My name is James Harmon, and I am the President and Chairman of the Export-Import Bank of the United States (Ex-Im Bank), the official export credit agency of the United States Government. We are an independent government agency wholly focused on preserving and expanding jobs here in the United States. I first testified before the Senate Banking Committee for my confirmation, and I am proud to appear before you today to testify on behalf of our agency's rechartering. The legislative request is minimal. We are asking for a renewal of our charter lasting four years to September 30, 2001, renewal of our authority to approve tied aid to last the length of the charter, and a renewal of our authority to approve transactions involving "dual use" items, that is, items that are used primarily by civilians but can also be used by military authorities. I want to give you a brief overview of what we have done since our last rechartering in 1992. But first, I want to share with you some my experiences during my first month at Ex-Im Bank, and where I would like to take Ex-Im Bank over the next four years.
I have spent thirty-eight years in the financial community and have had a variety of experiences with banks and bankers of all kinds. Right now, I feel that in testifying before you I am reporting to Ex-Im Bank's shareholders, the taxpayers. I am pleased to report that the Bank is in a sound financial position, with ample reserves and an enviable record of financial judgement, as shown by its loss experience over an extended period of time. Ex-Im Bank reserves for losses stand at $6.6 billion as of June 30, 1997. There are no unfunded liabilities on Ex-Im Bank's balance sheet.
Just as importantly, Ex-Im Bank is staffed by responsible and dedicated people with an admirable record of accomplishment over the past five years. The following is a sample of what we have done:
But we could not have accomplished this without the understanding and support of the Congress and this Committee in particular. It is the Congress that gave us our mandates in the environment and small business. They have made Ex-Im Bank a better institution. The Congress told us to act only where the private market will not, approving only those transactions that could not go forward without us, especially in higher risk markets where the private sector is not yet comfortable.
It is hard to conceive of a more sensible and necessary role for the U.S. government than to step up to meet the competition posed by foreign governments who offer their support in favor of their exporters and their workers. Ex-Im Bank can act when it finds, as Congress has mandated, a "reasonable assurance of repayment." We help exporters large and small to compete for the business of creditworthy buyers in a brutal international marketplace. In the past five years, since we were last rechartered, we have supported about $75 billion in exports that would not have gone forward without us. We have done this on appropriations of $3.7 billion. In other words, for every one taxpayer dollar invested, we have leveraged approximately $20 dollars in exports. This has directly supported hundreds of thousands of jobs here in the United States, and these jobs are the linchpin connecting Ex-Im Bank indirectly to a million jobs. The benefits of Ex-Im Bank reach into virtually every state and community.
First, let me address the issue of foreign governments supporting their exporters. This government would not be acting responsibly were it to stand by and allow high-paying jobs to leave this country and go to our competitors. Ideally, competition in the trade arena should be based on issues of price, quality, and service. Nobody wants to see that more than I or the rest of us working at Ex-Im Bank. The question is, how do we get there? A large part of the answer lies in multilateral negotiations carried out in the Organization for Economic Cooperation and Development (OECD). We have had great success in this arena, as I will discuss later. We are currently concluding an agreement on minimum fees charged for risk which will allow an increase in the fees. This will reduce our appropriation somewhat by offsetting what is charged for the risk in our transactions.
But to be credible at the negotiating table, we have to face the reality that we have to fight on the battlefield where the real conflict is taking place. These days, that frequently is in the "competition" between governments to offer export finance. It's not hard to see why this is happening. The big emerging markets of the Third World are growing at a fantastic rate. Over the past ten years, they have averaged approximately a 10% growth in their GDP and over 15% in import growth. The World Bank reports that these countries will need $200 billion by the end of the decade in infrastructure improvements alone. The exporting countries that get a foothold in these markets stand to reap the benefits of literally billions of dollars in initial sales and follow-on orders involving spare parts and improvements to existing systems. So our competitors try to lock in these markets by offering financial inducements to buy their exports.
We may not like it, we may want to see it change, and indeed, Ex-Im Bank is actively working to eliminate such practices. But until then, we have to live in the real world. I can assure you, U.S. workers and companies do. They have a very clear, ground level view of what "competition" really means. They know they are fighting against exports that are supported by foreign governments. They are fighting to increase productivity, and in many cases, have sacrificed to do so. If US exporters and workers are already doing so much, can the U.S. government desert the field and leave them to fight foreign governments alone? It is unthinkable.
In many of these markets where governments are willing to offer their support for exports, private financial institutions are not prepared to offer financing in the terms and conditions necessary, or to take the foreign risk at all. In these cases, where there is a reasonable assurance of repayment, Ex-Im still steps in to assist exporters even if it cannot be directly demonstrated that a foreign government is competing for the specific transaction. Commercial banks are still gun-shy regarding many developing country markets where the growth is taking place. They remember the debt crisis of the eighties, and they are reluctant to step in again at all, especially for the longer tenor required to finance projects. But there are opportunities in these markets that we must not let go, not if we want to help continue the export-led employment growth we have been experiencing. And if we do not act, eventually the foreign buyers will turn to our competitors to supply their needs.
Before I discuss some specific issues of competitiveness, I want to give you an idea of the specific programs Ex-Im Bank uses to help support our exporters. First there are guarantees. Ex-Im Bank will guarantee a commercial bank loan to a foreign buyer of U.S. goods and services for up to 85% of the contract price. The commercial bank provides the funds and we provide the risk protection. In this way, we endeavor to involve commercial banks in the export business. Repayment is made to the commercial bank at an interest rate negotiated between the bank and the buyer. Second, Ex-Im Bank will make a direct loan to the foreign buyer, once again for up to 85% of the contract price. We are repaid at a rate of one percent above the cost of our borrowing. Therefore, no U.S. taxpayer money is used to subsidize the interest payments on Ex-Im Bank loans. This is one of the real success stories of our negotiations in the OECD.
Third, Ex-Im Bank offers insurance programs to cover repayment risk as well as other hazards exporters face in foreign markets. These programs offers short term, 180 to 360 day, as well as medium term, up to five years. These insurance programs are a major tool for Ex-Im Bank to meet the needs of many of its small business customers. A fourth program, the pre-export working capital guarantee, also helps us reach our small business exporters. In this program, we will guarantee 90% of a working capital loan to help a credit-worthy small business export.
I would now like to mention the progress we have made in the area of small business. Congress has mandated that 10% of our financing be set aside directly for small business. Last year, 21% of our financing and 81% of our deals were direct support for small business. This is an increase for financing of 60% since 1992. In FY '96, the Bank supported directly a total of 1,934 small business transactions, valued at $2.4 billion. Most of these were done through our Insurance and our pre-export Working Capital Guarantee programs. In addition, the Bank support reaches small businesses that participate as subcontractors and suppliers to large companies exporting with Ex-Im Bank support.
This approach is a sensible one, because small and medium size businesses have become an important engine of growth in the U.S. economy, accounting for half of our GDP and employing 54% of the private workforce. That is why we have been so active. Also, as required by our charter, a member of Ex-Im Bank's Board of Directors has primary responsibility for ensuring the interests of small business are met.
There are many special challenges connected with dealing with small businesses. The local banks with which they deal may know very little about exports and the financing of them, and the large, money-center banks that are internationally savvy may not have an interest in dealing with small businesses. For these reasons, we have developed programs and services to make it easier for small businesses to access Ex-Im Bank. The City/State Program brings Ex-Im Bank to small businesses through partnerships with 33 state and local organizations across the country. In the Delegated Authority Program, eighty lenders in more than twenty states have the authority to commit the Bank's Working Capital Guarantee on a case-by-case basis for pre-export working capital without prior approval from Ex-Im Bank. This program brings access to Ex-Im Bank programs much closer to home.
The story behind our small business successes is really the story of two programs within Ex-Im Bank, both introduced above. One is Insurance, and the other is Working Capital Guarantees.
In 1992, after working in partnership with the Ex-Im Bank for thirty years, the Foreign Credit Insurance Association (FCIA) divided its insurance book between riskier transactions, which the private sector was unable to accommodate and which were absorbed by Ex-Im Bank, and deals which were capable of being handled by the private sector, which were absorbed by a private firm. By the end of 1993, Ex-Im Bank was responding to small business insureds with 7 day turnaround processing time for applications. This level of service compared favorably with the customer service standards and performance record of Ex-Im Bank's former private sector delivery system. Authorizations for the year ended September 30, 1993, totalled approximately $4.2 billion.
In 1994, the Insurance Division was instructed to create a medium term coverage policy which would facilitate increased and more efficient support for smaller medium term transactions. This policy was introduced in the summer of 1994 and gained rapid marketplace acceptance thus facilitating greater availability of financing for small and medium sized exporters while leveraging internal staff resources.
In 1994 there were also two organizational changes which affected the Insurance Division. The branch offices, which had come to Ex-Im Bank from FCIA were transferred from the Insurance Division to the Business Development Division, thereby providing broader geographic presence for the entire spectrum of Ex- Im Bank's programs and services. Their underwriting responsibilities were assumed by the Insurance Division in Washington.
Also, to improve customer service, an Exporter Underwriting and Small Business Department was formed within the Insurance Division. This unit was designed to give "hands-on" service to the small exporter. By the end of 1994, the Insurance Division had introduced the new medium term product, "upscaled" the small business products and reorganized to provide better service to small business. In 1994, we issued 107 medium term policies, in 1996, we issued 396. In 1994 we issued 1333 short-term policies to small business, and in 1996 we issued 1647. This shows the tremendous market acceptance of these programs by small U.S. exporters.
As for the future, we have recently completed a comprehensive study of practices of other ECA's and the current practices of the private sector. We find lots of private sector insurance capacity but no appetite for small business and the more risky markets and portfolio concentrations. Therefore, Ex-Im Bank's role over the next four years will be continued strong support for small business and particularly competitive financing for the small business sector taking risks in the markets where the private sector will not venture.
Though Ex-Im Bank's Pre-Export Working Capital Guarantee Program (WCGP) was founded in 1982, it did not become truly effective until it was overhauled in 1994. In FY '94, it had authorizations of $180 million, more than the previous two years combined. Authorizations in FY '95 totaled $306 million, and in FY '96, $380 million. In FY '95, 50% of the transactions were under delegated authority, and 66% in FY '96.
As is the case with countries in the long-term loan and guarantee programs, the WCGP keeps track of its own success stories and can point to many examples of companies who have prospered under its program and therefore no longer need it. These include, among many others, Accessline Technologies, Inc., in Bellevue, Washington, and Systems Chemistry Inc., in Santa Clara, California.
All-in-all, small business has been a real success story for us, but we still face the task of educating local banks and small businesses throughout the country. We have gotten a good start, but the task is far from complete.
Let me re-emphasize the way decisions are made, whether at the division level, by the Loan Committee for medium sized transactions, or by the Board for our larger, long-term transactions. The first thing we look for is creditworthiness in the buyer or the guarantor of the purchase. For larger transactions, adherence to environmental guidelines is also required. In the case of a Working Capital transaction, we look for the creditworthiness of the borrowing exporter and the bank making the loan. Our Congressional mandate is to promote jobs but also protect the taxpayer by finding a "reasonable assurance of repayment." It should be noted that we take applications for transactions in turn, as they "come through the door." We do not choose exports by sector and we do not target countries for exports. We do not arbitrarily pick winners and losers. And very importantly, if we discover that Ex-Im Bank financing is not necessary for a deal to go forward, if the private sector can handle it and there is no foreign export competition supported by a foreign government, then it is our job to get out of the way and let the free market take over. This is what we term "additionality," and it is central to all of our policies. We have to be sure that any transaction we approve would not forward without us.
Mr. Chairman, I would now like to examine what other ECA's do for their exporters. First, and most clearly, all of our major competitors governments support a higher percentage of their exports than we do. Whether it is a matter of tradition or the economic pressures which they are currently under, the major OECD countries are out in force in support of their exporters. For example, Japan's government-backed export credit agencies support fully 32% of that country's exports. The figure for France is 18%. With regard to the percent of exports financed with official export credit assistance, Ex-Im Bank ranks dead last at about 3%, seventh out of seven, in comparison to the export credit agencies of the leading industrialized countries
Under credit reform, Ex-Im Bank must live under a true budget constraint that requires a loss provision for each individual transaction it supports. No foreign ECA is limited by such a real budget as is Ex-Im Bank. Let me say that I consider the financial and budget constraints placed upon us by Congress to be prudent. However, it can be illuminating to compare the systems in various countries.
Also, it is Ex-Im Bank's philosophy to support only those deals where the private sector cannot or will not act. This tends to concentrate our activities in riskier, but often fast-growing, markets in the major developing countries. This is part of our policy of additionality, described earlier. Other ECA's, however, are not so concerned about displacing the private market. In fact, they often use the transactions in less risky markets to cross-subsidize their support for the riskier business.
Sometimes when Ex-Im Bank is compared to the other ECA's, our detractors will try to turn the point back on us, saying that if we support such a small percentage of exports in comparison to our competitors, why is it important that we exist? Let me answer this. Though Ex-Im Bank supports only about 3% of total U.S. exports yearly, in individual markets, and for exports where we make our biggest impact, this support can make a huge difference. In the high-growth developing markets, we are responsible for financing anywhere from 10% to 40% of all U.S. capital goods in certain crucial sectors such as telecommunications, major construction projects, and power. This is significant because it is through long-term financing that most large-scale projects are financed. The availability of long-term financing can often make or break some of the world's biggest deals - exactly the kind of projects that create thousands of new jobs and generate follow-on business.
We attempt to mitigate competition and achieve budget savings through multilateral negotiations in the OECD.
The OECD "Arrangements on Guidelines for Officially Supported Exports Credits" is a gentleman's agreement, reached through consensus, to which the major industrialized countries adhere. Its purpose is to reduce official export financing support while leveling the playing field among OECD nations so that buyers' decisions are influenced by market forces, that is, product price and quality, rather than government-provided financial inducements offered by export credit agencies. The Arrangement dictates the basic financing structure of official export credits, such as minimum interest rate, maximum repayment term and the cash payment. So far, it has excluded the charges made for the risk in the transaction, though we may be on the verge of achieving an agreement on this issue.
The U.S. goal of establishing market forces as the guiding principle requires both tough negotiating and actions to show that efforts to tilt the playing field will not be allowed to succeed. Over the last decade, great strides have been made in reducing subsidies in government-supported export credits by: (1) making minimum interest rates a full percentage point above the cost of government borrowing; and (2) dramatically reducing the incidence of tied aid, a costly practice that greatly distorts market forces.
Specifically, in the early 1980s, the official export credit interest rates were as much as 50% lower than comparable market interest rates. In order to be competitive in this interest rate environment, Ex-Im Bank was forced to lend at interest rates that were lower than the rates charged for borrowing the money, resulting in a loss of some $50 - $100 million for every $1 billion loaned. Today, as a result of ten years of hard bargaining and consistent Congressional support for Ex-Im Bank, there are no losses as a result of the interest rates charged on our loans.
The U.S. effort to curtail trade distorting tied aid for capital goods (infrastructure projects) is one of the most notable successes at the OECD. Tied aid is concessional financing that is tied to procurement from the donor country. Tied aid is used by donor countries to provide needed external resources to developing countries, sectors, or projects with little or no access to market financing. However, tied aid can lead to trade distortions when it is used for commercial purposes. The trade distortion is most pronounced when it is used to finance a capital project which normally should receive commercial financing. Donor country exporters reap a competitive advantage over U.S. exporters by offering below market financing, rather than having to compete on the basis of price and quality. The US government's tied aid policy has had an effective three-pronged approach, in which Ex-Im Bank has played a central role: (i) reduce tied aid financing for the more developed countries and for commercially viable projects; and, (ii), negotiate higher minimum levels of concessionality so that tied aid becomes too expensive a tool to be used primarily for commercial purposes; and (iii) create innovative programs to match tied aid in order to level the playing field for the U.S. exporter in areas where tied aid remains (i.e., less developed countries and commercially non-viable projects).
As a direct result of Ex-Im Bank's concentrated and aggressive use of the "war chest" funds, established in 1990, the US government's tied aid negotiating efforts were bolstered. This led in February, 1992, to a new international agreement--the "Helsinki Package", referred to as the "Arrangement" above. The "Helsinki Package" established two broad principles: (i) that tied aid credits should not be used for commercially viable projects; and, (ii) that a number of key markets were no longer potential targets for tied aid financing. These markets included several important countries for U.S. exporters in the Americas, Asia, and the Middle East, which are either "high income" or "upper middle income" countries (such as Argentina, Brazil, Mexico, Thailand, Hong Kong, Taiwan, South Korea and Czech Republic). Prior to the introduction of the "Helsinki Package", there were $8-$10 billion per year of Helsinki-type tied aid credits. Over 1993-1995, Helsinki-type tied aid credits declined and averaged between $4.1 billion and $5.3 billion, and was even lower, between $2 billion and $3 billion, in sectors of particular importance to the United States, such as manufacturing, power, transportation, and communications. According to U.S. Treasury Department estimates, U.S. exports will increase by approximately $1 billion annually due to the success of the OECD tied aid negotiations.
But eligible foreign tied aid is still a major competitive problem confronting U.S. exporters. So in April, 1994, President Clinton announced the creation of the Tied Aid Capital Projects Fund (TACPF). The theory of the TACPF is simple: if we keep the playing field level at every stage of a project, U.S. companies will win export sales on the basis of superior quality and value. Since the implementation of TACPF, Ex-Im Bank has employed the Fund to counter over $2.7 billion of actual and potential foreign tied aid credits. Under the TACPF, US exporters have been successful in winning contracts in 10 cases, all of which have required or will require Fund use. And there are further examples of success under the TACPF procedures. Ex-Im Bank--working through an OECD procedure called the "common line," --has won prior agreements from foreign governments not to offer tied aid for 16 contracts sought by U.S. exporters. These examples underscore the important role that Ex-Im Bank's TACPF have played in the US government's two-pronged strategy regarding tied aid--reinforcing OECD tied aid rules and disciplines, and leveling the financing playing field for U.S. exporters.
However, continued success of the OECD agreement in reducing tied aid supported exports is dependent on the ability and willingness of the Ex-Im Bank to match foreign tied aid offers. We have tied aid offers outstanding, amounting to about $1.5 billion, though not all will result in final tied aid transactions. Our goal in making these offers is to get foreign ECA's to agree to mutually withdraw all the tied aid offers to a project. The TACPF is like a nuclear deterrent. We do not want to use it. But there has to be enough in the fund to convince others that you can successfully match their offers. We feel that the current $343 million is sufficient to meet our commitments. So far this year, no tied aid transactions have been approved by the Bank. In FY '95, nine were approved, consuming $29 million in program budget.
The current round of OECD negotiations has dealt with "premia," the fees that ECA's charge to exporters on account of transaction risk. The risk of a loss in a transaction less fees charged to the borrower is what is financed in our appropriation, or "program budget." We are required by the Federal Credit Reform Act of 1990 to set aside reserves, in advance, against any risk of loss over the life of our transactions. This is done by evaluating the risk of every transaction, including separate evaluations for sovereign risk and private risk. The higher the risk, the more that must be set aside for each transaction. As a result of this system and the careful evaluation system in place prior to 1990, Ex-Im Bank is fully reserved against all of the credits it has issued. We do not have any unfunded liabilities.
Ex-Im refers to the premia as "exposure fees." Ideally, we would like to charge exposure fees commensurate with our assessment of the risk, a goal that would require significant increases in fees in many markets. However, many ECAs do not share either our perception of risk or belief in the way to account for risk. This issue has been the most significant financial aspect of official export credits that currently is not subject to the disciplines of the OECD Arrangement, but I am now happy to announce that after two and a half years of intensive negotiations, the 23 countries of the OECD who offer long term official export credit have agreed to new rules for exposure fees. This new system will allow Ex-Im Bank to reduce official export financing while maintaining a highly competitive program structure. Just as importantly, the agreement brings market pricing to bear on a larger area of export credit and lays the groundwork for continued expansion of the influence of the free market.
What the new system does is establish a minimum fee for all variations of program structures for all Export Credit Agencies. Up until now, some ECA's imposed fees of varying size, while others charged no fees. The new rules establish a transparent, uniform system that will provide exporters with a clear and fair tradeoff between the quality and extent of coverage, on the one hand, and price on the other. Hence, Ex-Im can create a menu of programs from which exporters can choose, for each individual transaction, the best program and associated exposure fee to meet case-specific needs. The new system will be fully in place by April, 1999.
On the budget side, the establishment of minimum premia for all ECA's provides protection against a future "fare war" of competitive price cuts and will also generate some budget savings in the near term. On average, across all risk categories and terms, Ex-Im fees will increase about 15%, or one percentage point. Applying that increase to current distributions of business would yield a budget saving of $50-75 million yearly once the phase-in period is over.
Let me emphasize that all of the negotiating successes were possible only because Ex-Im Bank could credibly threaten to match competitor interest rates and other lending terms. The net effect of a decade's worth of aggressive negotiations is a more level playing field for US exports and greater export opportunities. If Ex-Im Bank does not continue to have available the financial resources to match the terms of foreign government export financing the prospects for future negotiating successes will significantly diminish.
Ex-Im Bank has recognized for years that as governments in emerging markets were privatizing companies and in general exercising less control over commerce, a shift from sovereign buyers to private ones was occurring. So now we see an array of buyers which includes sovereign buyers, public sector buyers dependent upon implicit financial backing from their government, public sector companies with independent access to revenues and foreign exchange, as well as private sector companies and banks with varying degrees of financial strength.
Beginning in the Fall of 1995, Ex-Im Bank started to evaluate most individual transactions separately. In determining what fee is appropriate for each credit risk, Ex-Im evaluates each foreign buyer individually for its strengths and weaknesses through our rigorous credit evaluation process. The exposure fee amount is determined based on the quality of the specific borrower's credit and the term of the financing. This individualized analysis is called "transaction pricing."
It is through transaction pricing that we are able to meet the needs of the marketplace of the 1990s while conserving our appropriation to the greatest extent possible.
It is estimated by the World Bank that developing nations will require more than $200 billion by the end of the decade to upgrade their infrastructure. Within the last ten years, developing nations have turned away from sovereign-guaranteed borrowing and moved toward privatization of infrastructure projects. In June of 1994 the Bank established a Project Finance Division to meet the demands of this changing marketplace. The term "Project Finance" refers to the financing of projects that are dependent on the project cash flows for repayment. These projects do not rely on the typical export credit agency security package which has recourse to a foreign government, financial institution or established corporation to meet a reasonable assurance of repayment criterion.
Ex-Im Bank's project financing program has assisted U.S. exporters to compete in new international growth industries such as the development of private power and other infrastructure. Since its inception, the Division has arranged financing for twenty-one transactions supporting over $5 billion in US exports and $20 billion in overall project costs. They have been in Latin America, the Middle East, and Africa, and concentrated in the power and petrochemical industry sectors. Mining, telecommunication, and industry are also represented. In the recent edition of Independent Energy various parties stated the following:
As the market for project finance has evolved and matured, the capital markets are beginning to play an important element of limited recourse financings, in the form of bond financing. Ex-Im has seen its role diminish in stronger foreign exchange earning projects where the private sector can be more active. But Ex-Im Bank is still considered a critical component of financing many of the these projects as well as the riskier transactions and, in this capacity, acts as a catalyst for other financing sources.
The charge to the program budget is kept small through the use of risk mitigation techniques including offshore escrow accounts of hard currency revenues and risk sharing with project shareholders. As a further saving to the taxpayer, all outside consultancy fees are paid for by the project applicant.
The past five years have been extremely challenging and rewarding for Ex-Im Bank in dealing with the former Soviet Union. It has been a text-book case of balancing the competitive interests of exporters while devising new and creative solutions to protecting the taxpayers' dollars. We have made great strides in helping U.S. exporters win markets and be competitive in the former centrally-planned economies.
We formally opened in the Russian Federation in March 1992 and in rapid succession opened in the Baltics in 1992, Kazakstan, Uzbekistan and Turkmenistan in 1992, and Moldova in 1995. We opened in 1992 in Ukraine, then closed at the end of 1993 due to arrearages and a decline in country conditions, and reopened in 1995 when conditions improved. We opened in Belarus in 1992 but closed in 1995 because of country conditions without having actually done any business there.
In virtually every country of the former Soviet Union, we opened on a sovereign risk basis first -- that is, we looked to the governments of those countries to back the financing we extended to them. These arrangements continue to remain in effect for virtually all of these countries. Our total sovereign risk exposure in these countries is as follows: Russia-$896 million, Ukraine-$183 million, Uzbekistan-$411 million, Turkmenistan-$194 million, Kazakstan-$126 million, and Moldova, where this is no exposure.
But Ex-Im Bank soon discovered that even sovereign guarantees might not be satisfactory in reaching the full potential of these countries to buy U.S. exports, since many were rich in resources that had not yet been fully tapped, but did not have enough financial resources for Ex-Im Bank to find a reasonable assurance of repayment. In May, 1992 we approached the Russian Ministry of Fuel and Energy with the possibility of providing financing on a non-sovereign guarantee basis for modernization of the oil sector. In lieu of government guarantees, we agreed to look for assurance of repayment to the assignment of revenues generated by the export sale of existing production under long-term hard currency contracts. These revenues are deposited into offshore escrow accounts. By July 1993, we were able to sign the Oil and Gas Framework Agreement (OGFA) with the Russian Ministry of Fuel and Energy, Ministry of Finance and Central Bank. The first transaction under OGFA was approved in July 1994, and subsequently we have approved or made preliminary offers on twelve transactions for a total of around $2 billion. And the OGFA structure has been replicated in a number of other sectors.
In the other NIS states, to date, we have only been open on a sovereign risk basis. However, we believe that in the future, as these countries continue developing market economies, we are likely to supplement the sovereign risk and OGFA-type programs with additional programs targeted specifically at the private sector.
All of these structured financing programs have had another advantage. By obtaining security from long-term hard currency export contracts, we have been able to reduce significantly the risks of nonpayment and consequently decreased the hit to our program budget as well.
Our products, technology and services are much in demand in the region, and American firms as a general rule are warmly received everywhere. With financing available from Ex-Im Bank, U.S. suppliers will be in a position to expand dramatically their activities in these markets.
Ex-Im Bank's activity in the Americas in recent years follows the trends that have marked this area. Increased privatization is evident in the move from sovereign and public sector transactions to private transactions without local bank guarantees. Privatization of power, communications, steel and chemicals, has taken place in a number of countries, particularly in Argentina, Mexico and Brazil. Ex-In Bank responded to these changes with the decision in 1995 to accept more private sector risk. In the period October 1, 1994 through April 16, 1997, the Americas Division authorized 311 transactions aggregating $2.6 billion. Of this $.8 billion was sovereign and $.45 billion public; $.4 billion was to private financial institutions and $1.0 billion to private non-financial obligors.
Mexico remains the Bank's largest market with current actual exposure at $5.6 billion. Despite the recent difficulties with its economy, Mexico maintains an excellent repayment record with Ex-Im Bank. Exposure to Argentina stands at $2.3 billion. Recent activity there includes large amounts of lending to the private thermal electric power generation, communications, and petroleum sectors. News of activity in Brazil, where the current exposure is $4.1 billion, has been dominated by Ex-Im's support for the important $1.4 billion SIVAM project (supervision & control of land use in the Amazon region). This long and highly competitive transaction was won by Raytheon over the French government-owned firm Thomson after a long and brutal competition. Ex-Im Bank, though currently closed with the Government of Brazil, is active with Brazilian government-owned enterprises that are deemed creditworthy, i.e. have a budget, record of prompt payment and access to credit markets.
In Venezuela, Ex-Im suspended business with the private sector after the June 1994 banking crisis and unavailability of foreign exchange. However, it reopened in December 1996. There are currently several large Credit Guarantee Facilities for PDVSA (the state-owned petroleum firm) to support procurement of US capital goods.
But Ex-Im Bank by no means limits itself to dealing with the larger countries. In Honduras, Guatemala, and Panama, there have also been a number of transactions approved supporting exports to projects dealing with detergents, cement and power, that have recently been done with the participation of the International Finance Corporation, the private sector-oriented investment arm of the World Bank Group.
The story of the Americas division would not be complete without mentioning Chile, a country where we are no longer active. This is due to the fact that Chile has reached a stage of development where, for the large part, it is able to access the private capital markets for its importing needs. True to its policies about not going where it is not needed, Ex-Im Bank now has gotten out of the way to let the private sector provide export financing for Chile.
The story of Ex-Im Bank in Asia is similar to Ex-Im's activities in other parts of the world - the transition from sovereign risk to the private sector, and countries graduating from the need for Ex-Im Bank funding. All of our major competitors are anxious to increase their market shares in Asia. There is, however, one major additional point to consider - it is the region is where tied aid is most prevalent. The most active markets for tied aid are China and Indonesia.
Except for China, where we continue to do almost exclusively sovereign business, the trend in Asia and other areas over the last five years has been an increase in private sector support. In Indonesia, for instance, from 1987 to 1993, of the $1.6 billion authorized, 85% involved sovereign risk. However, of the $2.3 billion authorized from 1993-1996, 44% involved sovereign risk. This trend carries through for the Philippines, declining from 65% sovereign risk to 3%. In Thailand, from 1987 to 1993, Ex-Im Bank authorized $1.1 billion, 33% of which involved sovereign risk. From 1993-1996, the authorizations fell to $414 million, with no sovereign cases. Thailand represents a case both of increasing privatization and, due to its economic growth, decreasing need for Ex-Im Bank funding.
China is the most active and challenging country for Ex-Im Bank in Asia. China carries Ex-Im Bank's second largest exposure, $4.6 billion. Ex-Im Bank's support for U.S. exports to China has grown dramatically over the past five years. Since the beginning of FY '92 through the present, Ex-Im Bank has supported over sixty transactions representing approximately $5 billion in U.S. exports. In the vast majority of these cases, prior to winning the contract the U.S. exporter was in competitive bidding with companies from other industrialized countries supported by their ECA's, among them the French, Germans, Japanese and British. Contracts involve exports for power plants, paper mills, major construction projects, and aircraft. In 1995, about 20% of U.S. capital goods imports going to China were made possible by Ex-Im Bank.
Ex-Im Bank has significantly expanded its activity in Indonesia over the last five years, increasing its exposure from approximately $800 million to over $3.5 billion today. This kind of activity is to be expected for one of the fastest growing economies in the world. The majority of requests for financing are from the private sector. These entities typically have been large, well-established companies with a commercial track record, but recent requests have also come from small private buyers. Exports to Indonesia are primarily to the telecommunications, aircraft, and power sectors. This has been fairly consistent over the past five years. In the last two years, exports to the cement and pulp and paper sectors have shown a large increase.
The Philippines is a market in transition from sovereign credits with rescheduled debt during the 1980s and early 1990s to private credits with most borrowers depending on their own financial strength, i.e., no bank guarantees are necessary. Demand is predominantly for long-term Ex-Im Bank financing, and in sectors where the government is effecting deregulation, such as power generation and telecommunications. Current exposure is $2.7 billion.
Mr. Chairman, one of the most notable stories to come out of Asia regarding Ex-Im Bank is that we are succeeding in our policy of letting the private sector take over when countries are ready. The countries where we used to be heavily involved, but are, for the most part, no longer, include Taiwan, South Korea, and Malaysia. We are now concentrating on the fastest growing, but riskier markets discussed above.
Ex-Im is open in 14 countries in Subsaharan Africa and four in North Africa. These include in Subsaharan Africa: Benin, Mauritius, Botswana, Namibia, Cote D'Ivoire, Seychelles, Gabon, South Africa, Ghana, Swaziland, Kenya, Zimbabwe, Uganda and Lesotho. Ex-Im Bank exposure in Subsaharan Africa is $3.4 billion.
Ex-Im Bank is anxious to expand the opportunities for U.S. exporters in Subsaharan Africa, and is searching for new ways to accomplish this. A Ex-Im Bank mission earlier this year to South Africa, Zimbabwe, Ghana and Cote D'Ivoire was successful. There are a number of projects being developed in these countries, and as a result, a strong likelihood of additional Ex-Im Bank activity. Government officials, bankers and other members of the business community were very receptive and spoke frankly about concerns and opportunities in their relationship with Ex-Im Bank. Issues raised in discussions provided the team with insight on how to promote future business in the region.
Most future Ex-Im Bank activity in South Africa will most likely be in the capital equipment, telecommunications and aircraft sectors. Earth moving equipment will be utilized in the country's mining sector. Aircraft will be used for domestic and international passenger and cargo transportation. Ex-Im Bank may be requested to support projects in the power and aircraft sectors in Zimbabwe. The Government of Zimbabwe ("GOZ") has begun implementing its plans to restructure and upgrade a major power station. The GOZ is also taking steps to privatize Air Zimbabwe, the international passenger airline, as well as Afritair, the country's cargo carrier.
Last year, Ex-Im was active in Ghana, authorizing over $360 million worth of business, largely in the power sector. Ghana is currently Ex-Im Bank's most active market in Africa, both in terms of number of authorizations, as well as in amounts of total exposure. A variety of new projects are being considered there, most of which are in the construction and telecommunication sectors. Ex-Im Bank reopened in Cote D'Ivoire in November 1996. There are some opportunities for Ex-Im Bank participation in the mining, electric power and cocoa processing sectors.
In North Africa, Ex-Im Bank is open in Algeria, Egypt, Morocco, and Tunisia, and has an exposure of $3.3 billion.
No where has the competitiveness of the international marketplace been more graphically demonstrated than in the aircraft industry. AIRBUS, the European aircraft manufacturing consortium, has announced that it is seeking 50% of the worldwide large aircraft market. In order to keep U.S. manufacturers in the game, Ex-Im Bank has authorized $10.7 billion in support for aircraft since 1993. The aircraft have been sold to major airlines and leasing companies the world over.
Sometimes we are asked why a big aircraft manufacturer may need financing assistance from Ex-Im. The answer is, for the countries with which Ex-Im Bank conducts transactions, commercial banks will not match the lending term offered by AIRBUS. If Ex-Im Bank does not offer these terms, AIRBUS will, and U.S. jobs will be lost. And a job working for an aircraft manufacturer is as important as a job anywhere else in the economy. But just as importantly are what exports can mean to suppliers. Over the past five years, 64% to 70% of Boeing's earnings have been due to exports. Of the $11.6 billion Boeing procured in 1996, $3.7 billion came from over 20,000 small, disadvantaged, and women-owned businesses in all fifty states. While these suppliers may not even realize that they indirectly benefit from Ex-Im Bank support, they do. And I would like to point out that Boeing is just one example of how smaller suppliers share indirectly in Ex-Im financed exports.
Finally, due to the fact that aircraft are an asset in and of themselves, they can be financed on a secured basis in the absence of a sovereign guarantee at very low cost to our program budget. The current subsidy rate on aircraft deals is only 3.2%.
In its 1992 Charter, Congress directed Ex-Im to establish "environmental procedures" to take into account the beneficial and potentially adverse environmental effects of projects that it supports. Ex-Im responded by establishing an environmental policy which consists of two elements. First, the Bank developed an Environmental Exports Program to address exports that are environmentally beneficial such as waste water treatment plants and renewable energy plants. Second, it established Environmental Procedures and Guidelines designed to maintain U.S. exporter competitiveness and ensure that the foreign projects it supports are built in an environmentally responsible manner. The guidelines focus on: maintenance of air quality, protection of surface and ground water, adequate solid and toxic waste management, design of the project to mitigate risks from natural hazards, avoidance of significant socioeconomic and sociocultural adverse impacts, protection of ecological resources and protection from unhealthy levels of noise..
To support and encourage transactions that are beneficial to the environment, Ex-Im's "Environmental Exports Program" provides its customers with certain financing enhancements to its loan, guarantee and insurance programs that are designed to make Ex-Im financial support more attractive. Together with a robust marketing effort to help exporters tap the huge global environmental market, this program has helped scores of exporters win orders for U.S. equipment and services. Moreover, since 1995, Ex-Im has supported over $1.5 billion in environmental exports or exports for projects that are specifically beneficial to the environment.
The procedures developed by the Ex-Im Bank to screen applications for environmental implications are transparent to Ex-Im Bank's customers, and serve to identify applications that require an environmental review. U.S. exporters as well as U.S. environmental groups met with Ex-Im Bank several times to advise and provide input to the Bank on ways to make its environmental policy effective and responsive to the marketplace.
Since 1995, when the Procedures & Guidelines were approved, Ex-Im has reviewed the environmental effects of about 120 applications involving foreign projects, and with the exception of one, the Three Gorges Project, for which the needed environmental information has not yet been made available to Ex-Im the Bank, all have been approved. Ex-Im Bank's eight engineers perform the environmental evaluation of a project while the case undergoes its standard financial and economic reviews. Seldom, if ever, has this delayed the Bank's transaction review process.
Ex-Im is flexible on environmental matters and always takes exporter competitiveness and economic factors into account when acting on applications. It has approved at least seven applications even though elements of the projects were not completely within guidelines for air or water quality. But more to the point, the Guidelines have caused many applications to be upgraded, and since 1995 the amount of U.S. exports supported by Ex-Im has actually increased by at least $75 million as a direct result of action by foreign buyers and exporters to improve projects so that they would fall within Ex-Im's environmental criteria.
To make sure that U.S. competitiveness is maintained, Ex-Im and other agencies are presently endeavoring to have similar guidelines established in the foreign countries with whom the Bank competes. Though it has been a difficult process, our foreign counterparts are now showing a willingness to take steps to establish "common guidelines" that will apply to all industrialized nations. This is the U.S. goal.
Mr. Chairman, one of the reasons that we are continuing to save U.S. jobs in a very competitive international marketplace is that Ex-Im Bank is a well-run institution. Over the past year, there have been extensive reforms in our management system. We have reorganized the structure of Ex-Im Bank to improve our management. We are strengthening our management ranks, and are seeking expert advice and assistance from several sources. And a new position in our General Counsel's office, one devoted to Administrative law, will assure that every major administrative decision is thoroughly examined.
Let me now discuss briefly the efforts we have made to increase the efficiency of the employees, particularly the loan officers who work in the divisions defined by geographic areas. In 1993, loan officers were spending about 80% of their time doing high quality, lengthy credit analyses on preliminary commitments that did not result in an export.
Ex-Im Bank remedied this by instituting the "letter of interest." This financial instrument essentially states that Ex-Im Bank is open for and interested in the type of transaction the exporter is investigating. It states our general policies but it does not bind the Bank to further action. The turn around time is less than seven days. A letter of interest, because it takes very few Ex-Im Bank resources to issue, is an economical use of our limited staff. Though it is not a "sure thing" for the exporter, it is a real help in gaining export contracts. As a result, more of our staff's valuable time is spend working on transactions that do lead to actual exports.
Mr. Chairman, like every other government agency, we realize that we have to do more with less. We are currently allowed 436 full-time equivalents (FTEs), a number which must decrease to 427 for FY '98. This is why we will continue to search for ways to streamline our processes, make them more efficient, while continuing to give excellent service to exporters and value to our foremost customer - the American taxpayer.
But while we are making every effort to manage and operate within the real constraints of our administrative budget, we have to be candid about the shortfall we are currently experiencing with our program budget. The good news is that demand for US exports is up and demand for Ex-Im Bank programs is increasing. The bad news is we did not anticipate this increased demand when we made our budget estimates. For FY '97, although we were appropriated $726 million, we now expect to defer approximately $300 million in transactions to FY '98.
Current appropriations actions indicate that our program level for FY '98 will be between $632 million and $700 million. Moving the deferred cases from FY '97 to FY '98 would mean that we would, in effect, begin FY '98 with as little as 50% left in program resources to deal with an exporter demand level that is likely to continue at FY '97 levels or higher.
Right now, we are consulting with the Office of Management and Budget, the Congress, and the exporting community in order to develop options to address increased exporter demand. We have, on the one hand, mandates to keep our exporters competitive and to offer financing only when private sector financing is not available. This means that we are actively supporting transactions in higher risk markets, such as Venezuela and Russia and the NIS. On the other hand, Ex-Im Bank, like every other government agency, must live within the constraints of its appropriation and assist the Administration and Congress in their laudable efforts to reach a balanced budget. I want to advise the Committee of our situation. I welcome your guidance to help us find a way to cope with our success and will consult with you as we weigh the various options available to us.
Mr. Chairman, I will conclude where I began. I am proud to be here representing an
institution with a clear mission that is being fulfilled, staffed by loyal employees who are
unsurpassed in either the public or private sectors. We have important programs that give
excellent value to the taxpayer by supporting U.S. exports which promote high-paying U.S. jobs.
I will be happy to answer any questions you may have at this time.
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