Pressures to reform are emerging from various actors that have a stake in how ECAs understand and implement their financing mandates. In particular, questions about the roles and responsibilities of ECAs in the global economy are emerging in three areas.
Responding to the rise of the east
The political economy of international energy financing is rapidly changing, particularly in Asia. A notable development is the growth of regional energy cooperation, including the rise of domestic and intraregional financing from sovereign banks and funds (Sovacool, 2009). Particularly after the collapse of banking sectors in many western countries in 2008, public investment from China, Japan, India and Singapore became increasingly influential in funding capital-intensive projects across Asia. In 2008, Asian ECAs that are members of the Berne Union provided $268 billion in export financing. In 2009, the State Bank of India (SBI) surged to the top of the global league table for project financing after European and North American banks had dominated the list for the better part of a decade (Santiago, 2010). Similarly, several Chinese banks are providing generous loans to Chinese developers engaged in energy projects in the region (EDF, 2009, p. 7). For example, the Bank of China and Sinosur, the Chinese ECA, provided financing to the Indonesian energy company PLN to cover the construction costs of two coal-powered plants and the Chinese Ex-Im Bank extended an $891 million loan in support of a coal-fired power plant in Sri Lanka (Krismantari, 2008). This trend toward greater intraregional financing is closely associated with the growing market share of Asian energy companies in the region (Tenenbaum and Izaguirre, 2010).
These developments are posing a challenge to the current OECD-centred governance arrangements. When international regulation is created and maintained by ‘clubs’ of governments, formal participation in rule making is exclusive and controlled by membership criteria (Drezner, 2007). While the homogeneity of participants may make it easier to find consensus and achieve compliance, rules created through ‘club’ structures are prone to leakage when they impose restrictions on members, but not nonmembers. In cases where the latter account for a large share of market transactions, rules that do not apply to all market participants may prove ineffective in harmonizing practice and place rule followers at a competitive disadvantage. The effectiveness of OECD rules in Asia is undermined by the fact that they do not formally apply to a number of non-OECD countries with well-financed ECAs that are increasingly active in the region, notably China.
Interestingly, pressure to expand participation in decision making and the scope of rules is also coming from export companies based in OECD countries. They have argued against rules that do not formally apply to ECAs from non-OECD countries, as they may place them at a disadvantage relative to competitors (EBF, 2010). Such fears of leakage have undermined industry support for the OECD as a multilateral governance forum for regulating official export financing. In 2009, the British Exporters Association, whose members include banks, insurers and major export companies, called on the UK’s ECGD to ‘overhaul its excessive Business Principles’– the document outlining its environmental and social guidelines and implementing the Common Approaches – claiming that they create a burden of red tape that disadvantages British exporters (BExA, 2009). In 2010, the ECGD weakened a policy that prohibited financing to projects that would harm child workers’ education, health or development. Similarly, in response to calls from environmental groups for adopting an aggressive low-carbon energy strategy, a spokesman for the US Ex-Im Bank stated that a unilateral decision to stop the provision of export financing to fossil fuel projects would simply shift jobs to other countries (Friedman, 2010).
Recent developments suggest that OECD countries increasingly recognize the need to reach out to fast-growing economies that do not enjoy the benefits of full participation in OECD negotiations. The OECD has instituted an enhanced engagement programme with five countries – Brazil, China, India, Indonesia and South Africa – which has resulted in their participation in regular export credits meetings and in the review of existing disciplines on export credits related to civic aircrafts and nuclear power plants. It has invited Brazil as a formal participant of the Sector Understanding for Civil Aircraft since 1986, given the economic importance of its civil aircraft market. The revised Common Approaches of 2007 urges OECD countries to increase awareness and understanding among non-OECD countries of the benefits of applying the environmental framework to their official export financing activities (OECD, 2007a). The European Commission has produced a document with guidelines for how EU member states should address official export financing rules in bilateral talks with China and raised the prospect of holding multilateral talks under the auspices of the G20 (EC, 2010). Indeed, the gradual ascendance of the G20 in global economic governance has complemented the outreach efforts of the OECD. At the London Summit in 2009, the G20 leaders announced a joint intention to augment export financing and multilateral lending by $250 billion to help counter the global decline in commercial trade financing.
The expansion of transnational networks also reflects the growing demand for information exchange and coordination across OECD and non-OECD countries, as well as public and private financial institutions. Such networks have played an important role in diffusing knowledge, building capacity and generating mutual trust and understanding. The Berne Union has established an Asian Regional Cooperation Group (RCG) to provide a forum to discuss how to strengthen regional responses to the recent shortfall in trade financing, resulting in seven bilateral reinsurance agreements. In addition, the group has made possible new forms of knowledge diffusion and capacity building to boost regional export finance capacity. As an example, NEXI, the Japanese export credit agency, holds an annual risk-training seminar for smaller ECAs in the region (NEXI, 2010). The RCG complements the activities of the Asian Exim Bank Forum, an initiative led by the Export-Import Bank of India to enhance cooperation between Asian public banking and insurance institutions. It has created a Training Committee that meets annually to provide training to risk insurance professionals at member institutions, and has established close links with the ADB (Berne Union, 2010). Of the 11 meetings held since 2006, three have covered topics related to official export financing and the environment, including financing for clean energy.
Accepting global responsibilities
Official export financing is driven by national economic objectives, but has far-reaching consequences for international trade patterns and economic development in the countries in which ECAs operate. Tensions between national economic objectives and global responsibilities have primarily surfaced in relation to three policy areas, all of which have produced a demand for greater international coordination. The most obvious source of tension exists between the practice of intervening in markets in favour of domestic exporters and the aim of fostering an open and fair international trading system. Although ECAs fill a financing gap left open by the private export insurance market, they also have a distorting impact on energy markets by discriminating between potential beneficiaries on the basis of national origin. In contrast, the World Bank’s Multilateral Investment Guarantee Agency (MIGA) also provides risk guarantees to companies operating in developing countries, but does not consider the nationality of companies as a selection criterion. While a perfect market would reward companies on the basis of the quality of their products and their cost efficiency, ECAs regard these criteria as secondary to national content requirements. Without the ‘safe-harbour’ clause in the WTO Agreement on Subsidies and Countervailing Measures, official export financing would be considered a prohibited export subsidy under WTO rules.
A second source of tension exists between their export promotion objectives and broader sustainable development goals. Governments are increasingly expected to promote coherence between policies and strategies across different ministries. As part of this broader trend, ECAs are expected to balance their formal mandate to meet the financing demands of national export industries with broader responsibilities to promote sustainable development. Given that companies supported by ECAs can have an adverse impact on the environment and local communities, they are increasingly confronted by external demands for greater public accountability. During the past decade, transnational advocacy campaigns have challenged ECAs on a number of issues, including corruption, sustainable debt, environmental damages and human rights abuses (Schaper, 2007). Critics commonly refer to the policies and practices of multilateral development banks, and commercial banking institutions that have adopted the Equator Principles, when making the case that ECAs should have a legal obligation to comply with international environmental and social standards.
A third source of tension exists between the narrow mandate to arrange financing for domestic exporters in a confidential manner and growing public expectations to increase the public transparency of their operations. The governance structures of ECAs are dominated by the interests of domestic export industries and remain fairly closed to other stakeholders. There is a scarcity of information available about the financing activities of individual ECAs, and the terms and conditions of particular transactions. Most ECAs issue annual reports that provide a general overview of financing mandates and activities, but few if any systematically disclose the names of all companies supported. Among the most transparent, the UK’s ECGD annually releases a list of civil, non-aerospace beneficiaries that identifies the sector, good, and destination country of each transaction, its environmental risk profile, and applicable international environmental and social standards. The OECD Export Credit Division periodically releases aggregate data on official export financing flows by country and sector on the basis of data provided by OECD governments, but does not identify which projects have been supported by which ECAs. The other major source of information is research reports produced by NGOs on the basis of publicly available information. These typically link ECAs to particular projects that have been documented to cause adverse environmental and social impacts, as a means to build an argument for reform.
Confronting the climate challenge
ECAs remain understudied as significant actors in global climate governance (Schaper, 2007). While they influence global common problems through their financing activities, they are ill positioned to tackle global commons problems by themselves. ECAs are not mandated, nor do they currently possess the competencies, to change the development trajectories of global markets. Moreover, OECD countries have generally opposed the inclusion of environmental considerations in international financial policy given their preference for an open economic order that places few constraints on the movement of capital (Porter and Webb, 2008). Indeed, governments have been reluctant to accept international rules that undermine ECAs as investment-enabling institutions. As one former secretary general of the Berne Union has stated, ‘their facilities normally follow trade rather than initiate or lead it’ (Berne Union, 2010, p. 55). In the energy sector, this demand-driven orientation has compelled ECAs to be greatly supportive of efforts to expand fossil fuel-based power generation in developing countries with growing energy demands.
Some critics argue that ECAs should make their mandates in the energy sector supportive of international efforts to mitigate climate change and place developing countries on a more sustainable energy path (EDF, 2009; Maurer and Nakhooda, 2003). This agenda relates to broader policy debates about whether and how national and international trade policy should be better aligned with the objectives of the international climate regime. Evidence produced by the OECD and analysed by environmental groups has demonstrated that official export financing in the energy sector overwhelmingly benefits companies involved in large-scale, fossil fuel-based energy projects. Between 2002 and 2008, OECD governments provided $2.9 billion/year of long-term export financing to carbon-intensive energy development and only $534 million to exporters of low-carbon technologies, with large-scale hydropower accounting for a large share (Corfee-Morlot et al, 2009; OECD, 2007a). Other estimates put export finance support for fossil fuels to more than $10 billion annually (GSI-UNEP, 2010). The Environmental Defense Fund, the US NGO, estimated that export credits and multilateral loans to coal-fired power plants since 1994 have generated carbon emissions equalling 77 per cent of annual coal-related emissions in the EU power sector (EDF, 2009).
The small share of overall energy financing channelled to renewable energy and clean technology companies can be attributed to three causes. First, in the absence of a domestic regulatory environment that builds export capacity in the clean energy industry, it is generally difficult for ECAs to provide more financing to the sector. Since 2003, the UK’s ECGD has made £50 million available on an annual basis for promoting renewable energy technology in developing countries, but has seen little uptake among British exporters. The few governments that provide a large share of their export financing to the clean technology and renewable energy sector – such as Denmark and Spain – tend to have developed a large and mature export industry through domestic regulatory and fiscal policies. Second, ‘greening’ the investment portfolios of ECAs also hinges on complementary regulatory actions in importing countries that provide favourable investment conditions for green technology choices (Dubash, 2002). The geographic and sectoral composition of ECA portfolios will also reflect the extent to which their respective exporters find buyers of their products and services in other countries.
And third, it can also be attributed to the financial parameters that govern ECA support. OECD countries have negotiated rules that would allow for more generous pricing to exporters selling equipment and technology that supports clean energy development. Already in 2001, a G8 Renewable Energy Task Force called on OECD countries to include minimum standards for energy efficiency or carbon intensity in the environmental guidelines for ECAs (Schaper, 2004). In 2009, OECD governments adopted a revised version of a Sector Understanding on Export Credits for Renewable Energies and Water Projects that allows borrowers extended repayment terms of 18 years (up from 15 years) (OECD, 2010). This amendment to the Arrangement was meant to facilitate the financing of projects with lower annual cash flows as the repayment of the loan could be spread over a longer period of time. Some governments have also introduced or expanded export financing programmes specifically tailored to the capital needs of clean technology and renewable energy companies. The US Ex-Im Bank has managed an Environmental Export Program since 1994 and increased its renewable energy investment tenfold between 2008 and 2010 to $300 million (Friedman, 2010). In 2009, the Japan Bank for International Cooperation (JBIC) allocated $5 billion to support Japanese exports and investments with a strong focus on renewable energy and water projects in Asia. Korean Ex-Im Bank’s Green Pioneer Program is expected to provide $20 billion annually until 2020 to 200 companies engaged in clean energy technologies and renewable energy.
Modifications to international rules have thus far failed significantly to augment the share of official export financing flowing to clean technology and renewable energy exporters. This suggests that national export capacities are a more significant obstacle to boosting investment volumes than the terms and conditions that govern official export financing practices. According to data reported by OECD ECAs and released by the OECD, the sector understanding resulted in £685 million in combined financing across ten new projects during the first three years, the bulk of which benefited hydropower (three projects, £437 million) and wind energy (five projects, £250 million) (OECD, 2009). Negotiations are ongoing over a broader Climate Change Understanding that would also cover projects with low to zero carbon emissions or high energy efficiency (Recolfis, 2010).