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Abstract

  1. Top of page
  2. Abstract
  3. Export credit agencies
  4. The international governance of official export financing
  5. The path ahead: three tensions
  6. Conclusions
  7. References
  8. Author Information

Abstract

This article introduces export credit agencies (ECAs) as highly influential actors in international trade and global energy development. In the energy sector, official export financing stimulates international trade in energy-related technologies and promotes energy development in countries associated with high political risk. Adverse competition between ECAs has produced a demand among governments and other actors for international governance. The article explores the origins and effectiveness of international rules, and identifies three challenges to the current OECD-centred governance arrangements. First, the growing influence of ECAs from non-OECD countries is challenging the legitimacy and effectiveness of the OECD as an institutional venue for negotiating rules. Second, there are growing tensions between the national economic objectives that underpin the mandates and operations of ECAs, and their global implications. And third, as official export financing overwhelmingly benefits large-scale, carbon-intensive energy development, a number of ECAs have been criticized for undermining efforts to place developing countries on a more sustainable energy path. The article is pessimistic about the prospect of fundamental reform, as aligning official export financing with global policy objectives may require governments to enact fundamental changes to the mandates and structures of ECAs that compromise their effectiveness as instruments of national export promotion.

Policy Implications

  •  The growing influence of non-OECD countries in the international market for official export financing will generate new demands for international rules from governments and other stakeholders.
  •  Given the global impacts of ECAs, it will become increasingly difficult for governments to insulate themselves from pressures to align their mandates and activities with broader sustainable development objectives.
  •  The role of official export financing in the energy sector demonstrates the extent to which mitigating global climate change requires a better integration of international trade and climate policy.
  •  As more and more countries establish ECAs, it will become increasingly difficult to reach a consensus on international rules.
  •  When benefiting exports related to oil, gas and coal-based power generation, official export financing reduces the capital costs of large-scale fossil fuel-based energy development in developing countries.
  •  The ‘greening’ of official export financing in the energy sector would be accelerated by fiscal and regulatory policies in both exporting and importing countries that are favourable to clean technology and renewable energy companies.

This article aims to introduce export credit agencies (ECAs) as highly influential actors in international trade and global energy development. Today, more than 50 governments use ECAs to support national exports of large-scale equipment and technology, including in the energy sector (Gianturco, 2001; Singh, 2009; Stephens, 1999). When exporters have access to official export financing – in the form of export insurance or risk guarantees – they can accept deferred payments from buyers of their goods under conditions of high uncertainty. Such financing has become particularly important for industrial projects of strategic importance that are exposed to significant commercial and non-commercial risk, such as commercial aircraft, aerospace technology, armaments, industrial plants, infrastructure and transportation systems. In the energy sector, ECAs often underwrite transactions involving equipment and technology needed to build and operate long-term energy projects, such as hydropower dams, power plants, pipelines and large solar and wind installations. During the 1990s, the annual volume of loans, project guarantees, and investment insurance provided by Organisation for Economic Cooperation and Development (OECD) countries across all industry sectors averaged roughly $80–100 billion per annum, or twice the levels of traditional government-to-government development assistance (Maurer and Nakhooda, 2003). Since then, volumes have grown considerably, not least because of the rise of ECAs from non-OECD countries, reaching a record $514 billion across all countries in 2010 (Berne Union, 2011).

The article finds that ECAs influence a number of energy-related policy goals pursued by governments and international institutions. First, ECAs help expand energy supply in developing countries by providing risk cover to private companies involved in large, complex energy projects. They also mitigate energy poverty in cases where projects provide poor communities with access to new energy sources. Second, ECAs stimulate international trade in energy-related goods and services and facilitate the entry of multinational energy companies into countries associated with high political risk. They may also impact the relative international competitiveness of energy companies by providing export companies in their own national jurisdictions with privileged access to export financing. Third, ECAs may influence the extent to which energy development in developing countries follows a carbon-intensive or low-carbon path. Given that the energy choices developing countries make are partially driven by the cost of capital, the financing terms and conditions that ECAs attach to their financing instruments can help decide which types of energy project are able to attract affordable financing (Schaper, 2007). And fourth, ECAs have a bearing on international energy cooperation and domestic energy governance by providing an instrument for governments to intervene in the energy sectors of other countries. Often times, the financial involvement of an ECA in a particular transaction is part of a broader bilateral relationship between two countries.

The analytical focus of the article is to explore developments in the international governance of ECAs. While international rules provide governments with significant discretion and flexibility, they have nevertheless contributed to harmonizing policies and preventing harmful competition (Levit, 2004; Stephens, 1999). The article contends that the evolution of international rules is relevant for the future roles and responsibilities of ECAs. The article will proceed as follows. The first section introduces ECAs as influential national institutions in international trade, describing their mandates, modes of operation, and impacts. The second section considers their financing activities and impacts in the energy sector. The ensuing section reflects on three areas of tension between official export financing and international governance: the structure of international rule making; the relationship between ECAs and a variety of broader sustainable development objectives; and the impact of official export financing on international efforts to mitigate climate change. The conclusions summarize the analysis and consider the future of international governance of ECAs.

Export credit agencies

  1. Top of page
  2. Abstract
  3. Export credit agencies
  4. The international governance of official export financing
  5. The path ahead: three tensions
  6. Conclusions
  7. References
  8. Author Information

Virtually all governments view higher exports as a vital national objective (Moravczik, 1989). In recognition of this, most governments with export-oriented economies have created ECAs to support growth and employment in export industries (Gianturco, 2001; Levit, 2004; Moravczik, 1989; Stephens, 1999). The central aim of ECAs is to help domestic exporters sell goods and services to other countries. They each operate with content requirements that bar them from financially supporting private companies that are not based in their respective home countries. Collectively, they act as a ‘financial lubricant’ for international trade that makes it possible for certain types of exporter to sell expensive goods to buyers in foreign countries (Moravczik, 1989, p. 176). The origins of official export credits can be traced back to 1919, when the UK government established its Export Credit Guarantee Department (ECGD) to reinvigorate British exports to Russia following their collapse during the First World War. The British export credits were administered by the Board of Trade with the consent of the Treasury, with the provision that income should be sufficient to meet possible losses. During the subsequent half-century, most OECD countries created their own ECAs, and since the 1990s, a growing number of non-OECD countries have established them as well.

ECAs are commonly structured as public or semi-public institutions that draw funds from the treasury or public capital markets and transform these into export finance. Some ECAs are organized as government departments that report to particular ministries (e.g. ECGD in the UK and ERG in Switzerland), some are structured as more autonomous state-owned enterprises (e.g. SACE in Italy and NEXI in Japan), whereas in a few cases, official export credits are channelled through a private company on the basis of an agreement with the host government (e.g. COFACE in France and Hermes in Germany). Official export financing from OECD countries is highly concentrated among a few large countries and mainly benefits a small number of fast-growing developing countries. In the period 1998–2005, the ECAs of just five governments – United States, United Kingdom, Japan, France and Germany – accounted for the bulk of OECD export credits. Moreover, a third of the financing benefited exports to seven Asian countries – Iran, China, India, Indonesia, Thailand, Korea and Malaysia (OECD, 2007b).

Risk insurance that supports international trade flows is provided by both public and private financial institutions. In broad terms, we can distinguish between short-term trade financing, which covers risks for up to two years and is under normal market conditions provided by private insurers, and medium- and long-term trade financing, which is not considered ‘marketable’ and is generally covered by ECAs (Auboin, 2009). In accordance with international rules agreed by OECD countries, export financing is nowadays designed to insure against types of risk that private risk insurers are generally unwilling and unable to offer. However, OECD countries have on occasion suspended these to counter economic downturns. For example, in the aftermath of the global credit crisis, they agreed to allow their ECAs to enter the short-term trade finance market so as to make up for the shortfall in private insurance. The financing portfolios of ECAs at any given time typically reflect the demand for official export financing among domestic exporters. More broadly, they play an important role as an economic stimulus measure to revitalize and expand national employment and economic growth.

The influence of ECAs extends beyond their catalytic impact on international trade flows and the export activities of their direct beneficiaries. Official export financing may encourage economic activities in host countries that some stakeholders find objectionable. For example, ECAs may enable arms exports to undemocratic governments by providing risk cover to producers of armaments. In the 1990s, ECAs supported independent power producers in the Indonesian energy sector even though many power purchase agreements between the government and private companies had been signed in secrecy and under a cloud of corruption. Environmental groups have criticized ECAs for providing export financing to companies engaged in the construction of large dams that submerge large areas of natural habitat and force riverside communities to relocate from their homes. Others have called on governments to refrain from financing fossil fuel-based energy development and promote international rules that place international carbon constraints on all international export financing (EDF, 2009; Friedman, 2010). In all these cases, there is a perceived conflict between national export promotion on the one hand, and a variety of public interests in host countries on the other.

Official export financing in the energy sector

Global energy development is shaped by a wide array of different national and international institutions (Florini and Sovacool, 2009). During the past two decades, the diffusion of public–private partnerships (PPPs) as a regulatory model in developing countries provided new export opportunities for multinational companies in the energy sector (Dubash, 2002). Conversely, PPPs also laid the groundwork for developing countries to attract foreign investment into economic sectors traditionally dominated by public ownership and regulation, including energy. Even when operating in countries actively seeking foreign investment, multinational companies invested in energy projects are nevertheless exposed to conventional credit risks as well as domestic political actions over which they often have limited influence. Large-scale projects, such as power plants, hydropower dams and pipeline infrastructure, may take many years to build before they produce any revenues, during which the broader institutional environment may significantly change. In fact, a project that is profitable under one set of government policies could go bankrupt under a different set (Rodrik, 1995, p. 7). Political upheavals, internal conflicts, currency devaluations, and breaches of contract by a government entity can all occur during a lifetime of a contract and severely undermine the financial standing of the counterparty.

Historically, the bulk of official export financing in the energy sector has flowed to companies selling expensive technologies to large energy projects in countries associated with high investment risk (Corfee-Morlot et al., 2009; OECD, 2007a). Between 1990 and 2005, 40 per cent of OECD export financing by volume was provided to just ten multinational companies promoting conventional energy technologies (Tenenbaum and Izaguirre, 2007). In the 1990s, ECAs were instrumental in facilitating foreign participation and investment in oil, gas and coal-based power plants in Indonesia, the Philippines and other Asian countries (Dubash, 2002). Many projects supported by ECAs – such as the Dabhol gas-fired power plant in Indonesia – were extremely complex and of record size. During the past decade, OECD countries have supported the construction of transnational pipelines – such as the Baku–Tblisi–Ceyhan pipeline between Azerbaijan and Turkey and the Chad–Cameroon pipeline – as a means to aid national exports and boost global energy supplies. More recently, the International Finance Corporation (IFC), alongside the Asian Development Bank (ADB) and the Korean ECA, provided financing for the $4.2 billion Tata Mundra project, a 4,000-megawatt coal-fired power plant that is being developed in the Indian state of Gujarat.

Export financing that benefits renewable energy technologies remains comparatively modest overall. While the global market for renewable energy and clean technology is growing rapidly, its overall size remains small compared to the market for conventional energy technologies. Moreover, the financial instruments and competencies of ECAs do not readily cater to the needs of companies engaged in developing smaller, decentralized energy sources based on relatively unproven technologies. Between 2000 and 2008, OECD export financing flows to renewable energy did not exceed 1 per cent of total flows in any given year (OECD, 2010; UNEP, 2004). Moreover, most renewable energy financing has benefited large-scale hydropower development, with wind, solar, biomass and geothermal receiving a lesser share. Among the most notable examples, the Three Gorges Dam in China was supported by the ECAs of Germany, Switzerland, France, Canada, Japan and Sweden. In another record-breaking deal, export financing from the French, Norwegian and Swedish governments was central to the realization of the Nam Theun 2 Hydropower Project, Laos’ largest hydropower development.

The international governance of official export financing

  1. Top of page
  2. Abstract
  3. Export credit agencies
  4. The international governance of official export financing
  5. The path ahead: three tensions
  6. Conclusions
  7. References
  8. Author Information

While the mandates of ECAs are primarily established by national legislation, they are also subject to various binding and nonbinding international rules and regulations. There is a debate about whether international regulations governing national economic and financial affairs provide a meaningful constraint on state behaviour. Some argue that international rules are merely mechanisms of state power that are created and enforced by powerful states wishing to advance their economic interests and policy preferences (Drezner, 2007; Simmons, 2001). In this view, studying institutional change requires an examination of the evolving interests and capabilities of the most powerful states. Others say international rules exert an autonomous influence on the international political economy, either because they help states solve collective action problems (Abbott and Snidal, 2001) or because they reflect and help constitute shared normative understandings among states about what is regarded as appropriate and legitimate state conduct (Barnett and Finnemore, 2004; Porter and Webb, 2008). This entails that the influence of international rules on state behaviour does not depend solely on the ability and willingness of powerful states to coerce compliance.

In the case of explaining the emergence and evolution of international rules for official export financing, both views have some explanatory power. International governance of official export financing dates back to the mid-1970s when states with large export promotion programmes – notably the United States, United Kingdom, France, Germany and Japan – first proposed rules to coordinate export financing practices and safeguard them from international trade law (Moravczik, 1989). They chose to negotiate rules in exclusive multilateral governance forums where their policy preferences were broadly shared – notably the G7 (later G8) and the OECD. However, the influence of international rules does not simply reflect the interests of powerful states, as their effectiveness depends on broad acceptance among all states that provide official export financing. The natural inclination of ECAs is to provide financing terms and conditions to national exporters that are generous enough to give their respective export industries comparative advantages in securing contracts and managing risks. Without rules and norms that determine what constitutes an appropriate level of export subsidization, competition between ECAs may induce them to provide increasingly generous financing at rates below cost recovery, thereby putting a strain on public budgets (Levit, 2004). Thus, all states, even the most powerful, have an interest in relinquishing some national autonomy as a means of facilitating a ‘level playing field’ on the degree of export subsidization.

The OECD Arrangement

In the late 1970s, OECD countries negotiated the Rules of the Arrangement on Officially Supported Export Credits (or the Arrangement) as a means to prevent a recurrence of the war of export subsidies which had erupted earlier in the decade (Levit, 2004; Moravczik, 1989; OECD, 2011; Stephens, 1999) The Arrangement is not a formal agreement between governments signed by heads of state and ratified by national legislatures. Instead, the framework functions as a highly flexible, continuously updated, ‘self-designated gentleman’s agreement’ between OECD countries that is hosted by the OECD’s Export Credit Division (Levit, 2004, p.77), It provides a framework for OECD countries to negotiate how to stabilize the delicate conflict between the concentrated national benefits of promoting domestic exports and the diffused international costs that they may impose on each other. The overarching aim has not been to eliminate export subsidies altogether, but to establish an international consensus on what constitutes a legitimate export subsidy. Since its inception, the Arrangement has been the subject of more than 100 intergovernmental meetings between OECD countries.

Based on the collective demand among OECD countries for a ‘level playing field’, the Arrangement has succeeded in gradually reducing adverse pricing competition between OECD countries (Levit, 2004; Moravczik, 1989). It has three main regulatory functions. First, it has been used by OECD countries to find agreement on the amount of subsidy they can provide in areas such as interest rates, fees, maturities, down payments and repayment schedules. They have also negotiated special terms for project financing, and financing involving ships, civil aircraft, nuclear power plants and renewable energy, and water projects. Second, the Arrangement has facilitated the creation of a collective notification, reporting, and accountability framework among ECAs which has contributed to building mutual trust and commitment. As part of the rules, each agency is required to notify others of impending transactions and report aggregate data on export finance provision to the OECD Export Credit Division for public dissemination. And third, it is used to negotiate and determine adjustments to financing limits on the basis of changes in international capital markets. At the G20 summit in London in 2009, governments pledged to support international trade flows by providing their respective ECAs with expanded mandates to issue short-term direct financing to exporters. Technical discussions about financing limits continued among participants of the OECD Export Credit Division, resulting in adjustments to the Arrangement.

While an OECD institution, the Arrangement has gained broader legal standing by being recognized within the WTO and embedded in EU law. In 1979, OECD governments were successful in inserting a ‘safe harbour clause’ for official export financing in the General Agreement on Tariffs and Trade (GATT) subsidy code, which was readopted in 1995 and included in the WTO Agreement on Subsidies and Countervailing Measures (ASCM, Annex 1, Item (k)). This provision entails that an official export credit does not qualify as a prohibited export subsidy under WTO rules if it complies with interest rate provisions defined in the Arrangement. Moreover, compliance with the Arrangement is a legal obligation for EU Member States as a result of the EU Directive on Medium and Long-Term Export Credit Insurance.

The OECD Common Approaches

In the late 1990s, OECD countries were increasingly pressured to accept that ECAs – despite operating under narrow mandates to promote national exports – nevertheless should promote compliance with environmental and social standards (Maurer and Nakhooda, 2003; Schaper, 2007). A transnational advocacy campaign had directed public attention towards a number of ECA-supported projects in developing countries that had caused environmental damage, displaced local communities, and enabled government corruption. In 1997, a group of NGOs formed ECA Watch, a network to coordinate campaigns against ECAs, and demanded that they adopt and comply with international environmental and social standards, notably the World Bank’s Safeguard Policies. In 1999, in response to external demands, the G8 issued a joint statement proclaiming the need to integrate environmental considerations into export financing practices and align standards with those of the multilateral development banks. The following year, over 400 civil society organizations signed the Jakarta Declaration, a manifesto demanding that ECAs become more transparent, adopt binding environmental and human rights standards, fight corruption, cease financing to nonproductive ‘white elephant’ projects, and cancel debt to the poorest countries. It provided the normative basis for a long-standing campaign coordinated by FERN, the Dutch NGO, which aimed to induce governments to adopt legally binding environmental, social and human rights guidelines for ECAs and provide access to justice for people adversely affected by projects.

The civil society campaigns built public pressure on selected governments in North America and Europe to require their respective ECAs to adopt environmental and social standards (Schaper, 2007). Additionally, the US government, which had unilaterally committed to comply with environmental standards, was eager to create international rules that compelled others to follow. In 2001, OECD countries adopted the Common Approaches on Environment and Officially Supported Export Credits (the Common Approaches), a set of nonbinding, consensus-based rules for harmonizing environmental and social standards attached to the provision of medium- and long-term export credits. The current version of 2007 commits them to publish an environmental policy, adopt the environmental screening process used by multilateral development banks, and ‘benchmark’ projects against host country standards and the IFC Performance Standards in the case of private sector projects (OECD, 2007a, pp. 5–6). They are also required to report on implementation to the OECD secretariat on a semi-annual basis in order to facilitate joint reporting of official export financing data. However, the Common Approaches are notably more guarded and less expansive in defining the environmental responsibilities of ECAs than the frameworks adopted by multilateral development banks. Symptomatically, they identify one of three objectives as being to ‘foster transparency, predictability and responsibility in decision-making, with due regard to any relevant legal stipulation, business confidentiality and other competitive concerns’ (OECD, 2007a, p. 3, emphasis added). ECAs can in principle circumvent the standards provided that they report it ex post to the Export Credit Division. As is common among banking institutions, they have also retained the right to withhold transaction-level information.

Transnational governance networks

Transnational networks of professionals increasingly contribute to the emergence and diffusion of norms and rules in the global economy (Slaughter, 2004). Particularly in highly technical policy areas, informal interactions between professionals can be highly influential in setting policy agendas and shaping solutions to problems. In parallel with the evolution of intergovernmental rule making within the OECD, a number of informal networks of banking and insurance professionals have expanded in scope and scale. Their rise reflects the proliferation of networked governance more generally, and a growing interest among executives in the international banking and risk insurance industry for sharing knowledge and experiences. Since its inception in 1934, the Berne Union has become an increasingly influential trade association for the global export insurance industry (Berne Union, 2010). Administered by a small secretariat in London, the Berne Union currently has over 70 members (both public and private insurers) from more than 60 OECD and non-OECD countries, representing more than $15 trillion in new insurance business in 2008. Membership is based on meeting a set of maturity criteria, as well as gaining approval among existing Berne Union members. It has created the Prague Club, a network specifically designed to help newly established ECAs meet the Berne Union’s membership requirements.

Whereas rule making at the OECD is mainly conducted by government officials through formal channels, interactions within the Berne Union are practitioner driven and highly informal. It has developed a set of Guiding Principles that emphasize a commitment to promoting trade and investment in accordance with laws and agreements, transparency, and financial professionalism (Berne Union, 2010, p. 22). In recent years, networks of insurance professionals have deepened their informal discussions with public and commercial banking institutions on matters related to environmental and social standards. In 2003, a group of North American and European commercial banks launched the Equator Principles, a set of environmental and social risk management standards and procedures for project financing based on the policy framework of the IFC, the World Bank’s private sector financing arm (Equator Principles, 2006; Wright and Rwabizambuga, 2006). To date, more than 70 public and commercial banking institutions have pledged to follow them, including several ECAs. They have established the Equator Principles Association, a private, transnational association to oversee revisions of the framework, which has created a working group to maintain a dialogue with ECAs and the OECD on the development of standards related to environmental and social due diligence. They have also established five separate working groups to engage actively with banks in China, Russia, India and other developing countries with large state-owned banking and insurance institutions. In turn, informal interactions between banking and insurance professionals are contributing to a gradual convergence in environmental and social policy commitments among public financial institutions.

The path ahead: three tensions

  1. Top of page
  2. Abstract
  3. Export credit agencies
  4. The international governance of official export financing
  5. The path ahead: three tensions
  6. Conclusions
  7. References
  8. Author Information

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).

Conclusions

  1. Top of page
  2. Abstract
  3. Export credit agencies
  4. The international governance of official export financing
  5. The path ahead: three tensions
  6. Conclusions
  7. References
  8. Author Information

The article has provided an overview of the mandates and activities of ECAs, with a particular emphasis on their engagement with energy. It identifies how ECAs are first and foremost viewed by governments as financial instruments for promoting national exports. Their legality in the international trade regime is protected by WTO rules – which dictate that official export financing can be provided if terms and conditions secure cost recovery – and comply with soft law negotiated under the auspices of the OECD Export Credit Division. Complementing these formal governance arrangements are a number of transnational networks – such as the Berne Union and the Equator Principles Association – that allow banking and insurance professionals informally to share information and experiences and engage in collective problem solving. These networks are gradually expanding eastward to include professionals from banking and insurance institutions in fast-growing developing countries, notably in Asia.

The analysis identified how the impact of ECAs goes well beyond their national export industries. In the energy sector, they have helped expand trade in energy-related goods and services and boosted the supply of energy in developing countries. The practice of official export financing also facilitates international energy cooperation by encouraging financial and political relationships between countries that export and import energy technologies. However, the dissociation of official export financing from other international policy realms has produced a variety of tensions between ECAs and other institutions. The analysis focused on the issue of climate change, noting that ECAs remain central to energy development in the developing world. By reducing the capital cost of carbon-intensive energy development, ECAs are vulnerable to criticism that their financing is undermining efforts to place developing countries on a more sustainable energy path.

While ECAs are driven by national economic priorities, governments recognize the collective benefits of international rules that facilitate coordination and collective problem solving. However, as the current international rules were created at a time when global export capacity was heavily concentrated in a few OECD countries, their relevance is being scrutinized. Reforming international governance of ECAs is complicated by a number of obstacles. First, while the current OECD-centred rule-making process has been fairly successful in harmonizing pricing across ECAs in OECD countries, it is poorly designed to coordinate financing practices across OECD and non-OECD countries. Moreover, the liberal principles underpinning the OECD’s engagement with international trade policy (Porter and Webb, 2008) may not be widely accepted by non-OECD countries embracing various forms of state-led capitalism. The future impact of the governance arrangement is particularly uncertain in Asia, given the growing influence of ECAs from non-OECD countries in the region.

Second, in so far as improved international governance requires that the autonomy of governments be restricted, it becomes difficult to achieve through consensus-based rule making. The content of the Common Approaches – characterized by nonbinding aspirational commitments – reflects how governments remain extremely reluctant to accept constraints on their official export financing practices. Particularly after the financial crisis, OECD countries looking to domestic export industries to lead a national economic recovery have hesitated to propose and accept restrictions on their official export financing that do not apply to some of their fiercest economic rivals in the developing world (Singh, 2009). Moreover, if the relative effectiveness of the G20 is anything to go by, the inclusion of non-OECD countries in formal negotiations may make it even more difficult to reach a consensus on meaningful rules, given that it would increase the diversity of views represented.

And third, while many governments accept that ECAs should broadly promote sustainable development, few accept that their performance should be measured against broader development indicators in the countries in which they operate. Hence, many of the demands from external stakeholders – such as fostering a transition to a low-carbon energy future – are not viewed by governments as relevant policy goals for ECAs and the ministries that govern them. More broadly, aligning official export financing with policy objectives pursued by other institutions – including those operating in the broad field of global energy governance – may require governments to enact fundamental changes to the mandates and structures of ECAs that compromise their effectiveness as instruments of national export promotion.

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  2. Abstract
  3. Export credit agencies
  4. The international governance of official export financing
  5. The path ahead: three tensions
  6. Conclusions
  7. References
  8. Author Information
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Author Information

  1. Top of page
  2. Abstract
  3. Export credit agencies
  4. The international governance of official export financing
  5. The path ahead: three tensions
  6. Conclusions
  7. References
  8. Author Information

Dr Christopher Wright, Senior Researcher, Center for Environment and Development, University of Oslo.