ECGD COVER
CONFIDENTIAL
ANNEX A
All Departments agree, as your letter suggests, that ECGD cover will be vital to UK companies' chances of maximising success. (There is also a wider political aspect to this, discussed below.) One of Mr Heap's telegrams mentioned in your letter reports that the French have already offered full financial support for their companies and pledged to match any terms offered by competitors. The international competition is expected to be fierce, and we cannot afford to appear half-hearted.
The Foreign Secretary and the Secretary of State for Trade and Industry both believe that we can and should give substantial support under existing arrangements. ECGD's Advisory Council has approved a Market Exposure Control (MEC) of £3bn, under which there is some £900m spare capacity. This will increase as repayments of existing debts are made (now over £200m per year). If success puts the MEC under pressure, the Advisory Council can be asked to review the figure of
£3bn.
Hong Kong is already ECGD's most heavily concentrated market for medium-term exposure and commitments. Under the Portfolio Management System (PMS) support for any individual project where exposure would exceed £100m needs approval by the inter-Departmental Export Guarantees Committee (EGC) as does a project of any size which would take aggregate new commitments in any one market over £200m during the course of a financial year. In practice, Treasury Ministers have to date resisted commitments exceeding £200m in individual concentrated ("amber zone") markets.
The impact of aggregate new amber zone commitments in all concentrated markets on the annual business budget must also be taken into account. However, there is about £1bn headroom available (with 5 months of the year remaining), and the timing of contract awards may well push Hong Kong commitments into future years' budgets.
The Treasury is very concerned about the potential implications for ECGD's finances of taking on further large-scale commitments in Hong Kong. ECGD already has exposure and commitments of £2.1 billion in Hong Kong, equal to 8% of total ECGD exposure and commitments, compared with a stock control review point of £650 million. ECGD's financial problems (accumulated deficit of £4 billion and annual PSBR cost of £500-600 million) result from previous large-scale concentrations of exposure in markets, which at the time looked reasonable risks, but which later defaulted. Significant repayments on future credits would fall due after 1997, when there is obviously an increased risk of default and the possibility of very heavy claims. The larger the new credits, the larger the potential for loss (although if claims
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