Chapter 21: International Financial Institutions
21.4 Export Credit Agencies
Over years, a different category of financial institutions has evolved around the world known as the export credit agency. Export credit agencies (ECAs) use public funds or a combination of public and private funds to provide loans, guarantees, and insurance in support of overseas investment and exports by domestic corporations (ESCR-Net, n.d.). ECAs were originally government agencies intended to support exporters by providing financing, risk insurance, and other guarantees (FITT, 2023). The goal was to encourage international commerce opportunities by reducing potential exporters’ risk.
With their main mission of facilitating export, ECAs offer a range of financial services including credit insurance, loan guarantees and direct lending services (Financely, 2023). Most popular service among these is export credit insurance.
Review: Credit Insurance
Review your understanding of credit insurance by watching this video about the role of export credit insurance. The video was created by a private ECA called Euler Hermes, which is now Allianz Trade.
Source: Allianz Trade. (2014, January 20). Understanding credit insurance with Euler Hermes [En Subs] [Video]. YouTube. https://www.youtube.com/watch?v=tlP0zyYXYYY
Let’s Explore: History of ECAs
Role of ECAs: An Example from the Mining Industry
For a foreign contractor, building a coal-fired power station in a developing country entails substantial financial risks – even for prominent firms like Bilfinger, Siemens, Alstom, or ThyssenKrupp. Construction is expensive – a big power plant can easily cost over a billion euros – and requires huge investments upfront. It can take years for a contractor to get paid. The client, who may be a government-owned or private power generator, may run into financial difficulties. Political crises may halt construction.
To cut the risks for the contractors and their banks, many governments have established export credit insurance. In addition, loans from development banks support the export of mining equipment and power plants.
Developed countries support their exports generously. Between 2007 and 2014, more than $73 billion – or over $9 billion a year – in public finance was approved for coal.[1] Nearly half (47 percent) of the total international finance for coal came through export credit agencies in countries that are members of the Organisation for Economic Co-operation and Development (OECD). Japan, an OECD member, led the pack, with $20 billion. China (nearly $15 billion) was followed by two more OECD members, South Korea (over $7 billion) and Germany ($6.8 billion).
The largest recipient countries of coal finance by export credit agencies from 2007 to 2014 are Vietnam (more than $4.5 billion), South Africa (almost $4.5 billion), India (more than $4 billion) and Australia with $4 billion in total. Nearly one-quarter of coal funding from OECD export credit agencies went to high-income countries. In this period, the total greenhouse gas emissions related to international public finance for coal amounts to almost half a billion tonnes of CO2 per year, or, to put this number in context, the total annual emissions of Italy.
Most of the money goes into building power plants. However, countries such as Russia, Canada and Italy use export credits mainly to finance the digging of new coal mines. Led by the United States and Japan, around $12.9 billion have been used for this purpose from 2007 to 2013. Even though export credits were initially intended to reduce business risks in uncertain markets, they have also recently been used to develop coal mines in politically stable countries such as the United States and Australia.
Multilateral development banks also play an important role alongside the national credit agencies. Between 2007 and 2013, they supported coal projects with subsidies worth $13.5 billion. The biggest donor was the World Bank, at $6.5 billion; the biggest regional donor was the African Development Bank, with $2.8 billion in support. About 90 percent of this money went to build new power plants; the rest went to mining and on modernizing older plants.
Commercial banks, whose day-to-day operations are beyond government influence, play an even bigger role than the public sources of funding. Between 2005 and 2014, financing for coal projects added up to 500 billion dollars. Together, the 20 leading banks gave 73 percent of the loans.
The member states of the OECD have divergent views on tightening environmental and social standards that they should apply when offering export credits. The biggest issue is the financing of coal projects. The United States and some other countries demand that these types of credits for coal projects be stopped – more transparency is needed in this regard. Export credit agencies seldom make their business information available to the public. Critics demand that in future, the agencies should announce promptly whom they are supporting and in what way.
Did You Know? Export Credit Agencies and Human Rights
Most OECD-member countries have at least one taxpayer-funded export credit agency, often overseen by the trade, finance, or economics ministry. While promoting exports and investment is not necessarily problematic, ECAs have minimal transparency, accountability, and safeguards related to human rights, corruption, or the environment. As a result, ECAs often fund controversial projects. Financial backing is provided with taxpayer money for endeavours ranging from weapons export to extractive industry projects to infrastructure developments that have been rejected by the World Bank Group.
With minimal transparency, the Export Development Canada (EDC) supports Canada’s mining companies significantly, while the UK Export Credit Guarantee Department (ECGD) is heavily invested in arms exports. ECAs, such as the U.S. Export-Import (Ex-Im), are one of the largest and most influential public international financial institutions in trade and investment today, providing over ten times more in guarantees and risk insurance for large-scale infrastructure projects than the World Bank. Many ECA-backed projects have been associated with significant human rights violations, including arbitrary arrest, use of paramilitary “security” forces, forced resettlement, inadequate consultation and compensation, violations of the right to a healthy environment, loss of livelihood and destruction of sacred and cultural sites.
While ECAs have collapsed Indigenous rights and cultural heritage sites and forced resettlement into their voluntary “environmental” guidelines, comprehensive human rights concerns remain unaddressed. Under international human rights law, states have clear obligations to respect, protect and fulfill human rights, which extend to their respective institutions, including ECAs.
In order to ensure that ECA-backed projects are not directly responsible for or complicit with human rights violations, a number of human rights advocates and ECA campaigners have begun to explore mechanisms and standards to ensure the protection of human rights in projects supported by ECAs. Potential tools or strategies may include national litigation; regional and international mechanisms, such as regional human rights courts, the ILO, OECD National Contact Points, and UN treaty bodies and Special Rapporteurs; compliance officers associated with the Canadian and Japanese ECAs; and parliamentary oversight and implementation of human rights impact assessments. Similarly, there seems to be a need to explore the content of investment agreements, particularly host-government agreements (HGAs) that include stabilization clauses and dispute mechanisms that undermine state sovereignty and the ability to protect human rights.
International Cooperation and Progressive Realization of Economic Human Rights
Export credit agencies are part of a larger system of investment and trade agreements that often threaten the ability of states to respect, protect and fulfill human rights. Under the International Covenant on Economic, Social, and Cultural Rights, countries are obligated to “take steps, individually and through international assistance and cooperation” in order to achieve “progressively” economic, social, and cultural human rights, “without discrimination.” Corporations are the primary beneficiaries of export credit and insurance, often provided to projects of questionable feasibility on costly financing terms. This has led to massive indebtedness in many countries. According to Goldzimer (2003), over sixty percent of Nigeria’s external debt and over forty percent of the debt of the Democratic Republic of Congo is for export credits, normally with higher interest rates than World Bank or IMF loans. In turn, OECD countries often inflate their aid statistics by including the cancellation of commercial ECA debts in official aid budgets. Debt and reduced aid limit a state’s ability to fulfill all human rights, as do host-government agreements (HGAs) that include stabilization clauses that harshly penalize the creation or enforcement of laws that protect human rights and the environment.
References
ESCR-NET. (n.d.). Information on export credit agencies and human rights. https://www.escr-net.org/resources/information-export-credit-agencies-and-human-rights.
Financely. (2023). Understanding export credit agencies in trade finance: A comprehensive guide. https://blog.financely-group.com/understanding-export-credit-agencies-in-trade-finance/
FITT. (2023). FITTskills: International Trade Finance (7.3 ed). Forum for International Trade Training.
Goldzimer, A. (2003). Worse than the World Bank? Export credit agencies—The secret engine of globalization. Backgrounder, 9(1). https://www.escr-net.org/sites/default/files/Worse_than_the_World_Bank.pdf
Krauss, R. M. (2011). The role and importance of export credit agencies. Minerva Program. The Institute of Brazilian Business and Public Management Issues. George Washington University, Washington, D.C. https://www2.gwu.edu/~ibi/minerva/Fall2011/Raquel.pdf
Attributions
“Role of ECAs: An Example from the Mining Industry” is adapted from “Finance: Big players behind the scenes” by Arne Jungjohann, published by Heinrich Böll Stiftung, 18 November 2015, licensed under CC BY-SA 3.0 Deed.
“Did You Know? Export Credit Agencies and Human Rights” is adapted from “Information on Export Credit Agencies and Human Rights” by ESCR-Net – International Network for Economic, Social & Cultural Rights, licensed under CC BY-NC 4.0 Deed.
- All $ in Chapter 21 are USD. ↵
