Methodological and Technological issues in Technology Transfer

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5.2.3 Trade Finance and Export Credit Agencies

The largest source of public sector support for cross border finance is trade finance in its various forms, where a government agency provides a guarantee on loans to support exports (see also Section 2.2.7 in Chapter 2 on international ECA flows). Export credit is a massive area - in 1996 export credit agencies (ECAs) supported exports totalling US$432.2 billion (Berne Union Yearbook, 1998). While much of this was short-term cover, approximately US$100 billion was for medium and long-term transactions (over one year). Such guarantees normally cover political and sovereign risks only and not commercial risks, and will usually require that the business is either a state entity or is backed by a local bank guarantee. Trade finance is also particularly relevant in that it normally operates in conjunction with the private financial sector, and, for example, has increasingly played a critical role in supporting project finance. Many deals would not be possible without the support of ECAs.

A key aspect of trade finance however is that it does not focus particularly on clean technology, and indeed the ECAs appear to be heavily involved in supporting activities which contribute to climate change. One study found that the two U.S. export credit/investment insurance agencies (ECAs), the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank of the United States (Ex-Im), underwrote US$23.2 billion in financing for oil, gas and coal projects around the world between 1992 and 1998. These projects will, over their lifetimes, release 29.3 billion tonnes of CO2 (Institute for Policy Studies et al., 1999). The experience of the US ECAs is unlikely to be atypical and around 60% of ECA activity may be related to carbon or energy intensive exports or investments.

Given this, it is not surprising to find that most ECAs have no environmental or climate change policies. This is because the mandate of ECAs is not developmental or environmental, but to support the trading activities of the host nations. Furthermore, they are traditionally secretive in their operations and policy, failing to disclose their activities openly and act accountably. There are some exceptions: the US Ex-Im and OPIC mentioned above have some modest environmental requirements. Even these have been under pressure, as they have led to trade tensions, notably over the Three Gorges Dam Project (in China), which Ex-Im refused to back, whereas the German Hermesbuergschaften and other ECAs were prepared to provide support. This has lead to the Ex-Im Bank coming under pressure to relax its standards. In the absence of harmonisation among ECAs, any ECA seeking to develop environmental standards will be penalised. (Cornerhouse, 1999)

The fact that no standardised environmental requirements exist among ECAs is in many cases at odds with the commitments many countries have made in multilateral agreements such as the Climate Change Convention. It reflects the fact that ECAs generally report to the trade ministry, rather than the environment or development ministries. It would clearly appear desirable to develop some harmonised environmental standards, probably based on World Bank standards, with a particular emphasis on avoiding technology dumping and (supporting) undesirable projects, and possibly considering giving special support for transfer of ESTs. Rather than "a race to the bottom" there should be procedures for upwards harmonisation. Furthermore, in keeping with the discussions on participation in Chapter 4, it would appear important that such mechanisms are developed in an open and accountable manner, with participation from all interested parties.

Increasingly there is international recognition of the need for environmental standards within ECAs, and it has been placed on the international policy agenda. The final communiqué of the G8 summit in Koln stated "We will work within the OECD towards common environmental guidelines for export finance agencies. We aim to complete this work by the 2001 G8 Summit (source, date)" The OECD Export Credit Group has been attempting to share information and coordinate between ECAs for some time now, but relatively little progress has been made, with reluctance from some ECAs to take action, although with the emergence of increased political pressure it may be that the process will gain new impetus.

With environmental policies, Export Credit Agencies will be better placed to focus on issues particularly relevant to the transfer of ESTs. This will including moving away from the focus on exports (the most limited form of technology transfer in that there is no capacity building or value added in the host country) as well as the emphasis on large deals. It may also involve looking at the potential for specific activities in climate change related areas (for example, ECAs may have a role to play in the operation of the Clean Development Mechanism).

To date there have been few examples of activities which have sought to focus particularly on the problems of environmental technology transfer. One interesting exception, which illustrates the potential, is the creation of the private-sector Global Environmental Fund (not to be confused with the Global Environment Facility) in the United States, which invests in environmental projects and businesses worldwide. Its formation was greatly facilitated by the provision of an investment guarantee from the OPIC.

Box 5.1 ECAs: The Tools of Their Trade (Source: WRI, 2000)

ECAs are bilateral organisations such as investment promotion agencies or Export Import banks that offer a variety of financing options for foreign export and investment. Most advanced industrialised countries in the OECD have ECAs that are dedicated to promoting their economic and business interests overseas. Most of their incentives are directed toward companies trying to enter or compete in emerging market economies of developing countries and economies in transition (newly independent states). ECAs use a variety of financial instruments to give their private sector clients a leg up on foreign competitors. The following are the most common instruments used by ECAs:

Export credits or loans: loans to buyers or suppliers of export goods usually of a short term nature (maturities of less than a year or two) including letters of credit and banker's acceptances. These are provided on favourable terms that are not as easily available from private commercial banks.

Import credits or loans: essentially the same as export credits, but they are provided to overseas purchasers of domestic goods and services.

Project financing: direct or indirect loans for overseas projects with the significant participation of a domestic company, including joint-ventures. These are provided on favourable terms, such as extended maturities, that are not as readily provided by private commercial banks for politically risky markets.

Guarantees: agreement by a sovereign entity (usually a government) to cover or insure a domestic investor against any losses suffered on an investments or export that results from civil unrest, expropriation of property, or nationalisation (political risk), the inability to convert local currency into hard currency (currency transfer risk), from a breach of contract by the host country government (partial risk guarantee), and back a loan provided by a commercial bank against a borrowers default (loan guarantee).

Insurance: this is very similar to guarantees, the difference being that the coverage against political, currency transfer or loan defaults are purchased as an insurance premium.

Equity: these are direct investments into a project or an equity fund that in turn invests directly in development, infrastructure or other projects in the recipient country. Essentially, this equity buys down credit risk and permits private funds to raise additional financing more easily.

The instruments most commonly used by ECAs are export and import credits (also known as trade financing), project financing and various forms of guarantees and insurance. The use of equity funds is a fairly recent phenomenon, but it is growing more common as various types of financing instruments are increasingly packaged together (equity, bonds, loans, guarantees) to assemble sufficient capital to get a project off the ground.

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