UK Trade and Industry Secretary Patricia Hewitt has announced an ambitious programme of measures to ensure that the Export Credits Guarantee Department (ECGD) delivers a first rate service to UK exporters through better customer service, improved pricing and cover.
The new measures underline the government’s commitment to ECGD continuing to provide support at broadly current levels in the future. ECGD will aim to reduce the premium it charges by up to £5mn (US$9mn) per year from April 2005, applicable to deals where the price would exceed international benchmarks. In addition, the Department for Trade and Industry will invest up to £10mn over two years from 2005 to help ECGD improve its efficiency and to sustain premium rate reductions.
Hewitt said: “The deal is a key milestone in ECGD’s history and provides an excellent basis for moving forward. It took time to get this right because it was both complex and challenging but I believe it is an excellent package which customers should welcome.”
A capital framework of £1.8bn has been agreed by ministers that will enable ECGD to take a more expansive approach to cover and should be sufficient to meet current and future levels of business.
Chief Secretary to the Treasury Paul Boateng says: “The establishment of a framework for a trading fund will introduce new risk management policies and systems based on best commercial practice, to improve value for money for the taxpayer. As part of the government’s commitment to the future of ECGD, transparent reporting and accounting arrangements for the economic costs of providing export credit support to industry will be put in place.”
Customers will be invited to contribute to a consultation on the trading fund following the launch of a pilot fund in April 2005. It will give them the opportunity to influence how ECGD can deliver the best service to UK exporters before the fund is launched in 2007.
And following the recent appointments of a new ECGD chairman (Graham Pimlott) and CEO (Patrick Crawford), Hewitt added: “Ministers now have the right expertise at ECGD to meet its future challenges – helping to put the department on a sound business and financial basis and drive forward the right deal for customers.”
The following has been agreed for the structure of the trading fund:
It will have two separate accounts: Realisations and New Business. They will be capitalised and accounted for separately and have separate financial objectives.
Capital for new business will be £1.8bn. This capital will maintain the risk/reward balance on cover and pricing. There will be adequate headroom to manage both business growth and risk volatility.
The new business account target rate of return will be an affordable rate, specifically designed to deliver ECGD’s existing pricing regime. The government has charged ECGD to continue pricing to break-even, in line with international agreements on export credit, not to maximise profits. The government estimates the economic cost of this commitment to be approximately £120mn per year and will be publishing budgeting arrangements for this in the 2004 spending review.
Introduction of risk management policies and systems based on best commercial practice.
Revised Treasury consent giving ECGD greater autonomy on cover and premium policies.
The new business account will have four aims: to provide a good quality of service at a reasonable cost to exporters, to break even in financial terms, to maintain the current risk/reward balance, and to remunerate its capital at an ‘affordable rate of return’. This has been calculated to ensure it can be met from current premium rates without any across the board increase. Initially, the affordable rate will be set at 1.25% above the current National Loans Fund (NLF) rate of interest. At today’s NLF rate, the affordable rate would be just under 5% per year.
In establishing the framework for the trading fund, the UK government had three objectives. First, it should provide a structure for managing ECGD’s business consistent with the current risk/reward balance and business domain. In other words, ECGD should be able to maintain its support for current levels of business.
Second, it should help to improve risk management. This is vital to assure taxpayers that they are getting value for money.
And third, there should be transparent arrangements for reporting and accounting the economic costs to government associated with ECGD’s business.
These provisions will come into effect progressively from today. A period of operating a pilot trading fund from next April will give management the opportunity to test and assess these arrangements before the government establishes the right level of capital for a statutory trading fund to be vested in April 2007.