A government inquiry into the work of UK Export Finance (UKEF) has raised concerns over the agency’s concentration of support in certain sectors, ambiguous figures in its annual accounts, and potential exposure to environmental and human rights issues.
The export credit agency generally has a “positive track record” in supporting UK exporters, and is expected to play a vital role following the country’s exit from the EU, says a report published today by the International Trade Committee, a cross-party group of MPs.
But nearly 90% of the £12.3bn UKEF committed in 2020/21 went to just nine companies, the report finds. Four of those – Rolls-Royce, British Airways, EasyJet and BAE Systems – accounted for £7.5bn of that total, giving rise to questions over the level of support being provided to SME exporters.
The report also calls for clarity on how the agency plans to move away from fossil fuels – long a major area of focus – and warns that UKEF’s government-imposed mandate currently prevents it from rejecting business based on environmental, social and human rights concerns.
“UK Export Finance has an important role to play in backing exporters,” says committee chairperson Angus Brendan MacNeil. “However, it’s clear that UKEF is at a critical juncture and changes will be required if it is to continue to meet exporters’ needs.”
“UKEF should put serious thought into how it will increase support for renewables projects, or else its actions will continue to risk actively contradicting the government’s ambitions. The government will also need to amend UKEF’s mandate, enabling it to take environmental, social and human rights considerations into account when making decisions about which projects to support.”
When contacted by GTR, a UKEF spokesperson says: “We welcome the committee’s report which recognises the support UKEF has provided and the value of our product range. We will consider the government’s full response which will be issued in due course.”
Concentration of support
One of the inquiry’s conclusions is that UKEF support is concentrated in a small number of crucial sectors, and at the larger end of the market. In terms of geographical spread, 92% of UKEF’s support in 2020/21 went to just 10 countries, with Qatar, Egypt and Mozambique together receiving nearly two-thirds of the total.
“Much of UKEF’s support goes to relatively few large-scale manufacturing, energy and infrastructure projects each year and it still struggles to understand and meet the needs of other exporters, including SMEs,” the report says.
As well as the substantial support given to a small number of British companies in the aerospace and defence sectors, the report cites nearly £1bn that was provided to a monorail project in Cairo, and another £910mn towards a controversial LNG project in Mozambique led by energy giant Total.
When questioned by the committee, UKEF chief executive Louis Taylor suggested that SMEs’ export finance needs are sometimes overestimated, compared to access to finance more generally.
“Using your export credit agency to solve the access to finance issues of all of the SMEs is a sledgehammer to crack a nut,” he said in an evidence session in June.
The committee also questions UKEF claims that it directly supported 549 UK businesses in the last financial year, twice as many as in 2018/19.
It finds that only 167 of those firms “directly applied for finance and insurance”, with another 81 referred to UKEF by private sector providers. The largest proportion – 298 firms – were included because they secured business supplying goods or services to a UKEF-supported project.
“UKEF’s headline figure of 549 businesses supported in 2020–21 could be misinterpreted, as the number of exporters that received its direct support was significantly lower,” the inquiry concludes.
“We recognise the value of including businesses that have received indirect support from UKEF, as well as additional work that UKEF has undertaken to secure assistance for exporters from the private market, but these should not be included as businesses to which UKEF has given direct support.”
GTR understands that UKEF classifies any company that is paid directly by a drawdown from one of its facilities as a beneficiary of its support, and that contractual evidence must be provided.
That said, the report says there are positive signs around UKEF’s support for SMEs. 79% of the 167 exporters that received its direct support were SMEs, it finds, though the overall value of that support is unclear.
One step forward has been UKEF’s development of relationships with five high street banks, giving it greater reach among SMEs. Santander head of trade and working capital Mark Ling told the committee those efforts have made a material difference to the bank’s portfolio.
“If I look at my pipeline, this time last year probably only 5% of it was supported by a UKEF short-term product; that is now at 22%,” Ling said. “There has been an absolute step change in our pipeline.”
Environmental and social concerns
Another committee concern is how UKEF will transition away from the fossil fuels sector in line with the government’s net zero strategy, given non-renewables have historically made up the vast majority of the agency’s energy sector support.
UKEF has recently upped its support for renewable energy projects. It stated in July it has identified a “huge pipeline” of overseas opportunities, and in August issued its first green transition export development guarantee.
But the report says that since 2018 its support “remains low compared with fossil fuel projects”, based on annual reports and accounts. UKEF did not support any new renewable projects in the previous financial year, it adds.
In 2019 evidence given to another committee, Taylor said there is “considerable” liquidity available in the renewables sector, meaning demand for UKEF support is limited, but Nicholas Wrigley, chief executive of renewables-focused developer Winch Energy, told the International Trade Committee he disagrees with that analysis.
Private banks “will not lend to projects where the offtaker is a sovereign [nation] that has poor credit”, effectively ruling out support outside the G7 nations, Wrigley argued.
GTR understands UKEF intends to launch a new climate change strategy this month, which aims to align its support with a net zero future and assess greenhouse gas emissions in its portfolio of work.
More broadly, the committee raises concerns about UKEF’s government-imposed mandate “to support all viable exports”, which means it cannot turn down projects on the basis of environmental, social or human rights considerations.
UKEF is also unable to carry out due diligence throughout the full supply chains of companies it supports, giving rise to concerns over exposure to forced labour, it says. The agency is expected to issue a statement on modern slavery this month.
The report goes on to warn that UKEF has “a significant potential exposure to bribery and corruption issues”, an issue that has also drawn criticism from anti-corruption campaign groups.