UK Export Finance (UKEF) recently published its annual report and launched its 2017 to 2020 business plan, with ambitious proposals to scale up its support for exporters.
In the lead up to the Brexit divorce, the organisation increased funding support for exporters by 60%, to £3bn, in the year 2016/17 compared to 2015/16, and announced plans to boost this.
Last year also marked a year of innovation for the organisation, with numerous firsts including the first ever export credit loan to the Kurdistan Regional Government, the introduction of local currency support with over 40 different currencies, and being the first European export credit agency (ECA) to support an upstream oil and gas development transaction for GE in Ghana through a hybrid finance structure comprising both project finance and reserve-based lending.
However, the organisation’s work has not been applauded by all and many critics have pointed to the ECA’s strong support of polluting fossil fuel projects despite the UK government’s announcement of various commitments to support greener energy. Its due diligence and anti-corruption processes have also been under the spotlight after companies it has supported, such as Rolls-Royce and Carillion, have been faced with bankruptcy and bribery charges.
GTR spoke recently with international trade minister Greg Hands to find out the finer details of UKEF’s plans for the future, on the back of the published business plan. In this exclusive interview, he unveils details of new products and gives greater clarity on new markets the ECA is targeting. He also defends UKEF’s risk analysis and fossil fuel support.
On the past year:
GTR: A majority of UKEF’s projects supported last year were in the fossil fuels sector – how does this align with the organisation signing up to apply the Equator Principles and the UK’s commitment on climate policy and a greener future?
Hands: UKEF welcomes approaches for support from companies in the renewable sector, and has taken a number of steps to improve awareness and take-up within this sector. For example, itrecently signed a memorandum of understanding with the Kenyan government on renewables investment, and has established partnerships with renewables industry bodies. UKEF has also recruited staff with experience and expertise in renewables to key posts.
A great example of UKEF supporting UK exports of carbon-reducing technology is the headquarters building of waste management company Bee’ah in the United Arab Emirates. The building, designed by Zaha Hadid Architects, will be the first in the city of Sharjah to be powered entirely by renewable and recoverable energy sources, as well as utilising recycled materials in its construction.
But oil & gas remain an important part of the world’s energy mix, and one where the UK has strong expertise in minimising environmental impact. UKEF support for this sector is fully consistent with its application of the Equator Principles. Through this, and through other international forums, UKEF plays an important role in advocating for high environmental, social and human rights standards in fossil-fuel projects supported by export credits.
One project that demonstrates this commitment is the Offshore Cape Three Points natural gas project in Ghana, where UKEF provided US$400mn in financing and worked alongside the World Bank Group. This transformative project will displace the use of heavy oil, reducing Ghana’s carbon emissions by an estimated 1.6 million metric tonnes annually. The World Bank estimates that this is equivalent to taking 1.2 million cars off the road each year or planting 152 million trees – and most importantly it will help Ghana achieve its COP21 targets.
GTR: Can you outline the “extensive inquiry” UKEF has carried out on Rolls-Royce to be satisfied that the company has made significant changes to its anti-corruption process?
Hands: UKEF takes its due diligence responsibilities very seriously. As well as considering the judgment and the Statement of Facts from the Deferred Prosecution Agreement, UKEF officials worked closely with Rolls-Royce’s current senior management to understand what had happened in the past, and what the company had done to address those problems. A particular focus has been the company’s compliance processes and the improvements to those processes that it has implemented since these issues came to light.
We were able to conclude from this review that the company has implemented meaningful reform and made significant changes to its senior management and governance arrangements. We will continue to monitor Rolls-Royce’ progress around compliance over time and will of course scrutinise each transaction we consider going forward, including seeking specific assurances from senior management, to make sure that we can provide support with confidence.
GTR: Are you satisfied that you have a robust risk analysis and anti-corruption model given the Rolls Royce case, the ongoing Airbus case, and the more recent Carillion financial crisis case?
Hands: As far as risk analysis is concerned, UKEF’s low rate of claims is evidence of its robust approach – in fact, the department has returned significant amounts to the Exchequer in the last few years. Carillion has already begun delivering the projects for which it was provided support, and government continues to back these.
Regarding anti-bribery due diligence, UKEF applies the OECD Recommendation on Bribery and Officially Supported Export Credits to the fullest extent. This is effectively the international rule book setting out measures to deter bribery. UKEF requires due diligence to be undertaken on all cases it supports. These policies and processes are kept under review to ensure that they remain aligned with good practice.
However, it’s important to remember that UKEF is not, and is not intended to be, an investigatory body, and does not have investigatory powers. It is quite right though that when bribery and corruption is either proven or self-declared, that UKEF carefully considers the appropriate response, taking account of all relevant factors in each case. This is what we have done and continue to do.
On the business plan:
GTR: What will the focus sectors be going forward in the 2017-2020 period?
Hands: We’ve identified 13 sectors where UKEF support can be particularly relevant, ranging from advanced manufacturing, to financial services, to food and drink.
Among UKEF’s priority sectors there are a number that are also a priority for the wider department for international trade, where increasing UKEF’s involvement could be the key to unlocking significant overseas demand: Infrastructure and energy, for example, where there are complex large-scale contract opportunities. We’re pioneering a ‘team UK’ approach, where we identify an opportunity through the department’s overseas network, use UKEF’s financial support to bring the procurement opportunities to the UK, and then make the connection with the UK’s supply chain to maximise the contribution that the UK can make to these projects.
GTR: What will the focus regions be going forward?
Hands: UKEF’s business plan identifies 20 markets which are currently priorities, selected on a range of economic, political and commercial factors. You will see a wide geographic range there, covering markets in Central and South America, for example Mexico and Brazil. Then there’s the Middle East and Africa – including Egypt and the UAE – as well as Asia, taking in Thailand, Indonesia and India, among others.
There are a couple of points it’s worth clarifying though. First, these UKEF priorities should not be read as a proxy for the top markets for UK exporters generally. For instance, neither China nor the US are in the priority list, but not because they are not important export destinations. Because of factors like commercial financial market appetite and local procurement models, improved access to finance is not going to have a significant impact on growing exports in these markets.
Second, these priorities will remain under constant review to ensure they remain relevant through the life of the business plan. One of the ways that we plan to help better connect overseas buyers from fast-growing priority markets with suppliers in the UK is by recruiting a number of export finance specialists to operate in-market. Their financing expertise and local market knowledge will among other things increase the effectiveness of our ‘team UK’ approach.
GTR: The business plan mentions the UKEF will enhance its product range – can you elaborate on this?
Hands: UKEF already compares favourably with its international peers for the wide range of products it can offer to UK exporters and their customers. However, we know we can’t be complacent, and in fact some of the planned enhancements are being delivered this year.
For example, we have already announced improvements to UKEF’s trade finance products, which will allow banks to provide UKEF-backed support directly to exporters under a new distribution model. These changes will make it quicker and easier for exporters to access support, as well as allowing UKEF to manage a significant increase in take-up. We’re also making export working capital and contract bonds available to direct suppliers to exporters, so that for the first time smaller companies in the UK can receive UKEF support to unlock contracts supporting exporters.
Another imminent enhancement will be to UKEF’s overseas investment insurance product, reflecting changes to the scope of comparable products in the commercial market. This development further underlines UKEF’s support for the wider priorities of the department for international trade, which is seeking to boost outward direct investment from the UK.
However, these are just the beginning. We’ll continue to work with stakeholders – notably the British Exporters’ Association – to identify any gaps in private sector provision so that UKEF’s offer remains relevant to exporters’ changing needs.
GTR: What do you think will be the main challenges for UKEF in the 2017-2020 period?
Hands: As ever, the challenge – and the opportunity – is to make sure that we’re there for our customers when they need us, with the products they want and the risk appetite to deliver them on the ground. We’ve already talked about some of the product developments. On risk appetite, in the 2016 Autumn Statement UKEF’s risk appetite was doubled, and the capacity to provide support in individual markets was also increased by up to 100%.
The final part of that equation is to be able to deliver support at the pace customers need. This means improving the accessibility of UKEF support, and having the systems and processes behind the scenes that can transact business in higher volumes and at commercial pace. We’ve already discussed the new bank partnership, but supporting that will be a new digital portal through which banks and exporters will increasingly be able to access UKEF’s trade fiance products. We’re also working on automating our internal systems.