECA is very necessary. Hugh Bailey Director, British Exporters Association September 2011