Estimating the Economic Costs and Benefits of ECGD: A Report for the Export Credit Guarantee Department

Fri Jan 31 15:24:38 EST 2003
By Vakhtang Kvekvetsia

HM Treasury and the Export Credit Guarantee Department (ECGD) asked NERA to estimate the net benefits to the UK economy of the government's provision of export credit insurance and related products, as a part of a review launched this year to determine the contribution of ECGD to the competitiveness of the UK economy. Specifically, NERA was asked to:

  • Establish the net benefits to the UK economy of the government's provision of export credit insurance, finance, reinsurance, and overseas investment insurance, including the need to remunerate capital.
  • If those benefits are small or negative consider the scope for ECGD to increase them.
  • Consider the cumulative adjustment costs associated with the options identified to raise net benefits.

ECGD currently operates as a government department. Its primary function (under the Export and Investment Guarantees Act) is to benefit the economy through facilitating exports of goods and services. However, it is not required to do so at prices that reflect the full costs of its operation, but rather with a stated financial objective of building and maintaining sufficient reserves to give the level of assurance of breakeven. This effectively means that in some cases the premiums charged by ECGD comprise a subsidy element. Evaluating the benefit of ECGD to the UK economy is complex when it is extended to include possible subsidy elements in ECGD's products and services. In order to accommodate the possible ranges of calculations of the subsidy NERA estimated the net benefits of ECGD under two scenarios: first, with ECGD as a public sector entity providing a return on government funds and second, as a private sector entity under the requirement to remunerate shareholder capital. The study concluded that there is a strong rationale for eliminating the subsidy in ECGD's current pricing regime and recommended that ECGD implement prices that reflect the risks of holding ECGD's portfolio of exposures.