I am happy to be here today to testify on behalf of rechartering of the Export-Import Bank for fiscal year 2002. Ex-Im Bank is a "sunset" agency. Our charter needs to be renewed by Congress by September 30, 2001. In this reauthorization, we are requesting a renewal of the Bank's charter for four years, through September 30, 2005.
We are also requesting that our Sub-Saharan Africa Advisory Committee be extended for four years. This advisory committee has offered valuable advice which has been instrumental in our ability to increase our business in sub-Saharan Africa.
I can assure you that I would not have accepted my position if I were not convinced that the Ex-Im Bank is a valuable part of the US economic arsenal. It is because working in partnership with business and labor, it keeps our exporters competitive, helps create good jobs for US workers that pay above the average, and plays a role in reducing the trade deficit. This has been the task of the Ex-Im Bank in the past, and with Charter renewal, the Bank will continue its vital work. It is a highly respected institution of long-standing, staffed by a group of dedicated professionals.
The Bank can also play an important role in advancing broader US economic interests abroad. When we help to develop an export market, not only is there potential for follow-on sales, hopefully without Ex-Im Bank support, but we can help to hasten the development of lasting free market mechanisms.
When I talk of Ex-Im Bank's past, I am referring to a very special history. Since its inception in 1934, the Bank has had a unique role in our country's history. In 1939, the Bank helped finance the 717-mile Burma road in China. In 1941, the Bank approved financing for U.S. exports for the Pan-American highway in Central America and Mexico. In 1946, it authorized $2 billion for the reconstruction of Europe, and in 1948 it administered the funds for the Marshall Plan that rebuilt Europe after World War II and helped to establish the United States as a global superpower. In that same year, it authorized $100 million for exports to the newly recognized state of Israel. More recently, in June of 1997, when private sector lending institutions backed out due to the Asian financial crisis, Ex-Im Bank stepped in to provide short-term financing that resulted in $2 billion dollars of US exports going forward to Korea. This helped stabilize both Asia and Latin America in the wake of the crisis. The Bank is playing a role as Russia moves from a command economy towards a free market economy. In short, the Bank has a proud history of not only supporting exports and creating jobs generally, but also stepping in under circumstances where we can play a role in advancing broader American interests.
EX-IM BANK PROGRAMS
Our basic programs consist of direct loans to foreign buyers of US goods and services, guarantees of commercial loans to foreign buyers, and providing a number of transactional insurance programs that are of great assistance for short-term, small business sales. In fiscal year 2000, the Bank authorized $932.6 million in loans, $8.4 billion in guarantees, and about $3.3 billion in insurance, supporting a total US export value of $15.5 billion. Since our last rechartering in 1997, we have supported approximately $60.2 billion in US exports. For every $1 dollar of taxpayer money invested in Ex-Im Bank's program budget, there have been historical returns of $15 dollars in credit support for export transactions. Since Ex-Im Bank supports 85% of most transactions, this means that the actual export value is 15% higher, raising the ratio to $18 in total value of exports supported for every $1 of program budget.
Ex-Im Bank programs preserve US jobs by financing exports around the globe from businesses of all sizes, large and small. And Ex-Im Bank's Services are not free. In the past five years, we have collected $4.2 billion in interest and fees.
The Bank participates in financing export transactions in riskier markets where the private sector will not extend credit or will not meet the financing terms and conditions necessary to enable our exporters to offer a financing package that is competitive to exporters from other countries who are receiving assistance from their governments' export credit agencies. We try to reach out to small businesses and communicate with under served exporters in inner-cities and rural areas through speeches, briefings, seminars, local partnerships, and our internet site.
As our charter tells us, our programs have to be "fully competitive with the government-supported rates and terms and other conditions available...from the principal countries whose exporters compete with United States exporters." And we operate within the policy that we only participate in financing an export where the private sector will not extend credit or meet the financing terms and conditions necessary to enable our exporters to offer a competitive financing package.
We take seriously the long-standing Congressional mandate in our charter that in approving transactions there must be a "reasonable assurance of repayment." And while we are not perfect, we do a pretty good job. The Bank continues to have an excellent repayment record, with losses running 1.4% of disbursements over our 67-year history. In the last ten years, these losses have run at 3.4% of disbursements, which reflects the impact of the recent economic turmoil. It speaks well for our credit judgments and for our Asset Management Division, which does a very good job at recovering assets when a buyer gets into financial difficulty.
All-in-all, the Ex-Im Bank represents a prudent, intelligent use of taxpayers' dollars. If we accept the widely embraced proposition that exports are important to U.S. economic health and jobs and acknowledge the facts of subsidized competition from our exporters' foreign competitors as well as the unwillingness of commercial banks to finance transactions in risky markets, the United States has basically three choices:
- we can withdraw, and leave the field to our competition at the cost of American jobs;
- we can engage in a constantly escalating export subsidy "arms race" with our competition;
- or we can do what we are doing now - give US exporters a fair shot at meeting foreign competition and filling in where commercial banks will not, and simultaneously attempting through multilateral agreements to eliminate or limit government export subsidization.
FY 2002 BUDGET REQUEST
Mr. Chairman, we have already sent my testimony to the House Appropriations Subcommittee on Foreign Operations to you. This next part of my testimony draws from it.
In my confirmation hearing and in numerous individual conversations with Members of Congress, I was persistently asked my opinion of the Administration's budget proposal for the Ex-Im Bank. Since I had no participation whatever in the budget preparation, I was not sufficiently informed to have a useful opinion. So I made a commitment that when I testified on the Bank's appropriation, I would provide my honest appraisal of the effect of the Administration's budget request on Ex-Im Bank's ability to execute its mission.
What is most relevant in assessing the Administration's fiscal year 2002 program budget request of $633 million - and most important to the execution of the Bank's mission - is an analysis of what dollar amount of export transactions will the Bank be able to authorize based on those and other program budget resources which may be available to us in fiscal year 2002.
In other words, how much export bang from our available program budget bucks can the Bank get. If Congress and the exporting community understand this analysis they can make an informed judgment on the Administration's budget request.
Then, to make an honest appraisal of the real world impact of the level of the Bank's fiscal year 2002 program budget resources, we should compare the level of export credit authorization that those resources will support against the expected level of demand for export credit for the same period.
Before getting back to the numbers, I should address one critical point of budget methodology required under the Federal Credit Reform Act of 1990. I refer to the calculation by the Office of Management and Budget of the so-called "risk premia" cost that Ex-Im Bank must apply in using its program budget resources. The OMB calculation is reasonable, extremely complicated, and Ex-Im Bank does not challenge it. The risk premia, which are essentially a calculation of the level of credit risk a particular country, region and/or type of transaction represent, change from period to period. When they rise, it means that Ex-Im Bank has to set aside a larger reserve for its export transactions and thus spend more of its program budget funds to support a smaller level of transactions than when the risk premia are lower. The contrary is the effect - - that is, a bigger bang for our buck - - when risk premia decrease.
With that backdrop, let me return to the fiscal year 2002 program budget numbers:
The President's budget suggests the possibility of making up a gap between exporter credit demand and program budget resources by instituting changes in the way the Bank does business that would have the effect of reducing the cost, in terms of program budget usage, for export transactions. Examples of these changes would be to raise fees and/or lower the percentage of Ex-Im Bank's export credit coverage of a transaction from its current 85%.
Against the backdrop of Congress' mandate to administer our programs so that American exporters are competitive with their foreign export credit agency assisted competitors, and in the absence of any reliable data as to the competitive impacts and other possible consequences of such program changes, I would only consider an orderly and cautious approach to any program changes in order to determine their impact.
An orderly and cautious exploration of the potential impact of such changes on the Bank's resource usage and U.S. exporter competitiveness could possibly illuminate ways in which the Bank could increase the firepower of its resources without adverse competitive consequences to our exporters. To that end, and with no opinion on what the data might show or specific architecture for the experiment in mind, I will consider conducting some very limited and carefully designed "clinical trials" for the purpose of gathering real world data on these issues. It would be my plan to work with the export community and Congress in designing these limited experiments and to make what data was revealed available to Congress and other interested parties. It could be a responsible means of generating some potentially constructive data for future policy deliberations.
Administrative Budget
Mr. Chairman, our administrative budget is essential to our mission and I urge that our request be fully funded. For fiscal year 2002, we are requesting $65 million for our administrative budget, an increase of $3 million, or 5 percent, over the fiscal year 2001 level of $62 million. The bulk of the budget, 85%, is accounted for by staff salaries, rent and supplies. The increase represents our continuing effort to improve our case processing and upgrading our information technology systems.
We want to improve our overall efficiency, decrease our case processing time, and expand our customer base by reaching greater numbers of small- and medium-sized businesses. This subcommittee has previously been supportive of these objectives which are funded by the Bank's administrative budget. We are grateful for this past support, and hope that you will continue it.
We believe there are opportunities for improvements if we are able to employ technology for faster, more accurate exchange of information within the Bank and with its customers, the exporters. These are the changes that our competitors in Canada, Europe and Japan have already implemented, and if funded and implemented they will allow us to compete better with them.
The Administrative Budget and Small Business
These changes are important to our efforts to expand our small business support. In recent years, 86% of the total number of our transactions have directly benefitted small business, mostly through our insurance and working capital programs.
In fiscal year 2000, we supported $1.8 billion in insurance for small business. One of the processes we are developing is the Insurance Automation Project, which will help us address problems in distribution, productivity, and risk management. The Project is expected to use available technological solutions to address Ex-Im Bank's staffing and productivity constraints for expanding support to a targeted market of small businesses. It will help Ex-Im Bank to move from a labor and paper-intensive transactional level underwriting approach to more of a portfolio management approach, and from our current predominant reliance on brokers and direct sales to hopefully more of a technology-based acquisition focus. It will also enhance Ex-Im Bank's risk quantification and management, and provide increased levels of customer service support that are needed by smaller and less experienced exporters.
Implementation of the Project will require follow-on investment over the next few years. This is an investment we believe we should make if we want to support more small business exports.
SMALL BUSINESS
The benefits of the increased exporting Ex-Im Bank makes possible extend to businesses of all sizes in almost all states. According to the most recent data, nationally 96% of exporters are small and medium-sized businesses. They represent 30% of U.S. merchandise exports by value. Ex-Im Bank tends to track this national average, since in FY 2000 86% of our transactions directly benefit small businesses, and they consumed about 20% of our authorizations.
Small businesses account for most of the job growth in our country. We currently directly assist some 2000 small businesses each year, but this represents just a small fraction of the small businesses which export. While we are making substantial efforts to expand our small business base, there is much more that needs to be done. Ultimately, the most cost effective way to reach the thousands of small businesses that could make use of our services is to expand our technological base, ultimately by making use of the internet, which involves significant capital investment.
I would like to take this opportunity to review some of the small business initiatives the Ex-Im Bank has undertaken since we were last rechartered. First, we have reorganized internally to centralize all of our small business efforts. In 1997, the Small and New Business Group (SNBG) was established to provide specific services for the small business community. This group included the Insurance, Working Capital and Business Development Divisions along with the Regional Offices located in New York, Chicago, Miami, Houston, San Francisco, Newport Beach, and Long Beach, California. Since then, the SNBG has endeavored to meet the exporting needs of the small business community with superior customer service. This has included the establishment of an Emerging Market team to promote Ex-Im products and services to small business in the minority, women-owned and rural communities. I would like to add at this point that the results of a national survey conducted by the University of Michigan entitled the American Customer Satisfaction Index, which measures customer service ratings of public and private companies, show that Ex-Im Bank's customer service rating is a "70", which is "excellent" and compares well to not only other US Government agencies but also commercial banks.
Business Development
Starting in 1998, we transformed to a much more proactive business development philosophy. We have:
- Changed our regional offices to outreach organizations with sales goals and objectives
- Developed an Exporter Database, that includes approximately 200,000 exporting companies.
- Developed a Direct Mail campaign aimed at small businesses. We send more than 200,000 pieces of mail each year to exporters, building awareness of how the Bank can support their export financing needs. We have developed about 2,000 qualified leads for immediate sales follow-up with new contact management software.
- Developed a program of Nationwide Exporter Seminars, throughout the US. These have proven to be very popular and are large cost and time-savers for exporters, since they do not have to travel all the way to Washington for our multi-day seminars.
In addition, our regional offices have formed strategic alliances with our partners in the US Export Assistance Centers (the Department of Commerce and the Small Business Administration) to facilitate small business outreach; we are in the process of overhauling our web site to make it more user-friendly and logical; and we are utilizing more than 100 partnerships with trade associations and our City/State partners to reach small businesses at the local level.
We have increased our efforts to promote activities linking Ex-Im Bank with the Congress, state and federal agencies, and trade promotion groups. For example, Ex-Im Bank trade briefings have been coordinated for ten Members of Congress. These are joint efforts between Ex-Im Bank's City/State partners, local Chambers of Commerce, and the offices of various Senators and Representatives.
Export Credit Insurance
Mr. Chairman, our export credit insurance which covers political and commercial credit risk is the primary tool that supports small business. Ex-Im Bank has adopted a detailed strategic approach in supporting and increasing its support for small business exporters and associated lenders. Central to this strategy are three key components: offering useful, high-quality products that are reasonably priced and will attract a greater number of small business exporters; providing prompt customer service by investing in technology to support a growing volume of small transactions; and finally, through technology, being in a position to monitor and adapt risk-taking to the marketplace on a real time basis. Since 1997, the following initiatives in the Insurance program have been undertaken in support of these strategic objectives relating to small business.
Short Term Credit Standards: In 1999, Ex-Im Bank introduced Short-Term Credit Standards (STCS) designed to achieve greater transparency, predictability and consistency of application outcomes for small business exporters under the short term insurance program. With the STCS, all participants are informed as to what credit information is required and on what basis Ex-Im Bank will approve an application. A critical additional benefit derived from STCS is an improvement in application turnaround time.
Small Business Product Enhancements: At the same time the STCS were introduced,
Ex-Im Bank also modified a number of its policies to provide greater flexibility and incentives for small business exporters and their lenders to use the short-term credit insurance program. These included the following:
- We have extended the use of Enhanced Assignments, which transfer the risk of exporter performance from the commercial bank lender to Ex-Im Bank and make transactions more "bankable".
- Reduced the Minimum Annual Premium for small business (and other applicants as well)
- Expanded use of delegated authority to small business exporters
- 30-40% broker commissions for small business: To encourage greater broker participation in marketing and selling Ex-Im's short term insurance, Ex-Im Bank increased the commissions to be paid to brokers specializing in small businesses.
- Threshold increase for small business from $3 to $5 million: Ex-Im Bank recently changed its maximum annual export credit sales "small business enhancement" threshold from $3 million to $5 million. This change allows for a greater number of small business exporters to be eligible to receive the enhancements available under its Small Business Policy.
- Short-Term Insurance pricing: In order to provide simplified insurance premium pricing for small business exporters, Ex-Im adopted the use of a short term fee table in which Ex-Im Bank charges a flat fee based on term and buyer type, and excludes the variability of country risk as a factor. This simplifies pricing for the small exporter.
Working Capital
Mr. Chairman, we have made great strides in our Working Capital program since 1997. The program has grown from $387.7 million in FY '98 to $588.3 million in FY '2000, an increase of about 52%. About 88% of these transactions support small businesses. In addition to the hard work of our staff, this increase has been made possible by some program changes:
- Simplified documentation
- Greater use of delegated authority which is, in effect, a limited credit line Ex-Im Bank extends to qualifying lenders who may commit our guarantee for working capital loans. This allows lenders to conclude qualifying transactions on their time and with their resources, not ours.
- New partners have been added to broaden the potential marketplace for this product. Asset-based lenders and community bank initiatives have resulted in additional usage of the program. Ex-Im Bank has joined the Commercial Finance Association and dedicated a business development officer to enhance this relationship.
Because of the way our budget expenditures are calculated, the direct impact of the reduction in our program budget on small business will not be great. However, small businesses make a large contribution to the exports of large companies.
LOOKING AHEAD
Mr. Chairman, much of my testimony has discussed what our history has been and examined current policies. But even more importantly, in a time of rechartering, we have to look to the future. We have an idea of where some of the challenges are, and I want to discuss these issues.
TIED AID
Tied aid is essentially highly concessional foreign assistance conditioned on the purchase of goods and/or services from the donating country. This combination has the effect of injecting a grant element into trade finance by lowering interest rates, lengthening terms, or both.
As the US has long taken the position that aid in any form or amount should be used only for development - not commercial - purposes, the ultimate objective of the US as regards tied aid is to discourage its use. During the early nineties, the US had success in controlling the use of tied aid through negotiations at the OECD on rules and procedures. From 1992 to 1997, tied aid use fell from roughly $10 billion to around $3 billion. Moreover, several countries effectively "dropped out" of the tied aid game. For instance, Japanese tied aid dropped from several billion dollars in the early 90's to literally 0 in 1997.
Since 1997 there has been an increase in tied aid, which reached roughly $5.5 billion in 2000. However, this increase is entirely due to higher tied aid levels from Japan, which seems to have made a policy decision to be much more explicitly commercial in all of its aid giving. Levels of tied aid from all other major donors continue to decrease. For these other countries, we must maintain vigilance against the occasional use of tied aid for commercial advantage.
In this context sits the Ex-Im Tied Aid Matching Fund. Established in 1993 to provide muscle for negotiations and a block to the more egregious commercial impacts, it has seen episodic use during the 1990's - totaling a little over $100 million (supporting some $300 million in exports). One continuing issue is the use of War Chest funds.
There needs to be continued scrutiny of tied aid resources and we need to gather more data to determine the extent of evasion of the OECD rules.
INCREASING USE OF THE PRIVATE SECTOR
In FY 1992, 32% of Ex-Im Bank's transactions involved the private sector. In FY 2000, 55% were private. The fact that many economies are privatizing is good news, but it does complicate our job, because we now have to analyze the credit risk posed by many private buyers as opposed to a relatively few sovereign buyers. Moreover, we have to do this analysis for many more countries, as we open in new markets around the world. Trade relations between countries have become more competitive and complicated. This is the world U.S. exporters are facing, as they compete with the exporters of other countries and the export credit agencies which help them.
NEW MARKETS AND NEW INITIATIVES
Over the past few years, Ex-Im Bank has made a concerted effort in expanding our support to U.S. exporters in new and revitalized markets such as Mexico, sub-Saharan Africa, Russia, and the NIS as well as retooling in older markets such as India. As a result, Ex-Im Bank will expand U.S. export opportunities into markets that may hold great potential for U.S. export growth.
The most notable growth in Ex-Im Bank's programs has been in sub-Saharan Africa, a market where previously both Ex-Im Bank and U.S. exporters were largely inactive. As a result of Ex-Im Bank's commitment to meet its 1997 Congressional mandate, the Bank has seen nearly a 15-fold increase in supported exports to the region. Whereas in 1998 the Bank authorized approximately $56 million to support U.S. exports, it authorized $589 in 1999 and $914 million in 2000. And while the figures in the last two years may be abnormally high due to especially large transactions and may go down this year, we are determined to continue our efforts to support sales to this area.
In Mexico, where exporters are doing a growing business, our exposure is approximately $4.4 billion, our second largest. Future prospects there look bright given further capital expenditure needs and the new policies being proposed by President Fox.
The Bank is also developing tools to enter new market places as well as to expand in old markets. For instance, in August of 2000 the Bank announced a new subsovereign program that will help foreign borrowers with municipal, state and provincial support gain access to Ex-Im Bank financing. In the future, through our own efforts as well as the invaluable assistance of the Special Trade Representative, the Department of Commerce, and others, we hope to expand our availability to many new markets.
New market mechanisms are also being developed by other countries. One, "market windows", are state-owned institutions which claim to operate on a commercial basis in the province of trade credits and thus arguably outside the disciplines imposed by the OECD Arrangement. However, these institutions benefit from many indirect subsidies. For instance, they may pay no taxes or they may borrow with government backing. Canada and Germany are the primary users of this new financing concept through the Export Development Corporation of Canada and KfW of Germany. Market windows are a condition of today's market place and are growing.
One of our jobs at Ex-Im Bank is to examine important policy issues. In this case, we need to see if the OECD rules of engagement are being affected, or perhaps even evaded. We will be pulling together data on this issue to educate ourselves, formulate a position for use in the OECD if necessary, and bring back information to the administration and Congress.
On all of these issues, we will continue to gather data on a broad basis in order to be helpful to ourselves and the Congress as we work together to determine exactly what is occurring in the changing international marketplace. To this end, we are willing to commit some of our resources to a major research effort.
ECONOMIC IMPACT
I am keenly aware of the Bank's obligation to examine economic impact. This issue is at the top of my agenda, and it has produced great interest in Congress and the exporting community. We are reworking our economic impact guidelines. We are going to include Congress, the exporting community, and labor in this process. A draft of our report should be available shortly.
ENVIRONMENT
In 1995, at the direction of Congress, Ex-Im Bank adopted a comprehensive environmental policy, that included a program to support environmentally beneficial and renewable energy exports and adopt of a set of environmental procedures and guidelines applicable to its support of foreign projects. This was in recognition that the US is a leader in the manufacture of environmental technology, yet the level of our exports did not reflect this.
During the next generation, the world market for environmental technology will grow to nearly $1 trillion. As evidenced in its Annual Performance Plan, Ex-Im Bank is committed to increasing the level of support it provides to exporters of environmentally beneficial goods and services as well as to exporters participating in foreign environmental projects. To achieve this objective, Ex-Im Bank offers enhanced financing support with its Environmental Export Credit Insurance and under its Loan, Guarantee, and Medium-Term Insurance programs. These programs are intended to emphasize US government support for environmental technology exports, thereby enhancing the competitive position of U.S. environmental exporters. Since 1995, Ex-Im Bank has supported $3 billion in environmentally beneficial U.S. exports and environmentally beneficial projects.
In addition to encouraging U.S. companies to export environmentally friendly goods,
Ex-Im Bank instituted review procedures to ensure the projects it supports are environmentally responsible. If a project does not meet Ex-Im Bank environmental measures, the Bank will work with the exporter to implement mitigating measures.
In 1997, we initiated discussions with heads of G-7 export credit agencies to persuade them to work with the OECD to adopt environmental policies with meaningful environmental guidelines. Ex-Im Bank is recognized internationally for its progressive environmental policy and it spearheaded U.S. government efforts at recent G-8 Summits to encourage leaders of other nations to require that their export credit agencies adopt effective environmental guidelines.
As you are probably aware, these negotiations in the OECD are on-going. The Export-Import Bank believes that we have to arrive at an international policy that "levels the playing field" for our exporters. Our competition should agree to specific standards, assessment in sensitive cases, and transparency. The Congress has laid out the path for us the follow, and we are pursuing what is right for the environment and our exporters, and thus right for the agency.
CO-FINANCING
Let me now turn to the subject of co-financing. Co-financing is sometimes referred to as a "One-Stop-Shop" arrangement that allows buyers to source products from two or more countries without having to negotiate separate financing packages with each ECA.
The US exporter enhances its competitiveness by offering foreign buyers the administrative simplicity of a seamless co-financing package that contains a common documentary structure for the entire transaction -- one set of terms, conditions and procedures. The buyer interfaces with only one ECA who leads the financing. The lead ECA secures a counter-guarantee from the "follower" ECA for its portion.
Ex-Im Bank will continue to ensure compliance with its legal and policy requirements by either making certain that the transaction has met its standard procedures or by requiring side certifications and information from the US exporter that demonstrate compliance.
Ex-Im Bank currently has a bilateral agreement with ECGD of the UK and is concluding discussions with EDC of Canada. Other ECAs - most notably Coface of France and Hermes of Germany are on the horizon to sign bilateral agreements as well.
Mr. Chairman, that concludes my testimony. I will be happy to answer any questions.
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