COMMENT: Export credit agencies lurk in the shadows of responsible financing

COMMENT: Export credit agencies lurk in the shadows of responsible financing
In spite of repeated warnings about the Pljevla coal plant, the Czech Export Bank initially decided to support the project.
By Dan Heuer of Bankwatch February 5, 2018

Export credit agencies (ECAs) are financial tools used by countries to help realise exports for their own enterprises abroad. Typically an ECA finances projects that are too risky for commercial banks, in an effort to shelter companies from the political and economic uncertainties of operating in places with weak institutional capacities and legal frameworks. In the event that a project goes bust, the ECA steps in and assumes the loss, with the expenses of the original financing and possible repayment sourced from national budgets.

Export credits are big business. Members of the industry’s Berne Union insured nearly $1 trillion dollars between 2012 and 2016. That amount far exceeds the total investments of multilateral lenders such as the World Bank and the regional development banks, and accounts for 11% of world trade.

Yet in spite of the fact that ECAs are publicly-backed financial institutions that enjoy a significant place in the global economy, very little information about their operations is known to the public. A new study by Bankwatch and Finance & Trade Watch sheds light on the operations of seven ECAs in the countries of Central and Eastern Europe.

Surveying the institutional set-up and operations of agencies in Austria, Poland, Czech Republic, Croatia, Hungary, Slovakia and Romania, the report finds that this lack of transparency has led to their involvement in a number of economically and politically-compromising projects.

One such example is the ongoing spat between the Vítkovice Machinery Group and Adularya's Yunus Emre power plant in Turkey, which could result in a bill of hundred of millions of euros for the Czech state. The Czech exporter jumped into the coal power plant without first setting clear conditions for its construction, and the Czech Export Bank and the Export Guarantee and Insurance Corporation quickly followed suit and backed this deal. It later transpired that the boilers delivered by a Czech company for the plant were unable to burn the low-quality coal destined for Yunus Emre. Both sides claim that the other is responsible for the failure. Nevertheless it is clear that such a project should have never been supported by ECAs. It is unclear whether the power plant will ever operate, but the Czech state is likely to have to pay up anyway.

In fact, Czech ECAs have a rich history of financing risky projects. In the case of a cement factory in Vietnam, a police investigation led to accusations that two managers at the Export Guarantee and Insurance Corporation, the second arm of the Czech ECA, falsified information in order to move the project ahead. The project lost €30mn when the construction failed.

In another case, the construction of a second coal power plant at Pljevlja in Montenegro was nearly disastrous for the Czech Republic. From its inception, the project has had its fair share of scandal, with the Montenegrin government, under pressure from lobbyists, adopting a special law in order to select a single Czech supplier, Skoda Praha, without conducting a proper tender. In spite of repeated warnings from Czech and international groups about the project’s economic infeasibility, the Czech Export Bank threw its hat in the ring, but ultimately withdrew its support after admitting that Pljevlja II was too risky. 

ECAs have signed up to the so-called Common Approaches developed by the OECD, in an effort to standardise social, environmental and transparency screenings precisely to avoid such risky forms of financing. But this normative framework has not done enough to ensure that these agencies pass on dodgy investments. Adherence to the Common Approaches is voluntary and there are no sanctions in cases of non-compliance. Moreover, due to its very general provisions, even those attempting to comply end up pursuing investments with dire results.

For example, in the case of the Ilisu dam in Turkey, it was clear from the outset that construction would drastically affect the local environment and population, among other things, by relocating no fewer than 199 settlements and destroying the ancient city of Hasankeyf. NGOs and media pushed Austria’s OEKB and other ECAs to withdraw from the project, but the agencies decided instead to try to bring the project in line with international standards instead.

OEKB, together with Germany’s Euler Hermes and the Swiss SERV, negotiated 153 conditions with the Turkish government in an attempt to guarantee social, environmental and cultural heritage impact measures, including an exit clause in case these conditions were not fulfilled. However these were unlikely to succeed given that there was still insufficient data available on the project’s impact at this point, and the fact that the project was taking place in a strongly Kurdish region of Turkey where human rights violations were known to be ongoing, thus rendering any kind of open public consultation impossible.

After numerous clear violations of the conditions, OEKB and the other ECAs finally withdrew from financing the dam. Properly examining the project before the start of implementation and taking a less naive approach regarding human rights could have helped the ECAs avoid backing such a damaging project in its early stages.

Loopholes

The Common Approaches do require that information is disclosed for projects with a repayment period longer than two years. But this provision has created a loophole for a large number of projects financed by ECAs to remain secret. For example, Romania’s Eximbank has said that it has never supported a project with a repayment period longer than two years, so in theory the ECA has no reason to disclose any information about any of the projects it support.

Difficulties in obtaining information about ECA-backed projects have led to a variety of court cases. In Croatia, Slovakia and Hungary, a number of court rulings have supported the idea that that, as publicly backed institutions, ECAs have an obligation to disclose public information about their activities.

While the name explicitly implies support for companies that export, ECAs have been involved in domestic controversies as well. In Hungary, Eximbank provided loans for residential developments in Budapest and the purchase of a national television station – deals which were criticised as not being linked to the bank’s mission. In Croatia, an assistant to the Minister of Finance benefitted from loans from HBOR, and employees of HBOR also received loans to finance their homes. Media reports exposed the scandals, demonstrating that the public does not have sufficient insights into how HBOR works.

The list of recommendations for improvement is long. ECAs have a long way to go before adhering to even those standards followed at international financial institutions such as the European Investment Bank, which does a very similar job but has much more specific rules and requirements (and still they have proven to be insufficient to prevent environmental and socially damaging projects being financed).

The next step in ensuring more responsible financing should be the active publication of information about projects supported by ECAs.

Another crucial tool for oversight of ECA operations is the adoption of easily accessible compliance mechanisms, where complaints of wrongdoing can be submitted by ECA contractors as well as the general public, both in the home country and the destination country of the project.

To avoid the most problematic projects, ECAs should develop an exclusion list that prohibits support for projects that contravene international covenants and agreements that nations sign up to, in areas such as fossil fuels, nuclear power production, weapons manufacturing or projects where significant human rights violations are possible.

Reporting on which projects ECAs finance and why, as well as the results of monitoring project implementation, is another step towards ensuring the best value for money from these investments. While ECAs in central and eastern Europe argue that they are obliged to report to their governments and the European Commission, these reports are in practice more a formality with no real bearing on future operations.

There is however real potential in reporting to make ECAs improve their operations. The European Commission should for example revise the reporting areas and assess whether the activities of ECAs are in line with EU policy objectives in other areas, such as foreign policy, development and climate change. The commission will need to be more active in this respect. A complaint from civil society organisations to the European Ombudsman is pending about the lack of oversight by the commission of ECAs. There are hopes that a positive ruling could mean improvements across the board, for ECAs and the exporters they support.

Dan Heuer is project co-ordinator at the Centre for Transport and Energy/CEE Bankwatch Network based in Prague, Czech Republic

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